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59
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended January Commission File No. 1-
31, 1998 10892
HAROLD'S STORES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1308796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
765 Asp Norman, Oklahoma 73069 (405) 329-4045
(Address of principal executive (Registrant's
offices) telephone number,
(Zip Code) including area
code)
Securities registered pursuant to
Section 12(b) of the Act : Name of each
exchange
Title of each class on which registered
Common Stock, $0.01 Par Value American Stock
Exchange
Securities registered pursuant to Section 12(g) of the Act :
None
Indicate by check mark whether the registrant (1) has
filed all reports to be filed by Section 13 or 15 (d ) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No .
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K [
]
At March 27, 1998 the aggregate market value of the
Registrant's Common Stock held by non-affiliates was
$24,363,115 based on a value of $7.00 per share, the
closing price of Common Stock as quoted by the American
Stock Exchange on that date.
On March 27, 1998 the registrant had 6,054,226 shares of
Common Stock outstanding.
DOCUMENT INCORPORATED BY REFERENCE:
Information required by Part III of Form 10-K is
incorporated by reference from the Registrant's definitive
proxy statement for its 1998 Annual Meeting of
Shareholders.
Harold's Stores, Inc. & Subsidiaries
Index to
Annual Report on Form 10-K
For the Fiscal Year Ended January 31, 1998
Part I. Page
Item 1 Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security
Holders 11
Part II.
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Consolidated Financial Statements and
Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Consolidated Financial Disclosure 33
Part III.
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management 33
Item 13. Certain Relationships and Related Transactions 33
Part IV.
Item 14. Exhibits, Consolidated Financial Statement
Schedule and Reports on Form 8-K 34
Signatures 35
PART I.
ITEM 1. BUSINESS
General
Harold's Stores, Inc. and its wholly-owned subsidiaries
collectively ("Harold's" or the "Company"), through a 42-store
location chain of women's and men's specialty apparel stores in
17 states, offers high-quality, classically inspired apparel to
the upscale, quality-conscious consumer primarily in the 20 to
50 year old age group. The stores typically are strategically
located in shopping centers and malls with other upscale
specialty retailers and are enhanced by an eclectic mix of
antiques, together with specially designed fixtures and visual
props, to create an appealing stage for presentation of the
Company's distinctive women's and men's apparel and
accessories. More than 90% of sales consists of the Company's
designs controlled by Harold's own stylists and designers and
resourced by Harold's buyers from domestic, European and Asian
manufacturers. The remainder consists of branded merchandise
selected to complement Harold's merchandise presentation. See
"Business- Product Development and Sourcing Programs."
The Company's 42 stores are comprised of 27 full-line
women's and men's apparel stores, two stores which have a
product line principally of ladies' apparel with a limited
presentation of men's sportswear featuring the Company's Old
School Clothing brand, nine stores featuring women's apparel
only and four outlet stores to clear markdowns and slow-moving
merchandise, in addition to some merchandise produced
specifically for the outlets. In addition to the stores, the
Company has a direct response "mail order" catalog business.
Store occupancy costs include base and percentage rent, common
area maintenance expense, utilities and depreciation of
leasehold improvements.
There was a decline in comparable store sales of 5.4% for
fiscal 1998, compared to a decline of 0.5% for fiscal 1997.
The Company believes that the decrease in comparable store
sales for comparable periods is primarily attributable to the
opening of second stores in several key markets, including:
Birmingham, Alabama; Norman, Oklahoma; Memphis, Tennessee;
Dallas and Houston, Texas; and Washington, DC, as well as the
selection of fashion trends that did not sell as well as
anticipated. The Company's average sales per square foot for
stores open during the entire fiscal year were $529 and $615
for fiscal 1998 and fiscal 1997, respectively. The Company
believes its sales per square foot are higher than industry
averages for similar stores.
The Company believes that its future success will be
achieved by expanding the number of its women's and men's
apparel stores, increasing sales momentum at existing stores
and increasing circulation of its direct response catalog. The
Company recently embarked on an aggressive expansion program,
adding in the aggregate 13 retail stores during fiscal 1997 and
fiscal 1998 and thereby increasing the chain store count by
approximately 30%.
The Company's expansion plan will continue to focus
primarily on markets currently served by the Company and in new
markets that represent a geographical progression from existing
markets. Thus far during fiscal 1999, the Company has opened a
second store in San Antonio, Texas. With the opening of the
new San Antonio store, the original San Antonio location is
currently scheduled to be closed and consolidated with the new
location during fiscal 1999. Three additional stores are
planned for opening during the balance of fiscal 1999 in
regional shopping malls.
The Company operates on a 52-53 week fiscal year which
ends on the Saturday closest to January 31. References herein
to fiscal 1999, fiscal 1998, fiscal 1997, and fiscal 1996 refer
to the fiscal years ended January 30, 1999, January 31, 1998,
February 1, 1997, and February 3, 1996, respectively.
Retail Merchandising
The Company's merchandise mix in women's apparel
includes coordinated sportswear, dresses, coats, outerwear,
shoes and accessories, in updated classic styles. A
fundamental feature of the Company's marketing strategy is the
development of original exclusive and semi-exclusive apparel
items. The Company estimates that more than 95% of its women's
apparel sales are attributable to the Company's product
development and proprietary label programs. In fiscal 1998,
women's apparel accounted for approximately 77% of sales.
The men's apparel product line includes tailored clothing,
suits, sportcoats, furnishings, sportswear, and shoes. The
style is principally what is known in the apparel trade as
"updated traditional," classic styling with a contemporary
influence. The young executive and college markets account for
a substantial portion of the Company's men's store sales. In
fiscal 1998, the Company's proprietary label apparel accounted
for more than 90% of total men's sales. The majority of the
men's proprietary label sales are in the Company's Old School
Company and Harold Powell Clothing lines. In fiscal 1998,
men's apparel accounted for approximately 23% of sales.
The following table sets forth the approximate percentage
of sales attributable to the various merchandise categories
offered by the Company in the past three fiscal years:
Fiscal 1998 Fiscal 1997 Fiscal 1996
(Dollar amounts in thousands)
Women's Merchandise
Sportswear $81,408 67.9% $72,808 67.3% $65,009 69.0%
Shoes 4,827 4.0 5,422 5.0 5,196 5.5
Handbags, Belts 5,899 4.9 5,777 5.3 4,962 5.3
and Accessories
Men's Merchandise
Suits,
Sportcoats, Slacks 10,762 9.0 8,815 8.1 6,493 6.9
and Furnishings
Shoes 1,218 1.0 1,067 1.0 991 1.0
Sportswear and 14,894 12.4 13,547 12.5 11,256 11.9
Accessories
Other
911 0.8 821 0.8 357 0.4
Total: $119,91 100.0 $108,2 100.0 $94,26 100.0
9 % 57 % 4 %
Company Stores
The Company's 42 stores range in size from 2,100 to
15,000 square feet, with the typical store ranging from 4,000
to 6,000 square feet. The following table lists Harold's store
locations as of March 27, 1998, with selected information for
each location. Product lines in the table are defined as
follows:
W/M Stores with the Company's full-line women's
and men's apparel.
W/OS Stores with the Company's full-line women's
apparel and also featuring the Company's "Old School Clothing
Company" concept.
W Stores featuring women's apparel only.
Metropolitan Location Type of Product Square
Area Location Lines Footage
Atlanta, GA Lenox Square Regional W/M 6,861
Shopping Center
Atlanta, GA Park Place Specialty W 3,413
Center
Austin, TX Arboretum Specialty W 3,300
Market Place Center
Austin, TX 8611 N. Mopac Free Standing* W/M 13,200
Expressway
Baton Citiplace Specialty W/M 5,200
Rouge, LA Market Center Center
Birmingham, Riverchase Regional W 2,713
AL Galleria Shopping Center
Birmingham, The Summit Specialty W/M 5,500
AL Shopping Center Center
Charlotte, Shops on the Specialty W 4,000
NC Park Center
Columbus, The Mall at Regional W/M 6,000
OH Tuttle Crossing Shopping Center
Cordova, TN Wolfchase Regional W/M 6,302
Galleria Shopping Center
Dallas, TX Dallas Galleria Regional W 4,974
Shopping Center
Dallas, TX Highland Park Specialty W/M 7,503
Village Center
Ft. Worth, University Park Specialty W/M 6,000
TX Village Center
Germantown, Saddle Creek Specialty W/OS 3,909
TN South Center
(Memphis
metro)
Greenville, Greenville Mall Regional W/OS 5,076
SC Shopping Center
Hillsboro, Hillsboro Outlet Mall* W/M 5,160
TX Outlet Mall
Houston, TX Highland Village Specialty W/M 6,189
Center
Houston, TX Town and Country Specialty W/M 5,883
Village Center
Jackson, MS The Rogue Free W 2,100
Compound Standing
Kansas City, MO Country Club Regional W 4,155
Plaza Shopping
Center
Leawood, KS Town Center Regional W/M 5,000
(Kansas City Plaza Shopping
metro) Center
Littleton, CO Park Meadows Regional W/M 5,465
(Denver Mall Shopping
metro) Center
Louisville, KY Mall St. Regional W/M 4,292
Matthews Shopping
Center
Lubbock, TX 8201 Quaker Specialty W/M 3,897
Avenue Center
McLean, VA Tyson's Galleria Regional W/M 5,083
Shopping
Center
Nashville, TN The Mall at Regional W/M 5,975
Greenhills Shopping
Center
Norman, OK Campus Corner Specialty W/M 9,050
Center Center
Norman, OK 575 S. Free W/M 15,421
University Blvd. Standing*
Oklahoma City, 106 Park Avenue Street W/M 3,760
OK Location
Oklahoma City, 50 Penn Place Specialty W/M 14,240
OK Center
Omaha, NE One Pacific Specialty W 3,272
Place Center
Phoenix, AZ Biltmore Fashion Regional W/M 5,033
Park Shopping
Center
Plano, TX Park and Preston Free W/M 5,525
(Dallas Standing
metro)
Raleigh, NC Crabtree Valley Regional W/M 5,205
Mall Shopping
Center
Richmond, VA River Road Specialty W/M 5,000
Shopping Center Center
San Antonio, TX Broadway and Free W 3,312
Austin Highway standing
San Antonio, TX Alamo Quarry Specialty W/M 5,000
Market Center
Sealy, TX Sealy Outlet Outlet W/M 9,000
Center Mall*
St. Louis, MO Plaza Frontenac Regional W/M 4,221
Shopping
Center
Tulsa, OK Farm Shopping Specialty W/M 3,888
Center Center
Tulsa, OK Utica Square Regional W/M 4,625
Shopping
Center
Wichita, KS The Bradley Fair Specialty W/M 5,500
Center Center
*Outlet Store
The employee population of a typical full-line Harold's
store consists of a store manager, two assistant managers
(women's and men's), one or two desk associates, and five to
seven sales associates, most of whom work on a flex-time basis
(20-25 hours per week). Sales associates are paid a commission
against a draw. Commissions range from 7% to 10% based on the
type of product sold and the scale of the associate. Store
managers are paid on a salary plus a performance bonus based on
attainment of sales goals and expense control.
The Company's stores generally are open seven days per
week and evenings. In addition to the Company's own "Harold's"
credit card, the Company accepts VISA, Mastercard and American
Express.
