<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 (I.R.S. Employer
incorporation or organization) Identification No.)
111 WEST LEMON AVENUE, MONROVIA, CA 91016
(Address of principal executive offices)
Registrant's telephone number, including area code: (818) 303-4741
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.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS 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 Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 1, 1997:
Common Stock, no par value, 4,029,372 shares
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BARRY'S JEWELERS, INC.
FORM 10-Q
FEBRUARY 28, 1997
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Balance Sheets
February 28, 1997 and May 31, 1996 2
Statements of Operations
Three and nine months ended February 28, 1997 and
February 29, 1996 3
Statements of Cash Flows
Nine months ended February 28, 1997 and
February 29, 1996 4
Notes to Financial Statements - February 28, 1997 5
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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BARRY'S JEWELERS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT NUMBER OF COMMON SHARES)
<TABLE>
<CAPTION>
February 28, May 31,
1997 1996
(Unaudited) (Note)
--------- --------
<S> <C> <C>
Assets
Current assets:
Cash $ 236 $ 1,765
Customer receivables, net of allowance for doubtful
accounts of $2,302 (February 28, 1997) and
$10,930 (May 31, 1996) 68,960 68,374
Merchandise inventories 56,333 54,559
Prepaid expenses and other current assets 1,716 2,031
--------- --------
Total current assets 127,245 126,729
Net property and equipment 18,002 16,366
Deferred income taxes 122 122
Other assets, primarily deferred debt issue costs,
net of accumulated amortization of $2,955
(February 28, 1997) and $1,864 (May 31, 1996) 3,077 2,756
--------- --------
Total assets $ 148,446 $145,973
========= ========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 62,153 $ 181
Accounts payable - trade 12,133 3,837
Other accrued liabilities 10,108 5,336
--------- --------
Total current liabilities 84,394 9,354
Long-term debt, less current maturities 50,000 103,398
Shareholders' equity
Common stock, no par value: authorized - 8,000,000
shares; issued and outstanding 4,029,372 shares
(February 28, 1997) and 3,999,416 shares (May 31, 1996) 33,247 33,196
(Accumulated deficit) Retained earnings (19,195) 25
--------- --------
Total shareholders' equity 14,052 33,221
--------- --------
Total liabilities and shareholders' equity $ 148,446 $145,973
========= ========
</TABLE>
Note: The balance sheet at May 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Financial Statements.
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BARRY'S JEWELERS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND NUMBER OF COMMON SHARES OUTSTANDING)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 49,236 $ 50,868 $ 104,685 $ 110,732
Finance and credit insurance charges 3,593 4,004 10,775 12,051
----------- ---------- ----------- ----------
52,829 54,872 115,460 122,783
Costs and expenses:
Cost of goods sold,
buying and occupancy 32,022 27,865 68,765 63,559
Selling, general and
administrative expenses 19,114 14,695 46,099 39,169
Provision for doubtful accounts 3,558 4,126 8,116 8,913
Restructuring expenses 1,336 -- 1,336 --
----------- ---------- ----------- ----------
Operating (loss) income (3,201) 8,186 (8,856) 11,142
Interest expense, net 3,617 2,921 9,488 8,298
----------- ---------- ----------- ----------
(Loss) income before income taxes and
extraordinary item (6,818) 5,265 (18,344) 2,844
Income taxes -- 2,106 -- 1,138
----------- ---------- ----------- ----------
(Loss) income before extraordinary item (6,818) 3,159 (18,344) 1,706
Extraordinary item -- -- 876 --
----------- ---------- ----------- ----------
Net (loss) income ($ 6,818) $ 3,159 ($ 19,220) $ 1,706
=========== ========== =========== ==========
(Loss) income per share:
(Loss) income before extraordinary item ($ 1.70) $ 0.79 ($ 4.59) $ 0.43
Extraordinary item -- -- ($ 0.22) --
----------- ---------- ----------- ----------
Net (loss) income per share ($ 1.70) $ 0.79 ($ 4.81) $ 0.43
=========== ========== =========== ==========
Weighted average common shares
outstanding 4,000,747 3,973,658 3,999,855 3,970,530
=========== ========== =========== ==========
</TABLE>
See Notes to Financial Statements.
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BARRY'S JEWELERS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
February 28, February 29,
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net (loss) income ($19,220) $ 1,706
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 5,088 3,444
Provision for doubtful accounts 8,116 8,913
Loss on sale or abandonment of property and equipment 75 114
Impairment of long-lived assets 1,970 --
Changes in operating assets and liabilities:
Customer receivables (8,702) (13,117)
Merchandise inventories (1,774) (6,019)
Prepaid expenses and other current assets 365 (811)
Other assets (2,460) (1,925)
Accounts payable - trade 8,296 (7,093)
Accrued liabilities 4,969 1,954
-------- --------
Net cash used in operating activities (3,277) (12,834)
Investing activities:
Purchase of property and equipment (6,923) (3,781)
Proceeds from sale of equipment 83 9
-------- --------
Net cash used in investing activities (6,840) (3,772)
Financing activities:
Proceeds from issuance of common stock 14 87
Principal payments on long-term debt (135) (20,367)
Net borrowings (repayment) under securitization facility (45,119) 47,713
Net borrowings (repayment) under revolving facility 53,828 (11,431)
-------- --------
Net cash provided by financing activities 8,588 16,002
-------- --------
Decrease in cash (1,529) (604)
Cash at beginning of period 1,765 954
-------- --------
Cash at end of period $ 236 $ 350
======== ========
</TABLE>
See Notes to Financial Statements.
