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33
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended January Commission File No. 1-
30, 1999 10892
HAROLD'S STORES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1308796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
765 Asp Norman, Oklahoma 73069 (405) 329-4045
(Address of principal executive (Registrant's
offices) telephone number,
(Zip Code) including area
code)
Securities registered pursuant to
Section 12(b) of the Act : Name of each
exchange
Title of each class on which registered
Common Stock, $0.01 Par Value American Stock
Exchange
Securities registered pursuant to Section 12(g) of the Act :
None
Indicate by check mark whether the registrant (1) has
filed all reports to be filed by Section 13 or 15 (d ) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No .
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K [
]
At March 15, 1999 the aggregate market value of the
Registrant's Common Stock held by non-affiliates was
$23,459,666 based on a value of $6.75 per share, the
closing price of Common Stock as quoted by the American
Stock Exchange on that date.
On March 15, 1999 the registrant had 6,073,958 shares of
Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders
for the fiscal year ended January 30, 1999 ("Annual Report")
are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held June 25, 1999
("Proxy Statement") are incorporated by reference into
Part III.
Harold's Stores, Inc. & Subsidiaries
Index to
Annual Report on Form 10-K
For the Fiscal Year Ended January 30, 1999
Part I. Page
Item 1 Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Part II.
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters 10
Item 6. Selected Consolidated Financial Data 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 12
Item 7a. Quantitative and Qualitative Disclosure
about Market Risk 16
Item 8. Consolidated Financial Statements and
Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Consolidated Financial
Disclosure 17
Part III.
Item 10. Directors and Executive Officers of the
Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management 17
Item 13. Certain Relationships and Related
Transactions 17
Part IV.
Item 14 Exhibits, Consolidated Financial Statement
Schedule and Reports on Form 8-K 17
Signatures 19
PART I.
ITEM 1. BUSINESS
General
Harold's Stores, Inc. and its wholly-owned subsidiaries
(collectively "Harold's" or the "Company"), through a 46-store
location chain of women's and men's specialty apparel stores in
21 states, offers high-quality, classically inspired apparel to
the upscale, quality-conscious consumer primarily in the 20 to
50 year old age group. The stores typically are strategically
located in shopping centers and malls with other upscale
specialty retailers and are enhanced by an eclectic mix of
antiques, together with specially designed fixtures and visual
props, to create an appealing stage for presentation of the
Company's distinctive women's and men's apparel and
accessories. More than 90% of sales consists of the Company's
designs controlled by Harold's own stylists and designers and
resourced by Harold's buyers from domestic, European and Asian
manufacturers. The remainder consists of branded merchandise
selected to complement Harold's merchandise presentation. See
"Business- Product Development and Sourcing Programs."
The Company's 46 stores are comprised of 25 full-line
women's and men's apparel stores, seven stores which have a
product line principally of ladies' apparel with a limited
presentation of men's sportswear featuring the Company's Old
School Clothing brand, 10 stores featuring women's apparel only
and four outlet stores to clear markdowns and slow-moving
merchandise, in addition to some merchandise produced
specifically for the outlets. In addition to the stores, the
Company has a direct response "mail order" catalog business and
also sells merchandise online at www.harolds.com. Store
occupancy costs include base and percentage rent, common area
maintenance expense, utilities and depreciation of leasehold
improvements.
There was a decline in comparable store sales of 1.3% for
fiscal 1999, compared to a decline of 5.4% for fiscal 1998.
The Company believes that the decrease in comparable store
sales for comparable periods is primarily attributable to the
opening of second stores in several key markets, including:
Birmingham, Alabama; Norman, Oklahoma; Memphis, Tennessee;
Dallas, Houston and San Antonio, Texas; and Washington, DC, as
well as the selection of fashion trends that did not sell as
well as anticipated for fiscal 1998. The Company's average
sales per square foot for stores open during the entire fiscal
year were $506 and $529 for fiscal 1999 and fiscal 1998,
respectively. The Company believes sales per square foot are
higher than industry averages for most similar stores.
The Company believes that its future success will be
achieved by expanding the number of its women's and men's
apparel stores and increasing sales momentum at existing
stores. The Company is engaged in an aggressive expansion
program, adding in the aggregate 10 retail stores during fiscal
1998 and fiscal 1999 and thereby increasing the chain store
count by approximately 22%.
The Company's expansion program will continue to focus
primarily on markets currently served by the Company and in new
markets that represent a geographical progression from existing
markets. Thus far during fiscal 2000, the Company has opened
new stores in Palo Alto, California; Tampa, Florida and Dallas,
Texas, and anticipates opening a total of approximately ten
stores during the fiscal year.
The Company operates on a 52-53 week fiscal year which
ends on the Saturday closest to January 31. References herein
to fiscal 2000, fiscal 1999, fiscal 1998, and fiscal 1997 refer
to the fiscal years ended January 29, 2000, January 30, 1999,
January 31, 1998, and February 1, 1997, respectively.
Retail Merchandising
The Company's merchandise mix in women's apparel
includes coordinated sportswear, dresses, coats, outerwear,
shoes and accessories, in updated classic styles. A
fundamental feature of the Company's marketing strategy is the
development of original exclusive and semi-exclusive apparel
items. The Company estimates that more than 95% of its women's
apparel sales are attributable to the Company's product
development and proprietary label programs. In fiscal 1999,
women's apparel accounted for approximately 79% of sales as
compared to 77% for fiscal 1998.
The men's apparel product line includes tailored clothing,
suits, sportcoats, furnishings, sportswear, and shoes. The
style is principally what is known in the apparel trade as
"updated traditional," classic styling with a contemporary
influence. The young executive and college markets account for
a substantial portion of the Company's men's store sales. In
fiscal 1999, the Company's proprietary label apparel accounted
for more than 90% of total men's sales. The majority of the
men's proprietary label sales are in the Company's Old School
Company and Harold Powell Clothing lines. In fiscal 1999,
men's apparel accounted for approximately 21% of sales as
compared to 23% for fiscal 1998.
The following table sets forth the approximate percentage
of sales attributable to the various merchandise categories
offered by the Company in the past three fiscal years:
Fiscal 1999 Fiscal 1998 Fiscal 1997
(Dollar amounts in thousands)
Women's Merchandise
Sportswear $91,133 70.5% $81,408 67.9% $72,808 67.3%
Shoes 4,128 3.2 4,827 4.0 5,422 5.0
Handbags, Belts 6,243 4.8 5,899 4.9 5,777 5.3
and Accessories
Men's Merchandise
Suits,
Sportcoats,
Slacks
and Furnishings 11,552 8.9 10,762 9.0 8,815 8.1
Shoes 1,149 0.9 1,218 1.0 1,067 1.0
Sportswear and 14,309 11.1 14,894 12.4 13,547 12.5
Accessories
Other 710 0.6 911 0.8 821 0.8
Total: $129,224 100.0% $119,919 100.0% $108,257 100.0%
Company Stores
The Company's 46 stores range in size from 2,100 to
15,000 square feet, with the typical store ranging from 4,000
to 6,000 square feet. The Company's stores generally are open
seven days per week and evenings. The following table lists
Harold's store locations as of March 15, 1999, with selected
information for each location. Product lines in the table are
defined as follows:
W/M Stores with the Company's full-line women's
and men's apparel.
W/OS Stores with the Company's full-line women's
apparel and also featuring the Company's
"Old School Clothing Company" concept.
W Stores featuring women's apparel only.
