SIX YEAR REVIEW OF SELECTED FINANCIAL DATA
R.G. Barry Corporation and Subsidiaries
Summary of Operations (in thousands)
Net sales
Cost of sales
Gross profit
Gross profit as percent of net sales
Selling, general and administrative expenses
Restructuring and asset impairment charges (adjustments)
Other income (expense)
Proceeds from litigation, net of expenses incurred
Interest expense, net
Earnings (loss) before income taxes
Income tax (expense) benefit
Minority interest
Net earnings (loss)
Additional Data
Basic earnings (loss) per share
Diluted earnings (loss) per share
Book value per share
Annual % change in net sales
Annual % change in net earnings
Pretax return on net sales
Net earnings (loss) as a percentage of beginning shareholders' equity
Basic average number of shares outstanding (in thousands)
Diluted average number of shares outstanding (in thousands)
Financial Summary (in thousands)
Current assets
Current liabilities
Working capital
Long-term debt
Net shareholders' equity
Net property, plant and equipment
Total assets
Capital expenditures
Depreciation and amortization of property, plant and equipment
See also Management's Discussion & Analysis of Financial Condition & Results of
Operations.
* 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
2002 2001 2000 1999 1998 1997*
$ 122,570 $ 134,621 $ 140,339 $ 130,531 $ 142,503 $ 143,653
82,797 83,972 93,816 85,996 76,707 77,401
39,773 50,649 46,523 44,535 65,796 65,252
32.4% 37.6% 33.2% 34.1% 46.2% 46.1%
53,629 48,798 49,225 56,855 49,818 48,756
3,359 (118) 1,921 5,914 -- --
800 800 1,717 502 380 415
-- -- 4,476 -- -- --
(1,489) (1,079) (1,802) (1,651) (1,607) (1,817)
(17,904) 1,690 (232) (19,383) 14,751 16,094
6,049 (716) (522) 4,778 (5,443) (6,420)
(25) (42) (52) (20) -- --
$ (11,880) $ 932 $ (806) $ (14,625) $ 9,308 $ 9,674
$ (1.23) $ 0.10 $ (0.09) $ (1.55) $ 0.96 $ 1.02
$ (1.23) $ 0.10 $ (0.09) $ (1.55) $ 0.93 $ 0.99
$ 4.81 $ 6.44 $ 6.34 $ 6.46 $ 8.12 $ 7.23
(9.0)% (4.1)% 7.5% (8.4)% (0.8)% 0.4%
(1,374.7)% 215.6% 94.5% (257.1)% (3.8)% 16.9%
(14.6)% 1.3% (0.2)% (14.8)% 10.4% 11.2%
(19.7)% 1.6% (1.3)% (18.5)% 13.5% 16.5%
9,641 9,379 9,399 9,455 9,698 9,504
9,641 9,577 9,399 9,455 9,992 9,820
$ 61,068 $ 69,676 $ 70,268 $ 71,678 $ 91,914 $ 84,693
20,141 14,471 14,715 17,705 17,885 20,908
40,927 55,205 55,553 53,973 74,029 63,785
5,760 5,162 7,637 8,571 10,714 12,992
47,188 60,385 59,452 60,384 79,139 69,126
10,910 10,917 11,741 14,408 12,875 14,231
87,638 88,612 89,549 93,164 113,026 107,083
2,405 1,194 653 3,381 1,136 2,944
1,935 1,847 2,109 2,243 2,413 2,531
7
MARKET AND DIVIDEND INFORMATION
R.G. Barry Corporation and Subsidiaries
MARKET VALUE
QUARTER HIGH LOW CLOSE
- ----------------------------------------------------------------------------------
2002 First $6.45 $5.52 $6.03
Second 6.20 4.85 5.28
Third 5.50 4.03 4.16
Fourth 4.84 3.06 4.10
2001 First $3.25 $2.13 $2.50
Second 4.75 2.20 4.60
Third 5.18 3.83 4.04
Fourth 6.08 3.68 5.95
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 5 to
Consolidated Financial Statements, and Management's Discussion & Analysis of
Financial Condition & Results of Operations.
QUARTERLY FINANCIAL DATA
R.G. Barry Corporation and Subsidiaries
2002 Fiscal Quarters in thousands, except basic and diluted earnings (loss) per share
First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------------
Net sales $20,896 $16,160 $38,090 $47,424
Gross profit 6,419 4,412 14,073 14,869
Net earnings (loss) (3,331) (4,744) 202 (4,007)
Basic earnings (loss) per share $ (0.35) $ (0.50) $ 0.03 $ (0.41)
Diluted earnings (loss) per share $ (0.35) $ (0.50) $ 0.03 $ (0.41)
2001 Fiscal Quarters
First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 24,741 $16,352 $41,450 $ 52,078
Gross profit 8,573 11,348 15,689 15,039
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
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 & CAPITAL RESOURCES
Our company uses numerous types of assets in the development, production,
marketing, warehousing, distribution, and sale of our products. Most of our
assets are current assets, such as cash, receivables, inventory, and prepaid
expenses, but we also use non-current assets, such as property, plant and
equipment, as well as deferred taxes, goodwill and other.
At the end of 2002, current assets amounted to approximately 70 percent of total
assets, compared with 79 percent at the end of 2001. We had $40.9 million in net
working capital, made up of $61.1 million in current assets, less $20.1 million
in current liabilities, as of the end of 2002. As of the end of 2001, we had net
working capital of $55.2 million, made up of $69.7 million in current assets,
less $14.5 million in current liabilities. The $14.3 million decline in working
capital in 2002 is directly related to the $11.9 million net loss incurred for
the year.
We ended 2002 with $6.9 million in cash and cash equivalents, $9.5 million in
trade receivables net of allowances, and $32.9 million in inventory. By
comparison, at the end of 2001, we had $12.3 million in cash, $15.0 million in
net trade receivables, and $35.6 million in inventory. The decline in cash from
2001 to 2002 is due in large part to the net loss we incurred during 2002. The
decrease in ending receivables reflects the lower level of net sales during the
fourth quarter of 2002 than during the fourth quarter of 2001, and in part
improved collections late in the year. The decrease in ending inventory reflects
the result of our plan as discussed over the last several years to reduce our
investment in inventory. As noted in prior years, we had set out to reduce total
inventories. We did this in part by repositioning ourselves from a company with
nearly 100 percent of our production controlled in our own factories in 1999 and
prior years, to a company where in 2002 and beyond, we expect approximately
one-third of our inventory to be produced by contract manufacturers often
located outside North America. This strategic change allows us to respond faster
to customers' orders, to lower our investment in inventory, and to lower our
risks of inventory markdowns and obsolescence. As a result of this strategy,
over the last few years, we have reduced our investment in inventory from nearly
$41 million at the end of 1999 to our current level of $33 million. Inventory at
the end of 2002 is composed of $24.5 million of finished goods, compared with
$25.6 million at year end 2001; $1.5 million of in process inventory at year end
2002, compared with $1.8 million at year end 2001; and $7.0 million in raw
materials at the end of 2002, compared with $8.2 million at the end of 2001. See
also the accompanying Consolidated Statements of Cash Flows for more information
regarding our cash flows, and Note 2 of the Notes to Consolidated Financial
Statements for more information regarding inventory.
Traditionally, we have leased most of our operating facilities. On occasion, we
have leased some of our operating equipment. We periodically review our
facilities to determine whether they will satisfy projected operating needs for
the foreseeable future. Late in 2001, we committed to move into a new leased
warehouse facility in Nuevo Laredo, Mexico. We began warehousing operations in
Nuevo Laredo in 2002, which allowed us to reduce our warehousing operations in
the United States. This transition permitted us to lower our internal
transportation costs and substitute lower cost Mexican warehouse labor for
comparably higher cost U.S. labor. In November 2002, we announced that during
the first quarter of 2003, we would close our warehousing operations in
Goldsboro, North Carolina and shift those distribution responsibilities to the
new warehouse in Nuevo Laredo.
