As filed with the Securities and Exchange Commission on October 13, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12 (B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
BARNEYS NEW YORK, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-4040818
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
575 Fifth Avenue
New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 339-7300
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Warrants to Purchase Common Stock
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TABLE OF CONTENTS
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ITEM 1. BUSINESS.............................................................................................1
ITEM 2. FINANCIAL INFORMATION................................................................................7
ITEM 3. PROPERTIES..........................................................................................22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................24
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS....................................................................27
ITEM 6. EXECUTIVE COMPENSATION..............................................................................31
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................34
ITEM 8. LEGAL PROCEEDINGS...................................................................................34
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....35
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.............................................................36
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.............................................37
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS...........................................................38
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................................................39
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................39
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS...................................................................39
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ITEM 1. BUSINESS.
GENERAL
Barneys New York, Inc., a Delaware corporation
("Holdings"), is the parent company of Barney's, Inc., a New York corporation
("Barneys"), which together with its subsidiaries (collectively, the "Company"),
is a leading upscale retailer of men's and women's apparel and accessories and
items for the home. The Company is engaged in three distribution channels which
encompass its various product offerings: the full price stores, the outlet
stores and the warehouse sale events. In addition, the Company is involved in
licensing arrangements pursuant to which the "Barneys New York" trade name is
licensed for use in Asia. See " --Licensing Arrangements" below.
Barneys was founded by Barney Pressman in 1923 under the
name Barney's Clothes, Inc. Until its emergence from bankruptcy in January 1999,
Barneys was owned by the Pressman family, certain affiliates of the Pressman
family and certain trusts of which members of the Pressman family were the
beneficiaries. Pursuant to the Plan of Reorganization for Barneys and certain of
its affiliates as confirmed by the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"), Holdings was formed and
all the equity interests in Barneys were transferred to Holdings, making Barneys
a wholly-owned subsidiary of Holdings. See " -- The Reorganization" below.
The Company operates seven full price stores (three of
which are flagship stores located in New York, Chicago and Beverly Hills and
four of which are regional stores) and nine outlet stores throughout the United
States (see "Properties" below) under the "BARNEYS NEW YORK" trade name. Barneys
merchandise is priced from the middle to the upper end of the market and appeals
to sophisticated customers whose income levels are above average. Its
merchandising philosophy stresses a variety of fashion viewpoints. It offers a
mix of merchandise including established designers, new designers, branded goods
and private label goods. The Company purchases merchandise from a broad range of
vendors, domestic and foreign, including designers, manufacturers of branded
goods, and private label resources. Major designers include Giorgio Armani,
Prada, Jil Sander, Hermes, Donna Karan, Comme des Garcons, Robert Clergerie and
Ermenegildo Zegna. Major branded goods include Oxxford and Hickey Freeman, and
major cosmetics lines including but not limited to Chanel, Francois Nars and
Kiehls. A significant portion of the merchandise is manufactured in Europe
(primarily Italy). The flagship stores in New York and Beverly Hills also
include restaurants managed by third party contractors.
In addition to its full-price retail business, the Company
has developed two operations which focus on outlet stores and warehouse sales.
The Company conducts semi-annual warehouse sales in New York and Santa Monica,
California. Warehouse sale events operate on an extremely low cost basis,
generating significant net profit, while flattening seasonal effects on the
Company's business.
RETAILING STRATEGY
During fiscal 1998, the Company's sales were derived as
follows: 82% from full-price stores (71% from three flagship stores, and 11%
from four regional stores), 10% from Outlet Stores and 8% from Warehouse Sale
Events.
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FULL PRICE STORES
The Company operates seven full price stores: three large
flagship stores in prime retail locations in New York, Beverly Hills, and
Chicago, and four small regional stores in Manhasset, NY, Seattle, WA, Chestnut
Hill, MA, and World Financial Center, NY.
The three large flagship stores establish and promote the
Barneys image as a pre-eminent retailer of men's and women's fashion. They
provide customers with a wide range of high quality products, including apparel,
accessories, cosmetics and items for the home. They cater to affluent,
fashion-conscious men and women. The four smaller regional stores aim to serve
similar customers in smaller urban markets. These stores provide a limited
selection of the assortment offered in the flagship stores.
Creative merchandising, store design and displays,
advertising campaigns and publicity events develop the image of Barneys as a
fashion leader. The flagship stores create aesthetic shopping environments to
showcase designer and private label merchandise with the Barneys point of view.
Customer relationships are developed with in-store service, marketing
communications, and a customer loyalty awards program.
OUTLET STORES
The Company operates nine outlet stores across the country.
The outlet stores leverage the Barneys New York brand to reach a wider audience
by providing a lower priced version of the sophistication, style and quality of
the merchandise and retail experience provided in the full price stores. The
outlet stores also provide a clearance vehicle for full price stores' residual
merchandise. The stores operate with a low cost structure.
The outlet stores cater to budget minded yet
fashion-conscious men and women, selling designer, branded and private label
apparel and accessories. They are located in high-end outlet centers, and serve
a high number of destination shoppers and tourists.
WAREHOUSE SALE EVENTS
The Company operates four warehouse sale events, two each
season in New York and Santa Monica, California. The warehouse sale events
provide another vehicle for liquidation of end of season residual merchandise,
as well as a low cost extension of the Barneys New York brand to a wider
audience. The events attract a wide range of shoppers, mostly bargain hunters
who value quality and fashion.
THE REORGANIZATION
On January 10, 1996 (the "Filing Date"), Barneys and
certain of its subsidiaries commenced proceedings under Chapter 11 of title 11,
United States Code (the "Bankruptcy Code") by filing petitions in the Bankruptcy
Court. On January 28, 1999 (the "Effective Date"), the Company emerged from
reorganization proceedings (the "Reorganization") under the Bankruptcy Code
pursuant to a Second Amended Joint Plan of Reorganization, dated November 13,
1998, as supplemented and as confirmed on December 21, 1998 by the Bankruptcy
Court (the "Plan"). The following is a summary of the material provisions of the
Plan that became effective on the Effective Date.
OVERVIEW. Pursuant to the Plan, Holdings was formed and, on the
Effective Date, all of the outstanding capital stock of Barneys was transferred
to Holdings by the holders thereof. In addition, prior
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to the Effective Date, Barneys formed three subsidiaries (two of which, Barneys
(CA) Lease Corp. and Barneys (NY) Lease Corp., are direct, wholly-owned
subsidiaries of Barneys, and one of which, Barneys America (Chicago) Lease
Corp., is a direct, wholly-owned subsidiary of Barneys America, Inc., which is a
direct, wholly-owned subsidiary of Barneys and which was in existence since
before the Filing Date), each of which acts as a lessee and sublessor for one of
the flagship stores. See "PROPERTIES." BNY Licensing Corp. ("BNY Licensing"), a
wholly-owned subsidiary of Barneys, is party to certain licensing arrangements.
Barneys Asia Co. LLC is 70% owned by BNY Licensing and 30% owned by an affiliate
of Isetan Company Ltd. ("Isetan"), and was formed prior to the Effective Date
pursuant to the Plan. See "-- Licensing."
EQUITY. Pursuant to the Plan, the following equity was issued:
Issued In Exchange for Claims. The equity in Barneys was
exchanged for shares of common stock, $0.01 par value, of Holdings ("Holdings
Common Stock"), and certain allowed general unsecured claims and claims held by
Isetan against Barneys and certain of its affiliates were exchanged for, among
other things, shares of Holdings Common Stock and warrants (as defined below).
Rights Offering. Shares of Holdings Common Stock were
issued to all holders of allowed general unsecured claims (other than members of
the Pressman family and Isetan, each of which were party to separate
arrangements described herein, and other than holders of general unsecured
claims whose claims were for less than $2,300 and holders of general unsecured
claims of greater than $2,300 who elected to receive cash in settlement of their
claims) pursuant to the exercise by them of rights to subscribe for shares of
Holdings Common Stock ("Subscription Rights") which were issued in accordance
with the Plan, and exercised prior to consummation of the Plan. The $62.5
million offering of Subscription Rights was guaranteed by Bay Harbour Management
L.C. ("Bay Harbour") and Whippoorwill Associates, Inc. ("Whippoorwill," and,
together with Bay Harbour, the "Plan Investors") on behalf of their
discretionary and/or managed accounts to the extent the other holders of allowed
general unsecured claims did not elect to participate in the offering. Bay
Harbour and Whippoorwill agreed to guarantee the offering of Subscription Rights
pursuant to the Amended and Restated Stock Purchase Agreement dated as of
November 13, 1998 among Barneys, Bay Harbour, Whippoorwill and the Official
Committee of Unsecured Creditors of Barneys (the "Stock Purchase Agreement"). In
the offering, the Plan Investors purchased an aggregate of 6,707,531 shares of
Holdings Common Stock for an aggregate price of approximately $58.2 million.
Option. Pursuant to the Stock Purchase Agreement, the Plan
Investors were granted an option to purchase, at an aggregate exercise price of
$5.0 million, a total of 576,122 shares of Holdings Common Stock. Pursuant to
the option, each of the Plan Investors has the right to purchase the greater of
(i) 288,061 shares of Holdings Common Stock, and (ii) 576,122 shares of Holdings
Common Stock, less the number of shares purchased by the other Plan Investor.
This option expires on November 15, 1999.
Isetan Warrant. An affiliate of Isetan was issued a warrant
(the "Isetan Warrant") to purchase 287,724 share of Holdings Common Stock at an
exercise price of $14.68 per share. This warrant expires on January 29, 2002.
Unsecured Creditors Warrants. All holders of allowed
general unsecured claims (other than members of the Pressman family and Isetan,
each of which were party to separate arrangements described herein, and other
than holders of general unsecured claims whose claims were for less than $2,300
and holders of general unsecured claims of greater than $2,300 who elected to
receive cash in settlement of their claims) were issued warrants (the "Unsecured
Creditors Warrants") to purchase an
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aggregate of up to 1,013,514 shares of Holdings Common Stock at an exercise
price of $8.68 per share. These warrants expire on May 15, 2000.
Preferred Stock. Holdings issued 15,000 shares of Series A
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), to the
Barneys Employees Stock Plan Trust, which was established for the benefit of
eligible employees of the Company. In addition, Holdings issued 5,000 shares of
Preferred Stock for an aggregate purchase price of $500,000 in government
securities to Bay Harbour, which it sold to a third party under a prearranged
agreement.
INDEBTEDNESS. Pursuant to the Plan, the following debt securities
were issued:
Isetan. Barneys issued a promissory note (the "Isetan
Note") in the principal amount of $22,500,000 to Isetan. The Isetan Note bears
interest at the rate of 10% per annum payable semi-annually, and matures on
January 29, 2004.
Equipment Lessors. On the Effective Date, certain lessors
of equipment to the Company transferred all right, title and interest in such
equipment to the Company. In exchange therefor, the Company issued promissory
notes (the "Equipment Lessors Notes") to such lessors in an aggregate principal
amount of $35,788,865. Such promissory notes bear interest at the rate of
11-1/2% per annum payable semi-annually, mature on January 29, 2004, and are
secured by a first priority lien on the equipment that was the subject of each
of the respective equipment leases.
OTHER. Barneys paid approximately (i) $23,300,000 in cash to Isetan
on account of its allowed claims, (ii) $50,000 to members of the Pressman family
in partial settlement of claims filed by them against the Company and in partial
exchange for equity interests in the Company and certain of its affiliates,
(iii) an aggregate of $19,700,000 to holders of allowed administrative and
priority claims, exclusive of professional fees paid, and (iv) an aggregate of
$450,000 to holders of general unsecured claims whose claims were for amounts
less than $2,300 and holders of general unsecured claims of greater than $2,300
who elected to receive cash in settlement of their claims, pursuant to the Plan.
In addition, Barneys entered into consulting agreements with certain members of
the Pressman family. Pursuant to these agreements, each of which terminates on
the first anniversary of the Effective Date, each of Phyllis Pressman, Robert
Pressman, Gene Pressman and Holly Pressman have agreed to make himself or
herself available to Barneys (up to 60% of full-time for Phyllis Pressman, and
80% of full time for each of Robert, Gene and Holly Pressman) to furnish
consulting services to Barneys, its subsidiaries and affiliates with respect to
their business and potential business opportunities. The aggregate compensation
payable under the consulting agreements ranges from $410,000 to $1,400,000,
payable in four equal semi-annual installments commencing on the Effective Date.
The Company was also required to pay Nanelle Associates, an entity controlled by
members of the Pressman family, in respect of its claims in the bankruptcy case,
$400,000, payable in four equal semi-annual installments commencing on the
Effective Date.
REAL ESTATE. Pursuant to the Plan, an affiliate of Isetan became the
sole owner of the properties on which the Company's three flagship stores are
located and Barneys entered into modifications of the long-term leases for such
stores. See "PROPERTIES" below.
LICENSING. BNY Licensing entered into the licensing arrangements
described under "Licensing Arrangements" below.
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LICENSING ARRANGEMENTS
BNY Licensing is party to licensing arrangements pursuant
to which (i) two retail stores are operated in Japan and a single in-store
department is operated in Singapore under the name "BARNEYS NEW YORK," each by
an affiliate of Isetan, and (ii) Barneys Asia Co. LLC, which is 70% owned by BNY
Licensing and 30% owned by an affiliate of Isetan (and which was formed in
connection with the Reorganization referred to above), has the exclusive right
to sublicense the BARNEYS NEW YORK trademark throughout Asia (excluding Japan).
Licensing agreements governing these arrangements were entered into in
connection with Barneys's emergence from bankruptcy. See " -- THE
Reorganization" above.
TRADEMARKS AND SERVICE MARKS
The Company owns its principal trademarks and service marks
worldwide, including the "Barneys New York" and "Barneys" marks. In addition to
these marks, the Company owns other important trademarks and service marks used
in its business. The Company's trademarks and service marks are registered in
the United States and internationally. The term of these registrations is
generally ten years, and they are renewable for additional ten-year periods
indefinitely, so long as the marks are still in use at the time of renewal. The
Company is not aware of any claims of infringement or other challenges to its
right to register or use its marks in the United States.
SEASONALITY
The specialty retail industry is seasonal in nature, with a
high proportion of sales and operating income generated in the November and
December holiday season. As a result, the Company's operating results are
significantly affected by the holiday selling season. Seasonality also affects
working capital requirements, cash flow and borrowings as inventories build in
September and peak in October in anticipation of the holiday selling season. The
Company's dependence on the holiday selling season for sales and income is less
than that of many retailers, because of the significant sales and income
generated by the warehouse sale events held in February and August.
COMPETITION
The retail industry, in general, and the specialty retail
store business, in particular, are intensely competitive. Generally, the
Company's stores are in competition with both specialty stores and department
stores in the geographic areas in which they operate. The Company's outlet
stores and warehouse sale events also compete with off-price and discount
stores. During the last few years, several of the Company's significant vendor
resources have entered or expanded their presence in the retail business with
their own dedicated stores, which compete directly with the Company's stores
(e.g., Giorgio Armani, Prada, Gucci and Helmut Lang). Several department store,
specialty store, and vendor store competitors also offer mail order catalog
shopping. The Internet is beginning to permit the development of sales venues
run by existing competitor stores or by new ventures that will also compete with
the Company. Some of the retailers with which the Company competes have
substantially greater financial resources than the Company and may have various
other competitive advantages over the Company.
The trend toward vertical integration of designer resources
poses additional competitive risk for the Company (e.g., Neiman Marcus' purchase
of an interest in the Kate Spade accessories business, LVMH's stable of designer
vendors sold through its Duty Free Shops and Galleria stores as well as
individual designer boutiques). Competition is strong not only for retail
customers, but also for vendor
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resources. In the Company's luxury retail business, exclusivity of merchandise
brands is very valuable, and retail stores compete for exclusive distribution
arrangements with key designer vendors.
MERCHANDISING
In fiscal 1998, the Company's top 10 vendor brands
accounted for approximately 23% of total Company sales. The two top vendor
brands each accounted for approximately 5% of total Company sales. All of these
brands are also sold by competitor retailers in certain markets; nine of the ten
vendors also have their own dedicated retail stores. Exclusivity of distribution
of designer brands is a valuable resource in the luxury retail business. The
Company faces risk to its business if either designer vendors withdraw Barneys
from their distribution, or, conversely, if they provide distribution to
competitors.
EMPLOYEES
At September 24, 1999, the Company employed approximately
1350 people. The Company's staffing requirements fluctuate during the year as a
result of the seasonality of the retail apparel industry, adding approximately
100 employees during the holiday selling season. Approximately 550 of the
Company's employees are represented by unions and the Company believes that
overall its relationship with its employees and the unions is good. During its
more than fifty-year relationship with unions representing its employees, the
Company has never been subjected to a strike.
CAPITAL EXPENDITURES
The Company's capital expenditure plan is designated to
allocate funds to projects that are necessary to support the Company's strategic
plan. Under the terms of its $120,000,000 revolving credit facility, capital
expenditures are limited to $7,250,000 in fiscal year 1999, $7,500,000 in fiscal
year 2000, and $7,750,000 in each of fiscal years 2001 and 2002. See "FINANCIAL
INFORMATION -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
CERTAIN TAX MATTERS
FEDERAL AND STATE INCOME TAXES
Pursuant to the Plan, Holdings acquired 100% of Barneys'
stock. Holdings will make a Section 338(g) election (the "Election") with
respect to the acquisition under applicable provisions of the Internal Revenue
Code ("IRC"). The tax effects of making the Election would result in Barneys and
each of its subsidiaries generally being treated, for federal income tax
purposes, as having sold its assets at the time the Plan was consummated and
thereafter, as a new corporation which purchased the same assets as of the
beginning of the following day. As a result, Barneys will incur a gain or loss
at the time of the deemed sale in an amount equal to the difference between the
fair market value of its assets and its collective tax basis of the assets at
the time of the sale.
The Company may use existing net operating loss
carryforwards to reduce any gain incurred as a result of this sale.
Nevertheless, the Company will be subject to alternative minimum tax. As a
result of the Election, the Company has recorded an accrual for the alternative
minimum tax liability as a "fresh start" adjustment. Furthermore, immediately
after the sale, as a result of the IRC Section 338(g) election, Barneys will be
stripped of any remaining tax attributes, including any unutilized net operating
loss carryforwards and any unutilized tax credits. See Note 10 to Consolidated
Financial Statements.
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OTHER TAXES
For the years including 1996, 1997 and 1998 the Company is
subject to various tax audits of Barneys at the present time, particularly by
New York State. The Company believes that pending audit results, in the
aggregate, will not have a material effect on the Company's financial position,
results of operations or cash flows.
LIMITED POST - CHAPTER 11 CASE OPERATING HISTORY
The Company's emergence from Chapter 11 reorganization
occurred very recently, and consequently the Company's subsequent operating
history is limited. Financial statements for future periods will not be
comparable to the historical financial statements included herein, for the
reasons discussed under "Financial Information -- Management's Discussion and
Analysis of Financial Condition and Results of Operations."
FORWARD LOOKING INFORMATION
This Registration Statement contains "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward looking statements are based on management's expectations,
estimates, projections and assumptions. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," and variations of such words and
similar expressions are intended to identify such forward looking statements
which include, but are not limited to, projections of revenues, earnings and
cash flows. These forward looking statements are subject to risks and
uncertainties which could cause the Company's actual results or performance to
differ materially from those expressed or implied in such statements. These
risks and uncertainties include, but are not limited to, the following: general
economic and business conditions, both nationally and in those areas in which
the Company operates; demographic changes; prospects for the retail industry;
competition; changes in business strategy or development plans; the loss of
management and key personnel; the availability of capital to fund the expansion
of the Company's business; changes in consumer preferences or fashion trends;
adverse weather conditions, particularly during peak selling seasons; failure of
the Company or third parties to be Year 2000 compliant; and changes in the
Company's relationships with designers, vendors and other suppliers.
ITEM 2. FINANCIAL INFORMATION.
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial
data as of and for each of the five fiscal years in the period ended August 1,
1998 and for the six months ended January 30, 1999. The selected historical data
should be read in conjunction with the financial statements and the related
notes and other information contained elsewhere in this Registration Statement,
including information set forth herein under " -- Management's Discussions and
Analysis of Financial Condition and Results of Operations."
The historical financial data as of and for each of the
four fiscal years in the period ended August 1, 1998 and for the six months
ended January 30, 1999 are derived from financial statements audited by Ernst &
Young LLP, independent auditors. Information for the six months ended January
31, 1998 and for the fiscal year ended July 30, 1994 is derived from
management's internal financial statements.
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In conjunction with its emergence from Chapter 11, the
Company changed its fiscal year end to the Saturday closest to January 31.
Previously, the fiscal year end fell on the Saturday closest to July 31. A
January fiscal year end is in line with retail industry practice as it coincides
with the end of the fall/holiday season. Unless otherwise specified, all
historical information prior to August 2, 1998 reflects the July fiscal year
end. The period between August 2, 1998 and January 30, 1999 (the "Fall 1998 Stub
Period") represents the six month transition period to the new fiscal year.
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PREDECESSOR COMPANY
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SIX MONTHS SIX MONTHS FISCAL YEARS ENDED (1)
ENDED ENDED
JANUARY 30, JANUARY 28, AUGUST 1, AUGUST 2, AUGUST 3, JULY 29, JULY 30,
1999 (2) 1998 1998 1997 1996 1995 1994
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INCOME STATEMENT DATA
Net sales $ 181,657 $ 183,760 $ 342,967 $ 361,496 $ 366,424 $ 338,673 $ 291,098
Operating Income (loss) 10,301 10,177 8,061 (15,030) (29,415) (106,841) (66,638)
Net income (loss) 293,662 (4,123) (19,953) (94,973) (71,869) (120,843) (78,144)
BALANCE SHEET DATA:
Working capital $ 41,064 $ (20,216) $ (32,249) $ (19,443) $ 19,596 $(218,912) $ 8,017
Total assets 343,954 212,637 217,043 216,246 264,828 247,788 289,957
Long-term debt 118,533 -- -- -- -- -- 183,696
SELECTED OPERATING DATA
Comparable store net sales
(decrease) increase 1.0% 1.0% 9.3% (1.0%) 4.5% 15.0% (26.3%)
Number of stores
Full price stores 7 7 7 10 13 14 15
Outlet stores 13 13 13 10 7 3 2
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Total stores 20 20 20 20 20 17 17
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1 Effective January 1999, the Company changed its fiscal year to coincide
with the Saturday closest to the end of January.
2 The income statement data presented above reflects the results of
operations for the Predecessor Company. The Plan became effective on
January 28, 1999 and the results of operations for the Successor Company
for the two day period are immaterial and are not shown separately. The
balance sheet data presented as of January 30, 1999 is that of the
Successor Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company is a retailer of men's and women's apparel and
items for the home. In the late 1980's, the Company and certain of its
subsidiaries entered into various transactions and agreements with Isetan or
subsidiaries of Isetan, principally related to the building of the three
flagship stores and trademark licensing arrangements. Additionally, the Company
had entered into various transactions and agreements with affiliate companies
and other related parties, primarily engaged in the operation of real estate
properties and Barneys New York credit card operations.
The Company's financial results over the past three years
have been impacted as a result of its filing for reorganization under Chapter 11
of the Bankruptcy Code on January 10, 1996 (the "Filing Date") and subsequent
emergence from Chapter 11 reorganization on January 28, 1999 (the "Effective
Date").
The Company incurred reorganization costs of $13.8 million,
in the six months ended January 30, 1999, and $16.0 million, $72.2 million and
$29.4 million in fiscal years 1998, 1997 and 1996, respectively. These charges
included, over the three year period, approximately $58.9 million in relation to
the closing of under-performing stores, $34.9 million in professional fees, for
legal, accounting and business advisory services principally provided to the
Company and the unsecured creditors committee throughout the bankruptcy
proceedings, $18.0 million for payroll and related costs including termination
costs and a key employee retention program, and approximately $19.6 million of
other reorganization costs.
