UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-08769
R. G. BARRY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-4362899
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
13405 Yarmouth Road NW, Pickerington, Ohio 43147
(Address of principal executive offices) (Zip Code)
614-864-6400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Shares, $1 Par Value, Outstanding as of August 15, 2005 - 9,870,602
Index to Exhibits at page 26
-Page 1-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 2, 2005 January 1, 2005
------------ ---------------
(unaudited)
(in thousands)
ASSETS:
Cash $ 1,029 $ 958
Accounts receivable:
Trade (less allowances of 5,011 9,244
$3,217 and $12,095, respectively)
Other 223 897
Inventory 22,965 20,192
Prepaid expenses 1,663 1,791
-------- --------
Total current assets 30,891 33,082
-------- --------
Property, plant and equipment, at cost 12,963 13,705
Less accumulated depreciation and amortization 10,421 10,987
-------- --------
Net property, plant and equipment 2,542 2,718
-------- --------
Other assets 3,296 3,292
-------- --------
Total assets $ 36,729 $ 39,092
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term notes payable 6,398 4,901
Current installments of long-term debt 988 1,721
Accounts payable 6,378 5,200
Accrued expenses 4,021 6,387
-------- --------
Total current liabilities 17,785 18,209
-------- --------
Accrued retirement costs and other 14,750 15,426
Long-term debt, excluding current installments 294 479
-------- --------
Total liabilities 32,829 34,114
-------- --------
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 9,870 and 9,836 shares (excluding
treasury shares of 910 and 912) 9,870 9,836
Additional capital in excess of par value 12,908 12,851
Deferred compensation -- (19)
Accumulated other comprehensive loss (4,155) (3,981)
Accumulated deficit (14,723) (13,709)
-------- --------
Net shareholders' equity 3,900 4,978
-------- --------
$ 36,729 $ 39,092
======== ========
-Page 2-
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended Twenty-six weeks ended
--------------------------- ---------------------------
July 2, 2005 July 3, 2004 July 2, 2005 July 3, 2004
------------ ------------ ------------ ------------
(unaudited)
(in thousands, except per share amounts)
Net sales $16,219 $14,516 $33,209 $ 32,946
Cost of sales 9,381 10,483 19,543 23,400
------- ------- ------- --------
Gross profit 6,838 4,033 13,666 9,546
Selling, general and administrative
expenses 6,792 8,857 14,192 20,054
Restructuring and asset impairment
charges 108 3,619 349 11,901
------- ------- ------- --------
Operating loss (62) (8,443) (875) (22,409)
Other income 45 45 90 90
Interest expense, net (155) (291) (240) (532)
------- ------- ------- --------
Loss from continuing operations before
income tax and minority interest (172) (8,689) (1,025) (22,851)
Income tax expense (9) (230) (57) (228)
Minority interest in income of
consolidated subsidiaries, net of tax -- (10) -- (9)
------- ------- ------- --------
Loss from continuing operations (181) (8,929) (1,082) (23,088)
Earnings from discontinued operations,
net of income taxes 68 16 68 16
------- ------- ------- --------
Net loss $ (113) $(8,913) $(1,014) $(23,072)
======= ======= ======= ========
Net loss per common share: continuing
operations
Basic $ (0.02) $ (0.91) $ (0.11) $ (2.34)
======= ======= ======= ========
Diluted $ (0.02) $ (0.91) $ (0.11) $ (2.34)
======= ======= ======= ========
Net earnings per common share:
discontinued operations
Basic $ 0.01 $ -- $ 0.01 $ --
======= ======= ======= ========
Diluted $ 0.01 $ -- $ 0.01 $ --
======= ======= ======= ========
Net loss per common share
Basic $ (0.01) $ (0.91) $ (0.10) $ (2.34)
======= ======= ======= ========
Diluted $ (0.01) $ (0.91) $ (0.10) $ (2.34)
======= ======= ======= ========
Average number of common shares
outstanding
Basic 9,842 9,839 9,839 9,839
======= ======= ======= ========
Diluted 9,842 9,839 9,839 9,839
======= ======= ======= ========
-Page 3-
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended
---------------------------
July 2, 2005 July 3, 2004
------------ ------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss $(1,014) $(23,072)
Earnings from discontinued operations 68 16
------- --------
Loss from continuing operations (1,082) (23,088)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of
property, plant and equipment 318 843
Asset impairment loss -- 6,486
Amortization of deferred compensation 3 50
Loss on disposal of property, plant and equipment 53 --
Minority interest in income of consolidated subsidiaries,
net of tax -- 9
Changes in:
Accounts receivable, net 4,756 (1,275)
Inventory (3,014) 580
Prepaid expenses and other 122 1,542
Accounts payable 1,263 (1,428)
Accrued expenses (2,315) 918
Accrued retirement costs and other, net (676) (186)
------- --------
Net cash used in continuing operations (572) (15,549)
------- --------
Net cash provided by (used in) discontinued operations 68 (517)
------- --------
Net cash used in operating activities (504) (16,066)
------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (236) (123)
Proceeds from the sale of property, plant and equipment 2 64
------- --------
Net cash used in investing activities (234) (59)
------- --------
Cash flows from financing activities:
Proceeds from short-term notes, net 862 28,936
Repayments of short-term bank notes -- (10,204)
Proceeds from common shares issued 108 2
Repayment of long-term debt (134) (2,976)
------- --------
Net cash provided by financing activities 836 15,758
------- --------
Effect of exchange rates on cash (27) (15)
------- --------
Net increase (decrease) in cash 71 (382)
Cash at the beginning of the period 958 2,012
------- --------
Cash at the end of the period $ 1,029 $ 1,630
======= ========
Supplemental cash flow disclosures:
Interest paid $ 203 $ 508
======= ========
Income taxes (received) paid, net $ (23) $ 28
======= ========
-Page 4-
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended July 2, 2005 and July 3, 2004
(in thousands, except per share data)
1. The accompanying unaudited consolidated financial statements include the
accounts of R.G. Barry Corporation and its subsidiaries (collectively, the
"Company") and have been prepared in accordance with the United States of
America ("U.S.") generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of SEC Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for
the thirteen week and twenty-six week periods ended July 2, 2005 are not
necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2005 ("fiscal 2005"). For further information,
refer to the consolidated financial statements and notes thereto included
in the Annual Report to Shareholders of R.G. Barry Corporation ("R.G.