All real and personal property leased by the Company is leased for varying term
lengths, ranging generally from three years to fifteen years, often with options
for renewal. All leases are "operating leases" as defined by the various
accounting principles and the obligations thereunder are recorded as rent
expense during the periods of use and occupancy. The future obligations under
these lease commitments are discussed below under the caption "Off-Balance Sheet
Arrangements" and in Note 6 of the Notes to Consolidated Financial Statements.
9
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
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. Our most recent unsecured revolving
credit agreement had been entered into in March 2001 with our main bank. That
revolving credit agreement was amended in February 2002 and again in September
2002 to modify certain covenants.
On December 27, 2002, we entered into a new $32 million Revolving Credit
Agreement ("Revolver") with The Huntington National Bank ("Huntington") to
refinance the March 2001 revolving credit agreement, as amended. As a part of
the refinancing, we entered into a Security Agreement ("Security Agreement")
with Huntington, as collateral agent for itself and Metropolitan Life Insurance
Company ("Metropolitan"), pursuant to which we granted a security interest in
all of our personal property assets to (a) secure our obligations to Huntington,
including those obligations under the Revolver and (b) secure our obligations
under the Note Agreement dated July 5, 1994, as amended, between the Company and
Metropolitan ("Metropolitan Loan Agreement"). As of December 27, 2002, the
outstanding unpaid principal balance payable to Metropolitan under the
Metropolitan Loan Agreement was $4.285 million, and there was no balance due
under the Revolver. In conjunction with the Revolver and Security Agreement, we
also entered into a Conditional Consent Agreement, dated as of December 27,
2002, with Metropolitan, which permitted us to grant the security interests
under the Security Agreement. The Metropolitan Loan Agreement requires
semi-annual interest payments plus annual principal repayments of $2.1 million,
beginning in July 1998, and continuing through July 2004.
The Revolver is a three-year $32 million commitment from Huntington that matures
on April 30, 2006. The Revolver contains certain periodic monthly commitment
limitations ranging from $3 million in January, $12 million from February
through April, $32 million from May through October, and $27 million from
November through December, all of which is further limited monthly to 80 percent
of our eligible receivables and 40 percent of our eligible inventory, as
defined. The Revolver also contains various covenants, including financial
covenants that require us to maintain minimum specified consolidated tangible
net worth levels, quarterly EBITDA (earnings before interest, taxes,
depreciation and amortization) maintenance requirements through the end of
fiscal 2003, a minimum coverage of interest expense beginning at the end of the
first quarter in fiscal 2004, and certain cash flow leverage ratios beginning at
the end of fiscal 2003.
During 2002, we reached a peak of $32 million in borrowings outstanding under
our revolving credit agreement for a four-week period from late September
through late October. This compares with $26 million in peak outstanding
borrowings for a two-week period during the same months of 2001. Throughout
2002, our overall average daily usage under the revolving credit agreement was
greater than in 2001. The daily weighted average borrowings outstanding in 2002
amounted to $11.9 million compared with $7.9 million in 2001. The weighted
average rate of interest in 2002 amounted to 4.1 percent, while the weighted
average rate in 2001 was 5.8 percent. The primary cause of the rate decline from
2001 to 2002 was the influence on short-term market rates of the Federal
Reserve's federal funds rate. Clearly, during the time period from early spring
though December, we are dependent upon the Revolver for funding our seasonal
liquidity needs. As of the end of 2002, we were in compliance with all covenants
of the Metropolitan Loan Agreement and the Revolver. See also Note 5 of the
Notes to Consolidated Financial Statements for additional information.
We last paid cash dividends in 1981. The Revolver prohibits the payment of cash
dividends and limits 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 operating needs of the business. While the covenants under the
Metropolitan note permit us to incur additional long-term debt should that
become desirable, the Revolver requires the consent of Huntington in order for
us to do so.
10
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
We believe that our balance sheet contains strong financial ratios. At the end
of 2002, total shareholders' equity amounted to $47.2 million. This compares
with $60.4 million in shareholders' equity last year. Our long-term debt to net
worth ratio was 12.2 percent at the end of 2002, compared with 8.5 percent at
the end of 2001. Our current ratio, a measure of the relationship of current
assets to current liabilities, was 3.0 to 1 at year-end 2002, compared with 4.8
to 1 at year-end 2001.
ACCELERATION OF NAFTA TARIFF REDUCTIONS
Effective January 2002, the 15 percent duty on United States slippers made in
Mexico was eliminated. 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 our business. Prior to the elimination of the duty, the slipper tariff had
been scheduled to be reduced annually at the rate of 2.5 percent per year until
its elimination on January 1, 2008.
We retained outside consultants to assist us in pursuit of this tariff relief.
Upon 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 equal quarterly
installments over a four-year period through the end of 2005. The net present
value of this four-year obligation, which is subordinated to the obligations
under the Metropolitan note and the Revolver, is included within current
installments and long-term debt at its discounted present value totaling $4.0
million at the end of 2002. The net benefit we expect to receive from the tariff
relief, after taking into account the consultants' fees, has been estimated at
$12 million over the period from 2002 through 2006.
The tariff removal allows us to take full advantage of the benefits of
manufacturing in our own North American plants and is a key element in our
operating strategies for the future. It has permitted us to relocate cutting and
molding activities from the U. S. to Mexico and keep our cost structure in line
with competitive products produced offshore. In 2002, we transferred jobs from
the U. S. to Mexico to 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 from duties, and we would have been forced to
consider further reductions in North American jobs. The shift of manufacturing
jobs was completed in 2002, and impacted about 350 positions in the Company. The
severance costs associated with this reduction in workforce were recognized in
the first quarter of 2002 and amounted to about $727 thousand.
LEGAL PROCEEDINGS
In March 2000, we settled a lawsuit we filed in 1998 against Domino's Pizza,
Inc. and Phase Change Laboratories, Inc., alleging patent infringement and
deceptive advertising. 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.
In October 2001, our Vesture subsidiary received a claim charging that its
MICROCORE(R) pizza delivery system infringed on two United States patents owned
by Thermal Solutions, Inc. and licensed to CookTek, Inc. After receiving the
charge of infringement, Vesture and our counsel evaluated the patents and
reached the conclusion that the patents were not infringed. To protect its
rights, in November 2001, Vesture filed an action in the United States District
Court in North Carolina seeking a declaratory judgment that the patents were not
infringed and an order restraining Thermal Solutions and CookTek from making
further charges of infringement. Vesture also sought damages for CookTek's and
Thermal Solutions' unfounded allegations and for sales lost as a result of those
charges. After the North Carolina action was filed, Thermal Solutions and
CookTek filed suit against Vesture in November 2001, in the United States
District Court in Kansas, alleging infringement of the patents. Because the
North Carolina action was filed first, it had priority. Thermal Solutions and
CookTek voluntarily dismissed the Kansas action, in favor of the North Carolina
action, where they counterclaimed for infringement of the patents.
11
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
We believe that the patent infringement allegations are without merit and we
intend to defend vigorously against them. However, we do not believe it is
feasible to predict the outcome of the suit and the timing of the final
resolution of the claim is uncertain.
FOREIGN CURRENCY RISK
Our operations are currently conducted primarily in U.S. Dollars and to a much
lesser degree in Canadian Dollars, and in 2002 and prior years, were conducted
in British Pounds Sterling and Euros -- 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 maintain under foreign
exchange contracts has not been material to overall operations. At the end of
fiscal 2002, there were no such 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 historically
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 cost
of manufacturing and to some extent the cost of distribution, although any such
reduction would not be expected to have a significant impact upon our results of
operations.
OFF-BALANCE SHEET ARRANGEMENTS
As noted above, the Company has traditionally leased its facilities under
operating lease type transactions. On occasion, we have also leased certain
equipment utilizing operating leases. These leasing arrangements allow us to pay
for the facilities and equipment over the time that they are utilized, rather
than committing our resources initially to acquire the facilities or equipment.
All leases have been accounted for as operating leases, consistent with the
provisions of Statement of Financial Accounting Standards No. 13, Accounting for
Leases, as amended. Our future off balance sheet non-cancelable operating lease
obligations are discussed in Note 6 of the Notes to Consolidated Financial
Statements.
