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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 October 2, 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 November 5, 2004 - 9,836,602
Index to Exhibits at page 24
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 2, 2004 January 3, 2004
--------------- ---------------
(unaudited)
---------------
(in thousands)
ASSETS:
Cash $ 815 $ 2,012
Accounts receivable (less allowances of
$8,236 and $18,494, respectively) 25,876 7,118
Assets held for disposal 147 --
Inventory 29,549 32,797
Prepaid expenses 1,580 2,452
-------- --------
Total current assets 57,967 44,379
-------- --------
Property, plant and equipment, at cost 14,320 35,274
Less accumulated depreciation and amortization 11,211 25,905
-------- --------
Net property, plant and equipment 3,109 9,369
-------- --------
Other assets 3,334 7,532
-------- --------
Total assets $ 64,410 $ 61,280
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term notes payable 29,613 2,000
Current installments of long-term debt 1,876 3,869
Accounts payable 8,757 7,484
Accrued expenses 7,566 5,180
-------- --------
Total current liabilities 47,812 18,533
-------- --------
Accrued retirement costs and other, net 14,221 14,841
Long-term debt, excluding current installments 745 2,141
-------- --------
Total liabilities 62,778 35,515
-------- --------
Minority interest 391 378
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) 9,837 9,834
Additional capital in excess of par value 12,851 12,851
Deferred compensation (28) (84)
Accumulated other comprehensive loss (3,391) (3,370)
Retained earnings (accumulated deficit) (18,028) 6,156
-------- --------
Net shareholders' equity 1,241 25,387
-------- --------
Total liabilities and shareholders' equity $ 64,410 $ 61,280
======== ========
Page 2
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended Thirty-nine weeks ended
------------------------- ------------------------
October 2, September 27, October 2, September 27,
---------- ------------- ---------- -------------
2004 2003 2004 2003
---------- ------------- ---------- -------------
(unaudited)
(in thousands, except per share amounts)
Net sales $34,573 $ 40,001 $67,519 $79,395
Cost of sales 21,738 23,767 45,138 49,623
-------- -------- -------- --------
Gross profit 12,835 16,234 22,381 29,772
Selling, general and
administrative expense 9,748 13,410 29,802 34,985
Restructuring and asset
impairment charges 4,216 - 16,117 200
-------- -------- -------- --------
Operating earnings (loss) (1,129) 2,824 (23,538) (5,413)
Other income 45 - 135 53
Interest expense, net (396) (450) (928) (921)
Earnings (loss) from continuing
operations before income tax
(expense) benefit and
minority interest (1,480) 2,374 (24,331) (6,281)
Income tax (expense) benefit 57 (914) (171) 2,427
Minority interest, net of tax (3) (4) (12) (39)
-------- -------- -------- --------
Earnings (loss) from continuing
operations (1,426) 1,456 (24,514) (3,893)
Income (loss) from discontinued
operations, net of income tax 314 3 330 (1,305)
-------- -------- -------- --------
Net earnings (loss) ($ 1,112) $ 1,459 ($24,184) ($ 5,198)
======== ======== ======== ========
Net earnings (loss) per common share
Basic ($ 0.11) $ 0.15 ($ 2.46) ($ 0.53)
======== ======== ======== ========
Diluted ($ 0.11) $ 0.15 ($ 2.46) ($ 0.53)
======== ======== ======== ========
Average number of common
shares outstanding
Basic 9,839 9,828 9,839 9,818
======== ======== ======== ========
Diluted 9,839 9,972 9,839 9,818
======== ======== ======== ========
Page 3
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended
--------------------------------
October 2, September 27,
---------- -------------
2004 2003
-------- --------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss ($ 24,184) ($ 5,198)
Net income (loss) from discontinued operations 330 (1,305)
-------- --------
Net loss from continuing operations (24,514) (3,893)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of
property, plant and equipment 1,122 1,240
Restructuring and impairment non-cash charges 7,172 --
Loss on disposal of fixed assets 19 335
Amortization of deferred compensation 56 87
Minority interest, net of tax 12 39
Changes in:
Accounts receivable, net (18,730) (21,026)
Inventory 3,221 (18,019)
Prepaid expenses 870 (641)
Deferred and recoverable income taxes -- 2,426
Other, net 1,123 995
Accounts payable 1,774 4,488
Accrued expenses 2,405 (1,778)
Accrued retirement costs and other (540) 220
-------- --------
Net cash used in continuing operations (26,010) (35,527)
-------- --------
Net cash used by discontinued operations (219) (1,081)
-------- --------
Net cash used by operating activities (26,229) (36,608)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (111) (1,595)
Proceeds from assets sold 962 1,165
-------- --------
Net cash provided (used) by investing activities 851 (430)
-------- --------
Cash flows from financing activities:
Proceeds from short-term notes, net 37,898 36,000
Repayments of short-term notes (10,204) --
Repayment of long-term debt (3,522) (2,851)
Proceeds from shares issued and other 2 88
-------- --------
Net cash provided by financing activities 24,174 33,237
-------- --------
Effect of exchange rates on cash 7 26
-------- --------
Net decrease in cash (1,197) (3,775)
Cash at the beginning of the period 2,012 6,881
-------- --------
Cash at the end of the period $ 815 $ 3,106
======== ========
Supplemental cash flow disclosures:
Interest paid $ 904 $ 664
======== ========
Income taxes paid (refunded), net $ 28 ($ 4,653)
======== ========
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 October 2, 2004 and September 27, 2003
(in thousands, except per share data)
1. These interim consolidated financial statements are unaudited. All
adjustments, consisting solely of normal recurring adjustments, have been
made which, in the opinion of management, are necessary to fairly present
the results of operations.
