24
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 29, 2005
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. 001-10892
HAROLD'S STORES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1308796
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
5919 Maple Avenue (214) 366-0600
Dallas, Texas 75235 (Registrant's telephone
(Address of principal number,
executive offices) including area code)
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
prices of such common equity, as of the last business day of the
registrant's most recently completed second fiscal quarter. At July 31,
2004--$8,827,093.
On March 15, 2005 the registrant had 6,222,308 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its 2005 Annual Meeting
of Stockholders ("Proxy Statement") are incorporated by reference into
Part III.
Harold's Stores, Inc. & Subsidiaries
Index to
Annual Report on Form 10-K
For the Period Ended January 29, 2005
Part
I.
It 1. Business 3
em
It 2. Properties 1
em 1
It 3. Legal Proceedings 1
em 2
It 4. Submission of Matters to a Vote of Security 1
em Holders 2
Part
II.
It 5. Market for the Registrant's Common Equity,
em Related Stockholder Matters 1
and Issuer Purchases of Equty Securities 2
It 6. Selected Financial Data 1
em 3
It 7. Management's Discussion and Analysis of
em Financial Condition 1
and Results of Operations 4
It 7A Quantitative and Qualitative Disclosure about 1
em . Market Risk 8
It 8. Financial Statements and Supplementary Data 1
em 9
It 9. Changes in and Disagreements with Accountants
em on Accounting 1
and Consolidated Financial Disclosure 9
It 9A Controls and Procedures 1
em . 9
Part
III.
It 10 Directors and Executive Officers of the 2
em . Registrant 0
It 11 Executive Compensation 2
em . 0
It 12 Security Ownership of Certain Beneficial
em . Owners and Management and Related Stockholder 2
Matters 0
It 13 Certain Relationships and Related 2
em . Transactions 0
It 14 Principal Accountant Fees and Services 2
em . 0
Part
IV.
It 15 Exhibits and Financial Statement Schedules 2
em . 0
Signatures 2
1
PART I.
ITEM 1. BUSINESS
General
Harold's Stores, Inc. and its wholly-owned subsidiaries
(collectively "Harold's" or the "Company"), through a chain of
ladies' and men's specialty apparel stores in 19 states, offers
high-quality, classically inspired apparel to the upscale,
quality-conscious consumer primarily in the 30 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 specially designed fixtures and visual props,
to create an appealing stage for presentation of the Company's
distinctive ladies' and men's apparel and accessories. The
Company also operates a direct business consisting of catalog and
internet. The internet channel began September 2004. During
2004, this represented approximately 1% of the Company's total
sales. More than 95% of sales consists of the Company's
proprietary designs controlled by Harold's own designers and
merchants and sourced by Harold's manufacturing staff from
domestic, European and Asian manufacturers. The remainder
consists of merchandise selected to complement Harold's
merchandise presentation. See "Business - Product Development
and Sourcing Programs."
As of January 29, 2005, the Company's 41 stores were
comprised of 39 full-price retail stores and two outlet stores to
clear markdowns and slow-moving merchandise. Store occupancy
costs include base and percentage rent, common area maintenance
expense, utilities and depreciation of leasehold improvements.
The Company operates on a 52-53 week year, which ends on the
Saturday closest to January 31. References herein to 2005, 2004,
2003 and 2002 refer to the years ended January 28, 2006, January
29, 2005, January 31, 2004 and February 1, 2003, respectively.
Each of the years mentioned comprised 52-week years.
Developments in 2004
On February 9, 2004, the Company announced the hiring of a
new President and Chief Executive Officer. Hugh W. Mullins,
former Chairman and Chief Executive Officer of Neiman Marcus
Stores, joined the Company and Clark J. Hinkley announced his
retirement as Chief Executive Officer of the Company. An
employment agreement was entered into with Mr. Mullins, whereby
he receives an annual base salary of $600,000 and received
300,000 shares of common stock options. He also became a member
of the Board of Directors of the Company. At the same time, an
amendment was made to Mr. Hinkley's employment contract. Mr.
Hinkley's base salary remained at the annual rate of $450,000
through June 2004, at which time it was reduced to $250,000 per
annum through January 31, 2005. Mr. Hinkley will remain on the
Board of Directors of the Company through June 2006.
In order to achieve additional liquidity, on April 29, 2004,
the Company announced the completion of an amendment to its
existing credit facility with Wells Fargo Retail Finance II, LLC
("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 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, 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 common stock, and Mr. Lester is also a
director of the Company. WFRF has continued 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
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.
Beginning in April 2004, the Company significantly reduced
its dependence on promotional activities as part of its strategic
objectives. This resulted in an increase in the rate of full
price selling from 41% in 2003 to 53% in 2004. Despite this
decrease in promotional activities, there was an increase in
comparable store sales of 1.9% for 2004, compared to an increase
of 11.3% for 2003. The Company believes the increases
experienced in comparable store sales during 2004 were primarily
attributable to customer acceptance of the Company's merchandise
offerings. The Company's average sales per square foot for
retail stores excluding outlets open during the entire year were
$389 and $380 for 2004 and 2003, respectively.
The Company believes its future success will be achieved by
increasing sales momentum in its full-line stores by attracting
new customers through its direct marketing efforts and by
improving sales from existing customers due to increased emphasis
on fashion basics to complement the novelty offerings in ladies'
apparel for which the Company is well known. During 2004, the
Company did not open any new stores in order to focus on
reinvigorating the Harold's brand. Conversely, the Company was
able to close one unprofitable location. The Company currently
plans to resume a modest store expansion program in 2006. 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. The
Company currently does not plan to open any new stores during
2005 but does plan to relocate a store in Charlotte, NC. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity" for further information.
Retail Merchandising
The Company's merchandise mix in ladies' apparel includes
coordinated sportswear, dresses, outerwear, shoes and
accessories, in updated classic styles. A fundamental feature of
the Company's marketing strategy is the development of original
exclusive apparel items. The Company estimates that more than 95%
of its ladies' apparel sales are attributable to the Company's
product development and proprietary label programs. In 2004 and
2003, ladies' apparel accounted for approximately 81% and 78% of
sales, respectively.
The men's apparel product line includes tailored clothing,
furnishings, sportswear, outerwear and shoes in updated classic
styles. In 2004, the Company's proprietary label apparel
accounted for more than 95% 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 2004 and
2003, men's apparel accounted for approximately 19% and 22% of
sales, respectively.
The following table sets forth the approximate percentage of
sales attributable to the various merchandise categories offered
by the Company in the past three years:
2004 2003 2002
(Dollar amounts in thousands)
Ladies' Merchandise
Apparel and $65, 73.8% 65,9 71.9% 62,71 69.8%
Accessories 954 18 2
Handbags and 1,72 1.9 1,39 1.5 1,954 2.2
Belts 1 2
Shoes 4,60 5.2 4,62 5.1 3,711 4.1
9 9
Men's Merchandise
Suits, Sportcoats,
Slacks and 7,84 8.8 9,31 10.2 9,773 10.9
Furnishings 5 7
Sportswear and 8,29 9.3 9,47 10.3 10,72 12.0
Accessories 2 9 5
Shoes 906 1.0 948 1.0 871 1.0
Other 30 0.0 - 0.0 35 0.0
Total: $89,3 100.0% 91,68 100.0% 89,781 100.0%
57 3
Company Stores
The Company's stores range in size from 3,000 to 13,402
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 January 29, 2005, with selected information for
each location.
Metropolitan Square
Area Location Type of Location Footag
e
Atlanta, GA Lenox Square Regional 6,861
Shopping Center
Atlanta, GA Perimeter Center Regional 5,250
Shopping Center
Austin, TX Arboretum Market Specialty Center 4,787
Place
Austin, TX(1) 8611 N. Mopac Free Standing 13,20
Expressway 0
Baton Rouge, Citiplace Market Specialty Center 5,200
LA Center
Birmingham, The Summit Specialty Center 5,500
AL Shopping Center
Charlotte, NC Shops on the Park Specialty Center 4,000
Dallas, TX Dallas Galleria Regional 8,079
Shopping Center
Dallas, TX Highland Park Specialty Center 7,503
Village
Ft. Worth, TX University Park Specialty Center 6,000
Village
Greenville, Greenville Mall Regional 5,076
SC Shopping Center
Houston, TX Highland Village Specialty Center 6,189
Houston, TX Town and Country Specialty Center 5,883
Village
Houston, TX Champions Forest Specialty Center 5,500
Plaza
Indianapolis, Keystone Fashion Regional 3,829
IN Mall Shopping Center
Jackson, MS The Rogue Compound Free Standing 3,000
Kansas City, Country Club Plaza Specialty Center 4,155
MO
Leawood, KS Town Center Plaza Specialty Center 5,000
(Kansas City
metro)
Littleton, CO Park Meadows Mall Regional 5,465
(Denver Shopping Center
metro)
Louisville, Mall St. Matthews Regional 4,292
KY Shopping Center
Lubbock, TX 8201 Quaker Avenue Specialty Center 3,897
Marietta, GA The Avenue East Specialty Center 5,020
(Atlanta Cobb
metro)
McLean, VA Tyson's Galleria Regional 5,083
Shopping Center
Memphis, TN Poplar Avenue Specialty Center 5,085
Nashville, TN The Mall at Regional 4,814
Greenhills Shopping Center
Norman, OK Campus Corner Specialty Center 8,402
Center
Norman, OK(1) 575 S. University Free Standing 12,38
Blvd. 2
Oakbrook, IL Oakbrook Center Regional 4,860
(Chicago Shopping Center
Metro)
Oklahoma 50 Penn Place Specialty Center 13,40
City, OK 2
Omaha, NE One Pacific Place Specialty Center 4,397
Palo Alto, CA Stanford Shopping Regional 4,275
(San Center Shopping Center
Francisco
Metro)
Plano, TX Park and Preston Free Standing 5,525
(Dallas
metro)
Raleigh, NC Crabtree Valley Regional 5,205
Mall Shopping Center
Richmond, VA River Road Specialty Center 5,000
Shopping Center
Salt Lake Trolley Square Specialty Center 5,716
City, UT Center
San Antonio, Alamo Quarry Specialty Center 5,500
TX Market
Southlake, TX Southlake Town Specialty Center 5,462
(Dallas Square
metro)
St. Louis, MO Plaza Frontenac Specialty Center 4,216
Tulsa, OK Farm Shopping Specialty Center 3,888
Center
Tulsa, OK Utica Square Specialty Center 7,686
Wichita, KS The Bradley Fair Specialty Center 5,500
Center
(1) Outlet
store
The employee population of a typical full-line Harold's
store consists of a store manager, two assistant managers
(ladies' 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). The majority of sales associates are
generally paid a commission against a draw. Commissions range
from 1% to 11% based on the type of product sold and the tenure
and productivity of the associate. Store managers are paid a
salary plus a performance bonus based on attainment of sales
goals, expense control, inventory shrinkage and random store shop
scores.
Product Development and Sourcing Programs
The Company's product development and sourcing programs
enable it to offer exclusive items not available in competing
stores or catalogs. More than 95% of sales are 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 offer superior quality
and fit as well as improve its initial mark up. The fit and
quality of a garment are crucial to the Company's success. The
Company believes it has improved these areas which has translated
into improved sales. The Company's private label merchandise
consists of items developed by the Company and manufactured
exclusively for the Company.
An important component of the Company's product development
programs is market research of styles and fabrics. The Company's
design team shops European and domestic markets for emerging
fashion trends and for fabric, artwork and samples for new
garment designs. 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 implemented
through its offices in New York and Dallas, Texas and its
association with independent agents in Hong Kong; Florence,
Italy; Istanbul, Turkey; and Porto, Portugal. The Company
imports a significant portion of its merchandise directly from
the Far East and Italy.
The Company's merchandisers review the developed styles,
analyze fashion trends and historical data and select the best
pieces to convert into prints and patterns for the next season.
Once the new styles are selected, the team then determines the
specifications of various styles - detailing a garment's cut,
fit, fabric, color and trim. After the specifications have been
finalized, the fabric is ordered from domestic and international
fabric mills. The finished fabric is then shipped to
manufacturers who cut, sew and trim the completed design.
Additionally, a growing percentage of merchandise is purchased as
finished goods.
The Company's line of leather goods, which are sold in all
store locations, is made and sourced through various third
parties in Italy and Asia. Additionally, a growing portion of
the assortments in selected accessory areas are represented by
branded merchandise. Shoes, belts, handbags and small leather
goods are often co-designed by the Company's merchandisers and
manufacturing partners.
