SIX YEAR REVIEW OF SELECTED FINANCIAL DATA
R.G. Barry Corporation and Subsidiaries
<Table>
<Caption>
2001 2000 1999 1998 1997** 1996
SUMMARY OF OPERATIONS (THOUSANDS)
Net sales $ 144,121 $ 149,435 $ 140,092 $ 149,404 $ 148,034 $ 147,284
Cost of sales 83,972 93,816 85,996 76,707 77,401 81,797
Gross profit 60,149 55,619 54,096 72,697 70,633 65,487
Gross profit as percent of net sales 41.7% 37.2% 38.6% 48.7% 47.7% 44.5%
Selling, general and administrative expenses 58,298 58,321 66,416 56,719 53,137 49,008
Restructuring and asset impairment charges
(adjustments) (118) 1,921 5,914 -- -- --
Other income (expense) 800 1,717 502 380 415 (211)
Proceeds from litigation, net of expenses
incurred -- 4,476 -- -- -- --
Interest expense, net (1,079) (1,802) (1,651) (1,607) (1,817) (2,483)
Earnings (loss) before income taxes 1,690 (232) (19,383) 14,751 16,094 13,785
Income tax expense (benefit) 716 522 (4,778) 5,443 6,420 5,511
Minority interest (42) (52) (20) -- -- --
Net earnings (loss) $ 932 $ (806) $ (14,625) $ 9,308 $ 9,674 $ 8,274
ADDITIONAL DATA
Basic earnings (loss) per share* $ 0.10 $ (0.09) $ (1.55) $ 0.96 $ 1.02 $ 0.89
Diluted earnings (loss) per share* $ 0.10 $ (0.09) $ (1.55) $ 0.93 $ 0.99 $ 0.84
Book value per share* $ 6.44 $ 6.34 $ 6.46 $ 8.12 $ 7.23 $ 6.26
Annual % change in net sales (3.6)% 6.7% (6.2)% 0.9% 0.5% 9.9%
Annual % change in net earnings 215.6% 94.5% (257.1)% (3.8)% 16.9% 26.5%
Pretax return on net sales 1.2% (0.2)% (13.8)% 9.9% 10.9% 9.4%
Net earnings (loss) as a percentage of beginning
shareholders' equity 1.6% (1.3)% (18.5)% 13.5% 16.5% 16.7%
Basic average number of shares outstanding
(in thousands)* 9,379 9,399 9,455 9,698 9,504 9,308
Diluted average number of shares outstanding
(in thousands)* 9,577 9,399 9,455 9,992 9,820 9,827
FINANCIAL SUMMARY (THOUSANDS)
Current assets $ 69,676 $ 70,268 $ 71,678 $ 91,914 $ 84,693 $ 70,792
Current liabilities 14,471 14,715 17,705 17,885 20,908 15,108
Working capital 55,205 55,553 53,973 74,029 63,785 55,684
Long-term debt 5,162 7,637 8,571 10,714 12,992 15,265
Net shareholders' equity 60,385 59,452 60,384 79,139 69,126 58,704
Net property, plant and equipment 10,917 11,741 14,408 12,875 14,231 13,929
Total assets 88,612 89,549 93,164 113,026 107,083 92,180
Capital expenditures 1,194 653 3,381 1,136 2,944 2,404
Depreciation and amortization of property,
plant and equipment 1,847 2,109 2,243 2,413 2,531 2,571
</Table>
See also Management's Discussion & Analysis of Financial Condition & Results of
Operations.
*Retroactively restated to reflect 5-for-4 share split distributed June 17,
1996.
**Fiscal year includes fifty-three weeks.
Effective in 2000, the Company changed its inventory costing method from LIFO to
FIFO. All amounts have been retroactively restated to give effect to the change
in costing method. Certain amounts from prior years have been reclassified to
conform with current year's presentation.
6 and 7
MARKET AND DIVIDEND INFORMATION
R.G. Barry Corporation and Subsidiaries
MARKET VALUE
QUARTER HIGH LOW CLOSE
- ------------------------------------------------------------------------------
2001 FIRST $3.250 $2.130 $2.500
SECOND 4.750 2.200 4.600
THIRD 5.180 3.830 4.040
FOURTH 6.080 3.680 5.950
2000 First $4.250 $2.750 $3.375
Second 4.750 3.000 3.875
Third 3.938 2.750 3.000
Fourth 3.125 2.125 2.375
Stock Exchange: New York Stock Exchange
Stock Ticker Symbol: RGB
Wall Street Journal Lising: BarryRG
Approximate Number of Registered Shareholders: 1,000
No cash dividends were paid during the periods noted. The Company has no current
intention to pay cash dividends, and its liability to do so is subject to the
restrictions contained in various loan agreements. See also Note 4 to
Consolidated Financial Statements, and Management's Discussion & Analysis of
Financial Condition & Results of Operations.
QUARTERLY FINANCIAL DATA
R.G. Barry Corporation and Subsidiaries
2001 FISCAL QUARTERS in thousands, except basic and diluted earnings (loss) per share
FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------------------------
NET SALES $25,547 $16,958 $45,413 $56,203
GROSS PROFIT 9,289 5,701 19,652 25,507
NET EARNINGS (LOSS) (1,313) (3,579) 2,603 3,221
BASIC EARNINGS (LOSS) PER SHARE $(0.14) $(0.38) $0.28 $ 0.34
DILUTED EARNINGS (LOSS) PER SHARE $(0.14) $(0.38) $0.28 $ 0.34
2000 Fiscal Quarters
First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------------
Net sales $24,238 $22,241 $42,396 $60,560
Gross profit 8,647 5,861 16,405 24,706
Net earnings (loss) 653 (3,588) 137 1,992
Basic earnings (loss) per share $ 0.07 $(0.38) $0.01 $ 0.21
Diluted earnings (loss) per share $ 0.07 $(0.38) $0.01 $ 0.21
Certain amounts from prior periods have been reclassified to conform with
current presentation.
See also Management's Discussion & Analysis of Financial Condition & Results of
Operations.
8
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES
Our company uses many differing types of assets in the development, production,
marketing, warehousing and distribution, and sale of our products. Mainly, we
utilize current assets, such as cash, receivables, inventory, and prepaid
expenses, and to a lesser degree, we utilize property, plant and equipment, and
other non-current assets, such as deferred taxes and goodwill.
At the end of 2001, current assets amounted to approximately 79 percent of total
assets, compared with 78 percent at the end of 2000. We had $55.2 million in net
working capital, made up of $69.7 million in current assets, less $14.5 million
in current liabilities as of the end of 2001.
As of the end of 2000, we had nearly the same level of net working capital at
$55.6 million, made up of $70.3 million in current assets, less $14.7 million in
current liabilities.
We ended 2001 with $12.3 million in cash and cash equivalents, $15.0 million in
trade receivables, net of allowances, and $35.6 million in inventory. By
comparison, at the end of 2000, we had $6.9 million in cash and cash
equivalents, $19.7 million in net trade receivables, and $32.8 million in
inventory. The increase in cash from 2000 to 2001, is due in part to the $4.6
million decline in net trade receivables from year to year, and a federal income
tax refund received in 2001 of $3.6 million, as a result of carrying back tax
losses to prior fiscal periods. See also the accompanying Consolidated
Statements of Cash Flows.
Following year-end 1999, we set an objective of lowering our investment in
inventory. During 2000, we reduced total inventories by $8.2 million, with the
largest reduction being a $5.7 million reduction in finished goods. Raw
materials and work in progress, together, were reduced by approximately $2.5
million. During 2001, inventories increased by $2.8 million, with the largest
portion a $2.3 million increase in slipper finished goods, substantially all in
Barry Comfort North America, where inventories at year end 2001 are well
positioned and where we normally experience the least exposure to risk of
markdowns or obsolescence. Net trade receivables declined from 2000 to 2001, by
$4.6 million. This is due, in part, to a $3.5 million increase in 2001 in
offsetting provisions for customer allowances and sales support programs. Also
impacting the decline in trade receivables is the nearly $4.4 million decrease
in merchandise sold during the fourth quarter of 2001, compared with the fourth
quarter of 2000. To some degree, the increase in inventory from 2000 to 2001,
and the decrease in trade receivables, reflect the decline in net sales during
the fourth quarter. Additionally, at the end of 2000, we had one large customer
who was late in paying approximately $3 million on its account before year-end.
The customer's account was paid early in 2001. There was no similar sizable
customer payment delays noted at the end of fiscal 2001. We have experienced no
significant loss from exposure to uncollectable accounts. The recent highly
publicized bankruptcies of Kmart Corporation, and Jacobson Stores Inc., did not
have any impact upon us in 2001, as neither store has been a customer of ours in
recent years.
Traditionally, we have leased most of our operating facilities. We periodically
review facilities to determine whether our current facilities will satisfy
projected operating needs for the foreseeable future. During the second half of
1999, we opened a new manufacturing facility in the Dominican Republic. Products
manufactured in the leased Dominican facility were expected to be shipped into
the European market duty-free. Subsequent to opening the Dominican facility,
Mexico and the European market completed a new duty arrangement, which we
believe will, by 2003, result in the same duty situation as had existed with the
Dominican Republic. Taking this modified duty arrangement between Mexico and
Europe into consideration, we closed the Dominican operation before the end of
2000. In 1999, we opened a warehouse in San Antonio, Texas to serve what we
believed was a need to house increased finished goods inventory for the
Soluna(TM) line of Spa-at-home thermal/magnetic products. By 2000, the
Soluna(TM) products had not achieved expected results and we concluded that this
warehouse was too large and too expensive for its use, as originally planned,
especially in light of the significant reduction in inventory levels from 1999
to year-end 2000. In 2000, we moved that operation into a lower cost facility
that we had available in Laredo, Texas. Late in 2001, we committed to move into
a new leased warehouse facility in Nuevo Laredo, Mexico, which will permit us to
begin warehousing operations in Mexico in 2002, and reduce our warehousing
operations in the United States; this transition will permit us to substitute
lower cost Mexican
9
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
warehouse labor for comparably higher U.S. labor costs. See also Note 5 of Notes
to the Consolidated Financial Statements for information about operating lease
commitments.