Metropolitan
Area Location Type of Product Square
Location Lines Footage
Atlanta, GA Lenox Square Regional W/M 6,861
Shopping Center
Atlanta, GA Park Place Specialty W 3,413
Center
Austin, TX Arboretum Specialty W/OS 4,787
Market Place Center
Austin, 8611 N. Mopac Free Standing W/M 13,20
TX(2) Expressway 0
Baton Citiplace Specialty W/M 5,200
Rouge, LA Market Center Center
Birmingham, Riverchase Regional W 2,713
AL Galleria Shopping Center
Birmingham, The Summit Specialty W/M 5,500
AL Shopping Center Center
Charlotte, Shops on the Specialty W 4,000
NC Park Center
Columbus, The Mall at Regional W/M 6,000
OH Tuttle Crossing Shopping Center
Cordova, TN Wolfchase Regional W/M 6,302
(Memphis Galleria Shopping Center
metro)
Dallas, TX Dallas Galleria Regional W/M 8,079
Shopping Center
Dallas, TX Highland Park Specialty W/M 7,503
Village Center
Ft. Worth, University Park Specialty W/M 6,000
TX Village Center
Germantown, Saddle Creek Specialty W/OS 3,909
TN South Center
(Memphis
metro)
Greenville, Greenville Mall Regional W/OS 5,076
SC Shopping Center
Hillsboro, Hillsboro Outlet Mall W/M 5,160
TX(2) Outlet Mall
Houston, TX Highland Specialty W/M 6,189
Village Center
Houston, TX Town and Specialty W/M 5,883
Country Village Center
Jackson, MS The Rogue Free Standing W 2,100
Compound
Kansas City, Country Club Regional W 4,155
MO Plaza Shopping Center
Leawood, KS Town Center Regional W/M 5,000
(Kansas City Plaza Shopping Center
metro)
Littleton, CO Park Meadows Regional W/M 5,465
(Denver Mall Shopping Center
metro)
Louisville, Mall St. Regional W/OS 4,292
KY Matthews Shopping Center
Lubbock, TX 8201 Quaker Specialty W/M 3,897
Avenue Center
McLean, VA Tyson's Regional W/M 5,083
Galleria Shopping Center
Nashville, TN The Mall at Regional W/M 5,975
Greenhills Shopping Center
Norman, OK Campus Corner Specialty W/M 9,050
Center Center
Norman, OK(2) 575 S. Free Standing W/M 15,421
University
Blvd.
Oakbrook, IL Oakbrook Center Specialty Center W 4,860
(Chicago
metro)
Oklahoma City, 106 Park Avenue Street Location W/M 3,760
OK(1)
Oklahoma City, 50 Penn Place Specialty W/M 14,240
OK Center
Omaha, NE One Pacific Specialty W 3,272
Place Center
Palo Alto, CA Stanford Regional W 4,275
(San Francisco Shopping Center Shopping Center
metro)
Phoenix, AZ Biltmore Regional W/OS 5,033
Fashion Park Shopping Center
Plano, TX Park and Free Standing W/M 5,525
(Dallas metro) Preston
Raleigh, NC Crabtree Valley Regional W/M 5,205
Mall Shopping Center
Richmond, VA River Road Specialty W/M 5,000
Shopping Center Center
Salt Lake City, Trolley Square Specialty W 5,716
UT Center Center
San Antonio, Alamo Quarry Specialty W/M 5,000
TX Market Center
Sealy, TX(2) Sealy Outlet Outlet Mall W/M 9,000
Center
Skokie, IL Old Orchard Specialty W 5,455
(Chicago Metro) Center Center
St. Louis, MO Plaza Frontenac Regional W/OS 4,221
Shopping Center
Tampa, FL Citrus Park Specialty W/OS 5,717
Town Center Center
Tulsa, OK Farm Shopping Specialty W/M 3,888
Center Center
Tulsa, OK Utica Square Regional W/M 4,625
Shopping Center
Wichita, KS The Bradley Specialty W/M 5,500
Fair Center Center
(1) Store closed on March 26, 1999.
(2) Outlet store
The employee population of a typical full-line Harold's
store consists of a store manager, two assistant managers
(women's and men's), one or two desk associates, and five to
seven sales associates, most of whom work on a flex-time basis
(20-25 hours per week). Sales associates are paid a commission
against a draw. Commissions range from 7% to 10% based on the
type of product sold and the scale of the associate. Store
managers are paid a salary plus a performance bonus based on
attainment of sales goals and expense control.
Product Development and Sourcing Programs
The Company's product development and sourcing programs
enable it to offer exclusive and semi-exclusive items not
available in competing stores or catalogs. More than 90% of
sales is merchandise where the Company has created or
controlled the design, demonstrating the Company's commitment
to a unique product mix. The Company believes that this unique
product mix enables it to compete with, and differentiates it
from, larger apparel chains by offering customers an exclusive
garment at a price below designers and similar open market
merchandise. Direct creation and control of merchandise also
enables the Company to improve its initial mark up. The
Company's private label merchandise consists of items developed
by the Company and manufactured exclusively for the Company and
items developed by the Company and manufactured on a semi-
exclusive basis for the Company.
An important component of the Company's product
development programs is market research of styles and fabrics.
The Company's buyers shop European and domestic markets for
emerging fashion trends, for new vendors, and for fabric,
artwork and samples for new garment designs. Through
sophisticated, computer-aided design technologies, the product
development staff adapts and develops fabric designs and
garment models. These design models assist the Company in
sourcing and in negotiations with mills and vendors. The
Company's product development programs allow it to participate
directly in the design and manufacturing of an exclusive
product without investing in costly manufacturing equipment.
The Company's development program is complemented by
association with independent buying offices in New York and
Florence, Italy.
The Company's product development programs enable it to
offer new styles, often before similar merchandise is available
at other specialty or department stores or catalogs. The
Company imports a significant portion of its merchandise
directly from the United Kingdom, Italy, and through domestic
importers from the Far East.
The Company's merchandisers travel to Europe, including
popular fashion meccas such as Paris and Milan, six to eight
times each year, searching out new styles and collecting
vintage fabrics and antique wallpaper, and original art for
pattern development. In addition to purchasing original art
work created for pattern development, merchandisers have
ongoing contact with several art studios in Europe where
artists hand paint intricate patterns and prints exclusively
for the Company. The European development work helps the
Company spot emerging trends among fashion forward Europeans
for development into the Company's classically-inspired
merchandise.
The Company's merchandisers review the collected material,
analyze fashion directions and select the best pieces to
convert into prints and patterns for the next season. Once the
new patterns are selected, the team then "specs" out various
styles - detailing a garment's cut, fit, fabric, color and
trim. An advanced textile computer-aided design system makes
designing new pieces much easier by providing color "proofs"
which allow the Company to correct inaccuracies in a design
before a working sample is made. This process reduces costs
and contributes to the inherent value of each item. After the
specs have been finalized, the piece goods - materials for
making the product - are ordered from domestic and
international fabric mills. The finished fabric is then
shipped to manufacturers who cut, sew and trim the completed
design.
The Company's line of leather goods is made by European
craftsmen, primarily in Italy. Shoes, belts, handbags, wallets
and other leather products are co-designed by the Company's
merchandisers and Italian artisans. Italian-made leather goods
are marketed under a variety of Company-owned labels and are
featured in all of the Company's stores, in its catalog, and on-
line at www.harolds.com.
During fiscal 1995, the Company entered into a new
arrangement with its largest apparel vendor, CMT Enterprises,
Inc. ("CMT"). Previously, Harold's controlled the design process
and paid CMT for finished goods when produced and manufactured.
Under the new arrangement, the process has become more
verticalized. CMT acts as the Company's agent in the purchase of
raw materials (i.e. fabrics, linings, buttons, etc.) and
supervises the manufacturing process of the Company's merchandise
with manufacturing contractors. The Company purchases raw
materials directly from suppliers and pays for the manufacturing
process as costs are incurred. CMT is paid a commission based on
actual cutting, sewing and trim costs of the finished goods. The
Company believes this relationship with CMT permits the Company
to control the quality and cost of the Company's inventory
purchases. A substantial portion of the Company's merchandise
purchases is concentrated among a small number of vendors. The
Company believes that fewer vendor relationships advance the
Company's product development objectives by increasing control
over the design and manufacturing process. In the event of the
termination of the CMT relationship or other of the Company's
vendors, management believes that in most instances more than one
new vendor would be required to replace the loss of a principal
vendor. Although management believes that replacement vendors
could be located, if any buying relationship is terminated and
until replacement vendors are located, the operating results of
the Company could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations and - Capital
Resources, Capital Expenditures and Liquidity and note 11 to
Consolidated Financial Statements."