Product Development and Sourcing Programs
The Company's product development and sourcing programs
enable it to offer exclusive and semi-exclusive items not
available in competing stores or catalogs. More than 90% of
sales is merchandise where the Company has created or
controlled the design, demonstrating the Company's commitment
to a unique product mix. The Company believes that this unique
product mix enables it to compete with, and differentiates it
from, larger apparel chains by offering customers an exclusive
garment at a price below designers and similar open market
merchandise. Direct creation and control of merchandise also
enables the Company to improve its initial mark up. The
Company's private label merchandise consists of items developed
by the Company and manufactured exclusively for the Company and
items developed by the Company and manufactured on a semi-
exclusive basis for the Company.
An important component of the Company's product
development programs is market research of styles and fabrics.
The Company's buyers shop European and domestic markets for
emerging fashion trends, for new vendors, and for fabric,
artwork and samples for new garment designs. Through
sophisticated, computer-aided design technologies, the product
development staff adapts and develops fabric designs and
garment models. These design models assist the Company in
sourcing and in negotiations with mills and vendors. The
Company's product development programs allow it to participate
directly in the design and manufacturing of an exclusive
product without investing in costly manufacturing equipment.
The Company's development program is complemented by
association with independent buying offices in New York and
Florence, Italy.
The Company's product development programs enable it to
offer new styles, often before similar merchandise is available
at other specialty or department stores or catalogs. The
Company imports a significant portion of its merchandise
directly from the United Kingdom, Italy, and through domestic
importers from the Far East.
The Company's merchandisers travel to Europe, including
popular fashion meccas such as Paris and Milan, six to eight
times each year, searching out new styles and collecting
vintage fabrics and antique wallpaper, and original art for
pattern development. In addition to purchasing original art
work created for pattern development, merchandisers have
ongoing contact with several art studios in Europe where
artists hand paint intricate patterns and prints exclusively
for the Company. The European development work helps the
Company spot emerging trends among fashion forward Europeans
for development into the Company's classically-inspired
merchandise.
The Company's merchandisers review the collected material,
analyze fashion directions and select the best pieces to
convert into prints and patterns for the next season. Once the
new patterns are selected, the team then "specs" out various
styles - detailing a garment's cut, fit, fabric, color and
trim. An advanced textile computer-aided design system makes
designing new pieces much easier by providing color "proofs"
which allow the Company to correct inaccuracies in a design
before a working sample is made. This process reduces costs
and contributes to the inherent value of each item. After the
specs have been finalized, the piece goods - materials for
making the product - are ordered from domestic and
international fabric mills. The finished fabric is then
shipped to manufacturers who cut, sew and trim the completed
design.
The Company's line of leather goods is made by European
craftsmen, primarily in Italy. Shoes, belts, handbags, wallets
and other leather products are co-designed by the Company's
merchandisers and Italian artisans. Italian-made leather goods
are marketed under a variety of Company-owned labels and are
featured in all of the Company's stores and in its catalog.
During fiscal 1995, the Company entered into a new
arrangement with its largest apparel vendor, CMT Enterprises,
Inc. ("CMT"). Previously, Harold's controlled the design process
and paid CMT for finished goods when produced and manufactured.
Under the new arrangement, the process has become more
verticalized. CMT acts as the Company's agent in the purchase of
raw materials (i.e. fabrics, linings, buttons, etc.) and
supervises the manufacturing process of the Company's merchandise
with manufacturing contractors. The Company purchases raw
materials directly from suppliers and pays for the manufacturing
process as costs are incurred. CMT is paid a commission based on
actual cutting, sewing and trim costs of the finished goods. The
Company believes this relationship with CMT permits the Company
to control the quality and cost of the Company's inventory
purchases. A substantial portion of the Company's merchandise
purchases are concentrated among a small number of vendors. The
Company believes that fewer vendor relationships advance the
Company's product development objectives by increasing control
over the design and manufacturing process. In the event of the
termination of the CMT relationship or other of the Company's
vendors, management believes that in most instances more than one
new vendor would be required to
replace the loss of a principal vendor. Although management
believes that replacement vendors could be located, if any buying
relationship is terminated and until replacement vendors are
located, the operating results of the Company could be materially
adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of
Operations and - Capital Resources, Capital Expenditures and
Liquidity and note 11 to Consolidated Financial Statements."
Catalog Publication and Order Fulfillment
In March 1990, using an in-house data base, the Company
mailed its first direct response catalog to over 100,000
addresses. In addition to contributing to sales, the catalog
has become an increasingly important market research and new
store promotion tool. During fiscal 1998, the Company used its
mail order buyer list (currently containing approximately
170,000 names), its retail customer list (currently containing
approximately 200,000 names) and a variety of rental lists to
mail six issues with an average of 91 pages, and an aggregate
circulation of approximately 7.8 million copies (including
abridged issues). The catalogs are designed and produced in-
house with photography, prepress and printing services being
outsourced. On-line computerized inventory systems and order
processing programs offer control of fulfillment and shipping
times and record the purchase history of catalog buyers and the
performance of each individual mailing list. Orders are
processed daily and inventory adjustments are managed
accordingly.
The direct response catalog has experienced sales
increases from $620,000 in fiscal 1992 to $9,039,000 in fiscal
1998. As a stand-alone venture and as costs are currently
accounted, the catalog has recorded a loss from operations each
year. The principal reasons for the losses include: (i) in
addition to its primary merchandising role, the catalog is
employed as an advertising vehicle to stimulate customer
traffic in the existing Harold's stores, and also as a market
research and development tool in connection with expanding the
chain into new markets; and (ii) at the end of a specific
catalog's run the unsold merchandise is reacquired from the
catalog operation at marked down cost prices to allow such
merchandise to be sold with a customary profit margin in the
Company's retail stores, and profit is recorded in the store
and is not a component in calculating the catalog's
profitability. In addition, the Company does not account for
the advertising and traffic-building benefits of mailing the
catalog to its known retail customers, for any profits earned
from catalog close-outs sold in the outlet stores, or for the
catalog's contribution to developing potential new store
locations.
Management continues to control the expansion of the
Company's catalog operations. To the extent that the financial
results of the catalog operations improve, principally as a
consequence of increased sales and associated absorption of
fixed overhead, net earnings of the Company should improve as
a percentage of sales.
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 level in
order to identify slow-moving merchandise and broken
assortments (items no longer in stock in a sufficient range of
styles, colors and sizes) and may use markdowns to clear this
merchandise. Markdowns also may be used if inventory exceeds
customer demand for reasons of style, seasonal adaptation,
changes in customer preference, or if it is determined that the
inventory in stock will not sell at its currently marked price.
Such markdowns may have an adverse impact on earnings,
depending on their extent and the amount of inventory affected.
The Company utilizes its four outlet stores to dispose of slow
moving merchandise. In addition, slow moving merchandise is
periodically cleared through regional off-site discount sales
which are promoted under the name "Harold's Warehouse Sale".
The Company operates an 85,000 square foot distribution
facility capable of processing merchandise for 74 stores, in
Norman, Oklahoma. With a modest additional investment, the
facility will have the capability of processing merchandise for
138 stores. All of the Company's merchandise will route
through the distribution center from various manufacturers.
Each item is examined, sorted, tagged with bar coded tickets
which track the merchandise for analysis by multiple
parameters, including, vendor lot number, color and size. The
merchandise is then boxed for shipment by company trucks or
common carrier to the Company's 42 stores and catalog
operation. This process is done in a time sensitive manner in
a substantially paperless environment, utilizing computers, bar
codes and scanners.
Seasonality
The Company's business follows a seasonal pattern, peaking
twice a year during the late summer (August through early
September) and holiday (Thanksgiving through Christmas)
periods. During fiscal 1998, approximately 54% of the
Company's sales occurred and substantially all of the Company's
net income was earned during the third and fourth quarters.
Competition
The Company's business is highly competitive. The
Company's stores compete with national and local department
stores, specialty and discount store chains, catalogers and
independent retail stores which offer similar lines of
specialty apparel. Many of these competitors have
significantly larger sales volumes and assets than the Company.
Depth of selection in sizes and colors and styles of
merchandise, merchandise procurement and pricing, ability to
anticipate fashion trends and customer preferences, inventory
control, reputation, quality of private-label merchandise,
store design and location, advertising and customer service are
all important factors in competing successfully in the retail
industry. Given the large number of companies in the retail
industry, the Company cannot estimate the number of its
competitors or its relative competitive position.
In addition, the success of the Company's operations
depends upon a number of factors relating to economic
conditions and general consumer spending. If current economic
conditions worsen and consumer spending is restricted, the
Company's growth and profitability will be negatively impacted.
Customer Credit
The Company's stores accept the proprietary "Harold's"
credit card, and Visa, Mastercard, and the American Express
credit cards. The Company's catalog operation accepts VISA,
Mastercard and the Company's credit card. Credit card sales
were 73% in fiscal 1996, 74% in fiscal 1997, and 76% in fiscal
1998. In fiscal 1998, 17% of sales were made with the Harold's
credit card and 59% 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 31, 1998, the allowance for bad
debts from Company credit card sales was approximately 0.9% of
Harold's proprietary credit card sales for fiscal 1998.
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 and American Express). At January 31, 1998, the
Company had approximately 57,000 credit accounts, 60% of which
had been used at least once during the prior 12 months, and the
average card holder had a line of $1,000 and an outstanding
balance of $300. Charges by holders of the Company's credit
card during fiscal 1998 totaled approximately $22,900,000.
Advertising
The Company maintains an in-house advertising department,
which has won numerous Addy awards at the local, district and
national levels. The advertising department staff produces in-
house print advertising for daily and weekly newspapers and
other print media, and designs the Company's direct response
catalogs and other direct mail pieces. In fiscal 1998, the
Company spent approximately $10,000,000 (8.3% of sales) on
advertising as compared to $8,000,000 (7.4% of sales) in fiscal
1997. This expenditure includes the production and mailing
costs associated with the Company's direct response catalog.
The advertising department is also involved in the production
of quarterly and annual reports to the Company's stockholders,
sales training materials, internal marketing materials, and all
corporate logos and labeling.
Management Information Systems
The Company places great emphasis on upgrading and
integrating its management information systems ("MIS"). The
Company believes these upgrades will enable it to maintain more
efficient control of its operations and facilitate faster and
more informed responses to potential opportunities and
problems. The Company maintains an MIS team to oversee these
information management systems, which include credit, sales
reporting, accounts payable and merchandise control, reporting
and distribution.
The Company uses an integrated point-of-sale ("POS")
inventory and management system to control merchandising and
sales activities. This system automatically polls each
location every 24 hours and provides a detailed report by
merchandise category the next morning. Management evaluates
this information daily and implements merchandising controls
and strategies as needed. The Company's POS system has been
updated to allow additional functions to be programmed into the
system. The POS system provides personnel scheduling and time
keeping capabilities, as well as, a customer profile function
to better identify and track consumer demographics.
The Company continues to implement newer and better
inventory control systems. The Company routinely conducts its
own inventory using a sophisticated scanning system. POS
scanning devices record and track SKU bar codes which are
assigned to every piece of merchandise. This information is
downloaded into the Company's IBM AS400r computer which
generates a detailed report within 24 hours of the physical
inventory.
The Company has also implemented ARTHURr, a computerized
merchandise planning system which interacts with the Company's
AS400r and Island Pacific Systemsr software. ARTHURr
facilitates seasonal planning by department and store, and
provides certain data for financial planning.
