<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended August 31, 1997. Commission File Number 0-15017
BARRY'S JEWELERS, INC.
(Exact name of registrant as specified in its charter)
California 95-3746316
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
111 West Lemon Avenue, Monrovia, California 91016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 303-4741
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock
Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES. [X] NO. [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of October 12, 1997, the issuer had a total of 4,029,372 shares of common
stock outstanding.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a
court. [ X ] Yes. [ ] No.
<PAGE> 2
BARRY'S JEWELERS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGES
<S> <C> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1.Financial Statements 1
A. Consolidated Balance Sheets 1
B. Consolidated Statements of Operations 2
C. Consolidated Statements of Cash Flows 3
D. Notes to Consolidated Financial Statements 4
ITEM 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II.OTHER INFORMATION
ITEM 1.Legal Proceedings 11
ITEM 2.Changes in Securities 11
ITEM 3.Defaults Upon Senior Securities 11
ITEM 4.Submission of Matters to a Vote of Security Holders 11
ITEM 5.Other Information 11
ITEM 6.Exhibits and Reports on Form 8-K 11
</TABLE>
<PAGE> 3
ITEM 1.
PART I
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, 1997 MAY 31, 1997
--------------- -------------
<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 16,419 $ 7,322
Customer receivables, net of allowances for doubtful accounts of
$8,839 at August 31, 1997, and $10,300 at May 31, 1997 50,561 54,552
Merchandise inventories 33,913 41,374
Prepaid expenses and other current assets 1,408 2,142
--------- ---------
Total current assets 102,301 105,390
Property and equipment:
Leasehold improvements, furniture and fixtures 20,776 20,726
Computers and equipment 4,177 4,110
--------- ---------
24,953 24,836
Less: accumulated depreciation and amortization 10,182 9,413
--------- ---------
Net property and equipment 14,771 15,423
Deferred income taxes 72 72
Other assets, principally deferred debt issuance costs, net of
accumulated amortization of $2,120 at August 31, 1997,
and $1,834 at May 31, 1997 2,277 2,598
--------- ---------
Total assets $ 119,421 $ 123,483
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable - trade $ 1,373 $ 221
Other accrued liabilities 7,136 5,687
--------- ---------
Total current liabilities 8,509 5,908
Liabilities subject to compromise under
reorganization proceedings 130,348 130,271
Commitments and contingencies
Shareholders' deficiency:
Common stock; no par value; authorized 8,000,000
shares; issued and outstanding, 4,029,372 shares
at August 31, 1997 and May 31, 1997 33,247 33,247
Accumulated deficit (52,683) (45,943)
--------- ---------
Total shareholders' deficiency (19,436) (12,696)
--------- ---------
Total liabilities and shareholders' deficiency $ 119,421 $ 123,483
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED AUGUST 31, 1997 1996
- ------------------------------------------------- ---------- -------
<S> <C> <C>
(UNAUDITED)
Net sales $ 22,288 $ 26,101
Finance and credit insurance fees 2,947 3,733
-------- --------
25,235 29,834
-------- --------
Costs and expenses:
Cost of goods sold, buying and occupancy 15,860 17,394
Selling, general and administrative expenses 10,494 12,561
Provision for doubtful accounts 1,493 2,138
-------- --------
27,847 32,093
-------- --------
Operating loss (2,612) (2,259)
Interest expense, net 3,118 2,612
-------- --------
Loss before reorganization costs,
income taxes, and extraordinary item (5,730) (4,871)
Reorganization costs 1,010 --
-------- --------
Loss before income taxes and
extraordinary item (6,740) (4,871)
Income taxes --
-------- --------
Loss before extraordinary item (6,740) (4,871)
Extraordinary item -- (876)
-------- --------
Net loss $ (6,740) $ (5,747)
======== ========
Loss per share:
Loss before extraordinary item $ (1.67) $ (1.22)
Extraordinary item -- $ (0.22)
-------- --------
Net loss per share $ (1.67) $ (1.44)
======== ========
Weighted average number of common
shares outstanding 4,029 3,999
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED AUGUST 31, 1997 1996
- --------------------------------------------------------------- ---------- ----------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,740) $ (5,747)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,055 881
Extraordinary loss -- 876