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 have
an adverse impact on earnings. Such impact is dependent upon the
extent of the markdowns and the amount of inventory affected. The
Company utilizes its outlet stores to dispose of prior season or
slow moving merchandise. In addition, in lieu of utilizing
outside liquidation resources ("jobbers"), slow moving
merchandise is generally cleared periodically 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 in Norman, Oklahoma capable of processing merchandise
for 74 stores. 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. The majority of
merchandise arrives at the distribution center with bar coded
tickets placed on the garment by the vendor allowing merchandise
to be processed more efficiently. Each item is examined, sorted
and boxed for shipment by common carrier to the Company's stores.
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 has historically followed a seasonal
pattern, peaking three times per year during early spring (March
through April), the early fall (September through October) and
holiday (Thanksgiving through Christmas) periods. During 2004,
approximately 51% of the Company's sales occurred during the
third and fourth quarters. The majority of the Company's
cumulative net loss applicable to common stockholders, however,
was incurred during the first and second 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 e-commerce,
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.
Important factors in competing successfully in the retail
industry include the following: 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, marketing and
customer service. 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 could 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. Credit card sales as a percent of total
sales were 84% in 2004, 84% in 2003 and 73% in 2002. In 2004,
32% of total sales were made with the Harold's credit card and
52% 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 29, 2005, the provision for bad debts from Company
credit card sales was approximately 0.6% of Harold's proprietary
credit card sales for 2004. The Company's bad debt experience
from the Harold's proprietary credit card has been relatively
stable from year to year.
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 29, 2005,
the Company had approximately 22,885 active credit accounts and
the average cardholder had a credit limit of $1,600 and an
outstanding balance of $316. Charges by holders of the Company's
credit card during 2004 totaled approximately $35,457,000.
Finance charge revenue is netted against selling, general and
administrative expenses and was approximately $1,142,000,
$1,140,000, and $1,152,000, in 2004, 2003, and 2002,
respectively.
Advertising
The Company maintains an in-house marketing department,
which produces and designs in-house the Company's direct mail
pieces and e-commerce website. In 2004, the Company spent
approximately $4,313,000 (4.8% of sales) on advertising and
direct mail production costs as compared to approximately
$4,190,000 (4.6% of sales) in 2003. These expenditures include
the production and mailing costs associated with the Company's
catalog. The marketing 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's management information systems are located at
an Administrative Office in Norman, Oklahoma and at its Corporate
Office in Dallas, Texas. These systems consist of a full range of
retail, financial and merchandising systems, including credit,
inventory distribution and control, sales reporting, accounts
payable, budgeting and forecasting, financial reporting,
merchandise 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 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 utilizes software from JDA, a computerized
merchandise planning and allocation system, which interacts with
the Company's AS400 and Island Pacific Systems software. JDA
facilitates seasonal planning and allocation by department and
store, and provides certain data for financial planning.
In 2003, the Company completed the implementation of
CommercialWare's order management system and in 2004 the Company
replaced its in-house developed warehouse management system with
Manhattan Associates warehouse management system. These two
initiatives were undertaken to facilitate a return to Direct
channel business, including internet sales, and to make necessary
improvements to the Company's distribution center operations. In
addition to being able to take orders online and at the Company's
call center, sales associates can conduct customer searches for
merchandise no longer available in their store using an in-house
developed system available at each cash register.
Information Available on our Website
Our corporate internet address is www.harolds.com. Our
website provides a hyperlink to a third party website through
which our annual, quarterly and current reports, amendments to
those reports, as well as other documents we file electronically
with the Securities and Exchange Commission ("SEC") are available
free of charge. We believe these reports are made available as
soon as reasonably practicable after we electronically file them
with, or furnish them to, the SEC. We do not provide any
information directly to the third-party website, and we do not
check its accuracy. Copies of these reports can also be obtained
from the SEC's website at www.sec.gov.
Trademarks, Service Marks, and Copyrights
"Harold's", "Harold Powell", "Old School", "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 three Houston stores 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, 2005, the Company had approximately 341
full-time and 347 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.
Certain Additional Business Risk Factors
We must improve our financial performance and become consistently
profitable.
For six years through 2003, the Company reported operating
losses and deficit cash flows from operating activities. During
this period, we experienced restructuring resulting in store
closings and reductions of personnel. In 2004 we employed a new
Chief Executive Officer and we experienced significantly improved
financial results reporting a $95,000 operating profit (before
preferred dividends) but continued to report a net loss
applicable to common shares of $1.4 million. In addition, we
have limited cash flow from operating activities to finance
expansion or additional investment. Our future success depends
upon our ability to improve our financial performance and become
consistently profitable. While we believe our strategic
initiatives that are in place will result in ongoing improvements
in financial performance, there can be no assurance that we will
achieve sustained profitability and cash flow.
Our performance may depend on our ability to respond to changes
in customer demands and fashion trends in a timely manner.
We have historically experienced fluctuations in customer
response to our merchandise assortments. Our future performance
depends on our ability to consistently anticipate, assess and
react to the changing demands of our customer base. If we fail
to anticipate fashion trends, select the right merchandise
assortment, maintain appropriate inventory levels and creatively
present merchandise in a way that is appealing to our customer
base on a consistent basis, our sales could decline
significantly, and we could then be required to mark down certain
merchandise to significantly lower prices to sell excess
inventory, which would result in lower gross margins. As a
private label merchandiser, we assume certain risks, including
long product lead times and high initial purchase commitments,
that amplify the consequences of any miscalculation that we might
make in anticipating fashion trends or interpreting them for our
customers. We can provide no assurance that we will be able to
identify and offer merchandise that appeals to our customer-base
or that the introduction of new merchandise categories will be
successful or profitable.
Our ability to anticipate and effectively respond to
changing fashion trends depends in part on our ability to attract
and retain key personnel in our design, merchandising, marketing
and other functions. Competition for this personnel is intense,
and we cannot be sure that we will be able to attract and retain
a sufficient number of qualified personnel in future periods.
Also see the section entitled "Employees" above in this Item 1.
Our future success will depend upon brand awareness and the
effectiveness of our marketing programs.
Our future success will depend upon our ability to
effectively define, evolve and promote our brand. In order to
achieve and maintain significant brand name recognition, we will
need to increase investments in the development of the brand
through various means, including customer research, advertising
and promotional events, direct mail marketing and internet
marketing. We can provide no assurance that the marketing
strategies we implement and the investments we make will be
successful in building significant brand awareness or attracting
new customers.
Our business is highly competitive and depends on consumer
spending patterns.
The specialty retail industry is highly competitive. We
compete with national and local department stores, specialty and
discount store chains, independent retail stores and internet
businesses that market similar lines of merchandise. We face a
variety of competitive challenges including:
- anticipating and quickly responding to changing
consumer demands;
- maintaining favorable brand recognition and
effectively marketing our products to consumers in
several diverse market segments;
- developing innovative, high-quality products in
sizes, colors and styles that appeal to consumers of
varying age groups and tastes;
- sourcing merchandise efficiently;
- competitively pricing our products and achieving
customer perception of value; and
- providing strong and effective marketing support.
Our business is sensitive to a number of factors that
influence the levels of consumer spending, including political
and economic conditions such as recessionary environments, the
levels of disposable consumer income, consumer debt, interest
rates and consumer confidence. Declines in consumer spending on
apparel and accessories could have an adverse effect on our
operating results.
We experience fluctuations in our comparable store sales and
margins.
Our continued success depends, in part, upon our ability to
continue to further improve sales, as well as both gross margins
and operating margins. Our comparable store sales have
fluctuated significantly in the past on an annual, quarterly and
monthly basis, and we expect that they will continue to fluctuate
in the future. A variety of factors affect comparable store
sales, including fashion trends, competition, current economic
conditions, the timing of release of new merchandise and
promotional events, changes in our merchandise mix, the success
of marketing programs and weather conditions. These factors may
cause our comparable store sales results to differ materially
from prior periods and from expectations.
Our ability to deliver healthy comparable store sales
results and margins depends in large part on accurately
forecasting demand and fashion trends, selecting effective
marketing techniques, providing an appropriate mix of merchandise
for our customer base, managing inventory effectively and using
more effective pricing strategies
Our success is dependent on the performance of our vendors and
service providers.
Our business depends on the performance of third parties,
including manufacturers and foreign buying agents,
telecommunications service providers, the United States Postal
Service, United Parcel Service, shipping companies, landlords,
paper manufacturers, printers, photographers, creative designers
and models and credit card processing companies.
Any interruptions or delays in these services could
materially and adversely affect our business and financial
condition. Although we believe that, in general, the goods and
services we obtain from third parties could be purchased from
other sources, identifying and obtaining substitute goods and
services could result in delays and increased costs. We do not
maintain supply contracts with any of our private label or other
merchandise vendors. Rather, we acquire merchandise via purchase
orders that terminate upon completion of the order. If any
significant merchandise vendor or buying agent were to suddenly
discontinue its relationship with us, we could experience
temporary delivery delays until a substitute supplier could be
found.
Our business is subject to a number of external costs that we are
unable to control.
Our business is subject to a number of external costs we are
unable to control, including labor costs, insurance costs,
printing, paper and postage expenses, shipping charges associated
with distributing merchandise to our customers and stores, retail
store facility rental and construction costs, and inventory
acquisition costs, including product costs, quota and customs
charges. Any increase in these or other external costs could
adversely affect our financial position, results of operations
and cash flows.
Talented personnel are critical to our success.
Our success depends to a significant extent upon our ability
to retain key personnel, particularly Hugh W. Mullins, President
and Chief Executive Officer, and to continue to attract talented
new personnel. The loss of the services of Mr. Mullins or one or
more of our current members of senior management, or our failure
to attract talented new employees, could have an adverse effect
on our business.
A major failure of our information systems could harm our
business.
We depend on information systems to operate our website,
process transactions, respond to customer inquiries, manage
inventory, purchase, sell and ship goods on a timely basis and
maintain cost-efficient operations. Any material disruption or
slowdown of our systems could cause information to be lost or
delayed which could have a negative impact on our business. We
may experience operational problems with our information systems
as a result of system failures, viruses, computer "hackers" or
other causes. We cannot assure that our systems will be adequate
to support future growth.
Our financial resources are limited, and we may not be able to
attract additional sources of financing.
Other than our secured bank credit facility which supports
our investments in inventory and accounts receivable, our
principal sources of financing from 2001 through 2003 have been
from Inter-Him, N.V., an entity controlled by Ronald de Waal,
Howard Lester, one of our directors, and other directors who have
invested an aggregate of $15 million in shares of preferred stock
and have participated in $4 million of our bank financing. The
terms of the preferred stock permit the holders to elect a
majority of our directors and the consent of the holders of the
preferred stock is required for any significant actions,
including additional financing. We are substantially dependent
on the support of Ronald de Waal as the owner of Inter-Him and
controlling shareholder of the Company for any further financing.
Without additional financing, our ability to make additional
investments in marketing and store expansions are significantly
limited.
Our outstanding preferred stock limits our ability to achieve
financial returns for our holders of common stock.
As of January 29, 2005, we have outstanding three series of
preferred stock with an aggregate liquidation value of $16.5
million. Holders of preferred stock are entitled to annual
dividends in the aggregate amount of approximately $1.5 million
before any dividends are paid on common stock, and these
dividends reduce the amount of our net income applicable to our
shares of common stock. Until we achieve net income in excess of
the aggregate dividends payable to holders of preferred stock, we
will continue to report net losses per share of common stock.
We do not expect to pay dividends on our common stock.
Due to our weak financial performance and restrictions under
our existing credit agreement and preferred stock terms, we do
not expect to pay dividends on our common stock for the
foreseeable future.
Ronald de Waal, through his ownership of Inter-Him, N.V., which
owns a majority of our outstanding preferred stock, controls the
Company.
We are effectively controlled by Ronald de Waal by reason of
his ownership of Inter-Him, N.V. which owns a majority of our
outstanding preferred stock. Holders of the preferred stock have
the ability to elect a majority of the board of directors and
otherwise control the policies and strategy of the Company. The
financial and business objectives of Mr. de Waal and the other
holders of preferred stock as it relates to the Company may be
different from those that might be beneficial to holders of
common stock. Holders of the common stock are dependent on the
fiduciary duties of the Board of Directors, a majority of whom
are elected by the holders of preferred stock, to protect their
interests.
