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EXHIBIT 13.1
SIX YEAR REVIEW OF SELECTED FINANCIAL DATA
R.G. Barry Corporation and Subsidiaries
2004 2003* 2002 2001 2000 1999
SUMMARY OF OPERATIONS (THOUSANDS)
Net sales $ 104,404 $ 123,137 $ 119,024 $ 129,361 $ 131,002 $ 123,533
Cost of sales 67,065 80,427 77,597 80,182 88,021 77,932
Gross profit 37,339 42,710 41,427 49,179 42,981 45,601
Gross profit as percent of net sales 35.8% 34.7% 34.8% 38.0% 32.8% 36.9%
Selling, general and administrative expenses 39,200 48,163 50,360 45,973 45,568 51,651
Restructuring and asset impairment charges (adjustments) 17,341 2,563 2,837 (118) 1,886 5,624
Operating income (loss) (19,202) (8,016) (11,770) 3,324 (4,473) (11,674)
Other income (expense) 419 151 800 800 810 502
Interest expense, net (1,292) (1,418) (1,346) (1,103) (1,711) (1,347)
Earnings (loss) before income taxes, continuing operations (20,075) (9,283) (12,316) 3,021 (5,374) (12,519)
Income tax (expense) benefit (123) (10,096) 4,191 (1,153) 616 2,411
Minority interest, net of tax (1) (17) (25) (42) (52) (20)
Net earnings (loss) from continuing operations (20,199) (19,396) (8,150) 1,826 (4,810) (10,128)
Net earnings (loss) from discontinued operations 334 (2,310) (3,730) (894) 4,004 (4,497)
Net earnings (loss) (19,865) (21,706) (11,880) 932 (806) (14,625)
ADDITIONAL DATA
Basic earnings (loss) per share $ (2.02) $ (2.21) $ (1.23) $ 0.10 $ (0.09) $ (1.55)
Diluted earnings (loss) per share $ (2.02) $ (2.21) $ (1.23) $ 0.10 $ (0.09) $ (1.55)
Book value per share $ 0.51 $ 2.58 $ 4.81 $ 6.44 $ 6.34 $ 6.46
Annual % change in net sales (15.2)% 3.5% (8.0)% (1.3)% 6.0% (6.8)%
Annual % change in net earnings (loss) 8.5% (82.7)% (1374.7)% 215.6% 94.5% (257.1)%
Pretax return on net sales (19.2)% (7.5)% (10.3)% 2.3% (4.1)% (10.1)%
Net earnings (loss) as a percentage of beginning (78.2)% (46.0)% (19.7)% 1.6% (1.3)% (18.5)%
shareholders' equity
Basic average number of shares outstanding (in thousands) 9,839 9,823 9,641 9,379 9,399 9,455
Diluted average number of shares outstanding (in 9,839 9,823 9,641 9,577 9,399 9,455
thousands)
FINANCIAL SUMMARY (THOUSANDS)
Current assets $ 33,082 $ 44,379 $ 61,068 $ 69,676 $ 70,268 $ 71,678
Current liabilities 18,209 18,533 20,141 14,471 14,715 17,705
Working capital 14,873 25,846 40,927 55,205 55,553 53,973
Long-term debt 479 2,141 5,760 5,162 7,637 8,571
Net shareholders' equity 4,978 25,387 47,188 60,385 59,452 60,384
Net property, plant and equipment 2,718 9,369 10,910 10,917 11,741 14,408
Total assets 39,092 61,280 87,638 88,612 89,549 93,164
Capital expenditures 122 1,662 2,373 1,186 653 3,381
Depreciation and amortization of property, plant and
equipment 1,336 1,762 1,779 1,674 2,109 2,243
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
MARKET AND DIVIDEND INFORMATION
R.G. Barry Corporation and Subsidiaries
MARKET VALUE
QUARTER HIGH LOW CLOSE
- ---- ------- ------- ------- ------
2004 FIRST $ 4.75 $ 1.43 $ 2.59
SECOND 2.90 1.53 1.62
THIRD 2.80 1.51 2.55
FOURTH 4.00 2.30 3.52
2003 First $ 4.49 $ 2.10 $ 2.30
Second 4.76 2.25 4.60
Third 5.38 4.35 5.24
Fourth 6.39 4.18 4.40
Since June 2004, R.G. Barry Corporation common shares are dually quoted on the
OTC Bulletin Board and The Pink Sheets under trading symbol RGBC.
Stock Ticker Symbol: RGBC
Approximate Number of Registered Shareholders: 1,000
QUARTERLY FINANCIAL DATA
R.G. Barry Corporation and Subsidiaries
in thousands, except basic and diluted earnings (loss) per share
2004 FISCAL QUARTERS FIRST SECOND THIRD FOURTH
- ---------------------------------------------- ----------- ----------- ----------- ----------
NET SALES $ 18,430 $ 14,516 $ 34,573 $ 36,885
GROSS PROFIT 5,513 4,033 12,835 14,958
NET EARNINGS (LOSS) - CONTINUING (14,159) (8,929) (1,426) 4,315
NET EARNINGS - DISCONTINUED -- 16 314 4
NET EARNINGS (LOSS) (14,159) (8,913) (1,112) 4,319
BASIC EARNINGS (LOSS) PER SHARE - CONTINUING $ (1.44) $ (0.91) $ (0.14) $ 0.44
DILUTED EARNINGS (LOSS) PER SHARE - CONTINUING $ (1.44) $ (0.91) $ (0.14) $ 0.44
BASIC EARNINGS PER SHARE - DISCONTINUED $ 0.00 $ 0.00 $ 0.03 $ 0.00
DILUTED EARNINGS PER SHARE - DISCONTINUED $ 0.00 $ 0.00 $ 0.03 $ 0.00
BASIC EARNINGS (LOSS) PER SHARE - TOTAL $ (1.44) $ (0.91) $ (0.11) $ 0.44
DILUTED EARNINGS (LOSS) PER SHARE - TOTAL $ (1.44) $ (0.91) $ (0.11) $ 0.44
2003 FISCAL QUARTERS First Second Third Fourth
- ------------------------------------------------ ----------- ----------- ---------- -----------
Net sales $ 20,378 $ 19,016 $ 40,001 $ 43,742
Gross profit 7,085 6,453 16,234 12,938
Net earnings (loss) - continuing (2,954) (2,395) 1,456 (15,503)
Net earnings (loss) - discontinued (918) (390) 3 (1,005)
Net earnings (loss) (3,872) (2,785) 1,459 (16,508)
Basic earnings (loss) per share - continuing $ (0.30) $ (0.24) $ 0.14 $ (1.57)
Diluted earnings (loss) per share - continuing $ (0.30) $ (0.24) $ 0.14 $ (1.57)
Basic earnings (loss) per share - discontinued $ (0.09) $ (0.04) $ 0.00 $ (0.11)
Diluted earnings (loss) per share - discontinued $ (0.09) $ (0.04) $ 0.00 $ (0.11)
Basic earnings (loss) per share - total $ (0.39) $ (0.29) $ 0.15 $ (1.68)
Diluted earnings (loss) per share - total $ (0.39) $ (0.29) $ 0.15 $ (1.68)
See also Management's Discussion & Analysis of Financial Condition & Results of
Operations.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
Introduction
Critical Accounting Policies and Use of Significant Estimates
The following discussion and analysis is intended to provide investors and
others with information we believe is necessary to understand the Company's
financial condition, changes in financial condition, results of operations and
cash flows. This discussion and analysis should be read in conjunction with the
Company's consolidated financial statements, the notes to the consolidated
financial statements and other information contained in this report.
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. We make these estimates after gathering as much information
from as many resources, both internal and external, as are available to us at
the time. After reasonably assessing the conditions that exist at the time, we
make these estimates and prepare our consolidated financial statements
accordingly. These estimates are made in a consistent manner from period to
period, based upon historical trends and conditions and after review and
analysis of current events and circumstances. We believe 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.
A summary of the critical accounting policies requiring management estimates
follows:
(a) We recognize revenue when goods are shipped from our warehouse and other
third-party distribution locations, at which point our customers take
ownership and assume risk of loss. In certain circumstances, we sell
products to customers under special arrangements, which provide for return
privileges, discounts, promotions and other sales incentives. At the time
we recognize revenue, we reduce our measurement of revenue by an estimated
cost of potential future returns and allowable retailer promotions and
incentives, recognizing as well a corresponding reduction in our reported
accounts receivable. These estimates have traditionally been sensitive to
and dependent on a variety of factors including, but not limited to,
quantities sold to our customers and the related selling and marketing
support programs; channels of distribution; retail sale rates; acceptance
of the styling of our product by consumers; overall economic environment;
consumer confidence leading towards and through the holiday season; and
other factors. Allowances for returns established at the end of 2004 and
2003 were approximately $4.1 million and $7.8 million, respectively.
Furthermore, allowances for promotions and other sales incentives
established at the end of 2004 and 2003 were approximately $8.0 million
and $10.5 million, respectively. The decrease in the dollar amount of both
return and promotion allowances is mainly due to the change in our
business model, which includes a more customer-specific sell-in approach.
The decrease also reflects our initiatives of being more responsive to our
customers by assisting in promoting goods in season and attempting to
reduce returns accordingly. During 2004, 2003 and 2002, we recorded
approximately $4.0 million, $8.1 million, and $11.6 million as the sales
value of merchandise returned by our customers. During 2004, 2003, and
2002, we recorded approximately $10.7 million, $11.4 million, and $13.6
million in charges to earnings in those years for consumer promotion
activities undertaken with our customers. As our business model is further
implemented in 2005, and given the continuously changing retail
environment, and our short experience with the new operating model, it is
possible that allowances for returns, promotions and other sales
incentives, and the related charges reported in our consolidated results
of operations for these activities could be different than those estimates
noted above.
(b) We value inventories using the lower of cost or market, based upon the
first-in, first-out ("FIFO") costing method. We evaluate our inventories
for any impairment in realizable value in light of our prior selling
season, the overall economic environment, and our expectations for the
upcoming selling seasons, and we record the appropriate write-downs under
the circumstances. At the end of 2004, we estimated that the FIFO cost of
our inventory exceeded the estimated net realizable value of that
inventory by $1.6 million, compared with a similar estimate of $5.9
million made at the end of 2003. This decrease is mainly due to the change
in our business model, which resulted in a more customer-targeted product
offering in the fall of 2004 and included more aggressive initiatives to
reduce our inventory investment. Inventory write-downs, recognized as part
of cost of sales for continuing operations, amounted to $2.1 million
during 2004, $5.4 million during 2003, and $1.7 million during 2002.
Inventory write-downs, recognized as part of cost of sales for
discontinued operations, totaled $7 thousand during 2004, $1.2 million
during 2003, and $1.2 million during 2002. As noted above, given our short
experience with the new business model and considering
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
the ever-changing retail landscape, it is possible that our estimates to
represent our inventory at the net realizable value could be different
than those reported in previous years.
(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 of America, and the requirements of the
income tax codes existing in the various jurisdictions where we operate.
In evaluating the future benefits of our deferred tax assets, we examine
our capacity for refund of federal income taxes due to our net operating
loss carry-forward position, and our projections of future profits. As a
result of our cumulative losses, we have determined that it is uncertain
when, and if, the deferred tax assets will have realizable value in future
years. Accordingly, beginning with year-end 2003, we established a
valuation allowance against the value of those deferred tax assets and a
reserve of $21.3 million at the end of 2004, compared to a valuation
allowance of $13.8 million at the end of 2003. (See also Note (7) of the
Notes to Consolidated Financial Statements for additional income tax
information.) Should our profits improve in future years, such that those
deferred items become realizable as deductions in future years, we will
recognize that benefit by reducing our reported tax expense in the future
years, once that realization becomes assured. As of the end of 2004, we
had approximately $30.2 million of net operating loss carry-forwards, for
U.S. federal income tax purposes and approximately $2.1 million of net
operating loss carry-forwards for Mexican income tax purposes. The future
use of net operating loss carry-forwards is subject to applicable tax
laws.
(d) We account for the CIT Facility as a financing facility in recognizing and
recording trade receivables. For financial statement purposes, the
factoring of receivables under the CIT Facility is not considered a sale
of receivables. As such, the amounts advanced by CIT are considered
short-term loans and are included within short-term notes payable on our
consolidated balance sheets.
(e) We make estimates of the future costs associated with restructuring plans
related to operational changes announced during the year. Estimates are
based upon the anticipated costs of employee separations; an analysis of
the impairment in the value of any affected assets; anticipated future
costs to be incurred in settling remaining lease obligations, net of any
anticipated sublease revenues; and other costs associated with the
restructuring plans. At the end of 2004, we had an accrued balance of $2.7
million relating to the estimated future costs of closing or reorganizing
certain operations. At the end of 2003, we had an accrued balance of $174
thousand for similar restructuring and reorganization activities under way
at that time. Should the actual costs of restructuring activities exceed
our estimates, the excess costs will be recognized in the following
period. Conversely, should the costs of restructuring be less than the
amounts estimated, future periods would benefit by that difference. (See
also Notes (8) and (15) of the Notes to Consolidated Financial Statements
for additional information concerning restructuring and asset impairment
charges.)
