<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998. 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 (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. [ ]
As of April 14, 1998, the issuer had a total of 4,029,372 of common stock
outstanding.
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>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
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 12
ITEM 2. Changes in Securities 12
ITEM 3. Defaults Upon Senior Securities 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 5. Other Information 12
ITEM 6. Exhibits and Reports on Form 8-K 12
</TABLE>
<PAGE> 3
Item 1.
Part I
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
February 28,
1998 May 31, 1997
-------------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 22,249 $ 7,322
Customer receivables, net of allowance for doubtful accounts of
$6,912 at February 28, 1998, and $10,300 at May 31, 1997 53,208 54,552
Merchandise inventories 25,234 41,374
Prepaid expenses and other current assets 1,506 2,142
--------- ---------
Total current assets 102,197 105,390
Property and equipment:
Leasehold improvements, furniture and fixtures 20,737 20,726
Computers and equipment 4,634 4,110
--------- ---------
25,371 24,836
Less: accumulated depreciation 11,468 9,413
--------- ---------
Net property and equipment 13,903 15,423
Deferred income taxes 72 72
Other assets, principally deferred debt issuance costs, net of
accumulated amortization of $2,706 at February 28, 1998, and
$1,834 at May 31, 1997 1,748 2,598
--------- ---------
Total assets $ 117,920 $ 123,483
========= =========
Liabilities and Shareholders' Deficiency
Current liabilities:
Accounts payable - trade $ 6,818 $ 221
Other accrued liabilities 13,996 5,687
--------- ---------
Total current liabilities 20,814 5,908
Liabilities subject to compromise under reorganization proceedings 124,313 130,271
Shareholders' deficiency:
Common stock; no par value; authorized 8,000,000 shares; issued and outstanding,
4,029,372 shares at February 28, 1998, and May
31, 1997 33,247 33,247
Accumulated deficit (60,454) (45,943)
--------- ---------
Total shareholders' deficiency (27,207) (12,696)
Total liabilities and shareholders' deficiency $ 117,920 $ 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
(Unaudited, Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 44,662 $ 49,236 $ 90,535 $ 104,685
Finance and credit insurance fees 3,020 3,593 8,589 10,775
--------- --------- --------- ---------
47,682 52,829 99,124 115,460
Costs and expenses:
Cost of goods sold, buying and occupancy 26,864 32,022 59,405 68,765
Selling, general and administrative expenses 14,082 19,114 36,185 46,099
Provision for doubtful accounts 2,568 3,558 5,486 8,116
Restructuring expenses -- 1,336 -- 1,336
--------- --------- --------- ---------
43,514 56,030 101,076 124,316
Operating income (loss) 4,168 (3,201) (1,952) (8,856)
Interest expense, net 2,930 3,617 9,027 9,488
--------- --------- --------- ---------
Income (loss) before reorganization costs,
income taxes, and extraordinary item 1,238 (6,818) (10,979) (18,344)
Reorganization costs 2,075 -- 3,532 --
--------- --------- --------- ---------
Loss before income taxes and
extraordinary item (837) (6,818) (14,511) (18,344)
Income taxes -- -- -- --
--------- --------- --------- ---------
Loss before extraordinary item (837) (6,818) (14,511) (18,344)
Extraordinary item -- -- -- 876
--------- --------- --------- ---------
Net loss ($ 837) ($ 6,818) ($ 14,511) ($ 19,220)
========= ========= ========= =========
Basic loss per share ($ .21) ($ 1.70) ($ 3.60) ($ 4.81)
========= ========= ========= =========
Diluted loss per share ($ .21) ($ 1.70) ($ 3.60) ($ 4.81)
========= ========= ========= =========
Weighted average number of common shares
outstanding 4,029 4,001 4,029 4,000
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(Debtor-in-Possession)
STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net loss ($14,511) ($19,220)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,180 5,088
Provision for doubtful accounts 5,486 8,116
Loss on sale or abandonment of property and equipment 186 75
Impairment of long lived assets -- 1,970
Change in operating assets and liabilities:
Customer receivables (4,142) (8,702)
Merchandise inventories 16,140 (1,774)
Prepaid expenses and other current assets 636 365
Other assets (22) (2,460)
Accounts payable - trade 4,431 8,296
Accrued liabilities 4,517 4,969
-------- --------
Net cash provided by (used in) operating activities 15,901 (3,277)
Investing activities:
Purchase of property and equipment (974) (6,923)
Proceeds from sale of equipment -- 83
-------- --------
Net cash used in investing activities (974) (6,840)
Financing activities:
Proceeds from the issuance of common stock -- 14
Principal payments on long-term debt -- (135)
Net repayment under securitization facility -- (45,119)
Net borrowings under revolving facility -- 53,828
-------- --------
Net cash provided by financing activities -- 8,588
Increase (decrease) in cash 14,927 (1,529)
Cash at beginning of period 7,322 1,765
-------- --------
Cash at end of period $ 22,249 $ 236
======== ========
</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. REORGANIZATION AND 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 and
the nine months ended February 28, 1998 are not necessarily indicative of the
results that may be expected for the year ended May 31, 1998. 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, 1997.
