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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002
----------------------------
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 1-8769
R. G. BARRY CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-4362899
--------------------------- -----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
13405 Yarmouth Road NW, Pickerington, Ohio 43147
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
614-864-6400
------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes _________ No ___X_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Shares, $1 Par Value, Outstanding as of September 28, 2002 - 9,724,267
----------
Index to Exhibits at page 17
Page 1 of 18 pages
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 28, 2002 December 29, 2001
------------------ -----------------
(unaudited)
(in thousands)
ASSETS:
Cash and cash equivalents $ 3,992 12,258
Accounts receivable, less allowances 34,864 16,432
Inventory 44,864 35,642
Deferred and recoverable income taxes 6,986 2,896
Prepaid expenses 2,939 2,448
------- ------
Total current assets 93,645 69,676
------ ------
Property, plant and equipment, at cost 42,448 40,066
Less accumulated depreciation and amortization 30,702 29,149
------ ------
Net property, plant and equipment 11,746 10,917
------ ------
Goodwill, net of amortization 2,223 2,002
Other assets 9,760 6,017
-------- ------
$ 117,374 88,612
========= ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current installments of long-term debt 3,694 2,432
Short-term notes payable 32,000 -
Accounts payable 9,157 7,628
Accrued expenses 3,019 4,411
-------- -----
Total current liabilities 47,870 14,471
------- ------
Accrued retirement costs and other, net 8,927 8,258
Long-term debt, excluding current installments 6,351 5,162
------ -----
Total liabilities 63,148 27,891
------ ------
Minority interest 385 336
Shareholders' equity:
Preferred shares, $1 par value
Authorized 3,775 Class A shares,
225 Series I Junior Participating
Class A shares,
and 1,000 Class B shares, none issued - -
Common shares, $1 par value
Authorized 22,500 shares
(excluding treasury shares of 953 and 979) 9,724 9,376
Additional capital in excess of par value 12,646 12,093
Deferred compensation ( 232) ( 331)
Accumulated other comprehensive loss ( 166) ( 495)
Retained earnings 31,869 39,742
------ ------
Net shareholders' equity 53,841 60,385
------ ------
$ 117,374 88,612
========= ======
Page 2 of 18 pages
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
Sept. 28, 2002 Sept. 29, 2001 Sept. 28, 2002 Sept. 29, 2001
-------------- -------------- -------------- --------------
(u n a u d I t e d)
(in thousands, except per share amounts)
Net sales $ 38,090 41,450 75,146 82,543
Cost of sales 24,017 25,761 50,242 53,276
------- ------- ------- -------
Gross profit 14,073 15,689 24,904 29,267
Selling, general and
administrative expense 12,751 11,294 36,268 32,740
Restructuring charges
(adjustments) 545 - 1,272 ( 242)
------- -------- -------- ----------
Operating income (loss) 777 4,395 ( 12,636) ( 3,231)
Other income 200 200 600 600
Interest expense ( 493) ( 474) ( 1,033) ( 898)
Interest income - 21 40 218
------ -------- -------- -------
Net interest expense ( 493) ( 453) ( 993) ( 680)
Income (loss) before
income tax (benefit) 484 4,142 ( 13,029) ( 3,311)
Income tax (benefit) 276 1,537 ( 5,205) ( 1,055)
Minority interest, net of tax ( 6) ( 2) ( 49) ( 33)
-------- --------- -------- --------
Net income (loss) $ 202 2,603 ( 7,873) ( 2,289)
===== ====== ======== ========
Net income (loss)
per common share
Basic $ 0.03 0.28 ( 0.82) ( 0.24)
====== ===== ======= =======
Diluted $ 0.03 0.28 ( 0.82) ( 0.24)
====== ===== ======= =======
Average number of common
shares outstanding
Basic 9,635 9,379 9,553 9,379
===== ===== ===== =====
Diluted 9,749 9,379 9,553 9,379
===== ===== ===== =====
Page 3 of 18 pages
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended
Sept. 28, 2002 Sept. 29, 2001
-------------- --------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss ($ 7,873) ( 2,289)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of
property, plant and equipment 1,327 1,370
Amortization of goodwill - 102
Amortization of deferred compensation 99 99
Minority interest 49 33
Changes in:
Accounts receivable, net ( 18,288) ( 12,510)
Inventory ( 9,098) ( 14,008)
Prepaid expenses ( 492) ( 272)
Deferred and recoverable income taxes ( 4,089) ( 779)
Other ( 3,847) 13
Accounts payable 1,431 3,519