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BARRY'S JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS
PART I ITEM 1 - FOOTNOTES
NOTE 1 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 and the nine months ended
February 28, 1997 are not necessarily indicative of the results that
may be expected for the year ending May 31, 1997. For further
information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the
year ended May 31, 1996 and its Annual Report on Form 10-K/A for the
year ended May 31, 1995.
NOTE 2 During the first quarter of fiscal 1997, the Company was notified
that the agent under the accounts receivable securitization facility
established in December 1995 (the "Securitization Facility") desired to
extinguish the commitment under the facility. Consequently, on August
30, 1996, the Company entered into a Second Amended and Restated
Revolving Credit Agreement with its syndicate of banks (the "Amended
Revolving Credit Agreement"). Funds drawn under the Amended Revolving
Credit Agreement were used, in part, to refinance the Securitization
Facility, which was thereupon terminated. In connection with the
Amended Revolving Credit Agreement, the Company incurred financing fees
of approximately $2,300,000, which will be charged to earnings over the
life of the Amended Revolving Credit Agreement. Such financing fees
are included in the accompanying balance sheet. During the first
quarter of 1997, the Company recorded an extraordinary charge of
$876,000 that is composed of deferred financing fees related to the
terminated Securitization Facility.
The Amended Revolving Credit Agreement was amended on January 27, 1997
to cure certain covenant violations at November 30, 1996 as described
in the Company's Form 10-Q for the quarter ended November 30, 1996 and
to make other changes as described more fully in the "Liquidity and
Capital Resources" section of this Form 10-Q. The amendment fee of
$325,000 was charged to interest expense during the third fiscal
quarter.
NOTE 3 The Company currently accounts for its stock-based compensation plans
using the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). In 1995, the
Financial Accounting Standards Board issued a new statement on
accounting for stock-based compensation (SFAS 123). This statement
became effective for the Company beginning June 1, 1996. Among other
provisions, the statement allows companies to elect to account for
stock-based compensation plans using a fair-value-based method or
continue measuring
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compensation expense for those plans using the intrinsic value method
prescribed in APB 25. SFAS 123 requires that companies electing to
continue using the intrinsic value method must make pro forma
disclosures of net income and earnings per share as if the
fair-value-based method of accounting had been applied. The adoption of
SFAS 123 will be reflected in the Company's 1997 fiscal year-end
financial statements. As the Company will continue to account for
stock-based compensation using the intrinsic value method, SFAS 123
will not have an impact on the Company's results of operations or
financial position but will require additional disclosures.
NOTE 4 The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". This statement is effective for the Company beginning
June 1, 1996. Among other provisions, the statement standardizes the
accounting practices for the recognition and measurement of impairment
losses on certain long-lived assets. The standard requires an entity to
review long-lived assets for impairment and recognize a loss if
expected future cash flows are less than the carrying value of the
assets; such losses are measured as the difference between the carrying
value and the fair market value of the assets. The fair value is
determined by using quoted market prices, if available, or using a
method based upon a multiple of annual earnings before income taxes,
depreciation and amortization.
During the quarter ended February 28, 1997, the Company recognized a
$1,970,000 loss which is included within selling, general and
administrative expenses in the accompanying financial statements,
related principally to the impairment of leasehold improvements,
property and equipment related to twenty-six under-performing stores as
discussed further in Note 6.
NOTE 5 During the quarter ended February 28, 1997, the Company changed its
customer receivable write-off policy. Previously, the Company would
fully reserve for accounts that fell within certain aged parameters but
would continue internal collection efforts until such time as a
determination was made that the accounts should be written off against
the allowance for doubtful accounts. With this change in policy, the
internal collection efforts for these fully reserved accounts will be
discontinued and the accounts will be sent to outside collection
agencies, at which time the account balances will be written off
against the allowance for doubtful accounts. The Company adopted this
change as a result of their cost savings initiatives (as discussed in
Note 6) in an effort to reduce internal collection and other expenses.
Concurrent with this change, the Company accelerated the write-off of
approximately $6,780,000 of customer receivables against the allowance
for doubtful accounts. Such charge was fully reserved for and had no
material impact on current operations.
