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UNITED STATES
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 June 28, 2003
--------------------
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 in 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 June 28, 2003 - 9,813,652
-------------------------
Index to Exhibits at page 21
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 28, 2003 December 28, 2002
------------- -----------------
(unaudited)
-----------
(in thousands)
ASSETS:
Cash and cash equivalents $ 3,714 $ 6,881
Accounts receivable, less allowances 14,915 11,125
Inventory 43,663 32,894
Deferred and recoverable income taxes 7,177 8,569
Prepaid expenses 2,032 1,599
-------- --------
Total current assets 71,501 61,068
-------- --------
Property, plant and equipment, at cost 37,554 39,176
Less accumulated depreciation and amortization 27,255 28,266
-------- --------
Net property, plant and equipment 10,299 10,910
-------- --------
Goodwill, net of amortization 2,654 2,374
Deferred income taxes and other assets 12,653 13,286
-------- --------
$ 97,107 87,638
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term notes payable 18,000 -
Current installments of long-term debt 3,748 3,650
Accounts payable 10,922 10,474
Accrued expenses 3,429 6,017
-------- --------
Total current liabilities 36,099 20,141
-------- --------
Accrued retirement costs and other, net 14,206 14,188
Long-term debt, excluding current installments 5,413 5,760
-------- --------
Total liabilities 55,718 40,089
-------- --------
Minority interest 396 361
Shareholders' equity:
Preferred shares, $1 par value per share
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 per share
Authorized 22,500 shares
(excluding treasury shares) 9,814 9,806
Additional capital in excess of par value 12,805 12,791
Deferred compensation (141) (200)
Accumulated other comprehensive loss (2,690) (3,071)
Retained earnings 21,205 27,862
-------- --------
Net shareholders' equity 40,993 47,188
-------- --------
$ 97,107 87,638
======== ========
Page 2
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
------------- ------------- ------------- -------------
(unaudited)
(in thousands, except per share amounts)
Net sales $ 19,016 15,895 39,394 35,247
Cost of sales 12,563 11,159 25,856 24,467
-------- -------- -------- --------
Gross profit 6,453 4,736 13,538 10,780
Selling, general and
administrative expense 10,018 11,395 21,575 22,045
Restructuring charges
(adjustments) - - 200 727
-------- -------- -------- --------
Operating loss (3,565) (6,659) (8,237) (11,992)
Other income - 200 53 400
Interest expense (297) (306) (471) (540)
Interest income - 29 - 91
-------- -------- -------- --------
Net interest expense (297) (277) (471) (449)
Loss from continuing operations
before income tax benefit and
minority interest (3,862) (6,736) (8,655) (12,041)
Income tax benefit 1,474 2,705 3,341 4,951
Minority interest, net of tax (7) (26) (35) (43)
-------- -------- -------- --------
Loss from continuing operations (2,395) (4,057) (5,349) (7,133)
Loss from discontinued operations,
net of income tax benefit (including
loss on disposal of $223) (390) (687) (1,308) (942)
-------- -------- -------- --------
Net loss $ (2,785) $ (4,744) $ (6,657) $ (8,075)
======== ======== ======== ========
Net loss per common share
Basic $ (0.29) $ (0.50) $ (0.68) $ (0.85)
======== ======== ======== ========
Diluted $ (0.29) $ (0.50) $ (0.68) $ (0.85)
======== ======== ======== ========
Average number of common
shares outstanding
Basic 9,815 9,598 9,813 9,512
======== ======== ======== ========
Diluted 9,815 9,598 9,813 9,512
======== ======== ======== ========
Page 3
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended
June 28, 2003 June 29, 2002
------------- -------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss $ (6,657) $ (8,075)
Net loss from discontinued operations, net of tax benefit 1,308 942
-------- --------
Net loss from continuing operations (5,349) (7,133)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of
property, plant and equipment 844 842
Amortization of deferred compensation 58 66
Minority interest, net of tax 35 43
Changes in:
Accounts receivable, net (2,366) 4,389
Inventory (11,174) (7,375)
Prepaid expenses (458) (465)
Deferred and recoverable income taxes 1,391 (4,236)
Other 888 (3,805)
Accounts payable 420 659
Accrued expenses (1,964) (2,469)
Accrued retirement costs and other 17 436
-------- --------
Net cash used in continuing operations (17,658) (19,048)
-------- --------
Net cash used in discontinued operations (1,654) (1,560)
-------- --------
Net cash used in operating activities (19,312) (20,608)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment, net (1,568) (2,032)
-------- --------
Cash flows from financing activities:
Long-term debt, net of (repayments) (446) 4,825
Proceeds from short-term notes 18,000 8,000
Proceeds from shares issued and other 121 560
-------- --------
Net cash provided by financing activities 17,675 13,385
-------- --------
Effect of exchange rates on cash 38 98
-------- --------
Net decrease in cash (3,167) (9,157)
Cash at the beginning of the period 6,881 12,258
-------- --------
Cash at the end of the period $ 3,714 $ 3,101
======== ========
Supplemental cash flow disclosures:
Interest paid $ 416 $ 414
======== ========
Income taxes paid (refunded), net $ (4,653) $ 136
======== ========
Page 4
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 June 28, 2003 and June 29, 2002
1. These interim consolidated 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", "we", "our",
"us") operate on a fifty-two or fifty-three week fiscal year, ending
annually on the Saturday nearest December 31st. Fiscal 2003 is a
fifty-three week year, while 2002 was a fifty-two week year.