The Company plans to continue implementing upgrades and
improving its management information system to keep abreast of
the retail industry's increasing technological advances. The
Company is addressing the need to ensure that its operations will
not be adversely impacted by software or other system failures
related to Year 2000. Management is in the process of working
with its software vendors to assure that the Company is prepared
for the Year 2000. During fiscal 1999, the Company intends to
invest approximately $1,500,000 in management information system
upgrades and replacements that the Company believes are Year 2000
compliant and should address Year 2000 compliance issues
presently known to the Company. However, significant uncertainty
exists concerning potential costs and the Company's ability to
identify or address all Year 2000 compliance issues. Any Year
2000 compliance problem of either the Company or by those with
whom the Company conducts business could have a material adverse
effect on the Company's business, consolidated results of
operations and financial condition.
Trademarks, Service Marks, and Copyrights
"Harold's", "Harold Powell", "Old School Clothing Company",
"OSCC Bespoke" and other trademarks either have been
registered, or have trademark applications pending, with the
United States Patent and Trademark Office and with the
registries of various foreign countries. The Company files
U.S. copyright registration on the original design and artwork
purchased or developed by the Company.
The Company's two Houston stores and the Sealy, Texas
Outlet bear the name "Harold Powell" rather than "Harold's" to
avoid confusion with an existing local men's apparel store
which operates in Houston under the name "Harold's" with prior
usage in this market predating the Company's federal
registration.
Employees
On March 27, 1998 the Company had approximately 569
full-time and 753 part-time employees. Additionally, the
Company hires temporary employees during the peak late summer
and holiday seasons. None of the Company's employees belongs
to any labor union and the Company believes it has good
relations with its employees.
ITEM 2. PROPERTIES
Store Leases
At March 27, 1998, the Company owned the Austin Outlet
store and leased 41 stores. The Company believes rent payable
under its store leases is a key factor in determining the sales
volume at which a store can be profitably operated. The leases
typically provide for an initial term of 12 years. In most
cases, the Company pays a base rent plus a contingent rent
based on the store's net sales in excess of a certain
threshold, typically four to five percent of net sales in
excess of the applicable threshold. Among current store
leases, one store lease has fixed rent with no percentage rent.
Three store leases have percentage rent only. All other store
leases provide for a base rent with percentage rent payable
above specified minimum net sales. Twenty-three of the leased
stores open during all of fiscal 1998 operated at sales volumes
above the breakpoint (the sales volume below which only rent is
payable). Based on the Company's current level of sales per
square foot, the Company believes that some of the risk from
any decline in future sales volume in these stores is reduced
because a corresponding decline in occupancy expense would
occur.
Substantially all of the leases require the Company to pay
property taxes, insurance, utilities and common area
maintenance charges. The current terms of the Company's
leases, including automatic renewal options, expire as follows:
Years Leases Number of
Expire Stores
1998 2
1999-2000 6
2001-2003 8
2004 and later 25
The Company generally has been successful in renewing its
store leases as they expire.
During fiscal 1998, the Company entered into new leases for
stores in Birmingham, Alabama; Sealy, Texas; and Dallas,
Texas.
Management believes the terms of these leases are comparable
with other similar national retailers in these locations. Base
rent (minimum rent under terms of lease) in current leases
ranges from $6 per square foot to $32 per square foot over the
terms of the leases. Total base rent has continued to increase
based on new store leases. Occupancy costs has increased
slightly as the Company has entered new markets. The following
table sets forth the fixed and variable components of the
Company's rent expense for the fiscal years indicated:
1998 1997 1996
Base rent $ 3,702,000 2,806,000 2,222,000
Additional rents
computed as a
percentage of
sales 1,206,000 1,261,000 1,112,000
Total $_4,908,000 4,067,000 3,334,000
Corporate Headquarters and Catalog Fulfillment Center
The Company owns a complex of contiguous buildings in
Norman, Oklahoma comprised of approximately 36,500 square feet,
with 22,000 square feet of this space being utilized by the
Company for its executive offices, administrative functions and
catalog fulfillment center. The remainder of this complex is
currently leased to other parties and could be used for future
expansion of the catalog fulfillment center and other Company
needs.
Merchandise Buying Office, and Distribution Center
The Company leases a 10,000 square foot building used
primarily as a men's and ladies' buying office in Dallas, Texas
(the "Dallas Buying Office") and an 85,000 square foot
warehouse distribution center facility located in Norman,
Oklahoma.
The lessor of the Dallas Buying Office and the distribution
center is a limited partnership whose partners include Rebecca
Powell Casey, Michael T. Casey, H. Rainey Powell and Lisa
Powell Hunt, all of whom are stockholders and directors of the
Company. The term of the Dallas Buying Office lease expires
March 2012, with annual rent payments of $158,000 plus
insurance, utilities and property taxes until April, 2000, at
which time the annual rent will be $180,000, plus insurance,
utilities and property taxes, increasing $2,500 each year
thereafter until expiration of the lease. The term of the
distribution center lease expires in June 2012, with annual
rental payments of $338,438 plus insurance, utilities and
property taxes until July, 2001, at which time the annual rent
will increase annually on a fixed scale up to a maximum of
$419,951 during the final year of the lease.
The limited partnership also owns a 50,000 square foot
facility in Dallas, Texas. The Company is currently negotiating
with the limited partnership to lease the facility for
anticipated occupancy in the second half of fiscal 1999. The
Company intends to use approximately 31,000 square feet as a new
Dallas buying office with the remainder to be utilized for
storage and expansion. The present Dallas Buying Office will be
subleased. The Company is currently engaged in negotiations with
a potential sublessee but there is no assurance that a sublease
will be consummated on terms favorable to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine
litigation incidental to the conduct of its business. As of
this date, the Company is not a party to, nor is any of its
property subject to, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
report.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
At March 27, 1998, there were 683 record holders of the
Company's common stock, ("Common Stock"). The Company's Common
Stock is listed on the American Stock Exchange under the symbol
"HLD". The table below presents the range of the high and low
sales prices, for the periods indicated. The price per share
information contained in the following table is restated to
reflect 5% stock dividends paid to holders of Common Stock on
January 16, 1998 and on January 17, 1997.
Quarterly Common Stock Price Ranges
Fiscal 1998 High Low
1st Quarter $ 13.33 $ 8.69
2nd Quarter $ 9.41 $ 7.98
3rd Quarter $ 8.51 $ 7.02
4th Quarter $ 8.10 $ 5.95
Quarterly Common Stock Price Ranges
Fiscal 1997 High Low
1st Quarter $16.21 $10.77
2nd Quarter $15.42 $12.70
3rd Quarter $13.27 $12.36
4th Quarter $14.74 $12.38
Dividend Policy
The Company has never declared or paid cash dividends on
its Common Stock and presently intends to retain all earnings
for the operation and expansion of its business for the
foreseeable future. Any future determination as to the payment
of cash dividends will depend on the Company's earnings,
capital requirements, financial condition and other factors as
the Board of Directors may deem relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information
is derived from the audited consolidated financial statements
of the Company and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial
statements and the notes thereto, appearing elsewhere herein.
Fiscal Year
1998 1997 1996 1995 1994
(Dollar amounts in thousands, except per
share data)
Statements of Earnings
Data:
Sales $119,919 108,257 94,264 75,795 60,940
Percentage increase 10.8% 14.8% 24.4% 24.4% 23.7%
Gross profit on sales(1) $38,149 38,717 33,819 26,407 20,349
Percentage of sales 31.8% 35.8% 35.9% 34.8% 33.4%
Earnings before income $74 5,880 4,645 3,539 2,783
taxes
Percentage of sales 0.0% 5.4% 4.9% 4.7% 4.5%
Net earnings $44 3,528 2,787 2,088 1,612
Percentage of sales 0.0% 3.3% 3.0% 2.8% 2.6%
Earnings per common
share (2): $0.01 0.61 0.51 0.38 0.31
Basic $0.01 0.59 0.51 0.38 0.31
Diluted
Other Operating Data:
Stores open at end of 41 36 29 25 21
period
Growth in comparable (5.4%) (0.5%) 8.7% 10.7% 7.4%
store sales
(52-53 week basis)
Balance Sheet Data:
Working capital $35,430 28,016 21,301 12,524 12,540
Total assets 63,929 59,608 42,909 34,661 26,441
Long-term debt (3) 19,708 12,528 9,540 594 669
Stockholders' equity 36,466 36,035 25,299 22,260 19,996
Net book value per share $6.03 6.01 4.63 4.10 3.70
(4)
(1) In accordance with retail industry practice,
gross profit from sales is calculated by subtracting cost of
goods sold
(including occupancy and central buying expenses) from sales.
(2) Net earnings per common share are based on the
weighted average number of common shares outstanding during
each period restated for the 5% percent stock
dividends in fiscal 1998, fiscal 1997 and fiscal 1996 and the
10% percent stock
dividends in fiscal 1995, and fiscal 1994.
(3) In fiscal 1996, the Company renewed its line of
credit to be payable at a fixed maturity rather than on demand,
which required the loan to be reclassified as long-
term debt.
(4) Net book value per share is based on the number of
shares of Common Stock outstanding at the end of each fiscal
year restated for the 5% stock dividends in fiscal
1998, fiscal 1997 and 1996 and the 10% stock dividends in
fiscal 1995, and fiscal
1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table reflects items in the Company's
statement of earnings as a percentage of sales for the periods
indicated:
Fiscal Year
1998 1997 1996
(52 (52 (53
Weeks) Weeks) Weeks)
Sales 100.0% 100.0 100.0
Cost of goods sold (68.2) (64.2) (64.1)
Selling, general and (19.9) (20.1) (19.9)
administrative expenses
Advertising expense (8.3) (7.4) (8.3)
Depreciation and amortization (2.9) (2.6) (2.3)
Interest expense
(0.7) (0.3) (0.5)
Earnings before income taxes 0.0 5.4 4.9
Provision for income taxes
0.0 (2.1) (1.9)
Net earnings 0.0% 3.3 3.0
The following table reflects the sources of the increases
in Company sales for the periods indicated:
Fiscal Year
1998 1997 1996
(52 (52 (53
Weeks) Weeks) Weeks)
Store sales (000's) $110,880 99,374 84,880
Catalog sales (000's) 9,039 8,883 9,384
Sales (000's) $119,919 108,257 94,264
Total sales growth 10.8% 14.8% 24.4%
Growth in comparable store sales (5.4) 8.7
(52-53 week basis) (0.5)
Growth in catalog sales 1.8 (5.3) 36.1
Store locations:
Existing stores beginning of 36 29 25
period
Stores closed (1) - -
New stores opened during period 6 7 4
Total stores at end of
period 41 36 29
Total Company sales increased 10.8% in fiscal 1998 as
compared to 14.8% in fiscal 1997 and 24.4% in fiscal 1996. The
Company believes that such increases were primarily due to the
continued store expansion program. The Company opened five
stores and one outlet during fiscal 1998 and closed one store.
Stores were opened in: Cordova, Tennessee (Memphis metro);
Wichita, Kansas; Columbus, Ohio; Richmond, Virginia;
Birmingham, Alabama; and an outlet in Sealy, Texas. A store
closed in Kensington, MD (Washington, DC metro).
The Company opened six stores and one outlet during fiscal
1997. Stores were opened in: Greenville, South Carolina;
Leawood, Kansas; Raleigh, North Carolina; McLean, Virginia;
Littleton, Colorado (Denver metro); Houston, Texas (known as
Harold Powell); and an outlet in Norman, Oklahoma.
The Company opened three stores and one outlet during
fiscal 1996. Stores were opened in: St. Louis, Missouri;
Louisville, Kentucky; Baton Rouge, Louisiana; and an outlet in
Hillsboro, Texas.