On the Effective Date, the Company restructured its
capitalization in accordance with the Plan. The application of "fresh start"
reporting provisions of the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7") as of the Effective Date included
adjustments to certain assets and liabilities, which resulted in a $0.3 million
one-time charge to earnings. Also on the Effective Date, the value of the cash
and securities distributed by the Company in settlement of the claims resulted
in an extraordinary gain of $302.3 million. Further, the Company recognized
reorganization value in excess of amounts allocable to identifiable assets
("Excess Reorganization Value") of $177.8 million. This excess reorganization
value will be amortized by the straight-line method over 20 years. For further
information concerning the key provisions of the Plan, see note 2 to the
Consolidated Financial Statements.
In January 1999, the Company entered into a $120,000,000
revolving credit facility (the "Credit Agreement") with Citicorp USA, Inc.,
General Electric Capital Corporation, BNY Financial Corporation, and National
City Commercial Finance, Inc. that matures on January 28, 2003. The proceeds
from this facility were used to repay borrowings under the debtor in possession
credit agreement with BankBoston N.A., to pay certain claims, to pay
professional fees and to provide working capital to the Company as it emerged
from its chapter 11 proceeding pursuant to the Plan.
"FRESH-START" REPORTING
The balance sheet information at January 30, 1999 included
under "Selected Historical Financial Information" reflects the Company's Chapter
11 plan of reorganization and the application of the principles of "fresh start"
reporting in accordance with the provisions of SOP 90-7. Accordingly, such
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financial information is not comparable to the Company's historical financial
information prior to the Effective Date.
The reorganization value used as a basis for the "fresh
start" reporting was determined to be $285 million. The equity value of the
Company as of January 28, 1999 was calculated to be approximately $154.3 million
based upon this reorganization value.
"Fresh start" accounting adjustments have been made to
reflect the estimated adjustments necessary to adopt "fresh start" reporting in
accordance with SOP 90-7. "Fresh start" reporting requires that the
reorganization value of the Company be allocated to its assets in conformity
with Accounting Principles Bulletin Opinion No. 16, "Business Combinations," for
transactions reported on the basis of the purchase method. Any reorganization
value greater than the fair value of specific tangible or identified intangible
assets is to be included on the balance sheet as reorganization value in excess
of amount allocable to identifiable assets and amortized over time.
OPERATING RESULTS
Since the Filing Date, the Company has devoted a
significant amount of time to analyzing its cost structure to develop
cost-reduction initiatives to improve the overall financial condition and
operating results of the Company. The Company's present operating results
reflect the continued progress made with the cost reduction initiatives
implemented since the Filing Date. In the six months ended January 30, 1999,
selling, general and administrative expenses declined as a percentage of sales
to 40.5% from 42.5% in the comparable period last year. In 1998, the most recent
full year of operations, selling, general and administrative expenses as a
percent of sales were 44.1%, significantly below the 1996 level of 54.9%. As of
January 30, 1999, the Company has closed seven full price stores, opened seven
new outlet stores and reduced the Company's headcount by more than 300 as
follows: 28 associates in the six months ended January 30, 1999; 137 associates
in 1998; 143 associates in 1997; and 37 associates in 1996. The majority of the
store closings occurred in July and August of 1997 when the Company closed its
full price stores in Texas, Michigan and the original Barneys New York store
located on 17th Street in New York.
10
<PAGE>
The table which follows includes a percentage
reconciliation of net sales to earnings before interest, taxes, depreciation and
amortization (excluding reorganization costs) ("EBITDA") and also includes net
income (loss) as a percentage of sales for the six months ended January 30, 1999
and January 31, 1998, fiscal 1998 (52 weeks), fiscal 1997 (52 weeks), and fiscal
1996 (53 weeks). The Company believes EBITDA is a useful statistic since it
eliminates both the cost of the capital structure and non-cash charges (which
can vary dramatically by company) from the operating results of the Company.
While the table below excludes a reconciliation of EBITDA to net income (loss),
the narratives that follow contain a discussion of interest expense,
depreciation and amortization, and reorganization costs for the periods
presented, as necessary.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED FISCAL FISCAL FISCAL
1/30/99 1/31/98 1998 1997 1996
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 52.3 51.1 52.1 53.2 52.8
--------------------------------------------------------------------------
Gross profit 47.7 48.9 47.9 46.8 47.2
Selling, general and administrative expenses
(including occupancy expenses) 40.5 42.5 44.1 48.0 54.9
Other (income) expense, net (1) (1.1) (1.8) (1.4) (0.6) (3.5)
--------------------------------------------------------------------------
Earnings before Interest, Taxes, Depreciation
and Amortization (EBITDA) 8.3% 8.2% 5.2% (0.6)% (4.2)%
==========================================================================
Net income (loss)(2) 161.7% (2.2)% (5.8)% (26.3)% (35.7)%
==========================================================================
(1) Other income (expense) net includes Impairment and special charges (1996),
Royalty income (1998, 1997 and 1996), foreign exchange gains (1996) and
other income, net in each of the periods presented.
(2) Net income for the six months ended January 30, 1999 includes the effect of
an extraordinary gain on discharge of debt of $302.3 million.
</TABLE>
SIX MONTHS ENDED JANUARY 30, 1999 COMPARED TO THE SIX MONTHS ENDED JANUARY 31,
1998
The emergence from Chapter 11 proceedings effective January
28, 1999 as well the implementation of the store closing program announced in
1997 are the primary factors affecting comparability of operating results. The
store closings in 1998 were as follows: the 17th Street flagship store in
mid-August 1997; the Connecticut full-price store in January 1998; and the Costa
Mesa, California full-price store in July 1998. In the six months ended January
31, 1998, the Company opened new outlet stores in Hawaii, Massachusetts and
California.
In addition to the above, the six months ended January 30,
1999 represented an abbreviated reporting period of the Predecessor Company
whereas the six months ended January 31, 1998 coincided with the end of the
second quarter of the Predecessor Company. As a result, there are certain
"year-end" adjustments in the six months ended January 30, 1999, discussed
below, which affect the comparability of operating results with the same periods
in fiscal 1998.
11
<PAGE>
In prior years, the Company had entered into various
transactions and agreements with affiliates (i.e., members of the Pressman
family, or entitles controlled by them) who were primarily engaged in the
operation of real estate properties. Since the Filing Date, the Company incurred
certain normal operating costs and reorganization costs on behalf of these
affiliate entities. Such costs were routinely charged to the affiliates,
however, it was unclear whether the affiliates (also operating as debtors in
possession pursuant to the Bankruptcy Code) would have the ability to repay such
amounts in the future. Accordingly, at the time of such charges reserves were
provided in the operating results of the Predecessor Company. In December 1998,
principally in connection with the approval of the Plan and the settlements
included therein, collectibility issues of certain amounts due from these
affiliated entities were resolved. Accordingly, the Company was able to reduce
its affiliate receivable reserve by approximately $1.9 million, principally
representing cash payments from an affiliate in satisfaction of a portion of the
outstanding receivable balance. This reserve reversal reduced selling, general
and administrative expenses and reorganization costs by approximately $0.5
million and $1.4 million, respectively, in the six months ended January 30,
1999.
Net Sales for the six months ended January 30, 1999 were
$181.7 million compared to $183.8 million a year ago, a decrease of 1.1%. This
decrease is primarily attributable to the three full price store closings since
July 1997. Included in net sales for the six months ended January 31, 1998 is
$5.8 million generated from stores closed under the Company's store closing
program, completed in July 1998. Comparable store sales increased approximately
1%, principally due to an increase at full-price stores offset by weakness in
both the outlet and warehouse sale locations.
Gross profit on sales decreased 3.7% to $86.6 million for
the six months ended January 30, 1999 from $89.9 million for the six months
ended January 31, 1998, primarily due to lower revenues as a result of the store
closings. As a percentage of net sales, gross profit was 47.7% for the six
months ended January 30, 1999 compared to 48.9% in the year ago period. The
decrease resulted primarily from increased promotional markdowns in the outlet
and warehouse sale locations and non-recurrence of favorable variances on
foreign currency denominated purchases in the year ago period.
Selling, general and administrative expenses, including
occupancy expenses, declined 5.7% in the six month period ended January 30, 1999
to $73.6 million from $78.1 million in the prior year. This decrease was due in
part to reductions in personnel and occupancy costs, related to the store
closings and corporate headcount reductions as well as continuing improvements
from the Company's cost-reduction initiatives.
In addition to the above, in the six months ended January
30, 1999 "year-end" adjustments were made to certain employee benefit costs. The
most significant items impacted were pension expense, which in the six months
ended January 30, 1999 was recorded at the actual amount of the contribution as
compared to an estimated contribution in the six months ended January 30, 1998
and medical costs. Medical costs were significantly below the prior year due
principally to savings from a carrier change and to an extent, positive trends
in this cost. Combined savings in these two areas alone exceeded $1.5 million.
These savings were partially offset in the six months ended January 30, 1999 by
an approximate $.9 million charge to effectuate the withdrawal from one of the
union-sponsored multi-employer pension plans. There was no comparable charge in
the six months ended January 30, 1998.
There was no royalty income in the six months ended January
30, 1999, compared to $1.7 million in the prior year. The six months ended
January 31, 1998 includes $1.3 million received by the Company in consideration
for terminating a license agreement at the request of the third party licensee,
during the year.
12
<PAGE>
Interest expense decreased 14.7% in the six months ended
January 30, 1999 to $4.8 million from $5.6 million a year ago. Higher interest
expense associated with the Company's short-term borrowings was offset by a
significant reduction in the portion of interest expense associated with the
amortization of related bank fees. The fee to extend the Revolving Credit and
Guaranty Agreement with BankBoston, N.A. and other lenders party thereto (the
"DIP Credit Agreement") to February 1, 1999 from August 1, 1998 was minimal in
relation to the original DIP Credit Agreement fees. Average borrowings for the
26 week periods ended January 30, 1999 and January 31, 1998 were $82.0 million
and $67.0 million, respectively, and the effective interest rate on the
Company's outstanding debt was 10.0% in the six months ended January 30, 1999
compared to 16.5% in the prior year.
Reorganization costs increased 59.3% to $13.8 million in
the six months ended January 30, 1999 from $8.7 million in the year ago period.
This increase is mainly attributable to costs triggered in connection with the
negotiation and consummation of the Plan as well as higher employee separation
costs. Included in these amounts for the respective periods are professional
fees of $3.6 million (including $2.4 million for professionals retained by the
principal Plan Investors) and $5.1 million, provisions of $1.0 million and $1.1
million for a key employee retention program, other payroll and related costs,
including employee separation costs of $4.3 million and $.6 million and other
miscellaneous costs of $4.9 million and $1.9 million. The increase in other
miscellaneous costs (which include administrative costs of the bankruptcy,
public relation costs and costs attributed to closed stores) is principally
attributed to the remaining fee due Dickson Concepts of $3.5 million in
connection with the termination of the Dickson Concepts proposed purchase
agreement.
The Company recorded $0.3 million in "fresh-start" expense
in relation to the emergence from Chapter 11 reorganization in January 1999.
Related "fresh-start" adjustments of $167.9 million were credited to retained
earnings in the six months ended January 30, 1999 principally to eliminate the
Company's cumulative deficit as of the Effective Date.
The Company recognized a gain of $302.3 million related to
debt discharged in the Company's emergence from Chapter 11 reorganization in
January 1999.
FISCAL 1998 COMPARED TO FISCAL 1997
During 1997, the Company decided to close certain stores
and reduce personnel (the "1997 Restructuring Program"). The implementation of
the 1997 Restructuring Program announced in 1997 is one of the primary factors
affecting comparability of operating results for 1998 and 1997. In July 1997,
the Company closed its full-price stores in Texas and Michigan. The store
closings in 1998 were as follows: the 17th Street flagship store in mid-August
1997; the Connecticut full-price store in January 1998; and the Costa Mesa,
California full-price store in July 1998. Additionally, in the second quarter of
1998, the Company opened new outlet stores in Hawaii, Massachusetts and
California.
Net sales for 1998 were $343.0 million compared to $361.5
million in the prior year, a decrease of 5.1%. This decrease is primarily
attributable to the store closings pursuant to the 1997 Restructuring Program.
Included in net sales for 1997 is $63.7 million generated from stores closed
under this program, completed in July 1998. Comparable store sales increased
9.3%, principally due to a double-digit increase at full-price stores, in part,
attributable to the Company's success in transitioning shoppers from the 17th
Street store to the Madison Avenue store. This increase was partially offset by
a double-digit decline at our outlet stores.
Gross profit on sales decreased 2.9% to $164.2 million in
1998 from $169.2 million in 1997, primarily due to lower revenues as a result of
the store closings. As a percentage of net sales, gross
13
<PAGE>
profit was 47.9% in 1998 compared to 46.8% in the prior year. The increase
resulted primarily from reductions in inventory shortages and favorable
variances on foreign currency denominated purchases.
Selling, general and administrative expenses, including
occupance expenses, declined 12.8% in 1998 to $151.2 million from $173.4 million
in the prior year. This decrease was primarily due to reductions in personnel
and occupancy costs, related to the store closings and corporate headcount
reductions as well as continuing improvements under the Company's cost-reduction
initiatives.
Royalty income increased to $1.7 million in 1998 from $0.4
million in 1997. 1998 includes $1.3 million received by the Company in
consideration for terminating a license agreement at the request of the third
party licensee, during the year.
Interest expense increased 55.9% in 1998 to $12.0 million
from $7.7 million in 1997. This increase resulted from a higher effective
interest rate under the Company's DIP Credit Agreement as well as higher average
borrowings throughout the year. The effective interest rate on the Company's
outstanding debt was 16.6% in 1998 compared to 14.3% in the prior year.
Depreciation expense decreased 25.2% in 1998 to $9.6
million from $12.9 million in 1997. This decrease resulted from the store
closings pursuant to the 1997 Restructuring Program discussed above.
Reorganization costs declined 77.9% to $16.0 million in
1998 from $72.2 million in the prior year. This decrease is mainly attributable
to the non-recurring store closings costs of $50 million incurred in 1997. Other
reorganization costs for the respective periods are professional fees of $7.4
million and $13.9 million, provisions of $1.9 million and $2.4 million for a key
employee retention program, other payroll and related costs, including employee
separation costs, of $2.7 million and $3.2 million and other miscellaneous costs
(including administrative costs of the bankruptcy, public relations costs and
costs attributed to closed stores) of $4.0 million and $2.8 million. The decline
in professional fees is primarily related to reduced legal costs associated with
the Chapter 11 proceedings and the increase in other miscellaneous costs is
principally attributed to a $1.5 million expense associated with a fee payable
in connection with the termination of an agreement with a third party to acquire
the assets of the Company during the pendency of the bankruptcy case.
FISCAL 1997 COMPARED TO FISCAL 1996
The Chapter 11 filing on January 10, 1996 is one of the key
factors affecting comparability of operating results between 1997 and 1996. As a
result of the Chapter 11 filing on January 10, 1996, not only did the Company
cease accruing interest on pre-petition debt, but the Company also ceased
accruing stated rent expense to Isetan and affiliated companies for the Madison
Avenue, Beverly Hills and Chicago stores and to substantially all of its
equipment lessors as a result of disputes on the characterization of these
obligations. However, in accordance with interim stipulations, Orders of the
Court and the DIP Credit Agreement, the Company made "on-account" cash payments
to Isetan and the equipment lessors at rates significantly below the contractual
obligations. Accordingly, selling, general and administrative expenses from
January 11, 1996 forward includes "rent" expense pursuant to the Isetan Payment
Agreements and the Equipment Lessor Agreements (collectively the "Payment
Agreements") discussed in Note 8 of the Notes to Consolidated Financial
Statements. Prior to such date, the Company recorded rent expense based on the
terms of the original obligations.
Additionally, in 1996 through the Filing Date, the Company
recognized royalty income of $1.4 million pursuant to the original terms of the
licensing agreement with Isetan and a $9.4 million
14
<PAGE>
translation gain on a foreign currency denominated debt obligation to Isetan.
These amounts were non-recurring in future reporting periods.
Net sales for 1997 were $361.5 million compared to $366.4
million in 1996, a decrease of 1.3%. 1996 included 53 weeks; therefore, 1996 net
sales comparisons are presented on a 52-week basis for comparability. After
adjusting for the impact of the 53rd week in 1996, sales increased less than 1%
in 1997. The sales increase was primarily attributable to the three new outlet
stores opened in Connecticut, Arizona, and New York, as well as overall growth
in the outlet stores opened in 1996. This increased revenue in the outlet stores
was offset by a comparable store sales decrease of 1%, spread principally
between the full-price stores and the warehouse sale events. Exclusive of the
restaurant operations in the full-price stores, net sales increased 0.3% or $1.0
million, however there was a significant shift in sales composition with net
sales declining $5.4 million at the 17th Street store offset by a $5.1 million
increase in net sales at the Madison Avenue store. The sales decrease at the
17th Street store was partially attributed to the migration of business to the
newer, larger flagship store on Madison Avenue and to the changing retail
landscape in the area surrounding the original flagship store.
Gross profit on sales decreased 2.1% to $169.2 million in
1997 from $172.8 million in 1996. As a percentage of net sales, gross profit was
46.8% in 1997 compared to 47.2% in 1996. These variances are principally
attributed to reduced volume of the restaurant operations, principally in the
higher margin businesses associated with the dinner volume and its related
alcohol sales. Exclusive of the restaurant operations, gross profit was 46.5% in
1997 compared to 46.6% in 1996.
Selling, general and administrative expenses, including
occupancy expenses, declined 13.8% to $173.4 million in 1997 from $201.2 million
in 1996. As a percentage of net sales, selling, general and administrative
expenses were 48.0% in 1997 and 54.9% in 1996. This decrease is attributed to
the Company's continuing efforts at reducing costs pursuant to its cost
reduction initiatives, notably a $6.6 million reduction in personnel costs, $1.2
million in packaging and supply costs, a $1.0 million reduction in advertising
and related expenses as well as a $2.0 million reduction in professional fees
related to its legal, accounting and financial advisory services. Prior to the
Filing Date, the Company incurred significant professional fees which were
included in selling, general and administrative expenses. Subsequent to the
Filing Date, such expenses are principally included in Reorganization costs. In
addition, "rent" expense associated with the Madison Avenue, Beverly Hills and
Chicago stores and certain Equipment Leases declined approximately $12.1 million
as a result of the Payment Agreements discussed above.
Interest expense decreased 39.0% to $7.7 million in 1997
from $12.6 million in 1996. At the Filing Date, the Company had $282.0 million
of outstanding debt. As a result of the Chapter 11 filings, the Company ceased
accruing interest on this pre-petition debt as of January 10, 1996. The
Company's average borrowings under the DIP Credit Agreement from the Filing Date
to the end of 1996 of approximately $28 million have been substantially below
historical borrowing levels translating into reduced interest expense.
While operating as a debtor in possession, the Company
incurred reorganization costs of approximately $72.2 million in 1997 and $29.4
million in 1996. 1997 includes 12 months of reorganization costs whereas 1996
includes such costs from January 11, 1996 through August 3, 1996, or
approximately 6.5 months. Included in these amounts for the respective periods
are asset write-offs of $38.8 million and $8.4 million, lease rejection costs of
$15.0 million and $.6 million, straight line rent reversal of $(3.8) million and
$(0.1) million, professional fees of $13.9 million and $10.0 million, provisions
of $2.4 million and $0.6 million for a key employee retention program, other
payroll and related costs, including employee separation costs, of $3.2 million
and $2.3 million and other
15
<PAGE>
miscellaneous costs of $2.8 million and $7.7 million. Other miscellaneous costs
in 1997 and 1996 included administrative costs of the bankruptcy, public
relations costs and costs attributed to closed stores (1997 only). Other
miscellaneous costs in 1996 include a $7.0 million charge in connection with a
purchase put agreement with a subsidiary of an affiliated company. Such amount
was an allowed general unsecured claim and was settled pursuant to the Plan.
LIQUIDITY AND CAPITAL
LIQUIDITY AND CAPITAL RESOURCES
Cash Used in Operations and Working Capital. The Company's primary
source of liquidity has been borrowings under various credit facilities (see
description of the various credit facilities in the following section).
For the reporting periods below, net cash used in operations was as follows ($
in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS FISCAL FISCAL FISCAL
ENDED ENDED YEAR YEAR YEAR
JAN. 30, 1999 JAN. 31, 1998 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 293,662 $ (4,123) $ (19,953) $ (94,973) $ (71,869)
Depreciation and amortization 5,259 7,364 13,433 14,841 14,849
Other non-cash charges (306,854) (115) 1,329 51,977 6,554
Changes in current assets and liabilities (10,317) (5,135) (5,253) 6,897 10,908
-----------------------------------------------------------------------------
Net cash used in operating activities (18,250) (2,009) (10,444) (21,258) (39,558)
=============================================================================
</TABLE>
The Company's inability to generate cash from operations
and, accordingly, its need to provide liquidity through credit facility
borrowings were primarily due to: significant reorganization costs incurred
during the Chapter 11 case; the lack of full credit support from the vendor
community due to the Chapter 11 status, which necessitated significant
prepayment of merchandise vendors; and the growth of the Company's private label
credit card portfolio, which was financed by the Company's credit facilities.
Due to the items described above, the Company had a working
capital deficiency after the first post Chapter 11 fiscal year end through the
emergence from Chapter 11 (January 28, 1999) as follows ($ in thousands):
<TABLE>
<CAPTION>
AT AT AT
AT AT AT AUGUST 1, AUGUST 2, AUGUST 3,
JAN. 30, 1999 JAN. 28, 1999 JAN. 31, 1998 1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficiency) $41,064 $(40,316) $(20,216) $(32,249) $(19,443) $19,596
=================================================================================================
</TABLE>
Working capital (deficiency) for all periods above are net
of the amount then outstanding on the credit facilities that existed at the
time, except for January 30, 1999, where the amount then outstanding on the
credit facility ($62,096,000) is classified as long term. The classifications
are based on the terms of the credit facilities that existed at the time.
16
<PAGE>
For the reporting periods below, net cash provided by
financing activities was as follows ($ in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS FISCAL FISCAL FISCAL
ENDED ENDED YEAR YEAR YEAR
JAN. 30, 1999 JAN. 31, 1998 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by financing activities $26,902 $2,175 $11,324 $23,113 $59,934
=====================================================================================
</TABLE>
Net cash provided by financing activities for the six
months ended January 30, 1999 includes $62,500,000 of proceeds from the equity
rights offering pursuant to the Company's Chapter 11 plan of reorganization less
cash distributions related thereto.
Credit Facilities. On January 28, 1999, the Company entered
into a four year Credit Agreement with several financial institutions led by
Citicorp USA, Inc. The Credit Agreement provides a $120,000,000 revolving credit
facility with a $40,000,000 sublimit for the issuance of letters of credit. The
proceeds from this facility were used to refinance the debtor-in-possession
credit agreement with BankBoston N.A., to pay certain claims pursuant to the
Chapter 11 plan of reorganization, to pay professional fees, to fund working
capital in the ordinary course of business and for other general corporate
purposes not prohibited thereunder. Obligations under the Credit Agreement are
secured by a first priority and perfected lien on substantially all unencumbered
assets of the Company.
Revolving credit availability is calculated as a percentage
of eligible inventory (including undrawn letters of credit) and Barneys New York
credit card receivables plus $20,000,000 (such amount subject to a downward
adjustment as defined). Interest rates on the Credit Agreement are either the
Base Rate (as defined) plus 1.25% or LIBOR plus 2.25%, subject to adjustment
after the first year. The Credit Agreement also provides for a fee of 1.25% to
1.75% per annum on the daily average letter of credit amounts outstanding and a
commitment fee of 0.375% on the unused portion of the facility.
The Credit Agreement contains various financial covenants
relating to net worth, leverage, earnings and capital expenditures. During the
fiscal year ending January 29, 2000, the Credit Agreement covenants do not allow
for any material deviation from the Company's business plan for such year. As of
August 28, 1999, the Company was in compliance with each of the covenants
contained in the Credit Agreement.
At January 30, 1999, the Company had approximately
$28,045,000 of availability under the Credit Agreement, after consideration of
$62,096,000 of revolving loans and $19,944,000 of letters of credit outstanding.
There can be no assurance that the Company can achieve its
financial forecasts in Fiscal Year 1999 or beyond. Any material deviations from
the Company's forecasts could require the Company to seek alternative sources of
financing or to reduce expenditures. There can also be no assurance that
alternative financing could be obtained, or if obtained, would be on terms
acceptable to the Company.