3. Income tax benefit, from continuing operations, for the twenty-six week
periods ended June 28, 2003 and June 29, 2002, consisted of:
2003 2002
------ ------
(in thousands)
U. S. Federal and
Foreign tax benefit $2,952 $4,305
State & Local tax benefit 389 646
------ ------
Total $3,341 $4,951
====== ======
The income tax benefit reflects a combined federal, foreign, state and
local effective rate of approximately 38.6 percent and 41.1 percent for the
first half of 2003 and 2002, respectively, as compared to the statutory U.
S. federal rate of 34.0 percent in both years.
Income tax benefit for the twenty-six week periods ended June 28, 2003 and
June 29, 2002 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:
2003 2002
------ ------
(in thousands)
Computed "expected" tax benefit:
U. S. Federal benefit $2,943 $4,094
Foreign and other, net 141 411
State & Local benefit, net of
Federal tax benefit 257 446
------ ------
Total $3,341 $4,951
====== ======
4. Basic net loss per common share has been computed based on the weighted
average number of common shares outstanding during each period. Diluted net
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 employee stock purchase plan. Diluted loss
per common share as of June 28, 2003 and June 29, 2002 does not include the
effect of potential common shares due to the antidilutive effect of these
instruments, as a result of the losses incurred during the periods noted.
5. Inventory by category for the Company consisted of the following:
June 28, December 28,
-------- ------------
2003 2002
------- -------
( in thousands)
Raw materials $ 8,098 $ 6,981
Work in process 1,554 1,462
Finished goods 34,011 24,451
------- -------
Total inventory $43,663 $32,894
======= =======
Page 5
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 June 28, 2003 and June 29, 2002 - continued
6. Segment Information - The Company manufactures and markets comfort footwear
for at- and around-the-home. The Company considers its "Barry Comfort" at-
and around-the-home comfort footwear groups in North America and in Europe,
as its two 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 between 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.
Barry Comfort
-------------
Twenty-six weeks ended
June 28, 2003 North Intersegment
(in thousands) America Europe Eliminations Total
------- ------ ------------ -----
Net sales $ 34,091 $ 5,303 $ 39,394
Gross profit 12,650 888 13,538
Depreciation and
amortization 737 107 844
Interest income 104 (104)
Interest expense 554 21 (104) 471
Restructuring and asset
impairment charges 200 - 200
Pre tax loss from
continuing operations (8,249) (406) (8,655)
Additions to property, plant
and equipment, net 1,455 68 1,523
Total assets devoted $ 98,979 $ 6,499 ($9,561) $ 95,917
======== ======== ======== ========
Barry Comfort
-------------
Twenty-six weeks ended
June 29, 2002 North Intersegment
(in thousands) America Europe Eliminations Total
------- ------ ------------ -----
Net sales $ 30,115 $ 5,132 $ 35,247
Gross profit 9,740 1,040 10,780
Depreciation and
amortization 745 97 842
Interest income 91 (51) 40
Interest expense 520 20 (51) 489
Restructuring and asset
impairment charges 727 - 727
Pre tax loss from
continuing operations (11,651) (390) (12,041)
Additions to property, plant
and equipment, net 1,969 53 2,022
Total assets devoted $ 87,858 $ 7,618 ($6,968) $ 88,508
======== ======== ======== ========
Page 6
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 June 28, 2003 and June 29, 2002 - continued
6. Segment information - continued
Barry Comfort
-------------
Thirteen weeks ended
June 28, 2003 North Intersegment
(in thousands) America Europe Eliminations Total
------- ------ ------------ -----
Net sales $ 16,959 $ 2,057 $ 19,016
Gross profit 6,156 297 6,453
Depreciation and
amortization 365 14 27 406
Interest income 57 57
Interest expense 339 15 354
Pre tax loss from
continuing operations (3,471) (391) (3,862)
Additions to property, plant
and equipment, net 651 - 651
Total assets devoted $ 98,979 $ 6,499 $ (9,561) $95,917
======== ======== ======== =======
Barry Comfort
-------------
Thirteen weeks ended
June 29, 2002 North Intersegment
(in thousands) America Europe Eliminations Total
------- ------ ------------ -----
Net sales $ 13,697 $ 2,198 $ 15,895
Gross profit 4,336 400 4,736
Depreciation and
amortization 384 48 (39) 393
Interest income 29 29
Interest expense 294 12 306
Pre tax loss from
continuing operations (6,434) (302) (6,736)
Additions to property, plant
and equipment, net 1,103 2 1,105
Total assets devoted $ 87,858 $ 7,618 ($6,968) $88,508
======== ======== ======== =======
Page 7
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 June 28, 2003 and June 29, 2002 - continued
7. Restructuring and asset impairment charges - The Company has previously
announced plans to reduce costs and improve operating efficiencies, and
recorded restructuring and asset impairment charges as components of
operating expense. The following schedule highlights actual activities for
the six-month periods through June 28, 2003, with comparative information
through June 29, 2002.