2. R. G. Barry Corporation and its subsidiaries (the "Company") operate on a
fifty-two or fifty-three week 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. The Company has various stock option plans, under which incentive stock
options and nonqualified stock options have been granted. These options
are exercisable for periods of up to 10 years from the date of grant, at
prices not less than fair market value of the underlying common shares 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 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
earnings (loss) and earnings (loss) per share would approximate the pro
forma amounts indicated in the table below, for the periods noted:
Thirteen weeks ended Thirty-nine weeks ended
Oct. 2, 2004 Sept. 27, 2003 Oct. 2, 2004 Sept. 27, 2003
------------ -------------- ------------ --------------
Net earnings (loss):
As reported $ (1,112) $ 1,459 $ (24,184) $ (5,198)
Pro forma (1,255) 1,286 (24,614) (5,702)
Earnings (loss) per share:
As reported $ (0.11) $ 0.15 $ (2.46) $ (0.53)
Pro forma (0.13) 0.14 (2.50) (0.56)
Using the Black-Scholes option-pricing model, the per-share,
weighted-average fair value of stock options granted during 2004 and 2003,
was $1.14 and $1.72, respectively, on the date of grant. The assumptions
used in estimating the fair value of the options as of October 2, 2004,
and September 27, 2003 were:
2004 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 to 8 years 8 years
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 October 2, 2004 and September 27, 2003 - continued
(in thousands, except per share data)
4. Income tax expense (benefit) from continuing operations, for the
thirty-nine week periods ended October 2, 2004 and September 27, 2003,
consisted of:
2004 2003
------- -------
U. S. Federal and
Foreign tax expense (benefit) $ 171 $(2,176)
State & Local tax
expense (benefit) -- (251)
------- -------
Total $ 171 $(2,427)
======= =======
Income tax expense (benefit) for the thirty-nine week periods ended
October 2, 2004 and September 27, 2003 differed from the amounts computed
by applying the U. S. federal income tax rate of 34.0 percent to pretax
profit (loss), as a result of the following:
2004 2003
------- -------
Computed "expected" tax:
U. S. Federal $(8,335) $(2,136)
Valuation allowance 8,335 --
Foreign and other, net 171 (125)
State & Local benefit, net of
Federal tax benefit -- (166)
------- -------
Total $ 171 $(2,427)
======= =======
5. 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, if any. Diluted net loss per common share for the thirty-nine week
periods ended October 2, 2004 and September 27, 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.
6. Inventory by category consisted of the following:
October 2, January 3,
---------- ----------
2004 2004
---------- ----------
Raw materials $ 1,313 $ 3,711
Work in process 100 615
Finished goods 28,136 28,471
------- -------
Total inventory $29,549 $32,797
======= =======
Inventory is presented at its net realizable value, net of write-downs.
Raw materials reflect a write-down balance of $232 as of October 2, 2004
and $2,839 as of January 3, 2004, and finished goods reflect a write-down
balance of $512 as of October 2, 2004 and $3,022 as of January 3, 2004.
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 October 2, 2004 and September 27, 2003 - continued
(in thousands, except per share data)
7. Restructuring and asset impairment charges - The Company has previously
announced plans to close certain leased facilities, eliminate positions,
reduce costs and improve operating efficiencies, and has recorded
restructuring and asset impairment charges as components of operating
expense. The following schedule highlights actual activities for the
thirty-nine week period through October 2, 2004, with comparative
information for the thirty-nine week period through September 27, 2003.
