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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 September 27, 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 September 27, 2003 - 9,834,552
Index to Exhibits at page 22
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 27, December 28,
2003 2002
---------- ----------
(unaudited)
----------
(in thousands)
ASSETS:
Cash and cash equivalents $ 3,106 6,881
Accounts receivable, less allowances 31,768 11,125
Inventory 50,504 32,894
Deferred and recoverable income taxes 6,143 8,569
Prepaid expenses 2,215 1,599
---------- ----------
Total current assets 93,736 61,068
---------- ----------
Property, plant and equipment, at cost 36,083 39,176
Less accumulated depreciation and amortization 26,299 28,266
---------- ----------
Net property, plant and equipment 9,784 10,910
---------- ----------
Goodwill, net of amortization 2,692 2,374
Deferred income taxes and other assets 12,292 13,286
---------- ----------
$ 118,504 87,638
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term note payable 36,000 -
Current installments of long-term debt 3,794 3,650
Accounts payable 14,827 10,474
Accrued expenses 3,595 6,017
---------- ----------
Total current liabilities 58,216 20,141
---------- ----------
Accrued retirement costs and other, net 14,409 14,188
Long-term debt, excluding current installments 2,877 5,760
---------- ----------
Total liabilities 75,502 40,089
---------- ----------
Minority interest 400 361
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) 9,834 9,806
Additional capital in excess of par value 12,851 12,791
Deferred compensation (113) (200)
Accumulated other comprehensive loss (2,634) (3,071)
Retained earnings 22,664 27,862
---------- ----------
Net shareholders' equity 42,602 47,188
---------- ----------
$ 118,504 87,638
========== ==========
Page 2
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
---- ---- ---- ----
(unaudited)
(in thousands, except per share amounts)
Net sales $ 40,001 $ 38,619 $ 79,395 $ 73,866
Cost of sales 23,767 23,097 49,623 47,564
-------- -------- -------- --------
Gross profit 16,234 15,522 29,772 26,302
Selling, general and
administrative expense 13,410 13,145 34,985 35,190
Restructuring charges - 545 200 1,272
-------- -------- -------- --------
Operating earnings (loss) 2,824 1,832 (5,413) (10,160)
Other income - 200 53 600
Interest expense, net (450) (451) (921) (900)
Earnings (loss) from continuing
operations before income tax
and minority interest 2,374 1,581 (6,281) (10,460)
Income tax (expense) benefit (914) (592) 2,427 4,359
Minority interest, net of tax (4) (6) (39) (49)
-------- -------- -------- --------
Earnings (loss) from continuing
operations 1,456 983 (3,893) (6,150)
Income (loss) from discontinued
operations, net of income taxes
(including loss on disposal - $223
for the 39 weeks ended Sept. 27,
2003) 3 (781) (1,305) (1,723)
-------- -------- -------- --------
Net earnings (loss) $ 1,459 $ 202 ($ 5,198) ($ 7,873)
======== ======== ======== ========
Net earnings (loss) per common share
Basic $ 0.15 $ 0.03 ($ 0.53) ($ 0.82)
======== ======== ======== ========
Diluted $ 0.15 $ 0.03 ($ 0.53) ($ 0.82)
======== ======== ======== ========
Average number of common
shares outstanding
Basic 9,828 9,635 9,818 9,553
======== ======== ======== ========
Diluted 9,972 9,749 9,818 9,553
======== ======== ======== ========
Page 3
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended
-----------------------
September 27, September 28,
2003 2002
-------- --------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss ($ 5,198) ($ 7,873)
Net loss from discontinued operations, net of tax benefit 1,305 1,723
-------- --------
Net loss from continuing operations (3,893) (6,150)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of
property, plant and equipment 1,240 1,209
Loss on disposal of fixed assets 335 -
Amortization of deferred compensation 87 99
Minority interest, net of tax 39 49
Changes in:
Accounts receivable, net (21,026) (18,406)
Inventory (18,019) (8,882)
Prepaid expenses (641) (322)
Deferred and recoverable income taxes 2,426 (4,089)
Other 995 (3,847)
Accounts payable 4,488 1,789
Accrued expenses (1,778) (1,021)
Accrued retirement costs and other 220 669
-------- --------
Net cash used in continuing operations (35,527) (38,902)
-------- --------
Net cash used in discontinued operations (1,081) (2,661)
-------- --------
Net cash used in operating activities (36,608) (41,563)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,595) (1,977)
Proceeds from assets sold 1,165 -
-------- --------
Net cash used by investing activities (430) (1,977)
-------- --------
Cash flows from financing activities:
Long-term debt, net of repayments (2,851) (2,337)
Proceeds from short-term note 36,000 32,000
Proceeds from shares issued and other 88 901
-------- --------
Net cash provided by financing activities 33,237 35,238
-------- --------
Effect of exchange rates on cash 26 36
-------- --------
Net decrease in cash (3,775) (8,266)
Cash at the beginning of the period 6,881 12,258
-------- --------
Cash at the end of the period $ 3,106 $ 3,992
======== ========
Supplemental cash flow disclosures:
Interest paid $ 664 $ 913
======== ========
Income taxes paid (refunded), net ($ 4,653) $ 100
======== ========
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 September 27, 2003 and September 28, 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. All amounts are in thousands, except for per
share data.