Catalog Publication and Order Fulfillment
In March 1990, using an in-house data base, the Company
mailed its first direct response catalog to over 100,000
addresses. In addition to contributing to sales, the catalog
has become an increasingly important market research and new
store promotion tool. During fiscal 1999, the Company used its
mail order buyer list (currently containing approximately
175,000 names), its retail customer list (currently containing
approximately 300,000 names) and a variety of rental lists to
mail six issues with an average of 60 pages, and an aggregate
circulation of approximately 5.7 million copies (including
abridged issues). The catalogs are designed and produced in-
house with photography, prepress and printing services being
outsourced. On-line computerized inventory systems and order
processing programs offer control of fulfillment and shipping
times and record the purchase history of catalog buyers and the
performance of each individual mailing list. Orders are
processed daily and inventory adjustments are managed
accordingly.
The direct response catalog has experienced sales
increases from $620,000 in fiscal 1992 to $8,243,000 in fiscal
1999. As a stand-alone venture with costs fully allocated, the
catalog has recorded a loss from operations each year except
for fiscal 1999, when the division recorded a profit. The
principal reasons for the losses include: (i) in addition to
its primary merchandising role, the catalog is employed as an
advertising vehicle to stimulate customer traffic in the
existing Harold's stores, and also as a market research and
development tool in connection with expanding the chain into
new markets; and (ii) at the end of a specific catalog's run
the unsold merchandise is reacquired from the catalog operation
at marked down cost prices to allow such merchandise to be sold
with a customary profit margin in the Company's retail stores,
and profit is recorded in the store and is not a component in
calculating the catalog's profitability. In addition, prior to
fiscal 1999, the Company did not attempt to account for the
advertising and traffic-building benefits of mailing the
catalog to its known retail customers. The Company also does
not account for any profits earned from catalog close-outs sold
in the outlet stores, or for the catalog's contribution to
developing potential new store locations.
In addition , the Company currently sells merchandise via
electronic commerce online at www.harolds.com. Sales generated
from such efforts are currently immaterial. The Company
currently offers a limited merchandise assortment online, but
plans to continue to focus on growing the online business and
expand product offerings. The Company's catalog systems allow
for expansion of the online business with minimal effort or
investment.
Merchandise Inventory, Replenishment and Distribution
The specialty retail apparel business fluctuates according
to changes in customer preferences dictated by fashion and
season. These fluctuations affect the inventory owned by
apparel retailers, since merchandise usually must be ordered
well in advance of the season and sometimes before fashion
trends are evidenced by customer purchases. The Company's
policy of carrying basic merchandise items in full assortments
of sizes and colors requires it to carry a significant amount
of inventory. The Company must enter into contracts for the
purchase and manufacture of proprietary label apparel well in
advance of its selling seasons.
The Company continually reviews its inventory levels in
order to identify slow-moving merchandise and broken
assortments (items no longer in stock in a sufficient range of
styles, colors and sizes) and may use markdowns to clear this
merchandise. Markdowns also may be used if inventory exceeds
customer demand for reasons of style, seasonal adaptation,
changes in customer preference, or if it is determined that the
inventory in stock will not sell at its currently marked price.
Such markdowns may have an adverse impact on earnings,
depending on their extent and the amount of inventory affected.
The Company utilizes its four outlet stores to dispose of prior
season or slow moving merchandise as well as merchandise
developed specifically for the outlet division. In addition,
in lieu of utilizing outside liquidation resources ("jobbers"),
slow moving merchandise is periodically cleared through
regional off-site discount sales which are promoted under the
name "Harold's Warehouse Sale".
The Company operates an 85,000 square foot distribution
facility capable of processing merchandise for 74 stores in
Norman, Oklahoma. With a modest additional investment, the
facility will have the capability of processing merchandise for
138 stores. All of the Company's merchandise is routed through
the distribution center from various manufacturers. Each item
is examined, sorted, tagged with bar coded tickets which track
the merchandise for analysis by multiple parameters, including,
vendor lot number, color and size. An increasing amount of
merchandise is currently arriving at the distribution center
with tags previously placed by the vendor. The merchandise is
then boxed for shipment by company trucks or common carrier to
the Company's 46 stores and catalog operation. This process is
done in a time sensitive manner in a substantially paperless
environment, utilizing computers, bar codes and scanners.
Seasonality
The Company's business follows a seasonal pattern, peaking
twice a year during the late summer (August through early
September) and holiday (Thanksgiving through Christmas)
periods. During fiscal 1999, approximately 53% of the
Company's sales occurred and substantially all of the Company's
net income was earned during the third and fourth quarters.
Competition
The Company's business is highly competitive. The
Company's stores compete with national and local department
stores, specialty and discount store chains, catalogers and
independent retail stores which offer similar lines of
specialty apparel. Many of these competitors have
significantly larger sales volumes and assets than the Company.
Depth of selection in sizes and colors and styles of
merchandise, merchandise procurement and pricing, ability to
anticipate fashion trends and customer preferences, inventory
control, reputation, quality of private-label merchandise,
store design and location, advertising and customer service are
all important factors in competing successfully in the retail
industry. Given the large number of companies in the retail
industry, the Company cannot estimate the number of its
competitors or its relative competitive position.
In addition, the success of the Company's operations
depends upon a number of factors relating to economic
conditions and general consumer spending. If current economic
conditions worsen and consumer spending is restricted, the
Company's growth and profitability will be negatively impacted.
Customer Credit
The Company's stores accept the proprietary "Harold's"
credit card, and Visa, Mastercard, Discover and the American
Express credit cards. The Company's catalog operation accepts
VISA, Mastercard, Discover and the Company's credit card.
Credit card sales were 74% in fiscal 1997, 76% in fiscal 1998
and 77% in fiscal 1999. In fiscal 1999, 17% of sales were made
with the Harold's credit card and 61% were made with third
party credit cards. The Company maintains a credit department
for customer service, credit authorizations, credit
investigation, billing and collections. As of January 30,
1999, the allowance for bad debts from Company credit card
sales was approximately 0.9% of Harold's proprietary credit
card sales for fiscal 1999.
Harold's has offered customers its proprietary credit card
since 1974. The Company believes that providing its own credit
card enhances customer loyalty while providing customers with
additional credit at costs to the Company significantly lower
than those charged by outside credit card companies (i.e. Visa,
Mastercard, Discover and American Express). At January 30,
1999, the Company had approximately 22,975 active credit
accounts and the average card holder had a line of $1,000 and
an outstanding balance of $300. Charges by holders of the
Company's credit card during fiscal 1999 totaled approximately
$22,700,000.
Advertising
The Company maintains an in-house advertising department,
which has won numerous Addy awards at the local, district and
national levels. The advertising department staff produces in-
house print advertising for daily and weekly newspapers and
other print media, and designs the Company's direct response
catalogs and other direct mail pieces. In fiscal 1999, the
Company spent approximately $7,800,000 (6.0% of sales) on
advertising and catalog production costs as compared to
approximately $10,000,000 (8.3% of sales) in fiscal 1998. This
expenditure includes the production and mailing costs
associated with the Company's direct response catalog. The
advertising department is also involved in the production of
annual reports to the Company's stockholders, sales training
materials, internal marketing materials, and all corporate
logos and labeling.
Management Information Systems
The Company places great emphasis on upgrading and
integrating its management information systems ("MIS"). The
Company believes these upgrades will enable it to maintain more
efficient control of its operations and facilitate faster and
more informed responses to potential opportunities and
problems. The Company maintains an MIS team to oversee these
management information systems, which include credit, catalog,
sales reporting, accounts payable, and merchandise control,
reporting and distribution.
The Company uses an integrated point-of-sale ("POS")
inventory and management system to control merchandising and
sales activities. This system automatically polls each
location every 24 hours and provides a detailed report by
merchandise category the next morning. Management evaluates
this information daily and implements merchandising controls
and strategies as needed. The Company's POS system has been
updated to allow additional functions to be programmed into the
system. The POS system provides personnel scheduling and time
keeping capabilities, as well as, a customer profile function
to better identify and track consumer demographics. The
Company is currently installing a new and enhanced POS product
into all stores.
The Company continues to implement newer and better
inventory control systems. The Company routinely conducts its
own inventory using a sophisticated scanning system. POS
scanning devices record and track SKU bar codes which are
assigned to every piece of merchandise. This information is
downloaded into the Company's IBM AS400r computer which
generates a detailed report within 24 hours of the physical
inventory.