NOTE 6 On January 14, 1997, the Company announced its intent to implement
Company-wide restructuring and other cost savings initiatives during
the third and fourth quarters of fiscal 1997 to reduce operating
and administrative costs and debt. Those initiatives included declining
to renew leases on twelve stores and closing eighteen to twenty-four
additional under-performing stores with concurrent reductions in
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overhead at the Company's remaining stores and reductions in corporate
expenses. Those initiatives were expected to require various charges to
third quarter operations of between $10 - $14 million. Such charges
primarily included, but were not limited to, mall store rent
settlements, write-off of certain leasehold improvements, employee
severance costs and other related costs. Except for the mall store rent
settlements, employee severance and other related costs, the charges
would be non-cash in nature. The restructuring was expected to be
substantially completed by May 31, 1997.
During the quarter ended February 28, 1997, the Company declined to
renew leases on eleven stores. Additionally, the Company replaced its
executive management team late in the quarter. The new executive
management team has been reviewing and reevaluating the restructuring
and cost savings initiatives previously identified and has not yet
determined if all initiatives will be adopted or whether certain
initiatives may be added due to new operating strategies being
developed. As a result, the composition of the charges will change and
such charges will occur in both the third and fourth quarters as the
initiatives are finalized. However, management does not currently
anticipate that the magnitude of the various charges will significantly
increase as compared to what was previously announced. However, due to
uncertainties regarding the components of the various initiatives, an
estimate of these charges cannot be reasonably determined until
management's reevaluation is completed.
Restructuring charges taken in the third quarter ended February 28,
1997 total $1,336,000 and primarily relate to severance and costs
associated with the eleven stores closed during the quarter.
Additionally, the Company established a $1,095,000 reserve during the
third quarter to reduce the carrying value of its merchandise
inventory. The reserve was established to recognize the probable
diminution in value of certain of the Company's aged inventory that
will be recognized as it returns such merchandise to vendors, sells it
in bulk or marks it down below cost for sale to its customers. The
Company's decision to hasten the liquidation of this aged inventory is
part of the cost savings initiatives identified in an effort to improve
the Company's cash flow.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below should be read in conjunction with
the Financial Statements of the Company and the Notes to the Financial
Statements included elsewhere in this Form 10-Q.
Except for the historical information contained herein, certain of the
matters discussed in this quarterly report are "forward-looking statements," as
defined in Section 21E of the Securities Exchange Act of 1934, which involve
certain risks and uncertainties, which could cause actual results to differ
materially from those discussed herein including, but not limited to, risks
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relating to general economic conditions, especially as such conditions impact
retail sales in general and sales in the retail credit jewelry market in
particular, bad debt experience, which is also impacted by general economic
conditions, the transition to value pricing as the Company's principal marketing
strategy, the Company's operating losses, the Company's need for additional
financing or liquidity, growth and acquisition risks, collection of accounts
receivable and competition. See the relevant discussion elsewhere herein and in
the Company's periodic reports and other documents filed with the Securities and
Exchange Commission, including the Company's annual report on Form 10-K for the
fiscal year ended May 31, 1996, for a further discussion of these and other
risks and uncertainties applicable to the Company's business.
Results of Operations
Net sales in the third quarter of fiscal year 1997 decreased $1,632,000
or 3.2%, versus net sales in the comparable quarter of the previous year. Net
sales from comparable stores (those open both the entire quarter this year and
the corresponding quarter of the previous year) decreased by 7.3%. The decrease
in comparable store sales was partially offset by sales from the addition of two
net new stores opened since November 30, 1995. For the first nine months of
fiscal year 1997, net sales of $104,685,000 were $6,047,000 or 5.5% lower than
the comparable period of the prior year. Net sales in comparable stores
decreased 9.6% over the prior year's nine month period. The comparable store
sales decrease in the third quarter and first nine months was due, in part, to a
more restrictive credit policy implemented in November 1995, which has reduced
sales in the short term but is expected to result in higher quality receivables.
Additionally, net sales were adversely impacted by late receipt of merchandise
in the stores for the Christmas selling season which resulted in excessive stock
outs as well as the sales mix of promotionally priced merchandise and a
competitive discounting environment.
Finance and insurance revenues decreased $411,000 or 10.3%, and
$1,276,000 or 10.6%, for the three- and nine-month periods ended February 28,
1997 versus the comparable periods of the previous year due, in part, to a
decrease in the average total outstanding customer receivables. The average
total outstanding customer receivables for the nine months ended February 28,
1997 were $75,847,000, a decrease of $3,819,000, or 4.8%, from the prior year.
The remaining decrease in finance and insurance revenues was due primarily to a
decrease in the average effective finance charge rate.
Cost of goods sold, buying and occupancy expenses were 65.0% and 54.8%
of net sales for the third quarter of fiscal years 1997 and 1996, respectively.