ITEM 2. PROPERTIES
Store Leases
At January 29, 2005, the Company owned the Austin outlet
store and leased 40 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 10 to 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 percentage rent only. All other store leases provide
for a base rent with percentage rent payable above specified
minimum net sales. Seven of the leased stores open during all of
2004 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 Number
Leases of
Expire Stores
2005 1
2006-2007 7
2008-2010 20
2011 and 12
later
The Company generally has been successful in renewing its
store leases as they expire.
During 2004, the Company did not enter into any new store
leases. Management believes the terms of its 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 $65 per square
foot annually over the terms of the leases. The following table
sets forth the fixed and variable components of the Company's
rent expense for the years indicated:
2004 2003 2002
Base rent $6,797, $8,544, $7,793,
000 000 000
Additional rents
computed as a 252,000 217,000 288,000
percentage of
sales
Total $7,049, $8,761, $8,081,
000 000 000
Corporate Headquarters and Merchandise Buying Office
The Company leases a 46,132 square foot building used
primarily as its corporate headquarters and buying offices in
Dallas, Texas. The lessor of the Dallas location is a limited
partnership whose partners include W. Howard Lester, a director
of the Company and a partnership which is comprised of partners
Rebecca Powell Casey, an executive officer and director of the
Company and certain of her family members. The lease, which was
amended in 2003, expires September, 2010 with current monthly
rent payments of $26,490, plus insurance, utilities and property
taxes until November, 2005 at which time monthly rent will be
$38,443, plus insurance, utilities and property taxes until
September, 2007 at which time monthly rent will be $40,366 plus
insurance, utilities and property taxes until the expiration of
the lease. This lease contains two renewal options of five years
each. This lease has been approved by all independent directors
as being on terms at or below available competitive market
renewal rates.
Administrative Offices and Distribution Center
The Company owns a building in Norman, Oklahoma comprised of
approximately 18,000 square feet. This space is utilized by the
Company for its administrative functions.
The Company leases an 85,000 square foot warehouse
distribution center facility located in Norman, Oklahoma. The
owner and lessor of the distribution center is the limited
partnership of which Rebecca Powell Casey and members of her
family are partners. The term of the distribution center lease
expires in June 2012, with annual rent increasing on a fixed
scale from $365,416 in 2004 up to a maximum of $419,552 during
the final year of the lease. This lease has been approved by all
independent directors as being on terms at or below available
competitive market renewal rates.
ITEM 3. LEGAL PROCEEDINGS
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.
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 year covered by this report.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY
SECURITIES
At March 15, 2005, there were 663 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.
Quarterly Common Stock Price
Ranges
2004 High Low
1st Quarter 3.20 2.44
2nd Quarter 2.80 2.44
3rd Quarter 2.60 1.35
4th Quarter 1.60 1.15
2003 High Low
1st Quarter $1.20 $0.80
2nd Quarter $1.70 $0.80
3rd Quarter $3.40 $1.03
4th Quarter $5.25 $2.35
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.
The Company has three series of preferred stock outstanding,
issued in 2001, 2002 and 2003 in the aggregate amount of $15
million. These shares are entitled to cumulative dividends of
10% on $6 million of preferred stock and 8% on the remaining $9
million, subject to reduction if certain profitability targets
are met. See Note 8 to the Consolidated Financial Statements for
additional information on the preferred stock.
During 2004, approximately $1,501,000 of preferred stock
dividends and preferred stock issuance cost accretion was
recorded. Of this amount, approximately $1,441,000 represented
preferred stock dividends paid. Approximately $378,000 was paid
in additional shares of preferred stock (as provided by the terms
of the preferred stocks) and approximately $1,063,000 was paid in
cash.
The Company's primary lending agreement does not currently
allow for the payment of dividends on common stock. This
agreement does, however, allow for the distribution of preferred
stock dividends.
ITEM 6. SELECTED 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. See Note 2 to the
Consolidated Financial Statements for additional information
regarding the restatement of prior year amounts. The approximate
impact of this restatement on 2001 was an increase to gross
profit of $1,855,000; a decrease in net loss applicable to common
stockholders of $389,000; a decrease in net loss per common share
of $0.07; an increase in total assets of $10,037,000; a decrease
in stockholders' equity of $1,539,000; and a decrease in
stockholders' equity per share of $0.25. The approximate
impact of this restatement on 2000 was an increase to gross
profit of $1,784,000; a decrease in net loss applicable to common
stockholders of $330,000; a decrease in net loss per common share
of $0.06; an increase in total assets of $11,503,000; a decrease
in stockholders' equity of $1,929,000; and a decrease in
stockholders' equity per share of $0.32.
2004 2003 2002 2001 2000
*
(Dollar amounts in (Resta (Resta (Restat (Resta
thousands, except per ted) ted) ed) ted)
share data)
Statements of Operations
Data:
Sales $89,3 91,6 89,7 104,6 127,4
57 83 81 24 84
Percentage (decrease) (2.5) 2.1% (14. (17.9) (6.4)
increase in total sales % 2)% % %
Gross profit on sales $31,7 30,7 25,4 24,44 35,49
(1) 14 68 43 5 2
Percentage of sales 35.5% 33.6 28.4% 23.4% 27.8
% %
Net income (loss) before $ (12,7 (17,31 (7,86
income taxes 95 (5,67 89) 8) 4)
1)
Percentage of sales 0.1% (6.2) (14.2 (16.6) (6.2)
% )% % %
Provision (benefit) for $ - 3,20 (3,07 (3,27
income taxes - 6 7) 8)
Percentage of sales 0.0% 0.0% 3.6% (2.9) (2.6)
% %
Preferred stock
dividends and accretion $ 1,306 863 634 -
of preferred stock 1,501
issuance costs
Percentage of sales 1.7% 1.4% 1.0% 0.6% 0.0%
Net loss applicable to $(1,4 (16,8 (14,87 (4,58
common stockholders 06) (6,97 58) 5) 6)
7)
Percentage of sales (1.6) (7.6) (18.8 (14.2) (3.6)
% % )% % %
Net loss per common
share: $(0.2 (2.77 (2.44) (0.75
Basic and diluted 3) (1.14 ) )
)
Other Operating Data:
Stores open at end of 41 42 50 52 52
period
Increase (decrease) in
comparable store sales
(52-53 week basis) 1.9% 11.3% (9.9% (16.3% (11.9
) ) %)
Balance Sheet Data:
Working capital (2) $ 888 309 8,761 10,94
518 7
Total assets $43,0 42,7 51,1 64,62 79,85
65 45 20 6 6
Long-term debt, net of $ 1,358 1,62 1,921 2,758
current maturities 580 1
Stockholders' (deficit) $ (1,45 15,37 30,23
equity (9,59 (8,20 6) 8 9
4) 7)
Stockholders' (deficit) $(1.5 (0.24 2.53 4.97
equity per share 4) (1.34 )
)
*Each of the years presented above is a 52 week year except for
2000 which was a 53 week year.
(In accordance with retail industry practice, gross profit from
1sales is calculated by subtracting cost of goods sold
)(including occupancy and central buying expenses) from sales.
(Long-term debt is classified as current to comply with
2accounting pronouncement EITF 95-22. See Note 6 to the
)Consolidated Financial Statements for more information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
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-K 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; the customary risks of purchasing
merchandise abroad, including longer lead times, higher initial
purchase commitments and foreign currency fluctuations; the
Company's ability to attract and retain qualified personnel;
weather conditions in the Company's operating regions; laws and
government regulations; general business and economic conditions;
availability of capital; the existence or absence of operating
initiatives, publicity, advertising and promotional efforts;
changes in accounting policies; and the ability of new management
to improve the Company's financial condition and performance. In
addition, the Company disclaims any intent or obligation to
update those forward-looking statements.
Overview
Harold's is a multi-channel specialty retailer of ladies'
and men's apparel, including accessories and footwear. Harold's
markets its merchandise through retail stores, catalogs and its
website at www.harolds.com.
Results of Operations
The following table reflects items in the Company's
Statements of Operations as a percentage of sales for the periods
indicated:
52 52 52
Weeks Weeks Weeks
2004 2003 2002
(Rest (Rest
ated) ated)
Sales 100.0% 100.0% 100.0%
Cost of goods sold (including
occupancy and central buying (64.5) (66.4 (71.6
expenses) ) )
Selling, general and (29.7) (29.4 (33.4
administrative expenses ) )
Depreciation and amortization (4.6) (7.6) (6.5)
Restructuring charges - (1.8) (1.2)
Interest expense (1.1) (1.0) (1.5)
Income (loss) before income 0.1 (6.2) (14.2
taxes )
Provision for income taxes - - 3.6
Net income (loss) 0.1% (6.2)% (17.8)
%
The following table reflects the increases and decreases in
Company sales for the periods indicated:
52 52 52
Weeks Weeks Weeks
2004 2003 2002
Sales (000's) $89,35 $91,68 $89,78
7 3 1
Total sales (decline) growth (2.5)% 2.1% (14.2)%
Increase (decrease) in 1.9 11.3 (9.9)
comparable store sales
Store locations:
Existing stores, beginning of 42 50 52
period
Stores closed (1) (8) (2)
New stores opened during - - -
period
Total stores, end of period 41 42 50
During 2004, total sales decreased 2.5% as compared to an
increase of 2.1% in 2003 and a decrease of 14.2% in 2002. No new
locations were opened during 2004 or 2003, and one store was
closed in 2004 compared to eight closings in 2003. Beginning in
April 2004, the Company began to significantly reduce its
dependence on promotional activities. Despite this strategic
change, comparable store sales increased 1.9% during 2004,
compared to an increase of 11.3% in 2003. The Company believes
the increases experienced in comparable store sales during 2004
and 2003 were primarily attributable to strong acceptance by
customers to the merchandise assortments offered.
During 2003, total sales increased 2.1% as compared to a
decrease of 14.2% in 2002. No new locations were opened during
2003 or 2002, and two stores were closed in 2002 and eight in
2003. Comparable store sales increased 11.3% during 2003,
compared to a decline of 9.9% in 2002. The Company believes that
the increases experienced in comparable store sales during 2003
were primarily attributable to strong acceptance by customers to
the merchandise assortments offered. The declines experienced in
comparable store sales during 2002 were primarily attributable to
sales declines experienced in the full-price retail stores during
the fall and holiday periods, a result of inventory levels that
were down considerably over the prior year and the difficult
retail climate experienced by many retailers during the 2002
holiday period.
Gross margin represents net sales less cost of products and
merchandising. Cost of products and merchandising consists
primarily of product costs (e.g., product development, sourcing,
merchandising, inventory control, inventory acquisition costs and
inventory markdowns) and operating costs (e.g., occupancy costs
for the Company's retail stores). The Company's gross margin
increased to 35.5% in 2004 from 33.6% in 2003. The increase in
the Company's gross margin was primarily due to increased rates
of selling at full-price requiring fewer needed markdowns.
During 2003, the Company's gross margin increased to 33.6% from
28.4% in 2002, or 5.2%. The increase in the Company's 2003 gross
margin was primarily due to fewer markdowns being recorded in the
full-price stores due to stronger sales.
Selling, general and administrative expenses consist
primarily of retail store selling costs, costs to produce, print
and distribute direct response catalogs, as well as corporate
administrative costs. Selling, general and administrative
expenses (including advertising and catalog production costs)
increased slightly to 29.7% of sales in 2004 compared to 29.4% of
sales in 2003. Selling, general and administrative expenses
declined in the aggregate by $366,000 but increased slightly as a
percent of sales primarily due to transitional costs associated
with the hiring of Mr. Mullins and the retirement of Mr. Hinkley.
Selling, general and administrative expenses decreased to 29.4%
of sales in 2003 compared to 33.4% of sales in 2002. The
decrease in selling, general and administrative expenses as a
percentage of sales in 2003 was primarily due to savings
experienced from a corporate restructuring commenced in January
2003, savings experienced as a result of closing eight
unprofitable store locations during 2003, and increasing
comparable store sales trends which provided leverage of fixed
costs.
The Company recorded approximately $1,630,000 in
restructuring charges during 2003 compared to approximately
$1,060,000 in restructuring charges in 2002. The restructuring
charges of 2003 primarily relate to lease termination costs paid
to close eight unprofitable store locations. For 2002, the
restructuring charges recorded in the fourth quarter consisted of
severance costs of approximately $330,000 associated with
elimination of positions in the corporate office, with the
remainder of restructuring charges attributable to the
acceleration of amortization of assets in conjunction with
planned store closings in the first half of 2003. No
restructuring charges were recorded in 2004.
