1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
---------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission file number 1-8769
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R. G. BARRY CORPORATION
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(Exact name of registrant as specified in its charter)
OHIO 31-4362899
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
13405 Yarmouth Road, NW, Pickerington, Ohio 43147
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(Address of principal executive offices) (Zip Code)
614-864-6400
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(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
----- -----
Common Shares, $1 Par Value, Outstanding as of October 3, 1998 - 9,741,965
---------------------------
Index to Exhibits at page 11
Page 1 of 13 pages
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 3, 1998 January 3, 1998
--------------- ---------------
(in thousands)
ASSETS:
Cash and cash equivalents $ 2,678 22,495
Accounts receivable, less allowances 43,354 16,961
Inventory (note 3) 51,714 35,602
Deferred income taxes 4,827 4,827
Prepaid expenses 2,671 2,669
-------- -------
Total current assets 105,244 82,554
-------- -------
Property, plant and equipment, at cost 41,556 40,840
Less accumulated depreciation & amortization 28,239 26,609
-------- -------
Net property, plant and equipment 13,317 14,231
-------- -------
Goodwill, less accumulated amortization 4,144 4,230
Other assets 3,205 3,659
-------- -------
$125,910 104,674
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current installments of long-term debt
and capital lease obligations 2,273 2,273
Short-term notes payable 24,000 --
Accounts payable 7,153 6,389
Accrued expenses 5,181 11,355
-------- -------
Total current liabilities 38,607 20,017
-------- -------
Accrued retirement costs and other, net 4,655 4,057
Long-term debt and capital lease obligations,
excluding current installments:
Note payable 10,714 12,857
Capital lease obligations 135 135
-------- -------
Long-term debt and capital lease obligations 10,849 12,992
-------- -------
Total liabilities 54,111 37,066
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Shareholders' equity:
Preferred shares, $1 par value
Authorized 3,775,000 Class A shares,
225,000 Series I Junior Participating Class A
shares, and 1,000,000 Class B shares, none issued
Common shares, $1 par value
Authorized 22,500,000 shares
(excluding treasury shares) 9,742 9,564
Additional capital in excess of par value 15,137 14,629
Deferred compensation (note 6) (211) --
Retained earnings 47,131 43,415
-------- -------
Net shareholders' equity 71,799 67,608
-------- -------
$125,910 104,674
======== =======
Page 2 of 13 pages
3
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
Net sales $57,184 46,361 89,687 75,835
Cost of sales 30,215 24,611 43,841 38,838
------- ------ ------ ------
Gross profit 26,969 21,750 45,846 36,997
Selling, general and
administrative expense 16,460 12,815 38,900 32,479
------- ------ ------ ------
Operating income 10,509 8,935 6,946 4,518
Other income 102 111 293 354
Interest expense (675) (693) (1,459) (1,520)
Interest income 11 19 252 222
------- ------ ------ ------
Net interest expense (664) (674) (1,207) (1,298)
Earnings before
income taxes 9,947 8,372 6,032 3,574
Income tax expense (note 4) 3,882 3,348 2,316 1,429
------- ------ ------ ------
Net earnings $ 6,065 5,024 3,716 2,145
======= ====== ====== ======
Earnings per common share (note 5)
Basic $ 0.62 0.52 0.38 0.22
======= ====== ====== ======
Diluted $ 0.61 0.52 0.37 0.22
======= ====== ====== ======
Average number of common
shares outstanding
Basic 9,733 9,552 9,676 9,484
======= ====== ====== ======
Diluted 10,050 9,906 10,004 9,800
======= ====== ====== ======
Page 3 of 13 pages
4
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Thirty-nine Thirty-nine
weeks ended weeks ended
Oct. 3, 1998 Sept. 27, 1997
------------ --------------
(in thousands)
Cash flows from operating activities:
Net earnings $ 3,716 2,145
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization of
property, plant and equipment 1,510 1,322
Amortization of goodwill 86 86
Net (increase) decrease in:
Accounts receivable, net (26,393) (14,142)
Inventory (16,112) (20,041)
Prepaid expenses (2) (1,401)
Other 454 (70)
Net increase (decrease) in:
Accounts payable 764 2,840
Accrued expenses (6,174) (5,658)
Accrued retirement costs and other 598 603
-------- -------
Net cash used in operating activities (41,553) (34,316)
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment, net (596) (1,675)
-------- -------
Cash flows from financing activities:
Proceeds from short-term notes 24,000 24,000
Stock options exercised, net of treasury acquisitions 475 594
Repayment of long-term debt and
capital lease obligations (2,143) 0
-------- -------
Net cash provided by financing activities 22,332 24,594
-------- -------
Net decrease in cash (19,817) (11,397)
Cash at the beginning of the period 22,495 13,187
-------- -------
Cash at the end of the period $ 2,678 1,790
======== =======
Supplemental cash flow disclosures:
Interest paid $ 1,733 1,705
======== =======
Income taxes paid $ 6,751 3,770
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Page 4 of 13 pages
5
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
Under Item 1 of Part I of Form 10-Q
for the Periods ended
October 3, 1998 and September 27, 1997
1. These interim financial statements are unaudited. All adjustments
(consisting solely of normal recurring adjustments) have been made which,
in the opinion of management, are necessary to fairly present the results
of operations.