For the comparable nine month periods, cost of goods sold, buying and occupancy
expenses were 65.7%, and 57.4% of net sales. Included in cost of goods sold,
buying and occupancy expenses for the quarter and nine months ended February 28,
1997 was a $1,095,000 non-cash charge in connection with the Company's cost
savings initiatives to hasten the liquidation of aged inventory in an effort to
improve cash flow, as further described in Note 6 to the financial statements of
this Form 10-Q. This charge increased cost of goods sold by 2.2% and 1.0% of net
sales for the three and nine month periods ended February 28, 1997. The
remaining increases in both periods were primarily due to a combination of the
Company's continued value pricing strategy, rent, which is largely a fixed
expense, and a higher shrinkage reserve in fiscal 1997 than in fiscal 1996. Cost
of goods sold was also impacted by the sales mix of promotionally priced
merchandise and a competitive discounting environment.
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Selling, general and administrative expenses were 38.8% and 28.9% of
net sales for the three months ended February 28, 1997 and February 29, 1996,
respectively. For the nine months ended February 28, 1997 and February 29, 1996,
selling, general and administrative expenses as a percentage of net sales were
44.0% and 35.4%, respectively. In the current quarter, $1,970,000 of expense was
recognized for selected impaired assets in accordance with SFAS No. 121 as more
fully described in Note 4 to the financial statements of this Form 10-Q.
Excluding such charge, selling, general and administrative expenses as a
percentage of net sales for the three and nine month periods of fiscal 1997 and
1996 would have been 34.8% and 28.9%, and 42.2% and 35.4%, respectively. The
increases as a percentage of net sales were attributable to a combination of the
decline in net sales for both periods and the increase in total expenses. The
dollar increases for the three and nine month periods were primarily the result
of increases in the cost of advertising and display, professional services and
shipping.
The provision for doubtful accounts was 7.2% of net sales in the third
quarter of fiscal year 1997 compared to 8.1% for the prior year. For the
comparable nine month periods, the provision for doubtful accounts was 7.8% and
8.0% for fiscal year 1997 and 1996, respectively. The decrease of such provision
as a percentage of sales was primarily due to a more restrictive credit policy
being implemented in November 1995 which has reduced sales but is expected to
result in higher quality receivables. Additionally, with the change in the
Company's customer receivables write-off policy, as described in Note 5 to the
financial statements of this Form 10-Q, the Company believes that the amount of
uncollected finance charges will diminish as accounts will be written off
against the allowance for doubtful accounts earlier, which also favorably
impacted the provision this fiscal quarter.
During the current quarter, and as part of the restructuring described
in Note 6 to the financial statements of this Form 10-Q, $1,336,000 was charged
to restructuring expense for the three months ended February 28, 1997. This
charge consisted of $949,000 for severance items; $93,000 and $241,000 for costs
associated with terminating leases and abandoning or selling the leasehold
improvements, fixtures and equipment, respectively, for the eleven closed
stores; and $53,000 for other items related to the restructuring.
Net interest expense increased $696,000 and $1,190,000 in the three and
nine month periods ended February 28, 1997, respectively, versus the comparable
periods of the prior year. Such increase in the third quarter of the current
year was primarily due to a combination of an increase in the amortization of
deferred financing fees associated with the Amended Revolving Credit Agreement,
an amendment fee in connection with an amendment to the Amended Revolving Credit
Agreement as described more fully in Note 2 to the financial statements of this
Form 10-Q and an increase in average revolving debt. The average total revolving
debt for the third quarter of the current year was approximately $4.9 million
higher than the comparable period of the prior year.
The effective tax rates in both the three and nine month periods ended
February 28, 1997 were 0%, compared to 40% in the same periods of the prior
year. The benefit for income taxes was calculated based on the Company's
expected annual effective tax rate for each year. As described more fully below
under "Liquidity and Capital Resources," the Company has available net operating
loss carryovers (the "NOL") to offset future taxable income.
As a result of the foregoing, the net loss for the quarter was
6,818,000, or $1.70 per share, versus net income of $3,159,000 or $0.79 per
share in the comparable period of fiscal 1996. The net loss for the fiscal 1997
nine month period was a loss of $19,220,000, or $4.81 per share versus net
income of $1,706,000 or $0.43 per share for the comparable period of fiscal
1996.
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Liquidity and Capital Resources
The Company's operations require working capital to fund the purchase
of inventory and growth of customer receivables. Also, the seasonality of the
Company's business requires a significant build-up of inventory for the December
holiday selling period. These additional inventory needs must be funded during
the late summer and fall months because of the necessary lead time to obtain
additional inventory. The heavy holiday selling period leads to a seasonal
build-up of customer receivables that must be funded during the winter and
spring months.
In addition, the Company requires working capital to fund capital
expenditures. Capital expenditures for the first nine months of fiscal year 1997
and 1996 were $6,923,000 and $3,781,000, respectively. Such expenditures were
made primarily in connection with the opening of seventeen new stores and the
remodeling of twelve stores during the first nine months of the fiscal year
1997, and the opening of seven new stores and remodeling of fourteen stores in
the same period of fiscal year 1996, respectively.
