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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 April 3, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 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 April 3, 2004 - 9,836,602
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
April 3, 2004 January 3, 2004
------------- ---------------
(unaudited)
(in thousands)
ASSETS:
Cash $ 2,192 2,012
Accounts receivable (less allowances of
$11,845 and $18,494, respectively) 11,084 7,118
Inventory 31,832 32,797
Prepaid expenses 1,811 2,452
-------- --------
Total current assets 46,919 44,379
-------- --------
Property, plant and equipment, at cost 17,519 35,274
Less accumulated depreciation and amortization 11,916 25,905
-------- --------
Net property, plant and equipment 5,603 9,369
-------- --------
Other assets 3,836 7,532
-------- --------
$ 56,358 61,280
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term notes payable 17,118 2,000
Current installments of long-term debt 1,754 3,869
Accounts payable 4,824 7,485
Accrued expenses 4,235 5,180
-------- --------
Total current liabilities 27,931 18,533
-------- --------
Accrued retirement costs and other, net 15,114 14,841
Long-term debt, excluding current installments 1,688 2,141
-------- --------
Total liabilities 44,733 35,515
-------- --------
Minority interest 378 378
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) 9,836 9,834
Additional capital in excess of par value 12,851 12,851
Deferred compensation (27) (84)
Accumulated other comprehensive loss (3,410) (3,370)
Retained earnings (accumulated deficit) (8,003) 6,156
-------- --------
Net shareholders' equity 11,247 25,387
-------- --------
$ 56,358 61,280
======== ========
Page 2
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Weeks Ended
April 3, 2004 March 29, 2003
------------- --------------
(unaudited)
-----------
(in thousands,
except per share amounts)
Net sales $ 18,430 $ 20,378
Cost of sales 12,917 13,293
----------- ---------
Gross profit 5,513 7,085
Selling, general and administrative expense 11,197 11,557
Restructuring and asset impairment charges 8,282 200
----------- ---------
Operating loss (13,966) (4,672)
Other income 45 53
Net interest expense (241) (174)
----------- ---------
Loss from continuing operations, before income tax and minority interest (14,162) (4,793)
Income tax benefit 2 1,867
Minority interest, net of tax 1 (28)
----------- ---------
Loss from continuing operations (14,159) (2,954)
Loss from discontinued operations -- (918)
----------- ---------
Net loss ($ 14,159) ($ 3,872)
=========== =========
Net loss per common share
Basic ($ 1.44) ($ 0.39)
=========== =========
Diluted ($ 1.44) ($ 0.39)
=========== =========
Average number of common shares outstanding
Basic 9,839 9,811
=========== =========
Diluted 9,839 9,811
=========== =========
Page 3
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirteen Weeks Ended
April 3, 2004 March 29, 2003
------------- --------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss ($14,159) (3,872)
Net loss from discontinued operations -- 918
-------- --------
Net loss from continuing operations (14,159) (2,954)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of
property, plant and equipment 417 438
Asset impairment loss 6,263 --
Minority interest, net of tax -- 27
Amortization of deferred compensation 57 30
Changes in:
Accounts receivable, net (3,965) (2,847)
Inventory 916 (1,017)
Prepaid expenses and other 1,435 (1,907)
Accounts payable (2,279) (4,028)
Accrued expenses (930) (695)
Accrued retirement costs and other, net 283 (164)
-------- --------
Net cash used in continuing operations (11,962) (13,115)
-------- --------
Net cash used in discontinued operations (401) (1,232)
-------- --------
Net cash used in operating activities (12,363) (14,347)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (41) (831)
-------- --------
Cash flows from financing activities:
Proceeds from short-term notes 25,322 12,000
Repayments of short-term notes (10,204) --
Proceeds from shares issued 2 5
Long-term debt, net of repayments (2,537) 21
-------- --------
Net cash provided by financing activities 12,583 12,026
-------- --------
Effect of exchange rates on cash 1 2
-------- --------
Net increase (decrease) in cash 180 (3,150)
Cash at the beginning of the period 2,012 6,881
-------- --------
Cash at the end of the period $ 2,192 3,731
======== ========
Supplemental cash flow disclosures:
Interest paid $ 210 208
======== ========
Income taxes paid $ 15 18
======== ========
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 April 3, 2004 and March 29, 2003
(in thousands, except per share data)
1. The 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") operate on a
fifty-two or fifty-three week annual fiscal year, ending annually on the
Saturday nearest December 31st. Fiscal 2004 is a fifty-two week year,
while fiscal 2003 was a fifty-three week year.