Comparable store sales declined 5.4% during fiscal 1998,
compared to a decline of 0.5% in fiscal 1997 and an increase of
8.7% in fiscal 1996. The Company believes that the declines
experienced in comparable store sales during fiscal 1998 and
fiscal 1997 were primarily attributable to the opening of
second stores in several key markets, including: Birmingham,
Alabama; Norman, Oklahoma: Memphis, Tennessee; Dallas and
Houston, Texas; and Washington, DC, as well as lower than
anticipated sales of fashion apparel merchandise. The Company
believes that the increase in comparable store sales in fiscal
1996 was primarily attributable to favorable response to the
Company's merchandise offerings.
Catalog sales increased 1.8% during fiscal 1998, compared
to a decline of 5.3% in fiscal 1997 and an increase of 36.1% in
fiscal 1996. The increase during fiscal 1998 was due to
expanded catalog circulation. Since the 1989 test market of
Harold's first catalog, the Company has expanded its regular
catalog to include six seasonal issues each year. For fiscal
1998, the Company's catalog averaged 91 pages per issue with an
aggregate mailing (including abridged issues) of approximately
7.8 million catalogs. During fiscal 1997, the decline in
catalog sales was the result of the Company shifting its focus
from expanding catalog circulation to reducing catalog expenses
as a percentage of sales and a disappointing response toward
two of six books. The Company believes that the increase in
catalog sales during fiscal 1996 was the direct result of the
Company's expansion of this segment of the business.
The Company's gross margin declined from 35.8% in fiscal
1997 to 31.8% in fiscal 1998. The Company experienced higher
markdowns due to excess inventory levels, resulting from lower
than anticipated sales of fashion apparel merchandise. In
addition, higher occupancy costs that did not leverage due to
lower sales negatively impacted the gross margin. Any increase
in net earnings as a percentage of sales will be the result of
increasing sales while controlling selling, general and
administrative expenses and improvement in gross margin from
sales. The Company's gross margin declined from 35.9% in
fiscal 1996 to 35.8% in fiscal 1997. Increases in initial
markups and reduced markdowns were offset by higher occupancy
costs keeping the gross margin relatively flat. The increase in
the Company's gross margin during fiscal 1996 to 35.9% from
34.8% in fiscal 1995 was the result of reduced markdowns
related to increased store sales.
Selling, general and administrative expenses decreased
0.2% of sales in fiscal 1998 and increased 0.2% of sales in
fiscal 1997 and in fiscal 1996. The decline in selling, general
and administrative expenses as a percentage of sales in fiscal
1998 was primarily due to a reduction in catalog fulfillment
costs, offset by increases in sales salaries in order to
maintain exceptional customer service expectations. The
increases in selling, general and administrative expenses for
fiscal 1997 and fiscal 1996 resulted primarily from increases
in sales salaries as part of an effort to improve the quality
of customer service.
Catalog production costs increased $1,600,000 or 36% in
fiscal 1998, whereas in fiscal 1997 such costs decreased by 8%.
In fiscal 1998, the Company increased circulation in attempts
to increase the rate of sales growth in the catalog division,
resulting in an increase in catalog expenses as a percentage of
sales compared to fiscal 1997, when the Company decreased the
rate of sale growth in the catalog division. The increase of
31% in fiscal 1996 was due to the expansion of catalog
operations. Non-catalog advertising expenditures increased 11%
in fiscal 1998 compared to an increase of 20% in fiscal 1997
and 33% in fiscal 1996. Such expenses increased primarily due
to new store opening expenditures, combined with promotional
activity to clear excess inventory levels.
During fiscal 1998, interest expense increased $497,000,
or 0.4% of sales, compared to fiscal 1997 due to higher
outstanding debt balances. The average balance on total
outstanding debt was $19,448,000 in fiscal 1998, compared to
$9,073,000 for fiscal 1997. The increase in average balances
resulted principally from the addition of the CMT Enterprises,
Inc. term loan, as well as increases related to additional
working capital inventory purchase needs. As the Company's
growth continues, cash flow may require additional borrowed
funds, which may cause an increase in interest expense.
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. During fiscal 1998, the Company
entered into three forward exchange contracts with a major
financial institution to secure firm pricing related to purchase
commitments to be denominated in foreign currencies. The
contracts are of varying short-term duration and include a window
delivery feature which provides the Company with an option to
enter into a swap agreement in the event that all of the currency
is not utilized at the end of the contract's delivery term. The
amount of any gain or loss on these contracts in fiscal 1998 was
immaterial. The Company has no assurance that the impact in the
future will not be material.
The Company's income tax rate was 40% in fiscal 1998,
fiscal 1997 and fiscal 1996.
Capital Expenditures, Capital Resources and Liquidity
Cash Flows From Operating Activities. For fiscal 1998, net
cash used in operating activities as $3,551,000 was compared to
$249,000 net cash provided by operating activities for fiscal
1997. The decline can be partially attributable to (i) net
earnings of $44,000 for fiscal 1998, compared to net earnings of
$3,528,000 for fiscal 1997, a reduction in net earnings of
$3,484.000, (ii) the timing of cash disbursements as reflected in
a decrease in accounts payable of $1,879,000 for fiscal 1998, as
compared to an increase in accounts payable of $2,272,000 for
fiscal 1997, and (iii) amortization of deferred catalog costs as
reflected in a decrease in other assets of $558,000 in fiscal
1998 compared to a $652,000 increase in fiscal 1997.
Offsetting the decrease in net cash used in operating
activities was an increase of $2,896,000 in the Company's
merchandise inventories for fiscal 1998, compared to fiscal 1997
during which inventories increased by $6,897,000. Management
expects the dollar amount of the Company's merchandise
inventories to continue to increase with the expansion of its
product development programs, private label merchandise and chain
of retail stores, with related increases in trade accounts
receivable and accounts payable. Period-to-period differences in
timing of inventory purchases and deliveries will affect
comparability of cash flows from operating activities.
Cash Flows From Investing Activities. For fiscal 1998, net
cash used in investing activities was $4,554,000, as compared to
$9,705,000 for fiscal 1997. Capital expenditures totaled
$4,760,000, compared to $7,102,000 for fiscal 1997. The Company
incurred significant expansion costs at the distribution center
during fiscal 1997 that were not incurred to the same magnitude
in fiscal 1998. Capital expenditures during such periods were
invested principally in new stores, and remodeling and equipment
expenditures in existing operations. On November 6, 1996, the
Company made a term loan to CMT Enterprises, Inc. ("CMT") in the
principal amount of $2,750,000, to be used by CMT to refinance
its existing revolving line of credit of $1,391,000 at a New York
City bank and for working capital purposes. At March 27, 1998 the
outstanding balance of the loan was $2,599,000. CMT is a major
independent contractor whose assistance is instrumental in the
Company's design process. See note 3 to Consolidated Financial
Statements.
Cash Flows From Financing Activities. During fiscal 1998,
the Company made periodic borrowings under its revolving credit
facility to finance its inventory purchases, product
development and private label programs, store expansion,
remodeling and equipment purchases for the fiscal year (see
"Liquidity").
The Company has available a line of credit with its bank.
This line had average balances of $16,472,000 and $7,801,000
for the fiscal years 1998 and 1997, respectively. During
fiscal 1998, this line of credit had a high balance of
$21,500,000 and a $15,036,000 balance as of January 31, 1998.
The balance at March 27, 1998, was $13,732,000. In addition,
the Company secured a term loan totaling $2,341,000 and a
revolving note in the amount of $3,000,000 (of which $884,000
was outstanding at January 31, 1998) each maturing on June 30,
1999.
Liquidity. The Company considers the following as
measures of liquidity and capital resources as of the dates
indicated (dollars in thousands).
Fiscal Year
1998 1997 1996
Working capital $35,430 $28,016 $21,301
Current ratio 5.63:1 3.57:1 3.71:1
Ratio of working capital .55:1 .47:1 .49:1
to total assets
Ratio of long-term debt
(including current .56:1 .35:1 .38:1
maturities) to
stockholders' equity
The Company's primary needs for liquidity are to finance
its inventories and revolving charge accounts and to invest in
new stores, remodeling, fixtures and equipment. Cash flow from
operations and proceeds from credit facilities represent the
Company's sources of liquidity. Management anticipates these
sources of liquidity to be sufficient in the foreseeable
future. The Company's capital expenditures budget for fiscal
1999 is approximately $4,000,000.
Seasonality
The Company's business is subject to seasonal influences,
with the major portion of sales realized during the fall season
(third and fourth quarters) of each fiscal year, which includes
the back-to-school and the holiday selling seasons. In light
of this pattern, selling, general and administrative expenses
were typically higher as a percentage of sales during the
spring seasons (first and second quarters) of each fiscal year.
Inflation
Inflation affects the costs incurred by the Company in its
purchase of merchandise and in certain components of its
selling, general and administrative expenses. The Company
attempts to offset the effects of inflation through price
increases and control of expenses, although the Company's
ability to increase prices is limited by competitive factors in
its markets. Inflation has had no meaningful effect on sales,
or net earnings of the Company.
Impact of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income." SFAS No. 130
established standards for reporting and display of
"comprehensive income" and its components in a set of financial
statements. It requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements. The Company currently does not have any components
of comprehensive income that are not included in net income.
The Company will adopt SFAS No. 130 in fiscal 1999.
In June 1997, SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," was issued. SFAS No.
131 is effective for periods beginning after December 15, 1997.
SFAS No. 131 requires that a public entity report financial and
descriptive information about its reportable segments.
Operating segments are components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. The
Company will adopt SFAS No. 131 in fiscal 1999.
