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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year-ended February 1, 2003.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-26229
BARNEYS NEW YORK, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-4040818
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
575 FIFTH AVENUE 10017
NEW YORK, NEW YORK
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 450-8700
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
[Cover page 1 of 2 pages]
The common stock of the registrant is quoted on the Nasdaq Over-The-Counter
Bulletin Board service. The common stock of the registrant is only traded on a
limited or sporadic basis and there is no established public trading market for
such common stock. As of August 2, 2002, the aggregate market value of the
registrant's voting common equity held by non-affiliates of the registrant,
based on the $3.675 last average bid and asked price of the common stock on
August 2, 2002, as reported on the Over-the-Counter Bulletin Board service, was
approximately $11.8 million. For purposes of this computation, shares of common
stock of the registrant beneficially owned by each officer and director of the
registrant and by each of Whippoorwill Associates, Inc. (on behalf of its
Discretionary Accounts) and Bay Harbour Management L.C. (on behalf of its
Managed Accounts) and their respective affiliates are deemed to be beneficially
owned by affiliates. Such determination should not be deemed an admission that
such officers, directors and such other beneficial owners of common stock of the
registrant are, in fact, affiliates of the registrant.
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 of securities under a plan
confirmed by a court. Yes [x] No [_]
On April 21, 2003, the registrant had outstanding 14,103,227 shares of common
stock, par value $0.01 per share, which is the registrant's only class of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
in connection with the Annual Meeting of Stockholders of the registrant to be
held on June 20, 2003 are incorporated by reference into Part III of this
report.
[Cover page 2 of 2 pages]
Item 1. Business............................................................................................1
Item 2. Properties..........................................................................................7
Item 3. Legal Proceedings...................................................................................7
Item 4. Submission of Matters to a Vote of Security Holders.................................................8
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................10
Item 6. Selected Financial Data............................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............15
Item 8. Financial Statements and Supplementary Data........................................................35
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure...............35
Item 10. Directors and Executive Officers of the Registrant.................................................36
Item 11. Executive Compensation.............................................................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.....36
Item 13. Certain Relationships and Related Transactions.....................................................38
Item 14. Controls and Procedures............................................................................38
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................39
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Unless otherwise expressly stated herein or the context otherwise requires, all
references in this Form 10-K to (i) "Holdings" refer to Barneys New York, Inc.,
a Delaware corporation and the sole shareholder of Barney's, Inc., a New York
corporation, (ii) "Barney's, Inc." refer to such New York corporation and (iii)
"Barneys," "we," "us," "our," "our company" or "the company" refer to Holdings
and its direct and indirect subsidiaries, including Barney's, Inc. and its
subsidiaries.
FORWARD-LOOKING STATEMENTS
Certain statements discussed in Item 1 (Business), Item 3 (Legal Proceedings),
Item 7 (Management's Discussion and Analysis of Financial Condition and Results
of Operations), and elsewhere in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Statements that are not historical facts, including statements about
our beliefs and expectations, are forward-looking statements. Forward-looking
statements include statements preceded by, followed by or that include the words
"may," "could," "would," "should," "believe," "expect," "anticipate," "plan,"
"estimate," "target," "project," "intend," or similar expressions. These
statements include, among others, statements regarding our expected business
outlook, anticipated financial and operating results, our business strategy and
means to implement the strategy, our objectives, the amount and timing of future
store openings and capital expenditures, the likelihood of our success in
expanding our business, financing plans, working capital needs and sources of
liquidity.
Forward-looking statements are only estimates or predictions and are not
guarantees of performance. These statements are based on our management's
beliefs and assumptions, which in turn are based on currently available
information. Important assumptions relating to the forward-looking statements
include, among others, assumptions regarding demand for the merchandise we sell,
the introduction of new merchandise, store opening costs, expected pricing
levels, the timing and cost of planned capital expenditures, competitive
conditions and general economic conditions. These assumptions could prove
inaccurate. Forward-looking statements also involve risks and uncertainties,
which could cause actual results to differ materially from those contained in
any forward-looking statement. Many of these factors are beyond our ability to
control or predict. Such factors include, but are not limited to, the following:
o the continued appeal of luxury apparel and merchandise;
o economic conditions and their effect on consumer spending;
o our dependence on our relationships with certain
designers;
o our ability and the ability of our designers to design and
introduce new merchandise that appeals to consumer tastes
and demands;
o events and conditions in the New York City area;
o new competitors entering the market or existing
competitors expanding their market presence;
o our ability to accurately predict our sales;
o the continued service of our key executive officers and
managers;
o our being controlled by our principal stockholders;
o our ability to enforce our intellectual property rights
and defend infringement claims;
o interruptions in the supply of the merchandise we sell;
o changing preferences of our customers;
o our ability to borrow additional funds;
o our substantial indebtedness;
o significant operating and financial restrictions placed on
us by the indenture governing Barney's, Inc.'s 9% senior
secured notes and our credit facility; and
o other factors referenced in this 10-K, including those set
forth under "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations -
Forward-Looking Statements."
We believe the forward-looking statements in this Form 10-K are reasonable;
however, you should not place undue reliance on any forward-looking statements,
which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events.