Provision for doubtful accounts 1,493 2,138
Loss on sale or abandonment of property and equipment -- 70
Deferred income taxes -- (317)
Changes in assets and liabilities:
Customer receivables 2,498 1,719
Merchandise inventories 7,461 (5,435)
Prepaid expenses and other current assets 734 (18)
Other assets 35 (1,725)
Accounts payable - trade 1,152 9,892
Other Accrued liabilities 1,526 676
-------- --------
Net cash provided by operating activities 9,214 3,010
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (117) (3,429)
Proceeds from sale of assets -- 11
-------- --------
Net cash used in investing activities (117) (3,418)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility -- 45,493
Net repayments under securitization facility -- (45,119)
Principal payments on long-term debt -- (31)
-------- --------
Net cash provided by financing activities -- 343
-------- --------
Net increase (decrease) in cash and cash equivalents 9,097 (65)
Cash and cash equivalents at beginning of period 7,322 1,765
-------- --------
Cash and cash equivalents at end of period $ 16,419 $ 1,700
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest $ 1,212 $ 796
Income taxes $ 6 $ 10
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended August 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
May 31, 1998. For further information, refer to the financial statements and
footnotes thereto included in the Registrant Company's Annual Report on Form
10-K for the year ended May 31, 1997.
2. REORGANIZATION
Barry's Jewelers, Inc. (Debtor-in-Possession) and subsidiary (the "Company")
operates a chain of retail stores that sell fine jewelry and watches, utilizing
credit financing to enhance sales. It operated 128 stores on August 31, 1997,
and 152 stores on August 31, 1996.
On May 11, 1997, (the "Petition Date"), the Company filed a voluntary petition
for reorganization under Chapter 11 of the United States Bankruptcy Code
("Chapter 11") in the United States Bankruptcy Court for the Central District of
California, Los Angeles Division. Management determined that filing the Chapter
11 petition would allow the Company the needed time and flexibility to
restructure its operations, help assure the continued flow of merchandise to its
stores, and provide the time and protection necessary to restructure the
Company's funding sources.
Since the Petition Date, the Company has continued in possession of its
properties and, as Debtor-in-Possession, is authorized to operate and manage its
businesses and enter into all transactions (including obtaining services,
inventories, and supplies) that it could have entered into in the ordinary
course of business without approval of the Bankruptcy Court. A statutory
Creditors' Committee and an official Bondholders' Committee have also been
appointed.
In a Chapter 11 filing, substantially all liabilities as of the Petition Date
are subject to compromise or other treatment under a plan of reorganization. For
financial reporting purposes, those liabilities and obligations whose
disposition is dependent on the outcome of the Chapter 11 filing have been
segregated and classified as liabilities subject to compromise under
reorganization proceedings in the accompanying consolidated balance sheet (Note
3). Generally, actions to enforce or otherwise effect payment of all pre-Chapter
11 liabilities as well as all pending litigation against the Company are stayed
while the Company continues its business operations as Debtor-in-Possession.
Schedules have been filed by the Company with the Bankruptcy Court setting forth
its assets and liabilities as of the Petition Date as reflected in the Company's
accounting records. Differences between amounts reflected in such schedules and
claims filed by creditors will be investigated and either amicably resolved or
adjudicated before the Bankruptcy Court. The ultimate amount of and settlement
terms for such liabilities are subject to a plan of reorganization and
accordingly are not presently determinable.
Under the Bankruptcy Code, the Company may elect to assume or reject real estate
leases, employment contracts, personal property leases, service contracts and
other prepetition executory contracts, subject to Bankruptcy Court approval. The
liabilities subject to compromise under reorganization proceedings include a
provision for the estimated amount that may be claimed by lessors and allowed in
connection with the unexpired real estate leases. The Company will continue to
analyze its executory contracts and may assume or reject additional contracts.