During fiscal year 1996 through January 28, 1999, the
Company's working capital was provided by various credit facilities in effect
during the period. Credit facilities that existed at the time of the Chapter 11
filing (January 10, 1996) were ultimately not repaid in full, but settled as
part of the Company's Chapter 11 plan of reorganization. During the Chapter 11
period, the Company entered into two debtor-in-possession credit facilities, the
first of which was repaid in full pursuant to a refinancing on July 16, 1997 and
the second which was repaid in full pursuant to the Credit Agreement dated
January 28, 1999.
17
<PAGE>
Capital Expenditures. The Company incurred capital
expenditures (net of landlord contributions) of $22,777,000 during the three and
one-half year period ending January 30, 1999. $14,933,000 represented the cost
to refurbish existing stores, $2,065,000 was spent to open outlet stores,
administrative facility expenditures were $2,886,000 and $2,893,000 was incurred
on management information systems. Significant additional capital expenditures
will be required for the Company to upgrade its management information systems.
Pursuant to Credit Agreement covenants, the Company's total
capital expenditures for fiscal year 1999 are capped at $7,250,000. The Company
will fund these expenditures through borrowings under the Credit Agreement.
SEASONALITY
The Company's business is seasonal, with higher sales and
earnings occurring in the quarters ending in October and January of each year.
These two quarters, which include the holiday selling season, coincide with the
Company's fall selling season. Additionally, net sales and cash flow are
favorably impacted, in the quarters ending in April and October by the seasonal
warehouse sale events in New York and Santa Monica.
The following table sets forth sales, EBITDA and net income
(loss) for the six months ended January 30, 1999 and for fiscal years 1998 and
1997. This quarterly financial data is unaudited but gives effect to all
adjustments necessary, in the opinion of management of the Company, to present
fairly this information.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 30, 1999
QUARTER ENDING 1998 - QUARTER ENDING 1997 - QUARTER ENDING
------------------- ---------------------------------------- ---------------------------------------
10/31/98 1/30/99 11/1/97 1/31/98 5/2/98 8/1/98 11/2/96 2/1/97 5/3/97 8/2/97
-------- ------- ------- ------- ------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 91,641 $ 90,016 $ 95,890 $ 87,870 $ 87,309 $ 71,898 $ 96,721 $ 98,682 $ 87,716 $ 78,377
As % of period 50% 50% 28% 26% 25% 21% 27% 27% 24% 22%
EBITDA $ 7,380 $ 7,592 $ 7,813 $ 7,201 $ 3,463 $ (781) $ 2,781 $ 3,214 $ (2,952) $ (5,186)
Net income (loss) 94 293,568 (2,438) (1,685) (4,792) (11,038) (6,547) (10,396) (64,199) (13,831)
======== ======== ========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
INFLATION
Inflation over the past few years has not had a significant
impact on the Company's sales or profitability.
18
<PAGE>
ECONOMIC CLIMATE RISK
As a luxury goods retailer, the Company is subject to
economic risk conditioned upon the general health and stability of the U.S.
economy. A downturn in the stock market could cause the Company's business to
soften, especially in the New York area. During September 1998 when the Dow
dropped approximately 900 points, the Company's stores in the New York area
experienced a sales decrease of 10-26% versus the same period in the prior year.
YEAR 2000
The Year 2000 ("Y2K") issue relates to the inability of
information systems to properly recognize and process date-sensitive information
beyond January 1, 2000. Many computer systems and software products may not be
able to interpret dates after December 31, 1999 because such systems and
products allow only two digits to indicate the year in a date. As a result,
these systems and products are unable to distinguish January 1, 2000 from
January 1, 1900, which could have adverse consequences on the operations of an
entity and the integrity of information processing.
The Company's management recognized the need to address the
Y2K issue in all internal systems and applications. A Y2K plan was developed in
April 1998 to define all applications requiring system upgrades.
Letters were mailed to all system related vendors in March
through July of 1998. The letters instructed vendors to confirm status of their
systems and/or applications in connection with Y2K compliance needs. The Company
required modifications to software and hardware systems to make reasonably
certain these applications should perform properly after December 31, 1999.
System related vendors responded, providing schedules for upgrades on hardware
and software utilized by the Company. As of August, 1999, 85% of all vendors
have complied with written requests to address Y2K limitations.
The Company is modifying or replacing portions of its
software systems to attempt to make all applications Y2K compliant. The
components requiring upgrade include software related applications controlling
merchandising, credit, marketing, accounting, distribution, sales audit and
store security systems. Completion of modifications is currently scheduled for
Fall 1999.
The Company is utilizing both internal and external
resources to reprogram, replace and test software for Y2K modifications. All
computer network servers utilizing Novell technology will be upgraded with Y2K
compliant software versions. System related upgrades began in March 1998 when
STS, the retail system vendor, began installing Y2K compliant software on the
Company's main frame computer.
Additionally, the Company has established an ongoing
program to communicate with its significant suppliers and vendors to determine
the extent to which the Company's systems and operations are vulnerable to those
third parties' failure to rectify their own Y2K issues. The Company is not
presently aware of any significant exposure arising from potential third party
failures. However, there can be no assurance that the systems of other companies
on which the Company's systems or operations rely will be converted on a timely
basis or that any failure of such parties to achieve Y2K compliance would not
have any adverse effect on the Company's results of operations.
Based on the expenses incurred to date and management's
current estimates, the costs of Y2K remediation, including both system and
software application modifications, which have been and
19
<PAGE>
will be expensed as incurred as appropriate, have not been and are not expected
to be material to the results of operations or the financial position of the
Company. To date, the Company has incurred approximately $255,000 of costs
related to Y2K, of which approximately $147,000 has been expensed with the
remainder capitalized. The Company anticipates additional Y2K expenses will
total approximately $50,000.
The Company believes that it is difficult to identify its
most reasonable likely worst case Year 2000 scenario. However, a reasonable
worst case scenario could arise from a business interruption caused by, for
instance, governmental agencies, utility and telecommunication companies,
shipping companies or other merchandise and service providers outside the
Company's control. There can be no assurance that such providers will not suffer
business interruption caused by a Year 2000 matter. Such interruption could have
a material adverse effect on the Company's results of operations.
In addition to the steps outlined above, a Y2K disaster
recovery task force has been created. The primary function of this task force is
to test all Y2K related functionality for applications that the Company
currently uses. This process should enable the task force to quickly identify
any problem areas and react to those problems in an efficient manner, thereby
minimizing potential disruption to the Company.
The Company's cost of the Y2K project, and the dates on
which the Company believes it will substantially complete Y2K modifications are
based on management's best estimates. Currently no contingency plan exists in
the event that Y2K modifications are not complete or ineffective but management
will periodically evaluate the need for one and adapt accordingly. There is no
certainty or guarantee that these estimates will be achieved, and actual costs
could be materially greater than anticipated. Specific factors that might cause
such differences include, but are not limited to, the availability and cost of
personnel trained in the Y2K area, the compliance by merchandise and other
suppliers and other third parties, and similar uncertainties.
No assurances can be given that the Company will be able to
completely identify or address all Year 2000 compliance issues, or that third
parties with whom the Company does business will not experience system failures
as a result of the Year 2000 issues, nor can the Company fully predict the
consequences of noncompliance.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK ASSESSMENT
Market risks relating to the Company's operations result
primarily from changes in interest rates and foreign exchange rates. To address
some of these risks the Company enters into various hedging transactions as
described below. The Company does not use financial instruments for trading
purposes and is not a party to any leveraged derivatives.
FOREIGN CURRENCY RISK
The Company periodically enters into foreign exchange
forward contracts and option contracts to hedge some of its foreign exchange
exposure. The Company's objective in managing the exposure to changes in foreign
currency exchange is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management to focus its attention of its
core business issues and challenges. The Company uses such contracts to hedge
exposure to changes in foreign currency exchange rates, primarily in Western
Europe, associated with purchases denominated in
20
<PAGE>
foreign currency. The principal currencies hedged are the Italian lira, German
mark, British pound, and the French franc. A uniform 10% weakening as of August
1, 1998 in the value of the dollar relative to the currencies in which the
purchases are denominated would have resulted in a $3.8 million decrease in
gross profit for the twenty-six week period ending January 30, 1999.
Comparatively, the result of a uniform 10% weakening as of July 30, 1997 in the
value of the dollar relative to the currencies in which the purchases are
denominated would have resulted in a $7.2 million decrease in gross profit for
the fiscal year ended July 31, 1998.
This calculation assumes that each exchange rate would
change in the same direction relative to the U.S. dollar. In addition to the
direct effects in exchange rates, which are a changed dollar value of the
resulting purchases, changes in exchange rates also affect the volume of
purchases or the foreign currency purchase price as competitors prices become
more or less attractive.
INTEREST RATE RISK
The Company's earnings are affected by changes in
short-term interest rates as a result of its revolving credit agreement. If
short-term interest rates averaged 2% more in the twenty-six week period ended
January 30, 1999 than they did in the preceding twenty-six week period, the
Company's interest expense would have increased, and income before taxes would
decrease by $0.8 million. Comparatively, if short-term interest rates averaged
2% more in fiscal year 1998 than they did in fiscal year 1997, the Company's
interest expense would have increased, and loss before taxes would have
increased by $2.0 million. In the event of a change of such magnitude,
management would likely take actions to mitigate its exposure to the change.
However, due to uncertainty of the specific actions that would be taken and
their possible effects, the sensitivity analysis assumes no changes in the
Company's financial structure.
21
<PAGE>
ITEM 3. PROPERTIES.
The Company's principal facilities include corporate
offices, a central alterations facility, a distribution center and three
flagship stores. Prior to the Effective Date, Barneys formed three subsidiaries
(each, a "Lease Subsidiary"), each of which acts as lessee and sublessor for one
of the flagship stores. On the Effective Date, pursuant to the Plan, (i) the fee
interest in the properties on which the New York and the Chicago flagship stores
are located, and the leasehold interest in the property on which the Beverly
Hills flagship store is located, were transferred to an affiliate of Isetan,
(ii) such affiliate, as lessor, entered into amended and restated leases with
each of the tenants in each of the properties, and (iii) each of such tenants
assigned the leasehold interest in the related property to one of the Lease
Subsidiaries, which in turn entered into a sublease with Barneys, in the case of
the New York and Beverly Hills stores, and with Barneys America, Inc., a
subsidiary of Barneys, in the case of the Chicago store. The lease for the New
York store is for a term of twenty years, with four options to renew of ten
years each. The lease for the Chicago store is for a term of ten years, with
three options to renew of ten years each. The lease for the Beverly Hills store
is for a term of twenty years, with three options to renew of ten years each.
The leases for the flagship stores are all triple-net leases. In the case of the
Beverly Hills flagship store, Barneys is also responsible for the rent payable
pursuant to the existing ground lease.
The Company's corporate offices, central alterations
facility, distribution center, warehouse sale locations and its 16 stores are
located at the following locations:
CORPORATE OFFICES REGIONAL STORES
----------------- ---------------
New York, NY New York (World Financial Center)
Manhasset, NY
CENTRAL ALTERATIONS FACILITY Chestnut Hill, MA
---------------------------- Seattle, WA
New York, NY
DISTRIBUTION CENTER OUTLET STORES
------------------- -------------
Lyndhurst, NJ Harriman, NY
Worcester, MA*
FLAGSHIP STORES Potomac Mills, VA*
--------------- Cabazon, CA
Sunrise, FL*
New York, NY Camarillo, CA
Beverly Hills, CA Dawsonville, GA*
Chicago, IL Clinton, CT
New River, AZ
WAREHOUSE SALE LOCATIONS Riverhead, NY
------------------------ Wrentham, MA
Waikele, HI
New York, NY Carlsbad, CA
------------
* Closed subsequent to January 30, 1999.
22
<PAGE>
The Company also leases certain other facilities for its
semi-annual warehouse sales. The Company believes that all of its facilities are
suitable and adequate for the current and anticipated conduct of its operations.
At January 30, 1999, the Company established a financial reserve for the planned
closure of certain outlet stores.
23
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF EXISTING EQUITY SECURITIES
The following table sets forth information as of July 31,
1999 with respect to the beneficial ownership of shares of Holdings Common Stock
and Preferred Stock by (a) each person or group that is known to Holdings to be
the beneficial owner of more than 5% of the outstanding shares, (b) each
director and named executive officer of Holdings, and (c) all directors and
executive officers of Holdings as a group on such date.
COMMON STOCK
------------
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER OF SHARES OF CLASS
------------------- --------- --------
Whippoorwill Associates, Inc., 5,137,877(1) 39.3%
on behalf of its Discretionary Accounts
11 Martine Avenue
White Plains, New York 10606
Bay Harbour Management L.C. 5,169,003(2) 39.5%
on behalf of its Managed Accounts
885 Third Avenue, 34th Floor
New York, New York 10022
Isetan Company Limited 1,200,785(3) 9.4%
14-1 Shinjuku 3-Chome
Shinjuku-ku, Tokyo
Japan 160-0022
Shelley F. Greenhaus 5,140,377(4) 39.3%
c/o Whippoorwill Associates, Inc.
11 Martine Avenue
White Plains, New York 10606
John Halpern 2,500(5,6) *
Yasuo Okamoto 2,500(5) *
Allen I. Questrom 186,213(7) 1.5%
Carl Spielvogel 2,500(5) *
David A. Strumwasser 5,140,377(4) 39.3%
c/o Whippoorwill Associates, Inc.
11 Martine Avenue
White Plains, New York 10606
Robert J. Tarr, Jr. 2,500(5) *
24
<PAGE>
COMMON STOCK
------------
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER OF SHARES OF CLASS
------------------- --------- --------
Douglas P. Teitelbaum 5,171,503(8) 39.5%
c/o Bay Harbour Management L.C.
885 Third Avenue, 34th Floor
New York, New York 10022
Steven A. Van Dyke 5,171,503(8) 39.5%
c/o Bay Harbour Management L.C.
777 South Harbour Island Blvd.
Tampa, Florida 33602
Shelby S. Werner 5,140,377(4) 39.3%
c/o Whippoorwill Associates, Inc.
11 Martine Avenue
White Plains, New York 10606
Judy Collinson - -
Tom Kalenderian - -
Michael Tymash - -
Directors and Executive Officers 10,515,593 75.8%
as a Group
- -------------------
* Less than 1%.
1 All of such shares are owned by various limited partnerships, a limited
liability company, a trust and third party accounts for which Whippoorwill
has discretionary authority and acts as general partner or investment
manager. Includes an aggregate of 288,061 shares and 295,028 respectively,
of Holdings Common Stock issuable to Whippoorwill pursuant to the option
granted to it under the Stock Purchase Agreement, and pursuant to its
Unsecured Creditors Warrants. To the extent that either Bay Harbour or
Whippoorwill does not fully exercise its option, the unexercised portion
thereof may be exercised by the other. See "BUSINESS -- the
Reorganization." In addition, Bay Harbour and Whippoorwill have entered
into a stockholders' agreement with respect to their ownership in, and the
voting of the capital stock of, Holdings.
2 All of such shares are owned directly by BHB LLC, of which Bay Harbour is
the manager. Includes an aggregate of 288,061 shares and 290,690 shares,
respectively, of Holdings Common Stock issuable to Bay Harbour pursuant to
the option granted to it under the Stock Purchase Agreement, and pursuant
to its Unsecured Creditors Warrants. To the extent that either Bay Harbour
or Whippoorwill does not fully exercise its option, the unexercised portion
thereof may be exercised by the other. See "BUSINESS -- the
Reorganization." In addition, Bay Harbour and Whippoorwill have entered
into a stockholders' agreement with respect to their ownership in, and the
voting of the capital stock of, Holdings.
3 Includes 287,724 shares of Holdings Common Stock issuable to Isetan upon
exercise of the Isetan Warrant.
4 Includes all shares of Holdings Common Stock beneficially owned by
Whippoorwill. Mr. Greenhaus is a principal, President and Managing
Director, Mr. Strumwasser is a principal, Managing Director and General
Counsel, and Ms. Werner is a principal, Vice President and Managing
Director, of Whippoorwill. Also includes 2,500 shares of Holdings Common
Stock issuable pursuant to options granted to each of Messrs. Greenhaus and
Strumwasser and Ms. Werner under the Company's Stock Option Plan for
Non-Employee Directors (the "Option Plan").
25
<PAGE>
5 Represents shares of Holdings Common Stock issuable upon exercise of an
option granted to non-employee directors under the Option Plan.
6 Halpern, Denny & Company, of which John Halpern is a partner, is a member
of BHB LLC. Mr. Halpern disclaims beneficial ownership of any shares of
Holdings Common Stock owned by BHB LLC.
7 Represents the vested portion of shares of Common Stock issuable upon
exercise of an option granted to Mr. Questrom pursuant to his employment
agreement.
8 Includes all shares of Holdings Common Stock beneficially owned by Bay
Harbour. Messrs. Teitelbaum and Van Dyke are principals of Bay Harbour.
Also includes 2,500 shares of Holdings Common Stock issuable pursuant to
options granted to each of Messrs. Teitelbaum and Van Dyke under the Option
Plan.
In addition, there are 20,000 shares of Preferred Stock
outstanding. The shares of Preferred Stock vote on all matters (other than the
election of directors) with the Holdings Common Stock, together as a single
class. The Barneys Employees Stock Plan Trust owns 15,000 shares of Preferred
Stock, and Harry G. Wagner, an individual, owns 5,000 shares of Preferred Stock.
26
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth certain information with
respect to the persons who are members of the Board of Directors or executive
officers of Holdings. Except as noted below, each director will serve until the
next annual meeting of stockholders and until a successor is elected and
qualified or until his or her earlier resignation or removal. Except as noted
below, the term in office for all officers is one year and until their
respective successors have been elected and qualified, unless such officer is
removed by the Board of Directors. Except as indicated below, all directors and
executive officers have held their positions at Holdings since the Effective
Date or shortly thereafter.
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ---- --- ----------------
<S> <C> <C>
Shelley F. Greenhaus 46 Director
John Halpern 52 Director
Yasuo Okamoto 51 Director
Allen I. Questrom 1 59 Director, Chairman of the Board, President and Chief Executive
Officer
Carl Spielvoge l 70 Director
David A. Strumwasser 48 Director
Robert J. Tarr, Jr. 56 Director, Vice Chairman of the Board
Douglas P. Teitelbaum 34 Director
Steven A. Van Dyke 40 Director
Shelby S. Werner 54 Director
Judy Collinson 47 Executive Vice President - Women's Merchandising
Tom Kalenderian 42 Executive Vice President - Men's Merchandising
Marc H. Perlowitz 45 Executive Vice President - General Counsel and Human Resources
and Secretary
Michael Tymash 42 Executive Vice President - Stores and Operations
Steven Feldman 2 36 Senior Vice President and Interim Chief Financial Officer
Vincent Phelan 34 Treasurer
Set forth below are the names, positions and business
backgrounds of all of the directors and executive officers of Holdings.
- -----------------------
1 Allen I. Questrom became Chairman of the Board, President and Chief
Executive Officer effective May 5, 1999.
2 Steven Feldman became interim Chief Financial Officer as of May 28, 1999.
</TABLE>
27
<PAGE>
Shelley F. Greenhaus is a principal of Whippoorwill
Associates, Inc., an investment management firm ("Whippoorwill"), and has served
as President and Managing Director of Whippoorwill since 1990. From January 1983
through August 1990, Mr. Greenhaus was a Vice President and Portfolio Manager
(Distressed Securities) at Oppenheimer & Co., Inc. Prior to that, from September
1981 to January 1983, Mr. Greenhaus was a Financial Analyst at W.R. Family
Associates and from July 1978 through September 1981, he was a Financial Analyst
at Loeb Rhodes, Hornblower & Co. (Risk Arbitrage and Distressed Securities). Mr.
Greenhaus is a director of Marvel Enterprises, Inc., an entertainment based
marketing and licensing company.
John Halpern is a partner of Halpern, Denny & Company, a
private equity investment firm. Prior to that, Mr. Halpern was a founder of Bain
& Company, the international consulting firm and served as its Vice Chairman
until 1990. Mr. Halpern serves on the Board of Directors of certain privately
held companies.
Yasuo Okamoto is a member of the law firm of Hughes,
Hubbard & Reed LLP. Prior to joining Hughes, Hubbard & Reed LLP, Mr. Okamoto was
a partner at Hill, Betts & Nash from 1980-1986. Mr. Okamoto is presently a
member of the Boards of Directors of Sanwa International plc and Nikon Americas,
Inc. From 1990 to 1997, Mr. Okamoto was a Lecturer at the Boston University
School of Law. Mr. Okamoto has been elected to the Board of Directors as a
designee of Isetan pursuant to an agreement among Isetan, Bay Harbour,
Whippoorwill and the Company. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS -- Certain Business Relationships."
Allen I. Questrom was named Chairman, President and Chief
Executive Officer of Holdings on May 5, 1999, having served on the Board of
Directors since January 28, 1999. Mr. Questrom spent most of his 32 year career
in retail with Federated Department Stores, Inc. rising from management trainee
to become the corporation's youngest Chairman and Chief Executive Officer first
in 1980 of the Rich's division based in Atlanta, in 1984 of the Bullock's
division based in Los Angeles and in 1990 of Federated Department Stores, Inc.,
a position which he held until May 1997. Mr. Questrom also served as President
and Chief Executive Officer of the Dallas-based Neiman-Marcus Department Store
Group from 1988 until 1990. He also serves as a member of the Board of each of
the Whitney Museum of Art in New York, the Interpublic Group of Companies, Inc.
and Polo-Ralph Lauren and is on the Board of Trustees of Boston University.
Carl Spielvogel is the Chairman and Chief Executive Officer
of Carl Spielvogel Associates Inc., an investment and international counseling
firm. He was the Chairman and Chief Executive Officer of United Auto Group from
1995 to 1998, and the Chairman and Chief Executive Officer of Backer Spielvogel
Bates Worldwide, Inc., an international advertising agency from 1979 to 1995.
Prior to his employment at Backer Spielvogel, Mr. Spielvogel was employed by the
advertising agency of McCann Erickson. Mr. Spielvogel serves on the Boards of
Directors of Radio Free America, Hasbro, Inc., and Data Broadcasting Inc.
David A. Strumwasser is a principal of Whippoorwill, and
has served as Managing Director and General Counsel of Whippoorwill since 1993.
From 1984 through 1993, Mr. Strumwasser was a partner and co-head of the
Bankruptcy and Reorganization Practice at Berlack, Israels & Liberman LLP. Prior
to that, he practiced bankruptcy law at Anderson, Kill & Olick from 1981 to
1984, and at Weil, Gotshal & Manges LLP from 1976 to 1979. From 1979 to 1981,
Mr. Strumwasser was an Assistant Vice President at Citicorp Industrial Credit,
Inc. He is a director of Metropolis Realty Trust, Inc., a real estate investment
trust.
Robert J. Tarr, Jr. is an independent investor and
consultant. He was the President, Chief Executive Officer and Chief Operating
Officer of each of Harcourt General Inc. and the Neiman Marcus Group Inc. from
November 1991 to January 1997. Prior to that he held a variety of positions with
28
<PAGE>
General Cinema Corporation, the predecessor of Harcourt General Inc., including
President and Chief Operating Officer since 1984. Mr. Tarr presently serves on
the Boards of Directors of John Hancock Mutual Life Insurance Company, Hannaford
Bros., Inc., Houghton Mifflin & Co., Inc. and WESCO International Inc.
Douglas P. Teitelbaum joined Bay Harbour Management L.C.,
an investment management firm ("Bay Harbour") as a principal in April, 1996.
Prior to that time, Mr. Teitelbaum was first a managing director in the High
Yield and Distressed Securities Group at Bear Stearns, Inc. and previously a
partner at Dabney/Resnick, Inc., a Los Angeles based distressed securities
investment boutique. Mr. Teitelbaum serves on the Boards of Directors of EZ
Serve/Swifty-Mart Convenience Stores, Inc., EBC Holdings, Inc. and Tops
Appliance City, Inc.