The Company has also implemented ARTHURr, a computerized
merchandise planning system which interacts with the Company's
AS400r and Island Pacific Systemsr software. ARTHURr
facilitates seasonal planning by department and store, and
provides certain data for financial planning. The Company
plans to implement the allocation product offered by Comshare
during fiscal 2000.
Trademarks, Service Marks, and Copyrights
"Harold's", "Harold Powell", "Old School Clothing Company",
"OSCC Bespoke" and other trademarks either have been
registered, or have trademark applications pending, with the
United States Patent and Trademark Office and with the
registries of various foreign countries. The Company files
U.S. copyright registration on the original design and artwork
purchased or developed by the Company.
The Company's two Houston stores and the Sealy, Texas
outlet bear the name "Harold Powell" rather than "Harold's" to
avoid confusion with an existing local men's apparel store
which operates in Houston under the name "Harold's" with prior
usage in this market predating the Company's federal
registration.
Employees
On March 15, 1999, the Company had approximately 653
full-time and 786 part-time employees. Additionally, the
Company hires temporary employees during the peak late summer
and holiday seasons. None of the Company's employees belong to
any labor union and the Company believes it has good relations
with its employees.
ITEM 2. PROPERTIES
Store Leases
At March 15, 1999, the Company owned the Austin outlet
store and leased 45 stores. The Company believes rent payable
under its store leases is a key factor in determining the sales
volume at which a store can be profitably operated. The leases
typically provide for an initial term of 12 years. In most
cases, the Company pays a base rent plus a contingent rent
based on the store's net sales in excess of a certain
threshold, typically four to five percent of net sales in
excess of the applicable threshold. Among current store
leases, one store lease has fixed rent with no percentage rent.
Four store leases have percentage rent only. All other store
leases provide for a base rent with percentage rent payable
above specified minimum net sales. Eighteen of the leased
stores open during all of fiscal 1999 operated at sales volumes
above the breakpoint (the sales volume below which only base
rent is payable). Based on the Company's current level of
sales per square foot, the Company believes that some of the
risk from any decline in future sales volume in these stores is
reduced because a corresponding decline in occupancy expense
would occur.
Substantially all of the leases require the Company to pay
property taxes, insurance, utilities and common area
maintenance charges. The current terms of the Company's
leases, including automatic renewal options, expire as follows:
Years Leases Number of
Expire Stores
1999 4
2000-2001 4
2002-2004 10
2005 and later 27
The Company generally has been successful in renewing its
store leases as they expire.
During fiscal 1999, the Company entered into new leases for
stores in Houston, Texas; Palo Alto, California; OakBrook and
Skokie, Illinois; Salt Lake City, Utah; and Tampa, Florida.
Management believes the terms of these leases are comparable
with other similar national retailers in these locations. Base
rent (minimum rent under terms of lease) in current leases
ranges from $6 per square foot to $60 per square foot annually
over the terms of the leases. Total base rent has continued to
increase based on new store leases. Occupancy costs have
increased slightly as the Company has entered new markets. The
following table sets forth the fixed and variable components of
the Company's rent expense for the fiscal years indicated:
1999 1998 1997
Base rent $ 4,350,000 3,702,000 2,806,000
Additional rents
computed as a
percentage of
sales 1,041,000 1,206,000 1,261,000
Total $ 5,391,000 4,908,000 4,067,000
Corporate Headquarters and Catalog Fulfillment Center
The Company owns a complex of contiguous buildings in
Norman, Oklahoma comprised of approximately 36,500 square feet,
with 22,000 square feet of this space being utilized by the
Company for its executive offices, administrative functions and
catalog fulfillment center. The remainder of this complex is
currently leased to other parties and could be used for future
expansion of the catalog fulfillment center and other Company
needs.
Merchandise Buying Office, and Distribution Center
The Company leases a 50,000 square foot building used
primarily as a men's and ladies' buying office in Dallas, Texas
(the "Dallas Buying Office II") , a 10,000 square foot building
("The Dallas Buying Office I") and an 85,000 square foot
warehouse distribution center facility located in Norman,
Oklahoma.
The lessor of the Dallas locations and the distribution
center is a limited partnership whose partners include Rebecca
Powell Casey, Michael T. Casey, H. Rainey Powell and Lisa
Powell Hunt, all of whom are stockholders and directors of the
Company. The term of the Dallas Buying Office I lease expires
March 2012, with annual rent payments of $158,000 plus
insurance, utilities and property taxes until April, 2000, at
which time the annual rent will be $180,000, plus insurance,
utilities and property taxes, increasing $2,500 each year
thereafter until expiration of the lease. The Company is
currently engaged in negotiations with a potential sublessee
but there is no assurance that a sublease will be consummated
on terms favorable to the Company. Until such time as a lease
is consummated, the lessor is providing the Company with rent
abatements.
The term of the Dallas Buying Office II lease expires
September, 2010 with annual rent payments of $453,204 plus
insurance and property taxes until August, 2001 at which time
the annual rent will be $478,382, plus insurance, utilities and
property taxes until August, 2004 at which time the annual rent
will be $503,560, plus insurance, utilities and property taxes
until August, 2007 at which time annual rent will be $528,728,
plus insurance, utilities and property taxes until expiration
of the lease.
The term of the distribution center lease expires in June
2012, with annual rental payments of $338,438 plus insurance,
utilities and property taxes until July, 2001, at which time
the annual rent will increase annually on a fixed scale up to a
maximum of $419,951 during the final year of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine
litigation incidental to the conduct of its business. As of
this date, the Company is not a party to, nor is any of its
property subject to, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
report.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
At March 15, 1999, there were 662 record holders of the
Company's common stock, ("Common Stock"). The Company's Common
Stock is listed on the American Stock Exchange under the symbol
"HLD". The table below presents the range of the high and low
sales prices, for the periods indicated. The price per share
information contained in the following table is restated to
reflect the 5% stock dividend paid to holders of Common Stock
on January 16, 1998. There were no stock dividends issued in
fiscal 1999.
Quarterly Common Stock Price Ranges
Fiscal 1999 High Low
1st Quarter $ 7.94 $ 6.19
2nd Quarter $ 8.38 $ 6.50
3rd Quarter $ 7.00 $ 5.31
4th Quarter $ 8.00 $ 6.75
Quarterly Common Stock Price Ranges
Fiscal 1998 High Low
1st Quarter $ 13.33 $ 8.69
2nd Quarter $ 9.41 $ 7.98
3rd Quarter $ 8.51 $ 7.02
4th Quarter $ 8.10 $ 5.95
Dividend Policy
The Company has never declared or paid cash dividends on
its Common Stock and presently intends to retain all earnings
for the operation and expansion of its business for the
foreseeable future. Any future determination as to the payment
of cash dividends will depend on the Company's earnings,
capital requirements, financial condition and other factors as
the Board of Directors may deem relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information
is derived from the audited consolidated financial statements
of the Company and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial
statements and the notes thereto, appearing elsewhere herein.
Fiscal Year
1999 1998 1997 1996 1995
(Dollar amounts in thousands, except per
share data)
Statements of Earnings
Data:
Sales $129,224 119,919 108,257 94,264 75,795
Percentage increase 7.8% 10.8% 14.8% 24.4% 24.4%
Gross profit on sales(1) $45,128 38,149 38,717 33,819 26,407
Percentage of sales 34.9% 31.8% 35.8% 35.9% 34.8%
Earnings before income $4,785 74 5,880 4,645 3,539
taxes
Percentage of sales 3.7% 0.0% 5.4% 4.9% 4.7%
Net earnings $2,841 44 3,528 2,787 2,088
Percentage of sales 2.2% 0.0% 3.3% 3.0% 2.8%
Net earnings per common
share (2):
Basic $0.47 0.01 0.61 0.51 0.38
Diluted $0.47 0.01 0.59 0.51 0.38
Other Operating Data:
Stores open at end of 44 41 36 29 25
period
Growth in comparable (1.3%) (5.4%) (0.5%) 8.7% 10.7%
store sales
(52-53 week basis)
Balance Sheet Data:
Working capital $33,044 35,430 28,016 21,301 12,524
Total assets 63,917 63,929 59,608 42,909 34,661
Long-term debt, net of 16,330 19,708 12,528 9,540 594
current maturities (3)
Stockholders' equity 39,521 36,466 36,035 25,299 22,260
Net book value per share $6.51 6.03 6.01 4.63 4.10
(4)
(1) In accordance with retail industry practice, gross profit
from sales is calculated by subtracting cost of goods
sold (including occupancy and central buying expenses) from
sales.