Accrued expenses ( 1,434) ( 3,076)
Accrued retirement costs and other 669 734
-------- --------
Net cash used in operating activities ( 41,546) ( 27,064)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment, net ( 1,994) ( 784)
-------- --------
Cash flows from financing activities:
Long-term debt, net of (repayments) 2,337 ( 2,418)
Proceeds from short-term notes, net 32,000 26,000
Proceeds from shares issued and other 901 21
------- -------
Net cash provided by financing activities 35,238 23,603
------- -------
Effect of exchange rates on cash 36 ( 67)
---------- ---------
Net decrease in cash ( 8,266) ( 4,312)
Cash at the beginning of the period 12,258 6,930
------- -------
Cash at the end of the period $ 3,992 2,618
======= =======
Supplemental cash flow disclosures:
Interest paid $ 913 965
====== ======
Income taxes paid $ 100 79
====== =======
Page 4 of 18 pages
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended September 28, 2002 and September 29, 2001
1. These interim financial statements are unaudited. All adjustments
(consisting solely of normal recurring adjustments) have been made which,
in the opinion of management, are necessary to fairly present the results
of operations.
2. R. G. Barry Corporation and its subsidiaries (the "Company") operate on a
fifty-two or fifty-three week fiscal year, ending annually on the Saturday
nearest December 31. Fiscal 2002 and 2001 are both fifty-two week years.
3. Income tax benefit for the thirty-nine week periods ended September 28,
2002 and September 29, 2001, consisted of:
2002 2001
---- ----
(in thousands)
Current and deferred:
U. S. Federal and
Foreign tax benefit $ 4,554 966
State and Local tax benefit 651 89
---- ----
Total $ 5,205 1,055
======= =====
The income tax benefit reflects a combined federal, foreign, state and
local effective rate of approximately 39.9 percent and 31.9 percent for the
first three quarters of 2002 and 2001, respectively, as compared to the
statutory U. S. federal rate of 34.0 percent in both years.
Income tax benefit for the periods ended September 28, 2002 and September
29, 2001 differed from the amounts computed by applying the U. S. federal
income tax rate of 34.0 percent to pretax loss, as a result of the
following:
2002 2001
---- ----
(in thousands)
Computed "expected" tax
expense (benefit):
U. S. Federal benefit ($ 4,430) ( 1,126)
Foreign and other, net ( 345) 130
State & Local benefit, net of
Federal tax benefit ( 430) ( 59)
--------- --------
Total ($ 5,205) ( 1,055)
========= =========
4. Basic net income (loss) per common share has been computed based on the
weighted average number of common shares outstanding during each period.
Diluted net income (loss) per common share is based on the weighted average
number of outstanding common shares during the period, plus, when their
effect is dilutive, potential common shares consisting of certain common
shares subject to stock options and the stock purchase plan. Diluted loss
per common share for the nine-month periods ended September 28, 2002 and
September 29, 2001 does not include the effect of potential common shares
due to their antidilutive effect.
5. Inventory by category for the Company consisted of the following:
September 28, December 29,
2002 2002
---- ----
(in thousands)
Raw materials $ 7,870 8,203
Work in process 2,287 1,820
Finished goods 34,710 25,619
------ ------
Total inventory $ 44,864 35,642
======== ======
Page 5 of 18 pages
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form
10-Q for the periods ended September 28, 2002 and
September 29, 2001 - continued
6. Segment Information - The Company manufactures and markets comfort footwear
for at- and around-the-home and supplies thermal retention technology
products. The Company considers its "Barry Comfort" at- and around-the-home
comfort footwear groups in North America and in Europe, and the thermal
retention technology group, "Thermal", as its three operating segments. The
accounting policies of the operating segments are substantially similar,
except that the disaggregated information has been prepared using certain
management reports, which by their very nature require estimates. In
addition, certain items from these management reports have not been
allocated among the operating segments, including such items as a) costs of
certain administrative functions, b) current and deferred income tax
expense (benefit) and deferred tax assets (liabilities), and c) in some
periods, certain other operating provisions.