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 thirty-nine week
periods ended September 27, 2003 and September 28, 2002, consisted of:
2003 2002
---- ----
U. S. Federal and
Foreign tax benefit $2,176 $3,709
State & Local tax benefit 251 650
------ ------
Total $2,427 $4,359
====== ======
The income tax benefit reflects a combined federal, foreign, state and
local effective rate of approximately 38.6 percent and 41.7 percent for the
three quarters 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 thirty-nine week periods ended September 27,
2003 and September 28, 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
---- ----
Computed "expected" tax benefit:
U. S. Federal benefit $2,136 $3,585
Foreign and other, net 125 345
State & Local benefit, net of
Federal tax benefit 166 459
------ ------
Total $2,427 $4,359
====== ======
4. Basic net earnings (loss) per common share has been computed based on the
weighted average number of common shares outstanding during each period.
Diluted net earnings (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 net loss per common share as of thirty-nine weeks ended
September 27, 2003 and September 28, 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 consisted of the following:
September 27, December 28,
2003 2002
---- ----
Raw materials $ 7,061 $ 6,981
Work in process 1,283 1,462
Finished goods 42,160 24,451
-------- --------
Total inventory $ 50,504 $ 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 September 27, 2003 and September 28, 2002 - continued
6. Segment Information - We manufacture and market comfort footwear for at-
and around-the-home. We consider our "Barry Comfort" at- and
around-the-home comfort footwear groups in North America and in Europe, as
our 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
or liabilities, and c) in some periods, certain other operating provisions.
Barry Comfort
-------------
Thirty-nine weeks ended North Intersegment
September 27, 2003 America Europe Eliminations Total
---------- ---------- ------------ ----------
Net sales $ 71,535 $ 7,860 $ 79,395
Gross profit 28,680 1,092 29,772
Depreciation and
amortization 1,088 152 1,240
Interest income - - -
Interest expense 886 35 921
Restructuring and asset
impairment charges 200 - 200
Pre tax loss from
continuing operations (5,447) (834) (6,281)
Additions to property, plant
and equipment, net 1,492 103 1,595
Assets devoted - continuing $ 122,434 $ 5,067 ($ 9,268) $ 118,233
========== ========== ========== ==========
Assets devoted-discontinued 270
----------
Total assets devoted $ 118,504
==========
Barry Comfort
-------------
Thirty-nine weeks ended North Intersegment
September 28, 2002 America Europe Eliminations Total
--------- --------- ------------ ---------
Net sales $ 66,045 $ 7,821 $ 73,866
Gross profit 24,758 1,544 26,302
Depreciation and
amortization 1,063 146 1,209
Interest income 40 - 40
Interest expense 907 33 940
Restructuring and asset
impairment charges 1,272 - 1,272
Pre tax loss from
continuing operations (9,730) (730) (10,460)
Additions to property, plant
and equipment, net 1,896 81 1,977
Assets devoted - continuing $ 113,989 $ 7,081 ($ 8,081) $ 112,989
========= ========= ========= =========
Assets devoted-discontinued 4,385
---------
Total assets devoted $ 117,374
=========
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 September 27, 2003 and September 28, 2002 - continued
6. Segment information - continued
Barry Comfort
-------------
Thirteen weeks ended North Intersegment
September 27, 2003 America Europe Eliminations Total
-------- -------- ------------ ---------
Net sales $ 37,444 $ 2,557 $ 40,001
Gross profit 16,030 204 16,234
Depreciation and
amortization 351 45 396
Interest income - - -
Interest expense 436 14 450
Pre tax earnings (loss) from
continuing operations 2,802 (428) 2,374
Additions to property, plant
and equipment, net 37 35 72
Barry Comfort
-------------
Thirteen weeks ended North Intersegment
September 28, 2002 America Europe Eliminations Total
-------- -------- ------------ --------
Net sales $ 35,930 $ 2,689 $ 38,619
Gross profit 15,018 504 15,522
Depreciation and
amortization 318 49 367
Interest income 41 - 41
Interest expense 479 13 492
Pre tax earnings (loss) from
continuing operations 1,921 (340) 1,581
Additions to property, plant
and equipment, net 5 28 33
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 September 27, 2003 and September 28, 2002 - continued
7. Restructuring and asset impairment charges - We had 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 three
quarters through September 27, 2003, with comparative information through
September 28, 2002.