PART I
ITEM 1. BUSINESS
GENERAL
We are a leading upscale retailer of men's, women's and children's apparel and
accessories and items for the home. We provide our customers with a wide variety
of merchandise across a broad range of prices, including a diverse selection of
Barneys label merchandise. Our preferred arrangements with established and
emerging designers, combined with our creative merchandising, store designs and
displays, advertising campaigns, publicity events and emphasis on customer
service, have positioned us as a pre-eminent retailer of men's and women's
fashion, cosmetics, jewelry and home furnishings.
We operate 20 inter-related stores in the United States under the "Barneys New
York" trade name which cater to fashion-conscious customers. These stores
include three flagship stores in prime retail locations in New York, Beverly
Hills and Chicago, and three smaller regional stores in Manhasset, NY, Seattle,
WA and Chestnut Hill, MA. Our two CO-OP Barneys New York stores in New York City
are an extension of the CO-OP departments in our flagship stores. They cater to
customers seeking contemporary, urban casual apparel and accessories. Our 12
outlet stores cater to budget-minded yet fashion-conscious customers. In
addition, our noted semi-annual warehouse sale events in New York City and Santa
Monica, California enable us to sell our end-of-the-season residual merchandise
and extend the Barneys New York brand to a wider range of customers. We have
entered into a licensing arrangement pursuant to which a third party operates
two retail stores in Japan and a single in-store department in Singapore, all
under the "Barneys New York" name.
We drive sales by providing our customers with a carefully edited selection of
high-fashion quality merchandise from leading and emerging designers. Our
merchandising philosophy reflects a variety of fashion viewpoints and a culture
of seeking out creative and innovative products. It has established Barneys as a
premiere destination for fashion-conscious customers. We also strive to enhance
our sales by expanding and reallocating existing space within our stores,
attracting new customers, building upon our strong existing customer
relationships and selectively increasing the number of our stores. Our
experienced management team, led by Howard Socol (the former Chairman and Chief
Executive Officer of Burdines, a division of Federated Department Stores, Inc.),
emphasizes disciplined financial management throughout our operations. We
carefully monitor and have significantly reduced operating costs through a
variety of initiatives, including a rationalization of personnel hours, a
reduction in the number of our administrative employees and the renegotiation of
supply, service and benefit plan contracts.
We were founded in 1923 under the name "Barney's Clothes, Inc." Barneys
consummated a plan of reorganization under Chapter 11 of the Bankruptcy Code on
January 28, 1999. Pursuant to the plan, Holdings was formed and all the equity
interests in Barney's, Inc. were transferred to Holdings, making Barney's, Inc.
a wholly-owned subsidiary of Holdings. Holdings has no independent operations
and its primary asset consists of shares of Barney's, Inc.
BUSINESS STRENGTHS
Strong Designer Relationships. We are a preferred distribution channel for such
leading designers as Giorgio Armani, Manolo Blahnik, Marc Jacobs, Prada, Jil
Sander and Ermenegildo Zegna. We were the first to introduce a number of
designers (including both Giorgio Armani and Prada) into the high-fashion market
in the United States. Our stores are also a showcase for emerging designers,
whom we identify and help to develop. By cultivating strong relationships with
emerging designers, we are able to introduce their merchandise to the
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high-fashion market, often on an initially exclusive basis. We further
strengthen our relationships with both established and emerging designers
through design and product suggestions and by providing them with detailed
feedback on their collections that we gather from our customers.
Barneys Label Merchandise. We complement our designer merchandise with a diverse
selection of Barneys label merchandise, including ready-to-wear apparel,
handbags, shoes, dress shirts, ties and sportswear. Barneys label merchandise is
manufactured by independent third parties according to our specifications, and
we are intensively involved in all aspects of the design and manufacture of this
collection. This merchandise complements and is of comparable quality to our
designer merchandise. Our Barneys label merchandise constituted approximately
15% of our net sales for our fiscal year ended February 1, 2003, is generally
less expensive than our designer merchandise and generates higher margins.
Strong Brand Image. We benefit greatly from the strong Barneys New York brand
image as a fashion leader, which we have developed during the past three
decades. We believe that our brand image is further enhanced through our
consistently creative and innovative merchandising, store designs and displays
(including our renowned flagship store windows), advertising campaigns and
publicity events, all of which emphasize taste, luxury and humor. Our flagship
stores reflect the luxury and distinct style of the merchandise we sell and
establish and promote the Barneys New York brand image as a pre-eminent retailer
of men's and women's fashion. In addition to our direct advertising, we receive
frequent press coverage from independent publications, which feature our
merchandise and report our launches of new collections and new designers,
further strengthening our brand image.
Relationship-Driven Customer Service. We maintain a strong focus on providing
consistently high levels of service to our customers. Our sales associates,
particularly those at our flagship stores, maintain customer profile books to
serve specific customers better by providing merchandise suggestions tailored to
their personal tastes and by making them aware of new merchandise and sales
events. These sales associates also receive extensive in-house product training
and participate in vendor clinics to familiarize themselves with the styles,
fabrics and workmanship of our designer collections. In addition, our customer
loyalty program provides incentives to customers who use our proprietary credit
card.