3. Shareholders' Equity
The Company has various stock option plans, under which have been 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 amended 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 were 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. Had the Company elected to
recognize compensation expense based on the fair value of the options
granted at the grant date as prescribed by SFAS No. 123, the Company's net
loss would approximate the pro forma amounts indicated in the table below,
for the periods noted:
April 3, 2004 March 29, 2003
------------- --------------
Net loss:
As reported $ (14,159) $ (3,872)
Pro forma (14,302) (4,012)
Net loss per share:
As reported $ (1.44) $ (0.39)
Pro forma (1.44) (0.40)
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 April 3, 2004 and March 29, 2003 - continued
Using the Black-Scholes option pricing model, the per-share,
weighted-average fair value of stock options granted during 2004 and 2003,
was $1.20 and $1.79, respectively, on the date of grant. The assumptions
used in estimating the fair value of the options as of April 3, 2004, and
March 29, 2003 were:
April 3, 2004 March 29, 2003
------------- --------------
Expected dividend yield 0% 0%
Expected volatility 60% 50%
Risk-free interest rate 3.00% 3.00%
Expected life-ISO grants 6 years 6 years
Expected life-nonqualified grants 2 - 8 years 8 years
4. Income tax (expense) benefit for the periods ended April 3, 2004 and March
29, 2003 consist of:
2004 2003
----- -------
U. S. Federal and
Foreign net tax benefit $ 2 $ 1,649
State & Local tax (expense) benefit -- 218
----- -------
Total $ 2 $ 1,867
===== =======
Income tax (expense) benefit for the periods ended April 3, 2004 and March
29, 2003 differed from the amounts computed by applying the U. S. federal
income tax rate of 34 percent to pretax loss as a result of the following:
2004 2003
-------- -------
Computed "expected" tax (expense) benefit:
U. S. Federal tax benefit $ 4,821 $ 1,630
Valuation allowance (4,821) --
Foreign and other, net 2 93
State & Local tax (expense) benefit, net of
federal tax benefit -- 144
-------- -------
Total $ 2 $ 1,867
======== =======
5. 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 net
loss per common share for the thirteen weeks ended April 3, 2004 and March
29, 2003 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.
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 April 3, 2004 and March 29, 2003 - continued
6. Inventory by category for the Company consists of the following:
April 3, January 3,
2004 2004
-------- ----------
Raw materials $ 2,160 $ 3,771
Work in process 733 615
Finished goods 28,939 28,471
------- -------
Total inventory 31,832 32,797
======= =======
Inventory is presented at its net realizable value, net of write-downs.
Raw materials reflect a write-down balance of $2,344 as of April 3, 2004
and $2,389 as of January 3, 2004, and finished goods reflect a write-down
balance of $225 as of April 3, 2004 and $3,022 as of January 3, 2004.
7. Restructuring and asset impairment charges - The Company has previously
announced plans to reduce costs and improve operating efficiencies, and
has recorded restructuring and asset impairment charges as a component of
operating expense. The following schedule highlights actual activities
through April 3, 2004, with comparative information as of March 29, 2003.
Non-Cash
As of Write-Offs As of
Jan. 3, Charges Estimate and April 3,
2004 in 2004 Adjustments Paid in 2004 2004
------- ------- ----------- ------------ --------
Employee separations $ 174 1,132 (9) 740 557
Other exit costs -- 887 -- 887 --
Asset impairments -- 6,263 -- 6,263 --
------ ------- ------ ------- -----
Total restructuring costs $ 174 $ 8,282 (9) $ 7,890 $ 557
====== ======= ====== ======= =====
The Company expects that a substantial portion of the accrued obligations
will be paid before the end of the 2004 fiscal year.
Non-Cash
As of Write-Offs As of
Dec. 28, Charges Estimate and March 29,
2002 in 2003 Adjustments Paid in 2003 2003
-------- ------- ----------- ------------ ---------
Employee separations $ 1,530 -- -- 512 1,018
Asset impairments -- 200 -- 200 --
Noncancelable lease costs 208 -- -- 8 200
-------- ----- ----- ----- -------
Total restructuring costs $ 1,738 $ 200 -- $ 720 $ 1,218
======== ===== ===== ===== =======
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 April 3, 2004 and March 29, 2003 - continued