Thirty-nine Weeks Ended Barry Comfort
Sept. 28, 2002 North Intersegment
(In Thousands) America Europe Thermal Eliminations Total
------- ------ ------- ------------ -----
Net sales $ 64,580 $ 7,821 $ 2,745 $ 75,146
Depreciation and
amortization 1,063 146 118 1,327
Interest income 132 ( 92) 40
Interest expense 1,000 33 92 ( 92) 1,033
Pre tax loss ( 9,730) ( 730) ( 2,569) ( 13,029)
Additions to property, plant
and equipment, net 1,896 81 17 1,994
Total assets devoted $113,989 $ 7,081 $ 4,385 ($ 8,081) $ 117,374
Thirty-nine Weeks Ended Barry Comfort
Sept. 29, 2001 North Intersegment
(In Thousands) America Europe Thermal Eliminations Total
------- ------ ------- ------------ -----
Net sales $ 70,320 $ 7,909 $ 4,314 $ 82,543
Depreciation and
amortization 1,073 167 130 1,370
Interest income 143 30 45 218
Interest expense 870 28 ( 45) 45 898
Pre tax income (loss) ( 191) ( 350) ( 2,803) 33 ( 3,311)
Additions to property, plant
and equipment, net 637 146 1 784
Total assets devoted $ 101,440 $ 8,298 $ 5,876 ($ 3,594) $ 112,020
Page 6 of 18 pages
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form
10-Q for the periods ended September 28, 2002 and
September 29, 2001 - continued
7. Restructuring Charges - The Company has previously announced plans to
reduce costs and improve operating efficiencies, and recorded restructuring
charges as a component of operating expense. The following schedule
highlights actual activities for the three quarters through September 28,
2002 and September 29, 2001, respectively.
As of As of
Dec. 29, Charges Estimate Sept. 28,
2001 in 2002 Adjustments Paid in 2002 2002
---- ------- ----------- ------------ ----
(in thousands)
Employee separations $ 346 1,252 20 1,111 507
------ -------- ------ ------- ------
Total restructuring costs $ 346 $ 1,252 $ 20 $ 1,111 $ 507
====== ======== ====== ======= ======
As of As of
Dec. 30, Charges Estimate Sept. 29,
2000 in 2001 Adjustments Paid in 2001 2001
---- ------- ----------- ------------ ----
(in thousands)
Employee separations $ 527 - - 378 149
Noncancelable lease costs 499 40 ( 282) 100 157
------- ------ ------- ----- ------
Total restructuring costs $ 1,026 $ 40 $( 282) $ 478 $ 306
======= ====== ======= ===== ======
8. Impact of New Accounting Standards
Effective January 2002, the Company adopted the Emerging Issues Task Force
EITF 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products". EITF 00-25 requires certain
expenses, formerly characterized as selling expenses, to be recorded as a
reduction of net sales and a corresponding decrease in selling, general and
administrative expenses. EITF 00-25 requires that, upon adoption, all prior
period be reclassified. Accordingly, approximately $7.0 million and $5.2
million of expenses incurred during the first three quarters of 2002 and
2001, respectively, have been recorded as a reduction of net sales. There
was no change in the final determination of income (loss) before income
taxes or income (loss) after income taxes as a result of the change in
accounting principle.
Effective January 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangibles", which requires, among other things, the discontinuance
of goodwill amortization, and substituting an annual assessment of the
impairment of existing intangibles. Accordingly, the Company no longer
amortizes approximately $2 million of goodwill. The amortization of
goodwill during the first three quarters of 2001 was $102 thousand,
approximately one cent per share; there was no similar amortization charge
during the comparable period in 2002. The Company has determined that no
transitional impairment losses need be recognized due to the change in
accounting principle.