Prime Store Locations. The location of our flagship stores in prime retail
locations (Madison Avenue in New York City, Wilshire Boulevard off Rodeo Drive
in Beverly Hills and Oak Street in Chicago) contributes to the strong Barneys
New York brand image. We believe that our three flagship stores are premiere
destinations for fashion-conscious customers. All of our flagship stores are
leased under long-term leases, with initial terms ranging from ten to twenty
years and multiple ten-year renewal options.
Proven Management Team. We have a strong and dedicated management team with
significant experience in the upscale fashion market and retailing industry. Our
Chief Executive Officer, Howard Socol, brings more than 30 years of industry
experience to Barneys. Mr. Socol previously served as Chairman and Chief
Executive Officer of Burdines Department Stores from 1984 to 1997. During that
time, Burdines' business expanded from 25 stores as of January 28, 1984 to 48
stores as of February 1, 1997 and its sales grew from approximately $692 million
in 1984 to approximately $1.3 billion in 1996. Additionally, Thomas Kalenderian,
our Executive Vice-President -- Men's Merchandising, has been with us for 22
years, and Judith Collinson, our Executive Vice-President -- Women's
Merchandising, has been with us for 15 years. During their tenure with Barneys,
Mr. Kalenderian and Ms. Collinson have been instrumental in developing and
implementing our merchandising strategy, including our relationships with
designers and the design and procurement of Barneys label merchandise.
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BUSINESS STRATEGY
Our business strategy is focused on increasing comparable store sales, reducing
operating expenses and selectively expanding our store base.
Increase Comparable Store Sales. We are focused on maximizing the profitability
of existing space, particularly in our flagship stores. We constantly consider
opportunities to reallocate floor space to merchandise that can provide higher
sales per square foot or higher profit margins. For example, in October 2001 we
moved the restaurant in our New York City flagship store from the lower level to
the then unused ninth floor. This enabled us to expand our main floor women's
accessories business and to utilize the lower level space to expand our more
profitable cosmetics sales area, without adversely affecting the restaurant's
revenues. In June 2002 we also reallocated floor space in our New York City
flagship store to expand our women's shoe department. During the fiscal year
ended February 2, 2002, this department generated approximately three times more
sales per square foot than the merchandise previously sold in the area that has
been incorporated into our expanded women's shoe department. We plan to
implement this strategy of maximizing existing space in our other flagship
stores and regional and outlet locations, tailoring the enhancements to
individual store sales trends and tastes. In addition, our continued focus on
customer service and expanded marketing efforts, including increased
advertising, are designed to increase sales to our existing customers and to
attract new customers.
Reduce Operating Expenses. We have a highly-disciplined approach to managing
expenses throughout our operations. Since February 2001, we have reduced fixed
costs by implementing a number of expense reduction initiatives, including
reducing the number of our administrative personnel (which eliminated
approximately $4.3 million in annual payroll costs), rebidding repair and
maintenance contracts, reducing employee benefits and reducing our packaging and
general office overhead costs (which eliminated approximately $2.0 million in
annual expenses). We also upgraded the inventory controls and security measures
in our stores in an effort to reduce inventory shrinkage. In addition, we
constantly review our operations for opportunities to implement further expense
reduction initiatives.
Limited and Disciplined New Store Openings. In May 2000 we opened a new CO-OP
store in the Chelsea neighborhood of New York City, and in March 2002 we opened
a second new CO-OP store in the SoHo neighborhood of New York City. These
stores, which are an extension of the CO-OP departments in our flagship stores,
achieved aggregate net sales of $8.7 million and aggregate store level
contributions of $0.6 million in the fiscal year ended February 1, 2003
(reflecting twelve months of operations for our Chelsea CO-OP store and eleven
months of operations for our SoHo CO-OP store). Store level contributions equal
(a) net sales less (b) the cost of sales and store specific selling, general and
administrative expenses. We will continue to evaluate opportunities to expand
our CO-OP store base in a selective and financially disciplined manner. We
expect to open approximately ten additional CO-OP stores over the next five
years, including two stores in 2003 at a cost of between $1.0 million and $1.5
million each. We believe that the new CO-OP stores will increase customer
awareness of the Barneys New York name and enhance the strong Barneys New York
brand image.
RETAILING OPERATIONS
We sell to consumers primarily through three inter-related distribution
channels, consisting of full-price stores, outlet stores, and warehouse sale
events. While these three distribution channels differ in both size and
price-points, each is merchandised in its own way, with a wide range of
high-quality merchandise that generally appeals to fashion-conscious customers.
Our inventory supply chain is managed throughout these three distribution
channels, which are discussed in more detail below.
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Full-Price Stores. We operate eight full-price stores consisting of:
Flagship Stores -- We operate three large flagship stores in prime
retail locations in New York, Beverly Hills and Chicago. The three large
flagship stores establish and promote the Barneys New York brand image as a
pre-eminent retailer of men's and women's fashion. These stores offer customers
a wide variety of merchandise, including apparel, accessories, cosmetics and
items for the home, catering to affluent, fashion-conscious customers. We also
seek to ensure that the ambience of our flagship stores reflects the luxury and
distinct style of the merchandise that we sell. The flagship stores in New York
and Beverly Hills also include restaurants managed by third-party contractors.
