<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
ANNUAL REPORT PURSUANT to SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1997. Commission File Number 0-15017
BARRY'S JEWELERS, INC.
(Exact name of registrant as specified in its charter)
California 95-3746316
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
111 West Lemon Avenue, Monrovia, California 91016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (626) 303-4741
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock
Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES. [X] NO. [ ]
As of January 14, 1998, the issuer had a total of 4,029,372 shares
of common stock outstanding.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a
court. [X] Yes. [ ] No.
<PAGE> 2
<TABLE>
<CAPTION>
BARRY'S JEWELERS, INC.
FORM 10-Q
INDEX
PAGES
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
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 1
<TABLE>
<CAPTION>
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
NOVEMBER 30, 1997 MAY 31, 1997
----------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,629 $ 7,322
Customer receivables, net of allowances for doubtful accounts of
$7,053 at November 30, 1997, and $10,300 at May 31, 1997 48,685 54,552
Merchandise inventories 31,710 41,374
Prepaid expenses and other current assets 1,291 2,142
--------- ---------
Total current assets 101,315 105,390
Property and equipment:
Leasehold improvements, furniture and fixtures 20,922 20,726
Computers and equipment 4,265 4,110
--------- ---------
25,187 24,836
Less: accumulated depreciation and amortization 10,943 9,413
--------- ---------
Net property and equipment 14,244 15,423
Deferred income taxes 72 72
Other assets, principally deferred debt issuance costs, net of
accumulated amortization of $2,422 at November 30, 1997,
and $1,834 at May 31, 1997 2,032 2,598
--------- ---------
Total assets $ 117,663 $ 123,483
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable - trade $ 6,526 $ 221
Other accrued liabilities 9,872 5,687
--------- ---------
Total current liabilities 16,398 5,908
Liabilities subject to compromise under
reorganization proceedings 127,635 130,271
Commitments and contingencies
Shareholders' deficiency:
Common stock; no par value; authorized 8,000,000
shares; issued and outstanding, 4,029,372 shares
at November 30, 1997 and May 31, 1997 33,247 33,247
Accumulated deficit (59,617) (45,943)
--------- ---------
Total shareholders' deficiency (26,370) (12,696)
--------- ---------
Total liabilities and shareholders' deficiency $ 117,663 $ 123,483
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
<TABLE>
<CAPTION>
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1997 1996 1997 1996
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales $ 23,585 $ 29,348 $ 45,873 $ 55,449
Finance and credit insurance fees 2,622 3,449 5,569 7,182
-------- -------- -------- --------
26,207 32,797 51,442 62,631
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold, buying and occupancy 16,681 19,349 32,541 36,743
Selling, general and administrative expenses 11,609 14,424 22,103 26,985
Provision for doubtful accounts 1,425 2,420 2,918 4,558
-------- -------- -------- --------
29,715 36,193 57,562 68,286
-------- -------- -------- --------
Operating loss (3,508) (3,396) (6,120) (5,655)
Interest expense, net 2,979 3,259 6,097 5,871
-------- -------- -------- --------
Loss before reorganization costs,
income taxes, and extraordinary item (6,487) (6,655) (12,217) (11,526)
Reorganization costs 447 -- 1,457 --
-------- -------- -------- --------
Loss before income taxes and
extraordinary item (6,934) (6,655) (13,674) (11,526)
Income Taxes -- -- -- --
-------- -------- -------- --------
Loss before extraordinary item (6,934) (6,655) (13,674) (11,526)
Extraordinary item -- -- -- (876)
-------- -------- -------- --------
Net loss $ (6,934) $ (6,655) $(13,674) $(12,402)
======== ======== ======== ========
Loss per share $ (1.72) $ (1.66) $ (3.39) $ (3.10)
======== ======== ======== ========
Weighted average number of common
shares outstanding 4,029 3,999 4,029 3,999
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
<TABLE>
<CAPTION>
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
NOVEMBER 30,
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(13,674) $(12,402)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation and amortization 2,118 2,224
Extraordinary loss -- 876
Provision for doubtful accounts 2,918 4,558
Loss on sale or abandonment of property and equipment -- 73
Changes in assets and liabilities:
Customer receivables 2,949 (1,126)
Merchandise inventories 7,923 (18,972)
Prepaid expenses and other current assets 851 158
Other assets (22) (2,000)
Accounts payable - trade 5,880 22,729
Accrued liabilities 3,715 1,153
-------- --------
Net cash provided by (used in) operating activities 12,658 (2,729)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (351) (6,319)
Proceeds from sale of assets -- 83
-------- --------
Net cash used in investing activities (351) (6,236)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility -- 53,444
Net repayments under securitization facility -- (45,119)
Principal payments on long-term debt -- (90)
-------- --------
Net cash provided by financing activities -- 8,235
-------- --------
Net increase (decrease) in cash and cash equivalents 12,307 (730)
Cash and cash equivalents at beginning of period 7,322 1,765
-------- --------
Cash and cash equivalents at end of period $ 19,629 $ 1,035
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest $ 2,805 $ 5,040
Income taxes $ 6 $ 10
</TABLE>
See notes to Consolidated Financial Statements
3
<PAGE> 6
BARRY'S JEWELERS, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. 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 six months ended
November 30, 1997 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 128 stores on November 30, 1997,
and 174 stores on November 30, 1996.