Non-Cash
As of Write-Offs As of
Dec. 28, Charges Estimate and June 28,
(in thousands) 2002 in 2003 Adjustments Paid in 2003 2003
-------- ------- ----------- ------------ --------
Employee separations $ 1,530 - - 1,010 520
Asset impairments - 200 - 200 -
Noncancelable lease costs 208 - - 8 200
-------- ---- ------ ------ -------
Total restructuring costs $ 1,738 $ 200 - $ 1,218 $ 720
======= ===== ====== ======= =====
The Company expects that a substantial portion of the accrued obligations will
be paid before the end of the 2003 fiscal year.
As of As of
Dec. 29, Charges Estimate June 29,
(in thousands) 2001 in 2002 Adjustments Paid in 2002 2002
-------- ------- ----------- ------------ --------
Employee separations $ 346 727 - 895 178
------ --- ------ --- ---
Total restructuring costs $ 346 $ 727 - $ 895 $ 178
====== ====== ====== ===== ======
Page 8
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 June 28, 2003 and June 29, 2002 - continued
8. In May 2003, we announced an agreement to sell certain business assets of
our Vesture Corporation ("Vesture") thermal products subsidiary, and in
June 2003, we closed the sale of those assets. The sale was deemed
effective March 29, 2003. Vesture assets sold in the transaction included
furnishings, fixtures, equipment, inventories, books and records (including
supplier and customer lists), Vesture's rights under certain contracts and
agreements, patents and trademarks used by Vesture, and trade accounts
receivable of Vesture arising after March 29, 2003. We retained Vesture's
account receivables as of March 29, 2003. As consideration, the purchaser
assumed specific liabilities and obligations of Vesture and paid us a
nominal sum of cash. In addition, the purchaser is obligated to re-pay us
for the losses incurred, as defined, in the Vesture business for the period
from March 29, 2003 through June 18, 2003. As additional consideration for
the assets transferred, the purchaser has agreed to pay to us annual
payments, through the year 2006, based upon a percentage of purchaser's
annual sales in excess of specific thresholds.
With the disposal of those Vesture assets, we have discontinued the thermal
products business. The disposition of these assets represents a disposal of
a business segment under Statement of Financial Accounting Standard
("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, the results of this operation have been classified as
discontinued and financial data for all periods have been reclassified to
show discontinued operations.
Selected financial data relating to the discontinued operations through the
date of closing on June 18, 2003, follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
------------- ------------- ------------- -------------
Net sales $ 878 265 1,759 1,809
Gross profit 97 (325) 57 51
Selling, general and administrative 392 741 1,686 1,472
Loss on sale of certain assets
relating to discontinued operations (223) - (223) -
Loss from discontinued operations
before income tax benefit (363) (1,094) (1,745) (1,472)
Income tax benefit 196 406 660 530
Loss from discontinued operations
net of income tax benefit (390) (687) (1,308) (942)
Page 9
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 June 28, 2003 and June 29, 2002 - continued
9. Shareholders' Equity
The Company has various stock option plans, under which we have granted
incentive stock options and nonqualified stock options exercisable for
periods of up to 10 years from the date of grant at prices not less than
fair market value at the date of grant. In December 2002, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 148, Accounting for Stock- Based Compensation -
Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148
provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123, Accounting for Stock-Based Compensation, to require
prominent disclosures in annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
in measuring compensation expense. The disclosure requirements of SFAS No.
