As filed with the Securities and Exchange Commission on April 21, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
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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NY2:\903929\02\21645.0001
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TABLE OF CONTENTS
PAGE
ITEM 1. BUSINESS........................................................1
ITEM 2. FINANCIAL INFORMATION...........................................7
ITEM 3. PROPERTIES.....................................................24
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................26
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS...............................29
ITEM 6. EXECUTIVE COMPENSATION.........................................33
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................36
ITEM 8. LEGAL PROCEEDINGS..............................................37
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............38
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.......................39
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO
BE REGISTERED..........................................39
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.....................41
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................42
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................42
ITEM 15. FINANCIAL STATEMENTS SCHEDULE AND EXHIBITS....................42
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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, women's and children'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 eight 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 men's, women's and children's clothes and
accessories plus decorative items for the home and gifts. The merchandise is
from a variety of resources, 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, 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.
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 eight 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, annually,
one 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 to the
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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 Arrangements." On the Effective Date, 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, became the two largest holders
of shares of common stock, $0.01 par value, of Holdings ("Holdings Common
Stock"). Each of the Plan Investors has appointed three designees to the Board
of Directors of each of Holdings and Barneys. On the Effective Date, Isetan
became the third largest holder of shares of Holdings Common Stock, a creditor
of Holdings pursuant to the Isetan Note referred to below and the lessor of the
Company's three flagship stores. See "PROPERTIES." In addition, Isetan is
entitled to appoint, pursuant to a contractual arrangement, and has appointed, a
designee on the Board of Directors of each of Holdings and Barneys. Isetan is
also a licensee of the Barneys name in Japan. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS - Certain Business Relationships."
EQUITY. Pursuant to the Plan, the following equity was issued:
Issued In Exchange for Claims. The equity in Barneys was
exchanged for shares of 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. Rights to subscribe for shares of Holdings
Common Stock ("Subscription Rights") were issued in accordance with the Plan 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).
Certain recipients of Subscription Rights exercised such rights prior to the
expiration thereof, which was prior to consummation of the Plan. The $62.5
million offering of Subscription Rights was guaranteed by Bay Harbour and
Whippoorwill 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 had 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. On
November 12, 1999, each of Bay Harbour and Whippoorwill notified the Company of
its intention to exercise the option in full. The closing of the exercise
occurred on November 19, 1999.
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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 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 terminated 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.
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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.
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' 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
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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 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. Management does not expect that the trend toward vertical
integration discussed above or the withdrawal from Barneys of the distribution
of certain designer vendors will have a material impact on the operations of the
Company. If certain vendors were to withdraw distribution from Barneys, 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 in the event of such a disruption.
EMPLOYEES
At January 29, 2000, the Company employed approximately
1400 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 designed 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 were 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, subject
to certain adjustments. 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 made 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 resulted 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
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new corporation which purchased the same assets as of the beginning of the
following day. As a result, Barneys incurred a gain 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 used existing net operating loss carryforwards
to reduce the gain incurred as a result of this sale. Nevertheless, the Company
was 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 was 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.
OTHER TAXES
For the years 1996 through 1999 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 on January 28, 1999, 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; 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
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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.
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.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------------------------------------
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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<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales(3) $ 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) 236,937 (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
--------- --------- --------- --------- --------- --------- ---------
Total stores 20 20 20 20 20 17 17
</TABLE>
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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.
3 Net sales exclude bulk sales of merchandise to jobbers in order to enhance
comparability of data presented.
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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") pursuant to the Plan.
The Plan provided generally for the issuance of Holdings
stock and cash in settlement of Liabilities subject to compromise. The value of
the cash and securities distributed under the Plan was substantially less than
the value of the allowed claims on and interests in the Predecessor Company. The
estimated percent recovery for the allowed claims approximated 18% and was
determined based on the assumed value of shares and warrants issued to the
holders of allowed claims. Accordingly, the Predecessor Company recorded an
extraordinary gain of $245.6 million related to the discharge of prepetition
liabilities. See Note 2 to the Consolidated Financial Statements for the
calculation of the extraordinary gain.
During the three years of the bankruptcy proceedings, the
Company's operating results were principally impacted by the following:
continuing efforts to improve the Predecessor Company's profitability, including
seven full-price store closings and human resource reductions; the incurrence of
the reorganization costs discussed below; the cessation of the accrual of stated
interest expense on pre-petition debt; the cessation of the accrual of stated
rent expense to Isetan and the Equipment Lessors (see Note 8 to the Consolidated
Financial Statements) pursuant to orders of the Bankruptcy Court; and the
reduction and substantial elimination of numerous related party transactions as
more fully described in Note 11 to the Consolidated Financial Statements.
The Plan contained various settlements, however, the
principal ones impacting the operating results of the Company were the
settlements reached with Isetan and the Equipment Lessors. Isetan was determined
to be the owner of the three flagship stores, including all leasehold
improvements therein and the Company entered into renegotiated license
agreements and flagship store leases with them. The result of the Isetan
settlement to the financial condition and ongoing operations of the Successor
Company (as more fully described in Note 2 to the Consolidated Financial
Statements) is as follows:
Reduction in rent expense - rent expense pursuant to the renegotiated
leases was less than the contractual rent required in the
original leases but greater than the amounts paid pursuant to
orders of the Court during the bankruptcy period (see Note 8 to
the Consolidated Financial Statements);
9
<PAGE>
Elimination of a significant amount of leasehold improvements
ultimately generating reduced depreciation expense;
Receipt of a new stream of minimum royalty payments - the Company
entered into new license arrangements with Isetan;
90% of the new minimum royalty was assigned to Isetan with the
remainder due the Company; and
Interest expense associated with the $22.5 million Isetan Note.
Regarding the settlement with the Equipment Lessors, the
Company obtained title to the assets previously leased from the Equipment
Lessors and in exchange issued to them $35.9 million subordinated notes. As more
fully discussed in Note 8 to the Consolidated Financial Statements, the
Predecessor Company was recording an expense associated with these financing
arrangements, which expense was eliminated as a result of this settlement.
Subsequent to the Effective Date, the Company will record depreciation expense
related to the assets and interest expense associated with the subordinated
notes.
In addition to the stock, subordinated notes and cash
issued as discussed above, concurrent with its emergence from bankruptcy, the
Company replaced its debtor in possession credit facility (the "DIP facility").
At the filing date, the Predecessor Company's debt, exclusive of trade and
expense payables, approximated $283.7 million. At the filing date, this debt
became subject to compromise and the Company entered into a DIP facility. Prior
to emergence, there was outstanding under the DIP facility approximately $83
million. Subsequent to the emergence, the Company's long-term debt of $118.5
million consisted of $56.5 million of subordinated notes (the Isetan and
Equipment Lessor Notes) and $62.0 million under the new revolving credit
facility.
Until the Effective Date, the Company's primary source of
liquidity had been borrowings under various credit facilities as more fully
described under Liquidity and Capital. During the bankruptcy, the Company's
inability to generate cash from operations were primarily due to significant
reorganization costs, the lack of full credit support from the vendor community
necessitating prepayments for merchandise and the growth of the private label
credit card portfolio. Due to these items, the Predecessor Company had a working
capital deficiency up until the emergence from Chapter 11. While the Company is
emerging from bankruptcy with a substantially reduced debt as compared to the
Predecessor Company at the Filing Date, the Company is emerging with debt in
excess of the levels maintained during the bankruptcy.
As described below and in Note 3 to the Consolidated
Financial Statements, the Company adopted fresh start reporting as of January
28, 1999. 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 adoption of fresh start reporting
combined with the impact of the provisions of the Plan and the settlements
contained therein, significantly impacted the balance sheet of the Successor
Company. All assets and liabilities were recorded at their respective fair
market values and the balance sheet was further adjusted to reflect the
enterprise value of the Successor Company.
During the bankruptcy, 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.
10
<PAGE>
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 $245.6 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
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 40.3% 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 43.7%, significantly below the 1996 level of 53.7%. As of
January 30, 1999, the Company had 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
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<PAGE>
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.
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
ENDED SIX MONTHS 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 52.6 51.1 52.5 54.0 53.9
--------------------------------------------------------------------------
Gross profit 47.4 48.9 47.5 46.0 46.1
Selling, general and administrative expenses
(including occupancy expenses) 40.3 42.5 43.7 47.1 53.7
Other (income) expense, net (1) (1.1) (1.8) (1.4) (0.5) (3.4)
--------------------------------------------------------------------------
Earnings before Interest, Taxes, Depreciation
and Amortization (EBITDA) 8.2% 8.2% 5.2% (0.6)% (4.2)%
==========================================================================
Net income (loss)(2) 129.7% (2.2)% (5.8)% (25.8)% (19.1)%
==========================================================================
</TABLE>
(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 $245.6 million.
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
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<PAGE>
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.
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. In prior years, the Company had entered into various transactions
and agreements with Pressman-family controlled entities, including Preen Realty
Inc. ("Preen") and certain of its subsidiaries. Preen and certain of its
subsidiaries were shareholders of the Predecessor Company and were primarily
engaged in the operation of real estate properties, certain of which were leased
to the Company. The type of property leased included store, warehouse and office
space. Prior to the Filing Date through the Effective Date, the Company incurred
certain normal operating costs, principally personnel costs, on behalf of Preen.
This situation arose as both entities shared the same corporate office space and
certain employees (including officers) of the Company were providing services to
Preen. After the Filing Date, the Company also incurred and paid reorganization
costs, including legal, accounting and business advisory services, on behalf of
Preen which was also operating as a debtor in possession pursuant to the
Bankruptcy Code. While the Company routinely allocated to Preen a share of both
the normal operating costs and reorganization costs incurred on its behalf, it
was unclear (because of the bankruptcy) whether Preen 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
Preen were resolved. Accordingly, the Company was able to reduce its affiliate
receivable reserve by approximately $1.9 million, principally representing cash
payments from Preen 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
$182.6 million compared to $183.8 million a year ago, a decrease of 0.7%. 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 47.4% 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, markdowns associated with the bulk sale of
merchandise to jobbers, 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 of $1.9 million related to
the store closings and corporate headcount reductions as well as continuing
improvements from the Company's cost-reduction initiatives.
13
<PAGE>
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, which reduced annual premiums
approximately $1.0 million 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.
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
Plan Investors) and $5.1 million, respectively. Professional fees include legal
fees which increased to $3.4 million in the current period from $3.3 million in
the year ago period; accounting and tax fees which declined to $(0.3) million in
the current period from $0.4 million in the year ago period; and investment
advisory fees which declined to $0.6 million in the current period from $1.3
million in the year ago period. In the current year, substantially all of the
professional fees discussed above were reduced by settlements reached with the
various professional services firms with respect to fees held back but not paid
throughout the bankruptcy case and, as discussed above, the cash payment from
Preen reimbursing certain reorganization costs. In the case of the accounting
and tax fees, the settlement and reimbursement reduced the expenses for the six
months ended January 30, 1999 below zero. Additionally, investment advisory fees
declined principally due to a reduction in fees negotiated with the firm
providing services to the debtors since the firm representing the official
committee of unsecured creditors was assuming a larger role in the bankruptcy
resolution process. In addition, Reorganization costs include provisions of $1.0
million and $1.3 million for a key employee retention program, other payroll and
related costs of $4.3 million and $1.0 million which include separation costs of
$3.0 million covering 11 individuals (inclusive of employees of Meridian
Ventures, Inc.) and $0.5 million covering 6 individuals, respectively and other
miscellaneous costs (including principally administrative costs of the
bankruptcy, public relations costs and costs attributed to closed stores) of
$4.9 million and $1.3 million. The increase in other miscellaneous costs is
14
<PAGE>
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.