(f) We make an assessment of the ongoing future value of goodwill and other
intangible assets. No goodwill existed during 2004; therefore, no annual
evaluation was necessary. (See also Note (1)(f) of the Notes to
Consolidated Financial Statements.)
(g) We review the carrying value of our long-lived assets held and used and
long-lived assets to be disposed of whenever events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. This review is performed using estimates of future cash
flows. If the carrying value of the assets is considered impaired, an
impairment charge is recorded for the amount by which the carrying value
of the asset exceeds its fair value. Fair value is determined using the
present value of estimated net cash flows or comparable market values.
Assets to be disposed of are reported at the lower of book or fair market
value, less costs of disposal. We recorded asset impairment charges of
approximately $7.1 million, $200 thousand, and $673 thousand during 2004,
2003 and 2002, respectively. The significant increase in asset impairment
charges from 2003 to 2004 is due mainly to the closure of our
manufacturing and distribution facilities in Mexico and Laredo, Texas.
(h) There are various other accounting policies that also require management's
judgment. We follow these policies consistently from year to year and
period to period. For an additional discussion of all of our significant
accounting policies, please see Notes (1)(a) through (v) of the Notes to
Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
Actual results may vary from these estimates as a consequence of activities
after the period-end estimates have been made. These subsequent activities will
have either a positive or negative impact upon the results of operations in a
period subsequent to the period when we originally made the estimate.
Summary of Results for 2004
In early 2004, we developed and implemented a new business model in order to
respond to the significant operating losses that we experienced in prior years.
This new model focuses primarily on reducing our operating costs by simplifying
our product offerings and streamlining the overhead management structure
throughout all areas of our Company.
In summary, the following are key actions taken in 2004 related to our new
business model and other events that impacted our 2004 operating results. These
accomplishments and events are discussed in further detail below.
NEW BUSINESS MODEL
- - In January 2004, we engaged The Meridian Group ("Meridian"), a turnaround
consulting firm, to assist us in developing a new business model.
- - On March 10, 2004, Mr. Thomas M. Von Lehman, former principal with
Meridian, was hired as President and CEO. On February 24, 2005, Mr. Von
Lehman's employment agreement was extended through March 31, 2006.
- - On March 29, 2004, we entered into a three-year financing agreement (the
"CIT Facility") with The CIT Group/Commercial Services, Inc. ("CIT").
Following the closing of the CIT facility, we retired all outstanding
indebtedness with The Huntington National Bank. In addition, on that date,
we repaid all outstanding indebtedness under our Note Agreement with
Metropolitan Life Insurance Company. See "Liquidity and Capital Resources"
below.
- - We transitioned to a 100 percent outsourcing model that supported our fall
2004 business, relying on third party contract manufacturers in China,
without significant delivery or quality issues.
- - During the year, we sold approximately $8.0 million of slow-moving and
closeout type products and, in combination with other initiatives, reduced
our finished goods inventories by approximately 3 million pairs.
- - We completed the closure of our manufacturing and distribution facilities
in Mexico and Laredo, Texas in late September 2004. Distribution of our
goods is now done primarily through our distribution center in San Angelo,
Texas and a third-party logistics supplier located on the West Coast of
the United States.
- - With the assistance of an auctioning firm, in early August 2004, we sold
all of our machinery and equipment located in our former manufacturing
facilities in Mexico.
- - We streamlined our management structure and reduced our selling, general
and administrative expenses, consistent with our simplified business
model. This initiative involved personnel reductions at our headquarters
in Ohio and the closure of our operations support office in San Antonio,
Texas in late December 2004.
OTHER EVENTS
- - As a result of the closure of our manufacturing and distribution
facilities in Mexico and Laredo, Texas, the cessation of support
activities in San Antonio, Texas, and other reductions in overhead
expenses at our Ohio headquarters, we recorded restructuring and asset
impairment charges in 2004 of $17.4 million. These charges were a major
component of our operating loss of $19.2 million for 2004.
- - As a result of our cumulative losses in five of the last six years, we
have fully reserved the value of our deferred tax assets in the amount of
$21.3 million as of the end of 2004. In addition, as of the end of 2004,
we had approximately $30.2 million of net operating loss carry-forwards
for U.S. federal income tax purposes and approximately $2.1 million of net
operating loss carry-forwards for Mexican income tax purposes. Net
operating loss carry-forwards in the United States are generally available
for up to twenty years, while net operating loss carry-forwards in Mexico
are available for up to ten years.
The results of our operations are discussed later in this narrative.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
REFINING OUR BUSINESS MODEL IN 2005
As previously discussed, during the first quarter of 2004, we successfully
developed and began implementation of a new business model. Although the
consequences of adopting this model were costly, as reflected in our
consolidated results of operations, we believe the actions taken were necessary
to stabilize and position our Company for a return to profitability. The 2004
fourth quarter results evidence the positive impact of the changes made to our
business model. When compared to the same period a year earlier, we reported
higher gross profit as a percent of net sales, lower operating costs, and our
best fourth quarter earnings performance since 2001.
Going forward, we expect to aggressively focus on refining the new business
model and formalizing related processes; revitalizing the image of our Company
as well as the Dearfoams family of brands; and meeting or exceeding the
expectations of our customers and consumers with fresh, innovating thinking. We
believe our future business and operating models will result in fewer
significant changes than those experienced during 2004. However, due to the
seasonality of our business, there may still be significant inherent risk in our
model that we have not yet recognized. See the "Risk Factors" section below.
Liquidity and Capital Resources
Historically, we have utilized numerous types of assets in the development,
sourcing, marketing, warehousing, distribution, and sale of our products. Most
of our assets are current assets, such as cash, trade receivables, inventory,
and prepaid expenses.
At the end of 2004, current assets amounted to 85 percent of total assets,
compared with 72 percent at the end of 2003. As of the end of 2004, we had $14.9
million in net working capital, made up of $33.1 million in current assets, less
$18.2 million in current liabilities. As of the end of 2003, we had net working
capital of $25.8 million, made up of $44.4 million in current assets, less $18.5
million in current liabilities. The $10.9 million decline in net working capital
from 2003 to 2004 is primarily attributable to the net effect of a reduction in
net inventories of approximately $12.6 million and an increase of approximately
$3.8 million in net trade receivables. The reduction in inventories is
consistent with the change in our operating model, which includes a shift to 100
percent outsourcing of products from third-party manufacturers, combined with a
more consumer-focused product offering and sell-in approach for the fall season
of 2004. The increase in net trade receivables was mainly due to a lower returns
allowance reported at the end of 2004 versus 2003. Lower returns resulted
primarily from a combination of better than expected retail sale rates in some
of our product lines, the initiatives to assist our customers in promoting
certain products during the holiday season, and our more restrictive returns
policy.
We ended 2004 with $958 thousand in cash, $9.2 million in trade receivables, net
of allowances, and $20.2 million in inventory. By comparison, at the end of
2003, we had $2.0 million in cash, $5.4 million in net trade receivables, and
$32.8 million in inventory. The increase in ending trade receivables, net of
returns and promotions allowances, is primarily due to a lower returns reserve
recorded in 2004 as compared to the previous year. As noted above, this is
consistent with our new business model that includes a more customer-focused
sell-in approach and a more restrictive returns policy. The reduction in
inventories is a clear reflection of the changes in our supply chain processes
and other changes to our business model implemented during 2004 as we
transitioned our supply of goods to 100 percent outsourcing and sold a
significant amount of closeout-type products.
A key element of our new operating model is the reduction of our finished goods
inventory. As noted above, during 2004, we made significant progress in
establishing processes to align our inventory investment with the expected
demand for our products. As a result of this initiative, we were successful in
selling slow-moving, closeout-type products, generating approximately $8.0
million in cash. As in previous years, we have evaluated our on-hand inventory
and have taken appropriate write-downs in 2004 to value our inventory at the
expected net realizable value. (See also the discussion above regarding critical
accounting policies relating to inventory and Note (2) of the Notes to
Consolidated Financial Statements for more information regarding our inventory.)
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
We reported $6.4 million in accrued expenses at the end of 2004 compared to $5.2
million at the end of 2003. The increase in accrued expenses is due primarily to
the increase in restructuring charges related to the closure of our operations
in Mexico and Laredo and San Antonio, Texas, which includes accruals for
employee separation and noncancelable lease costs.
During 2004, we had capital expenditures of approximately $122 thousand and
received proceeds of approximately $965 thousand from the disposition of assets.
The disposition of assets was related to the closing of our manufacturing and
distribution activities in Mexico and Laredo, Texas. Capital expenditures during
2003 were approximately $1.7 million, while proceeds from the disposition of
assets totaled approximately $1.2 million. The capital expenditures in 2003
reflect the level of capital investment, which had been reflective of our prior
operating and manufacturing model. The proceeds from the disposition of assets
in 2003 related to the sale of our warehouse in Goldsboro, North Carolina.
2005 Liquidity
Based on the changes made during 2004 to create a lower-cost, more- efficient
business model, and the CIT ABL Facility, as discussed below, we believe there
should be sufficient liquidity and capital resources to fund our operations
through fiscal 2005, including our anticipated restructuring costs accrued for
at the end of 2004.
CIT CREDIT FACILITIES
For many years, we relied on unsecured credit agreements to satisfy our seasonal
and long-term capital liquidity needs. Our former primary lending institutions,
The Huntington National Bank ("Huntington") and Metropolitan Life Insurance
Company ("Metropolitan") accommodated our borrowing requirements and provided us
with needed liquidity, occasionally modifying provisions of the loan agreements
as necessary. During 2002, we entered into a Revolving Credit Agreement
("Revolver") with Huntington to refinance the previous revolving credit
agreement. As part of the Revolver, we granted Huntington and Metropolitan a
security interest in substantially all of our assets to secure our obligations
to Huntington under the Revolver and our obligations under our Note Agreement
dated July 5, 1994, as amended, with Metropolitan ("Loan Agreement"). Largely,
as a result of our significant continuing losses in 2003 and 2002, we were
unable to meet a number of the financial covenants included in both the Loan
Agreement and the Revolver, as amended.
On March 29, 2004, we entered into the CIT Facility. On March 30, 2004, we
borrowed approximately $10.3 million under the CIT Facility to repay all
outstanding indebtedness and related charges under the Revolver and terminated
that agreement. In addition, on that date we borrowed approximately $2.3 million
under the CIT Facility to repay all outstanding indebtedness under our Loan
Agreement with Metropolitan and terminated that agreement as well.
The CIT Facility provided us with advances in a maximum amount equal to the
lesser of (i) $35 million or (ii) a Borrowing Base (as defined in the CIT
Facility). The CIT Facility was a discretionary facility, meaning that CIT was
not contractually obligated to advance us funds.
Our obligations under the CIT Facility were secured by a first priority lien and
mortgage on substantially all of our assets, including accounts receivable,
inventory, intangibles, equipment, intellectual property and real estate. In
addition, we pledged to CIT the stock in our U.S. wholly-owned subsidiaries and
the subsidiaries guaranteed our indebtedness under the CIT Facility.
On March 31, 2005, we entered into a new asset-based financing agreement (the
"CIT ABL Facility") with CIT. The CIT ABL Facility replaces the CIT Facility.
The CIT ABL Facility is a two-year committed facility under which CIT is
obligated to advance us funds so long as we comply with the CIT financing
agreement, including satisfying covenants requiring that we meet various
financial condition and financial performance requirements.
Under the CIT ABL Facility, we are required to meet various financial covenants
including: (a) minimum Tangible Net Worth at the end of each fiscal quarter of
2005 and 2006; (b) negative Earnings Before Income Taxes, Depreciation, and
Amortization (excluding certain extraordinary or nonrecurring gains and losses),
for the two fiscal quarters ended June 30, 2005, not exceeding a specified
level; (c) Minimum Net Availability at the end of each fiscal year beginning in
2005; and (d) a minimum Fixed Charge Coverage Ratio test at the end of fiscal
2005 and each 12-month period ending at the end of each fiscal quarter
thereafter. The foregoing capitalized terms are defined in the CIT ABL
Facility. We currently believe we can meet these financial covenants in 2005.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
The CIT ABL Facility provides us with advances in a maximum amount equal to the
lesser of (a) $35 million or (b) a Borrowing Base (as defined in the CIT ABL
Facility). The Borrowing Base is determined by the agreement and is based
primarily on the sum of (i) the amount of 80% of the receivables due under the
factoring agreement, if any, and 80% of our total eligible accounts receivable;
(ii) the amount of our eligible inventory; (iii) a $3.5 million overformula
availability during our peak borrowing season from April through October; and
(iv) a $4.0 million allowance on our eligible intellectual property from January
1 to October 31. The CIT ABL Facility includes a $3 million subfacility for
CIT's guarantee of letters of credit that is counted against the maximum
borrowing amount noted above.