Following the Securities and Exchange Commission's ("SEC") recent release number
2003-10, it is not clear whether the SEC intends that liabilities already
recorded in the Company's books and records be included in the following tabular
disclosure or only those "Off-Balance Sheet Arrangements". For the readers'
convenience, we have repeated and summarized here our contractual obligations
for both those long-term obligations that appear on our balance sheet, as
recognized in our financial statement presentations, and for those so-called
"Off-Balance Sheet Arrangements", as discussed in the notes to our financial
statements:
12
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
1 year 1 - 3 3 - 5 More than
Total or less years years 5 years
- ---------------------------------------------------------------------------------------------------------
Payments due by period (in thousands of dollars)
CONTRACTUAL OBLIGATIONS:
recognized on the books and
records of the Company
Long-Term Debt, Current
and Non-Current Portions $ 9,410 $3,650 $5,716 $ 44 none
Capital Lease Obligations none
Other Long-Term Liabilities
reflected on the Balance Sheet
of the Company* $14,188 * * * *
CONTRACTUAL OBLIGATIONS:
considered "off-balance sheet
arrangements"
Operating Leases - see also
Note 6 of the Notes to
Consolidated Financial
Statements $16,861 $4,256 $5,582 $3,426 $3,597
Purchase Obligations in the
ordinary course of business ** $ 1,755 $1,755 none none none
* Other Long-Term Liabilities of the Company represent accrued cumulative
future obligations under our Associate Retirement Plan of $7,822, accrued
cumulative future obligations under our Supplemental Retirement Plan of
$4,624, and accrued cumulative future obligations from employee salary
withholdings under our salary deferral plan of $1,742. The timing of
future cash outflows related to these obligations is not readily
determinable, as it is fully dependent upon the timing of Associate future
retirements. Following the requirements under Statement of Financial
Accounting Standards No. 87, Accounting for Pensions, as amended, during
2002 we have made a charge to Other Comprehensive Income, to recognize the
effect of actuarial assumptions and market value changes as of the
September 30, 2002 evaluation date. The resultant effect has increased the
liability under the Associate Retirement Plan by $5,074 with a
corresponding charge to Other Comprehensive Income.
** We acquire inventory and merchandise in the ordinary course of business,
issuing both purchase orders and letters of credit to acquire merchandise
from suppliers. Under the regulations set out by the SEC, one may
interpret those commitments in the ordinary course of business as "off-
balance sheet arrangements". Those commitments, as noted in the table
above, are in the ordinary course of business, and there are no material
unusual outstanding commitments other than in the ordinary course of
business.
At times we have entered into foreign currency contracts, as noted in the
discussion above regarding Foreign Currency Risk, to hedge currency risk
exposures that we have identified. Here too, under the regulations set out by
the SEC, one may interpret those currency contracts utilized as hedges as "off-
balance sheet arrangements". As of the end of fiscal year 2002, there were no
such contracts outstanding.
13
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
LICENSE AGREEMENT FOR EUROPEAN DISTRIBUTION
Early in January 2003, we entered into a five-year licensing agreement for the
sale and marketing of our slipper products with a British footwear and apparel
firm. During the first half of 2003, we will cease operating our Wales, U.K.
distribution center and our Paris sales office. This distributor-type license
agreement allows us to continue to service the soft washable footwear market in
Europe without maintaining the costly sales organization and warehousing and
distribution operations we have had since the mid-1990's. The anticipated costs
of closing these operations, estimated at $2.8 million, have been recognized and
accrued during the fourth quarter of 2002. The Company will continue to maintain
and operate its profitable Fargeot footwear operations in southern France.
THERMAL PRODUCTS
The Thermal products business is a segment of our business which, for the past
several years, we have not operated profitably. We are actively exploring
several options which we expect will curb the losses incurred by our Vesture
thermal products subsidiary.
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 to us at the time, and
after reasonably assessing the conditions that exist at the time we make
estimates and prepare the financial reports. We make these estimates in a
consistent manner from period to period, based upon historical trends and
conditions, and after review and analysis of current events and conditions.
Management believes that these estimates reasonably reflect the current
assessment of the financial impact of events that may not become known with
certainty until some time in the future.
The more critical of these accounting policies requiring significant management
estimates, are summarized here: a) We recognize revenue when our goods are
shipped to our customers and title passes. In certain circumstances, we have
made arrangements with customers that provide for returns, discounts, promotions
and other incentives. We recognize revenue net of provisions for estimated
returns, discounts, and retailer promotions and incentives, and recognize a
corresponding offset to accounts receivable. b) We value inventories using the
lower of cost or market method, based upon a standard costing method. We
evaluate our inventories for any impairment in realizable value in light of the
just concluded selling season, the economic environment, and our expectations
for the upcoming selling season. c) We make an assessment of the amount of
income taxes that will become currently payable or recoverable for the just
concluded period and what deferred tax costs or benefits will become realizable
for income tax purposes in the future as a result of differences between results
of operations as reported in conformity with accounting principles generally
accepted in the United States and the requirements of the increasingly complex
income tax codes existing in the various jurisdictions where we operate. In
evaluating the future usability of our deferred tax assets, we are relying on
projections of future profits. Should those future profits not materialize in
the time frames required, we may need to establish a valuation allowance against
those deferred tax assets. d) We make an assessment of the ongoing future value
of goodwill and other intangible assets. And e) We make estimates of the future
costs associated with restructuring plans related to a number of operational
changes and reconfigurations that we have announced. In addition, there are
other accounting policies, which also require judgmental input by management,
that we follow consistently from year to year, and those additional policies are
summarized in Note 1 of the Notes to Consolidated Financial Statements beginning
on page 23 in this Annual Report to Shareholders. Actual results may vary from
these estimates as a result of activities learned after the year end estimates
have been made, and will have a positive or negative impact upon the results of
operations in a period subsequent to the period when we originally made the
estimate.
14
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
RESTRUCTURING ACTIVITIES
During the last few years, we have undertaken a strategic initiative to improve
our operating performance and reduce expenses. The activities involved include:
(i) closing a factory in Shenzhen China, (ii) closing a factory in the Dominican
Republic, (iii) moving our samples activities from Columbus, Ohio to Nuevo
Laredo, Mexico, (iv) instituting improved design and product development
processes to increase speed to market, (v) closing a warehouse in San Antonio,
Texas, and a warehouse in Goldsboro, North Carolina, while opening a warehouse
in Nuevo Laredo, Mexico. (vi) shifting cutting activities from Laredo, Texas to
Nuevo Laredo, Mexico, (vii) shifting our molding operations from San Angelo,
Texas, to Nuevo Laredo, Mexico, (viii) changing ourselves from a company that
manufactures nearly its entire production needs to one that manufactures about
two-thirds of its needs and contracts with outside third party manufacturers for
one-third of its needs, and (ix) changing our European branch sales and
warehouse operations to a distributorship-type arrangement.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No.
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred, rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by SFAS No. 146 include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Previous accounting guidance was provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 replaces EITF Issue No. 94-3 and is required to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. We are currently evaluating the impact of SFAS No. 146.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's financial statements. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. SFAS No. 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. We are currently evaluating the impact of this standard.
RESULTS OF OPERATIONS
2002 SALES AND OPERATIONS COMPARED WITH 2001
We operate in three different business segments: (i) "Barry Comfort North
America", which manufactures and markets at- and around-the-home comfort
footwear for sale 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 14 of the Notes to Consolidated Financial Statements for a breakdown of net
sales by geographic region of the world and by segment of our operations.
15
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
During 2002, net sales totaled $122.6 million, nearly 9.0 percent less than the
net sales of $134.6 million in 2001. There were net sales decreases in all three
segments of our business. Net sales in Barry Comfort North America decreased in
2002 to $108.7 million from $116.9 million in 2001; net sales in Barry Comfort
Europe decreased in 2002 to $9.8 million from $10.4 million in 2001; and net
sales of Thermal products decreased to $4.0 million in 2002 from $7.3 million in
2001. The economic malaise domestically and internationally contributed to a
decline in sales generally across all channels of distribution and all classes
of trade. One of the few areas showing an increase in net sales for the year was
our business with our largest customer, where our business increased
domestically by approximately 7 percent from 2001 to 2002. Retailing in the
holiday season of 2002 was again very promotional, with retailers aggressively
discounting products early in the holiday selling season. We believe that our
products sold relatively well at retail. The decrease in Thermal net sales
reflects a decline in orders for the pizza delivery systems that we have been
marketing for the last several years.