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. In connection therewith,
the Company recorded $0.3 million in "fresh-start" expense in relation to the
emergence from Chapter 11 reorganization in January 1999. The primary components
of this charge include individually immaterial adjustments of recorded amounts
to their fair market values and accruals recorded in accordance with both SOP
90-7 and APB No. 16. The accruals, principally related to professional fees,
severance, taxes and registration fees aggregating $5,261,000, were offset by a
$5,894,000 write-down of Other long-term liabilities which pertained to both
contractual rent escalations and landlord contributions for store build-outs
recorded in accordance with FASB 13 "Accounting for Leases" ("FAS No. 13"). Such
amounts were reversed since, in accordance with APB No. 16, the existing leases
of the Predecessor Company are treated as new leases of the Successor Company
giving rise to new amortization periods over the remaining life of the lease.
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 $345.9 million compared to $368.0
million in the prior year, a decrease of 6.0%. This decrease is primarily
attributable to the store closings pursuant to the 1997 Restructuring Program
offset by comparable store sales growth. 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 profit was 47.5% in 1998
compared to 46.0% 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.
15
<PAGE>
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.
Included in these amounts for the respective periods are professional fees of
$7.4 million and $13.9 million, respectively. Professional fees include legal
fees which declined to $4.4 million in the current fiscal year from $9.4 million
in the year ago period; accounting and tax fees which declined to $0.9 million
in the current fiscal year from $1.1 million in the year ago period; and
investment advisory fees which declined to $2.2 million in the current fiscal
year from $3.4 million in the year ago period. The decline in legal fees in the
current year is related to reduced litigation costs resulting from an attempt by
all parties involved to arrive at a consensual plan of reorganization.
Investment advisory fees in fiscal 1997 included $1.0 million (approved by the
Bankruptcy Court) paid to Dickson Concepts in connection with due diligence
procedures performed. In addition, Reorganization costs include provisions of
$1.9 million and $2.4 million for a key employee retention program, other
payroll and related costs of $2.7 million and $3.2 million, which include
separation costs of $1.9 million covering 13 individuals and $2.5 million
covering 300 individuals (both store and support), respectively, and other
miscellaneous costs (including principally administrative costs of the
bankruptcy, public relations costs and costs attributed to closed stores) of
$4.0 million and $2.8 million. Other miscellaneous costs in 1997 also include
$0.9 million of ancillary administrative costs associated with the litigation
referred to above for, among other things, photocopying and translation
services. The increase in other miscellaneous costs is principally attributed to
a $1.5 million fee payable to Dickson Concepts in connection with the
termination of the Dickson Concepts proposed purchase agreement.
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.
16
<PAGE>
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 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 $368.0 million compared to $374.5
million in 1996, a decrease of 1.7%. 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
46.0% in 1997 compared to 46.1% 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 47.1% in 1997 and 53.7% 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, representing the net
book value of the leasehold interests and other fixed assets of the stores to be
closed at their respective closure dates, lease rejection costs of $15.0 million
17
<PAGE>
and $0.6 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 of $3.2 million and $2.3 million, which include
separation costs of $2.5 million covering approximately 300 individuals (both
store and support) and $1.8 million covering 37 individuals (both store and
support), respectively, and other miscellaneous costs of $2.8 million and $7.7
million, respectively.
Professional fees referred to above include legal fees
which increased to $9.4 million in 1997 from $4.3 million in 1996; accounting
and tax fees which declined to $1.1 million in 1997 from $4.8 million in 1996;
and investment advisory fees which increased to $3.4 million in 1997 from $.9
million in 1996. The increase in legal fees in the current year is related to a
full year of such costs as well as significant litigation costs arising from the
lawsuits filed between Barneys and Isetan. The significant decline in accounting
and tax fees is principally attributable to a significant reduction in the
number of special projects being performed by both the accountants to the
debtors and the creditors in 1997. Both firms incurred significant fees in the
first six months following the Filing Date assisting the debtors in certain
aspects of the business, gathering data and analyzing transactions on behalf of
both the Company and the official committee of unsecured creditors. Investment
advisory fees increased in 1997 from 1996 as they not only included a full year
of expense but also included the expenses of the investment advisory firm to the
official committee of unsecured creditors. In addition, 1997 also included
$1,000,000 (approved by the Bankruptcy Court) paid to Dickson Concepts, as
mentioned above.
Other miscellaneous costs, referred to above, 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 1997
also include $0.9 million of ancillary administrative costs associated with the
litigation referred to above for, among other things, photocopying and
translation services. 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.
The purchase put agreement was entered into in connection
with the mortgaging of real property then leased by the Company from Preen.
Pursuant to that agreement, the Company, at the election of Preen, could have
been required to purchase the real property subject to the mortgage for a
purchase price equal to the greater of $7.0 million and the fair market value of
the property. Preen's interest in the purchase put agreement was pledged to the
institutional mortgagee who subsequently foreclosed on the security interest. As
the fair market value of the property was less than $7.0 million, that amount
was an allowed general unsecured claim and was settled pursuant to the Plan.
LIQUIDITY AND CAPITAL
LIQUIDITY AND CAPITAL RESOURCES
Cash Used in Operations and Working Capital. The Company's primary
source of liquidity has been borrowings under various credit facilities (see
description of the various credit facilities in the following section).
18
<PAGE>
For the reporting periods below, net cash used in operations was as
follows ($ 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) $ 236,937 $ (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 (250,129) (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 ($62,096,000) is classified as long term. The classifications
are based on the terms of the credit facilities that existed at the time.
For the reporting periods below, net cash provided by
financing activities was as follows ($ 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.
19
<PAGE>
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
principally relating to net worth, leverage, earnings and capital expenditures
as outlined below. With the exception of the capital expenditures covenant,
which is a covenant measured on an annual basis, the remaining covenants
discussed herein are required to be measured on a quarterly basis. 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
January 1, 2000, the Company was in compliance with each of the covenants
contained in the Credit Agreement.
Minimum consolidated net worth. Shall not be less than
$140,000,000 through 2000 and $150,000,000 through 2002.
Leverage ratio. On a consolidated basis, as determined as
of the last day of each fiscal quarter for the twelve-month period ending on
such day, shall not be greater than 7.0 at January 29, 2000; 4.5 at the end of
2000; 3.5 at the end of 2001; and 3.0 at the end of 2002.
Minimum consolidated EBITDA. As of the last day of each
fiscal quarter for the trailing twelve-month period ending on such day, EBITDA
shall not be less than certain minimum amounts, subject to escalation during the
fiscal year. The minimum amount at the end of 1999 is $20,000,000; $25,000,000
at the close of 2000; $30,000,000 at the close of 2001; and $35,000,000 at the
close of 2002.
Capital expenditures. The Company's total capital
expenditures for 1999 are capped at $7,250,000 with gradual increases throughout
the term of the agreement, and are subject to upward adjustment and, if certain
conditions are met, may be eligible for carryover to a future period.
At January 1, 2000, the Company had approximately
$35,867,000 of availability under the Credit Agreement, after consideration of
$48,000,000 of revolving loans and $18,115,000 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.
Capital Expenditures. The Company incurred capital
expenditures (net of landlord contributions) of $22,777,000 during the three and
20
<PAGE>
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 1998 - QUARTER ENDING 1997 - QUARTER ENDING
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>
Net Sales $ 91,641 $ 90,974 $ 95,890 $ 87,870 $ 90,277 $ 71,898 $100,733 $ 98,682 $ 90,220 $ 78,377
As % of period 50% 50% 28% 25% 26% 21% 27% 27% 25% 21%
EBITDA $ 7,380 $ 7,592 $ 7,813 $ 7,201 $ 3,463 $ (781) $ 2,781 $ 3,214 $ (2,952) $ (5,186)
Net income (loss) 94 236,843 (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.
ECONOMIC CLIMATE RISK
As a luxury goods retailer, the Company is subject to
economic risk conditioned upon the general health and stability of the United
States 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. The Company's management recognized the need to address
21
<PAGE>
the Y2K issue in all internal systems and applications. A Y2K plan was developed
in April 1998 to define all applications requiring system upgrades. 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 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. The Company incurred approximately $300,000 of costs
related to Y2K, of which approximately $175,000 has been expensed with the
remainder capitalized. The Company anticipates that minimal additional
Y2K-related expenses will be incurred during the coming year.
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 on 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 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 United States 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.
22
<PAGE>
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.
23
<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 15 stores are located at the following locations:
CORPORATE OFFICES REGIONAL STORES
----------------- ---------------
New York, NY New York, NY
(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
New York, NY Sunrise, FL*
Beverly Hills, CA Camarillo, CA
Chicago, IL Dawsonville, GA*
Clinton, CT
WAREHOUSE SALE LOCATION New River, AZ*
-----------------------
Riverhead, NY
New York, NY Wrentham, MA
Waikele, HI
Carlsbad, CA
---------------
* Closed subsequent to
January 30, 1999
24
<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.
25
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF EXISTING EQUITY SECURITIES
The following table sets forth information as of April 25,
2000 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., 5,536,391(1) 40.2%
on behalf of its Discretionary Accounts
11 Martine Avenue
White Plains, New York 10606
Bay Harbour Management L.C. 5,549,701(2) 40.3%
on behalf of its Managed Accounts
885 Third Avenue, 34th Floor
New York, New York 10022
Isetan Company Limited 1,200,785(3) 9.0%
14-1 Shinjuku 3-Chome
Shinjuku-ku, Tokyo
Japan 160-0022
Shelley F. Greenhaus 5,541,391(4) 40.2%
c/o Whippoorwill Associates, Inc.
11 Martine Avenue
White Plains, New York 10606
John Halpern 5,000(5,6) *
Yasuo Okamoto 5,000(5) *
Allen I. Questrom 804,458(7) 5.8%
Carl Spielvogel 5,000(5) *
David A. Strumwasser 5,541,701(4) 40.2%
c/o Whippoorwill Associates, Inc.
11 Martine Avenue
White Plains, New York 10606
Robert J. Tarr, Jr. 5,000(5) *
26
<PAGE>
COMMON STOCK
------------
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER OF SHARES OF CLASS
- ------------------- --------- --------
Douglas P. Teitelbaum 5,554,701(8) 40.3%
c/o Bay Harbour Management L.C.
885 Third Avenue, 34th Floor
New York, New York 10022
Steven A. Van Dyke 5,554,701(8) 40.3%
c/o Bay Harbour Management L.C.