For many years, we have relied on unsecured revolving credit agreements to
satisfy our seasonal working capital liquidity needs. Throughout recent years,
our banks have agreed to amend the various agreements to accommodate our needs
and provide us with needed operating liquidity, occasionally modifying
provisions of the agreements as necessary. In March 2001, we entered into the
current Revolving Credit Agreement ("Revolver") with our main bank. This
Revolver, which extended through February 2002, was also unsecured, and further
modified certain of the covenants included in the previous agreements. The
Revolver contained covenants that we believe were not uncommon for agreements of
similar type and duration. The Revolver provided us a seasonally adjusted
available line of credit with a peak of $30 million from April through November.
During 2001, we reached a peak of $26 million in borrowings outstanding for a
two week period late in September through early October. This compares with $30
million in peak outstanding borrowings for a nearly four week period during the
same months of 2000. Throughout 2001, our overall usage of the Revolver was
lower than in 2000. The daily weighted average borrowings outstanding in 2001
amounted to $7.9 million in 2001 compared with $11.5 million in 2000. Clearly,
during the time period from mid-spring though December, we are dependent upon
the bank and the Revolver for funding our seasonal liquidity needs. On March 8,
2002, we received a letter from our bank with their commitment to renew and
extend the Revolver through 2002, providing us with a seasonally adjusted line
of credit of up to $30 million, which we expect will meet our liquidity needs
for the upcoming year.
At times, we have incurred additional long-term debt to provide long-term
capital financing. The last time we incurred additional long-term debt was in
1994, when we issued a $15 million, 9.7 percent note, due in 2004 ("Note"). The
balance due under the Note as of the end of 2001 was $6.4 million. The Note
contains covenants that we believe are not uncommon among agreements of its type
and duration. The Note and the Revolver place restrictions on the amount of
additional borrowings we may incur, and contain certain other financial
covenants. See also Note 4 of Notes to the Consolidated Financial Statements for
additional information. The Note requires semi-annual interest payments and
annual principal repayments of $2.1 million, the first of which was made in July
1998, and which continue through July 2004. We are in compliance with all
covenants of the Note and the Revolver.
We last paid cash dividends in 1981. As of year-end 2001, the Revolver
prohibited the payment of cash dividends and further limited the acquisition of
common shares for treasury. We have no current plans to pay cash dividends or to
acquire common shares for treasury. We anticipate continuing to use our cash
resources to finance operations and to fund the future needs of the business.
While the covenants under the Note permit us to incur additional long-term debt
should that become desirable, the Revolver requires the consent of the bank in
order for us to do so.
We believe that we have a strong balance sheet, with strong financial ratios. At
the end of 2001, total shareholders' equity amounted to $60.4 million. With the
addition of long-term debt totaling $5.2 million, we have a total capital base
of $65.6 million. This compares with $59.5 million in shareholders' equity last
year and $7.6 million in long-term debt. Our long-term debt to net worth ratio
was 8.5 percent at the end of 2001, slightly improved from the 12.8 percent at
the end of 2000. Our current ratio, a measure of the relationship of current
assets to current liabilities, was 4.81 to 1 at year-end 2001, compared with
4.78 to 1 at year-end 2000.
ACCELERATION OF NAFTA TARIFF REDUCTIONS - SUBSEQUENT EVENTS
Effective January 1, 2002, the 15 percent duty on United States slippers made in
Mexico has been eliminated in total. The tariff removal, which was a part of
round three of the NAFTA tariff acceleration, eliminated duties on a range of
products, including slippers. This duty elimination is expected to have a
positive impact on many aspects of our business. Prior to the elimination of the
duty, the slipper tariff was scheduled to be reduced annually at the rate of 2.5
percent per year until its scheduled elimination on January 1, 2008.
10
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
The acceleration allows us to take full advantage of the benefits of
manufacturing in our own North American plants and is a key element in our
strategies for the future. It permits us to relocate cutting and molding
activities from the U. S. to Mexico and thus keep our costs in line with
competitive products produced offshore. In 2002, we expect to transfer jobs from
the U.S. to Mexico and realize the benefits of reduced labor and benefit costs.
Without the tariff eliminations, most of the labor savings would have been
offset by the increase in the cost of duties, and we would have been forced to
consider further reductions in North American jobs. We expect the shift of jobs
to be completed in 2002, and impact about 350 positions in the company. The
severance costs associated with this reduction in workforce are to be recognized
in the first quarter of 2002, and are expected to amount to about $750 thousand.
We contracted with two firms to assist us in pursuit of this tariff relief. With
the successful conclusion of this pursuit, we agreed to pay an aggregate of
approximately $6.25 million, most of which is to be paid in nearly equal
quarterly installments, over the next four years. The benefit we will receive
from the tariff relief in excess of $18 million over the next six years, with an
estimated $1.5 million in pre-tax net benefit in 2002 alone. The remainder of
the benefit will be realized equally over the following five years.
LEGAL PROCEEDINGS
In March 2000, a lawsuit we filed in 1998 against Domino's Pizza, Inc. and Phase
Change Laboratories, Inc., alleging patent infringement and deceptive
advertising, was settled. As a part of the settlement, we received a cash
payment of $5 million, and entered into a $1 million licensing arrangement with
Domino's for the future use of our patented thermal retention technology.
FOREIGN CURRENCY RISK
Our operations are currently conducted primarily in U. S. Dollars and to a much
lesser degree, in British Pounds Sterling, French Francs and Euros, and Canadian
Dollars--all currencies that historically have not been subject to significant
market volatility. In accordance with our established policy guidelines, we have
at times hedged some of these currencies on a short-term basis, using foreign
exchange contracts as a means to protect ourselves from fluctuations. The amount
we normally maintained under foreign exchange contracts has not been material to
overall operations. At the end of fiscal 2001, there were no foreign exchange
contracts outstanding.
In addition, a sizable portion of our manufacturing labor and other costs are
incurred in Mexican Pesos. It has not been our practice to hedge the Peso as it
has generally declined in value over longer time horizons, when compared to the
U. S. Dollar. In addition, forward contracts denominated in Pesos generally have
not been readily or economically available. Should the Peso suffer a devaluation
compared to the U. S. Dollar, we believe that the impact would likely be of
benefit to us by reducing, at least initially, the effective costs of
manufacturing, although any such reduction would not be expected to have a
significant impact upon our results of operations.
IMPLEMENTATION OF THE "EURO" AS A COMMON LEGAL CURRENCY IN EUROPE
We believe that we are prepared for the implementation of the "Euro" as the
common legal currency in certain European Community countries. The United
Kingdom will not immediately join the transition to the Euro, although France
has already joined. Our systems were designed several years ago with sufficient
flexibility to handle the introduction of the Euro as an added transactional
currency.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that we make certain
estimates. These estimates can affect our reported revenues, expenses and
results of operations, as well as the reported values of certain of our assets
and liabilities. This is not new; making estimates about the impact of future
events has been a generally accepted practice for nearly all companies in nearly
all industries for many many years. We make these estimates after gathering as
much information from as many resources as are available at the time, and after
reasonably assessing the conditions that exist at the time we prepare the
financial reports. We make these estimates in a consistent manner from period to
period, based upon historical trends and conditions, after review and analysis
of current events and conditions. Management believes that these
11
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
estimates reasonably reflect the impact of events that may not become known with
certainty until some time in the future.
The more critical of these accounting policies requiring significant management
estimates include: a) an assessment of the estimated costs of returns and
allowances that will be required to satisfy the commitments made to retailers
for the just concluded holiday season, b) an evaluation of any impairment in the
realizable value of our inventories in light of the just concluded holiday
selling season, the economic environment, and the plans for the upcoming selling
season, c) an assessment of the amount of income taxes that will become
currently payable 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 of America
and the requirements of the complex income tax laws existing in various
jurisdictions, d) an assessment of the ongoing future value of goodwill, and e)
estimations of the future costs associated with restructuring charges related to
a number of operational changes and reconfigurations we have announced. In
addition, there are other accounting policies, which require less judgmental
input by management, that we follow consistently from year to year, and those
policies are summarized in Note 1 of Notes to the Consolidated Financial
Statements beginning on page 20 of this Annual Report to Shareholders.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations, which
requires the purchase method of accounting for business combinations initiated
after June 2001, and eliminates pooling-of-interests method. We believe the
adoption of SFAS No. 141 will not have a significant impact on our financial
statements.