The Company has developed a business plan to (1) reposition the Company's
merchandise selection; (2) establish vendor partnering programs to bring in new
consignment inventory and return aged merchandise to vendors in exchange for new
inventory; (3) establish a consistent store format and consolidate trade names;
(4) adjust the Company's pricing and commission structure to improve sales and
strengthen its competitive position; (5) pursue alternatives to an in-house
credit and collection process; and (6) install modern merchandising and
point-of-sale systems.
4
<PAGE> 7
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
As a result of this business plan, the Company reached an agreement in July 1997
with its vendors and creditors regarding the terms of a trade
debtor-in-possession financing agreement. Pursuant to the agreement, the
participating vendors will allow the Company to return merchandise with a value
equal to 75% of the vendor's prepetition claim. The value of the prepetition
merchandise returned shall not exceed, in the aggregate, approximately $7,913.
Additionally, participating vendors will also provide credit for merchandise
purchases in an amount equal to two and one-half times the value of the
prepetition merchandise returned. The revolving trade credit will be granted,
generally, on 90-day terms for a period of one year from the date of the
agreement.
Additionally, the Company also reached an agreement in July 1997 with its
vendors and creditors allowing the Company to increase the level of consigned
merchandise. Pursuant to the terms of the agreement, certain Company vendors
will commit to maintain a specified minimum amount of consigned merchandise with
the Company for a specified period. The Company shall hold such merchandise for
sale in the ordinary course of its business and is responsible for insuring the
consignment merchandise for its full value and against all risks of loss.
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern, which
contemplate the realization of assets and the satisfaction of liabilities in the
normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, such realization of assets and
satisfaction of liabilities is subject to uncertainty. A plan of reorganization
could materially change the amounts reported in the accompanying consolidated
financial statements, which do not give effect to adjustments to the carrying
values of assets and liabilities, which may be necessary as a consequence of a
plan of reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to formulate a plan of
reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, to maintain
compliance with the debtor-in-possession trade financing agreement and terms of
the cash stipulation, and the ability to obtain sufficient financing sources to
meet future obligations.
3. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Liabilities subject to compromise under reorganization proceedings consist of
the following as of August 31, 1997:
<TABLE>
<CAPTION>
Secured liabilities: August 31, 1997 May 31, 1997
--------------- ------------
<S> <C> <C>
Borrowings outstanding under
Amended Revolving Credit Agreement $ 57,855 $ 57,855
Senior Secured Notes (includes interest payable
of $3,073 accrued through the Petition Date) 53,073 53,073
Other notes payable and capital lease obligations 24 88
-------- --------
110,952 111,016
Unsecured liabilities:
Accounts payable trade 10,349 10,344
Other accrued expenses 9,047 8,911
-------- --------
19,396 19,255
-------- --------
$130,348 $130,271
======== ========
</TABLE>
5
<PAGE> 8
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Any plan of reorganization ultimately approved by the Company's impaired
prepetition creditors and shareholders and confirmed by the Bankruptcy Court may
materially change the amounts and terms of these prepetition liabilities. Such
amounts are estimated as of August 31, 1997, and the Company anticipates that
claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. The additional liability arising
from this reconciliation process, if any, is not subject to reasonable
estimation, and accordingly, no provision has been recorded for these possible
claims. The termination of other contractual obligations and the settlement of
disputed claims may create additional prepetition liabilities. Such amounts, if
any, will be recognized in the balance sheet as they are identified and become
subject to reasonable estimation.
6
<PAGE> 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT. This Quarterly Report on Form 10-Q
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and the Company intends that such forward-looking statements be subject to
the safe harbors created thereby.