On January 27, 1997, the Company's Amended Revolving Credit Agreement
was amended, and the bank group 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. The total commitment of the bank group
was reduced from $85,000,000 to $70,000,000 as of January 27, 1997 through May
31, 1997, and will be further reduced to $65,000,000 from June 1, 1997 through
the final maturity date of August 31, 1999. The Company may borrow 75% of
Eligible Accounts Receivable (as defined in the Amended Revolving Credit
Agreement) plus 40% of Eligible Inventory (as defined in the Amended Revolving
Credit Agreement) less a Landlord Lien Reserve (as defined in the Amended
Revolving Credit Agreement) and less $1,250,000 from January 27, 1997 through
March 31, 1997 and $1,500,000 after March 31, 1997. The Amended Revolving Credit
Agreement requires the Company to comply with certain customary financial
covenants and restrictions, some of which were adjusted in the above described
amendment, to take into account the various charges to be incurred in connection
with the Company-wide restructuring and cost savings initiatives as more
fully described in Note 6 to the financial statements of this Form 10-Q. At
February 28, 1997, the Company had outstanding borrowings of $62,018,000 and had
available borrowing capacity of $1,169,000 under the Amended Revolving Credit
Agreement, as amended. Outstanding borrowings bear interest at the agent bank's
reference rate plus 1.5% unless an Event of Default (as defined in the 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.
The Company failed to meet certain financial covenants contained in
the Amended Revolving Credit Agreement as of the February 28, 1997 testing date.
The failure to meet such covenants constitutes an Event of Default under the
Amended Revolving Credit Agreement. While the Company is continuing
negotiations with the bank group to obtain a forbearance or waiver of the Event
of Default, or a modification of the covenants, there can be no assurance that
the Company will be able to obtain such forbearance or waiver, or that such
forbearance or waiver can be obtained on acceptable terms. Under the terms of
the Amended Revolving Credit Agreement, the Company may not make the interest
payment due on April 30, 1997 or any subsequent payment due under its 11% Senior
Secured Notes due December 22, 2000 after an Event of Default under the Amended
Revolving Credit Agreement has occurred and is continuing unless such Event of
Default has been waived.
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The Company is uncertain as to whether its existing cash, plus funds
provided by operations and borrowing capacity under the Amended Revolving Credit
Agreement will be sufficient to fund operations for the coming twelve months.
The Company is exploring various financing alternatives, including the sale
of its customer receivables to a national provider and servicer of consumer
credit, refinancing its existing Amended Revolving Credit Agreement, bulk sales
of certain of its inventory, returning certain merchandise inventory to vendors,
and increasing the percentage of total inventory that is consignment inventory
to finance its business and provide adequate working capital for operations. In
addition, the expense reductions resulting from the restructuring and other cost
savings initiatives are anticipated to provide additional funds from operations
in future quarters. Any decision to obtain financing through debt or other
markets will depend on various factors, including, among others, financial
market conditions and investors' perceptions about the Company. Also, there is
no assurance that additional financing will be available or, if available, will
be available on acceptable terms. Should vendor shipments of products be delayed
or should the Company experience significant shortfalls in planned revenues, or
not achieve sufficient cost savings as a result of the restructuring and other
cost savings initiatives, or experience unforeseen fixed expenses, the Company
has limited abilities to make further additional reductions to variable expenses
to extend its capital.
At February 28, 1997, the Company had available approximately
$14,000,000 of the remaining pre-reorganization usable NOL for federal income
tax purposes which expire in the years ending May 31, 2006 through 2008.
Additionally, the Company had approximately $1,336,000 of post-reorganization
net operating loss carryovers that originated in fiscal 1996 and expire in 2011.
The utilization of the remaining NOL is limited to approximately $1,159,000
of taxable income annually.
PART II - OTHER INFORMATION
ITEM 3. Defaults Upon Senior Securities.
See Item 2 -- "Liquidity and Capital Resources" regarding defaults
under the Company's Amended Revolving Credit Agreement.
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ITEM 5. Other Information.
Effective February 13, 1997, the Company entered into a non-binding
letter of intent with Sam Merksamer to employ him as President and Chief
Executive Officer of the Company for a term of three years. The agreement
provides for an annual salary of $300,000, plus customary benefits, plus an
annual bonus of up to 100% of base salary, plus an incentive bonus of up to 300%
of base salary, subject to performance targets. The letter of intent provides
that Mr. Merksamer will purchase from the Company 202,000 shares of the
Company's common stock at fair market value as of February 13, 1997, with the
Company financing the purchase of 100,000 of such shares by a loan secured by
all of the common stock, payable within 20 months and bearing interest at the
applicable federal rate. In addition, the letter of intent provides that the
Company will grant to Mr. Merksamer the right to purchase up to 190,000 shares
of the Company's common stock at an exercise price equal to the fair market
value of the common stock as of February 13, 1997. The parties agreed to
negotiate a definitive employment contract in good faith by May 15, 1997.