In July 2002 the Financial Accounting Standards Board (FASB) issued
Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. Statement No. 146 requires recognition of costs associated with
exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. Statement No. 146 covers costs
related to lease termination, certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, and
other exit or disposal activity. Statement No. 146 is effective
prospectively for exit and disposal plans initiated after December 31,
2002. The Company currently does not expect Statement No. 146 will have a
material impact on the Company upon adoption.
Page 7 of 18 pages
R. G. BARRY CORPORATION AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------------
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
The statements in this Quarterly Report on Form 10-Q, other than statements of
historical fact are forward-looking statements as that term is defined in the
Private Litigation Reform Act of 1995. These forward-looking statements are
based upon our current plans and strategies, and reflect our current assessment
of the risks and uncertainties related to our business. In addition to the risks
and uncertainties noted in this Form 10-Q, there are factors that could cause
results to differ materially from those anticipated by some of the statements
made. These factors include product demand and market acceptance; the economic
and business environment and the impact of governmental regulations, both in the
United States and abroad; the effects of direct sourcing by customers of
competitive products from alternative suppliers; the effect of pricing pressures
from retailers; the loss of significant customers in connection with mergers,
acquisitions, bankruptcies or other circumstances; inherent risks of
international development, including foreign currency risks, economic,
regulatory and cultural difficulties or delays in our business development
outside the United States; our ability to improve processes and business
practices to keep pace with the economic, competitive and technological
environment; the availability and costs of financing; capacity, efficiency, and
supply constraints; weather; the effects of terrorist acts, and governments'
responses to terrorist acts, on business activities and customer orders; acts of
war; and other risks detailed in our press releases, shareholder communications,
and Securities and Exchange Commission filings.
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
As of the end of the third quarter of 2002, we had $45.8 million in net working
capital. This compares with $52.3 million at the end of the third quarter of
2001, and $55.2 million at fiscal year-end 2001. The declines in net working
capital from the end of the third quarter of 2001 and from the end of fiscal
year 2001 to the end of the third quarter of 2002 are primarily the result of
the comparatively greater losses we have incurred throughout 2002.
The primary components of net working capital have changed as follows:
- - Accounts receivable increased from $34.1 million at the end of the third
quarter of 2001, to $34.9 million at the end of the third quarter of 2002.
Most of the increase in 2002 is related to one Thermal customer. We believe
that there is minimal exposure to bad debts and expect receivables to be at
more historically appropriate levels by year-end 2002. Accounts receivable
at the end of the third quarter of 2002 have increased by $18.4 million
from $16.4 million at the end of fiscal 2001, representing a normal
seasonal pattern of change in receivables.
- - Inventories at the end of the third quarter of 2002 were $44.9 million
compared with $46.8 million one year ago, and $35.6 million as of the end
of fiscal 2001. Most of the decrease in inventory from one year ago,
reflects a decrease in raw materials and in process inventories on hand
from period to period. This decline is consistent with our 3-year strategic
plan to purchase increasing amounts of finished goods from third party
suppliers and decrease the amount of merchandise produced in our own
plants. The amount of inventory has increased from the end of fiscal 2001,
representing a normal seasonal pattern of inventory changes from season to
season, and is mainly an increase in finished goods on hand to support
expected sales later in the year.
- - We ended the third quarter of 2002 with $4.0 million in cash and cash
equivalents, compared with $2.6 million at the end of the third quarter of
2001. At the end of fiscal 2001, we had $12.3 million in cash and cash
equivalents. At the end of the third quarter of 2002, we had borrowed $32
million in short-term notes from our bank, compared with $26 million at the
end of the third quarter of 2001. There were no short-term bank borrowings
outstanding at the end of fiscal 2001.
Capital expenditures during the first three quarters of 2002 amounted to $2.0
million compared with $784 thousand during the first three quarters of 2001.
