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 April 3, 1999
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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
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 office) (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 April 3, 1999 - 9,598,922
-------------------------
Index to Exhibits at page 12
Page 1 of 13 pages
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 3, 1999 January 2, 1999
------------- ---------------
ASSETS: (in thousands)
Cash and cash equivalents $ 11,314 29,596
Accounts receivable, less allowances 14,871 15,985
Inventory (note 3) 45,244 38,648
Deferred income taxes 3,729 3,729
Recoverable income taxes 1,214
Prepaid expenses 2,317 2,275
--------- ---------
Total current assets 78,689 90,233
--------- ---------
Property, plant and equipment, at cost 42,184 41,697
Less accumulated depreciation & amortization 29,274 28,822
--------- ---------
Net property, plant and equipment 12,910 12,875
--------- ---------
Goodwill, net of amortization 4,086 4,114
Other assets 4,107 4,123
--------- ---------
$ 99,792 111,345
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current installments of long-term debt
and capital lease obligations 2,278 2,278
Accounts payable 5,614 6,581
Accrued expenses 1,805 8,404
--------- ---------
Total current liabilities 9,697 17,263
--------- ---------
Accrued retirement costs and other, net 5,570 5,288
Long-term debt and capital lease obligations,
excluding current installments:
Note payable 10,714 10,714
--------- ---------
Total liabilities 25,981 33,265
--------- ---------
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, $1 par value
Authorized 22,500,000 shares
(excluding treasury shares) 9,599 9,745
Additional capital in excess of par value 14,164 15,357
Deferred compensation (197) (204)
Retained earnings 50,245 53,182
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Net shareholders' equity 73,811 78,080
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$ 99,792 111,345
========= =========
Page 2 of 13 pages
3
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Thirteen
weeks ended weeks ended
April 3, April 4,
-------- --------
1999 1998
---- ----
(in thousands)
Net sales $ 14,798 15,593
Cost of sales 6,154 5,446
-------- --------
Gross profit 8,644 10,147
Selling, general and
administrative expense 13,438 11,337
-------- --------
Operating loss (4,794) (1,190)
Other income 145 104
Interest expense (306) (383)
Interest income 248 217
-------- --------
Net interest expense (58) (166)
Loss before income
tax benefit (4,707) (1,252)
Income tax benefit (note 4) (1,770) (501)
-------- --------
Net loss ($ 2,937) (751)
======== ========
Net loss per common share (note 5)
Basic ($ 0.30) (0.08)
======== ========
Diluted ($ 0.30) (0.08)
======== ========
Average number of common
shares outstanding
Basic 9,705 9,599
======== ========
Diluted 9,705 9,599
======== ========
Page 3 of 13 pages
4
R. G. BARRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Thirteen Thirteen
weeks ended weeks ended
April 3, April 4,
-------- --------
1999 1998
---- ----
(in thousands)
Cash flows from operating activities:
Net loss ($ 2,937) (751)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of
property, plant and equipment 452 495
Amortization of goodwill 28 29
Net (increase) decrease in:
Accounts receivable, net 1,114 3,463
Inventory (6,596) (10,734)
Prepaid expenses (42) 509
Recoverable income taxes (1,214) (447)
Other 23 (66)
Net increase (decrease) in:
Accounts payable (967) 377
Accrued expenses (6,599) (8,776)
Accrued retirement costs and other 282 227
-------- --------
Net cash used in operating activities (16,456) (15,674)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment, net (487) (708)
-------- --------
Cash flows from financing activities:
Stock options exercised 9 372
Treasury share acquisitions (1,348) --
Common shares granted as deferred compensation -- (230)
-------- --------
Net cash provided by (used in) financing activities (1,339) 142
-------- --------
Net decrease in cash (18,282) (16,240)
Cash at the beginning of the period 29,596 22,495
-------- --------
Cash at the end of the period $ 11,314 6,255
======== ========
Supplemental cash flow disclosures:
Interest paid $ 624 769
======== ========
Income taxes paid $ 5,410 6,344
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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 April 3, 1999 and April 4, 1998
1. The 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, ending annually on the Saturday nearest December 31st. Fiscal
1999 and 1998 are both fifty-two week years.