148 are effective for periods beginning after December 15, 2002.
The Company has elected, in accordance with the provisions of SFAS No. 123,
as amended by SFAS No. 148, to apply the current accounting rules under APB
Opinion No. 25 and related interpretations in accounting for employee stock
options and, accordingly, has presented the disclosure-only information as
required by SFAS No. 123. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at the
grant date as prescribed by SFAS No. 123, the Company's net earnings (loss)
would approximate the pro forma amounts indicated in the table below:
June 28, 2003 June 29, 2002
------------- --------------
(in thousands)
Net earnings (loss):
As reported $ (6,657) $ (8,075)
Pro forma (6,988) (8,615)
Earnings (loss) per share:
As reported $ (0.68) $ (0.85)
Pro forma (0.70) (0.86)
Using the Black-Scholes option pricing model, the per-share
weighted-average fair value of stock options granted during 2003 and 2002,
was $1.69 and $3.07, respectively, on the date of grant. The assumptions
used in estimating the fair value of the options as of June 28, 2003, and
June 29, 2002 were:
June 28, June 29,
2003 2002
---- ----
Expected dividend yield 0% 0%
Expected volatility 50% 50%
Risk-free interest rate 3.00% 5.00%
Expected life-ISO grants 6 years 6 years
Expected life-nonqualified grants 8 years 8 years
Page 10
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, which are not historical
fact are forward-looking statements based upon our current plans and strategies,
and reflect our current assessment of the risks and uncertainties related to our
business, including such things as 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. Actual events affecting us and
the impact of such events on our operations may vary from those currently
anticipated.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
As of the end of the second quarter of 2003, we had $35.4 million in net working
capital. This compares with $47.1 million at the end of the second quarter of
2002, and $40.9 million at fiscal year-end 2002. The declines in net working
capital from the end of the second quarter of 2002 and from fiscal year-end 2002
to the end of the second quarter of 2003 are primarily the result of the net
losses we have incurred during the periods.
The primary components of net working capital have changed as follows:
- - Net accounts receivable increased from $12.1 million at the end of the
second quarter of 2002, to $14.9 million at the end of the second quarter
of 2003. Most of the increase in 2003 reflects a shift in the timing of
sales to customers, plus a moderate slowdown in collections of customer
accounts. We do not believe that there is any increased exposure to bad
debts and expect receivables to return to historic levels by year-end 2003.
Accounts receivable at the end of the second quarter of 2003 increased by
$3.8 million from $11.1 million at the end of fiscal 2002, representing a
seasonal pattern of changes in receivables.
- - Inventories ended the second quarter of 2003 at $43.7 million compared with
$43.2 million one year ago, and $32.9 million as of the end of fiscal 2002.
Compared with one year ago, there is a decrease in aggregate raw materials
and work in process inventories from period to period of approximately $1.6
million, and an approximate $2.0 million increase in finished goods
inventory. This is consistent with our three-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 2002 by $10.8
million, which represents a seasonal pattern of inventory changes from
season to season, and is mainly an increase in finished goods in
expectation of sales later in the year.
- - We ended the second quarter of 2003 with $3.7 million in cash and cash
equivalents, compared with $3.1 million at the end of the second quarter of
2002. At the end of fiscal 2002, we had $6.9 million in cash and cash
equivalents. At the end of the second quarter of 2003, we had borrowed $18
million in short-term notes from our bank, compared with $8 million at the
end of the second quarter of 2002. The increase in short-term borrowings at
the end of the second quarter of 2003 compared with the end of the second
quarter of 2002, is primarily related to the losses that we incurred during
the second half of 2002. There were no short-term bank borrowings
outstanding at the end of fiscal 2002.
Page 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
Capital expenditures during the first half of 2003 amounted to $1.6 million
compared with $2.0 million during the first half of 2002. Most of the capital
expenditures in both 2002 and 2003, reflect expenditures needed to implement our
three-year strategic plan, as outlined in prior reports, plus routine
replacements.