As noted above, early in January 2003, we entered into an agreement that will
effectively convert the European soft washable slipper portion of Barry Comfort
Europe into a distributorship license arrangement. We will continue to operate
our profitable Fargeot business, but the slipper business operating with a
warehouse in Wales and a sales office in Paris will close during 2003 and those
customers will continue to be served via our British distributor. We will begin
receiving a royalty from the distributor but will no longer incur the expense of
supporting our own warehouse in Wales and sales organization in Paris.
Gross profit decreased in 2002 by approximately $10.9 million. In 2002, gross
profit amounted to $39.8 million or approximately 32.4 percent of net sales,
while in 2001, gross profit amounted to $50.6 million or about 37.6 percent of
net sales. The primary cause of the decline in gross profit was the $12.0
million decrease in net sales from 2001 to 2002, as noted above.
During much of 2002, we incurred restructuring and other costs relating to
implementing our strategic plan. As noted previously, during 2002, we completed
that portion of our three-year strategic plan relating to repositioning
activities in lower cost locations. We have completed the move of our molding
operations from San Angelo, Texas to Nuevo Laredo, Mexico. We have completed the
move of our cutting subassembly operation from Laredo, Texas to Nuevo Laredo. We
have opened a new state of the art distribution facility in Nuevo Laredo. While
all of these activities were planned for the year, the task level was greater
than we anticipated. We wanted to assure that our customers did not suffer
delays in their supply of our footwear, so we maintained certain duplicative
operations in both San Angelo and Laredo until we were sure that there would be
not disruption in our supplying the market place from Nuevo Laredo. The costs of
this assurance resulted in an estimated $3.5 million of added expense, which was
incurred mainly during the first half of the year. This added expense adversely
affected gross profit for the year, and the additional warehousing costs
adversely affected selling, general and administrative expenses, as noted in the
following paragraphs. In addition, as of the end of 2002, we have marked down
our thermal inventory valuations to their estimated net realizable values,
further depressing gross profit.
Selling, general and administrative expenses increased significantly during
2002, by approximately $4.8 million, compared with those expenses in 2001.
Selling and marketing expenses increased during 2002, primarily in the area of
retail program support, such as advertising, displays, and other promotional
programs at retail. Warehousing expenses increased during 2002, with a sizable
portion of that related to the duplicative activities we conducted in
conjunction with the opening of the new warehousing facility in Nuevo Laredo
early in 2002. Other administrative expenses also increased with a major portion
of this increase being the legal costs incurred to defend Vesture's intellectual
property as noted above in the section entitled Legal Proceedings.
16
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
Net interest expense increased in 2002 to $1.5 million from $1.1 million in
2001. Two factors influenced this increase. As noted above, we recognized a
long-term obligation to the consultants who assisted us in the accelerated
elimination of NAFTA duties as of the beginning of 2002. As noted above, as of
the end of 2002, the discounted present value of that long-term obligation
amounted to $4.0 million. For accounting purposes, a portion of the payment to
the consultants is treated as debt and a portion of the payment is treated as an
imputed interest charge associated with that debt. In 2002, the amount of that
imputed interest amounted to $374 thousand. In addition, during 2002, we
utilized our seasonal revolving credit agreement to a greater degree than in
2001. During 2002, the daily average seasonal borrowings outstanding under our
revolving credit agreement increased to $11.9 million. During 2001, the average
borrowings under the revolver credit agreement had been $7.9 million. The
weighted average interest rate on short-term bank borrowings in 2002 was 4.1
percent, having been 5.8 percent during 2001. Short-term market interest rates
generally declined in 2002 as a result of actions taken by the Federal Reserve
during the year, although this decline was in part offset by the increase in
spreads over market charged by our bank. The net result was a 1.7 percent
reduction in the average rate of interest that we incurred in 2002 for
short-term borrowings.
During 2002, we engaged in several actions related to reorganization efforts to
improve our profitability. One action in the first quarter resulted in the
coordinated transfer of cutting operations from the U.S. to Mexico and a
reduction in sewing operations in Nuevo Laredo, Mexico. This action resulted in
the reduction of 354 positions in North America, at a cost of $727 thousand.
Other actions in the third and fourth quarters were taken to restructure staff
support of sales and operations, which impacted nine employees at a cost of $938
thousand. In the fourth quarter, we announced the decision to close the
Goldsboro distribution center in early 2003, impacting 53 positions at a cost of
$601 thousand, and to similarly close the Wales distribution center in early
2003, impacting 22 positions at a cost of $178 thousand. The closure of the
Wales facility also resulted in recognition of $208 thousand in future lease
obligation losses as well as $150 thousand in asset impairment charges. In
addition, during the fourth quarter of 2002, we recognized $523 thousand in
asset impairment charges in our Vesture subsidiary. The aggregate reorganization
and asset impairment charges recognized in 2002 amounted to $3.4 million.
As a result, for fiscal 2002, we incurred a loss before income taxes of $17.9
million and a loss after income taxes of $11.9 million, or $1.23 per diluted
share. During 2001, we earned a profit before income taxes of $1.7 million and
$932 thousand after income taxes, or $0.10 per diluted share.
2001 SALES AND OPERATIONS COMPARED WITH 2000
During 2001, net sales totaled $134.6 million, about 4.1 percent less than they
were in 2000. Net sales for Barry Comfort North America increased slightly in
2001, to $116.9 million from $115.9 million in 2000. The increase in North
America, although only 0.8 percent, came in an economic environment of
recession, consumer concerns heightened by terrorist attacks, and a highly
promotional retail atmosphere, resulting in a generally lackluster retail sales
environment. We continued efforts to provide new styling 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. Net
sales in France, at $10.3 million in 2001, were essentially flat with net sales
of $10.4 million in 2000.
17
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
Net sales of Thermal products declined in 2001 to $7.3 million from $12.7
million in 2000. Much of the decrease relates to lower sales of our pizza
delivery systems. In 2000, net sales had benefited from the sizable increase in
the number of these 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.
Gross profit in 2001 increased to $50.6 million from $46.5 million in 2000.
Gross profit as a percent of net sales also increased significantly in 2001 to
37.6 percent, from 33.2 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 resulting 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, there was a slightly richer mix of products in 2001,
which contributed to the overall increase in gross profit for the
year.
- 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.
Manufacturing efficiencies in 2001 were greatly improved over 2000.
Selling, general and administrative expenses declined slightly in 2001 at $48.8
million compared with $49.2 million in 2000.
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
revolving credit agreement 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,
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 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.
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 approximately $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.
18
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements in this Annual Report to Shareholders, other than statements of
historical fact are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based upon our current plans and strategies, and reflect our
current assessment of the risks and uncertainties related to our business. In
addition to the risks and uncertainties noted in this Annual Report, there are
factors that could cause results to differ materially from those anticipated by
some of the statements made. These factors include product demand and market
acceptance; the economic and business environment and the impact of governmental
regulations, both in the United States and abroad; the effects of direct
sourcing by customers of competitive products from alternative suppliers; the
effect of pricing pressures from retailers; the loss of significant customers in
connection with mergers, acquisitions, bankruptcies or other circumstances;
inherent risks of international development, including foreign currency risks,
economic, regulatory and cultural difficulties or delays in our business
development outside the United States; our ability to improve processes and
business practices to keep pace with the economic, competitive and technological
environment; the availability and costs of financing; capacity, efficiency, and
supply constraints; weather; the effects of terrorist acts, and governments'
responses to terrorist acts, on business activities and customer orders; acts of
war; and other risks detailed in our press releases, shareholder communications,
and Securities and Exchange Commission filings. Actual events effecting us and
the impact of such events on our operations may vary significantly from those
currently anticipated.