Non-Cash
As of Write-Offs As of
Jan. 3, Charges Estimate and Oct. 2,
2004 in 2004 Adjustments Paid in 2004 2004
------- ------- ----------- ------------ -------
Employee separations $174 $ 3,921 $(10) ($ 2,999) $1,086
Other exit costs -- 2,376 -- (2,376) --
Noncancelable lease costs -- 2,658 -- (977) 1,681
Asset impairments -- 7,172 -- (7,172) --
---- ------- ---- -------- ------
Total restructuring costs $174 $16,127 $(10) ($13,524) $2,767
==== ======= ==== ======== ======
During 2004, the Company closed its sewing and distribution operations at
three leased locations in Mexico, closed leased warehouse and distribution
facilities in Laredo, Texas, and will be closing it's leased San Antonio
support office before the end of 2004. These actions are a continuation
and integral part of the Company's ongoing strategy to reduce operating
costs as discussed in Item 7 of the Company's Form 10-K for the fiscal
year ended January 3, 2004, under the caption "New Business Plan". The
Company expects to absorb the operating activities from these facilities
into the Company's other warehousing operations in San Angelo, Texas and a
third party warehouse operator on the West Coast of the United States. The
Company eliminated numerous employee positions, incurred losses from the
impairment in value of certain of its assets, and incurred certain costs
related to its obligations for remaining facilities and equipment leases.
The Company expects to pay a substantial portion of the accrued
obligations before the end of the 2004 fiscal year.
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
====== ==== ==== ======= ====
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 October 2, 2004 and September 27, 2003 - continued
(in thousands, except per share data)
8. Segment Information - The Company manufactures and markets comfort
footwear for at- and around-the-home. The Company considers its "Barry
Comfort" at- and around-the-home comfort footwear groups in North America
and in Europe, as its two operating segments. The accounting policies of
the operating segments are substantially similar, except that the
disaggregated information has been prepared using certain management
reports, which by their very nature require estimates. In addition,
certain items from these management reports have not been allocated
between the operating segments, including such items as a) costs of
certain administrative functions, b) current and deferred income tax
expense or benefit, and deferred tax assets or liabilities, and c) in some
periods, certain other operating provisions.
Barry Comfort
----------------------
Thirty-nine weeks ended North
October 2, 2004 America Europe Total
--------- ------- --------
Net sales $ 60,583 $6,936 $ 67,519
Gross profit 21,348 1,033 22,381
Depreciation and
amortization 944 178 1,122
Interest expense 879 49 928
Restructuring and asset
impairment charges 16,117 - 16,117
Pre tax profit (loss) from
continuing operations (24,391) 60 (24,331)
Additions to property, plant
and equipment 67 44 111
Total assets devoted $ 62,934 $1,476 $ 64,410
========= ====== ========
Barry Comfort
----------------------
Thirty-nine weeks ended North
September 27, 2003 America Europe 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 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
Total assets devoted $ 113,437 $ 5,067 $118,504
========= ======= ========
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 October 2, 2004 and September 27, 2003 - continued
(in thousands, except per share data)
8. Segment information - continued
Barry Comfort
------------------------
Thirteen weeks ended North
October 2, 2004 America Europe Total
---------- ------- --------
Net sales $ 32,215 $ 2,358 $ 34,573
Gross profit 12,488 347 12,835
Depreciation and
amortization 222 57 279
Interest expense 379 17 396
Restructuring and asset
impairment charges 4,216 -- 4,216
Pre tax loss from
continuing operations (1,448) (32) (1,480)
Additions to property, plant
and equipment 8 13 21
Total assets devoted $ 62,934 $ 1,476 $ 64,410
======== ======= ========
Barry Comfort
-----------------------
Thirteen weeks ended North
September 27, 2003 America Europe Total
---------- ------- --------
Net sales $ 37,444 $ 2,557 $ 40,001
Gross profit 16,030 204 16,234
Depreciation and
amortization 351 45 396
Interest expense 436 14 450
Restructuring and asset
impairment charges -- -- --
Pre tax profit (loss) from
continuing operations 2,802 (428) 2,374
Additions to property, plant
and equipment, net 37 35 72
Total assets devoted $113,704 $ 5,067 $118,504
======== ======= ========
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 October 2, 2004 and September 27, 2003 - continued
(in thousands, except per share data)
9. Discontinued Operations - During 2003, the Company sold certain assets of
its thermal products subsidiary. Selected financial data relating to the
discontinued operations follows:
Thirteen weeks ended Thirty-nine weeks ended
--------------------------- ------------------------------
October 2, September 27, October 2, September 27,
---------- ------------- ---------- -------------
2004 2003 2004 2003
----- ----- ----- -------
Net sales $ -- $ -- $ -- $ 1,759
===== ===== ===== =======
Gross profit -- -- -- 57
Selling, general & admin. expense -- -- (2) 1,686
Income (loss) on sale of certain
assets relating to discontinued
operations 314 -- 328 (223)
----- ----- ----- -------
Income (loss) from discontinued
operations before income tax 314 3 330 (1,742)
Income tax benefit -- -- -- 660
----- ----- ----- -------
Income (loss) from discontinued
operations net of income tax $ 314 $ 3 $ 330 $(1,305)
===== ===== ===== =======
During the third quarter of 2004, the Company recognized as income from
discontinued operations, the receipt of payments of $314 from the
purchasers of its former thermal products business. The Company sold the
thermal business during the second quarter of 2003.