On May 11, 1997, (the "Petition Date"), the Company filed a voluntary petition
for reorganization under Chapter 11 of the United States Bankruptcy Code
("Chapter 11") in the United States Bankruptcy Court for the Central District
of California, Los Angeles Division. Management determined that filing the
Chapter 11 petition would allow the Company the needed time and flexibility to
restructure its operations, help assure the continued flow of merchandise to
its stores, and provide the time and protection necessary to restructure the
Company's funding sources.
Since the Petition Date, the Company has continued in possession of its
properties and, as Debtor-in-Possession, is authorized to operate and manage
its businesses and enter into all transactions (including obtaining services,
inventories, and supplies) that it could have entered into in the ordinary
course of business without approval of the Bankruptcy Court. A statutory
Creditors' Committee and an official Bondholders' Committee have also been
appointed.
In a Chapter 11 filing, substantially all liabilities as of the Petition Date
are subject to compromise or other treatment under a plan of reorganization.
For financial reporting purposes, those liabilities and obligations whose
disposition is dependent on the outcome of the Chapter 11 filing have been
segregated and classified as liabilities subject to compromise under
reorganization proceedings in the accompanying consolidated balance sheet (Note
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 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 shall not exceed, in the aggregate, approximately $7.9
million. 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. Through November 30, 1997, the Company has returned approximately
$1.7 million of merchandise under this 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
November 30, 1997, the Company had approximately $34.4 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 debtor-in-possession trade financing agreement and terms of
the cash 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>
Secured liabilities: November 30, 1997 May 31, 1997
---------------- ------------
<S> <C> <C>
Borrowings outstanding under
Amended Revolving Credit Agreement $ 57,855 $57,855
Senior Secured Notes (includes interest payable
of $3,073 accrued through the Petition Date) 53,073 53,073
Other notes payable and capital lease obligations 7 88
-------- --------
110,935 111,016
Unsecured liabilities:
Accounts payable trade 8,178 10,344
Other accrued expenses 8,522 8,911
-------- --------
16,700 19,255
-------- --------
$127,635 $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 November 30, 1997, and the Company anticipates that claims filed
with the Bankruptcy Court by the Company's creditors will be reconciled to the
Company's financial records. The additional liability arising from this
reconciliation process, if any, is not subject to reasonable estimation, and
accordingly, no provision has been recorded for these possible claims. The
termination of other contractual obligations and the settlement of disputed
claims may create additional prepetition liabilities. Such amounts, if any, will
be recognized in the balance sheet as they are identified and become subject to
reasonable estimation.
6
<PAGE> 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT. This Quarterly Report on Form 10-Q
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and the Company intends that such forward-looking statements be subject to
the safe harbors created thereby.
OVERVIEW. The following discussion presents information about the financial
condition, liquidity and capital resources, and results of operations of the
Company as of and for six months and fiscal quarters ended November 30, 1997 and
1996. This information should be read in conjunction with the audited
consolidated financial statements of the Company and the notes thereto as
reported on the Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1997.
PROCEEDINGS UNDER CHAPTER 11. On May 11, 1997, (the "Petition Date"),
the Company commenced a reorganization case by filing a voluntary petition (the
"Chapter 11 Petition") for relief under chapter 11 ("Chapter 11") of title 11 of
the United States Code (as amended from time to time, the "Bankruptcy Code") in
the United States Bankruptcy Court for the Central District of California, Los
Angeles Division (the "Bankruptcy Court"), case number 97-27988-VZ. Management
determined that filing of the Chapter 11 Petition would allow the needed time
and flexibility to restructure the Company's operations, help assure the
continued flow of merchandise to its stores, and provide the time and protection
necessary to restructure the Company's funding sources.
Since the Petition Date, the Company has continued in possession of its
properties and, as debtor-in-possession, is authorized to operate and manage its
businesses and enter into all transactions (including obtaining services,
inventories, and supplies) that it could have entered into in the ordinary
course of business without approval of the Bankruptcy Court, after notice and
hearing. A statutory Creditors' Committee and an official Bondholders' Committee
have been appointed in the Chapter 11 case, and as of January 12, 1998, an
unofficial equity committee was in the process of being formed.