777 South Harbour Island Blvd.
Tampa, Florida 33602
Shelby S. Werner 5,541,391(4) 40.2%
c/o Whippoorwill Associates, Inc.
11 Martine Avenue
White Plains, New York 10606
Judith Collinson - -
Thomas Kalenderian - -
Michael Tymash(9) - -
Directors and Executive Officers 11,131,092 76.7%
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 294,230 shares of Holdings Common Stock issuable to
Whippoorwill pursuant to its Unsecured Creditors Warrants. In addition, Bay
Harbour and Whippoorwill have entered into a stockholders' agreement (the
"Stockholders Agreement") with respect to their ownership in, and the voting of
the capital stock of, Holdings. The number of shares indicated as being
beneficially owned by Whippoorwill (x) does not include the shares of Holdings
Common Stock held by Bay Harbour which are the subject of the Stockholders
Agreement and with respect to which Whippoorwill disclaims beneficial ownership
and (y) includes 402,229 shares of Holdings Common Stock beneficially owned by
Allen I. Questrom ("Mr. Questrom") which are the subject of a stockholders
agreement dated as of February 1, 2000, pursuant to which Mr. Questrom agreed to
vote such shares at the direction of Whippoorwill.
2 All of such shares are owned directly by (i) BHB LLC, of which Bay Harbour is
the manager, or (ii) certain of Bay Harbour's managed accounts. Includes an
aggregate of 286,549 shares of Holdings Common Stock issuable to Bay Harbour
pursuant to its Unsecured Creditors Warrants. 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. The number of
shares indicated as being beneficially owned by Bay Harbour (x) does not include
the shares of Holdings Common Stock held by Whippoorwill which are the subject
of the Stockholders Agreement and with respect to which Bay Harbour disclaims
beneficial ownership and (y) includes 402,229 shares of Holdings Common Stock
beneficially owned by Mr. Questrom which are the subject of a stockholders
agreement dated as of February 1, 2000, pursuant to which Mr. Questrom agreed to
vote such shares at the direction of Bay Harbour.
27
<PAGE>
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").
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 5,000 shares of Holdings Common Stock issuable pursuant to options
granted to each of Messrs. Teitelbaum and Van Dyke under the Option Plan.
9 Michael Tymash served as Executive Vice President - Stores and Operations
through January 18, 2000. He resigned from that position at that time.
In addition, there are 20,000 shares of Preferred Stock
outstanding, all of which were issued on the Effective Date. 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 (75%) of Preferred Stock, and Harry G.
Wagner, an individual, owns 5,000 shares (25%) of Preferred Stock.
28
<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 Spielvogel 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 48 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
Karl Hermanns(2) 35 Executive Vice President -Operations
Michael Celestino(2) 44 Executive Vice President - Stores and Operations
- --------------------------------
(1) Allen I. Questrom became Chairman of the Board, President and Chief
Executive Officer effective May 5, 1999.
(2) Karl Hermanns and Michael Celestino were appointed to their positions in
February 2000.
29
<PAGE>
Steven Feldman(3) 36 Executive Vice President and Chief Financial Officer
David New(4) 43 Executive Vice President - Creative Services
Vincent Phelan 34 Senior Vice President and Treasurer
</TABLE>
Set forth below are the names, positions and business
backgrounds of all of the directors and executive officers of Holdings.
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.
- ---------------------------
(3) Steven Feldman became Chief Financial Officer as of May 28, 1999.
(4) David New was appointed to his position in March 2000.
30
<PAGE>
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
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.
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<PAGE>
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.
Karl Hermanns has been with Barneys for almost four years,
initially responsible for Financial and Strategic Planning. During his tenure,
he has assumed other responsibilities and is currently responsible for
Merchandise Planning, Marketing, Inventory Control, Distribution, Management
Information Systems, Imports and the Company's Central Alterations department.
Mr. Hermanns was promoted to Executive Vice President in February 2000. Prior to
joining Barneys, Mr. Hermanns spent 10 years with Ernst & Young LLP in their
audit and consulting practices.
Michael Celestino has been with Barneys for eight years and
has served in a number of store operations capacities during that period. Mr.
Celestino is currently responsible for all store operations including full price
stores, outlet stores and the Company's warehouse sales. He was promoted to
Executive Vice President in February 2000.
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. Additionally, in May 1999, Mr. Feldman was
appointed as Chief Financial Officer. Prior to joining Barneys, Mr. Feldman was
a Senior Manager at Ernst & Young LLP principally serving retail engagements.
Mr. Feldman was promoted to Executive Vice President in February 2000.
David New has been with Barneys since 1992 when he joined
as Men's Display Manager of the Seventeenth Street store in New York City. Mr.
New's responsibilities have increased over time and in March 2000 he was
promoted to Executive Vice President, Creative Services. In that capacity, Mr.
New is responsible for Store Design, Display, Advertising and Publicity.
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 Senior Vice President in March 2000. Mr. Phelan
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.
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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>
ANNUAL COMPENSATION
NAME AND ------------------- 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(8) 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(9) 1999 518,135 129,488 0 8,510
1998 369,550 112,958 0 8,330
1997 233,514 0 0 0
</TABLE>
- -----------------
1 Other Annual Compensation includes auto, auto insurance, parking and clothing
allowances.
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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 Michael Tymash served as Executive Vice President - Stores and Operations
through January 18, 2000. He resigned from that position at that time.
9 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 was also obligated to pay Mr. Dubel additional
severance in the aggregate amount of $180,000 commencing in July 1999 subject to
mitigation. All amounts due pursuant to Mr. Dubel's contract have been paid.
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. In addition to the foregoing amounts,
Robert J. Tarr, Jr. is paid $25,000 annually for serving as Vice Chairman of the
Board of Directors and $5,000 annually for serving as Chairman of the Company's
Internet Committee. Mr. Tarr also receives $5,000 with respect to each meeting
of the Internet Committee in lieu of the per meeting amount set forth above.
Nonemployee directors also participate in the Company's Stock Option Plan for
Non-Employee Directors (the "Director Option Plan"). Pursuant to the Director
Option Plan, each Eligible Director (as defined in the Director Option Plan) is
granted an option to purchase 5,000 shares of 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 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.
34
<PAGE>
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
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.
Agreement with Allen Questrom. Pursuant to an agreement
between Holdings and Allen I. Questrom effective as of May 5, 1999 and dated
February 1, 2000, 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
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<PAGE>
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
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. On November 12, 1999, each
of Bay Harbour and Whippoorwill notified the Company of its intention to
exercise the option in full. The closing of the exercise occurred on November
19, 1999. 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,
36
<PAGE>
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 election
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 Okamoto 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.
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 United States Bankruptcy Court for the Southern
District of New York. 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 January 29, 2000. The Company has reserved in its financial
statements the amount it deems will be necessary to settle these claims,
however, 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.
37
<PAGE>
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 854,458 shares
of Holdings Common Stock are issuable upon exercise of outstanding options, and
an aggregate of 1,301,094 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"). Resales under Rule
144 are subject to limitations relating to current public information, volume
and manner of sales. 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.
HOLDERS
The number of record holders of Holdings Common Stock as of
April 6, 2000 is 987.
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 80% 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".
Allen I. Questrom, Chairman, President and Chief Executive
Officer of the Company, beneficially owns 5.8% of Holdings Common Stock.
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<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Other than the securities referred to below, Holdings did
not make any recent sales of unregistered securities.
Prior to the consummation of the Plan, Subscription Rights
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) based upon the exemptions provided by Section 1145 of the Bankruptcy
Code.
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. The shares of Preferred Stock were issued on the Effective Date
to the Barneys Employees Stock Plan Trust and to an individual. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." During 1999, 144 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. On November 12, 1999, each of Bay Harbour and Whippoorwill exercised in
full the option granted to them pursuant to the Stock Purchase Agreement in a
transaction pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
AUTHORIZED CAPITAL STOCK
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 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 January 29, 2000,
13,076,144 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
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<PAGE>
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 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
40
<PAGE>
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 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
41
<PAGE>
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, SCHEDULE AND EXHIBITS.
(a) Financial Statements
See Index to Consolidated Financial Statements and
Schedules included herewith.
(b) Financial Statement Schedules
See page F-47 for Schedule II - Valuation and Qualifying
Accounts and Reserves.
(c) Exhibits
The exhibits listed on the Exhibit Index following the
Consolidated Financial Statements hereof are filed herewith in response to this
Item.
42
<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
<TABLE>
<S> <C>
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
Schedule II - Valuation and Qualifying Accounts..................................... F-47
</TABLE>
<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. Our audits also included the financial statement schedule
listed in the Index at Item 15(b). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As more fully described in Note 1 to the consolidated financial statements, the
Company restated Extraordinary item--gain on debt discharge and Net income for
the six months ended January 30, 1999 to include settlement amounts between the
Predecessor Company and certain of its creditors, previously reflected as
reorganization adjustments. Such restatement does not impact the Successor
Company Balance Sheet at January 30, 1999.
/s/ Ernst & Young LLP
New York, New York
May 24, 1999, except for Note 1,
as to which the date is April 21, 2000
F-1
<PAGE>
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
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
==============================================================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these financial statements.
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 $ 182,615 $ 345,935 $ 368,012 $ 374,508
Cost of sales 96,042 181,723 198,818 201,694
----------------------------------------------------------------
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,
restated (Note 1) 245,560 - - -
----------------------------------------------------------------
Net income (loss), restated (Note 1) $ 236,937 $ (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>
COMMON PREFERRED ADDITIONAL RETAINED
STOCK ISSUED STOCK ISSUED PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
Balances at July 29, 1995 9 $ 171 328 $32,770 $ 38,950 $ (352,730) $ (280,839)
Net Loss - - - (71,869) (71,869)
----------------------------------------------------------------------------------------------------
Balances at August 3, 1996 9 171 328 32,770 38,950 (424,599) (352,708)
Net Loss - - - (94,973) (94,973)
----------------------------------------------------------------------------------------------------
Balances at August 2, 1997 9 171 328 32,770 38,950 (519,572) (447,681)
Net Loss - - - (19,953) (19,953)
----------------------------------------------------------------------------------------------------
Balances at August 1, 1998 9 171 328 32,770 38,950 (539,525) (467,634)
Net income for the six months
ended January 30, 1999,
restated (Note 1) - - - 236,937 236,937
Elimination of Predecessor
Company equity (9) (171) (328) (32,770) (38,950) 302,588 230,697
Issuance of Successor Company
stock 12,500 125 - - 148,855 - 148,980
Issuance of Successor Company
warrants - - 5,360 - 5,360
----------------------------------------------------------------------------------------------------
SUCCESSOR COMPANY
Balances at January 30, 1999 12,500 $ 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), restated (Note 1) $ 236,937 $ (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 (245,560) - - -
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.
The Company has restated the Predecessor Company statement of
operations for the six months ended January 30, 1999 by a reduction of
$56,725,000 to the Extraordinary item-gain on debt discharge and the resulting
net income. The items constituting the restatement represent certain settlement
amounts between the Predecessor Company and its more significant creditors as a
result of the Plan. These amounts were previously excluded from the Statement of
Operations and instead reflected as reorganization adjustments to the
Predecessor Company balance sheet. The re-characterization of these settlement
amounts does not impact the Successor Company balance sheet at January 30, 1999.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. 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.