Barry") for the fiscal year ended January 1, 2005 ("fiscal 2004"), which
are incorporated by reference into "Item 8 - Financial Statements and
Supplementary Data" of R.G. Barry's Annual Report on Form 10-K for the
fiscal year ended January 1, 2005.
2. The Company operates on a fifty-two or fifty-three week annual fiscal year,
ending annually on the Saturday nearest December 31st. Fiscal 2005 and
fiscal 2004 are both fifty-two week years.
3. R.G. Barry has various stock option plans, under which R.G. Barry has
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 of the underlying common shares at the date of
grant. In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an
amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
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 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.
Accordingly, the Company has presented the disclosure only information as
required by SFAS No. 123. Had the Company elected to recognize compensation
expense based on the fair value of the stock options granted at the grant
date as prescribed by SFAS No. 123, the Company's net loss would
approximate the pro forma amounts indicated below for the periods noted:
-Page 5-
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended July 2, 2005 and July 3, 2004 - continued
(in thousands, except per share data)
Thirteen weeks ended Twenty-six weeks ended
--------------------------- ---------------------------
July 2, 2005 July 3, 2004 July 2, 2005 July 3, 2004
------------ ------------ ------------ ------------
Net loss:
As reported $ (113) $(8,913) $(1,014) $(23,072)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effect $ (134) $ (144) $ (217) $ (287)
Pro forma $ (247) $(9,057) $(1,231) $(23,359)
Net loss per share:
Basic - as reported $(0.01) $ (0.91) $ (0.10) $ (2.34)
Basic - pro forma $(0.02) $ (0.93) $ (0.12) $ (2.37)
Diluted - as reported $(0.01) $ (0.91) $ (0.10) $ (2.34)
Diluted - pro forma $(0.02) $ (0.93) $ (0.12) $ (2.37)
Using the Black-Scholes option-pricing model, the per-share,
weighted-average fair value of stock options granted during fiscal 2005 and
fiscal 2004, was $1.95 and $1.20, respectively, on the date of grant. The
assumptions used in estimating the fair value of the options as of July 2,
2005, and July 3, 2004 were:
July 2, 2005 July 3, 2004
------------ ------------
Expected dividend yield 0% 0%
Expected volatility 60% 60%
Risk-free interest rate 3.75% 3.00%
Expected life-ISO grants 5 years 6 years
Expected life-nonqualified grants 3 - 5 years 2 - 8 years
4. Income tax expense for the twenty-six week periods ended July 2, 2005 and
July 3, 2004 consists of:
2005 2004
---- ----
Current expense:
Federal $-- $ --
Foreign 57 228
State -- --
Deferred expense (benefit) -- --
--- ----
Total expense $57 $228
=== ====
Total expense (benefit) allocated
to discontinued operations -- --
--- ----
Total expense on continuing operations $57 $228
=== ====
-Page 6-
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended July 2, 2005 and July 3, 2004 - continued
(in thousands, except per share data)
Income tax expense for the twenty-six week periods ended July 2, 2005 and July
3, 2004 differed from the amounts computed by applying the U. S. federal income
tax rate of 34 percent to pretax loss as a result of the following:
2005 2004
----- -------
Computed "expected" tax benefit $(326) $(7,764)
State income taxes benefit, net of federal
income taxes (34) (688)
Valuation allowance 417 8,680
Foreign income tax rate differences -- --
Other, net -- --
----- -------
Total expense $ 57 $ 228
===== =======
Total expense (benefit) allocated to
discontinued operations -- --
===== =======
Total expense on continuing operations $ 57 $ 228
===== =======
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. In March 2005, the IRS requested and the Company
consented to an extension of the statute of limitations to December 31,
2006 and no other correspondence has been received from the IRS since then.
The Company intends to vigorously contest the proposed adjustments. In the
opinion of management, the resolution of these matters is not expected to
have a material effect on the Company's financial position or results of
operations.
5. Basic net loss per common share has been computed based on the weighted
average number of common shares outstanding during each period. Diluted net
loss per common share is based on the weighted average number of
outstanding common shares during the period, plus, when their effect is
dilutive, potential common shares consisting of certain common shares
subject to stock options and the employee stock purchase plan. Diluted net
loss per common share for the thirteen-week periods and for the twenty-six
week periods ended July 2, 2005 and July 3, 2004 does not include the
effect of potential common shares due to the antidilutive effect of these
instruments, since net losses were incurred during the periods noted.
6. Inventory by category for the Company consists of the following:
July 2, 2005 January 1, 2005
------------ ---------------
Raw materials $ 1,015 $ 1,031
Work in process 154 202
Finished goods 21,796 18,959
------- -------
Total inventory $22,965 $20,192
======= =======
-Page 7-
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended July 2, 2005 and July 3, 2004 - continued
(in thousands, except per share data)
Inventory is presented net of raw materials write-downs of $39 as of July
2, 2005, and $42 as of January 1, 2005, respectively, and finished goods
write-downs of $459 as of July 2, 2005 and $1,515 as of January 1, 2005,
respectively. Write-downs, recognized as a part of cost of sales were, $355
and $151 for the second quarter 2005 and 2004, respectively; and $447 and
$317 for the twenty-six week periods ended July 2, 2005 and July 3, 2004,
respectively.
7. Restructuring and asset impairment charges - The Company recorded
restructuring and asset impairment charges as a result of certain actions
taken to reduce costs and improve operating efficiencies. Through the
twenty-six week period ended July 2, 2005, these actions mainly represented
minor continuing occupancy costs on the Company's leased facilities and
other minor liquidation costs both of which were related to the prior
year's restructuring plan as described in R.G. Barry's Annual Report to
Shareholders for the fiscal year ended January 1, 2005, under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - New Business Model", which is incorporated by reference into
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation" of R.G. Barry's Annual Report on Form 10-K for the
fiscal year ended January 1, 2005. As shown in the table below and
consistent with prior reporting periods, the restructuring and asset
impairment charges have been recorded as a component of the Company's
operating expense.