Regional Stores -- We operate three smaller regional stores in the
following locations: Manhasset, NY, Seattle, WA and Chestnut Hill, MA. The three
smaller regional stores, which provide a limited selection of the merchandise
offered in the flagship stores, cater to similar customers as our flagship
stores in more localized markets.
CO-OP Stores -- We operate two smaller CO-OP stores in New York City.
These free-standing stores are an extension of the CO-OP departments in our
flagship stores and focus on providing customers with a selection of high-end,
contemporary, urban casual apparel and accessories, often at price points that
are slightly lower than our non-CO-OP merchandise. Similar to our CO-OP
departments, our CO-OP stores offer merchandise from established and emerging
designers, as well as our Barneys label.
Outlet Stores. We operate twelve outlet stores across the country. The outlet
stores leverage the Barneys New York brand to reach a wider audience by
providing a lower priced version of the sophistication, style and quality of the
retail experience provided in the full-price stores. These stores, which
typically operate with a low cost structure, also provide a clearance vehicle
for residual merchandise from the full-price stores.
The outlet stores, which sell designer and Barneys label apparel and
accessories, serve budget-minded yet fashion-conscious customers. They are
located in high-end outlet centers and serve a high number of destination
shoppers and tourists.
Warehouse Sale Events. We operate four warehouse sale events annually, one each
spring and fall season in both New York and Santa Monica, California. The
warehouse sale events provide another vehicle for liquidation of end of season
residual merchandise, as well as a low cost extension of the Barneys New York
brand to a wider audience. The events attract a wide range of shoppers, mostly
bargain hunters who value quality and fashion.
LICENSING ARRANGEMENTS
BNY Licensing Corp., a wholly-owned subsidiary of Barneys, is party to licensing
arrangements pursuant to which:
o two retail stores are operated in Japan and a single
in-store department is operated in Singapore under the
name "Barneys New York," each by an affiliate of Isetan
Company Limited; and
o Barneys Asia Co. LLC, which is 70% owned by BNY Licensing
and 30% owned by an affiliate of Isetan, has the exclusive
right to sublicense the Barneys New York trademark
throughout Asia (excluding Japan).
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Licensing agreements governing these arrangements were entered into in
connection with Barneys' emergence from bankruptcy. With regard to the first
licensing arrangement described above, and in accordance with a prior
arrangement, we assigned 90% of certain annual minimum royalties we receive from
this licensing arrangement to Isetan Company Limited until the expiration of the
licensing arrangement in 2015. Under the present arrangement we do not receive
significant annual revenues from this licensing arrangement. On February 5,
2003, this arrangement was amended, and the affiliate of Isetan agreed to pay us
$750,000 in each of February 2003 and February 2004 in consideration of our
consent to certain matters relating to the establishment of an additional
Barneys New York store in Japan by an affiliate of Isetan. Barneys Asia Co. LLC
has not entered into any sublicensing arrangements for the operation of any
stores or departments under the Barneys New York trademark. See note 7(b) to our
consolidated financial statements.
TRADEMARKS AND SERVICE MARKS
We own our trademarks and service marks, including the "Barneys New York" and
"Barneys" marks. Our trademarks and service marks are registered in the United
States and certain countries in Asia. The term of these registrations is
generally ten years, and they are renewable for additional ten-year periods
indefinitely, so long as the marks are still in use at the time of renewal. We
are not aware of any claims of infringement or other challenges to our right to
register or use our marks in the United States. We regard our trademarks and
service marks as valuable assets in the marketing of our products and take
appropriate action when necessary to protect them.
SEASONALITY
The specialty retail industry is seasonal in nature, with a high proportion of
sales and operating income generated in the November and December holiday
season. As a result, our operating results are significantly affected by the
holiday selling season. Seasonality also affects working capital requirements,
cash flow and borrowings as inventories build in September and peak in October
in anticipation of the holiday selling season. Our dependence on the holiday
selling season is mitigated by the sales and income generated by our warehouse
sale events held in February and August.
The following table sets forth net sales and net income (loss) for the fiscal
years ended February 1, 2003 and February 2, 2002. This quarterly financial data
is unaudited but gives effect to all adjustments necessary, in the opinion of
Barneys' management, to present fairly this information.
FISCAL 2002 - QUARTER ENDED FISCAL 2001 - QUARTER ENDED
------------------------------------------------ -----------------------------------------------------
($ in thousands) 5/4/02 8/3/02 11/2/02 2/1/03 5/5/01 8/4/01 11/3/01 2/2/02
----------- ----------- ------------ ----------- ------------ ----------- ------------- --------------
Net Sales $92,475 $81,603 $103,299 $ 105,986 $94,069 $ 85,146 $ 89,408 $ 102,546
As % of period 24% 21% 27% 28% 25% 23% 24% 28%
Net Income (loss) 478 (439) 2,877 5,550 (3,301) (3,860) (8,448) 438
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COMPETITION
The retail industry, in general, and the upscale retail apparel business, in
particular, are intensely competitive. Competition is strong for customers,
sales and vendor resources.