2. The Company operates on a fifty-two or fifty-three week annual fiscal year.
Fiscal 1998 is a fifty-two week year, fiscal 1997 was a fifty-three week
year.
3. A substantial portion of inventory is valued using the dollar value LIFO
method and, therefore, it is impractical to separate inventory values
between raw materials, work-in-process and finished goods.
4. Income tax for the periods ended October 3, 1998 and September 27, 1997,
consists of:
1998 1997
---- ----
Current:
U. S. Federal $2,166 $1,204
State & Local 150 225
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Total $2,316 $1,429
====== ======
The income tax reflects a combined federal, foreign, state and local
effective rate of 38.4 percent in 1998 and 40.0 percent in 1997, as
compared to the statutory U. S. federal rate of 35.0 percent in both years.
Income tax for the periods ended October 3, 1998 and September 27, 1997
differed from the amounts computed by applying the U. S. federal income tax
rate of 35.0 percent to pretax earnings as a result of the following:
1998 1997
---- ----
Computed "expected" tax:
U. S. Federal $2,111 $1,215
Other 107 63
State & Local, net of
federal income tax 98 151
------ ------
Total $2,316 $1,429
====== ======
5. The computation of basic earnings per common share has been computed based
on the weighted average number of common shares outstanding during each
period. Diluted earnings 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 stock purchase plan.
6. Pursuant to agreements with two key executives, entered into in January
1998, the Company is committed to issue a total of 10,000 common shares to
each executive ratably over the next eight years, subject to the terms of
the agreement. Upon achievement of certain profit goals in any fiscal year,
the issuance of common shares may be accelerated. The Company will expense
the costs associated with the agreements over the eight-year term of the
agreements.
Page 5 of 13 pages
6
R. G. BARRY CORPORATION AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
- -------------------------------
The Company ended the third quarter of 1998 with $66.6 million in net working
capital. This compares with $54.6 million at the end of the same quarter in
1997, and $62.5 million at the end of fiscal 1997. The increase in net working
capital from the end of the third quarter of 1997 to the end of the third
quarter of 1998, is mostly due to the profit that the Company earned during the
latest 12 months. The increase in working capital from fiscal year end 1997 to
the end of the third quarter of 1998, is mainly the result of the seasonal
profit earned during the first nine months of 1998, net of the scheduled
periodic payment on long-term debt made during the period.
Highlights of the significant changes in the components of the Company's net
working capital are:
o Accounts receivable increased at the end of the third quarter of 1998, to
$43.4 million from $32.7 million at the end of the third quarter of 1997,
and increased from $17.0 million at the end of fiscal 1997. The increase in
receivables from third quarter 1997 to the third quarter of 1998, is mainly
due to the $10.8 million increase in net sales, or 23.3 percent, during the
third quarter of 1998 when compared with the same quarter of 1997. The
increase from the end of fiscal 1997, represents a normal seasonal pattern
of change in receivables.
o Inventories at the end of the third quarter of 1998, at $51.7 million, are
about 5.8 percent greater than the inventory levels of $48.9 million one
year ago, and increased from $35.6 million as of the end of fiscal 1997.
The increase in inventories from the end of the third quarter of 1997 to
the end of the third quarter of 1998 is primarily an increase in finished
goods inventories, to support the increase in net sales from 1997 to 1998,
as the Company builds its operations in Europe and plans for its
anticipated future domestic growth. The increase in inventories from the
end of fiscal 1997, reflects a normal seasonal increase.
o The Company ended the third quarter of 1998, with $2.7 million in cash and
$24 million in short-term bank loans. This compares with the third quarter
of 1997, when the Company had $1.8 million in cash and the same $24 million
in short-term bank loans. The increase in cash is largely the result of
increased profitability in 1998 versus 1997, offset by the $2.1 million
scheduled periodic payment on long-term debt made during 1998. There were
no short-term bank loans outstanding at the end of fiscal 1997.