OVERVIEW. The following discussion presents information about the financial
condition, liquidity and capital resources, and results of operations of the
Company as of and for the fiscal quarters ended August 31, 1997, and 1996. This
information should be read in conjunction with the audited consolidated
financial statements of the Company and the notes thereto as reported on the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
PROCEEDINGS UNDER CHAPTER 11. On May 11, 1997, (the "Petition Date"), the
Company commenced a reorganization case by filing a voluntary petition (the
"Chapter 11 Petition") for relief under chapter 11 ("Chapter 11") of title 11 of
the United States Code (as amended from time to time, the "Bankruptcy Code") in
the United States Bankruptcy Court for the Central District of California, Los
Angeles Division (the "Bankruptcy Court"), case number 97-27988-VZ. Management
determined that filing of the Chapter 11 Petition would allow the needed time
and flexibility to restructure the Company's operations, help assure the
continued flow of merchandise to its stores, and provide the time and protection
necessary to restructure the Company's funding sources.
Since the Petition Date, the Company has continued in possession of its
properties and, as debtor-in-possession, is authorized to operate and manage its
businesses and enter into all transactions (including obtaining services,
inventories, and supplies) that it could have entered into in the ordinary
course of business without approval of the Bankruptcy Court, after notice and
hearing. A statutory Creditors' Committee and an official Bondholders' Committee
have been appointed in the Chapter 11 case, and as of September 17, 1997, an
unofficial equity committee was in the process of being formed.
Subsequent to the filing of the Chapter 11 Petition, the Company sought
and obtained several orders from the Bankruptcy Court which were intended to
stabilize its business. The most significant of these orders: (1) authorized and
extended use of the Company's cash collateral through February 28, 1998,
pursuant to the Stipulation Authorizing Use of Cash Collateral (the "Cash
Stipulation"); (2) approved a trade debtor-in-possession ("DIP") financing
agreement (the "Trade DIP Financing Agreement"), which allows the Company to
obtain its expected merchandise orders of over $50 million on extended trade
terms while providing the trade vendors with substantial support for the payment
of their accounts receivable; (3) authorized the Company to return approximately
$8 million of merchandise to vendors as credit against the vendors' prepetition
claims in exchange for at least $11 million of new merchandise on extended trade
terms (the "Vendor Return Program"); (4) authorized the Company to obtain
merchandise on consignment (the "Consignment Agreement"); and (5) authorized
payment of certain prepetition liabilities, principally prepetition wages and
employee benefits, and payments for certain prepetition customer and related
service claims.
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates realization of assets and satisfaction
of liabilities in the normal course of business. As a result of the Chapter 11
filing and circumstances relating to this event, such realization of assets and
satisfaction of liabilities is subject to uncertainty. A plan of reorganization
could materially change the amounts reported in the accompanying consolidated
financial statements, which do not give effect to adjustments to the carrying
values of assets and liabilities, which may be necessary as a consequence of a
plan of reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to formulate a plan of
reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, to maintain
compliance with the Debtor-in-Possession Trade Financing Agreement and terms of
the Cash Stipulation, and the ability to obtain sufficient financing sources to
meet future obligations.
7
<PAGE> 10
RESULTS OF OPERATIONS
Net sales for the quarter ended August 31, 1997 were $22.3 million, a
decrease of $3.8 million, or 15%, from net sales of $26.1 for the quarter ended
August 31, 1996. The decrease was primarily the result of the closure of
approximately 50 stores during fiscal 1997, which was offset slightly by an
increase of 4% in sales of comparable stores (those open for the same period in
both the current and preceding years) versus the first quarter of the prior
year. The comparable store sales increase reflected a higher sales mix of
promotionally priced merchandise
Finance and credit insurance charges on credit sales for the quarter
ended August 31, 1997 were $3.0 million, a decrease of $786 thousand, or 21%,
from the prior year period primarily due to a decrease in the average total
outstanding customer receivables.
Cost of goods sold, buying and occupancy expenses were 71% of net sales
for the quarter ended August 31, 1997 compared to 67% for the prior year period.
The gross margin percentage declined in first quarter of fiscal 1998 as the
Company increased markdowns on slow-moving merchandise in preparation for new
merchandise, which management expects to begin arriving during the second
quarter, pursuant to the Company's new merchandising strategy.