Effective February 13, 1997, the Company entered into a non-binding
letter of intent with E. Peter Healey to employ him as Executive Vice President,
Chief Financial Officer and Secretary of the Company for a term of three years.
While this letter of intent has not been executed, Mr. Healey has commenced his
employment, subject to the parties negotiating a definitive employment contract
in good faith. The agreement provides for an annual salary of $200,000, plus
customary benefits, plus an annual bonus of up to 75% of base salary, plus an
incentive bonus of up to 200% of base salary, subject to performance targets.
The letter of intent provides that Mr. Healey will purchase from the Company
100,000 shares of the Company's common stock at fair market value as of February
13, 1997, with the Company financing the purchase of 50,000 of such shares by a
loan secured by all of the common stock, payable within 20 months and bearing
interest at the applicable federal rate. In addition, the letter of intent
provides that the Company will grant to Mr. Healey the right to purchase up to
100,000 shares of the Company's common stock at an exercise price equal to the
fair market value of the common stock as of February 13, 1997.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Amendment No. 2 to Second Amended and Restated Revolving Credit
Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
None filed for the quarter ended February 28, 1997.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARRY'S JEWELERS, INC.
Date: April 21, 1997 /S/SAMUEL J. MERKSAMER
-----------------------------------
Samuel J. Merksamer
President and
Chief Executive Officer
Date: April 21, 1997 /S/E. PETER HEALEY
-----------------------------------
E. Peter Healey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: April 21, 1997 /S/DANIEL L. FELSENTHAL
----------------------------------
Daniel L. Felsenthal
Vice President, Finance
(Chief Accounting Officer)
13
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 2
TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This Amendment No. 2 (the "Amendment"), dated as of January 27, 1997 is
by and among BARRY'S JEWELERS, INC., a California corporation (the "Borrower"),
THE FIRST NATIONAL BANK OF BOSTON and the other lending institutions which may
become party to the Credit Agreement (as defined herein) (collectively, the
"Lenders") and THE FIRST NATIONAL BANK OF BOSTON, as Agent for the Lenders (the
"Agent"). Capitalized terms used herein unless otherwise defined shall have the
respective meanings set forth in the Credit Agreement.
WHEREAS, the Borrower, the Lenders and the Agent are parties to that
certain Second Amended and Restated Revolving Credit Agreement, dated as of
August 30, 1996 (as so amended and as further amended and in effect from time to
time, the "Credit Agreement"); and
WHEREAS, the Borrower, the Lenders and the Agent are agreeable to making
certain amendments to the Credit Agreement upon the terms and conditions
described herein;
NOW, THEREFORE, in consideration of the foregoing premises, the parties
hereby agree as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement
is hereby amended as follows:
(a) The definition of "Borrowing Base" set forth in
Section 1.1 of the Credit Agreement is amended by inserting after
paragraph (c) thereof the following new paragraph (d):
"minus (d) (i) until March 31, 1997, $1,250,000, and (ii) at
all times after March 31, 1997, $1,500,000."
(b) The definition of "Borrowing Base Report" set forth in
Section 1.1 of the Credit Agreement is amended by deleting such
definition in its entirety and substituting therefor the following
definition:
"Borrowing Base Report. A Borrowing Base Report signed
by the chief financial officer of the Borrower in such form and
including such supporting documentation as the Agent may require from
time to time."
(c) The definition of "Consolidated EBITDA" set forth in
Section 1.1 of the Credit Agreement is amended by deleting such
definition in its entirety and substituting therefor the following
definition:
"Consolidated EBITDA. Consolidated EBIT for any period
plus (a) depreciation for such period, plus (b) amortization for
such period, plus (c) the amount of 1997 Restructuring Charges
for such period to the extent taken into account in connection
with
<PAGE> 2
-2-
the calculation of EBIT during such period, all determined in accordance
with generally accepted accounting principles."
(d) Section 1.1 of the Credit Agreement is amended by
adding the following definition:
"GBFC. GBFC, Inc., an affiliate of the Agent."
(e) The definition of "Shareholders Equity" set forth in
ss.1.1 of the Credit Agreement is amended by deleting such definition in
its entirety and substituting therefor the following definition:
"Shareholders Equity. An amount equal to
Consolidated Total Assets less Consolidated Total Liabilities plus 1997
Restructuring Charges."
(f) The definition of "Total Commitment" set forth in
Section 1.1 of the Credit Agreement is amended by deleting such
definition in its entirety and substituting therefor the following
definition:
"Total Commitment. The sum of the Commitments of the
Lenders which, (i) from the Closing Date through January 26,
1997 is $85,000,000, from January 27, 1997 through May 31,
1997 is $70,000,000 and (iii) after May 31, 1997 is
$65,000,000, as the same may be reduced from time to time in
accordance with the provisions hereof, or if the Commitments
are terminated pursuant to the provisions hereof, zero."