Steven A. Van Dyke joined Bay Harbour (and its predecessor,
Tower Investment Group) as a principal in 1986. He is a chartered financial
analyst and is a member of both the Financial Analysts Society of Central
Florida and the Association for Investment Management and Research. Mr. Van Dyke
serves on the Boards of Directors of Buckhead America, EZ Serve/Swifty-Mart
Convenience Stores, Inc., EBC Holdings, Inc. and Tops Appliance City, Inc.
Shelby S. Werner is a principal of Whippoorwill, and has
served as a Vice President and Managing Director of Whippoorwill since 1991. Ms.
Werner joined Whippoorwill upon its formation after spending 2 years at
Progressive Partners, L.P. as a Senior Managing Director and Portfolio Manager.
Shelby Werner served on the Board of Directors of Texscan Corporation. She is a
Chartered Investment Counselor and a Chartered Financial Analyst.
Judy Collinson started with Barneys in 1989 as an
Accessories Buyer. Prior to her current position, she had been responsible for
Accessories and Private Label Collections. She was promoted to Executive Vice
President and General Merchandising Manager for all women's merchandising in May
1998. Ms. Collinson is also responsible for women's shoes and cosmetics.
Tom Kalenderian is head of men's merchandising. He has been
at Barneys for 20 years. His responsibilities have increased over time until he
was promoted to Executive Vice President/Menswear in July 1997. Mr. Kalenderian
is responsible for developing and implementing menswear strategy and manages
many of the key vendor relationships for the menswear business.
Marc H. Perlowitz joined Barneys in September 1985. He was
promoted to Executive Vice President, General Counsel and Human Resources of
Barneys in October 1997. Mr. Perlowitz' responsibilities include direct
responsibility for all legal matters of Barneys and its affiliates. He is
responsible for Human Resources which includes compensation, benefits, labor
relations, training, recruiting, employee policies and procedures and Company
communications. He is also responsible for real estate, facilities and risk
management.
Michael Tymash has been with Barneys since 1990 when he
joined as the Director of Distribution Services. Mr. Tymash's responsibilities
increased from Director, Vice President, Senior Vice President until he was
promoted to Executive Vice President. Mr. Tymash was promoted to Executive Vice
President of Barneys in 1997 and was responsible for purchasing, accounts
payable, credit card operations, imports, corporate services and the alterations
department for Barneys. In January 1999, Mr. Tymash has assumed his new position
as Executive Vice President - Stores and Operations.
Steven M. Feldman has been with Barneys since May 1996 when
he joined as Controller. He was promoted to Vice President in December 1997 and
to Senior Vice President in May 1999.
29
<PAGE>
Additionally, in May 1999, Mr. Feldman was appointed as interim Chief Financial
Officer in connection with the departure of Mr. Lambert. Prior to joining
Barneys, Mr. Feldman was a Senior Manager at Ernst & Young LLP principally
serving retail engagements.
Vincent Phelan has been with Barneys since August 1995 when
he joined as Director of Finance. Prior to joining Barneys, Mr. Phelan was the
Deputy Director of Finance at the United States Tennis Association, Inc. in
White Plains, NY from January 1993 to July 1995. Mr. Phelan is a certified
public accountant and was responsible for reconciling all claims filed in
connection with the Chapter 11 filing. Mr. Phelan was promoted to Vice President
- - Treasurer in January 1999 and is responsible for financial planning,
budgeting, cash management, banking relations, and taxes.
None of the directors or executive officers listed herein
is related to any other director or executive officer.
None of the directors is a director of any other company
with a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934 or subject to the requirements of Section 15(d) of such Act
or any company registered as an investment company under the Investment Company
Act of 1940, except as set forth above.
30
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY OF COMPENSATION
The following summary compensation table sets forth information concerning
compensation during the 12 months ended January 30, 1999, January 30, 1998, and
January 30, 1997 for services in all capacities awarded to, earned by or paid to
the Company's Chief Executive Officer and the four other most highly compensated
executive officers of the Company during the 12 months ended January 30, 1999.
<TABLE>
<CAPTION>
NAME AND ANNUAL COMPENSATION OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) COMPENSATION (2)
- ------------------ ---- ------ ----- ------------- -------------
<S> <C> <C> <C> <C> <C>
Thomas C. Shull(3) 1999 $ 485,000 $ 115,000 $ 0 $ 0
President and Chief 1998 220,000 0 0 0
Executive Officer 1997 0 0 0 0
Robert Pressman(4) 1998 834,610 0 0 23,607
Co-Chief Executive Officer 1998 848,647 15,000 0 22,647
1997 752,678 0 0 21,108
Eugene Pressman(4) 1999 807,885 12,684 0 26,680
Co-Chief Executive Officer 1998 824,441 15,000 58,924(5) 25,863
1997 724,252 0 0 23,765
Shari Gregerman(6) 1999 484,866 114,113 0 13,670
1998 452,271 127,840 51,171(7) 13,620
1997 335,863 29,006 0 12,447
Michael Tymash 1999 307,411 87,114 0 13,310
1998 264,057 73,258 0 12,448
1997 220,509 42,688 0 12,356
Thomas Kalenderian 1999 343,384 73,256 0 13,310
1998 295,547 72,373 0 13,260
1997 223,639 20,707 0 12,486
Judith Collinson 1999 306,612 72,863 0 12,530
1998 215,204 39,758 0 11,147
1997 152,224 13,558 0 9,572
John Dubel(8) 1999 518,135 129,488 0 8,510
1998 369,550 112,958 0 8,330
1997 233,514 0 0 0
- -----------------
1 Other Annual Compensation includes auto, auto insurance, parking and
clothing allowances.
</TABLE>
31
<PAGE>
2 All Other Compensation includes imputed life insurance, 401k match payments
made by the Company, and contributions by the Company to the Company's
Money Purchase Plan (a defined contribution plan).
3 The services of Thomas C. Shull were provided pursuant to an agreement with
Meridian, and the amounts are based upon an allocation provided by Meridian
to the Company. See "Agreements with Executive Officers -- Meridian
Agreement" below. Mr. Shull resigned as director, President and Chief
Executive Officer effective May 5, 1999.
4 Robert Pressman and Eugene Pressman each served as Co-Chief Executive
Officers of Barneys through May 1998. Both resigned from that position at
that time and were replaced by Thomas C. Shull.
5 Other Annual Compensation for Eugene Pressman includes $15,563 for auto and
$36,563 for clothing allowances.
6 Ms. Gregerman resigned as of February 5, 1999 and is currently receiving
severance in accordance with the Company severance plan. The Company has
also entered into an agreement with Ms. Gregerman pursuant to which she
receives the aggregate sum of $305,125 over a six month period.
7 Other Annual Compensation for Shari Gregerman includes $23,850 for auto and
$20,152 for clothing allowances.
8 John Dubel left the Company on January 15, 1999 and his salary includes a
$180,000 severance payment made in January 1999 in accordance with the
terms of his contract. The Company is also obligated to pay Mr. Dubel
additional severance in the aggregate amount of $180,000 commencing in July
1999, which severance shall be paid over a six month period.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company is paid
$15,000 annually for his or her services as a director, $5,000 annually for each
committee of the Board of Directors on which he or she serves, $1,000 for
attendance in person at each meeting of the Board of Directors or committee and
$500 for participation by telephone. Nonemployee directors also participate in
the Company's Stock Option Plan for Non-Employee Directors (the "Option Plan").
Pursuant to the Option Plan, each Eligible Director (as defined in the Option
Plan) is granted an option to purchase 5,000 shares of Holdings Common Stock
upon their initial appointment to the Board of Directors, exercisable at the
fair market value (as determined by the Board of Directors) of Holdings Common
Stock on the date of grant. The options granted under the Option Plan expire ten
years after the date of grant and become exercisable (i) as to one-half of the
total number of shares subject to the grant on the date of grant, and (ii) as to
the remaining shares subject to the grant on the first anniversary of the date
of grant. On the date of the annual stockholders' meeting which takes place
after the initial grant, each Eligible Director may, at the discretion of the
Board of Directors, be granted an option to purchase additional shares of
Holdings Common Stock, provided such grantee is an Eligible Director in office
immediately following such annual meeting. On March 11, 1999, each of the
non-employee directors was granted an option to purchase 5,000 shares of
Holdings Common Stock at an exercise price of $8.68 per share, one-half of which
vested on issuance, and one-half of which will vest on March 11, 2000.
AGREEMENTS WITH EXECUTIVE OFFICERS
Meridian Agreement. Pursuant to an agreement dated as of
August 1, 1998, among the Company, Thomas C. Shull and Meridian Ventures, Inc.,
a venture management firm ("Meridian"), as amended (the "Meridian Agreement"),
Meridian received payments from the Company for consulting services provided by
Mr. Shull and two additional consultants, Edward Lambert and Paul Jen. Pursuant
to the Meridian Agreement, Mr. Shull served as President and Chief Executive
Officer until May 5, 1999, and Mr. Lambert served as Chief Financial Officer of
Holdings and its affiliates until May 28, 1999. In addition, Paul Jen served as
Vice President-Marketing until May 1999. The services provided under the
Meridian
32
<PAGE>
Agreement consisted of providing the services of these three individuals in such
capacities. In consideration of these services, Meridian received a base fee at
the rate of $95,000 per month, $9,500 per month to cover Meridian's overhead and
other expenses and reimbursement for reasonable out-of-pocket expenses of the
three individuals. In addition, Meridian received a $100,000 performance bonus
on February 1, 1999, and in consideration of Meridian's efforts during the
transition to Successor Company management, Meridian received payments totaling
$465,000 covering the period February 1999 through May 1999. Meridian advised
the Company that, for the twelve month period ending January 30, 1999, $600,000
of the annual payments made by the Company to Meridian represent the portion of
the payments payable under the Meridian Agreement allocated by Meridian to Mr.
Shull. The Meridian Agreement terminated on May 31, 1999. Mr. Shull resigned as
President and Chief Executive Officer on May 5, 1999, upon the appointment of
Allen I. Questrom to those positions. Mr. Lambert resigned as Chief Financial
Officer effective May 28, 1999.
Upon termination of the Meridian Agreement on May 31, 1999,
Meridian was entitled to a payment of (i) $104,500 per month for a period of
eight months, (ii) $104,500 per month for a period of four additional months,
commencing on the first day of the ninth month following termination, subject to
mitigation based on any other compensation received for the services of Mr.
Shull and the two other consultants during that period and (iii) payment of all
earned and accrued vacation pay, not to exceed $85,000. All amounts due to
Meridian pursuant to the terms of the Meridian Agreement have been paid by the
Company.
Arrangement with Allen Questrom. Pursuant to an arrangement
between Holdings and Allen I. Questrom, Mr. Questrom serves as Chairman of the
Board of Directors, President and Chief Executive Officer of Holdings through
January 31, 2003. Mr. Questrom's base salary for the period May 5, 1999 through
January 31, 2000 is $150,000 per month, and for the period February 1, 2000
through January 31, 2003 is $100,000 per month. In addition, for the periods
commencing February 1, 2000 Mr. Questrom is entitled to an annual performance
bonus of up to 100% of his base salary. Mr. Questrom was granted options to
purchase up to 15% of the outstanding shares of Holdings Common Stock, which
will vest over the term of his employment. One third of such options are
exercisable at a price of $8.68 per share and the balance at $4.34 per share. A
portion of the salary and bonus payable to Mr. Questrom up to $3,232,662 will be
retained by Holdings to pay for the grant of a portion of such stock options.
The stock options have an exercise period of 8 years. Upon a termination of
employment by the Company without cause or by Mr. Questrom for good reason, or
upon a change of control of Holdings, all stock options which have not yet been
granted will be granted and all stock options will fully vest. In addition, a
portion of the stock options will vest upon Mr. Questrom's death or disability.
Upon a termination of employment by the Company without cause or by Mr. Questrom
for good reason, Mr. Questrom will also be entitled, for the remainder of the
term of his employment, to a cash payment equal to his base salary and target
bonus, and to participate in Holdings' benefit plans. If Mr. Questrom resigns
prior to May 22, 2000, he will earn additional compensation of $50,000 per month
during the period February 1, 2000 until his date of termination, but he will
not be entitled to any other deferred compensation or to earn any bonus during
that period, and he will forfeit his stock options.
Holdings also granted Mr. Questrom certain registration
rights with respect to his shares of Holdings Common Stock. Bay Harbour,
Whippoorwill and Mr. Questrom have agreed to provide each other certain co-sale
rights in connection with any sales of their Holdings Common Stock. Mr. Questrom
also agreed to vote half of his shares as directed by Bay Harbour and half as
directed by Whippoorwill.
Employee Severance Plan. The Company has implemented an
employee severance plan (a "ESP") which was adopted shortly after commencement
of the reorganization cases. The ESP covers all salaried employees. The
severance benefits under the ESP are triggered by either (a) an involuntary
33
<PAGE>
termination of employment for any reason other than for cause or (b) a voluntary
termination as a result of either (i) a substantial diminution of the employee's
responsibilities and duties, or (ii) a substantial reduction in salary, in
either case within 12 months of certain events constituting a change in control
of Barneys. The amount of severance payable depends on a participant's position
and the number of years of service, ranging from one week to one month for each
year of service. The severance payments range from a minimum of a two weeks
salary to a maximum of 18 months salary. For some employees, severance is
subject to mitigation for amounts payable during the severance period from other
employment. For a period of two (2) years following the Effective Date, the
terms of Barneys' existing ESP will not be terminated or amended by the Company
in a manner that is adverse to the employees covered.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Registration Rights Agreement. On the Effective Date,
Holdings entered into a Registration Rights Agreement (the "Registration Rights
Agreement") with Bay Harbour, Whippoorwill and Isetan, pursuant to which each of
Bay Harbour and Whippoorwill are entitled to exercise up to two demand
registrations and unlimited short-form demand and piggyback registration rights.
In addition, Isetan was granted piggyback registration rights.
CERTAIN BUSINESS RELATIONSHIPS
Meridian Agreement. See "EXECUTIVE COMPENSATION --
Agreements with Executive Officers."
Stock Purchase Agreement. Pursuant to the Stock Purchase
Agreement, Bay Harbour and Whippoorwill received an option to purchase up to an
aggregate of 576,122 shares of Holdings Common Stock. In addition, Bay Harbour
and Whippoorwill backstopped the offering of Subscription Rights. See "BUSINESS
- -- the Reorganization." The Company also agreed to reimburse Bay Harbour and
Whippoorwill for reasonable out of pocket expenses incurred by them in
connection with the Stock Purchase Agreement and the Plan.
Isetan. Pursuant to the Plan, the Company entered into
various agreements and arrangements with Isetan and certain of its affiliates.
See "BUSINESS -- the Reorganization" and "PROPERTIES." In connection with the
consummation of the Plan, (x) each of Whippoorwill and Bay Harbour have agreed,
for a period of five years from the Effective Date, to vote, or cause to be
voted, all shares of Holdings Common Stock held by it in favor of the elction of
one director designated by Isetan to Holdings' Board of Directors, and (y)
Holdings has agreed to cause such designee to be elected to the Board of
Directors of Barneys. Yasuo Okamato is the director designated by Isetan. In
addition, Holdings may designate one individual to attend all meetings of
Holdings' Board of Directors in a non-voting observer capacity.
Equipment Lessors. Whippoorwill owns a beneficial interest
of approximately 25% of a holder of one of the Equipment Lessors Notes, which
note is in an aggregate principal amount of $34,232,500. See "BUSINESS -- The
Reorganization."
ITEM 8. LEGAL PROCEEDINGS.
Barneys and certain of its subsidiaries commenced
proceedings under the Bankruptcy Code on January 10, 1996, and emerged therefrom
on January 28, 1999. See "BUSINESS -- The Reorganization." In addition, Holdings
and its subsidiaries are involved in various legal proceedings which are routine
and incidental to the conduct of their business. Management believes that none
of these proceedings, if determined adversely to Holdings or any of its
subsidiaries, would have a material adverse effect on the financial condition or
results of operations of such entities.
34
<PAGE>
On or about August, 1996, Barneys commenced an action
against Circle Management Ltd. and Giuseppe Luongo for misappropriation of
monies, an accounting and avoidance of certain post-petition transfers. The
action is pending in the Bankruptcy Court. Barneys alleges that Circle
Management and Mr. Luongo, operators of the prior restaurant at the Company's
Madison Avenue flagship store known as Mad 61, have not paid over monies from
the operation of the restaurant which belong to Barneys. Barneys seeks
unspecified money damages.
Defendants have answered the complaint and have asserted
counterclaims. The counterclaims allege breach of contract, breach of agency,
libel and the making of false and fraudulent statements about the defendants.
Defendants allege that Barneys did not reimburse them for the operating expenses
of the Mad 61 restaurant and that Barneys made libelous, false and fraudulent
statements about the financial condition of defendants. They seek money damages
of not less than $1,000,000. While it is not possible to predict with certainty
the outcome of this case, it is the opinion of management that this lawsuit will
not have a material adverse effect on the Company's operating results, liquidity
or consolidated financial statements.
ADMINISTRATIVE CLAIMS
As a result of the bankruptcy, the Company is subject to
various Administrative Claims filed by various claimants throughout the
bankruptcy case. In connection with the Plan, the Company was required to
establish a Disputed Administrative Claims Cash Reserve ("Cash Reserve") while
the Administrative Claims are negotiated and settled. The initial total amount
of the Cash Reserve was $4.6 million, of which approximately $2.4 million
remains as of October 2, 1999. The Company has reserved in its financial
statements the amount it deems will be necessary to settle these claims. There
can be no assurances that the results of the settlement of these Administrative
Claims will be on terms that will not exceed the amount reserved. For further
information, reference is made to the Plan, a copy of which is filed as an
exhibit to this Registration Statement.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
There is no current public trading market for Holdings
Common Stock or the Unsecured Creditors Warrants. An aggregate of 1,365,975
shares of Holdings Common Stock are issuable upon exercise of outstanding
options, and an aggregate of 1,301,238 shares of Holdings Common Stock are
issuable upon exercise of outstanding warrants. In addition, the Preferred
Stock, under certain circumstances, is convertible into 162,500 shares of
Holdings Common Stock. The Company does not presently intend to apply to list
the Holdings Common Stock on any national securities exchange or The Nasdaq
Stock Market. The Company believes that all of the shares of Holdings Common
Stock held by Bay Harbour, Whippoorwill and Isetan could be sold pursuant to
Rule 144 of the Securities Act of 1933, as amended (the "Securities Act").
Pursuant to the Registration Rights Agreement, Holdings has agreed to register
under the Securities Act all shares of Holdings Common Stock held by Bay
Harbour, Whippoorwill and, pursuant to piggyback registration rights, Isetan.
See "Security Ownership of Certain Beneficial Owners and Management," which sets
forth the number of shares of Holdings Common Stock owned by each of Bay
Harbour, Whippoorwill and Isetan.
35
<PAGE>
HOLDERS
The number of record holders of Holdings Common Stock as of
September 27, 1999 is 1067.
DIVIDENDS
Each share of Holdings Common Stock will be entitled to
participate equally in any dividend declared by the Board of Directors and paid
by Holdings. The guarantee by Holdings of the Company's new working capital
facility prohibits Holdings from declaring dividends on shares of its capital
stock, with the exception of dividends payable to the holders of the Preferred
Stock. See "DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED -- Preferred
Stock." The Company has no present intention to declare dividends on the
Holdings Common Stock.
SIGNIFICANT STOCKHOLDERS
Bay Harbour and Whippoorwill collectively beneficially own
approximately 79% of the outstanding shares of the Holdings Common Stock. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Accordingly,
they may be in a position to control the outcome of actions requiring
stockholder approval, including the election of directors. This concentration of
ownership could also facilitate or hinder a negotiated change of control of
Holdings and, consequently, have an impact upon the value of the Holdings Common
Stock. Further, the possibility that either Bay Harbour or Whippoorwill may
determine to sell all or a large portion of their shares of Holdings Common
Stock in a short period of time may adversely affect the market price of the
Holdings Common Stock. In addition, Bay Harbour and Whippoorwill have entered
into a stockholders' agreement with respect to their ownership in, and the
voting of the capital stock of, Holdings. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS".
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Other than the securities referred to below, Holdings did
not make any recent sales of unregistered securities.
5,792,469 shares of Holdings Common Stock, the Isetan
Warrant, 1,013,514 Unsecured Creditors Warrants (and any exercise thereof) , the
Isetan Note and the Equipment Lessors Notes were issued on or about the
Effective Date pursuant to the Plan in satisfaction of certain allowed claims
against, or interests in, Barneys and its subsidiaries and pursuant to the
offering of Subscription Rights. Based upon the exemptions provided by Section
1145 of the Bankruptcy Code (other than as set forth below), Holdings believes
that none of such securities is required to be registered under the Securities
Act, in connection with their issuance and distribution pursuant to the Plan. In
addition, the 6,707,531 shares of Holdings Common Stock issued to Bay Harbour
and Whippoorwill on the Effective Date in respect of their backstop of the
offering of Subscription Rights, the option granted to them pursuant to the
Stock Purchase Agreement and the Preferred Stock were issued in a transaction
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act. On May 15, 1999, 22 shares of Holdings Common Stock were issued
upon exercise of Unsecured Creditors Warrants, pursuant to the exemption
provided by Section 1145 of the Bankruptcy Code.
36
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
AUTHORIZED CAPITAL STOCK
Holdings's Certificate of Incorporation (the "Charter")
provides that the total number of all classes of stock which Holdings will have
authority to issue is 35,000,000 shares, of which 25,000,000 may be Holdings
Common Stock and 10,000,000 shares may be preferred stock, having a par value of
$0.01 per share. Of such shares, there were outstanding at September 8, 1999,
12,500,022 shares of Holdings Common Stock and 20,000 shares of Preferred Stock.
Holdings is prohibited by its Charter from issuing any class or series of
non-voting securities.
HOLDINGS COMMON STOCK
Each share of Holdings Common Stock entitles its holder to
one vote. The holders of record of Holdings Common Stock will be entitled to
participate equally in any dividend declared by the Board of Directors of
Holdings. Each share of Holdings Common Stock is entitled to share ratably in
the net worth of Holdings upon dissolution. So long as any shares of Preferred
Stock are outstanding, no dividends on Holdings Common Stock may be paid until
all accrued and unpaid dividends on the Preferred Stock have been paid.
UNSECURED CREDITORS WARRANTS
The Unsecured Creditors Warrants are exercisable for up to
an aggregate of 1,013,514 shares of Holdings Common Stock at an exercise price
of $8.68 per share. The Unsecured Creditors Warrants became exercisable on the
Effective Date and expire at 5:00 p.m., New York City time on May 15, 2000.
The number of shares for which the Unsecured Creditors
Warrants are exercisable, and the exercise price of the Unsecured Creditors
Warrants, are subject to antidilution adjustment if the number of shares of
Holdings Common Stock is increased by a dividend or other share distribution, or
by a stock split or other reclassification of shares of Holdings Common Stock.
In addition, the exercise price of the Unsecured Creditors Warrants is subject
to decrease if Holdings distributes, to all holders of Holdings Common Stock,
evidences of its indebtedness, any of its assets (other than cash dividends), or
rights to subscribe for shares of Holdings Common Stock expiring more than 45
days after the issuance thereof.
In the event that Holdings merges or consolidates with
another person, the holders of the Unsecured Creditors Warrants will be entitled
to receive, in lieu of shares of Holdings Common Stock or other securities
issuable upon exercise of the Unsecured Creditors Warrants, the greatest amount
of securities, cash or other property to which such holder would have been
entitled as a holder of Holdings Common Stock or such other securities.
PREFERRED STOCK
20,000 shares of Series A Preferred Stock are outstanding.
The Preferred Stock has an aggregate liquidation preference of $2,000,000 (the
"Liquidation Preference"), plus any accrued and unpaid dividends thereon
(whether or not declared). Dividends on the Preferred Stock are cumulative
(compounding annually) from the Effective Date and are payable when and as
declared by the Board of Directors of Holdings, at the rate of 1% per annum on
the Liquidation Preference. No dividends shall be
37
<PAGE>
payable on any shares of Holdings Common Stock until all accrued and unpaid
dividends on the Preferred Stock have been paid.