Total 2004 interest expense increased approximately $100,000
from 2003 due to higher average interest rates on the Company's
outstanding borrowings and higher average outstanding debt
balances. The average balance on total outstanding debt was
$20,663,000 in 2004, compared to $19,433,000 in 2003. The
increase in average debt balances resulted principally from
increased inventory levels. Total 2003 interest expense
decreased $442,000 from 2002 due to lower average interest rates
on the Company's outstanding borrowings. The average balance on
total outstanding debt was $19,433,000 in 2003, compared to
$19,729,000 in 2002. Increases to interest expense may occur if
the Company's cash flow requires additional borrowed funds and if
interest rates continue to rise.
The Company's effective income tax rate was 0% in 2004, 0%
in 2003 and 24.2% in 2002. During 2002, the Company increased
its valuation allowance to fully provide for all remaining
deferred tax assets because the Company's history of operating
losses made the realization of these assets uncertain. It is
expected that such amounts could be utilized for tax purposes
against any future operating income.
Cash Flows
Cash Flows From Operating Activities. During 2004, net cash
provided by operating activities was $343,000 as compared to net
cash used in 2003 of $1,891,000. The increase in cash flows in
2004 are primarily attributed to a $5.8 million improvement in
net income offset by a $5.3 million net increase in inventories.
Cash Flows From Investing Activities. For 2004, net cash
used in investing activities was $2,028,000 as compared to
$1,614,000 in 2003. The increase is primarily attributed to a
$326,000 increase in capital expenditures. Capital expenditures
during 2004 and 2003 were invested principally in remodeling of
existing stores and equipment expenditures in existing
operations.
Cash Flows From Financing Activities. During 2004, the
Company made periodic borrowings under its revolving credit
facility to finance its inventory purchases, product development
and private label programs, store remodeling and equipment
purchases for the year (see "Liquidity").
The Company has a line of credit with its bank. This line
had average balances of $19,203,000 and $17,679,000 for 2004 and
2003, respectively. During 2004, this line of credit had a high
balance of $22,829,000 and a balance of $19,178,000 as of January
29, 2005. The balance at March 15, 2005 was $20,867,000.
The Company has no off-balance sheet arrangements or
transactions with unconsolidated, limited purpose entities, nor
does it have any undisclosed material transactions or commitments
involving related persons or entities.
Liquidity
The Company considers the following as measures of liquidity
and capital resources as of the dates indicated (dollars in
thousands).
Year end
2004 2003 2002
(Restat (Restat
ed) ed)
Working capital (000's) $518 $888 $309
(1)
Current ratio (1) 1.02:1 1.03:1 1.01:1
Ratio of working capital .01:1 .02:1 .01:1
to total assets (1)
Ratio of long-term debt
(including current 2.98:1 2.36:1 2.10:1
maturities) to
stockholders' equity (2)
(1) Long-term debt is classified as current to comply
with accounting pronouncement EITF 95-22. See Note 6
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 $19,696, $17,508 and $16,401 in 2004, 2003
and 2002, respectively; current ratio would be
3.01:1, 2.81:1 and 2.19:1 in 2004, 2003 and 2002,
respectively and working capital to total assets
would be .46:1, .41:1 and .32:1 in 2004, 2003 and
2002, respectively.
(2) Preferred stock is treated as equity for this
calculation.
Cash flow from operations and proceeds from credit
facilities represent the Company's sources of liquidity,
supplemented in 2004 and prior periods by investments and
extensions of credit from its preferred shareholders. Management
anticipates these sources of liquidity to be adequate for the
foreseeable future but does not anticipate needing funding from
preferred shareholders in 2005. The Company's capital
expenditures budget for 2005 is approximately $2,000,000 to be
used for the purchase of fixtures and equipment as well as store
remodeling expenses.
See Note 6 to the Consolidated Financial Statements for
information about restrictions and covenants under the Company's
revolving line of credit.
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 fall
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 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.
Critical Accounting Policies
The Consolidated Financial Statements and Notes to
Consolidated Financial Statements contain information that is
pertinent to Management's Discussion and Analysis. In preparing
the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Changes to these assumptions and estimates
could have a material effect on the Company's consolidated
financial statements. However, the Company believes it has taken
reasonable but conservative positions, where assumptions and
estimates are used, in order to minimize the negative financial
impact to the Company that could result if actual results vary
from the assumptions and estimates. In management's opinion, the
areas of the Company where the most significant judgment is
exercised is in the allowance for doubtful accounts related to
the Company's proprietary credit card program, the valuation of
inventory, asset impairment estimates and revenue recognition.
The selection, application and disclosure of the following
critical accounting estimates have been discussed with the
Company's audit committee.
In 2004, approximately 32% of the Company's net retail sales
were made under its proprietary credit card program, which
resulted in customer accounts receivable balances of
approximately $7,343,000 at January 29, 2005. The Company has
significant experience in managing its credit card program. Each
month, the Company reviews all of its credit card accounts and
writes off those deemed uncollectible. The allowance for
uncollectible accounts is maintained and periodically reviewed.
The allowance is primarily based on account write-off trends and
aging information. The Company does not expect actual results to
vary significantly from its estimate.
The Company uses the retail inventory method. Under this
method, the Company records markdowns to value merchandise
inventories at net realizable value. The Company closely
monitors actual and forecasted sales trends, current inventory
levels, and aging information by merchandise categories. If
forecasted sales are not achieved, additional markdowns may be
needed in future periods to clear excess or slow-moving
merchandise, which may result in lower gross margins.
When a store experiences unfavorable operating performance,
the Company evaluates whether an impairment charge should be
recorded. A store's assets are evaluated for impairment by
comparing the store's estimated undiscounted cash flows to the
assets' carrying value. If the cash flows are not sufficient to
recover the carrying value, the assets are written down to fair
value. Impairment losses associated with these reviews have not
been significant. However, if comparative store sales decline,
future impairment losses could be significant.
Sales from store locations represented 99% of the Company's
total sales for 2004. These sales are recognized at the time of
the customer's purchase. Sales are net of returns and exclude
sales tax. The Company's direct catalog and internet sales
represented about one percent of the total sales during 2004.
These sales are recognized at the time the order is shipped to
the customer. Gift card sales are recognized as revenue when the
gift card is redeemed, not when it is sold.
Impact of New Accounting Pronouncements
On December 16, 2004, the FASB issued FASB Statement No. 123
(revised 2004) ("SFAS 123(R)"), "Share-Based Payment", which must
be adopted by the Company no later than January 29, 2006. SFAS
123(R) requires an entity to recognize compensation expense in an
amount equal to the fair value of share-based payments granted to
employees. The Company will adopt SFAS 123(R) in the required
period and apply the standard using the modified prospective
method, which requires compensation expense to be recorded for
new and modified awards. For any unvested portion of previously
issued and outstanding awards, compensation expense is required
to be recorded based on the previously disclosed SFAS 123
methodology, and amounts. Prior periods presented are not
required to be restated. The Company is still assessing the
impact on its results of operations and financial position upon
the adoption of SFAS 123(R).
Commitments
The following table reflects certain of the Company's
commitments as of January 29, 2005.
Payments due by Period (In Thousands)
Less More
than than
Contractual Total 1 year 1-3 3-5 5 years
Obligations years years
Long-term debt $20,53 $19,95 ( $ $ $
8 8 1 188 222 170
)
Store leases (2) 31,426 6,111 11,794 8,124 5,397
Operating leases 6,176 1,028 1,990 1,851 1,307
(other than
stores)
Purchase 425 178 147 50 50
obligations
Estimated interest 8,709 1,274 2,530 2,479 2,426
payments
Total $67,27 $28,54 $16,64 $12,72 $9,350
4 9 9 6
(1) The expiration of the Company's loan agreement, which
represents the overwhelming majority of this amount, is
February 5, 2007. It is unlikely such debt will be repaid
within one year. See Note 6 to the Consolidated Financial
Statements for further information.
(2) Store leases are based on minimum rents exclusive of
percentage rent based on sales which could increase rental
expense.
The foregoing table does not include contractual commitments
pursuant to executory contracts for products and services such as
telephone, data, computer maintenance and other regular payments
pursuant to contracts that are expected to remain in existence
for several years but as to which the Company's obligations are
contingent upon the Company's continued receipt of the contracted
products and services.
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 29, 2005, the Company had debt outstanding of
approximately $20.5 million. Of this amount, $1.3 million bears
interest at a weighted average fixed rate of 6.32%. The
remaining $19.2 million bears interest at a variable rate, which
averaged approximately 4.70% during 2004. A 10% increase in
short-term interest rates on the variable rate debt outstanding
at January 29, 2005 would approximate 46 basis points. Such an
increase in interest rates would increase the Company's interest
expense by approximately $88,000 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 management would take in response to
such a change is also not considered. If it were possible to
quantify this impact, the results could well be different than
the sensitivity effects shown above.
The table below provides information about the Company's
debt obligations that are sensitive to changes in interest rates:
Expected Maturity
(In thousands)
2005 2006 2007 2008 2009 Thereaf Total
ter
Long-term debt:
Variable Rate $19,17 $ $ $ $ $ $19,17
7 - - - - - 7
Weighted
Average 4.70% - - - - -
Interest Rate
Fixed Rate $ $ $ $ $ $ $
780 90 98 107 116 170 1,361
Weighted
Average 6.32% 6.32% 6.32% 6.32% 6.32% 6.32%
Interest Rate
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 29, 2005; 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 2004, 2003 or 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements included
immediately following the Exhibit Index to this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
CONSOLIDATED FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under Item 10 will be contained in
the definitive Proxy Statement of the Company for its 2005 Annual
Meeting of Stockholders (the "Proxy Statement") 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 29, 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information required under Item 11 will be contained in
the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under Item 12 will be contained in
the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 13 will be contained in
the Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under Item 14 will be contained in
the Proxy Statement and is incorporated herein by reference.
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) The following consolidated financial statements
and schedule are attached as a separate section of this report
entitled "Consolidated Financial Statements and Schedule":
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of January 29, 2005 and
January 31, 2004
Consolidated Statements of Operations for the Years Ended
January 29, 2005, January 31, 2004 and February 1, 2003
Consolidated Statements of Stockholders' Deficit for the
Years Ended January 29, 2005, January 31, 2004 and February 1,
2003
Consolidated Statements of Cash Flows for the Years Ended
January 29, 2005, January 31, 2004 and February 1, 2003
Notes to Consolidated Financial Statements
SCHEDULE:
Schedule II - Harold's Stores, Inc. and subsidiaries
valuation account
All other schedules have been omitted because they are not
applicable, not required, or the information is included
elsewhere in the financial statements or notes thereto.
(b) Exhibits: See accompanying Index to Exhibits. The Company
will furnish to any stockholder, upon written request, any
exhibit listed in the accompanying Index to Exhibits upon payment
by such stockholder of the Company's reasonable expenses in
furnishing any such exhibit.
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 29, /s/ Hugh W. Mullins
2005
Hugh W. Mullins
Chief Executive
Officer
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
President, Chief April 29,
/s/ Hugh W. Executive Officer 2005
Mullins and Director
Hugh W. Mullins (Principal Executive
Officer)
/s/ William E. Non-Executive Chairman April
Haslam of the Board 29, 2005
William E. Haslam and Director
/s/ Rebecca P. Executive Vice April
Casey President 29, 2005
Rebecca P. Casey and Director
/s/ Jodi L. Taylor Chief Financial April
Officer and Secretary 29, 2005
Jodi L. Taylor (Principal Financial
and
Accounting Officer)
/s/ Clark J. Director April
Hinkley 29, 2005
Clark J. Hinkley
/s/ James D. Director April
Abrams 29, 2005
James D. Abrams
/s/ Robert L. Director April
Anderson 29, 2005
Robert L. Anderson
/s/ Margaret A. Director April
Gilliam 29, 2005
Margaret A.
Gilliam
/s/ W. Howard Director April
Lester 29, 2005
W. Howard Lester
/s/ Leonard M. Director April
Snyder 29, 2005
Leonard M. Snyder
INDEX TO EXHIBITS
No. Description
3.1 Certificate of Incorporation of the Company, as amended
(Incorporated by reference to Exhibit 3.1 to Form 10-K
for the year ended February 3, 2001).