In July 2001, the FASB issues SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after December 2001. SFAS
No. 142 requires, among other things, the discontinuance of goodwill
amortization, substituting an assessment of the impairment of existing
intangibles. With the adoption of SFAS in 2002, we will no longer amortize
approximately $2 million of goodwill--the amortization incurred in 2001 and 2000
was $136 thousand per year. We will be required to perform an impairment review
of goodwill upon adoption of SFAS 142. We expect to complete this review in 2002
and do not anticipate the need to record an impairment charge, however, there
can be no assurance that at the time of the review or later, an impairment
charge may not be required.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 develops one accounting method by
which long-lived assets held for disposal are measured at the lower of book
value or fair market value less costs of disposal. In addition, SFAS 144
enlarges the scope of discontinued operations to include all operations of an
entity with operations that can be separated from the rest of the business and
that will be eliminated in a disposal transaction. We do not anticipate the
adoption of SFAS No. 144 to have a material impact on our financial statements.
In June 2001, the Emerging Issues Task Force, ("EITF") issued EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of Vendor's Products," effective for periods beginning after December
2001. EITF 00-25 addresses whether consideration from a vendor to a reseller is
an adjustment of the selling prices of the vendor's products and thus, should be
deducted from revenue when classified in the vendor's statement of operations,
or is a cost incurred by the vendor for services received from the reseller and
thus should be classified as an expense in the vendor's statement of operations.
Upon application of this EITF, financial statements of prior periods presented
for comparative purposes should be reclassified to comply with the current
statement classification required under this Issue. The application of this
Issue will require a reclassification of certain expenses netting them against
sales in our Statement of Operations. This will result in a revocation of net
sales and a corresponding decrease in selling, general and administrative
expenses of approximately $9.5 million, $9.0 million and $9.7 million for fiscal
years 2001, 2000 and 1999, respectively. There will be no change in the final
determination of earnings before income taxes or in the determination of net
earnings after income taxes.
12
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
RESULTS OF OPERATIONS
2001 SALES AND OPERATIONS COMPARED WITH 2000
The results of 2001 represent an important turnaround. Operating results in 2001
showed continued improvement.
During 2001, net sales totaled $144.1 million, about 3.6 percent less than they
were in 2000. We operate in three different business segments: (I) "Barry
Comfort North America", which manufactures and markets at- and around-the-home
comfort footwear in North America; (II) "Barry Comfort Europe", which markets
footwear principally in western Europe; and (III) "Thermal", which markets,
principally in North America, thermal retention technology products that act as
hot or cold temperature reservoirs releasing that energy over time. See also
Note 13 of Notes to the Consolidated Financial Statements for a breakdown of net
sales by geographic region of the world and by segment of our operations.
Net sales for Barry Comfort North America increased slightly in 2001, to $126.4
million from $125.0 million in 2000. The increase in North America, although
only 1.1 percent, came in an economic environment of recession, consumer
concerns heightened by September's terrorist attacks in the United States, and a
retail atmosphere that was highly promotional, resulting in generally lackluster
retail sales increases. We have continued our efforts to provide new styling to
the consumers of our soft washable footwear, with continued focus on fresh
product, delivered complete and on-time to our customers. Sales of our products
at retail did well, while retailers generally struggled through a difficult and
very promotional holiday season. The mix within net sales was enriched slightly
in 2001, to a mix that was slightly higher in our more profitable image brands,
sold to traditional department stores and chains, and relatively fewer net sales
to the lower priced mass merchandisers.
Net sales for Barry Comfort Europe decreased to $10.4 million in 2001, from
$11.7 million in 2000. Substantially the entire decline in net sales came from
the United Kingdom where sales decreased from 2000 to 2001 by $1.2 million. In
2000, we changed the nature of our operations in the United Kingdom. Previously,
we had operated with our own full service sales organization, but in 2000, we
shifted to a joint arrangement with GBR Limited, a British footwear marketer.
Thus far, our results from this arrangement have been less than we expected. Net
sales in France, at $10.3 million in 2001, were essentially flat with net sales
of $10.4 million in 2000. We continue to refine our strategies in Europe,
believing that this region still provides a growth opportunity for us. In 2002,
we will be introducing a new program with a lower retail selling price point in
France to compliment our existing business in the French Hypermarkets.
Net sales of Thermal products declined in 2001 to $7.3 million from $12.7
million in 2000. Much of the decrease relates to sales of the quick heat units -
units that allow the delivery of a pizza that is hotter and fresher than pizzas
transported for delivery to consumers by conventional means. In 2000, net sales
benefited by the sizable increase in quick heat units sold to Papa John's
International, Inc. The sales volume in 2001 was less than that in 2000,
representing the major portion of the decline. We believe that there are others
with the experience and food industry contacts that may be better able to
provide direction and support for growth in the Thermal products. We continue to
actively seek an established business partner to join with us in a venture to
fully unlock the opportunities in the Thermal segment of our business.
Gross profit in 2001 increased to $60.1 million from $55.6 million in 2000.
Gross profit as a percent of net sales also increased significantly in 2001 to
41.7 percent, from 37.2 percent, in 2000. Benefiting the increase in gross
profit, both in dollars and as a percentage of net sales, were several factors:
- In 2000, as a result of an aggressive effort to lower our inventory levels,
we sold a sizable amount of obsolete and out-of-season inventory in a short
period of time for little or no profit. This aggressive inventory
liquidation successfully reduced inventories by about $8 million from 1999
to 2000, but at a significant cost in gross profit in 2000. In 2001, the
levels and thus net sales of obsolete and out-of-season inventory were much
lower than in 2000, and thus there was no similar penalty to gross profit in
2001.
- As noted above, in the discussion of net sales changes, there was a slightly
richer mix of products in 2001, which contributed to the overall increase in
gross profit for the year.
13
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
- Manufacturing efficiencies in 2001 were much improved over 2000. The
improvement in manufacturing efficiencies was in part due to activities from
2000, which did not recur in 2001. Early in 2000, the startup of a new
factory in the Dominican Republic required a longer than anticipated time to
bring operations up to normal efficiency standards. As a consequence, we
incurred manufacturing variances from inefficient operations. Moreover, with
the reduction of inventory by $8 million during 2000, we required that less
product be manufactured throughout 2000. Lower production requirements
generally added to the manufacturing variances. There were no similar
adverse impacts on our production activities in 2001 to penalize gross
profit, and manufacturing efficiencies in 2001 were greatly improved.
Selling, general and administrative expenses remained flat in 2001 compared with
2000, following a nearly $8.1 million reduction from 1999. We have been very
diligent in keeping our expense structure in line with our strategic objectives.
Within the selling, general and administrative expense category, there were
modest increases in selling expenses to assist retailers' efforts in a difficult
holiday selling season, with corresponding reductions in other administrative
expenses.
Net interest expense declined in 2001 to $1.1 million from $1.8 million in 2000.
During 2001, the daily average seasonal borrowings outstanding under the
Revolver decreased to $7.9 million from $11.5 million in 2000, a decrease of 31
percent in average bank borrowings. In addition, the weighted average interest
rate on short-term bank borrowings in 2001 decreased to 5.8 percent from 8.2
percent in 2000. The improved operating results in 2001, coupled with the
strategic initiatives we began implementing in 1999 and 2000, greatly
contributed to the decrease in average borrowings in 2001. Short-term market
interest rates generally declined significantly in 2001, by nearly 4.75 percent
throughout the year. Part of this decrease was offset by the 75 basis points
increase in spreads over market charged by our bank. The net result was a
reduction in the average rate of interest, by about 2.4 percent, that we
incurred in 2001 for borrowings to provide short-term operating capital.
In 2001, we continued on the strategic plan that we outlined in 1999 and 2000.
Beginning in 2000, we took several actions to align the forecasting of our
manufacturing requirements with our customers' demand visibility. As a result,
we have begun to migrate, over a three-year period, to a company that produces
about two-thirds of our products in-house and outsources the remainder to
independent third party suppliers. In previous years, we had produced in excess
of 95 percent internally and outsourced the balance. Early in 2001, we opened a
representative office in Hong Kong, which is responsible for procuring
outsourced products from the Far East. During 2001, about 20 percent of our
requirements were sourced from the Far East.
For fiscal 2001, we earned $1.7 million before income taxes and $932 thousand
after income taxes, or $0.10 per diluted share. In 2000, we incurred a loss of
$232 thousand before income taxes, this after including restructuring charges
and after including $5 million proceeds from settlement of the Domino's
litigation and the related $1 million licensing arrangement. As our operations
outside the United States were profitable in 2000, we incurred foreign taxes of
$407 thousand, plus we incurred taxes in a number of states where we operate.
Consequently, in 2000, the net loss after income taxes amounted to $806
thousand, or $0.09 per share.
2000 SALES AND OPERATIONS COMPARED WITH 1999
Effective in 2000, we changed the method of accounting for domestic inventories
of company-manufactured soft washable slippers from the LIFO method to the FIFO
method, so that in 2000, all inventories were accounted for using the FIFO
method. For all previous years' financial statements presented, this change was
applied retroactively by restating the financial information.
Results for 2000 were disappointing. Following the loss incurred in 1999, and
the restructuring actions taken at the end of 1999, we anticipated that 2000
would be a profitable year. In 1999, we recognized that we needed to reduce our
levels of production and to lessen our manufacturing capacity. We closed a plant
in Shenzhen, China although we opened a plant in the Dominican
14
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
Republic. We believed that the customs duty advantages enjoyed between the
Dominican Republic and Europe would outweigh our need to reduce capacity. After
opening the plant in the Dominican Republic, Mexico completed a new treaty with
Europe that we believe will, by 2003, provide the same duty situation as had
existed with the Dominican Republic. In December 2000, we closed the plant in
the Dominican Republic. In 1999, we opened a warehouse in San Antonio, Texas to
serve what we believed was a need to house increased finished goods inventory
for the Soluna(TM) line of products first introduced in 1999. By 2000, the
Soluna(TM) products had not achieved expected results and we concluded that this
warehouse was too large and too expensive for its prospective use. This was
especially so, in light of the significant reduction in inventory levels from
1999 to year-end 2000. Moreover, our strategy for the future includes acquiring
greater portions of our inventories from third party suppliers, thus reducing
the need to take large portions of finished goods into our warehouses for
extended periods of time. In mid-2000, we closed the San Antonio warehouse and
moved into a smaller warehouse that we already controlled in Laredo, Texas. The
opening and subsequent closing of a factory and a warehouse, all within a
two-year period, was very costly. During 2000, we provided for a restructuring
charge of $1.9 million to handle the costs of closing the Dominican Republic
plant and closing the warehouse in San Antonio, as well as various staff
reductions which all together involved the elimination of 225 positions.