Non-Cash
As of Write-Offs As of
Jan. 1, Charges Estimate and July 2,
2005 in 2005 Adjustments Paid in 2005 2005
------- ------- ----------- ------------ -------
Employee separations $ 927 $ 54 $(32) $ 857 $ 92
Other exit costs -- 208 -- 208 --
Noncancelable lease costs 1,732 51 68 713 1,138
------ ---- ---- ------ ------
Total restructuring costs $2,659 $313 $ 36 $1,778 $1,230
====== ==== ==== ====== ======
The Company recorded restructuring and asset impairment charges of $11,901
during the twenty-six week period ended on July 3, 2004. These charges were
related to the major initiatives undertaken in that year to reduce costs
and improve operating efficiencies.
8. Segment Information - The Company primarily markets comfort footwear for
at- and around-the-home. The Company considers "Barry Comfort" at- and
around-the-home comfort footwear groups in North America and in Europe as
its two operating segments. The accounting policies of the operating
segments are substantially similar, except that the disaggregated
information has been prepared using certain management reports, which by
their very nature require estimates. In addition, certain items from these
management reports have not been allocated between the operating segments,
including such items as costs of certain administrative functions; current
and deferred income tax expense or benefit; and deferred tax assets or
liabilities.
-Page 8-
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended July 2, 2005 and July 3, 2004 - continued
(in thousands, except per share data)
Barry Comfort
-----------------
Twenty-six weeks ended North
July 2, 2005 America Europe Total
- ---------------------------------- -------- ------ -------
Net sales $28,634 $4,575 $33,209
Gross profit 13,052 614 13,666
Depreciation and
amortization 273 45 318
Restructuring and asset impairment
charges 349 -- 349
Interest expense 207 33 240
Earnings (loss) from continuing
operations before income taxes (1,193) 168 (1,025)
Purchases of property, plant and
equipment 151 85 236
------- ------ -------
Total assets devoted $33,465 $3,264 $36,729
======= ====== =======
Barry Comfort
-----------------
Twenty-six weeks ended North
July 3, 2004 America Europe Total
- ---------------------------------- -------- ------ --------
Net sales $ 28,368 $4,578 $ 32,946
Gross profit 8,860 686 9,546
Depreciation and
amortization 722 121 843
Restructuring and asset impairment
charges 11,901 -- 11,901
Interest expense 501 31 532
Earnings (loss) from continuing
operations before income taxes
and minority interest (22,943) 92 (22,851)
Purchases of property, plant and
equipment 92 31 123
-------- ------ --------
Total assets devoted $ 48,905 $3,778 $ 52,683
======== ====== ========
Barry Comfort
----------------
Thirteen weeks ended North
July 2, 2005 America Europe Total
- ---------------------------------- ------- ------ -------
Net sales $14,749 $1,470 $16,219
Gross profit 6,667 171 6,838
Depreciation and amortization 123 25 148
Restructuring and asset impairment
charges 108 -- 108
Interest expense 137 18 155
Earnings (loss) from continuing
operations before income taxes (199) 27 (172)
Purchases of property, plant
and equipment 122 47 169
------- ------ -------
Total assets devoted $33,465 $3,264 $36,729
======= ====== =======
-Page 9-
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended July 2, 2005 and July 3, 2004 - continued
(in thousands, except per share data)
Barry Comfort
----------------
Thirteen weeks ended North
July 3, 2004 America Europe Total
- ---------------------------------- ------- ------ -------
Net sales $12,852 $1,664 $14,516
Gross profit 3,644 389 4,033
Depreciation and amortization 367 59 426
Restructuring and asset impairment
charges 3,619 -- 3,619
Interest expense 271 20 291
Earnings (loss) from continuing
operations before income taxes
and minority interest (8,746) 57 (8,689)
Purchases of property, plant and
equipment 57 25 82
Total assets devoted $48,905 $3,778 $52,683
======= ====== =======
9. Employee Retirement Plans - The Company uses a measurement date of
September 30 in making the required pension computations on an annual
basis. In fiscal 2005, the Company has potential pension related payments
of $1,359 for unfunded, nonqualified supplemental retirement plans as well
as for payments anticipated for fiscal 2004 and fiscal 2005 quarterly
estimated contributions into the funded, qualified associate retirement
plan. The Company's application for deferral of the lump sum fiscal 2003
payment due in September 2004 of $747 was approved by the IRS in fiscal
2004, and accordingly, that payment will be made over a five-year period,
ending in September 2009. During the first six months of fiscal 2005, the
Company made payments of $297 and $492 under its nonqualified supplemental
and qualified associate retirement plans, respectively.
The components of net periodic benefit cost for the retirement plans were:
Thirteen weeks ended Twenty-six weeks ended
--------------------------- ---------------------------
July 2, 2005 July 3, 2004 July 2, 2005 July 3, 2004
------------ ------------ ------------ ------------
Service cost $ -- $ -- $ -- $ 214
Interest cost 548 564 1,097 1,123
Expected return on plan assets (462) (506) (925) (1,003)
Net amortization 65 31 131 159
Curtailment loss -- -- -- 1,128
----- ----- ------ -------
Total pension expense $ 151 $ 89 $ 303 $ 1,621
===== ===== ====== =======
10. Related party transactions - R.G. Barry and its non-executive chairman
("chairman") previously entered into an agreement pursuant to which R.G.
Barry 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 R.G. Barry's
common shares, at their fair market value. To fund its potential obligation
to purchase such common shares, R.G. Barry purchased a $5,000 insurance
policy on the life of the chairman; in addition, R.G. Barry maintains
another policy insuring the life of the chairman. The cumulative cash
surrender value of the policies approximates $2,600, which is included in
other assets in the accompanying consolidated balance sheets. Effective
March 2004 and continuing through July 2, 2005, the Company has borrowed
against the cash surrender value of these policies.
-Page 10-
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended July 2, 2005 and July 3, 2004 - continued
(in thousands, except per share data)
In addition, for a period of 24 months following the chairman's death, R.G.
Barry will have a right of first refusal to purchase any common shares of
R.G. Barry owned by the chairman at the time of his death if his estate
elects to sell such common shares. R.G. Barry would have the right to
purchase such common shares on the same terms and conditions as the estate
proposes to sell such common shares to a third party.
R.G. Barry and the mother of the chairman have been parties to a royalty
agreement (the "Original Agreement") pursuant to which the chairman's
mother has granted to R.G. Barry 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 Original Agreement,
R.G. Barry agreed to pay a royalty to her of 1% of the net sales of
products utilizing her designs. At the end of the second quarter 2005, the
Company reported approximately $12 as unpaid royalty fees related to this
Original Agreement. The Original Agreement also granted to R.G. Barry the
option to purchase and acquire her ownership interest in her product
designs and patent rights, if any, upon a change of control of R.G. Barry
for $750 or upon her death prior to a change of control for $500. The
chairman's mother was granted the right to require R.G. Barry to purchase
and acquire her product designs and patent rights, if any, on the
occurrence of a change of control of R.G. Barry for $750.