Prior to the Filing Date, and to a lesser extent thereafter, the
Predecessor Company engaged in numerous transactions with Preen and certain of
its subsidiaries. Many of the transactions with Preen are discussed in further
detail in Note 11(c). Preen is owned by various trusts established for the
benefit of certain Pressman family members and, prior to the Effective Date,
Preen also owned approximately 55% of the outstanding common stock of Barneys.
Preen was previously engaged in the ownership and operation of real estate
properties, including certain buildings used in connection with the Predecessor
Company's retail and back office operations. Additionally, Preen leased
commercial and retail space to third parties and operated a parking lot used by
Barneys employees.
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 Plan was primarily an equity conversion plan, pursuant to which
all of the Allowed Claims against Barneys and certain of its affiliates
(including Preen and its affiliates), will be converted into Equity Interests in
Holdings. The Plan, which also included the issuance of options and warrants,
was premised on three primary settlements among the Debtors and each of Isetan,
the Pressman Family and the Equipment Lessors. The result of the settlements was
that all litigation among the Debtors, Isetan, the Equipment Lessors and the
Pressman Family was settled. The Plan also provided for the infusion of at least
$62,500,000 in new equity (see Rights Offering below), which when combined with
the new credit facility, enabled the Debtors to exit Chapter 11 with sufficient
capital to support the new business plan and provide the necessary liquidity for
future operations.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The official committee of unsecured creditors and the Plan Investors
proposed the Plan. The Plan Investors were creditors of the Debtors and held
approximately $149,600,000 in claims against the Debtors, representing
approximately 47.9% of the estimated $312,500,000 million in Allowed General
Unsecured Claims (the "Allowed Claims"). The estimated percent recovery for the
Allowed Claims approximated 18% and was determined based on the assumed value of
the shares and warrants issued to the holders of Allowed Claims. The Plan
Investors would own the majority of the equity interests in Holdings and Isetan,
the Pressman Family and the other general unsecured creditors would own the
remaining minority equity interests. The percentage of Holdings Common Stock
owned by the holders of allowed General Unsecured Claims was dependant on the
extent to which such holders participated in the Rights Offering.
At the Effective Date, the percentage ownership of Holdings was
approximately allocated as follows: 69.7% to the Plan Investors; 21.5% to the
general unsecured creditors; 7.3% to Isetan and 1.5% to the Pressman Family.
As indicated above, the Plan was premised on three primary
settlements between the Debtors and each of Isetan, the Equipment Lessors and
the Pressman Family. A brief summary of those settlements is discussed below and
a more detailed discussion is included in (b), (c), and (d) below.
ISETAN SETTLEMENT - Isetan had asserted numerous claims against the
Company totaling approximately $365 million plus undetermined amounts for, among
other things, breach of contract, unpaid interest and legal fees, and fraud in
the inducement. The totality of these claims, as discussed below, was settled
pursuant to the Plan.
Prior to the Filing Date, as discussed in Note 11(c), the Predecessor
Company entered into various agreements with Isetan to, among other things, (i)
exploit the "Barneys New York" trademark in the United States and Asia, (ii)
expand its United States 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 United States, (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 United States 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 United States
specialty retailing business and the application of these skills and knowledge
to the acquisition of real estate properties and development of stores both
within and outside of the United States, (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. During the
Company's bankruptcy proceedings, the Company and certain of its affiliates and
Isetan and certain of its affiliates were engaged in litigation as discussed
below.
The Company and Preen commenced a lawsuit on January 11, 1996 against
Isetan, Isetan of America Inc., and parties involved in the leasing of its three
flagship stores, Newireen Associates (Madison Avenue), Calireen Realty Corp.
(Beverly Hills) and Rush Oak Limited Partnership (Chicago). The lawsuit arose
out of various transactions involving one or more of the plaintiffs and one or
more of the defendants and sought, among other relief: (i) a declaration that
certain agreements relating to the Company's Madison Avenue, Beverly Hills and
Chicago stores should not be treated as leases and should be recharacterized,
(ii) damages in the approximate amount of $50,000,000 and (iii) restructuring of
the relationship between the Company and its affiliates, on one hand, and Isetan
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and its affiliates on the other, to reflect the true economic interest of the
parties and to convert the interests of Isetan and its affiliates into equity.
In submitting their answer to the complaint, Isetan asserted certain
counterclaims against Barneys, Preen, certain of their respective subsidiaries
and Reen Japan Corp., an affiliate, and sought, among other relief, damages
against Barneys and Preen in an amount not less than $180,000,000 and a
declaration that the above agreements for the Madison Avenue, Beverly Hills and
Chicago stores should be considered leases.
In September 1996, BNY Licensing provided Isetan and Japan Company with notice
of the termination of the License Agreement by reason of breaches of such
agreement, which termination was to be effective September 23, 1996.
BNYLicensing also advised Isetan and Japan Company that they were liable under
the License Agreement and Services Agreement for the payments under such
agreements (including the present value of the unpaid minimum royalties). As the
occurrence of an event of default under the License Agreement constituted an
event of default pursuant to the Services Agreement, the Company simultaneously
provided Isetan and Japan Company with a notice of termination of the Services
Agreement, also to be effective September 23, 1996. Barneys and BNYLicensing
also filed a demand for arbitration with the American Arbitration Association,
which arbitration was to be held in New York City, pursuant to which proceeding
such parties sought an award providing for, among other relief, the following:
(i) a declaration that the License Agreement and the Services Agreement have
terminated in accordance with their respective terms, (ii) payment by Japan
Company and Isetan of the royalties due (including the present value of the
minimum royalties) together with damages by reason of the breaches of the
License Agreement and the Services Agreement, and (iii) compliance by Japan
Company and Isetan with all the "Effect of Termination" provisions contained in
the License Agreement and the Services Agreement. The Company and BNYLicensing
also commenced litigation on September 19, 1996 against Isetan and Japan Company
seeking, among other things, to avoid certain unperfected liens on royalties and
fees payable (which were collaterally assigned as security) and to recover from
such parties, payments of royalties and fees.
As discussed below in the Isetan Settlement, the original license
agreement and technical services agreement between the Company and Isetan were
terminated. Accordingly, the Deferred Credits of $162,446,000 which recognition
was, in part, contingent on the payment of amounts due pursuant to these
agreements were determined to be no longer collectible and were reversed against
the accumulated deficit of the Company. See Notes 3 and 11 to the Consolidated
Financial Statements for additional discussion.
The Debtors combined owed prepetition liabilities to Isetan in excess
of $260,000,000. Of that total, approximately $51,000,000 was recorded by the
Barneys Debtors. On the Effective Date, any and all of the claims of Isetan
against the Debtors, the Barneys Affiliates, and Reen Japan (collectively, the
"Affiliated Parties") including but not limited to those claims asserted in
adversary proceedings were resolved and compromised and Isetan exchanged its
claims against and equity interests in the Affiliated Parties pursuant to the
following settlements:
1) All litigation between the Debtors and Isetan was settled and
dismissed with prejudice;
2) Isetan was named sole owner of the real estate encompassing
the Flagship Stores and the Company entered into modified
long-term leases for such stores;
3) A cash payment to Isetan of approximately $23,275,000;
4) Contribution of Isetan's minority interest in Barneys America
to Barneys (See Note 12 (d) to the consolidated financial
statements);
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5) Issuance to Isetan of a $22,500,000 subordinated note;
6) Assignment to Isetan of 90% of the minimum royalty stream
arising from the new license agreement;
7) Issuance to Isetan of 7.3% of the common stock of Holdings;
and
8) Issuance to Isetan of a three-year warrant to purchase 2.25%
of the new common stock of Holdings at an aggregate exercise
price of $14.68 per share.
PRESSMAN FAMILY SETTLEMENT - The Pressman family had asserted claims
against the Debtors in excess of $23 million in the aggregate, as well as equity
interests in various Debtors.
Prior to the Effective Date, members of the Pressman family, entities
controlled by the Pressman family and certain trusts of which members of the
Pressman family were the beneficiaries, owned Barneys.
The Barneys Debtors had recorded prepetition liabilities to members
of the Pressman family or Pressman controlled entities in excess of $2,500,000.
On the Effective Date, any and all of the claims and equity interests of the
Pressman family were resolved and compromised and the Pressman Family, in
accordance with the Plan, exchanged their claims against and equity interests in
the Debtors for the following consideration:
1) 1.5% of the stock in Holdings;
2) A $50,000 cash payment in consideration for the 327,695 shares
of preferred stock that was held by the Pressman family at the
Filing Date;
3) Consulting agreements with Holdings for each of Phyllis,
Robert, Eugene and Holly Pressman;
4) The exchange of mutual general releases by the Pressman
family, the Company and the Plan proponents; and
5) The dismissal of the Isetan litigation as well as the exchange
of general releases by Isetan and the Pressman family.
EQUIPMENT LESSORS SETTLEMENT - The Equipment Lessors had asserted in
the aggregate over $60 million in secured, unsecured and administrative claims
against the Debtors.
Prior to the Filing Date, the Company had utilized a significant
amount of equipment pursuant to arrangements with several equipment-leasing
companies. See Note 8 to the Consolidated Financial Statements. The nature of
the equipment included furniture and fixtures and certain equipment used in the
operations of the business. The majority of this equipment was located in the
Flagship stores. The Predecessor Company made monthly payments pursuant to these
financing arrangements. On the Effective Date, there were remaining payments due
at the contractual rates specified in the agreements, exclusive of the amount to
purchase the assets, of approximately $2,800,000.
On the Effective Date, the Equipment Lessors retained the security
deposits deposited with them in connection with the related leases and
transferred all right, title, and interest in the equipment subject to these
leases to the Company. In exchange therefor, the Company issued subordinated
promissory notes to such lessors in an aggregate principal amount of
$35,789,000.
The following is a summary of the material provisions of the Plan
that became effective on the Effective Date.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. Since the
Company has a controlling interest in this affiliated Company, this subsidiary
is included in the consolidated financial statements of the Company. See " --
Licensing Arrangements."