Most of the increase in capital expenditures from 2001 to 2002, reflects
expenditures supporting the implementation of our three-year strategic plan
related to establishing cutting, molding, and warehousing operations in Mexico.
Expenditures in both periods were funded out of working capital.
Page 8 of 18 pages
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
Traditionally, we have leased most of our operating facilities and some of our
operating equipment under operating lease arrangements for periods of three to
twenty years. We periodically review facilities to determine whether our current
facilities will satisfy projected operating needs for the foreseeable future.
Most recently late in 2001, we committed to a new leased warehouse facility in
Nuevo Laredo, Mexico, and began warehousing operations in Mexico in the Spring
of 2002. The projected future annual rental costs of our operating lease
commitments are outlined in Note 5 of the Notes to the Consolidated Financial
Statements included in our 2001 Annual Report to Shareholders.
We currently have in place an unsecured Revolving Credit Agreement ("Revolver").
The current Revolver became effective in March 2001, and was extended during the
first quarter of 2002 through April 30, 2003. The Revolver provides a seasonally
adjusted available line of credit ranging from zero during the month of January,
to a peak of $30 million from April through November. During the third quarter
of 2002, the Revolver was amended to provide an additional $2 million of
borrowing capacity for a sixty day period ending November 22, 2002, and to amend
certain other covenants. We ended the third quarter of 2002 with $32 million
outstanding under the Revolver as compared with $26 million outstanding under
the Revolver at the end of the third quarter of 2001. Subsequent to the end of
the third quarter of 2002, this additional $2 million of borrowings was repaid.
The Revolver contains a number of financial covenants, including: limitations on
incurrence of additional debt and liens, maintenance of minimum seasonal
tangible net worth, limitations on dividends and other restricted payments, and
minimum seasonal earnings before taxes, net interest, depreciation and
amortization. We believe that the covenants are not uncommon for agreements of
its type and duration. We are in compliance with all the covenants of the
Revolver, and all other debt agreements.
Effective January 1, 2002, the 15% duties imposed by the United States on
slippers coming from Mexico were eliminated. The duties had been scheduled for
reduction at the rate of 2.5% per year until the scheduled elimination on
January 1, 2008. With the assistance of two firms, we were successful in
accelerating the elimination of these duties. With the successful conclusion of
this pursuit, we agreed to pay to these firms an aggregate of approximately $6.2
million, most of which is payable in quarterly installments through the end of
2005. Reflected in current installments and long-term debt is approximately $4.3
million, which represents the discounted present value of the remaining
quarterly installments due through 2005. The unamortized cost of the services of
these firms, amounting to $4.7 million, is included in other assets as of the
end of the third quarter of 2002. These costs are being amortized through the
end of 2007, which corresponds with the period of expected benefit from the
reduction in duties. Amortization during the first three quarters of 2002
amounted to $620 thousand.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See note 8 of Notes to Consolidated Financial Statements on page 6 of this Form
10-Q, for the impact of recently issued accounting standards.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that we make certain
estimates. These estimates can affect our reported revenues, expenses and
results of operations, as well as the reported values of certain of our assets
and liabilities. This is not new; making estimates about the impact of future
events has been a generally accepted practice for nearly all companies in nearly
all industries for many many years. We make these estimates after gathering as
much information from as many resources as are available at the time, and after
reasonably assessing the conditions that exist at the time we prepare the
financial reports.
We make these estimates in a consistent manner from period to period, based upon
historical trends and conditions, after review and analysis of current events
and conditions. Management believes that these estimates reasonably reflect the
impact of events that may not become known with certainty until some time in the
future.