During fiscal 2004, R.G. Barry 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. R.G.
Barry's President and Chief Executive Officer is currently on leave from
Meridian, and his spouse is the President and sole owner of Meridian. The
fees incurred were at Meridian's customary rates for providing such
services, and R.G. Barry believes the fees were consistent with the market
price for such services. During the fourth quarter of fiscal 2004 and
through the first six months of fiscal 2005, R.G. Barry did not engage the
services of Meridian.
11. 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 these matters is not expected to have a
material adverse effect on the Company's financial position or results of
operations.
12. Subsequent Events - As of August 11, 2005, R.G. Barry and the mother of the
chairman terminated the Original Agreement and entered into a new agreement
(the "New Agreement") whereby the mother of the chairman has transferred
all of her product designs and patent rights to R.G. Barry effective as of
the date of the New Agreement; provided a covenant not to compete during
the period payments are owed to her under the New Agreement and for one
year thereafter; and released all unpaid claims that would have accrued
under the Original Agreement from January 1 through August 11, 2005 for the
sum of $600. This amount will be paid in 24 quarterly payments of $25 each
beginning on August 11, 2005 and continuing on the last business day of
each and every October, January, April, and July until the last business
day in April 2011.
-Page 11-
R. G. BARRY CORPORATION AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Some of the disclosure in this Quarterly Report on Form 10-Q represents
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 the disclosure that
contains forward-looking statements carefully because these statements (1)
discuss our future expectations; (2) contain projections of our future results
of operations or of our future financial condition; or (3) state other
"forward-looking" information. The risk factors described below, as well as any
other cautionary language in this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q occur, they could have a material adverse
effect on our business, operating results and financial condition.
RISK FACTORS
The following are the most significant risk factors in our business:
- - The Company's ability to continue sourcing products from outside North
America without negatively impacting delivery times or product quality
under our current business model.
- - The ability of the Company to meet certain minimum covenants regarding our
financial condition and financial performance as described in our
asset-based lending facility with CIT Commercial Services, Inc. ("CIT"),
discussed below under "CIT Facilities". While we believe we can continue to
comply with such covenants during the remainder of fiscal 2005, our ability
to do so assumes that (i) the cost benefits of our current business model
continue during the remainder of fiscal 2005; (ii) we experience no major
loss of customers or a major loss of business from existing customers; and
(iii) the Company continues to be able to source products without incurring
substantial unplanned costs.
- - The Company's ability to maintain our inventory levels in accordance with
our plans and achieve adequate levels of working capital.
- - The continued demand for the Company's products by our customers and
consumers, especially during the critical holiday season.
- - The continued demand for the Company's products by our key customers during
the remainder of fiscal 2005.
- - The ability of the Company to successfully compete on quality, fashion,
service, selection, and price.
- - The Company's ability to successfully manage the impact on our product cost
that may result from a potential material change in the valuation of the
Chinese currency.
- - The ability of the Company to finalize the exiting of certain lease
obligations related to our former distribution facility in Nuevo Laredo,
Mexico and our former office in San Antonio, Texas, without incurring
substantial unplanned costs or experiencing unforeseen difficulties.
- - The Company's ability to resolve our dispute with the IRS, as described in
Note 4 of the Notes to Consolidated Financial Statements, without incurring
substantial liability.
-Page 12-
- - 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 our senior management.
-Page 13-
INTRODUCTION
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 found in this Quarterly Report on
Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND USE OF SIGNIFICANT ESTIMATES
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles 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; and other similar factors.
Allowances established for returns were approximately $0 and $449 thousand at
the end of the second quarter 2005 and the second quarter 2004, respectively,
and $4.1 million at the end of fiscal 2004. Furthermore, allowances for
promotions and other sales incentives established at the end of the second
quarter 2005 and second quarter 2004 were approximately $3.2 million and $4.8
million, respectively, and $8.0 million at the end of fiscal 2004. The decrease
of $449 thousand of return allowances is due primarily to a specific sales
arrangement, entered into during the second quarter of fiscal 2004, which
provided for return privileges at that time. Historically, our returns allowance
at the end of the each year's second quarter reflects a zero balance, unless
special situations occur that require us to establish an allowance at the end of
that period. The quarter-over-quarter decrease of approximately $1.6 million in
the promotions and sales incentives allowance reflects a favorable adjustment of
approximately $685 thousand, which resulted from better than anticipated
over-the-counter sales experienced during the selling season in fiscal 2004.
Most of the remainder of the quarterly decrease reflects higher promotions and
sales incentives claims processed during the second quarter of 2005, as compared
to the same period a year earlier.
During the second quarter 2005 and 2004, we recorded approximately $517 thousand
and $118 thousand, respectively, as favorable adjustments related to sales
returns, which resulted from lower actual returns than anticipated from our
customers through the end of the second quarter periods. The higher favorable
adjustment to sales returns in the second quarter 2005, as compared to last
year's same period, reflects the benefit of our new business model's
customer-specific sell-in approach undertaken during fiscal 2004. At the end of
fiscal 2004, we reported $4.0 million as the value of merchandise returned by
our customers. Charges to earnings for the second quarter 2005 and same period
in 2004 for consumer promotion activities, undertaken with our customers, were
approximately $890 thousand and $1.3 million, respectively, and $10.7 million
for fiscal 2004. We recorded approximately $367 and $118 as net
-Page 14-
favorable adjustments to sales returns for the twenty-six week periods ended
July 2, 2005 and July 3, 2004, respectively. We recorded charges to earnings of
$2.1 million and $3.4 million for consumer promotion activities for the
twenty-six week periods ended July 2, 2005 and July 3, 2004, respectively. Since
we implemented our current business model in early fiscal 2004 and through the
second quarter of fiscal 2005, our selling approach has remained consistent
inasmuch as being responsive to our customers by assisting in promoting goods in
season and attempting to reduce returns accordingly.