(2) Net earnings per common share for each period have been
restated for the 5% stock dividends in fiscal 1998,
fiscal 1997 and fiscal 1996 and the 10% stock
dividend in fiscal
1995.
(3) In fiscal 1996, the Company renewed its line of credit to be
payable at a fixed maturity rather than on demand,
which required the loan to be reclassified as long-term debt.
(4) Net book value per share is based on the number of shares of
Common Stock outstanding at the end of each fiscal
year restated for the 5% stock dividends in fiscal 1998,
fiscal 1997 and 1996 and the 10% stock dividend in fiscal 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table reflects items in the Company's
statement of earnings as a percentage of sales for the periods
indicated:
Fiscal Year
1999 1998 1997
(52 Weeks) (52 Weeks) (52 Weeks)
Sales 100.0% 100.0 100.0
Cost of goods sold (65.1) (68.2) (64.2)
Selling, general and (27.6) (28.2) (27.5)
administrative expenses
Depreciation and amortization (3.0) (2.9) (2.6)
Interest expense (0.6) (0.7) (0.3)
Earnings before income taxes and
cumulative effect of change in 3.7 0.0 5.4
accounting principle
Provision for income taxes (1.5) 0.0 (2.1)
Earnings before cumulative effect
of change in accounting principle 2.2 0.0 3.3
Cumulative effect of change in
accounting principle 0.0 - -
Net earnings 2.2% 0.0% 3.3%
The following table reflects the sources of the increases
in Company sales for the periods indicated:
Fiscal Year
1999 1998 1997
(52 Weeks) (52 Weeks) (52 Weeks)
Store sales (000's) $120,981 110,880 99,374
Catalog sales (000's) 8,243 9,039 8,883
Sales (000's) $129,224 119,919 108,257
Total sales growth 7.8% 10.8% 14.8%
Growth in comparable store sales (1.3) (5.4) (0.5)
(52-53 week basis)
Growth in catalog sales (8.8) 1.8 (5.3)
Store locations:
Existing stores beginning of 41 36 29
period
Stores closed (1) (1) -
New stores opened during period 4 6 7
Total stores at end of
period 44 41 36
Total Company sales increased 7.8% in fiscal 1999 as
compared to 10.8% in fiscal 1998 and 14.8% in fiscal 1997. The
Company believes that such increases were primarily due to the
continued store expansion program. The Company opened four
stores during fiscal 1999 and closed one store. Stores were
opened in Oak Brook and Skokie, Illinois; San Antonio, Texas
(Alamo Quarry Market) and Salt Lake City, Utah. A store closed
in San Antonio, Texas (Broadway and Austin Highway).
Total Company sales increased 10.8% in fiscal 1998 as
compared to 14.8% in fiscal 1997. The Company believes that
such increases were primarily due to the continued store
expansion program. The Company opened five stores and one
outlet during fiscal 1998 and closed one store. Stores were
opened in: Cordova, Tennessee (Memphis metro); Wichita, Kansas;
Columbus, Ohio; Richmond, Virginia; Birmingham, Alabama; and an
outlet in Sealy, Texas. A store closed in Kensington, MD
(Washington, DC metro). The Company opened six stores and one
outlet during fiscal 1997. Stores were opened in: Greenville,
South Carolina; Leawood, Kansas; Raleigh, North Carolina;
McLean, Virginia; Littleton, Colorado (Denver metro); Houston,
Texas (known as Harold Powell); and an outlet in Norman,
Oklahoma.
Comparable store sales declined 1.3% during fiscal 1999,
compared to a decline of 5.4% in fiscal 1998. The Company
believes that the declines experienced in comparable store
sales during fiscal 1999 and fiscal 1998 were primarily
attributable to the opening of second stores in several key
markets, including: Birmingham, Alabama; Norman, Oklahoma;
Memphis, Tennessee; Dallas, Houston, and San Antonio, Texas;
and Washington, DC, as well as lower than anticipated sales of
fashion apparel merchandise in fiscal 1998.
Catalog sales declined 8.8% during fiscal 1999 compared
to an increase of 1.8% during fiscal 1998. The decline during
fiscal 1999 was due to a 27.1% reduction in the total number of
catalogs circulated. Since the 1989 test market of Harold's
first catalog, the Company has expanded its regular catalog to
include six seasonal issues each year. For fiscal 1999, the
Company's catalog averaged 60 pages per issue with an aggregate
mailing (including abridged issues) of approximately 5.7
million catalogs. The increase during fiscal 1998 was due to
expanded catalog circulation.
The Company's gross margin increased to 34.9% in fiscal
1999 from 31.8% in fiscal 1998. The increase in gross margin
can be primarily attributed to improved inventory planning and
customer acceptance of product offerings, resulting in lower
inventory levels and reduced markdowns. The Company's gross
margin declined from 35.8% in fiscal 1997 to 31.8% in fiscal
1998. The Company experienced higher markdowns due to excess
inventory levels, resulting from lower than anticipated sales
of fashion apparel merchandise. In addition, higher occupancy
costs that did not leverage due to lower sales negatively
impacted the gross margin. Any increase in net earnings as a
percentage of sales will be the result of increasing sales
while controlling selling, general and administrative expenses
and improvement in gross margin from sales.
Selling, general and administrative expenses decreased by
0.6% of sales in fiscal 1999 compared to an increase of 0.7% of
sales in fiscal 1998. The decrease in selling, general and
administrative expenses as a percentage of sales in fiscal 1999
was primarily due to reduced advertising and catalog production
costs, offset by increased payroll related expenses. The
increase in selling, general and administrative expenses as a
percentage of sales in fiscal 1998 was primarily due to
increased catalog fulfillment cost and increases in sales
salaries in order to maintain exceptional customer service
expectations. In fiscal 1999, the Company initiated a 27.1%
reduction in the total number of catalogs circulated to reduce
costs, while attempting to minimize the reduction in sales.
The result was a $2,100,000, or 35%, decline in production
costs and an $800,000, or 8.8%, decline in catalog sales. In
fiscal 1998, the Company increased circulation in attempts to
increase the rate of sales growth in the catalog division,
resulting in an increase in catalog expenses of $1,600,000, or
36%. Non-catalog advertising expenditures decreased 1.6% in
fiscal 1999 compared to an increase of 11% in fiscal 1998.
Such expenses decreased in fiscal 1999 as a result of improved
sales and lower inventory levels and increased in fiscal 1998
as a result of promotional activity to clear excess inventory
levels.
During fiscal 1999, the total interest costs (including
capitalized interest) decreased $174,000 compared to fiscal
1998 due to lower outstanding debt balances. The average
balance on total outstanding debt was $17,217,000 in fiscal
1999, compared to $19,448,000 in fiscal 1998. The decrease in
average debt balances resulted principally from lower inventory
levels. As the Company's growth continues, cash flow may
require additional borrowed funds, which may cause an increase
in interest expense. During fiscal 1998, interest costs
(including capitalized interest) increased $788,000 as compared
to fiscal 1997 due to higher inventory balances.
The Company's income tax rate was 40% in fiscal 1999,
fiscal 1998 and fiscal 1997.
Capital Expenditures, Capital Resources and Liquidity
Cash Flows From Operating Activities. For fiscal 1999, net
cash provided by operating activities was $9,638,000 as compared
to $3,551,000 net cash used in operating activities for fiscal
1998. The increase in cash flows can be partially attributed to
(i) net earnings of $2,841,000 for fiscal 1999, compared to net
earnings of $44,000 for fiscal 1998, an increase in net earnings
of $2,797,000, (ii) the timing of accrued expenses as reflected
in an increase in accrued expenses of $365,000 in fiscal 1999,
compared to a decrease in accrued expenses of $1,051,000 in
fiscal 1998, (iii) the timing of accounts payable as reflected by
a decline in accounts payable of $329,000 in fiscal 1999,
compared to a decrease in accounts payable of $1,879,000 in
fiscal 1998.