The shares of Preferred Stock are not redeemable prior to
the sixth anniversary of the Effective Date. On or after the sixth anniversary
of the Effective Date, the Preferred Stock is redeemable at the option of
Holdings for cash, in whole or in part, at an aggregate redemption price equal
to the Liquidation Preference, plus any accrued and unpaid dividends thereon. In
addition, Holdings is required to redeem the Preferred Stock in whole on the
tenth anniversary of the Effective Date at an aggregate redemption price equal
to the Liquidation Preference, plus any accrued and unpaid dividends thereon.
The shares of Preferred Stock are convertible, in whole or
in part, at the option of the holders thereof, any time on or after the earlier
of the fifth anniversary of the Effective Date and the consummation of a rights
offering by Holdings (which offering meets certain conditions), into 162,500
shares of Holdings Common Stock. Any accrued and unpaid dividends on the
Preferred Stock will be cancelled upon conversion. Conversion rights will be
adjusted to provide antidilution protection for stock splits, stock
combinations, mergers or other capital reorganization of Holdings. In addition,
upon a sale of Holdings, Holdings' right to redeem the Preferred Stock and the
holders' right to convert the Preferred Stock will be accelerated. The Preferred
Stock has one vote per share and votes together with the Holdings Common Stock
on all matters other than the election of directors.
CERTAIN CORPORATE GOVERNANCE MATTERS
Except as the Delaware General Corporation Law (the
"General Corporation Law"), the Charter or the By-Laws of Holdings (the
"By-Laws") may otherwise provide, the holders of a majority of the issued and
outstanding shares of the capital stock entitled to vote shall constitute a
quorum at a meeting of stockholders for the transaction of any business. The
holders of a majority of such shares present may adjourn the meeting until a
quorum has been obtained.
Each stockholder entitled to vote in accordance with the
terms of the Charter and By-Laws shall be entitled to one vote, in person or by
proxy, for each share of stock entitled to vote held by such stockholder. In the
election of directors, the vote need not be by written ballot, and a plurality
of the votes present at the meeting shall elect. Any other action shall be
authorized by a majority of the votes cast except as otherwise required by the
General Corporation Law. Except as otherwise required by law or the Charter,
action required or permitted to be taken at any meeting of stockholders, may be
taken without a meeting, without prior notice and without a vote, by written
consent of the holders of shares representing the votes that would be necessary
to authorize or take such action at a meeting.
The Board of Directors is expressly authorized to adopt,
amend or repeal the By-laws. The stockholders are expressly authorized to repeal
or change By-laws adopted by the Board of Directors, and to adopt new By-laws.
The stockholders may prescribe that any By-law made by them shall not be
altered, amended or repealed by the Board of Directors.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Charter provides for the indemnification, to the
fullest extent permitted by the General Corporation Law, of all persons who may
be indemnified by Holdings under the General Corporation Law, which would
include the directors, officers, employees and agents of Holdings. The
indemnification provided by the Charter does not limit or exclude any rights,
indemnities or limitations of liability to which any person may be entitled,
whether as a matter of law, under the By-Laws, by
38
<PAGE>
agreement, vote of the stockholders or disinterested directors of Holdings or
otherwise. The Charter also does not absolve directors of liability for (1) any
breach of the directors' duty of loyalty to Holdings or its stockholders, (2)
acts or omissions which are not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) any matter in respect of which
such director shall be liable under Section 174 of Title 8 of the General
Corporation Law or any amendment thereto or successor provision thereto, which
makes directors personally liable for unlawful dividends or unlawful stock
repurchases or redemptions in certain circumstance and expressly sets forth a
negligence standard with respect to such liability, or (4) any transaction from
which the director derived an improper personal benefit.
Under Delaware law, directors, officers, employees and
other individuals may be indemnified against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement in connection with
specified actions, suits or proceedings, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation (a
"derivative action")) if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of Holdings
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe their conduct was unlawful. A similar standard of care is applicable
in the case of a derivative action, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with defense or
settlement of such an action and Delaware law requires court approval before
there can be any indemnification of expenses where the person seeking
indemnification has been found liable to Holdings.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See "Item 15. Financial Statements and Exhibits" and the
Consolidated Financial Statements included herewith.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See Index to Consolidated Financial Statements and
Schedules included herewith.
(b) Exhibits
The exhibits listed on the Exhibit Index following the
Consolidated Financial Statements hereof are filed herewith in response to this
Item.
39
<PAGE>
Barneys New York, Inc. and Subsidiaries
Audited Consolidated Financial Statements
Six months ended January 30, 1999 and Fiscal Years ended 1998, 1997 and 1996
INDEX
Report of Independent Auditors........................................... F-1
Audited Consolidated Financial Statements:
Consolidated Balance Sheets as of January 30, 1999, August 1, 1998
and August 2, 1997................................................. F-2
Consolidated Statements of Operations for the six months ended
January 30, 1999, and fiscal years 1998, 1997 and 1996............. F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the six months ended January 30, 1999, and fiscal years 1998,
1997 and 1996...................................................... F-4
Consolidated Statements of Cash Flows for the six months ended
January 30, 1999, and fiscal years 1998, 1997 and 1996............. F-5
Notes to Consolidated Financial Statements............................... F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Barneys New York, Inc.
We have audited the accompanying consolidated balance sheet of Barneys New York,
Inc. and subsidiaries as of January 30, 1999 (Successor Company balance sheet)
and of Barney's, Inc. and subsidiaries as of August 1, 1998 and August 2, 1997
(Predecessor Company balance sheets), and the related consolidated statements of
operations, cash flows and changes in stockholder's equity (deficit) for the six
months ended January 30, 1999 and each of the three fiscal years in the period
ended August 1, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurances about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As more fully described in Note 2 to the consolidated financial statements,
effective January 28, 1999, the Company emerged from protection under Chapter 11
of the U.S. Bankruptcy Code pursuant to a Reorganization Plan which was
confirmed by the Bankruptcy Court on December 21, 1998. Accordingly, the
accompanying January 30, 1999 balance sheet has been prepared in conformity with
AICPA Statement of Position 90-7 "Financial Reporting for Entities in
Reorganization Under the Bankruptcy Code," for the Successor Company as a new
entity with assets, liabilities and a capital structure having carrying values
not comparable with prior periods as described in Note 3.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Barneys
New York, Inc. and subsidiaries as of January 30, 1999, and of Barney's, Inc.
and subsidiaries as of August 1, 1998 and August 2, 1997, and the consolidated
results of their operations and their cash flows for the six months ended
January 30, 1999 and for each of the three fiscal years in the period ended
August 1, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
May 24, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SUCCESSOR |
COMPANY | PREDECESSOR COMPANY
JANUARY 30, | AUGUST 1, AUGUST 2,
1999 | 1998 1997
----------------------|----------------------------------------
<S> <C> | <C> <C>
ASSETS |
Current assets: |
Cash and cash equivalents $ 6,824 | $ 3,478 $ 5,442
Restricted cash 5,082 | - -
Receivables, less allowances of $4,356, $4,386 and $5,016 27,841 | 22,107 16,583
Inventories 65,551 | 68,983 61,234
Other current assets 6,347 | 6,502 11,973
----------------------|----------------------------------------
Total current assets 111,645 | 101,070 95,232
Fixed assets at cost, less accumulated depreciation |
and amortization of $0, $38,226 and $32,274 51,356 | 114,639 119,151
Excess reorganization value 177,767 | - -
Other assets 3,186 | 1,334 1,863
----------------------|----------------------------------------
|
Total assets $ 343,954 | $ 217,043 $ 216,246
======================|========================================
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) |
Current liabilities: |
DIP credit agreement $ - | $ 75,437 $ 64,113
Accounts payable 15,996 | 17,324 8,460
Accrued expenses 54,585 | 40,558 42,102
----------------------|----------------------------------------
Total current liabilities 70,581 | 133,319 114,675
|
Long-term debt 118,533 | - -
Other long-term liabilities - | 4,640 3,603
Liabilities subject to compromise - | 372,272 371,203
|
Deferred credits - | 162,446 162,446
Minority interest - | 12,000 12,000
|
Commitments and contingencies |
|
Redeemable Preferred Stock -- Aggregate liquidation |
preference $2,000 500 | - -
|
Shareholders' equity (deficit): |
Preferred stock -- $100 par value; authorized |
400,000 shares-- issued 327,695 shares - | 32,770 32,770
Common stock-- $.01 par value; authorized |
25,000,000 shares-- issued 12,500,000 shares 125 | - -
Common stock-- $20 par value; authorized |
15,000 shares-- issued 8,560 shares - | 171 171
Additional paid-in capital 154,215 | 38,950 38,950
Retained deficit - | (539,525) (519,572)
----------------------|----------------------------------------
Total shareholders' equity (deficit) 154,340 | (467,634) (447,681)
----------------------|----------------------------------------
|
Total liabilities and shareholders' equity (deficit) $ 343,954 | $ 217,043 $ 216,246
======================|========================================
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
</TABLE>
F-2
<PAGE>
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JANUARY 30, FOR THE FISCAL YEARS
1999 1998 1997 1996
---------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 181,657 $ 342,967 $ 361,496 $ 366,424
Cost of sales 95,084 178,755 192,302 193,610
---------------------------------------------
Gross profit 86,573 164,212 169,194 172,814
Expenses:
Selling, general and administrative (including occupancy
expense of $11,728, $25,453, $33,235 and $41,737) 73,634 151,191 173,392 201,184
Depreciation and amortization 4,671 9,635 12,886 13,814
Impairment and special charges -- -- 255 2,184
Royalty income and foreign exchange gains -- (1,653) (420) (11,292)
Other - net (2,033) (3,022) (1,889) (3,661)
---------------------------------------------
Income (loss) before interest and financing costs, reorganization costs,
"fresh-start" revaluation, income taxes and extraordinary item 10,301 8,061 (15,030) (29,415)
Interest and financing costs (excludes contractual interest of $11,012,
$22,024, $22,024 and $11,794) 4,758 11,967 7,674 12,575
---------------------------------------------
Income (loss) before reorganization costs, "fresh-start" revaluation,
income taxes and extraordinary item 5,543 (3,906) (22,704) (41,990)
Reorganization costs 13,834 15,970 72,207 29,407
Fresh-start revaluation 294 -- -- --
---------------------------------------------
Loss before income taxes and extraordinary item (8,585) (19,876) (94,911) (71,397)
Income taxes 38 77 62 472
---------------------------------------------
Loss before extraordinary item (8,623) (19,953) (94,973) (71,869)
Extraordinary item - gain on debt discharge 302,285 -- -- --
---------------------------------------------
Net income (loss) $ 293,662 $ (19,953) $ (94,973) $ (71,869)
=============================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements
F-3
<PAGE>
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PREFERRED PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
Balances at July 29, 1995 $ 171 $ 32,770 $ 38,950 $ (352,730) $ (280,839)
Net Loss - - - (71,869) (71,869)
----------------------------------------------------------------------------------
Balances at August 3, 1996 171 32,770 38,950 (424,599) (352,708)
Net Loss - - - (94,973) (94,973)
----------------------------------------------------------------------------------
Balances at August 2, 1997 171 32,770 38,950 (519,572) (447,681)
Net Loss - - - (19,953) (19,953)
----------------------------------------------------------------------------------
Balances at August 1, 1998 171 32,770 38,950 (539,525) (467,634)
Net income for the six months ended
January 30, 1999 - - - 293,662 293,662
Fresh-start adjustments (171) (32,770) (38,950) 245,863 173,972
Issuance of Successor Company stock 125 - 148,855 - 148,980
Issuance of Successor Company warrants - - 5,360 - 5,360
----------------------------------------------------------------------------------
SUCCESSOR COMPANY
Balances at January 30, 1999 $ 125 $ - $ 154,215 $ - $ 154,340
==================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-4
<PAGE>
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JANUARY 30, FOR THE FISCAL YEARS
1999 1998 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 293,662 $ (19,953) $ (94,973) $ (71,869)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Reorganization items:
Extraordinary gain on debt discharge (302,285) - - -
Fresh-start revaluation 294 - - -
Real estate losses and asset write-offs, net - 29 49,991 12,357
Write-off of deferred financing costs - - - 2,897
Depreciation and amortization 4,671 9,635 12,886 13,814
Amortization of DIP financing costs 588 3,798 1,955 1,035
Deferred rent (252) (368) (39) 21
Receivables provision (1,888) 1,043 1,324 2,042
Real estate losses and asset write-offs, net - 4 600 1,037
Foreign exchange gains and net interest on Isetan Loan - - - (10,808)
Other - 92 - -
Decrease (increase) in:
Receivables (6,759) (5,316) (763) (15,769)
Inventories 2,032 (7,749) 338 (4,688)
Other current assets (622) 1,673 (3,140) (8,867)
Long-term assets (2,723) 529 101 (992)
Increase (decrease) in:
Accounts payable and accrued expenses (4,968) 6,139 10,462 40,232
--------------------------------------------------------------------
Net cash used in operating activities (18,250) (10,444) (21,258) (39,558)
--------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed asset additions (2,112) (3,047) (5,799) (13,255)
Restricted cash (5,082) - - -
Contributions from landlords - 203 1,234 -
Net repayments from affiliates 1,888 - 143 (8,379)
--------------------------------------------------------------------
Net cash used in investing activities (5,306) (2,844) (4,422) (21,634)
--------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of debt 265,383 385,834 128,939 99,000
Repayments of debt (278,724) (374,510) (105,826) (39,066)
Proceeds from subscription rights offering 62,607 - - -
Cash distributions pursuant to the Plan (22,364) - - -
--------------------------------------------------------------------
Net cash provided by financing activities 26,902 11,324 23,113 59,934
--------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,346 (1,964) (2,567) (1,258)
Cash and cash equivalents - beginning of period 3,478 5,442 8,009 9,267
--------------------------------------------------------------------
Cash and cash equivalents - end of period $ 6,824 $ 3,478 $ 5,442 $8,009
====================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Barneys New York, Inc. ("Holdings") and Subsidiaries (collectively
the "Company") is a retailer of men's and women's apparel and accessories and
items for the home. The Company operates 20 stores throughout the United States,
including its three flagship stores in New York, Beverly Hills and Chicago which
are leased from an affiliate of Isetan Co. Ltd. ("Isetan"), a minority
stockholder of Holdings. The Company has also entered into licensing
arrangements, pursuant to which the Barneys New York trade name is licensed for
use in Asia.
The consolidated financial statements of the Company during the
bankruptcy proceedings (the "Predecessor Company financial statements") are
presented in accordance with American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). Pursuant to guidance provided by SOP
90-7, the Company adopted fresh start reporting as of January 28, 1999 upon its
emergence from bankruptcy.
Under fresh start reporting, a new reporting entity is deemed to be
created and the recorded amounts of assets and liabilities are adjusted to
reflect their estimated fair values at the Effective Date (as defined below). A
black line has been drawn to separate the Successor Company's consolidated
balance sheet from those of the Predecessor Company to signify that they are
different reporting entities and such balance sheets have not been prepared on
the same basis. The operating results of the Successor Company for the
intervening period from January 28, 1999 to January 30, 1999 were immaterial and
therefore included in the operations of the Predecessor Company.
The Company changed its fiscal year-end to the Saturday closest to
January 31 to coincide with its emergence from bankruptcy and to be more
comparable with industry practices. Accordingly, the financial statements for
the current period are as of and for the six months ended January 30, 1999.
References in these financial statements to "1998" and "1996" are for the 52
weeks ended August 1, 1998 and August 3, 1996, respectively. References to
"1997" are for the 53 weeks ended August 2, 1997. References in these financial
statements to "1999" are for the 52 weeks ending January 29, 2000.
As used herein, Successor Company refers to Barneys New York, Inc.
and subsidiaries from the Effective Date to January 30, 1999 and Predecessor
Company refers to Barney's, Inc. and subsidiaries prior to the Effective Date.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
REORGANIZATION CASE:
(A) PLAN OF REORGANIZATION -
On January 10, 1996 (the "Filing Date"), Barney's, Inc. ("Barneys")
and certain subsidiaries of Barneys (collectively the "Barneys Debtors") and an
affiliate, Preen Realty, Inc. ("Preen") and certain subsidiaries of Preen
(collectively the "Preen Debtors") (together the Barneys Debtors and Preen
Debtors referred to as the "Debtors") filed voluntary petitions under chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code"). Pursuant to an
order of the Court, the individual Chapter 11 cases of the Debtors were
consolidated for procedural purposes only and were jointly administered by the
United States Bankruptcy Court for the Southern District of New York (the
"Court"). Subsequent to the Filing Date, the Debtors operated their businesses
as debtors in possession subject to the jurisdiction and supervision of the
Court.
In the Chapter 11 cases, substantially all liabilities as of the
Filing Date were subject to compromise under a plan of reorganization pursuant
to the provisions of the Bankruptcy Code. Under the Bankruptcy Code, the Barneys
Debtors assumed or rejected real estate leases, employment contracts, personal
property leases, service contracts and other unexpired executory pre-petition
contracts, subject to Court approval. Parties affected by the rejections filed
claims with the Court in accordance with the reorganization process.
On January 28, 1999 (the "Effective Date"), the Company emerged from
reorganization proceedings (the "Reorganization") under the Bankruptcy Code
pursuant to a Second Amended Joint Plan of Reorganization, dated November 13,
1998, as supplemented and as confirmed on December 21, 1998 by the Bankruptcy
Court (the "Plan"). Consequently, the Company has applied the reorganization and
fresh-start reporting adjustments to the consolidated balance sheet as of
January 30, 1999, the closest fiscal month end to the Effective Date.
The following is a summary of the material provisions of the Plan
that became effective on the Effective Date.
Pursuant to the Plan, Holdings was formed and, on the Effective Date,
all of the outstanding capital stock of Barneys was transferred to Holdings by
the holders thereof. In addition, prior to the Effective Date, Barneys formed
three subsidiaries (two of which, Barneys (CA) Lease Corp. and Barneys (NY)
Lease Corp., are direct, wholly-owned subsidiaries of Barneys, and one of which,
Barneys America (Chicago) Lease Corp., is a direct, wholly-owned subsidiary of
Barneys America, Inc., which is a direct, wholly-owned subsidiary of Barneys and
which was in existence since before the Filing Date), each of which acts as a
lessee and sublessor for one of the flagship stores. See "PROPERTIES." BNY
Licensing Corp. ("BNY Licensing"), a wholly-owned subsidiary of Barneys, is
party to certain licensing arrangements. Barneys Asia Co. LLC is 70% owned by
BNY Licensing and 30% owned by an affiliate of Isetan Company Ltd. ("Isetan"),
and was formed prior to the Effective Date pursuant to the Plan.
See " -- Licensing."
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
EQUITY -
Pursuant to the Plan, the following equity was issued:
Common Stock Issued In Exchange for Claims. The equity in Barneys was
exchanged for shares of common stock in a new company created under the Plan,
Barneys New York, Inc. ("Holdings Common Stock"), and certain allowed general
unsecured claims and claims held by Isetan against Barneys and certain of its
affiliates exchanged for, among other things, shares of Holdings Common Stock
and warrants (as defined below).
Rights Offering. Shares of Holdings Common Stock were issued to
certain holders of allowed general unsecured claims pursuant to the exercise by
them of rights to subscribe for shares of Holdings Common Stock ("Subscription
Rights") which were issued in accordance with the Plan and exercised prior to
consummation of the Plan. The $62.5 million offering of Subscription Rights was
guaranteed by Bay Harbour Management L.C. ("Bay Harbour") and Whippoorwill
Associates, Inc. ("Whippoorwill", and, together with Bay Harbour, the "Plan
Investors") on behalf of their discretionary and/or managed accounts to the
extent the other holders of allowed general unsecured claims did not elect to
participate in the offering. Bay Harbour and Whippoorwill agreed to guarantee
the offering of Subscription Rights pursuant to the Amended and Restated Stock
Purchase Agreement dated as of November 13, 1998 among Barneys, Bay Harbour,
Whippoorwill and the Official Committee of Unsecured Creditors of Barneys (the
"Stock Purchase Agreement"). Prior to the Effective Date, the Plan Investors
were the two largest creditors of Barneys. On the Effective Date, pursuant to
the Plan, the Plan Investors became the two largest holders of Holdings Common
Stock. The offering of Subscription Rights was made to enable the Company to
emerge from bankruptcy with sufficient capital to support its new business plan
and provide the necessary liquidity for its future operations. Pursuant to the
offering, Subscription Rights to purchase an aggregate of 7,200,461 shares of
Holdings Common Stock at a purchase price of $8.68 per share were issued. In
order to ensure that the Company received the maximum amount of funds possible
pursuant to the offering, the offering was guaranteed by the Plan Investors. In
the offering, the Plan Investors purchased an aggregate of 6,707,531 shares of
Holdings Common Stock for an aggregate price of approximately $58.2 million and
holders of general unsecured claims purchased an aggregate of 492,930 shares of
Holdings Common stock for an aggregate price of approximately $4.3 million.
Option. Pursuant to the Stock Purchase Agreement, the Plan Investors
were granted an option to purchase, at an aggregate exercise price of $5.0
million, a total of 576,122 shares of Holdings Common Stock. Pursuant to the
option, each of the Plan Investors has the right to purchase the greater of (i)
288,061 shares of Holdings Common Stock, and (ii) 576,122 shares of Holdings
Common Stock, less the number of shares purchased by the other Plan Investor.
This option expires on November 15, 1999. The value of the options granted to
the Plan Investors was determined within the context of a derived reorganization
value pursuant to a valuation analysis prepared by an investment banking firm
retained by the creditors committee.
Isetan Warrant. Isetan was issued a warrant (the "Isetan Warrant") to
purchase 287,724 share of Holdings Common Stock at an exercise price of $14.68
per share. This warrant expires on January 29, 2002. The Isetan Warrant was
issued as part of a settlement reached with Isetan in respect of all of their
claims against the Company.
Unsecured Creditors Warrants. Holders of certain allowed general
unsecured claims were issued warrants (the "Unsecured Creditors Warrants") to
purchase an aggregate of up to
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1,013,514 shares of Holdings Common Stock at an exercise price of $8.68 per
share. These warrants expire on May 15, 2000. The value of the Unsecured
Creditors Warrants was determined within the context of a derived reorganization
value pursuant to a valuation analysis prepared by an investment banking firm
retained by the creditors committee. The warrants were issued to all general
unsecured creditors in settlement of their allowed claim amounts, other than
holders of general unsecured claims whose claims were for less than $2,300 and
holders of general unsecured claims of greater than $2,300 who elected to
receive cash in settlement of their claims.
Preferred Stock. Holdings issued 15,000 shares of Series A Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), to the Barneys
Employees Stock Plan Trust, which was established for the benefit of employees
of the Company. In addition, Holdings issued 5,000 shares of Preferred Stock for
an aggregate purchase price of $500,000 in government securities to Bay Harbour,
which it resold to a third party under a prearranged agreement.
In total, the Company settled general unsecured claims of
approximately $320,000,000 through the issuance of Holdings Common Stock and
warrants. Exclusive of shares and warrants issued to the Plan Investors and
Isetan, the Company issued 4,198,916 shares and 1,013,514 warrants in
satisfaction of allowed general unsecured claims.
INDEBTEDNESS -
Pursuant to the Plan, the following debt securities were issued:
Isetan. Barneys issued a subordinated promissory note (the "Isetan
Note") in the principal amount of $22,500,000 to Isetan. The Isetan Note bears
interest at the rate of 10% per annum payable semi-annually, and matures on
January 29, 2004. The Isetan Note was issued as part of a settlement reached
with Isetan in respect of all of their claims against the Company.
Equipment Lessors. On the Effective Date, certain lessors of
equipment to the Company transferred all right, title and interest in such
equipment to the Company. In exchange therefor, the Company issued subordinated
promissory notes (the "Equipment Lessors Notes") to such lessors in an aggregate
principal amount of $35,788,865. Such promissory notes bear interest at the rate
of 11-1/2% per annum payable semi-annually, mature on January 29, 2004, and are
secured by a first priority lien on the equipment that was the subject of each
of the respective equipment leases.
OTHER SETTLEMENTS -
Pursuant to the Plan, the following occurred:
Isetan. Barneys paid approximately $23.3 million in cash to Isetan on
account of its allowed claims, an affiliate of Isetan became the sole owner of
the properties in which the Company's three flagship stores are located and
Barneys entered into modifications of the long-term leases (the "New Isetan
Leases") for such stores. Additionally, Isetan received outright ownership of
the leasehold improvements in the three flagship stores at the Effective Date.