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 projected pension related payments of $869
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's application for deferral of the lump 2003 payment due in
September 2004, of $747, has been approved by the Internal Revenue
Service, and accordingly that payment has been deferred to 2005. During
the first three quarters of 2004, the Company made payments totaling $577
under its qualified retirement plan and its nonqualified supplemental
retirement plan. Effective April 1, 2004, retirement plans were frozen,
resulting in a curtailment loss of $1,128 during the first quarter of
2004, and the elimination of additional service costs after the first
quarter of 2004.
The components of net periodic benefit cost for the retirement plans were:
Thirteen weeks ended Thirty-nine weeks ended
October 2, September 27, October 2, September 27,
---------- ------------- ----------- -------------
2004 2003 2004 2003
---------- ------------- ----------- -------------
Service cost $ -- $ 231 $ 214 $ 692
Interest cost 564 613 1,687 1,698
Expected return on plan
assets (506) (505) (1,509) (1,514)
Net amortization 32 (50) 191 4
Curtailment loss -- -- 1,128 --
----- ----- ------- -------
Total pension expense $ 90 $ 289 $ 1,711 $ 880
===== ===== ======= =======
Page 10
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 October 2, 2004 and September 27, 2003 - continued
(in thousands, except per share data)
11. Related party transactions - The Company and a former key executive
("executive") entered into an agreement pursuant to which the Company is
obligated for up to two years after the death of the executive to
purchase, if the estate elects to sell, up to $4 million of the Company's
common shares, at their fair market value. To fund its potential
obligation to purchase such common shares, the Company purchased a $5
million life insurance policy on the executive; in addition, the Company
maintains another policy insuring the life of the executive. The
cumulative cash surrender value of the policies approximates $2.5 million,
which is included in other assets in the accompanying consolidated balance
sheets. Effective March 2004, the Company borrowed against this cash
surrender value of this policy.
In addition, for a period of 24 months following the executive's death,
the Company will have a right of first refusal to purchase any common
shares of the Company owned by the executive at the time of his death if
his estate elects to sell such common shares. The Company would have the
right to purchase such common shares on the same terms and conditions as
the estate proposes to sell such common shares.
In conjunction with closing the Company's Mexican manufacturing
operations, the Company engaged a firm to conduct a public auction of a
substantial portion of our manufacturing equipment. The auction was
concluded in early August 2004. The Company also engaged the services of
The Meridian Group ("Meridian") to assist in identifying auction firms
that could successfully market and sell equipment in Mexico. The Company's
acting President and Chief Executive Officer, Thomas M. Von Lehman, is
currently on leave from Meridian, and Mr. Von Lehman's spouse is the
President and sole owner of Meridian. The fees paid Meridian, amounting to
$94 thousand, were at Meridian's customary rates for providing such
services, and consistent with the market price of such services.
12. Contingent Liabilities - The Company has been named as defendant in
various lawsuits arising from the ordinary course of business.
On June 8, 2004, the Company received a "30-day letter" from the Internal
Revenue Service ("IRS") proposing certain adjustments which, if sustained,
would result in an additional tax obligation approximating $4 million plus
interest. The proposed adjustments relate to the years 1998 through 2002.
Substantially all of the proposed adjustments relate to the timing of
certain deductions taken during that period. On July 7, 2004, the Company
submitted to the IRS a letter protesting the proposed adjustments, and
reiterating its position. The Company intends to vigorously contest the
proposed adjustments.
In the opinion of management, the resolution of these matters is not
expected to have a material adverse effect on the Company's financial
position or results of operations.