Interest on the CIT ABL Facility is initially at a rate per annum equal to the
JPMorgan Chase Bank prime rate plus 1%. In the event that we satisfy various
requirements as of the end of fiscal 2005, the rate per annum may be reduced to
the JPMorgan Chase Bank prime rate plus 0.5%. Each month, when our borrowing
needs require inclusion of the $3.5 million overformula in the Borrowing Base,
the interest rate will be increased by 0.5%.
As part of the CIT Facility, we entered into a factoring agreement with CIT,
under which CIT purchased accounts receivable that met CIT's eligibility
requirements. Although the CIT ABL Facility is intended to replace our current
factoring arrangement with CIT, the factoring agreement will remain in effect
for all accounts currently being factored under that agreement. However, going
forward, the CIT ABL Facility will be the exclusive loan facility between us and
CIT and no additional accounts will be factored and no further advances will be
made by CIT under the factoring agreement.
The liens and mortgage that secured the original CIT Facility remain in place
and have been amended and modified to secure the new CIT ABL Facility. In
addition, the pledge agreement and the subsidiary guarantees entered into in
connection with the original CIT Facility have also been amended to secure the
new CIT ABL Facility.
OTHER SHORT-TERM DEBT
Early in March 2004, we borrowed $2.2 million against the cash surrender value
of the life insurance policies insuring our non-executive chairman. This $2.2
million indebtedness is classified as short-term notes payable in the
consolidated balance sheets. At the end of 2003, our other short-term debt was
$2.0 million, represented by the amount outstanding under the Revolver.
Other Matters Impacting Liquidity and Capital Resources
OFF-BALANCE SHEET ARRANGEMENTS
We have traditionally leased facilities under operating lease transactions for
varying term lengths, ranging generally from three years to fifteen years, often
with options for renewal. On occasion, we have also leased certain equipment
utilizing operating leases. These leasing arrangements have allowed 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 ("SFAS") 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.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
The following table summarizes the Company's contractual obligations for both
long-term obligations that appear on our consolidated balance sheet, as
recognized in our consolidated financial statements, and so-called "Off-Balance
Sheet Arrangements", as discussed in the notes to our consolidated financial
statements:
LESS THAN 1 - 3 3 - 5 MORE THAN 5
TOTAL 1 YEAR YEARS YEARS YEARS
-------- --------- -------- -------- -----------
Payments due by period (in thousands of dollars)
CONTRACTUAL OBLIGATIONS:
recognized on the books and
records of the Company
Short-term debt $ 4,901 $ 4,901
Long-term debt, current
and non-current portions $ 2,200 $ 1,721 $ 403 $ 76 None
Capital lease obligations None
Other long-term
liabilities reflected on
the consolidated balance
sheet of the Company* $ 15,426 * * * *
CONTRACTUAL OBLIGATIONS:
considered "off-balance sheet
arrangements"
Operating leases - see also
Note (6) of the Notes to
Consolidated Financial
Statements $ 8,353 $ 1,897 $ 2,811 $ 1,707 $ 1,938
Purchase obligations in
the ordinary course of
business** $ 6,304 $ 6,304 None None None
* Other Long-Term Liabilities of the Company represent accrued cumulative
future obligations under our Associate Retirement Plan of approximately $7.0
million; accrued cumulative future obligations under our Supplemental
Retirement Plan of approximately $7.3 million; and accrued cumulative future
obligations from employee salary withholdings under our salary deferred
compensation plan of approximately $1.1 million. The timing of future cash
outflows related to these obligations is not readily determinable, as it is
totally dependent upon the timing of future associate retirements. Following
the requirements under SFAS No. 87, Accounting for Pensions, as amended,
during 2004 and 2003, we recorded a charge to Other Comprehensive Income to
recognize the effect of actuarial assumptions and market value changes as of
the September 30, 2004 and 2003 evaluation dates. The resultant effect
increased the aggregate liability under the Associate Retirement Plan and the
Supplemental Retirement Plan by $597 thousand and $529 thousand, in 2004 and
2003, respectively, with a corresponding charge to Other Comprehensive
Income. In early 2004, we froze pension benefits under the Associate
Retirement Plan and the Supplemental Retirement Plan effective as of April 1,
2004 and requested and obtained permission from the Internal Revenue Service
to defer our 2003 contribution to the Associate Retirement Plan in the amount
of approximately $1.4 million from 2004 to 2005. As a result of freezing our
pension plan, we reported a related curtailment loss of approximately $1.1
million in the first quarter of 2004.
** We acquire inventory and merchandise in the ordinary course of business,
issuing both purchase orders and letters of credit to acquire merchandise
from suppliers. Commitments in the ordinary course of business are included
above as "off-balance sheet arrangements". There are no material unusual
outstanding commitments other than in the ordinary course of business.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
We last paid cash dividends in 1981. We have no current plans to resume payment
of cash dividends or to acquire common shares for treasury. We anticipate
continuing to use our cash resources to fund the operating needs of the
business.
At times we have entered into foreign currency contracts, as noted in the
discussion below under the heading "Other Matters Relevant to Financial
Condition and Results of Operations - Foreign Currency Risk," to hedge currency
risk exposures that we have identified. However, as of the end of 2004 and 2003,
we had no foreign currency contracts outstanding. If outstanding, currency
contracts utilized as hedges would be included as "off-balance sheet
arrangements" as well.
Results of Operations
DISCONTINUED OPERATIONS
In June 2003, we sold substantially all of our thermal products assets to a
corporation formed by investors headed by a co-founder and former chief
executive officer of RGB Technology, Inc., our subsidiary formerly known as
Vesture Corporation ("RGB Technology"). This sale involved our Company selling
certain assets and the buyer assuming certain liabilities. As partial payment
for amounts owing from the buyer, the buyer delivered to us a promissory note in
the principal amount of $334 thousand. The promissory note was due and payable
in full on December 1, 2004. As of the end of 2003, we had reserved the full
amount of this note for doubtful collection. During 2004, we received from the
buyer $334 thousand mainly related to this promissory note. We recorded this
payment as part of earnings from discontinued operations in the consolidated
statements of operations.
As additional consideration for the assets transferred, the buyer has agreed to
pay us through the year 2007 annual royalties based on a percentage of the
buyer's annual sales of certain products in excess of specific thresholds. We do
not expect future royalty payments, if any, to be material to our Company's
overall results of operations or financial position.
With the disposal of the thermal products related assets, we have discontinued
the thermal products business segment. The disposition of these assets
represents a disposal of a business segment under SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Accordingly, the results of
this operation have been classified as discontinued and financial data for all
periods has been reclassified as discontinued operations.
Selected financial data relating to the discontinued operations has been
included in Note (16) of the Notes to Consolidated Financial Statements.
RESTRUCTURING ACTIVITIES
As discussed above, during 2004 we developed and implemented a new operating
model that caused us to undertake certain significant restructuring initiatives.
These initiatives primarily included closing our manufacturing and distribution
facilities in Mexico, closing our cross-dock location in Laredo, Texas, closing
our operations support office in San Antonio, Texas, and reducing overhead costs
in our Columbus, Ohio headquarters. As a result of these initiatives, we reduced
our total number of associates by approximately 1,800. We believe the results of
these initiatives have so far met the objectives of what we set out to do as
part of our business plan to return to profitability. The benefits of these
initiatives are evident in our 2004 fourth quarter results as we reported higher
gross profit as a percent of net sales and lower operating costs as compared to
the same period a year earlier, and posted our best fourth quarter earnings
performance since 2001.
Prior to 2004, we undertook a number of actions designed to improve our
operating performance. These actions spanned a variety of operations affecting
the manufacturing and distribution of products for our domestic and
international customers. As reflected in previous years' results and discussed
below in the comparison of results of operations from 2003 to 2002, these
actions proved to be inadequate and fell short of achieving the desired results,
which gave rise to the need to implement a new business model in 2004.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
Results of Continuing Operations
2004 SALES AND CONTINUING OPERATIONS COMPARED WITH 2003
We operate in two different business segments: "Barry Comfort North America",
which manufactures and markets at- and around-the-home comfort footwear for sale
in North America; and "Barry Comfort Europe", which markets footwear principally
in Western Europe. See also Note (14) of the Notes to Consolidated Financial
Statements for a breakdown of net sales by geographic region and by segment of
our operations.
During 2004, net sales from continuing operations totaled $104.4 million, a
decrease of approximately 15.2 percent from 2003. Net sales for Barry Comfort
North America decreased 15.5 percent in 2004 to $96.3 million from $113.9
million in 2003. The decrease in net sales for Barry Comfort North America
occurred principally among our department store customers and reflects in part
the initiatives undertaken in 2004 to build a new operating model by simplifying
our product offering and servicing a core of key customers profitably. The
decrease in net sales was also due to the negative impact of customer concerns
regarding our liquidity challenges in early 2004, their adverse reaction to our
more restrictive returns policy, and competition from in-store private label
programs. We intend to continue to examine our internal processes and undertake
the necessary initiatives to provide new styling of our comfort footwear, with
continued focus on fresh product, delivered complete and on-time to our
customers.
Net sales for Barry Comfort Europe decreased to $8.1 million in 2004 from $9.3
million in 2003. The decrease in net sales in Europe was primarily due to a
reduction of business within the export channels of our Fargeot subsidiary. This
decrease primarily resulted from the strengthening of the Euro currency as
compared to the dollar and other world currencies.
Gross profit in 2004 decreased to approximately $37.3 million from $42.7 million
in 2003. Gross profit as a percent of net sales increased to 35.8 percent in
2004, compared to 34.7 percent in 2003. The increase in gross profit as a
percent of net sales is due primarily to the benefit of lower cost purchases
from third-party suppliers of outsourced goods. The benefit of lower cost
purchases began to reflect itself during the second half of the year and even
more so in the last quarter of 2004. As a result of our closing operations in
Mexico, we became dependent upon third-party manufacturers and now outsource 100
percent of our product needs. As part of the new model, we expect to be more
cost competitive and to improve our gross profit percent performance in the
future.
Selling, general and administrative ("SG&A") expenses declined significantly by
$9 million in 2004 to $39.2 million, compared with $48.2 million in 2003. The
decrease occurred primarily in three of our key business expense areas noted as
follows. First, approximately $3.6 million of the total year-on-year reduction
in SG&A expenses occurred in our selling and marketing expense areas and was
consistent with our new operating business model to be more customer-specific in
our selling activities. Second, approximately $3.4 million of the decline in
SG&A expenses from 2003 was related to our closing of the support operations
office in San Antonio, Texas. Lastly, approximately $1.8 million of the
reduction in SG&A expenses was in shipping expenses and was also the result of
our overall decision to exit manufacturing, distribution, and operations support
activities in Mexico and Laredo, Texas.
Restructuring and asset impairment charges recognized in 2004 amounted to $17.3
million compared with $2.6 million recognized in 2003. The significant increase
in restructuring and asset impairment charges resulted primarily from the
initiatives undertaken in 2004 to close all manufacturing and distribution
facilities in Mexico and Laredo, Texas. These charges primarily include about
$7.1 million in asset impairment charges, of which $4.2 million were impairment
charges on our property, plant and equipment and approximately $2.7 million were
impairment costs related to the unamortized duty acceleration balance, as
discussed under the Acceleration of NAFTA Tariff Reduction section below.
Furthermore, the 2004 restructuring and asset impairment charges include about
$4.2 million for employee separation costs; approximately $3.3 million in
non-cancelable lease costs; and approximately $2.7 million reported in other
exit costs. See also Note (15) of the Notes to Consolidated Financial
Statements. In 2005, we do not expect to incur significant restructuring and
asset impairment charges related to new activities.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
Net interest expense decreased slightly in 2004 to $1.3 million from $1.4
million in 2003. The daily average seasonal borrowings outstanding under the CIT
Facility and the Revolver decreased to $16.3 million in 2004 from $19.5 million
in 2003 under the Revolver. The weighted-average interest rate on short-term
borrowings in 2004 increased to 5.2 percent from 3.9 percent in 2003, reflecting
a general increase in market rates and the change in our lending arrangements
with CIT.
Our operating results from continuing operations for 2004 reflect the results of
several initiatives to develop and establish a new operating model. Our business
model transformation clearly came at a substantial cost in both dollars and
human resources. The pre-tax loss from continuing operations increased to $20.1
million in 2004 from a pre-tax loss of $9.3 million a year earlier. We
recognized a tax expense of $123 thousand, primarily foreign taxes incurred by
our subsidiaries in Mexico through most of 2004. In 2003, our tax expense was
approximately $10.1 million and was mostly related to the valuation allowance
established in that year against the deferred tax assets. See also Note (7) of
the Notes to Consolidated Financial Statements.
Our net loss from continuing operations was $20.2 million in 2004 as compared to
$19.4 million loss from continuing operations a year earlier.