Accordingly, the net book value of those leasehold interests approximating $97
million at the Effective Date were eliminated from the Predecessor Company's
books.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pressman Family. An aggregate of $50,000 in cash was paid to members
of the Pressman family in partial settlement of claims filed by them against the
Company and in partial exchange for equity interests in the Company and certain
of its affiliates. In addition, on the Effective Date, Barneys entered into
consulting agreements with certain members of the Pressman family. Pursuant to
these agreements, each of which terminates on the first anniversary of the
Effective Date, each of Phyllis Pressman, Robert Pressman, Gene Pressman and
Holly Pressman have agreed to make himself or herself available to Barneys (up
to 60% of full-time for Phyllis Pressman, and 80% of full time for each of
Robert, Gene and Holly Pressman) to furnish consulting services to Barneys, its
subsidiaries and affiliates with respect to their business and potential
business opportunities. The aggregate compensation payable under the consulting
agreements ranges from $410,000 to $1,400,000, payable in four equal semi-annual
installments, commencing with the Effective Date. The Company was also required
to pay Nanelle Associates, an entity controlled by members of the Pressman
family, in respect of its claims in the bankruptcy case, $400,000, payable in
four equal semi-annual installments commencing on the Effective Date.
Licensing. BNY Licensing, a wholly-owned subsidiary of Barneys, is
party to licensing arrangements pursuant to which (i) two retail stores are
operated in Japan and a single in-store department is operated in Singapore
under the name "BARNEYS NEW YORK", each by an affiliate of Isetan, and (ii)
Barneys Asia Co. LLC, which is 70% owned by BNY Licensing and 30% owned by an
affiliate of Isetan (and which was formed in connection with the Reorganization
discussed above), has the exclusive right to sublicense the BARNEYS NEW YORK
trademark throughout Asia (excluding Japan). Isetan received an absolute
assignment of 90% of the annual minimum royalties pursuant to item (i) above in
satisfaction of the note payable to Isetan by BNY Licensing.
Pursuant to the trademark license agreement between BNY Licensing and
Barneys Japan Company ("Barneys Japan") (an affiliate of Isetan), a
royalty-bearing, exclusive right and license has been granted to Barneys Japan
to operate retail store locations in Japan and a royalty-bearing, non-exclusive
right and license to operate a department within a retail store in Singapore,
under the trademark and trade names "BARNEYS NEW YORK" (the "Trademark License
Agreement"). In addition, Barneys Japan has been granted a license to make, sell
and distribute certain products bearing the trademark "BARNEYS NEW YORK" and to
use "BARNEYS NEW YORK" as part of its corporate name. The Trademark License
Agreement expires on December 31, 2015; however, Barneys Japan may renew the
agreement for up to three additional ten year terms provided certain conditions
are met. Under the terms of the agreement, Barneys Japan pays BNY Licensing or
its assignee a minimum royalty of 2.50% of a minimum net sales figure set forth
in the agreement (the "Minimum Royalty") and an additional royalty of 2.50% of
net sales in excess of the minimum net sales and sales generated from the
expansion of Barneys Japan store base (beyond three stores) and business
methods. Pursuant to the terms of the Trademark License Agreement, the Company
is entitled to receive a Minimum Royalty over the term of the Trademark License
Agreement ranging from 37,700,000 to 61,195,106 Japanese Yen ($325,140 to
$527,772 at a conversion rate of 115.95 Japanese yen to one U.S. dollar) a year.
The minimum royalty revenue will be recognized monthly as the license fee
accrues.
Pursuant to the license agreement between BNY Licensing and Barneys
Asia Co., BNY Licensing has granted to Barneys Asia, a royalty-free, exclusive
right and license to sublicense the right to operate retail store locations and
departments with retail stores in Taiwan, Korea, Singapore, Thailand, Malaysia,
Hong Kong, Indonesia, India, China and the Philippines, and a
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
non-exclusive right and license to sublicense the same activities in Singapore,
under the trademark and trade name "BARNEYS NEW YORK". In addition, Barneys Asia
has been granted a license to sublicense the right to make, sell and distribute
certain products bearing the trademark "BARNEYS NEW YORK". Further, Barneys Asia
has been granted a license to use "BARNEYS NEW YORK" as part of its corporate
name. All sublicenses granted by Barneys Asia under this agreement must be
royalty-bearing. The Barneys Asia License Agreement expires on December 31,
2015; however, Barneys Asia may renew the agreement for up to three additional
ten year terms.
Intercompany Claims. On the Effective Date, substantially all
intercompany claims against the Debtors were either released and cancelled by
means of contribution, distribution or otherwise, or were offset against any
mutual intercompany claims with any remaining amount released and discharged
with no further consideration.
Administrative Claims. As a result of the bankruptcy, the Company is
subject to various Administrative Claims filed by various claimants throughout
the bankruptcy case. In connection with the Plan, the Company was required to
establish a disputed Administrative Claims Cash Reserve while the Administrative
Claims are negotiated and settled. The total amount of the cash reserve was
$4,600,000 and is included in restricted cash at January 30, 1999. The Company
has reserved in its financial statements the amount it believes will be
necessary to settle these claims.
Guarantee of Obligations. Holdings guaranteed the obligations of
Barneys and its subsidiaries under the Isetan Note, the Equipment Lessors Notes,
the New Isetan Leases and the new Licensing Arrangements.
(B) EXTRAORDINARY GAIN ON DISCHARGE OF DEBT -
The value of cash and securities required to be distributed under the
Plan was less than the value of the allowed claims on and interests in the
Predecessor Company; accordingly, the Predecessor Company recorded an
extraordinary gain of $302,285,000 related to the discharge of prepetition
liabilities in the six months ended January 30, 1999. Payments, distributions
associated with the prepetition claims and obligations and provisions for
settlements are reflected in the January 30, 1999 balance sheet. The
consolidated financial statements at January 30, 1999 give effect to the
issuance of all common stock and notes in accordance with the Plan.
The extraordinary gain recorded by the Predecessor Company was
determined as follows:
(in thousands)
Liabilities subject to compromise at the effective date $ 369,747
Less:
Cash distributions pursuant to the Plan (1,156)
Assumption of prepetition liabilities (9,119)
Value of new common stock and warrants issued to
prepetition creditors (57,187)
------------------
Extraordinary gain on debt discharge $ 302,285
==================
In the accompanying Predecessor Company consolidated balance sheets,
the principal categories of claims classified as Liabilities subject to
compromise are identified below.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AUGUST 1, AUGUST 2,
1998 1997
--------------------------------
(in thousands)
Unsecured debt $ 233,060 $ 233,084
BNY Licensing Yen loan payable to Isetan 49,129 49,129
Pre-petition accrued interest 1,467 1,467
Trade and expense payables 58,124 58,055
Lease rejection claims 15,638 15,638
Other claims 14,854 13,830
---------------------------------
Total $ 372,272 $ 371,203
=================================
(C) RESTRUCTURING PROGRAMS -
As a result of continuing efforts to improve Predecessor Company
profitability, during the third quarter of 1997, management of the Predecessor
Company approved a plan to close six stores and reduce personnel (the "1997
Restructuring Program"). The store closings and personnel reductions were
expected to result in headcount reductions in excess of 300 employees. Sales and
operating results (without corporate overhead allocations) respectively relating
to the stores closed were $7,954,000 and $(527,000), $63,751,000 and
$(4,300,000), and $69,937,000 and $(3,165,000) for 1998, 1997 and 1996,
respectively. Included in these results are depreciation and amortization
charges of $425,000, $3,560,000 and $3,486,000 for 1998, 1997 and 1996,
respectively.
In 1997, the Predecessor Company recorded $52,510,000 of
reorganization costs resulting from the aforementioned decisions. $38,767,000 of
the costs represented the net book value of the leasehold interests and other
fixed assets, net of an estimated recovery for future use or disposition of the
related assets in the affected stores at the expected date of closure,
$15,038,000 represented the estimated cost of claims which could have been filed
against the Predecessor Company by the landlords of the stores in connection
with rejection of the store leases and $2,519,000 related to employee
termination costs. Offsetting these costs in 1997 was a $3,814,000 reversal of
accrued rent previously recorded to straight-line rent over the lease term. In
1998 and the six months ended January 30, 1999, the Predecessor Company recorded
additional employee termination costs of $1,881,000 and $3,139,000,
respectively, either as a result of continuing efforts to improve Predecessor
Company profitability or to fulfill certain contractual obligations pursuant to
employee separations.
Pursuant to the 1997 Restructuring Program, the Predecessor Company
closed five regional mall stores, three in July 1997, and one each in January
1998 and July 1998 and the original flagship store on 17th Street in New York
City in August 1997. After the closings of the four stores between July and
August 1997, and the related charges against the reserve for the disposition of
fixed assets, the remaining reserve (exclusive of amounts provided for lease
rejection costs) was not significant to the total amount provided in fiscal
1997. With the exception of the amounts provided for the rejection of store
leases, the cash and non-cash reserves for the various reorganization efforts of
the Company, throughout the reorganization period, were substantially utilized
as intended at the initial amounts provided. The amounts provided for the
rejection of store leases were subject to resolution pursuant to the Plan.
In the six months ended January 30, 1999, and in each of fiscal 1998,
1997 and 1996, the Predecessor Company reduced its headcount as part of the
ongoing reorganization efforts,
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
including the 1997 Restructuring Program, by 28 associates, 137 associates, 143
associates and 37 associates, respectively. As of January 30, 1999, the
severance related reserves provided in 1998 and 1997 have been utilized as
intended. At January 30, 1999, the Successor Company has a severance reserve of
approximately $3.5 million, which will be substantially utilized by January 29,
2000.
At January 30, 1999, the Company has recorded a fresh-start
adjustment for the closure of certain outlet stores. This adjustment is
reflected in the Successor Company balance sheet at January 30, 1999.
3. FRESH START REPORTING:
As indicated in Note 1, the Company adopted fresh-start reporting as
of January 28, 1999. The use of fresh start reporting is appropriate because
holders of the existing voting shares of the Predecessor Company received less
than 50% of the voting shares of the Successor Company and the reorganization
value of the assets of the emerging entity, immediately before the date of
confirmation of the Plan, was less than the total of all post-petition
liabilities and allowed claims. In adopting fresh start reporting, the Company
was required to determine its enterprise value, which represents the fair value
of the entity before considering its liabilities.
The official committee of unsecured creditors retained and was
advised by Peter J. Solomon Company Ltd. ("PJSC") with respect to the value of
Holdings. PJSC undertook its valuation analysis for the purpose of determining
the value available to distribute to creditors pursuant to the Plan and to
analyze the relative recoveries to creditors thereunder. The analysis was based
on the financial projections provided by the Predecessor Company's management as
well as current market conditions and statistical data. The values were as of an
assumed Effective Date of January 30, 1999 and were based upon information
available to and analyses undertaken by PJSC in October 1998.
PJSC used discounted cash flow, comparable publicly traded company
multiple and comparable merger and acquisition transaction multiple analyses to
arrive at total reorganization value. These valuation techniques reflect the
levels at which comparable public companies trade and have been acquired as well
as the intrinsic value of future cash flow projections in the Company's business
plan. The valuation was also based on a number of additional assumptions,
including a successful reorganization of the business and finances in a timely
manner, the achievement of the forecasts reflected in the financial projections,
the amount of available cash at emergence, the availability of certain tax
attributes, the continuation of current market conditions through the Effective
Date and the Plan becoming effective.
Based upon the foregoing assumptions, the pro-forma organizational
structure, and advice from PJSC, the going concern value for Holdings
post-reorganization was determined to be $285,000,000 (the "Total Reorganization
Value") as of the Effective Date. Based on the established Total Reorganization
Value for Holdings, and assumed total debt of approximately $129,500,000 and
$2,000,000 in new preferred stock upon emergence, the Plan Investors and the
official committee of unsecured creditors employed an assumed common equity
value for Holdings of approximately $153,500,000 which was subject to adjustment
after giving effect to the exercise of warrants and options. The Total
Reorganization Value of the Debtors' business assumed a projected average exit
financing facility revolver balance for the 12 months subsequent to the
Effective Date equal to $71,200,000 and included cash of $3,500,000 upon
emergence.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The adjustments to reflect the provisions of the Plan and the
adoption of fresh start reporting, including the adjustments to record assets
and liabilities at their fair market values, have been reflected in the
following balance sheet reconciliation as of January 30, 1999 as fresh start
adjustments. In addition, the Successor Company's balance sheet was further
adjusted to eliminate existing equity and to reflect the aforementioned
$285,000,000 Total Reorganization Value, which includes the establishment of
$177,767,000 of reorganization value in excess of amounts allocable to net
identifiable assets ("Excess Reorganization Value"). The Excess Reorganization
Value is being amortized using the straight-line method over a 20-year useful
life.
The Successor Company established a 20-year useful life after
considering the financial health of the emerging entity, the principal
investors, the luxury goods sector of the specialty retail industry, and the
strength of the Barneys New York trademark. Additionally, but to a lesser
extent, the Successor Company considered the terms of the renegotiated leases
with Isetan for the three flagship stores in New York, California and Chicago.
The base terms of two of the three leases, including the lease for the Madison
Avenue store, is 20 years. If the Successor Company exercises all renewal
options, the lease terms could range from a minimum of 40 years to a high of 60
years.
The reorganization value has been allocated on a preliminary basis to
the net assets of the Predecessor Company as part of fresh-start accounting. The
Reorganization column on the following page reflects the adjustments to the
Predecessor Company's balance sheet giving effect to either the direct terms of
the Plan or the indirect consequences of the Plan on certain previously recorded
balance sheet amounts, such as the deferred credits. The other significant
Reorganization adjustments include the discharge of prepetition debt, issuance
of new stock and debt, write-off of the leasehold improvements in the three
flagship stores, elimination of minority interest and repayment of amounts
outstanding under the debtor in possession credit agreement. The fresh-start
adjustments relate to the elimination of the Predecessor Company's equity; the
adjustments of assets and liabilities to their fair market value; and other
adjustments to reflect the $285,000,000 Total Reorganization Value. In
accordance with SOP 90-7, the effects of the fair market value adjustments on
the reported amounts of individual assets and liabilities resulting from the
adoption of fresh start reporting are to be reflected in the Predecessor
Company's final statement of operations. Such adjustments approximated $294,000
and are included in the Statement of Operations as fresh-start revaluation. This
adjustment includes among other items, the write-off of straight line rent
accruals included in Other long-term liabilities; the write-up of fixed assets
to their appraised value; the recognition of the debt discount related to the
Isetan Note; and the impact of establishing certain liabilities pursuant to
Accounting Principles Bulletin Opinion 16, "Accounting for Business
Combinations."
Reconciliation of the Predecessor Company balance sheet as of January
30, 1999 to that of the Successor Company showing the adjustments thereto to
give effect to the discharge of prepetition debt and fresh-start reporting
appears on the following page.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
PREDECESSOR REORGANI- FRESH-START SUCCESSOR
COMPANY ZATION ADJUSTMENTS COMPANY
---------------- ------------------ ----------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 5,806 $ 1,018 $ - $ 6,824
Restricted cash 4,386 696 - 5,082
Receivables 28,866 - (1,025) 27,841
Inventories 66,951 - (1,400) 65,551
Other current assets 6,180 500 (333) 6,347
---------------- ------------------ ----------------- ---------------
Total current assets 112,189 2,214 (2,758) 111,645
Fixed assets 112,080 (61,240) 516 51,356
Excess reorganization value - 60,676 117,091 177,767
Other assets 2,357 829 - 3,186
---------------- ------------------ ----------------- ---------------
Total assets $226,626 $ 2,479 $ 114,849 $ 343,954
================ ================== ================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Debtor in possession credit agreement $ 83,389 $ (83,389) $ - $ -
Accounts payable 15,996 - - 15,996
Accrued expenses 48,734 591 5,260 54,585
Subscription Rights offering liability 4,386 (4,386) - -
---------------- ------------------ ----------------- ---------------
Total current liabilities 152,505 (87,184) 5,260 70,581
Long-term debt - 120,385 (1,852) 118,533
Other long-term liabilities 5,894 - (5,894) -
Liabilities subject to compromise 369,747 (369,747) - -
Deferred credits and minority interest 174,446 (174,446) - -
Redeemable Preferred Stock - 500 - 500
Shareholders' equity (deficit)
Preferred stock 32,770 - (32,770) -
Common stock 171 125 (171) 125
Additional paid-in capital 38,950 133,144 (17,879) 154,215
Accumulated deficit (547,857) 379,702 168,155 -
---------------- ------------------ ----------------- ---------------
Total shareholders' equity (deficit) (475,966) 512,971 117,335 154,340
---------------- ------------------ ----------------- ---------------
Total liabilities and shareholders' equity (deficit) $226,626 $ 2,479 $ 114,849 $ 343,954
================ ================== ================= ===============
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements include the accounts of the
Predecessor or Successor Company and its wholly-owned and majority-owned
subsidiaries. Intercompany investments and transactions have been eliminated in
consolidation.
(B) CASH AND CASH EQUIVALENTS -
All highly liquid investments with a remaining maturity of three
months or less at the date of acquisition are classified as cash equivalents.
The carrying value approximates their fair value.
(C) ACCOUNTS RECEIVABLE AND FINANCE CHARGES -
The Company provides credit to its customers and performs on-going
credit reviews of its customers. Concentration of credit risk is limited because
of the large number of customers. Finance charge income recorded in the six
months ended January 30, 1999 approximated $1,978,000. Finance charge income
recorded in fiscal 1998, 1997 and 1996 approximated $3,280,000, $3,202,000 and
$1,315,000, respectively and is included in other-net in the statement of
operations.
(D) INVENTORIES -
Merchandise inventories are stated at the lower of FIFO (first-in,
first-out) cost or market, as determined by the retail inventory method.
Merchandise is purchased from many different vendors based throughout the world.
In certain instances, the Company has formal and informal arrangements with
vendors covering the supply of goods. While no vendor supplies the Company with
more than 10% of its inventory, if certain vendors were to suspend shipments,
the Company might, in the short term, have difficulty identifying comparable
sources of supply. However, management believes that alternative supply sources
do exist to fulfill the Company's requirements should a supply disruption occur
with any major vendor.
(E) FIXED ASSETS -
Fixed assets of the Predecessor Company are recorded at cost.
Depreciation is computed using the straight-line method. Fully depreciated
assets are written off against accumulated depreciation. Furniture, fixtures and
equipment are depreciated over their useful lives. Leasehold improvements are
amortized over the shorter of the useful life or the lease term.
Pursuant to SOP 90-7, property and equipment were restated at
approximate fair market value at January 30, 1999.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(F) EXCESS REORGANIZATION VALUE -
Excess reorganization value represents the adjustment of the
Company's balance sheet for reorganization value in excess of amounts allocable
to identifiable assets. Excess reorganization value is being amortized using the
straight-line method over 20 years.
(G) EARNINGS PER COMMON SHARE -
Earnings per common share is computed as net income (loss) divided by
the weighted average number of common shares outstanding. Earnings per common
share has not been included herein as the computation would not provide
meaningful results as the capital structure of the Successor Company is not
comparable to that of the Predecessor Company.
(H) IMPAIRMENT OF ASSETS -
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired. For purposes of evaluating the recoverability of long-lived assets,
the recoverability test is performed using undiscounted net cash flows of the
individual stores and consolidated undiscounted net cash flows for long-lived
assets, not identifiable to individual stores.
(I) FOREIGN EXCHANGE CONTRACTS -
The Company enters into certain foreign currency hedging instruments
(forward and option contracts), from time to time, to reduce the risk associated
with currency movement related to committed inventory purchases denominated in
foreign currency. Gains and losses that offset the movement in the underlying
transactions are recognized as part of such transactions.
As of January 30, 1999, the Company had outstanding forward contracts
for the Italian Lira, German Mark, French Franc and the Belgium Frank with a
notional value approximating $6,050,000 maturing in 1999. Utilizing applicable
forward rates at the end of the fiscal period and the rate spread at the time of
purchase, the Company estimated the fair value of these contracts to be
approximately $5,931,000 at January 30, 1999.
(J) NET SALES -
Net sales, recognized at the point of sale, consist of sales of
merchandise, net of returns. Bulk sales of merchandise to jobbers are not
included in Net sales, but rather the net profit or loss on these sales is
reflected as an adjustment to Cost of sales.
(K) ADVERTISING EXPENSES -
The Company expenses advertising costs upon first showing.
Advertising expenses were approximately $2,041,000 in the six months ended
January 30, 1999 and $3,324,000, $3,818,000 and $4,009,000 in fiscal 1998, 1997
and 1996, respectively.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(L) INCOME TAXES -
The Company records income tax expense using the liability method.
Under this method, deferred tax assets and liabilities are estimated for the
future tax effects attributable to temporary differences between the financial
statement and tax basis of assets and liabilities.
(M) ESTIMATES -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
(N) RECLASSIFICATION -
Certain prior year amounts have been reclassified to conform to
current year presentation.
5. FIXED ASSETS:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
SUCCESSOR | PREDECESSOR COMPANY COMPANY COMPANY
COMPANY | ESTIMATED ESTIMATED
JANUARY 30, | AUGUST 1, AUGUST 2, USEFUL LIFE USEFUL LIFE
1999 | 1998 1997 (IN YEARS) (IN YEARS)
----------- | --------- --------- ----------- -----------
|
<S> <C> | <C> <C> <C> <C>
Furniture, fixtures and equipment $ 46,145 | $ 13,859 $ 15,406 3 to 7 5 to 10
Leasehold improvements 5,211 | 139,006 136,019 2 to 14 2 to 40
----------- | --------- ---------
Total 51,356 | 152,865 151,425
Less: Accumulated depreciation and |
amortization - | (38,226) (32,274)
----------- | --------- ---------
Net fixed assets $ 51,356 | $ 114,639 $ 119,151
=========== | ========= =========
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. DEBT - SUCCESSOR COMPANY:
(A) REVOLVING CREDIT FACILITY -
In January 1999, the Company entered into a $120,000,000 revolving
credit facility with a $40,000,000 sublimit for the issuance of letters of
credit (the "Credit Agreement") with Citicorp USA, Inc., General Electric
Capital Corporation, BNY Financial Corporation, and National City Commercial
Finance, Inc. maturing on January 28, 2003. The proceeds from this Credit
Agreement were used to repay borrowings under the debtor in possession credit
agreement, to pay certain claims, to pay professional fees and to provide
working capital to the Company as it emerged from its Chapter 11 proceeding
pursuant to the Plan. At January 30, 1999, there were outstanding loans of
approximately $62,096,000 and $19,044,000 was committed under unexpired letters
of credit. Additionally, as collateral for performance on certain leases and as
credit guarantees, Barneys is contingently liable under standby letters of
credit in the amount of approximately $2,489,000 (See Note 8).
Revolving credit availability is calculated as a percentage of
eligible inventory (including undrawn documentary letters of credit) and a
percentage of the Barneys private label credit card receivables plus $20,000,000
(such amount subject to a downward adjustment as defined). Interest rates on the
Facility are the Base Rate (as defined), which approximates Prime, plus 1.25% or
LIBOR plus 2.25%, subject to adjustment after the first year. The interest rate
at January 30, 1999 was 9%.
The Credit Agreement contains various financial covenants principally
relating to net worth, leverage, earnings and capital expenditures. During the
fiscal year ending January 29, 2000, the Credit Agreement covenants do not allow
for any material deviation from the Company's business plan for such year.
Obligations under the Facility are secured by a first priority and
perfected lien on all unencumbered property of the Company. The Facility
provides for a fee of 1.25% to 1.75% per annum on the daily average letter of
credit amounts outstanding and a commitment fee of 0.375% on the unused portion
of the facility.
In connection with the Facility, the Company incurred fees of
$2,825,000 that will be amortized over the life of the facility as interest and
financing costs. These fees were principally paid in December 1998 and January
1999 and are included in Other assets at January 30, 1999.
(B) ISETAN NOTE -
Barneys issued the Isetan Note in the principal amount of
$22,500,000. The Isetan Note bears interest at the stated rate of 10% per annum
payable semi-annually, and matures on January 29, 2004. The first interest
payment due on August 15, 1999 is to be paid in cash unless a majority of
independent directors of the Company determine, with respect to the first four
interest payments due, that it is in the best interests of Barneys to defer
those payments and add them to the outstanding principal amount.