8. Segment Information - The Company 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.
Thirteen weeks ended Barry Comfort
-------------------------
North
April 3, 2004 America Europe Total
-------- ------- --------
Net sales $ 15,517 $ 2,913 $ 18,430
Gross profit 5,216 297 5,513
Depreciation and amortization 355 62 417
Interest expense 230 11 241
Restructuring and asset impairment charges 8,282 -- 8,282
Pre tax earnings (loss) (14,197) 35 (14,162)
Purchases of property, plant and equipment 35 6 41
Total assets devoted $ 54,528 $ 1,830 $ 56,358
======== ======= ========
Thirteen weeks ended Barry Comfort
-------------------------
North
March 29, 2003 America Europe Total
-------- ------- --------
Net sales $ 17,132 $ 3,246 $ 20,378
Gross profit 6,494 591 7,085
Depreciation and amortization 386 52 438
Interest expense 167 7 174
Restructuring and asset impairment charges 200 -- 200
Pre tax loss (4,778) (15) (4,793)
Purchases of property, plant and equipment 791 40 831
Total assets devoted:
Continuing operations $ 83,168 $ 6,390 $ 89,558
======== ======= ========
Discontinued operations 1,249
--------
Total operations $ 90,807
========
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 April 3, 2004 and March 29, 2003 - continued
9. Sale of Vesture Net Assets
During 2003, the Company sold certain assets of its Vesture thermal
products subsidiary. Selected financial data relating to the discontinued
operations follows:
Thirteen weeks
ended
March 29, 2003
--------------
Net sales $ 881
Gross profit (loss) (40)
Selling, general and administrative expense 1,294
Loss from discontinued operations before income tax benefit (1,381)
Income tax benefit 463
Loss from discontinued operations, net of income tax benefit ($ 918)
10. Employee Retirement Plans
The Company uses a measurement date of September 30 in making the required
pension computations on an annual basis. In 2004, the Company has
potential pension related payments of $1,345 for unfunded, nonqualified
supplemental retirement plans as well as for payments anticipated for the
2003 year and 2004 quarterly estimated contributions into the funded,
qualified associate retirement plan. The Company has applied for a
deferral of the lump 2003 payment due in September 2004, approximating
$747, and is awaiting approval of this application by the Internal Revenue
Service. Once approved, this payment anticipated in the contribution
projection above for 2004 will be deferred to 2005. During the first
quarter of 2004, the Company made payments of $54 under its nonqualified
supplemental retirement plan.
The components of net periodic benefit cost for the retirement plans were:
Thirteen weeks ended
April 4, 2004 March 29, 2003
------------- --------------
Service cost $ 214 $ 231
Interest cost 559 566
Expected return on plan assets (497) (505)
Net amortization 128 74
Curtailment loss 1,128 --
------- ------
Total pension expense $ 1,532 $ 366
======= ======
Page 9
R. G. BARRY CORPORATION AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
The statements in this Quarterly Report on Form 10-Q, other than statements of
historical fact, are forward-looking statements, and are based upon information
available to the Company on the date of this Report. Our forward-looking
statements inherently involve risks and uncertainties that could cause actual
results and outcomes to differ materially from those anticipated by our
forward-looking statements. Factors that would cause or contribute to such
differences include, but are not limited to, the ability of the Company to close
its manufacturing facilities in Mexico in accordance with plan without incurring
substantial unplanned cost or delays or experiencing unforeseen labor
difficulties; the ability of the Company to substantially increase its sourcing
of products from outside North America to replace the products previously
manufactured in its own plants in Mexico without incurring substantial unplanned
cost and without negatively impacting delivery times or product quality; the
continuing willingness of CIT to fund the Company's financing requirements under
CIT's discretionary factoring and financing arrangement with the Company; the
Company's ability to reduce its inventory levels in accordance with its plan;
the continued demand for the Company's products by its customers and the
continuing willingness of its customers and suppliers to support the Company as
it implements its new business plan; the ability of the Company generally to
successfully implement its new business plan; the unexpected loss of key
management; and the ability of competitors to take market share from the
Company. Other risks to the Company's business are detailed in our previous
press releases, shareholder communications and Securities Exchange Act filings
including our Annual Report on Form 10-K for the fiscal year ended January 3,
2004. Except as required by applicable law, we do not undertake to update the
forward-looking statements contained in this Quarterly Report on Form 10-Q to
reflect new information that becomes available after the date hereof.
Introduction
The following discussion and analysis provides investors and others with
information that management believes to be necessary for an understanding of our
financial condition and results of operations and cash flows and should be read
in conjunction with the consolidated financial statements and notes to
consolidated financial statements and other information found in this Quarterly
Report on Form 10-Q.
Critical Business Issues
During the fiscal year 2004, management is focused on several key issues -
implementation of our new business plan, inventory management and liquidity.
New Business Plan
With the assistance of experienced turnaround consultants, we developed a new
business model that we believe should significantly reduce operating costs by
simplifying our product offering and focusing our business on a core customer
base that represented approximately 70% of our 2003 revenues.
The key components of our new business plan and the actions we have already
taken or expect to take in 2004 are as follows:
- We have employed an experienced turnaround professional as the
President and CEO on an interim basis.
- We are streamlining our management structure and seeking to reduce
selling, general and administrative costs to a lower level that is
more consistent with our simplified business model.
Page 10
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Critical Business Issues - continued
- We intend to reduce costs by closing our Mexican manufacturing
facilities by the end of 2004 and relying upon third party contract
manufacturers in China and other locations outside North America to
manufacture our products.
- We will further reduce costs through the closure of our operations
support office in San Antonio, Texas by the end of 2004. The staff
at this facility primarily supports our operations in Mexico. Some
functions performed in San Antonio will be maintained and relocated
to our Columbus, Ohio headquarters.
- We expect to reduce our inventory levels from year-end 2003 levels.