(B) 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 $4.4 million,
generating combined proceeds from the Rights Offering of $62.6 million.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 was exercised prior to its expiration date of November 15, 1999. No
claims were satisfied through the issuance of these options. These options were
issued to the Plan Investors in exchange for their guarantee of the offering of
Subscription Rights. 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 shares of Holdings Common Stock at an exercise price of $14.68
per share. This warrant expires on January 29, 2002. In preparing its analysis
of reorganization value, the investment banking firm retained by the creditors
committee did not consider the exercise of the Isetan Warrant based upon its
considerable exercise premium over the total reorganization value. Accordingly,
the Company did not assign a fair market value to this warrant. 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 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
investment banking firm retained by the creditors committee computed the
theoretical value of the Unsecured Creditor Warrants using a variant of a
standard computation methodology for the valuation of warrants. Based on (i) an
assumed trading price equal to a common equity value for Holdings of
approximately $153,500,000; (ii) distribution of 12,500,000 shares of Holdings
common stock and (iii) an estimated trading volatility of between 55% and 65%
(based on historical trading volatilities of publicly traded companies that are
comparable to Holdings), the aggregate value was determined to be in a range
from $5,180,000 to $5,550,000 with a midpoint of $5,360,000. The Company
utilized the midpoint to value the Unsecured Creditor Warrants. 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 (the "Trust"), which was established for the benefit
of employees of the Company. The shares contributed to the Trust will be issued
to existing employees of Barneys as incentive compensation in connection with
future services to be rendered to the Company. Since the 15,000 shares issued to
the Trust have not been issued to existing employees, they are not considered
issued and outstanding. When such shares are issued to the employees, the
Company will record compensation expense based on the fair value of the shares
at such time. Any difference between the fair value at that time and the
ultimate redemption value will be accreted as a dividend over the period up
through the date on which they must be redeemed. 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.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In total, the Company settled general unsecured claims of
approximately $320,000,000 through the issuance of Holdings Common Stock,
warrants and the Subscription Rights. 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.
(C) 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. At the Effective Date, these operating leases had
remaining payments due at the contractual rates specified in the agreements, of
approximately $2,800,000, exclusive of the amount to purchase the Equipment. 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.
(D) 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.
Pressman Family. Prior to the Effective Date, 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. On the
Effective Date, the Pressman family was issued an aggregate of 1.5% of the
outstanding shares of Holdings Common Stock. 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
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Date. The Company entered into these consulting agreements to ensure that each
of Phyllis Pressman, Robert Pressman, Gene Pressman and Holly Pressman, each of
whom had been part of senior management of Barneys until the Effective Date,
would be available to the Company on an as-needed basis from and after 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. Nanelle held the license agreement for the
Kilgour, French & Stanbury brand of apparel sold in the Company's stores and the
payment to Nanelle settled approximately $739,000 in claims filed by Nanelle
against the Company.
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). In satisfaction of amounts
outstanding pursuant to the BNY Licensing Yen loan payable to Isetan, valued at
$49,129,000 at the Filing Date, Isetan received an absolute assignment of 90% of
the annual minimum royalties pursuant to item (i) above.
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 the January 29, 1999 conversion rate of 115.95 Japanese yen to one
United States 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 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
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
reserved approximately $2,000,000 in its financial statements which is 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.
(E) 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:
<TABLE>
<S> <C>
(in thousands)
Liabilities subject to compromise at the effective date $ 369,747
Less:
Cash distributions pursuant to the Plan (21,309)
Issuance of new debt (22,500)
Assumption of prepetition liabilities* (9,119)
Value of new common stock ($65,899) and warrants ($5,360) issued to
prepetition creditors (71,259)
---------------------
Extraordinary gain on debt discharge $ 245,560
=====================
</TABLE>
*The prepetition liabilities assumed by the Successor Company related
principally to claims settled pursuant to the Plan and to a reserve for disputed
claims pending resolution; such amounts were to be paid (or resolved) after the
Effective Date. The nature of the claims included convenience class; vendor
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
reclamation; and priority tax as well as amounts due pursuant to the assumption
of executory contracts.
In the accompanying Predecessor Company consolidated balance sheets,
the principal categories of claims classified as Liabilities subject to
compromise are identified below.
<TABLE>
<CAPTION>
AUGUST 1, AUGUST 2,
1998 1997
------------------------ ------------------------
<S> <C> <C>
(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
======================== ========================
</TABLE>
(F) 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 unamortized value of the leasehold improvements,
furniture, fixtures and equipment attributable to the stores at each of their
respective closing dates, net of management's immaterial estimates for proceeds
to be received on disposal of certain of these assets or the estimated value of
certain assets (notably fixtures) to be re-used in other stores. The Company
continued to depreciate the assets through the store-closing date, which
coincided with the last day of operations of each of the stores. A majority of
this charge related to the unamortized value of leasehold improvements which
were abandoned after the stores closed. $15,038,000 of the costs represented the
estimated cost of claims (the "lease rejection 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 covering an estimated 300 employees in both the stores and
administrative offices. In accordance with SOP 90-7, prepetition liabilities,
including claims that become known after a petition is filed, should be reported
on the basis of the expected amount of the allowed claims. When a lease is
rejected pursuant to a bankruptcy proceeding, the calculation to determine the
value of the lessor's claim against the lessee is governed by, and was
calculated in accordance with, the Bankruptcy Code. Accordingly, at the time the
decision was made to close the stores, the Company was able to calculate the
Lease Rejection Claims, and it believed that an accrual was appropriate in
accordance with both FASB Statement No. 5, "Accounting for Contingencies" and
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SOP 90-7 and included such amount in the charge. 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. The employee termination costs in
1998 and the six months ended January 30, 1999 covered 13 individuals and 11
individuals, respectively, all of whom were principally administrative
employees.
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.
At the time of the recording of the charge relating to the 1997
Restructuring Program, the Company wrote down the related fixed assets by
$38,767,000. A rollforward of the remaining restructuring charges related to
this program and any additional charges taken in subsequent periods is provided
below.
<TABLE>
<CAPTION>
Non-Cash
Lease Rejection
Claims Severance
---------------------------- -------------------------
<S> <C> <C>
BALANCE AUGUST 3, 1996 $ 600 $ -
Additions 15,038 2,519
Payments - (598)
---------------------------- -------------------------
BALANCE AUGUST 2, 1997 15,638 1,921
Additions - 1,881
Payments - (2,614)
---------------------------- -------------------------
BALANCE AUGUST 1, 1998 15,638 1,187
Additions - 3,100
Payments - (830)
Adjustments (15,638) -
---------------------------- -------------------------
BALANCE JANUARY 30, 1999 $ - $ 3,457
============================ =========================
</TABLE>
The Lease rejection claims were treated as general unsecured claims
and resolved 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, 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 related to future on-going
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
severance commitments for previously terminated employees, 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. Prior to the Effective Date, the majority of
common shares of the Predecessor Company were owned by the Pressman family,
certain affiliates of the Pressman family and certain trusts of which members of
the Pressman family were the beneficiaries. On the Effective Date, the Pressman
family was issued an aggregate of 1.5% of the outstanding shares of Holdings
Common Stock. After the Effective Date, the majority of Common Shares of
Holdings were owned by the Plan Investors. 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.
In performing their analysis, PJSC used a number of
significant assumptions when determining the value of Holdings. For their
discounted cash flow analysis, they used a discount range of 16% to 18% and a
multiple of 8.0 times trailing twelve months earnings before interest, taxes
depreciation and amortization ("EBITDA"). These assumptions led to a range in
values between $302,000,000 to $353,000,000.
For the comparable publicly traded company analysis, PJSC
used a range of trailing twelve months EBITDA of 7.7 times to 10.4 times. This
was indicative of some of Barneys' competitors during the relevant time period.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
PJSC then took the multiple and multiplied it by a control premium to factor in
the estimated premium that would be required to gain control of a publicly
traded company. This premium was estimated at 30%. Using the above premium and
the trailing twelve months EBITDA of the Predecessor Company of $25,000,000, the
range in values based on comparable company transactions fell between
$211,000,000 to $299,000,000.
The last valuation method employed by PJSC was using
comparable merger and acquisition transaction multiple analyses. For this
method, PJSC looked at the most recent transactions involving comparable
retailers. PJSC used the time frame of July 1996 to July 1998 and analyzed
eleven comparable transactions. Based on this review, they came up with a range
of multiples from 7.9 times EBITDA to 13.3 times EBITDA. Using the
aforementioned $25,000,000 trailing twelve months EBITDA, PJSC determined a
range of values for comparable companies from $197,000,000 to $332,000,000.
Based upon the foregoing assumptions and the three
valuation methods, 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. This
value was the approximate midpoint of values derived from three valuation
methods. 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.
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"). In accordance with SOP
90-7, the Company allocated the $285,000,000 reorganization value (or
capitalization) as follows: first to the long-term debt issued (outstanding) as
discussed below; then to the pre-petition liabilities of the Predecessor Company
assumed by the Successor Company or paid on the Effective Date approximating
$10,275,000 and the remainder of $154,340,000 was attributed to the new equity
of Holdings issued in satisfaction of the remaining unsecured claims of the
Predecessor Company. 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.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 effects of transactions
or settlements arising pursuant to the Plan as Reorganization adjustments. In
addition, the Company also recorded fresh-start adjustments. In accordance with
SOP 90-7, the Company included in this column the adjustments required to
eliminate the Predecessor Company's equity; to record the reported assets and
liabilities at their fair market value; to establish certain liabilities
pursuant to Accounting Principles Bulletin Opinion 16, "Accounting for Business
Combinations" ("APB No. 16"); and to reflect the $285,000,000 Total
Reorganization Value. The effects of the fair market value adjustments
approximated $294,000 and are included in the Statement of Operations of the
Predecessor Company as fresh-start valuation.
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-20
<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 and restricted cash $ 10,192 $ 1,714 $ - $ 11,906
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 - - 177,767 177,767
Other assets 2,357 829 - 3,186
----------------- ------------------ ------------------- ----------------
Total assets $226,626 $ (58,197) $ 175,525 $ 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 (2,979) 8,830 54,585
Subscription Rights offering liability 4,386 (4,386) - -
----------------- ------------------ ------------------- ----------------
Total current liabilities 152,505 (90,754) 8,830 70,581
Long-term debt - 120,382 (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 38,950 133,634 (18,369) 154,215
Accumulated deficit (547,857) 322,106 225,751 -
----------------- ------------------ ------------------- ----------------
Total shareholders' equity (deficit) (475,966) 455,865 174,441 154,340
----------------- ------------------ ------------------- ----------------
Total liabilities and shareholders' equity (deficit)
$226,626 $ (58,197) $ 175,525 $ 343,954
================= ================== =================== ================
</TABLE>
The balance sheet captions impacted and the nature of the more
significant reorganization adjustments are discussed in further detail below:
Cash and Restricted Cash ("Cash"). The $58,221,000 proceeds from the
Rights Offering received from the Plan Investors in January and borrowings
pursuant to the Credit Agreement (approximately $62,100,000), combined
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
aggregating $120,321,000, were used to: repay $83,389,000 outstanding under the
debtor in possession credit agreement; pay Isetan $23,275,000 (including a
$3,122,000 administrative claim payment for unpaid rent) on account of its
allowed claims (the "Isetan Payments"); to establish the restricted cash amount
of $5,082,000 (which includes the $4,600,000 administrative claim reserve); pay
$4,730,000 for professional fees and allowed administrative claims; pay Dickson
Concepts $3,500,000 in connection with the termination of an asset purchase
agreement (the "Dickson Payment"); pay $1,600,000 in bank fees in connection
with the Credit Agreement (the "Bank Payment"); pay $1,156,000 to holders of
certain general unsecured claims; and pay $955,000 to members of the Pressman
family (the "Pressman family payment") in connection with their consulting
agreements. The net amount of the above transactions increased cash and
restricted cash by $1,714,000 to $11,906,000. Such amount was then allocated
between restricted and non-restricted cash. The primary component of the
restricted cash pertains to the Administrative Claim reserve of $4,600,000 as
discussed in Note 3 to the Consolidated Financial Statements.