3.2 By-laws of the Company (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).
4.2 Certificate of Elimination of Designations of the Series
2001-A Preferred Stock (Incorporated by reference to
Exhibit 4.1 to Form 8-K dated August 2, 2002).
4.3 Certificate of Designations of the Amended Series 2001-A
Preferred Stock (Incorporated by reference to Exhibit 4.2
to Form 8-K dated August 2, 2002).
4.4 Certificate of Designations of the Series 2002-A
Preferred Stock (Incorporated by reference to Exhibit 4.3
to Form 8-K dated August 2, 2002).
4.5 Amendment to the Certificate of Designation of the
Amended Series 2001-A Preferred Stock ($0.01 Par Value)
of Harold's Stores, Inc., dated February 4, 2003
(Incorporated by reference to Exhibit 4.1 to Form 8-K
dated February 4, 2003).
4.6 Certificate of Designations of the Series 2003-A
Preferred Stock (Incorporated by reference to Exhibit 4.2
to Form 8-K dated February 4, 2003).
10. Lease Agreement effective May 1, 1996 between Company and
1 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 April 4,
2002. (Incorporated by reference to Exhibit 10.1 to Form
10-Q for the quarter ended May 4, 2002).
10. Amended and Restated Lease Agreement dated as of June 3,
2 1996 between Company 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. Amended and Restated Lease Agreement dated as of June 20,
3 2001 between Company and 329 Partners II Limited
Partnership (Outlet Store, Norman, Oklahoma)
(Incorporated by reference to Exhibit 10.6 to Form 10-K
for the year ended February 2, 2002).
10. 2002 Performance and Equity Incentive Plan of Company.
4* (Incorporated by reference to Definitive Proxy Statement
dated May 17, 2002, for annual meeting of shareholders
held on June 20, 2002.
10. Employment Agreement dated February 9, 2004 between
5* Company and Hubert W. Mullins (Incorporated by reference
to Exhibit 10.5 to Form 10-K for the year ended January
31, 2004).
10. Employment Agreement dated February 9, 2004 between
6* Company and Clark Hinkley (Incorporated by reference to
Exhibit 10.6 to Form 10-K for the year ended January 31,
2004).
10. Stock Option Agreement dated February 23, 2001 between
7* Company and Clark Hinkley (Incorporated by reference to
Exhibit 10.12 to Form 10-K for the year ended February 3,
2001).
10. First Amendment to Stock Option Agreement dated February
8* 9, 2004 between Company and Clark Hinkley (Incorporated
by reference to Exhibit 10.8 to Form 10-K for the year
ended January 31, 2004).
10. Employment and Deferred Compensation Agreement dated
9* February 1, 1998 between Company and Harold G. Powell
(Incorporated by reference to Exhibit 10.25 to Form 10-Q
for quarter ended May 2, 1998).
10. First Amendment dated February 28, 2001 to Employment and
10* Deferred Compensation Agreement between Company and
Harold G. Powell (Incorporated by reference to Exhibit
10.17 to Form 10-K for the year ended February 3, 2001).
10. Series 2001-A Preferred Stock Purchase Agreement dated
11 February 23, 2001 between Company and Inter-Him N.V.
(Incorporated by reference to Exhibit 10.1 to Form 8-K
dated February 28, 2001).
10. Investor Rights Agreement dated February 28, 2001 between
12 Company and Inter-Him N.V. (Incorporated by reference to
Exhibit 10.2 to Form 8-K dated February 28, 2001).
10. Voting Agreement dated February 28, 2001 among Company,
13 Inter-Him N.V. and the other stockholders named therein
(Incorporated by reference to Exhibit 10.3 to Form 8-K
dated February 28, 2001).
10. Right of First Refusal Agreement dated February 28, 2001
14 among Company, Inter-Him N.V. and the other stockholders
named therein (Incorporated by reference to Exhibit 10.4
to Form 8-K dated February 28, 2001).
10. First Amended and Restated Stockholders Agreement dated
15 June 15, 1998 among certain stockholders of Company
(Incorporated by reference to Exhibit 10.2 to Form 10-Q
for quarter ended August 1, 1998).
10. First Amendment dated February 28, 2001 to First Amended
16 and Restated Stockholders Agreement among certain
stockholders of Company (Incorporated by reference to
Exhibit 10.6 to Form 8-K dated February 28, 2001).
10. Series 2002-A Preferred Stock Purchase Agreement dated as
17 of June 26, 2002, by and among Harold's Stores, Inc.,
Inter-Him, N.V., W. Howard Lester, William E. Haslam,
Clark J. Hinkley and Margaret A. Gilliam (Incorporated by
reference to Exhibit 10.1 to Form 8-K dated August 2,
2002).
10. First Amendment to Investor Rights Agreement dated as of
18 August 2, 2002, by and among Harold's Stores, Inc., Inter-
Him, N.V., W. Howard Lester, William E. Haslam, Clark J.
Hinkley and Margaret A. Gilliam (Incorporated by
reference to Exhibit 10.2 to Form 8-K dated August 2,
2002).
10. First Amendment to Right of First Refusal Agreement dated
19 as of August 2, 2002, by and among Harold's Stores, Inc.,
Inter-Him, N.V., W. Howard Lester, Harold G. Powell, Anna
M. Powell, Rebecca Powell Casey, H. Rainey Powell, Lisa
Powell Hunt, Clay M. Hunt and Arvest Trust Company, N.A.
(Incorporated by reference to Exhibit 10.3 to Form 8-K
dated August 2, 2002).
10. First Amendment to Voting Agreement dated as of August 2,
20 2002, by and among Harold's Stores, Inc., Inter-Him,
N.V., W. Howard Lester, William E. Haslam, Clark J.
Hinkley, Margaret A. Gilliam, Harold G. Powell, Anna M.
Powell, Rebecca Powell Casey, H. Rainey Powell, Lisa
Powell Hunt, Clay M. Hunt and Arvest Trust Company, N.A.
(Incorporated by reference to Exhibit 10.4 to Form 8-K
dated August 2, 2002).
10. Series 2003-A Preferred Stock Purchase Agreement dated as
21 of February 5, 2003, by and among Harold's Stores, Inc.,
Inter-Him N.V. and W. Howard Lester (Incorporated by
reference to Exhibit 10.1 to Form 8-K dated February 4,
2003).
10. Second Amendment to Investor Rights Agreement dated as of
22 February 5, 2003, by and among Harold's Stores, Inc.,
Inter-Him N.V. and W. Howard Lester (Incorporated by
reference to Exhibit 10.2 to Form 8-K dated February 4,
2003).
10. Loan and Security Agreement dated as of February 5, 2003,
23 by and among Wells Fargo Retail Finance, LLC, Harold's
Stores, Inc., Harold's Financial Corporation, Harold's
Direct, Inc., Harold's Stores of Texas, L.P., Harold's
Stores of Georgia, L.P., and Harold's of Jackson, Inc.
(Incorporated by reference to Exhibit 10.3 to Form 8-K
dated February 4, 2003).
10. Series 2003-A Preferred Stock Investment Agreement dated
24 as of February 4, 2003, by and between Harold's Stores,
Inc. and 329 Partners-II Limited Partnership
(Incorporated by reference to Exhibit 10.6 to Form 8-K
dated February 4, 2003).
10. Form of Indemnification Agreement between Company and
25 members of its Board of Directors (Incorporated by
reference to Exhibit 10.36 to Form 10-K for the year
ended February 1, 2003).
10. Form of Waiver of Claims and Covenant Not to Sue
26 Directors between principal shareholders of the Company
and members of the Company's Board of Directors
(Incorporated by reference to Exhibit 10.37 to Form 10-K
for the year ended February 1, 2003).
10. Participation Agreement dated as of July 10, 2003, by and
27 between Wells Fargo Retail Finance II, LLC and RonHow,
LLC (Incorporated by reference to Exhibit 10.3 to Form 8-
K dated July 10, 2003).
10. Amended and Restated Participation Agreement dated as of
28 April 29, 2004, by and between Wells Fargo Retail Finance
II, LLC and RonHow, LLC (Incorporated by reference to
Exhibit 10.28 to Form 10-K for the year ended January 31,
2004).
10. Assignment and Assumption of Lease Agreement and Third
29 Amendment to Lease Agreement dated October 1, 2003 by and
between Company and 329 Partners-II Limited Partnership
(Dallas Buying Office, Dallas, Texas) (Incorporated by
reference to Exhibit 10.1 to Form 10-Q dated November 1,
2003).
10. Option Agreement between Company and RONHOW LLC dated
30 April 30, 2004 (Incorporated by reference to Exhibit
10.30 to Form 10-K for the year ended January 31, 2004).
10. First Amendment to Loan and Security Agreement dated as
31 of February 5, 2003, by and among Wells Fargo Retail
Finance, LLC, Harold's Stores, Inc., Harold's Financial
Corporation, Harold's Direct, Inc., Harold's Stores of
Texas, L.P., Harold's Stores of Georgia, L.P., and
Harold's of Jackson, Inc. (Incorporated by reference to
Exhibit 10.31 to Form 10-K for the year ended January 31,
2004).
10. Second Amendment to Loan and Security Agreement dated as
32 of April 29, 2004, by and among Wells Fargo Retail
Finance, LLC, Harold's Stores, Inc., Harold's Financial
Corporation, Harold's Direct, Inc., Harold's Stores of
Texas, L.P., Harold's Stores of Georgia, L.P., and
Harold's of Jackson, Inc. (Incorporated by reference to
Exhibit 10.32 to Form 10-K for the year ended January 31,
2004).
22. Subsidiaries of Company (Incorporated by Reference to
1 Exhibit 22.1 to Form 8-B Registration Statement,
Registration No. 1-10892).
23. Consent of Ernst & Young LLP.
1
31. Certification of Chief Executive Officer Pursuant to
1 Rule 13a-14(a) under the Securities Exchange Act of 1934.
31. Certification of Chief Financial Officer Pursuant to
2 Rule 13a-14(a) under the Securities Exchange Act of 1934.
32. Certification of Chief Executive Officer Pursuant to 18
1 U.S.C. Section 1350.
32. Certification of Chief Financial Officer Pursuant to 18
2 U.S.C. Section 1350
___________________________
* Constitutes a management contract or compensatory plan
or arrangement required to be filed as an exhibit to this
report.
Harold's Stores, Inc. and Subsidiaries
Consolidated Financial Statements and Schedule
January 29, 2005, January 31, 2004 and February 1, 2003
(With Independent Registered Public Accounting Firm's Report
Thereon)
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Harold's Stores, Inc. has the responsibility
for preparing the accompanying consolidated financial
statements and for their integrity and objectivity. The
statements were prepared in accordance with accounting
principles generally accepted in the United States and include
amounts that are based on management's best estimates and
judgment where necessary. Management believes that all
representations made to our external auditors during their
examination of the financial statements were valid and
appropriate.
To meet its responsibility, management has established and
maintains a comprehensive system of internal control that
provides reasonable assurance as to the integrity and
reliability of the consolidated financial statements, that
assets are safeguarded, and that transactions are properly
executed and reported. This system can provide only
reasonable, not absolute, assurance that errors and
irregularities can be prevented or detected. The concept of
reasonable assurance is based on the recognition that the cost
of a system of internal control is subject to close scrutiny by
management and is revised as considered necessary.
The Board of Directors of Harold's Stores, Inc. has engaged
Ernst & Young LLP, an independent registered public accounting
firm, to conduct an audit of the 2004 consolidated financial
statements. Their report is included on the following page.
/s/ Hugh W. Mullins
Hugh W. Mullins
President/Chief Executive Officer
/s/ Jodi L. Taylor
Jodi L. Taylor
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Harold's Stores, Inc.
We have audited the accompanying consolidated balance sheets of
Harold's Stores, Inc. and subsidiaries as of January 29, 2005
and January 31, 2004, and the related consolidated statements
of operations, stockholders' deficit, and cash flows for each
of the three years in the period ended January 29, 2005. Our
audits also included the financial statement schedule for the
52 weeks ended January 29, 2005, January 31, 2004, and February
1, 2003 listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control
over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Harold's Stores, Inc. and subsidiaries as
of January 29, 2005 and January 31, 2004, and the consolidated
results of their operations and their cash flows for each of
the three years in the period ended January 29, 2005, in
conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule
for the 52 weeks ended January 29, 2005, January 31, 2004, and
February 1, 2003, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
As discussed in Note 2 of the consolidated financial
statements, the consolidated financial statements as of January
31, 2004 and for each of the two years in the period then ended
have been restated.