Page 9 of 18 pages
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
The more critical of these accounting policies requiring significant management
estimates include: a) an assessment of the estimated costs of returns and
allowances that will be required to satisfy commitments made to retailers for
the upcoming holiday season, b) an evaluation of any impairment in the
realizable value of our inventories in light of the upcoming holiday selling
season, the economic environment, and the plans for the next selling season, c)
an assessment of the amount of income taxes that will become currently payable
or recoverable for the period and what deferred tax costs or benefits will
become realizable for income tax purposes in the future as a result of
differences between results of operations as reported in conformity with
accounting principles generally accepted in the United States of America and the
requirements of the complex income tax laws existing in various jurisdictions,
d) an assessment of the ongoing future value of goodwill, and e) estimations of
the future costs associated with restructuring charges related to announced
operational changes and reconfigurations. In addition, there are other
accounting policies, which require less judgmental input by management, that we
follow consistently from year to year, and those policies are summarized in Note
1 of the Notes to the Consolidated Financial Statements included in our 2001
Annual Report to Shareholders.
RESULTS OF OPERATIONS
During the third quarter of 2002, net sales of $38.1 million were 8.1 percent
lower than net sales of $41.5 million during the same quarter in 2001. For the
first three quarters of 2002, net sales amounted to $75.1 million, a 9.0 percent
decrease in net sales when compared with the first three quarters of 2001.
In our Barry Comfort North America segment, as noted in the first quarter's Form
10-Q, there was a decline in net sales relating to our shipments to our largest
mass merchandizing customer. In an effort to improve their inventory
productivity, this customer indicated a desire to reduce their on-hand and
backup inventory across the board in footwear. As a consequence, first quarter
sales declined by approximately $4 million. We believe that most of these sales
will be made up over the remainder of the year, as we expect our business with
that customer to be approximately the same throughout 2002 as they were during
entirety of 2001. Through the first three quarters of 2002, net sales to this
customer have recovered approximately half of the decline experienced in the
first quarter of 2002. There have been other decreases in net sales from year to
year: i) caused by unexpected returns, during the second quarter of 2002, of
approximately $1 million of fall warm-lined footwear primarily from one customer
as a consequence of one of the warmest winters ever recorded in the United
States, ii) a decline in sales in excess of $2 million, to a customer that has
decided to bid out their business through a "reverse auction" process, that we
have elected not to pursue, iii) a continuing trend by many retailers to defer
their shipments later and later into the season, and iv) a generally difficult
retail environment caused by a sluggish worldwide economy.
In the Barry Comfort Europe segment, net sales for the third quarter of 2002 and
for the three quarters year to date of 2002, are approximately flat with the
comparable periods in 2001, off by less than $100 thousand.
In the Thermal segment, net sales for the first three quarters of 2002 were
approximately $1.6 million less than in 2001, with most of that decline
occurring during the third quarter of 2002. Approximately $1.2 million of the
decline in net sales of Thermal products resulted from our decision to
concentrate on the commercial applications of Thermal products and not pursue
the applications of this technology to consumer products. In addition, net sales
of pizza delivery systems to the home delivery of pizza industry, our principal
commercial application of Thermal products, were slightly less during the first
three quarters of 2002 compared to 2001. (See also note 6 of the Notes to
Consolidated Financial Statements on page 6 of this Form 10-Q, for selected
segment information.)
Page 10 of 18 pages
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
Gross profit during the third quarter of 2002, amounted to $14.1 million, or
36.9 percent of net sales. This compares with gross profit of $15.7 million, or
37.9 percent of net sales, in the same quarter of 2001. For the first three
quarters of the year, gross profit as a percent of net sales was 33.1 percent in
2002 compared with 35.5 percent in 2001. The percent of gross profit improved
during the third quarters of each 2002 and 2001, compared with the gross profit
percent during the first half in each year; through the first six months of both
years, gross profit had been 29.2 percent for 2002 and 33.0 percent for 2001.
During the first half of 2002, we incurred planned one-time or excess costs
related to transitioning many manufacturing and distribution processes from the
United States to Mexico, which increased the costs of sales and selling, general
and administrative expenses during the first half of 2002, when compared with
last year. The magnitude of the increase was approximately $3.5 million for the
first half of 2002, with approximately $727 thousand of the $3.5 million treated
as a restructuring charge during the first quarter. During the transition, we
maintained duplicate activities in certain functional areas, running certain
operations in parallel in both Texas and Mexico, to ensure a smooth transfer of
responsibilities to Mexico, and to ensure that there was no disruption in
service to our customers during the transition. This added expense adversely
impacted both the cost of sales and the resulting gross profit, as well as the
selling, general and administrative expenses, for the both the first half and
the first three quarters of 2002.