Selling, general and administrative expenses were $10.5 million, a
decrease of $2.1 million, or 16%, from the prior year period, primarily due to
decreases in payroll, benefits and advertising costs. Selling, general and
administrative expenses decreased slightly as a percentage of net sales to 47%
for the quarter ended August 31, 1997 from 48% for the quarter ended August 31,
1996. The decrease as a percentage of net sales is attributable to a combination
of the decline in total expense offset by the decrease in net sales.
The provision for doubtful accounts was $1.5 million, a decrease of $645
thousand from the prior year period. The provision was approximately 7% and 8%,
respectively of net sales for the quarters ended August 31, 1997 and 1996. The
decrease of such provision was primarily due to the closed stores, which had
generated less creditworthy customer receivables, along with changes in credit
underwriting implemented by new management.
Interest expense was $3.1 million, an increase of $506 thousand from the
prior year period. Such increase was a result of higher average interest rates
on the Company's long-term debt, and higher average debt balances. The Company
also recorded $876 thousand of extraordinary charges during the first quarter of
fiscal 1997 due to the write-off of deferred finance fees in connection with the
early extinguishment of its Securitization Facility.
FINANCIAL CONDITION
CREDIT PROGRAM. The Company offers its merchandise sales on credit terms to
qualified customers. The Company's policy is to attempt to obtain a cash down
payment on all credit sales, with monthly payments established such that the
payment of the credit balance will occur, generally, over a period ranging from
24 to 36 months. The Company's customer receivables are revolving charge
accounts. As of August 31, 1997, and May 31, 1997, the aggregate customer
receivables balances were $59.4 million and $64.9 million, respectively.
INVENTORY. At August 31, 1997, inventory was approximately $33.9 million, a
decrease of approximately $7.5 million from May 31, 1997. This decrease is
primarily due to liquidation of aged merchandise and lower merchandise
purchases.
LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS. As discussed
previously, the Company filed a voluntary petition for relief under Chapter 11.
Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on events that occurred on or before
the Petition Date. The ultimate terms of settlement of these claims will be
determined in accordance with a plan of reorganization that requires approval of
the impaired prepetition creditors and shareholders and confirmation by the
Bankruptcy Court.
8
<PAGE> 11
Until a plan of reorganization is confirmed by the Bankruptcy Court,
only such payments on prepetition obligations that are approved or required by
the Bankruptcy Court will be made. Pursuant to the Cash Stipulation, the Company
is making contractual interest payments to its lenders. At August 31, 1997,
$130.3 million has been established as liabilities subject to compromise under
reorganization proceedings. Other liabilities may arise or be subject to
settlement as a result of rejection of executory contracts and unexpired leases,
or the Bankruptcy Court's resolution of claims for contingencies and other
disputed amounts.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's operations require working capital to fund the purchase
of inventory, lease payments, and the funding of normal operating expenses. The
seasonality of the Company's business requires a significant build-up of
inventory for the Christmas holiday selling period. These seasonal inventory
needs generally must be funded during the late summer and fall months because of
the necessary lead-time to obtain additional inventory. Additionally, the heavy
holiday selling period leads to a seasonal build-up of customer receivables that
must be funded during the winter and spring months.
The Company reported cash flow from operating activities of
approximately $9.2 million for the quarter ended August 31, 1997, as compared to
cash flow from operating activities of approximately $3.0 million for the
comparable period last year. The increase in cash flow from operating activities
during the current year is primarily due to a decrease of $7.5 million in
inventory, which resulted from the liquidation of aged slow-moving inventory.
Additionally, the Company paid approximately $2.3 million of finance fees
during the first quarter of last year in connection with the termination of an
accounts receivable securitization facility and the amendment of the Company's
revolving credit agreement.
As of August 31, 1997, the Company had $16.4 million of cash and cash
equivalents as a result of the Chapter 11 filing and the prohibition on payments
of prepetition debt. Approximately $3.3 million of the Company's cash and cash
equivalents at August 31, 1997, was restricted pursuant to the terms of the Cash
Stipulation. Additionally, $2.0 million of the Company's cash and cash
equivalents at August 31, 1997, was restricted pursuant to the terms of the
Trade DIP Financing Agreement.