As we continue to operate our business under the current business model for the
remainder of fiscal 2005, and given the ever-changing retail environment, 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 the
second quarter 2005 and the second quarter 2004, we estimated that the FIFO cost
of our inventory exceeded the estimated net realizable value of that inventory
by approximately $498 thousand and $2.3 million, respectively, as compared with
a similar estimate of approximately $1.6 million at the end of fiscal 2004. The
significant decrease of inventory write-downs from quarter to quarter continues
to reflect the benefit of our decision made in early fiscal 2004 to exit
manufacturing activities in Mexico. As previously reported, this decision
resulted in a significant write down against the value of our raw material
investment to position it for liquidation through auctioning, which was
completed in August 2004. Inventory write-downs, recognized as part of cost of
sales for continuing operations, amounted to $355 thousand, $151 thousand and
$2.1 million during the second quarter 2005, the second quarter 2004, and fiscal
2004, respectively. Inventory write-downs recognized as part of cost of sales
for continuing operations were approximately $447 and $151 for the twenty-six
week periods ended July 2, 2005 and July 3, 2004, respectively. As noted above,
as we continue to operate under the current business model and considering the
rapidly 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 periods.
(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 U.S. generally accepted accounting principles, 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. We
established a valuation allowance against the value of those deferred assets and
a reserve of approximately $21.3 million was recorded at the end of fiscal 2004.
Should our profits improve in future periods, such that those deferred items
become realizable as deductions in future periods, we will recognize that
benefit by reducing our reported tax expense in the future periods, once that
realization becomes assured.
(d) 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 the second quarter 2005 and the second quarter 2004, we had an
accrued balance of approximately $1.2 million and $2.0 million, respectively,
relating to the estimated future costs of closing or reorganizing certain
operations. At the end of fiscal 2004, we had an accrued balance of $2.7 million
for similar restructuring and reorganization activities, which were under way at
that time. Should the actual costs of restructuring activities exceed our
estimates, the excess costs will be recognized in the period in which they
occur. Conversely, should the costs of restructuring be less than the amounts
estimated, future periods would benefit by that difference. (See also Note 7 of
the Notes to Consolidated Financial Statements for additional information
concerning restructuring and asset impairment charges.)
-Page 15-
(e) 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 an asset 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 $0, $24, and $7.1 million during the second quarter
2005, the second quarter 2004 and fiscal 2004, respectively. For the twenty-six
week periods ended July 2, 2005 and July 3, 2004, we recorded asset impairment
charges of $0 and $6.3 million, respectively. The significant decrease in asset
impairment charges, comparing the twenty-six week periods, reflects the actions
taken related to the closure of our manufacturing and distribution facilities in
Mexico and Laredo, Texas announced early in fiscal 2004.
(f) There are 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 in our 2004 Annual Report to Shareholders, which was
incorporated by reference into "Item 8 - Financial Statements and Supplementary
Data" of our Annual Report on Form 10-K for the fiscal year ended January 1,
2005.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
The following represent accounting standards that have been recently issued and
that are applicable to our business.
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 Non-monetary Assets, an
amendment of APB Opinion 29. Both standards go into effect for fiscal years
beginning after July 15, 2005. We do not anticipate that the implementation of
either standard will have a material impact on the results of operations or
financial condition of our company. SFAS No. 151 provides specific definition to
the term "abnormal costs", as used in previous accounting standards in inventory
reporting under Accounting Research Bulletin No. 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. 29 to require the use of fair value of assets exchanged
involved in an exchange of productive used 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. 123 (Revised 2004), Share-Based Payments ("SFAS No. 123R") supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS
No. 95, Statement of Cash Flows. SFAS No. 123R must be adopted no later than the
first interim reporting period of our first fiscal year beginning on or after
June 15, 2005; therefore, we intend to adopt this standard on January 1, 2006.
The impact of adopting SFAS No.123R cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future. This
standard will incorporate into reported results a measure of expense for
stock-based compensation. This standard effectively requires the same reporting
approach for all companies in this area. Under this standard, we have
alternative implementation options as to how to present prior period
information, either as restated results on prior interim periods, and/or
restatement of prior years, or by reference to prior period proforma footnote
disclosures. We intend to implement this standard prospectively, with reference
to prior period proforma disclosures.
-Page 16-
CONTINUING TO REFINE OUR BUSINESS MODEL DURING THE REMAINDER OF FISCAL 2005
As previously reported, we successfully developed and began implementing our new
business model, financially reengineered our company, and executed significant
changes in our operations during fiscal 2004. Refinement of our new business
model for the remainder of fiscal 2005 and beyond will continue to be anchored
primarily on three central goals:
- Continuing to meet or exceed the expectations of our retailing
partners and consumers with fresh, innovative, thinking and a line-up
of great products;
- Continuing to enhance the image of our Dearfoams(R) family of brands;
and
- Continuing to improve our order fulfillment and inventory management
processes through the use of improved forecasting processes.
LIQUIDITY AND CAPITAL RESOURCES
As of the end of the second quarter of 2005, we had $13.1 million in net working
capital. This compares with $10.1 million at the end of last year's second
quarter, and $14.9 million at the end of fiscal 2004. The increase in net
working capital quarter-on-quarter is primarily due to lower operating losses
from period to period. The improved net working capital also includes the
effects of a reduction, quarter-on-quarter, in our inventory investment, which
has resulted in lower short-term funding needs to support our existing business
model.
The primary components of net working capital have changed as follows:
- - Our net accounts receivable decreased from $8.4 million at the end of the
second quarter of 2004 to $5.2 million at the end of the same period this
year. Accounts receivable were $10.1 million at the end of fiscal 2004.
Most of the quarter-on-quarter decrease is due to improved receivable
turnover, resulting primarily from lower sales returns activity. The
decrease in our net accounts receivable of $4.9 million from the end of
fiscal 2004 to the end of the second quarter 2005 is mainly due to the
seasonality of our business.
- - Our net inventories for second quarter-end 2005 and 2004 were $23.0 million
and $32.1 million, respectively, and $20.2 million at the end of fiscal
2004. The quarter-on-quarter decrease of approximately $9.1 million in our
inventory investment clearly continues to reflect the positive effects of
the change in our operating model from in-house manufacturing supply to a
100% outsourcing model effected during fiscal 2004 and is consistent with
one of our key initiatives to better manage our inventory investment. The
slight increase of $2.8 million in our net inventory investment from the
end of fiscal 2004 to this reporting period is due principally to purchases
of finished goods as we gradually build inventory to support this year's
upcoming selling season.