During 2004, we received from Vesture's buyer $334 thousand mainly related to
the promissory note as final payment on the earlier sale of that business.
During 2003, we reported a net loss from discontinued operations of
approximately $2.3 million. Including earnings from discontinued operations, we
reported a total net loss of $19.9 million in 2004 compared with a total net
loss of $21.7 million in 2003.
2003 SALES AND CONTINUING OPERATIONS COMPARED WITH 2002
During 2003, net sales totaled $123.1 million, an increase of 3.4 percent from
net sales of $119.0 million in 2002. Net sales in Barry Comfort North America
increased in 2003 to $113.9 million from $109.2 million in 2002, while net sales
in Barry Comfort Europe decreased in 2003 to $9.3 million from $9.8 million in
2002. The increase in Barry Comfort North America occurred principally among our
mass merchandising customers, with about one-third of that increase attributable
to our largest customer - Wal-Mart Stores, Inc. The decrease in Barry Europe was
primarily due to the change in our method of operations in Europe in early 2003
to a distributor/license agreement with a British footwear and apparel firm.
Gross profit increased slightly in 2003 to $42.7 million from $41.4 million a
year earlier. As a percentage of net sales, gross profit remained relatively
constant at 34.7 percent in 2003 and 34.8 percent a year earlier. The benefits
realized in 2003 as a result of the restructuring activities over the prior
several years were offset by increased manufacturing variances incurred during
2003, and the need to increase inventory write-downs recorded at the end of
2003. As noted in Note (2) of the Notes to the Consolidated Financial
Statements, total inventory write-downs increased by $2.3 million during 2003.
Selling, general and administrative expenses decreased during 2003 by
approximately $2.2 million to $48.2 million from $50.4 million a year earlier.
Most of this decrease was represented in the marketing and administrative areas.
Selling expenses in 2003 were relatively flat when compared to those incurred in
2002. We estimate that expenses incurred in shipping and distribution increased
during the third and fourth quarters of 2003 by approximately $2.0 million due
to the additional amount of inventory on-hand during the second half of that
year.
Restructuring expenses and asset impairment charges recognized in 2003 reported
as part of continuing operations amounted to approximately $2.6 million compared
to approximately $2.8 million in 2002. The charges recognized in 2003 were
related primarily to the goodwill impairment loss on our Fargeot subsidiary. The
2002 restructuring expenses and impairment charges were principally employee
separation costs resulting from several reorganization actions including
reduction in sewing operations in Nuevo Laredo, Mexico, reduction in our sales
and operations staff; and closure of our distribution facility in Goldsboro,
North Carolina.
Net interest expense increased to $1.4 million in 2003 from $1.3 million in
2002. During 2003, we relied more heavily on the Revolver to fund the daily
operations of the business. The daily average seasonal borrowings outstanding
under the Revolver increased to $19.5 million in 2003 from $11.9 million a year
earlier. The weighted-average interest rate on short-term bank borrowings in
2003 decreased slightly to 3.9 percent from 4.1 percent in 2002, reflecting the
general decline in short-term market related interest rates year-on-year.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
Our pre-tax loss from continuing operations decreased to $9.3 million in 2003
from $12.3 million a year earlier. Even though we were unprofitable in 2003, we
recorded a tax expense of $10.1 million, primarily as a consequence of providing
a valuation allowance of $13.8 million against our deferred tax assets. Our
total net loss for 2003 and 2002 was approximately $21.7 million and
approximately $12.0 million, respectively.
Other Matters Relevant to Financial Condition and Results of Operations
ACCELERATION OF NAFTA TARIFF REDUCTIONS
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 complete elimination
on January 1, 2008. With the assistance of two consulting firms, we were
successful in accelerating the elimination of these duties and agreed to pay an
aggregate amount of approximately $6.3 million, most of which is payable
quarterly through 2005.
We computed the discounted cost associated with these future payments to be
approximately $5.3 million, which was to be recognized through cost of sales,
proportionately over the years 2002 to 2007. This recognition was based on the
estimated benefit of duty elimination on our products as produced and projected
to be produced in Mexico over this six-year period. Consistent with our method,
in the first quarter of 2004, the year 2003 and the year 2002, we recognized
approximately $251 thousand, $1.5 million and $873 thousand, respectively, of
these costs and reported them within cost of sales. The unamortized balance of
approximately $2.9 million and $4.4 million was reported at the end of 2003 and
2002, respectively, and included in the "Other Assets" section of our
consolidated balance sheet. This asset classification was consistent with
projected realization of the duty elimination benefits and expected recognition
of those costs over the remaining years through 2007. As a result of our
decision to discontinue manufacturing operations during the first quarter 2004,
the remaining unamortized balance of these costs, or approximately $2.7 million,
was recognized as an impairment loss and reported within restructuring and asset
impairment charges in the consolidated statements of operations reported for
that period.
FOREIGN CURRENCY RISK
A substantial portion of our sales were conducted in North America and
denominated in US Dollars during 2004. For any significant sales transactions
denominated in other than US Dollars, our established policy guidelines require
us to hedge against currency exposure on a short-term basis, using foreign
exchange contracts as a means to protect ourselves from fluctuations. At the end
of fiscal 2004 and 2003, there were no such foreign exchange contracts
outstanding.
Most of our product is purchased from third party manufacturers in China. While
our business is conducted in US Dollars, should there be a change in the
valuation of the Chinese Renminbi, the cost structure of our suppliers could
change. A revaluation of the Renminbi could result in an increase in the costs
of our products, depending upon the competitive environment and the availability
of alternative suppliers.
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. This distributor-type license agreement allows us to continue servicing
the soft washable footwear market in Europe without incurring overhead costs in
support of our own selling, warehousing, and distribution operations as we once
had in the mid-1990's. We do not expect the annual royalty fees resulting from
this agreement to be significant to the overall operations of our business. We
continue to maintain our Fargeot footwear subsidiary, which operates in southern
France. Fargeot is not part of this license agreement.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries (continued)
"30-DAY LETTER" FROM THE INTERNAL REVENUE SERVICE
On June 8, 2004, we received a "30-day letter" from the Internal Revenue Service
("IRS") proposing certain adjustments which, if sustained, would result in an
additional tax obligation approximating $4.0 million plus interest. The proposed
adjustments relate to the years 1998 through 2002. Substantially all of the
proposed adjustments relate to the timing of certain deductions taken during
that period. On July 7, 2004, we submitted to the IRS a letter protesting the
proposed adjustments, and reiterating our position. We intend to vigorously
contest the proposed adjustments by the IRS. In our opinion, the resolution of
these matters is not expected to have a material adverse effect on our Company's
financial position or results of operations.
Forward-looking Statements
Some of the information in this Annual Report to Shareholders contains
forward-looking statements that involve substantial risks and uncertainties. You
can identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," or similar words. These
statements, which are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995, are based upon our current
plans and strategies and reflect our current assessment of the risks and
uncertainties related to our business. You should read statements that contain
forward-looking statements carefully because they (1) discuss our future
expectations; (2) contain projections of our future results of operations or of
our future financial conditions; or (3) state other "forward-looking"
information. The risk factors described below, as well as any other cautionary
language in this Annual Report to Shareholders, give examples of the types of
uncertainties that may cause our actual performance to differ materially from
the expectations we describe in our forward-looking statements. You should know
that if the events described in this section and elsewhere in this Annual Report
to Shareholders occur, they could have a material adverse effect on our
business, operating results and financial condition.
The following are the most significant risk factors in our business.
RISK FACTORS
- - The Company's ability to continue sourcing products from outside North
America without negatively impacting delivery times or product quality
under its new business model.
- - The ability of the Company to meet certain minimum covenants regarding its
financial condition and financial performance requirements as described in
the CIT ABL Facility. While we believe we can comply with such covenants
in 2005, our ability to do so assumes that (i) the cost benefits of our
new business model continue in 2005; (ii) we experience no major loss of
customers; and (iii) the Company continues to be able to source products
without incurring substantial unplanned costs.
- - The Company's ability to maintain its inventory levels in accordance with
its plans and achieve adequate levels of working capital.
- - The continued demand for the Company's products by its customers and
consumers, especially during the critical holiday season.
- - The ability of the Company to successfully compete on quality, fashion,
service, selection, and price.
- - The ability of the Company to finalize the exiting of certain lease
obligations related to our distribution facilities in Nuevo Laredo, Mexico
and Laredo, Texas and our former office in San Antonio, Texas without
incurring substantial unplanned costs or experiencing unforeseen
difficulties.
- - The Company's ability to resolve its dispute with the IRS, as described
above, without incurring substantial liability.
- - The impact of competition on the Company's market share.
- - The ability of the Company to retain key executives and successfully
manage a succession plan for members of its senior management.
CONSOLIDATED BALANCE SHEETS
R.G. Barry Corporation and Subsidiaries
JANUARY 1, 2005 January 3, 2004
(in thousands, except per share data)
-------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 958 $ 2,012
Accounts receivable:
Trade (less allowance for doubtful receivables, returns and
promotions of $12,095 and $18,494, respectively) 9,244 5,403
Other 897 1,715
Inventory 20,192 32,797
Prepaid expenses 1,791 2,452
-------- --------
Total current assets 33,082 44,379
-------- --------
Property, plant and equipment, at cost 13,705 35,274
Less accumulated depreciation and amortization 10,987 25,905
-------- --------
Net property, plant and equipment 2,718 9,369
-------- --------
Other assets 3,292 7,532
-------- --------
Total assets $ 39,092 $ 61,280
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term notes payable $ 4,901 $ 2,000
Current installments of long-term debt 1,721 3,869
Accounts payable 5,200 7,484
Accrued expenses 6,387 5,180
-------- --------
Total current liabilities 18,209 18,533
-------- --------
Accrued retirement cost, excluding current liability 14,304 13,619
Long-term debt, excluding current installments 479 2,141
Other 1,122 1,222
-------- --------
Total liabilities 34,114 35,515
-------- --------
Minority interest -- 378
Shareholders' equity:
Preferred shares, $1 par value per share. Authorized 3,775 Class A shares,
225 Series I Junior Participating Class A shares, and
1,000 Class B shares; none issued -- --
Common shares, $1 par value per share. Authorized 22,500 shares;
issued and outstanding 9,836 and 9,834 shares
(excluding treasury shares of 910 and 912) 9,836 9,834
Additional capital in excess of par value 12,851 12,851
Deferred compensation (19) (84)
Accumulated other comprehensive loss (3,981) (3,370)
Retained earnings (deficit) (13,709) 6,156
-------- --------
Net shareholders' equity 4,978 25,387
-------- --------
Total liabilities and net shareholders' equity $ 39,092 $ 61,280
======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
R.G. Barry Corporation and Subsidiaries
2004 2003 2002
(in thousands, except per share data)
--------- --------- ---------
Net sales $ 104,404 $ 123,137 $ 119,024
Cost of sales 67,065 80,427 77,597
--------- --------- ---------
Gross profit 37,339 42,710 41,427
Selling, general and administrative expenses 39,200 48,163 50,360
Restructuring and asset impairment charges 17,341 2,563 2,837
--------- --------- ---------
Operating loss (19,202) (8,016) (11,770)
Other income 419 151 800
Interest expense, net of interest income of $40 in 2002 (1,292) (1,418) (1,346)
--------- --------- ---------
Loss from continuing operations, before
income tax and minority interest (20,075) (9,283) (12,316)
Income tax (expense) benefit (123) (10,096) 4,191
Minority interest in income of consolidated
subsidiaries, net of tax (1) (17) (25)
--------- --------- ---------
Loss from continuing operations $ (20,199) $ (19,396) $ (8,150)
Earnings (loss) from discontinued operations,
net of income taxes (including a $223 loss
on disposal in 2003) 334 (2,310) (3,730)
--------- --------- ---------
Net loss (19,865) (21,706) (11,880)
========= ========= =========
Loss per common share: continuing operations
Basic $ (2.05) $ (1.97) $ (0.84)
========= ========= =========
Diluted $ (2.05) $ (1.97) $ (0.84)
========= ========= =========
Loss per common share: discontinued operations
Basic $ 0.03 $ (0.24) $ (0.39)
========= ========= =========
Diluted $ 0.03 $ (0.24) $ (0.39)
========= ========= =========
Loss per common share: total
Basic $ (2.02) $ (2.21) $ (1.23)
========= ========= =========
Diluted $ (2.02) $ (2.21) $ (1.23)
========= ========= =========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
R.G. Barry Corporation and Subsidiaries
Additional Accumulated
Capital in Deferred other Retained Net
Common excess of compen- comprehensive earnings shareholders'
shares par value sation income (loss) (deficit) equity
-------- ---------- -------- ------------- -------- -------------
(in thousands)
Balance at December 29, 2001 $ 9,376 $ 12,093 $ (331) $ (495) $ 39,742 $ 60,385
Comprehensive loss:
Net loss -- -- -- -- (11,880) (11,880)
Other comprehensive income (loss):
Foreign currency translation
adjustment -- -- -- 559 -- 559
Pension liability charge, net of
$(1,878) deferred income taxes -- -- -- (3,135) -- (3,135)
--------
Total comprehensive loss -- -- -- -- -- (14,456)