Other current assets. Other current assets increased as a result of
Holdings' issuance of 5,000 shares of preferred stock for an aggregate purchase
price of $500,000.
Fixed Assets. The adjustment to fixed assets arose pursuant to the
Isetan and Equipment Lessors Settlements. Pursuant to the Isetan settlement,
Isetan received outright ownership of the leasehold improvements in the three
flagship stores. Accordingly, the Company reduced its fixed assets by
$97,029,000 with a corresponding write-off to Accumulated deficit. Pursuant to
the Equipment Lessors settlement, certain lessors of equipment to the Company
transferred all right, title and interest in such equipment to the Company. The
Company issued the Equipment Lessors Notes in an aggregate principal amount of
$35,789,000 with a corresponding increase to fixed assets.
Other Assets. Other assets increased principally as a result of the
Bank Payment discussed above offset by the write-off of $871,000 in long-term
security deposits compromised in connection with the Equipment Lessors
settlement pursuant to the Plan.
Accrued Expenses. Accrued expenses were impacted principally by the
disbursement of cash for the professional fee and administrative claim payments,
the Dickson Payment and the Pressman family payment aggregating $12,317,000
principally offset by the assumption of pre-petition liabilities aggregating
$9,119,000 to be paid subsequent to the emergence from bankruptcy.
Subscription Rights Offering Liability. In December 1998, the
Predecessor Company received $4,386,000 in cash from certain general unsecured
creditors in connection with the Subscription Rights offering. The cash was
recorded as Restricted cash on the Balance sheet. On the Effective Date, these
cash proceeds were aggregated with the $58,221,000 cash proceeds discussed in
cash and restricted cash above, and were used to consummate the provisions of
the Plan and the related equity in Holdings was issued. The aggregate cash
received from the Subscription Rights offering was combined with the proceeds
from the new credit facility to pay the obligations discussed in further detail
in cash and restricted cash above.
Long-term Debt. Long-term debt adjustment consists of $62,096,000
outstanding pursuant to the Credit Facility, $35,789,000 outstanding pursuant to
the Equipment Lessor Notes, and $22,500,000 issued pursuant to the Isetan Note.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Liabilities Subject to Compromise. Such amounts were settled pursuant
to the Plan. The Predecessor Company recognized an extraordinary gain on debt
discharge of $245,560,000. See Note 2 (b).
Deferred Credits and Minority Interest. In a prior year, the
Predecessor Company had recorded deferred credits of $162,446,000 relating to
the cash sale to an affiliate of participation rights in future payments to be
received pursuant to the License Agreement and Services Agreement (collectively
the "Agreements") with Isetan discussed in Note 11 (c). Additionally, in a prior
year, Barneys America issued preferred stock to Isetan of America, Inc. for an
aggregate purchase price of $12,000,000. Such amount was recorded as minority
interest. Pursuant to the Isetan settlements in the Plan, the Agreements were
terminated and Isetan's investment in Barneys America was contributed to
Barneys. The elimination of these liabilities, aggregating $174,446,000 (the
"Eliminated Liabilities"), were accounted for as a direct reduction to the
Accumulated deficit of the Predecessor Company.
Redeemable Preferred Stock. 20,000 shares of New Preferred Stock,
with an aggregate liquidation preference of $2,000,000, were issued pursuant to
the Plan. Holdings issued 5,000 shares for an aggregate purchase price of
$500,000 in government securities to Bay Harbour, which it resold to a third
party, and 15,000 shares were issued to the Barneys Employees Stock Plan Trust
(the "Trust"). The shares contributed to the Trust will be issued to existing
employees of Barneys as incentive compensation in connection with future
services to be rendered to the Company. Since the 15,000 shares issued to the
Trust have not yet been issued to existing employees, they are not considered as
issued or outstanding. Accordingly, the Reorganization adjustment pertains
solely to the aforementioned 5,000 shares.
Common Stock and Additional Paid in Capital. The adjustments reflect
principally the issuance of Holdings common stock pursuant to the Plan. In the
aggregate, 12,500,000 shares of Holdings common stock were issued either in
settlement of Allowed Claims or in connection with the Rights offering. These
shares equate to a par value of $125,000 that is the reorganization adjustment
to the Common stock. On the Effective Date, the Plan Investors received or
acquired approximately 8,717,000 shares with an aggregate value of $83,209,000;
the general unsecured creditors received or acquired approximately 2,683,000
shares with an aggregate value of $31,507,000; Isetan received approximately
913,000 shares with an aggregate value of $11,351,000; and the Pressman family
received approximately 187,000 shares with an aggregate value of $2,332,000. The
remaining $5,630,000 adjustment to Additional paid in capital is the value of
the warrants issued to the unsecured creditors as more fully discussed in Note 2
to the Consolidated Financial Statements.
Accumulated Deficit. Accumulated deficit of the Predecessor Company
was reduced by both the extraordinary gain on discharge of prepetition debt and
the Eliminated Liabilities offset by the net adjustment to fixed assets and the
compromise of the long-term security deposits, all of which are discussed above.
The balance sheet captions impacted and the nature of the more
significant Fresh-start adjustments are discussed in further detail below:
Receivables. Concurrent with the emergence from bankruptcy,
management of the Successor Company elected to modify the treatment of special
order sales of merchandise. This adjustment reflects a reduction of the
receivable balance recorded by the Predecessor Company in connection with these
sales. See related discussion below in Accrued expenses.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inventory. Concurrent with the emergence from bankruptcy, management
of the Successor Company approved a plan to close certain outlet stores and
discontinue certain private label cosmetic lines. In accordance with APB No.16,
a $1,400,000 inventory valuation reserve was recorded to reduce the acquired
assets to fair market value.
Fixed Assets. Prior to the emergence from Bankruptcy, the Company
retained a third party asset appraisal service to value all the fixed assets of
the Company (including those acquired pursuant to the Equipment Lessors
Settlement). The fixed asset adjustment includes a $2,716,000 fair market value
adjustment required to value the fixed assets of the Successor Company at the
appraised amount and a $2,200,000 write down of the fixed assets in the outlet
stores to be closed.
Excess Reorganization Value and Shareholders' Equity (Deficit). The
adjustments reflect the elimination of the Predecessor Company's old stock,
accumulated deficit (after taking into account the impact of the Reorganization
adjustments discussed above and the fresh start revaluation), and the adjustment
to reflect the Successor Company's total reorganization value of $285,000,000.
Excess reorganization value was determined as follows:
Total Reorganization Value $ 285,000
Normal operating liabilities* 61,462
Other adjustments - net (2,508)
-----------------------
Total Liabilities and equity 343,954
Less: Tangible Assets* (166,187)
-----------------------
Excess Reorganization Value $ 177,767
=======================
*Normal operating liabilities is net of the Predecessor Company's
liabilities which were not settled/paid on the Effective Date which arose either
prior to the Filing Date or prior to the Effective Date and related to the
bankruptcy proceedings. Such amounts will be paid for or settled by the
Successor Company. Tangible Assets includes total Current assets, Fixed and
Other assets of the Successor Company.
Accrued Expenses. Principally includes individually immaterial
accruals recorded in accordance with both SOP 90-7 and APB No. 16, principally
related to professional fees, severance, taxes, registration fees as well the
establishment of a liability to customers for deposits on special orders (see
Receivables discussion above). The corresponding charge to establish such
accruals, aggregating $5,260,000, is included in Fresh-start revaluation in the
Statement of Operations. The remainder of the adjustment represents a $3,570,000
accrual recorded in connection with the consulting agreements entered into with
certain members of the Pressman family (see Note 2 to the Consolidated Financial
Statements).
Other Long Term Liabilities. Other long-term liabilities of the
Predecessor Company represented amounts recorded in accordance with FASB 13
"Accounting for Leases" ("FAS No. 13") pertaining to both contractual rent
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
escalations and landlord contributions for build-outs. A fair market value was
not assigned to these liabilities since, in accordance with APB No.16, the
existing leases are treated as new leases of the Successor Company. This
requires the Successor Company to amortize the remaining scheduled lease
commitments over the remaining lease periods on a straight-line basis beginning
with the Effective Date. The $5,894,000 write-down of the Other long-term
liabilities is included in Fresh-start revaluation in the Statement of
Operations.
F-25
<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 in which the Company has a controlling financial interest and
exercises control over their operations. 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-26
<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. An impairment loss recognized
will be measured as the amount by which the carrying amount of the asset exceeds
the fair value of the asset. If quoted market prices are not available, the
estimate of fair value will be based on the best information available under the
circumstances, such as prices for similar assets or the present value of
estimated expected future cash flows.
(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.
The notional and estimated fair value of the individual currencies is
detailed below:
Foreign Currency Notional Amount Estimated Fair Vale
---------------- --------------- -------------------
Italian Lira $ 4,151,000 $ 4,069,000
German Marc 973,000 954,000
Belgium Franc 564,000 553,000
French Franc 362,000 355,000
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(J) REVENUE RECOGNITION -
Sales, recognized at the point of sale, consist of sales of
merchandise, net of returns. Net sales in the Statement of Operations include
bulk sales of merchandise to jobbers and an estimate for merchandise returns,
where a right of return exists, in accordance with SFAS No. 48, "Revenue
Recognition When Right of Return Exists." Bulk sales to jobbers were $958,000,
$2,968,000, $6,516,000 and $8,084,000 in the six months ended January 30, 1999
and fiscal 1998, 1997 and 1996, respectively.
(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.
(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-28
<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 discount at January 30, 1999. The
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, one of the Successor Company's principal shareholders
after the Effective Date, 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 (the "DIP Facility"). 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.
The DIP Facility outstanding just prior to the Effective Date, was
entered into with BankBoston, N.A., as Administrative Agent, and it was dated as
of July 15, 1997. The agreement provided for loans in two tranches, "Tranche A"
and "Tranche B". Credit extensions were limited to $85,000,000 under Tranche A
and $30,000,000 under Tranche B. Interest rates on Tranche A loans were either
prime plus 0.50% or LIBOR plus 2.25%. The interest rate on Tranche B loans was
LIBOR plus 4.50%. At August 1, 1998 and August 2, 1997, Tranche A borrowings
were $44,792,633 and $39,112,946, respectively, and Tranche B borrowings were
$30,000,000 and $25,000,000, respectively. Interest rates on the outstanding
borrowings were between 7.875% and 10.875% at August 1, 1998 and between 7.92%
and 10.25% at August 2, 1997.
Obligations under the DIP Facility were secured by (a) guarantees by
each of the Debtors; (b) a first priority lien on all unencumbered property of
each of the Debtors; and (c) a junior lien on certain property of the Debtors
subject to existing liens. The DIP Facility provided for a fee of 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.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(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.
Prepetition debt consists of the following:
(IN THOUSANDS)
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
(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.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(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.
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,
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
included in Selling, general and administrative expenses are detailed below
along with the corresponding contractual amount for each of the periods
reported.