The fair value of the Isetan Note was estimated to be approximately
$20,648,000. This amount is not necessarily representative of the amount that
could be realized or settled. The difference between the face amount and the
fair market value has been recorded as a debt
F-19
<PAGE>
discount at January 30, 1999. The fair market value was based upon a valuation
from an investment banking firm utilizing discounted cash flows and comparable
company methodology.
(C) EQUIPMENT LESSORS NOTES -
The Company issued the Equipment Lessors Notes in an aggregate
principal amount of approximately $35,789,000. Such promissory notes bear
interest at the stated rate of 11-1/2% per annum payable semi-annually, mature
on January 29, 2004, and are secured by a first priority lien on the equipment
that was the subject of each of the respective equipment leases. The first
interest payments were made on February 15, 1999.
The estimated fair value of the Equipment Lessors Notes approximates
face value as estimated by an investment banking firm utilizing discounted cash
flows and comparable company methodology.
Whippoorwill owns an approximate 25% beneficial interest in the
holder of one of the Equipment Lessor Notes with an aggregate principal amount
of $34.2 million.
7. DEBT - PREDECESSOR COMPANY:
(A) DEBTOR IN POSSESSION CREDIT AGREEMENT -
From January 11, 1996 through the Effective Date, Barneys had debtor
in possession revolving credit facilities. At August 1, 1998 and August 2, 1997
there were outstanding loans of approximately $75,437,000 and $64,113,000,
respectively. On January 28, 1999, all loans outstanding pursuant to the
Predecessor Company's debtor in possession credit facility were repaid in full.
(B) INTEREST PAID -
During the six months ended January 30, 1999 the Company paid
interest of $4,095,000. During fiscal 1998, 1997 and 1996 the Company paid
interest of $5,614,000, $5,467,000 and $11,698,000, respectively.
(C) OTHER OBLIGATIONS -
The table that follows and the descriptions of the financing
arrangements contained herein is based on the original contractual terms and
maturities of the related financial instrument. As a result of the Chapter 11
filings, the Company breached covenants in substantially all of its then
existing debt agreements. The amounts outstanding are classified as Liabilities
subject to compromise at both August 1, 1998 and August 2, 1997. It is not
practicable to estimate the fair value of the prepetition debt due to the
Chapter 11 filings.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Prepetition debt consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Revolving credit facility, with Chemical Bank as Agent; interest rate of 8.5%(i)*
$ 72,911
Term loan facility, with Chemical Bank as Agent; interest rate of 7.1875% (i) *
35,000
Republic National Bank of New York note due on January 10, 1996 at 8% (ii)*
25,000
Senior notes due between 1998 and 2000 at 8.32%
issued April 1994 (iii)* 40,000
Senior notes due between 1998 and 2000 at 7.18%
issued June 1993 (iii)* 60,000
BNY Licensing Yen loan payable to Isetan 49,129
------------------------
Long-term debt $ 282,040
========================
* In Default
</TABLE>
(i) Financing Agreements -
In September 1995, the Company entered into a credit facility with a
group of lenders, with Chemical Bank as Agent, which permitted borrowings up to
$120,000,000 on an unsecured basis. Proceeds from this facility were used to
refinance various existing credit agreements and to pay off, pursuant to the
terms of such facility, the outstanding debt of certain affiliated entities,
which Barneys had guaranteed. The scheduled due date of this facility was
February 28, 1998. Interest was calculated at various interest rates, one of
which was the prime rate. The credit facility provided for revolving credit
loans, issuance of letters of credit and term loans. The term loan portion of
the facility was $35,000,000 with the following scheduled repayment terms:
$5,000,000 on October 1, 1997, $5,000,000 on January 1, 1998 and $25,000,000 on
February 28, 1998.
(ii) Republic National Bank Note -
The Republic National Bank Note was an unsecured note in the amount
of $25,000,000 with a scheduled maturity date of January 10, 1996.
(iii) Senior Notes -
Senior notes were unsecured, with scheduled interest payments due
semi-annually on June 15 and December 15. Principal on the aggregate $100
million senior notes was payable by its terms as follows: 1998 - $25,000,000,
1999 - $25,000,000, 2000 - $50,000,000.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. COMMITMENTS AND CONTINGENCIES:
(A) LEASES -
The Company leases real property and equipment under agreements that
expire at various dates. Certain leases contain renewal provisions and generally
require the Company to pay utilities, insurance, taxes and other operating
expenses. In addition, certain real estate leases provide for escalation rentals
based upon increases in lessor's costs or provide for additional rent contingent
upon the Company increasing its sales.
At January 30, 1999, total minimum rentals at contractual rates are
as follows for the respective fiscal years:
THIRD
PARTIES ISETAN TOTAL
----------------------------------------------------
(IN THOUSANDS)
1999 $ 7,686 $ 12,222 $ 19,908
2000 7,465 12,480 19,945
2001 7,490 12,720 20,210
2002 7,155 12,942 20,097
2003 6,348 28,200 34,548
Thereafter 140,004 214,995 354,999
----------------------------------------------------
Total minimum rentals $ 176,148 $ 293,559 $ 469,707
====================================================
Total rent expense for the six months ended January 30,1999 was
$14,632,000 including percentage rent of $57,000. Total rent expense in fiscal
1998, 1997 and 1996 was $31,696,000, $40,175,000 and $54,219,000, respectively
which included percentage rent of $319,000, $98,000 and $3,240,000 in each of
the respective years.
On January 10, 1996, the Company ceased accruing stated rent expense
(both base rent and percentage rent) to Isetan and its affiliated companies for
the Madison Avenue, Beverly Hills and Chicago stores and to substantially all of
its equipment lessors as a result of disputes on the characterization of these
obligations. These matters were resolved as part of the Plan.
During the bankruptcy, in accordance with interim stipulations,
orders of the Court and the debtor-in-possession credit agreements the Company
made "on account" cash payments to Isetan and the equipment lessors at rates
substantially below the contractual amounts. The amount of these payments,
included in Selling, general and administrative expenses are detailed below
along with the corresponding contractual amount for each of the periods
reported.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
ISETAN OCCUPANCY COSTS EQUIPMENT LESSOR COSTS
------------------------------ -------------------------------
RECORDED CONTRACTUAL RECORDED CONTRACTUAL
-------- ----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Six months ended
January 30, 1999 $ 4,611 $ 10,248 $ 2,687 $ 7,750
Fiscal 1998 9,223 22,510 5,642 15,500
Fiscal 1997 9,297 22,164 6,427 15,500
January 11, 1996 to
August 2, 1996 6,231 11,929 3,300 8,900
</TABLE>
The recorded equipment lessor costs in the six months ended January
30, 1999 and fiscal 1998 exclude amounts recorded as reorganization costs
related to closed stores.
(B) LEASE LETTERS OF CREDIT -
At January 30, 1999, Barneys had prepetition letters of credit
outstanding in the amount of $1,346,000 in connection with certain leases.
Subsequent to January 30, 1999, substantially all of these prepetition letters
of credit were cancelled.
(C) LITIGATION -
The Company is party to certain other litigation and asserted claims
and is aware of other potential claims. Management believes that pending
litigation in the aggregate will not have a material effect on the Company's
future financial position, cash flows or results of operations.
(D) CONSULTING AGREEMENT -
Meridian Agreement. Pursuant to an agreement dated as of August 1,
1998, among the Company, Thomas C. Shull and Meridian, as amended (the "Meridian
Agreement"), Meridian received payments from the Company for consulting services
provided by Mr. Shull and two additional consultants, Edward Lambert and Paul
Jen. Pursuant to the Meridian Agreement, Mr. Shull served as President and Chief
Executive Officer until May 5, 1999, and Mr. Lambert served as Chief Financial
Officer of Holdings and its affiliates until May 28, 1999. In addition, Paul Jen
served as Vice President-Marketing until May 1999. The services provided under
the Meridian Agreement consisted of providing the services of these three
individuals in such capacities. In consideration of these services, Meridian
received a base fee at the rate of $95,000 per month, $9,500 per month to cover
Meridian's overhead and other expenses and reimbursement for reasonable
out-of-pocket expenses of the three individuals. In addition, Meridian received
a $100,000 performance bonus on February 1, 1999. Additionally, in consideration
of Meridian's efforts during the transition to Successor Company management,
Meridian received payments totaling $465,000 covering the period February 1999
through May 1999. Meridian advised the Company that, for the twelve month period
ending January 30, 1999, $600,000 of the annual payments made by the Company to
Meridian represent the portion of the payments payable under the Meridian
Agreement allocated by Meridian to Mr. Shull. The Meridian Agreement terminated
on May 31, 1999. Mr. Shull resigned as President and Chief Executive Officer on
May 5, 1999, upon the appointment of Allen I. Questrom to those positions. Mr.
Lambert resigned as Chief Financial Officer effective May 28, 1999.
Upon termination of the Meridian Agreement on May 31, 1999, Meridian
was entitled to a payment of (i) $104,500 per month for a
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
period of eight months, (ii) $104,500 per month for a period of four additional
months, commencing on the first day of the ninth month following termination,
subject to mitigation based on any other compensation received for the services
of Mr. Shull and the two other consultants during that period and (iii) payment
of all earned and accrued vacation pay, not to exceed $85,000. All amounts due
to Meridian pursuant to the terms of the Meridian Agreement have been paid by
the Company.
9. REORGANIZATION COSTS:
The effects of transactions occurring as a result of the Barneys
Debtors' Chapter 11 filings and reorganization efforts have been segregated from
ordinary operations and are comprised of the following:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FISCAL YEAR
JANUARY 30, 1999 1998 1997 1996
-------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional fees $ 3,637 $ 7,381 $ 13,869 $ 9,974
Asset write-offs, net - 29 38,767 8,382
Lease rejection costs - - 15,038 600
Straight line rent reversal - - (3,814) (95)
Payroll and related costs 5,274 4,565 5,574 2,938
Other 4,923 3,995 2,773 7,608
-------------------------------------------------------------------------
Total reorganization costs $ 13,834 $ 15,970 $ 72,207 $ 29,407
=========================================================================
</TABLE>
During the six months ended January 30, 1999, the Company paid
Reorganization costs of $12,511,000, net of amounts received from an affiliate
(see Note 11). During fiscal 1998, 1997 and 1996, the Company paid
Reorganization costs of $18,105,000, $14,512,000 and $5,859,000, respectively.
Professional fees -- principally relate to legal, accounting and
business advisory services provided to the Predecessor Company and the unsecured
creditors committee to the Predecessor Company from the Filing Date to the
Effective Date. Substantially all of these fees were expensed as incurred, in
accordance with the provisions of SOP 90-7.
Asset write-offs -- each of the stores closed by the Predecessor
Company was fully operational until the established closing date. As such, the
Predecessor Company continued to depreciate the related store assets up to such
date. Accordingly, the amount provided by the Predecessor Company for asset
write-offs, net included the unamortized value of the leasehold improvements,
furniture, fixtures and equipment attributable to the store at the respective
stores closing date, net of an estimated recovery for future use or disposition
of the related assets. A majority of the assets written off related to
unamortized leasehold improvements which were abandoned.
In addition to the above, asset write-offs in 1996 also includes
approximately $3.0 million related to the unamortized portion of the bank fees
associated with the Predecessor Company's bank financing arrangements entered
into prior to the Filing Date.
Payroll and related costs -- principally represent costs associated
with the Bankruptcy Court approved key employee retention and bonus program,
severance costs attributable to either
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
employee headcount reductions or contractual obligations of the Predecessor
Company, and certain other fees earned by certain individuals retained by the
Predecessor Company, for their expertise in bankruptcy related matters.
Other costs -- in the six months ended January 30, 1999 and fiscal
1998 includes $3,500,000 and $1,500,000, respectively, paid to Dickson Concepts
(International) Limited in connection with the termination of an asset purchase
agreement and the consummation of the Plan. Other miscellaneous costs in fiscal
1996 includes a $7.0 million charge in connection with a purchase put agreement
whereby Barneys agreed to purchase certain property leased by Barneys from an
affiliate and to assume obligations to the mortgagee thereof upon the exercise
of the rights granted pursuant thereto. Such amount was an allowed general
unsecured claim and was settled pursuant to the Plan.
In addition to the above, other costs includes costs incurred by the
Predecessor Company related to its reorganization, including but not limited to
ancillary costs associated with the decision to close certain stores,
administrative costs of the bankruptcy such as for trustee fees and public
relations costs.
Accrued expenses at January 30, 1999 and August 1, 1998 includes fees
payable to professionals pertaining to court approved "holdbacks" or fees not
awarded, during the bankruptcy of approximately $6,900,000 and $7,400,000,
respectively. Substantially all of these fees will be paid in 1999.
10. INCOME TAXES:
Pursuant to the Plan, Holdings acquired 100% of the Predecessor
Company's stock. Holdings will make a Section 338(g) election (the "Election")
with respect to the acquisition under applicable provisions of the Internal
Revenue Code ("IRC"). The tax effects of making the Election would result in
Barneys and each of its subsidiaries generally being treated, for federal income
tax purposes as having sold its assets to a new corporation which purchased the
same assets as of the beginning of the following day. As a result, the
Predecessor Company will incur a gain or loss at the time of the deemed sale in
an amount equal to the difference between the fair market value of its assets
and its collective tax basis of the assets at the time of the sale.
The Company may use existing net operating loss carryforwards to
reduce any gain incurred as a result of this sale. The Company will, however, be
subject to alternative minimum tax. As a result of the Election, the Company has
recorded a $1,000,000 alternative minimum tax liability as a "fresh start"
adjustment. Furthermore, immediately after the sale, as a result of the
Election, the Predecessor Company will be stripped of any remaining tax
attributes, including any unutilized net operating loss carryforwards and any
unutilized tax credits.
In the six months ended January 30, 1999 and fiscal 1998, 1997 and
1996, the Company recorded a provision for income taxes of approximately
$38,000, $77,000, $62,000 and $472,000, respectively, which principally relates
to state and local income and franchise taxes. In the comparable periods, the
Company paid capital, franchise and income taxes, net of refunds, of
approximately $19,000, $18,000, $35,000 and $63,000, respectively.
Deferred tax assets and liabilities of the Predecessor Company
reflected the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. On the Effective
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Date, the significant differences related to deferred credits, net operating
loss carryforwards of approximately $230,804,000 and its reserve for affiliate
receivables. The Predecessor Company also had an investment tax credit carryover
and a minimum tax credit carryover of approximately $4,717,000 and $626,000,
respectively, at January 28, 1999.
The components of deferred taxes were as follows:
<TABLE>
<CAPTION>
JANUARY 28, AUGUST 1, AUGUST 2,
1999 1998 1997
------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current deferred tax assets $ 17,953 $ 8,507 $ 5,706
Noncurrent deferred tax assets 181,584 185,363 180,843
------------- ------------- ------------
Total deferred tax assets 199,537 193,870 186,549
Less: Valuation allowance (199,537) (193,870) (186,549)
------------- ------------- ------------
Net deferred tax asset $ - $ - $ -
============= ============= ============
</TABLE>
As of January 30, 1999 in conjunction with the Election, the
remaining tax attributes associated with the Predecessor Company's deferred tax
assets are no longer available.
For the period ended January 28, 1999 and fiscal 1998, 1997 and 1996,
income taxes reported differ from the amounts that would result from applying
statutory tax rates as net operating loss carryforwards which arose in such
periods provided no tax benefit since their future utilization was uncertain.
Accordingly, the Predecessor Company increased its valuation allowance by
approximately $5,667,000, $7,321,000, $50,477,000 and $22,294,000, in the
respective periods.
For the six months ended January 30, 1999, no income taxes were
reported in conjunction with the gain on discharge of debt as such amounts are
excluded from taxable income under IRC Section 108.
For the years including 1996, 1997 and 1998, the Company is subject
to various tax audits of the Predecessor Company's tax returns, particularly by
New York State. Most of these audits will result in minimal, if any, additional
tax liability. The Company believes that pending audit results, in the
aggregate, will not have a material effect on the Company's financial position,
results of operations or cash flows.
The Company has been audited by the Internal Revenue Service through
the fiscal year ended June 1990. The results of such audits did not have a
material effect on the Company's financial position or results of operations.
11. RELATED PARTY TRANSACTIONS:
(A) FLAGSHIP STORE LEASES - ISETAN -
Subsidiaries of Holdings lease the Madison Avenue, Beverly Hills and
Chicago stores from Isetan. Pursuant to the terms of these leases, the Company
is required to pay base rent, as defined, and all operating expenses. Total rent
expense (excluding operating expenses) related to these leases was approximately
$4,611,000 in the six months ended January 30, 1999 and $9,223,000, $9,297,000
and $15,804,000, in fiscal 1998, 1997 and 1996, respectively.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(B) AFFILIATE COMPANIES AND OTHER RELATED PARTIES -
In addition, the Predecessor Company had previously entered into
various transactions and agreements with affiliate companies and other related
parties. The affiliates were or had been primarily engaged in the operation of
real estate properties, Barneys New York credit card operations, and certain
leased departments. The following information summarizes the activity between
the Predecessor Company and balances due to or from these related parties at
January 30, 1999, August 1, 1998 and August 2, 1997 and for the six months ended
January 30, 1999 and the fiscal years ended 1998, 1997 and 1996, respectively.
Unless otherwise indicated below, all revenues and expenses recognized by the
Predecessor Company pursuant to the arrangements discussed below are included in
selling, general and administrative expenses in the respective periods.
Substantially all of the agreements and transactions described below had either
ceased or been terminated prior to November 1997.
Prior to the Chapter 11 filing the Predecessor Company advanced
amounts to certain shareholders. The Predecessor Company assigned amounts due
from these shareholders to another affiliate during the year the amounts were
advanced. At August 1, 1998 and August 2, 1997 no amounts were due from these
shareholders.
The Predecessor Company leased various retail, office and parking lot
properties from affiliate companies and other related parties. Under the terms
of these leases, the Predecessor Company was required to pay base rents plus
operating expenses and real estate taxes as defined. Total rent expense
(including operating expenses) relating to these leases with affiliates and
other related parties was approximately $272,000, $6,195,000 and $7,758,000, in
fiscal 1998, 1997 and 1996, respectively.
Included above was (1) office and office related premises which were
vacated in February 1997; (2) a triple net lease with respect to the operation
of the Predecessor Company's 17th Street store in New York City which the
Predecessor Company vacated in August 1997; and (3) parking lots on 17th Street
which were vacated in September 1997. Each of the leases between the Predecessor
Company and these certain affiliates, for the applicable properties, were
rejected by orders of the Court during 1997 or 1998.
The Predecessor Company sub-leased certain retail space to an
affiliate. The affiliate leases this space to a third-party retailer. The lease
between the Predecessor Company and this affiliate was rejected by order of the
Court in February 1997. Rental income under this agreement for 1997 and 1996 was
approximately $195,000 and $370,000, respectively.
Barneys subleased retail and warehouse space from a third party that
leased said space from an affiliate. Pursuant to the terms of the sublease,
Barneys was required to pay base rent and all operating expenses as defined. The
sublease was rejected by order of the Court in December 1998. Total rent expense
(including operating expenses) related to this sublease was approximately
$374,000 in the six months ended January 30, 1999 and $2,055,000, $2,265,000 and
$2,765,000 in fiscal 1998, 1997 and 1996, respectively.
Pursuant to a purported lease between the Predecessor Company, an
affiliate, and Isetan, if the annual minimum rent to be received by a joint
venture between the affiliate and Isetan relating to certain office space was
less than $13,700,000 after January 1, 1996, the Predecessor Company was to fund
the short-fall. The Predecessor Company was disputing this purported lease and
had not made any payments related to the short-fall. In November 1996 pursuant
to
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Court approval, the Predecessor Company rejected the purported lease, if it was
construed to be a lease, together with those provisions of other agreements that
pertain solely to the purported leasing of such office space and any rent
obligations relating thereto. No rent expense was recorded related to this
purported lease.
During the six months ended January 30, 1999 and fiscal 1998, 1997
and 1996 the Predecessor Company charged affiliates approximately $1,000,000,
$418,000, $583,000 and $466,000, respectively, for various expenses. In December
1998, in connection with the approval of the Plan and the settlements included
therein, collectibility issues of amounts due from affiliated entities were
resolved. Accordingly, the Predecessor Company was able to reduce its affiliate
receivable reserve by approximately $1,900,000, principally representing cash
payments from an affiliate in settlement of a portion of the outstanding
receivable. This reserve reversal reduced Selling, general and administrative
expenses and reorganization costs by approximately $500,000 and $1,400,000,
respectively, in the six months ended January 30, 1999.
Barneys licensed the right to sell certain branded merchandise from
an affiliate. Royalty expense incurred related to this license was $86,322 in
the six months ended January 30, 1999 and $171,000, $127,000 and $115,000 in
fiscal 1998, 1997, and 1996, respectively. This expense is included in cost of
sales. Pursuant to the Plan, the affiliate transferred its rights in this
license to Barneys.
Various affiliates operated beauty salons and restaurants located in
certain retail stores of the Predecessor Company. Pursuant to operating license
agreements, the affiliates were entitled to receive the sales proceeds less
license costs and certain other fees ("the net proceeds"). During 1997, the
Predecessor Company advanced to these affiliates approximately $211,000 less
than the net proceeds. In addition, pursuant to these agreements, the
Predecessor Company earned license fee income of approximately $121,000 and
$794,000 in 1997 and 1996, respectively. The Predecessor Company had fully
reserved the receivables due from these affiliates accordingly no revenue was
recognized in the Statement of Operations pursuant to these agreements. During
1997, all beauty salon and restaurant operating licenses with affiliates were
terminated.
At August 1, 1998 and August 2, 1997, the Predecessor Company was due
approximately $28,730,000 and $28,575,000 respectively, from affiliates. The
Predecessor Company had a full reserve against these balances at the respective
year-ends. In addition at August 1, 1998 and August 2, 1997, approximately
$2,760,000 and $2,733,000 respectively, was due to various other affiliates of
the Predecessor Company and was principally included in Liabilities subject to
compromise.
(C) ISETAN RELATIONSHIP - PRIOR TO THE EFFECTIVE DATE -
In 1989, the Predecessor Company entered into agreements with Isetan
to, among other things, (i) exploit the "Barneys New York" trademark in the U.S.
and Asia, (ii) expand its U.S. business through the acquisition of real estate
properties and development of major stores in New York, Beverly Hills and
Chicago, (iii) establish Barneys America to develop a series of smaller, leased
stores in other cities across the U.S., (iv) jointly design, develop and produce
product, (v) develop the Barneys New York brand and/or other designer wholesale
businesses, and (vi) open Barneys New York stores in Japan and throughout the
Pacific Rim area. Isetan agreed to contribute up to 95% of the development costs
of the three major stores in the U.S. and to operate the stores in Asia, subject
to the terms of various agreements. The Company agreed to contribute (i) its
knowledge and skills in the U.S. specialty retailing business and the
application
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of these skills and knowledge to the acquisition of real estate properties and
development of stores both within and outside of the U.S., (ii) certain use in
Asia of the "Barneys New York" trade name and associated goodwill value, and
(iii) the remaining 5% of the development costs of the three major stores. As
part of the ongoing relationship between Isetan and the Company, Isetan and/or
their respective affiliates (i) established Barneys America, (ii) established a
Barneys New York retail business in Asia and in connection therewith entered
into license and technical assistance agreements providing for payment of
royalties and other fees and a loan agreement secured by the minimum royalties
and technical assistance payments, (iii) acquired and developed retail
properties in New York, Beverly Hills and Chicago, (iv) established Barneys New
York Credit Co., L.P. to operate the Barneys New York private label credit card,
and (v) trained Isetan employees in the operation of the specialty retail
business.
In 1989, BNY Licensing entered into an operating license agreement
with Isetan (the "License Agreement") to license the "Barneys New York" name in
Japan and certain other Asian countries in connection with the operation of
retail stores and the manufacturing and distributing of licensed products. The
License Agreement provided for royalties based upon a percentage of net sales.