The Company's net capital expenditures during the first nine months of 1998,
amounted to $596 thousand, compared with $1.7 million during the same period of
1997. Capital expenditures in both years have been funded out of working
capital.
During the first quarter of 1999, the Company plans to open a new slipper
manufacturing facility in the Dominican Republic. This facility when fully
operational will produce all the components necessary to make a slipper and
assemble them into a finished product. Products produced in this plant will
enjoy duty-free entry into both Europe and the United States. The Company also
plans to open a 150,000 square foot distribution center in San Antonio, Texas in
early 1999. This new distribution center will allow the Company to move out of
several temporary storage locations and help better serve retail slipper
customers. Costs of opening both the manufacturing facility in the Dominican
Republic and the distribution center in San Antonio will be funded internally
from working capital.
The Company currently has in place a Revolving Credit Agreement ("Revolver"),
with its three main lending banks. The Revolver provides the Company a
seasonally adjusted available line of credit ranging from $6 million during
January, to a peak of $51 million from July through November. The Revolver
contains financial covenants typical of agreements of its type and duration. The
Company is in compliance with all the covenants of the Revolver, and all other
debt agreements. The Revolver extends through 2000 and contains provisions for
periodic extensions upon request and with the approval of the banks.
Page 6 of 13 pages
7
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
Introduction of the "Euro" as a Common Legal Currency in Europe
- ---------------------------------------------------------------
The Company believes that it is prepared for the introduction of the "Euro" as
the common legal currency in certain European Community countries in 1999. The
United Kingdom, which is the Company's principle base of operations in Europe,
will not immediately join the transition to the Euro; although France, where the
Company also conducts business, will join. The Company's systems have been
designed with sufficient flexibility to handle the introduction of the Euro as a
transactional currency. The Company incurred a nominal cost in preparing itself
for the Euro.
Year 2000 Considerations
- ------------------------
The Company has conducted a review of its key financial, information and
operating systems to determine the extent to which it is exposed to year 2000
computer date problems. The Company believes that all of its critical
application systems have been converted to correct for potential date problems.
During the first quarter of 1998, the Company conducted extensive testing which
have confirmed its readiness. Key suppliers and electronic trading partners have
been contacted to obtain their commitments to conversion and readiness, so as to
minimize problems relating to the exchange of electronic data. The Company has
not separately identified the costs associated with this conversion, but
estimates that the costs incurred to date, which have been expensed as incurred,
have not been significant, and does not anticipate the future impact on its
financial condition, results of operations or cash flows will be material. The
possibility exists that the Company's conversion could inadvertently fail,
although the Company believes that the impact of such an occurrence would be
manageable and minor in impact as a result of substantial equipment and software
upgrades implemented in recent years. The Company is not dependent upon any one
customer or any one supplier to conduct its business, and the Company believes
that should one of its suppliers or customers prove not to become year 2000
compliant in a timely manner, the Company can convert to alternative compliant
suppliers or resort to increased use of paper transactions to satisfied its
customer needs. If in the future, the Company uncovers additional risks
associated with year 2000 compliance, the Company will develop contingency plans
at that time as deemed necessary.
Results of Operations
- ---------------------
During the third quarter of 1998, net sales amounted to $57.2 million, an
increase of 23.3 percent from net sales of $46.4 million during the third
quarter of 1997. For the nine months, net sales amounted to $89.7 million, an
18.3 percent increase in net sales when compared with the first nine months of
1997. Net sales of the Company's slipper products, domestically and
internationally, were responsible for substantially all of the increase in
consolidated net sales.
In 1997, we reported that raw material delivery and production scheduling
problems caused approximately $4 million of third quarter slipper orders to be
carried forward into the fourth quarter of 1997. Since third quarter 1998 sales
and earnings reflect complete and on-time deliveries of orders, the fourth
quarter of 1998 is not expected to reflect, as did the fourth quarter of 1997,
the impact from delayed deliveries. In addition, the Company has decided to
de-emphasize the sale of thermal consumer products in the accessories
departments of department stores, and as a result the Company expects fourth
quarter 1998 sales to be less that those reported for 1997.