During 2000, net sales totaled $149.4 million, about 6.7 percent greater than in
1999. Net sales for Barry Comfort North America increased 5.1 percent to $125.0
million in 2000, from $118.9 million in 1999. The increase in North America net
sales was largely the result of providing fresh new comfortable soft washable
footwear to our customers with complete and on-time delivery, plus the impact of
our aggressive program of inventory liquidation. We believe that sales of these
products at retail were generally excellent; whereas, retailers generally
experienced a mediocre holiday season. Net sales for Barry Comfort Europe were
essentially flat at $11.7 million in 2000 and 1999. In Europe, in 2000, we had
the benefit of our Fargeot operation for the entire 2000 year compared with only
half of the year in 1999. In addition, we changed the nature of our operations
in the United Kingdom. In 1999 and prior, we operated with our own full service
sales organization. In mid-year 2000, we shifted to a joint arrangement with GBR
Limited, a British footwear marketer. Net sales of Thermal products in 2000
increased by 33.3 percent to $12.7 million from $9.5 million in 1999. This
increase largely reflected Vesture's first major contract to provide thermal
retention quick heat units to a national pizza chain.
Gross profit in 2000 amounted to $55.6 million, as compared with gross profit in
1999 of $54.1 million. Gross profit as a percent of net sales declined in 2000
to 37.2 percent, compared with 38.6 percent during 1999. Gross profit was
adversely impacted by several items:
- We sold a sizable amount of obsolete and out-of-season inventory in a short
period of time for little or no profit, in an effort to lower our inventory
levels. By year-end 2000, substantially all of this inventory had been
liquidated.
- We experienced a shift in the mix of net sales toward mass merchandisers.
- In 2000, we included the operations of our Fargeot subsidiary, which
operates with a lower gross margin and a lower expense structure than our
other operations.
- The new factory in the Dominican Republic required a longer than anticipated
time to bring its operations up to normal efficiency standards, resulting in
manufacturing variances from inefficient operations.
Selling, general and administrative expenses decreased by 12.2 percent in 2000
to $58.3 million from $66.4 million in 1999, a significant reduction of nearly
$8.1 million. Much of the reduction reflected our plan to lower the costs of
operation throughout the organization--selling, marketing, warehousing and
administration. Lower costs were incurred in all of these areas in 2000.
Early in 2000, our lawsuit against Domino's Pizza and Phase Change Laboratories
for patent infringement was settled. As a result, we received a payment of $5
million and entered into a $1 million licensing arrangement with Domino's for
the future use of our patented thermal retention technology.
15
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
Net interest expense increased in 2000 to $1.8 million from $1.7 million in
1999. During 2000, the daily average seasonal borrowings under the Revolver
amounted to $11.5 million compared with $9.9 million during 1999, a 16.2 percent
increase. In addition, the weighted average interest rate in 2000 increased to
8.2 percent from 6.4 percent in 1999. The loss we incurred in 1999, plus the
scheduled $2.1 million annual principal repayment under the Note, contributed to
the increase in average borrowings in 2000. General market interest rates
increased in 2000 by about one and one-half percent, and the spread over market
rates charged by our banks also increased in 2000 by one-half of one percent.
While interest expense increased as a result of increased borrowings under the
Revolver, there was an nearly offsetting decrease in interest expense resulting
from the $2.1 million scheduled annual repayments of long-term debt.
With the reduction in inventory levels and the strategic change to outsourcing
increased levels of product, the need for the warehouse in San Antonio
diminished and we transferred that warehousing function to a smaller facility in
Laredo, Texas. These actions, coupled with administrative staff reductions,
eliminated 225 associates throughout the organization. The costs associated with
closing the Dominican facility, closing the San Antonio warehouse and staff
reductions total about $1.9 million, which was provided for in the results of
operations for 2000.
For the 2000 fiscal year, after the restructuring charges and after including
the $5 million proceeds from settlement of the Domino's litigation and the
related $1 million licensing arrangement, we incurred a loss amounting to $232
thousand before income taxes, compared with a loss before income taxes in 1999
of $19.4 million. For 2000, the net loss after income taxes was $806 thousand.
The net loss in 1999, after the benefit of current and deferred income taxes,
amounted to $14.6 million. For 2000, basic and diluted loss per share amounted
to $0.09 per share, compared with basic and diluted loss per share in 1999 of
$1.55 per share.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
The statements in this Annual Report to Shareholders, which are not
historical fact are forward-looking statements based upon our current plans
and strategies, and reflect our current assessment of the risks and
uncertainties related to our business, including such things as product demand
and market acceptance; the economic and business environment and the impact of
governmental regulations, both in the United States and abroad; the effects of
direct sourcing by customers of competitive products from alternative
suppliers; the effect of pricing pressures from retailers; the loss of
significant customers in connection with mergers, acquisitions, bankruptcies
or other circumstances; inherent risks of international development, including
foreign currency risks, the implementation of the Euro, economic, regulatory
and cultural difficulties or delays in our business development outside the
United States; our ability to improve processes and business practices to keep
pace with the economic, competitive and technological environment; the
availability and costs of financing; capacity, efficiency, and supply
constraints; weather; the effect of terrorist acts and governments' responses
to terrorist acts, on business activities and customer orders; acts of war;
and other risks detailed in our press releases, shareholder communications,
and Securities and Exchange Commission filings. Actual events affecting us and
the impact of such events on our operations may vary from those currently
anticipated.
16
CONSOLIDATED BALANCE SHEETS
R.G. Barry Corporation and Subsidiaries
DECEMBER 29, 2001 December 30, 2000
(in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,258 $ 6,930
Accounts receivable:
Trade (less allowance for doubtful receivables, returns and
promotions of $17,619 and $14,141, respectively) 15,004 19,650
Other 1,428 1,945
Inventory 35,642 32,796
Recoverable income taxes -- 2,820
Deferred income taxes 2,896 4,401
Prepaid expenses 2,448 1,726
-------- --------
Total current assets 69,676 70,268
-------- --------
Property, plant and equipment, at cost 40,066 40,187
Less accumulated depreciation and amortization 29,149 28,446
-------- --------
Net property, plant and equipment 10,917 11,741
-------- --------
Deferred income taxes 2,971 2,339
Goodwill (less accumulated amortization of
$304 and $193, respectively) 2,002 2,266
Other assets 3,046 2,935
-------- --------
$ 88,612 $ 89,549
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt $ 2,432 $ 2,432
Accounts payable 7,628 6,206
Accrued expenses 4,411 6,077
-------- --------
Total current liabilities 14,471 14,715
-------- --------
Accrued retirement cost, excluding current liability 6,665 5,975
Long-term debt, excluding current installments 5,162 7,637
Other 1,593 1,476
-------- --------
Total liabilities 27,891 29,803
-------- --------
Minority interest 336 294
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;
issued and outstanding 9,376 and 9,371 shares
(excluding treasury shares of 979 and 980) 9,376 9,371
Additional capital in excess of par value 12,093 12,069
Deferred compensation (331) (461)
Accumulated other comprehensive income (loss) (495) (337)
Retained earnings 39,742 38,810
-------- --------
Net shareholders' equity 60,385 59,452
Commitments and contingencies -- --
-------- --------
$ 88,612 $ 89,549
======== ========
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries 2001 2000 1999
(in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 144,121 $ 149,435 $ 140,092
Cost of sales 83,972 93,816 85,996
--------- --------- ---------
Gross profit 60,149 55,619 54,096
Selling, general and administrative expenses 58,298 58,321 66,416
Restructuring and asset impairment charges (adjustments) (118) 1,921 5,914
--------- --------- ---------
Operating income (loss) 1,969 (4,623) (18,234)
Proceeds from litigation, net of expenses incurred -- 4,476 --
Other income 800 1,717 502
Interest expense, net of interest income of $242,
$240 and $367, respectively (1,079) (1,802) (1,651)
--------- --------- ---------
Earnings (loss) before income taxes 1,690 (232) (19,383)
Income tax expense (benefit) 716 522 (4,778)
Minority interest, net of tax (42) (52) (20)
--------- --------- ---------
Net earnings (loss) $ 932 $ (806) $ (14,625)
========= ========= =========
Earnings (loss) per common share:
Basic $ 0.10 $ (0.09) $ (1.55)
========= ========= =========
Diluted $ 0.10 $ (0.09) $ (1.55)
========= ========= =========
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
R.G. Barry Corporation and Subsidiaries
Additional Accumulated
capital in Deferred other
Common excess of compen- Retained comprehensive Shareholders'
shares par value sation earnings income (loss) equity
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at January 2, 1999 $ 9,745 $ 15,357 $(204) $ 54,241 $ -- $ 79,139
Comprehensive income (loss):
Net loss -- -- -- (14,625) -- (14,625)
Other comprehensive income (loss):
Foreign currency translation
adjustment -- -- -- -- (92) (92)
Total comprehensive loss -- -- -- -- -- (14,717)