- - We ended the second quarter of 2005 with $1.0 million in cash, compared
with $1.6 million at the end of the second quarter of 2004 and $1.0 million
at the end of fiscal 2004. We ended the second quarter of 2005 with $6.4
million in short-term notes payable, compared with $20.7 million in
short-term notes at the end of the second quarter a year earlier and $4.9
million at the end of fiscal 2004. The significant quarter-on-quarter
decrease of approximately $14.3 million in our short-term notes payable is
due primarily to lower borrowings required to fund our much leaner
operating model from the same quarter period a year ago. The increase in
short-term notes payable of $1.5 million from the end of fiscal 2004 to the
end of the second quarter 2005 is due mainly to the timing of purchases
required to support our customer orders for the upcoming selling season.
Capital expenditures for the first six-month period of fiscal 2005 amounted to
$236 thousand compared with $123 thousand during the same period in 2004.
Expenditures in both years were funded out of working capital, and reflect a
much reduced level of capital asset spending as compared to previous years
during which we operated our own manufacturing plants. We expect our future
capital expenditures to be in line with our current business model and thus
require a much lower funding than in prior years.
-Page 17-
CIT FACILITIES
On March 31, 2005, we entered into a two-year, asset-based lending facility with
CIT (the "CIT ABL Facility"), which replaced our previous financing arrangement
with CIT. 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 ABL Facility,
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 (" minimum TNW") 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 ("negative EBITDA-R") for the two fiscal quarters ended July 2,
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 have met the only two financial covenants, minimum
TNW and negative EBIDTA-R, which were applicable for the second quarter 2005 and
for the two fiscal quarters ended July 2, 2005, respectively, as established in
the CIT ABL Facility. We currently believe we can meet all financial covenants
under the CIT ABL Facility for the remainder of fiscal 2005.
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 entering into in connection with the previous CIT financing
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 to be issued by letter of credit banks. This
amount 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 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%.
The first priority liens and mortgage on substantially all of our assets,
including accounts receivable, inventory, intangibles, equipment, intellectual
property, and real estate that secured the previous CIT financing agreement
remain in place and have been amended and modified to secure the CIT ABL
Facility. In addition, the pledge agreement and the subsidiary guarantees
entered into in connection with the previous CIT financing agreement have also
been amended to secure the CIT ABL Facility.
OTHER SHORT-TERM DEBT
Early in March 2004, we borrowed $2.2 million against the cash surrender value
of life insurance policies insuring our non-executive chairman. Consistent with
prior periods, the $2.2 million indebtedness is classified within short-term
notes payable in the accompanying consolidated balance sheets.
CURRENT INSTALLMENTS OF LONG-TERM DEBT
Approximately $728 thousand, reflected in current installments of long-term
debt, represents the present value, discounted at 8%, of the remaining two
quarterly payments related to our agreement to pay two consulting firms for
their assistance in the process that accelerated the elimination of duties
imposed by the United States of America on slippers coming from Mexico. As part
of the NAFTA agreement, these
-Page 18-
duties had been scheduled for elimination on January 1, 2008. The duties were
eliminated on January 1, 2002. The remaining two quarterly payments are
subordinated to all of our other obligations.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes in our "Off-Balance Sheet Arrangements" and
"Contractual Obligations" since the end of fiscal 2004, other than routine
payments and the New Agreement entered into with the mother of our chairman as
disclosed in Note 12 of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
During the second quarter of 2005, net sales amounted to approximately $16.2
million or approximately $1.7 million higher than the same period last year. In
the first half of 2005, our net sales were approximately $33.2 million, as
compared to $32.9 million for the same period a year earlier. Substantially all
of the second quarter net sales increase was reported by our Barry Comfort North
America business. This year's second quarter and first half net sales in Barry
Comfort Europe were approximately $1.5 million and $4.6 million, respectively,
as compared to $1.7 million and $4.6 million for the same reporting periods,
respectively, last year. (See also Note 8 of the Notes to Consolidated Financial
Statements for selected segment information.)
The quarter-on-quarter increase in net sales reported for Barry Comfort North
America reflects the favorable adjustments of approximately $1.1 million related
to promotions and sales incentives as well as sales returns recorded at the end
of the second quarter 2005. These adjustments resulted primarily from the better
than expected benefit of our selling support activities undertaken with our
retailing partners during fiscal 2004 and the better than anticipated
over-the-counter sales experienced during the selling season of fiscal 2004, as
compared to the sell-through rates based on our previous operating model. Net
sales reported for Barry North America for the second quarter 2005, as compared
to the same period a year earlier, reflect also higher sales to one of our key
customers, which were offset by lower sales in some of our private label
business.
Gross profit during the second quarter in 2005 and 2004 was approximately $6.8
million, or 42.2% of net sales, and $4.0 million, or 27.8% of net sales,
respectively. For the six-month period of 2005 and 2004, gross profit was
approximately $13.7 million, or 41.2% of net sales, and $9.5 million or 29.0% of
net sales, respectively. The improvement in our gross profit dollars and percent
of net sales quarter-on-quarter includes approximately $886 related to the
favorable adjustments relative to promotions, sales incentives, and sales
returns noted above. In addition, the quarterly and six-month period improvement
in gross profit dollars and percent of sales is also attributable to our
continuing lower cost of purchases from third-party suppliers of outsourced
goods, when compared with the costs incurred under our former supply model of
in-house manufacturing. Another reason for the improvement in the gross profit
results for the quarter and the first half of fiscal 2005 is due to higher
margins earned on sales of close out goods shipped during the six-month period,
as compared to those sold during the same period last year.
Selling, general and administrative expenses ("SG&A expenses") for the quarter
were approximately $6.8 million, reflecting a decrease of nearly $2.1 million or
23.3%, from approximately $8.9 million in the same quarter last year. For the
six months, SG&A expenses were approximately $14.2 million reflecting a
significant decrease of nearly $5.9 million from the same period in the previous
year. In addition, SG&A expenses as a percent of net sales decreased from 61.0%
in the second quarter of 2004 to 41.9% of net sales in the second quarter of
2005. The significant quarter-on-quarter net decrease in SG&A expenses was due
primarily to lower expenses in the following areas: shipping expenses; payroll
and benefits expenses essentially across all departments; and selling expenses
attributable to our former selling unit in Mexico. For the six-month period
ended July 2, 2005 as compared to the same period a year ago, significant
reductions in SG&A expenses were reported in shipping, logistics, and corporate
administration area, which included the curtailment loss of $1.1 million
recorded in the first quarter of fiscal 2004; whereas modest increases were
incurred period-on-period in our marketing and sourcing departments. Our SG&A
spending pattern for the six-month period, when compared to last year's same
period, continues to reflect the impact of the changes in our operating model.