Page 11
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
consummate the activities related to the closure of its manufacturing facilities
in Mexico in accordance with plan without incurring substantial unplanned cost
or experiencing unforeseen difficulties; the ability of the Company to continue
sourcing product from outside North America 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 maintain 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; the impact of competition on the Company's
market share; and the Company's ability to resolve its dispute with the IRS, as
described above, without incurring substantial liability. 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 information that management
believes is necessary for an understanding of our financial condition, 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,
including a) implementation of a new business plan, b) inventory management, and
c) liquidity.
New Business Plan
With the assistance of experienced turnaround consultants, we developed a new
business model that we believe should significantly reduce future 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 have streamlined our management structure and reduced selling, general
and administrative costs to a lower level that is more consistent with our
simplified business model.
- - We have reduced costs by closing our Mexican manufacturing facilities
during the first half of 2004 and we are relying upon third party contract
manufacturers in China and other locations outside North America to
manufacture our products.
Page 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Critical Business Issues - continued
- - As of the end of the third quarter, we have further reduced costs by
closing our Distribution Center in Nuevo Laredo, Mexico, and in the future
we will rely on our remaining Distribution Center in San Angelo, Texas,
and a third party logistics provider on the West Coast, to distribute
products to our customers.
- - We intend to further reduce operating costs through the closure of our
operations support office in San Antonio, Texas by the end of 2004. The
staff at that facility primarily supported operations in Mexico. Some
functions performed in San Antonio will be maintained and relocated to our
Columbus, Ohio headquarters.
- - We have reduced and expect to continue to reduce our inventory levels from
year-end 2003 levels.
We concluded that the actions contemplated by the 2004 business plan were
undertaken with a goal of reducing and eventually eliminating the operating
losses incurred in 2002 and 2003. Because the business plan has resulted in
substantial changes from 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 the section captioned "Risk Factors" in Item
7 of our Annual Report on Form 10-K for the fiscal year ended January 3, 2004.
Implementation of the business plan has resulted in significant costs in the
form of severance payments, lease loss accruals, asset write-downs and other
costs, and is expected to result in additional such costs during the remainder
of 2004. (See also Note 7 of Notes to Consolidated Financial Statements.) In
part due to these costs and write-downs, we expect to report an operating loss
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, as described below
under "CIT Credit 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 involves some amounts of cash outlays, a significant portion of
the 2004 restructuring costs are non-cash in nature and we expect that our plans
to reduce inventory should generate additional cash flow.
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 the new business model, once fully implemented, 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 accounting 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 13
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 warehouse
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 sales 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 reported 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. Where appropriate,
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 first-in, first-out ("FIFO") 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 current and upcoming selling
seasons, and we provide appropriate write-downs under the circumstances. As of
October 2, 2004, we estimated that the FIFO cost of our inventory exceeded the
estimated net realizable value of that inventory by $744 thousand, compared with
a similar estimate made as of September 27, 2003 of $1.0 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 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, if any, 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
previously 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 periods, such that
those deferred tax items become realizable as deductions in future periods, we
will recognize that benefit, by reducing our reported tax expense in future
periods, once their realization becomes assured.
d) We record accounts receivable net of allowances for potential future
returns, allowable retailer promotions and incentives, anticipated discounts,
and where appropriate allowances for doubtful accounts. 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. With the new CIT
Facility in 2004, and the factoring aspects of that agreement, our exposure to
uncollectible accounts should be greatly diminished. 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 14
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. Estimates are based
upon the anticipated costs of employee separations; an analysis of the
impairment in value of any affected assets; anticipated future costs to be
incurred in settling remaining lease obligations, net of any anticipated
sublease revenues; as well as other costs associated with the restructuring
plan. As of October 2, 2004, we had an accrued balance of $2.8 million relating
to the estimated future costs of closing or reorganizing certain operations, as
previously outlined. As of September 27, 2003, we had an accrued balance of $330
thousand for similar restructuring and reorganization activities. Should the
actual costs of these activities exceed these estimates, the excess costs will
be recognized in the 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 third quarter of 2004, we had $10.2 million in net working
capital. This compares with $35.5 million at the end of the third quarter of
2003, and $25.8 million at fiscal year-end 2003. The decline in net working
capital from the end of the third quarter of 2003 and from fiscal year-end 2003
to the end of the third quarter of 2004 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 $31.8 million at the end of the
third quarter of 2003, to $25.9 million at the end of the third quarter of
2004. Most of the decrease in 2004 reflects the decrease in net sales
between 2003 and 2004. Accounts receivable at the end of the third quarter
of 2004 increased to $25.9 million from $7.1 million at the end of fiscal
2003, representing a normal seasonal pattern of increase in receivables.