Generally, our flagship, regional and CO-OP stores compete with both specialty
stores and department stores, while our outlet stores and warehouse sale events
compete with off-price and discount stores, in the geographic areas in which
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they operate. Several department store, specialty store, and vendor store
competitors also offer catalog and internet shopping that also compete with us.
We compete for customers principally on the basis of quality, fashion,
assortment and presentation of merchandise, customer service, marketing and, at
times, store ambiance. In our luxury retail business, merchandise assortment is
a critical competitive factor, and retail stores compete for exclusive,
preferred and limited distribution arrangements with key designers. In addition,
we face increasing competition from our designer resources, which have
established or expanded their market presence with their own dedicated stores.
Some of the retailers with which we compete have substantially greater financial
resources than we have and may have other competitive advantages over us.
MERCHANDISING
We are a preferred distribution channel for such leading designers as Giorgio
Armani, Manolo Blahnik, Marc Jacobs, Prada, Jil Sander and Ermenegildo Zegna. We
also offer a diverse selection of unique, Barneys label merchandise (primarily
under the "Barneys New York" and "CO-OP" labels). In the fiscal year ended
February 1, 2003, our ten top designers (including all brands owned by such
designers) accounted for approximately 28% of our total sales, and our two top
designers (including all brands owned by such designers) accounted for
approximately 11% and 4%, respectively, of our total sales. If one or more of
our top designers were to cease providing us with adequate supplies of
merchandise, our business might, in the short term, be adversely affected.
However, management believes that alternative supply sources exist to fulfill
our requirements in the event of a disruption. In addition, if one or more of
our top designers were to increase sales of merchandise through its own stores
or to the stores of our competitors, our business could be materially adversely
affected.
EMPLOYEES
As of February 1, 2003, we employed approximately 1,300 people. Our staffing
requirements fluctuate during the year as a result of the seasonality of the
retail apparel industry, and we add approximately 100 employees during the
holiday selling season. Approximately 500 of our employees are represented by
unions, and we believe that overall our relationship with our employees and
these unions is good. During our more than fifty-year relationship with unions
representing our employees, we have never been subjected to a strike or work
stoppage.
GOVERNMENT REGULATION
Our proprietary credit card operations, as well as those of third-party credit
card providers, are subject to numerous federal and state laws, including laws
that impose disclosure and other requirements upon the origination, servicing
and enforcement of credit accounts and limitations on the maximum amount of
finance charges that may be charged by a credit provider. Any change in these
regulations that would materially limit the availability of credit to our
customers could adversely affect our business, financial condition and results
of operations. Our practices, as well as our competitors' practices, are also
subject to review in the ordinary course of business by the Federal Trade
Commission. We believe that we are currently in material compliance with all
applicable state and federal regulations.
Additionally, we are subject to certain customs, truth-in-advertising and other
laws, including consumer protection regulations and zoning and occupancy
ordinances, that regulate retailers generally and/or govern the importation,
promotion and sale of merchandise and the operation of retail stores and
warehouse facilities. We undertake to monitor changes in these laws and believe
that we are in material compliance with applicable laws with respect to these
practices.
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ITEM 2. PROPERTIES
Our principal facilities include corporate offices, a central alterations
facility, a distribution center and three flagship stores. We lease all of our
facilities. All of our flagship stores are leased under long-term leases, with
initial terms ranging from ten to twenty years and multiple ten-year renewal
options. The following table lists the location, type, and approximate gross and
selling square footage of each of our facilities:
APPROXIMATE APPROXIMATE
GROSS SELLING
LOCATION TYPE SQUARE FEET SQUARE FEET
-------- ---- ----------- -----------
New York, NY................................... Corporate Offices 46,000 --
New York, NY................................... Central Alterations Facility 32,968 --
Lyndhurst, NJ.................................. Distribution Center 180,000 --
New York, NY................................... Flagship Store 240,000 113,920
Beverly Hills, CA.............................. Flagship Store 120,000 60,671
Chicago, IL.................................... Flagship Store 50,000 21,913
Manhasset, NY.................................. Regional Store 19,052 12,646
Chestnut Hill, MA.............................. Regional Store 6,234 4,165
Seattle, WA.................................... Regional Store 11,113 6,406
New York, NY (Wooster Street).................. CO-OP Store 7,000 3,782
New York, NY (17th Street)..................... CO-OP Store 7,038 5,800
Harriman, NY................................... Outlet Store 9,576 7,468
Cabazon, CA.................................... Outlet Store 7,026 4,930
Camarillo, CA.................................. Outlet Store 7,500 5,471
Clinton, CT.................................... Outlet Store 7,525 4,898
Riverhead, NY.................................. Outlet Store 7,500 5,077
Wrentham, MA................................... Outlet Store 7,500 5,012
Waikele, HI.................................... Outlet Store 6,295 4,766
Carlsbad, CA................................... Outlet Store 7,500 4,969
Napa Valley, CA................................ Outlet Store 5,500 3,877
Orlando, FL.................................... Outlet Store 6,000 3,965
Allen, TX...................................... Outlet Store 7,000 4,801
Leesburg, VA................................... Outlet Store 6,000 4,224
We also license, on a short-term basis, facilities for our semi-annual Santa
Monica, CA warehouse sale events. We believe that all of our facilities are
suitable and adequate for the current and anticipated conduct of our operations.