The Company's merchandise inventories decreased $1,954,000
in fiscal 1999 compared to an increase of $2,896,000 for fiscal
1998 as a result of the Company's improved inventory planning and
customer acceptance of product offerings. Management expects the
dollar amount of the Company's merchandise inventories to
increase with the expansion of its product development programs,
private label merchandise and chain of retail stores, with
related increases in trade accounts receivable and accounts
payable. Period-to period differences in timing of inventory
purchases and deliveries will affect comparability of cash flows
from operating activities.
Cash Flows From Investing Activities. For fiscal 1999, net
cash used in investing activities was $5,755,000, as compared to
$4,554,000 for fiscal 1998. Capital expenditures totaled
$6,280,000, compared to $4,760,000 for fiscal 1998. Capital
expenditures during such periods were invested principally in new
stores, and remodeling and equipment expenditures in existing
operations. On November 6, 1996, the Company made a term loan to
CMT Enterprises, Inc. ("CMT") in the principal amount of
$2,750,000, to be used by CMT to refinance its existing revolving
line of credit and for working capital purposes. At March 15,
1999, the outstanding balance of the loan was $2,218,000. CMT is
a major independent contractor whose assistance is instrumental
in the Company's design and manufacturing process. See note 3 to
Consolidated Financial Statements.
Cash Flows From Financing Activities. During fiscal 1999,
the Company made periodic borrowings under its revolving credit
facility to finance its inventory purchases, product
development and private label programs, store expansion,
remodeling and equipment purchases for the fiscal year (see
"Liquidity").
The Company has available a line of credit with its bank.
This line had average balances of $12,813,000 and $16,472,000
for the fiscal years 1999 and 1998, respectively. During 1999,
this line of credit had a high balance of $16,701,000 and a
balance of $12,872,000 as of January 30, 1999. The balance at
March 15, 1999 was $15,475,000.
Liquidity. The Company considers the following as
measures of liquidity and capital resources as of the dates
indicated (dollars in thousands).
Fiscal Year
1999 1998 1997
Working capital $33,044 $35,430 $28,016
Current ratio 5.14:1 5.63:1 3.57:1
Ratio of working capital .52:1 .55:1 .47:1
to total assets
Ratio of long-term debt
(including current .43:1 .56:1 .35:1
maturities) to
stockholders' equity
The Company's primary needs for liquidity are to finance
its inventories and revolving charge accounts and to invest in
new stores, remodeling, fixtures and equipment. Cash flow from
operations and proceeds from credit facilities represent the
Company's sources of liquidity. Management anticipates these
sources of liquidity to be sufficient in the foreseeable
future. The Company's capital expenditures budget for fiscal
2000 is approximately $5,000,000.
Seasonality
The Company's business is subject to seasonal influences,
with the major portion of sales realized during the fall season
(third and fourth quarters) of each fiscal year, which includes
the back-to-school and holiday selling seasons. In light of
this pattern, selling, general and administrative expenses are
typically higher as a percentage of sales during the spring
seasons (first and second quarters) of each fiscal year.
Inflation
Inflation affects the costs incurred by the Company in its
purchase of merchandise and in certain components of its
selling, general and administrative expenses. The Company
attempts to offset the effects of inflation through price
increases and control of expenses, although the Company's
ability to increase prices is limited by competitive factors in
its markets. Inflation has had no meaningful effect on sales
or net earnings of the Company.
Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes
standards for accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in
fair value of a derivative depends on the intended use of the
derivative and the resulting designation. Management is
currently evaluating the impact of this standard and believes
its adoption will not materially affect the Company's
consolidated financial position or results of operations.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1 (SOP 98-1)
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The adoption of SOP
98-1 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
Year 2000
Many computer systems use only two digits to identify a year
(for example, "99" is used for the year "1999"). As a result,
these systems may be unable to process accurately dates later
than December 31, 1999, since they may recognize "00" as the year
"1900", instead of the year "2000". This anomaly is often
referred to as the "Year 2000 compliance" issue. Since 1997, the
Company has been executing a plan to remediate or replace
affected systems on a timely basis. Equipment and other non-
information technology systems that use microchips or other
embedded technology, such as certain conveyor systems at the
Company's distribution center, are also covered by the Company's
Year 2000 compliance project.
The Company's Year 2000 compliance project includes four
phases: (1) evaluation of the Company's owned or leased systems
and equipment to identify potential Year 2000 compliance issues;
(2) remediation or replacement of Company systems and equipment
determined to be non-compliant (and testing of remediated systems
before returning them to production); (3) inquiry regarding Year
2000 readiness of material business partners and other third
parties on whom the Company's business is dependent; and (4)
development of contingency plans, where feasible, to address
potential third party non-compliance or failure of material
Company systems.
The initial phase of the Company's Year 2000 compliance
project was the evaluation of all software, hardware and
equipment owned, leased or licensed by the Company, and
identification of those systems and equipment requiring Year 2000
remediation. This analysis was completed during fiscal 1999.
All computer hardware in the Company's corporate office and
distribution center that was not Year 2000 compliant has been
remediated or replaced, and all computer hardware in the
Company's retail stores that was not Year 2000 compliant will be
remediated or replaced by the end of the second quarter of fiscal
2000. Of those software systems that were found not to be Year
2000 compliant, approximately 90% of all material systems have
been remediated or replaced by Year 2000 compliant software. The
Company anticipates that all remaining material systems,
including certain operating systems used in the Company's
distribution center, will be remediated or replaced by the end of
the second quarter of fiscal 2000.
Over the past few years, the Company's strategic plan has
included significant investment in and modernization of many of
the Company's computer systems. As a result, much of the costs
and timing for replacement of certain of the Company's systems
that were not Year 2000 compliant were already anticipated as
part of the Company's planned information systems spending and
did not need to be accelerated as a result of the Company's Year
2000 project. The total cost to the Company specifically
associated with addressing the Year 2000 issue with respect to
its systems and equipment has not been, and is not anticipated to
be, material to the Company's financial position or results of
operations in any given year. The Company estimates that the
total additional cost of managing its Year 2000 project,
remediating existing systems and replacing non-compliant
systems, is approximately $2 million, of which approximately $1.5
million was expended in fiscal 1999 and the balance anticipated
to be expended in fiscal 2000.
Although the Company believes its Year 2000 compliance
efforts with respect to its systems will be successful, any
failure or delay could result in actual costs and timing
differing materially from that presently contemplated, and in a
disruption of business. The Company is developing a contingency
plan to permit its primary operations to continue if the
Company's modifications and conversions of its systems are not
successfully completed on a timely basis, but the foregoing cost
estimates do not take into account any expenditures arising out
of a response to any such contingencies that materialize. The
Company's cost estimates also do not include time or costs that
may be incurred as a result of third parties' failure to become
Year 2000 compliant on a timely basis.
The Company is communicating with its business partners,
including key manufacturers, vendors, banks and other third
parties with whom it does business, to obtain information
regarding their state of readiness with respect to the Year 2000
issue. Failure of third parties to remediate Year 2000 issues
affecting their respective businesses on a timely basis,
or to implement contingency plans sufficient to permit
uninterrupted continuation of their businesses in the event of
a failure of their systems, could have a material adverse
effect on the Company's business and results of operations.
Assessment of third party Year 2000 readiness is expected to be
substantially completed by
the end of the first quarter of Fiscal 2000. The Company will
not be able to determine its most reasonably likely worst case
scenarios until assessment of third parties' Year 2000
compliance is completed.
The Company's Year 2000 compliance project also includes
development of a contingency plan designed to support critical
business operations in the event of the occurrence of systems
failures or the occurrence of reasonably likely worst case
scenarios. The Company anticipates that contingency plans
will be substantially developed by the end of the second quarter
of Fiscal 2000.
The Company may not be able to compensate adequately
for business interruption caused by certain third parties.
Potential risks include suspension or significant curtailment of
service or significant delays by banks, utilities or common
carriers, or at U.S. ports of entry. The Company's business also
could be materially adversely affected by the failure of
governmental agencies to address Year 2000 issues affecting the
Company's operations. For example, a significant amount of
the Company's merchandise is manufactured outside the United
States, and the Company is dependent upon the issuance by
foreign governmental agencies of export visas for, and upon the
U.S. Customs Service to process and permit entry into the
United States of, such merchandise. If failures in
government systems result in the suspension or delay of
these agencies' services, the Company could experience
significant interruption or delays in its inventory flow.