/s/ Ernst and Young LLP
Ernst and Young LLP
Oklahoma City, Oklahoma
April 20, 2005
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
Januar Januar
y 29, y 31,
2005 2004
ASSETS: (Restat
ed)
Current assets:
Cash and cash equivalents $ $
674 1,118
Trade accounts receivable, less
allowance for doubtful accounts of
$200 as of January 29, 2005 and as 7,343 7,120
of January 31, 2004
Note and other receivables 125 109
Merchandise inventories 20,12 17,71
3 3
Prepaid expenses 1,254 1,130
Total current assets 29,51 27,19
9 0
Property and equipment, at cost 44,21 43,48
1 4
Less accumulated depreciation and (30,66 (27,92
amortization 5) 9)
Net property and equipment 13,54 15,55
6 5
Total assets $ $
43,06 42,74
5 5
The accompanying notes are an integral part of the consolidated
balance sheets.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
Januar Januar
y 29, y 31,
2005 2004
LIABILITIES AND STOCKHOLDERS' (Restat
DEFICIT: ed)
Current liabilities:
Accounts payable $ $
7,116 7,526
Redeemable gift certificates 1,130 926
Accrued payroll expenses and 613 890
bonuses
Accrued rent expense 184 102
Current maturities of long-term 19,958 16,858
debt
Total current liabilities 29,001 26,302
Accrued rent expense, net of current 6,587 7,381
Long-term debt, net of current 580 1,358
maturities
Commitments and contingent
liabilities (Notes 9, 11 and 13)
Convertible preferred stock of $.01
par value
Amended Series 2001-A, authorized
600,000 shares, issued and
outstanding 336,231 as of January 6,725 6,627
29, 2005 and 331,631 as of January
31, 2004
Series 2002-A, authorized 300,000
shares, issued and outstanding
217,732 as of January 29, 2005 and 4,340 4,133
208,803 as of January 31, 2004
Series 2003-A, authorized 100,000
shares, issued and outstanding
54,514 as of January 29, 2005 and 5,426 5,151
52,024 as of January 31, 2004
Amended 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
Stockholders' deficit:
Common stock of $.01 par value
Authorized 25,000,000 shares;
issued and outstanding
6,222,308 as of January 29, 62 62
2005 and 6,209,147 as of
January 31, 2004
Additional paid-in capital 34,468 34,449
Accumulated deficit (44,122 (42,716
) )
(9,592) (8,205)
Less: Treasury stock of 205 shares as
of January 29, 2005 and as of (2) (2)
January 31, 2004 recorded at cost
Total stockholders' deficit (9,594) (8,207)
Total liabilities and stockholders' $43,06 $42,74
deficit 5 5
The accompanying notes are an integral part of the consolidated
balance sheets.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
52 52 52
Weeks Weeks Weeks
Ended Ended Ended
January January February
29, 31, 1, 2003
2005 2004
(Restat (Restat
ed) ed)
Sales $89,357 $91,683 $89,781
Costs and expenses:
Cost of goods sold (including
occupancy and central buying
expenses, exclusive of items 57,643 60,915 64,338
shown separately below)
Selling, general and 26,564 26,930 30,053
administrative expenses
Depreciation and amortization 4,076 7,000 5,798
Restructuring charges - 1,630 1,060
Interest expense 979 879 1,321
89,262 97,354 102,570
Income (loss) before income 95 (5,671) (12,789
taxes )
Provision for income taxes - - 3,206
Net income (loss) $ $(5,671 $(15,99
95 ) 5)
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS:
Net income (loss) $ $(5,671 $(15,99
95 ) 5)
Less: Preferred stock
dividends and accretion of 1,501 1,306 863
preferred stock issuance
costs
Net loss applicable to common $(1,406 $(6,977 $(16,85
stockholders ) ) 8)
Net loss per common share:
Basic $ $ $
(0.23) (1.14) (2.77)
Diluted $ $ $
(0.23) (1.14) (2.77)
Weighted average number of 6,217,6 6,114,2 6,096,5
common shares 29 02 00
Weighted average number of
common shares assuming 6,217,6 6,114,2 6,096,5
dilution 29 02 00
The accompanying notes are an integral part of these
consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Dollars in Thousands)
52 52 52
Weeks Weeks Weeks
Ended Ended Ended
January January Februar
29, 31, y 1,
2005 2004 2003
Common stock: (Restat (Restat
ed) ed)
Balance (net of treasury shares), $ $ $
beginning of year 60 59 59
Stock bonuses issued, 16 shares
in 2004, no shares in 2003, 1,165 0 - 0
shares in 2002
Stock options exercised, 13,350
shares in 2004, 109,439 shares in 0 1 0
2003, 4,000 shares in 2002
Shares issued to members of the
board of directors, none in 2004, - - 0
none in 2003, 5,210 shares in
2002
Balance (net of treasury shares), $ $ $
end of year 60 60 59
Additional paid-in capital:
Balance, beginning of year $ $ $
34,449 34,224 34,200
Stock bonuses - - 4
Stock options exercised 19 225 8
Shares issued to members of the - - 12
board of directors
Balance, end of year $ $ $
34,468 34,449 34,224
Accumulated deficit:
Balance, beginning of year $ $ $
(42,716 (35,739 (18,881
) ) )
Net income (loss) 95 (5,671) (15,995
)
Preferred stock dividends and (1,501) (1,306) (863)
accretion
Balance, end of year $ $ $
(44,122 (42,716 (35,739
) ) )
The accompanying notes are an integral part of these
consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
52 52 52
Weeks Weeks Weeks
Ended Ended Ended
January January February
29, 31, 1, 2003
2005 2004
(Restat (Restat
ed) ed)
Cash flows from operating
activities:
Net income (loss) $ $ $(15,99
95 (5,671) 5)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 4,076 7,000 6,528
Deferred income tax provision - - 3,206
(Gain) loss on sale of assets (67) (12) 107
Shares issued to members of the - - 12
board of directors
Changes in assets and
liabilities:
Increase in trade and other (174) (658) (111)
receivables
(Increase) decrease in (2,410) 2,917 921
merchandise inventories
(Increase) decrease in prepaid (124) 830 (41)
expenses
Decrease in income taxes - - 4,237
receivable
(Decrease) increase in accounts (268) (3,047) 2,808
payable
Increase (decrease) in accrued (785) (3,250) (2,390)
expenses
Net cash provided by (used in) 343 (1,891) (718)
operating activities
Cash flows from investing
activities:
Acquisition of property and (2,030) (1,704) (1,863)
equipment
Proceeds from disposal of 67 77 117
property and equipment
Issuance of notes receivable (102) - -
Payments received for note 37 13 10
receivable
Net cash used in investing (2,028) (1,614) (1,736)
activities
Cash flows from financing
activities:
Payments of long-term debt (272) (1,291) (2,014)
Advances on revolving line of 100,53 102,15 107,28
credit 2 5 8
Payments on revolving line of (97,975 (101,62 (106,72
credit ) 7) 7)
Proceeds from the issuance of 18 226 11
common stock
Proceeds from the issuance of - 4,939 3,913
preferred stock
Preferred stock dividends (1,062) (809) (413)
Net cash provided by financing 1,241 3,593 2,058
activities
Net (decrease) increase in cash (444) 88 (396)
and cash equivalents
Cash and cash equivalents at 1,118 1,030 1,426
beginning of year
Cash and cash equivalents at end $ $ $
of year 674 1,118 1,030
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Income taxes $ $ $
44 40 37
Interest $ $ $
1,096 778 1,358
Non-cash investing and financing
activities:
Issuance of note receivable for $ $ $
sale of equipment - - 80
Issuance of common stock to
members of the board of $ $ $
directors - - 12
Preferred stock dividends accrued $ $ $
378 426 367
The accompanying notes are an integral part of these
consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Entity
Harold's Stores, Inc., an Oklahoma corporation (the
Company), operates a 41-store chain of "updated traditional",
classic styled ladies and men's specialty apparel stores. The
Company offers its merchandise in stores primarily across the
South and Southwest. The Company creates the majority of its
product assortment through its private label program. The
product development and private label programs provide an
exclusive selection of upscale merchandise to the consumer.
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.
Reclassification
Certain comparative prior year amounts in the consolidated
financial statements have been reclassified to conform to the
current year presentation.
Definition of Fiscal Year
The Company has a 52-53 week year that ends on the Saturday
closest to January 31. Years 2004, 2003 and 2002 ended on
January 29, 2005, January 31, 2004, February 1, 2003,
respectively. The years 2004, 2003 and 2002 each comprised 52-
week years.
Accounting Pronouncements
On December 16, 2004, the FASB issued FASB Statement No. 123
(revised 2004) ("SFAS 123(R)"), "Share-Based Payment", which must
be adopted by the Company no later than January 29, 2006. SFAS
123(R) requires an entity to recognize compensation expense in an
amount equal to the fair value of share-based payments granted to
employees. The Company will adopt SFAS 123(R) in the required
period and apply the standard using the modified prospective
method, which requires compensation expense to be recorded for
new and modified awards. For any unvested portion of previously
issued and outstanding awards, compensation expense is required
to be recorded based on the previously disclosed SFAS 123
methodology, and amounts. Prior periods presented are not
required to be restated. The Company is still assessing the
impact on its results of operations and financial position upon
the adoption of SFAS 123(R).
Cash and Cash Equivalents
Cash and cash equivalents include overnight investments and
credit card receivables collected within three business days.
Concentration of Credit Risk
Financial instruments that potentially subject the Company
to credit risk consist principally of trade accounts receivable
and cash equivalents. The company extends credit to its
customers in the normal course of business. The Company performs
ongoing credit evaluations and generally does not require
collateral. The Company maintains reserves for potential credit
losses based upon its loss history and its aging analysis.
Accounts receivable are comprised of a diversified customer base
that results in a lack of concentration of credit risk.
Accounts Receivable and Finance Charges
Trade accounts receivable primarily represents the Company's
credit card receivables from customers. These customers are
primarily residents of Oklahoma and Texas. Finance charges on
these revolving receivables are imposed at various annual rates
in accordance with the state laws in which the Company operates,
and are recognized in income when applied to the customers'
statements. Minimum monthly payments are required and are
generally equal to ten percent of the outstanding balance. The
average liquidation rate at January 29, 2005 was approximately
2.65 months. Finance charge revenue is netted against selling,
general and administrative expenses and was approximately
$1,142,000, $1,140,000, and $1,152,000, in 2004, 2003, and 2002,
respectively.
Allowances for doubtful accounts are established based upon
historical losses and increased as necessary to cover specific
items. Receivables determined to be uncollectible are written
off as a charge to the allowance. Recoveries of previously
written off amounts are added back to the allowance. Charge-offs
related to these accounts were approximately $253,000, $221,000
and $275,000 during 2004, 2003 and 2002, respectively.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or
market using the retail method of accounting. Manufacturing
inventories of raw materials, work-in-process and in-transit
items are valued at the lower of cost (first-in, first-out
method) or market, and approximate $3,570,000 and $2,604,000 at
January 29, 2005 and January 31, 2004, respectively.
Stock Options
The Company follows the intrinsic value method of accounting
for common stock options granted to employees, in accordance with
the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations.
Had the Company elected to recognize compensation expense
based on the fair value of the stock options granted as of their
grant date, the Company's 2004, 2003 and 2002 pro forma net loss
and pro forma net 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.
Year Ended
January January Februar
29, 31, y 1,
2005 2004 2003
(Resta (Resta
ted) ted)
(In thousands, except
per share data)
Net loss applicable to common $(1,40 $(6,9 $(16,
stockholders, as reported 6) 77) 858)
Add:
Stock-based employee
compensation expense included - - -
in reported net loss
Deduct:
Stock-based employee
compensation expense determined 375 460 496
under fair value method for all
awards
Pro forma net loss applicable $(1,78 $(7,4 $(17,
to common stockholders 1) 37) 354)
Net loss per common share:
Basic, as reported $(0.23 $(1.1 $(2.7
) 4) 7)
Basic, pro forma $(0.29 $(1.2 $(2.8
) 2) 5)
Diluted, as reported $(0.23 $(1.1 $(2.7
) 4) 7)
Diluted, pro forma $(0.29 $(1.2 $(2.8
) 2) 5)
Revenue Recognition
Sales from store locations represented 99% of the Company's
total sales for 2004. These sales are recognized at the time of
the customer's purchase. Sales are net of returns and exclude
sales tax. The Company's direct catalog and internet sales
represented about one percent of the total sales during 2004.