Amortization of deferred compensation -- -- 131 -- -- 131
Stock options and warrants exercised 430 698 1,128
-------- -------- -------- -------- -------- --------
Balance at December 28, 2002 $ 9,806 $ 12,791 $ (200) $ (3,071) $ 27,862 $ 47,188
Comprehensive loss:
Net loss -- -- -- -- (21,706) (21,706)
Other comprehensive income (loss):
Foreign currency translation
adjustment -- -- -- 231 -- 231
Pension liability charge -- -- -- (530) -- (530)
--------
Total comprehensive loss -- -- -- -- -- (22,005)
Amortization of deferred compensation -- -- 116 -- -- 116
Stock options exercised 28 60 -- -- -- 88
-------- -------- -------- -------- -------- --------
Balance at January 3, 2004 $ 9,834 $ 12,851 $ (84) $ (3,370) $ 6,156 $ 25,387
Comprehensive loss:
Net loss -- -- -- -- (19,865) (19,865)
Other comprehensive loss:
Foreign currency translation
adjustment -- -- -- (14) -- (14)
Pension liability charge -- -- -- (597) -- (597)
--------
Total comprehensive loss -- -- -- -- -- (20,476)
Amortization of deferred compensation -- -- 65 -- -- 65
Stock options exercised 2 -- -- -- -- 2
-------- -------- -------- -------- -------- --------
Balance at January 1, 2005 $ 9,836 $ 12,851 $ (19) $ (3,981) $(13,709) $ 4,978
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
R.G. Barry Corporation and Subsidiaries
2004 2003 2002
(in thousands)
-------- -------- --------
Cash flows from operating activities:
Net loss $(19,865) $(21,706) $(11,880)
Net (earnings) loss from discontinued operations,
net of tax benefit (334) 2,310 3,730
-------- -------- --------
Net loss from continuing operations (20,199) (19,396) (8,150)
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization of property,
plant and equipment 1,336 1,762 1,779
Deferred income tax and valuation adjustment expense (benefit) -- 9,841 (1,714)
Restructuring and impairment non-cash losses 7,156 -- 226
Loss on disposal of property, plant and equipment 26 390 271
Impairment loss on goodwill -- 2,363 --
Amortization of deferred compensation 65 116 131
Minority interest in income of consolidated subsidiaries,
net of tax 1 17 25
Changes in:
Accounts receivable (2,850) 3,463 4,003
Inventory 12,778 (212) 2,003
Recoverable income taxes -- 4,934 (4,934)
Prepaid expenses and other assets 836 (2,147) (3,785)
Accounts payable (2,128) (3,192) 2,923
Accrued expenses (972) (2,166) 2,406
Accrued retirement cost, net 1,235 1,172 768
Other liabilities 169 (1,049) 149
-------- -------- --------
Net cash used in continuing operations (2,547) (4,104) (3,899)
-------- -------- --------
Net cash provided by (used in) discontinued operations (216) 1,144 (1,931)
-------- -------- --------
Net cash used in operating activities (2,763) (2,960) (5,830)
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (122) (1,662) (2,373)
Proceeds from disposal of property, plant and equipment 965 1,168 8
-------- -------- --------
Net cash provided by (used in) investing activities 843 (494) (2,365)
-------- -------- --------
Cash flows from financing activities:
Additions to short-term and long-term debt 2,538 2,000 5,092
Repayment of long-term debt (1,683) (3,546) (3,416)
Proceeds from shares issued 2 88 1,128
-------- -------- --------
Net cash provided by (used in) financing activities 857 (1,458) 2,804
-------- -------- --------
Effect of exchange rates on cash 9 43 14
-------- -------- --------
Net decrease in cash (1,054) (4,869) (5,377)
Cash and cash equivalents at beginning of year 2,012 6,881 12,258
-------- -------- --------
Cash and cash equivalents at end of year $ 958 $ 2,012 $ 6,881
======== ======== ========
Supplemental cash flow disclosures:
Interest paid $ 1,199 $ 1,526 $ 1,223
Income taxes paid (recovered), net $ 28 $ (4,644) $ 723
======== ======== ========
See accompanying notes to consolidated financial statements.
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 primarily a United
States-based corporation with a small operation in France. The
Company's principal line of business is the design, purchase, 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 stores, chain stores, and
mass merchandisers.
The Company owns a French company, Escapade S.A. and its Fargeot et
Compagnie, S.A. subsidiary (collectively, "Fargeot"). An 80%
ownership interest in the Fargeot was purchased in 1999 and the
underlying purchase agreement included put and call options for the
purchase of the remaining 20% of the Fargeot shares. The minority
interest owner could put his shares to the Company for a period of
five years after July 22, 2004 at a fair value determined by the
purchase agreement. Similarly, the Company could call the remaining
shares through July 22, 2009 on the same basis. During November
2004, the minority interest owner exercised his put option, and the
Company acquired the remaining 20% ownership interest. As a result
of this action, the fair value of Fargeot's assets acquired less the
liabilities assumed exceeded the acquisition cost ("negative
goodwill") by $100 on the elimination of the minority interest.
After determining that no impairment loss existed based on estimates
using projected net present value of cash flows, negative goodwill
was applied as an proportional offset to the carrying book basis of
property, plant and equipment assets of the subsidiary. The
treatment of negative goodwill on this step acquisition is pursuant
to provisions of Statement of Financial Accounting Standard ("SFAS")
No. 141, Business Combinations.
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 existed up to end of November 2004, when
that interest was purchased by the Company. Through November 2004,
the minority interest was presented on an after-tax basis in the
Company's consolidated 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. There were no balances
maintained in such investments as of the end of fiscal 2004 or
fiscal 2003.
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 expense has 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 governed by SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 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.
The annual evaluation for impairment was done in the second quarter
of each year and updated in the event of any major events or changes
should they occur later in the year. The evaluation of goodwill was
made with no impairment adjustment required for the 2002 year.
As a consequence of changes occurring throughout the Company,
management determined that it was appropriate to reassess the value
of these assets as of the end of 2003. Based on its reassessment at
the end of 2003 of the present and projected long-term business
environment for its then 80% owned Fargeot subsidiary, the Company
determined that the goodwill value related to its purchase of the
80% ownership was impaired. In making this determination, the
Company approximated fair value through the use of projected future
cash flows and net present value analysis for this business unit.
Accordingly, an impairment loss of $2,363 was recorded in 2003.
No Goodwill existed during 2004, and, accordingly, no annual
evaluation was necessary.
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 No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
h) REVENUE RECOGNITION
The Company recognizes revenue when the goods are shipped to customers and
customers take ownership, assuming risk of loss, with adequate allowance
made for anticipated sales returns. The Company bases its allowance for
sales returns on current and historical trends and experience. Any
promotional allowances granted to customers are accrued and recognized at
the time when the underlying goods are shipped.
i) DISTRIBUTION AND WAREHOUSING COSTS
Distribution and warehousing costs for finished product, including
occupancy, are classified within selling, general and administrative
expenses in the consolidated statements of operations. These costs
amounted to $11,328, $13,481 and $13,113, respectively, for the fiscal
years ended January 1, 2005, January 3, 2004 and December 28, 2002.
j) ASSIGNMENT OF CUSTOMER RECEIVABLES
The Company entered into an agreement with its principal lender during
fiscal 2004, under which the Company assigned and transferred customer
receivables to its lender, with limited exceptions, and for which the
lender effectively guaranteed collection in the event of subsequent
customer bankruptcy. All customer claims or deductions against these
assigned accounts are with recourse to the Company for ultimate
resolutions.
This transaction was evaluated using criteria under SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, and the assignment of accounts was deemed
not to be a sale of financial assets, and has been accounted for as a
secured borrowing.
k) 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 fiscal years ended January 1, 2005, January
3, 2004, and December 28, 2002, advertising and promotion expenses in
continuing operations of $1,928, $2,677, and $3,540, 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.
l) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
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.
m) PER-SHARE INFORMATION
The computation of basic loss per common share is based on the weighted
average number of outstanding common shares during the period. Diluted
earnings per common share includes those weighted average common shares as
well as, when their effect is dilutive, potential common shares consisting
of certain common shares subject to stock options and the stock purchase
plan. Diluted loss per common share does not include the impact of
potential common shares due to their antidilutive effect.
n) COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net loss, foreign currency
translation adjustments and pension liability adjustments and is presented
in the consolidated statements of shareholders' equity and comprehensive
income.
o) 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 each period. Revenues, expenses, and cash flows have been
translated at the applicable weighted average rates of exchange in effect
during each period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
p) SHAREHOLDERS' EQUITY
The Company has various stock option plans, under which the Company
granted incentive stock options and nonqualified stock options exercisable
for periods of up to 10 years from the date of grant at prices not less
than fair market value at the date of grant. In December 2002, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an
amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, to require prominent disclosures in annual and
interim financial statements about the method of accounting for
stock-based compensation and the effect in measuring compensation expense.
The disclosure requirements of SFAS No. 148 are effective for periods
beginning after December 15, 2002.
The Company has elected to use the intrinsic value method, in accordance
with the provisions of SFAS No. 123, as amended by SFAS No. 148, to apply
the current accounting rules under Accounting Principles Board ("APB")
Opinion No. 25 and related interpretations, including FASB Interpretation
No. 44 (Accounting for Certain Transactions Involving Stock Compensation,
an interpretation of APB No. 25) in accounting for employee stock options
and accordingly, we have presented the disclosure only information as
required by SFAS No. 123 (see Note 10).
Had the Company elected to determine compensation cost based on the fair
value at the grant date, as prescribed by SFAS No. 123, the Company's net
loss would have been the proforma results shown below:
2004 2003 2002
------------ ------------ ------------
Net loss:
As reported $ (19,865) $ (21,706) $ (11,880)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effect (602) (672) (1,081)
----------- ----------- -----------
Pro forma (20,467) (22,378) (12,961)
=========== =========== ===========
Net loss per share:
Basic - as reported (2.02) (2.21) (1.23)
=========== =========== ===========
Basic - pro forma (2.08) (2.28) (1.34)
=========== =========== ===========
Diluted - as reported (2.02) (2.21) (1.23)
=========== =========== ===========
Diluted - pro forma (2.08) (2.28) (1.34)
=========== =========== ===========
Using the Black-Scholes option pricing model, the per-share,
weighted-average fair value of stock options granted during 2004, 2003,
and 2002, was $1.14, $1.72, and $3.07, respectively, on the date of grant.
The assumptions used in estimating the fair value of the options as of
January 1, 2005 and January 3, 2004 were:
JANUARY 1, January 3,
2005 2004
----------- -----------
Expected dividend yield 0% 0%
Expected volatility 60% 50%
Risk-free interest rate 3% 3%
Expected life - ISO grants 6 years 6 years
Expected life - nonqualified grants 2 - 8 years 8 years
q) 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.
r) 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
s) 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 SFAS No. 144. SFAS No. 144 requires that long-lived assets
held and used and long-lived assets held for disposal be measured at the
lower of book value or fair market value less costs of disposal. Fair
value is determined using the present value of estimated net cash flows or
comparable market values. In addition, SFAS No. 144 expands 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.
t) 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. This EITF is codified as EITF 01-9, Accounting for Consideration
given by a Vendor to a Customer (including a Reseller of the Vendor's
Products). This EITF 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. This EITF was effective in 2002 and
upon adoption, prior periods presented for comparative purposes were
reclassified. Application of this EITF resulted in a reduction of
Company's net sales of approximately $10,534, $11,055, and $13,195 for
fiscal years 2004, 2003, and 2002, respectively.
u) 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 elimination on January 1,
2008. With the assistance of two firms, the Company was successful in
accelerating the elimination of these duties and agreed to pay an
aggregate of about $6,250, most of which is payable in quarterly
installments through 2005.
The discounted cost associated with these future payments was $5,291 and
was 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 period. In the first quarter of fiscal 2004, fiscal years 2003
and 2002, $251, $1,473 and $873, respectively, of these costs have been
recognized within cost of sales. The unamortized balance of $2,945 and
$4,418 was included in the consolidated balance sheet in other assets for
2003 and 2002, respectively, and this asset classification was consistent
with projected realization of the duty elimination benefits and expected
recognition of those costs over the remaining years through 2007.
With its decision to discontinue manufacturing operations during the first
quarter 2004, the remaining unamortized balance of these costs was
recognized as an impairment loss of $2,694.
v) RECENTLY ISSUED ACCOUNTING STANDARDS
In late 2004, the FASB issued SFAS No. 151, Inventory Costs -- an
Amendment of ARB No. 43, Chapter 4, and SFAS No. 153, Exchanges of
Nonmonetary Assets, an amendment of APB Opinion 29. Both standards go into
effect for fiscal years beginning after July 15, 2005. With both of these
issued but not yet effective pronouncements, the Company does not
anticipate any material impact in adopting these standards in its
reporting results of operations or of the statement of financial position.