In April 1998, The American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." This SOP requires that
costs incurred during start-up activities, including
organization costs, be expensed as incurred. Initial
application of the SOP is as of the beginning of the fiscal
year in which the SOP is first adopted and will be reported as
the cumulative effect of a change in accounting principle. It
is effective for fiscal year 2000 and earlier application is
encouraged. The Company will adopt SOP 98-5 in the first
quarter of fiscal 1999. Management believes that the adoption
of SOP 98-5 will not have a material impact on the financial
condition or the results of operations of the Company.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 18
Consolidated Financial Statements:
Consolidated Balance Sheets
January 31, 1998 and February 1, 1997 19
Consolidated Statements of Earnings
52 Weeks Ended January 31, 1998 and February 1, 1997, and
53 Weeks Ended February 3, 1996 .....................21
Consolidated Statements of Stockholders' Equity
52 Weeks Ended January 31, 1998 and February 1, 1997, and
53 Weeks Ended February 3, 1996 .....................22
Consolidated Statements of Cash Flows
52 Weeks Ended January 31, 1998 and February 1, 1997,
and
53 Weeks Ended February 3, 1996 .....................23
Notes to Consolidated Financial Statements 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Harold's Stores, Inc.:
We have audited the accompanying consolidated balance
sheets of Harold's Stores, Inc. and subsidiaries (the Company)
as of January 31, 1998 and February 1, 1997, and the related
consolidated statements of earnings, stockholders' equity, and
cash flows for the 52 week periods ended January 31, 1998 and
February 1, 1997, and the 53 week period ended February 3,
1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Harold's Stores, Inc. and subsidiaries as
of January 31, 1998 and February 1, 1997, and the results of
their operations and their cash flows for the 52 week periods
ended January 31, 1998 and February 1, 1997, and the 53 week
period ended February 3, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK
LLP
Oklahoma City, Oklahoma
March 27, 1998
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
January February 1,
31, 1998 1997
Current assets:
Cash and cash equivalents $130 433
Trade accounts receivable, less
allowance for doubtful accounts 5,822 5,476
of $228
in 1998 and $215 in 1997
Other receivables 886 673
Merchandise inventories 31,440 28,544
Prepaid expenses 2,688 2,174
Prepaid income tax 961 -
Deferred income taxes 1,154 1,615
Total current assets 43,081 38,915
Property and equipment, at cost 28,533 25,001
Less accumulated depreciation and (10,197) (7,897)
amortization
Net property and equipment 18,336 17,104
Other receivables, noncurrent 2,084 2,603
Other assets 428 986
Total assets $ 63,929 59,608
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands Except Share Data)
January February
31, 1998 1, 1997
Current liabilities:
Current maturities of long-term $ 734 110
debt
Accounts payable 4,789 6,668
Redeemable gift certificates 916 923
Accrued bonuses and payroll 953 1,958
expenses
Accrued rent expense 259 298
Income taxes payable - 942
Total current liabilities 7,651 10,899
Long-term debt, net of current 19,708 12,528
maturities
Deferred income taxes 104 146
Commitments and contingent
liabilities (notes 10 and 12)
Stockholders' equity:
Preferred stock of $.01 par value
Authorized 1,000,000 shares; - -
none issued
Common stock of $.01 par value
Authorized 25,000,000 shares;
issued and 60 57
outstanding 6,044,105 in
1998, and 5,713,526 in 1997
Additional paid-in capital 33,947 31,548
Retained earnings 2,459 4,430
Total stockholders' equity 36,466 36,035
Total liabilities and stockholders' $63,929 59,608
equity
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Share Data)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January February 1, February 3,
31, 1998 1997 1996
Sales $ 119,919 108,257 94,264
Costs and expenses:
Cost of goods sold
(including occupancy and
central buying expenses, 81,770 69,540 60,445
exclusive of items
shown separately below)
Selling, general and 23,723 21,712 18,730
administrative expenses
Advertising expense 10,002 8,001 7,807
Depreciation and 3,535 2,806 2,185
amortization
Interest expense 815 318 452
119,845 102,377 89,619
Earnings before income 74 5,880 4,645
taxes
Provision for income taxes 30 2,352 1,858
Net earnings $ 44 3,528 2,787
Net earnings per common
share:
Basic $.01 .61 .51
Diluted $.01 .59 .51
Weighted average number of 6,020,936 5,798,098 5,453,905
common shares
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February February
1998 1, 1997 3, 1996
Common stock:
Balance, beginning of year $57 50 47
Stock dividend (5 percent) in
1998 of 287,528 shares, (5
percent) in 1997 of 272,072 3 3 3
shares, and
(5 percent) in 1996 of 235,868
shares
Stock bonuses, 2,306 shares in
1998, 1,761 shares in 1997, and - - -
1,301 shares in 1996
Employee Stock Purchase Plan
40,745 shares in 1998, 21,512 - - -
shares in 1997, and 22,838 shares
in 1996
Issuance of 460,000 shares in
1997 - 4 -
Balance, end of year $ 60 57 50
Additional paid-in capital:
Balance, beginning of year $ 31,548 20,572 17,491
Stock dividend (5 percent) in 2,010 3,772 2,827
1998, 1997 and 1996
Stock bonuses 22 28 13
Issuance of 460,000 shares in
1997, net of issuance - 6,860 -
cost of $145
Employee stock purchase plan 367 316 241
Balance, end of year $ 33,947 31,548 20,572
Retained earnings:
Balance, beginning of year $ 4,430 4,677 4,722
Net earnings 44 3,528 2,787
Stock dividend (5 percent) in (2,015) (3,775) (2,832)
1998, 1997 and 1996
Balance, end of year $ 2,459 4,430 4,677
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 31, February 1, February
1998 1997 3, 1996
Cash flows from operating
activities:
Net earnings $44 3,528 2,787
Adjustments to reconcile net
earnings to net cash
provided by (used in)
operating activities:
Depreciation and 3,535 2,806 2,185
amortization
Deferred income tax 419 (685) (360)
expense (benefit)
(Gain) loss on sale of (44) (2) 1
assets
Shares issued under 389 344 254
employee incentive plans
Changes in assets and
liabilities:
Increase in trade and (209) (798) (346)
other receivables
Increase in (2,896) (6,897) (3,800)
merchandise inventories
Increase in prepaid (961) - -
income taxes
Decrease (increase) 558 (652) (37)
in other assets
Increase in prepaid (514) (415) (585)
expenses
(Decrease) increase (1,879) 2,272 242
in accounts payable
(Decrease) increase (942) 106 253
in income taxes payable
(Decrease) increase (1,051) 642 642
in accrued expenses
Net cash provided by (used (3,551) 249 1,236
in)operating activities
Cash flows from investing
activities:
Acquisition of property (4,760) (7,102) (5,687)
and equipment
Proceeds from disposal of
property and 37 96 302
equipment
Term loan to others - (2,750) -
Payment of principal from
term loan to others 169 51 -
Net cash used in investing (4,554) (9,705) (5,385)
activities
Cash flows from financing
activities:
Borrowings on long-term 4,364 956 -
debt
Payments of long-term (411) (97) (75)
debt
Advances on revolving 46,834 44,518 32,652
line of credit
Payments of revolving (42,983) (42,354) (28,533)
line of credit
Proceeds of common stock - 6,864 -
offering
Payments of fractional
shares issued with
stock dividend (2) - (2)
Net cash provided by 7,802 9,887 4,042
financing activities
Net increase (decrease) in
cash and cash equivalents (303) 431 (107)
Cash and cash equivalents at
beginning of year 433 2 109
Cash and cash equivalents at
end of year $130 433 2
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Income taxes $756 2,239 1,965
Interest $ 1,487 699 678
Interest Capitalized during
the year $ 672 381 226
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1998, February 1, 1997 and February 3, 1996
1. Summary of Significant Accounting Policies
Nature of Entity
Harold's Stores, Inc., an Oklahoma corporation (the
Company), operates a chain of "updated traditional", classic
styled ladies' and men's specialty apparel stores. The Company
offers its merchandise in 41 stores primarily across the South
and Southwest, with 12 stores located in Texas, and through its
mail order catalog. The product development and private label
programs provide an exclusive selection of upscale merchandise
to the consumer. In addition, the in-house advertising and
catalog production capabilities create opportunities for
vertical integration.
Basis of Presentation
The consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions
have been eliminated.
Definition of Fiscal Year
The Company has a 52-53 week fiscal year which ends on the
Saturday closest to January 31. Fiscal years 1998, 1997, and
1996 ended January 31, 1998, February 1, 1997, and February 3,
1996, respectively.
Accounts Receivable and Finance Charges
Trade accounts receivable primarily represent the
Company's credit card receivables from customers. These
customers are primarily residents of Oklahoma and Texas.
Finance charges on these revolving receivables are imposed at
various annual rates in accordance with the state laws in which
the Company operates, and are recognized in income when billed
to the customers. Minimum monthly payments are required
generally equal to ten percent of the outstanding balance. The
average liquidation rate at January 31, 1998 was approximately
3.5 months. Finance charge revenue is netted against selling,
general and administrative expenses and was approximately
$985,000, $864,000, and $705,000, in fiscal 1998, fiscal 1997,
and fiscal 1996, respectively.
Derivatives
The Company uses forward exchange contracts to reduce
exposure to foreign currency fluctuations related to certain
purchase commitments. Unrealized gains or losses related to
hedges of firm commitments are deferred and included in the basis
of the transaction when completed.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or
market using the retail method of accounting. Inventories of
raw materials are valued at the lower of cost or market, and
approximate $7,121,000 and $7,612,000 in fiscal 1998, and
fiscal 1997, respectively.
Depreciation, Amortization, and Maintenance and Repairs
Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the
life of the respective leases or the expected life of the
improvements. The following are the estimated useful lives
used to compute depreciation and amortization:
Buildings 30 years
Leasehold improvements 5-10 years
Furniture and equipment 4-7 years
Maintenance and repairs are charged directly to expense as
incurred, while betterments and renewals are generally
capitalized in the property accounts. When an item is retired
or otherwise disposed of, the cost and applicable accumulated
depreciation are removed from the respective accounts and the
resulting gain or loss is recognized.
Preopening Expenses and Catalog Costs
Costs associated with the opening of new stores are
expensed over a six month period. The costs are carried as
prepaid expenses prior to the store opening. Such costs
included approximately $ 83,000 at January 31, 1998 and
$117,000 at February 1, 1997.
The Company expenses all non-direct advertising as
incurred and defers the direct costs of producing its mail
order catalogs. These costs are amortized over the estimated
sales period of the catalogs, generally three to four months.
At January 31, 1998 and February 1, 1997 approximately $341,000
and $909,000, of deferred catalog costs are included in other
assets. The Company incurred approximately $10,002,000,
$8,001,000, and $7,807,000, in advertising expenses, of which
approximately $6,028,000, $4,429,000, and $4,818,000 were
related to the mail order catalogs during fiscal years 1998,
1997, and 1996, respectively.
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that
includes the enactment date.
Net Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earning Per Share." SFAS No. 128 revised
the previous calculation methods and presentations of earnings
per share. The statement requires that all prior period
earnings per share data be restated. The Company adopted SFAS
No. 128 in the fourth quarter of 1998 as required by the
statement. The effect of adopting SFAS No. 128 was not
material to the Company's prior period earnings per share data.
The previously reported amounts for earnings per share were
restated using basic earnings per share and diluted earnings
per share.
Under the provisions of SFAS No. 128, basic earnings per
share is computed by dividing net earnings (loss) applicable to
common stock by the weighted average number of common shares
outstanding for the period. The weighted average number of
common shares outstanding were restated for the five (5%) percent
stock dividends in fiscal 1998, 1997 and 1996. Diluted earnings
per share reflects the potential dilution that could occur if the
Company's outstanding stock options were exercised (calculated
using the treasury stock method).
The following table reconciles the net income applicable to
common shares and weighted average common shares outstanding used
in the calculation of basic and diluted earnings per common share
for the periods indicated:
Fiscal Year
1998 1997 1996
(Amounts in thousands, except
per share data)
Net earnings applicable to common $ 44 3,528 2,787
shares, basic and diluted
Weighted average number of common 6,021 5,798 5,454
shares outstanding - basic
Dilutive effect of potential common
shares issuable upon
exercise of employee stock 11 147 59
options
Weighted average number of common
shares outstanding - diluted 6,032 5,945 5,513
Earnings per share:
Basic $.01 .61 .51
Diluted $.01 .59 .51
Stock Options
The Company follows the intrinsic value method of
accounting for common stock options granted to employees, in
accordance with the provision of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations.
Cash and Cash Equivalents
Cash and cash equivalents include overnight investments
and credit card receivables collected within three business
days.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets.
Reclassifications
Certain comparative prior year amounts in the consolidated
financial statements have been reclassified to conform with the
current year presentation.
2. Fair Value of Financial Instruments
Balance Sheet: Cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate
fair value because of the short maturity of these financial
instruments. Other receivables and debt are at variable
interest rates, therefore, fair value approximates book value.
Off Balance sheet: The aggregate outstanding notional
principal amount of forward exchange contract commitments
approximates fair value at January 31, 1998. Fair values
relating to the forward exchange contracts reflect the estimated
amounts that the Company would pay to terminate the contracts,
based on quoted market prices at January 31, 1998.
3. Other Receivables
On November 6, 1996, the Company made a term loan to CMT
Enterprises, Inc., ("CMT"), in the principal amount of
$2,750,000 to be used by CMT to refinance its existing
revolving line of credit of $1,391,000 at a New York City bank
and for working capital purposes. CMT is a major independent
contractor whose assistance is instrumental in the Company's
design process.