Gross profit during the third quarter of 1998, amounted to $27.0 million, or
47.2 percent of net sales. This compares with gross profit percent of 46.9
percent in the same quarter of 1997. For the nine months, gross profit percent
also increased to 51.1 percent in 1998 compared with 48.8 percent in 1997. The
increase in gross profit percentages from year to year continues to result
mainly from the Company's continuing efforts in the area of cost reduction, such
as the expanded use of modular manufacturing, plus a change in mix of styles and
products sold from year to year.
Page 7 of 13 pages
8
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
Selling, general and administrative expenses during the quarter amounted to
$16.5 million, an increase of 28.4 percent from the same quarter one year ago.
For the nine months these expenses amounted to $38.9 million, an increase of
19.8 percent from the same period last year. The percentage increases are in
line with the percentage increases in net sales for the periods. Included in
these expenses are those related to the Company's expansion in the French
slipper market, which the Company began during the fourth quarter of 1997.
Net interest expense declined from 1997 to 1998. During the third quarter of
1998, net interest expense amounted to $664 thousand compared with $674 thousand
in the same period of 1997. For the nine months, net interest expense also
declined to $1.2 million in 1998 from $1.3 million in 1997. The decrease in net
interest expense is principally due to the Company's lower average usage of its
Revolver during 1998, than in 1997.
For the third quarter of 1998, the Company earned $6.1 million, or $0.61 per
share, compared with earnings during the same period of 1997 of $5.0 million, or
$0.52 per share. For the nine months, the Company earned $3.7 million in 1998,
or $0.37 per share, compared with earnings in 1997 of $2.1 million, or $0.22 per
share. All per share references in both years represent diluted earnings per
share.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
The statements in this Quarterly Report on Form 10-Q, which are not historical
fact are forward-looking statements based upon the Company's current plans and
strategies, and reflect the Company's current assessment of the risks and
uncertainties related to its business, including such things as product demand
and market acceptance; the economic and business environment and the impact of
governmental regulations; the effects of competitive products and pricing
pressures; inherent risks of international development, including currency
risks, the implementation of the Euro, economic conditions, regulatory and
cultural difficulties or delays in the Company's development outside the United
States; the Company's ability to improve its processes and business practices to
keep pace with the economic, competitive and technological environment,
including successfully addressing year 2000 issues; capacity, efficiency, and
supply constraints; weather conditions; and other risks detailed in the
Company's press releases, shareholder communications, and Securities and
Exchange Commission filings. Actual events affecting the Company and the impact
of such events on the Company's operations may vary from those currently
anticipated.
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ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
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Not Applicable
Page 8 of 13 pages
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
On September 10, 1998, the Company filed a lawsuit for patent
infringement of United States Patent No. 5,790,962 against Domino's
Pizza, Inc., a Michigan corporation, and Phase Change Laboratories,
Inc., a Nevada corporation. The case was filed on behalf of both the
Company and its subsidiary Vesture Corporation in the United States
District Court for the Middle District of North Carolina. The `962
patent covers an invention which maintains the desired temperature of
food and other items using a phase change material. Domino's Pizza,
Inc. purchases a product which it calls the "Heat Wave" system. The
product is manufactured by Phase Changes Laboratories, Inc. Study of
the product indicates that it infringes the `962 patent. The Court has
granted an extension of time for both defendants to plead. Neither has
answered or otherwise responded to the Complaint at this time. The
Company seeks damages, attorney's fees, and an injunction against
further infringement by both defendants. The Company intends to seek
lost profits as part of the relief. The case has been assigned Civil
Action No. 1:98CV00802.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
(a) through (d) Not Applicable
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
(a), (b) Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) through (d) Not Applicable
Item 5. Other Information
- --------------------------
No response required
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits: See Index to Exhibits at page 11.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended October 3, 1998.
Page 9 of 13 pages
10
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
November 5, 1998
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date
/s/ Richard L. Burrell
-----------------------------
Richard L. Burrell
Senior Vice President - Finance
(Principal Financial Officer)
(Duly Authorized Officer)
Page 10 of 13 pages
11
R. G. BARRY CORPORATION
INDEX TO EXHIBITS
Exhibit No. Description Page Number
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27.1 Financial Data Schedule 12
(Period ended October 3, 1998)
27.2 Financial Data Schedule 13
(Period ended September 27, 1997 Restated)
Page 11 of 13 pages