ITEM 3. LEGAL PROCEEDINGS
On or about July 31, 2002, an individual filed a class action complaint against
us in the Superior Court for the State of California, County of San Diego. The
complaint alleges two causes of action for purported violations of California's
Civil Code and Business and Professions Code relating to the alleged requesting
by us of certain information. The complaint seeks relief on a class basis under
the statutes permitting a plaintiff to recover a fine, in the discretion of the
court, and such other damages which each member of the class may have suffered
as a result of our alleged conduct. The complaint further seeks an accounting of
7
all moneys and profits received by us in connection with the alleged violations
as well as injunctive relief with respect to the alleged practices.
Certification of the class and attorneys fees is sought as well. We believe that
the complaint is without merit, that we have substantial defenses to the claims
and we plan to vigorously defend the lawsuit. A proposed settlement of this
matter received preliminary court approval on May 1, 2003. The settlement is
subject to final court approval on June 20, 2003 as well as satisfaction of
certain other conditions. No assurances can be given that the proposed
settlement will be finalized in accordance with its terms. In management's
judgment, based in part on consultation with legal counsel, neither this case
nor the proposed settlement is expected to have a material adverse effect on our
financial position.
In addition, we are involved in various legal proceedings which are routine and
incidental to the conduct of our business. Management believes that none of
these proceedings, if determined adversely to us, would have a material effect
on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions and business backgrounds of all
of the executive officers of Holdings. Except as otherwise indicated, each
executive officer has held his current position for the past five years.
NAME AGE AT FEBRUARY 1, 2003 POSITION
- ---- ----------------------- ----------------------------------------------------------------
Howard Socol.................... 57 Chairman, President and Chief Executive Officer
Judith Collinson................ 51 Executive Vice President-- Women's Merchandising
Thomas Kalenderian.............. 45 Executive Vice President-- Men's Merchandising
Marc H. Perlowitz............... 48 Executive Vice President-- General Counsel and Human Resources,
Secretary
Karl Hermanns................... 38 Executive Vice President-- Operations
Michael Celestino............... 46 Executive Vice President-- Store Operations
Steven M. Feldman............... 39 Executive Vice President and Chief Financial Officer
David New....................... 46 Executive Vice President-- Creative Services
Vincent Phelan.................. 37 Senior Vice President-- Treasurer
Howard Socol has been the Chairman, President and Chief Executive Officer of
Holdings since January 8, 2001. Mr. Socol was the Chief Executive Officer of J.
Crew Group, Inc., a retailer of women's and men's apparel, shoes and
accessories, from February 1998 through January 1999. From 1969 to 1997, Mr.
Socol served in various management positions at Burdines, a division of
Federated Department Stores, Inc., becoming President in 1981 and Chairman and
Chief Executive Officer in 1984, a position he held until his retirement in
1997. Mr. Socol is also a director of Guess?, Inc.
Judith Collinson started with Barneys in 1989 as an Accessories Buyer. Prior to
her current position, she had been responsible for Accessories and Private Label
Collections. She was promoted to Executive Vice President and General
Merchandising Manager for all women's merchandising in May 1998. Ms. Collinson
is also responsible for women's shoes and cosmetics.
Thomas Kalenderian has been at Barneys for 22 years. His responsibilities have
increased over time until he was promoted to Executive Vice President and
General Merchandising Manager for all men's merchandising in July 1997. Mr.
Kalenderian is responsible for developing and implementing menswear strategy and
manages many of the key vendor relationships for the menswear, children's and
gifts for the home businesses.
8
Marc H. Perlowitz joined Barneys in September 1985. He was promoted to Executive
Vice President, General Counsel and Human Resources of Barneys in October 1997.
Mr. Perlowitz' responsibilities include direct responsibility for all legal
matters of Holdings and its affiliates. He is responsible for Human Resources
which includes compensation, benefits, labor relations, training, recruiting,
employee policies and procedures and company communications. He is also
responsible for real estate and risk management.
Karl Hermanns has been with Barneys since July 1996 and previously was
responsible for Financial and Strategic Planning. During his tenure, he has
assumed other responsibilities and is currently responsible for Marketing,
Merchandise Planning, Management Information Systems, Distribution, Imports and
our Central Alterations department. Mr. Hermanns was promoted to Executive Vice
President in February 2000. Prior to joining Barneys, Mr. Hermanns spent 10
years with Ernst & Young LLP in their audit and corporate finance practices.
Michael Celestino has been with Barneys since November 1991 and has served in a
number of store operations capacities during that period. Mr. Celestino is
currently responsible for all store operations including full-price stores,
outlet stores and our warehouse sale events. He was promoted to Executive Vice
President in February 2000.