The term loan matures December 31, 2002, and bears
interest at the national prime rate, plus 4.25%, with a floor
interest rate of 12.5%. Principal and interest on the loan are
payable in approximately equal monthly installments, subject to
semi-annual adjustments based upon changes in the prime rate.
The loan is governed by a loan agreement containing terms and
conditions customary to financing of this type. The Company
recognized $204,000 and $51,000 of interest income during
fiscal 1998 and 1997, respectively.
The loan is secured by substantially all assets of CMT.
CMT's President and Chief Executive Officer has personally
guaranteed repayment of the loan and granted the Company a
second mortgage lien on real estate in Duchess County, New
York. As further security for the loan, the President has
pledged 100% of the outstanding stock of CMT and granted a
subordinated lien in cash collateral of approximately $340,000.
In addition, CMT has issued a 10-year warrant to the Company to
purchase 20% of the outstanding stock of CMT.
4. Property and Equipment
Property and equipment at January 31, 1998 and February 1,
1997 consisted of the following:
1998 1997
(in thousands)
Land $665 665
Buildings 2,940 2,847
Leasehold improvements 8,516 7,052
Furniture and 15,683 13,504
equipment
Construction in 729 933
progress
$_28,533 25,001
5. Note Payable and Long-term Debt
Long-term debt at January 31, 1998 and February 1, 1997
consisted of the following:
1998 1997
(in thousands)
Borrowings under line of credit with
a maximum $19,000,000, bearing
interest at a variable rate (7.3%
and 7.6% at January 31, 1998 and $15,036 11,185
February 1, 1997, respectively)
payable monthly, principal due June,
1999.
Borrowings under line of credit with
a maximum line of $3,000,000, used
to finance certain build-out costs,
secured by assignment of reimbursed
amounts received from landlords for
new store build-outs, or existing 884 -
store remodeling costs, bearing
interest at a variable rate (7.3% at
January 31, 1998), payable monthly,
principal due June, 1999.
Note payable to financial
institution, secured by the
assignment of substantially all
assets of CMT, certain security
documents, and promissory note of
CMT, bearing interest at a variable 2,282 -
rate (7.3% at January 31, 1998), due
in monthly installments of principal
and interest of approximately
$52,000, with final payment due
December, 1999.
Note payable to financial
institution, secured by building and
land, bearing interest at a variable
rate, (8.0% and 7.9% at January 31,
1998 and February 1, 1997, 444 519
respectively), due in monthly
installments of principal of $6,000,
plus accrued interest, with final
payment due September, 2002.
Note payable to financial
institution, secured by building and
land, bearing interest at a fixed
rate (8.3%), due in monthly 899 934
installments of principal and
interest of $9,000, with final
payment due June, 2011.
Note payable to financial
institution, secured by certain
equipment, bearing interest at a
fixed rate (8.0%), due in monthly
installments of principal and 897 -
interest of approximately $18,000,
with final payment due March, 2003.
Total long-term debt 20,442 12,638
Less current maturities of long-
term debt 734 110
Long-term debt, net of current
maturities $ 19,708 12,528
The annual maturities of the above long-term debt as of January
31, 1998 are as follows (in thousands):
Fiscal year
ending
1999 $734
2000 18,072
2001 292
2002 310
2003 307
2004 and
subsequent 727
Total $20,442
6. Income Taxes
Income tax expense (benefit) for the years ended January 31,
1998, February 1, 1997, and February 3, 1996, consisted of the
following (in thousands):
1998 1997 1996
Current:
Federal $ (318) 2,484 1,814
State (71) 553 404
(389) 3,037 2,218
Deferred:
Federal 349 (570) (300)
State 70 (115) (60)
419 (685) (360)
Total $30 2,352 1,858
Income tax expense differs from the normal tax rate as
follows :
1998 1997 1996
Statutory tax rate 34% 34% 34%
Increase in income taxes
caused by:
State income taxes 6 6 6
Effective tax rate 40% 40% 40%
The tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and
deferred
tax liabilities at January 31, 1998 and February 1, 1997 are
presented below (in thousands):
1998 1997
Deferred tax assets -
current:
Allowance for doubtful $94 88
accounts
Insurance reserves 37 50
Merchandise 972 1,165
inventories
Deferred compensation 51 312
$1,154 1,615
Deferred tax liability -
noncurrent:
Property and equipment $104 146
The net deferred tax asset relates solely to future
deductible temporary differences and there is no valuation
allowance. Management believes that it is more likely than not
that the Company will fully realize the gross deferred tax
assets; however, there can be no assurances that the Company will
generate the necessary adjusted taxable income in any future
periods.
7. Stockholders' Equity and Stock Options
The Company has authorized 1,000,000 shares of preferred
stock, par value $.01 per share. This preferred stock may be
issued in one or more series and the terms and rights of such
stock will be determined by the Board of Directors. No
preferred shares were issued and outstanding at January 31,
1998 or February 1, 1997.
The Company has reserved 1,000,000 shares of its common
stock for issuance to key employees under its current stock
option and equity incentive plan which was adopted in April
1993 and amended in June 1995. The plan has a term of ten
years. The Compensation Committee of the Board of Directors
may grant incentive or non-qualified stock options, restricted
stock, stock appreciation rights and other stock-based and cash
awards under the provisions of the plan. The exercise price of
incentive stock options is the fair market value of the stock
at the date of the grant, plus ten percent if the employee
possesses more than ten percent of the total combined voting
power of all classes of the Company's stock. Options granted
may have a term of up to ten years, except that incentive stock
options granted to stockholders who have more than ten percent
of the Company's voting stock at the time of the grant may have
a term of up to five years. Any unexercised portion of the
options will automatically and without notice terminate upon
the applicable anniversary of the issuance date or termination
of employment. A summary of the status of the Company's stock
option plan, and activity for the periods indicated, is
presented as follows:
Options Options
Outstanding Exercisable
Weighted Weighted
Shares Avg. Shares Avg.
Exercise Exercise
Price Price
Balance of options 342,653 $ 7.64 199,054 $7.62
outstanding, fiscal 1995
Granted 36,463 9.50
Exercised (335) 9.50
Terminated (13,571) 7.36
Balance of options 365,210 7.84 235,182 7.91
outstanding, fiscal 1996
Granted 61,193 15.98
Exercised - -
Terminated (11,025) 7.29
Balance of options 415,378 9.05 266,441 8.80
outstanding, fiscal 1997
Granted 94,500 8.98
Exercised - -
Terminated (12,682) 7.61
Balance of options
outstanding, fiscal 1998 497,196 9.07 294,056 $ 8.81
At January 31, 1998, the range of exercise prices and
weighted average remaining contractual life of outstanding
options was $5.71 - $16.71, and 7.83 years, respectively. The
following table summarizes information about the Company's
stock options which were outstanding, and those which were
exercisable as of January 31, 1998:
Options Outstanding Options Exercisable
Range of Weighted Weighted Weighted
Exercise Number Average Average Number Average
Prices Outstanding Remaining Exercise Exercisable Exercisab
Life Price le Price
$5.71- 316,925 7.02 7.70 210,079 7.67
8.45
$9.05- 180,271 9.26 11.49 83,977 11.65
16.71
The number of shares and exercise prices have been
restated to reflect the five percent stock dividend in fiscal
1998, fiscal 1997 and fiscal 1996.
Additionally, as of January 31, 1998, restricted stock
awards for up to $34,700 market value of common stock were
outstanding under the plan. These awards may be exercised over
the remaining three-year vesting period in equal annual
installments at the fair market value of common stock on such
installment vesting date. After giving effect to the
outstanding and exercised awards, and based upon the price of
common stock on January 31, 1998, the Company may award 497,414
shares or options under the plan.
The weighted average fair values of options granted under
the non-qualified plan during fiscal 1998, 1997 and 1996 were
$2.90, $4.08, and $2.78, respectively. The weighted average
fair values of options granted under the incentive plan during
fiscal 1997 was $4.80. No options were granted during fiscal
1998 or fiscal 1996 under the incentive plan. The fair value of
each option granted was estimated using the Black-Scholes Option
Pricing Model with the following assumptions for fiscal 1998,
1997, and 1996: risk-free interest rate of 5.5% for fiscal 1998,
and 5.1% for fiscal 1997 and fiscal 1996; expected dividend yield
of 5% for all periods; expected lives of approximately 9 years
for all periods; and volatility of the price of the underlying
common stock of 43.4% for fiscal 1998, and 41.8% for fiscal 1997
and fiscal 1996.
Had the Company elected to recognize compensation expense
based on the fair value of the stock options granted as of their
grant date, the Company's fiscal 1998, 1997, and 1996 pro forma
net earnings and pro forma net earnings per share would have
differed from the amounts actually reported as shown in the table
below. The pro forma amounts shown reflect only options granted
in fiscal 1998, 1997, and 1996. Therefore, the full impact of
calculating compensation cost for stock options based on their
fair value is not reflected in the pro forma net income amounts
presented because compensation cost is reflected over the
options' vesting period of up to 10 years and compensation cost
for options granted prior to January 29, 1995 is not considered.
Fiscal Years
1998 1997 1996
Net As
earnings reported $ 44 3,528 2,787
(loss) Pro Forma $(165) 3,475 2,642
Earnings As
(loss) per reported $.01 .61 .50
share - Pro Forma $(.03) .60 .48
basic
8. Retirement and Benefit Plans
The Company has a profit sharing retirement plan with a
401(k) provision that allows participants to contribute up to
15 percent of their compensation before income taxes. Eligible
participants are employees at least 21 years of age with one
year of service. The Company's Board of Directors will
designate annually the amount of the profit sharing
contribution as well as the percentage of participants'
compensation that it will match as 401(k) contributions. For
the years ended January 31, 1998, February 1, 1997, and
February 3, 1996, the Company contributed approximately
$124,000, $108,000, and $81,000, respectively, to the 401(k)
plan.
The Company has reserved 200,000 shares of common stock
for employees under its stock purchase plan which covers all
employees who meet minimum age and service requirements. The
Company's management will determine from time to time the
amount of any matching contribution as well as the percentage
of participants' compensation that it will match as purchase
contributions. The purchase price of shares covered under the
plan is fair market value as of the date of purchase in the
case of newly issued shares and the actual price paid in the
case of open market purchases. The plan was implemented in
January 1994. For the years ended January 31, 1998, February
1, 1997, and February 3, 1996, the Company's matching
contributions were approximately $74,000, $66,000, and $48,000
and approximately 41,000, 22,000, and 23,000 shares were
issued, respectively.
9. Related Party Transactions
Rent on the Norman, Oklahoma store and certain related
facilities is paid to a corporation controlled by the Company's
Chairman. The store lease terms in 1998, 1997, and 1996
provided for payment of percentage rent equal to four percent
of sales plus certain ancillary costs. During the years ended
January 31, 1998, February 1, 1997, and February 3, 1996, the
total of such rent for the store and certain related facilities
was approximately $131,000, $137,000, and $140,000,
respectively.
The Company leases certain office space, a distribution
center facility and retail space from a limited partnership
whose partners are stockholders and directors of the Company.