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 125 stores on
February 28, 1998, and 163 stores on February 28, 1997.
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 2). 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 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 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 ("DIP") financing agreement (the "Trade DIP Financing
Agreement"). Pursuant to the agreement, the participating vendors allowed the
Company to return merchandise with a value equal to 75% of the vendor's
prepetition claim. The value of the prepetition merchandise returned was not
allowed to exceed approximately $7.9 million in the aggregate. Additionally,
participating vendors provided 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 was granted, generally, on 90-day terms for
a period of one year from the date of the agreement. The amount of merchandise
actually returned under the Trade DIP Financing Agreement was approximately $5.6
million. The amount returned was limited by the amount of pre-petition claims
held by those vendors which signed the Trade DIP Financing 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
committed 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. As of
February 28, 1998, the Company had approximately $29.5 million of consigned
merchandise on hand.
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 Trade DIP Financing Agreement and terms of the cash
collateral stipulation, and the ability to obtain sufficient financing sources
to meet future obligations.
2. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Liabilities subject to compromise under reorganization proceedings consist of
the following:
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
----------------- -----------
<S> <C> <C>
Secured liabilities:
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 6 88
----------------- -----------
110,934 111,016
Unsecured liabilities:
Accounts payable trade 5,038 10,344
Other accrued expenses 8,341 8,911
----------------- -----------
13,379 19,255
----------------- -----------
$ 124,313 $ 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 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 February 28, 1998, 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.
3. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share, for the period ended February 28, 1998. SFAS No. 128
requires the Company to present basic and diluted earnings per share on the face
of the income statement. Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the sum
of the weighted average number of common shares outstanding for the period plus
the assumed exercise of all dilutive securities. However, in the case of a loss
per share, dilutive securities outstanding would be antidilutive and would
therefore be excluded from the computation of diluted earnings per share.
The weighted average number of shares used to calculate basic earnings per share
was 4,029,000 and 4,001,000 for the three months ended February 28, 1998 and
1997, respectively. Diluted earnings per share were the same as basic earnings
per share.
The weighted average number of shares used to calculate basic earnings per share
was 4,029,000 and 4,000,000 for the nine months ended February 28, 1998 and
1997, respectively. Diluted earnings per share were the same as basic earnings
per share.
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 nine months and fiscal quarters ended February 28, 1998
and 1997. 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. An unofficial equity committee has
also been 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 May 31, 1998, pursuant to
the Stipulation Authorizing Use of Cash Collateral (the "Cash Stipulation"); (2)
approved a 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 $7.9
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 Trade DIP Financing Agreement and terms of the Cash
Stipulation, and the ability to obtain sufficient financing sources to meet
future obligations.
RESULTS OF OPERATIONS Net sales for the quarter ended February 28, 1998 were
$44.7 million, a decrease of $4.5 million, or 9%, from net sales of $49.2 for
the quarter ended February 28, 1997. Net sales for the nine months ended
February 28, 1998 were $90.5 million, a decrease of $14.2 million, or 14%, from
net sales of $104.7 million for the nine months ended February 28, 1997. The
decreases were primarily the result of the closure of 48 stores during fiscal
1997 and 5 in fiscal 1998 partially offset by an increase in comparable store
sales. Comparable store sales (those open for the same period in both the
current and preceding years), increased 14% from $38.6 million to $44.1 million
for the three months ended
7
<PAGE> 10
February 28, 1998, and 8% from $75.2 million to $81.5 million for the nine
months ended February 28, 1998, versus the same periods from the prior year.
Finance and credit insurance fees on credit sales for the quarter ended February
28, 1998 were $3.0 million, a decrease of $573,000, or 16%, from the prior year
period and $8.6 million, a decrease of $2.2 million, or 20% for the nine months
ended February 28, 1998. These decreases were primarily due to a decrease in the
average total customer receivables outstanding during the nine month period
ended February 28, 1998 of approximately $12.7 million compared to February 28,
1997 resulting from the closure of stores, changes in credit underwriting, and
lower reliance on credit to generate sales.
