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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year-ended January 31, 2004
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to
___________
Commission file number: 0-26229
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BARNEYS NEW YORK, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-4040818
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
575 FIFTH AVENUE
NEW YORK, NEW YORK 10017
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 450-8700
Securities registered pursuant Name of Each Exchange
to Section 12(b) of the Act: on Which Registered
Title of Each Class
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
[Cover page 1 of 2 pages]
The common stock of the registrant is quoted on the Nasdaq Over-The-Counter
Bulletin Board service. The common stock of the registrant is only traded on a
limited or sporadic basis and there is no established public trading market for
such common stock. As of August 2, 2003, the aggregate market value of the
registrant's voting common equity held by non-affiliates of the registrant,
based on the $6.00 last average bid and asked price of the common stock on
August 2, 2003, as reported on the Over-the-Counter Bulletin Board service, was
approximately $20.3 million. For purposes of this computation, shares of common
stock of the registrant beneficially owned by each officer and director of the
registrant and by each of Whippoorwill Associates, Inc. (on behalf of its
Discretionary Accounts) and Bay Harbour Management L.C. (on behalf of its
Managed Accounts) and their respective affiliates are deemed to be beneficially
owned by affiliates. Such determination should not be deemed an admission that
such officers, directors and such other beneficial owners of common stock of the
registrant are, in fact, affiliates of the registrant.
On April 23, 2004, the registrant had outstanding 14,126,489 shares of common
stock, par value $0.01 per share, which is the registrant's only class of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
in connection with the Annual Meeting of Stockholders of the registrant to be
held on June 17, 2004, are incorporated by reference into Part III of this
report.
[Cover page 2 of 2 pages]
Item 1. Business............................................................................................1
Item 2. Properties..........................................................................................8
Item 3. Legal Proceedings...................................................................................8
Item 4. Submission of Matters to a Vote of Security Holders.................................................9
Executive Officers of Holdings......................................................................9
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..................................................11
Item 6. Selected Financial Data............................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................34
Item 8. Financial Statements and Supplementary Data........................................................36
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................................................36
Item 9A. Controls and Procedures............................................................................36
Item 10. Directors and Executive Officers of the Registrant.................................................37
Item 11. Executive Compensation.............................................................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................................................37
Item 13. Certain Relationships and Related Transactions.....................................................39
Item 14. Principal Accountant Fees and Services.............................................................39
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................40
Unless otherwise expressly stated herein or the context otherwise requires, all
references in this Form 10-K to (i) "Holdings" refer to Barneys New York, Inc.,
a Delaware corporation and the sole shareholder of Barney's, Inc., a New York
corporation, (ii) "Barney's, Inc." refer to such New York corporation and (iii)
"Barneys," "we," "us," "our," "our company" or "the Company" refer to Holdings
and its direct and indirect subsidiaries, including Barney's, Inc. and its
subsidiaries.
FORWARD-LOOKING STATEMENTS
Certain statements discussed in Item 1 (Business), Item 3 (Legal Proceedings),
Item 7 (Management's Discussion and Analysis of Financial Condition and Results
of Operations), and elsewhere in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Statements that are not historical facts, including statements about
our beliefs and expectations, are forward-looking statements. Forward-looking
statements include statements preceded by, followed by or that include the words
"may," "could," "would," "should," "believe," "expect," "anticipate," "plan,"
"estimate," "target," "project," "intend," or similar expressions. These
statements include, among others, statements regarding our expected business
outlook, anticipated financial and operating results, our business strategy and
means to implement the strategy, our objectives, the amount and timing of future
store openings and capital expenditures, the likelihood of our success in
expanding our business, financing plans, working capital needs and sources of
liquidity.
Forward-looking statements are only estimates or predictions and are not
guarantees of performance. These statements are based on our management's
beliefs and assumptions, which in turn are based on currently available
information. Important assumptions relating to the forward-looking statements
include, among others, assumptions regarding demand for the merchandise we sell,
the introduction of new merchandise, store opening costs, expected pricing
levels, the timing and cost of planned capital expenditures, competitive
conditions and general economic conditions. These assumptions could prove
inaccurate. Forward-looking statements also involve risks and uncertainties,
which could cause actual results to differ materially from those contained in
any forward-looking statement. Many of these factors are beyond our ability to
control or predict. These factors include, but are not limited to, the
following:
o the continued appeal of luxury apparel and merchandise;
o economic conditions and their effect on consumer spending;
o our dependence on our relationships with some designers;
o our ability and the ability of our designers to design and
introduce new merchandise that appeals to consumer tastes and
demands;
o events and conditions in the New York City area;
o new competitors entering the market or existing competitors
expanding their market presence;
o our ability to accurately predict our sales;
o the continued service of our key executive officers and managers;
o our being controlled by our principal stockholders;
o our ability to enforce our intellectual property rights and
defend infringement claims;
o interruptions in the supply of the merchandise we sell;
o changing preferences of our customers;
o our ability to borrow additional funds;
o our substantial indebtedness;
o significant operating and financial restrictions placed on us by
the indenture governing Barney's, Inc.'s 9.000% senior secured
notes and our credit facility; and
o other factors referenced in this 10-K, including those set forth
under "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward-Looking
Statements."
We believe the forward-looking statements in this Form 10-K are reasonable.
However, they are based on current expectations, speak only as of the date they
are made, and are subject to change by reason of the factors and risks noted
above, the passage of time or other circumstances. We undertake no obligation to
update publicly any forward-looking statements in light of new information or
future events, except as required by applicable laws, including the securities
laws of the United States.
PART I
ITEM 1. BUSINESS
GENERAL
We are a leading upscale retailer of men's, women's and children's apparel and
accessories and items for the home. We provide our customers with a wide variety
of merchandise across a broad range of prices, including a diverse selection of
Barneys label merchandise. Our preferred arrangements with established and
emerging designers, combined with our creative merchandising, store designs and
displays, advertising campaigns, publicity events and emphasis on customer
service, have positioned us as a pre-eminent retailer of men's and women's
fashion, cosmetics, jewelry and home furnishings.
We operate 21 inter-related stores in the United States under the "Barneys New
York" trade name which cater to fashion-conscious customers. These stores
include three flagship stores in prime retail locations, three smaller regional
stores, and three CO-OP Barneys New York stores, all of which cater to customers
seeking contemporary, urban casual apparel and accessories. Our 12 outlet stores
cater to budget-minded yet fashion-conscious customers and our noted semi-annual
warehouse sale events in New York City and Santa Monica, California enable us to
sell our end-of-the-season residual merchandise and extend the Barneys New York
brand to a wider range of customers. In September 2003, we also began selling a
limited and highly edited assortment of products on our newly re-launched
Barneys.com website further expanding our reach to both new and existing
customers. In addition, we have entered into a licensing arrangement pursuant to
which a third party operates two retail stores in Japan and a single in-store
department in Singapore, all under the "Barneys New York" name. In October 2004,
it is anticipated that this third party will be opening a third Barneys New York
store in Ginza, Japan.
We drive sales by providing our customers with a carefully edited selection of
high-fashion quality merchandise from leading and emerging designers. Our
merchandising philosophy reflects a variety of fashion viewpoints and a culture
of seeking out creative and innovative products. It has established Barneys as a
premiere destination for fashion-conscious customers. We also strive to enhance
our sales by expanding and reallocating existing space within our stores,
attracting new customers, building upon our strong existing customer
relationships and selectively increasing the number of our stores. Our
experienced management team, led by Howard Socol, the former Chairman and Chief
Executive Officer of Burdines, a division of Federated Department Stores, Inc.,
emphasizes disciplined financial management throughout our operations. We
carefully monitor and have significantly reduced operating costs through a
variety of initiatives over the years, including a rationalization of personnel
hours, a reduction in the number of our administrative employees and the
renegotiation of supply, service and benefit plan contracts. We continue to seek
out new ways to reduce our operating costs which generally have the least impact
to our customers.
We were founded in 1923 under the name "Barney's Clothes, Inc." Barneys
consummated a plan of reorganization under Chapter 11 of the Bankruptcy Code on
January 28, 1999. Pursuant to the plan, Holdings was formed and all the equity
interests in Barney's, Inc. were transferred to Holdings, making Barney's, Inc.
a wholly-owned subsidiary of Holdings. Holdings has no independent operations
and its primary asset consists of shares of Barney's, Inc.
BUSINESS STRENGTHS
Strong Designer Relationships. We sell merchandise from leading designers
including Giorgio Armani, Manolo Blahnik, Marc Jacobs, Prada, Jil Sander and
Ermenegildo Zegna. We were the first to introduce a number of designers,
including both Giorgio Armani and Prada, into the high-fashion market in the
United States. Our stores are also a showcase for emerging designers, whom we
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identify and help to develop. By cultivating strong relationships with emerging
designers, we are able to introduce their merchandise to the high-fashion
market, often on an initially exclusive basis. We further strengthen our
relationships with both established and emerging designers through design and
product suggestions and by providing them with detailed feedback on their
collections that we gather from our customers.
Barneys Label Merchandise. We complement our designer merchandise with a diverse
selection of Barneys label merchandise, including ready-to-wear apparel,
handbags, shoes, dress shirts, ties and sportswear. Barneys label merchandise is
manufactured by independent third parties according to our specifications. We
are intensively involved in all aspects of the design and manufacture of this
collection. This merchandise complements and is of comparable quality to our
designer merchandise. Our Barneys label merchandise constituted approximately
16% of our net sales for our fiscal year ended January 31, 2004, is generally
less expensive than our designer merchandise and generates higher margins.
Strong Brand Image. We benefit greatly from the strong Barneys New York brand
image as a fashion leader, which we have developed during the past three
decades. We believe that our brand image is further enhanced through our
consistently creative and innovative merchandising, store designs and displays,
including our renowned flagship store windows, advertising campaigns and
publicity events, all of which emphasize taste, luxury and humor. Our flagship
stores reflect the luxury and distinct style of the merchandise we sell and
establish and promote the Barneys New York brand image as a pre-eminent retailer
of men's and women's fashion. In addition to our direct advertising, we receive
frequent press coverage from independent publications. This coverage features
our merchandise and reports our launches of new collections and new designers,
further strengthening our brand image.
Relationship-Driven Customer Service. We maintain a strong focus on providing
consistently high levels of customer service. We utilize third parties to
conduct customer surveys and mystery shopping programs to gain additional
insights about the shopping experience in our stores and to identify areas for
improvement. Our sales associates, particularly those at our flagship stores,
maintain customer profile books to serve specific customers better by providing
merchandise suggestions tailored to their personal tastes and by making them
aware of new merchandise and sales events. These sales associates also receive
extensive in-house product training and participate in vendor clinics to
familiarize themselves with the styles, fabrics and workmanship of our designer
collections. In addition, our customer loyalty program provides incentives to
customers who use our proprietary credit card.
Prime Store Locations. The location of our flagship stores in prime retail
locations contributes to the strong Barneys New York brand image. These
locations are Madison Avenue in New York City, Wilshire Boulevard off Rodeo
Drive in Beverly Hills and Oak Street in Chicago. We believe that our three
flagship stores are premiere destinations for fashion-conscious customers. All
of our flagship stores are leased under long-term leases, with initial terms
ranging from ten to twenty years with multiple ten-year renewal options.
Proven Management Team. We have a strong and dedicated management team with
significant experience in the upscale fashion market and retailing industry. Our
Chief Executive Officer, Howard Socol, brings more than 30 years of industry
experience to Barneys. Mr. Socol previously served as Chairman and Chief
Executive Officer of Burdines Department Stores from 1984 to 1997. During that
time, Burdines' business expanded from 25 stores as of January 28, 1984 to 48
stores as of February 1, 1997 and its sales grew from approximately $692 million
in 1984 to approximately $1.3 billion in 1996. Additionally, Thomas Kalenderian,
our Executive Vice-President -- Men's Merchandising, has been with us for 23
years, and Judith Collinson, our Executive Vice-President -- Women's
Merchandising, has been with us for 16 years. During their tenure with Barneys,
Mr. Kalenderian and Ms. Collinson have been instrumental in developing and
implementing our merchandising strategy, including our relationships with
designers and the design and procurement of Barneys label merchandise.
2
BUSINESS STRATEGY
Our business strategy is focused on increasing comparable store sales, reducing
operating expenses and selectively expanding our store base.
Increase Comparable Store Sales. We are focused on maximizing the profitability
of existing space, particularly in our flagship stores. We constantly consider
opportunities to reallocate floor space to merchandise that can provide higher
sales per square foot or higher profit margins. For example, in a prior year the
restaurant in our New York City flagship store was moved from the lower level to
the then unused ninth floor. This enabled us to expand our main floor women's
accessories business and to utilize the lower level space to expand our more
profitable cosmetics sales area, without adversely affecting the restaurant's
revenues. Additionally, in a prior year we also reallocated floor space in our
New York City flagship store to expand our women's shoe department. This
department generated approximately three times more sales per square foot than
the merchandise previously sold in the area that has been incorporated into our
expanded women's shoe department. We continue to implement this strategy of
maximizing existing space in our other flagship stores and regional and outlet
locations, tailoring the enhancements to individual store sales trends and
tastes.
In the current year we began significant projects in both our Beverly Hills and
Madison Avenue flagship stores. The renovation project in Beverly Hills includes
the consolidation of our men's offerings into two dedicated floors freeing up
space on the main floor to significantly intensify our women's shoes,
accessories and jewelry businesses. At Madison Avenue, we are relocating and
significantly expanding our Chelsea Passage (items for the home) business to
currently unproductive space on the ninth floor of that store. By doing this, we
are freeing up space to further expand and intensify our women's designer and
ready-to-wear businesses. The renovations in these two stores are expected to be
substantially complete by the end of the Spring 2004 season. In addition to the
above, our continued focus on customer service and expanded marketing efforts,
including increased advertising, are designed to increase sales to our existing
customers and to attract new customers.
Reduce Operating Expenses. We have a highly-disciplined approach to managing
expenses throughout our operations. Over the last several years, we have reduced
fixed costs through the implementation of a number of expense reduction
initiatives, including reducing the number of our administrative personnel,
rebidding repair and maintenance contracts, reducing employee benefits and
reducing our packaging and general office overhead costs. In addition, we
continue to upgrade inventory controls and security measures in our stores in an
effort to reduce inventory shrinkage. We continuously review our operations and
the related expenses to identify cost reduction initiatives to improve
profitability.
Limited and Disciplined New Store Openings. In May 2000 we opened a CO-OP store
in the Chelsea neighborhood of New York City, and in March 2002 we opened a
second CO-OP store in the SoHo neighborhood of New York City. In September 2003,
we opened our first CO-OP store outside of the New York area in the South Beach
section of Miami, Florida. These stores, which are an extension of the CO-OP
departments in our flagship stores, achieved aggregate net sales of $11.2
million in the fiscal year ended January 31, 2004 (reflecting twelve months of
operations for the two New York stores and five months of operations for our
Miami store). We continue to evaluate opportunities to expand our CO-OP store
base in a selective and financially disciplined manner. We expect to open
approximately ten additional CO-OP stores over the next five years, at a cost of
between $1.0 million and $1.5 million each. We believe that the new CO-OP stores
will increase customer awareness of the Barneys New York name and enhance the
strong Barneys New York brand image.
3
RETAILING OPERATIONS
We sell to consumers primarily through three inter-related distribution
channels, consisting of full-price stores, outlet stores, and warehouse sale
events. While these three distribution channels differ in both size and
price-points, each is merchandised in its own way, with a wide range of
high-quality merchandise that generally appeals to fashion-conscious customers.
Our inventory supply chain is managed throughout these three distribution
channels, which are discussed in more detail below.
Full-Price Stores. We operate nine full-price stores consisting of:
Flagship Stores -- We operate three large flagship stores in prime
retail locations in New York, Beverly Hills and Chicago. The three large
flagship stores establish and promote Barneys New York as a pre-eminent retailer
of men's and women's fashion. These stores offer customers a wide variety of
merchandise, including apparel, accessories, cosmetics and items for the home,
catering to affluent, fashion-conscious customers. We also seek to ensure that
the ambience of our flagship stores reflects the luxury and distinct style of
the merchandise that we sell. The flagship stores in New York and Beverly Hills
also include restaurants managed by third-party contractors.
Regional Stores -- We operate three smaller regional stores in the
following locations: Manhasset, NY, Seattle, WA and Chestnut Hill, MA. The three
smaller regional stores, which provide a limited selection of the merchandise
offered in the flagship stores, cater to similar customers as our flagship
stores in more localized markets.
CO-OP Stores -- We operate three smaller CO-OP stores in the
following locations: two in New York City and one in Miami. These free-standing
stores are an extension of the CO-OP departments in our flagship stores and
focus on providing customers with a selection of high-end, contemporary, urban
casual apparel and accessories, often at price points that are slightly lower
than our non-CO-OP merchandise. CO-OP stores provide us with the opportunity to
develop one of our fastest growing merchandise categories in a less capital
intensive manner, relative to our other full-price stores. These stores give us
the opportunity to enter new markets and expand in our existing markets while
broadening our client base by targeting the younger designer customer. In
addition, since we will be attracting our Barneys customer earlier in their life
cycle, we also believe this format can serve as the initial entree for the
shopper who will ultimately develop into our regional and flagship store
customers. Similar to our CO-OP departments, our CO-OP stores offer merchandise
from established and emerging designers, as well as our Barneys label.
Outlet Stores. We operate twelve outlet stores across the country. The outlet
stores leverage the Barneys New York brand to reach a wider audience by
providing a lower priced version of the sophistication, style and quality of the
retail experience provided in the full-price stores. These stores, which
typically operate with a low cost structure, also provide a clearance vehicle
for residual merchandise from the full-price stores. The outlet stores, which
sell designer and Barneys label apparel and accessories, serve budget-minded yet
fashion-conscious customers. They are located in high-end outlet centers and
serve a high number of destination shoppers and tourists.
Warehouse Sale Events. We operate four warehouse sale events annually, one each
spring and fall season in both New York and Santa Monica, California. The
warehouse sale events provide another vehicle for liquidation of end of season
residual merchandise, as well as a low cost extension of the Barneys New York
brand to a wider audience. The events attract a wide range of shoppers, mostly
bargain hunters who value quality and fashion.
4
LICENSING ARRANGEMENTS
BNY Licensing Corp., a wholly-owned subsidiary of Barneys, is party to licensing
arrangements pursuant to which:
o two retail stores are operated in Japan and a single in-store
department is operated in Singapore under the name "Barneys New York,"
each by an affiliate of Isetan Company Limited; and
o Barneys Asia Co. LLC, which is 70% owned by BNY Licensing and 30%
owned by an affiliate of Isetan, has the exclusive right to sublicense
the Barneys New York trademark throughout Asia, excluding Japan.
These arrangements were established, under the plan of reorganization pursuant
to which Barneys emerged from bankruptcy, as part of the settlement of claims
filed by Isetan and its affiliates in the bankruptcy aggregating more than $365
million and pending litigation and arbitration proceedings involving Barneys and
Isetan and its affiliates. With regard to the first licensing agreement, Isetan
was given an assignment of 90% of the annual minimum royalties, pursuant to the
plan of reorganization. The amount of the annual royalty assigned to Isetan
increases each year from $3.2 million for the first twelve months of the
agreement to $5.2 million for the final license year ending in December 2015. As
a result of the assignment, Barneys only receives ten percent (10%) of the total
royalty payable pursuant to the trademark license agreement. As the royalty is
paid in Japanese Yen, Barneys determined the U.S. dollar equivalent of the
royalty as of January 31, 2004 using a conversion rate of 105.8. For a
description of the terms of the licensing arrangements, see note 7 to our
audited consolidated financial statements.
TRADEMARKS AND SERVICE MARKS
We own our trademarks and service marks, including the "Barneys New York" and
"Barneys" marks. Our trademarks and service marks are registered in the United
States and some countries in Asia. The term of these registrations is generally
ten years, and they are renewable for additional ten-year periods indefinitely,
so long as the marks are still in use at the time of renewal. We are not aware
of any claims of infringement or other challenges to our right to register or
use our marks in the United States. We regard our trademarks and service marks
as valuable assets in the marketing of our products and take appropriate action
when necessary to protect them.
SEASONALITY
The specialty retail industry is seasonal in nature, with a high proportion of
sales and operating income generated in the November and December holiday
season. As a result, our operating results are significantly affected by the
holiday selling season. Seasonality also affects working capital requirements,
cash flow and borrowings as inventories build in September and peak in October
in anticipation of the holiday selling season. Our dependence on the holiday
selling season is mitigated by the sales and income generated by our warehouse
sale events held in February and August.
The following table sets forth net sales and net income (loss) for the fiscal
years ended January 31, 2004 and February 1, 2003. This quarterly financial data
is unaudited but gives effect to all adjustments necessary, in the opinion of
Barneys' management, to present fairly this information.
5
FISCAL 2003 - QUARTER ENDED FISCAL 2002 - QUARTER ENDED
---------------------------------------------- -------------------------------------------------
($ in thousands) 5/3/03 8/2/03 11/1/03 1/31/04 5/4/02 8/3/02 11/2/02 2/1/03
----------- ----------- ---------- ----------- ---------- ----------- ------------ -------------
Net sales $91,385 $88,707 $111,893 $ 117,492 $92,475 $81,603 $103,299 $ 105,986
As % of period 22% 22% 27% 29% 24% 21% 27% 28%
Net (loss) income (1,210) (2,102) 4,141 6,311 478 (439) 2,877 5,550
=========== =========== ========== =========== ========== =========== ============ =============
COMPETITION
The retail industry, in general, and the upscale retail apparel business, in
particular, are intensely competitive. Competition is strong for customers,
sales and vendor resources.
Generally, our flagship, regional and CO-OP stores compete with both specialty
stores and department stores, while our outlet stores and warehouse sale events
compete with off-price and discount stores, in the geographic areas in which
they operate. Several department store, specialty store, and vendor store
competitors also offer catalog and more extensive internet shopping that also
compete with us.
We compete for customers principally on the basis of quality, fashion,
assortment and presentation of merchandise, customer service, marketing and, at
times, store ambiance. In our luxury retail business, merchandise assortment is
a critical competitive factor, and retail stores compete for exclusive,
preferred and limited distribution arrangements with key designers. In addition,
we face increasing competition from our designer resources, which have
established or expanded their market presence with their own dedicated stores.
Some of the retailers with which we compete have substantially greater financial
resources than we have and may have other competitive advantages over us.
MERCHANDISING
In addition to selling the products of a number of leading designers, including
Giorgio Armani, Manolo Blahnik, Marc Jacobs, Prada, Jil Sander and Ermenegildo
Zegna, we also offer a diverse selection of unique, Barneys label merchandise
(primarily under the "Barneys New York" and "CO-OP" labels). In the fiscal year
ended January 31, 2004, our ten top designers (including all brands owned by
those designers) accounted for approximately 27% of our total sales, and our two
top designers (including all brands owned by those designers) accounted for
approximately 10% and 4%, respectively, of our total sales. If one or more of
our top designers were to cease providing us with adequate supplies of
merchandise, our business might, in the short term, be adversely affected.
However, management believes that alternative supply sources exist to fulfill
our requirements in the event of a disruption. In addition, if one or more of
our top designers were to increase sales of merchandise through its own stores
or to the stores of our competitors, our business could be materially adversely
affected.
EMPLOYEES
As of January 31, 2004, we employed approximately 1,400 people. Our staffing
requirements fluctuate during the year as a result of the seasonality of the
retail apparel industry, and we add approximately 200 employees during the
holiday selling season. Approximately 500 of our employees are represented by
unions, and we believe that overall our relationship with our employees and
these unions is good. During our more than fifty-year relationship with unions
representing our employees, we have never been subjected to a strike or work
stoppage.
6
GOVERNMENT REGULATION
Our proprietary credit card operations, as well as those of third-party credit
card providers, are subject to numerous federal and state laws, including laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts and limitations on the maximum amount of
finance charges that may be charged by a credit provider. Any change in these
regulations that would materially limit the availability of credit to our
customers could adversely affect our business, financial condition and results
of operations. Our practices, as well as our competitors' practices, are also
subject to review in the ordinary course of business by the Federal Trade
Commission. We believe that we are currently in material compliance with all
applicable state and federal regulations.
Additionally, we are subject to certain customs, truth-in-advertising and other
laws, including consumer protection regulations and zoning and occupancy
ordinances, that regulate retailers generally and/or govern the importation,
promotion and sale of merchandise and the operation of retail stores and
warehouse facilities. We undertake to monitor changes in these laws and believe
that we are in material compliance with applicable laws with respect to these
practices.
AVAILABLE INFORMATION
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports are available
free of charge through our website at www.Barneys.com as soon as reasonably
practicable after such material is electronically filed with or furnished to the
Securities and Exchange Commission. Also, copies of the Company's annual report
on Form 10-K will be made available, free of charge, upon written request.