These sales are recognized at the time the order is shipped to
the customer. Gift card sales are recognized as revenue when the
gift card is redeemed, not when it is sold.
Advertising
During 2004, 2003 and 2002, the Company incurred
approximately $4,313,000, $4,190,000, and $4,220,000,
respectively, in advertising expenses. Advertising expenditures
related to small publications mailed to the Company's database of
active customers are expensed at the time of mailing to the
customer.
Depreciation, Amortization and Maintenance and Repairs
Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets. Leasehold
improvements are amortized over the shorter of the life of the
respective leases or the expected life of the improvements. The
following are the estimated useful lives used to compute
depreciation and amortization:
Buildings 30 years
Leasehold improvements 5-10 years
Furniture and equipment 4-7 years
Software and related costs 3 years
Maintenance and repairs are charged directly to expense as
incurred, while betterments and renewals are generally
capitalized in the property accounts. When an item is retired or
otherwise disposed of, the cost and applicable accumulated
depreciation are removed from the respective accounts and the
resulting gain or loss is recognized. During 2004, 2003 and
2002, the Company recorded approximately $4,076,000, $7,000,000,
and $5,798,000, respectively, of depreciation and amortization
expense.
Computer Software Costs
For 2004, 2003 and 2002, software related costs of
approximately $70,000, $55,000 and $57,000, respectively, were
capitalized. These costs are amortized over the life of the
related software.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date. 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 made the
realization of these assets uncertain. As of January 29, 2005,
the Company's valuation allowance was equal to 100% of its
deferred tax assets. See Note 7 for additional discussion.
Net loss Per Common Share
Basic net loss per common share is computed by dividing net
loss applicable to common stock by the weighted average number of
common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if the
Company's outstanding stock options were exercised (calculated
using the treasury stock method).
The following table reconciles the net loss applicable to
common shares and weighted average common shares outstanding used
in the calculation of basic and diluted earnings per common share
for the periods indicated:
2004 2003 2002
(Resta (Resta
ted) ted)
(In thousands, except
per share data)
Net loss applicable to common $(1,40 $(6,97 $(16,8
stockholders, basic and diluted 6) 7) 58)
Weighted average number of common 6,218 6,114 6,097
shares outstanding - basic
Dilutive effect of potential common
shares issuable upon - - -
exercise of employee stock
options
Weighted average number of common 6,218 6,114 6,097
shares outstanding - diluted
Net loss per share:
Basic $(0.23 $(1.14 $(2.77
) ) )
Diluted $(0.23 $(1.14 $(2.77
) ) )
Options to purchase 1,606,313, 1,680,084 and 2,175,755
shares of common stock were outstanding during 2004, 2003 and
2002, respectively, but were not included in the computation of
earnings per share because the options' exercise price was
greater than the average market price of common shares and their
inclusion would result in anti-dilution. The options expire
through the year 2014.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets.
2. Restatement of Financial Statements
In light of a recent SEC clarification on lease accounting,
we re-evaluated our lease accounting practices and have corrected
the way we account for our leases, specifically the accounting
for operating leases with scheduled rent increases and tenant
allowances.
Under the requirements of FASB Technical Bulletin 85-3,
"Accounting for Operating Leases with Scheduled Rent Increases,"
rent expense should be amortized on a straight-line basis over
the term of the lease. In prior periods, we had determined that
the term of the lease begins on the commencement date of the
lease, which generally coincides with the store opening date,
instead of at the time we take physical possession of the
property to start construction on leasehold improvements. This
had the effect of excluding the construction period of the stores
from the calculation of the period over which rent is expensed.
We have restated our previously reported Consolidated Financial
Statements to correct our accounting for scheduled rent
increases.
In addition, under FASB Technical Bulletin 88-1, "Issues
Relating to Accounting for Leases," lease incentives such as
tenant allowances received from the landlord to cover
construction costs incurred by us should be reflected as a
deferred liability, amortized over the term of the lease and
reflected as a reduction to rent expense. We had previously
classified tenant allowances as a reduction to store build out
costs (leasehold improvements). As a result, we reflected the
amortization as a reduction to depreciation expense instead of as
a reduction to rent expense. We have restated our previously
reported Consolidated Financial Statements to properly account
for tenant allowances.
The restatement primarily resulted in a decrease to retained
earnings of $1,540,000 as of February 2, 2002 and an increase in
net earnings of $58,000, $503,000, and $484,000 in 2004, 2003 and
2002, respectively. The majority of the adjustments relate to
periods prior to 2002.
As a result of these restatements, the Company's financial
results have been adjusted as follows (in thousands, except per
share data):
As As
Previous Restated
ly
Reported
January January
31, Adjustme 31,
2004 nts 2004
Property and equipment 30,037 13,447 43,484
Accumulated amortization (20,064) (7,865) (27,929)
Accrued rent expense, 1,247 6,134 7,381
net of current
Accumulated deficit (42,164) (552) (42,716)
Total stockholders' (7,655) (552) (8,207)
deficit
As As
Previous Restated
ly
Reported
January January
31, Adjustme 31,
2004 nts 2004
Sales $91,683 - $91,683
Costs and expenses:
Cost of goods sold 64,363 (3,448) 60,915
Selling, general and
administrative expenses 26,930 - 26,930
Depreciation and 4,055 2,945 7,000
amortization
Restructuring charges 1,630 - 1,630
Interest expense 879 - 879
97,857 (503) 97,354
Loss before income taxes $(6,174) 503 $(5,671)
Provision for income - - -
taxes
Net loss $(6,174) 503 $(5,671)
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS:
Net loss $(6,174) 503 $(5,671)
Less: Preferred stock
dividends and accretion 1,306 - 1,306
of preferred stock
issuance costs
Net loss applicable to
common stockholders $(7,480) 503 $(6,977)
Net loss per common
share:
Basic and diluted $ 0.08 $
(1.22) (1.14)
As As
Previous Restated
ly
Reported
February February
1, Adjustme 1,
2003 nts 2003
Sales $89,781 - $89,781
Costs and expenses:
Cost of goods sold 66,707 (2,369) 64,338
Selling, general and
administrative expenses 30,053 - 30,053
Depreciation and 3,913 1,885 5,798
amortization
Restructuring charges 1,060 - 1,060
Interest expense 1,321 - 1,321
103,054 (484) 102,570
Loss before income taxes $(13,273 484 $(12,789
) )
Provision for income 3,206 - 3,206
taxes
Net loss $(16,479 484 $(15,995
) )
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS:
Net loss $(16,479 484 $(15,995
) )
Less: Preferred stock
dividends and accretion 863 - 863
of preferred stock
issuance costs
Net loss applicable to
common stockholders $(17,342 484 $(16,858
) )
Net loss per common
share:
Basic and diluted $ 0.07 $
(2.84) (2.77)
3. Fair Value of Financial Instruments
Balance Sheet: Cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate
fair value because of the short maturity of these financial
instruments. Substantially all of the debt is at variable
interest rates, therefore, fair value approximates carrying
value.
Off balance sheet: There were no outstanding notional
principal amounts of forward exchange contract commitments at
January 29, 2005 or at January 31, 2004.
4. Note Receivable
On April 2, 2002, the Company sold its only restaurant
accepting a promissory note in return in the principal amount of
$80,000. Interest income is netted against selling, general and
administrative expenses and was $4,000 during 2004 and $4,000
during 2003. The balance of this note at January 29, 2005 and
January 31, 2004 was approximately $41,000 and $57,000,
respectively.
5. Property and Equipment
Property and equipment at January 29, 2005 and January 31,
2004 consisted of the following:
2004 2003
(Resta
ted)
(in thousands)
Land 631 631
Buildings 3,039 3,039
Leasehold improvements 25,624 25,922
Furniture and 14,917 13,89
equipment 2
44,211 43,484
6. Long-term Debt
Long-term debt at January 29, 2005 and January 31, 2004
consisted of the following:
2004 2003
(in thousands)
Borrowings under line of credit with
a maximum availability of
$22,000,000, bearing interest at a
weighted-average variable rate
(4.70% at January 29, 2005) payable $ $
monthly, due February, 2007. This 19,17 16,62
line of credit is secured by 8 0
substantially all assets of the
Company.
Note payable to financial
institution, secured by building and
land, bearing interest at a fixed
rate (8.34%), due in monthly 663 740
installments of principal and
interest of approximately $11,000,
with final payment due June, 2011.
Note payable to financial
institution, secured by certain
equipment, bearing interest at a
fixed rate (8.1%), due in monthly - 105
installments of principal and
interest of approximately $12,000,
with final payment due November,
2004.
Note payable to financial
institution, secured by building and
land, bearing interest at a fixed
rate (4.25%) due in monthly 670 751
installments of principal and
interest of approximately $9,000,
with final payment due December,
2005.
Capital lease obligation, secured by
computer equipment, bearing interest
at a fixed rate (8.00%) due in
quarterly installments of principal 27 -
and interest of approximately
$9,000, with final payment due
September, 2005.
Total debt 20,53 18,2
8 16
Less current maturities of long- 19,95 16,85
term debt 8 8
Long-term debt, net of current $ $
maturities 580 1,358
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 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 January 29, 2005 was $19,178,000 which includes
the $4 million outstanding under the bridge facility discussed
below. At January 29, 2005 the Company's availability under the
WFRF line of credit was approximately $3.0 million above the
minimum availability requirement of $1.35 million and the average
interest rate on the credit line was 4.70%.
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 WFFR 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
year ended January 29, 2005. 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 sheets 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 line of credit 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."
The annual maturities of the above long-term debt as of
January 29, 2005 are as follows (in thousands):
Year
2005 $19,9
58
2006 90
2007 98
2008 106
2009 116
2010 and 170
subsequent
Total $20,5
38
7. Income Taxes
Income tax provision for the years ended January 29, 2005,
January 31, 2004 and February 1, 2003, consisted of the
following:
2004 2003 2002
(in thousands)
Current provision - - -
(benefit)
Deferred provision - - 3,206
(benefit)
Total - - 3,206
Income tax expense differs from the statutory tax rate as
follows:
2004 2003 2002
Statutory tax rate 34.0% (34.0) (34.0)
% %
Changes in income
taxes caused by:
State income taxes 6.0 (6.0) (6.0)
Non-deductible - - -
goodwill
Net operating loss
valuation allowance (40.0) 40.0 64.2
and other
Effective tax rate 0.0% 0.0% 24.2%
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets at January 29,
2005 and January 31, 2004 are presented below:
2004 2003
(in thousands)
Deferred tax assets -
current:
Allowance for 80 80
doubtful accounts
Merchandise 497 1,241
inventories
Accrued expenses 607 565
1,184 1,886
Less: Valuation (1,184 (1,886
allowance ) )
- -
Deferred tax assets -
noncurrent:
Property and 3,160 2,969
equipment
Net operating loss 9,184 7,931
12,344 10,900
Less: Valuation (12,34 (10,90
allowance 4) 0)
- -
The Company's federal net operating losses of approximately
$21.6 million will begin to expire in 2021. The Company also has
state net operating losses of approximately $30.7 million which
begin to expire in 2005. 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 made the realization of these assets uncertain. The
Company's valuation allowance as of January 29, 2005 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. The
Company's management, in consultation with its tax advisors, has
been assessing the impact its preferred stock issuances had on
the change in the beneficial ownership of the Company, and
whether or not such a change would impact the Company's ability
to utilize its net operating loss carryforwards ("NOLs"). After
thorough review, it was determined in the third quarter of 2004
that a change in ownership had occurred on October 1, 2002, and
that this change resulted in a limitation on the Company's
ability to utilize its NOLs under Section 382 of the Code. As a
result of the limitation, the Company may only utilize $1.0
million per year of its total October 1, 2002 pre-change NOL of
$12.5 million. Any portion of the $1.0 million annual limitation
not utilized in a particular year may be carried over to the next
year and added to that year's limitation. Based on the Company's
2004 projected taxable loss, the cumulative excess annual
limitation carryover to 2005 is approximately $2.4 million.