- - Inventories ended the third quarter of 2004 at $29.5 million compared with
$50.5 million one year ago, and $32.8 million as of the end of fiscal
2003. Compared with one year ago, there is a decrease in aggregate raw
materials and work in process inventories from period to period of
approximately $6.9 million, and a decrease of approximately $14.0 million
in finished goods inventory. This is consistent with our new business
model, where we have eliminated our production in Mexico thus reducing the
need for raw materials and work in process; where we have sold obsolete
and closeout finished goods in order to generate additional cash and
reduce our investment in inventory; and where we have increased our
purchases of finished goods from third parties in China and elsewhere. The
amount of inventory has decreased as well from the end of fiscal 2003 by
$3.3 million, with substantially all of that decrease reflected in raw
materials and work in process; the level of finished goods at the end of
the third quarter of 2004 is approximately $335 thousand lower than at the
end of fiscal 2003. The reduction at the end of the third quarter of 2004
when compared with year-end 2003, is at variance with the historical
seasonal pattern of inventory changes, principally as a result of the
change in our business model in 2004.
Page 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
Liquidity and Capital Resources - continued
- - We ended the third quarter of 2004 with $815 thousand in cash and cash
equivalents, compared with $3.1 million at the end of the third quarter of
2003. At the end of fiscal 2003, we had $2.0 million in cash and cash
equivalents. At the end of the third quarter of 2004, we had borrowed
$27.4 million in short-term notes from CIT plus $2.2 million against a
life insurance policy insuring one of our former executives, compared with
$36.0 million in short-term notes borrowed from our bank at the end of the
third quarter of 2003. The decrease in short-term borrowings at the end of
the third quarter of 2004 compared with the end of the third quarter of
2003, is primarily related to lower working capital requirements under our
new business model, than was required under our former
manufacturing-driven business model. With lower inventories, we have a
lower need for short-term working capital. At the end of fiscal 2003,
there were $2.0 million in short-term bank borrowings outstanding.
- - At the end of the third quarter of 2004, accrued expenses amounted to $7.6
million, compared with $3.6 million at the end of the third quarter of
2003, and compared with $5.2 million as of the end of fiscal 2003. The
primary cause of the change in accrued expenses from the end of fiscal
2003 and from one year ago, was the change in restructuring charges that
had been accrued at the end of the various periods. (See also Note 7 of
Notes to Consolidated Financial Statements for additional information on
restructuring charges.)
Capital expenditures during the first three quarters of 2004 were approximately
$111 thousand. Proceeds from dispositions of $962 thousand were primarily from
the disposition of assets formerly used in our manufacturing operations in
Mexico. During the first three quarters of 2003, net capital expenditures were
approximately $430 thousand, with capital expenditures of $1.6 million offset by
dispositions of $1.2 million primarily from the disposition of our warehouse in
Goldsboro, North Carolina. Capital expenditures in both 2003 and 2004, were
funded out of net working capital. With the change from a manufacturing business
model to an outsourcing business model for procuring our finished goods
products, we expect capital expenditures in future periods will continue at 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 approximately $10.3 million under the CIT Facility to
repay all outstanding indebtedness under our Revolving Credit Agreement
("Revolver") with Huntington National Bank 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 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.
Page 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
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.
Amounts outstanding under the CIT Facility bear interest at the prime rate as
announced by JPMorgan Chase Bank ("Prime Rate") plus 1% (averaging 5.3% for the
third quarter of 2004; 5.75% effective October 1, 2004 and as of the end of the
third quarter on October 2, 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 October 2, 2004, the outstanding
balance under the CIT Facility was $27.4 million. The amount available to borrow
under the CIT Facility changes daily, and we estimate that there was $6.9
million available to borrow under the CIT Facility as of October 2, 2004.
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 primarily
from internally generated funds and to a lesser extent from borrowings under the
CIT Facility. 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 level of our sales during the
remainder of 2004. As discussed below in "Results of Operations-Continuing
Operations," our net sales in the first three quarters of 2004 declined by 15.0%
as compared to net sales in the comparable period of 2003. We believe this
reduction resulted, in part, from continuing competition from retailers'
in-store private label programs, from our customers' concerns about our publicly
announced liquidity concerns early in 2004, and our introduction of new return
policies which limit the amount of returned merchandise from our customers.
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 former key executives. This $2.2
million indebtedness is classified within short-term notes payable in the
accompanying consolidated balance sheet.