7
ITEM 2. PROPERTIES
Our principal facilities include corporate offices, a central alterations
facility, a distribution center and three flagship stores. We lease all of our
facilities. All of our flagship stores are leased under long-term leases, with
initial terms ranging from ten to twenty years with multiple ten-year renewal
options. The following table lists the location, type, and approximate gross and
selling square footage of each of our facilities as of January 31, 2004:
APPROXIMATE APPROXIMATE
GROSS SELLING
LOCATION TYPE SQUARE FEET SQUARE FEET
-------- ---- ----------- -----------
New York, NY................................... Corporate Offices 46,000 --
New York, NY................................... Central Alterations Facility 32,968 --
Lyndhurst, NJ.................................. Distribution Center 180,000 --
New York, NY................................... Flagship Store 240,000 113,920
Beverly Hills, CA.............................. Flagship Store 120,000 60,671
Chicago, IL.................................... Flagship Store 50,000 21,913
Manhasset, NY.................................. Regional Store 19,052 12,646
Chestnut Hill, MA.............................. Regional Store 6,234 4,165
Seattle, WA.................................... Regional Store 11,113 6,406
New York, NY (Wooster Street).................. CO-OP Store 7,000 3,782
New York, NY (17th Street)..................... CO-OP Store 7,038 5,800
Miami, FL...................................... CO-OP Store 9,038 6,858
Harriman, NY................................... Outlet Store 9,576 7,468
Cabazon, CA.................................... Outlet Store 7,026 4,930
Camarillo, CA.................................. Outlet Store 7,500 5,471
Clinton, CT.................................... Outlet Store 7,525 4,898
Riverhead, NY.................................. Outlet Store 7,500 5,077
Wrentham, MA................................... Outlet Store 7,500 5,012
Waikele, HI.................................... Outlet Store 6,295 4,766
Carlsbad, CA................................... Outlet Store 7,500 4,969
Napa Valley, CA................................ Outlet Store 5,500 3,877
Orlando, FL.................................... Outlet Store 6,000 3,965
Allen, TX...................................... Outlet Store 7,000 4,801
Leesburg, VA................................... Outlet Store 6,000 4,224
We also license, on a short-term basis, facilities for our semi-annual Santa
Monica, CA warehouse sale events. We believe that all of our facilities are
suitable and adequate for the current and anticipated conduct of our operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings which are routine and
incidental to the conduct of our business. Management believes that none of
these proceedings, if determined adversely to us, would have a material effect
on our financial condition or results of operations.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF HOLDINGS
Set forth below are the names, ages, positions and business backgrounds of all
of the executive officers of Holdings. Except as otherwise indicated, each
executive officer has held his current position for the past five years.
NAME AGE AT JANUARY 31, 2004 POSITION
- ---- ----------------------- -------------------------------------------------
Howard Socol.................... 58 Chairman, President and Chief Executive Officer
Judith Collinson................ 52 Executive Vice President-- Women's Merchandising
Thomas Kalenderian.............. 46 Executive Vice President-- Men's Merchandising
Marc H. Perlowitz............... 49 Executive Vice President-- General Counsel and
Human Resources,Secretary
Karl Hermanns................... 39 Executive Vice President-- Operations
Michael Celestino............... 47 Executive Vice President-- Store Operations
Steven M. Feldman............... 40 Executive Vice President and Chief Financial Officer
David New....................... 47 Executive Vice President-- Creative Services
Vincent Phelan.................. 38 Senior Vice President-- Treasurer
Howard Socol has been the Chairman, President and Chief Executive Officer of
Holdings since January 8, 2001. Mr. Socol was the Chief Executive Officer of J.
Crew Group, Inc., a retailer of women's and men's apparel, shoes and
accessories, from February 1998 through January 1999. From 1969 to 1997, Mr.
Socol served in various management positions at Burdines, a division of
Federated Department Stores, Inc., becoming President in 1981 and Chairman and
Chief Executive Officer in 1984, a position he held until his retirement in
1997. Mr. Socol is also a director of Liz Claiborne Inc.
Judith Collinson started with Barneys in 1989 as an Accessories Buyer. Prior to
her current position, she had been responsible for Accessories and Private Label
Collections. She was promoted to Executive Vice President and General
Merchandising Manager for all women's merchandising in May 1998. Ms. Collinson
is also responsible for women's shoes and cosmetics.
Thomas Kalenderian has been at Barneys for 23 years. His responsibilities have
increased over time until he was promoted to Executive Vice President and
General Merchandising Manager for all men's merchandising in July 1997. Mr.
Kalenderian is responsible for developing and implementing menswear strategy and
manages many of the key vendor relationships for the menswear, children's and
gifts for the home businesses.
Marc H. Perlowitz joined Barneys in September 1985. He was promoted to Executive
Vice President, General Counsel and Human Resources of Barneys in October 1997.
Mr. Perlowitz' responsibilities include direct responsibility for all legal
matters of Holdings and its affiliates. He is responsible for Human Resources
which includes compensation, benefits, labor relations, training, recruiting,
employee policies and procedures and company communications. He is also
responsible for real estate and risk management.
Karl Hermanns has been with Barneys since July 1996 and previously was
responsible for Financial and Strategic Planning. During his tenure, he has
assumed other responsibilities and is currently responsible for Marketing,
Merchandise Planning, Management Information Systems, Distribution, Imports and
our Central Alterations department. Mr. Hermanns was promoted to Executive Vice
President in February 2000. Prior to joining Barneys, Mr. Hermanns spent 10
years with Ernst & Young LLP in their audit and corporate finance practices.
9
Michael Celestino has been with Barneys since November 1991 and has served in a
number of store operations capacities during that period. Mr. Celestino is
currently responsible for all store operations including full-price stores,
outlet stores and our warehouse sale events. He was promoted to Executive Vice
President in February 2000.
Steven M. Feldman has been with Barneys since May 1996 when he joined as
Controller. During his tenure he assumed additional responsibilities and was
appointed as Chief Financial Officer in May of 1999. Prior to joining Barneys,
Mr. Feldman was a Senior Manager at Ernst & Young LLP principally serving retail
engagements. Mr. Feldman was promoted to Executive Vice President in March 2000.
David New has been with Barneys since 1992 when he joined as Men's Display
Manager of the 17th Street store in New York City. Mr. New's responsibilities
have increased over time and in March of 2000 he was promoted to Executive Vice
President -- Creative Services. In that capacity, Mr. New is responsible for
Store Design, Display, Advertising and Publicity.
Vincent Phelan has been with Barneys since August 1995 when he joined as
Director of Finance. Prior to joining Barneys, Mr. Phelan was the Deputy
Director of Finance at the United States Tennis Association, Inc. in White
Plains, NY from January 1993 to July 1995. Mr. Phelan was promoted to Vice
President -- Treasurer in January 1999 and Senior Vice President in March 2000.
Mr. Phelan is a certified public accountant and is responsible for financial
planning and analysis, cash management, banking relations, taxes and facilities.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Holdings common stock is quoted on the Nasdaq Over-The-Counter Bulletin Board
service under the symbol "BNNY." Holdings common stock is only traded on a
limited or sporadic basis and there is no established public trading market for
such common stock. The following table sets forth the reported high and low bid
prices of Holdings common stock on the Nasdaq Over-The-Counter Bulletin Board
service for each fiscal quarter during the period from February 3, 2002 through
January 31, 2004. The quotations listed below reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
HIGH BID LOW BID
-------- -------
FISCAL YEAR ENDED FEBRUARY 1, 2003:
First Quarter (February 3, 2002 - May 4, 2002)............. $ 5.40 $ 1.50
Second Quarter (May 5, 2002 - August 3, 2002).............. 3.90 3.01
Third Quarter (August 4, 2002 - November 2, 2002).......... 3.55 2.65
Fourth Quarter (November 3, 2002 - February 1, 2003)....... 4.26 3.00
FISCAL YEAR ENDED JANUARY 31, 2004:
First Quarter (February 2, 2003 - May 3, 2003)............. 5.50 3.80
Second Quarter (May 4, 2003 - August 2, 2003).............. 6.50 4.49
Third Quarter (August 3, 2003 - November 1, 2003).......... 6.05 5.00
Fourth Quarter (November 2, 2003 - January 31, 2004)....... 10.25 5.50
HOLDERS
As of April 23, 2004, there were 888 holders of record of Holdings common stock.
DIVIDENDS
The terms of the indenture governing Barney's, Inc.'s 9.000% Senior Secured
Notes and our credit facility restrict the ability of Barney's, Inc. to make
distributions to Holdings and, consequently, restrict the ability of Holdings to
pay dividends on shares of Holdings common stock. In addition, the guarantee by
Holdings of the credit facility prohibits Holdings from declaring dividends on
shares of its capital stock, with the exception of dividends payable to holders
of shares of Holdings preferred stock. Holdings has no present intention to
declare dividends on shares of its common stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated historical financial data set forth in the table below
as of and for each of the five fiscal years in the period ended January 31,
2004, are derived from our consolidated financial statements for such periods.
11
The selected consolidated historical financial data should be read in
conjunction with the financial statements and the related notes and other
information contained elsewhere in this Form 10-K, including information set
forth herein under "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FISCAL FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Net Sales.......................... $ 409,477 $ 383,363 $ 371,169 $ 404,321 $ 366,802
Gross Profit....................... 187,981 179,348 162,324 187,596 173,515
Selling, General and Administrative
Expenses (including occupancy
expenses)(1).................... 159,364 154,813 154,818 161,523 152,445
Depreciation and
Amortization(2)................. 11,531 10,760 18,802 18,027 17,440
Other Income-- Net(3).............. (5,872) (6,327) (6,957) (4,833) (4,355)
Interest and Financing Costs, Net of
Interest Income................. 15,143 11,036 10,393 11,723 12,968
Income Taxes....................... 675 600 439 546 363
Net Income (Loss).................. 7,140 8,466 (15,171) 610 (5,346)
Basic Earnings (Loss) Per Share.... $ 0.51 $ 0.61 $ (1.09) $ 0.04 $ (0.42)
Diluted Earnings (Loss) Per Share.. $ 0.50 $ 0.61 $ (1.09) $ 0.04 $ (0.42)
SELECTED OPERATING DATA:
Comparable Store Net Sales Increase
(Decrease) (4).................. 6.2% 2.9% (7.7)% 9.7% 9.0%
Number of Stores................... 21 20 19 18 16
OTHER FINANCIAL DATA:
EBITDA(5).......................... $ 34,489 $ 30,862 $ 14,463 $ 30,906 $ 25,425
Net Cash Provided by Operating Activities 25,272 14,141 14,011 23,042 15,005
Net Cash Used in Investing
Activities........................ 9,036 10,882 11,369 6,256 3,585
Capital Expenditures............... 9,036 11,082 11,982 8,499 6,224
Net Cash Used in Financing
Activities........................ 7,781 6,983 9,176 9,750 7,911
BALANCE SHEET DATA:
Cash and Cash Equivalents.......... $ 15,566 $ 7,111 $ 10,835 $ 17,369 $ 10,333
Fixed Assets at Cost, Less Accumulated
Depreciation and Amortization... 47,769 50,463 50,141 48,170 48,974
Total Assets....................... 318,600 301,793 296,980 323,859 324,482
Total Debt......................... 90,536 75,956 81,048 89,315 105,915
Redeemable Preferred Stock......... 500 500 500 500 500
Total Stockholders' Equity......... 165,792 155,584 146,622 161,793 153,996
- ----------
(1) Selling, General and Administrative Expenses for the fiscal year ended
February 3, 2001 include the benefit of a $1.5 million reversal of a
Predecessor Company liability favorably settled in that fiscal year.
(2) In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
beginning in the fiscal year ended February 1, 2003, we stopped amortizing
our excess reorganization value. Amortization of excess reorganization
value was approximately $8.8 million, $8.7 million and $8.8 million in the
fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000,
respectively.
(3) Other Income -- Net primarily includes finance charge income generated from
our proprietary credit card operations. Other Income -- Net for the fiscal
year ended February 2, 2002 includes a gain of $926,000 related to
insurance recoveries associated with the loss of one of our stores due to
the September 11 events and the benefit of a $913,000 reversal of a
12
Predecessor Company liability favorably settled in that fiscal year. Other
Income -- Net for the fiscal year ended February 1, 2003 includes a gain of
$523,000 related to additional insurance recoveries associated with the
loss of one of our stores in the prior fiscal year due to the September 11
events and the benefit of a $400,000 gain from the sale of a trademark.
Other Income - Net for the fiscal year ended January 31, 2004 includes
$750,000 representing the receipt of the first of two equal payments
pursuant to the first amendment of the trademark license agreement with
Isetan (see note 7 to our consolidated financial statements).
(4) All stores that are open as of the beginning and end of the pertinent
fiscal periods, regardless of relocation or expansion of existing square
footage, are considered to be comparable stores for purposes of determining
the comparable net store sales increases (decreases). All stores closed
during a fiscal period are excluded from the determination of the
comparable net store sales increases (decreases) effective with the date of
closing.
(5) EBITDA for each period represents the sum of (a) the respective amounts of
Net Income (Loss) set forth above for that period and (b) the respective
amounts of Interest and Financing Costs, Net of Interest Income, Income
Taxes and Depreciation and Amortization. The following table reconciles Net
Income (Loss) to EBITDA:
FISCAL FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
($ IN THOUSANDS)
Net Income (Loss)................ $ 7,140 $ 8,466 $ (15,171) $ 610 $ (5,346)
Interest and Financing Costs, Net of
Interest Income............... 15,143 11,036 10,393 11,723 12,968
Income Taxes..................... 675 600 439 546 363
Depreciation and
Amortization.................. 11,531 10,760 18,802 18,027 17,440
------------- ------------- ------------- ------------- -------------
EBITDA........................... $ 34,489 $ 30,862 $ 14,463 $ 30,906 $ 25,425
============= ============= ============= ============= =============
EBITDA is not an alternative measure of operating results or cash
flows from operations, as determined in accordance with accounting
principles generally accepted in the United States. We have included
EBITDA because we believe it is an indicative measure of our
operating performance and our ability to meet our debt service
requirements and is used by investors and analysts to evaluate
companies in our industry. EBITDA is also a measure utilized in a
covenant contained in our credit facility and in a covenant in the
indenture governing the 9.000% senior secured notes that limits our
ability to incur indebtedness.
As presented by us, EBITDA may not be comparable to similarly titled
measures reported by other companies. EBITDA should be considered in
addition to, not as a substitute for, operating income, net (loss)
income, cash flow and other measures of financial performance and
liquidity reported in accordance with accounting principles generally
accepted in the United States. In addition, a substantial portion of
our EBITDA must be dedicated to the payment of interest on our
indebtedness and to service other commitments, thereby reducing the
funds available to us for other purposes. Accordingly, EBITDA does
not represent an amount of funds that is available for management's
discretionary use. See "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations."
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a leading upscale retailer of men's, women's and children's apparel and
accessories and items for the home. We provide our customers with a wide variety
of merchandise across a broad range of prices, including a diverse selection of
Barneys label merchandise.
Barneys consummated a plan of reorganization under Chapter 11 of the Bankruptcy
Code on January 28, 1999. Pursuant to the plan, Holdings was formed and all the
equity interests in Barney's, Inc. were transferred to Holdings, making
Barney's, Inc. a wholly-owned subsidiary of Holdings. Holdings has no
independent operations and its primary asset consists of shares of Barney's,
Inc.
OVERVIEW
Overall, the fiscal 2003 operating results reflect our continued focus on
driving sales, controlling expenses, providing exceptional customer service and
executing key merchandising initiatives. Strong sales growth in the last three
quarters of the year were bolstered, to an extent, by a recovery in the luxury
sector, driven in part by stronger financial markets and consumer confidence. In
contrast, first quarter comparable store sales results were negatively impacted
by unusually harsh weather in the Northeast, as well as other external factors
including the threat of war in Iraq, continued weakness in the economy and soft
financial markets.
During the year, we continued to focus on improving sales productivity within
our existing stores by continuing to reconfigure and reallocate existing selling
space to more productive merchandise categories or by creating additional
selling space by recapturing "non-productive" space. In addition, we sought to
grow our sales by strategically increasing the breadth and depth of our product
offerings of our new or established brands. We continued the roll-out of our
CO-OP stores with the opening of our third free-standing store in Miami in
September 2003 and we also re-launched the Barneys.com website, which includes
information about the Company and an e-tailing component featuring a limited
assortment of merchandise. Our comparable store sales growth of approximately
10% in the fourth quarter helped us end the year with a record sales
performance. Sales in fiscal 2003 continued to be positively impacted by
additional direct mail and print marketing campaigns, particularly in the fourth
quarter which included the production of our largest holiday mailer to date.
Sales efforts during that important holiday selling season were also supported
with the addition of extra selling associates in our stores to appropriately
service our customers.
GENERAL
Comparable Store Net Sales. We determine comparable store net sales increases or
decreases using the net sales of all stores that are open as of the beginning
and end of the pertinent fiscal period, regardless of store relocation or
expansion of existing square footage. Net sales of all stores closed during a
fiscal period are excluded from the determination of the comparable net store
sales increases (decreases) effective with the date of closing.
Expense classification. Cost of sales includes the cost of merchandise sold as
well as costs associated with the purchase of that merchandise, primarily
including inbound freight and duty costs, buying agent costs, foreign exchange
gains and losses on settlement of foreign denominated purchases, sample costs
and label costs. All other expenses, except depreciation and amortization,
interest and income taxes, but including internal transfer costs and warehousing
and distribution expenses, are included in selling, general and administrative
expenses, because the predominant costs associated with these expenses, most
notably occupancy costs and personnel costs, are general and administrative in
nature. Based on these classifications, our gross margins may not be comparable
to those of other entities, since some entities include the costs related to
their distribution network and retail store rent expenses in cost of sales,
whereas others, like us, exclude these costs from gross margin, including them
instead in selling, general and administrative expenses.
14
RESULTS OF OPERATIONS
The following table includes earnings before Interest and Financing Costs, Net
of Interest Income, Income Taxes and Depreciation and Amortization (or EBITDA)
as a percentage of Net Sales and also includes Net Income (Loss) as a percentage
of Net Sales. EBITDA is not an alternative measure of operating results or cash
flows from operations, as determined in accordance with accounting principles
generally accepted in the United States. We have included EBITDA because we
believe it is an indicative measure of our operating performance and our ability
to meet our debt service requirements and is used by investors and analysts to
evaluate companies in our industry. EBITDA is also a measure utilized in a
covenant contained in our credit facility and in a covenant in the indenture
governing the 9.000% senior secured notes that limits our ability to incur
indebtedness. As presented by us, EBITDA may not be comparable to similarly
titled measures reported by other companies. EBITDA should be considered in
addition to, not as a substitute for, operating income, net income (loss), cash
flow and other measures of financial performance and liquidity reported in
accordance with accounting principles generally accepted in the United States.
In addition, a substantial portion of our EBITDA must be dedicated to the
payment of interest on our indebtedness and to service other commitments,
thereby reducing the funds available to us for other purposes. Accordingly,
EBITDA does not represent an amount of funds that is available for management's
discretionary use.
FISCAL YEAR ENDED
------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
-------- -------- --------
Net Sales........................................................................ 100.0% 100.0% 100.0%
Cost of Sales.................................................................... 54.1 53.2 56.3
-------- -------- --------
Gross Profit..................................................................... 45.9 46.8 43.7
Selling, General and Administrative Expenses (Including
Occupancy Expenses).......................................................... 38.9 40.4 41.7
Other Income-- Net(1)............................................................ (1.4) (1.7) (1.9)
-------- -------- --------
Earnings before Interest and Financing Costs, Net of
Interest Income, Income Taxes and Depreciation
and Amortization (EBITDA) (2)................................................ 8.4 8.1 3.9
Interest and Financing Costs, Net of Interest Income,
Income Taxes and Depreciation and Amortization................................ 6.7 5.9 8.0
-------- -------- --------
Net Income (Loss)................................................................ 1.7% 2.2% (4.1)%
======== ======== ========
- ----------------------
(1) Other Income -- Net primarily includes finance charge income generated from
our proprietary credit card operations. Other Income -- Net for the fiscal
year ended February 2, 2002 also includes a gain of $926,000 related to
insurance recoveries associated with the loss of one of our stores due to
the September 11 events and the benefit of a $913,000 reversal of a
Predecessor Company liability favorably settled in that fiscal year. Other
Income -- Net for the fiscal year ended February 1, 2003 also includes a
gain of $523,000 related to additional insurance recoveries associated with
the loss of one of our stores in the prior fiscal year due to the September
11 events and the benefit of a $400,000 gain from the sale of a trademark.
Other Income - Net for the fiscal year ended January 31, 2004 includes
$750,000 representing the receipt of the first of two equal payments
received pursuant to the first amendment of the trademark license agreement
with Isetan (see note 7 to our consolidated financial statements).
15
(2) EBITDA as a percentage of net sales for each period represents the sum of
(a) the respective amounts of Net Income (Loss) set forth above for such
period plus (b) the respective amounts of Interest and Financing Costs, Net
of Interest Income, Income Taxes and Depreciation and Amortization for such
period. The following table reconciles Net Income (Loss) as a percentage of
net sales to EBITDA as a percentage of net sales:
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
-------- -------- --------
Net Income (Loss)................................................................ 1.7% 2.2% (4.1)%
Plus
Interest and Financing Costs, Net of Interest Income............................. 3.7 2.9 2.8
Income Taxes..................................................................... 0.2 0.2 0.1
Depreciation and Amortization.................................................... 2.8 2.8 5.1
-------- -------- --------
EBITDA........................................................................... 8.4% 8.1% 3.9%
======== ======== ========
FISCAL YEAR ENDED JANUARY 31, 2004 COMPARED TO FISCAL YEAR ENDED FEBRUARY 1,
2003
Net sales for the fiscal year ended January 31, 2004 were $409.5 million
compared to $383.4 million for the fiscal year ended February 1, 2003, an
increase of 6.8%. Comparable store sales increased approximately 6.2% in the
fiscal year ended January 31, 2004. Net sales for the fiscal year ended January
31, 2004 benefited from increased full-price sales as compared to the prior year
and particularly benefited from strong third and fourth quarter sales.
Gross profit on sales increased 4.8% to $188.0 million in the fiscal year ended
January 31, 2004 from $179.3 million in the fiscal year ended February 1, 2003.
The continued weak US Dollar put pressure on gross margin throughout the year.
Among other things, improved full-price selling in fall 2003 helped reduce our
annual markdown expense and at least partially offset the margin erosion caused
by the deterioration in our initial markup. While we attempt to hedge a
significant portion of our exposure related to foreign denominated purchases, we
expect that the continued weakness in the US Dollar, relative to the Euro, will
continue to put pressure on our gross profit. The more significant components
impacting the increase in our gross margin are the following: the sales increase
discussed above, which improved our gross profit by approximately $10.0 million;
decreased promotional selling, which improved our gross profit by approximately
$1.5 million; reduced initial mark-up and foreign exchange losses (driven by the
weak US dollar) on settlement of foreign denominated purchases, unfavorably
impacted our gross profit by approximately $3.5 million; an increase in our
actual and estimated inventory shortage unfavorably impacted our gross profit by
approximately $700,000; the reversal of an accrual no longer considered
necessary favorably impacted our gross profit by approximately $600,000; and the
implementation of EITF 02-16 favorably impacted our gross profit by
approximately $1.3 million. As a percentage of net sales, gross profit was 45.9%
in the fiscal year ended January 31, 2004, compared to 46.8% in the fiscal year
ended February 1, 2003.
Selling, general and administrative expenses, including occupancy expenses, were
$159.4 million in the fiscal year ended January 31, 2004, compared to $154.8
million for the fiscal year ended February 1, 2003. As a percentage of sales,
selling, general and administrative expenses declined to 38.9% in fiscal 2003
from 40.4% in the prior fiscal year.
In the fiscal year ended January 31, 2004, personnel and related costs increased
in the aggregate by approximately $1.9 million. This increase principally
relates to raises, higher variable costs associated with the sales increases
discussed above and higher employee benefit costs. The Company's benefit costs
were generally higher in fiscal 2003 as compared to the prior year which
included an approximate $800,000 benefit for a concession received by the
16
Company related to a renegotiated collective bargaining agreement. Other than
personnel related costs, some of the other variable expenses which increased as
a result of the higher sales volume were costs associated with our settlement of
third party credit card transactions and our proprietary credit card loyalty
program. These two expenses increased approximately $750,000, in the aggregate,
versus the year ago period. For the fiscal year, insurance expense increased
approximately $480,000, due primarily to higher premiums, and net occupancy
costs increased approximately $1.4 million, primarily driven by significant
increases in real estate taxes associated with our New York area locations and
the operation of two additional stores. In addition, there were other
individually less significant increases, driven in part by increased sales,
which were partially offset by individually less significant reductions in
various overhead expenses resulting from the Company's continued cost reduction
efforts.
In connection with the provisions of EITF 02-16, for the fiscal year ended
January 31, 2004, the Company recorded approximately $1.3 million of vendor
cooperative advertising contributions as a reduction of cost of sales rather
than a reduction of advertising expense. As a result of this new treatment, net
advertising expense for the full fiscal year is approximately $1.2 million
greater than the year ago period. Excluding the impact of EITF 02-16, our
advertising costs were about flat with last year. This was a combination of
increased advertising costs on a gross basis, offset by an increase in vendor
cooperative advertising contributions.
Other income, net, which principally includes finance charge income generated by
our proprietary credit card operations, decreased 7.2% in the fiscal year ended
January 31, 2004 to $5.9 million from $6.3 million in the fiscal year ended
February 1, 2003. Other income in the fiscal year ended January 31, 2004
includes $750,000 representing the first of two payments pursuant to the first
amendment of the trademark license agreement with Isetan (see note 7 to our
consolidated financial statements). The fiscal year ended February 1, 2003 also
includes gains of $523,000 related to the final insurance recoveries associated
with the loss of one of our stores in the fiscal year ended February 2, 2002 due
to the September 11 events and approximately $400,000 related to the assignment
of a subsidiary's interest in a trademark unrelated to our business.