We currently have in place a $32 million Revolving Credit Agreement ("Revolver")
with The Huntington National Bank ("Huntington"). In connection with the
Revolver, we granted a security interest in all of our personal property assets
to (a) secure our obligations to Huntington, including those obligations under
the Revolver and (b) secure our obligations under a Note Agreement with
Metropolitan Life Insurance Company dated July 5, 1994, as amended. The Revolver
is a three-year $32 million commitment from Huntington that matures on April 30,
2006. The Revolver contains certain periodic monthly commitment limitations
ranging from $3 million in January, $12 million for February and March, $32
million from April through October, and $27 million for November and December,
all of which are further limited monthly to 80 percent of eligible receivables
and 40 percent of eligible inventory, as defined. We have recently discussed
with Huntington and expect soon to obtain a $4 million increase in the
availability under the Revolver to cover our anticipated peak seasonal borrowing
needs. The Revolver contains various covenants, including financial covenants,
that require us to maintain specified consolidated minimum tangible net worth
levels, quarterly EBITDA (earnings before interest, taxes, depreciation and
amortization) maintenance requirements through the end of fiscal 2003, a minimum
coverage of interest expense beginning at the end of the first quarter in fiscal
2004, and certain cash flow leverage ratios beginning at the end of fiscal 2003.
We are in compliance with all covenants of the Revolver and 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 an aggregate of approximately $6 million, most of
which is payable in equal quarterly installments through the end of 2005.
Reflected in current installments and long-term debt is approximately $3.4
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 $3.7 million, is mainly included in other assets as of
the end of the first half of 2003. 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 half of 2003 amounted to $736
thousand, compared with $365 thousand during the first half of 2002.
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. Making estimates in the preparation of financial statements 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, both internal and external to our organization, as are available
to us at the time. After reasonably assessing the conditions that exist at the
time, we make estimates and prepare the financial reports. We make these
estimates in a consistent manner from period to period, based upon historical
trends and conditions, and after review and analysis of current events and
conditions. Management believes that these estimates reasonably reflect the
current assessment of the financial impact of events that may not become known
with certainty until some time in the future.
Page 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
Application of Critical Accounting Policies - continued
- -------------------------------------------------------
The more critical of these accounting policies requiring management estimates
are summarized here:
a) We recognize revenue when our goods are shipped to our customers and
title passes. In certain circumstances, we have made arrangements with customers
that provide for returns, discounts, promotions and other incentives. At the
time we recognize revenue, we reduce our measurement of revenue by an estimate
of future returns and retailer promotions and incentives, and recognize a
corresponding reduction in the measurement of accounts receivable. As a result
of the rapidly changing retail environment and the ever-changing economic
environment, it is possible that returns or retailer promotions and incentives
could change in the future. Accordingly, we have identified this estimate as one
requiring significant management judgement. We also estimate an amount for the
potential of doubtful accounts as a result of bad debts. In preparing the
financial statements for the periods ending June 28, 2003, we estimated the cost
of future returns, promotions, incentives and bad debts to amount to $2.1
million. This compares with an estimate at the end of June 29, 2002 of $1.4
million.
b) We value inventories using the lower of cost or market method, based
upon a standard costing method. We evaluate our inventories for any impairment
in realizable value in light of the prior selling season, the economic
environment, and our expectations for the upcoming selling season. At the end of
the second quarter of 2003, we estimated that the standard cost valuation of our
inventory exceeded the estimated net realizable value of that inventory by $1.2
million, compared with a similar estimate made at the end of the second quarter
of 2002 of $1.1 million.
c) We make an assessment of the amount of income taxes that will become
currently payable or recoverable for the just concluded 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
and the requirements of the increasingly complex income tax codes existing in
the various jurisdictions where we operate. We ended the second quarter of 2003
with net deferred and recoverable tax assets of $10.8 million, compared with net
deferred and recoverable tax assets at the end of the second quarter of 2002
amounting to $7.1 million. In evaluating the future usability of our deferred
and recoverable tax assets, we are relying on our capacity for refund of federal
income taxes due to our tax loss carry-back position, and on projections of
future profits. Should those future profits not materialize in the time frames
required, we may need to establish a further valuation allowance against
deferred tax assets.
d) We make an assessment of the ongoing future value of goodwill and
other intangible assets. During the second quarter of 2003, we made an
assessment, using discounted projected cash flows methodology, to determine that
there was no impairment in the value of those assets.
e) We make estimates of the future costs associated with restructuring
plans related to a number of operational changes and reconfigurations that we
have announced. At the end of the second quarter of 2003, we had an accrued
balance of $720 thousand relating to the estimated future costs of closing or
reorganizing certain operations, as previously outlined. At the end of the
second quarter of 2002, we had an accrued balance of $178 thousand for similar
restructuring and reorganization activities. Should the actual costs of these
activities exceed these estimates, the excess costs will be recognized in the
following period. Conversely, should the costs of such restructuring be less
than the amounts estimated, future periods would benefit by that difference.