8. Stock and Stock Options
The Company has authorized 1,000,000 shares of preferred
stock, par value $.01 per share. This preferred stock may be
issued in one or more series and the terms and rights of such
stock will be determined by the Board of Directors. As of
January 31, 2004, The Board had authorized three series of
preferred stock, the Amended Series 2001-A Preferred Stock,
consisting of 600,000 shares, and the 2002-A Preferred Stock
consisting of 300,000 shares, and the 2003-A Preferred Stock
consisting of 100,000 shares.
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 is 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. The preferred shares are not 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.
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 is 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. The
preferred shares are not 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.
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. As a
result of the sale of the 2003-A Preferred Stock, the percentage
ownership of common stock on an as-converted basis (assuming
conversion of all of the Company's outstanding preferred stock)
by Inter-Him and Mr. de Waal is 52.6%. The preferred shares are
not 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.
The Company has reserved 3,000,000 shares of its common
stock for issuance to key employees under its current stock
option and equity incentive plan, which was adopted in 2002 and
replaced a prior plan initially adopted in 1993. The current
plan has a term of ten years. The Compensation Committee of the
Board of Directors may grant incentive or non-qualified stock
options, restricted stock, stock appreciation rights and other
stock-based and cash awards under the provisions of the plan.
The exercise price of incentive stock options is the fair market
value of the stock at the date of the grant, plus ten percent if
the employee possesses more than ten percent of the total
combined voting power of all classes of the Company's stock.
Options granted may have a term of up to ten years, except that
incentive stock options granted to stockholders who have more
than ten percent of the Company's voting stock at the time of the
grant may have a term of up to five years. No options were
granted to stockholders who have more than 10% of the Company's
voting stock during 2003, 2002 or 2001 under the incentive plan.
Twenty percent of each option grant, except for grants to non-
employee board members, vests one year after the date of issuance
with the remaining options vesting at 20% per year for four
years. Non-employee board members are required to wait six
months from the date of grant before exercising any options from
that grant, at which time the options are fully vested. Any
unexercised portion of the options will automatically and without
notice terminate upon the applicable anniversary of the issuance
date or termination of employment. A summary of the status of
the Company's stock option plan, and activity for the periods
indicated, is presented as follows:
Options Options
Outstanding Exercisable
Weight Weight
ed ed
Avg. Avg.
Shares Exerci Shares Exerci
se se
Price Price
Balance of options 1,962, 3.88 810,77 $5.69
outstanding at February 2, 082 9
2002
Granted 461,00 2.25
0
Terminated (245,4 2.50
57)
Exercised (4,000 2.00
)
Balance of options 2,173, 3.70 1,159, $4.83
outstanding at February 1, 625 482
2003
Granted 312,80 1.13
0
Terminated (156,2 3.42
02)
Exercised (109,4 2.07
39)
Balance of options 2,220, $3.43 1,282, $4.45
outstanding at January 31, 784 736
2004
Granted 359,55 3.02
0
Terminated (436,1 4.82
43)
Exercised (13,35 1.46
0)
Balance of options 2,130, $3.09 1,383, $3.46
outstanding at January 29, 841 431
2005
As of the year ended January 29, 2005, the range of exercise
prices and weighted average remaining contractual life of
outstanding options was $0.95 - $16.71, and 5.9 years,
respectively. The following table summarizes information about
the Company's stock options, which were outstanding, and those,
which were exercisable as of January 29, 2005:
Options Outstanding Options
Exercisable
Range Weighted Weighted Weighted
of Number Average Average Number Average
Exercise Outstand Remainin Exercise Exercisa Exercisab
Prices ing g Life Price ble le Price
0.95- 396,28 7.9 $1.34 208,82 $1.44
1.20 0 0
1.20- 1,446, 5.9 $2.58 886,48 $2.45
4.06 436 6
4.06- 203,62 3.8 $6.24 203,62 $6.24
7.66 6 6
7.66- 84,499 1.7 $12.38 84,499 $12.38
16.71
2,130, 1,383,
841 431
The weighted average fair values of options granted under
the non-qualified plan during 2004, 2003 and 2002 were $2.25,
$0.80, and $1.63, respectively.
The fair value of each non-qualified and incentive option
granted was estimated using the Black-Scholes Option Pricing
Model with the following assumptions for 2004, 2003 and 2002:
risk-free interest rate of 4.15% for 2004, 4.28% for 2003, and
4.84% for 2002; expected dividend yield of 0% for all periods;
expected lives of approximately seven years for 2004, 2003 and
2002; and volatility of the price of the underlying common stock
of 79.0% for 2004, 75.1% for 2003, and 73.6% for 2002.
9. Retirement and Benefit Plans
The Company has a profit sharing retirement plan with a
401(k) provision that allows participants to annually contribute
up to $13,000 of their compensation before income taxes plus an
additional catch up contribution of $3,000 before income taxes if
the participant is at least 50 years old. Eligible participants
are employees at least 21 years of age with one year of service.
The Company's Board of Directors will designate annually the
amount of the profit sharing contribution as well as the
percentage of participants' compensation that it will match as
401(k) contributions. For the years ended January 29, 2005,
January 31, 2004, and February 1, 2003, the Company contributed
approximately $250,000, $249,000, and $243,000, respectively, to
the 401(k) plan.
10. Related Party Transactions
The Company leases its Norman, Oklahoma retail and outlet
stores and a distribution center facility from a limited
partnership whose partners include Rebecca Powell Casey, an
executive officer and a director of the Company, and certain of
her family members. The store lease terms in 2004, 2003 and
2002, provided for annual base rental payments and percentage
rent equal to four percent of sales plus insurance, utilities,
and property taxes. During the years ended January 29, 2005,
January 31, 2004, and February 1, 2003, the total of such rent
for the stores was approximately $246,000, $214,000, and
$230,000, respectively. The term of the retail space lease is
twelve years commencing June 4, 1996. The term of the
distribution center lease is sixteen years commencing July 1,
1996, with increasing annual rental payments on a fixed scale
which has a maximum annual rental up to $419,951 during the final
year of the lease. The lease also provides for payments to the
partnership for insurance, utilities and property taxes. The
Company leases its corporate headquarters location from a limited
partnership whose partners include W. Howard Lester, a director
of the Company and the above referenced partnership. The lease,
which was amended in 2003, expires September, 2010 with monthly
rent payments of $26,490, plus insurance, utilities and property
taxes until November, 2005 at which time monthly rent will be
$38,443, plus insurance, utilities and property taxes until
September, 2007 at which time monthly rent will be $40,366 plus
insurance, utilities and property taxes until the expiration of
the lease. This lease contains two renewal options of five years
each. These leases have been approved by all independent
directors as being on terms at or below available competitive
market renewal rates.
See Note 8 for information concerning the purchase of
preferred stock by one of the Company's executive officers and
certain members of the Company's Board of Directors.
11. Facility Leases
The Company conducts a majority of its retail operations
from leased store premises under leases that will expire within
the next ten years. In addition to minimum rental payments,
certain leases provide for payment of taxes, maintenance, and
percentage rentals based upon sales in excess of stipulated
amounts.
Minimum rental commitments (excluding renewal options) for
store, distribution premises, office space and equipment under
noncancelable operating leases having a term of more than one
year as of January 29, 2005 were as follows (in thousands):
Year:
2005 $
7,139
2006 7,037
2007 6,748
2008 5,829
2009 4,145
2010 and 6,704
subsequent
Total $37,6
02
Total rental expense for the years ended January 29, 2005,
January 31, 2004 and February 1, 2003, was as follows (in
thousands):
2004 2003 2002
Base rent $6,79 $8,54 $7,79
7 4 3
Additional rents
computed 252 217 288
As percentage
of sales
Total $7,04 $8,76 $8,08
9 1 1
12. Business Concentrations
More than 95% of the ladies' apparel sales were attributable
to the Company's product development and private label programs
during 2004, 2003 and 2002. The breakdown of total sales between
ladies' and men's apparel was approximately 81% and 19% for 2004,
78% and 22% for 2003, and 76% and 24% for 2002.
13. Commitments and Contingent Liabilities
The Company may issue letters of credit which are used
principally in overseas buying, cooperative buying programs, and
for other contract purchases. At January 29, 2005, the Company
had no outstanding letters of credit to secure orders of
merchandise from various domestic and international vendors.
The Company did not enter into any forward exchange
contracts during the year ended January 29, 2005. Normally,
forward exchange contracts require the Company to exchange U.S.
dollars for foreign currencies at maturity, at rates agreed to at
inception of the contracts. The contracts are usually of varying
short-term duration and include a window delivery feature that
provides the Company with an option to enter into a swap
agreement in the event that all of the currency is not utilized
at the end of the contract's delivery term. A swap allows the
Company to sell the unused currency, at the contract's maturity,
to the counterparty at the current market rate and then buy back
the same amount for the time period to which the Company wants to
extend. The counterparty to the derivative transactions is a
major financial institution. The credit risk is generally
limited to the unrealized gains or losses in such contracts
should this counterparty fail to perform as contracted. The
Company considers the risk of counterparty default to be minimal.
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.
14. Business Segments
The Company manages its operations on an individual store
basis. Financial information is maintained for each store and
provided to the Company's management for review and as a basis
for decision making. The Company fully allocates all expenses
down to a pre-tax level and monitors each store's performance
accordingly. Given the economic characteristics of the store
formats, the similar nature of the products sold, the type of
customer and method of distribution, the operations of the
Company are aggregated into one reportable segment. The Company
has no operations that would qualify as a separate operating
segment under Statement of Financial Accounting Standards (SFAS)
No. 131 "Disclosure About Segments of an Enterprise and Related
Information."
SUPPLEMENTARY DATA
Summarized unaudited quarterly financial results are as follows
(in thousands, except per share data):
First Second Third Fourth
52 Weeks Ended January
29, 2005
Sales $24,1 $19,2 $23,1 $22,7
69 90 10 88
Gross profit on sales as 9,032 6,156 8,382 N/A
previously reported
Gross profit on sales 9,297 6,421 8,647 7,349
(as restated, see Note
2)
Net income (loss)
applicable to common 237 (1,434 272 N/A
stockholders as )
previously reported
Net income (loss)
applicable to common 251 (1,420 286 (525)
stockholders (as )
restated, see Note 2)
Net income (loss) per
common share:
Basic as previously $0.04 ($0.23 $0.05 N/A
reported )
Basic (as restated, $0.04 ($0.23 $0.05 ($0.09
see Note 2) ) )
Diluted as previously $0.04 ($0.23 $0.04 N/A
reported )
Diluted (as restated, $0.04 ($0.23 $0.04 ($0.08
see Note 2) ) )
52 Weeks Ended January
31, 2004
Sales $24,6 $19,5 $23,8 $23,5
95 61 63 64
Gross profit on sales as 7,174 5,824 9,087 5,235
previously reported
Gross profit on sales 8,036 6,686 9,949 6,097
(as restated, see Note
2)
Net (loss) income
applicable to common (2,515 (2,535 629 (3,059
stockholders (A) as ) ) )
previously reported
Net (loss) income
applicable to common (2,389 (2,409 755 (2,934
stockholders (A) (as ) ) )
restated, see Note 2)
Net (loss) income per
common share:
Basic as previously ($0.41 ($0.42 $0.10 ($0.49
reported ) ) )
Basic (as restated, ($0.39 ($0.40 $0.12 ($0.47
see Note 2) ) ) )
Diluted as previously ($0.41 ($0.42 $0.06 ($0.49
reported ) ) )
Diluted (as restated, ($0.39 ($0.40 $0.06 ($0.47
see Note 2) ) ) )
(A) In the first and second quarters of 2003, the Company
recorded restructuring charges of approximately $1.63 million.
The restructuring charges consisted primarily of lease
termination costs of approximately $1.24 million. The
remainder of the restructuring charges consisted primarily of
legal and consulting fees related to planned store closings in
the first half of 2003.
Schedule II
HAROLD'S STORES, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
(In Thousands)
Additi
Balanc Additi ons- Deduct Balanc
e at ons- Recove ions- e at
Description Beginn Charge ries Write- End of
ing of d to of off of Period
Period Expens Accoun Accoun
e ts ts
Writte
n off
52 Weeks ended
January 29, 2005:
Allowance for $200 218 35 253 $200
doubtful accounts
52 Weeks ended
January 31, 2004:
Allowance for $200 192 29 221 $200
doubtful accounts
52 Weeks ended
February 1, 2003:
Allowance for $200 217 58 275 $200
doubtful accounts