Depreciation and amortization expense increased in the fiscal year ended January
31, 2004 to $11.5 million from $10.8 million in the fiscal year ended February
1, 2003 principally as a result of the additional depreciation related to the
capital projects completed over the last couple of years, principally in the
Company's Madison Avenue flagship store
Interest expense, net increased 37.2% in the fiscal year ended January 31, 2004
to $15.1 million from $11.0 million a year ago, principally as a result of the
increased cost of capital associated with Barney's, Inc.'s senior notes issued
on April 1, 2003. The Company's dependence on borrowings from its credit
facility are largely seasonal in nature, especially with the new long-term debt
in place. Accordingly, average borrowings under the credit facility for the
fiscal year ended January 31, 2004 declined to $8.2 million from $30.7 million
in the fiscal year ended February 1, 2003.
We continue to have significant net operating losses available to us to offset
future taxable earnings. In the current year, we were able to partially reduce
our deferred tax asset valuation allowance primarily as a result of the
significant increase in our deferred tax liabilities principally related to
fixed asset depreciation. For the most part, the reported taxes were not based
on income. Rather they relate principally to state franchise and capital taxes
and foreign taxes associated with the receipt of royalty payments from Japan. As
a result, currently, there is no consistent correlation between the amount of
income and the amount of taxes reported. As a percentage of our income, this tax
expense will decrease with an increase in income and increase with a decrease in
income. Our effective tax rate for the years ended January 31, 2004 and February
1, 2003 was 12.0% and 7.0%, respectively.
17
Our net income for the fiscal year ended January 31, 2004 was $7.1 million
compared with $8.5 million for the fiscal year ended February 1, 2003. Basic and
diluted net income per common share was $0.51 and $0.50, respectively, and $0.61
per common share for the fiscal years ended January 31, 2004 and February 1,
2003, respectively.
FISCAL YEAR ENDED FEBRUARY 1, 2003 COMPARED TO FISCAL YEAR ENDED FEBRUARY 2,
2002
We returned to profitability in the fiscal year ended February 1, 2003, despite
a continued weak economy and retail sector. Our operating results for the fiscal
year ended February 2, 2002 reflect the impact of a weak economy exacerbated by
the events of September 11, 2001. The business disruption caused by the
terrorist attacks and the indirect impact the attacks had on consumer spending
and tourism were significant factors that adversely affected our operating
results for the fiscal year ended February 2, 2002.
Net sales for the fiscal year ended February 1, 2003 were $383.4 million
compared to $371.2 million for the fiscal year ended February 2, 2002, an
increase of 3.3%. Comparable stores sales increased approximately 2.9% in the
fiscal year ended February 1, 2003. Net sales for the fiscal year ended February
1, 2003 benefited from increased full-price sales as compared to the fiscal year
ended February 2, 2002 and particularly benefited from strong third and fourth
quarter sales which had been adversely affected in the prior year by the
business disruption caused by the September 11 events. In addition, in the
fiscal year ended February 1, 2003 sales were positively impacted by, among
other things, continued maximization of retail selling space in our stores,
particularly in our flagship stores, and additional direct mail and print
marketing campaigns throughout the year.
Gross profit on sales increased 10.5% to $179.3 million in the fiscal year ended
February 1, 2003 from $162.3 million in the fiscal year ended February 2, 2002.
This net increase is primarily attributable to the following: the sales increase
discussed above, which improved our gross profit by approximately $5 million;
decreased promotional selling, which improved our gross profit by approximately
$11 million; foreign exchange losses (driven by the weakening US dollar) on
settlement of foreign currency denominated purchases, which impacted our gross
profit by approximately $1 million and decreased inventory shortage, which
improved our gross profit by approximately $1 million. As a percentage of net
sales, gross profit was 46.8% in the fiscal year ended February 1, 2003,
compared to 43.7% in the fiscal year ended February 2, 2002.
Selling, general and administrative expenses, including occupancy expenses, were
$154.8 million in the fiscal year ended February 1, 2003, unchanged from the
fiscal year ended February 2, 2002. In the fiscal year ended February 1, 2003,
personnel and related costs decreased in the aggregate by approximately
$550,000. This net decrease occurred as we offset higher personnel related
costs, particularly related to our bonus program, which was cancelled during the
fiscal year ended February 2, 2002 in the aftermath of the September 11 events,
and higher commission costs in line with higher sales, by approximately $800,000
of savings from a concession related to a renegotiated collective bargaining
agreement and the annualized benefit of the personnel cost reduction measures
implemented in the fiscal year ended February 2, 2002. Various additional
reductions in expenses including packaging, supplies, postage and travel
aggregating approximately $1.9 million primarily reflect the benefit of expense
reduction initiatives implemented in the prior and current fiscal year,
including, among other things, re-bidding products and services, and general
reductions in consumption of products and services, as well as a $400,000
reduction in bad debt expense associated with our proprietary credit card
operations. The above expense reductions were in part offset by higher variable
operating costs commensurate with higher sales, increased advertising costs of
approximately $500,000, increased professional fees of approximately $200,000,
increased insurance premiums of approximately $600,000 and increased occupancy
and related costs of approximately $700,000, principally as a result of higher
real estate taxes and the costs attributed to opening one new CO-OP store in the
period.
18
Other income, net, which principally includes finance charge income generated by
our proprietary credit card operations, decreased 9.1% in the fiscal year ended
February 1, 2003 to $6.3 million from $7.0 million in the fiscal year ended
February 2, 2002. Other income in the fiscal year ended February 1, 2003 and the
fiscal year ended February 2, 2002 also includes gains of $500,000 and $900,000,
respectively, related to insurance recoveries associated with the loss of one of
our stores in the fiscal year ended February 2, 2002 due to the September 11
events. In addition, other income in the fiscal year ended February 1, 2003
includes a gain of approximately $400,000 related to the assignment of a
subsidiary's interest in a trademark unrelated to our business.
Depreciation and amortization expense decreased in the fiscal year ended
February 1, 2003 to $10.8 million from $18.8 million in the fiscal year ended
February 2, 2002. This decrease was due to SFAS No. 142, which first became
effective for the fiscal year ended February 1, 2003, and which eliminated the
mandatory amortization of excess reorganization value.
Interest expense, net increased 6.2% in the fiscal year ended February 1, 2003
to $11.0 million from $10.4 million in the fiscal year ended February 2, 2002,
primarily as a result of our write-off of approximately $600,000 in unamortized
fees associated with the replacement of our prior revolving credit facility in
the second quarter of the fiscal year ended February 1, 2003. Generally,
interest associated with borrowings under our credit facility declined
principally as a result of lower average borrowings. Average borrowings under
the credit facility for the fiscal year ended February 1, 2003 and the fiscal
year ended February 2, 2002 were $30.7 million and $35.2 million, respectively.
We continue to have significant net operating losses available to us to offset
future taxable earnings. In the fiscal year ended February 1, 2003, we were able
to reduce our deferred tax asset valuation allowance primarily as a result of
the significant increase in our deferred tax liabilities principally related to
fixed asset depreciation. The reported state taxes were principally franchise
and capital taxes that, for the most part, are not based on income. As a result,
there is no consistent correlation between the amount of income and the amount
of state taxes reported. As a percentage of our income, this tax expense will
decrease with an increase in income and increase with a decrease in income. Our
effective tax rate for the years ended February 1, 2003 and February 2, 2002 was
7.0% and (3.0)%, respectively.
Our net income for the fiscal year ended February 1, 2003 was $8.5 million
compared to a net loss of $15.2 million for the fiscal year ended February 2,
2002. Basic and diluted net income per common share was $0.61 per common share
for the fiscal year ended February 1, 2003 compared to a $1.09 loss per common
share for the fiscal year ended February 2, 2002.
LIQUIDITY AND CAPITAL RESOURCES
On April 1, 2003, we completed an offering to sell 106,000 units at a price of
$850 per unit, for gross proceeds of $90.1 million. Net proceeds to us were
approximately $81.7 million after deducting commissions, financial advisory fees
and expenses of the offering. We used the net proceeds from the offering to
repay a substantial portion of our outstanding indebtedness, including our
obligations pursuant to our $22.5 million subordinated note, approximately $35.8
million due under our 11 1/2 % promissory notes, the remaining portion of term
loan borrowings and a portion of the revolver loans outstanding under our then
existing credit facility and to pay a substantial portion of our deferred lease
obligations pursuant to our flagship leases.
Upon consummation of this offering, the Company entered into a restated credit
facility which, among other things, reduced the size of the existing credit
facility from $105.0 million to $70.0 million and extended the maturity date to
July 15, 2006. Continued improvements in our operating results, as well as the
partial pay down of amounts outstanding under the then existing credit facility,
enabled the Company to reduce its credit facility by $35.0 million. At January
31, 2004, there were no revolving loans outstanding under the restated credit
facility.
19
CASH PROVIDED BY OPERATIONS AND WORKING CAPITAL
For the reporting periods below, Net Cash Provided by Operating Activities, on a
consolidated basis, was as follows:
FISCAL YEAR ENDED
-------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------- -------------
($ in thousands)
Net Income (Loss) ............................................................... $ 7,140 $ 8,466 $ (15,171)
Depreciation and Amortization.................................................... 15,844 12,020 19,994
Other Non-Cash Charges........................................................... 3,943 2,825 2,667
Changes in Current Assets and Liabilities........................................ (1,655) (9,170) 6,521
------------ ------------- -------------
Net Cash Provided by Operating Activities........................................ $ 25,272 $ 14,141 $ 14,011
============ ============= =============
Net cash provided by operating activities improved over the prior year primarily
as a result of improved operating results and reduced working capital
requirements primarily related to inventory. The Company's primary source of
liquidity has been borrowings under its credit facility, although such reliance
has been lessened with the new long term debt structure resulting from the
senior notes offering and the Company's operating performance.
Our consolidated working capital position at each of the dates shown below was
as follows:
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------- -------------
($ in thousands)
Working Capital.................................................................. $ 58,703 $ 37,547 $ 16,485
Working capital at January 31, 2004 improved over the prior year primarily as a
result of an $8.5 million increase in cash and an $11.0 million reduction in
short term borrowings, largely as a result of our improved operating results and
the debt refinancing completed in April 2003. Working capital at February 1,
2003 improved over the prior year primarily as a result of a $12.7 million
reduction in short term borrowings, largely as a result of our improved
operating results and a $9.9 million increase in inventory. Inventory levels at
February 2, 2002 were unusually low largely as a result of diminished
requirements in the aftermath of the September 11, 2001 terrorist attacks.
For the reporting periods below, Net Cash Used in Financing Activities was as
follows:
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------- -------------
($ in thousands)
Net Cash Used in Financing Activities............................................ $ (7,781) $ (6,983) $ (9,176)
CAPITAL EXPENDITURES
We have principally funded our capital expenditures through a combination of
borrowings under our prior credit facilities and the use of cash received in
connection with the exercise of options and warrants in prior years.
20
During the fiscal year ended January 31, 2004, we incurred capital expenditures
of approximately $9.0 million. Of the total capital expenditures, $5.4 million
was spent on leasehold improvements, $2.9 million was spent on furniture,
fixtures and equipment and $700,000 was spent on management information systems,
including new point-of-sale registers. During the fiscal year ended February 1,
2003, we incurred capital expenditures of approximately $11.1 million. Of the
total capital expenditures, $5.8 million was spent on leasehold improvements,
$3.2 million was spent on furniture, fixtures and equipment and $2.1 million was
spent on management information systems, including new point-of-sale registers.
During the fiscal year ended February 2, 2002, we incurred capital expenditures
of approximately $12.3 million, without giving effect to approximately $400,000
of offsetting construction allowances which we received from our landlords. Of
the total capital expenditures, $6.9 million was spent on leasehold
improvements, $2.8 million was spent on furniture, fixtures and equipment and
$2.6 million was spent on management information systems, including new point of
sale registers. A significant portion of the amounts spent in each fiscal year
pertained to building out and reconfiguring existing retail space and/or new
store openings. The management information systems capital expenditures for the
fiscal years ended February 1, 2003 and February 2, 2002, relate primarily to
the upgrade and replacement of all point-of-sale registers in our stores which
occurred during the two fiscal years which ended on February 1, 2003.
The amount of capital expenditures that we make in any year depends on a number
of factors, including general economic conditions. Pursuant to the covenants
contained in our restated credit facility, our total capital expenditures for
the fiscal year ended January 31, 2004 were established at a base level of $10.0
million subject to permitted adjustments. We currently estimate that capital
expenditures for the fiscal year ending January 29, 2005, including permitted
carryover amounts from the prior year, will be approximately $13.5 million,
consisting of approximately $8.1 million for leasehold improvements,
approximately $4.4 million for furniture, fixtures and equipment, and
approximately $1.0 million for management information systems.
SENIOR NOTES ISSUANCE
On April 1, 2003, we completed an offering to sell 106,000 units at a price of
$850 per unit, for gross proceeds of $90.1 million. Each unit consisted of
$1,000 principal amount at maturity of 9.000% senior secured notes due April 1,
2008 of Barney's, Inc., a wholly-owned subsidiary of Holdings, and one warrant
to purchase 3.412 shares of common stock of Holdings at an exercise price of
$0.01 per share. Net proceeds to us were approximately $81.7 million after
deducting commissions, financial advisory fees and estimated expenses of the
offering. These commissions, fees and expenses of approximately $8.4 million
were deferred, are included in other assets, and are being amortized to interest
expense over the term of the notes.
We used the net proceeds from the offering to repay a substantial portion of our
outstanding indebtedness at the time, including our obligations pursuant to our
$22.5 million subordinated note, approximately $35.8 million due under our 11
1/2 % promissory notes, the remaining portion of term loan borrowings and a
portion of the revolver loans outstanding under our then existing credit
facility and to pay a substantial portion of the Company's deferred lease
obligations. Other than the amounts outstanding pursuant to the existing credit
facility, the outstanding indebtedness and deferred lease obligations had
original scheduled maturities of January 28, 2004.
As part of the offering process, we requested a rating on the 9.000% senior
secured notes. Standard and Poor's assigned a rating of B- and Moody's assigned
a rating of B3.
21
In connection with the offering, we entered into a restated credit facility, as
more fully described below. The restated credit facility and its related
guarantees are secured by a first-priority lien on substantially all of our
assets, other than real property leaseholds. The 9.000% senior secured notes are
guaranteed by Holdings and each of the existing and future domestic restricted
subsidiaries of Barney's, Inc. on a senior secured basis. The 9.000% senior
secured notes and the related guarantees are secured by a second-priority lien
on the same assets as secure the restated credit facility.
CREDIT FACILITY
On July 15, 2002, we entered into a $105.0 million credit facility, which
replaced our prior credit facility. On April 1, 2003, contemporaneously with the
senior notes issuance we entered into a restated credit facility. The restated
credit facility provides for a $70.0 million revolving credit facility pursuant
to which we may borrow up to $66.0 million, with a $40.0 million sub-limit for
the issuance of letters of credit, subject to a borrowing base test. With the
consent of the required lenders under the restated credit facility, the maximum
borrowing amount may be increased to up to $70.0 million. At January 31, 2004 we
had approximately $40.9 million of availability under the credit facility and
approximately $0 and $22.2 million of loans and letters of credit, respectively,
outstanding. In addition, upon consummation of the offering we wrote off
approximately $364,000 in deferred financing costs relating to the credit
facility and incurred additional costs of approximately $400,000 in connection
with the restated credit facility. A summary of the financial covenants and
other terms of the restated credit facility are as follows:
The restated credit facility is secured by a first-priority lien on
substantially all of our assets, other than real property leaseholds. The assets
that secure our restated credit facility include, among others, our accounts
receivable, inventories, general intangibles (including software), equipment and
fixtures, equity interests of subsidiaries owned by us, intellectual property
and cash. In addition, each borrower under the restated credit facility is
required to cross-guarantee each of the other borrowers' obligations under the
restated credit facility, and the assets of each borrower secure such borrower's
cross guarantee.
Availability under the restated credit facility is calculated as a percentage of
eligible inventory and receivables, including finished inventory covered by
undrawn documentary letters of credit and Barneys private label credit card
receivables, less certain reserves.
Interest rates on borrowings under the restated credit facility are either the
"base rate," as defined in the restated credit facility, plus 1.00% or LIBOR
plus 2.50%, subject to quarterly adjustment after August 2, 2004. The restated
credit facility also provides for a fee of 2.0% per annum on the maximum amount
available to be drawn under each outstanding letter of credit and a tiered
unused commitment fee with a weighted average of approximately 0.45% on the
unused portion of the credit facility.
The restated credit facility contains financial covenants relating to net worth,
earnings (specifically, earnings before interest, taxes, depreciation and
amortization, or "EBITDA"), capital expenditures and minimum excess borrowing
base availability as outlined below. With the exception of the capital
expenditures covenant, with which compliance is measured on an annual basis, and
the minimum excess borrowing base availability covenant, with which we must be
in compliance at all times, the covenants discussed below are required to be
satisfied on a quarterly basis.
o Minimum consolidated net worth -- As of the last day of every
fiscal quarter, starting with the first fiscal quarter of 2002,
consolidated net worth must not be less than specified minimum
amounts. The minimum amount is $136.0 million for the fiscal year
ended January 31, 2004; $147.0 million at the end of the fiscal
year ending January 29, 2005; and $147.0 million at the end of
the fiscal year ending January 28, 2006.
22
o Minimum consolidated EBITDA -- As of the last day of every fiscal
quarter (for defined trailing periods), starting with the first
quarter of the fiscal year ended February 1, 2003, EBITDA must
not be less than certain minimum amounts, measured on a quarterly
basis. The minimum amount at the end of the fiscal year ended
January 31, 2004 is $25.0 million; $29.0 million at the end of
the fiscal year ending January 29, 2005; and $30.0 million at the
end of the fiscal year ending January 28, 2006.
o Capital expenditures -- Our total capital expenditures for the
fiscal year ended January 31, 2004 and for fiscal years ending
thereafter, were limited to $10.0 million per fiscal year,
subject to increase if certain conditions are met.
o Minimum excess borrowing base availability-- We are required to
maintain minimum excess borrowing base availability of $8.0
million at all times.
The restated credit facility matures on July 15, 2006.
Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our restated credit
facility will be adequate to meet our liquidity needs for at least the next 12
months, including scheduled payments of interest on our 9.000% senior secured
notes and payments of interest on borrowings under the restated credit facility.
Our ability to make payments on and to refinance our indebtedness and to fund
planned capital expenditures will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial,
competitive, regulatory and other factors that are beyond our control. See
"Forward-Looking Statements -- Due to events that are beyond our control, we may
not be able to generate sufficient cash flow to make interest payments on our
indebtedness" below.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
Our material obligations under firm contractual arrangements, including
commitments for future payments under long-term debt arrangements and operating
lease arrangements, as of January 31, 2004, are summarized below and are more
fully disclosed in notes 4 and 5 of our consolidated financial statements. Total
Debt does not include commitments under unexpired letters of credit under our
restated credit facility. As of January 31, 2004, we had approximately $22.2
million of such letters of credit outstanding.
PAYMENTS DUE BY PERIOD
- ------------------------------------------------------ -----------------------------------------------------------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
- ------------------------------------------------------ ----- ------ --------- --------- -----
($ in thousands)
Total Debt............................................ $ 106,000 $ -- $ -- $ 106,000 $ --
Operating Leases...................................... 440,167 27,700 52,342 47,331 312,794
Firm Purchase Commitments............................. 49,188 49,188 -- -- --
----------- ------------ ----------- ------------ -----------
Total Contractual Obligations......................... $ 595,355 $ 76,888 $ 52,342 $ 153,331 $ 312,794
=========== ============ =========== ============ ===========
As reflected in the January 31, 2004 balance sheet, there were no loans
outstanding under the restated credit facility.
We lease real property and equipment under agreements that expire at various
dates. As of January 31, 2004, minimum rent payments at contractual rates over
the next five years aggregate approximately $440.2 million. In accordance with
SFAS No. 13 "Accounting for Leases," we account for the rental payments due
under our operating leases on a straight-line basis, and record an annual rent
expense for each lease by dividing the total rent payments due during the term
of the lease by the number of years in the term of the respective lease.
23
Pursuant to an agreement between Holdings and Howard Socol, our Chairman,
President and Chief Executive Officer, Mr. Socol receives a base salary of $1.0
million per year and annual performance bonuses. For the fiscal year ended
February 2, 2002, Mr. Socol was guaranteed and paid a $1.0 million performance
bonus, and for the annual period ended January 31, 2003, he was entitled to a
performance bonus of up to 125% of his base salary. In addition, for the period
commencing on February 1, 2003 and ending on January 31, 2005, Mr. Socol is
entitled to an annual performance bonus based on the amount by which Holdings
exceeds certain financial target amounts, which bonus is not limited to 125% of
his base salary. See "Certain Relationships and Related Transactions."
OTHER COMMERCIAL COMMITMENTS
At January 31, 2004, our primary commercial commitments included commitments of
approximately $10.5 million under unexpired letters of credit under our credit
facility and firm purchase commitments of approximately $49.0 million related to
purchases of merchandise from vendors which will be received by the Company
generally within the next six months. In addition, as collateral for performance
on certain leases and as credit guarantees, Barney's, Inc. is contingently
liable under standby letters of credit under our credit facility in the amount
of $11.7 million. These standby letters of credit generally mature within one
year and generally contain provisions for annual renewals. At January 31, 2004,
we had total letters of credit outstanding under our credit facility of
approximately $22.2 million.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet financing or unconsolidated special
purpose entities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements is based on the
application of significant accounting policies, many of which require us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. See note 2 to our consolidated financial statements. On an ongoing
basis, we evaluate our estimates, including those related to goodwill (including
excess reorganization value and other intangible assets), bad debt, inventory,
taxes, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. The Company's management has discussed the selection of
these critical accounting policies with the Audit Committee of the Board of
Directors and the Audit Committee has reviewed the disclosure relating to these
critical accounting policies in this Management's Discussion and Analysis.
Excess Reorganization Value. Excess reorganization value represents the amount
of goodwill attributed to a company under accounting principles generally
accepted in the United States upon its emergence from Chapter 11, as adjusted
from time to time pursuant to SFAS No. 142, "Goodwill and Other Intangible
Assets," which was issued in June 2001. As of January 31, 2004, the amount of
excess reorganization value which we recognized in our financial statements was
$147.2 million, and our total stockholders' equity, including the excess
reorganization value, was $165.8 million.
24
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets, including excess reorganization value. Among other
things, SFAS No. 142 requires that goodwill no longer be amortized, but rather
be tested annually for impairment. In accordance with SFAS No. 142, in the
fiscal years ended January 31, 2004 and February 1, 2003, we completed the
required testing for impairment of our excess reorganization value. Based upon
our testing, we concluded that the fair value of the enterprise exceeded its
book value. Accordingly, we did not need to perform the second step of the test,
which measures the amount of the impairment. For the fiscal years ended January
31, 2004 and February 1, 2003, we did not record an impairment loss related to
excess reorganization value. However, our excess reorganization value was
reduced by approximately $538,000 and $1.7 million during the fiscal years ended
January 31, 2004 and February 1, 2003, respectively, due to a reversal of a tax
reserve resulting from the resolution of tax contingencies existing at the time
of our emergence from bankruptcy in January 1999.
During the fiscal year ended February 2, 2002 (and prior fiscal years), when
SFAS No. 142 was not in effect, we amortized excess reorganization value over a
twenty-year period. If excess reorganization value had not been amortized during
the fiscal year ended February 2, 2002, our adjusted net income (loss) and basic
and diluted income (loss) per share would have been as follows:
FISCAL YEAR ENDED
FEBRUARY 2, 2002
------------------------------
(dollars in thousands, except
per share data)
-----------------------------
BASIC AND
DILUTED
(LOSS)
NET (LOSS) INCOME PER
INCOME SHARE
---------- ----------
As Reported.............................................. $ (15,171) $ (1.09)
Amortization of Excess Reorganization Value.............. 8,791 0.63
---------- ----------
As Adjusted.............................................. $ (6,380) $ (0.46)
========== ==========
Bad Debt. We maintain allowances for doubtful accounts for estimated losses
resulting from the failure of our customers to make required payments on their
outstanding proprietary credit card balances. Accounts are generally written off
automatically after 180 days have passed without our having received a full
scheduled monthly payment. Accounts are written off sooner in the event of
bankruptcy or other factors that make collection seem unlikely. We estimate the
appropriate allowance using a model that considers the current aging of the
accounts, historical write-off and recovery rates and other portfolio data. This
estimate is then reviewed by management to assess whether additional analysis is
required to appropriately estimate expected losses. We believe that our
allowance for doubtful accounts is adequate to cover anticipated losses in our
proprietary credit card portfolio under current conditions. Significant
deterioration in any of the factors noted above or in the economy could require
us to provide additional allowances that would reduce our net earnings. At
January 31, 2004, a 0.5% increase in our net historical write-off rate would not
have a material impact on our net earnings.
Inventory. We value our inventory at the lower of cost or market, or LCM, as
determined by the first-in, first-out method using the retail inventory method,
or RIM. Under RIM, the valuations of inventory at cost and the resulting gross
margins are calculated by applying a cost-to-retail ratio to the retail value of
our inventories. RIM is inherently an averaging method that is widely used in
the retail industry. The use of RIM will result in inventories being valued at
the LCM as markdowns are currently recorded as a reduction of the retail
inventory value.
Based on a review of historical business trends, on-hand inventory levels,
discontinued merchandise categories and assumptions regarding future demand and
market conditions, we calculate a markdown reserve for our inventory to reflect
additional markdowns which are estimated to be necessary for obsolescence and to
25
reduce our inventories to the LCM. We believe that our markdown reserve is
adequate under current conditions. If current conditions deteriorate, we may be
required to increase our markdown reserve which would reduce our net earnings.
At January 31, 2004, a 0.5% increase in our markdown reserve as a percentage of
our inventory would increase our cost of sales and decrease our net earnings by
approximately $300,000.