Subsequent to the filing of the Chapter 11 Petition, the Company sought
and obtained several orders from the Bankruptcy Court which were intended to
stabilize its business. The most significant of these orders: (1) authorized and
extended use of the Company's cash collateral through February 28, 1998,
pursuant to the Stipulation Authorizing Use of Cash Collateral (the "Cash
Stipulation"); (2) approved a trade debtor-in-possession ("DIP") financing
agreement (the "Trade DIP Financing Agreement"), which allows the Company to
obtain its expected merchandise orders of over $50 million on extended trade
terms while providing the trade vendors with substantial support for the payment
of their accounts receivable; (3) authorized the Company to return approximately
$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.
7
<PAGE> 10
RESULTS OF OPERATIONS
Net sales for the quarter ended November 30, 1997 were $23.6 million, a
decrease of $5.7 million, or 19%, from net sales of $29.3 for the quarter ended
November 30, 1996. Net sales for the six months ended November 30, 1997 were
$45.9 million, a decrease of $9.5 million, or 17%, from net sales of $55.4
million for the six months ended November 30, 1996. The decreases were primarily
the result of the closure of 48 stores during fiscal 1997 and two in fiscal
1998. Comparable store sales (those open for the same period in both the current
and preceding years), increased 2% for the six months ended November 30, 1997
versus the same period from the prior year.
Finance and credit insurance charges on credit sales for the quarter
ended November 30, 1997 were $2.6 million, a decrease of $827,000, or 24%, from
the prior year period and $5.6 million, a decrease of $1.6 million, or 22% for
the six months ended November 30, 1997. These decreases were primarily due to a
decrease in the average total customer receivables outstanding during the six
month period ended November 30, 1997 of approximately $15.6 million compared to
November 30, 1996.
Cost of goods sold, buying and occupancy expenses were 71% of net sales
for the quarter ended November 30, 1997 compared to 66% for the prior year
period. For the comparable six month period, cost of goods sold, buying and
occupancy expenses were 71% compared to 66% for the prior year period. The gross
margin percentage declined in fiscal 1998 periods compared to 1997 periods, as
the Company continued to sell slow-moving, aged merchandise in preparation for
the receipt of new merchandise pursuant to the Company's new merchandising
strategy.
Selling, general and administrative expenses were $11.6 million, a
decrease of $2.8 million, or 19%, from the prior year quarter, primarily due to
a decrease of approximately $1.1 million, or 52% in advertising expense and the
closure of 48 stores during fiscal 1997. Selling, general and administrative
expenses as a percentage of net sales were 49% for both the quarter ended
November 30, 1997 and the quarter ended November 30, 1996. Selling, general and
administrative expenses were $22.1 million, a decrease of $4.9 million, or 18%
from the prior year six month period. Selling, general and administrative
expenses as a percentage of net sales decreased to 48% for the six months ended
November 30, 1997 from 49% for the six months ended November 30, 1996. The
decrease as a percentage of net sales is attributable to a combination of a
decrease of approximately $2.5 million, or 64% in advertising expense and store
closures, offset by the decrease in net sales.
The provision for doubtful accounts was $1.4 million, a decrease of
$995,000, or 42% from the prior year quarter. The provision was approximately 6%
and 8%, respectively of net sales for the quarters ended November 30, 1997 and
1996. The provision was approximately 11% and 12%, respectively of net credit
sales for the quarters ended November 30, 1997 and 1996. The provision for
doubtful accounts was $2.9 million, a decrease of $1.6 million, or 36% from the
prior year for the six months ended November 30, 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.
Net interest expense was $3.0 million, a decrease of $280,000 from the
prior year quarter and $6.1 million, an increase of $226,000 from the prior year
six month period. The decrease for the quarter is primarily due to interest
income earned on cash balances of $320,000 which is offset against interest
expense. The primary increase for the six month period is the result of higher
average interest rates of approximately .8% during the six month period ended
November 30, 1997 versus the same period from the prior year.
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
November 30, 1997, and May 31, 1997, the aggregate customer receivables balances
were $55.7 million and $64.9 million, respectively.
8
<PAGE> 11
INVENTORY. At November 30, 1997, inventories (not including consignment
inventory of approximately $34.4 million) were approximately $31.7 million, a
decrease of approximately $9.6 million from May 31, 1997. This decrease is due
to liquidation of aged merchandise, the sell through of inventories, the return
of approximately $1.7 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 November 30, 1997, the
Company's inventory reserves totalled $3.0 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 November 30, 1997,
$127.6 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 $12.7 million for the six months ended November 30, 1997, as
compared to cash flow used by operating activities of approximately $2.7 million
for the comparable period last year. The increase in cash flow from operating
activities during the current year is primarily due to a decrease of $7.9
million in inventory which resulted from the liquidation of aged, slow-moving
inventory and the increase of $5.9 million in trade accounts payable as a result
of the Trade DIP Financing Agreement. 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 November 30, 1997, the Company had $19.6 million of cash and cash
equivalents as a result of the Chapter 11 filing and the prohibition on payments
of prepetition debt. Approximately $5.2 million of the Company's cash and cash
equivalents at November 30, 1997, was restricted pursuant to the terms of the
Cash Stipulation. Additionally, $2.0 million of the Company's cash and cash
equivalents at November 30, 1997 was restricted pursuant to the terms of the
Trade DIP Financing Agreement.