(See also Note 7 of Notes to Consolidated Financial Statements for additional
restructuring information.)
f) In addition, there are other accounting policies, which also require
some judgmental input by management. We have followed these policies
consistently from year to year, period to period. For an additional discussion
of all of our accounting policies, the reader may refer to Note 1 of the Notes
to Consolidated Financial Statements contained in our 2002 Annual Report to
Shareholders. Actual results may vary from these estimates as a result of
activities learned after the period end estimates have been made, and will have
a positive or negative impact upon the results of operations in a period
subsequent to the period when we originally made the estimate.
Page 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
On May 15, 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
requires issuers to classify as liabilities (or assets in some circumstances)
three classes of freestanding financial instruments that embody obligations for
the issuer. Generally SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
adopted the provisions of SFAS No. 150 as of July 1, 2003. The Company's
adoption of SFAS No. 150 did not have a material impact on the Company's
financial condition or results of operations.
Results of Operations - Discontinued Operations
- -----------------------------------------------
In May, 2003, we agreed to sell certain business assets of our Vesture
Corporation thermal products subsidiary. On June 18, 2003, we closed the sale of
those assets. The sale was deemed effective March 29, 2003. The discontinued
operations include the activities of Vesture Corporation through June 18, 2003.
Upon closing, we received a nominal amount of cash, with a certain amount of
additional money to be received after closing to adjust the closing price,
retained the right to collect certain customer receivables, and the right to
potential royalties on sales, by the purchaser, above a certain threshold amount
through 2006. See Note 8 of Notes to Consolidated Financial Statements regarding
discontinued thermal operations.
With the disposal of those Vesture assets, we have discontinued the thermal
products business. The disposition of these assets represents a disposal of a
business segment under SFAS No. 144. Accordingly, the results of this operation
have been classified as discontinued and financial data for all periods have
been reclassified to show discontinued operations. During the second quarter of
2003, we incurred a net loss from discontinued operations of $390 thousand
compared with a net loss from discontinued operations in 2002 of $687 thousand.
For the first six months of 2003, we incurred a net loss from discontinued
operations of $1.3 million compared with a net loss from discontinued operations
in 2002 of $942 thousand. See Note 8 of Notes to Consolidated Financial
Statements for the highlights of the results of operations of the discontinued
thermal operations.
Results of Operations - Continuing Operations
- ---------------------------------------------
During the second quarter of 2003, net sales from continuing operations of $19.0
million, were 19.6 percent greater than net sales from continuing operations of
$15.9 million during the same quarter in 2002. For the six months, net sales
from continuing operations amounted to $39.4 million, an 11.8 percent increase
when compared with the first six months of 2002. Of the increase in net sales of
$4.1 million for the first half of 2003, $3.9 million occurred in Barry Comfort
North America, with approximately $172 thousand of the increase in Barry Comfort
Europe. Most of these increases occurred during the second quarter of the year.
(See also Note 6 of Notes to Consolidated Financial Statements for selected
segment information.)
Gross profit from continuing operations during the second quarter of 2003,
amounted to $6.5 million, or 33.9 percent of net sales. This compares with gross
profit of $4.7 million, or 29.8 percent of net sales, in the same quarter of
2002. For the six months, gross profit as a percent of net sales was 34.4
percent in 2003 compared with 30.6 percent in 2002. During the past three years,
we have been repositioning our operations to lower cost locations (transitioning
certain molding, cutting and warehousing operations from the United States into
Mexico), and making increasing use of outsourced purchases from third party
suppliers in Asia. The costs and efforts to achieve those objectives have been
arduous, but the results for the current periods in 2003, reflect the benefits
of that effort. Lowering costs of production have resulted in an increase in
gross profits.
Page 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
Selling, general and administrative expenses from continuing operations during
the second quarter amounted to $10.0 million, about $1.4 million lower than the
same quarter one year ago. For the six months, these expenses amounted to $21.6
million, compared with $22.0 million for the same six months last year. The
decline in expense reflects the efforts to curb expenses as contemplated in the
three-year strategic plan that we have been working on for the past three years.
Net interest expense increased during both the second quarter and first half of
2003 when compared with 2002. During the second quarter of 2003, net interest
expense amounted to $297 thousand compared with $277 thousand in the second
quarter of 2002. For the first half, net interest expense increased to $471
thousand in 2003, from $449 thousand in 2002. During 2003, we have borrowed more
under the Revolver than in 2002. At the end of the second quarter of 2003, we
had borrowed about $18 million under the Revolver, compared with $8 million
borrowed during the same time frame in 2002. Long-term debt at the end of the
second quarter of 2003 had decreased, due to scheduled repayments, by
approximately $3.4 million from the same period in 2002. The net impact of both
short-term and long-term debt was an increase of approximately $7 million from
2002 to 2003. During the comparable periods, interest rates on the Revolver were
nearly flat at approximately 4.0 percent in 2003, compared with 4.1 percent in
2002.