Deferred Taxes. The operating period after emergence from bankruptcy and the
cumulative losses incurred by us make the future utilization of deferred tax
assets uncertain. Accordingly, we record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
In the event we were to determine that we would be able to realize our deferred
tax assets in the future in excess of the net recorded amount, an adjustment to
the deferred tax asset would increase income in the period that determination
was made. At January 31, 2004, the valuation allowance was $2.8 million.
Derivative Instruments and Hedging Activities. We purchase approximately 40% to
50% of the goods which we sell from vendors outside of the United States, and we
generally pay for a portion of those goods in foreign currencies (particularly
the Euro, but also the British pound). We periodically enter into foreign
exchange forward contracts and option contracts in order to hedge some of our
foreign exchange exposure. In June 1998, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", or SFAS No.
133, which we adopted, as amended, on February 4, 2001. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments. Specifically, SFAS No. 133 requires an entity to recognize all
derivative instruments as either assets or liabilities in the balance sheet and
to measure those instruments at fair value. Additionally, the fair value
adjustments will affect either stockholders' equity or net income depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities ("VIE's"), an interpretation of Accounting Research
Bulletin No. 51" ("Interpretation No. 46"). In December 2003, the FASB issued a
revision to Interpretation No. 46 to make certain technical corrections and
address certain implementation issues that had arisen. Interpretation No. 46
requires the consolidation of entities in which an enterprise absorbs a majority
of the entity's expected losses, receives a majority of the entity's expected
residual returns, or both, as a result of ownership, contractual or other
financial interests in an entity. Currently, entities are generally consolidated
by an enterprise when it has a controlling financial interest through ownership
of a majority voting interest in the entity. Interpretation No. 46 was effective
immediately for VIE's created after January 31, 2003. The provisions of
Interpretation No. 46, as revised, are required to be applied by the Company no
later than the end of the Company's first quarter ending May 1, 2004. The
Company is currently evaluating the requirements and impact of Interpretation
No. 46, however, at the present time, the Company does not believe there are any
additional entities that will require disclosure or consolidation as a result of
the provisions of Interpretation No. 46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of SFAS No. 149 had
no impact on our results of operations or our financial position.
26
In May 2003, the FASB issued Statement No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
Company adopted SFAS No. 150 in the third quarter ended November 1, 2003. The
adoption of SFAS No. 150 did not affect the Company's consolidated financial
statements.
In 2002, the FASB Emerging Issues Task Force ("EITF") issued EITF No. 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor." EITF 02-16 addresses the accounting by a reseller for
consideration received from a vendor. A consensus was reached that cash
consideration is presumed to be a reduction in the price of a vendor's product
that should be recognized as a reduction of cost of sales. However, this
presumption can be overcome when the consideration received is for the
reimbursement of specific, identifiable and incremental costs of the reseller.
In that event, the consideration, subject to a threshold, is recognized as a
reduction in selling, general and administrative expenses. The provisions of
EITF 02-16 were effective for all new arrangements, or modifications to existing
arrangements, entered into after December 31, 2002.
For the fiscal year ended January 31, 2004, the implementation of the provisions
of EITF 02-16 had the effect of increasing selling, general and administrative
expenses by approximately $1.3 million and decreasing cost of sales by a like
amount. EITF 02-16 had no impact on the Company's cash flows. Had EITF 02-16
been in effect for the fiscal year ended February 1, 2003, selling, general and
administrative expenses would have increased by approximately $600,000 and cost
of sales would have decreased by a like amount.
INFLATION
During recent years, inflation has not had a significant impact on our sales or
profitability.
FORWARD-LOOKING STATEMENTS
Certain statements discussed under the captions "Item 1 - Business," "Item 3 -
Legal Proceedings," "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of results to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others:
PURCHASES OF THE MERCHANDISE WE SELL ARE GENERALLY DISCRETIONARY AND ARE
THEREFORE PARTICULARLY SUSCEPTIBLE TO ECONOMIC SLOWDOWNS. IF CURRENT ECONOMIC
CONDITIONS DETERIORATE, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED.
The merchandise we sell generally consists of luxury retail products, the
purchase of which is generally discretionary for consumers. Consumers are
generally more willing to make discretionary purchases, including purchases of
fashion products, during periods in which favorable economic conditions prevail.
A general slowdown in the United States economy could adversely affect consumer
confidence and spending habits, as well as our sales.
27
Although there have been signs of some improvement, the outlook for the United
States economy is uncertain and is directly affected by global political factors
that are beyond our control. Any escalation of military action involving the
United States could cause increased volatility in financial markets, further
adversely affecting consumer confidence and spending habits. If current economic
conditions are made worse by military action involving the United States or by
any other circumstances, our business, financial condition and results of
operations could be materially adversely affected.
OUR BUSINESS IS HIGHLY SENSITIVE TO EVENTS AND CONDITIONS IN THE NEW YORK CITY
AREA.
Our New York City stores generate, in the aggregate, approximately 55% of our
annual revenues. Our business will be materially adversely affected if we
experience a significant decrease in revenues from these stores. Changes in the
demographic or retail environment of our New York City stores, particularly our
Madison Avenue flagship store, could result in a significant decrease in our
revenues. In addition, our New York City store sales are highly sensitive to
events and conditions in the New York City area, and any terrorist event,
prolonged period of extreme or unseasonable weather conditions or sustained
downturn in economic conditions in the New York City area could cause our New
York City stores to suffer a decrease in sales and materially adversely affect
our business, financial condition and results of operations.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO RESPOND TO CONSTANTLY
CHANGING FASHION TRENDS AND CONSUMER DEMANDS.
Our success depends in large part on our ability to identify fashion trends as
well as to anticipate, gauge and react to changing consumer demands in a timely
manner. The products we sell must appeal to consumers whose preferences cannot
be predicted with certainty and are subject to rapid change. Consequently, we
depend in part upon the continuing favorable market response to the creative
efforts of our purchasing and marketing divisions, as well as the design team
for our Barneys label merchandise, to anticipate trends and fashions that will
appeal to our consumer base. Any failure on our part to anticipate, identify and
respond effectively to changing consumer demands and fashion trends will
adversely affect our sales.
IF WE DO NOT ACCURATELY PREDICT OUR SALES AND THEY ARE SIGNIFICANTLY LOWER THAN
WE EXPECT, OUR PROFITABILITY MAY BE MATERIALLY ADVERSELY AFFECTED.
We make decisions regarding the purchase and production of our merchandise well
in advance of the season in which it will be sold, particularly for the November
and December holiday season. We incur significant additional expenses leading up
to the months of November and December in anticipation of higher sales in those
periods, including for acquiring additional inventory, advertising and hiring
additional employees. If our sales during any season, particularly our peak
seasons, are significantly lower than we expect for any reason, we may not be
able to adjust our expenses in a timely fashion and we may be left with a
substantial amount of unsold inventory. If that occurs, we may be forced to rely
on markdowns or promotional sales to dispose of excess inventory. This could
have a material adverse effect on our business, financial condition and results
of operations. At the same time, if we fail to purchase a sufficient quantity of
merchandise, we may not have an adequate supply of products to meet consumer
demand. This may cause us to lose sales.
WE ARE DEPENDENT ON OUR RELATIONSHIPS WITH SOME DESIGNERS.
Our relationships with established and emerging designers are a key factor in
our position as a pre-eminent retailer of high-fashion merchandise and a
substantial portion of our revenues is attributable to our sales of designer
merchandise. For example, in the fiscal year ended January 31, 2004, our two top
designers, including all brands owned by those designers, accounted for
28
approximately 10% and 4%, respectively, of our total retail sales, and our ten
top designers, including all brands owned by those designers, accounted for
approximately 27% of our total retail sales. Hence, our success is in part
dependent on our relationships with our designers. Most of these relationships
are not subject to contractual arrangements, and we have no legal assurance that
these relationships will continue. Moreover, all of the brands of our top
designers are sold by competitor retailers, and each of our top ten designers
also have their own dedicated retail stores. If one or more of our top designers
were to cease providing us with adequate supplies of merchandise or, conversely,
were to increase sales of merchandise through its own stores or to the stores of
our competitors, our business, financial condition and results of operations
could be materially adversely affected. In addition, any decline in the
popularity of any of our designer brands could also have a material adverse
effect upon us.
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY
AFFECTED IF THE MANUFACTURERS OF OUR DESIGNER OR BARNEYS LABEL MERCHANDISE
EXPERIENCE OPERATIONAL DIFFICULTIES.
Our continued supply of designer and Barneys label merchandise is subject to a
number of risks, including:
o operational issues at the manufacturers' facilities or in the
transportation infrastructure;
o a work stoppage or strike by employees of manufacturers or
transporters;
o the failure of manufacturers to provide merchandise of the
requisite quality; and
o the failure of essential manufacturing or transportation
equipment.
If one or more of our more important designers or manufacturers were to
interrupt or cease providing us with merchandise on a timely basis, due to one
of the circumstances described above or otherwise, our business, financial
condition and results of operations could be materially adversely affected.
In addition, some of our suppliers rely on sole or limited sources of materials
for their merchandise. Their inability to obtain sufficient quantities of these
materials or to develop alternative sources if required may prevent them from
continuing to supply the merchandise in the quantities and at the quality levels
and times we require, or at all. This could result in delays, increased costs or
our inability to maintain our existing level of operations. Any of these results
could have a material adverse effect on our business, financial condition and
results of operations.
CONDITIONS IN EUROPE COULD ADVERSELY AFFECT OUR SUPPLY OF MERCHANDISE. THIS
COULD DECREASE OUR SALES.
A significant portion of our merchandise is manufactured in Europe, particularly
Italy. As a result, political instability or other events resulting in the
disruption of trade from Europe, particularly Italy, or the imposition of
additional regulations relating to imports from Europe could cause significant
delays or interruptions in the supply of our merchandise and have a material
adverse effect on our business. There can be no assurance that we could replace
the merchandise currently sourced in Europe with merchandise produced elsewhere
without a material adverse effect on our business, financial condition and
results of operations.
OUR BUSINESS COULD SUFFER IF WE DO NOT RETAIN OUR KEY PERSONNEL.
Our future success depends, in large part, on the continued service of our key
executive officers and managers who possess significant expertise and knowledge
of our business, customers and markets. We do not maintain key person insurance
on any of our executive officers or managers and our executive officers and
29
managers, other than our Chief Executive Officer, are not bound by employment
contracts. Any loss or interruption of the services of these individuals could
significantly reduce our ability to manage our operations effectively because we
might not be able to find appropriate replacements for our key executive
officers and managers should the need arise.
OUR BUSINESS IS SUSCEPTIBLE TO EXTREME AND/OR UNSEASONABLE WEATHER CONDITIONS.
Extreme weather conditions in the areas in which our stores are located could
have a material adverse effect on our business, financial condition or results
of operations. For example, heavy snowfall or other extreme weather conditions
over a prolonged period might make it difficult for our customers to travel to
our stores. Our business is also susceptible to unseasonable weather conditions.
For example, extended periods of unseasonably warm temperatures during the
winter season or cool weather during the summer season could render a portion of
our inventory incompatible with those unseasonable conditions. These prolonged
unseasonable weather conditions could adversely affect our business, financial
condition and results of operations.
OUR BUSINESS IS HIGHLY COMPETITIVE.
The retail industry, in general, and the upscale retail apparel business, in
particular, are intensely competitive. Competition is strong for customers,
sales and vendor resources. In addition, during periods of unfavorable economic
conditions, we also compete with other discretionary goods in general, and
consumers may curtail discretionary purchases, such as fashion merchandise, and
instead opt to limit their discretionary spending to other types of
discretionary purchases.
We compete for customers principally on the basis of quality, fashion,
assortment and presentation of merchandise, customer service, marketing and, at
times, store ambiance. In our luxury retail business, merchandise assortment is
a critical competitive factor, and retail stores compete for exclusive,
preferred and limited distribution arrangements with key designers. In addition,
we face increasing competition from our designer resources, which have
established or expanded their market presence with their own dedicated stores.
Some of the retailers with which we compete have substantially greater financial
resources than we have and may have other competitive advantages over us.
FUTURE STORE OPENINGS MAY NOT BE SUCCESSFUL.
We expect to open approximately ten additional CO-OP stores over the next five
years. These stores, and any other stores that we might open in the future, may
not be successful and our overall gross profit may not increase as a result of
opening these stores. Our failure to predict accurately the demographic or
retail environment at any future store location could have a material adverse
effect on our business, financial condition and results of operations.
From time to time we receive and review proposals with respect to the opening of
additional flagship and regional stores. We do not have any current plan or
intention to open any new flagship or regional stores, but we might consider
doing so in the event that a compelling opportunity, consistent with our
financial resources and business objectives, were to come to our attention. If
we were to open a new flagship or regional store, we would have to incur
significant expenses to acquire a facility, either through construction or
long-term lease, make the necessary store improvements and acquire inventory.
There can be no assurance that any investment would be profitable or otherwise
successful.
30
IF WE ARE UNABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OR IF WE ARE
ACCUSED OF INFRINGING ON A THIRD PARTY'S INTELLECTUAL PROPERTY RIGHTS, OUR NET
INCOME MAY DECLINE.
We currently own our trademarks and service marks, including the "Barneys New
York" and "Barneys" marks. Our trademarks and service marks are registered in
the United States and in some countries in Asia. The laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. Moreover, we are unable to predict the effect that any future
foreign or domestic intellectual property legislation or regulation may have on
our existing or future business. The loss or reduction of any of our significant
proprietary rights could have a material adverse effect on our business,
financial condition and results of operations.
Additionally, third parties may assert claims against us alleging infringement,
misappropriation or other violations of their trademark or other proprietary
rights, whether or not such claims have merit. Claims like these may be time
consuming and expensive to defend and could result in our being required to
cease using the trademark or other rights and selling the allegedly infringing
products. This might have a significant impact on our sales and cause us to
incur significant litigation costs and expenses.
A SMALL NUMBER OF STOCKHOLDERS OWN A SIGNIFICANT PERCENTAGE OF OUR COMMON STOCK
AND THUS CONTROL ALL MAJOR CORPORATE DECISIONS.
Bay Harbour Management L.C. and Whippoorwill Associates, Inc., collectively,
beneficially own approximately 79.3% of the outstanding shares of common stock
of Holdings. As a result, Bay Harbour and Whippoorwill are in a position to
control the outcome of actions requiring stockholder approval, including the
election and removal of directors. Bay Harbour and Whippoorwill have entered
into a stockholders agreement with respect to their ownership and voting of the
capital stock of Holdings. This concentration of ownership could also facilitate
or hinder a negotiated change of control of Holdings.
OUR CREDIT CARD OPERATIONS AND THOSE OF THIRD PARTIES COULD BE AFFECTED BY
REGULATIONS THAT ALTER THE USE OR LIMIT THE AVAILABILITY OF CREDIT TO OUR
CUSTOMERS.
Sales of our merchandise are facilitated by the use of credit cards, including
the use of our proprietary credit card. Our proprietary credit card operations
also generate revenue from fees related to extending credit. Our credit card
operations are affected by numerous federal and state laws that impose
disclosure and other requirements upon the origination, servicing and
enforcement of credit accounts and limitations on the maximum amount of finance
charges that may be charged by a credit provider. In addition to our proprietary
credit card, credit to our customers is provided primarily through third parties
such as American Express(R), Visa(R), MasterCard(R) and Japanese Credit
Bureau(R). Any change in the regulation of credit that would materially limit
the availability of credit to our customer base could adversely affect our
business, financial condition and results of operations. In addition, changes in
credit card use, payment patterns, and default rates may result from a variety
of economic, legal, social, and other factors that we cannot control or predict
with certainty.
WE ARE SUBJECT TO NUMEROUS OTHER REGULATIONS THAT COULD AFFECT OUR OPERATIONS.
We are subject to customs, truth-in-advertising and other laws, including
consumer protection regulations and zoning and occupancy ordinances, that
regulate retailers generally and/or govern the importation, promotion and sale
of merchandise and the operation of retail stores and warehouse facilities.
Although we undertake to monitor changes in these laws, if these laws change
without our knowledge, or are violated by importers, designers, manufacturers or
distributors, we could experience delays in shipments and receipt of goods or be
subject to fines or other penalties under the controlling regulations, any of
which could have a material adverse effect on our business, financial condition
and results of operations.
31
OUR BUSINESS IS EXPOSED TO FOREIGN CURRENCY FLUCTUATIONS.
A portion of our inventory purchases is denominated in foreign currencies,
particularly the Euro, and to a lesser extent the British Pound. Changes in
currency exchange rates may also affect the relative prices at which we and our
competitors sell products in the same market. Although we hedge some exposures
to changes in foreign currency exchange rates arising in the ordinary course of
business, foreign currency fluctuations could have a material adverse effect on
our business, financial condition and results of operations.
WE HAVE A SUBSTANTIAL AMOUNT OF EXCESS REORGANIZATION VALUE, WHICH IS AN
INTANGIBLE ASSET AND MUST BE TESTED ANNUALLY FOR IMPAIRMENT. IF WE ARE REQUIRED
TO REDUCE OUR EXCESS REORGANIZATION VALUE, WE WILL TREAT THE REDUCTION AS AN
EXPENSE. THIS WOULD REDUCE OUR STOCKHOLDERS' EQUITY BY AN AMOUNT EQUAL TO THE
AMOUNT OF THE REDUCTION.
As of January 31, 2004, the amount of excess reorganization value which we
recognized in our financial statements was $147.2 million, and our total
stockholders' equity was $165.8 million. Pursuant to SFAS No. 142, "Goodwill and
Other Intangible Assets," we must test excess reorganization value annually for
impairment. If we are required to reduce the amount of excess reorganization
value as a result of our annual impairment tests, we will treat the reduction as
an expense. This would reduce our stockholders' equity by an amount equal to the
amount of the reduction. Furthermore, inasmuch as excess reorganization value is
an intangible asset, there can be no assurance that all or any portion thereof
could be realized in the event of a sale or liquidation of our company,
regardless of the value at which it is reported in our financial statements.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We have a substantial amount of indebtedness. At January 31, 2004, the amount of
our outstanding indebtedness was approximately $90.5 million, which could have
important consequences. For example, it could:
o make it more difficult for us to satisfy our obligations with
respect to our 9.000% senior secured notes;
o limit our ability to obtain additional financing, if needed, for
working capital, capital expenditures and general corporate
purposes;
o increase our vulnerability to adverse economic and industry
conditions;
o require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby reducing
funds available for working capital, capital expenditures,
expansions and other purposes;
o limit our flexibility in planning for, or reacting to, changes in
our business and/or our industry; and
o place us at a competitive disadvantage compared to our
competitors that have less indebtedness.
The terms of the indenture governing our outstanding 9.000% senior secured notes
allow us to incur additional indebtedness, subject to some limitations. Our
restated credit facility permits borrowings under that facility of up to $66.0
million, with a $40.0 million sub-limit for the issuance of letters of credit,
subject to a borrowing base test. Any additional indebtedness incurred as
permitted under the indenture could increase the risks associated with our
substantial leverage.
32
THE INDENTURE AND OUR CREDIT FACILITY IMPOSE SIGNIFICANT OPERATING AND FINANCIAL
RESTRICTIONS ON US.
The indenture and our credit facility impose significant operating and financial
restrictions on us. These restrictions limit our ability and the ability of our
restricted subsidiaries, among other things, to:
o incur additional indebtedness or issue capital stock having a
maturity or redemption date on or prior to 91 days after the
scheduled maturity date of the notes;
o pay dividends or make other restricted payments;
o issue capital stock of some of our subsidiaries;
o enter into transactions with affiliates;
o create or incur liens;
o transfer or sell some of our assets;
o incur dividend or other payment restrictions affecting some of
our subsidiaries;
o make capital expenditures; and
o consummate a merger, consolidation or sale of all or
substantially all of our or our subsidiaries' assets.
Our ability to comply with these covenants may be affected by events beyond our
control, and any material deviations from our forecasts could require us to seek
waivers or amendments of covenants or alternative sources of financing or to
reduce expenditures. We cannot be certain that any of these waivers, amendments
or alternative financing could be obtained, or if obtained, would be on terms
acceptable to us.
In addition to the covenants listed above, our credit facility also limits our
ability to enter into sale and leaseback transactions and requires us to
maintain compliance with specified financial covenants relating to net worth,
earnings, capital expenditures and minimum excess borrowing base availability.
A breach of any of the covenants contained in our credit facility, including our
inability to comply with the required financial covenants, could result in an
event of default, which would allow the lenders under our credit facility to
discontinue lending and/or to declare all borrowings outstanding to be due and
payable. We have granted the lenders under our credit facility a first-priority
security interest in substantially all of our assets, other than real property
leaseholds. In the event of any default under our credit facility, the lenders
could elect to foreclose upon the assets pledged to them and to require us to
apply all of our available cash to repay our borrowings. If the maturity of the
indebtedness outstanding under our credit facility or the notes were to be
accelerated, our assets might not be sufficient to repay our indebtedness in
full.
33
DUE TO EVENTS THAT ARE BEYOND OUR CONTROL, WE MAY NOT BE ABLE TO GENERATE
SUFFICIENT CASH FLOW TO MAKE INTEREST PAYMENTS ON OUR INDEBTEDNESS.
Our ability to make payments on and to refinance our indebtedness, including the
9.000% senior secured notes, and to fund planned capital expenditures will
depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. There can be no assurance,
however, that our business will generate sufficient cash flow from operations or
that future borrowings will be available to us under our credit facility in an
amount sufficient to enable us to pay our indebtedness or to fund our other
liquidity needs. A significant reduction in operating cash flow would likely
increase the need for alternative sources of liquidity. If we are unable to
generate sufficient cash flow to make payments on the 9.000% senior secured
notes or our other indebtedness, we will have to pursue one or more
alternatives, such as reducing or delaying capital expenditures, refinancing the
notes or such other indebtedness, selling assets or raising equity. There can be
no assurance that any of these alternatives could be accomplished on
satisfactory terms or that they would yield sufficient funds to repay the 9.000%
senior secured notes and our other indebtedness.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and foreign exchange rates. To address some of these risks we
enter into various hedging transactions as described below. We do not use
financial instruments for trading purposes and are not a party to any leveraged
derivative transactions.
Foreign Currency Risk. We purchase outside of the United States approximately
40% to 50% of the goods which we sell, and we generally pay for those goods
either in foreign currencies (particularly the Euro, but also the British pound)
or US dollars. We periodically enter into foreign exchange forward contracts and
option contracts in order to hedge some of our foreign exchange exposure. Absent
our hedging transactions, a uniform 10% weakening as of February 2, 2003 in the
value of the dollar relative to the currencies in which our purchases are
denominated would have resulted in an $8.9 million decrease in gross profit for
the fiscal year ended January 31, 2004. After factoring in the effect of our
hedging transactions, a uniform 10% weakening as of February 2, 2003 in the
value of the dollar relative to the currencies in which our purchases are
denominated would have resulted in a $1.8 million decrease in gross profit for
the fiscal year ended January 31, 2004. Absent our hedging transactions, a
uniform 10% weakening as of February 3, 2002 in the value of the dollar relative
to the currencies in which our purchases are denominated would have resulted in
an $8.1 million decrease in gross profit for the fiscal year ended February 1,
2003. After factoring in the effect of our hedging transactions, a uniform 10%
weakening as of February 3, 2002 in the value of the dollar relative to the
currencies in which our purchases are denominated would have resulted in a $1.6
million decrease in gross profit for the fiscal year ended February 1, 2003.
Absent our hedging transactions, a uniform 10% weakening as of February 4, 2001
in the value of the dollar relative to the currencies in which our purchases are
denominated would have resulted in an $8.3 million decrease in gross profit for
the fiscal year ended February 2, 2002. After factoring in the effect of our
hedging transactions, a uniform 10% weakening as of February 4, 2001 in the
value of the dollar relative to the currencies in which our purchases are
denominated would have resulted in a $1.7 million decrease in gross profit for
the fiscal year ended February 2, 2002.
These calculations assume that each exchange rate would change in the same
direction relative to the United States dollar. In addition to the direct effect
of changes in exchange rates, which changes the dollar value of the resulting
purchases, changes in exchange rates also affect the volume of purchases or the
foreign currency purchase price as competitors' prices become more or less
attractive.
34
Interest Rate Risk. Our earnings are affected by changes in short-term interest
rates as a result of our revolving credit facility. If short-term interest rates
averaged 2% more in the fiscal year ended January 31, 2004, our interest expense
would have increased, and net income before taxes would have decreased by
$164,000. If short-term interest rates averaged 2% more in the fiscal year ended
February 1, 2003, our interest expense would have increased, and net income
before taxes would have decreased by $600,000. If short-term interest rates
averaged 2% more in the fiscal year ended February 2, 2002, our interest expense
would have increased, and net loss before taxes would have increased by
$700,000. In the event of a change of such magnitude, management would likely
take actions to mitigate its exposure to the change. However, due to uncertainty
of the specific actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in our financial structure.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data listed below are included in the
report on the page indicated.
Index
Report of Independent Auditors....................................................................................... F-1
Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003.............................................. F-2
Consolidated Statements of Operations for each of the three fiscal years
in the period ended January 31, 2004............................................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for each of the
three fiscal years in the period ended January 2004................................................................ F-4
Consolidated Statements of Cash Flows for each of the three fiscal years
in the period ended January 31, 2004.............................................................................. F-5
Notes to Consolidated Financial Statements........................................................................... F-6
Schedule I - Condensed Financial Information of Registrant........................................................... F-35
Schedule II - Valuation and Qualifying Accounts...................................................................... F-38
All other schedules are omitted either because they are not applicable or the
required information is disclosed in the consolidated financial statements or
notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Holdings' management evaluated, with the participation of Holdings' principal
executive and principal financial officers, the effectiveness of Holdings'
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as
of January 31, 2004. Based on their evaluation, Holdings' principal executive
and principal financial officers concluded that Holdings' disclosure controls
and procedures were effective as of January 31, 2004.