Cost of goods sold, buying and occupancy expenses were 60% of net sales for the
quarter ended February 28, 1998 compared to 65% for the prior year period. The
higher costs during the third quarter of 1997 were primarily a result of the
company establishing a reserve to reduce the carrying value of its merchandise
inventory. For the nine months ended February 28, 1998 and 1997, cost of goods
sold, buying and occupancy expenses were 66% of net sales.
Selling, general and administrative expenses were $14.1 million for the quarter
ended February 28, 1998, a decrease of $5.0 million, or 26%, from the prior
year. Selling, general and administrative expenses as a percentage of net sales
were 32% for the quarter ended February 28, 1998 and 39% for the quarter ended
February 28, 1997. The decrease is primarily due to a decrease of approximately
$2.0 million, or 55% in advertising expense and the closure of 48 stores during
fiscal 1997 partially offset by the decrease in net sales. Selling, general and
administrative expenses were $36.2 million, a decrease of $9.9 million, or 22%
from the prior year nine month period. Selling, general and administrative
expenses as a percentage of net sales decreased to 40% for the nine months ended
February 28, 1998 from 44% for the nine months ended February 28, 1997. The
decrease as a percentage of net sales is attributable to a combination of a
decrease of approximately $4.5 million, or 59% in advertising expense and store
closures, partially offset by the decrease in net sales.
The provision for doubtful accounts was $2.6 million for the quarter ended
February 28, 1998. This was a decrease of $1.0 million, or 28% from the same
period in the prior year. The provision was approximately 6% and 7%,
respectively of net sales for the quarters ended February 28, 1998 and 1997. The
provision was approximately 12% and 13%, respectively of net credit sales for
the quarters ended February 28, 1998 and 1997. The provision for doubtful
accounts was $5.5 million for the nine months ended February 28, 1998, a
decrease of $2.6 million, or 32% from the prior year. The provision was
approximately 6% and 8%, respectively of net sales for the nine months ended
February 28, 1998 and 1997. The provision was approximately 11% and 14%,
respectively of net credit sales for the nine months ended February 28, 1998 and
1997. The decreases in the provision were primarily due to the closed stores,
which had generated less creditworthy customer receivables, along with changes
in credit underwriting implemented by new management and lower reliance on
credit to effect sales.
Restructuring charges taken in the third quarter ended February 28, 1997 totaled
$1,336,000 and primarily related to severance and costs associated with the
eleven stores closed during the quarter.
Net interest expense was $2.9 million, for the quarter ended February 28, 1998,
a decrease of $687,000 or 19% from the prior year quarter and $9.0 million, for
the nine months ended February 28, 1998, a decrease of $461,000 or 5% from the
prior year nine month period. The decrease is primarily due to interest income
earned on cash balances which is offset against interest expense.
Reorganization costs consist primarily of professional fees directly related to
the Chapter 11 filing and are expensed as incurred.
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 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
February 28, 1998, and May 31, 1997, the aggregate customer receivables balances
were $60.1 million and $64.9 million, respectively. The reduction in the
customer receivables balances were primarily a result of the closure of stores,
changes in credit underwriting, and lower reliance on credit to generate sales
offset by lower charge off rates.
8
<PAGE> 11
INVENTORY. At February 28, 1998, inventories (not including consignment
inventory of approximately $29.5 million) were approximately $25.2 million, a
decrease of approximately $16.1 million from May 31, 1997. This decrease is due
to liquidation of aged merchandise, the sell through of inventories, the return
of approximately $5.6 million of inventory under the Trade DIP Financing
Agreement and the Company's new merchandising strategy to decrease owned
inventories and increase consignment inventories. At February 28, 1998, the
Company's inventory reserves totaled $2.7 million.
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.
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 February 28, 1998,
$124.3 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, and 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 provided by operating activities of approximately
$15.9 million for the nine months ended February 28, 1998, as compared to cash
flow used by operating activities of approximately $3.3 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 $16.1 million in
inventory which resulted from liquidation of aged merchandise, the sell through
of inventories, the return of approximately $5.6 million of inventory under the
Trade DIP Financing Agreement and the Company's new merchandising strategy to
decrease owned inventories and increase consignment inventories. Additionally,
the Company paid approximately $2.3 million of finance fees during the first
quarter of the prior year in connection with the termination of an accounts
receivable securitization facility and the amendment of the Company's revolving
credit agreement.
As of February 28, 1998, the Company had $22.2 million of cash and cash
equivalents as a result of the Chapter 11 filing and the prohibition on payments
of prepetition debt. Approximately $4.4 million of the Company's cash and cash
equivalents at February 28, 1998, was restricted pursuant to the terms of the
Cash Stipulation. Additionally, $2.0 million of the Company's cash and cash
equivalents at February 28, 1998 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.