Inherent in a successful plan of reorganization is a capital structure
that permits the Company to generate sufficient cash flow after reorganization
to meet its restructured obligations and to fund the current obligations of the
reorganized Company. Under the Bankruptcy Code, the rights of and ultimate
payment to prepetition creditors may be substantially altered and eliminated as
to some classes of creditors. At this time, it is not possible to predict the
outcome of the Chapter 11 filing, or its effects on the business of the Company,
or on the interests of the creditors or shareholders.
FINANCING TRANSACTIONS. On July 26, 1996, the agent under the then existing
accounts receivable securitization facility (the "Securitization Facility")
advised the Company that it wished to terminate the commitment under the
Securitization Facility. On August 30, 1996, the Company entered into an amended
and restated revolving credit agreement with First National Bank of Boston
("FNBB", the "Amended Revolving Credit Agreement"), which has a term of three
years and contains various restrictive and financial covenants.
Proceeds of the initial funding under the Amended Revolving Credit
Agreement in the amount of approximately $41.2 million were used to refinance
the Company's obligations under the Securitization Facility, following which the
Securitization Facility was terminated. In addition, upon consummation of the
Amended Revolving Credit Agreement, the Company paid fees of approximately $2.3
million, which were deferred and are being amortized. On August 30, 1996, the
indenture governing the 11% Senior Secured Notes due December 22, 2000 (the
"Notes") was also amended to the extent required to permit the consummation of
the Amended Revolving Credit Agreement and the termination of the Securitization
Facility.
On January 27, 1997, the Company's Amended Revolving Credit Agreement
was amended again (the "Second Amended Revolving Credit Agreement") and the bank
waived the Company's non-compliance with certain financial covenants therein for
the quarter ended November 30, 1996, and reduced its commitment to lend to the
Company from $85 million to $70 million as of January 27, 1997. Outstanding
borrowings bear interest at the agent bank's reference rate plus 1.5% unless an
Event of Default (as defined in the Second Amended Revolving Credit Agreement)
has occurred and is continuing, or is not waived, in which case such outstanding
borrowings bear interest at 2.0% above the rate otherwise payable.
9
<PAGE> 12
The Second Amended Revolving Credit Agreement required the Company to
comply with certain customary financial covenants and restrictions, some of
which were adjusted in the January amendment to take into account the various
charges incurred in connection with the Company's restructuring and cost savings
initiatives implemented during the third and fourth quarters of fiscal 1997. The
Company failed to meet certain financial covenants contained in the Second
Amended Revolving Credit Agreement as of February 28, 1997, which constituted an
Event of Default under the Second Amended Revolving Credit Agreement. The Event
of Default prohibited the Company from paying the interest due on April 30, 1997
on the Notes.
Commencement of the Chapter 11 case has automatically stayed any actions
to enforce collection of amounts owed by the Company to the holders of the
Second Amended Revolving Credit Agreement and Notes. Concurrent with the Chapter
11 proceedings, the commitment to lend under the Second Amended Revolving Credit
Agreement was terminated. The Company had $57.9 million outstanding on the
Petition Date.
As of August 31, 1997, the Company had approximately $57.9 million of
borrowings outstanding under its Second Amended Revolving Credit Agreement and
$50 million outstanding on the Notes. The Company had $4.7 million of interest
payable on the Notes. This amount represented the semi-annual interest payment
that was due on April 30, 1997, but was not paid, plus accrued interest through
August 31, 1997.