Selling, general and administrative expenses during the third quarter amounted
to $12.8 million, approximately $1.5 million greater than the same quarter one
year ago. During the quarter we incurred approximately $700 thousand more
shipping expenses than last year, a large portion of which was due to the
additional costs incurred relating to the new warehousing operation in Nuevo
Laredo, as a result of the high task level of shipping by a team of newly hired
associates in a newly established warehouse. For the first three quarters,
selling, general and administrative expenses amounted to $36.3 million, compared
with $32.7 million for the same period. The increase for the first three
quarters also reflects increases in expense, as outlined in the preceding
paragraph, during the period of transition of activities to Mexico.
During the nine-months ended September 28, 2002, we incurred approximately $1.3
million in restructuring charges in connection with the ongoing implementation
of our strategic plan. Approximately $545 thousand was incurred during the third
quarter in connection with restructuring our sales and marketing organization,
while the balance of $727 thousand was incurred during the first quarter related
to migrating certain manufacturing and distribution operations to Mexico.
Net interest expense increased during both the third quarter and first three
quarters of 2002 when compared with the same periods of 2001. During the third
quarter of 2002, net interest expense amounted to $493 thousand compared with
$453 thousand in the same quarter of 2001. For the first three quarters, net
interest expense increased to $993 thousand in 2002, from $680 thousand in 2001.
As noted in the above discussion of long-term debt, we will have quarterly fees
due through 2005 to the parties that assisted us in obtaining accelerated duty
relief. The interest imputed on these quarterly fees was the primary factor
contributing to the increase in the level of interest expense for the periods
covered. During 2002, we have borrowed more under the Revolver than in 2001,
although interest rates in 2002 at approximately 4 percent are nearly 2
percentage points lower than in 2001. In addition, interest income from
short-term investments in 2002 was $178 thousand lower than in 2001 primarily as
a result of lower amounts of investments and lower market investment income
rates from year to year.
For the third quarter of 2002, we realized net income after tax of $202
thousand, or $0.03 per share, compared with net income of $2.6 million, or $0.28
per share, during the same quarter of 2001. For the nine months, we incurred a
net loss in 2002 of $7.8 million, or $0.82 per share, compared with a net loss
of $2.3 million, or $0.24 per share during the same period in 2001. Per share
calculations for both years are the same for both basic income (loss) per share
and diluted income (loss) per share.
Page 11 of 18 pages
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK SENSITIVE INSTRUMENTS - FOREIGN CURRENCY
We transact business in various foreign countries. Our primary foreign currency
net cash outflows occur in Mexico. We do not hedge anticipated foreign currency
net cash outflows in the Mexican Peso, as the Peso generally has declined in
value over time, when compared with the U. S. Dollar. In addition, forward
contracts in this currency are not normally economically available.
Our primary foreign currency net cash inflows are generated from Canada and
Western Europe, and to a much lesser extent from Mexico. We do, at times, employ
a foreign currency hedging program utilizing currency forward exchange contracts
for anticipated net cash inflows in Canada and Western Europe. Under this
program, increases or decreases in net local operating revenue and expenses as
measured in U. S. Dollars are partially offset by realized gains and losses on
hedging instruments. The goal of the hedging program is to fix economically the
exchange rates on projected foreign currency net cash flows. Foreign currency
forward contracts are not used for trading purposes.
All foreign currency contracts are marked-to-market and unrealized gains and
losses are included in the current period's calculation of net income. Because
not all economic hedges qualify as accounting hedges, unrealized gains and
losses may be recognized in net income in advance of the actual projected net
foreign currency cash flows. This often results in a mismatch of accounting
gains and losses, and transactional foreign currency net cash flow gains and
losses.