Page 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
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 through the end of 2005. For
accounting purposes, a portion of the payment has been treated as debt and a
portion of the payment has been treated as an imputed interest charge associated
with that debt. The remaining net present value of this obligation, which is
subordinated to our other obligations, is included within current installments
and long-term debt at its discounted present value totaling $1.8 million as of
the end of the third 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 routine lease
payments, the repayment of the Metropolitan Note, repayment of the outstanding
amounts and cancellation of the Revolver, and obtaining the CIT Facility, as
noted above.
Results of Operations - Continuing Operations
During the third quarter of 2004, net sales from continuing operations of $34.6
million were 13.6 percent lower than net sales from continuing operations of
$40.0 million during the same quarter in 2003. For the first three quarters, net
sales from continuing operations in 2004 amounted to $67.5 million, a 15.0
percent decrease when compared with the first three quarters of 2003. A
substantial portion of the net sales decline both in the quarter and for the
first three quarters occurred in Barry Comfort North America, with a much
smaller portion of the decline attributable to Barry Comfort Europe. (See also
Note 8 of Notes to Consolidated Financial Statements for selected segment
information.) A portion of the decline in Barry Comfort North America net sales
occurred in our branded Dearfoams(R) line of slippers for men and women
primarily sold through traditional department stores, with a smaller offsetting
increase in net sales to our mass merchandising customers including sales of
obsolete inventory and closeout merchandise. We believe that this overall
reduction in net sales was attributable, in part, to i) continuing competition
from retailers' in-store private label programs, ii) our customers' concerns
about our publicly announced liquidity concerns raised early in 2004, and iii)
the introduction of our new return policy which limits the amount of merchandise
returned by our customers.
Gross profit from continuing operations during the third quarter of 2004,
amounted to $12.8 million, or 37.1 percent of net sales. This compares with
gross profit of $16.2 million, or 40.6 percent of net sales, in the same quarter
of 2003. For the three quarters, gross profit as a percent of net sales was 33.1
percent in 2004 compared with 37.5 percent in 2003. The most significant portion
of the decline in gross profit dollars resulted from the decrease in net sales
for the periods, while a portion of the decline was the result of a change in
sales mix. During 2004, a greater proportion of sales was made through the mass
merchandising channels of distribution with relatively fewer sales of our
branded Dearfoams(R). In addition, sales of obsolete inventory and closeout
merchandise were higher in 2004 than in prior periods as a result of our
increased efforts at selling off inventory. This adversely impacted gross profit
in 2004. We believe that once excess inventory has been reduced, future sales of
this category of inventory will decline.
Selling, general and administrative expenses from continuing operations during
the third quarter of 2004 amounted to $9.7 million, about $3.7 million lower
than the same quarter one year ago. For the three quarters, these expenses in
2004 amounted to $29.8 million, compared with $35.0 million for the same
Page 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations - continued
three quarters last year. The decrease in these expenses reflects the results of
our efforts to reduce the size of the business under the new business operating
model, where we are reducing our dependence upon manufacturing and transitioning
to a company more dependent upon independent third parties to produce our
merchandise.
During the third quarter of 2004, we recognized $4.2 million in restructuring
and asset impairment charges, and during the first three quarters, we have
recognized a total of $16.1 million in restructuring and asset impairment
charges. These charges relate to the decisions during the first three quarters
of 2004 to i) close all of our manufacturing operations in Mexico and to source
all of our product needs from third party manufacturers primarily located in
China, and ii) close our Distribution Center in Nuevo Laredo, Mexico, making
greater use of an existing facility in San Angelo, Texas, and a third party
logistics provider on the West Coast. This compares with a $200 thousand asset
impairment charge during the first three quarters of 2003. (See also Note 7 of
Notes to Consolidated Financial Statements for added information relating to
restructuring and asset impairment charges.) As a part of closing our Mexican
manufacturing operations, we engaged a firm to conduct a public auction of a
substantial portion of our manufacturing equipment. The auction was concluded in
early August 2004, (see also Note 11 of Notes to Consolidated Financial
Statements.)