<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.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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. At the Filing Date, the Company defaulted on such
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
financing arrangements, and the amounts outstanding pursuant to these agreements
became subject to compromise. At that time, the unamortized fees were deemed
worthless and written off as a reorganization expense.
Payroll and related costs -- principally represent costs associated
with the Bankruptcy Court approved key employee retention and bonus program,
severance costs attributable to either 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. For the six months ended January 30,
1999 and for 1998, 1997 and 1996, the severance included in payroll related
costs and the related employees severed were $3,139,000 and 11 (managerial and
support employees, inclusive of employees of Meridian Ventures, Inc.) $1,881,000
and 13 (managerial employees), $2,519,000 and 300 (store and support personnel),
and $1,785,000 and 37 (store and support personnel), respectively. (See Note 2
for actual employees severed and utilization of reserves.
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. The purchase put agreement was entered
into in connection with mortgaging of real property which was leased by the
Company from Preen. Pursuant to that agreement, the Company, at the election of
Preen, could have been required to purchase the real property for a purchase
price equal to the greater of $7.0 million and the fair market value of the
property. Preen's interest in the purchase put agreement was pledged to the
institutional mortgagee who subsequently foreclosed on the security interest. As
the fair market value of the property was less than $7.0 million, that 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.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
(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 members of the Pressman family (the "Shareholders"). The
Predecessor Company assigned amounts due from these Shareholders to Preen 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 principally from subsidiaries of Preen but also from companies owned
by certain members of the Pressman family. Included was (1) office and office
related premises; (2) properties used in connection with the operation of the
Predecessor Company's 17th Street store in New York City; and (3) parking lots
on 17th Street. Each of the above properties were vacated by the Predecessor
Company during the bankruptcy and each of the respective leases were rejected by
orders of the Court during 1997 or 1998. 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 was approximately $272,000, $6,195,000 and $7,758,000,
in fiscal 1998, 1997 and 1996, respectively.
The Predecessor Company triple net leased its Seventh Avenue office
space as well as other properties from Preen and certain of its wholly owned
subsidiaries. The lower level retail space in two of those properties was
subleased to two of those subsidiaries, 106 Seventh Avenue Property Corp.
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
("106") and Goderich Realty Corp. ("Goderich"). 106 and Goderich, in turn,
subleased this retail space to a third party retailer. Pursuant to the terms of
the subleases between 106 and Goderich and the Predecessor Company, Barneys was
paid rent equal to 90% of the rent charged to the third party retailer. The
remaining 10% of the rent was retained by 106 and Goderich. All of the triple
net leases between Preen and/or its subsidiaries and the Predecessor Company and
the sublease between Barneys and 106 and Goderich were rejected by the order of
the Bankruptcy Court. Rental income under the subleases 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 Fener Realty Co. ("Fener"). At the time, Fener was a
non-debtor entity owned by certain members of the Pressman family. Fener owned
the property at 249 West 17th Street and triple-net leased the property located
at 245 West 17th Street (collectively the "properties") from Renef Realty (also
owned by certain members of the Pressman family). Prior to January 1995, the
Predecessor Company leased approximately 10% of these properties directly from
Fener for use in connection with the semi-annual warehouse sales. Fener leased
the remaining 90% of the properties to a third party. In January 1995, Fener and
Renef refinanced their mortgages on the Properties. In connection therewith,
ownership of the Properties was transferred to two limited liability companies,
Pine Associates LLC ("Pine") and Spruce Associates LLC, which were indirectly
owned by Fener and Renef, respectively. As part of this transaction, the lease
between Fener and the third party was restructured as a triple-net lease between
Pine and the third party for the Properties in their entirety and the lease
between the Predecessor Company and Fener was restructured as a triple-net
sublease (the "Sublease") between the third party and the Predecessor Company
(collectively the "New Lease Arrangements"). Pursuant to the New Lease
Arrangements, the third party, in addition to its fixed rent, was responsible
for paying all operating expenses of the Properties, and the Predecessor Company
was responsible for fixed rent, all operating expenses and 90% of the taxes of
the Properties, except for amounts which were the third party's responsibility
pursuant to its prior lease. The sublease between the third party and the
Predecessor Company 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, a
subsidiary of Preen 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 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.
In prior years, the Company had entered into various transactions and
agreements with Preen. Prior to the Filing Date as well as through the Effective
Date, the Company incurred certain normal operating costs, principally personnel
costs, on behalf of Preen. This situation arose as both entities shared the same
corporate office space and certain employees (including officers) of the Company
were also providing services to Preen. After the Filing Date, the Company also
incurred and paid reorganization costs, including legal, accounting and business
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
advisory services, on behalf of Preen which was also operating as a debtor in
possession pursuant to the Bankruptcy Code. The Company routinely allocated to
Preen a share of both the normal operating costs and reorganization costs
incurred on their behalf, however, it was unclear (because of the bankruptcy)
whether Preen would have the ability to repay such amounts in the future. The
normal operating costs principally covered an allocation of certain employees'
salaries. The allocation was based on an estimated percentage of time that the
employee spent working on the matters of Preen. Such allocations ranged from 2%
to 100% depending on the year of allocation with the allocation percentages
declining over time during the bankruptcy proceedings as the workload for Preen
declined as properties were sold. Accordingly, at the time of the recording of
such charges that reduced expenses and generated receivables for the Predecessor
Company, reserves were provided in the operating results either as a selling,
general and administrative expense or a reorganization expense, depending on the
nature of the charge. During the six months ended January 30, 1999 and fiscal
1998, 1997 and 1996 the Predecessor Company charged Preen approximately
$1,000,000, $418,000, $583,000 and $466,000, respectively, for various expenses.
For the periods presented, the Company had allocated approximately $595,000 of
operating expenses and approximately $1,872,000 of reorganization expenses,
principally of a legal nature in connection with the litigation discussed in
Note 2 to the Consolidated Financial Statements and the sale of or negotiations
surrounding the real estate properties owned by Preen. In December 1998, in
connection with the approval of the Plan and the settlements included therein,
collectibility issues of these receivables 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
Nanelle. Nanelle, owned by certain members of the Pressman family, held the
license to use the Kilgour, French and Stanbury trademarks (the "Mark"). 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, Nanelle transferred its rights in this license to Barneys.
TF Salons Co. ("TF Salon") and Piccola Restaurant Services, Inc.
("Piccola") operated beauty salons and restaurants located in or near certain of
the Predecessor Company's retail stores. At the time TF Salon was 75% owned by
147 West 17th Street (a Company owned directly by certain members of the
Pressman family) and 25% owned by a third party. TF Salon operated the beauty
salons previously located in the Predecessor Company's 17th Street and Dallas
stores pursuant to license agreements with the Predecessor Company. At the time
Piccola was 50% owned, directly or indirectly, by certain members of the
Pressman family and 50% owned by a third party. Pursuant to license agreements,
Piccola operated restaurants in or near the Dallas, Houston and Costa Mesa
stores of the Predecessor Company. The daily operations of the restaurants were
managed by the third party. Pursuant to the license agreements, TF Salon and
Piccola were entitled to receive the sales proceeds less license costs and
certain other fees ("the net proceeds"). During 1997, the Predecessor Company
advanced 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 TF Salon and
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Piccola; accordingly, no revenue was recognized in the Statement of Operations
pursuant to these agreements. During 1997, all beauty salon and restaurant
operating licenses were terminated.
As discussed above, to a large extent prior to the Filing Date, the
Predecessor Company (controlled by the Pressman family) engaged in numerous
transactions with affiliated companies owned or controlled by the Pressman
family. These transactions gave rise to numerous affiliate receivable balances.
Certain of the past transactions with the affiliates involved funding debt
service costs and operating expenses, advances to members of the Pressman family
and contractual payments. The Predecessor Company's ability to collect such
receivables was unclear; accordingly, in a prior year the Predecessor Company
provided a full reserve against the outstanding affiliate receivables at that
time. As many of these affiliates also filed for protection pursuant to the
Bankruptcy Code at the Filing Date, any receivables generated between the
Predecessor Company and these affiliates after that date were also reserved
against, as discussed above. 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
United States and Asia, (ii) expand its United States business through the
acquisition of real estate properties and development of major stores in New
York, Beverly Hills and Chicago, (iii) establish Barneys America, Inc. to
develop a series of smaller, leased stores in other cities across the United
States, (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 United States 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 United States specialty retailing business and the application
of these skills and knowledge to the acquisition of real estate properties and
development of stores both within and outside of the United States, (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.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the January 29, 1999
conversion rate of 115.95 Japanese yen to one United States 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.
After the filing date, as a result of the Chapter 11 filings and the litigation
surrounding these agreements as discussed in Note 2 to the Consolidated
Financial Statements, the Predecessor Company ceased recognizing royalty income
and, accordingly, net royalty income recognized in the Statement of Operations
was $1,400,000 in 1996. 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. Gains and losses resulting from the translation of this
obligation to its United States dollar equivalent were recognized in current
operations prior to the Filing Date when the obligation became subject to
compromise. The Predecessor Company recognized a foreign exchange gain of
$9,440,000 in 1996, in connection therewith. Interest expense in 1996 includes
$1,700,000 in connection with this debt obligation. Such amount approximates one
half the annual interest charge. As a result of the Chapter 11 filings, the
Predecessor Company ceased accruing interest on this debt as of the Filing Date.
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 sold to Preen, for
$162,446,000 in cash, undivided interests in the future payments to become due
under the Services Agreement as well as royalty payments in excess of the future
minimum royalties due pursuant to the License Agreement, each of which is
discussed above. Preen had obtained the cash as a result of various loans made
by Isetan to Preen. The Predecessor Company would have recognized the Deferred
Credits as earned over the remaining terms of the respective agreements or in
accordance with the outcome of certain litigation commenced between Barneys and
Isetan. Pursuant to the Plan, both the License Agreement and the Services
Agreement were terminated. Accordingly, the outstanding balance of the Deferred
Credits was reversed against the Accumulated Deficit of the Predecessor Company
as a Reorganization Adjustment (See Note 3).
During the Company's bankruptcy proceedings involving the Company,
the Company and certain of its affiliates and Isetan and certain of its
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
affiliates were engaged in litigation involving the various aspects of the
relationship outlined above. That litigation was settled 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 5,000 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 -
The 20,000 shares of Series A Preferred Stock have 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
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
payable on any shares of Holdings Common Stock until all accrued and unpaid
dividends on the Preferred Stock have been paid.
In accordance with SAB No. 64, Redeemable Preferred Stock, the
Company recorded the two separate issuances of redeemable preferred stock at
their respective fair values. The 5,000 shares originally issued to Bay Harbour
were valued at $500,000. The remaining 15,000 shares were issued to the Barneys
Employees Stock Plan Trust (the "Trust"). The shares contributed to the Trust
will be issued to existing employees of Barneys as incentive compensation in
connection with future services to be rendered to the Company. Since the 15,000
shares issued to the Trust have not yet been issued to existing employees, they
are not considered as issued or outstanding. When such shares are issued to the
employees, the Company will record compensation expense based on the fair value
of the shares at such time. Any difference between the fair value at that time
and the ultimate redemption value will be accreted as a dividend over the period
up through the date on which they must be redeemed.