Deferred compensation 71 335 (406) -- -- --
Amortization of deferred compensation -- -- 71 -- -- 71
Stock options exercised 11 29 -- -- -- 40
Purchase of shares (478) (3,671) -- -- -- (4,149)
------- -------- ----- -------- ----- --------
Balance at January 1, 2000 9,349 12,050 (539) 39,616 (92) 60,384
Comprehensive income (loss):
Net loss -- -- -- (806) -- (806)
Other comprehensive income (loss):
Foreign currency translation
adjustment -- -- -- -- (180) (180)
Pension liability adjustment -- -- -- -- (65) (65)
Total comprehensive loss -- -- -- -- -- (1,051)
Deferred compensation 22 19 (41) -- -- --
Amortization of deferred compensation -- -- 119 -- -- 119
------- -------- ----- -------- ----- --------
Balance at December 30, 2000 9,371 12,069 (461) 38,810 (337) 59,452
Comprehensive income:
Net earnings -- -- -- 932 -- 932
Other comprehensive income (loss):
Foreign currency translation
adjustment -- -- -- -- (161) (161)
Pension liability adjustment -- -- -- -- 3 3
Total comprehensive income -- -- -- -- -- 774
Amortization of deferred compensation -- -- 130 -- -- 130
Stock options exercised and
warrants issued 5 24 -- -- -- 29
------- -------- ----- -------- ----- --------
Balance at December 29, 2001 $ 9,376 $ 12,093 $(331) $ 39,742 $(495) $ 60,385
======= ======== ===== ======== ===== ========
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
R.G. Barry Corporation and Subsidiaries
2001 2000 1999
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ 932 $ (806) $(14,625)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization of property,
plant, and equipment 1,847 2,109 2,243
Amortization of goodwill 136 136 183
Goodwill impairment -- -- 4,000
Deferred income tax expense (benefit) 42 2,711 (4,535)
Loss on disposal of property, plant and equipment 135 998 186
Amortization of deferred compensation 130 119 71
Minority interest, net of tax 42 52 20
Changes in:
Accounts receivable 5,107 (11,985) 2,907
Inventory (2,930) 8,095 5,443
Prepaid expenses, recoverable income taxes
and other assets 2,860 (1,283) (1,039)
Accounts payable 1,500 (2,131) (777)
Accrued expenses (1,668) (458) (2,742)
Accrued retirement cost, net 690 921 549
Other liabilities 402 (58) 292
-------- -------- --------
Net cash provided (used) by operating activities 9,225 (1,580) (7,824)
-------- -------- --------
Cash flows from investing activities:
Acquisition, net of cash acquired -- -- (2,448)
Additions to property, plant, and equipment (1,194) (653) (3,381)
Proceeds from disposal of property, plant, and equipment 13 8 10
-------- -------- --------
Net cash used in investing activities (1,181) (645) (5,819)
-------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt (2,671) (934) (2,278)
Short-term borrowings -- -- 489
Proceeds from shares issued 29 -- 40
Purchase of common shares for treasury -- -- (4,149)
-------- -------- --------
Net cash used in financing activities (2,642) (934) (5,898)
-------- -------- --------
Effect of exchange rates on cash (74) 83 (49)
-------- -------- --------
Net increase (decrease) in cash 5,328 (3,076) (19,590)
Cash and cash equivalents at beginning of year 6,930 10,006 29,596
-------- -------- --------
Cash and cash equivalents at end of year $ 12,258 $ 6,930 $ 10,006
======== ======== ========
Supplemental cash flow disclosures:
Interest paid $ 1,425 $ 2,124 $ 2,113
======== ======== ========
Income taxes paid (recovered) $ (3,113) $ 413 $ 4,127
======== ======== ========
See accompanying notes to consolidated financial statements.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) OPERATIONS
R. G. Barry Corporation (the Company) is a United States based
multinational corporation. The Company's principal line of business is
the production and distribution of comfort products for at- and
around-the-home. The predominant market for the Company's products is
North America. Products are sold primarily to department and discount
stores.
The Company maintains Europe branch sales and distribution center
activities in Europe as well as an 80% ownership interest in a French
company, Escapade SARL, in France. The Escapade subsidiary was purchased
in 1999 and the underlying purchase agreement includes put and call
options for the purchase of the remaining 20% of the Escapade shares.
The minority interest owner may put his shares to the Company for a
period of five years after July 22, 2004 at a price as determined by the
purchase agreement. Similarly, the Company may exercise call options on
the minority interest shares through July 22, 2009 at the same basis.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Minority interest of
20% in the French subsidiary, Escapade SARL, is presented on an
after-tax basis in the Company's financial statements.
The Company maintains its accounts on a 52-53 week fiscal year ending on
the Saturday nearest December 31.
(c) CASH EQUIVALENTS
Investments with maturities of three months or less at the date of
issuance are considered cash equivalents. These investments consisted of
short-term money market funds with balances of $8,423 and $5,156 for
2001 and 2000, respectively.
(d) INVENTORY
Inventory is valued at the lower of cost or market as determined on the
first-in, first-out (FIFO) basis, see note 2.
(e) DEPRECIATION AND AMORTIZATION
Depreciation and amortization have been provided substantially using the
straight-line method over the estimated useful lives of the assets.
(f) GOODWILL
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on the straight-line method over 20
years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment,
if any, is measured based on projected discounted future operating cash
flows using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of goodwill will be impacted
if estimated future operating cash flows are not achieved.
(g) REVENUE RECOGNITION
The Company recognizes revenue when the goods are shipped to customers
with adequate allowance made for anticipated sales returns. The Company
bases its allowance for sales returns on current and historical
experience.
(h) ADVERTISING AND PROMOTION
The Company has certain programs in place to advertise and promote the
sale of its products. The Company expenses the costs of advertising and
promotion as incurred. For the years ended December 29, 2001, December
30, 2000 and January 1, 2000, advertising and promotion expenses were
$13,894, $11,805 and $13,965, respectively, and are included in selling,
general and administrative expenses in the consolidated statements of
operations.
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(j) PER-SHARE INFORMATION
The computation of basic earnings (loss) per common share for 2001, 2000
and 1999 is based on the weighted average number of outstanding common
shares during the period. Diluted earnings per common share for 2001
includes those weighted average common shares as well as, when their
effect is dilutive, potential common shares consisting of certain shares
subject to stock options and the stock purchase plan. Diluted loss per
common share for 2000 and 1999 does not include the impact of potential
common shares due to their antidilutive effect.
(k) COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net income, foreign currency
translation adjustments and pension liability adjustments and is
presented in the consolidated statements of shareholders' equity.
(l) TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Assets and liabilities of foreign operations have been translated into
United States dollars at the applicable rates of exchange in effect at
the end of the period. Revenues, expenses and cash flows have been
translated at the applicable weighted average rates of exchange in
effect during the period.
(m) STOCK-BASED COMPENSATION
The Company follows the intrinsic value method set forth in APB Opinion
No. 25, Accounting for Stock Issued to Employees, and provides pro forma
net earnings (loss) and pro forma earnings (loss) per share disclosures
for employee stock option grants as if the fair-value-based method
defined in SFAS No. 123 had been applied, see note 9. Warrants issued to
non-employees for services rendered are accounted for at fair value at
the time of grant.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(o) FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses as reported in the
financial statements approximate their fair value because of the
short-term maturity of those instruments. The fair value of the
Company's long-term debt is disclosed in note 4.
(p) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less any
disposition costs.
(q) IMPACT OF NEW ACCOUNTING STANDARDS
In April 2001, the Emerging Issues Task Force (EITF) reached a consensus
on issues 2 and 3 within EITF 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products. EITF 00-25 addresses whether consideration from a vendor to a
reseller of the vendor's products is an adjustment of the selling prices
of the vendor's products and, therefore, a reduction of sales or a cost
incurred by the vendor for assets or services received from the reseller
and, therefore, a cost or an expense.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
EITF 00-25 is effective in 2002 and upon adoption prior periods
presented for comparative purposes are reclassified. The Company expects
the adoption will result in a reduction of Company's net sales and
corresponding decrease in selling, general and administrative expenses
of approximately $9,550, $8,979 and $9,561 for the fiscal years 2001,
2000 and 1999 respectively.
(2) INVENTORY
Inventory by category for the Company consists of the following:
DECEMBER 29, December 30,
2001 2000
-----------------------------
Raw materials $ 8,203 $ 7,739
Work in process 1,820 1,708
Finished goods 25,619 23,349
------- -------
Total inventory $35,642 $32,796
======= =======
Effective in 2000, the Company changed its inventory costing method for its
domestic inventories of manufactured soft washable slippers from the LIFO
method to the FIFO method.
The effect of the change in accounting decreased the reported net loss for
2000, by $418 after tax, or $0.04 per diluted share. The change has been
applied to prior years by retroactively restating the financial statements.