Steven M. Feldman has been with Barneys since May 1996 when he joined as
Controller. During his tenure he assumed additional responsibilities and was
appointed as Chief Financial Officer in May of 1999. Prior to joining Barneys,
Mr. Feldman was a Senior Manager at Ernst & Young LLP principally serving retail
engagements. Mr. Feldman was promoted to Executive Vice President in March 2000.
David New has been with Barneys since 1992 when he joined as Men's Display
Manager of the 17th Street store in New York City. Mr. New's responsibilities
have increased over time and in March of 2000 he was promoted to Executive Vice
President -- Creative Services. In that capacity, Mr. New is responsible for
Store Design, Display, Advertising and Publicity.
Vincent Phelan has been with Barneys since August 1995 when he joined as
Director of Finance. Prior to joining Barneys, Mr. Phelan was the Deputy
Director of Finance at the United States Tennis Association, Inc. in White
Plains, NY from January 1993 to July 1995. Mr. Phelan was promoted to Vice
President -- Treasurer in January 1999 and Senior Vice President in March 2000.
Mr. Phelan is a certified public accountant and is responsible for financial
planning and analysis, cash management, banking relations, taxes and facilities.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Holdings common stock is quoted on the Nasdaq Over-The-Counter Bulletin Board
service under the symbol "BNNY." Holdings common stock is only traded on a
limited or sporadic basis and there is no established public trading market for
such common stock. The following table sets forth the reported high and low bid
prices of Holdings common stock on the Nasdaq Over-The-Counter Bulletin Board
service for each fiscal quarter during the period from February 4, 2001 through
February 1, 2003. The quotations listed below reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
HIGH BID LOW BID
-------- -------
FISCAL YEAR ENDED FEBRUARY 2, 2002:
First Quarter (Feb. 4, 2001 - May 5, 2001)............................... $ 8.00 $ 6.00
Second Quarter (May 6, 2001 - August 4, 2001)............................ 7.00 5.75
Third Quarter (August 5, 2001 - November 3, 2001)........................ 6.00 4.25
Fourth Quarter (November 4, 2001 - February 2, 2002)..................... 5.00 1.50
FISCAL YEAR ENDED FEBRUARY 1, 2003:
First Quarter (February 3, 2002 - May 4, 2002)........................... 5.40 1.50
Second Quarter (May 5, 2002 - August 3, 2002)............................ 3.90 3.01
Third Quarter (August 4, 2002 - November 2, 2002)........................ 3.55 2.65
Fourth Quarter (November 3, 2002 - February 1, 2003)..................... 4.26 3.00
HOLDERS
As of April 21, 2003, there were 949 holders of record of Holdings common stock.
DIVIDENDS
The terms of the indenture governing Barney's, Inc.'s 9% Senior Secured Notes
and our credit facility restrict the ability of Barney's, Inc. to make
distributions to Holdings and, consequently, restrict the ability of Holdings to
pay dividends on shares of Holdings common stock. In addition, the guarantee by
Holdings of the credit facility prohibits Holdings from declaring dividends on
shares of its capital stock, with the exception of dividends payable to holders
of shares of Holdings preferred stock. Holdings has no present intention to
declare dividends on shares of its common stock.
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to an amendment to Howard Socol's employment agreement, dated January
10, 2003, Holdings made a restricted stock award on February 2, 2003 of 200,000
shares of Holdings common stock to Howard Socol, Holdings' Chairman, President
and Chief Executive Officer. The issuance by Holdings of these securities were
not registered under the Securities Act of 1933 pursuant to the exemption
contemplated by Section 4(2) thereof for transactions not involving a public
offering.
10
On April 1, 2003, we completed an offering to sell 106,000 units at a price of
$850 per unit, for gross proceeds of $90.1 million. Each unit consisted of
$1,000 principal amount at maturity of 9% senior secured notes due April 1, 2008
of Barney's, Inc. and one warrant to purchase 3.412 shares of common stock of
Holdings at an exercise price of $0.01 per share. The units were sold in a
private placement to qualified institutional investors pursuant to Rule 144A and
Regulation S of the Securities Act of 1933, as amended, and to institutional
accredited investors within the meaning of Rule 501(a)(1), (2), (3) or (7) under
such statute. Jefferies & Company, Inc. acted as initial purchaser of the units.
In addition to commissions of approximately $2.7 million, which we paid the
initial purchaser in connection with the sale of the units, we also paid
Jeffries & Company, Inc. an approximate $3.3 million fee for certain financial
advisory and investment banking services provided by it to us. Net proceeds to
us were approximately $81.7 million after deducting commissions, financial
advisory fees and estimated expenses of the offering. The warrants are
exercisable at any time after the earliest to occur of:
o 180 days after April 1, 2003;
o the date on which a registration statement for a
registered exchange offer with respect to the 9% senior
secured notes is declared effective under the Securities
Act;
o the date on which a shelf registration statements with
respect to the shares issuable upon exercise of the
warrants is declared effective under the Securities Act;
and
o such date as the initial purchaser of the units in its
sole discretion may determine.
The warrants will expire on April 1, 2008. The exercise price and number of
shares issuable upon exercise of a warrant are subject to adjustment from time
to time upon the occurrence of certain events with respect to the common stock
of Holdings, issuances of options or other convertible securities, dividends and
distributions and certain changes in options and convertible securities of
Holdings.