There has been no change in Holdings' internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during Holdings' fiscal quarter ended January 31, 2004, that has
materially affected, or is reasonably likely to materially affect, Holdings'
internal control over financial reporting.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as set forth below, the information called for by this item is
incorporated by reference to the Company's 2004 definitive proxy statement to be
filed with the Securities and Exchange Commission not later than 120 days after
January 31, 2004.
The information required with respect to executive officers is set forth in Part
I of this report under the heading "Executive Officers of Holdings".
Holdings has adopted a written Code of Ethics that applies to its Chief
Executive Officer, Chief Financial Officer and other senior officers. The Code
of Ethics can be found on our web site, which is located at www.Barneys.com.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after January 31, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after January 31, 2004.
37
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information on securities that were authorized for
issuance under equity compensation plans as of January 31, 2004:
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE UNDER EQUITY
BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN
(A) (B) (A))
(C)
------------- ------------------- ------------------- -------------------
EQUITY COMPENSATION PLANS APPROVED
BY SECURITY HOLDERS:
Employee Stock Option Plan 1,492,234 $ 9.81 257,766
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS:
Stock Option Plan for
Non-Employee Directors(1) 270,000 9.47 30,000
Restricted Stock Award
Agreement with Howard Socol(2) 200,000 N/A N/A
---------------------------------------------------------------------------------------
TOTAL: 1,962,234 9.76 287,766
=======================================================================================
(1) In the fiscal year ended January 29, 2000, we adopted a stock option plan
that provides for the granting of non-qualified stock options to non-employee
members of Holdings' board of directors. Each "eligible director," as defined in
the plan, is granted an option to purchase 5,000 shares of Holdings common stock
upon his initial appointment to the board of directors of Holdings, which is
exercisable at the fair market value of Holdings common stock on the date of
grant. At the discretion of the board of directors of Holdings, additional
options may be granted to eligible directors on the date of the annual meeting
of Holdings' stockholders that takes place after the initial grant, provided the
grantee is an eligible director in office immediately following such annual
meeting. The options granted under this plan are exercisable at the fair market
value, as determined by Holdings' board of directors, and expire ten years after
the date of grant. These options are exercisable:
o as to one-half of the total number of shares subject to the grant on
the date of grant; and
o as to the remaining shares subject to the grant on the first
anniversary of the date of grant.
(2) Pursuant to an amendment to Mr. Socol's employment agreement, on January 10,
2003, Holdings agreed to make a restricted stock award of 200,000 shares of
Holdings common stock to Mr. Socol on February 2, 2003. Pursuant to the
restricted stock award agreement between Holdings and Mr. Socol, until the
shares vest, the shares will be held in escrow and Mr. Socol may not transfer
the shares. In addition, until the shares vest, the shares are subject to a
right of repurchase by Holdings upon Mr. Socol's resignation without good reason
or termination by Holdings for cause. 100,000 of the shares vested on January
31, 2004 and the other 100,000 shares vest on January 31, 2005, provided that
Mr. Socol does not terminate his employment before those dates. In addition,
upon a change of control of Holdings before Mr. Socol's service terminates, if
Holdings terminates Mr. Socol's employment without cause or if Mr. Socol
terminates his employment for good reason, all 200,000 shares will fully vest.
In addition, a portion of the restricted shares will vest upon Mr. Socol's death
or disability. As a restricted stock award, no amounts are payable by Mr. Socol
upon the vesting of such shares.
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after January 31, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after January 31, 2004.
39
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) - The response to this portion of Item 15 is submitted as a
separate section of this report entitled "List of Financial
Statements and Financial Statement Schedules."
(3) Exhibits:
EXHIBIT NAME OF EXHIBIT
- ------- ---------------
3.1 Certificate of Incorporation of Barneys New York, Inc. ("Holdings"),
filed with the Secretary of State of the State of Delaware on November
16, 1998 (1)
3.2 Certificate of Designation for Series A Preferred Stock of Holdings
filed with the Secretary of State of the State of Delaware on December
24, 1998 (1)
3.3 By-laws of Holdings (1)
4.1 Specimen of Holdings' Common Stock Certificate (1)
4.2 Indenture, dated as of April 1, 2003, among Barney's, Inc., Holdings,
Barneys America, Inc., Barneys (CA) Lease Corp., Barneys (NY) Lease
Corp., Basco All-American Sportswear Corp., BNY Licensing Corp.,
Barneys America (Chicago) Lease Corp. and Wilmington Trust Company (9)
4.3(a) Form of Note (included in Exhibit 4.2)
4.3(b) Form of Note Guarantee (included in Exhibit 4.2)
4.4 Registration Rights Agreement, dated April 1, 2003, by and among
Holdings, Barney's, Inc., Barneys America, Inc., Barneys (CA) Lease
Corp., Barneys (NY) Lease Corp., Basco All-American Sportswear Corp.,
BNY Licensing Corp., Barneys America (Chicago) Lease Corp. and
Jefferies & Company, Inc. (9)
4.5 Warrant Agreement, dated April 1, 2003, between Holdings and
Wilmington Trust Company (9)
4.6 Form of Warrant Certificate (9)
4.7 Equity Registration Rights Agreement, dated April 1, 2003, by and
between Holdings and Jefferies & Company, Inc. (9)
4.8 Security Agreement, dated April 1, 2003, by and among Barney's, Inc.,
Barneys America, Inc., Barneys (CA) Lease Corp., Barneys (NY) Lease
Corp., Basco All-American Sportswear Corp., BNY Licensing Corp.,
Barneys America (Chicago) Lease Corp. and Wilmington Trust Company (9)
4.9 Security Agreement, dated April 1, 2003, by and between Holdings and
Wilmington Trust Company (9)
4.10 Pledge Agreement, dated as of April 1, 2003, by and among Barney's,
Inc., Barneys America, Inc., Barneys (CA) Lease Corp., Barneys (NY)
Lease Corp., Basco All-American Sportswear Corp., BNY Licensing Corp.,
Barneys America (Chicago) Lease Corp. and Wilmington Trust Company (9)
4.11 Pledge Agreement, dated as of April 1, 2003, by and among
Holdings and Wilmington Trust Company (9)
40
EXHIBIT NAME OF EXHIBIT
- ------- ---------------
4.12 Intellectual Property Security Agreement, dated as of April 1, 2003,
by Barney's, Inc., Barneys America, Inc., Barneys (CA) Lease Corp.,
Barneys (NY) Lease Corp., Basco All-American Sportswear Corp., BNY
Licensing Corp., Barneys America (Chicago) Lease Corp. and Wilmington
Trust Company (9)
10.1 License Agreement among Barney's, Inc., BNY Licensing Corp. and
Barneys Japan Co. Ltd. dated as of January 28, 1999 (1)
10.2 First Amendment to License Agreement, dated as of February 5, 2003, by
and between Barney's, Inc., BNY Licensing Corp. and Barneys Japan Co.,
Ltd. (9)
10.3 Stock Option Plan for Non-Employee Directors effective as of March 11,
1999 (1)*
10.4 Employee Stock Option Plan (5)*
10.5 Registration Rights Agreement by and among Holdings and the Holders
party thereto dated as of January 28, 1999 (the "Registration Rights
Agreement") (1)
10.6 Amendment No.1 dated as of February 1, 2000, to the Registration
Rights Agreement (3)
10.7 Letter Agreement, dated January 28, 1999, among Bay Harbour Management
L.C. ("Bay Harbour"), Whippoorwill Associates, Inc. ("Whippoorwill"),
Isetan of America, Inc. ("Isetan") and Holdings (4)
10.8 Employment Agreement between Holdings and Howard Socol effective as of
January 8, 2001 (7)*
10.9 First Amendment to Employment Agreement, effective as of January 10,
2003, between Holdings and Howard Socol (2)*
10.10 Registration Rights Agreement between Holdings and Howard Socol dated
as of January 8, 2001 (7)
10.11 Restricted Stock Award Agreement, dated February 2, 2003, between
Holdings and Howard Socol (9)*
10.12 Option Award Agreement, dated January 8, 2001, between Holdings and
Howard Socol (9)*
10.13 Credit Agreement, among Barney's Inc., Barneys America, Inc., Barneys
(CA) Lease Corp., Barneys (NY) Lease Corp., Basco All-American
Sportswear Corp., BNY Licensing Corp. and Barneys America (Chicago)
Lease Corp., as Borrowers, the Lenders party thereto, and General
Electric Capital Corporation, as the Administrative Agent for such
lenders ("GE Capital"), dated as of July 15, 2002 (the "2002 Credit
Agreement") (8)
10.14 Guaranty by Holdings in favor of GE Capital, dated as of July 15, 2002
(8)
10.15 Security Agreement by the Borrowers under the 2002 Credit Agreement,
in favor of GE Capital, dated as of July 15, 2002 (8)
10.16 Pledge Agreement by the Borrowers under the 2002 Credit Agreement, in
favor of GE Capital, dated as of July 15, 2002 (8)
10.17 Security Agreement by Holdings in favor of GE Capital, dated as of
July 15, 2002 (8)
41
EXHIBIT NAME OF EXHIBIT
- ------- ---------------
10.18 Pledge Agreement by Holdings in favor of GE Capital, dated as of July
15, 2002 (8)
10.19 Intellectual Property Security Agreement by the Borrowers under the
2002 Credit Agreement, in favor of GE Capital, dated as of July 15,
2002 (8)
10.20 First Amendment, dated as of April 1, 2003, to Security Agreement by
the Borrowers under the 2002 Credit Agreement, in favor of GE Capital
(9)
10.21 Purchase Agreement, dated March 26, 2003, by and among Holdings,
Barney's, Inc., Barneys America, Inc., Barneys (CA) Lease Corp.,
Barneys (NY) Lease Corp., Basco All-American Sportswear Corp., BNY
Licensing Corp., Barneys America (Chicago) Lease Corp. and Jefferies &
Company, Inc. (9)
10.22 Restated Credit Agreement, dated as of April 1, 2003, among Barney's,
Inc., Barneys America, Inc., Barneys (CA) Lease Corp., Barneys (NY)
Lease Corp., Basco All-American Sportswear Corp., BNY Licensing Corp.,
and Barneys America (Chicago) Lease Corp., as borrowers, the
institutions party thereto from time to time as lenders, and General
Electric Capital Corporation, for itself, as Lender, and as the
Administrative Agent for such lenders (9)
10.23 Omnibus Amendment and Confirmation of Collateral Documents, dated as
of April 1, 2003, by and among Holdings, Barney's, Inc., Barneys
America, Inc., Barneys (CA) Lease Corp., Barneys (NY) Lease Corp.,
Basco All-American Sportswear Corp., BNY Licensing Corp., and Barneys
America (Chicago) Lease Corp., and General Electric Capital
Corporation, as administrative agent for the lenders (9)
14 Holdings' Code of Ethics for its Chief Executive Officer, Chief
Financial Officer and Other Senior Officers (2)
21 Subsidiaries of the Registrant (2)
23 Consent of Independent Auditors (2)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (2)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (2)
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (2)
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (2)
(1) Incorporated by reference to Holdings' Registration Statement on Form 10
(the "Form 10") filed with the Securities and Exchange Commission (the
"Commission") on June 1, 1999.
(2) Filed herewith.
(3) Incorporated by reference to Amendment No. 2 to the Form 10 filed with the
Commission on February 15, 2000.
(4) Incorporated by reference to Amendment No. 1 to the Form 10 filed with the
Commission on October 13, 1999.
42
(5) Incorporated by reference to Exhibit A to the Proxy Statement of Holdings
for its annual meeting of Stockholders held on June 27, 2000.
(6) Incorporated by reference to Holdings' Quarterly Report on Form 10-Q for
the quarter ended November 3, 2001.
(7) Incorporated by reference to Holdings' Annual Report on Form 10-K for the
fiscal year ended February 3, 2001.
(8) Incorporated by reference to Holdings' Quarterly Report on Form 10-Q for
the quarter ended August 3, 2002.
(9) Incorporated by reference to Holdings' Annual Report on Form 10-K for the
fiscal year ended February 1, 2003.
* Management contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K - The following Report on Form 8-K was filed or
furnished during the quarter ended January 31, 2004:
A Form 8-K was furnished on November 25, 2003, under Item 12, relating to
Holdings' November 24, 2003 press release setting forth Holdings' third
quarter 2003 earnings.
43
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.
BARNEYS NEW YORK, INC.
(Registrant)
By: /s/ Steven M. Feldman
-----------------------------------
Name: Steven M. Feldman
Title: Executive Vice President and
Chief Financial Officer
Date: April 30, 2004
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 and on the date indicated.
Name Date
/s/ Shelley F. Greenhaus April 30, 2004
- --------------------------------------------
Shelley F. Greenhaus
Director
/s/ John Halpern April 30, 2004
- --------------------------------------------
John Halpern
Director
/s/ Yasuo Okamoto April 30, 2004
- --------------------------------------------
Yasuo Okamoto
Director
/s/ Allen I. Questrom April 30, 2004
- --------------------------------------------
Allen I. Questrom
Director
/s/ Howard Socol April 30, 2004
- --------------------------------------------
Howard Socol
Chairman, President, Chief
Executive Officer and Director
/s/ Carl Spielvogel April 30, 2004
- --------------------------------------------
Carl Spielvogel
Director
/s/ David A. Strumwasser April 30, 2004
- --------------------------------------------
David A. Strumwasser
Director
44
/s/ Robert J. Tarr, Jr. April 30, 2004
- --------------------------------------------
Robert J. Tarr, Jr.
Director
/s/ Douglas P. Teitelbaum April 30, 2004
- --------------------------------------------
Douglas P. Teitelbaum
Director
/s/ Steven A. Van Dyke April 30, 2004
- --------------------------------------------
Steven A. Van Dyke
Director
/s/ Steven M. Feldman April 30, 2004
- --------------------------------------------
Steven M. Feldman
Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
45
Annual Report on Form 10-K
Item 15(a) (1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedules
Certain Exhibits
Financial Statement Schedules
Year-ended January 31, 2004
Barneys New York, Inc.
New York, New York
Form 10-K--Item 15(a) (1) and (2)
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Barneys New York, Inc. and
subsidiaries, included in the Annual Report on Form 10-K of the Company for the
year ended January 31, 2004, are incorporated by reference in Item 8:
Consolidated Balance Sheets--January 31, 2004 and February 1, 2003
Consolidated Statements of Operations--
Year ended January 31, 2004, February 1, 2003 and February 2, 2002
Consolidated Statements of Changes in Stockholders' Equity--
Year ended January 31, 2004, February 1, 2003 and February 2, 2002
Consolidated Statements of Cash Flows
Year ended January 31, 2004, February 1, 2003 and February 2, 2002
Notes to Consolidated Financial Statements
The following consolidated financial statement schedules of Barneys New York,
Inc. and subsidiaries, are included in Item 15(d):
Schedule I Condensed Financial Information of Registrant
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Barneys New York, Inc.
We have audited the accompanying consolidated balance sheets of
Barneys New York, Inc. and subsidiaries as of January 31, 2004 and February 1,
2003, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended January 31, 2004. Our audits also included the financial statement
schedules listed in the index at Item 15(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Barneys
New York, Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended January 31, 2004, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in
fiscal year 2003, the Company changed its method of accounting for cash
consideration received from vendors to conform with Emerging Issues Task Force
Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." In addition, as discussed in Note 2 to
the consolidated financial statements, effective February 3, 2002, the Company
adopted Statement of Financial Accounting Standards No. 142, "Accounting for
Goodwill and Other Intangible Assets."
/s/ Ernst & Young LLP
New York, New York
March 19, 2004
F-1
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, FEBRUARY 1,
2004 2003
-------------- --------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 15,566 $ 7,111
Receivables, less allowances of $4,077 and $4,225........................................... 28,652 24,957
Inventories................................................................................. 61,535 62,252
Other current assets........................................................................ 9,929 7,908
-------------- --------------
Total current assets................................................................... 115,682 102,228
Fixed assets at cost, less accumulated depreciation and amortization
of $48,754 and $37,290..................................................................... 47,769 50,463
Excess reorganization value.................................................................... 147,226 147,764
Other assets................................................................................... 7,923 1,338
-------------- --------------
$ 318,600 $ 301,793
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................................................ $ __ $ 425
Revolving credit facility................................................................... __ 10,480
Accounts payable............................................................................ 24,016 20,747
Accrued expenses............................................................................ 32,963 33,029
-------------- --------------
Total current liabilities.............................................................. 56,979 64,681
Long-term debt................................................................................. 90,536 65,051
Other long-term liabilities.................................................................... 4,793 15,977
Series A Redeemable Preferred Stock-- Aggregate liquidation preference $2,000.................. 500 500
Commitments and contingencies
Stockholders' equity:
Common stock -- $.01 par value; authorized 25,000,000 shares --
shares issued 14,103,227 and 13,903,227................................................... 141 139
Additional paid-in capital..................................................................... 169,187 166,390
Accumulated other comprehensive income......................................................... 765 496
Retained deficit............................................................................... (4,301) (11,441)
-------------- --------------
Total stockholders' equity............................................................. 165,792 155,584
-------------- --------------
$ 318,600 $ 301,793
============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-2
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED
------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................................................ $ 409,477 $ 383,363 $ 371,169
Cost of sales............................................................ 221,496 204,015 208,845
-------------- -------------- --------------
Gross profit.................................................. 187,981 179,348 162,324
Expenses:
Selling, general and administrative (including occupancy expense of
$33,798, $32,421, and $31,367)...................................... 159,364 154,813 154,818
Depreciation and amortization...................................... 11,531 10,760 18,802
Other income-- net................................................. (5,872) (6,327) (6,957)
-------------- -------------- --------------
Operating income (loss).................................................. 22,958 20,102 (4,339)
Interest and financing costs, net of interest income..................... 15,143 11,036 10,393
-------------- -------------- --------------
Income (loss) before income taxes........................................ 7,815 9,066 (14,732)
Income taxes............................................................. 675 600 439
-------------- -------------- --------------
Net income (loss)........................................................ $ 7,140 $ 8,466 $ (15,171)
============== ============== ==============
Basic net income (loss) per share of common stock........................ $ 0.51 $ 0.61 $ (1.09)
============== ============== ==============
Diluted net income (loss) per share of common stock...................... $ 0.50 $ 0.61 $ (1.09)
============== ============== ==============
Weighted average number of shares of common stock outstanding
Basic.................................................................... 14,103 13,903 13,903
============== ============== ==============
Diluted.................................................................. 14,404 13,903 13,903
============== ============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-3
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED
ISSUED ADDITIONAL OTHER
--------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Balances at February 3, 2001................... 13,903 $ 139 $ 166,390 $ (4,736) -- $ 161,793
Net loss for Fiscal 2001....................... -- -- -- (15,171) -- (15,171)
------------ ------------ ------------ ------------ ------------ ------------
Balances at February 2, 2002................... 13,903 139 166,390 (19,907) -- 146,622
Net income for Fiscal 2002..................... -- -- -- 8,466 -- 8,466
Forward Contracts.............................. -- -- -- -- $ 496 496
-----------
Comprehensive income........................... -- -- -- -- -- 8,962
------------ ------------ ------------ ------------ ------------ ------------
Balances at February 1, 2003................... 13,903 139 166,390 (11,441) 496 155,584
Issuance of restricted stock................... 200 2 848 -- -- 850
Issuance of warrants........................... -- -- 1,949 -- -- 1,949
Net income for Fiscal 2003..................... -- -- -- 7,140 -- 7,140
Forward Contracts.............................. -- -- -- -- 269 269
-----------
Comprehensive income........................... -- -- -- -- -- 7,409
------------ ------------ ------------ ------------ ------------ ------------
Balances at January 31, 2004................... 14,103 $ 141 $ 169,187 $ (4,301) $ 765 $ 165,792
============ ============ ============ ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-4
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-----------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------- ------------- -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ 7,140 $ 8,466 $ (15,171)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.................................... 15,844 12,020 19,994
Write-off of fixed assets........................................ 200 -- --
Write-off of unamortized bank fees............................... 364 641 --
Deferred compensation............................................ 425 -- --
Deferred rent.................................................... 2,954 2,184 2,667
Decrease (increase) in:
Receivables...................................................... (3,695) 1,732 1,042
Inventories...................................................... 717 (9,803) 8,783
Other current assets............................................. (465) (778) 795
Long-term assets................................................. (1,953) -- (4)
(Decrease) increase in:
Accounts payable and accrued expenses............................ 3,741 (321) (4,095)
------------- ------------- -------------
Net cash provided by operating activities................... 25,272 14,141 14,011
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed asset additions............................................... (9,036) (11,082) (11,982)
Contributions from landlords........................................ -- -- 613
Restricted cash..................................................... -- 200 --
------------- ------------- -------------
Net cash used in investing activities....................... (9,036) (10,882) (11,369)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt.................................................. 398,270 439,691 397,613
Repayments of debt.................................................. (416,325) (445,216) (406,264)
Proceeds from senior notes issuance................................. 90,100 -- --
Repayment of long-term debt......................................... (58,064) -- --
Repayment of deferred rent obligations.............................. (15,000) -- --
Loan origination fees............................................... (6,762) (1,458) (525)
------------- ------------- -------------
Net cash used in financing activities....................... (7,781) (6,983) (9,176)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................ 8,455 (3,724) (6,534)
Cash and cash equivalents-- beginning of year....................... 7,111 10,835 17,369
------------- ------------- -------------
Cash and cash equivalents-- end of year............................. $ 15,566 $ 7,111 $ 10,835
============= ============= =============
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-5
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Barneys New York, Inc. ("Holdings") and Subsidiaries (collectively
the "Company") is a leading upscale retailer of men's, women's and children's
apparel and accessories and items for the home. The Company operates 21 stores
throughout the United States, including its three flagship stores in New York,
Beverly Hills and Chicago. The Company has entered into a licensing arrangement
pursuant to which a third party operates two retail stores in Japan and a single
in-store department in Singapore, all under the "Barneys New York" name.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Holdings and its wholly-owned and majority-owned subsidiaries in which Holdings
has a controlling financial interest and exercises control over their
operations. Intercompany investments and transactions have been eliminated in
consolidation.
(B) FISCAL YEARS
References in these financial statements to "2003", "2002" and "2001"
are for the 52 weeks ended January 31, 2004, February 1, 2003, and February 2,
2002, respectively.
(C) CASH AND CASH EQUIVALENTS
All highly liquid investments with a remaining maturity of three
months or less at the date of acquisition are classified as cash equivalents.
The carrying value approximates their fair value.
(D) ACCOUNTS RECEIVABLE AND FINANCE CHARGES
The Company provides credit to its customers and performs on-going
credit reviews of its customers. Accounts are generally written off
automatically after 180 days have passed without the Company having received a
full scheduled monthly payment. Accounts are written off sooner in the event of
bankruptcy or other factors that make collection seem unlikely. The Company
estimates the appropriate allowance using a model that considers the current
aging of the accounts, historical write-off and recovery rates and other
portfolio data. This estimate is then reviewed by Company management to assess
whether additional analysis is required to appropriately estimate expected
losses. Concentration of credit risk is limited because of the large number of
customers.
Finance charge income recorded in Fiscal 2003, 2002 and 2001
approximated $4,541,000, $4,608,000 and $4,661,000, respectively, and is
included in other income-net in the statement of operations. The costs of
administering the Company's private label credit card program are included in
selling, general and administrative expenses. Prior to any allocation of
"in-store" costs related to the Company's private label credit card program or
any allocation of corporate overhead expenses, these costs approximated
$3,651,000, $3,247,000, and $4,005,000 for the years ended January 31, 2004,
February 1, 2003, and February 2, 2002, respectively.
F-6
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
(E) INVENTORIES
Merchandise inventories, consisting primarily of finished goods, are
stated at the lower of FIFO (first-in, first-out) cost or market, as determined
by the retail inventory method. Merchandise is purchased from many different
vendors based throughout the world. Most of the Company's relationships with its
vendors are not subject to contractual arrangements. In the fiscal year ended
January 31, 2004, our ten top designers (including all brands owned by such
designers) accounted for approximately 27% of our total sales, and our two top
designers (including all brands owned by such designers) accounted for
approximately 10% and 4%, respectively, of our total sales. If one or more of
the Company's top designers were to cease providing the Company with adequate
supplies of merchandise, the Company's business might, in the short term, be
adversely affected. However, management believes that alternative supply sources
exist to fulfill the Company's requirements in the event of a disruption.
(F) FIXED ASSETS
Pursuant to American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"), property and equipment were restated at
approximate fair market value at January 30, 1999 in connection with the
Company's emergence from bankruptcy. Fixed assets acquired after January 30,
1999 are recorded at cost. Depreciation is computed using the straight-line
method. Fully depreciated assets are written off against accumulated
depreciation. Furniture, fixtures and equipment are depreciated over their
useful lives. Leasehold improvements are amortized over the shorter of the
useful life or the lease term. The Company expenses normal repairs and
maintenance costs as incurred.