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 benefit for the periods ended April 3, 1999 and April 4,
1998 consisted of:
1999 1998
---- ----
Current:
U. S. Federal benefit ($1,652) ($ 427)
State & Local (118) (74)
------- -------
Total ($1,770) ($ 501)
======= =======
The income tax benefit reflects a combined federal, foreign, state and
local effective rate of 37.6 percent and 40.0 percent for the first
quarter of 1999 and 1998, respectively, as compared to the statutory
U.S. federal rate of 35.0 percent in both years.
Income tax for the periods ended April 3, 1999 and April 4, 1998
differed from the amounts computed by applying the U. S. federal income
tax rate of 35.0 percent to pretax loss as a result of the following:
1999 1998
---- ----
Computed "expected"
tax benefit:
U. S. Federal benefit ($1,647) ($ 439)
Other (46) (14)
State & Local benefit, net of
federal income tax benefit (77) (48)
------- -------
Total ($1,770) ($ 501)
======= =======
5. The computation of basic loss per common share has been computed based
on the weighted average number of common shares outstanding during each
period. Diluted 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 stock purchase plan.
Page 5 of 13 pages
6
R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
Under Item 1 of Part I of Form 10-Q
for the periods ended April 3, 1999 and April 4, 1998
(continued)
6. Segment Information - The Company maintains two operating segments:
Barry Comfort manufactures and markets comfort footwear for
at-and-around-the-home; and Thermal supplies thermal retention
technology products. 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, such as a) costs of certain administrative functions, b)
current and deferred income tax expense (benefit) and deferred tax
assets (liabilities), and c) certain operating provisions.
1999 Barry Intersegment
(in thousands) Comfort Thermal Eliminations Total
------- ------- ------------ -----
Net sales $ 13,834 $ 964 $ 14,798
Depreciation and
amortization 389 63 452
Interest income 297 -- (49) 248
Interest expense 306 49 (49) 306
Pre tax earnings (loss) (3,737) (970) (4,707)
Additions to property, plant
and equipment 407 80 487
Total assets devoted $ 94,775 $ 8,082 ($ 3,065) $ 99,792
======== ======== ======== ========
1998 Barry Intersegment
(in thousands) Comfort Thermal Eliminations Total
------- ------- ------------ -----
Net sales $ 15,358 $ 235 $ 15,593
Depreciation and
amortization 432 63 495
Interest income 268 -- (51) 217
Interest expense 383 51 (51) 383
Pre tax earnings (loss) (839) (413) (1,252)
Additions to property, plant
and equipment 632 76 708
Total assets devoted $ 90,268 $ 8,264 ( $2,639) $ 95,893
======== ======== ======== ========
Page 6 of 13 pages
7
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 first quarter of 1999 with $69.0 million in net working
capital. This compares with $61.9 million at the end of the same quarter in
1998, and $73.0 million as of the end of the 1998 fiscal year. The increase in
net working capital from the end of the first quarter of 1998 to the end of the
first quarter of 1999 is primarily due to the profit that the Company earned
during fiscal 1998, offset by the increased loss during the first quarter of
1999. The decline in working capital from fiscal year end 1998 to the end of the
first quarter of 1999, is mainly due to the seasonal loss in the first quarter
of 1999, plus the Company's purchase, in the open market, of about $1.3 million
of its common shares to be held in Treasury.
The primary components of the Company's net working capital have changed as
follows:
o Accounts receivable increased from $13.5 million at the end of the
first quarter of 1998, to $14.9 million at the end of the first quarter
of 1999, and decreased by $1.1 million since the end of fiscal 1998.