SFAS No. 151 provides specific definition to the term "abnormal costs", as
used in previous accounting standards in inventory reporting under
Accounting Research Bulletin 43. Such abnormal costs, with specific
definitions now provided under the standard, must be recognized in period
expense and not included in the valuation of inventory.
SFAS No. 153 modifies APB Opinion No. 129 to require the use of fair value
of assets exchanged involved in an exchange of productive use assets, and
limits the exception to the use of fair value only to situations involving
asset exchanges that do not have commercial substance.
SFAS No. 123R (Revised), Share Based Payments, has been issued to take
effect in the first interim period after July 15, 2005. This standard will
incorporate into reported results, a measure of expense for share based
compensation. This standard effectively requires the same reporting
approach for all companies in this area. The Company under this standard
has alternative implementation options as to how to present prior period
information, either as restated results on prior interim period, and/or
restatement of prior years, or by reference to prior period proforma
footnote disclosures. The Company intends to implement this Standard
prospectively, with reference to prior period proforma disclosures. The
Company has not determined what the impact of implementation of this
Standard will be on its results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
(2) INVENTORY
Inventory by category consists of the following:
JANUARY 1, January 3,
2005 2004
---------- ----------
Raw materials $ 1,031 $ 3,711
Work in process 202 615
Finished goods 18,959 28,471
--------- ---------
Inventory $ 20,192 $ 32,797
========= =========
Inventory is presented net of raw material write-downs of $42, and $2,839,
in fiscal years 2004 and 2003, respectively, and finished goods
write-downs of $1,515 and $3,022 in fiscal years 2004 and 2003,
respectively. Write-downs, recognized as a part of cost of sales for
continuing operations, amounted to $2,092, $5,445 and $1,729 in fiscal
years 2004, 2003 and 2002 respectively.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost consists of the following:
JANUARY 1, January 3, Estimated
2005 2004 life in years
---------- ---------- -------------
Land and improvements $ 422 $ 434 8 - 15
Buildings and improvements 3,175 3,244 40 - 50
Machinery and equipment 7,946 23,978 3 - 10
Leasehold improvements 2,162 7,212 5 - 20
======
Construction in progress -- 406
-------- --------
Total property, plant and equipment $ 13,705 $ 35,274
======== ========
(4) INTANGIBLE TRADEMARK AND PATENT ASSETS
These assets include the following:
JANUARY 1, January 3,
2005 2004
--------- ----------
Trademarks and patents, at cost $318 $702
Less accumulated amortization 101 298
---- ----
Trademarks and patents, net $217 $404
==== ====
The Company has recognized trademark and patent amortization expense of
$75 in 2004, $111 in 2003, and $118 in 2002, which is included within
selling, general, and administrative expenses.
During the first quarter of 2004, with its decision to eliminate
manufacturing activities, the Company recognized $194 in impairment loss
on remaining unamortized manufacturing related patent costs, where no
future benefit existed. The Company determined full impairment existed,
without any effective recovery of remaining unamortized cost on these
specific manufacturing related patents.
In addition, the Company recognized an impairment loss of $226 on thermal
product trademarks and patents in 2002. Based on the Company's methods,
remaining net trademark and patent cost will be recognized as amortization
expense of $64, $60, $47, $32, and $14, respectively, for each of the next
5 years. This expense recognition would accelerate should circumstances
change and an impairment be determined for trademarks or patents with
remaining value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
(5) SHORT-TERM NOTES PAYABLE AND LONG-TERM DEBT
Prior to March 29, 2004, the Company had in place various revolving credit
agreements with The Huntington National Bank (collectively the
"Revolver"). On March 29, 2004, the Company entered into a new financing
agreement with CIT Group/Commercial Services, Inc. (the "CIT Facility"),
to replace the financing provided by the Revolver.
The CIT Facility provides the Company with advances in a maximum amount
equal to the lesser of (i) $35 million or (ii) a Borrowing Base, as
defined in the CIT Facility. The CIT Facility is a discretionary facility,
which means that CIT is not contractually obligated to advance funds. The
Borrowing Base, which is determined by CIT in its sole discretion, is
determined on the basis of a number of factors, including the amount of
eligible accounts receivable and the amount of qualifying inventory,
subject to the right of CIT to establish reserves against availability as
it deems necessary. The CIT Facility also includes a $3 million
subfacility for the issuance of letters of credit that is counted against
the maximum borrowing amount discussed above.
On March 4, 2004 and continuing throughout fiscal 2004, the Company
borrowed $2,200 against the cash surrender value of life insurance
policies that the Company maintains on its non-executive chairman. See
also Note 13.
On March 30, 2004, the Company borrowed under the CIT Facility
approximately $10,300 to repay all outstanding indebtedness under the
Revolver and terminated the Revolver. On the same date, the Company
borrowed approximately $2,300 under the CIT Facility to repay all
outstanding indebtedness under the 9.7% long-term note with the
Metropolitan Life Insurance Company (the "Met Loan") and terminated that
agreement.
Obligations under the CIT Facility are secured by a first priority lien
and mortgage on substantially all of the Company's assets, including
accounts receivable, inventory, intangibles, equipment, intellectual
property and real estate. In addition, the Company granted to CIT a pledge
of the stock in its wholly-owned subsidiaries. The subsidiaries have
guaranteed the Company's indebtedness under the CIT Facility.
At January 1, 2005, short-term notes payable of $4,901, consist of
short-term indebtedness of $1,947 under the CIT Facility, with an interest
rate at 1% over prime or 6.25% at January 1, 2005, $2,200 short-term
borrowings against the cash surrender value of life insurance policy loans
with an interest rate of 3.25%, and $754 under an unsecured bank overdraft
arrangement carried by the French banks of Fargeot. At January 3, 2004,
short-term note payable of $2,000 consisted of indebtedness under the
Revolver, with an interest rate of 3.9%.
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 elimination on January 1,
2008. The Company was successful in accelerating the elimination of these
duties and agreed to pay two firms that assisted in the process, an
aggregate of $6,250, most of which is payable in quarterly installments
through December 2005. Reflected in current installments is $1,428, which
represents the present value, discounted at 8%, of the remaining quarterly
installments. The quarterly obligations due are subordinated to all other
Company obligations. The carrying value of the remaining obligation
approximates fair value based on current rates for borrowings 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 other notes, issued in January 2000, require quarterly interest and
principal payments, which commenced in 2000 and end in 2009. The interest
rate on these notes is set to Euribor plus 1% on a quarterly basis; at
January 1, 2005, the interest rate on these notes was 5.5%. The carrying
value of other notes approximates fair value based on current rates for
borrowings with comparable maturities.
Long-term debt consists of the following:
JANUARY 1, January 3,
2005 2004
---------- ----------
9.7% note, due July 2004 $ -- $ 2,142
Subordinated obligation 1,428 2,747
Other notes 772 1,121
--------- ---------
2,200 6,010
Less current installments 1,721 3,869
--------- ---------
Long-term debt, excluding current installments $ 479 $ 2,141
========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
The aggregate minimum principal maturities of the long-term debt for each
of the next five years following January 1, 2005 are as follows:
2005 $ 1,721
2006 307
2007 96
2008 52
2009 24
--------
$ 2,200
========
The CIT Facility places no restrictions on the Company's ability to pay
cash dividends. The Company last paid cash dividends in 1981 and has no
current intention to pay cash dividends.
(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 January 1, 2005 is as follows.
2005 $ 1,897
2006 1,548
2007 1,263
2008 841
2009 866
2010 - 2011 1,938
---------
$ 8,353
=========
Substantially all of these operating lease agreements are renewable for
periods of 3 to 5 years and require the Company to pay insurance, taxes,
and maintenance expenses. Rent expense under cancelable and noncancelable
operating lease arrangements in fiscal 2004, 2003, and 2002, for
continuing operations amounted to $5,792, $6,281, and $6,403,
respectively.
(7) INCOME TAXES
Income tax expense (benefit) consists of:
2004 2003 2002
---- ---- ----
Current expense (benefit):
Federal $ -- $ -- $ (4,933)
Foreign 123 127 482
State -- 128 116
------ --------- ---------
123 255 (4,335)
Deferred expense (benefit) -- 9,841 (1,714)
------ --------- ---------
Total expense (benefit) 123 10,096 (6,049)
====== ========= =========
Total benefit allocated to discontinued operations -- -- (1,858)
====== ========= =========
Total expense (benefit) on continuing operations $ 123 $ 10,096 $ (4,191)
====== ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
In fiscal 2002, 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 fiscal years 2004, 2003, and 2002) and income tax
expense (benefit) in the consolidated financial statements are:
2004 2003 2002
--------- --------- ---------
Computed "expected" tax benefit $ (6,712) $ (3,942) $ (6,087)
State income taxes (benefit), net of federal income tax (586) 83 27
Foreign income tax rate differences 5 (7) 18
Valuation allowance 7,479 13,344 450
Fargeot goodwill impairment impact -- 826 --
Other, net (63) (208) (457)
-------- -------- --------
Total expense (benefit) $ 123 $ 10,096 $ (6,049)
======== ======== ========
Total benefit allocated to discontinued operations -- -- (1,858)
======== ======== ========
Total expense (benefit) on continued operations $ 123 $ 10,096 $ (4,191)
======== ======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
JANUARY 1, January 3,
2005 2004
---------- -----------
Deferred tax assets:
Accounts receivable $ 573 $ 857
Inventories 344 772
Package design costs 128 201
Certain accounting accruals, including such items as
self-insurance costs, vacation costs, and others 2,394 980
Fixed asset impairment loss accrual 548 --
Accrued pension costs 3,500 3,352
Pension liability charge 1,878 1,878
State net operating loss carryforward 1,357 771
U.S. Federal net operating loss carryforward 10,267 4,442
Mexico federal net operating loss carryforward 699 614
Other -- 51
-------- --------
Total deferred tax assets 21,688 13,918
Less valuation allowance (21,273) (13,794)
-------- --------
Deferred tax assets, net 415 124
Deferred tax liabilities:
Prepaid insurance 390 --
Property, plant and equipment 25 124
-------- --------
Total deferred tax liabilities 415 124
-------- --------
Net deferred tax assets $ -- $ --
======== ========
The net deductible temporary differences incurred to date will reverse in future
periods when the Company anticipates generating taxable earnings. As a result of
its cumulative losses, the Company determined that it is questionable whether
the deferred tax assets recognized on the consolidated balance sheet will have
realizable value in future years. The deferred tax assets result from provisions
in the U.S. income tax code which require that certain accounting accruals must
wait until future years before those accruals are deductible for current income
tax purposes. Given the Company's recent operating results, there is no
historical assurance that future taxable income will be generated to offset
these deferred deductible items. Accordingly, the Company has established a
valuation allowance against the net deferred tax assets in the amount of $21,273
and $13,794 at the end of 2004 and 2003, respectively. Should the Company
produce profits in future years, such that those net deferred tax assets become
realized as tax deductions, the Company will recognize the benefit at that time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
At the end of fiscal 2004 and 2003, there are approximately $30,198 and
$12,935, respectively, of net operating loss carryforwards available for
U.S. Federal Income tax purposes, and approximately $2,118 and $1,805,
respectively, in net operating loss carryforwards available for income tax
purposes in Mexico related to the Company's sales subsidiary in that
country. Loss carryforwards in the United States are generally available
for up to twenty years in the future; in Mexico, carryforwards are
available for up to ten years into the future. The loss carryforwards for
U.S. Federal Income tax purposes are available starting in fiscal 2005 and
expire through fiscal 2024.
Deferred taxes are not provided on unremitted earnings of subsidiaries
outside the United States because it is expected that the earnings be
permanently reinvested. Such earnings may become taxable upon the sale or
liquidation of these subsidiaries or upon the remittance of dividends.
On June 8, 2004, the Company received a "30-day letter" from the Internal
Revenue Service ("IRS") proposing certain adjustments which, if sustained,
would result in an additional tax obligation approximating $4,000 plus
interest. The proposed adjustments relate to the years 1998 through 2002.