Non-Cash
As of Write-Offs As of
Dec. 28, Charges Estimate and Sept. 27,
2002 in 2003 Adjustments Paid in 2003 2003
-------- -------- ----------- ------------ --------
Employee separations $ 1,530 $ - $ - ($ 1,200) $ 330
Asset impairments - 200 - (200) -
Noncancelable lease costs 208 - - (208) -
-------- -------- -------- -------- --------
Total restructuring costs $ 1,738 $ 200 - ($ 1,608) $ 330
======== ======== ======== ======== ========
We expect 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 Sept. 28,
2001 in 2002 Adjustments Paid in 2002 2002
-------- -------- ----------- ------------ --------
Employee separations $ 346 $ 1,252 $ 20 ($ 1,111) $ 507
-------- -------- -------- -------- --------
Total restructuring costs $ 346 $ 1,252 $ 20 ($ 1,111) $ 507
======== ======== ======== ======== ========
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 September 27, 2003 and September 28, 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. Vesture assets sold in the
transaction included furnishings, trade fixtures, equipment, raw material
and finished products 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. As additional consideration for the assets sold,
the purchaser has agreed to remit to us annual payments, through the year
2006, based upon a percentage of purchaser's annual sales in excess of
specific sales 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 Thirty-nine weeks ended
-------------------- -----------------------
Sept. 27, 2003 Sept. 28, 2002 Sept. 27, 2003 Sept. 28, 2002
-------------- -------------- -------------- --------------
Net sales $ - $ 562 $ 1,759 $ 2,371
Gross profit (loss) - (357) 57 (307)
Selling, general and administrative
expense - 699 1,686 2,170
Loss on sale of certain assets
relating to discontinued operations - - (223) -
Income (loss) from discontinued
operations before income tax benefit 3 (1,097) (1,742) (2,569)
Income tax benefit - 316 660 846
Income (loss) from discontinued
operations, net of income tax benefit $ 3 ($ 781) ($ 1,305) ($ 1,723)
We have previously reported that Vesture has been involved in certain
patent infringement litigation relating to its MICROCORE pizza delivery
systems. On September 16, 2003, the United States District Court for the
Middle District of North Carolina entered an Order and Judgment granting
the motion for summary judgment of Thermal Solutions, Inc. and CookTek,
Inc. finding, inter alia, that Vesture's pizza delivery system infringed on
two of the patents owned by Thermal Solutions and licensed to CookTek. We
are currently evaluating our options in view of the Court's September 16
decision. The issues remaining for trial before the Court are Vesture's
claim that the patents are not valid, and what damages could be awarded to
Thermal Solutions and CookTek if any valid patent claims are infringed. We
do not believe that the ultimate resolution of the litigation will result
in a material adverse impact to our financial condition or operations. (For
additional discussion of this legal matter, see also Part II - Other
Information, Item I - Legal Proceedings, found on page 18 of this Form
10-Q)
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 September 27, 2003 and September 28, 2002 - continued
9. Certain amounts in the 2002 financial statements have been reclassified to
conform with the 2003 presentation.
10. Shareholders' Equity
We have 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.