19
CONSOLIDATED BALANCE SHEETS
R.G. Barry Corporation and Subsidiaries
December 28, 2002 December 29, 2001
(in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,881 $ 12,258
Accounts receivable:
Trade (less allowance for doubtful receivables, returns and
promotions of $20,264 and $17,619, respectively) 9,506 15,004
Other 1,619 1,428
Inventory 32,894 35,642
Recoverable income taxes 4,934 --
Deferred income taxes 3,635 2,896
Prepaid expenses 1,599 2,448
-------- --------
Total current assets 61,068 69,676
-------- --------
Property, plant and equipment, at cost 39,176 40,066
Less accumulated depreciation and amortization 28,266 29,149
-------- --------
Net property, plant and equipment 10,910 10,917
-------- --------
Deferred income taxes 5,824 2,971
Goodwill, net of accumulated amortization 2,374 2,002
Other assets 7,462 3,046
-------- --------
$ 87,638 $ 88,612
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 3,650 $ 2,432
Accounts payable 10,474 7,628
Accrued expenses 6,017 4,411
-------- --------
Total current liabilities 20,141 14,471
-------- --------
Accrued retirement cost, excluding current liability 12,446 6,665
Long-term debt, excluding current installments 5,760 5,162
Other 1,742 1,593
-------- --------
Total liabilities 40,089 27,891
-------- --------
Minority interest 361 336
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 9,806 and 9,376 shares
(excluding treasury shares of 933 and 979) 9,806 9,376
Additional capital in excess of par value 12,791 12,093
Deferred compensation (200) (331)
Accumulated other comprehensive loss (3,071) (495)
Retained earnings 27,862 39,742
-------- --------
Net shareholders' equity 47,188 60,385
-------- --------
Commitments and contingencies -- --
-------- --------
$ 87,638 $ 88,612
======== ========
See accompanying notes to consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
2002 2001 2000
(in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 122,570 $ 134,621 $ 140,339
Cost of sales 82,797 83,972 93,816
--------- --------- ---------
Gross profit 39,773 50,649 46,523
Selling, general and administrative expenses 53,629 48,798 49,225
Restructuring and asset impairment charges (adjustments) 3,359 (118) 1,921
--------- --------- ---------
Operating income (loss) (17,215) 1,969 (4,623)
Proceeds from litigation, net of expenses incurred -- -- 4,476
Other income 800 800 1,717
Interest expense, net of interest income of $40,
$242 and $240, respectively (1,489) (1,079) (1,802)
--------- --------- ---------
Earnings (loss) before income taxes (17,904) 1,690 (232)
Income tax (expense) benefit 6,049 (716) (522)
Minority interest, net of tax (25) (42) (52)
--------- --------- ---------
Net earnings (loss) $ (11,880) $ 932 $ (806)
========= ========= =========
Earnings (loss) per common share:
Basic $ (1.23) $ 0.10 $ (0.09)
========= ========= =========
Diluted $ (1.23) $ 0.10 $ (0.09)
========= ========= =========
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
R.G. Barry Corporation and Subsidiaries
Additional Accumulated
capital in Deferred other Net
Common excess of compen- comprehensive Retained shareholders'
shares par value sation income (loss) earnings equity
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $9,349 $12,050 $(539) $ (92) $ 39,616 $ 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) (337) 38,810 59,452
Comprehensive income (loss):
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) (495) 39,742 60,385
------ ------- ----- ------- -------- --------
Comprehensive income (loss):
Net loss -- -- -- -- (11,880) (11,880)
Other comprehensive income (loss):
Foreign currency translation
adjustment -- -- -- 559 -- 559
Pension liability adjustment, net of
($1,878) deferred income taxes -- -- -- (3,135) -- (3,135)
Total comprehensive loss -- -- -- -- -- (14,456)
Amortization of deferred compensation -- -- 131 -- -- 131
Stock options exercised and warrants issued 430 698 -- -- -- 1,128
------ ------- ----- ------- -------- --------
Balance at December 28, 2002 $9,806 $12,791 $(200) $(3,071) $ 27,862 $ 47,188
====== ======= ===== ======= ======== ========
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF CASHFLOWS
R.G. Barry Corporation and Subsidiaries
2002 2001 2000
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $(11,880) $ 932 $ (806)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization of property,
plant and equipment 1,935 1,847 2,109
Amortization of goodwill -- 136 136
Deferred income tax expense (benefit) (1,714) 42 2,711
Loss on disposal of property, plant and equipment 568 135 998
Impairment loss on trademarks/patents 226 -- --
Amortization of deferred compensation 131 130 119
Minority interest, net of tax 25 42 52
Changes in:
Accounts receivable 5,440 5,107 (11,985)
Inventory 3,027 (2,930) 8,095
Recoverable income taxes (4,934) -- --
Prepaid expenses, and other assets (3,803) 2,860 (1,283)
Accounts payable 2,688 1,500 (2,131)
Accrued expenses 1,576 (1,668) (458)
Accrued retirement cost, net 768 690 921
Other liabilities 149 402 (58)
-------- -------- --------
Net cash provided (used) by operating activities (5,798) 9,225 (1,580)
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (2,405) (1,194) (653)
Proceeds from disposal of property, plant and equipment 8 13 8
-------- -------- --------
Net cash used in investing activities (2,397) (1,181) (645)
-------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt, net of additional debt 1,676 (2,671) (934)
Proceeds from shares issued 1,128 29 --
-------- -------- --------
Net cash provided by (used in) financing activities 2,804 (2,642) (934)
-------- -------- --------
Effect of exchange rates on cash 14 (74) 83
-------- -------- --------
Net increase (decrease) in cash (5,377) 5,328 (3,076)
Cash and cash equivalents at beginning of year 12,258 6,930 10,006
-------- -------- --------
Cash and cash equivalents at end of year $ 6,881 $ 12,258 $ 6,930
======== ======== ========
Supplemental cash flow disclosures:
Interest paid $ 1,223 $ 1,425 $ 2,124
======== ======== ========
Income taxes paid (recovered) $ 723 $ (3,113) $ 413
======== ======== ========
See accompanying notes to consolidated financial statements.
22
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 maintained branch sales and distribution center
activities in Europe (see Note 19) as well as an 80% ownership
interest in a French company, Escapade SARL and its Fargeot et Cie
subsidiary (collectively, "Fargeot") in France. The Fargeot
subsidiary was purchased in 1999 and the underlying purchase
agreement includes put and call options for the purchase of the
remaining 20% of the Fargeot 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 determined by the purchase agreement. Similarly,
the Company may exercise call options on the minority interest
shares through July 22, 2009 on 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 Fargeot 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
acquisition are considered cash equivalents. These investments
consisted of short-term money market funds with balances of $8,423
for 2001 and no similar investments at the end of 2002.
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 now governed by Statement of
Financial Accounting Standard No. 142. SFAS 142 mandated the
discontinuance of goodwill amortization effective with the 2002 year
and requires an annual evaluation of goodwill to determine and
recognize what, if any, impairment of goodwill should be recorded.
Such an initial and annual evaluation of goodwill has been made with
no impairment adjustment required for the 2002 year. The annual
evaluation for impairment is done in the 2nd quarter of each year
and is updated in the event of any major events or changes should
they occur later in the year. Goodwill amortization expense was
recognized for $136 in each of the 2001 and 2000 years.
g) Trademarks and Patents
The Company incurs costs in obtaining and perfecting trademarks and
patents related to the Company's products and production related
processes. These costs are generally amortized over a period
subsequent to acquisition not to exceed 5 years and are evaluated
for impairment on an annual basis as required by SFAS 142. Beyond
annual amortization expense, the Company recognized an impairment
loss on thermal related trademarks and patents of $226 for the
year-end December 28, 2002.
h) 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.
i) Product Warranties
The Company's thermal product subsidiary provides extended product
warranties on certain thermal products sold in commercial business
channels. These extended product warranties provide coverage over a
range from 12 to 18 months. The Company's accounting policy is to
accrue for the estimated future warranty costs on these selected
products at the time of sale. The Company monitors the warranty
estimates against subsequent product performance for any adjustment
required to the estimated future warranty cost.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
j) 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
28, 2002, December 29, 2001, and December 30, 2000, advertising and
promotion expenses of $3,774, $4,394, and $2,709, respectively, are
included in selling, general and administrative expenses in the
consolidated statements of operations as required by accounting
principles generally accepted (GAAP) in the United States.
k) 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
carryforwards. 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.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent on the generation of
future taxable income or with any applicable net operating loss
carryforward period thereafter during periods in which temporary
differences become deductible. Management considers the scheduled
reversal of deferred items, projected future taxable income, and tax
planning strategies in making this assessment.