Substantially all of the proposed adjustments relate to the timing of
certain deductions taken during that period. On July 7, 2004, the Company
submitted to the IRS a letter protesting the proposed adjustments, and
reiterating its position. The Company intends to vigorously contest the
proposed adjustments by the IRS. In the opinion of management, the
resolution of these matters is not expected to have a material adverse
effect on the Company's financial position or results of operations.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
JANUARY 1, January 3,
2005 2004
---------- ----------
Salaries and wages $ 650 $ 668
Income taxes 194 482
Non-income taxes 1,160 1,532
Restructuring costs 2,659 174
Current pension liabilities 1,359 1,663
Other 365 661
-------- --------
$ 6,387 $ 5,180
======== ========
(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). Effective April 1, 2004,
the ARP retirement plan was frozen, resulting in a curtailment loss of
$196 for the ARP in the first quarter of 2004, and the elimination of
additional service costs after the first quarter of 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
The funded status of the ARP and the accrued retirement costs (measured on
September 30, 2004 and 2003) as recognized at January 1, 2005 and January 3,
2004 were:
2004 2003
----------- -----------
Change in projected benefit obligation:
Benefit obligation at the beginning of the year $ 30,971 $ 28,993
Service cost 196 854
Interest cost 1,792 1,857
Plan amendments (1,743) --
Actuarial loss 442 721
Benefits paid (1,722) (1,454)
---------- ----------
Benefit obligation at year-end $ 29,936 $ 30,971
========== ==========
Change in plan assets:
Fair value of plan assets at the beginning of the year $ 21,142 $ 19,073
Actual return on plan assets 2,786 3,818
Contributions 289 --
Expenses (340) (295)
Benefits paid (1,722) (1,454)
---------- ----------
Fair value of plan assets at year-end $ 22,155 $ 21,142
========== ==========
Funded status $ (7,781) $ (9,829)
Contributions made in the fourth quarter 145 --
Unrecognized actuarial loss 4,613 6,390
Unrecognized prior service cost -- 202
---------- ----------
Net amount recognized in the consolidated balance sheets $ (3,023) $ (3,237)
========== ==========
Amounts recognized in the consolidated balance sheets consist of:
Accrued retirement costs, (including $767 and $1,443 in 2004
and 2003, respectively, classified as current accrued
liability for retirement costs) $ (7,780) $ (7,915)
Intangible asset -- 202
Accumulated other comprehensive expense 4,757 4,476
---------- ----------
Net amount recognized in the consolidated balance sheets $ (3,023) $ (3,237)
========== ==========
The accumulated benefit obligation for the ARP was $29,936 and $29,058 as of
January 1, 2005 and January 3, 2004, respectively.
At January 1, 2005, expected benefit payments to plan participants from the ARP
for each of the next five years, and the next 5 year period in aggregate, are
projected as:
2005 $ 1,739
2006 1,801
2007 1,885
2008 1,970
2009 2,067
2010 - 2014 11,152
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. For certain participants, the Plan provides an alternative
benefit formula for years worked past the normal retirement age assumed by the
plan. Effective April 1, 2004, the SRP retirement plan was frozen, resulting in
a curtailment loss of $932 for the SRP in the first quarter of 2004, and the
elimination of additional service costs after the first quarter of 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
The funded status of the SRP and the accrued retirement cost (measured on
September 30, 2004 and 2003) recognized at January 1, 2005 and January 3, 2004
are:
2004 2003
---------- ----------
Change in projected benefit obligation:
Benefit obligation at the beginning of the year $ 7,532 $ 4,833
Service cost 18 69
Interest cost 459 407
Curtailment/Plan Amendment (154) --
Actuarial loss 287 2,434
Benefits paid (343) (211)
---------- ----------
Benefit obligation at year-end $ 7,799 $ 7,532
========== ==========
Change in plan assets:
Fair value of plan assets at the beginning of the year $ -- $ --
Employer contributions 343 211
Benefits paid (343) (211)
---------- ----------
Fair value of plan assets at year-end $ -- $ --
========== ==========
Funded status $ (7,799) $ (7,532)
Contribution during the fourth quarter 148 55
Unrecognized actuarial loss 1,214 1,171
Unrecognized prior service cost -- 1,014
---------- ----------
Net amount recognized in the consolidated balance sheets $ (6,437) $ (5,292)
========== ==========
Amounts recognized in the consolidated balance sheets consist of:
Accrued retirement cost, including current liability of
$592 and $220, respectively $ (7,882) $ (7,366)
Intangible asset -- 945
Accumulated other comprehensive expense 1,445 1,129
---------- ----------
Net amount recognized in the consolidated balance sheets $ (6,437) $ (5,292)
========== ==========
The accumulated benefit obligation for the SRP was $7,799 and $7,532 as of
January 1, 2005 and January 3, 2004, respectively.
At January 1, 2005, expected benefit payments to plan participants from the SRP
for each of the next five years, and the next 5 year period in aggregate, are
projected as:
2005 $ 597
2006 614
2007 637
2008 649
2009 655
2010 - 2014 3,387
Weighted average assumptions to determine net costs for both the ARP and the SRP
for the years ended January 1, 2005 and January 3, 2004 were:
2004 2003
----- -----
Discount rate 6.25% 6.60%
Rate of compensation increase 4.00% 4.50%
Expected return on plan assets 9.00% 9.00%
==== ====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
The components of net periodic benefit cost for the retirement plans were:
2004 2003 2002
----------- ----------- -----------
Service cost $ 214 $ 923 $ 844
Interest cost 2,251 2,263 2,166
Expected return on plan assets (2,015) (2,018) (2,223)
Settlement/Curtailment loss 1,128 - -
Net amortization 222 298 108
---------- ---------- ----------
$ 1,800 $ 1,466 $ 895
========== ========== ==========
Weighted average assumptions to determine benefit obligations and net cost as of
and for the years ended January 1, 2005 and January 3, 2004 were:
2004 2003
----- -----
Discount rate 6.00% 6.25%
Rate of compensation increase 4.00% 4.00%
Expected return on plan assets 8.50% 9.00%
==== ====
The qualified ARP is funded on a periodic basis as required under ERISA/IRS
guidelines. The qualified plan assets are invested as of the measurement date
for each fiscal year, as follows:
2004 2003
---- ----
Cash and equivalents 2% 2%
Domestic equities 61% 63%
Domestic fixed income securities 37% 35%
--- ---
Total pension plan assets invested 100% 100%
=== ===
The return on asset assumption used in the pension computations for the
qualified ARP plan is based on the Company's best judgment of future anticipated
performance of those invested assets based on our past long-term experience and
judgment on how future long-term performance will occur.
The Company's nonqualified SRP is unfunded and payments, as required, are made
when due from the Company's general funds.
The Company uses a measurement date of September 30 in making the required
pension computations on an annual basis. In 2005, the Company has potential
pension related payments of $1,359 for unfunded, nonqualified supplemental
retirement plans as well as for payments anticipated for 2004 and 2005 quarterly
estimated contributions to the funded, qualified associate retirement plan.
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 the 401(k) plan. Effective April 1, 2003, the Company changed its
matching contribution from an automatic fixed percentage to a match that is
contingent upon to meeting Company profit objectives on an annual basis. The
Company's contribution in cash to the 401(k) plan for the years ended January 1,
2005, January 3, 2004, and December 28, 2002 were $52, $87, and $244,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
(10) SHAREHOLDERS' EQUITY
The Company has various stock option plans, under which have been granted
incentive stock options ("ISOs") and nonqualified stock options ("NQs")
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:
NUMBER OF SHARES NUMBER OF SHARES WEIGHTED-AVERAGE
SUBJECT TO ISOs SUBJECT TO NQs EXERCISE PRICE
---------------- ---------------- ----------------
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
Granted 202,500 59,200 3.43
Exercised (7,700) (20,000) 3.19
Expired/Cancelled (156,600) (39,900) 6.64
-------- -------- --------
Outstanding at January 3, 2004 904,300 444,900 5.91
Granted 75,000 150,000 2.52
Exercised (800) - 3.01
Expired/Cancelled (266,200) (142,600) 6.50
-------- -------- --------
Outstanding at January 1, 2005 712,300 452,300 $ 5.05
======== ======== ========
Options exercisable at January 1, 2005 362,800 452,300
======== ========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ----------------------------------------
NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING AT REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES JANUARY 1, 2005 LIFE (YEARS) EXERCISE PRICE AT JANUARY 1, 2005 EXERCISE PRICES
- ---------------- --------------- --------------------- ---------------- ------------------ ----------------
$ 2.50 and under 115,000 1.8 $ 2.21 112,000 $ 2.21
2.51 - 5.00 731,900 7.2 3.66 459,800 3.87
5.01 - 10.00 191,700 6.3 6.46 117,300 7.07
10.01 - 15.00 126,000 2.8 13.58 126,000 13.58
========= =======
1,164,600 815,100
========= =======
At January 1, 2005, the remaining number of common shares available for grant of
ISOs and NQs was 319,900, of which 163,000 are available pursuant to the 1997
Incentive Stock Plan and 156,900 are available pursuant to the 2002 Stock
Incentive Plan.
At January 1, 2005, January 3, 2004, and December 28, 2002, the options
outstanding under these plans were held by 65, 80, and 85 employees
respectively, and had expiration dates ranging from 2005 to 2014.
Stock appreciation rights may be issued subject to certain limitations. No such
rights have been issued or are outstanding at January 1, 2005, January 3, 2004,
and December 28, 2002.
The Company has an employee stock purchase plan, with approximately 506,000
shares available for subscription, in which approximately 175 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. No shares were
subscribed and no shares were purchased during the three year period ending
January 1, 2005.
YEAR ENDED:
JANUARY 1, 2005 JANUARY 3, 2004 DECEMBER 28, 2002
--------------- --------------- -----------------
Total compensation cost recognized in income for
stock-based employee compensation awards $ 65 $ 116 $ 131
===== ======== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
(11) Earnings per Share
Earnings (loss) per share for the years ended January 1, 2005, January 3,
2004, and December 28, 2002 were as follows:
JANUARY 1, 2005
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ----------------- ---------
Basic and diluted loss per share:
Net loss allocable to common shareholders $ (19,865) 9,839 $ ( 2.02)
=============== ================= =========
January 3, 2004
Net loss Shares Per-share
(numerator) (denominator) amount
--------------- ----------------- ---------
Basic and diluted loss per share:
Net loss allocable to common shareholders $ (21,706) 9,823 $ (2.21)
=============== ================= =========
January 28, 2002
Net loss Shares Per-share
(numerator) (denominator) amount
--------------- ----------------- ---------
Basic and diluted loss per share:
Net loss allocable to common shareholders $ (11,880) 9,641 $ (1.23)
=============== ================= =========
No options to purchase common shares were included in the computation of
diluted loss per share because of the Company's net losses in fiscal years
2004, 2003 and 2002.
(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 I Junior 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 outstanding common shares, each holder of a Right will be entitled
to purchase, upon exercise of the Right, common shares having a market
value two times the exercise price of the Right. In the event that, at any
time following the Share Acquisition Date, the Company is acquired in a
merger or other business combination transaction in which the Company is
not the surviving corporation or 50% or more of the Company's assets or
earning power is sold or transferred, the holder of a Right will be
entitled to buy the number of shares of common stock of the acquiring
company which at the time of such transaction will have a market value of
two times the exercise price of the Right.
The Rights, which do not have any voting rights, expire on March 16, 2008,
and may be redeemed by the Company at a price of $0.01 per Right at any
time until 10 business days following the Share Acquisition Date.
Each Class A Preferred Share is entitled to one-tenth of one vote, while
Class B Preferred Shares, 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 the preferred
shares have been issued.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
(13) RELATED-PARTY OBLIGATION
The Company and its non-executive chairman ("chairman") had previously
entered into an agreement pursuant to which the Company is obligated for
up to two years after the death of the chairman to purchase, if the estate
elects to sell, up to $4,000 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 $5,000 life insurance policy on the
chairman; in addition, the Company maintains another policy insuring the
life of the chairman. The cumulative cash surrender value of the policies
approximates $2,500, at January 1, 2005 and January 3, 2004, which is
included in other assets in the accompanying consolidated balance sheets.
Effective March 4, 2004, and continuing throughout 2004, the Company has
borrowed against the cash surrender value of these policies.
In addition, for a period of 24 months following the chairman's death, the
Company will have a right of first refusal to purchase any common shares
of the Company owned by the chairman 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.
The Company has a royalty agreement with the mother of the chairman,
providing the Company with the exclusive right to manufacture and sell
various slipper styles and other product designs created and owned by her,
including future styles and designs. Under the agreement, the Company
agreed to pay a royalty to her of 1% of the net sales of products
utilizing her designs. The royalty agreement terminates five years after
her death. During 2004, 2003 and 2002, the Company accrued royalty
payments, to be paid in the following year, of $35, $33 and $55,
respectively, pursuant to the royalty agreement. The royalty agreement
also provides the Company an option to purchase her product designs and
related patent rights. The option is exercisable by the Company for a
period of six months following her death or a change of control of the
Company. The option price for her ownership interest in the product
designs and patent rights is $750 if the option is exercised following a
change of control of the Company that occurs prior to her death and $500
if the option is exercised following her death, if her death occurs prior
to a change of control. The royalty agreement grants her the right to
require the Company to purchase her product designs and patent rights for
a period of six months following a change of control of the Company that
occurs prior to her death for a purchase price of $750. Upon the Company's
purchase of her design rights the royalty agreement will terminate.