We concluded that the actions contemplated by the 2004 business plan were
necessary to materially reduce and eventually eliminate the operating losses
incurred in 2002 and 2003. Because the business plan will result in substantial
changes in the way in which we have done business for many years, we recognize
that the implementation of the business plan carries business risks, which have
been discussed in Item 7 of our Annual Report on Form 10-K for the fiscal year
ended January 3, 2004. Implementation of the 2004 business plan is expected to
result in significant costs in the form of severance payments and asset
write-downs. In part due to these costs and write-downs, we do not expect to
report an operating profit in 2004.
2004 Liquidity
Based on the actions being taken in 2004 to create a lower-cost, more efficient
business model, as described above, and the new CIT Facility, management
believes that there should be sufficient liquidity and capital resources to fund
our operations through the balance of fiscal 2004, including our anticipated
restructuring costs. Although our restructuring will involve cash outlays, the
majority of the restructuring costs to be incurred in 2004 are expected to be
non-cash in nature and we expect that our plans to reduce inventory should
generate additional cash flow.
Because we recognize that the implementation of our new business plan presents
business risks, and as discussed, we can give no assurance of the plan's
success. However, we believe that these risks should be manageable and that,
once implemented, the new business model should give the Company a reasonable
opportunity to return to profitability, although that will not occur in 2004.
Critical Accounting Policies and Use of Estimates
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 about the impact of future events has been a
generally accepted practice for nearly all companies in nearly all industries
for 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 our 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 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Critical Accounting Policies and Use of Estimates - continued
A summary of the more critical of these accounting policies requiring management
estimates follows:
a) We recognize revenue when goods are shipped from our warehouses
distribution points 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 estimated cost of potential future returns and
allowable retailer promotions and incentives, and recognize a corresponding
reduction in the amount 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 be different
than anticipated. 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.
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 seasons, and
we provide appropriate write-downs under the circumstances. As of April 3, 2004,
we estimated that the standard cost valuation of our inventory exceeded the
estimated net realizable value of that inventory by $2.6 million, compared with
a similar estimate made as of March 29, 2003 of $2.7 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. 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. As a result of our cumulative losses, we have
determined that it is uncertain when and whether the deferred tax assets we had
recognized on our consolidated balance sheet will have realizable value in
future years. Accordingly, we have fully reserved the value of those deferred
tax assets. Should our profits improve in future years, such that those deferred
tax items become realizable as deductions in future years, we will recognize
that benefit, by reducing our reported tax expense in future years, once their
realization becomes assured.
d) We record accounts receivable net of allowances and anticipated
discounts. Allowances for doubtful accounts are determined through analysis of
the aging as of the date of the consolidated financial statements, assessments
of collectibility based on historic trends and an evaluation of economic
conditions. Costs associated with potential returns of products as well as
allowable customer markdowns and operational chargebacks, net of expected
recoveries, are included as a reduction to net sales and are part of the
provision for allowances. These provisions are based upon seasonal negotiations
and historic deduction trends, net expected recoveries and the evaluation of
current market conditions.
e) We account for the CIT Facility as a financing facility in
recognizing and recording trade receivables. For financial statement purposes,
the factoring of receivables under the CIT Facility is not considered a sale of
receivables. As such, the amounts advanced by CIT are considered short-term
loans and are included within short-term notes payable on the accompanying
consolidated balance sheet.
Page 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Critical Accounting Policies and Use of Estimates - continued
f) We make estimates of the future costs associated with
restructuring plans related to operational changes that we have announced. As of
April 3, 2004, we had an accrued balance of $557 thousand relating to the
estimated future costs of closing or reorganizing certain operations, as
previously outlined. As of March 29, 2003, we had an accrued balance of $1.2
million for similar restructuring and reorganization activities. Should the
actual costs of these activities exceed these estimates, the excess costs will
be recognized in the period in which such costs occur. Conversely, should the
costs of such restructuring be less than the amounts estimated, future periods
would benefit by that difference.
g) In addition, there are various other accounting policies, which
also require some judgmental input by management. We believe that we have
followed these policies consistently from year to year, period to period. For an
additional discussion of all of our significant accounting policies, the reader
may refer to Note 1 of the Notes to Consolidated Financial Statements included
in Item 8 of our Annual Report on Form 10-K for the fiscal year ended January 3,
2004. Actual results may vary from these estimates as a result of activities
after the period end estimates have been made, and those subsequent activities
will have either a positive or negative impact upon the results of operations in
a period subsequent to the period when we originally made the estimate.
Liquidity and Capital Resources
As of the end of the first quarter of 2004, we had $19.0 million in net working
capital. This compares with $36.9 million at the end of the first quarter of
2003, and $25.8 million at fiscal year-end 2003. The declines in net working
capital from the end of the first quarter of 2003 and from fiscal year-end 2003
to the end of the first quarter of 2004 are primarily the result of the losses
we incurred during fiscal 2003 and the comparatively greater losses we incurred
during the first quarter of 2004 than in the comparable first quarter of 2003.
The primary components of net working capital have changed as follows:
- - Accounts receivable decreased from $13.9 million at the end of the first
quarter of 2003, to $11.1 million at the end of the first quarter of 2004.