Net interest expense was lower in the third quarter of 2004 than in the same
quarter of 2003 by approximately $54 thousand, and interest expense incurred
during the first three quarters of 2004 was nearly flat when compared with the
same period in 2003. During the third quarter of 2004, net interest expense
amounted to $396 thousand compared with $450 thousand in the third quarter of
2003. For the three quarters, net interest expense increased to $928 thousand in
2004, from $921 thousand in 2003. During the third quarter of 2004, we had
borrowed less under the CIT Facility, than we borrowed in the third quarter of
2003 under the former revolving credit agreement with our bank. At the end of
the third quarter of 2004, we had borrowed about $27.4 million under the CIT
Facility, compared with $36.0 million borrowed at the same time in 2003 under
the former revolving credit agreement. Long-term debt at the end of the third
quarter of 2004 had decreased due to scheduled repayments. During the comparable
periods, weighted average interest rate on the CIT Facility was approximately
5.3 percent for the third quarter of 2004 and 5.0 percent for the nine months of
2004, compared with the third quarter of 2003 average rate of 3.9 percent and
4.0 percent for the nine months of 2003, under the revolving credit agreement
then in existence.
During the third quarter of 2004, we recognized as income from discontinued
operations, payments of approximately $314 thousand from the purchasers of our
former thermal products business, which we sold during the second quarter of
2003.
For the third quarter of 2004, we incurred a net loss of $1.1 million, or $0.11
per diluted share, including an aggregate of $4.2 million in restructuring and
asset impairment charges taken during the quarter. This compares with net
earnings during the third quarter of 2003 of $1.4 million, or $0.15 per diluted
share. There was no comparable restructuring charge during the third quarter of
2003.
For the first three quarters of 2004, we incurred a net loss of $24.2 million or
$2.46 per diluted share including an aggregate of $16.1 million in restructuring
and asset impairment charges taken in the period. For the first three quarters
of 2003, we incurred a net loss of $5.2 million or $0.53 per diluted share;
during 2003, there was a $200 thousand restructuring and asset impairment charge
incurred.
Page 19
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments - Foreign Currency
Historically, we have transacted business in a number of foreign countries. Our
primary foreign currency net cash outflows historically had occurred in Mexico,
although we did not hedge the Mexican Peso. With our new business plan in 2004,
our foreign currency exposure in Mexican Pesos has greatly diminished.
Our primary foreign currency net cash inflows are generated from Canada. At
times, we have employed a foreign currency hedging program utilizing currency
forward exchange contracts for anticipated net cash Canadian inflows. Under this
program, increases or decreases in operating revenue as measured in U.S. Dollars
are partially offset by realized losses and gains 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
foreign currency cash flows. This often results in a mismatch between accounting
gains and losses and transactional foreign currency cash flow gains and losses.
We believe that the impact of foreign currency forward contracts has not been
material to our financial condition or results of operations. During the
thirty-nine weeks ended October 2, 2004, we have had no foreign currency
exchange contracts.
Market Risk Sensitive Instruments - Interest Rates
We believe that we have an exposure to the impact of changes in short-term
interest rates. Our principal interest rate risk exposure results from the
floating rate nature of the CIT Facility (see discussions above). If interest
rates were to increase or decrease by one percentage point, we estimate that in
a typical year our interest expense would increase or decrease by approximately
$150 thousand to $200 thousand on an annualized basis. Currently, we do not
hedge our exposure to floating interest rates.
Page 20
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 quarterly period 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 and the other reports which R. G.
Barry files or submits under the Securities Exchange Act 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 and the other reports which R. G.
Barry files or submits under the Securities Exchange Act 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 quarterly 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 October 2, 2004, that have materially affected, or
are reasonably likely to materially affect, R. G. Barry's internal control over
financial reporting.
Page 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 8, 2004, R. G. Barry Corporation ("R. G. Barry") received a
"30-day letter" from the Internal Revenue Service ("IRS") proposing
certain adjustments which, if sustained, would result in an additional tax
obligation approximating $4 million plus interest. The proposed
adjustments relate to the years 1998 through 2002. Substantially all of
the proposed adjustments relate to the timing of certain deductions taken
during that period. On July 7, 2004, R. G. Barry submitted to the IRS a
letter protesting the proposed adjustments, and reiterating its position.
R. G. Barry intends to vigorously contest the proposed adjustments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a), (b) Not applicable
(c) R. G. Barry did not purchase any of its common shares during the
quarterly period ended October 2, 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) through (d) Not applicable
Item 5. Other Information
No response required
Item 6. Exhibits
See Index to Exhibits on page 24.
Page 22
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 15, 2004 /s/ Daniel D. Viren
-------------------------------
Daniel D. Viren
Senior Vice President - Finance
(Principal Financial Officer)
(Duly Authorized Officer)
Page 23
R. G. BARRY CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
31.1 Rule 13a-14(a)/15d-14(a) Certification Filed herewith
(Principal Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification Filed herewith
(Principal Financial Officer)
32.1 Section 1350 Certifications Filed herewith
(Principal Executive Officer, and
Principal Financial Officer)
Page 24