The effect of this restatement was to increase retained earnings as of
January 3, 1998 by $1,518. The restatement decreased the net loss reported
for 1999, by $844 or $0.09 per diluted share.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 29, December 30, Estimated
2001 2000 life in years
----------------------------------------------
Land and improvements $ 506 $ 506 8-15
Buildings and improvements 5,912 5,915 40-50
Machinery and equipment 25,673 26,190 3-10
Leasehold improvements 7,701 7,522 5-20
Construction in progress 274 54
------- -------
$40,066 $40,187
======= =======
(4) LONG-TERM DEBT AND RESTRICTIONS
Long-term debt consists of the following:
DECEMBER 29, December 30,
2001 2000
--------------------------
9.7% note, due July 2004 $ 6,428 $ 8,571
Other notes 1,166 1,498
------- -------
7,594 10,069
Less current installments 2,432 2,432
------- -------
Long-term debt, excluding current installments $ 5,162 $ 7,637
======= =======
The 9.7% note, issued in July 1994, requires semiannual interest payments
and annual principal repayments of $2,143, which commenced in 1998 and end
in 2004.
The other notes, issued in January 2000, require quarterly interest and
principal payments which commenced in 2000 and end in 2007. The interest
rate on these notes is set to Euribor plus 1% on a quarterly basis; at
year-end the interest rate on these notes was 5.5%. The carrying value of
other notes approximates fair value based on current rates with comparable
maturities.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
The Company has estimated the fair value of its long-term debt based upon
the present value of expected cash flows, considering expected maturities
and using current interest rates available to the Company for borrowings
with similar terms. The fair value of the 9.7% note was $6,750 and $9,050 at
December 29, 2001 and December 30, 2000, respectively.
In March 2001, the Company terminated its previous unsecured revolving
credit agreement with three of its banks, and entered a new unsecured
revolving credit agreement with its principal bank (the "Revolver"). The
Revolver increased the borrowing spreads over market rates and increased the
periodic reporting requirements of certain financial information. The
Revolver provides the Company with a seasonally adjusted availability of
credit that peaks at $30 million. The Revolver extends through February
2002, and the Company is in discussions with its bank to renew and extend
the agreement beyond its current expiration date.
Under the most restrictive of the covenants of the various loan agreements,
the Company is: (1) limited from additional borrowings, payment of dividends
and the purchase of treasury shares, (2) required to maintain minimum
seasonally adjusted tangible net worth, (3) limited in annual acquisitions
of fixed assets, (4) and required to meet seasonally adjusted minimum
earnings before interest, depreciation and amortization. As of December 29,
2001, the Company is prohibited from paying cash dividends or purchasing
treasury shares under the Revolver covenants. There were no covenant
violations during 2001 or 2000, and the Company is in compliance with all
the covenants of the Revolver and all other debt agreements.
The Company maintains compensating balances, which are not restricted, to
defray the costs of other banking services provided.
(5) LEASE COMMITMENTS
The Company occupies certain manufacturing, warehousing, operating, and
sales facilities and uses certain equipment under cancelable and
noncancelable operating lease arrangements. A summary of the noncancelable
operating lease commitments at December 29, 2001 are as follows.
2002 $ 4,371
2003 4,015
2004 3,309
2005 2,587
2006 2,000
2007-2011 5,152
-------
$21,434
=======
Substantially all of these operating lease agreements are renewable for
periods of 3 to 15 years and require the Company to pay insurance, taxes and
maintenance expenses. Rent expense under cancelable and noncancelable
operating lease arrangements in 2001, 2000 and 1999, amounted to $5,616,
$6,056 and $6,275, respectively.
(6) INCOME TAXES
Income tax expense (benefit) consists of:
Current expense (benefit): 2001 2000 1999
---------------------------------
Federal $ 105 $(2,847) $ (776)
Foreign 397 433 254
State 172 225 774
------- ------- -------
674 (2,189) 252
Deferred expense (benefit) 42 2,711 (5,030)
------- ------- -------
$ 716 $ 522 $(4,778)
======= ======= =======
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
The differences between income taxes computed by applying the statutory
federal income tax rate (34% in 2001 and 2000 and 35% in 1999) and income
tax expense (benefit) in the consolidated financial statements are:
2001 2000 1999
-------------------------------------
Computed "expected" tax expense (benefit) $ 575 $ (79) $(6,784)
State income taxes, net of federal income tax benefit 93 149 502
Foreign income taxes 138 407 69
Impairment write down of goodwill -- -- 1,400
Other, net (90) 45 35
----- ----- -------
$ 716 $ 522 $(4,778)
===== ===== =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
DECEMBER 29, 2001 December 30, 2000
------------------------------------------
Deferred tax assets:
Accounts receivable $ 944 $1,898
Inventories 1,069 1,326
Package design costs 262 287
Certain accounting accruals, including such items as
self-insurance costs, vacation costs, and others 684 971
Pension costs 3,042 2,684
State net operating loss carryforward 234 213
------ ------
Total deferred tax assets 6,235 7,379
Deferred tax liabilities:
Royalties 238 294
Property, plant, and equipment 130 345
------ ------
Total deferred tax liabilities 368 639
------ ------
Net deferred tax assets $5,867 $6,740
====== ======
The Company believes the existing net deductible temporary differences will
reverse during future periods in which the Company generates net taxable
earnings. The Company considers 1999 and 2000 to be unusual years since
throughout the Company's history it has regularly been profitable. The
Company is in the process of a three-year plan to change from a company that
solely manufactures its product internally to include a substantial portion
of outsourced product and expects to continue profitable operations in
upcoming years. Further, the Company believes it has available certain tax
planning strategies that could be implemented, if necessary, to supplement
future taxable earnings from operations. The Company has considered the
above factors in concluding that it is more likely than not that the Company
will realize the future benefits of existing deferred tax assets. There can
be no assurance, however, that the Company will generate any specific level
of continuing earnings.
Deferred taxes are not provided on unremitted earnings of subsidiaries
outside the United States because it is expected that the earnings are
permanently reinvested. Such earnings may become taxable upon the sale or
liquidation of these subsidiaries or upon the remittance of dividends.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 29, 2001 December 30, 2000
--------------------------------------------------
Salaries and wages $1,299 $1,383
Income taxes 710 524
Non-income taxes 989 1,568
Restructuring costs 346 1,026
All other areas 1,067 1,576
------ ------
$4,411 $6,077
====== ======
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
(8) EMPLOYEE RETIREMENT PLANS
The Company and its domestic subsidiaries have a noncontributory retirement
plan for the benefit of salaried and nonsalaried employees, the Associates'
Retirement Plan (ARP). The employees covered under the ARP are eligible to
participate upon the completion of one year of service. Salaried participant
benefits are based upon a formula applied to a participant's final average
salary and years of service, which is reduced by a certain percentage of the
participant's social security benefits. Nonsalaried participant benefits are
based on a fixed amount for each year of service. The ARP provides reduced
benefits for early retirement. The Company intends to fund the minimum
amounts required under the Employee Retirement Income Security Act of 1974
(ERISA).
The funded status of the ARP and the accrued retirement costs recognized at
December 29, 2001 and December 30, 2000 were:
2001 2000
------------------------------
Change in benefit obligation:
Benefit obligation at the beginning of the year $ 25,706 $ 23,679
Service cost 762 798
Interest cost 1,895 1,739
Actuarial (gain) loss (1,004) 370
Benefits paid (1,322) (880)
-------- --------
Benefit obligation at the end of the year 26,037 25,706
======== ========
Change in plan assets:
Fair value of plan assets at the beginning of the year 23,540 23,618
Actual return on plan assets 1,733 1,010
Expenses (326) (207)
Benefits paid (1,322) (880)
-------- --------
Fair value of plan assets at the end of the year 23,625 23,541
======== ========
Funded status (2,412) (2,165)
Unrecognized actuarial (gain) loss 63 300
Unrecognized prior service cost 250 186
-------- --------
Net amount recognized in the consolidated balance sheets $ (2,099) $ (1,679)
======== ========
The Company also has a Supplemental Retirement Plan (SRP) for certain
officers and other key employees of the Company as designated by the Board
of Directors. The SRP is unfunded, noncontributory, and provides for the
payment of monthly retirement benefits. Benefits are based on a formula
applied to the recipients' final average monthly compensation, reduced by a
certain percentage of their social security benefits.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
The funded status of the SRP and the accrued retirement cost recognized at
December 29, 2001 and December 30, 2000 are:
2001 2000
---------------------------
Change in benefit obligation:
Benefit obligation at the beginning of the year $ 4,522 $ 4,214
Service cost 54 86
Interest cost 335 312
Amendments -- 175
Actuarial gain (187) (166)
Benefits paid (142) (99)
------- -------
Benefit obligation at the end of the year 4,582 4,522
======= =======
Change in plan assets:
Fair value of plan assets at the beginning of the year -- --
Employer contributions 142 99
Benefits paid (142) (99)
------- -------
Fair value of plan assets at the end of the year -- --
======= =======
Funded status (4,582) (4,522)
Contribution during the fourth quarter 39 25
Unrecognized actuarial (gain) loss (449) (254)
Unrecognized prior service cost 526 635
Unrecognized net transition obligation -- 20
------- -------
Net amount recognized in the consolidated balance sheets (4,466) (4,096)
======= =======
Amounts recognized in the consolidated balance sheets consist of:
Accrued retirement cost, including current liability of $156
and $99, respectively (4,722) (4,395)
Intangible asset 194 234
Accumulated other comprehensive income 62 65
------- -------
Net amount recognized $(4,466) $(4,096)
======= =======
The components of net periodic benefit cost for the retirement plans were:
2001 2000 1999
-----------------------------------------------------
Service cost $ 816 $ 884 $ 923
Interest cost 2,230 2,051 1,771
Expected return on plan assets (2,173) (2,029) (1,853)
Net amortization 73 113 165
------- ------- -------
$ 946 $ 1,019 $ 1,006
======= ======= =======
Weighted average assumptions as of December 29, 2001 and December 30, 2000
were:
DECEMBER 29, 2001 December 30, 2000
-------------------------------------
Discount rate 7.25% 7.50%
Rate of compensation increase 5.00% 5.00%
Expected return on plan assets 9.25% 9.25%
The Company has a 401(k) plan to which salaried and nonsalaried employees
may contribute a percentage, as defined, of their compensation per pay
period and the Company contributes 50% of the first 3% of each participant's
compensation contributed to this plan. The Company's contribution in cash to
the 401(k) plan for the years ended December 29, 2001, December 30, 2000 and
January 1, 2000 was $241, $254 and $261, respectively.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
(9) SHAREHOLDERS' EQUITY
The Company has various stock option plans, which have granted incentive
stock options (ISO's) and nonqualified stock options exercisable for periods
of up to 10 years from date of grant at prices not less than fair market
value at date of grant. Information with respect to options under these
plans follows:
ISO NON-QUALIFIED
NUMBER NUMBER WEIGHTED-AVERAGE
OF SHARES OF SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at January 2, 1999 845,000 336,100 $10.85
Granted 331,600 87,000 7.31
Exercised (9,800) -- 3.54
Expired/Cancelled (210,400) (62,700) 10.82
-------- ------- ----
Outstanding at January 1, 2000 956,400 360,400 9.85
Granted 196,900 63,100 3.23
Exercised -- -- --
Expired/Cancelled (633,700) (89,800) 9.68
-------- ------- ----
Outstanding at December 30, 2000 519,600 333,700 7.90
Granted 428,600 258,800 4.26
Exercised (3,200) -- 2.21
Expired/Cancelled (125,300) (6,300) 8.88
-------- ------- ----
Outstanding at December 29, 2001 819,700 586,200 $6.04
======= ======= =====
Options exercisable at December 29, 2001 209,200 299,900
======= =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/29/01 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE AT 12/29/01 EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------------------
$ 5.00 and under 818,300 8.8 $ 3.67 122,400 $ 3.26
5.01 - 10.00 389,300 6.3 $ 7.28 211,300 $ 8.26
10.01 - 15.00 191,600 5.5 $ 13.27 175,400 $ 13.15
15.01 and over 6,700 6.4 $ 16.43 -- --
--------- ---------
1,405,900 509,100
========= =========
At December 29, 2001, the remaining number of ISO and nonqualified shares
available for grant was 259,000.