Based on the level of adjusted historical taxable income and
projections of future taxable income over the periods which the
deferred tax assets are deductible, management has established a
valuation allowance for deferred taxes as of December 28, 2002 for
$450, and $0 was provided as an allowance as of December 29, 2001.
The realizability of deferred tax assets, however, could be reduced
if estimates of future taxable income during the carryforward
periods are reduced.
l) Per-Share Information
The computation of basic earnings (loss) per common share for 2002,
2001, and 2000 is based on the weighted average number of
outstanding common shares during the period. Diluted earnings per
common share for 2002, 2001, and 2000 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 2002 and 2000 does not include the impact of potential
common shares due to their antidilutive effect.
m) 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.
n) 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.
o) 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 10). Warrants issued to non-employees for services
rendered are accounted for at fair value at the time of grant.
p) Use of Estimates
The preparation of financial statements in conformity with GAAP
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.
q) 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 5.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
r) 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. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement requires that long-lived assets held for disposal are
measured at the lower of book value or fair market value less costs
of disposal. In addition, this Standard 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.
s) Allowances granted to Resellers
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. EITF 00-25 is effective in 2002 and upon adoption
prior periods presented for comparative purposes are reclassified.
Upon adoption in 2002, this resulted in a reduction of Company's net
sales and corresponding decrease in advertising and promotional
expenses formerly included in selling, general and administrative
expenses of approximately $13,195, $9,500, and $9,096 for the fiscal
years 2002, 2001, and 2000, respectively.
t) Duty Acceleration Costs Recognition
Effective January 1, 2002, the 15% duties imposed by the United
States on slippers coming from Mexico were eliminated. The duties
had been scheduled for reduction at the rate of 2.5% per year until
the scheduled elimination on January 1, 2008. With the assistance of
two firms, the Company was successful in accelerating the
elimination of these duties. With the successful conclusion of this
pursuit, the Company agreed to pay an aggregate of about $6.2
million, most of which is payable in quarterly installments through
2005.
The discounted cost associated with these future payments is $5,291
and is being recognized through cost of sales proportionately over
the years 2002 to 2007 based on the estimated benefit of duty
elimination on Company product as produced and projected to be
produced in Mexico over this six year time frame. In 2002, $873 of
these costs have been recognized within cost of sales.
The remaining amounts of $4,418 are included in the balance sheet in
Other assets. This asset classification is consistent with projected
realization of the duty elimination benefits and expected
recognition of those costs over the remaining years through 2007.
(2) Inventory
Inventory by category for the Company consists of the following:
December 28, December 29,
2002 2001
-------------------------------
Raw materials $ 6,981 $ 8,203
Work in process 1,462 1,820
Finished goods 24,451 25,619
------- -------
Total inventory $32,894 $35,642
======= =======
(3) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 28, December 29, Estimated
2002 2001 life in years
----------------------------------------------
Land and improvements $ 508 $ 506 8-15
Buildings and improvements 6,008 5,912 40-50
Machinery and equipment 24,670 25,673 3-10
Leasehold improvements 7,700 7,701 5-20
Construction in progress 290 274 =====
------- -------
$39,176 $40,066
======= =======
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
(4) Intangible Trademark/Patent Assets
These assets include the following:
December 28, December 29,
2002 2001
---------------------------------
Trademarks and patents, gross $527 $589
Less: accumulated amortization 187 174
---- ----
Trademarks and patents, net $340 $415
==== ====
Trademark/patent expense has been recognized of $118 in 2002, $174 in
2001, and $312 in 2000 and is included within selling, general, and
administrative expenses. In addition, the Company recognized an impairment
loss of $226 on thermal related trademarks and patents in 2002. Based on
the Company's methods, remaining net Trademark/Patent cost would be
expected to be recognized into expense on a straight-line basis over the
next 5 years. This expense recognition would accelerate should
circumstances change and an impairment be determined for trademarks or
patents with remaining value.
(5) Long-term Debt and Restrictions
Long-term debt consists of the following:
December 28, December 29,
2002 2001
---------------------------------
9.7% note, due July 2004 $4,285 $6,428
Subordinated obligation 3,966 --
Other notes 1,159 1,166
------ ------
9,410 7,594
Less current installments 3,650 2,432
------ ------
Long-term debt, excluding current installments $5,760 $5,162
====== ======
The aggregate minimum principal maturities of the long-term debt for each
of the next five fiscal years following December 28, 2002 are as follows:
2003 $3,650
2004 3,906
2005 1,614
2006 196
2007 44
------
$9,410
======
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.
Effective January 1, 2002, the 15% duties imposed by the United States on
slippers coming from Mexico were eliminated. The duties had been scheduled
for reduction at the rate of 2.5% per year until the scheduled elimination
on January 1, 2008. With the assistance of two firms, the Company was
successful in accelerating the elimination of these duties. As a part of
this pursuit, the Company agreed to pay an aggregate of about $6.2
million, most of which is payable in quarterly installments through
December 2005. Reflected in current installments and long-term debt is
$3,966, which represents the present value, discounted at 8%, of the
remaining quarterly installments. The quarterly obligations due are
subordinated to the obligations under the 9.7% note and obligations under
the Revolver.
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 2002 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.
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 approximately
$4,500 and $6,750 at December 28, 2002 and December 29, 2001,
respectively.
On December 27, 2002, the Company terminated its previous unsecured
revolving credit agreement, and entered into a new $32.0 million Revolving
Credit Agreement ("Revolver") with its principal bank to refinance the
revolving credit agreement between the Company and the bank dated March
12, 2001, as amended. As part of the Revolver, the Company also executed
and delivered a
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
Security Agreement ("Security Agreement") to the bank, as collateral agent
for itself and the 9.7% noteholder, pursuant to which the Company granted
a security interest in all of its personal property assets to secure its
obligations (a) to the bank, including those obligations under the
Revolver and (b) under the 9.7% note, as amended. In conjunction with the
execution of the Revolver and Security Agreement, the Company also entered
into a Conditional Consent Agreement dated as of December 27, 2002 with
the 9.7% noteholder, which permitted granting the security interests under
the Security Agreement.
The Revolver is a three year $32.0 million commitment from the bank that
extends through April 30, 2006. The Revolver contains certain periodic
monthly commitment limitations ranging from $3 million in January, $12
million from February through April, $32 million per month for May through
October, and $27 million from November through December. The Revolver also
contains various covenants, including financial covenants that require the
Company to maintain minimum consolidated tangible net worth, quarterly
EBITDA (earnings before interest, taxes, depreciation and amortization)
maintenance requirements through the end of fiscal 2003, minimum coverage
of interest expense beginning at the end of the first quarter in fiscal
2004, and certain cash flow leverage ratios beginning at the end of fiscal
2003. The Revolver requires that the Company be completely out of the
Revolver for any 15 consecutive day period during 2003 and any 30
consecutive day period during 2004 and 2005. The Company is in compliance
with all the covenants of its debt agreements.
(6) 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 28, 2002 are as follows.
2003 $4,256
2004 3,372
2005 2,210
2006 1,871
2007 1,555
2008 - 2011 3,597
-------
$16,861
=======
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 2002, 2001, and 2000, amounted to $6,520,
$5,616, and $6,056, respectively.
(7) Income Taxes
Income tax expense (benefit) consists of:
2002 2001 2000
-------------------------------------------------
Current expense (benefit):
Federal $(4,933) $105 $(2,847)
Foreign 482 397 433
State 116 172 225
------- ---- -------
(4,335) 674 (2,189)
Deferred expense (benefit) (1,714) 42 2,711
------- ---- -------
$(6,049) $716 $522
======= ==== ====
In addition to the 2002 year deferred income tax benefit of $1,714,
certain deferred income tax benefits of $1,878 were allocated directly to
shareholders' equity.