The term of the office space lease is sixteen years commencing
April 1, 1996, with annual rent payments of $158,000 plus
insurance, utilities, and property taxes until April, 2000, at
which time the rent will be $180,000 plus insurance, utilities
and property taxes, increasing $2,500 per year until expiration
of the lease. The term of the distribution center lease is
sixteen years commencing July 1, 1996, with annual rental
payments of $338,438 plus insurance, utilities and property
taxes until July, 2001, at which time the annual rent will
increase annually on a fixed scale up to a maximum of $419,951
during the final year of the lease. The term of the retail
space lease is twelve years commencing June 4, 1996, and
amended December 30, 1997 with a retroactive date of January 1,
1997, with annual rental payments of $84,106 plus percentage
rent equal to four percent of sales plus insurance, utilities,
and property taxes.
See note 12 for information concerning the employment
contracts with the Company's Chairman of the Board, Chief
Executive Officer and President.
10. Facility Leases
The Company conducts a majority of its retail operations
from leased store premises under leases that will expire within
the next ten years. In addition to minimum rental payments,
certain leases provide for payment of taxes, maintenance, and
percentage rentals based upon sales in excess of stipulated
amounts.
Minimum rental commitments (excluding renewal options) for
store, distribution premises, office space and equipment under
noncancelable operating leases having a term of more than one
year as of January 31, 1998 were as follows (in thousands):
Fiscal year
ending:
1999 $ 4,579
2000 4,790
2001 4,596
2002 4,433
2003 4,166
2004 and 21,293
subsequent
Total $ 43,857
Total rental expense for the years ended January 31, 1998,
February 1, 1997, and February 3, 1996, was as follows (in
thousands):
1998 1997 1996
Base rent $ 3,702 2,806 2,222
Additional rents
computed 1,206 1,261 1,112
as percentage of
sales
Total $ 4,908 4,067 3,334
11. Business Concentrations
More than 90% of the ladies' apparel sales were attributable
to the Company's product development and private label programs
during fiscal 1998, 1997 and 1996. The breakdown of total sales
between ladies' and men's apparel was approximately 77% and 23%
for fiscal 1998, 78% and 22% for fiscal 1997, and 80% and 20%
for fiscal 1996.
The product development programs result in a substantial
portion of the Company's purchases of raw materials being
concentrated among a small group of vendors, of which some are
located outside of the United States. CMT acts as the Company's
agent in the purchase of the raw materials, including fabrics,
linings, buttons, etc., and supervises the manufacturing process
for a substantial portion of the Company's ladies merchandise
with manufacturing contractors. In the event of the termination
of the CMT relationship or other of the Company's vendors,
management believes that in most instances more than one new
vendor would be required to replace the loss of a principal
vendor. Although management believes that replacement vendors
could be located, if any buying relationship is terminated and
until replacement vendors are located, the operating results of
the Company could be materially adversely affected.
The Company's sales are directly impacted by regional and
local economics and consumer confidence. The amount of
disposable income available to consumers, as well as their
perception of the current and future direction of the economy,
impact their level of purchases. The consumer demand for the
Company's apparel fluctuates according to changes in customer
preferences dictated by fashion and season. In addition, the
Company's sales are subject to seasonal influences, with the
major portion of sales being realized during the fall season,
which includes the back-to-school and the holiday selling
seasons. Such fluctuations could affect sales and the valuation
of inventory, since the merchandise is placed in the production
process, or ordered, well in advance of the season and sometimes
before fashion trends are evidenced by consumer purchases.
12. Commitments and Contingent Liabilities
The Company issues letters of credit which are used
principally in overseas buying, cooperative buying programs,
and for other contract purchases. At January 31, 1998, the
Company had outstanding, pursuant to such facility,
approximately $1,006,000 in letters of credit to secure orders
of merchandise from various domestic and international vendors.
During fiscal 1998 the Company entered into three forward
exchange contracts with a major financial institution. The
aggregate notional principal amount of these contracts was
approximately $1,029,000 at January 31, 1998. The forward
exchange contracts require the Company to exchange US dollars for
foreign currencies at maturity, at rates agreed to at inception
of the contracts. The amount of any gain or loss on these
contracts in fiscal 1998 was immaterial. The contracts are of
varying short-term duration and include a window delivery feature
which provides the Company with an option to enter into a swap
agreement in the event that all of the currency is not utilized
at the end of the contract's delivery term. A swap allows the
Company to sell the unused currency, at the contract's maturity,
to the counterparty at the current market rate and then buy back
the same amount for the time period to which the Company wants to
extend. The counterparty to the derivative transactions is a
major financial institution. The credit risk is generally
limited to the unrealized gains or losses in such contracts
should this counterparty fail to perform as contracted. The
Company considers the risk of counterparty default to be minimal.
Pursuant to an employment agreement, dated January 31, 1993,
and amended January 31, 1995 the Chairman of the Board is paid
an annual salary of $180,000 plus an annual performance bonus
and deferred annual compensation of $25,000. The agreement
expired January 31, 1998 and terms of a new agreement are
currently being revised, and upon approval by the Company's
Board of Directors will become effective retroactively on
February 1, 1998.
Pursuant to an employment agreement, dated January 31, 1993,
and amended January 31, 1995 the Chief Executive Officer is paid
an annual salary of $220,000 plus an annual performance bonus;
and the President is paid an annual salary of $160,000 plus an
annual performance bonus. These agreements are currently being
revised, and upon approval by the Company's Board of Directors
will become effective retroactively on February 1, 1998.
The Company is involved in various claims, administrative
agency proceedings and litigation arising out of the normal
conduct of its business. Although the ultimate outcome of such
litigation cannot be predicted, the management of the Company,
after discussions with counsel, believes that resulting
liability, if any, will not have a material effect upon the
Company's financial position or results of operations.
13. Quarterly Financial Data (Unaudited - in thousands, except
per share data)
Summarized quarterly financial results are as follows:
First Second Third Fourth
52 Weeks Ended
January 31, 1998
Sales $28,408 26,826 31,979 32,706
Gross profit on 9,662 8,316 9,539 10,632
sales
Net earnings 127 (577) 164 330
Net earnings per
common share:
Basic .02 (.10) .03 .05
Diluted .02 (.10) .03 .05
52 Weeks Ended
February 1, 1997
Sales $24,522 22,391 29,397 31,947
Gross profit on 8,492 8,048 10,512 11,665
sales
Net earnings 606 578 1,144 1,200
Net earnings per
common share:
Basic .11 .10 .19 .20
Diluted .11 .10 .19 .20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND CONSOLIDATED FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to
directors and executive officers of the Company is incorporated
by reference to the registrant's definitive proxy statement for
its 1998 annual meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference to the registrant's definitive proxy statement for
its 1998 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by
reference to the registrant's definitive proxy statement for
its 1998 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference to the registrant's definitive proxy statement for
its 1998 annual meeting of stockholders.
PART IV.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements. See Index to
Consolidated Financial Statements on page 16.
(2) Consolidated Financial Statement Schedule. The
following financial statement schedule for the 52 week periods
ended January 31, 1998 and February 1, 1997, and the 53 week
period ended February 3, 1996, is
included in this report after the signature page:
Independent Auditors' Report on Consolidated Financial
Statement
Schedule 36
Schedule II - Valuation Account 37
(3) Exhibits. Copies of the following documents are
exhibits to this
report: (see Index to Exhibits on page 38).
Certain of the exhibits to this filing contain schedules
which have been omitted in accordance with applicable
regulations.
The Company undertakes to furnish supplementary a copy of any
omitted schedule to the SEC upon request.
(b) Reports on Form 8-K: There were no reports on Form 8-K
for the quarter ended January 31, 1998.
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.
By:/s/ H. Rainey Powell, Date: May 1, 1998
H. Rainey Powell, President
Pursuant to the requirements of the Securities Exchange Act of
1934 this report has been signed below by the following persons
on behalf of the Registrant and in the capacities shown, and on
the dates indicated.
Signature Title Date
/s/ Harold G. Powell ____________Chairman of the Board
May 1, 1998
Harold G. Powell and Director
/s/ Rebecca P. Casey Chief Executive Officer
May 1, 1998
Rebecca P. Casey and Director
/s/ H. Rainey Powell President and Director
May 1, 1998
H. Rainey Powell
/s/ Jodi L. Taylor _________________ Chief Financial Officer
May 1, 1998
Jodi L. Taylor
/s/ Lisa P. Hunt Director
May 1, 1998
Lisa P. Hunt
/s/ Kenneth C. Row Executive Vice President
May 1, 1998
Kenneth C. Row and Director
/s/ Linda L. Daugherty Vice-President May
1, 1998
Linda L. Daugherty and Controller
(Chief Accounting
Officer)
/s/ Michael T. Casey Director May
1, 1998
Michael T. Casey
/s/ Gary C. Rawlinson ________________ Director May
1, 1998
Gary C. Rawlinson
/s/ William F. Weitzel _______________Director May 1,
1998
William F. Weitzel
____________________ Director
James R. Agar
/s/ W. Howard Lester __________________Director May 1, 1998
W. Howard Lester
/s/ Robert Brooks Cullum,Jr. _________ Director May
1, 1998
Robert Brooks Cullum, Jr. owar
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL
STATEMENT SCHEDULE
The Board of Directors and Stockholders
Harold's Stores, Inc.:
Under date of March 27, 1998, we reported on the consolidated
balance sheets of Harold's Stores, Inc. and subsidiaries as of
January 31, 1998 and February 1, 1997, and the related
consolidated statements of earnings, stockholders' equity and
cash flows for the 52 week periods ended January 31, 1998 and
February 1, 1997, and the 53 week period ended February 3,
1996, which are included in the annual report on Form 10-K for
the 52 week period ended January 31, 1998. In connection with
our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated
financial statement schedule listed in Item 14(a)(2) of Form 10-
K. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility
is to express an opinion on this consolidated financial
statement schedule based on our audits.
In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK
LLP
Oklahoma City, Oklahoma
March 27, 1998
Schedule II
HAROLD'S STORES, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
(In Thousands)
Balance Additions Additions Deductions- Balance at
at Charged Recoveries Write-off of End of
Descriptio Beginning to of Accounts Period
of Expense Accounts
Period Written
Off
52 Weeks ended
January 31, 1998: $ 215 168 79 234 $228
Allowance for
doubtful receivables
52 Weeks ended
February 1, 1997: $ 200 134 49 168 $215
Allowance for
doubtful receivables
53 Weeks ended
February 3, 1996:
Allowance for $ 175 109 34 118 $200
doubtful receivables
INDEX TO EXHIBITS
No. Description
3.1 Certificate of Incorporation of Registrant (Incorporated by
reference to Exhibit 3.1 to Form 8-B Registration Statements,
Registration No. 1-10892).
3.2 By-laws of Registrant (Incorporated by reference to Exhibit 3.2
to Form 8-B Registration Statement, Registration No. 1-10892).
4.1 Specimen Certificate for Common Stock (Incorporated by
reference to Exhibit 4.1 to Form S-1 Registration Statement,
Registration No. 33-15753).
9.1 Stockholders' Agreement Among Certain Stockholders of
Registrant dated August 20, 1987 (Incorporated by reference to
Exhibit 9.1 to Form S-1 Registration Statement, Registration
No. 33-15753).
10.1 Lease Agreement dated May 1, 1987 by and between Harold's of
Norman, Inc. and Powell Properties, Inc. (Norman, Oklahoma
Store) (Incorporated by reference to Exhibit 10.1 to Form S-1
Registration Statement, Registration No. 33-15753).
10.2 Lease Agreement dated May 1, 1987 by and between Harold's of
Norman, Inc. and Ruby K. Powell (Norman, Oklahoma Store)
(Incorporated by Reference to Exhibit 10.2 to Form S-1
Registration Statement, Registration No. 33-15753).