-Page 19-
During the second quarter of 2005, we recognized $108 thousand in restructuring
and asset impairment charges, compared to approximately $3.6 million recognized
in the same period a year earlier. For the first half of 2005, restructuring and
asset impairment charges were $349 thousand, compared to approximately $11.9
million in the same period in 2004. The significant decrease in restructuring
and asset impairment charges for the quarter and the six months is due to less
reorganization activity occurring during this year's second quarter and through
the first half as compared to the actions taken in the same periods last year.
As previously reported, last year's reorganization activity through the first
six months was related to the closure of our manufacturing facilities in Mexico.
(See also Note 7 of the Notes to Consolidated Financial Statements for added
information relating to restructuring and asset impairment charges.)
Net interest expense was $155 thousand for the second quarter 2005, representing
a decrease of approximately $136 thousand from last year's same period. For the
first six months of 2005 and 2004, net interest expense was $240 thousand and
$532 thousand, respectively. The net interest expense decline,
quarter-on-quarter and for the six-month periods, resulted from our lower daily
average short-term borrowings outstanding of approximately $14.3 million to $6.4
million at the end of the second quarter of 2005 as compared to $20.7 million at
the end of the same period a year earlier. The decrease in net interest expense
for the second quarter and the six-month period also take into account slightly
higher interest rates as we transitioned to our previous CIT financing agreement
during the first quarter of 2004 and into our current CIT ABL Facility in March
2005.
For the second quarter of 2005, we incurred a net loss of $113 thousand or $0.01
per diluted share, compared with a net loss incurred during the second quarter
of 2004 of nearly $9.0 million or $0.91 per diluted share. For the first six
months of 2005, we incurred a net loss of approximately $1.0 million or $0.10
per diluted share, compared to a net loss of approximately $23.1 million or
$2.34 per diluted share the same period a year earlier.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments - Foreign Currency
The majority of our sales were conducted in North America and denominated in US
Dollars during the first half of fiscal 2005. For any significant sales
transactions denominated in other than US Dollars, our established policy
guidelines allow us to hedge against any significant currency exposure on a
short-term basis, using foreign exchange contracts as a means to protect our
operating results from currency adverse fluctuations. At the end of the first
half of fiscal 2005 and the end of fiscal 2004, there were no such foreign
exchange contracts outstanding.
Most of our product is purchased from third party manufacturers in China and is
transacted in US Dollars. The recent revaluation of the Chinese Renminbi did not
have a significant impact on the results of our operations through the end of
the second quarter 2005 or our financial condition at the end of the same
reporting period. However, should there be additional changes in the valuation
of the Chinese Renminbi, the cost structure of our suppliers could change. A
future revaluation of the Renminbi could potentially result in an increase in
the costs of our products, depending upon the competitive environment and the
availability of alternative suppliers.
Market Risk Sensitive Instruments - Interest Rates
We believe that we have an exposure to the impact of changes in short-term
interest rates. Our principal interest rate risk exposure results from the
floating rate nature of the CIT ABL Facility. If interest rates were to increase
or decrease by one percentage point (100 basis points), we estimate interest
expense would increase or decrease by approximately $100 thousand on an
annualized basis. Currently, we do not hedge our exposure to floating interest
rates.
-Page 20-
ITEM 4 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
With the participation of the President and Chief Executive Officer (the
principal executive officer) and the Senior Vice President-Finance, Chief
Financial Officer and Secretary (the principal financial officer) of R. G. Barry
Corporation ("R. G. Barry"), R. G. Barry's management has evaluated the
effectiveness of R. G. Barry's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), as of the end of the quarterly period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, R. G. Barry's President
and Chief Executive Officer and R. G. Barry's Senior Vice President-Finance,
Chief Financial Officer and Secretary have concluded that:
a. information required to be disclosed by R. G. Barry in this Quarterly
Report on Form 10-Q and the other reports which R. G. Barry files or
submits under the Exchange Act would be accumulated and communicated
to R. G. Barry's management, including its principal executive officer
and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure;
b. information required to be disclosed by R. G. Barry in this Quarterly
Report on Form 10-Q and the other reports which R. G. Barry files or
submits under the Exchange Act would be recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms; and
c. R. G. Barry's disclosure controls and procedures are effective as of
the end of the quarterly period covered by this Quarterly Report on
Form 10-Q to ensure that material information relating to R. G. Barry
and its consolidated subsidiaries is made known to them, particularly
during the period in which this Quarterly Report on Form 10-Q is being
prepared.
Changes in Internal Control Over Financial Reporting
There were no changes in R. G. Barry's internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) that occurred during R. G.
Barry's quarterly period ended July 2, 2005 that have materially affected, or
are reasonably likely to materially affect, R. G. Barry's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, 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 $4.0
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, the Company
submitted to the IRS a letter protesting the proposed adjustments and
reiterating its position. In March 2005, the IRS requested and the Company
consented to an extension of the statute of limitations to December 31, 2006 and
no other correspondence has been received from the IRS since then. The Company
intends to vigorously contest the proposed adjustments.
-Page 21-
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) and (b) Not Applicable
(b) R. G. Barry did not purchase any of its common shares during the
quarterly period ended July 2, 2005. R. G. Barry does not currently have in
effect a publicly announced repurchase plan or program.
Item 3. Defaults Upon Senior Securities
(a), (b) Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) R.G. Barry's Annual Meeting of Shareholders (the "Annual Meeting") was
held on May 20, 2005. At the close of business on the record date
March 21, 2005, 9,836,602 common shares were outstanding and entitled
to vote at the Annual Meeting. At the Annual Meeting, 9,231,100, or
93.8% of the outstanding common shares entitled to vote, were
represented in person or by proxy.