Most of the decrease in 2004 reflects a decrease in the amount of net
sales during the first quarter of 2004 compared with the first quarter of
2003. Accounts receivable at the end of the first quarter of 2004
increased by $4.0 million from $7.1 million at the end of fiscal 2003. The
increase in accounts receivable, net, from year-end 2003 to the end of the
first quarter of 2004 is largely due to the decrease in the allowances for
returns and promotions from the end of 2003.
- - Inventories ended the first quarter of 2004 at $31.8 million compared with
$33.9 million one year ago, and $32.8 million as of the end of fiscal
2003. Most of the decrease in inventory from one year ago to the end of
the current quarter represents a decrease in raw materials and in-process
inventories as we transition from a manufacturing business model to a
outsourcing business model in 2004. The decline in inventory from fiscal
year-end 2003 to the end of the current quarter, reflects a seasonal
increase in the amount of finished goods from period to period, offset by
planned decreases in raw materials and in process inventories.
- - We ended the first quarter of 2004 with $2.2 million in cash and cash
equivalents, compared with $3.7 million at the end of the first quarter of
2003. We ended the first quarter of 2004 with $17.1 million in short-term
notes payable, compared with $12 million is short-term bank notes at the
end of the first quarter of 2003. At the end of fiscal 2003, we had $2.0
million in cash and cash equivalents, and $2 million short-term bank notes
payable. The changes in short-term notes payable and cash reflect our
increased short-term capital needs following the losses incurred during
the latter portions of fiscal year 2003, plus the early repayment of the
Metropolitan Note with the short-term funding provided under the CIT
Facility.
Page 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Capital expenditures during the first quarter of 2004 amounted to $41 thousand
compared with $831 thousand during the first quarter of 2003. All expenditures
in both years were funded out of working capital. As we transition from a
manufacturing business model to an outsourcing model for procuring our finished
goods products, we expect capital expenditures in future periods will be much
less than historic levels.
CIT Credit Facility
On March 29, 2004, we entered into a new factoring and financing agreement (the
"CIT Facility") with The CIT Group/Commercial Services, Inc. ("CIT"). On March
30, 2004, we borrowed under the CIT Facility approximately $10.3 million to
repay all outstanding indebtedness under our Revolving Credit Agreement
("Revolver") with Huntington National Bank ("Huntington") and related charges,
and the Revolver was terminated. In addition, on that date, we borrowed
approximately $2.3 million under the CIT Facility to repay all outstanding
indebtedness under our Note Agreement with the Metropolitan Life Insurance
Company and that agreement was terminated.
The CIT Facility, the agreements for which were filed as Exhibits to the Form
8-K dated as of April 1, 2004, provides us with advances in a maximum amount
equal to the lesser of (i) $35 million or (ii) a Borrowing Base (as defined in
the CIT Facility). The CIT Facility is a discretionary facility, which means
that CIT is not contractually obligated to advance us funds. The Borrowing Base,
which is determined by CIT in its sole discretion, is determined on the basis of
a number of factors, including the amount of our eligible accounts receivable
and the amount of our qualifying inventory, subject to the right of CIT to
establish reserves against availability as it deems necessary. The CIT Facility
also includes a $3 million subfacility for the issuance of letters of credit
that is counted against the maximum borrowing amount discussed above.
Our obligations under the CIT Facility are secured by a first priority lien and
mortgage on substantially all of our assets, including accounts receivable,
inventory, intangibles, equipment, intellectual property and real estate. In
addition, we have granted to CIT a pledge of the stock in our U.S. wholly owned
subsidiaries. The subsidiaries have guaranteed our indebtedness under the CIT
Facility.
As part of the CIT Facility, we entered into a factoring agreement with CIT,
under which CIT will purchase accounts receivable that meet CIT's eligibility
requirements. The purchase price for the accounts is the gross face amount of
the accounts, less factoring fees (discussed below), discounts available to our
customers and other allowances.
The factoring agreement provides for a factoring fee equal to 0.50% of the gross
face amount of all accounts receivable factored by CIT, plus certain customary
charges. For accounts outside the United States, we will pay an additional
factoring fee of 1% of the gross face amount. For each 30 day period that an
account exceeds 60 days unpaid, we must pay an additional fee of 0.25% of the
gross face amount. The minimum factoring commission fee per year is $400,000 and
if the fees paid throughout the year do not meet this minimum, CIT will charge
us for the difference. We also agreed to pay CIT's expenses incurred in
connection with negotiation of the CIT Facility, as well as fees for preparing
reports, wire transfers, setting up accounts and other administrative services.
We are also responsible for any taxes on sales of our products or on
transactions between CIT and the Company.
Page 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Amounts outstanding under the CIT Facility bear interest at the prime rate as
announced by JPMorgan Chase Bank ("Prime Rate") plus 1% (5% as of April 3,
2004). Interest is charged as of the last day of each month, and any change in
the Prime Rate will take effect the first month following the change in the
Prime Rate. Upon entering into the CIT Facility, we paid to CIT an initial
facility set-up fee of $262,500. The term of the CIT Facility is for a period of
three years. As of April 3, 2004, the outstanding balance under the CIT Facility
was $14.9 million.