The costs and timing for management's completion of Year
2000 compliance modification and testing processes are based on
management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued
availability of certain resources, the success of third parties'
Year 2000 compliance efforts and other factors. There can be no
assurance that these assumptions will be realized or that
actual results will not materially vary.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary objective of the following information is to
provide forward-looking quantitative and qualitative
information about the Company's potential exposure to market
risks. The term "market risk" for the Company refers to the
risk of loss arising from adverse changes in interest rates and
various foreign currencies. The disclosures are not meant to
be precise indicators of expected future losses, but rather
indicators of reasonably possible losses. This forward-looking
information provides indicators of how the Company views and
manages its ongoing market risk exposures.
Interest Rate
At January 30, 1999, the Company had long-term debt
outstanding of approximately $16.9 million. Of this amount,
$1.6 million bears interest at a weighted average fixed rate of
8.16%. The remaining $15.3 million bears interest at variable
rates which averaged approximately 6.62% at January 30, 1999.
A 10% increase in short-term interest rates on the variable
rate debt outstanding at January 30, 1999 would approximate 66
basis points. Such an increase in interest rates would
increase the Company's interest expense by approximately
$100,000 assuming borrowed amounts remain outstanding.
The above sensitivity analysis for interest rate risk
excludes accounts receivable, accounts payable and accrued
liabilities because of the short-term maturity of such
instruments. The analysis does not consider the effect this
movement may have on other variables including changes in sales
volumes that could be indirectly attributed to changes in
interest rates. The actions that management would take in
response to such a change are also not considered. If it were
possible to quantify this impact, the results could well be
different than the sensitivity effects shown above.
Foreign Currency
Substantially all of the Company's purchases are priced in
U.S. dollars. However, some European purchases are denominated
in local currency and, therefore, are subject to the
fluctuation in currency exchange rates. From time to time the
Company utilizes forward exchange contracts to secure firm
pricing related to purchase commitments to be denominated in
foreign currencies. The contracts are of varying short-term
durations and amounts include a window delivery feature, which
provides the Company with an option to enter into a swap
agreement in the event that all of the currency is not utilized
at the end of the contract's delivery term. The Company's
objective in managing its exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse
fluctuations in earnings and cash flows associated with foreign
currency exchange rate changes. The principal currency hedged
is the Italian lira. The Company regularly monitors its
foreign exchange exposures to ensure the overall effectiveness
of its foreign currency hedge positions. However, there can be
no assurance the Company's foreign currency hedging activities
will substantially offset the impact of fluctuations in
currency exchange rates on its results of operations and
financial position.
The Company had no foreign exchange instruments
outstanding at January 30, 1999; therefore, a sensitivity
analysis would result in no impact to earnings. Anticipated
transactions, firm commitments, and accounts payable
denominated in foreign currencies would be excluded from the
sensitivity analysis. Additionally, as the Company utilizes
foreign currency instruments for hedging anticipated and firmly
committed transactions, a loss in fair value for those
instruments is generally offset by increases in the value of
the underlying exposure. Foreign currency fluctuations did not
have a material impact on the Company during fiscal years 1999,
1998 and 1997.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and
related information described below are set forth in the
Company's Annual Report to Shareholders for the fiscal year
ended January 30, 1999 (on pages 3-25) and are incorporated
herein by reference.
(a) Independent Auditors' Report.
(b) Consolidated Balance Sheets as of the Fifty-Two Weeks Ended
January 30, 1999 and January 31, 1998.
(c) Consolidated Statements of Earnings for the Fifty-Two
Weeks Ended January 30, 1999, January 31, 1998 and February 1,
1997.
(d) Consolidated Statements of Stockholders' Equity for the
Fifty-Two Weeks Ended January 30, 1999, January 31, 1998 and
February 1, 1997.
(e) Consolidated Statements fo Cash Flows for the Fifty-Two
Weeks Ended January 30, 1999, January 31, 1998 and February 1, 1997.
(f) Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND CONSOLIDATED FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under Item 10 will be contained
in the definitive Proxy Statement of the Company for its 1999
Annual Meeting of Shareholders (the "Proxy Statement") under
the headings "Election of Directors", "Officer Compensation and
Other Information" and "Compliance with Section 16 (a) of the
Securities Exchange Act of 1934" and is incorporated herein by
reference. The Proxy Statement will be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after January 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required under Item 11 will be contained
in the Proxy Statement under the heading "Officer Compensation
and Other Information" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required under Item 12 will be contained
in the Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 13 will be contained
in the Proxy Statement under the headings "Related Party
Transactions" and "Officer Compensation and Other Information-
Compensation Committee Interlocks and Insider Participation"
and is incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements: The response to this
portion of Item 14 is set forth in Item 8
of Part II of this Report.
(2) Financial Statement Schedules: Schedule II - Harold's
Stores, Inc. and Subsidiaries Valuation Account and
Independent Auditors' Report of Consolidated Financial
Statement Schedule (see pages 20-21) of this Report. All
other schedules have been omitted because they are
inapplicable, not required, or the information is
included elsewhere in the financial statements or notes
thereto.
(3) Exhibits: See accompanying Index to Exhibits. The Company
will furnish to any stockholder,upon written request, any exhibit
listed in the accompanying Indes to Exhibits upon payment
by such stockholder of the Company's reasonable expenses in
furnishing any such exhibit.
(b) Reports on Form 8-K: There were no reports on Form 8-K for
the quarter ended January 30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d)
of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAROLD'S STORES, INC.
Date: April 23, 1999 By:/s/ H. Rainey Powell,
H. Rainey Powell, President
Pursuant to the requirements of the Securities Exchange Act of
1934 this report has been signed below by the following persons
on behalf of the Registrant and in the capacities shown, and on
the dates indicated.
Signature Title Date
/s/ Harold G. Powell _________Chairman Emeritus and Director April 23, 1999
Harold G. Powell
/s/ Rebecca P. Casey Chairman of the Board April 23, 1999
Rebecca P. Casey Chief Executive Officer and
Director
/s/ H. Rainey Powell President and Director April 23, 1999
H. Rainey Powell
/s/ Jodi L. Taylor __________Chief Financial Officer April 23, 1999
Jodi L. Taylor
/s/ Lisa P. Hunt Director April 23, 1999
Lisa P. Hunt
/s/ Kenneth C. Row Executive Vice President April 23, 1999
Kenneth C. Row and Director
/s/ Linda L. Daugherty Vice-President and Controller April 23, 1999
Linda L. Daugherty (Chief Accounting Officer)
/s/ Michael T. Casey Director April 23, 1999
Michael T. Casey
/s/ Gary C. Rawlinson Director April 23, 1999
Gary C. Rawlinson
/s/ William F. Weitzel Director April 23, 1999
William F. Weitzel
/s/ James R. Agar Director April 23, 1999
James R. Agar
/s/ W. Howard Lester Director April 23, 1999
W. Howard Lester
/s/ Robert Brooks Cullum Director April 23, 1999
Robert Brooks Cullum, Jr.
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL
STATEMENT SCHEDULE
The Board of Directors and Stockholders
Harold's Stores, Inc.:
Under date of March 15,1999, we reported on the consolidated
balance sheets of Harold's Stores, Inc. and subsidiaries as of
January 30, 1999 and January 31, 1998, and the related
consolidated statements of earnings, stockholders' equity and
cash flows for the 52 week periods ended January 30, 1999,
January 31, 1998 and February 1, 1997, which are included in
the annual report on Form 10-K for the 52 week period ended
January 30, 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also have
audited the related consolidated financial statement schedule
listed in Item 14(a)(2). This consolidated financial statement
schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Oklahoma City, Oklahoma
March 15, 1999
Schedule II
HAROLD'S STORES, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
(In Thousands)
Additions
Balance at Additions Recoveries Deductions Balance
Description Beginning Charged of Write- at End
of to Accounts off of of
Period Expense Written off Accounts Period
52 Weeks ended
January 30, 1999:
Allowance for
doubtful $ 228 105 63 173 $ 223
receivables
52 Weeks ended
January 31, 1998:
Allowance for $ 215 168 79 234 $ 228
doubtful
receivables
52 Weeks ended
February 1, 1997:
Allowance for $ 200 134 49 168 $ 215
doubtful
receivables
INDEX TO EXHIBITS
No. Description
3.1 Certificate of Incorporation of Registrant (Incorporated by
reference to Exhibit 3.1 to Form 8-B Registration Statements,
Registration No. 1-10892).