10.3 Lease Agreement dated October 31, 1985 by and between Harold's
Men's Apparel, Inc. predecessor to Harold's of Norman, Inc. and
Highland Park Shopping Village (Incorporated by Reference to
Exhibit 10.9 to Form S-1 Registration Statement, Registration
No. 33-15753) and Amendment to Lease dated June 15, 1988.
(Incorporated by reference to Exhibit 10.8 to Form 10-K for the
year ended January 31, 1989).
10.4 Lease Agreement dated November 1, 1990, by and between
Registrant and Michael T. Casey, Trustee (329 Partners-I
Limited Partnership). (Dallas Buying Office, Dallas, Texas)
(Incorporated by reference to Exhibit 10.29 to Form 10-K for
the year ended February 2, 1991).
10.5 Amended and Restated Lease Agreement dated April 1, 1996, by
and between Registrant and 329 Partners-II Limited
Partnership. (Dallas Buying Office, Dallas, Texas).
(Incorporated by reference to Exhibit 10.22 to Form 10-K for
the year ended February 1, 1992).
10.6 Lease Agreement dated October 4, 1991, by and between
Registrant and 329 Partners-II Limited Partnership. (East
Lindsey Warehouse facility, Norman, Oklahoma). (Incorporated
by Reference to Exhibit 10.22 to Form 10-K for the year ended
February 1, 1992).
10.7 Lease Agreement effective May 1, 1996 between Registrant and
Carousel Properties, Inc. (Campus Corner Store, Norman,
Oklahoma) (Incorporated by reference to Exhibit 10.7 to Form S-
2 Registration Statement, Registration No. 333-04117) and
amendment to Lease Agreement dated June 28, 1996.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q for
the quarter ended November 2, 1996).
10.8 Agreement effective June 1, 1994 between Registrant and CMT
Enterprises, Inc. (Incorporated by reference to Exhibit 10.8
to Form S-2 Registration Statement, Registration No. 333-
04117).
10.9 Employment and Deferred Compensation Agreement dated January
* 31, 1993 between Registrant and Harold G. Powell (Incorporated
by reference to Exhibit 10.21 to Form 10-K for year ended
January 30, 1993).
10.1 Employment and Deferred Compensation Agreement dated January
0* 31, 1993 between Registrant and Rebecca Powell Casey, as
amended by Amendment No. 1 dated as of April 28, 1995
(Incorporated by reference to Exhibit 10.10 to Amendment No. 1
to Form S-2 Registration Statement, Registration No. 333-
04117).
10.1 Employment and Deferred Compensation Agreement dated January
1* 31, 1993 between Registrant and H. Rainey Powell, as amended
by Amendment No. 1 dated as of April 28, 1995 (Incorporated by
reference to Exhibit 10.11 to Amendment No. 1 to Form S-2
Registration Statement, Registration No. 333-04117).
10.1 Form of Indemnification Agreement between Registrant and
2 members of its Board of Directors (Incorporated by reference
to Exhibit 10.12 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.1 Amended and Restated Lease Agreement dated as of June 3, 1996
3 between Registrant and 329 Partners II Limited Partnership
(East Lindsey Warehouse Facility, Norman, Oklahoma)
(Incorporated by reference to Exhibit 10.13 to Amendment No. 1
to Form S-2 Registration Statement, Registration No. 333-
04117).
10.1 Lease Agreement dated as of May 31, 1996 between Registrant
4 and 329 Partners II Limited Partnership (Outlet Store, Norman,
Oklahoma) (Incorporated by reference to Exhibit 10.14 to
Amendment No. 1 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.1 Amended and Restated Lease Agreement dated as of December 30,
5 1997 between Registrant and 329 Partners II Limited
Partnership (Outlet Store, Norman, Oklahoma).
10.1 Second Amended and Restated Credit Agreement dated February
6 28, 1996 between Registrant and Boatmen's First National Bank
of Oklahoma (Incorporated by reference to Exhibit 10.15 to
Amendment No. 1 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.1 Third Amended and Restated Credit Agreement dated April 24,
7 1997 between Registrant and NationsBank formerly Boatmen's
First National Bank of Oklahoma (Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarter ended August 2,
1997).
10.1 Fourth Amended and Restated Credit Agreement dated June 25,
8 1997 between Registrant and NationsBank formerly Boatmen's
First National Bank of Oklahoma (Incorporated by reference to
Exhibit 10.2 to Form 10-Q for the quarter ended August 2,
1997).
10.1 Fifth Amended and Restated Credit Agreement dated July 10,
9 1997 between Registrant and NationsBank formerly Boatmen's
First National Bank of Oklahoma (Incorporated by reference to
Exhibit 10.3 to Form 10-Q for the quarter ended August 2,
1997).
10.2 Sixth Amended and Restated Credit Agreement dated July 31,
0 1997 between Registrant and NationsBank (Incorporated by
reference to Exhibit 10.4 to Form 10-Q for quarter ended
August 2, 1997).
10.2 Seventh Amendment to Second Amended and Restated Credit
1 Agreement dated September 30, 1997 between Registrant and
NationsBank (Incorporated by reference to Exhibit 10.5 to Form
10-Q for the quarter ended November 1, 1997).
10.2 Third Amended and Restated Credit Agreement dated November 10,
2 1997 between Registrant and NationsBank (Incorporated by
reference to Exhibit 10.6 to Form 10-Q for the quarter ended
November 1, 1997).
10.2 Amended and Restated Term Loan and Security Agreement dated as
3 of November 6, 1996 among CMT Enterprises, Inc. (as borrower),
Franklin I. Bober (as Guarantor) and the Company (as lender).
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended November 2, 1996).
22.1 Subsidiaries of the Registrant (Incorporated by Reference to
Exhibit 22.1 to Form 8-B Registration Statements, Registration
No. 1-10892).
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
___________________________
* Constitutes a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
report.
INDEPENDENT AUDITORS' CONSENT Exhibit 23.1
The Board of Directors
Harold's Stores, Inc.:
We consent to incorporation by reference in the
registration statement (No. 33-68604) on Form S-8 of Harold's
Stores, Inc. of our reports dated March 27, 1998, relating to
the consolidated balance sheets of Harold's Stores, Inc. and
subsidiaries as of January 31, 1998, and February 1, 1997,
the related consolidated statements of earnings,
stockholders' equity and cash flows, and the related
consolidated financial statement schedule for the 52 week
periods ended January 31, 1998 and February 1, 1997, and the
53 week period ended February 3, 1996, which reports appear
in the January 31, 1998, annual report on Form 10-K of
Harold's Stores, Inc.
KPMG PEAT MARWICK LLP
Oklahoma City, Oklahoma
May 1, 1998
FIRST AMENDMENT TO LEASE AGREEMENT
THIS First Amendment to Lease Agreement is made and
entered into this 30th day of December, 1997, by and between 329
PARTNERS II - LIMITED PARTNERSHIP, an Oklahoma limited
partnership, hereinafter referred to as "Landlord," and HAROLD'S
STORES, INC., an Oklahoma corporation, hereinafter referred to as
"Tenant."
W I T N E S S E T H:
For and in consideration of the mutual covenants
hereinafter contained, the parties agree as follows:
I.
1. Recitations. On or about May 31, 1996, the
parties entered into a Lease Agreement, a copy of which is
attached hereto marked as Exhibit "A" and made a part hereof by
this reference (the "Lease"). Thereafter, the parties determined
that a portion of the construction on the Premises would be paid
by Landlord, rather than Tenant, and, consequently, the parties
have agreed to modify the Lease. This First Amendment is entered
into in order to so provide.
2. Amendments to Lease. The Lease is hereby amended
in the following respects effective January 1, 1997:
2.1 Base Rent. Section 3.1 of the Lease is
hereby deleted and the following is inserted in its
place:
"3.1 Base Rent. Monthly, commencing on
January 1, 1997, Tenant shall pay Landlord
the sum of Seven Thousand Eight and 83/100
Dollars ($7,008.83) as Base Rent. Base Rent
will be paid monthly in advance for the
remainder of the term."
2.2 Percentage Rent. The following is inserted
as Section 3.2:
"3.2 Percentage Rent. As additional
consideration for the leasing of the
Premises, Tenant agrees to pay Landlord four
percent (4%) of the annual gross sales from
the Premises (which, together with the Base
Rent, shall be sometimes referred to herein
as the "Rent"). Such Percentage Rental shall
be paid monthly, on or before the 20th day of
each month, commencing on the month following
the month when Tenant opens for business,
based upon the gross sales for the previous
month.
The term "gross sales," as used herein, shall
mean the gross amount received by Tenant from
all sales made from the Premises (not
including sales filled from other stores).
The following items shall be excluded from
gross sales: (i) exchange of merchandise
between stores; (ii) returned goods; (iii)
cash or credit refunds to customers; (iv)
sale of fixtures; (v) gift certificates until
redeemed; (vi) sale of inventory not in the
ordinary course of business; (vii) sales to
employees at a discount (not to exceed three
percent [3%] of annual gross sales); (viii)
sales tax; (ix) interest on sales; (x) credit
card fees; and (xi) insurance proceeds.
At the time Tenant makes its rental payment,
it shall provide Landlord with a statement
certified by an officer of Tenant to be
correct, certifying the amount of gross sales
from the Premises. Landlord shall be
entitled to audit the records of Tenant
annually, and if the gross sales of Tenant
are determined to be in error, the amount of
the error shall be adjusted between the
parties. If the audit determines greater
than a three percent (3%) shortage in
reporting gross sales, Tenant shall pay for
the audit."
2.3 Continuous Operation. Section 3.2 of the
Lease is renumbered as Section 3.3.
2.4 Recapture of Leasehold Improvements. Section
5.3 of the Lease is hereby deleted and the following is
inserted in its place:
5.3 Recapture of Leasehold Improvements. In
consideration for the Tenant's construction
of leasehold improvements on the Premises,
which will not be removable trade fixtures,
as defined in Section 5.1 of the Lease,
Landlord agrees that if the gross sales from
the Premises, in any lease year (May 1
through April 30) exceeds Two Million Five
Hundred Thousand Dollars ($2,500,000.00),
Tenant shall be entitled to recapture up to
Four Hundred Thousand Dollars ($400,000.00)
over the term of the Lease out of seventy-
five percent (75%) of the Percentage Rent due
on all gross sales in excess of Two Million
Five Hundred Thousand Dollars
($2,500.000.00).
3. Other Provisions. All other provisions of the
Lease, except those that have been specifically modified herein,
shall remain in full force and effect. In the event of any
inconsistency between the terms and provisions of the Lease, and
the terms and provisions of this First Amendment to Lease
Agreement, the terms and provisions of this First Amendment to
Lease Agreement shall control.
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the day and year first above
written.
"LANDLORD" 329 PARTNERS II-LIMITED
PARTNERSHIP,
an Oklahoma Limited Partnership
By: 329 HOLDING, L.L.C., an Oklahoma
Limited
Liability Company, General Partner
By: ___________________________
H. Rainey Powell, CEO-Manager
765 Asp Avenue
Norman, OK 73069
"TENANT" HAROLD'S STORES, INC., an Oklahoma
Corporation
By:
Harold G. Powell, Chairman of
the Board
P.O. Drawer 2970
Norman, OK 73070-2970
Lease Agreement dated as of May 31, 1996 between Registrant
and 329 Partners II Limited Partnership (Outlet Store, Norman,
Oklahoma) (Incorporated by reference to Exhibit 10.14 to
Amendment No. 1 to Form S-2 Registration Statement,
Registration No. 333-04117).