(G) EXCESS REORGANIZATION VALUE
Excess reorganization value represents the adjustment of the
Company's balance sheet for reorganization value in excess of amounts allocable
to identifiable assets. In June 2001, SFAS No. 142, "Goodwill and Other
Intangible Assets" was issued. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets, including excess
reorganization value. Among other things, SFAS No. 142 requires that goodwill no
longer be amortized, but rather be tested annually for impairment. This
statement was effective for fiscal years beginning after December 15, 2001. In
accordance with SFAS No. 142, in the fiscal year ended January 31, 2004, we
completed the required testing for impairment of our excess reorganization
value. Based upon our testing, we concluded that the fair value of the
enterprise exceeded its book value. Accordingly, we did not need to perform the
second step of the test, which measures the amount of the impairment. For the
fiscal years ended January 31, 2004 and February 1, 2003, we did not record an
impairment loss related to excess reorganization value. However, our excess
reorganization value was reduced by approximately $538,000 and $1.7 million
during the fiscal years ended January 31, 2004 and February 1, 2003,
respectively, due to a reversal of a tax reserve resulting from the resolution
of tax contingencies existing at the time of our emergence from bankruptcy in
January 1999.
During the fiscal year ended February 2, 2002 (and prior fiscal
years), when SFAS No. 142 was not in effect, the Company amortized excess
reorganization value over a twenty-year period. If excess reorganization value
had not been amortized during the fiscal year ended February 2, 2002 the
Company's adjusted net (loss) income and basic and diluted (loss) income per
share would have been as follows:
F-7
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
FISCAL YEAR ENDED
FEBRUARY 2, 2002
-------------------------------
BASIC AND
DILUTED (LOSS)
NET (LOSS) INCOME PER
INCOME SHARE
------------ ----------
(dollars in thousands, except per share data)
As Reported........................................... $ (15,171) $ (1.09)
Amortization of Excess Reorganization Value........... 8,791 0.63
------------ ----------
As Adjusted........................................... $ (6,380) $ (0.46)
============ ==========
(H) EARNINGS PER COMMON SHARE ("EPS")
Basic EPS is computed as net income (loss) available to common
stockholders divided by the weighted average number of common shares
outstanding. Diluted EPS reflects the incremental increase in common shares
outstanding assuming the exercise of stock options and warrants that would have
had a dilutive effect on earnings per common share. Options and warrants to
acquire an aggregate of 1,762,234, 1,627,234 and 1,734,634 shares of common
stock (issued pursuant to the Company's stock option plans and other previously
outstanding options and warrants, all of which are discussed in Notes 8(b), 8(c)
and 9(b)) were not included in the computation of diluted EPS for Fiscal 2003,
2002 and 2001, respectively, as including them would have been anti-dilutive.
Net income (loss) attributed to common stockholders is not materially affected
by the 1% dividend on the 5,000 issued and outstanding shares of preferred
stock.
The following is an analysis of the differences in the share
computation used for basic and diluted earnings per common share in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
FISCAL YEAR ENDED
JANUARY 31, 2004
----------------
(in thousands)
Weighted average common shares outstanding................ 14,103
Effect of dilutive securities:
Warrants............................................... 301
-------
Weighted average common shares outstanding
and common share equivalents........................... 14,404
=======
Pro-forma disclosures, as required by Statement of Financial
Accounting Standard No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure", are computed as if the Company recorded compensation
expense based on the fair value for stock-based awards or grants. The following
pro-forma information includes the effects of the options discussed in Note
9(b).
F-8
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
FISCAL 2003 FISCAL 2002 FISCAL 2001
------------ ----------- -----------
(dollars in thousands, except
per share data)
Net income (loss)-as reported.............................................. $ 7,140 $ 8,466 $ (15,171)
Deduct: Stock-based employee compensation expense
determined under fair value method, net
of related tax effects............................................ 1,098 1,410 1,596
---------- ---------- ----------
Pro-forma net income (loss)................................................ $ 6,042 $ 7,056 $ (16,767)
========== ========== ==========
Net income (loss) per share:
Basic-- as reported........................................................ $ 0.51 $ 0.61 $ (1.09)
Diluted-- as reported...................................................... 0.50 0.61 (1.09)
Basic -- pro-forma......................................................... 0.43 0.51 (1.21)
Diluted-- pro-forma........................................................ 0.42 0.51 (1.21)
(I) IMPAIRMENT OF ASSETS
The Company records impairment losses on long-lived assets (including
excess reorganization value) when events and circumstances indicate that the
assets might be impaired. For purposes of evaluating the recoverability of
long-lived assets (including excess reorganization value through February 2,
2002), the recoverability test is performed using undiscounted net cash flows of
the individual stores and consolidated undiscounted net cash flows for
long-lived assets, not identifiable to individual stores. An impairment loss
recognized will be measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. If quoted market prices are not
available, the estimate of fair value will be based on the best information
available under the circumstances, such as prices for similar assets or the
present value of estimated expected future cash flows. Subsequent to February 2,
2002, the Company determines any impairment in excess reorganization value in
accordance with SFAS No. 142 as discussed in Note 2(g).
(J) FOREIGN EXCHANGE CONTRACTS
Derivative Instruments and Hedging Activities. In June 1998, the
Financial Accounting Standards Board, or FASB, issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and for
Hedging Activities", or SFAS No. 133, which we adopted, as amended, on February
4, 2001. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments. Specifically, SFAS No. 133 requires an
entity to recognize all derivative instruments as either assets or liabilities
in the balance sheet and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either stockholders' equity
or net income depending on whether the derivative instrument qualifies as a
hedge for accounting purposes and, if so, the nature of the hedging activity.
The Company in the normal course of business periodically enters into
foreign exchange forward contracts and option contracts to reduce the risk
associated with currency movements related to committed inventory purchases
denominated in foreign currency. The Company does not enter into these contracts
for the purpose of trading or speculation.
For the fiscal year ended February 2, 2002, the Company did not
designate the forward foreign currency contracts that it entered into as hedges
of the anticipated purchases, and therefore, unrealized gains and losses were
recognized currently in earnings. Accordingly, in connection with these forward
foreign currency contracts outstanding at February 2, 2002, the Company
recognized a loss of approximately $300,000 which was included in cost of sales
in the Statement of Operations and as a reduction to inventory as of February 2,
2002. For the fiscal years ended January 31, 2004 and February 1, 2003, the
Company designated its forward foreign currency contracts as cash flow hedges.
F-9
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
At January 31, 2004 and February 1, 2003, $765,000 and $496,000,
respectively, were recorded by the Company in other comprehensive income in the
Statement of Changes in Stockholders' Equity with corresponding increases to
other current assets, to recognize at fair value the forward foreign currency
contracts that were designated as cash flow hedging instruments in accordance
with SFAS No. 133. No components of the contracts were excluded in the
measurement of the related hedge effectiveness. Additionally, no gains or losses
related to the ineffectiveness of cash flow hedges were recognized in earnings
during fiscal 2003 and 2002. The Company expects to reclassify all of the
unrealized gain from other comprehensive income into earnings within the next
eight month period due to the actual usage of foreign exchange contracts to
purchase merchandise and the Company's ultimate sale of that merchandise.
Cost of sales includes a $653,000 and $53,000 loss in the fiscal
years ended January 31, 2004 and February 1, 2003, respectively, and income of
approximately $970,000 for the fiscal year ended February 2, 2002, related to
the settlement of foreign denominated inventory purchases.
In order to qualify as cash flow hedges, the Company's forward
foreign currency contracts must satisfy various criteria as outlined in SFAS No.
133. That criteria includes documenting at inception, the hedging relationship
and the risk management objective and strategy for undertaking the hedge. This
documentation includes identifying the hedged instrument, the hedged
transaction, the nature of the risk being hedged, and how the hedging
instrument's effectiveness in hedging the exposure to the hedged transaction's
variability in cash flows attributable to the hedged risk will be assessed.
The Company enters into these foreign currency contracts with an
unrelated third party bank. The critical terms of the Company's foreign currency
contracts are the same as the underlying forecasted transactions, therefore,
changes in the fair value of the contracts should be highly effective in
offsetting changes in the expected cash flows from the forecasted transactions.
In addition, the forecasted transactions that are being hedged are specifically
identifiable and the occurrence of the forecasted transactions is probable.
The gain in comprehensive income results in a deferred tax liability
which is offset by the Company's net operating loss carryforward. The deferred
tax on the gain and tax benefit from the use of the net operating loss
carryforward were recorded in comprehensive income as required by paragraph 37
of Statement of Financial Accounting Standard No. 109.
At January 31, 2004 and February 1, 2003, the notional amount and
estimated fair value, utilizing quotes from external sources, of the Company's
outstanding forward foreign currency contracts is detailed below:
JANUARY 31, 2004 FEBRUARY 1, 2003
-------------------------------------------- -------------------------------------------
FOREIGN CURRENCY NOTIONAL AMOUNT ESTIMATED FAIR VALUE NOTIONAL AMOUNT ESTIMATED FAIR VALUE
- ---------------- ------------------- ----------------------- ------------------- ----------------------
Euro................................ 18,095,000 18,704,000 8,506,000 9,100,000
British Pound....................... 165,000 170,000 160,000 153,000
At January 31, 2004, the Company's forward exchange contracts have
maturity dates through November 2004.
F-10
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
(K) REVENUE RECOGNITION
Sales, recognized at the point of sale, consist of sales of
merchandise, net of returns. Net sales in the Statement of Operations include an
estimate for merchandise returns, where a right of return exists, in accordance
with SFAS No. 48, "Revenue Recognition When Right of Return Exists."
In accordance with the licensing arrangements discussed in Note 7,
the Company's minimum royalty revenue is recognized monthly as the license fee
accrues. Any royalties above the minimum are recognized as earned.
(L) ADVERTISING EXPENSES
The Company expenses advertising costs upon first showing.
Advertising expenses were approximately $8,332,000, $7,120,000, and $6,647,000
in Fiscal 2003, 2002, and 2001, respectively.
In 2002, the FASB Emerging Issues Task Force ("EITF") issued EITF No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 addresses the accounting by a
reseller for consideration received from a vendor. A consensus was reached that
cash consideration is presumed to be a reduction in the price of a vendor's
product that should be recognized as a reduction of cost of sales. However, this
presumption can be overcome when the consideration received is for the
reimbursement of specific, identifiable and incremental costs of the reseller.
In that event, the consideration, subject to a threshold, is recognized as a
reduction in selling, general and administrative expenses. The provisions of
EITF 02-16 were effective for all new arrangements, or modifications to existing
arrangements, entered into after December 31, 2002.
For the fiscal year ended January 31, 2004, the implementation of
EITF 02-16 had the effect of increasing advertising expenses by approximately
$1.3 million and decreasing cost of sales by a like amount. Had EITF 02-16 been
in effect for the fiscal year ended February 1, 2003, selling, general and
administrative expenses would have increased by approximately $600,000 and cost
of sales would have decreased by a like amount.
(M) INCOME TAXES
The Company records income tax expense using the liability method.
Under this method, deferred tax assets and liabilities are estimated for the
future tax effects attributable to temporary differences between the financial
statement and tax basis of assets and liabilities.
(N) ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
F-11
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
(O) SHIPPING AND HANDLING COSTS
Shipping and handling costs of the Company are included in selling,
general and administrative expenses. These costs amounted to $1,583,000,
$1,332,000 and $1,243,000 for the fiscal years ended January 31, 2004, February
1, 2003, and February 2, 2002, respectively.
(P) INCOME STATEMENT EXPENSE CLASSIFICATION
Cost of sales includes the cost of merchandise sold as well as costs
associated with the purchase of the merchandise primarily including inbound
freight and duty costs, buying agent costs, foreign exchange gains and losses on
settlement of foreign denominated purchases, sample costs and label costs. All
other expenses, except depreciation and amortization, interest and income taxes,
but including internal transfer costs and warehousing and distribution expenses,
are included in selling, general and administrative expenses, because the
predominant costs associated with these expenses, most notably occupancy costs
and personnel costs, are general and administrative in nature. Based on these
classifications, the Company's gross margins may not be comparable to those of
other entities, since some entities include the costs related to their
distribution network and retail store rent expenses in cost of sales, whereas
others, like the Company, exclude these costs from gross margin, including them
instead in selling, general and administrative expenses. Expenses related to the
Company's distribution network which primarily include personnel, occupancy and
transportation costs were $5,928,000, $5,770,000, and $5,686,000 in Fiscal 2003,
2002, and 2001, respectively.
(Q) VENDOR ALLOWANCES
The Company receives allowances from its vendors through a variety of
programs and arrangements, primarily including co-operative advertising,
markdown reimbursement programs, salary expense reimbursement programs and
promotional event reimbursement programs. Allowances received from vendors
included in selling, general and administrative expenses, which are netted
against the related expense were, $8,916,000, $8,826,000, and $8,164,000 in
Fiscal 2003, 2002, and 2001, respectively. Markdown reimbursements are credited
against cost of sales in the period in which the related markdowns are taken.
Through February 1, 2003, all other reimbursement programs discussed
above were credited against the related selling, general and administrative
expense when the purpose for which the vendor funds were intended to be used had
been fulfilled. Effective with the adoption of EITF 02-16, which covered
reimbursement arrangements entered into after December 31, 2002, the Company now
credits the aggregate portion of the vendor reimbursements received in excess of
third party incremental costs incurred against cost of sales, with the remainder
credited against the related selling, general and administrative expense for
which the vendor funds were intended to be used.
(R) FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments" ("SFAS No. 107"), the Company has estimated the fair value of its
financial instruments using the following methods and assumptions: the carrying
amounts of cash and equivalents, accounts receivable and accounts payable
approximate fair value because of their short-term nature.
F-12
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
The fair value of the Company's long-term debt is estimated based on
quoted market prices for the same issue. The fair value was $106,000,000 at
January 31, 2004 and the related carrying amount, net of discount, was
$90,536,000.
(S) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities ("VIE's"), an interpretation of
Accounting Research Bulletin No. 51" ("Interpretation No. 46"). In December
2003, the FASB issued a revision to Interpretation No. 46 to make certain
technical corrections and address certain implementation issues that had arisen.
Interpretation No. 46 requires the consolidation of entities in which an
enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in an entity. Currently,
entities are generally consolidated by an enterprise when it has a controlling
financial interest through ownership of a majority voting interest in the
entity. Interpretation No. 46 was effective immediately for VIE's created after
January 31, 2003. The provisions of Interpretation No. 46, as revised, are
required to be applied by the Company no later than the end of the Company's
first quarter ending May 1, 2004. The Company is currently evaluating the
requirements and impact of Interpretation No. 46, however, at the present time,
the Company does not believe there are any additional entities that will require
disclosure or consolidation as a result of the provisions of Interpretation No.
46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
adoption of SFAS No. 149 had no impact on our results of operations or our
financial position.
In May 2003, the FASB issued Statement No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Company adopted SFAS No. 150 in the third quarter ended November
1, 2003. The adoption of SFAS No. 150 did not have any effect on the Company's
consolidated financial statements.
3. FIXED ASSETS
Fixed assets consist of the following:
JANUARY 31, FEBRUARY 1, USEFUL LIFE
2004 2003 (IN YEARS)
-------------- -------------- -------------
($ IN THOUSANDS)
Furniture, fixtures and equipment.............................................. $ 43,254 $ 39,470 3 to 7
Leasehold improvements......................................................... 53,269 48,283 2 to 14
-------------- --------------
Total.......................................................................... 96,523 87,753
Accumulated depreciation and amortization...................................... (48,754) (37,290)
-------------- --------------
Net fixed assets............................................................... $ 47,769 $ 50,463
============== ==============
F-13
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
4. DEBT
(A) REVOLVING CREDIT FACILITY
On July 15, 2002, the Company entered into a $105,000,000 million
credit facility led by General Electric Capital Corporation, as Administrative
Agent (the "GE Facility"), which replaced the Company's prior credit facility.
The GE Facility provided a $97,000,000 revolving loan commitment with a
$40,000,000 sub-limit for the issuance of letters of credit and an $8,000,000
term loan commitment. Proceeds from the GE Facility were used to repay in full
all amounts outstanding under a prior revolving credit facility and are being
used for working capital, capital expenditures and general corporate purposes.
On April 1, 2003, contemporaneously with the senior notes issuance discussed
below, the Company repaid the term loan outstanding under the GE Facility and
entered into a restated credit facility. The restated credit facility provides
for a $70.0 million revolving credit facility pursuant to which the Company may
borrow up to $66.0 million, with a $40.0 million sub-limit for the issuance of
letters of credit, subject to a borrowing base test. With the consent of the
required lenders under the restated credit facility, the maximum borrowing
amount may be increased to up to $70.0 million. The restated credit facility
matures on July 15, 2006.
The restated credit facility is secured by a first-priority lien on
substantially all of our assets, other than real property leaseholds. The assets
that secure our restated credit facility include, but are not limited to, our
accounts receivable, inventories, general intangibles (including software),
equipment and fixtures, equity interests of subsidiaries owned by us,
intellectual property and cash. In addition, each borrower under the restated
credit facility is required to cross-guarantee each of the other borrowers'
obligations under the restated credit facility, and the assets of each borrower
secure such borrower's cross guarantee.
Availability under the restated credit facility is calculated as a
percentage of eligible inventory and receivables, including finished inventory
covered by undrawn documentary letters of credit and Barneys private label
credit card receivables, less certain reserves. At January 31, 2004 we had
approximately $40.9 million of availability under this facililty.
Interest rates on borrowings under the restated credit facility are
either the "base rate," as defined in the restated credit facility, plus 1.00%
or LIBOR plus 2.50%, subject to quarterly adjustment after August 2, 2004. The
restated credit facility also provides for a fee of 2.0% per annum on the
maximum amount available to be drawn under each outstanding letter of credit and
a tiered unused commitment fee with a weighted average of approximately 0.45% on
the unused portion of the credit facility.
Average borrowings under the respective credit facilities for the
fiscal year ended January 31, 2004 and the fiscal year ended February 1, 2003
were $8.2 million and $30.7 million, respectively. The effective interest rate
on this portion of the Company's outstanding debt for the fiscal year ended
February 1, 2003 was 10.52%.
In connection with the origination of the GE Facility, and the
restatement of that facility on April 1, 2003, the Company incurred fees of
approximately $1,500,000 and $400,000, respectively. Such fees are being
amortized over the life of the GE Facility as interest and financing costs. In
addition, and in connection with the restatement of the GE Facility, the Company
wrote off approximately $364,000 in deferred financing costs relating to the
credit facility. The unamortized portion of the remaining fees is included in
Other Assets. The unamortized fees of approximately $641,000, associated with
the prior revolving credit facility which was replaced by the GE Facility, were
written off in Fiscal 2002 and are included in Interest expense.
F-14
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
The restated credit facility contains financial covenants relating to
net worth, earnings (specifically, earnings before interest, taxes, depreciation
and amortization ("EBITDA")), capital expenditures and minimum excess borrowing
base availability as outlined below. With the exception of the capital
expenditures covenant, which is measured on an annual basis, and the minimum
excess borrowing base availability covenant, with which we must be in compliance
at all times, the covenants discussed herein are required to be measured on a
quarterly basis.
Minimum consolidated net worth. As of the last day of every fiscal
quarter, starting with the first fiscal quarter of 2002, consolidated net worth
shall not be less than certain minimum amounts. The minimum amount is $136.0
million for the fiscal year ended January 31, 2004; $147.0 million at the end of
the fiscal year ending January 29, 2005; and $147.0 million at the end of the
fiscal year ending January 28, 2006.
Minimum consolidated EBITDA. As of the last day of every fiscal
quarter (for the defined trailing periods), starting with the first fiscal
quarter of 2002, EBITDA shall not be less than certain minimum amounts, subject
to escalation during the fiscal year. The minimum amount at the end of the
fiscal year ended January 31, 2004 is $25.0 million; $29.0 million at the end of
the fiscal year ending January 29, 2005; and $30.0 million at the end of the
fiscal year ending January 28, 2006.
Capital expenditures. Our total capital expenditures for the fiscal
year ended January 31, 2004 and for fiscal years ending thereafter, were limited
to $10.0 million per fiscal year, subject to increase if certain conditions are
met.
Minimum excess borrowing base availability. We are required to
maintain minimum excess borrowing base availability of $8.0 million at all
times.
At January 31, 2004, there were no loans outstanding under the
restated credit facility. As of February 1, 2003, inclusive of current amounts
due, the Company had approximately $18.1 million of loans outstanding under its
GE Facility, consisting of approximately $10.5 million of borrowings under the
revolving portion of the facility and $7.6 million in term loan borrowings. In
addition, at January 31, 2004 and February 1, 2003, $10,492,000 and $17,982,000,
respectively, was committed under unexpired letters of credit. Additionally, as
collateral for performance on certain leases and as credit guarantees, Barney's,
Inc. is contingently liable under standby letters of credit under the restated
credit facility in the amount of approximately $11,713,000.
Management believes that it will be in compliance with the financial
covenants contained in the restated credit facility for the fiscal year ending
January 29, 2005. However, any material deviations from the Company's forecasts
could require the Company to seek waivers or amendments of covenants,
alternative sources of financing or to reduce expenditures. There can be no
assurance that such waivers, amendments or alternative financing could be
obtained, or if obtained, would be on terms acceptable to the Company.
(B) $106,000,000 SENIOR NOTES
On April 1, 2003, the Company completed an offering of 106,000 units
at a price of $850 per unit, for gross proceeds of $90.1 million. Each unit
consisted of $1,000 principal amount at maturity of 9.000% senior secured notes
due April 1, 2008 of Barney's, Inc. and one warrant to purchase 3.412 shares of
common stock of Holdings at an exercise price of $0.01 per share. $106.0 million
aggregate principal amount at maturity of notes were issued, together with an
aggregate of 106,000 warrants to acquire an aggregate of 361,672 shares of the
common stock of Holdings. The warrants expire on April 1, 2008. Approximately
$1.9 million of the proceeds from the offering was allocated to the warrants and
F-15
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
the remainder of the proceeds was allocated to the notes. The total debt
discount of $17.8 million is being amortized over the life of the notes.
Interest is payable semi-annually on April 1 and October 1 commencing on October
1, 2003. In September 2003, the Company completed an exchange offer pursuant to
which the holders of the notes exchanged them for freely tradable notes with
substantially identical terms.
On or after April 1, 2006 and April 1, 2007, Barney's, Inc., at its
option, may redeem some or all of the notes at a redemption price of 109.894% of
accreted value, and 100% of principal amount at maturity, respectively, in all
cases plus accrued and unpaid interest. Prior to April 1, 2005, Barney's, Inc.
can utilize the proceeds of certain equity offerings to redeem up to 35% of the
aggregate principal amount at maturity of the notes, at a redemption price equal
to 113.192% of accreted value plus accrued and unpaid interest. If Barney's,
Inc. experiences a change of control, each holder of the notes will have the
right to sell to Barney's, Inc. all or a portion of their notes at 101% of their
accreted value, plus accrued and unpaid interest, to the date of repurchase.
In connection with the offering, Holdings agreed that upon receipt of
a written request from the holders of at least 5% of the shares issuable upon
exercise of the warrants, Holdings will, as promptly as practicable, file a
shelf registration statement covering the resale of the shares issuable upon
exercise of the warrants. Holdings may, at its option, file a registration
statement covering the resale of the shares issuable upon exercise of the
warrants.
Net proceeds to the Company were approximately $81.7 million after
deducting commissions, financial advisory fees and expenses (collectively
referred to as the "Offering Fees") of the offering. The Offering Fees of
approximately $8.4 million have been deferred and are included in other assets.
Such amount is being amortized to interest expense over the term of the notes.
The net proceeds were used to repay the $22,500,000 subordinated note; the
equipment notes; the term loan and a portion of the revolver loans outstanding
under the GE Facility; and a substantial portion of the Company's deferred rent
obligations pursuant to its flagship leases. The prepayment of the $22.5 million
subordinated note and the equipment notes aggregated approximately $58.1 million
and resulted in a gain on early extinguishments of debt of approximately
$200,000.
(C) REPAID DEBT
The following notes had original scheduled maturity dates of January
28, 2004. On April 1, 2003, a portion of the net proceeds from the senior note
issuance discussed above were used to repay these notes. Therefore, at February
1, 2003 in accordance with Statement of Financial Accounting Standards No. 6,
"Classification of Short-Term Obligations Expected to be Refinanced", these
obligations were recorded as long-term liabilities in the consolidated balance
sheet at February 1, 2003.
(i) $22,500,000 SUBORDINATED NOTE
This note bore interest at the stated rate of 10% per annum. After
amortization of the debt discount, this note was recorded at $22,112,000 at
February 1, 2003.
(ii) EQUIPMENT NOTES
These promissory notes, totaling $35,789,000, bore interest at the
stated rate of 11 1/2% per annum. The estimated fair value of the equipment
notes approximated face value as estimated by an investment banking firm
utilizing discounted cash flows and comparable company methodology.
F-16
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
(D) OTHER
During Fiscal 2003, 2002 and 2001, the Company paid interest of
approximately $9,879,000, $9,447,000 and $9,835,000, respectively.
The terms of the indenture governing Barney's, Inc.'s $106,000,000
Senior Notes and our restated credit facility restrict the ability of Barney's,
Inc. to make distributions to Holdings and, consequently, restrict the ability
of Holdings to pay dividends on shares of Holdings common stock. In addition,
the guarantee by Holdings of the restated credit facility prohibits Holdings
from declaring dividends on shares of its capital stock, with the exception of
dividends payable to holders of shares of Holdings preferred stock. Holdings has
no present intention to declare dividends on shares of its common stock.
5. COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases real property and equipment under agreements that
expire at various dates. Certain leases contain renewal provisions and generally
require the Company to pay utilities, insurance, taxes and other operating
expenses. In addition, certain real estate leases provide for escalation rentals
based upon inflation or increases in the lessor's costs or provide for
additional rent contingent upon the Company increasing its sales. In accordance
with SFAS No. 13 "Accounting for Leases," the Company accounts for the rental
payments due under its operating leases on a straight-line basis, and records an
annual rent expense for each lease by dividing the total rent payments due
during the term of the lease by the number of years in the term of the
respective lease. Accordingly, the difference between the cash rent expense and
the straight line rent expense is included in other long-term liabilities on the
balance sheet.