We believe that the impact of foreign currency forward contracts is not material
to our financial condition or results of operations. At the end of the third
quarter of 2002, we had net foreign currency exchange contracts outstanding to
sell forward the following currencies. All contracts mature later in fiscal
2002.
Approximate Estimated Fair Unrealized
Nominal Amount in Average Exchange Value as of Gain, as of
US Dollars Rate Sept. 28, 2002 Sept. 28, 2002
(in thousands) (in thousands)
Canadian Dollar $ 500 US$1 = CAN 1.60 $ 504 $ 4
Euros $ 437 US$1 = XEU 1.14 $ 494 $57
ITEM 4 - Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Based on an evaluation of the Company's disclosure controls and procedures
conducted within 90 days of the filing date of this Quarterly report on
Form 10-Q, carried out under the supervision and with the participation of
the Company's management, including the Company's principal executive
officer and principal financial officer, as contemplated by Rule 13a-15
under the Securities Exchange Act of 1934, as amended, the Company's
principal executive officer and principal financial officer have concluded
that such disclosure controls and procedures are effective to ensure that
material information relating to the Company and its consolidated
subsidiaries, is made known to them, particularly during the period for
which this periodic report has been prepared.
(b) Changes in internal controls
There were no significant changes made in the Company's internal disclosure
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation performed pursuant to Rule 13a-15
under the Securities Exchange Act of 1934, as amended, referred to above.
Page 12 of 18 pages
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) through (d) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a), (b) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) through (d) Not applicable
ITEM 5. OTHER INFORMATION
No response required
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS: See index to exhibits on page 17.
(b) REPORTS ON FORM 8-K:
On August 20, 2002, R. G. Barry Corporation (the "Registrant")
filed a Current Report on Form 8-K, dated August 19, 2002,
including a press release announcing the resignation of William
Lenich as President and Chief Operating Officer of the Registrant
and as a member of the Registrant's Board of Directors.
On September 26, 2002, the Registrant filed a Current Report
on Form 8-K, dated that same day, to report that the Registrant,
as borrower, had entered into a Second Amendment to revolving
Credit Agreement with The Huntington National Bank, as lender.
On October 22, 2002, the Registrant filed a Current Report on
Form 8-K, dated that same day, including a press release
announcing that the Registrant had revised downward its revenue
and earnings forecast for 2002 and expected to report a loss for
the full year.
On November 1, 2002, the Registrant filed a Current Report on
Form 8-K, dated that same day, including a press release reporting
a small third quarter profit and reiterating that the Registrant
expected to report a loss for the full year.
Page 13 of 18 pages
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R. G. BARRY CORPORATION
------------------------
Registrant
Dated: November 12, 2002
- --------------------------
/s/ DANIEL D. VIREN
--------------------
Daniel D. Viren
Senior Vice President - Finance
(Principal Financial Officer)
(Duly Authorized Officer)
Page 14 of 18 pages
CERTIFICATION
I, Gordon Zacks, certify that
1. I have reviewed this quarterly report on Form 10-Q of R. G. Barry
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 11, 2002
/s/ GORDON ZACKS
----------------
Printed Name: Gordon Zacks
Title: Chief Executive Officer
Page 15 of 18 pages
CERTIFICATION
I, Daniel D. Viren, certify that:
1. I have reviewed this quarterly report on Form 10-Q of R. G. Barry
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 11, 2002
/s/ DANIEL D VIREN
------------------
Printed Name: Daniel D. Viren
Title: Chief Financial Officer
Page 16 of 18 pages
R. G. BARRY CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Location
----------- ----------- --------
4 Second Amendment to Revolving Credit Agreement, dated Incorporated herein by reference to
as of September 23, 2002, between The Huntington Exhibit 4 of the Registrant's
National Bank, as lender and the Registrant Current Report on Form 8-K dated as
of September 26, 2002
[File No. 1-8769]
99.1 Certification pursuant to 18 U. S. C. Section 1350,
as adopted pursuant to Section 906 of the Page 18
Sarbanes-Oxley Act of 2002 (Chief Executive Officer
and Chief Financial Officer)
Page 17 of 18 pages