Inherent in a successful plan of reorganization is a capital structure
that permits the Company to generate sufficient cash flow after reorganization
to meet its restructured obligations and to fund the current obligations of the
reorganized Company. Under the Bankruptcy Code, the rights of and ultimate
payment to prepetition creditors may be substantially altered and eliminated as
to some classes of creditors. At this time, it is not possible to predict the
outcome of the Chapter 11 filing, or its effects on the business of the Company,
or on the interests of the creditors or shareholders.
FINANCING TRANSACTIONS. On July 26, 1996, the agent under the then
existing accounts receivable securitization facility (the "Securitization
Facility") advised the Company that it wished to terminate the commitment under
the Securitization Facility. On August 30, 1996, the Company entered into an
amended and restated revolving credit agreement with First National Bank of
Boston ("FNBB", the "Amended Revolving Credit Agreement"), which has a term of
three years and contains various restrictive and financial covenants.
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 November 30, 1997, the Company had approximately $57.9 million of
borrowings outstanding under its Second Amended Revolving Credit Agreement and
$50 million outstanding on the Notes. Additionally, the Company had $3.4 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
November 30, 1997.
STIPULATION AUTHORIZING USE OF CASH COLLATERAL. On May 14, 1997, the Company
received interim approval of the Bankruptcy Court of an Agreement to Use Cash
Collateral. The Company operated under that agreement until July 22, 1997, at
which time it received final court approval of an Amended and Restated
Stipulation Pursuant to Sections 361 and 363 of the Bankruptcy Code Authorizing
Debtor's Use of Cash Collateral and Granting Adequate Protection to Collateral
Agent, Lenders and Bondholders (the "Cash Stipulation"). Pursuant to the terms
of the Cash Stipulation, through February 28, 1998, the lenders agreed to allow
the Company to utilize the cash collateral generated by operations rather than
paying down any of the $57.9 million outstanding balance. This cash collateral
agreement requires the Company to, among other things, comply with a modified
borrowing base. The modified borrowing base increased the cash collateral
availability under the Company's Second Amended Revolving Credit Agreement by
increasing the advance rate to 82% of eligible accounts receivable, as defined,
and to 45% of eligible inventory, as defined, subject to various reductions
stipulated in the Cash Stipulation.
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 $46
million of new merchandise through November 30, 1997.
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 November 30, 1997, the Company has
returned approximately $1.7 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 November 30, 1997, the vendors committed to provide at least
$7.8 million of inventory on consignment. The Company received approximately
$33.7 million of inventory on consignment through November 30, 1997. 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; (5) collect,
assess, or recover claims against the Company that arose before the
commencement of the Chapter 11 case; or (vi) offset any debt owing to
the Company that arose prior to the commencement of the Chapter 11 case
against a claim of such creditor or part in interest against the Company
that arose before the commencement of the Chapter 11 case.
As a result of the foregoing, all pre-petition claims asserted or
assertable against the Company have been automatically stayed.
The nature of a Chapter 11 case is to have all claims against and
interest in the Company resolved. Accordingly, the Bankruptcy Court
ordered that any entity desiring to participate in any distribution in
the Chapter 11 case must either have been previously properly scheduled
by the Company or file a proof of claim with the Bankruptcy Court on or
before October 31, 1997. The Company will evaluate proofs of claims
filed during the Chapter 11 case.
COMPLAINT IN INTERPLEADER TO DETERMINE RESPECTIVE RIGHTS AND OBLIGATIONS
OF PARTIES UNDER EXECUTIVE BONUS PLAN. On December 9, 1997, Imperial
Trust Company, the trustee of the Company's Executive Bonus Plan, filed
a complaint in interpleader naming the Company, the Official Committee
of Unsecured Creditors 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. To the best of the Company's knowledge, none of the parties
served with the complaint have yet responded.
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.
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. By agreement of the parties, the Collateral Agent and the
remaining defendants must file and serve any response no later that
January 30, 1998.
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
Exhibits
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.
January 14, 1998 By: /S/SAMUEL J. MERKSAMER
----------------------
Samuel J. Merksamer
President and Chief Executive Officer
January 14, 1998 By: /S/E. PETER HEALEY
------------------
E. Peter Healey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
January 14, 1998 By: /S/BRIAN K. HANSEN
------------------
Brian K. Hansen
Controller
(Principal Accounting Officer)
13
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<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
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