For the second quarter of 2003, we incurred a net loss from continuing
operations of $2.4 million, compared with a net loss from continuing operations
of $4.0 million in 2002. The net loss from discontinued operations for the
second quarter of 2003, amounted to $390 thousand, compared with a net loss from
discontinued operations of $687 thousand in 2002. The total net loss from both
continuing and discontinued operations amounted to $2.8 million in 2003, or
$0.29 per share, compared with $4.7 million in 2002, or $0.50 per share.
For the first six months of 2003, we incurred a net loss from continuing
operations of $5.3 million, compared with a net loss from continuing operations
of $7.1 million in 2002. The net loss from discontinued operations for the first
six months of 2003, amounted to $1.3 million, compared with a net loss from
discontinued operations of $942 thousand in 2002. The total net loss from both
continuing and discontinued operations amounted to $6.7 million in 2003, or
$0.68 per share, compared with $8.1 million in 2002, or $0.85 per share.
Page 15
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.
Our primary foreign currency cash inflows are generated from Canada, and to a
far lesser degree 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 use the foreign currency inflows in Mexico to net
against our foreign currency outflows in that country. 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 between 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 second
quarter of 2003, we had net foreign currency exchange contracts outstanding to
sell forward the following currency. All contracts mature later in fiscal 2003.
Approximate Estimated Fair Unrealized Loss,
Nominal Amount in Average Exchange Value as of as of
US Dollars Rate June 28, 2003 June 28, 2003
(in thousands) (in thousands)
Canadian Dollar $512 US$1 = CAN 1.56 $ 593 ($ 81)
ITEM 4 - Controls and Procedures
With the participation of management of R. G. Barry Corporation (the
"Registrant"), including the Registrant's principal executive officer and acting
principal financial officer, the Registrant has evaluated the effectiveness of
the Registrant's disclosure controls and procedures (as defined in Rule 13a-15
under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of
the period covered by this Quarterly Report on Form 10-Q. Based upon that
evaluation, the Registrant's principal executive officer and the Registrant's
acting principal financial officer have concluded that such disclosure controls
and procedures are effective as of the end of the period covered by this
Quarterly Report on Form 10-Q to ensure that material information relating to
the Registrant and its consolidated subsidiaries is made known to them,
particularly during the period for which the Registrant's periodic reports,
including this Quarterly Report on Form 10-Q, are being prepared.
In addition, there were no significant changes during the period covered by
this Quarterly Report on Form 10-Q in the Registrant's internal control over
financial reporting (as defined in Rule 13a-15 under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
On August 4, 2003, the Board of Directors appointed Jose G. Ibarra, Vice
President - Corporate Controller, as the Acting Principal Financial Officer of
the Registrant, until Daniel D. Viren, Senior Vice President - Finance and Chief
Financial Officer, resumes his duties. Mr. Viren is recuperating from heart
surgery and is expected to make a full recovery and soon resume his
responsibilities.
Page 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
No Response Required
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) R. G. Barry Corporation's Annual Meeting of Shareholders (the
"Annual Meeting") was held on May 8, 2003. At the close of business on
the record date, March 17, 2003, 9,808,175 common shares were
outstanding and entitled to vote at the Annual Meeting. At the Annual
Meeting, 9,156,444, or 93.4% of the outstanding common shares entitled
to vote, were represented in person or by proxy.
(b) Directors elected at the Annual Meeting, for three-year terms,
were:
Janice Page
For: 9,045,491 Withheld: 110,953 Broker non-votes: none
Harvey Weinberg
For: 8,999,525 Withheld: 156,919 Broker non-votes: none
Other directors whose terms of office continued after the Annual
Meeting:
Gordon Zacks Christian Galvis Roger E. Lautzenhiser
Edward M. Stan Philip G. Barach Daniel D. Viren
(c ) See Item 4(b) for the voting results for directors
Proposal to approve amendments to the R. G. Barry Corporation
Employee Stock Purchase Plan:
For: 8,885,522 Against: 199,921
Abstain: 71,001 Broker non-votes: none
(d) Not Applicable
Item 5. Other Information
- ---------------------------
No response required
Page 17
PART II - OTHER INFORMATION - continued
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits: See Index to Exhibits on page 21.