The increase in receivables from first quarter 1998 to 1999 is mainly
due to a slow down in collection of accounts. The Company believes that
this slow down is attributable to customers' increasing the amount of
returned merchandise in 1999, which will offset customers' balances
due. The decrease in receivables from the end of fiscal 1998 to the end
of the first quarter of 1999 mainly represents a normal seasonal
pattern in collection of accounts.
o Inventories ended the first quarter of 1999, at $45.2 million compared
with $46.3 million one year ago, and $38.6 million as of the end of
fiscal 1998. The Company has set a goal for itself of reducing its
levels of inventory during 1999, from those levels maintained in the
prior year or so. The modest decline in the first quarter when compared
with the same quarter one year ago, is the first step in that program
of lowering inventory levels. The increase in inventories from the end
of fiscal 1998 to the end of the first quarter 1999 reflects a normal
seasonal pattern of inventory growth, as the Company prepares for
anticipated shipments to customers later in the year.
o The Company ended the first quarter of 1999 with $11.3 million in cash
and cash equivalents, compared with $6.3 million at the end of the
first quarter of 1998. The Company ended fiscal 1998 with $29.6 million
in cash and cash equivalents. There were no short-term seasonal bank
loans outstanding during either quarter, or as of the end of fiscal
1998.
o During the first quarter of 1999, the Company commenced a program to
repurchase up to five percent of its common shares, intending to hold
those common shares in Treasury. During the first quarter of 1999, the
Company acquired about one and one-half percent of the outstanding,
spending about $1.3 million. The Company expects that program to
continue during the balance of 1999, depending upon the availability of
common shares and market conditions at any point in time.
The Company's capital expenditures during the first quarter of 1999, amounted to
$487 thousand, compared with $708 thousand during the same period of 1998.
Capital expenditures in both years were funded out of 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 the Company believes are 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 currently extends
through 2000 and provides for periodic extensions upon request and with the
approval of the banks. The Company intends to request an extension through 2001
later in 1999, and anticipates the banks granting an extension.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In January 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1")
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP requires that certain
Page 7 of 13 pages
8
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. The
SOP also requires that costs related to the preliminary project stage and the
post-implementation/operations stage (as defined in the SOP) in an internal-use
computer software development project be expensed as incurred. The adoption of
SOP 98-1 did not affect results of operations or financial position of the
Company.
In addition, in January 1999, the Company adopted Statement of Position 98-5
("SOP 98-5"), "Reporting on the Costs of Start-Up Activities ". The SOP requires
that costs incurred during start-up activities, including organization costs, be
expensed as incurred. The adoption of SOP 98-5 did not affect results of
operations or financial position.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is required to be adopted in years
beginning after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to adopt
the new Statement effective January 1, 2000. The Statement will require
companies to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position.
Year 2000 Readiness Disclosures
- -------------------------------
The Company has conducted a review of its key financial, information and
operating systems to determine the extent to which it is exposed to so-called
year 2000 computer date problems. The Company believes that all of its critical
application systems have been converted to correct for potential problems.
During 1998, the Company conducted extensive tests, which have confirmed the
readiness of its systems. 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 its conversion, but
estimates that the costs incurred, which have been expensed as incurred, have
not been material, 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 revert to alternative compliant suppliers or
resort to increased use of traditional methods of transacting business to
satisfy 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 first quarter of 1999, net sales amounted to $14.8 million, a 5.1
percent decrease in net sales from the first quarter of 1998. The primary cause
of the net sales decline relates to a strategic change made by several national
chain department store customers. These customers decided to purchase a portion
of their slippers from other suppliers utilizing their own private labels,
reducing the amount of Dearfoams(R) brand slippers they purchase. This decision
accounted for a sizable portion of the decline in net sales during the first
quarter. Unless these national chains reverse their current strategy, the
Company expects this erosion of net sales to national chains will continue to
offset sales gains in other areas - to mass merchandisers, traditional
department stores, and internationally. Adding to the sales decline, is a
Page 8 of 13 pages
9
Management's Discussion and Analysis of Financial Condition
and Results of Operations - continued
slowing of sales of thermal retention elements used by a strategic alliance
customer in its consumer houseware products. [See also financial statements note
6 for selected segment information.]