At December 29, 2001, December 30, 2000 and January 1, 2000, the options
outstanding under these plans were held by 89, 73 and 81, employees,
respectively, and had expiration dates ranging from 2002 to 2011.
Stock appreciation rights may be issued subject to certain limitations.
There were no rights outstanding at December 29, 2001, December 30, 2000 and
January 1, 2000.
Had the Company elected to determine compensation cost based on the fair
value at the grant date, as alternatively permitted under SFAS No. 123, the
Company's net earnings would have been reduced to the pro forma amounts
indicated below:
2001 2000 1999
-----------------------------------------------------
Net earnings (loss):
As reported $ 932 $ (806) $ (14,625)
Pro forma 279 (1,400) (15,807)
Earnings (loss) per share (diluted):
As reported .10 (.09) (1.55)
Pro forma .03 (.15) (1.67)
====== ========= =========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
Using the Black Scholes option-pricing model, the per-share,
weighted-average fair value of stock options granted during 2001, 2000 and
1999, was $2.14, $1.10 and $3.33, respectively, on the date of grant. The
assumptions used in estimating the fair value of the options as of December
29, 2001 and December 30, 2000 were:
DECEMBER 29, 2001 December 30, 2000
----------------------------------------
Expected dividend yield 0% 0%
Expected volatility 50% 45%
Risk-free interest rate 5.00% 6.25%
Expected life -- ISO grants 6 years 6 years
Expected life -- nonqualified grants 8 years 8 years
The Company has an employee stock purchase plan in which approximately 800
employees are eligible to participate. Under the terms of the plan,
employees receive options to acquire common shares at the lower of 85% of
the fair market value on their enrollment date or at the end of each
two-year plan term.
SHARES
SUBSCRIBED
----------
Balance at January 1, 2000 --
Subscriptions 249,300
Purchases --
Expired (10,600)
-------
Balance at December 30, 2000 238,700
Subscriptions 5,800
Purchases --
Expired (48,400)
-------
Balance at December 29, 2001 196,100
=======
During December 2000, the Company offered all stock option holders,
excluding its Chief Executive Officer, with an option price greater than $5
per share, the opportunity to participate in an option exchange program. The
program permitted the option holder to tender current options for
cancellation prior to the end of the year. The Company agreed to reissue to
the option holder one-half of the number of option shares tendered,
contingent upon continued employment, after the passage of six months and
one day. The options, granted in June 2001, were granted at $4.60 per share,
the then current fair market value. Approximately 557,000 shares were
tendered under the program, by 68 associates.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
(10) EARNINGS PER SHARE
Earnings per share for the years ended December 29, 2001, December 30, 2000
and January 1, 2000 were as follows:
DECEMBER 29, 2001
-------------------------------------------------------
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------------------------
BASIC EPS --
Net earnings allocable to common
shareholders $932 9,379 $.10
EFFECT OF DILUTIVE SECURITIES --
Stock options -- 198 --
BASIC AND DILUTED EPS --
Net earnings allocable to common
shareholders including assumed conversions 932 9,577 .10
Options to purchase 1,215,000 common shares at prices up to $16.43 were
outstanding in 2001 but were not included in the computation of diluted
earnings per share because based on the Company's share price at December
29, 2001, the effect would be anti-dilutive.
December 30, 2000
-------------------------------------------------------
Loss Shares Per-share
(numerator) (denominator) amount
-------------------------------------------------------
BASIC AND DILUTED EPS --
Net loss allocable to common
shareholders $(806) 9,399 $(.09)
Options to purchase 1,092,000 common shares at prices up to $16.43 were
outstanding in 2000 but were not included in the computation of diluted
earnings per share because based on the Company share price at December 30,
2000, the effect would be anti-dilutive.
January 1, 2000
-------------------------------------------------------
Loss Shares Per-share
(numerator) (denominator) amount
-------------------------------------------------------
BASIC AND DILUTED EPS --
Net loss allocable to common
shareholders $(14,625) 9,455 $(1.55)
Options to purchase 1,316,800 common shares at prices up to $16.43 were
outstanding in 1999 but were not included in the computation of diluted
earnings per share because based on the Company share price at January 1,
2000, the effect would be anti-dilutive.
(11) PREFERRED SHARE PURCHASE RIGHTS
In February 1998, the Company's Board of Directors declared a distribution
of one Preferred Share Purchase Right (Right) for each outstanding common
share of the Company to shareholders of record on March 16, 1998. The new
Rights replaced similar Rights issued in 1988 which expired on March 16,
1998. Under certain conditions, each new Right may be exercised to purchase
one one-hundredth of a share of Series Junior I Participating Class A
Preferred Shares, par value $1 per share, at an initial exercise price of
$40. The Rights initially will be attached to the Common Shares. The Rights
will separate from the Common Shares and a Distribution Date will occur
upon the earlier of 10 business days after a public announcement that a
person or group has acquired, or obtained the right to acquire 20% or more
of the Company's outstanding common shares (Share Acquisition Date) or 10
business days (or such later date as the Board shall determine) after the
commencement of a tender or exchange offer that would result in a person or
group beneficially owning 20% or more of the Company's outstanding common
shares. The Rights are not exercisable until the Distribution Date.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
In the event that any Person becomes the beneficial owner of more than 20%
of the then outstanding common shares, each holder of a Right will be
entitled to purchase, upon exercise of the Right, common shares having a
market value two times the exercise price of the Right. In the event that,
at any time following the Share Acquisition Date, the Company is acquired
in a merger or other business combination transaction in which the Company
is not the surviving corporation or 50% or more of the Company's assets or
earning power is sold or transferred, the holder of a Right will be
entitled to buy the number of shares of common stock of the acquiring
company which at the time of such transaction will have a market value of
two times the exercise price of the Right.
The Rights, which do not have any voting rights, expire on March 16, 2008,
and may be redeemed by the Company at a price of $0.01 per Right at any
time until 10 business days following the Share Acquisition Date.
Each Class A Preferred Share is entitled to one-tenth of one vote, while
Class B Preferred Shares are entitled to ten votes. The preferred shares
are entitled to a preference in liquidation. None of these shares have been
issued.
(12) RELATED-PARTY OBLIGATION
The Company and a key executive have entered into an agreement pursuant to
which the Company is obligated for up to two years after the death of the
key 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 shares, the Company has purchased a
$5 million life insurance policy on the key executive with a cash surrender
value of $1.7 million and $ 1.6 million at December 29, 2001 and December
30, 2000, respectively, which is included in other assets in the
accompanying consolidated balance sheets. In addition, for a period of 24
months following the key executive's death, the Company will have a right
of first refusal to purchase any common shares of the Company owned by the
key executive at the time of his death if his estate elects to sell such
shares. The Company would have the right to purchase such shares on the
same terms and conditions as the estate proposes to sell such shares.
(13) SEGMENT REPORTING
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the manner in which public
enterprises report information about operating segments, their products and
the geographic areas where they operate.
The Company manufactures and markets comfort footwear for
at-and-around-the-home and supplies thermal retention technology products.