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' 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. In accordance with the Plan, a component of the
various settlements reached with Isetan included the contribution of 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
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
327,695 shares outstanding prior to the Effective Date and no dividends were in
arrears. This preferred stock was owned directly or indirectly by members of the
Pressman family. Pursuant to one of the settlements contained in the Plan, there
was a cash payment of $50,000 to certain members of the Pressman family on
account of the existing preferred (and common) stock held by such members of the
Pressman family.
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
Preferred Stock will be issued to existing employees of Barneys as incentive
compensation in connection with future services to be rendered to the Company.
Since the 15,000 shares issued to the Trust have not yet been issued to existing
employees, they are not considered as issued or outstanding. When such shares
are issued to the employees, the Company will record compensation expense based
on the fair value of the shares at such time. Any difference between the fair
value at that time and the ultimate redemption value will be accreted as a
dividend over the period up through the date on which they must be redeemed.
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.
(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. As options to purchase an aggregate of 45,000
shares of Holding Common Stock were granted on March 11, 1999, subsequent to
these grants, there were 255,000 shares available for future grant under this
option plan.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations in accounting for its employee stock options. Under APB No. 25,
no compensation expense is recognized because the exercise price of the stock
options equals the assumed market price of the underlying stock on the date of
grant.
The weighted average fair value of these options, estimated at the
date of grant using the Black-Scholes option-pricing model, was $3.84. The fair
value was estimated at the date of grant using the following weighted-average
assumptions: risk-free interest rate of 5.84%; dividend yield of 0%; stock price
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
at date of grant of $8.68 and a weighted-average expected life of the option of
10 years. As the Company's stock is not actively traded, expected volatility was
considered not applicable for purposes of this calculation.
(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.
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.
Bay Harbour and Whippoorwill are parties to a Stockholders Agreement,
dated as of November 13, 1998 (the "Stockholders Agreement"), which sets forth
their agreement with respect to certain matters relating to the shares of
Holdings Common Stock held by them. Pursuant to the Stockholders Agreement, each
of Bay Harbour and Whippoorwill have agreed to (i) restrict the transferability
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of such shares prior to January 28, 2000, (ii) grant rights of first offer as
well as tag along rights in the event of a transfer of shares, (iii) grant the
right to participate in an acquisition of additional shares of Holdings Common
Stock by one of them, and (iv) give the other a right of first refusal to
purchase shares of Holdings Common Stock which one of them has requested
Holdings to register pursuant to the Registration Rights Agreement entered into
on the Effective Date. In addition, Bay Harbour and Whippoorwill have agreed to
take all actions necessary to elect the three designees of each, one designee of
Isetan, the chief executive officer of Holdings, and three independent
directors, to the Board of Directors of Holdings. The Stockholders Agreement
also generally prohibits each of Bay Harbour and Whippoorwill from voting the
shares of Holdings Common Stock held by it in favor of amending Holdings'
Certificate of Incorporation or Bylaws or a sale of the Company without the
consent of the other.
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.
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-46
<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
BEGINNING OF CHARGED TO COSTS CHARGED TO BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES (A) OTHER 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
============= =========== ============ ============= ===========
</TABLE>
- ----------------------
(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.
F-47
<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: April 21, 2000
BARNEYS NEW YORK, INC.
By: Steven Feldman
-----------------------------------
Name: Steven Feldman
Title: Executive Vice President and
Chief Financial Officer
<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*
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*
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*
10.29 Employment Agreement between Holdings and Allen I. Questrom
effective as of May 5, 1999*
10.30 Registration Rights Agreement between Holdings and Allen I. Questrom
dated as of February 1, 2000*
10.31 Amendment No. 1, dated as of February 1, 2000, to Registration
Rights Agreement, dated as of January 28, 1999 by and among Holdings
and the Holders party thereto*
10.32 Third Amendment to the Credit Agreement dated as of November 30,
1999*
10.33 Second Amendment to the Credit Agreement dated as of June 2,
1999.(1)
10.34 Fourth Amendment to the Credit Agreement dated as of March 17, 2000.
11 Statement re: computation of per share earnings*
21 Subsidiaries of the registrant*
27 Financial Data Schedule*
- ------------
* Filed Previously
(1) Incorporated by reference to Holdings' Quarterly Report on Form 10-Q for the
quarter ended May 1, 1999.
II-3
EXHIBIT 10.34
EXECUTION COPY
FOURTH AMENDMENT
Dated as of March 17, 2000
This FOURTH AMENDMENT is among Barney's, Inc., a New York corporation
("Barneys"), Barneys America, Inc., a Delaware corporation ("BAI"), PFP Fashions
Inc., a New York corporation ("PFP"), Barneys (CA) Lease Corp., a Delaware
corporation ("CA Lease"), Barneys (NY) Lease Corp., a Delaware corporation ("NY
Lease"), Basco All-American Sportswear Corp., a New York corporation ("Basco"),
BNY Licensing Corp., a Delaware corporation ("BNY"), and Barneys America
(Chicago) Lease Corp., a Delaware corporation ("Chicago Lease;" and together
with Barney's, BAI, PFP, CA Lease, NY Lease, Basco and BNY collectively the
"Borrowers"), Barneys New York, Inc. ("Holdings"), the Lenders (as defined
below) and the Administrative Agent (as defined below). This Fourth Amendment
amends the Credit Agreement dated as of January 28, 1999 (as the same may be
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement") entered into among the Borrowers, the financial institutions from
time to time parties thereto (the "Lenders"), the issuing banks from time to
time parties thereto (the "Issuing Banks"), and Citicorp USA, Inc., in its
capacity as agent for the Lenders and the Issuing Banks (the "Administrative
Agent") and General Electric Capital Corporation, in its capacity as
documentation agent. Unless otherwise defined herein, the terms defined in the
Credit Agreement shall be used herein as therein defined.
PRELIMINARY STATEMENTS:
(1) The Borrowers and the Requisite Lenders have agreed to amend the
Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement is,
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended as follows:
(a) The definition of "Consolidated EBITDA" in Section 1.01 of the
Credit Agreement is hereby amended by deleting in its entirety such definition
and substituting therefor the following:
"'Consolidated EBITDA' means, for any twelve-month period on a
consolidated basis for any Person and its Subsidiaries, (i) the sum of
(A) Consolidated Net Income, (B) depreciation and amortization expense,
(C) Consolidated Interest Expense, (D) federal, state, local and
foreign income taxes, (E) other non-cash charges and (F) up to
$3,000,000 in the aggregate of any cash equity contributed to the
Borrowers during Fiscal Years 2000 and 2001 to the extent not used for
Capital Expenditures pursuant to clause (i) of the first proviso in
Section 10.04, minus (ii) extraordinary gains not already excluded from
the determination of Consolidated Net Income."
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(b) Section 10.02 of the Credit Agreement is hereby amended by
deleting in its entirety such Section and substituting therefor the following:
"10.02. Maximum Leverage Ratio. The Leverage Ratio of the Barneys
Group on a consolidated basis, as determined as of the last day of
each fiscal quarter set forth below for the twelve month period
ending on such day, shall not be greater than the ratio set forth
opposite such fiscal quarter:
Fiscal Quarter Ending Ratio
--------------------- -----
First fiscal quarter of Fiscal Year 1999 7.00
Second fiscal quarter of Fiscal Year 1999 7.00
Third fiscal quarter of Fiscal Year 1999 7.00
Fourth fiscal quarter of Fiscal Year 1999 7.00
First fiscal quarter of Fiscal Year 2000 5.25
Second fiscal quarter of Fiscal Year 2000 5.25
Third fiscal quarter of Fiscal Year 2000 5.25
Fourth fiscal quarter of Fiscal Year 2000 4.50
First fiscal quarter of Fiscal Year 2001 3.50
Second fiscal quarter of Fiscal Year 2001 3.50
Third fiscal quarter of Fiscal Year 2001 3.50
Fourth fiscal quarter of Fiscal Year 2001 3.50
First fiscal quarter of Fiscal Year 2002 3.00
Second fiscal quarter of Fiscal Year 2002 3.00
Third fiscal quarter of Fiscal Year 2002 3.00
Fourth fiscal quarter of Fiscal Year 2002 3.00"
SECTION 2. Conditions Precedent to Effectiveness. This Fourth
Amendment shall become effective as of the date hereof on the date (the
"Amendment Effective Date") when the Administrative Agent shall have received
this Fourth Amendment executed by the Borrowers, Holdings and the Requisite
Lenders.
SECTION 3. Representations and Warranties. Each Borrower represents
and warrants as follows:
(a) After giving effect to this Fourth Amendment, all of the
representations and warranties contained in Section 6.01 of the Credit
Agreement and in the other Loan Documents shall be true, correct and
complete in all material respects.
(b) After giving effect to this Fourth Amendment, no Default
or Event of Default shall have occurred and be continuing.
(c) As of the date hereof, no material adverse change shall
have occurred in the condition (financial or otherwise), performance,
properties, operations or prospects of the Barneys Group since August
1, 1998 except as publicly disclosed prior to the date hereof.
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SECTION 4. Reference to and Effect on the Loan Documents. (a) Upon
the effectiveness of this Fourth Amendment, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Credit Agreement, and each reference in
the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement and
all other Loan Documents, are and shall continue to be in full force and effect
and are hereby in all respects ratified and confirmed. Without limiting the
generality of the foregoing, the Loan Documents and all of the Collateral
described therein do and shall continue to secure the payment of all obligations
of the Borrowers under the Credit Agreement, the Notes and the other Loan
Documents, in each case as amended hereby.
(c) The execution, delivery and effectiveness of this Fourth
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or the Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
SECTION 5. Execution in Counterparts. This Fourth Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
SECTION 6. Governing Law. This Fourth Amendment shall be governed by,
and construed in accordance with, the laws of the State of New York.
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IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be executed as of the date first above written.
BARNEY'S, INC.
BARNEYS AMERICA, INC.
PFP FASHIONS INC.
BARNEYS (CA) LEASE CORP.
BARNEYS (NY) LEASE CORP.
BASCO ALL-AMERICAN SPORTSWEAR CORP.
BNY LICENSING CORP.
BARNEYS AMERICA (CHICAGO) LEASE CORP.
By: /s/ Steven Feldman
------------------------------------
Title: Senior Vice President and
Chief Financial Officer
BARNEYS NEW YORK, INC.
By: /s/ Steven Feldman
------------------------------------
Title: Senior Vice President and
Chief Financial Officer
CITICORP USA, INC., as Administrative Agent and
Lender
By: /s/ Brenda Cotsen
------------------------------------
Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION, as Lender
By: /s/ Charles Chiodo
------------------------------------
Title: Senior Vice President
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GMAC COMMERCIAL CREDIT LLC, as Lender
By: /s/ Frank Imperato
------------------------------------
Title: Senior Vice President
NATIONAL CITY COMMERCIAL
FINANCE, INC., as Lender
By: /s/ Katherine Ellero
------------------------------------
Title: Assistant Vice President
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