Gross profit during the first quarter, amounted to $8.6 million, compared with
$10.1 million during the same quarter in 1998. Lower net sales during 1999
reduced gross profit. As a percent of net sales, gross profit during the first
quarter of 1999 was 58.4 percent compared with 65.1 percent during the first
quarter of 1998. The Company's desire to bring about an orderly reduction in
inventory levels throughout 1999 had a negative impact on gross profit, as
lowering inventory was accomplished in part, by necessarily running plants at
less than full capacity during the quarter.
Selling, general and administrative expenses during the quarter, at $13.4
million, represent an increase of 18.5 percent from similar expenses incurred
during the first quarter of 1998. The increase in these expenses was much
greater than the increase in net sales. The Company has decided to continue with
several long-term productivity related projects that will have a negative impact
short term on expenses. The Company believes that the long-term benefit of the
projects will offset the short-term costs. An example of this type of project is
the startup of a new warehouse in San Antonio, Texas, intended to handle
warehousing needs for future years. The costs of that expansion have been
expensed during the quarter, even though the warehouse will not reach full
utility until later in the year.
Net interest expense declined from 1998 to 1999. During the first quarter of
1999, net interest expense amounted to $58 thousand compared with $166 thousand
in the first quarter of 1998. With improved liquidity during the first quarter,
the Company had excess funds to invest seasonally, earning more interest income
on short-term instruments in 1999 than during the first quarter of 1998.
For the first quarter of 1999, the Company incurred a loss of $2.9 million, or
$0.30 per share, compared with a loss of $751 thousand, or $0.08 per share
during the same quarter of 1998. Per share calculations from both years are the
same for both basic loss per share and for diluted loss per share.
- --------------------------------------------------------------------------------
"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, both in the United States and abroad; the effect of
direct sourcing by customers of competitive products from alternative suppliers;
the effect of pricing pressures from retailers; inherent risks of international
development, including foreign currency risks; implementation of the Euro,
economic, 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.
- --------------------------------------------------------------------------------
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
No response required
Page 9 of 13 pages
10
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. and Phase Change Laboratories, Inc. 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 Change
Laboratories, Inc. The Company believes that the product infringes upon
the '962 Patent. The Company seeks damages, attorney's fees and
injunction against further infringement by both defendants. The matter
is currently in discovery. A mediator has been selected to aid in
settlement discussions. The Company has moved to amend the case to add
a claim for deceptive advertising. The case has been assigned Civil
Action No. 1:98CV00802.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
(a) and (b) Not Applicable
(c) As of March 1, 1999, each of Charles E. Ostrander and Christian
Galvis was issued 1,250 common shares of the Company. These common
shares were issued in respect of the Company's 1998 fiscal year in
accordance with the terms of Restricted Stock Agreements, effective as
of January 4, 1998, between the Company and each of Messrs. Ostrander
and Galvis. The common shares had a market value of $8.50 per share on
the date of issuance. The common shares were issued in reliance upon
the exemptions from registration provided by Sections 4(2) and 4(6)
under the Securities Act of 1933 based upon the limited number of
persons to whom the common shares were "sold" and the status of each of
such individuals as an executive officer and director of the Company.
(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) - (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 12.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended April 3, 1999.
Page 10 of 13 pages
11
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
May 12, 1999
- ------------
date
/s/ Richard L. Burrell
Richard L. Burrell
Senior Vice President - Finance
(Principal Financial Officer)
(Duly Authorized Officer)
Page 11 of 13 pages
12
R. G. BARRY CORPORATION
INDEX TO EXHIBITS
Exhibit Number Description Page Number
-------------- ----------- -----------
27 Financial Data Schedule 13
(Period ended April 3, 1999)
Page 12 of 13 pages