We have 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, we have presented the disclosure-only information
as required by SFAS No. 123. If we 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, our net loss would approximate the pro forma
amounts indicated in the table below, for the periods noted:
September 27, September 28,
2003 2002
---- ----
Net loss:
As reported $ (5,198) $ (7,873)
Pro forma (5,702) (8,683)
Net loss per share:
As reported $ (0.53) $ (0.82)
Pro forma (0.56) (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 $1.72 and $3.07, respectively, on the date of grant. The assumptions
used in estimating the fair value of the options as of September 27, 2003,
and September 28, 2002 were:
September 27, September 28,
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 stock option 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 third quarter of 2003, we had $35.5 million in net working
capital. This compares with $45.8 million at the end of the third quarter of
2002, and $40.9 million at fiscal year-end 2002. The decline in net working
capital from the end of the third quarter of 2002 and from fiscal year-end 2002
to the end of the third quarter of 2003 is primarily the result of the net
losses we have incurred during the various periods.
The primary components of net working capital have changed as follows:
- - Net accounts receivable decreased from $34.9 million at the end of the
third quarter of 2002, to $31.8 million at the end of the third quarter of
2003. Most of the decrease in 2003 reflects a decline in receivables
attributable to changing our operations in Europe to a distributorship and
the discontinued thermal products unit, which we sold in June 2003. We
believe that we have adequately provided for all significant exposures to
bad debts. Accounts receivable at the end of the third quarter of 2003
increased to $31.8 million from $11.1 million at the end of fiscal 2002,
representing a normal seasonal pattern of increase in receivables.
- - Inventories ended the third quarter of 2003 at $50.5 million compared with
$44.9 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 $1.8
million, offset by an increase of approximately $7.5 million in finished
goods inventory. During the third quarter, we acquired inventory from our
suppliers in Asia, at an accelerated pace, when compared with last year.
Inventory was received in the third quarter that was not intended for use
until the fourth quarter of 2003. We have identified this as an area for
improved management in the timing of ordering inventory from suppliers. We
do not foresee any increased risk of obsolescence and we believe that this
higher level of finished goods inventory will be reduced to more manageable
levels by the end of the 2003 fiscal year. The amount of inventory has
increased from the end of fiscal 2002 by $17.6 million, which represents a
seasonal pattern of inventory changes from year end to the peak shipping
season, and is mainly an increase in finished goods.
- - At the end of the third quarter of 2003, accrued expenses amounted to $3.6
million, compared with $3.0 million at the end of the third quarter of
2002, and compared with $6.0 million as of the end of fiscal 2002. The
primary cause of the decline from the end of fiscal 2002 were payments made
on the restructuring charges that had been accrued as of the end of 2002.
(See also Note 7 of Notes to Consolidated Financial Statements for
additional information on restructuring charges.)
Page 11
Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
- - We ended the third quarter of 2003 with $3.1 million in cash and cash
equivalents, compared with $4.0 million at the end of the third quarter of
2002. At the end of fiscal 2002, we had $6.9 million in cash and cash
equivalents. At the end of the third quarter of 2003, we had borrowed $36
million in short-term notes from our bank, compared with $32 million at the
end of the third quarter of 2002. The increase in short-term borrowings at
the end of the third quarter of 2003 compared with the end of the third
quarter of 2002 was used to help fund the accelerated acquisition of
finished goods inventory referred to above. There were no short-term bank
borrowings outstanding at the end of fiscal 2002. (See also comments
following regarding our Revolving Credit Agreement.)
Capital expenditures during the first three quarters of 2003 were approximately
$400 thousand, net of dispositions of $1.1 million, primarily the disposition of
a warehouse in Goldsboro, North Carolina. During the first three quarters of
2002, net capital expenditures amounted to $2.0 million. Capital expenditures in
both 2002 and 2003, were funded out of net working capital. In 2002, the
expenditures were in support of our three-year strategic plan, as outlined in
prior reports; whereas in 2003, most capital expenditures represented routine
replacements.
We currently have in place a Revolving Credit Agreement ("Revolver") with The
Huntington National Bank ("Huntington"). In September 2003, the Revolver was
temporarily increased by $4 million to $36 million from the prior $32 million
commitment. In connection with the Revolver, we had previously 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 (temporarily increased to $36 million only for September
and October 2003) 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, (temporarily increased to $36 million for September and October of
2003) 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. The Revolver contains various covenants, including
financial covenants, that require us to maintain specified consolidated minimum
tangible net worth levels, require us to earn at least One Dollar of
Consolidated Net Income, as defined, in 2003 and future years (excluding the
impact of the sale and operations of the thermal products segment sold in June
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.
As previously mentioned, we encountered timing problems with our inventory
purchases from our suppliers in Asia during the third quarter of this year.