The differences between income taxes computed by applying the statutory
federal income tax rate (34% in 2002, 2001 and 2000) and income tax
expense (benefit) in the consolidated financial statements are:
2002 2001 2000
------------------------------------------------
Computed "expected" tax expense (benefit) $(6,087) $575 $(79)
State income taxes, net of federal income tax benefit 27 93 149
Foreign income tax rate differences 18 138 407
Other, net (7) (90) 45
------- ---- ----
$(6,049) $716 $522
======= ==== ====
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
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 28, 2002 December 29, 2001
----------------------------------------
Deferred tax assets:
Accounts receivable $1,050 $ 944
Inventories 1,914 1,069
Package design costs 260 262
Certain accounting accruals, including such items as
self-insurance costs, vacation costs, and others 1,762 684
Accrued pension costs 2,694 3,042
Pension liability adjustments 1,878 --
State net operating loss carryforward 619 234
Property, plant and equipment 94 --
------ ----
Total gross deferred tax assets 10,271 6,235
Less valuation allowance (450) --
------ ----
Total deferred tax assets 9,821 6,235
------ ----
Deferred tax liabilities:
Royalties -- 238
Foreign deferred items, net 362 --
Property, plant and equipment -- 130
------ ----
Total deferred tax liabilities 362 368
------ ----
Net deferred tax assets $9,459 $5,867
====== ======
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 2002 to be an unusual year since
throughout the Company's history it has regularly been profitable. The
Company was in the second year 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.
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The valuation allowances at
December 28, 2002 predominantly represent allowances against state net
operating losses which may not result in future tax benefits.
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. At
the end of the 2002 year, there were approximately $544 of such cumulative
earnings in the Fargeot subsidiary.
(8) Accrued Expenses
Accrued expenses consist of the following:
December 28, 2002 December 29, 2001
---------------------------------------
Salaries and wages $ 593 $1,299
Income taxes 463 710
Non-income taxes 1,524 989
Restructuring costs 1,738 346
All other areas 1,699 1,067
------ ------
$6,017 $4,411
====== ======
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
9) 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 (measured on
September 30, 2002 and 2001) as recognized at December 28, 2002 and
December 29, 2001 were:
2002 2001
---------------------------
Change in benefit obligation:
Benefit obligation at the beginning of the year $26,037 $25,706
Service cost 781 762
Interest cost 1,841 1,895
Actuarial (gain) loss 2,060 (1,004)
Benefits paid (1,726) (1,322)
------- -------
Benefit obligation at the end of the year 28,993 26,037
======= =======
Change in plan assets:
Fair value of plan assets at the beginning of the year 23,625 23,540
Actual return on plan assets (2,536) 1,733
Expenses (290) (326)
Benefits paid (1,726) (1,322)
------- -------
Fair value of plan assets at the end of the year 19,073 23,625
======= =======
Funded status (9,920) (2,412)
Unrecognized actuarial loss 7,173 63
Unrecognized prior service cost 226 250
------- -------
Net amount recognized in the consolidated balance sheets (2,521) (2,099)
======= =======
Amounts recognized in the consolidated balance sheets consist of:
Accrued retirement costs, classified all as non-current accrued
retirement costs (7,822) (2,099)
Intangible asset 226 --
Accumulated other comprehensive income 5,075 --
------- -------
Net amount recognized $(2,521) $(2,099)
======= =======
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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
The funded status of the SRP and the accrued retirement cost (measured on
September 30, 2002 and 2001) recognized at December 28, 2002 and December 29,
2001 are:
2002 2001
--------------------
Change in benefit obligation:
Benefit obligation at the beginning of the year $ 4,582 $ 4,522
Service cost 63 54
Interest cost 326 335
Amendments -- --
Actuarial (gain)/loss 30 (187)
Benefits paid (179) (142)
------- -------
Benefit obligation at the end of the year 4,822 4,582
======= =======
Change in plan assets:
Fair value of plan assets at the beginning of the year -- --
Employer contributions 179 142
Benefits paid (179) (142)
------- -------
Fair value of plan assets at the end of the year -- --
======= =======
Funded status (4,822) (4,582)
Contribution during the fourth quarter 48 39
Unrecognized actuarial (gain) (404) (449)
Unrecognized prior service cost 418 526
------- -------
Net amount recognized in the consolidated balance sheets (4,760) (4,466)
======= =======
Amounts recognized in the consolidated balance sheets consist of:
Accrued retirement cost, including current liability of $194
and $156, respectively (4,818) (4,722)
Intangible asset 58 194
Accumulated other comprehensive income -- 62
------- -------
Net amount recognized $(4,760) $(4,466)
======= =======
The components of net periodic benefit cost for the retirement plans were:
2002 2001 2000
-----------------------------------------------
Service cost $844 $816 $884
Interest cost 2,166 2,230 2,051
Expected return on plan assets (2,223) (2,173) (2,029)
Net amortization 108 73 113
------ ------ ------
$ 895 $ 946 $1,019
====== ====== ======
Weighted average assumptions as of December 28, 2002 and December 29, 2001 were:
December 28, 2002 December 29, 2001
--------------------------------------
Discount rate 6.60% 7.25%
Rate of compensation increase 4.50% 5.00%
Expected return on plan assets 9.00% 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 28,
2002, December 29, 2001, and December 30, 2000 was $244, $241, and $254,
respectively.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
(10) Shareholders' Equity
The Company has various stock option plans, which have granted incentive
stock options (ISOs) 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 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
Granted 265,300 30,700 5.74
Exercised (188,700) (21,300) 2.70
Expired/Cancelled (30,200) (150,000) 6.39
-------- -------- -----
Outstanding at December 28, 2002 866,100 445,600 $6.46
======== ======== =====
Options exercisable at December 28, 2002 241,300 344,000
======== ========
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 options for cancellation prior to the end of 2000.
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.
Options outstanding Options exercisable
---------------------------------------------------- ----------------------------------
Number Weighted-average Number
Range of outstanding remaining Weighted-average exercisable Weighted-average
exercise prices at 12/28/02 contractual life (years) exercise price at 12/28/02 exercise price
- --------------------------------------------------------------------------------------------------------------------------
$ 5.00 and under 605,300 7.8 $ 4.01 184,200 $ 3.58
5.01 - 10.00 530,300 6.0 $ 6.90 226,400 $ 8.26
10.01 - 15.00 169,400 4.5 $13.42 168,000 $13.40
15.01 and over 6,700 0.4 $16.43 6,700 $16.43
--------- -------
1,311,700 585,300
========= =======
At December 28, 2002, the remaining number of ISO and nonqualified shares
available for grant was 414,000.
At December 28, 2002, December 29, 2001, and December 30, 2000, the options
outstanding under these plans were held by 85, 89, and 73, employees,
respectively, and had expiration dates ranging from 2003 to 2012.
Stock appreciation rights may be issued subject to certain limitations. There
were no rights outstanding at December 28, 2002, December 29, 2001, and December
30, 2000.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
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:
2002 2001 2000
--------------------------------------------------
Net earnings (loss):
As reported $(11,880) $932 $(806)
Pro forma (12,961) 279 (1,400)
Earnings (loss) per share (diluted):
As reported (1.23) .10 (.09)
Pro forma (1.29) .03 (.15)
======= ==== ======
Using the Black-Scholes option pricing model, the per-share,
weighted-average fair value of stock options granted during 2002, 2001,
and 2000, was $3.07, $2.14, and $1.10, respectively, on the date of grant.
The assumptions used in estimating the fair value of the options as of
December 28, 2002 and December 29, 2001 were:
December 28, 2002 December 29, 2001
--------------------------------------
Expected dividend yield 0% 0%
Expected volatility 50% 50%
Risk-free interest rate 5.00% 5.00%
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 85% of the lower of
the fair market value on their enrollment date or at the end of each
two-year plan term.