STIPULATION AUTHORIZING USE OF CASH COLLATERAL. On May 14, 1997, the Company
received interim approval of the Bankruptcy Court of an Agreement to Use Cash
Collateral. The Company operated under that agreement until July 22, 1997, at
which time it received final court approval of an Amended and Restated
Stipulation Pursuant to Sections 361 and 363 of the Bankruptcy Code Authorizing
Debtor's Use of Cash Collateral and Granting Adequate Protection to Collateral
Agent, Lenders and Bondholders (the "Cash Stipulation"). Pursuant to the terms
of the Cash Stipulation, through February 28, 1998, the lenders agreed to allow
the Company to utilize the cash collateral generated by operations rather than
paying down any of the $57.9 million outstanding balance. This cash collateral
agreement requires the Company to, among other things, comply with a modified
borrowing base. The modified borrowing base increased the cash collateral
availability under the Company's Second Amended Revolving Credit Agreement by
increasing the advance rate to 82% of eligible accounts receivable, as defined,
and to 45% of eligible inventory, as defined, subject to various reductions
stipulated in the Cash Stipulation.
DEBTOR-IN-POSSESSION TRADE FINANCING AGREEMENT AND VENDOR RETURN PROGRAM. On
July 22, 1997, the Company reached an agreement with its vendors and creditors
regarding the terms of the Trade DIP Financing Agreement. Pursuant to such
agreement, the Company should be able to obtain its expected orders for over $50
million of new merchandise on extended trade terms, without having to pay the
high fees and interest charges that normally accompany a DIP loan. The vendors
are protected from credit exposure through a $2 million trade trust and a $4
million subordination provided by certain holders of the Company's Notes.
In addition, the agreement allows the Company to exchange up to
approximately $8 million of slow-moving merchandise for at least $11 million of
fresh inventory on extended trade terms.
CONSIGNEE AGREEMENT. As part of the Company's plan of reorganization, management
has sought to increase the level of consigned merchandise. Toward this end, the
Company received Bankruptcy Court approval of its Consignment Agreement on July
22, 1997. Pursuant to the terms of the Consignment Agreement, the Company's
vendors will commit to maintain a specified minimum amount of consigned
merchandise. The Company shall hold such merchandise for sale in the ordinary
course of its business and is responsible for insuring the consignment
merchandise for its full value and against all risks of loss. The Company is
required to report all consignment merchandise sales on a weekly basis, and to
pay all invoices within specified trade payment terms, generally 30 days from
receipt of invoice, as set forth in the Consignment Agreement.
10
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Pursuant to section 362 of the Bankruptcy Code, during the Chapter 11
case, creditors and other parties in interest may not, without court
approval, (i) commence or continue a judicial, administrative or other
proceeding against the Company which was or could have been commenced
prior to the commencement of the Chapter 11 case, or recover a claim
that arose prior to the commencement of the Chapter 11 case; (ii)
enforce any pre-petition judgment against the Company; (iii) take any
action to obtain possession of property of the Company or to exercise
control over property of the Company or its estate; (iv) create, perfect
or enforce any lien against property of the Company; (5) collect,
assess, or recover claims against the Company that arose before the
commencement of the Chapter 11 case; or (vi) offset any debt owing to
the Company that arose prior to the commencement of the Chapter 11 case
against a claim of such creditor or part in interest against the Company
that arose before the commencement of the Chapter 11 case.
As a result of the foregoing, all pre-petition claims asserted or
assertable against the Company have been automatically stayed.
The nature of a Chapter 11 case is to have all claims against and
interest in the Company resolved. Accordingly, the Bankruptcy Court
ordered that any entity desiring to participate in any distribution in
the Chapter 11 case must either have been previously properly scheduled
by the Company or file a proof of claim with the Bankruptcy Court on or
before October 31, 1997. The Company will evaluate proofs of claims
filed during the Chapter 11 case.
Item 2. Changes in Securities Not Applicable
Item 3. Defaults Upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders Not
Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K Not Applicable
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BARRY'S JEWELERS, INC.
October 15, 1997 By: /s/ SAMUEL J. MERKSAMER
----------------------------------
Samuel J. Merksamer
President and Chief Executive Officer
October 15, 1997 By: /s/ E. PETER HEALEY
----------------------------------
E. Peter Healey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
October 15, 1997 By: /s/ DANIEL L. FELSENTHAL
----------------------------------
Daniel L. Felsenthal
Vice President Finance
(Principal Accounting Officer)
12
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