--------
(b) Reports on Form 8-K:
--------------------
On May 2, 2003, R. G. Barry Corporation (the "Registrant")
furnished information to the SEC on a Current Report on Form 8-K
dated that same date, reporting under "Item 9. Regulation FD
Disclosure," (which information was also deemed provided under
"Item 12. Results of Operations and Financial Condition") that on
May 2, 2003, the Registrant issued a news release reporting
operating results for its first quarter ended March 29, 2003.
On May 8, 2003, the Registrant furnished information to the SEC on
a Current Report on Form 8-K dated that same date, reporting under
"Item 9. Regulation FD Disclosure," that on May 8, 2003, the
Registrant had unveiled NASCAR(R) products at the Registrant's
Annual Meeting of Shareholders and the shareholders of the
Registrant had re-elected two directors and authorized amendments
to the Employee Stock Purchase Plan.
On May 16, 2003, the Registrant filed a Current Report on Form
8-K, dated May 15, 2003, reporting the issuance of a press release
announcing that the Registrant had agreed to sell certain business
assets of the Registrant's Vesture Corporation thermal products
subsidiary to a private company led by the Chairman of Vesture
Corporation.
On June 6, 2003, the Registrant filed a Current Report on Form
8-K, dated June 5, 2003, reporting that the Registrant had issued
a press release regarding its response to notification from the
New York Stock Exchange that the Registrant had fallen below
continued listing standards for market capitalization and
shareholders' equity.
On June 19, 2003, the Registrant filed a Current Report on Form
8-K, dated June 18, 2003, reporting that the Registrant had issued
a press release announcing that the Registrant had closed the sale
of certain business assets of the Registrant's Vesture Corporation
thermal products subsidiary to a private company led by the
Chairman of Vesture Corporation.
On July 2, 2003, the Registrant filed a Current Report on Form 8-K
dated the same date, providing information about the sale of
substantially all of the assets of the Registrant's Vesture
Corporation subsidiary to Vesture Acquisition Corp., a corporation
formed by investors headed by a co-founder and former Chairman of
Vesture Corporation. The following pro forma financial statements
were filed with the Form 8-K: Unaudited Pro Forma Consolidated
Condensed Statements of Operations for the year ended December 28,
2002; Unaudited Pro Forma Consolidated Condensed Statements of
Operations for the three months ended March 29, 2003; and
Unaudited Pro Forma Consolidated Condensed Balance Sheets for the
three months ended March 29, 2003, in each case to give effect to
the transaction.
On July 3, 2003, the Registrant filed a Current Report on Form
8-K/A dated the same date, amending certain of the disclosures
included in the Current Report on Form 8-K dated and filed July 2,
2003.
Page 18
PART II - OTHER INFORMATION - continued
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(b) Reports on Form 8-K (continued):
--------------------------------
On July 31, 2003, the Registrant furnished information to the SEC on a
Current Report on Form 8-K dated the same date, reporting under "Item 12.
Results of Operations and Financial Condition," that on July 31, 2003, the
Registrant issued a news release reporting operating results for its second
quarter ended June 28, 2003.
On August 1, 2003, the Registrant furnished information to the SEC on a
Current Report on Form 8-K, dated that same date, reporting under "Item 9.
Regulation FD Disclosure," the issuance of a news release announcing that
the New York Stock Exchange had accepted the Registrant's business plan for
continued listing on the New York Stock Exchange.
Page 19
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: August 11, 2003
/s/ Jose G. Ibarra
------------------
Jose G. Ibarra
Vice President - Corporate Controller
(Acting Principal Financial Officer)
(Duly Authorized Officer)
Page 20
R. G. BARRY CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
2.1 Asset Purchase Agreement, made as of May 14, 2003, by Incorporated herein by
and among Vesture Corporation, R. G. Barry Corporation reference to Exhibit 2 to
and Venture Acquisition Corp. (certain schedules and R. G. Barry Corporation's
exhibits are omitted from this Asset Purchase Agreement Current Report on Form 8-K,
and R. G. Barry Corporation has agreed to furnish a copy dated July 2, 2003 and filed
of any such schedule or exhibit to the Securities and on that date (File No. 1-8769)
Exchange Commission upon its request)
10.1 R. G. Barry Corporation Employee Stock Purchase Plan Filed herewith
(reflects amendments and revisions for share splits and
share dividends through May 8, 2003)
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Filed herewith
Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Acting Principal Filed herewith
Financial Officer)
32.1 Section 1350 Certifications (Principal Executive Officer Filed herewith
and Acting Principal Financial Officer)
Page 21