For financial statement purposes, the factoring of receivables under the CIT
Facility is not considered a sale of receivables. As such, the amounts advanced
by CIT are considered short-term loans and are included within short-term notes
payable on the accompanying consolidated balance sheet.
We expect to meet our liquidity requirements for the remainder of 2004 from
internally generated funds and borrowings under the CIT Facility. Based on our
current 2004 operating plan, we believe that the CIT Facility should be adequate
to meet these requirements. The amount of credit available under the CIT
Facility is based, in part, on accounts receivable so that the adequacy of the
CIT Facility in meeting our liquidity requirements will depend on the our sales
results during the remainder of 2004. As discussed below in "Results of
Operations-Continuing Operations," our net sales in the first quarter declined
9.6% as compared to net sales in the first quarter of 2003. This reduction
resulted, in part, from customer concern about our publicly announced liquidity
concerns very early in 2004 and our introduction of new return policies. Based
on our current 2004 operating plan, including our forecast sales level, coupled
with planned cost savings, we believe the CIT Facility should be adequate to
meet our liquidity requirement for the remainder of 2004.
Other Short-Term Debt
Early in March 2004, we borrowed $2.2 million against the cash surrender value
of life insurance policies insuring one of our key executives. This $2.2 million
indebtedness is classified within short-term notes payable in the accompanying
consolidated balance sheet.
Other Long-Term Indebtedness
Effective January 1, 2002, the 15% duty imposed by the United States on slippers
made in Mexico was eliminated. The slipper tariff had been scheduled for
reduction at the rate of 2.5% per year until the scheduled elimination on
January 1, 2008.
We utilized third parties to assist us in obtaining this tariff relief. Upon the
successful conclusion, we agreed to pay an aggregate of approximately $6.25
million, mostly in equal quarterly installments over a four-year period through
the end of 2005. For accounting purposes, a portion of the payment to the
consultants has been treated as debt and a portion of the payment has been
treated as an imputed interest charge associated with that debt. The net present
value of this four-year obligation, which is subordinated to our other
obligations, is included within current installments and long-term debt at its
discounted present value totaling $2.4 million as of the end of the first
quarter of 2004.
Off Balance Sheet Arrangements
There have been no material changes in our "Off Balance Sheet Arrangements" and
"Contractual Obligations" since the end of fiscal 2003, other than the repayment
of the Metropolitan Note, cancellation of the Revolver, and obtaining the CIT
Facility, as noted above.
Page 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Results of Operations - Continuing Operations
During the first quarter of 2004, net sales amounted to $18.4 million, a 9.6
percent decrease in net sales from the first quarter of 2003. Net sales during
the first quarter of 2004 in Barry Comfort North America amounted to $15.5
million, a decrease of 9.4 percent compared with the same quarter last year; net
sales in Barry Comfort Europe, at $2.9 million declined by only $333 thousand,
although that amounts to 10.3 percent compared with the same quarter last year.
(See also Note 8 of Notes to Consolidated Financial Statements for selected
segment information.) Substantial portions of the decline in Barry Comfort North
America net sales, for the first quarter of 2004, occurred in our branded
Dearfoams line of slippers for men and women, with an offsetting increase to a
lesser degree in our net sales to our mass merchandising customers. We believe
that this overall reduction in net sales was attributable, in part, to our
customers' concern about our publicly announced liquidity concerns early in 2004
and our introduction of new return policies.
Gross profit during the first quarter of 2004, amounted to $5.5 million, or 29.9
percent of net sales, approximately $1.6 million lower than during the first
quarter of 2003, when gross profit amounted to $7.1 million, or 34.8 percent of
net sales. The most significant portion of the decline in gross profit dollars
is the result of the corresponding decrease in net sales for the period, while a
portion of the decline is the result of a change in sales mix. During the first
quarter of 2004, a greater proportion of sales was made through the mass
merchandising channel of distribution; in addition, during the quarter we sold
relatively more closeout merchandise than in prior periods adversely impacting
gross profit.
Selling, general and administrative expenses during the quarter, at $11.2
million, decreased by $380 thousand, or 3.3 percent, from $11.6 million in the
same quarter last year. The decrease in these expenses resulted from the initial
efforts to decrease selling, general and administrative expenses under the new
business operating model as we reduce our dependence upon manufacturing and
transition to a company solely dependent upon the importation of products.
During the first quarter of 2004, we recognized $8.3 million in restructuring
and asset impairment charges. The charges relate to the decision during the
first quarter of 2004 to close all of the manufacturing operations in Mexico and
begin to source all of our product needs from third party manufacturers in
China. This compares with a $200 thousand asset impairment charge during the
first quarter of 2003, relating to the valuation of the facility in Goldsboro,
North Carolina, which was sold in mid-2003. (See also Note 7 of Notes to
Consolidated Financial Statements for added information relating to
restructuring and asset impairment charges.)