The chairman's mother was also a party to a consulting services agreement
with the Company pursuant to which she agreed to provide consulting
services in regard to product design and construction and to promote and
enhance the Company's image and reputation. The consulting services
agreement provided for quarterly payments of $15. The initial term of the
agreement began on January 1, 2000 and was automatically renewed through
December 31, 2004, at which time the consulting services agreement was not
renewed by the Company.
During 2004, the Company engaged The Meridian Group ("Meridian"), whose
services included assisting the Company in the development of its new
business model, in restructuring its financing resources, and in
identifying auction firms to market and sell its equipment in Mexico. The
Company's President and Chief Executive Officer, is currently on leave
from Meridian, and his spouse is the President and sole owner of Meridian.
The Company paid fees to Meridian amounting to $752, a substantial portion
of which was incurred in conjunction with activities undertaken prior to
the Company's hiring its President and Chief Executive Officer. The fees
incurred were at Meridian's customary rates for providing such services,
and the Company believes the fees were consistent with the market price
for such services.
(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 primarily markets comfort footwear for at- and
around-the-home. The Company considers its "Barry Comfort" at- and
around-the-home comfort footwear group in North America and Europe as its
two operating segments.
The accounting policies of the operating segments are substantially
similar to those described in Note 1, except that the segment 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 between operating segments.
Some of the more significant unallocated items include costs of certain
administrative functions, and current and deferred income tax expense
(benefit) and deferred tax assets (liabilities).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
Net sales, and net property, plant and equipment, have been allocated to
geographic areas based upon the location of the Company's operating unit.
NET SALES
2004 2003 2002
---- ---- ----
United States/North America $ 96,275 $113,881 $109,196
France 8,129 9,074 9,786
United Kingdom -- 182 42
-------- -------- --------
$104,404 $123,137 $119,024
======== ======== ========
NET PROPERTY, PLANT AND EQUIPMENT
2004 2003
---- ----
United States $ 2,423 $3,637
Mexico -- 5,114
Other 295 618
-------- ------
$ 2,718 $9,369
======== ======
In fiscal 2004, one customer accounted for approximately 29%, and a second
customer accounted for approximately 11% of the Company's net sales. In fiscal
2003, one customer accounted approximately for 25%, a second customer for 11%,
and a third customer accounted for 10% of the Company's net sales. In fiscal
2002, one customer accounted for approximately 26% and a second customer
accounted for approximately 11% of the Company's net sales.
BARRY COMFORT
JANUARY 1, 2005 NORTH AMERICA EUROPE TOTAL
- --------------- ------------- ------ ---------
Net sales $ 96,275 $8,129 $ 104,404
Depreciation and amortization 1,163 173 1,336
Interest income -- -- --
Interest expense 1,228 64 1,292
Restructuring and asset impairment charges 17,341 -- 17,341
Gross profit 36,224 1,115 37,339
Pre tax earnings (loss) (20,241) 166 (20,075)
Additions to property, plant and equipment 55 67 122
Total assets $ 35,082 $4,010 $ 39,092
======== ====== =========
Barry Comfort
January 3, 2004 North America Europe Total
- --------------- ------------- ------ ---------
Net sales $ 113,881 $ 9,256 $ 123,137
Depreciation and amortization 1,547 215 1,762
Interest income -- -- --
Interest expense 1,343 75 1,418
Restructuring and asset impairment charges 200 -- 200
Goodwill impairment charge -- 2,363 2,363
Gross profit 41,627 1,083 42,710
Pre tax loss (5,874) (3,409) (9,283)
Additions to property, plant and equipment 1,555 107 1,662
Total assets $ 57,216 $ 4,064 $ 61,280
========= ======= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
Barry Comfort
December 28, 2002 North America Europe Total
- ----------------- ------------- ------- --------
Net sales $ 109,196 $ 9,828 $ 119,024
Depreciation and amortization 1,570 209 1,779
Interest income 40 -- 40
Interest expense 1,318 68 1,386
Restructuring, net charges 2,301 536 2,837
Gross profit 40,159 1,268 41,427
Pre tax loss (10,003) (2,313) (12,316)
Additions to property, plant and equipment 2,226 147 2,373
Total assets - continuing operations $ 77,617 $ 8,489 $ 86,106
============ =======
Total assets - discontinued operations 1,532
---------
Total assets $ 87,638
=========
(15) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
During 2004, the Company closed its manufacturing operations in Mexico in
the first quarter; closed its distribution activities centered in Mexico
in the third quarter; closed related cross dock distribution operations in
Laredo in the fourth quarter; and completed closure of its operations
offices based in San Antonio in the fourth quarter. The Company recognized
asset impairment charges of $7,098, with $4,202 related to net property,
plant and equipment, and the remaining $2,896 related to other non-current
assets, primarily manufacturing patents and unamortized duty acceleration
costs [as discussed in Note 1(u)].
ACCRUALS CHARGES NON-CASH PAID IN ACCRUALS
JANUARY 3, 2004 IN 2004 ADJUSTMENTS WRITE-OFFS 2004 JANUARY 1, 2005
--------------- ------- ----------- ---------- -------- ---------------
Employee separations $174 $ 4,201 $(10) $ -- $3,438 $ 927
Other exit costs -- 2,736 -- -- 2,736 --
Noncancelable leases -- 3,316 -- -- 1,584 1,732
---- ------- ---- ----------- ------ ------
Total restructuring 174 10,253 (10) -- 7,758 2,659
---- ------- ---- ----------- ------ ------
Asset impairments -- 7,098 -- 7,098 -- --
---- ------- ---- ----------- ------ ------
Total $174 $17,351 $(10) $ 7,098 $7,758 $2,659
==== ======= ==== =========== ====== ======
The impact of the $17,341 restructuring and impairment loss on fiscal 2004 from
the actions noted above increased the loss by approximately $1.76 per share.
During 2003, the Company closed its Goldsboro warehouse facility and upon
closure, evaluated the carrying value of this facility and recognized a $200
impairment loss, which was realized upon sale of the facility in the second
quarter, 2003. In addition, during 2003, the Company recorded goodwill
impairment loss on its then-80% owned Fargeot subsidiary [see Note 1(a)].
Accruals Charges Non-cash Paid in Accruals
December 28, 2002 in 2003 Adjustments write-offs 2003 January 3, 2004
----------------- ------- ----------- ---------- ---- ---------------
Employee separations $ 1,530 $ -- $ -- $ -- $1,356 $174
Noncancelable leases 208 -- -- -- 208 --
---------- -------- ---------- ---------- ------ ----
Total restructuring 1,738 -- -- -- 1,564 174
---------- -------- ---------- ---------- ------ ----
Goodwill impairment -- 2,363 -- 2,363 -- --
Asset impairments -- 200 -- 200 -- --
---------- -------- ---------- ---------- ------ ----
Total $ 1,738 $ 2,563 $ -- $ 2,563 $1,564 $174
========== ======== ========== ========== ====== ====
The impact of the $2,563 impairment loss on fiscal 2003 from the actions noted
above increased the loss by approximately $0.26 per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
During 2002, the Company engaged in several actions related to
reorganization efforts to improve 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 at a
payroll severance cost of $727. Other actions in the third and fourth
quarters were taken to restructure staff support of sales and operations,
which impacted 9 employees at a payroll severance cost of $938. In the
fourth quarter, the Company announced the decision to close the Goldsboro
distribution center in early 2003, impacting 53 positions at a payroll
severance cost of $601. In the same year, the Company closed the Wales
distribution center in early 2003, impacting 22 positions at a payroll
severance cost of $178, recognition of $208 in future lease obligation
losses, and $150 in asset impairment losses. The closure of the Wales
distribution center ended direct selling activities in Europe. At year-end
2002, the Company also recognized an asset impairment loss for $523 on net
property, plant and equipment and on non-current assets, trademarks, and
patents, associated with its discontinued operations.
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 impairment ----------- ------- ----- -------- ------- ---------
-- 673 -- 673 -- --
Total $ 346 $ 3,325 $ 34 $ 673 $ 1,294 $ 1,738
=========== ======= ===== ======== ======= =========
After an income tax benefit of $131, 2002 actions increased the loss by
$2,228, or approximately $0.23 per share.
(16) SALE OF VESTURE NET ASSETS
In 2003, the Company sold certain assets of its Vesture thermal product
subsidiary. Vesture assets sold in the transaction included furnishings,
trade fixtures, equipment; raw material and finished products inventories;
books and records, including supplier and customer lists; Vesture's rights
under certain contracts and agreements; patents and trademarks used by
Vesture; and trade accounts receivable of Vesture arising after March 29,
2003. The Company retained Vesture's account receivables as of March 29,
2003. As consideration, the purchaser assumed specific liabilities and
obligations of Vesture and paid the Company a nominal sum of cash, and
provided the Company with a promissory note in the amount of $334, due in
December 2004. In 2003, the Company provided a full reserve for the
balance due on the note. As additional consideration for the assets sold,
the purchaser committed to remit a specified sum in December, 2004 and
make annual payments, through 2007, based upon a percentage of purchaser's
annual sales of certain products in excess of specific sales thresholds.
Beyond the provisions involved in the sale, the Company has no continuing
involvement in this business.
At the time of the sale, the particular assets and liabilities involved in
this sale included:
Accounts receivable, net $ 783
Inventory 253
Other Assets 108
Accounts payable (475)
Other liabilities (304)
-----
Net assets involved in sale $ 365
=====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R.G. Barry Corporation and Subsidiaries (continued)
(Dollar amounts in thousands, except for per share data)
Selected financial data relating to the discontinued operations follows:
2004 2003 2002
------- -------- --------
Net sales $ -- $ 1,759 $ 3,546
Gross profit (loss) -- 57 (1,654)
Selling, general and administrative expense -- 2,040 3,268
Restructuring expense -- -- 523
Interest expense -- 104 143
Gain (loss) on sale of certain assets relating to
discontinued operations 334 (223) --
Earnings (loss) from discontinued operations
before income tax 334 (2,310) (5,588)
Income tax benefit -- -- 1,858
Earnings (loss) from discontinued operations,
net of income tax $ 334 $(2,310) $(3,730)
In fiscal 2004, earnings from discontinued operations is primarily from
the early payment of a promissory note receivable received in conjunction
with the sale. At the time of the sale, the note had been fully reserved
for doubtful collection.
(17) 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.
(18) SUBSEQUENT EVENT
On March 31, 2005, the Company entered into a new asset-backed financing
agreement (the "CIT ABL Facility") with CIT. The CIT ABL Facility replaces
the CIT Facility. The CIT ABL Facility is a two-year committed facility
under which CIT is obligated to advance the Company funds so long as the
Company complies with the CIT financing agreement, including satisfying
covenants requiring that we meet various financial condition and financial
performance requirements.
Under the CIT ABL Facility, the Company is required to meet various
financial covenants including: a) minimum Tangible Net Worth at the end of
each fiscal quarter of 2005 and 2006; b) negative Earnings Before Income
Taxes, Depreciation, and Amortization (excluding certain extraordinary or
nonrecurring gains and losses) for the two fiscal quarters ended June 30,
2005, not exceeding a specified level; c) Minimum Net Availability at the
end of each fiscal year beginning in 2005; and d) a minimum Fixed Charge
Coverage Ratio test at the end of fiscal 2005 and each 12-month period
ending at the end of each fiscal quarter thereafter. The foregoing
capitalized terms are defined in the CIT ABL Facility. While we believe we
can comply with such covenants in 2005, our ability to do so assumes that
(i) the cost benefits of our new business model continue in 2005; (ii) we
experience no major loss of customers; and (iii) the Company continues to
be able to source products without incurring substantial unplanned costs.
The CIT ABL Facility provides the Company with advances in a maximum
amount equal to the lesser of (i) $35 million or (ii) a Borrowing Base (as
defined in the CIT ABL Facility). The Borrowing Base is determined by the
agreement and is based primarily on the sum of (i) the amount of 80% of
the receivables due under the factoring agreement, if any, and 80% of the
Company's total eligible accounts receivable; (ii) the amount of eligible
inventory; (iii) a $3.5 million overformula availability during the
Company's peak borrowing season from April through October; and (iv) a
$4.0 million allowance on the Company's eligible intellectual property
from January 1 to October 31. The CIT ABL Facility includes a $3 million
subfacility for CIT's guarantee of letters of credit that is counted
against the maximum borrowing amount noted above.
The liens and mortgage that secured the original CIT Facility remain in
place and have been amended and modified to secure the new CIT ABL
Facility. In addition, the pledge agreement and the subsidiary guarantees
entered into in connection with the original CIT Facility have also been
amended to secure the new CIT ABL Facility.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 January 1, 2005 and January 3, 2004 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended January 1, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 January 1, 2005 and January 3, 2004 and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 1, 2005 in conformity with U.S. generally
accepted accounting principles.
KPMG LLP
Columbus, Ohio
February 25, 2005
Except as to Note 18, which is as of March 31, 2005.