Although much of this inventory is expected to be shipped to customers in the
fourth quarter, the inventory arrived in our warehouses much earlier than it was
needed. As a consequence of the early purchases, we had higher cash requirements
than normal during the third quarter, necessitating an above-planned level of
borrowing under our Revolver. Our bank agreed to increase the maximum borrowing
amount under the Revolver from $32 million to $36 million for the months of
September and October 2003 only. As of the end of the third quarter, our
borrowings under the line were $36 million. The liquidity pressures we
experienced in late August and September are now reversing as a result of
payments received from our customers. As of October 31, 2003 our borrowing under
our Revolver had been paid down to $27 million, and we expect to have adequate
liquidity from cash generated from operations and the Revolver to operate our
business going forward. Steps have been taken to address and correct the
inventory purchase problems that caused the early purchase of inventory from
Asia in the third quarter.
Page 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
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 $3.0
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 $3.3 million, is included in other assets as of the
end of the third quarter of 2003. These costs are being amortized through the
end of 2007, corresponding with the period of expected benefit from the
reduction in duties. Amortization during the three quarters of 2003 amounted to
$1.1 million, compared with $620 thousand during the three quarters 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 a
variety of 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.
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 the level of 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 September 27, 2003, we
estimated the cost of future returns, promotions, incentives and bad debts to
amount to $6.0 million. This compares with an estimate at the end of September
28, 2002 of $4.1 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 third quarter of 2003, we estimated that the standard cost valuation of our
inventory exceeded the estimated net realizable value of that inventory, by $1.0
million, and we have provided a reserve in that amount at the end of the third
quarter of 2003. This compares with a similar estimate made at the end of the
third quarter of 2002 of slightly less than $900 thousand.
Page 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
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. We take into consideration the 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 third
quarter of 2003 with net deferred and recoverable tax assets of $6.1 million,
compared with net deferred and recoverable tax assets at the end of the third
quarter of 2002 amounting to $7.0 million. In evaluating the future
recoverability of our deferred and recoverable tax assets, we are relying on
current tax planning strategies, as well as 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 third quarter of 2003, we had an accrued
balance of $330 thousand relating to the estimated future costs of employee
separation payments expected to be paid as a result of previously announced
actions. At the end of the third quarter of 2002, we had an accrued balance of
$507 thousand for similar restructuring, costs of employee separations, and
reorganization activities. Should the actual costs of these activities exceed
these estimates, the excess costs will be recognized in the future period in
which the excess costs occur. 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 information on restructuring charges.)
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 our significant 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
information 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.
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. We adopted
the provisions of SFAS No. 150 as of July 1, 2003. The adoption of SFAS No. 150
did not have a material impact on our financial condition or results of
operations.
Page 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Results of Operations - Discontinued Operations
In May, 2003, we announced an agreement to sell certain business assets of our
Vesture Corporation ("Vesture") thermal products subsidiary. On June 18, 2003,
we closed the sale of those assets. The discontinued operations include the
activities of Vesture through June 18, 2003. Upon closing, we received a nominal
amount of cash with additional money received after closing to adjust the
closing price to reflect losses incurred by the Vesture business from March 29,
2003 through June 18, 2003. We retained Vesture's receivables as of March 29
2003, and we have the right to potential royalties on future sales, by the
purchaser, above specific sales thresholds through 2006. See Note 8 of Notes to
Consolidated Financial Statements regarding discontinued thermal operations.
With the disposal of the 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, 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. During the first three quarters 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 $1.7 million.
For the third quarter of 2003, there was no significant impact from these
discontinued operations, while during the third quarter of 2002, we incurred a
net loss of $781 thousand relating to these operations. 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 third quarter of 2003, net sales from continuing operations of $40.0
million, were 3.6 percent greater that net sales from continuing operations of
$38.6 million during the same quarter in 2002. For the three quarters, net sales
from continuing operations amounted to $79.4 million, a 7.5 percent increase
when compared with the three quarters of 2002. Of the increase in net sales of
$5.5 million for the three quarters of 2003, and the $1.4 million increase
during the third quarter, virtually all of the increase occurred in Barry
Comfort North America, with only a nominal change in the net sales of Barry
Comfort Europe. A portion of the increase relates to the success of the
Terrasoles(TM) brand of at-and around-the-home comfort footwear, first tested
and introduced in 2002, and the introduction in 2003 of NASCAR(R) licensed
slippers. (See also Note 6 of Notes to Consolidated Financial Statements for
selected segment information.)