(g) Section 1.1 of the Credit Agreement is amended by
adding the following definition:
"1997 Restructuring Charges. Restructuring charges
taken by the Borrower in its fiscal year ending May 31, 1997
relating to the closing of up to 36 retail locations of the
Borrower; provided, however, that the aggregate amount of
such restructuring charges shall not exceed $13,000,000 and
the cash amount of such restructuring charges shall not
exceed $6,000,000."
(h) Section 8.4 of the Credit Agreement is amended by
deleting sub paragraphs (f) and (g) thereof in their entirety and
substituting therefor the following:
"(f) within three (3) Business Days after the end
of each calendar week or at such earlier time as the Agent
may reasonably request, a Borrowing Base Report;
(g) INTENTIONALLY OMITTED."
(i) Section 10.1 of the Credit Agreement is amended by
deleting the table set forth therein in its entirety and substituting
therefor the following:
<TABLE>
<CAPTION>
Quarter Ending Amount for 2 Quarters Amount for 1 Quarter
-------------- --------------------- --------------------
<S> <C> <C> <C>
11/30/96 ($ 5,000,000) ($ 2,500,000)
</TABLE>
<PAGE> 3
-3-
<TABLE>
<CAPTION>
<S> <C> <C> <C>
02/28/97 $ 3,800,000 $ 6,200,000
05/31/97 $ 8,200,000 $ 2,000,000
08/31/97 $ 4,000,000 $ 2,000,000
11/30/97 $ 6,100,000 $ 4,000,000
02/28/98 $14,700,000 $10,650,000
05/31/98 $14,200,000 $ 3,550,000
08/31/98 $ 3,000,000 $ 1,200,000
11/30/98 $ 3,400,000 $ 2,200,000
02/28/99 $12,000,000 $ 9,300,000
05/31/99 $11,500,000 $ 2,000,000
</TABLE>
(j) Section 10.3 of the Credit Agreement is amended by
deleting the table set forth therein in its entirety and substituting
therefor the following:
<TABLE>
<CAPTION>
Quarter Ending Ratio
-------------- -----
<S> <C> <C> <C>
11/30/96 7.00:1.00
02/28/97 7.00:1.00
05/31/97 6.60:1.00
08/31/97 6.90:1.00
11/30/97 7.30:1.00
02/28/98 5.70.1.00
05/31/98 and quarters
ending thereafter 5.50:1.00
</TABLE>
(k) Section 10.5 of the Credit Agreement is amended by adding
the following subparagraph (d):
"(d) Notwithstanding anything to the contrary contained
herein, the Borrower will not open any new retail store locations
during its 1998 fiscal year; provided, however, the Borrower may
open up to four (4) new retail stores in substitution for
existing retail stores which are closed to the extent that as of
January 27, 1997 the Borrower has entered into binding agreements
to open such stores."
(l) Section 13.1 of the Credit Agreement is amended by adding
the following subparagraph (o):
"(o) the physical count of the Borrower's inventory in
March, 1997 shall yield a dollar valuation which is less than 90%
of the Borrower's inventory as carried on the Borrower's books as
of the end of the Borrower's February, 1997 or March, 1997 fiscal
months, all determined in accordance with generally accepted
accounting principles."
SECTION 2. MODIFICATIONS TO THE BORROWING BASE. The Borrower and the
Lenders acknowledge and agree that notwithstanding any provision in the Credit
Agreement to the contrary, (a) the Agent may rely on GBFC in connection with
determining the Borrowing Base, the components thereof, and the form of the
Borrowing Base Report and (b) following the execution of this Amendment the
Agent, GBFC and their representatives will conduct periodic reviews of the
Borrowing Base components and, as a result of any such reviews, the Agent may,
in its discretion, consistent with the Agent's usual business practices
<PAGE> 4
-4-
and polices, change the Borrowing Base, the AR Advance Rate, the advance rate
for inventory, or those items considered Eligible Accounts Receivable or
Eligible Inventory; provided, however, without the consent of all of the
Lenders, the Agent will not make any changes to such items which would result in
the Borrowing Base being greater than the Borrowing Base as calculated in the
Credit Agreement.
SECTION 3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment shall be conditioned upon the satisfaction of the following conditions
precedent:
SECTION 3.1. DELIVERY OF DOCUMENTS. This Amendment shall have
been authorized, executed and delivered to the Agent by the Borrower, the
Lenders and the Agent.
SECTION 3.2. PAYMENT OF AMENDMENT FEE. The Borrower shall have
paid to the Agent, for the pro rata accounts of the Lenders, an amendment fee of
$325,000.
SECTION 3.3. PROCEEDINGS AND DOCUMENTS. All proceedings in
connection with the transactions contemplated by this Amendment and all
documents incidental thereto shall be in form and substance satisfactory to the
Lenders, the Agent and the Agent's special counsel and the Lenders, the Agent
and such counsel shall have received all information and such counterpart
originals or certified or other copies of all such documents as the Agent shall
have reasonably requested.