Net interest expense increased in the first quarter from 2003 to 2004. During
the first quarter of 2004, net interest expense amounted to $241 thousand
compared with $174 thousand in the first quarter of 2003. As of the end of the
first quarter of 2004, we borrowed $17.1 million utilizing short-term notes
payable compared with $12 million utilized by the end of the first quarter of
2003. The primary cause of the increased usage of short-term credit during the
first quarter of 2004 compared with the first quarter of 2003, was a result of
the losses we incurred during fiscal 2003 and the comparatively greater the
losses incurred during the first quarter of 2004 compared with the first quarter
of 2003.
For the first quarter of 2004, we incurred a net loss of $14.1 million, or $1.44
per diluted share, compared with a net loss incurred during the first quarter of
2003 amounting to $3.9 million, or $0.39 per diluted share.
Page 16
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments - Foreign Currency
We have historically transacted business in a number of foreign countries. Our
primary foreign currency net cash outflows have occurred in Mexico. We have not
hedged 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 net cash inflows are generated from Canada. We
have, at times, employed a foreign currency hedging program utilizing currency
forward exchange contracts for anticipated net cash inflows from Canada. Under
this program, increases or decreases in net local operating revenue 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 (loss) 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. During the first quarter of
2004, we had no foreign currency exchange contracts outstanding.
ITEM 4 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
With the participation of the interim President and Chief Executive
Officer (the principal executive officer) and the Senior Vice President-Finance,
Chief Financial Officer, Secretary and Treasurer (the principal financial
officer) of R. G. Barry Corporation ("R. G. Barry"), R. G. Barry's management
has evaluated the effectiveness of R. G. Barry's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")), as of the end of the fiscal quarter
covered by this Quarterly Report on Form 10-Q. Based on that evaluation, R. G.
Barry's interim President and Chief Executive Officer and R. G. Barry's Senior
Vice President-Finance, Chief Financial Officer, Secretary and Treasurer have
concluded that:
(a) information required to be disclosed by R. G. Barry in this
Quarterly Report on Form 10-Q would be accumulated and communicated
to R. G. Barry's management, including its principal executive
officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure;
(b) information required to be disclosed by R. G. Barry in this
Quarterly Report on Form 10-Q would be recorded, processed,
summarized and reported within the time periods specified in the
SEC's rules and forms; and
(c) R. G. Barry's 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 R. G. Barry and its
consolidated subsidiaries is made known to them, particularly during
the period in which this Quarterly Report on Form 10-Q is being
prepared.
Changes in Internal Control Over Financial Reporting
There were no changes in R. G. Barry's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred
during R. G. Barry's fiscal quarter ended April 3, 2004, that have materially
affected, or are reasonably likely to materially affect, R. G. Barry's internal
control over financial reporting.
Page 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No response required
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(a) and (b) Not Applicable
(c) As of March 1, 2004, Christian Galvis was issued 1,250 common shares
of R. G. Barry Corporation ("R. G. Barry"). These common shares were
issued in accordance with the terms of a Restricted Stock Agreement,
effective as of January 4, 1998, between R. G. Barry and Mr. Galvis. The
common shares had a market value of $2.08 per share on the date of
issuance. The common shares were issued in reliance upon the exemptions
from registration provided in Sections 4(2) and 4(6) under the Securities
Act of 1933 (the "1933 Act"), based upon the fact that there was only one
individual to whom the common shares were "sold" and the status of Mr.
Galvis as an executive officer and director of R. G. Barry.
(d) Not Applicable
(e) R. G. Barry did not purchase any of its common shares during the
fiscal quarter ended April 3, 2004. R. G. Barry does not currently have in
effect a publicly announced repurchase plan or program.
Item 3. Defaults Upon Senior Securities
(a), (b) Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) - (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 at page 21.
(b) Reports on Form 8-K:
On January 8, 2004, R. G. Barry filed a Current Report on Form 8-K, dated
that same date, reporting that on December 22, 2003, RGB Technology, Inc.
("RGB Technology"), a subsidiary of R. G. Barry, had settled the pending
patent litigation involving RGB Technology, Thermal Solutions, Inc. and
CookTek, LLC involving RGB Technology's MICROCORE pizza delivery system.
On January 14, 2004, R. G. Barry furnished information in a Current Report
on Form 8-K, dated the same date, reporting that on January 12, 2004, R.
G. Barry issued a press release reporting that it had discontinued slipper
sewing operations at its manufacturing facility in Nuevo Laredo, Mexico.