Gross profit from continuing operations during the third quarter of 2003,
amounted to $16.2 million, or 40.6 percent of net sales. This compares with
gross profit of $15.5 million, or 40.2 percent of net sales, in the same quarter
of 2002. For the three quarters, gross profit as a percent of net sales was 37.5
percent in 2003 compared with 35.6 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
long and arduous, but the results for the current periods in 2003 reflect the
benefits of that effort. Lowering costs of production has resulted in an
increase in gross profits.
Selling, general and administrative expenses from continuing operations during
the third quarter amounted to $13.4 million, about $265 thousand higher than the
same quarter one year ago. For the three quarters, these expenses amounted to
$35.0 million, compared with $35.2 million for the same three quarters last
year. As a percent of net sales there has been a decline in these expenses which
reflects our efforts to curb expenses as contemplated in the three-year
strategic plan.
Page 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Net interest expense was nearly flat during both the third quarter and three
quarters of 2003 when compared with 2002. During the third quarter of 2003, net
interest expense amounted to $450 thousand compared with $451 thousand in the
third quarter of 2002. For the three quarters, net interest expense increased to
$921 thousand in 2003, from $900 thousand in 2002. During 2003, we have borrowed
more under the Revolver than in 2002. At the end of the third quarter of 2003,
we had borrowed about $36 million under the Revolver, compared with $32 million
borrowed at the same time in 2002. Long-term debt at the end of the third
quarter of 2003 had decreased, due to scheduled repayments. During the
comparable periods, interest rates on the Revolver were nearly flat at
approximately 3.9 percent in 2003, compared with 4.0 percent in 2002.
Page 16
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 third
quarter of 2003, we had net foreign currency exchange contracts outstanding to
sell forward the following currency. All contracts mature later in fiscal 2003.
Average Estimated Fair Unrealized Loss,
Nominal Amount in Contract Value as of as of
US Dollars Exchange Rate Sept. 27, 2003 Sept. 27, 2003
(in thousands) (in thousands)
Canadian Dollar $ 512 US$1 = CAN 1.56 $ 606 ($ 94)
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 the
Registrant's 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 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 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.
Page 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, on October 19, 2001, RGB Technology, Inc.
(previously known as Vesture Corporation), a subsidiary of R. G. Barry
Corporation (the "Registrant"), received a charge that its MICROCORE pizza
delivery system infringed on United States Patents owned by Thermal
Solutions, Inc. and licensed to CookTek, Inc. (the "Patents"). On November
2, 2001, RGB Technology, Inc. ("RGB Vesture") filed an action in the United
States District Court for the Middle District of North Carolina (Civil
Action No. 1: 01CV01006, the "North Carolina Litigation"), seeking a
declaratory judgment that the Patents are not infringed by the Vesture
MICROCORE pizza delivery system. Thermal Solutions and CookTek
counterclaimed for infringement of the Patents. In response, RGB Vesture
asserted claims that the Patents were invalid. All of the parties to the
North Carolina Litigation filed motions for summary judgment or dismissal.
On September 16, 2003, the United States District Court for the Middle
District of North Carolina (the "Court") entered an Order and Judgment in
the North Carolina Litigation granting the motion for summary judgment of
Thermal Solutions and CookTek finding, inter alia, that RGB Vesture's pizza
delivery system infringed on two of the Patents. In addition, the Court
dismissed RGB Vesture's claims that Thermal Solutions and CookTek had
tortiously interfered with its prospective business relations and committed
unfair and deceptive trade practices under North Carolina law.
RGB Vesture is currently evaluating its options in view of the Court's
September 16 decision. The issues remaining for trial before the Court are
RGB Vesture's claim that the Patents are not valid, and what damages could
be awarded to Thermal Solutions and CookTek if any valid patent claims are
infringed. As soon as appropriate, RGB Vesture intends to appeal the
Court's September 16 decision. Such appeal will be made to the Federal
Circuit Court of Appeals, which has exclusive jurisdiction over patent
decisions made by federal district courts. The Registrant cannot predict
the ultimate outcome of the North Carolina Litigation or the amount of
damages that could be awarded against RGB Vesture if it is unsuccessful in
the Litigation. However, the Registrant does not believe that the ultimate
resolution of the North Carolina Litigation will result in a material
adverse impact to the financial condition or operations of the Registrant.