Shares
subscribed
----------
Balance at December 30, 2000 238,700
Subscriptions 5,800
Purchases --
Expired (48,400)
-------
Balance at December 29, 2001 196,100
Subscriptions --
Purchases 195,700
Expired (400)
-------
Balance at December 28, 2002 0
=======
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
(11) Earnings per Share
Earnings(loss) per share for the years ended December 28, 2002, December
29, 2001, and December 30, 2000 were as follows:
December 28, 2002
--------------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------------------------------------------------
Basic and diluted EPS --
Net earnings (loss) allocable to common
shareholders $(11,880) 9,641 $(1.23)
======== ===== ======
No options to purchase were included in the computation of diluted
earnings per share because of the Company's loss for 2002.
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 --
---- ----- ----
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 $16.78 were
outstanding in 2001 but were not included in the computation of diluted
earnings per share because based on the Company 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)
===== ===== =====
No options to purchase common shares outstanding in 2000 were included in
the computation of diluted earnings per share because of the Company's
loss in 2000.
(12) 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.
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.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
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, should they become authorized for issuance by
action of the Board of Directors, are entitled to ten votes. The preferred
shares are entitled to a preference in liquidation. None of these shares
have been issued.
(13) 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
chief executive to purchase, if the estate elects to sell, up to $4
million of the Company's common shares, at their fair market value. To
fund its potential obligation to purchase such common shares, the Company
has purchased a $5 million life insurance policy on the chief executive
with a cash surrender value of $1.7 million at December 28, 2002 and
December 29, 2001, which is included in other assets in the accompanying
consolidated balance sheets. In addition, for a period of 24 months
following the chief executive's death, the Company will have a right of
first refusal to purchase any common shares of the Company owned by the
chief executive at the time of his death if his estate elects to sell such
common shares. The Company would have the right to purchase such common
shares on the same terms and conditions as the estate proposes to sell
such common shares.
(14) 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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
Revenues, and net property, plant and equipment, have been allocated to
geographic areas based upon the location of the Company's operating unit.
Revenues
2002 2001 2000
-------------------------------------------------
United States/North America $112,742 $124,206 $128,647
France 9,786 10,345 10,406
United Kingdom 42 70 1,286
-------- -------- --------
$122,570 $134,621 $140,339
======== ======== ========
Net Property, Plant and Equipment
2002 2001
---------------------------
United States $5,240 $6,797
Mexico 5,052 3,383
Other 618 737
------- -------
$10,910 $10,917
======= =======
Revenues by Product Line
2002 2001 2000
-------------------------------------------------
At- and around-the-home comfort footwear $118,559 $127,304 $127,632
Thermal retention technology products 4,011 7,317 12,707
-------- -------- --------
$122,570 $134,621 $140,339
======== ======== ========
In 2002, one Barry Comfort customer accounted for approximately 26% and a
second Barry Comfort customer accounted for approximately 11% of the
Company's net sales. In 2001, one Barry Comfort customer accounted for
approximately 22% and a second Barry Comfort customer accounted for
approximately 10% of the Company's net sales. In 2000, one Barry Comfort
customer accounted for approximately 21% of the Company's net sales.
Other Segment Information
Barry Comfort Inter-
North Segment
December 28, 2002 America Europe Thermal Eliminations Total
---------------------------------------------------------------------------------------------------------------------
Net sales $108,731 $9,828 $4,011 $ -- $122,570
Depreciation and amortization 1,570 209 156 -- 1,935
Interest income 183 -- -- (143) 40
Interest expense 1,450 79 143 (143) 1,529
Restructuring charges 2,300 536 523 -- 3,359
Pre tax earnings (loss) (9,744) (2,313) (5,847) -- (17,904)
Additions to property, plant and equipment 2,226 147 32 -- 2,405
Total assets devoted $87,830 $6,115 $1,531 $(7,838) $87,638
======= ====== ====== ======= =======
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
Barry Comfort Inter-
North Segment
December 29, 2001 America Europe Thermal Eliminations Total
---------------------------------------------------------------------------------------------------------------------
Net sales $116,889 $ 10,415 $ 7,317 $ -- $134,621
Depreciation and amortization 1,453 221 173 -- 1,847
Interest income 265 -- -- (23) 242
Interest expense 1,253 68 (23) 23 1,321
Restructuring (net adjustment) (118) -- -- -- (118)
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
December 30, 2000 America Europe Thermal Eliminations Total
---------------------------------------------------------------------------------------------------------------------
Net sales $ 115,940 $ 11,692 $12,707 $ -- $140,339
Depreciation and amortization 1,650 249 210 -- 2,109
Interest income 331 -- 44 (135) 240
Interest expense 1,972 70 135 (135) 2,042
Restructuring charges 1,886 -- 35 -- 1,921
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
========= ======== ======= ====== ========
(15) Restructuring and Asset Impairment Charges
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.
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.
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
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.
During the 2002 year, the Company engaged in several actions related to
reorganization efforts to improve profitability. One action in the 1st
quarter resulted in the coordinated transfer of cutting operations from
the U.S. to Mexico and a reduction in sewing operations in Nuevo Laredo,
Mexico. This action resulted in the reduction of 354 positions at a cost
of $727. Other actions in the 3rd and 4th quarters were taken to
restructure staff support of sales and operations, which impacted 9
employees at a cost of $938.
In the 4th quarter, the Company announced the decision to close the
Goldsboro distribution center in early 2003, (impacting 53
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries
(Dollar amounts in thousands, except for per share data)
positions at a cost of $601) and to similarly close the Wales distribution
center in early 2003 (impacting 22 positions at a cost of $178). The
closure of the Wales facility also resulted in recognition of $208 in
future lease obligation losses as well as $150 in asset impairment losses.
At year-end 2002, the Company also determined an asset impairment loss for
$523 on net fixed assets, trademarks, and patents associated with its
Vesture subsidiary.
Accruals Charges Non-cash Paid in Accruals
December 29, 2001 in 2002 Adjustments write-offs 2002 December 28, 2002
------------------------------------------------------------------------------------------------------------------------------
Employee separations $346 $2,444 $34 $ -- $1,294 $1,530
Noncancelable leases -- 208 -- -- -- 208
---- ------ --- ---- ------ ------
Total restructuring 346 2,652 34 -- 1,294 1,738
---- ------ --- ---- ------ ------
Asset impairments -- 673 -- 673 -- --
---- ------ --- ---- ------ ------
Total $346 $3,325 $34 $673 $1,294 $1,738
==== ====== === ==== ====== ======
After an income tax benefit of $1,131, these fiscal year 2002 actions
decreased earnings by $2,228 or approximately 23 cents per share.
(16) Product Warranties
Accruals and expenditures associated with the Company's warranties
provided on key components in selected commercial market thermal products
are recapped as follows:
Accruals Net charges Expenditures Accruals
December 30, 2000 in 2001 in 2001 December 29, 2001
-----------------------------------------------------------------------------------------------------------------
Warranty accrual $293 $453 $546 $200
---- ---- ---- ----
Accruals Net charges Expenditures Accruals
December 29, 2001 in 2002 in 2002 December 28, 2002
---------------------------------------------------------------------------------------------------------------------
Warranty accrual $200 $619 $491 $328
---- ---- ---- ---
(17) 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.
(18) 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.
In October 2001, the Company's Vesture subsidiary received a claim
charging that its pizza delivery system infringed on two United States
Patents. After receiving the charge of infringement, Vesture and counsel
evaluated the Patents and reached the conclusion that the Patents were not
infringed. The Company believes that the patent infringement allegations
are without merit and intends to defend vigorously against them. However,
the Company does not believe it is feasible to predict the outcome of the
suit and the timing of the final resolution of claim is uncertain.
(19) Subsequent Event
Early in January 2003, the Company entered into a five-year licensing
agreement for the marketing and distribution of slipper products with a
British footwear and apparel firm. This distributor-type agreement allows
the Company to continue to service the soft washable footwear market in
defined areas of Europe (including the United Kingdom, France, and
selected customers in specific other European countries) without
maintaining the costly sales organization and warehousing and distribution
operations operated since the mid-1990s. The Company will continue to
maintain and operate its profitable Fargeot footwear operations in
southern France.
37
INDEPENDENT AUDITOR'S 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 28, 2002 and December 29, 2001, 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 28, 2002. 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 28, 2002 and December 29, 2001, and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended December 28, 2002, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Columbus, Ohio
February 28, 2003
38