Page 18
PART II - OTHER INFORMATION - CONTINUED
Item 6. Exhibits and Reports on Form 8-K - continued
On January 26, 2004, R. G. Barry filed a Current Report on Form 8-K, dated
the same date, reporting that on January 22, 2004, R. G. Barry entered
into a Fourth Amendment to its Revolving Credit Agreement, as previously
amended, with The Huntington National Bank ("Huntington") making certain
changes including (a) an increase, from $3 million to $9 million, in the
amount of available credit for the month of January 2004; (b) the grant to
Huntington of a mortgage lien on R. G. Barry's headquarters in
Pickerington, Ohio, to be shared ratably with Metropolitan Life Insurance
Company ("Metropolitan") based on loans outstanding; (c) the grant to
Huntington of control over cash and collections; and (d) an expansion of
R. G. Barry's reporting requirements to Huntington. R. G. Barry also
furnished information about its January 23, 2004 news release reporting
the Fourth Amendment, in which R. G. Barry made statements disclosing
material, non-public information regarding its fourth quarter of 2003 and
fiscal year 2003 operating results. A copy of the Fourth Amendment was
attached to the Form 8-K as Exhibit 4.
On February 4, 2004, R. G. Barry furnished information in a Current Report
on Form 8-K, dated the same date, reporting that on February 3, 2004, R.
G. Barry issued a press release reporting that it had been advised by its
lending bank that the bank would not consider further amending R. G.
Barry's credit agreement to increase the availability of funding under the
agreement, and that R. G. Barry was actively seeking alternative forms of
financing.
On March 11, 2004, R. G. Barry filed a Current Report on Form 8-K, dated
the same date, reporting that: (x) on March 10, 2004, R. G. Barry entered
into a Fifth Amendment to its Revolving Credit Agreement, as previously
amended, with Huntington making certain changes including (i) an increase,
from $12 million to $13.8 million, in the amount of available credit
during the month of March 2004, (ii) the modification of the Borrowing
Base (as defined in the Fifth Amendment) to exclude from eligible
inventory the inventory of R. G. Barry located outside of the United
States and to reduce the Borrowing Base by $2,100,000, the approximate
amount of R G. Barry's obligations to Metropolitan, (iii) the consent to
R. G. Barry's borrowing of the aggregate sum of $2.2 million under the
policies of insurance owned by R. G. Barry and insuring the life of Gordon
Zacks and (iv) the grant to Huntington and Metropolitan of an assignment
of and lien on one of these life insurance policies; and (y) on March 10,
2004, R. G. Barry entered into a separation agreement with Gordon Zacks
providing for Mr. Zacks' retirement as President and Chief Executive
Officer of R. G. Barry and an executive employment contract with Thomas M.
Von Lehman pursuant to which Mr. Von Lehman was named as interim President
and Chief Executive Officer of R. G. Barry. The Fifth Amendment, the
separation agreement and the executive employment contract were attached
to the Form 8-K as Exhibits 4, 10.1 and 10.2, respectively.
Page 19
PART II - OTHER INFORMATION - CONTINUED
Item 6. Exhibits and Reports on Form 8-K - continued
On April 1, 2004, R. G. Barry filed a Current Report on Form 8-K, dated
the same date, reporting that on March 29, 2004, R. G. Barry had entered
into a new factoring and financing agreement (the "CIT Facility") with The
CIT Group/Commercial Services, Inc. ("CIT") under which CIT, in its sole
discretion, may advance to R. G. Barry loans and arrange for the issuance
of letters of credit in an aggregate amount up to $35 million, subject to
a borrowing base formula, and R. G. Barry had granted to CIT a first
priority lien and mortgage on substantially all of R. G. Barry's assets,
including accounts receivable, inventory, intangibles, equipment,
intellectual property and real estate and a pledge of the stock of R. G.
Barry's wholly-owned U.S. subsidiaries. R. G. Barry also reported that on
March 30, 2004, R. G. Barry borrowed under the CIT Facility approximately
$10.3 million to repay all outstanding indebtedness, and related charges,
under the Revolving Credit Agreement, as amended, with Huntington and
approximately $2.3 million to repay all outstanding indebtedness under the
Note Agreement, as amended, between R. G. Barry and Metropolitan and that
those agreements had terminated. The Factoring Agreement, the Letter of
Credit Agreement, the Grant of Security Interest in Patents, Trademarks
and Licenses, the Equipment Security Agreement and the Inventory Security
Agreement, each dated March 29, 2004, between R. G. Barry and CIT, were
filed as Exhibits 4.1 through 4.5 to the Form 8-K.
On April 5, 2004, R. G. Barry furnished information in a Current Report on
Form 8-K, dated the same date, reporting that on April 2, 2004, R. G.
Barry issued a press release reporting on its results of operations for
the fiscal year ended January 3, 2004.
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
May 18, 2004
Date
/s/ Daniel D. Viren
-------------------------------
Daniel D. Viren
Senior Vice President - Finance, Chief
Financial Officer,
Secretary and Treasurer
(Principal Financial Officer)
(Duly Authorized Officer)
Page 20
R. G. BARRY CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------------------------------------------------------------------------------------- --------------
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) Filed herewith
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) Filed herewith
32.1 Section 1350 Certifications (Principal Executive Officer and Principal Financial Officer) Filed herewith
Page 21