The Predecessor Company was also entitled to receive future minimum royalties
over the remaining term of the License Agreement ranging from 265,650,000 to
663,933,000 Japanese yen ($2,291,000 to $5,726,000 at a conversion rate of
115.95 Japanese yen to one U.S. dollar) a year. In June 1990, Isetan assigned
its interest in the License Agreement and in the Services Agreement to Barneys
Japan, a majority owned subsidiary of Isetan. The License Agreement was
terminated as part of the Plan.
Simultaneously with entering into the License Agreement, Barneys
entered into a technical assistance agreement with Isetan (the "Services
Agreement") in connection with the operation of retail stores and the
manufacturing and distributing of licensed products in Japan and other Asian
countries. The Services Agreement was coterminous with the License Agreement.
The Services Agreement provided for the payment of an annual fee based upon the
excess of a percentage of gross profit, if any, as defined in the Services
Agreement, plus other fees. The Services Agreement was terminated as part of the
Plan.
In December 1989, BNY Licensing borrowed four billion Japanese yen
from an affiliate of Isetan and executed a promissory note to evidence that
obligation (the "BNY Licensing Note"). BNY Licensing assigned as collateral its
rights to receive future royalties and Barneys assigned as collateral its rights
to Services Agreement fees, due from Isetan, to be used to pay interest and
principal due under the loan. The loan called for quarterly payments of
principal and interest at 7.48% a year (subject to adjustment in 1999) through
March 31, 2011. If calculated interest was greater than royalties and fees, the
shortfall would be added to principal and all unpaid principal will be deferred
until March 31, 2011. Pursuant to the Plan and in satisfaction of the BNY
Licensing Note, BNY Licensing assigned to Isetan 90% of the minimum royalty
payable during the initial term of the amended and restated license agreement
that replaced the License Agreement.
In a prior year, the Predecessor Company recorded deferred credits of
approximately $162,500,000 representing cash received from affiliates that was
funded by Isetan, principally related to certain participation rights sold to an
affiliate under the License Agreement and Services Agreement. The deferred
credits were eliminated as a direct consequence of the Plan.
During the Company's bankruptcy proceedings involving the Company,
the Company and certain of its affiliates and Isetan and certain of its
affiliates were engaged in litigation
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
involving the various aspects of the relationship outlined above. That
litigation was resolved pursuant to the Plan.
12. STOCKHOLDERS' EQUITY:
Holdings' Certificate of Incorporation (the "Charter") provides that
the total number of all classes of stock which Holdings will have authority to
issue is 35,000,000 shares, of which 25,000,000 will be Holdings Common Stock,
and 10,000,000 shares will be preferred stock both having a par value of $0.01
per share. Of such shares, there were outstanding at January 30, 1999,
12,500,000 shares of Holdings Common Stock and 20,000 shares of Preferred Stock.
Holdings is prohibited by its Charter from issuing any class or series of
non-voting securities.
(A) HOLDINGS COMMON STOCK -
Each share of Holdings Common Stock entitles its holder to one vote.
The holders of record of Holdings Common Stock will be entitled to participate
equally in any dividend declared by the Board of Directors of Holdings. Each
share of Holdings Common Stock is entitled to share ratably in the net worth of
Holdings upon dissolution. So long as any shares of Preferred Stock are
outstanding, no dividends on Holdings Common Stock may be paid until all accrued
and unpaid dividends on the Preferred Stock have been paid.
(B) UNSECURED CREDITORS WARRANTS -
The Unsecured Creditors Warrants are exercisable for up to an
aggregate of 1,013,514 shares of Holdings Common Stock at an exercise price of
$8.68 per share. The Unsecured Creditors Warrants became exercisable on the
Effective Date and expire at 5:00 p.m., New York City time on May 15, 2000.
The number of shares for which the Unsecured Creditors Warrants are
exercisable, and the exercise price of the Unsecured Creditors Warrants, are
subject to antidilution adjustment if the number of shares of Holdings Common
Stock is increased by a dividend or other share distribution, or by a stock
split or other reclassification of shares of Holdings Common Stock. In addition,
the exercise price of the Unsecured Creditors Warrants is subject to decrease if
Holdings distributes, to all holders of Holdings Common Stock, evidences of its
indebtedness, any of its assets (other than cash dividends), or rights to
subscribe for shares of Holdings Common Stock expiring more than 45 days after
the issuance thereof.
In the event that Holdings merges or consolidates with another
person, the holders of the Unsecured Creditors Warrants will be entitled to
receive, in lieu of shares of Holdings Common Stock or other securities issuable
upon exercise of the Unsecured Creditors Warrants, the greatest amount of
securities, cash or other property to which such holder would have been entitled
as a holder of Holdings Common Stock or such other securities.
(C) PREFERRED STOCK -
20,000 shares of Series A Preferred Stock are outstanding. The
Preferred Stock has an aggregate liquidation preference of $2,000,000 (the
"Liquidation Preference"), plus any accrued and unpaid dividends thereon
(whether or not declared). Dividends on the Preferred Stock are cumulative
(compounding annually) from the Effective Date and are payable when and as
declared by the Board of Directors of Holdings, at the rate of 1% per annum on
the Liquidation
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Preference. No dividends shall be payable on any shares of Holdings Common Stock
until all accrued and unpaid dividends on the Preferred Stock have been paid.
The shares of Preferred Stock will not be redeemable prior to the
sixth anniversary of the Effective Date. On or after the sixth anniversary of
the Effective Date, the Preferred Stock will be redeemable at the option of
Holdings for cash, in whole or in part, at an aggregate redemption price equal
to the Liquidation Preference, plus any accrued and unpaid dividends thereon. In
addition, Holdings will be required to redeem the Preferred Stock in whole on
the tenth anniversary of the Effective Date at an aggregate redemption price
equal to the Liquidation Preference, plus any accrued and unpaid dividends
thereon.
The shares of Preferred Stock will be convertible, in whole or in
part, at the option of the holders thereof, any time on or after the earlier of
the fifth anniversary of the Effective Date and the consummation of a rights
offering by Holdings (which offering meets certain conditions), into 162,500
shares of Holdings Common Stock. Any accrued and unpaid dividends on the
Preferred Stock will be cancelled upon conversion. Conversion rights will be
adjusted to provide antidilution protection for stock splits, stock
combinations, mergers or other capital reorganization of Holdings. In addition,
upon a sale of Holdings, Holdings's right to redeem the Preferred Stock and the
holders' right to convert the Preferred Stock will be accelerated. The Preferred
Stock has one vote per share and votes together with the Holdings Common Stock
on all matters other than the election of directors.
(D) PREDECESSOR COMPANY -
(i) Series A-1 Convertible Preferred Stock
In a prior year, Barneys America authorized and issued 120,000 Series
A-1 Convertible Preferred Stock (Series A-1) to Isetan of America Inc. for an
aggregate purchase price of $12,000,000. Such amount was recorded by the Company
as Minority interest at August 1, 1998. Pursuant to the Plan, Isetan contributed
this investment to Barneys.
(ii) Other preferred stock
The Predecessor Company was authorized to issue 400,000 shares of
preferred stock with a par value of $100 per share. Each share of preferred
stock was entitled to one vote and dividends were non-cumulative. Each share
also had a liquidation preference of $100 plus declared dividends. There were
327,695 shares outstanding prior to the Effective Date and no dividends were in
arrears.
13. EMPLOYEE BENEFIT PLANS:
(A) EMPLOYEES STOCK PLAN -
Pursuant to the Plan, Holdings established the Barneys Employees
Stock Plan effective January 28, 1999 for all eligible employees. The assets of
this plan consist of 15,000 shares of new Holdings Preferred Stock which were
contributed to the Barneys Employees Stock Plan Trust pursuant to the Plan. This
Plan is a profit sharing plan covering all eligible employees other than those
covered by a collective bargaining agreement. Contributions under this plan are
at the discretion of the Company.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(B) STOCK OPTION PLAN -
On March 11, 1999, the Company adopted a stock option plan that
provides for the granting of non-qualified stock options to non-employee members
of the Company's Board of Director's. Each Eligible Director (as defined in the
option plan) is granted an option to purchase 5,000 shares of Holdings Common
Stock upon their initial appointment to the Board of Directors, exercisable at
the fair market value of Holdings Common Stock at the date of grant. These
options expire ten years from the date of grant and vest 50% on the date of
grant with the remainder on the first anniversary therefrom. At the discretion
of the Board of Directors, additional options may be granted to Eligible
Directors on the date of the annual stockholders' meeting that takes place after
the initial grant. On March 11, 1999, each of the non-employee directors was
granted an option to purchase 5,000 shares of Holdings Common Stock at an
exercise price of $8.68 per share. Subsequent to these grants, there were
255,000 shares available for future grant under this option plan.
(C) UNION PLAN -
Pursuant to agreements with unions, the Company is required to make
periodic pension contributions to union-sponsored multiemployer plans which
provide for defined benefits for all union members employed by the Company.
Union pension expense aggregated $1,329,000 in the six months ended January 30,
1999 and $1,014,000, $1,137,000 and $1,171,000 in fiscal 1998, 1997 and 1996,
respectively.
With Court approval, the Predecessor Company elected to withdraw from
one of the union-sponsored multi-employer plans. Accordingly, Union pension
expense in the six months ended January 30, 1999 includes a charge of
approximately $862,000 to effectuate the withdrawal.
The value of the remaining plans unfunded vested liabilities
allocable to the Company, and for which it may be liable upon withdrawal is
estimated to be $1,365,000 at January 30, 1999. The Company, at present, has no
intentions of withdrawing from this plan.
(D) MONEY PURCHASE PLAN -
The Company's Money Purchase Plan is a noncontributory defined
contribution plan covering substantially all nonunion employees fulfilling
minimum age and service requirements and provides for contributions of 5% of
compensation (as defined) not to exceed the maximum allowable as a deduction for
income tax purposes. The Predecessor Company recorded Money Purchase Plan
expense of $295,000, $1,023,000, $1,216,000 and $1,469,000 in the six months
ended January 30, 1999 and fiscal 1998, 1997 and 1996, respectively.
(E) 401(K) PLAN -
The Company has a 401(k) defined contribution plan for the benefit of
its eligible employees who elect to participate. Employer contributions are made
to the plan in amounts equal to 50% of employee contributions, less than or
equal to 6% of their salary, as defined. Plan expense aggregated $292,000,
$596,000, $630,000 and $706,000 in the six months ended January 30, 1999 and
fiscal 1998, 1997 and 1996, respectively.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. OTHER
Allen Questrom, a member of the Board of Directors, became the
Chairman, President and Chief Executive Officer of the Company as of May 5, 1999
and is also a member of the board of Polo Ralph Lauren Corporation. During the
six months ended January 30, 1999 and fiscal 1998, 1997 and 1996, the
Predecessor Company purchased approximately $1,012,000, $1,814,000, $212,000,
and $140,000 respectively, of products from Polo Ralph Lauren Corporation.
On the Effective Date, pursuant to the Plan, Messrs. Greenhaus and
Strumwasser and Ms. Werner, who are principals and officers of Whippoorwill
(which is a stockholder of Holdings), and Messrs. Teitelbaum and Van Dyke, who
are principals of Bay Harbour (which is a stockholder of Holdings), became
members of the board of directors of Holdings.
Approximately 39% of the Company's employees are covered under
collective bargaining agreements. Approximately 9% of the Company's employees
are covered under collective bargaining agreements expiring in 1999 which have
not yet been renewed.
During 1996, the Predecessor Company recorded a gain of approximately
$5,700,000 representing the net proceeds received by the Company under life
insurance policies on an officer of the Company. This gain is included in
Expenses: Other - net.
Additionally, during 1996, the Predecessor Company recognized a
$9,440,000 translation gain on a foreign denominated debt obligation to Isetan.
This gain is included in Royalty income and foreign exchange gains.
F-33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this amendment to this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: October 13, 1999
BARNEYS NEW YORK, INC.
By: /s/ Steven Feldman
----------------------------------------
Name: Steven Feldman
Title: Senior Vice President and
Interim Chief Financial Officer
<PAGE>
SCHEDULE II
Barneys New York, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------------------- ----------------- ------------------------------- ------------- -------------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
Beginning Costs and Other at End
Description of Period Expenses (a) Accounts Deductions (c) of Period
---------------------------------------------- ----------------- ------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
YEAR ENDED AUGUST 3, 1996
----------------------------------------------
Deducted from asset accounts:
Allowance for returns and doubtful
accounts $ 2,982 $ 706 $ 783 (b) $ 524 $ 3,947
================= ============= ================= ============= ==============
YEAR ENDED AUGUST 2, 1997
----------------------------------------------
Deducted from asset accounts:
Allowance for returns and doubtful
accounts $ 3,947 $ 3,213 $ - $ 2,144 $ 5,016
================= ============= ================= ============= ==============
YEAR ENDED AUGUST 1, 1998
----------------------------------------------
Deducted from asset accounts:
Allowance for returns and doubtful
accounts $ 5,016 $ 2,086 $ - $ 2,716 $ 4,386
================= ============= ================= ============= ==============
SIX MONTHS ENDED JANUARY 30, 1999
----------------------------------------------
Deducted from asset accounts:
Allowance for returns and doubtful
accounts $ 4,386 $ 1,292 $ - $ 1,322 $ 4,356
================= ============= ================= ============= ==============
-----------------------------------------------------
(a) Primarily provisions for doubtful accounts.
(b) Reserve associated with the Barneys New York credit card portfolio acquired
from an affiliate.
(c) Primarily uncollectible accounts charged against the allowance provided
therefor.
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NAME OF EXHIBIT
- ------- ---------------
2.1 Second Amended Joint Plan of Reorganization for Barney's, Inc.
("Barneys") and certain of its affiliates proposed by Whippoorwill
Associates, Inc. ("Whippoorwill"), Bay Harbour Management L.C. ("Bay
Harbour") and the Official Committee of Unsecured Creditors dated
November 13, 1998 (the "Plan of Reorganization")*
2.2 Supplement to the Plan of Reorganization dated December 8, 1998*
2.3 Second Supplement to the Plan of Reorganization dated December 16,
1998*
3.1 Certificate of Incorporation of Barneys New York, Inc. ("Holdings"),
filed with the Secretary of State of the State of Delaware on
November 16, 1998*
3.2 Certificate of Designation for Series A Preferred Stock of Holdings
filed with the Secretary of State of the State of Delaware on
December 24, 1998.*
3.3 By-laws of Holdings*
4.1 Warrant Agreement between Holdings and American Stock Transfer &
Trust Company as Warrant Agent dated as of January 28, 1999*
4.2 Specimen of Holdings' Common Stock Certificate*
10.1 Credit Agreement, among Barneys, Barneys (CA) Lease Corp., Barneys
(NY) Lease Corp., Basco All-American Sportswear Corp., BNY Licensing
Corp. and Barneys America (Chicago) Lease Corp., as Borrowers, the
lenders party thereto, Citicorp USA, Inc. ("CUSA"), as Administrative
Agent for such lenders, and General Electric Capital Corporation, as
Documentation Agent (the "Credit Agreement"), dated as of January 28,
1999*
10.2 First Amendment to the Credit Agreement dated as of March 23, 1999.*
10.3 Guarantee by Holdings in favor of CUSA as the Administrative Agent
dated as of January 28, 1999*
10.4 Security Agreement by Holdings in favor of CUSA as the Administrative
Agent dated as of January 28, 1999*
10.5 Pledge Agreement by Holdings in favor of CUSA as the Administrative
Agent dated as of January 28, 1999*
10.6 Pledge Agreement by Barneys in favor of CUSA as the Administrative
Agent dated as of January 28, 1999*
10.7 Security Agreement by Barneys in favor of CUSA as the Administrative
Agent dated as of January 28, 1999*
10.8 Trademark Security Agreement by Barneys and BNY Licensing Corp. in
favor of CUSA as the Administrative Agent dated as of January 28,
1999*
- ---------------------
* Filed Previously
II-1
<PAGE>
EXHIBIT NAME OF EXHIBIT
- ------- ---------------
10.9 Cash Collateral Pledge Agreement by Barneys in favor of CUSA as the
Administrative Agent dated as of January 28, 1999*
10.10 Pledge Agreement by Barneys America, Inc. in favor of CUSA as the
Administrative Agent dated as of January 28, 1999*
10.11 Security Agreement by Barneys America, Inc. in favor of CUSA as the
Administrative Agent dated as of January 28, 1999*
10.12 Security Agreement by PFP Fashions Inc. in favor of CUSA as the
Administrative Agent dated as of January 28, 1999*
10.13 Security Agreement by Barneys (CA) Lease Corp. in favor of CUSA as
the Administrative Agent dated as of January 28, 1999*
10.14 Security Agreement by Barneys (NY) Lease Corp. in favor of CUSA as
the Administrative Agent dated as of January 28, 1999*
10.15 Security Agreement by Basco All-American Sportswear Corp. in favor of
CUSA as the Administrative Agent dated as of January 28, 1999*
10.16 Security Agreement by Barneys America (Chicago) Lease Corp. in favor
of CUSA as the Administrative Agent dated as of January 28, 1999*
10.17 Security Agreement by BNY Licensing Corp. in favor of CUSA as
Administrative Agent dated as of January 28, 1999*
10.18 Subordinated Note issued by Barneys and payable to Isetan of America,
Inc. ("Isetan") dated January 28, 1999 (the "Isetan Note")*
10.19 Guarantee by Holdings of the Isetan Note dated January 28, 1999*
10.20 Subordinated Note issued by Barneys and payable to Bi-Equipment
Lessors LLC, dated January 28, 1999 (the "Bi-Equipment Lessors
Note")*
10.21 Guarantee by Holdings of the Bi-Equipment Lessors Note dated as of
January 28, 1999*
10.22 Security Agreement by Barneys in favor of Bi-Equipment Lessors LLC
dated as of January 28, 1999*
10.23 License Agreement among Barneys, BNY Licensing Corp. and Barneys
Japan Co. Ltd. dated as of January 28, 1999*
10.24 Stock Option Plan for Non-Employee Directors effective as of March
11, 1999.*
10.25 Services Agreement, among Meridian Ventures, Inc., Thomas C. Shull
and Barneys dated as of August 1, 1998*
10.26 Services Agreement Amendment among Meridian Ventures, Inc., Thomas C.
Shull, Barneys and Holdings dated as of January 28, 1999*
- ---------------------
* Filed Previously
II-2
<PAGE>
EXHIBIT NAME OF EXHIBIT
- ------- ---------------
10.27 Registration Rights Agreement by and among Holdings and the Holders
party thereto dated as of January 28, 1999*
10.28 Letter Agreement, dated January 28, 1999, among Bay Harbour,
Whippoorwill, Isetan and Holdings.
11 Statement re: computation of per share earnings*
21 Subsidiaries of the registrant*
27 Financial Data Schedule.*
- ---------------------
* Filed Previously
II-3
BAY HARBOUR MANAGEMENT L.C. WHIPPOORWILL ASSOCIATES, INC.
885 THIRD AVENUE, 34TH FLOOR 11 MARTINE AVENUE
NEW YORK, NEW YORK 10022 WHITE PLAINS, NEW YORK 10606
BARNEYS NEW YORK, INC.
575 FIFTH AVENUE
NEW YORK, NEW YORK 10017
January 28, 1999
Isetan of America Inc.
660 Madison Avenue, 10th Floor
New York, New York 10021
Attn: Toshiaki Nakagawa
Gentlemen:
Reference is made to the Second Amended Joint Plan of Reorganization
of Barney's, Inc., dated November 13, 1998 (the "Plan"), and filed with the
United States Bankruptcy Court for the Southern District of New York. Except as
otherwise defined herein, terms defined in the Plan are used herein as so
defined.
This letter confirms our agreement that in accordance with the Plan
each of Bay Harbour Management L.C. for its managed accounts ("Bay Harbour") and
Whippoorwill Associates, Inc. as agent and/or general partner for its
discretionary accounts and as investment advisor to Whippoorwill/Barney's
Obligations Trust-1996 ("Whippoorwill"), for a period of five years from the
date hereof (or for such shorter period as they or their Affiliates own shares
of common stock, $.01 par value (the "Common Stock") of Barneys New York, Inc.
("New Barneys") (the "Directorship Period")) will (a) vote, or cause to be
voted, all shares of Common Stock and any other equity securities of New Barneys
held by it and entitled to vote in the election of directors for which it has
voting power at any regular or special meeting of stockholders of New Barneys
called for the purpose of electing members to the Board of Directors of New
Barneys (the "New Barneys Board"), or pursuant to a written consent executed in
lieu of such a meeting of stockholders, in favor of the election of one director
designated by you to the New Barneys Board, and (b) take all such further
commercially reasonable action to arrange for the nomination for election of
such person to the New Barneys Board; provided, however, that neither Bay
Harbour nor Whippoorwill shall be required to solicit the vote of any other
stockholder of New Barneys, other than their respective affiliates.
In the event that the director designated by you ceases to be a
director for any reason (including, but not limited to, death, disability or
voluntary departure) during the Directorship Period, you shall have the right to
designate a new director immediately upon the occurrence of such vacancy, and
Bay Harbour and Whippoorwill shall take the actions specified in the immediately
preceding paragraph with respect to such designee.
<PAGE>
New Barneys hereby agrees that, for a period of five years from the
date hereof, you may designate one individual (the "Barneys Observer") to attend
all meetings of the Board of Directors of Barneys (the "Barneys Board") and one
individual (the "New Barneys Observer") to attend all meetings of the New
Barneys Board, in each case in a non-voting observer capacity. The Barneys
Observer shall be entitled to receive all notices, reports, presentations, and
materials (collectively, the "Materials") as if the Barneys Observer were a
member of the Barneys Board and the New Barneys Observer shall be entitled to
receive all Materials as if the New Barneys Observer were a member of the New
Barneys Board.
In addition, New Barneys hereby agrees that, for so long as a person
designated by you serves on the New Barneys Board, New Barneys will vote, or
cause to be voted, all shares of common stock of Barneys at any regular or
special meeting of stockholders of Barneys called for the purpose of electing
members to the Barneys Board, or pursuant to a written consent executed in lieu
of such a meeting of stockholders, in favor of the election of your designee on
the New Barneys Board as a member of the Barneys Board.
New Barneys shall not be responsible for any costs or expenses
incurred by any observer or designee of yours to either the Barneys Board or the
New Barneys Board in attending board meetings or otherwise, including without
limitation, any and all costs incurred by any such observer or director in
connection with travel, accommodation, translation, interpretation or attorney's
fees.
Any person designated by Isetan to the New Barneys Board or the
Barneys Board or to be a New Barneys Observer or a Barneys Observer must either
be an employee of Isetan or reasonably acceptable to each of Bay Harbour and
Whippoorwill.
Notwithstanding the foregoing, your rights hereunder shall terminate
if you and/or your affiliates cease to (i) be a licensee under the New Trademark
License Agreement; and (ii) be a lessor under any of the New Leases; and (iii)
own at least one-half of the number of shares of Common Stock initially issued
to you under the Plan.
Your rights hereunder may not be assigned (including by operation of
law) except to Isetan Company Limited or any of its wholly-owned subsidiaries
without the prior written consent of Bay Harbour, Whippoorwill and New Barneys.
This agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to the conflict of laws
provisions thereof.
2
<PAGE>
If you are in agreement with the foregoing, please so indicate by
signing and returning to the undersigned one copy of this agreement.
Very truly yours,
BAY HARBOUR MANAGEMENT L.C.
for its managed accounts
By: /s/ Douglas P. Teitelbaum
-------------------------------------
Name: Douglas P. Teitelbaum
Title: Principal & Portfolio Manager
WHIPPOORWILL/BARNEYS OBLIGATIONS TRUST - 1996
By: WHIPPOORWILL ASSOCIATES, INC.,
as agent and/or general partner for its
discretionary accounts and as investment
advisor to Whippoorwill/Barney's Obligations
Trust - 1996
By: /s/ David Strumwasser
-------------------------------------
Name: David Strumwasser
Title: Managing Director
Acknowledged and Agreed to: BARNEYS NEW YORK, INC.
ISETAN OF AMERICA INC.
By: /s/ Toshiaki Nakagawa By: /s/ Edward Lambert
- ------------------------- ------------------------------------
Name: Toshiaki Nakagawa Name: Edward Lambert
Title: President Title: Executive Vice President
and Chief Financial Officer
3