The Company considers its "Barry Comfort" at-and-around-the-home comfort
footwear group in North America and Europe, and the thermal retention
technology products group, "Thermal", as its three operating segments.
The accounting policies of the operating segments are substantially similar
to those described in note 1, except that the disaggregated financial
information has been prepared using certain management reports, which by
their very nature require estimates. In addition, certain items from these
management reports have not been allocated among operating segments. Some
of the more significant items include: a) costs of certain administrative
functions, b) current and deferred income tax expense (benefit) and
deferred tax assets (liabilities), and c) in some years, certain operating
provisions.
Revenues, and net property, plant and equipment, have been allocated to
geographic areas based upon the location of the Company's operating unit.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
REVENUES
2001 2000 1999
-------------------------------------------------
United States/North America $133,706 $137,743 $128,462
France 10,345 10,406 7,677
United Kingdom 70 1,286 3,953
-------- -------- --------
$144,121 $149,435 $140,092
======== ======== ========
NET PROPERTY, PLANT AND EQUIPMENT
2001 2000
---------------------------
United States $6,797 $7,469
Mexico 3,383 3,509
Other 737 763
------- -------
$10,917 $11,741
======= =======
REVENUES BY PRODUCT LINE
2001 2000 1999
-------------------------------------------------
At- and around-the-home comfort footwear $136,804 $136,728 $130,557
Thermal retention technology products 7,317 12,707 9,535
-------- -------- --------
$144,121 $149,435 $140,092
======== ======== ========
In 2000, and 1999, one Barry Comfort customer accounted for approximately
21% and 23% of the Company's net sales, respectively. In 2001, one Barry
Comfort Customer accounted for 22% and a second Barry Comfort Customer
accounted for 10% respectively of the Company's net sales.
OTHER SEGMENT INFORMATION
BARRY COMFORT INTER-
NORTH SEGMENT
DECEMBER 29, 2001 AMERICA EUROPE THERMAL ELIMINATIONS TOTAL
---------------------------------------------------------------------------------------------------------------------
Net sales $126,389 $10,415 $7,317 $ -- $144,121
Depreciation and amortization 1,453 221 173 -- 1,847
Interest income 265 -- -- (23) 242
Interest expense 1,253 68 (23) 23 1,321
Pre tax earnings (loss) 4,616 (1,239) (1,687) -- 1,690
Additions to property, plant, and equipment 990 196 8 -- 1,194
Total assets devoted $81,811 $7,142 $5,027 $(5,368) $88,612
======= ====== ====== ======= =======
BARRY COMFORT INTER-
NORTH SEGMENT
DECMEBER 30, 2000 AMERICA EUROPE THERMAL ELIMINATIONS TOTAL
---------------------------------------------------------------------------------------------------------------------
Net sales $125,036 $11,692 $12,707 $ -- $149,435
Depreciation and amortization 1,650 249 210 -- 2,109
Interest income 331 -- 44 (135) 240
Interest expense 1,972 70 135 (135) 2,042
Litigation proceeds, net of expense incurred -- -- 4,476 -- 4,476
Pre tax earnings (loss) (4,440) (1,498) 5,706 -- (232)
Additions to property, plant, and equipment 400 201 52 -- 653
Total assets devoted $76,041 $8,930 $4,711 $(133) $89,549
======= ====== ====== ===== =======
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
Barry Comfort Inter-
North Segment
January 1, 2000 America Europe Thermal Eliminations Total
---------------------------------------------------------------------------------------------------------------------
Net sales $118,927 $11,630 $9,535 $ -- $140,092
Depreciation and amortization 1,681 176 386 -- 2,243
Interest income 684 27 -- (344) 367
Interest expense 2,010 48 304 (344) 2,018
Pre tax earnings (loss) (5,278) (2,268) (11,837) -- (19,383)
Additions to property, plant, and equipment 3,063 220 98 -- 3,381
Total assets devoted $85,072 $12,341 $3,497 $(7,746) $93,164
======= ======= ====== ======= =======
</Table>
(14) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In December 1999, in connection with management's plan to reduce costs and
improve operating efficiencies, the Company recorded a restructuring charge
of $1,794 as a component of operating income. The restructuring charge
primarily related to the elimination of 240 positions. The positions
eliminated were primarily manufacturing and administrative positions. As a
result, severance and employee benefit costs of $1,487 were accrued at
January 1, 2000. In December 1999, the Company determined that based on the
recoverability of the goodwill balance related to its acquisition of
Vesture Corporation in 1994 that the remaining unamortized value could not
be recovered through future operating cash flows. The Company's analysis
resulted in a charge of $4.0 million to write down the carrying value of
the Vesture acquisition goodwill to zero. After an income tax benefit of
$670, these fiscal year 1999 actions reduced earnings by $5,244 or $.55 per
share.
During 2000, the Company announced additional actions to reduce costs and
improve operating efficiencies. As a result of these actions, the Company
recognized $1,921 in restructuring and asset impairment charges in fiscal
year 2000. Actions in 2000 included: (i) closure in July 2000 of a
distribution warehouse in San Antonio and transfer of its functions to a
smaller facility in Laredo, Texas, (ii) closure in December 2000 of a
manufacturing facility in the Dominican Republic; and (iii) various staff
reduction actions taken in December 2000 in the administrative functions
within the Company. The actions taken in fiscal year 2000 involved
elimination of 225 positions. After an income tax benefit of $711, the
fiscal year 2000 actions reduced earnings by $1,210 or $0.13 per share.
Accruals Charges Non-cash Paid in Accruals
January 1, 2000 in 2000 Adjustments write-offs 2000 December 30, 2000
-----------------------------------------------------------------------------------------------------------------------
Employee separations $1,487 $ 551 $(279) $ -- $1,232 $ 527
Other exit costs 94 -- (62) -- 32 --
Noncancelable leases 213 1,013 (5) -- 722 499
------ ------ ----- ---- ------ ------
Total restructuring 1,794 1,564 (346) -- 1,986 1,026
------ ------ ----- ---- ------ ------
Asset impairments -- 703 -- 703 -- --
------ ------ ----- ---- ------ ------
Total $1,794 $2,267 $(346) $703 $1,986 $1,026
====== ====== ===== ==== ====== ======
In 2001, the Company experienced favorable adjustments of approximately
$420 related to settlement of lease cancellations of facilities and cutting
equipment accrued during fiscal year 2000. In October 2001, the Company
announced a decision to close the molding operations in Texas and relocate
those activities to Nuevo Laredo, Mexico. The plan primarily includes a
reduction of 70 employees and related severance costs of $172.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
continued
Accruals Charges Non-cash Paid in Accruals
December 30, 2000 in 2001 Adjustments write-offs 2001 December 29, 2001
---------------------------------------------------------------------------------------------------------------------
Employee separations $ 527 $172 $ 2 $-- $355 $346
Other exit costs -- -- -- -- -- --
Noncancelable leases 499 40 (422) -- 117 --
------ ---- ----- --- ---- ----
Total restructuring 1,026 212 (420) -- 472 346
------ ---- ----- --- ---- ----
Asset impairments -- 90 -- 90 -- --
------ ---- ----- --- ---- ----
Total $1,026 $302 $(420) $90 $472 $346
====== ==== ===== === ==== ====
After an income tax expense of $42, these fiscal year 2001 actions
increased earnings by $76 or $.01 per share.
(15) LITIGATION SETTLEMENT
During the first quarter of 2000, the Company settled its pending patent
infringement litigation. As a part of the settlement the Company received a
$5 million cash payment. The pretax gain, net of expenses incurred,
recognized by the Company was approximately $4.5 million. In addition, the
Company entered into a licensing arrangement for approximately $1 million
for the future use of the Company's thermal technology.
(16) CONTINGENT LIABILITIES
The Company has been named as defendant in various lawsuits arising from
the ordinary course of business. In the opinion of management, the
resolution of such matters is not expected to have a material adverse
effect on the Company's financial position or results of operations.
(17) SUBSEQUENT EVENTS
R.G. Barry Corporation announced January 8, 2002 that it had been granted
accelerated elimination of United States and Mexican tariffs on slippers
under the North American Free Trade Agreement ("NAFTA"). The current 15%
tariff on slippers made in Mexico and sold in the United States was
eliminated effective January 1, 2002. Without such elimination, the tariff
on Mexican-manufactured slippers would have been phased out under NAFTA
over six years at the rate of 2.5% per year with tariffs eliminated in
their entirety on January 1, 2008.
Due to the importance of obtaining early elimination of these tariffs, the
Company contracted with two firms for a total fee of $6.2 million and
granted warrants to purchase 25 thousand of the Company's common shares to
assist in securing tariff relief.
After receiving accelerated elimination of tariffs in January 2002, the
Company announced the transfer of cutting operations from Laredo, Texas to
Nuevo Laredo, Mexico and in a coordinated move, to significantly reduce
sewing operations in Nuevo Laredo, Mexico. The Company expects the transfer
to be completed in 2002 resulting in a reduction of 354 employees and
approximately $750 in related severance costs.
33
INDEPENDENT AUDITORS' REPORT
R.G. Barry Corporation and Subsidiaries
The Board of Directors and Shareholders
R. G. Barry Corporation:
We have audited the accompanying consolidated balance sheets of R. G. Barry
Corporation and subsidiaries as of December 29, 2001 and December 30, 2000, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the fiscal years in the
three-year period ended December 29, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of R. G. Barry
Corporation and subsidiaries as of December 29, 2001 and December 30, 2000, and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended December 29, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Columbus, Ohio
February 21, 2002
34