At January 31, 2004, total minimum rent payments at contractual rates
are as follows for the respective fiscal years:
($ IN 000'S)
-------------
2004................................................. $ 27,700
2005................................................. 27,177
2006................................................. 25,165
2007................................................. 24,234
2008................................................. 23,097
Thereafter........................................... 312,794
-------------
Total minimum rent payments.......................... $ 440,167
=============
Total rent expense in Fiscal 2003, 2002, and 2001, was $33,978,000,
$32,621,000, and $31,701,000, respectively, which included percentage rent of
$0, $60,000, and $37,000, in each of the respective periods.
(B) LITIGATION
The Company is involved in various legal proceedings which are
routine and incidental to the conduct of its business. Management believes that
none of these proceedings, if determined adversely to the Company, would have a
material effect on its financial condition or results of operations.
F-17
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
6. INCOME TAXES
Holdings is the parent of a U.S federal consolidated group that
includes Barney's, Inc. and its wholly-owned subsidiaries, collectively referred
to as the Consolidated Subsidiaries. Holdings and the Consolidated Subsidiaries
file a consolidated U.S federal income tax return. Under the U.S federal
consolidated return rules, the Consolidated Subsidiaries generally do not
directly pay U.S federal income taxes. Instead, Holdings remits any tax due with
respect to the consolidated group. To equitably allocate the consolidated income
tax liabilities of the consolidated group between Barney's, Inc., on behalf of
itself and its subsidiaries, and the remainder of the group, on January 28,
1999, Holdings entered into a tax sharing and indemnification agreement with the
Consolidated Subsidiaries. Under this agreement, Barney's, Inc. is obligated,
among other things, to pay to Holdings any taxes attributable to the
Consolidated Subsidiaries, and Holdings may be required to compensate Barney's,
Inc. for Holdings' use of tax benefits attributable to the Consolidated
Subsidiaries.
Significant components of the provision for income taxes attributable
to continuing operations, as well as taxes paid, are as follows:
FISCAL 2003 FISCAL 2002 FISCAL 2001
------------- ------------- -------------
Current
Federal............................................................ $ -- $ -- $ --
State, local and franchise......................................... 600,000 600,000 439,000
Foreign............................................................ 75,000 -- --
------------- ------------- -------------
Total Current...................................................... $ 675,000 $ 600,000 $ 439,000
============= ============= =============
Taxes Paid......................................................... $ 627,000 $ 538,000 $ 359,000
============= ============= =============
The reconciliation of income tax attributable to continuing
operations computed at the U.S. statutory tax rates to income tax expense is:
FISCAL 2003 FISCAL 2002 FISCAL 2001
----------- ----------- -----------
U.S. Statutory Rate................................................ 35.0% 35.0% 35.0%
State Taxes........................................................ 7.0 11.0 2.0
Foreign Taxes...................................................... 1.0 -- --
Other.............................................................. 1.0 (1.0) 3.0
Valuation Allowance................................................ (32.0) (38.0) (43.0)
------- ------- --------
Effective Tax Rate................................................. 12.0% 7.0% (3.0)%
======= ======= ========
F-18
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
Deferred tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
components of the Company's deferred tax assets and liabilities are as follows
($ in thousands):
JANUARY 31, FEBRUARY 1,
2004 2003
------------ ------------
Deferred tax assets:
Inventory................................................................ $ 57 $ 323
Provision for doubtful accounts.......................................... 241 299
Tax credit and loss carryforward......................................... 10,948 11,293
Other.................................................................... 2,654 1,925
------------ ------------
Gross deferred tax assets................................................ 13,900 13,840
Less: Valuation allowance................................................ (2,779) (5,684)
------------ ------------
Deferred tax assets......................................................... 11,121 8,156
Deferred tax liabilities:
Depreciation & amortization.............................................. 11,052 8,087
------------ ------------
Net deferred tax asset................................................... $ 69 $ 69
============ ============
Included in:
Current assets........................................................... $ 2,362 $ 1,501
Other long-term liabilities.............................................. (2,293) (1,432)
------------ ------------
Net deferred tax asset................................................... $ 69 $ 69
============ ============
At January 31, 2004, the Company had net operating loss carryforwards
of $27,200,000 for regular tax purposes, which begin to expire in 2020 and
future tax years. The AMT credit carryforward of $69,000 can be carried forward
indefinitely.
7. RELATED PARTY TRANSACTIONS
LICENSING ARRANGEMENTS
BNY Licensing, a wholly-owned subsidiary of Barneys, is party to
licensing arrangements pursuant to which (i) two retail stores are operated in
Japan and a single in-store department is operated in Singapore under the name
"BARNEYS NEW YORK", each by Barneys Japan Company ("Barneys Japan"), an
affiliate of Isetan of America, Inc., ("Isetan"), and (ii) Barneys Asia Co. LLC,
which is 70% owned by BNY Licensing and 30% owned by an affiliate of Isetan, has
the exclusive right to sublicense the BARNEYS NEW YORK trademark throughout Asia
(excluding Japan).
Pursuant to the trademark license agreement between BNY Licensing and
Barneys Japan, a royalty-bearing, exclusive right and license to operate retail
store locations in Japan and a royalty-bearing, non-exclusive right and license
to operate a department within a retail store in Singapore, under the trademark
and trade names "BARNEYS NEW YORK" (the "Trademark License Agreement") has been
granted to Barneys Japan. In addition, Barneys Japan has been granted a license
to make, sell and distribute certain products bearing the trademark "BARNEYS NEW
YORK" and to use "BARNEYS NEW YORK" as part of its corporate name. The Trademark
License Agreement expires on December 31, 2015; however, Barneys Japan may renew
the agreement for up to three additional ten year terms provided certain
conditions are met. Under the terms of the agreement, Barneys Japan pays BNY
Licensing or its assignee a minimum royalty of 2.50% of a minimum net sales
figure set forth in the agreement (the "Minimum Royalty") and an additional
royalty of 2.50% of net sales in excess of the minimum net sales and sales
generated from the expansion of Barneys Japan store base (beyond three stores)
and business methods. In accordance with a prior arrangement, Isetan was given
an absolute assignment of 90% of the annual minimum royalties. As a result, the
Company only receives royalty payments equal to 10% of the annual minimum
royalties as set forth in the licensing agreement.
F-19
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
Pursuant to the license agreement between BNY Licensing and Barneys
Asia Co., BNY Licensing has granted to Barneys Asia, a royalty-free, exclusive
right and license to sublicense the right to operate retail store locations and
departments with retail stores in Taiwan, Korea, Thailand, Malaysia, Hong Kong,
Indonesia, India, China and the Philippines, and a non-exclusive right and
license to sublicense the same activities in Singapore, under the trademark and
trade name "BARNEYS NEW YORK". In addition, Barneys Asia has been granted a
license to sublicense the right to make, sell and distribute certain products
bearing the trademark "BARNEYS NEW YORK". Further, Barneys Asia has been granted
a license to use "BARNEYS NEW YORK" as part of its corporate name. All
sublicenses granted by Barneys Asia under this agreement must be
royalty-bearing. The Barneys Asia License Agreement expires on December 31,
2015; however, Barneys Asia may renew the agreement for up to three additional
ten year terms.
Pursuant to the terms of the trademark license agreement between BNY
Licensing and an affiliate of Isetan, the Company's 10% portion of the annual
minimum royalty over the remaining initial term of this agreement ranges from
47,700,000 to 61,195,106 Japanese Yen ($450,900 to $578,400 at the January 31,
2004 conversion rate of 105.8 Japanese yen to one United States dollar) a year.
The minimum royalty revenue is recognized monthly as the license fee accrues.
Any royalties above the minimum will be recognized as earned. Minimum royalty
income included in other income, net is approximately $356,000, $318,000 and
$326,000 for Fiscal 2003, 2002, and 2001, respectively.
By a first amendment to the above license agreement dated as of
February 5, 2003, the affiliate of Isetan agreed to pay the Company the sum of
$750,000 in each of February 2003 and February 2004 in consideration of the
Company's consent to certain matters relating to the establishment by the
affiliate of Isetan of an additional Barneys New York store in Japan. The
Company received each payment as due.
8. STOCKHOLDERS' EQUITY
Holdings' Certificate of Incorporation (the "Charter") provides that
the total number of all classes of stock which Holdings will have authority to
issue is 35,000,000 shares, of which 25,000,000 will be Holdings common stock,
and 10,000,000 shares will be preferred stock (of which 20,000 shares have been
issued (see (d) below)), both having a par value of $0.01 per share. The rights
and preferences of the preferred stock are established by the Company's Board of
Directors upon issuance. Holdings is prohibited by its Charter from issuing any
class or series of non-voting securities.
(A) HOLDINGS COMMON STOCK
Each share of Holdings common stock entitles its holder to one vote.
The holders of record of Holdings common stock will be entitled to participate
equally in any dividend declared by the Board of Directors of Holdings. Each
share of Holdings common stock is entitled to share ratably in the net worth of
Holdings upon dissolution. So long as any shares of preferred stock are
outstanding, no dividends on Holdings common stock may be paid until all accrued
and unpaid dividends on the preferred stock have been paid.
(B) PREFERRED STOCK
The 20,000 shares of Series A preferred stock have an aggregate
liquidation preference of $2,000,000 (the "Liquidation Preference"), plus any
accrued and unpaid dividends thereon (whether or not declared). Dividends on the
preferred stock are cumulative (compounding annually) from January 28, 1999 (the
"Effective Date") and are payable when and as declared by the Board of Directors
of Holdings, at the rate of 1% per annum on the Liquidation Preference. No
dividends shall be payable on any shares of Holdings common stock until all
accrued and unpaid dividends on the preferred stock have been paid.
F-20
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
In accordance with SAB No. 64, Redeemable Preferred Stock, the
Company recorded the two separate issuances of redeemable preferred stock at
their respective fair values. The 5,000 shares originally issued to Bay Harbour
Management L.C. ("Bay Harbour"), one of the Company's principal shareholders,
were valued at $500,000. The remaining 15,000 shares were issued to the Barneys
Employees Stock Plan Trust (the "Trust"). See Note 9(a) Employees Stock Plan
below.
The shares of preferred stock will not be redeemable prior to January
28, 2005. On or after January 28, 2005, the preferred stock will be redeemable
at the option of Holdings for cash, in whole or in part, at an aggregate
redemption price equal to the Liquidation Preference, plus any accrued and
unpaid dividends thereon. In addition, Holdings will be required to redeem the
preferred stock in whole on January 28, 2009 at an aggregate redemption price
equal to the Liquidation Preference, plus any accrued and unpaid dividends
thereon.
The shares of preferred stock are convertible, in whole or in part,
at the option of the holders thereof, into 162,500 shares of Holdings common
stock. Any accrued and unpaid dividends on the preferred stock will be cancelled
upon conversion. Conversion rights will be adjusted to provide antidilution
protection for stock splits, stock combinations, mergers or other capital
reorganization of Holdings. In addition, upon a sale of Holdings, Holdings'
right to redeem the preferred stock will be accelerated. The preferred stock has
one vote per share and votes together with the Holdings common stock on all
matters other than the election of directors.
(C) RESTRICTED STOCK
Pursuant to an amendment to his employment agreement dated January
10, 2003, Holdings agreed to make a restricted stock award on February 2, 2003
of 200,000 shares of Holdings common stock to Howard Socol, the Company's
Chairman, President and Chief Executive Officer. The fair value of the
restricted shares was $850,000 based on the $4.25 trading price of Holdings
common stock on the award date. Pursuant to the restricted stock award agreement
between Holdings and Mr. Socol, until the shares vest, the shares will be held
in escrow and Mr. Socol may not transfer the shares. In addition, until the
shares vest, the shares are subject to a right of repurchase by Holdings upon
Mr. Socol's resignation without good reason or termination by Holdings for
cause. 100,000 of the shares vested on January 31, 2004 and the other 100,000
shares will vest on January 31, 2005, provided that Mr. Socol does not terminate
his employment before that date. The agreement also contains an accelerated
vesting provision upon the occurrence of certain events.
F-21
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
(A) EMPLOYEES STOCK PLAN
Pursuant to the plan of reorganization, Holdings established the
Barneys Employees Stock Plan effective January 28, 1999 for all eligible
employees and 15,000 shares of new Holdings Preferred Stock were contributed to
the Barneys Employees Stock Plan Trust. This Preferred Stock will be issued to
existing employees of Barneys as incentive compensation in connection with
future services to be rendered to the Company. Since the 15,000 shares issued to
the Trust have not yet been issued to existing employees, they are not
considered as issued or outstanding. When such shares are issued to the
employees, the Company will record compensation expense based on the fair value
of the shares at such time. Any difference between the fair value at that time
and the ultimate redemption value will be accreted as a dividend over the period
up through the date on which they must be redeemed. This plan is a profit
sharing plan covering all eligible employees other than those covered by a
collective bargaining agreement. Contributions under this plan are at the
discretion of the Company.
(B) STOCK OPTIONS
The Company has a stock option plan that provides for the granting of
stock options to officers and key employees for purchase of Holdings' common
shares. This plan is administered by the compensation committee of the Board of
Directors, whose members are not eligible for grants under this plan. These
options expire seven years from the date of grant and vest 20% on the date of
grant, with the remainder vesting ratably over the next four years. The option
price is determined by the compensation committee, but cannot be less than 100%
of the fair market value of the stock (as defined) at the date the option is
granted. As of January 31, 2004, there were 257,766 shares available for future
grant under this option plan.
In Fiscal 2000, pursuant to his employment agreement with the
Company, Howard Socol, Chairman, President and Chief Executive Officer, was
granted 792,234 options from this plan to purchase an equivalent number of
shares of Holdings common stock. Pursuant to an amendment to his employment
agreement in Fiscal 2002, Holdings has guaranteed that, as of the date of the
first change of control of Holdings, the aggregate amount of compensation
derived from all stock options (previously or thereafter) granted to Mr. Socol
(and the value of any shares of Holdings common stock acquired upon exercise of
such stock options) will be at least $5.0 million. If Holdings achieves certain
financial targets, the guarantee will increase to as much as $10.0 million.
Following the change of control, Holdings will pay Mr. Socol in cash any
shortfall between the aggregate value of all stock options granted to him and
the guaranteed amount.
In addition to the above stock option plan, in Fiscal 1999, the
Company adopted a stock option plan that provides for the granting of
non-qualified stock options to non-employee members of the Company's Board of
Directors. Each Eligible Director (as defined in the option plan) is granted an
option to purchase 5,000 shares of Holdings common stock upon his or her initial
appointment to the Board of Directors, exercisable at the fair market value of
Holdings common stock at the date of grant. These options expire ten years from
the date of grant and vest 50% on the date of grant, with the remainder on the
first anniversary thereof. At the discretion of the Board of Directors,
additional options may be granted to Eligible Directors on the date of the
annual stockholders' meeting that takes place after the initial grant. As of
January 31, 2004, 30,000 shares were available for future grants pursuant to
this option plan.
F-22
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
Following is a summary of the stock option plan activity for each of
the respective years:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------------- ---------------
Outstanding at February 3, 2001........................... 1,292,234 $ 9.81
Granted................................................... 489,000 9.62
Canceled.................................................. (46,600) 10.04
-------------
Outstanding at February 2, 2002........................... 1,734,634 9.75
Granted................................................... -- --
Canceled.................................................. (107,400) 9.89
-------------
Outstanding at February 1, 2003........................... 1,627,234 9.74
Granted................................................... 135,000 10.00
Canceled.................................................. -- --
-------------
Outstanding at January 31, 2004........................... 1,762,234 9.76
=============
At January 31, 2004, the outstanding options have a weighted average
remaining contractual life of 5.9 years, with exercise prices ranging from $8.68
- -- $10.25.
Options exercisable at:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ----------------
February 2, 2002..................... 599,359 $ 9.74
February 1, 2003..................... 972,318 9.77
January 31, 2004..................... 1,483,434 9.72
There were no options granted during Fiscal 2002. The weighted
average fair value of options granted during Fiscal 2001 and 2003 estimated on
the date of grant using the Black Scholes option-pricing model was $2.88 and
$3.77, respectively. The fair values were estimated on the date of grant using
the following weighted average assumptions: risk-free interest rate range of
3.60% to 6.66% depending on grant date; dividend yield of 0%; a weighted average
expected life ranging from five to 10 years; and expected volatility ranging
from 37.3% to 41.5%.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its employee stock options. Under APB No. 25,
no compensation expense is recognized because the exercise price of the stock
options equals the assumed market price of the underlying stock on the date of
grant.
(C) UNION PLAN
Pursuant to agreements with unions, the Company is required to make
periodic pension contributions to union-sponsored multiemployer plans which
provide for defined benefits for all union members employed by the Company.
Union pension expense aggregated $723,000, $753,000 and $771,000 in Fiscal 2003,
2002 and 2001, respectively. The Company, at present, has no intentions of
withdrawing from this plan.
(D) 401(K) AND MONEY PURCHASE PLAN
Through December 2001, the Company maintained both a 401(k) Savings
Plan and a Money Purchase Plan. All employees of the Company, except for certain
employees covered by specific collective bargaining agreements, were eligible to
F-23
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
participate in both plans. Pursuant to the terms of the 401(k) Plan, eligible
participating employees can elect to contribute between 1% and 13% of their
annual compensation up to the annual dollar limits set by the Internal Revenue
Service. The Company will match 50% of the first 6% of the participant's
elective contributions resulting in a maximum of 3% of total compensation.
Effective January 2002, the Company amended the 401(k) Plan and the Money
Purchase Plan. Prior to the effective date of the amendments, contributions to
the Money Purchase Plan were made 100% by the Company in an amount equal to 3%
of a participant's eligible compensation for the year in question, subject to a
specified cap. In addition, the 401(k) Plan included a profit sharing feature
whereby the Company could make a discretionary contribution of up to 3% of a
participant's eligible compensation. The determination of whether or not a
contribution is made and, if so, the amount thereof, is determined by the
Compensation Committee. Pursuant to the amendments, the following occurred: (1)
further contributions to the Money Purchase Plan were eliminated commencing with
contributions for the 2002 plan year, (2) the plans were consolidated with the
new plan now called the Barney's, Inc. Retirement Savings Plan, (3) the adding
of a non-discretionary contribution of 1.5% of a participant's eligible
compensation for the year in question subject to a specified cap and (4) an
increase in the maximum discretionary contribution from 3% to 4% of a
participant's eligible compensation.
The aggregate expense of these plans was $1,251,000, $1,560,000, and
$1,695,000 in Fiscal 2003, 2002 and 2001, respectively.
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
JANUARY 31, FEBRUARY 1,
2004 2003
-----------------------------
($ In thousands)
Payroll and other employee benefit liabilities............... $ 8,774 $ 9,608
Customer liabilities......................................... 13,312 11,203
Interest..................................................... 3,266 3,220
Other........................................................ 7,611 8,998
----------- -----------
Accrued expenses............................................. $ 32,963 $ 33,029
=========== ===========
11. OTHER INCOME
Other income -- net includes the following at:
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------------------------------------------------- ------------ ---------------- -------------
($ In thousands)
Finance charge income................................. $ 4,541 $ 4,608 $ 4,661
Income pursuant to license agreement.................. 1,106 318 326
Insurance recoveries.................................. -- 523 926
Reversal of Predecessor Company liabilities........... -- -- 913
Sale of a trademark unrelated to business............. -- 400 --
Other................................................. 225 478 131
--------- --------- ---------
Total................................................. $ 5,872 $ 6,327 $ 6,957
========= ========= =========
F-24
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
12. OTHER
Mr. Socol became a member of the board of Liz Claiborne Inc. during
fiscal 2003. During fiscal 2003, the Company purchased at retail approximately
$3.7 million of products from Liz Claiborne Inc.
Mr. Questrom, a member of the Board of Directors and former Chairman,
President and Chief Executive Officer of the Company is also a member of the
board of Polo Ralph Lauren Corporation. During Fiscal 2003, 2002, and 2001, the
Company purchased at retail approximately $793,000, $1,245,000, and $1,558,000,
respectively, of products from Polo Ralph Lauren Corporation.
Bay Harbour and Whippoorwill, who collectively beneficially own
approximately 79% of the outstanding shares of Holdings common stock, are
parties to a Stockholders Agreement, dated as of November 13, 1998 (the
"Stockholders Agreement"), which sets forth their agreement with respect to
certain matters relating to the shares of Holdings common stock held by them.
Pursuant to the Stockholders Agreement, each of Bay Harbour and Whippoorwill
have agreed to (i) grant rights of first offer as well as tag along rights in
the event of a transfer of shares, (ii) grant the right to participate in an
acquisition of additional shares of Holdings common stock by one of them, and
(iii) give the other a right of first refusal to purchase shares of Holdings
common stock which one of them has requested Holdings to register pursuant to
the Registration Rights Agreement entered into on the effective date of the
Company's plan of reorganization. In addition, Bay Harbour and Whippoorwill have
agreed to take all actions necessary to elect three designees of each, one
designee of Isetan (which right of Isetan has since expired), the chief
executive officer of Holdings, and three independent directors, to the Board of
Directors of Holdings. The Stockholders Agreement also generally prohibits each
of Bay Harbour and Whippoorwill from voting the shares of Holdings common stock
held by it in favor of amending Holdings' Certificate of Incorporation or Bylaws
or a sale of the Company without the consent of the other.
On the Effective Date, pursuant to the plan of reorganization,
Messrs. Greenhaus and Strumwasser, who are principals and officers of
Whippoorwill, and Messrs. Teitelbaum and Van Dyke, who are principals of Bay
Harbour, and Mr. Halpern, became members of the board of directors of Holdings.
Holdings guaranteed the obligations of Barney's, Inc. and its
subsidiaries under the leases for the Company's flagship stores and the
licensing arrangements (described in Note 7).
Approximately 37% of the Company's employees are covered under
collective bargaining agreements.
F-25
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On April 1, 2003, Barney's, Inc., a subsidiary of the Company, issued
$106.0 million principal amount of its 9.000% senior secured notes due April 1,
2008. Barney's, Inc. and the guarantor subsidiaries are 100% owned by Holdings.
These notes have been fully and unconditionally, jointly and severally
guaranteed by Holdings and each of the existing and future domestic restricted
subsidiaries of Barney's, Inc. Subject to certain exceptions, Barney's, Inc. is
restricted in its ability to make funds available to Holdings. The following
condensed consolidating financial information of the Company is being provided
pursuant to Article 3-10(d) of Regulation S-X.