RGB Vesture sold substantially all of its assets on June 18, 2003 to a
newly-organized entity, now called "Vesture Corporation," which was
organized by the Chief Executive Officer of RGB Vesture ("New Vesture").
The MICROCORE pizza delivery system was included in the assets sold by RGB
Vesture to New Vesture. The claims against RGB Vesture in the North
Carolina Litigation relate to pizza delivery systems distributed by RGB
Vesture prior to the sale of its assets to New Vesture. In connection with
the sale by RGB Vesture of its assets to New Vesture, New Vesture agreed to
pay to RGB Vesture through 2006 annual payments based on a percentage of
New Vesture's annual sales in excess of specific thresholds. If there is a
final determination in the North Carolina Litigation that the MICROCORE
pizza system infringes on the Patents, it would likely reduce significantly
or eliminate these future payments by New Vesture to RGB Vesture.
Item 2. Changes in Securities and Use of Proceeds
(a) through (d) Not applicable
Item 3. Defaults Upon Senior Securities
(a), (b) Not applicable
Page 18
PART II - OTHER INFORMATION - continued
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 22.
(b) Reports on Form 8-K:
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.
On September 3, 2003, the Registrant filed a Current Report on Form 8-K,
dated that same day, reporting that on September 1, 2003, the Registrant
had entered a Second Amendment to the Revolving Credit Agreement with
The Huntington National Bank to increase the borrowing capacity by an
additional $4 million (up to a maximum of $36 million) for the period
from September 1, 2003 through November 1, 2003. The Second Amendment,
filed as an exhibit to the Form 8-K, also modified certain covenants
under the Revolving Credit Agreement.
On September 22, 2003, the Registrant filed a Current Report on Form
8-K, dated September 19, 2003, reporting that on September 15, 2003, the
Registrant had entered a Third Amendment to the Revolving Credit
Agreement with The Huntington National Bank to deleting certain
covenants relating to EBITDA and replacing them with the requirement
that the Registrant earn at least One Dollar ($1.00) in Consolidated Net
Income, as defined, for the fiscal year 2003 and each year thereafter
(excluding any losses due to the sale of the assets, or from the
operations, of Vesture Corporation, the Registrant's wholly-owned
thermal products operations sold in June 2003.)
Page 19
PART II - OTHER INFORMATION - continued
Item 6. Exhibits and Reports on Form 8-K (continued)
(b) Reports on Form 8-K (continued):
On September 26, 2003, the Registrant filed a Current Report on Form
8-K, dated September 25, 2003, reporting that on September 16, 2003, the
United States District Court for the Middle District of North Carolina
had issued an Order and Judgment in the pending North Carolina
litigation granting the motion for summary judgment of Thermal
Solutions, Inc. and CookTek, Inc. finding, inter alia, that RGB
Technology, Inc.'s pizza delivery system infringed on two of the United
States Patents owned by Thermal Solutions and licensed to CookTek. See
the discussion under "Item 1. Legal Proceedings" of Part II of this
Quarterly Report on Form 10-Q for more information about this
litigation.
Page 20
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 10, 2003
/s/ Daniel D. Viren
--------------------------------------
Daniel D. Viren
Senior Vice President - Finance
(Principal Financial Officer)
(Duly Authorized Officer)
Page 21
R. G. BARRY CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
4.1 Second Amendment to Revolving Credit Agreement entered Incorporated herein by reference to
into as of September 1, 2003, between The Huntington Exhibit 4 to R. G. Barry
National Bank, as lender, and R. G. Barry Corporation, Corporation's Current Report on Form
as borrower, in order to amend Revolving Credit 8-K, dated September 3, 2003 and
Agreement dated as of December 27, 2002 filed on that date (File No. 1-8769)
4.2 Third Amendment to Revolving Credit Agreement entered Incorporated herein by reference to
into as of September 15, 2003, between The Huntington Exhibit 4 to R. G. Barry
National Bank, as lender, and Corporation's Current Report on Form
R. G. Barry Corporation, as borrower, in order to 8-K, dated September 19, 2003 and
amend Revolving Credit Agreement dated as of December filed on September 22, 2003 (File
27, 2002 No. 1-8769)
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 (Principal Filed herewith
Financial Officer)
32.1 Section 1350 Certifications (Principal Executive Filed herewith
Officer, and Principal Financial Officer)
Page 22