SECTION 4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to the Lenders as follows:
(a) The representations and warranties of the Borrower
contained in the Credit Agreement, as amended hereby, the other Loan Documents
or in any document or instrument delivered pursuant to or in connection with the
Credit Agreement were true and correct when made and continue to be true and
correct on the date hereof (except that the financial statements referred to
therein shall be the financial statements of the Borrower most recently
delivered to the Agent, and except as such representations and warranties are
affected by the transactions contemplated hereby and changes occurring in the
ordinary course of business that singly or in the aggregate are not materially
adverse, and to the extent that such representations and warranties relate
expressly to an earlier date) and no Default or Event of Default has occurred
and is continuing;
(b) The execution, delivery and performance by the Borrower
of this Amendment and the transactions contemplated hereby (i) are within the
corporate authority of the Borrower, (ii) have been duly authorized by all
necessary corporate proceedings, (iii) do not conflict with or result in any
breach or contravention of any provision of law, statute, rule or regulation to
which the Borrower or any of its Subsidiaries is subject or any judgment, order,
writ, injunction, license or permit applicable to the Borrower or any of its
Subsidiaries and (iv) do not conflict with any provision of the corporate
charter or bylaws of, or any agreement or other instrument binding upon, the
Borrower or any of its Subsidiaries.
(c) This Amendment, the Credit Agreement as amended hereby,
and the other Loan Documents constitute the legal, valid and binding obligations
of the Borrower, enforceable against the Borrower in accordance with their
respective terms, provided that (i) enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws of general
application affecting the rights and remedies of creditors, and (ii) enforcement
may be subject to general principles of equity, and the availability of the
remedies of specific performance and injunctive relief may be subject to the
discretion of the court before which any proceeding for such remedies may be
brought.
<PAGE> 5
-5-
SECTION 5. CONFIRMATION OF SECURITY DOCUMENTS. The Borrower hereby
ratifies and confirms each of the respective Security Documents and pledges of
security interests granted thereby to secure the obligations of the Borrower
under the Credit Agreement, as amended hereby, and the Notes.
SECTION 6. NO OTHER AMENDMENTS. Except as expressly provided in
this Amendment, all of the terms and conditions of the Credit Agreement and the
other Loan Documents shall remain in full force and effect.
SECTION 7. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by each party on a separate
counterpart, each of which when so executed and delivered shall be an original,
but all of which together shall constitute one instrument. In proving this
Amendment, it shall not be necessary to produce or account for more than one
such counterpart signed by the party against whom enforcement is sought.
SECTION 8. EFFECTIVE DATE. Subject to the satisfaction of the
conditions precedent set forth in ss.2 hereof, this Amendment shall be deemed to
be effective as of the date hereof (the "Effective Date").
SECTION 9. MISCELLANEOUS. This Amendment is intended to take
effect as a sealed instrument and shall for all purposes be governed by, and
construed in accordance with the laws of The Commonwealth of Massachusetts
(without reference to conflicts of law).
<PAGE> 6
-6-
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have duly
executed this Amendment as of the date first above written.
BARRY'S JEWELERS, INC.
By: /s/ Thomas S. Liston
----------------------------------
Title: Vice Chairman and CFO
THE FIRST NATIONAL BANK
OF BOSTON, individually and as Agent
By: /s/ William Sherald
----------------------------------
Title: Vice President
THE CIT GROUP/BUSINESS
CREDIT, INC.
By: /s/ Frank A. Grimaldi
----------------------------------
Title: Vice President
SANWA BUSINESS CREDIT
CORPORATION
By: /s/ Victor Alarcon
----------------------------------
Title: Vice President
JACKSON NATIONAL LIFE INSURANCE
COMPANY
By: PPM America, Inc., as its
attorney-in-fact
By: /s/ Bradley E. Sher
----------------------------------
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 2 AND 3 OF THE
COMPANY'S FORM 10-Q FOR THE NINE MONTHS ENDED FEBRUARY 28, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-1-1996
<PERIOD-END> FEB-28-1997
<EXCHANGE-RATE> 1
<CASH> 236
<SECURITIES> 0
<RECEIVABLES> 71,262
<ALLOWANCES> 2,302
<INVENTORY> 56,333
<CURRENT-ASSETS> 127,245
<PP&E> 29,916
<DEPRECIATION> 11,914
<TOTAL-ASSETS> 148,446
<CURRENT-LIABILITIES> 84,394
<BONDS> 50,000
0
0
<COMMON> 33,247
<OTHER-SE> (19,195)
<TOTAL-LIABILITY-AND-EQUITY> 148,446
<SALES> 104,685
<TOTAL-REVENUES> 115,460
<CGS> 68,765
<TOTAL-COSTS> 46,099
<OTHER-EXPENSES> 1,336
<LOSS-PROVISION> 8,116
<INTEREST-EXPENSE> 9,488
<INCOME-PRETAX> (18,344)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 876
<CHANGES> 0
<NET-INCOME> (19,220)
<EPS-PRIMARY> (4.81)
<EPS-DILUTED> (4.81)
</TABLE>