9
<PAGE> 12
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 (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.
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 thereunder
on the Petition Date.
As of February 28, 1998, the Company had approximately $57.9 million of
borrowings outstanding under its Second Amended Revolving Credit Agreement and
$50 million outstanding on the Notes. Additionally, the Company had $4.9 million
of interest payable on the Notes. This amount represented the semi-annual
interest payment that was due on April 30, 1997, plus accrued interest through
February 28, 1998.
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 May 31, 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.
TRADE DIP 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
expected to obtain 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. The Company received approximately $58
million of new merchandise through February 28, 1998. In addition, the agreement
allows the Company to exchange up to approximately $7.9 million of slow-moving
merchandise for at least $11 million of fresh inventory on extended trade terms.
Through February 28, 1998, the Company has returned approximately $5.6 million
of this merchandise.
10
<PAGE> 13
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 committed to maintain a specified minimum amount of consigned
merchandise. As of February 28, 1998, the vendors committed to provide at least
$7.8 million of inventory on consignment. The Company received approximately
$42.2 million of inventory on consignment through February 28, 1998. 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.
11
<PAGE> 14
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; (v) 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 party 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.
COMPLAINT IN INTERPLEADER TO DETERMINE RESPECTIVE RIGHTS AND
OBLIGATIONS OF PARTIES UNDER EXECUTIVE BONUS PLAN. On December 9, 1997, Imperial
Trust Company ("Imperial"), the trustee of the Company's Executive Bonus Plan,
filed a complaint in interpleader naming the Company, the Official Committee of
Unsecured Creditors (the "Committee") and numerous individual plan participants
as defendants. The complaint seeks a judicial determination of the respective
rights and obligations of the parties under the Executive Bonus plan. The
Company moved to dismiss the complaint because if failed to join as defendants
all interested parties. The Company's motion was granted, and on March 12, 1998
Imperial filed and served a first amended complaint in which all potentially
interested parties were named as defendants. On April 13, 1998, the Committee
moved to dismiss the amended complaint, asserting that it failed to state a
claim upon which relief could be granted. The Company has joined in that
motion.
COMPLAINT TO AVOID AND/OR LIMIT PURPORTED SECURITY INTERESTS HELD BY
COLLATERAL AGENT. On October 21, 1997, in response to a Bankruptcy
Court-approved deadline, the Company filed a complaint to avoid and/or limit
certain of the purported security interests held solely by First National Bank
of Boston, N.A. (the "Collateral Agent") for the benefit of Barry's prepetition
lenders. As a precaution only, the complaint names as additional defendants
First Trust National Association, as trustee under that certain indenture dated
December 22, 1993 (the "Indenture Trustee") and the Company's individual
prepetition lenders (the "Bank Group"). By the complaint the Company seeks,
among other things (i) to avoid the Collateral Agent's purported security
interest in inventory located in California having a unit retail value of $500
or less, (ii) a declaratory judgment determining that certain statutory landlord
liens preserved for the benefit of the estate are senior to any purported
security interest of the Collateral Agent in and to the same assets, and (iii) a
declaratory judgment determining that the Collateral Agent holds no security
interest in the Company's retail store leases and proceeds thereof. On December
10, 1997, the Indenture Trustee filed an answer to the complaint. On January 30,
1998, the Bank Group filed a motion to dismiss the first claim for relief in the
complaint on the ground that Massachusetts law, not California law, governed the
dispute. The Collateral Agent joined in that motion. On February 4, 1998, the
Indenture Trustee adopted the argument made in the Bank Group's motion to
dismiss and filed a motion for summary judgment on the first claim for relief.
By orders entered on March 2, 1998, the bankruptcy court denied both motions
without prejudice. On March 6, 1998 and March 9, 1998, respectively, the Bank
Group and the collateral Agent filed answers to the complaint. On March 27,
1998, the Company filed a motion for permission to file a first amended
complaint. That motion is pending.
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
Exhibit 27 Financial Data Schedule
12
<PAGE> 15
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.
April 14, 1998 By: /s/ Randy N. McCullough
--------------------------------
Randy N. McCullough
President and Chief Executive Officer
April 14, 1998 By: /s/ E. Peter Healey
--------------------------------
E. Peter Healey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
April 14, 1998 By: /s/ Robert J. Herman
--------------------------------
Robert J. Herman
Vice President and Controller
(Principal Accounting Officer)
13
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<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
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