3.2 By-laws of Registrant (Incorporated by reference to Exhibit
3.2 to Form 8-B Registration Statement, Registration No. 1-
10892).
4.1 Specimen Certificate for Common Stock (Incorporated by
reference to Exhibit 4.1 to Form S-1 Registration Statement,
Registration No. 33-15753).
9.1 Stockholders' Agreement Among Certain Stockholders of
Registrant dated August 20, 1987 (Incorporated by reference to
Exhibit 9.1 to Form S-1 Registration Statement, Registration
No. 33-15753).
9.2 First Amended and Restated Stockholders' Agreement Among
Certain Stockholders of Registrant dated June 15, 1998.
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended August 1, 1998).
10.1 Lease Agreement dated May 1, 1987 by and between Harold's of
Norman, Inc. and Powell Properties, Inc. (Norman, Oklahoma
Store) (Incorporated by reference to Exhibit 10.1 to Form S-1
Registration Statement, Registration No. 33-15753).
10.2 Lease Agreement dated May 1, 1987 by and between Harold's of
Norman, Inc. and Ruby K. Powell (Norman, Oklahoma Store)
(Incorporated by Reference to Exhibit 10.2 to Form S-1
Registration Statement, Registration No. 33-15753).
10.3 Lease Agreement dated October 31, 1985 by and between Harold's
Men's Apparel, Inc. predecessor to Harold's of Norman, Inc.
and Highland Park Shopping Village (Incorporated by Reference
to Exhibit 10.9 to Form S-1 Registration Statement,
Registration No. 33-15753) and Amendment to Lease dated June
15, 1988. (Incorporated by reference to Exhibit 10.8 to Form
10-K for the year ended January 31, 1989).
10.4 Lease Agreement dated November 1, 1990, by and between
Registrant and Michael T. Casey, Trustee (329 Partners-I
Limited Partnership). (Dallas Buying Office, Dallas, Texas)
(Incorporated by reference to Exhibit 10.29 to Form 10-K for
the year ended February 2, 1991).
10.5 Amended and Restated Lease Agreement dated April 1, 1996, by
and between Registrant and 329 Partners-II Limited
Partnership. (Dallas Buying Office, Dallas, Texas).
(Incorporated by reference to Exhibit 10.22 to Form 10-K for
the year ended February 1, 1992).
10.6 Lease Agreement dated October 4, 1991, by and between
Registrant and 329 Partners-II Limited Partnership. (East
Lindsey Warehouse facility, Norman, Oklahoma). (Incorporated
by Reference to Exhibit 10.22 to Form 10-K for the year ended
February 1, 1992).
10.7 Lease Agreement effective May 1, 1996 between Registrant and
Carousel Properties, Inc. (Campus Corner Store, Norman,
Oklahoma) (Incorporated by reference to Exhibit 10.7 to Form S-
2 Registration Statement, Registration No. 333-04117) and
amendment to Lease Agreement dated June 28, 1996.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q for
the quarter ended November 2, 1996).
10.8 Agreement effective June 1, 1994 between Registrant and CMT
Enterprises, Inc. (Incorporated by reference to Exhibit 10.8
to Form S-2 Registration Statement, Registration No. 333-
04117).
10.9* Employment and Deferred Compensation Agreement dated February
1, 1998 between Registrant and Harold G. Powell (Incorporated
by reference to Exhibit 10.25 to Form 10-Q for quarter ended
May 2, 1998).
10.10* Employment and Deferred Compensation Agreement dated February
1, 1998 between Registrant and Rebecca Powell Casey,
(Incorporated by reference to Exhibit 10.24 to Form 10-Q for
quarter ended May 2, 1998).
10.11* Employment and Deferred Compensation Agreement dated February
1, 1998 between Registrant and H. Rainey Powell, (Incorporated
by reference to Exhibit 10.26 to Form 10-Q for quarter ended
May 2, 1998).
10.12 Form of Indemnification Agreement between Registrant and
members of its Board of Directors (Incorporated by reference
to Exhibit 10.12 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.13 Amended and Restated Lease Agreement dated as of June 3, 1996
between Registrant and 329 Partners II Limited Partnership
(East Lindsey Warehouse Facility, Norman, Oklahoma)
(Incorporated by reference to Exhibit 10.13 to Amendment No. 1
to Form S-2 Registration Statement, Registration No. 333-
04117).
10.14 Lease Agreement dated as of May 31, 1996 between Registrant
and 329 Partners II Limited Partnership (Outlet Store, Norman,
Oklahoma) (Incorporated by reference to Exhibit 10.14 to
Amendment No. 1 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.15 Amended and Restated Lease Agreement dated as of December 30,
1997 between Registrant and 329 Partners II Limited
Partnership (Outlet Store, Norman, Oklahoma).
10.16 Lease Agreement dated June 30, 1998 by and between Registrant
and 329 Partners-II Limited Partnership. (Dallas Buying
Office, 5919 Maple, Dallas, Texas) (Incorporated by reference
to Exhibit 10.3 to Form 10-Q for the quarter ended August 1,
1998).
10.17 Second Amended and Restated Credit Agreement dated February
28, 1996 between Registrant and Boatmen's First National Bank
of Oklahoma (Incorporated by reference to Exhibit 10.15 to
Amendment No. 1 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.18 Third Amendment to Second Amended and Restated Credit
Agreement dated April 24, 1997 between Registrant and
NationsBank formerly Boatmen's First National Bank of Oklahoma
(Incorporated by reference to Exhibit 10.1 to Form 10-Q for
the quarter ended August 2, 1997).
10.19 Fourth Amendment to Second Amended and Restated Credit
Agreement dated June 25, 1997 between Registrant and
NationsBank formerly Boatmen's First National Bank of Oklahoma
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended August 2, 1997).
10.20 Fifth Amendment to Second Amended and Restated Credit
Agreement dated July 10, 1997 between Registrant and
NationsBank formerly Boatmen's First National Bank of Oklahoma
(Incorporated by reference to Exhibit 10.3 to Form 10-Q for
the quarter ended August 2, 1997).
10.21 Sixth Amendment to Second Amended and Restated Credit
Agreement dated July 31, 1997 between Registrant and
NationsBank (Incorporated by reference to Exhibit 10.4 to Form
10-Q for quarter ended August 2, 1997).
10.22 Seventh Amendment to Second Amended and Restated Credit
Agreement dated September 30, 1997 between Registrant and
NationsBank (Incorporated by reference to Exhibit 10.5 to Form
10-Q for the quarter ended November 1, 1997).
10.23 Third Amended and Restated Credit Agreement dated November 10,
1997 between Registrant and NationsBank (Incorporated by
reference to Exhibit 10.6 to Form 10-Q for the quarter ended
November 1, 1997).
10.24 First Amendment to the Third Amended and Restated Credit
Agreement dated June 10, 1998 between Registrant and
NationsBank (Incorporated by reference to Exhibit 10.1 to Form
10-Q for the quarter ended August 1, 1998).
10.25 Amended and Restated Term Loan and Security Agreement dated as
of November 6, 1996 among CMT Enterprises, Inc. (as borrower),
Franklin I. Bober (as Guarantor) and the Company (as lender).
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended November 2, 1996).
13.1 The portion of the Registrant's Annual Report to Shareholders
for the fiscal year ended January 30, 1999 consisting of the
consolidated financial statements and notes thereto and
independent auditors report set forth in pages 3-25 of the
Annual Report to Shareholders.
22.1 Subsidiaries of the Registrant (Incorporated by Reference to
Exhibit 22.1 to Form 8-B Registration Statements, Registration
No. 1-10892).
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
___________________________
* Constitutes a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
report.