FISCAL YEAR ENDED JANUARY 31, 2004
------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
Net sales............................. $ -- $ 357,758 $ 51,719 $ -- $ -- $ 409,477
Cost of sales......................... -- 192,421 29,075 -- -- 221,496
------------ ------------ ------------ ------------ ------------ ------------
Gross profit....................... -- 165,337 22,644 -- -- 187,981
Expenses:
Selling, general and
administrative expenses
(including occupancy
expense of $33,798)................ 425 144,340 14,599 -- -- 159,364
Depreciation and amortization........ -- 10,786 745 -- -- 11,531
Other income-- net................... -- (5,872) -- -- -- (5,872)
------------ ------------ ------------ ------------ ------------ ------------
Operating (loss) income............ (425) 16,083 7,300 -- -- 22,958
Equity in net income of
subsidiary........................ (8,240) -- -- -- 8,240 --
Interest and financing costs,
net of interest income............... -- 15,143 -- -- -- 15,143
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes......... 7,815 940 7,300 -- (8,240) 7,815
Income taxes.......................... 675 -- -- -- -- 675
------------ ------------ ------------ ------------ ------------ ------------
Net income......................... $ 7,140 $ 940 $ 7,300 $ -- $ (8,240) $ 7,140
============ ============ ============ ============ ============ ============
F-26
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FISCAL YEAR ENDED FEBRUARY 1, 2003
---------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
Net sales............................. $ -- $ 336,298 $ 47,065 $ -- $ -- $ 383,363
Cost of sales......................... -- 177,218 26,797 -- -- 204,015
------------ ------------ ------------ ------------ ------------ ------------
Gross profit....................... -- 159,080 20,268 -- -- 179,348
Expenses:
Selling, general and
administrative expenses
(including occupancy
expense of $32,421)................ -- 139,850 14,963 -- -- 154,813
Depreciation and amortization........ -- 9,233 1,527 -- -- 10,760
Other income-- net................... -- (6,278) (49) -- -- (6,327)
------------ ------------ ------------ ------------ ------------ ------------
Operating income................... -- 16,275 3,827 -- -- 20,102
Equity in net income of
subsidiary........................ (9,027) -- -- -- 9,027 --
Interest and financing costs,
net of interest income............... (39) 11,075 -- -- -- 11,036
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes......... 9,066 5,200 3,827 -- (9,027) 9,066
Income taxes.......................... 600 -- -- -- -- 600
------------ ------------ ------------ ------------ ------------ ------------
Net income......................... $ 8,466 $ 5,200 $ 3,827 $ -- $ (9,027) $ 8,466
============ ============ ============ ============ ============ ============
F-27
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FISCAL YEAR ENDED FEBRUARY 2, 2002
------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
Net sales....................... $ -- $ 323,722 $ 47,447 $ -- $ -- $ 371,169
Cost of sales................... -- 181,908 26,937 -- -- 208,845
------------ ------------ ------------ ------------ ------------ ------------
Gross profit................. -- 141,814 20,510 -- -- 162,324
Expenses:
Selling, general and
administrative expenses
(including occupancy
expense of $31,367).......... -- 138,488 16,330 -- -- 154,818
Depreciation and
amortization................. -- 17,070 1,732 -- -- 18,802
Other income-- net............. -- (6,345) (612) -- -- (6,957)
------------ ------------ ------------ ------------ ------------ ------------
Operating (loss) income........ -- (7,399) 3,060 -- -- (4,339)
Equity in net loss of
subsidiary................... 15,098 -- -- -- (15,098) --
Interest and financing
costs, net of interest
income........................ (366) 7,107 3,652 -- -- 10,393
------------ ------------ ------------ ------------ ------------ ------------
Loss before income taxes (14,732) (14,506) (592) -- 15,098 (14,732)
Income taxes.................... 439 -- -- -- -- 439
------------ ------------ ------------ ------------ ------------ ------------
Net loss..................... $ (15,171) $ (14,506) $ (592) $ -- $ 15,098 $ (15,171)
============ ============ ============ ============ ============ ============
F-28
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 2004
------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------ ----------- ----------- ----------- -----------
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 15,029 $ 537 $ -- $ -- $ 15,566
Receivables, less allowances
of $4,077....................... -- 28,354 298 -- -- 28,652
Inventories...................... -- 51,337 10,198 -- -- 61,535
Other current assets............. 2,787 6,769 373 -- -- 9,929
------------- ------------ ----------- ----------- ----------- -----------
Total current assets.......... 2,787 101,489 11,406 -- -- 115,682
Fixed assets at cost, less
accumulated depreciation and
amortization of $48,754.......... -- 45,209 2,560 -- -- 47,769
Excess reorganization value....... -- 147,226 -- -- -- 147,226
Investment in and advances to
subsidiary....................... 165,135 29,660 -- -- (194,795) --
Other assets...................... -- 7,912 11 -- -- 7,923
------------- ------------ ----------- ----------- ----------- -----------
Total assets.................. $ 167,922 $ 331,496 $ 13,977 $ -- $ (194,795) $ 318,600
============= ============ =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................. $ -- $ 23,747 $ 269 $ -- $ -- $ 24,016
Accrued expenses................. 102 25,997 6,864 -- -- 32,963
Net affiliate payable............ -- 125,045 33,493 -- (158,538) --
------------- ------------ ----------- ----------- ----------- -----------
Total current liabilities..... 102 174,789 40,626 -- (158,538) 56,979
Long-term debt.................... -- 90,536 -- -- -- 90,536
Other long-term liabilities....... 2,293 3,825 (1,325) -- -- 4,793
Series A Redeemable Preferred
Stock -- Aggregate
liquidation preference $2,000.... 500 -- -- -- -- 500
Commitments and contingencies
Stockholders' equity:
Preferred stock.................. -- -- 214 -- (214) --
Common stock-- $.01 par
value; authorized
25,000,000 shares --
issued 14,103,227 shares........ 141 -- 341 -- (341) 141
Additional paid-in capital....... 169,187 -- 45,176 -- (45,176) 169,187
Accumulated other comprehensive
income...................... -- 765 -- -- -- 765
Retained deficit................. (4,301) 61,581 (71,055) -- 9,474 (4,301)
------------- ------------ ----------- ----------- ----------- -----------
Total stockholders' equity.... 165,027 62,346 (25,324) -- (36,257) 165,792
------------- ------------ ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity............. $ 167,922 $ 331,496 $ 13,977 $ -- $ (194,795) $ 318,600
============= ============ =========== =========== =========== ===========
F-29
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
FEBRUARY 1, 2003
-----------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 6,666 $ 445 $ -- $ -- $ 7,111
Receivables, less allowances
of $4,225....................... -- 24,575 382 -- -- 24,957
Inventories...................... -- 52,879 9,373 -- -- 62,252
Other current assets............. 1,507 6,097 304 -- -- 7,908
------------ ------------ ------------ ------------ ------------ ------------
Total current assets.......... 1,507 90,217 10,504 -- -- 102,288
Fixed assets at cost, less
accumulated depreciation and
amortization of $37,290.......... -- 47,550 2,913 -- -- 50,463
Excess reorganization value ...... -- 147,764 -- -- -- 147,764
Investment in and advances to
subsidiary....................... 156,113 29,659 -- -- (185,772) --
Other assets...................... -- 1,327 11 -- -- 1,338
------------ ------------ ------------ ------------ ------------ ------------
Total assets.................. $ 157,620 $ 316,517 $ 13,428 $ -- $ (185,772) $ 301,793
============ ============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt.................. $ -- $ 425 $ -- $ -- $ -- $ 425
Revolving credit facility........ -- 10,480 -- -- -- 10,480
Net affiliate payable............ -- 115,208 42,547 -- (157,755) --
Accounts payable................. -- 20,521 226 -- -- 20,747
Accrued expenses................. 598 28,382 4,049 -- -- 33,029
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities..... 598 175,016 46,822 -- (157,755) 64,681
Long-term debt.................... -- 65,051 -- -- -- 65,051
Other long-term liabilities....... 1,434 15,313 (770) -- -- 15,977
Series A Redeemable Preferred
Stock -- Aggregate
liquidation preference $2,000.... 500 -- -- -- -- 500
Commitments and contingencies
Stockholders' equity:
Preferred stock.................. -- -- 214 -- (214) --
Common stock-- $.01 par
value; authorized
25,000,000 shares --
issued 13,903,227 shares........ 139 -- 341 -- (341) 139
Additional paid-in capital....... 166,390 -- 45,176 -- (45,176) 166,390
Accumulated other comprehensive
income...................... -- 496 -- -- -- 496
Retained deficit................. (11,441) 60,641 (78,355) -- 17,714 (11,441)
------------ ------------ ------------ ------------ ------------ ------------
Total stockholders' equity.... 155,088 61,137 (32,624) -- (28,017) 155,584
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity............. $ 157,620 $ 316,517 $ 13,428 $ -- $ (185,772) $ 301,793
============ ============ ============ ============ ============ ============
F-30
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED JANUARY 31, 2004
-----------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ----------- ------------ ------------- ----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........................ $ 7,140 $ 940 $ 7,300 $ -- $ (8,240) $ 7,140
Adjustments to reconcile net
income to net cash (used in)
provided by operating
activities:
Depreciation and amortization..... -- 15,099 745 -- -- 15,844
Write-off of fixed assets......... -- 200 -- -- -- 200
Write-off of unamortized bank
fees............................. -- 364 -- -- -- 364
Deferred compensation............. 425 -- -- -- -- 425
Deferred rent..................... -- 2,509 445 -- -- 2,954
Equity in net income of
subsidiary...................... (8,240) -- -- -- 8,240 --
Decrease (increase) in:
Receivables...................... -- (3,779) 84 -- -- (3,695)
Inventories...................... -- 1,542 (825) -- -- 717
Other current assets............. -- (396) (69) -- -- (465)
Long-term assets................. -- (1,953) -- -- -- (1,953)
Increase (decrease) in:
Accounts payable and accrued
expenses....................... 42 841 2,858 -- -- 3,741
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
operating activities........... (633) 15,367 10,538 -- -- 25,272
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Fixed asset additions............. -- (8,644) (392) -- -- (9,036)
Investment in and advances to
subsidiary....................... 633 9,421 (10,054) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities........ 633 777 (10,446) -- -- (9,036)
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from debt................ -- 398,270 -- -- -- 398,270
Repayments of debt................ -- (416,325) -- -- -- (416,325)
Proceeds from senior notes
issuance......................... -- 90,100 -- -- -- 90,100
Repayments of long-term debt...... -- (58,064) -- -- -- (58,064)
Repayments of deferred rent
obligation.................... -- (15,000) -- -- -- (15,000)
Loan origination fees............. -- (6,762) -- -- -- (6,762)
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities.................... -- (7,781) -- -- -- (7,781)
----------- ----------- ----------- ----------- ----------- -----------
Net increase in cash
and cash equivalents............. -- 8,363 92 -- -- 8,455
Cash and cash equivalents--
beginning of period.............. -- 6,666 445 -- -- 7,111
----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents-- end
of period........................ $ -- $ 15,029 $ 537 $ -- $ -- $ 15,566
=========== =========== =========== =========== =========== ===========
F-31
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED FEBRUARY 1, 2003
--------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------- ------------- ------------
(In thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........................ $ 8,466 $ 5,200 $ 3,827 $ -- $ (9,027) $ 8,466
Adjustments to reconcile net
income to net cash (used in)
provided by operating
activities:
Depreciation and amortization..... -- 10,493 1,527 -- -- 12,020
Write-off of unamortized bank
fees............................. -- 641 -- -- -- 641
Deferred rent..................... -- 1,772 412 -- -- 2,184
Equity in net income of
subsidiary....................... (9,027) -- -- -- 9,027 --
Decrease (increase) in:
Receivables...................... -- 1,836 (104) -- -- 1,732
Inventories...................... -- (9,877) 74 -- -- (9,803)
Other current assets............. -- (727) (51) -- -- (778)
Increase (decrease) in:
Accounts payable and accrued
expenses....................... (444) 2,890 (2,767) -- -- (321)
------------ ------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
operating activities........... (1,005) 12,228 2,918 -- -- 14,141
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Fixed asset additions............. -- (10,752) (330) -- -- (11,082)
Restricted cash................... -- 200 -- -- -- 200
Investment in and advances to
subsidiary....................... (5,792) 8,626 (2,821) (13) -- --
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities.................... (5,792) (1,926) (3,151) (13) -- (10,882)
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from debt................ -- 439,691 -- -- -- 439,691
Repayments of debt................ -- (445,216) -- -- -- (445,216)
Payment of bank fees.............. -- (1,458) -- -- -- (1,458)
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in financing
activities.................... -- (6,983) -- -- -- (6,983)
------------ ------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents............. (6,797) 3,319 (233) (13) -- (3,724)
Cash and cash equivalents--
beginning of period.............. 6,797 3,347 678 13 -- 10,835
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents-- end
of period........................ $ -- $ 6,666 $ 445 $ -- $ -- $ 7,111
============ ============ ============ ============ ============ ============
F-32
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED FEBRUARY 2, 2002
------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------- ------------- ------------ ------------
(In thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $ (15,171) $ (14,506) $ (592) $ -- $ 15,098 $ (15,171)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization.... -- 18,262 1,732 -- -- 19,994
Deferred rent.................... 217 2,024 426 -- -- 2,667
Equity in net loss of subsidiary. 15,098 -- -- -- (15,098) --
Decrease (increase) in:
Receivables..................... -- 888 154 -- -- 1,042
Inventories..................... -- 7,105 1,678 -- -- 8,783
Other current assets............ (217) 928 84 -- -- 795
Long-term assets................ -- (4) -- -- -- (4)
Increase (decrease) in:
Accounts payable and accrued
expenses...................... 80 (2,990) (1,185) -- -- (4,095)
------------ ------------ ------------ ------------ ------------ ------------
Net cash provided by
operating activities......... 7 11,707 2,297 -- -- 14,011
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Fixed asset additions............ -- (11,182) (800) -- -- (11,982)
Contributions from landlords..... -- 613 -- -- -- 613
Investment in and advances to
subsidiary...................... (5,216) 7,267 (2,051) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities................... (5,216) (3,302) (2,851) -- -- (11,369)
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from debt............... -- 397,613 -- -- -- 397,613
Repayments of debt............... -- (406,264) -- -- -- (406,264)
Payment of bank fees............. -- (525) -- -- -- (525)
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in financing
activities................... -- (9,176) -- -- -- (9,176)
------------ ------------ ------------ ------------ ------------ ------------
Net decrease in cash and cash
equivalents..................... (5,209) (771) (554) -- -- (6,534)
Cash and cash equivalents--
beginning of period............. 12,006 4,118 1,232 13 -- 17,369
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents--
end of period................... $ 6,797 $ 3,347 $ 678 $ 13 $ -- $ 10,835
============ ============ ============ ============ ============ ============
F-33
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
2003-- QUARTER ENDED
-------------------------------------------------
5/3/03 8/2/03 11/1/03 1/31/04
------ ------ ------- -------
(in thousands, except per share amounts)
Net sales......................................... $ 91,385 $ 88,707 $ 111,893 $ 117,492
Gross profit...................................... 40,788 40,543 50,705 55,945
Net (loss) income................................. (1,210) (2,102) 4,141 6,311
Basic EPS......................................... (0.09) (0.15) 0.29 0.45
Diluted EPS....................................... (0.09) (0.15) 0.29 0.44
2002 -- QUARTER ENDED
-------------------------------------------------
5/4/02 8/3/02 11/2/02 2/1/03
------ ------ ------- ------
(in thousands, except per share amounts)
Net sales......................................... $ 92,475 $ 81,603 $ 103,299 $ 105,986
Gross profit...................................... 42,469 40,157 46,249 50,473
Net income (loss)................................. 478 (439) 2,877 5,550
Basic and diluted EPS............................. 0.03 (0.03) 0.21 0.40
F-34
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------ ------------
(In thousands)
Expenses:
Selling, general and administrative expenses......................... $ 425 $ -- $ --
------------ ------------ ------------
Loss before interest and financing costs, equity in net
(income) loss of subsidiary and income taxes...................... 425 -- --
Equity in net (income) loss of subsidiary............................ (8,240) (9,027) 15,098
Interest and financing costs, net of interest income................. -- (39) (366)
------------ ------------ ------------
Income (loss) before income taxes................................. 7,815 9,066 (14,732)
Income taxes......................................................... 675 600 439
------------ ------------ ------------
Net income (loss)................................................. $ 7,140 $ 8,466 $ (15,171)
============ ============ ============
F-35
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT --- (CONTINUED)
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
FISCAL YEAR FISCAL YEAR
ENDED ENDED
JANUARY 31, FEBRUARY 1,
2004 2003
-------------- --------------
(In thousands, except share data)
ASSETS
Current assets:
Other current assets........................................................ $ 2,787 $ 1,507
-------------- --------------
Total current assets..................................................... 2,787 1,507
Investment in and advances to subsidiary...................................... 165,135 156,113
-------------- --------------
Total assets $ 167,922 $ 157,620
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses............................................................ $ 102 $ 598
-------------- --------------
Total current liabilities................................................ 102 598
Other long-term liabilities................................................... 2,293 1,434
Series A Redeemable Preferred Stock -- Aggregate liquidation
preference $2,000......................................................... 500 500
Commitments and contingencies
Stockholders' equity:
Common stock-- $.01 par value; authorized 25,000,000 shares--
issued 14,103,227 shares................................................... 141 139
Additional paid-in capital................................................... 169,187 166,390
Retained deficit............................................................. (4,301) (11,441)
-------------- --------------
Total stockholders' equity................................................. 165,027 155,088
-------------- --------------
Total liabilities and stockholders' equity.................................... $ 167,922 $ 157,620
============== ==============
F-36
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------ ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ 7,140 $ 8,466 $ (15,171)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Equity in net (income) loss of subsidiary.................................... (8,240) (9,027) 15,098
Deferred compensation........................................................ 425 -- --
Deferred rent................................................................ -- -- 217
Decrease (increase) in:
Other current assets........................................................ -- -- (217)
Increase (decrease) in:
Accounts payable and accrued expenses....................................... 42 (444) 80
------------ ------------ ------------
Net cash (used in) provided by operating activities....................... (633) (1,005) 7
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in and advances to subsidiary..................................... 633 (5,792) (5,216)
------------ ------------ ------------
Net cash used in investing activities..................................... 633 (5,792) (5,216)
------------ ------------ ------------
Net decrease in cash and cash equivalents.................................... -- (6,797) (5,209)
Cash and cash equivalents-- beginning of period.............................. -- 6,797 12,006
------------ ------------ ------------
Cash and cash equivalents-- end of period.................................... $ -- $ -- $ 6,797
============ ============ ============
NOTE TO CONDENSED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The condensed financial statements of the Company are provided in
compliance with the requirements of Rule 5-04 and 12-04 of Regulation S-X.
In the Company's condensed financial statements, the Company's
investment in subsidiaries is stated at cost plus equity in the undistributed
earnings of the subsidiaries. The Company's share of net income (loss) of its
subsidiaries is included in net income (loss) using the equity method of
accounting. The condensed financial statements should be read in conjunction
with the Company's consolidated financial statements.
F-37
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
JANUARY 31, 2004
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------------------------------- -------- -------- -------- --------
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES(A) ACCOUNTS DEDUCTIONS(B) PERIOD
----------------------------------- -------------- ------------- ---------- ------------- ------------
(IN THOUSANDS)
YEAR ENDED FEBRUARY 2, 2002
Deducted from asset accounts:
Allowance for returns and doubtful
accounts........................... $ 4,328 $ 1,840 $ -- $ 1,680 $ 4,488
======== ======== ====== ========= ========
YEAR ENDED FEBRUARY 1, 2003
Deducted from asset accounts:
Allowance for returns and doubtful
accounts........................... $ 4,488 $ 1,323 $ -- $ 1,586 $ 4,225
======== ======== ====== ========= ========
YEAR ENDED JANUARY 31, 2004
Deducted from asset accounts:
Allowance for returns and doubtful
accounts........................... $ 4,225 $ 1,408 $ -- $ 1,556 $ 4,077
======== ======== ====== ========= ========
- -------------------
(a) Primarily provisions for doubtful accounts.
(b) Primarily uncollectible accounts charged against the allowance provided
therefor.
F-38
EXHIBIT INDEX
-------------
EXHIBIT NAME OF EXHIBIT
- ------- ---------------
3.1 Certificate of Incorporation of Barneys New York, Inc. ("Holdings"),
filed with the Secretary of State of the State of Delaware on November
16, 1998 (1)
3.2 Certificate of Designation for Series A Preferred Stock of Holdings
filed with the Secretary of State of the State of Delaware on December
24, 1998 (1)
3.3 By-laws of Holdings (1)
4.1 Specimen of Holdings' Common Stock Certificate (1)
4.2 Indenture, dated as of April 1, 2003, among Barney's, Inc., Holdings,
Barneys America, Inc., Barneys (CA) Lease Corp., Barneys (NY) Lease
Corp., Basco All-American Sportswear Corp., BNY Licensing Corp.,
Barneys America (Chicago) Lease Corp. and Wilmington Trust Company (9)
4.3(a) Form of Note (included in Exhibit 4.2)
4.3(b) Form of Note Guarantee (included in Exhibit 4.2)
4.4 Registration Rights Agreement, dated April 1, 2003, by and among
Holdings, Barney's, Inc., Barneys America, Inc., Barneys (CA) Lease
Corp., Barneys (NY) Lease Corp., Basco All-American Sportswear Corp.,
BNY Licensing Corp., Barneys America (Chicago) Lease Corp. and
Jefferies & Company, Inc. (9)
4.5 Warrant Agreement, dated April 1, 2003, between Holdings and
Wilmington Trust Company (9)
4.6 Form of Warrant Certificate (9)
4.7 Equity Registration Rights Agreement, dated April 1, 2003, by and
between Holdings and Jefferies & Company, Inc. (9)
4.8 Security Agreement, dated April 1, 2003, by and among Barney's, Inc.,
Barneys America, Inc., Barneys (CA) Lease Corp., Barneys (NY) Lease
Corp., Basco All-American Sportswear Corp., BNY Licensing Corp.,
Barneys America (Chicago) Lease Corp. and Wilmington Trust Company (9)
4.9 Security Agreement, dated April 1, 2003, by and between Holdings and
Wilmington Trust Company (9)
4.10 Pledge Agreement, dated as of April 1, 2003, by and among Barney's,
Inc., Barneys America, Inc., Barneys (CA) Lease Corp., Barneys (NY)
Lease Corp., Basco All-American Sportswear Corp., BNY Licensing Corp.,
Barneys America (Chicago) Lease Corp. and Wilmington Trust Company (9)
4.11 Pledge Agreement, dated as of April 1, 2003, by and among
Holdings and Wilmington Trust Company (9)
4.12 Intellectual Property Security Agreement, dated as of April 1, 2003,
by Barney's, Inc., Barneys America, Inc., Barneys (CA) Lease Corp.,
Barneys (NY) Lease Corp., Basco All-American Sportswear Corp., BNY
Licensing Corp., Barneys America (Chicago) Lease Corp. and Wilmington
Trust Company (9)
EXHIBIT NAME OF EXHIBIT
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10.1 License Agreement among Barney's, Inc., BNY Licensing Corp. and
Barneys Japan Co. Ltd. dated as of January 28, 1999 (1)
10.2 First Amendment to License Agreement, dated as of February 5, 2003, by
and between Barney's, Inc., BNY Licensing Corp. and Barneys Japan Co.,
Ltd. (9)
10.3 Stock Option Plan for Non-Employee Directors effective as of March 11,
1999 (1)*
10.4 Employee Stock Option Plan (5)*
10.5 Registration Rights Agreement by and among Holdings and the Holders
party thereto dated as of January 28, 1999 (the "Registration Rights
Agreement") (1)
10.6 Amendment No.1 dated as of February 1, 2000, to the Registration
Rights Agreement (3)
10.7 Letter Agreement, dated January 28, 1999, among Bay Harbour Management
L.C. ("Bay Harbour"), Whippoorwill Associates, Inc. ("Whippoorwill"),
Isetan of America, Inc. ("Isetan") and Holdings (4)
10.8 Employment Agreement between Holdings and Howard Socol effective as of
January 8, 2001 (7)*
10.9 First Amendment to Employment Agreement, effective as of January 10,
2003, between Holdings and Howard Socol (2)*
10.10 Registration Rights Agreement between Holdings and Howard Socol dated
as of January 8, 2001 (7)
10.11 Restricted Stock Award Agreement, dated February 2, 2003, between
Holdings and Howard Socol (9)*
10.12 Option Award Agreement, dated January 8, 2001, between Holdings and
Howard Socol (9)*
10.13 Credit Agreement, among Barney's Inc., Barneys America, Inc., Barneys
(CA) Lease Corp., Barneys (NY) Lease Corp., Basco All-American
Sportswear Corp., BNY Licensing Corp. and Barneys America (Chicago)
Lease Corp., as Borrowers, the Lenders party thereto, and General
Electric Capital Corporation, as the Administrative Agent for such
lenders ("GE Capital"), dated as of July 15, 2002 (the "2002 Credit
Agreement") (8)
10.14 Guaranty by Holdings in favor of GE Capital, dated as of July 15, 2002
(8)
10.15 Security Agreement by the Borrowers under the 2002 Credit Agreement,
in favor of GE Capital, dated as of July 15, 2002 (8)
10.16 Pledge Agreement by the Borrowers under the 2002 Credit Agreement, in
favor of GE Capital, dated as of July 15, 2002 (8)
10.17 Security Agreement by Holdings in favor of GE Capital, dated as of
July 15, 2002 (8)
10.18 Pledge Agreement by Holdings in favor of GE Capital, dated as of July
15, 2002 (8)
EXHIBIT NAME OF EXHIBIT
- ------- ---------------
10.19 Intellectual Property Security Agreement by the Borrowers under the
2002 Credit Agreement, in favor of GE Capital, dated as of July 15,
2002 (8)
10.20 First Amendment, dated as of April 1, 2003, to Security Agreement by
the Borrowers under the 2002 Credit Agreement, in favor of GE Capital
(9)
10.21 Purchase Agreement, dated March 26, 2003, by and among Holdings,
Barney's, Inc., Barneys America, Inc., Barneys (CA) Lease Corp.,
Barneys (NY) Lease Corp., Basco All-American Sportswear Corp., BNY
Licensing Corp., Barneys America (Chicago) Lease Corp. and Jefferies &
Company, Inc. (9)
10.22 Restated Credit Agreement, dated as of April 1, 2003, among Barney's,
Inc., Barneys America, Inc., Barneys (CA) Lease Corp., Barneys (NY)
Lease Corp., Basco All-American Sportswear Corp., BNY Licensing Corp.,
and Barneys America (Chicago) Lease Corp., as borrowers, the
institutions party thereto from time to time as lenders, and General
Electric Capital Corporation, for itself, as Lender, and as the
Administrative Agent for such lenders (9)
10.23 Omnibus Amendment and Confirmation of Collateral Documents, dated as
of April 1, 2003, by and among Holdings, Barney's, Inc., Barneys
America, Inc., Barneys (CA) Lease Corp., Barneys (NY) Lease Corp.,
Basco All-American Sportswear Corp., BNY Licensing Corp., and Barneys
America (Chicago) Lease Corp., and General Electric Capital
Corporation, as administrative agent for the lenders (9)
14 Holdings' Code of Ethics for its Chief Executive Officer, Chief
Financial Officer and Other Senior Officers (2)
21 Subsidiaries of the Registrant (2)
23 Consent of Independent Auditors (2)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (2)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (2)
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (2)
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (2)
(1) Incorporated by reference to Holdings' Registration Statement on Form 10
(the "Form 10") filed with the Securities and Exchange Commission (the
"Commission") on June 1, 1999.
(2) Filed herewith.
(3) Incorporated by reference to Amendment No. 2 to the Form 10 filed with the
Commission on February 15, 2000.
(4) Incorporated by reference to Amendment No. 1 to the Form 10 filed with the
Commission on October 13, 1999.
(5) Incorporated by reference to Exhibit A to the Proxy Statement of Holdings
for its annual meeting of Stockholders held on June 27, 2000.
(6) Incorporated by reference to Holdings' Quarterly Report on Form 10-Q for
the quarter ended November 3, 2001.
(7) Incorporated by reference to Holdings' Annual Report on Form 10-K for the
fiscal year ended February 3, 2001.
(8) Incorporated by reference to Holdings' Quarterly Report on Form 10-Q for
the quarter ended August 3, 2002.
(9) Incorporated by reference to Holdings' Annual Report on Form 10-K for the
fiscal year ended February 1, 2003.
* Management contracts or compensatory plans or arrangements.