(b) Directors elected at the Annual Meeting, for a three-year term to
expire at the 2008 Annual Meeting of Shareholders, were:
Roger E. Lautzenhiser
For: 7,757,458 Withheld: 1,473,642 Broker non-votes: none
Gordon Zacks
For: 8,282,737 Withheld: 948,363 Broker non-votes: none
Thomas M. Von Lehman
For: 8,578,432 Withheld: 652,668 Broker non-votes: none
Other directors whose terms of office continued after the Annual
Meeting:
David P. Lauer Janice Page Edward M. Stan Harvey A. Weinberg
(c) See Item 4(b) for the voting results for directors
Proposal to approve the R.G. Barry Corporation 2005 Long-Term
Incentive Plan.
For: 3,639,895 Against: 775,242 Abstain: 34,872
Broker non-votes: 4,781,091
(d) Not Applicable
-Page 22-
Item 5. Other Information
Grant of Non-Qualified Stock Options to New Non-Employee Directors
On June 16, 2005, R.G. Barry's Board of Directors (the "Board") granted to each
of Messrs. Nicholas P. DiPaolo and David L. Nichols, who became non-employee
directors of R.G. Barry on June 1, 2005 (the " New Non-Employee Directors"), a
non-qualified stock option (a "Director Option") to purchase 10,000 common
shares of R.G. Barry. Each Director Option was granted under the R.G. Barry
Corporation 2005 Long-Term Incentive Plan (the "2005 Plan") and has an exercise
price equal to $4.50, the reported "closing price" of the underlying common
shares on the Over the Counter Market on the date of the grant. Each Director
Option will vest and become exercisable in three equal annual installments,
beginning June 16, 2006. Vesting of a Director Option will be accelerated upon
the death, disability (as defined in Section 22(e)(3) of the Internal Revenue
Code of 1986, as amended) or retirement (after completing one full term as a
member of the Board of Directors) of a New Non-Employee Director or if R. G.
Barry undergoes a business combination (as defined in the 2005 Plan). If the
service of a New Non-Employee Director as a director of R. G. Barry is
terminated due to his death or disability, his Director Option must be exercised
before the earlier of (a) one year after death or termination of Board service,
respectively, or (b) June 16, 2010. If the service of a New Non-Employee
Director as a director of R. G. Barry is terminated due to his retirement, his
Director Option must be exercised before the earlier of one year following
retirement or June 16, 2010. There will be no other terms governing exercise of
Director Option following termination of service.
At any time, the Board may, in its sole discretion and without the consent of
the affected New Non-Employee Director, cancel an outstanding Director Option,
whether or not then exercisable, by giving written notice to the New
Non-Employee Director of R. G. Barry's intent to buy out the Director Option. In
the event of such a buy out, R. G. Barry will pay to the New Non-Employee
Director the difference between the fair market value of the common shares
underlying the exercisable portion of the Director Option to be cancelled and
the exercise price associated therewith. No payment will be made for the portion
of a Director Option that is not exercisable when cancelled. At the option of
the Board, payment of the buy out amount may be made in cash, in whole common
shares or a combination thereof.
Form of Nonqualified Stock Option Agreement, Nonqualified Stock Option Exercise
Notice and Beneficiary Designation Form in respect of nonqualified stock options
granted and to be granted under the 2005 Plan
Filed with this Quarterly Report of Form 10-Q as Exhibit 10.1 is the form of
Nonqualified Stock Option Award Agreement, Nonqualified Stock Option Exercise
Notice and Beneficiary Designation Form used in connection with the grant of the
Director Options to the New Non-Employee Directors and which will be used in
connection with the grant of future nonqualified stock options to employees of
the Company and non-employee directors of R.G. Barry under the 2005 Plan.
Transaction with Mrs. Florence Zacks Melton
As of August 11, 2005, R.G. Barry and Mrs. Florence Zacks Melton, the mother of
the chairman of R.G. Barry, terminated the existing royalty agreement between
them (the "Original Agreement) and entered into a new agreement (the "New
Agreement"). The terms of the Original Agreement are disclosed in Note 10 of the
Notes to Consolidated Financial Statements. At the end of the second quarter
2005, the Company reported approximately $12,000 as unpaid royalty fees related
to the Original Agreement.
Under the terms of the New Agreement, Mrs. Melton has transferred all of her
product designs and patent rights to R.G. Barry effective as of the date of the
New Agreement; provided a covenant not to compete during the period payments are
owed to her under the terms of the New Agreement and for one year thereafter;
and released all claims that would have accrued under the Original Agreement
from January 1, through August 11, 2005 for the sum of $600,000. This amount
will be paid in 24 quarterly payments of $25,000 each beginning on August 11,
2005 and continuing on the last business day of each and every October, January,
April, and July until the last business day in April 2011.
-Page 23-
In the event of Mrs. Melton's death prior to the time that all payments owing
under the New Agreement have been made, R.G. Barry will pay the remaining
quarterly payments to the then acting trustee of the Florence Zacks Melton
Trust, dated November 9, 1997, as amended in its entirety on September 27, 2000,
and as amended, or to such other designee as may be provided by Mrs. Melton (the
"Melton Designee"), as such payments become due and payable under the terms of
the New Agreement. In the event of a change of control of R.G. Barry (as defined
in the New Agreement), the time for payment of all remaining amounts then owing
under the terms of the New Agreement will be accelerated and R.G. Barry will pay
all such amounts to Mrs. Melton (or if she is then deceased, the Melton
Designee) within 10 days following the occurrence of the change of control. The
New Agreement is filed with this Quarterly Report on Form 10-Q as Exhibit 10.2.
Item 6. Exhibits
See Index to Exhibits at page 26.
-Page 24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R. G. BARRY CORPORATION
Registrant
August 16, 2005 /s/ Daniel D. Viren
Date ----------------------------------------
Daniel D. Viren
Senior Vice President - Finance,
Chief Financial Officer and Secretary
(Principal Financial Officer)
(Duly Authorized Officer)
-Page 25-
R. G. BARRY CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
10.1 Form of 2005 Long-Term Incentive Plan - Nonqualified Stock Option Filed herewith
Award Agreement, Nonqualified Stock Option Exercise Notice and
Beneficiary Designation Form
10.2 Agreement, made to be effective August 11, 2005, between R.G. Filed herewith
Barry Corporation and Florence Zacks Melton
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Filed herewith
Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Filed herewith
Officer)
32.1 Section 1350 Certifications (Principal Executive Officer and Filed herewith
Principal Financial Officer)
-Page 26-