In connection with the offering we entered into a registration rights agreement
pursuant to which we agreed to file a registration statement within 90 days of
the offering with respect to an exchange offer pursuant to which the holders of
the notes will be able to exchange the notes for freely transferable notes
having terms substantially identical to the notes. In addition, in certain
circumstances we have agreed to file a shelf registration statement that would
allow some or all of the notes to be offered to the public. If we do not comply
with the terms of the registration rights agreement, we will be required to pay
liquidated damages to holders of the notes in the form of additional cash
payments until all defaults under the registration rights agreement have been
cured.
In connection with the offering, Holdings agreed that upon receipt of a written
request from the holders of at least 5% of the shares issuable upon exercise of
the warrants, Holdings will, as promptly as practicable, file a shelf
registration statement covering the resale of the shares issuable upon exercise
of the warrants. Holdings may, at its option, file a registration statement
covering the resale of the shares issuable upon exercise of the warrants.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated historical financial data set forth in the table below
as of and for each of the four fiscal years in the period ended February 1,
2003, for the six months ended January 30, 1999, and the fiscal year ended
August 1, 1998, are derived from our consolidated financial statements for such
periods, as audited by Ernst & Young LLP.
11
The selected consolidated historical financial data set forth below for the
twelve months ended January 30, 1999 and as of and for the six months ended
January 28, 1998 are derived from management's unaudited internal financial
statements.
The selected consolidated historical financial data should be read in
conjunction with the financial statements and the related notes and other
information contained elsewhere in this Form 10-K, including information set
forth herein under "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In conjunction with our emergence from Chapter 11 in January 1999, we changed
our fiscal year-end to the Saturday closest to January 31. Previously, the
fiscal year-end fell on the Saturday closest to July 31. Unless otherwise
specified, all historical information as of or prior to August 1, 1998 reflects
the July fiscal year-end. The six-month period ended January 30, 1999 represents
the six month transition period to the new fiscal year.
As hereinafter used, "Successor Company" refers to Holdings and subsidiaries
subsequent to January 30, 1999 and "Predecessor Company" refers to Barney's,
Inc. and subsidiaries prior to January 30, 1999.
Our consolidated financial statements during the bankruptcy proceedings are
presented in accordance with American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," known as SOP 90-7. Pursuant to guidance provided by
SOP 90-7, we adopted fresh start reporting as of January 28, 1999 upon our
emergence from bankruptcy.
Under fresh start reporting, a new reporting entity is deemed to be created and
the recorded amounts of assets and liabilities are adjusted to reflect their
estimated fair values at the effective date. Black lines have been drawn to
separate the Successor Company's financial information from that of the
Predecessor Company to signify that they are different reporting entities and
such financial information has not been prepared on the same basis. The
operating results of the Successor Company for the intervening period from
January 28, 1999 to January 30, 1999 were immaterial and therefore included in
the operations of the Predecessor Company.
The balance sheet data as of January 30, 1999 in the following table reflect the
plan of reorganization for Barneys and certain of its affiliates and the
application of the principles of "fresh start" reporting in accordance with the
provisions of SOP 90-7. Accordingly, such financial information is not
comparable to our historical financial information prior to January 28, 1999.
12
PREDECESSOR COMPANY | SUCCESSOR COMPANY
-------------------------------------------------- |--------------------------------------------------
SIX SIX TWELVE | FISCAL FISCAL FISCAL FISCAL
MONTHS MONTHS MONTHS | YEAR YEAR YEAR YEAR
FISCAL YEAR ENDED ENDED ENDED | ENDED ENDED ENDED ENDED
ENDED AUGUST JANUARY 28, JANUARY 30, JANUARY 30, |JANUARY 29, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
1, 1998 1998 1999(1,2) 1999(1,2,3) | 2000 2001 2002 2003
------------ ----------- ----------- ----------- |----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) |
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE | (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AND OPERATING DATA AND RATIOS) | AND OPERATING DATA AND RATIOS)
STATEMENT OF OPERATIONS DATA: |
Net Sales.................... $ 345,935 $ 183,760 $ 182,615 $ 344,790 | $ 366,802 $ 404,321 $ 371,169 $ 383,363
Gross Profit................. 164,212 89,930 86,573 160,855 | 173,515 187,596 162,324 179,348
Selling, General and |
Administrative Expenses |
(including occupancy |
expenses)(4).............. 151,191 78,123 73,634 146,702 | 152,445 161,523 154,818 154,813
Depreciation and |
Amortization.............. 9,635 4,838 4,671 9,468 | 17,440 18,027 18,802 10,760
Other Income-- Net(5)........ (4,675) (3,208) (2,033) (3,500) | (4,355) (4,833) (6,957) (6,327)
Interest and Financing Costs, |
Net of Interest Income.... 11,967 5,578 4,758 11,147 | 12,968 11,723 10,393 11,036
Reorganization Costs......... 15,970 8,683 13,834 21,121 | -- -- -- --
Income Taxes................. 77 39 38 76 | 363 546 439 600
Extraordinary Item-- Gain on |
Debt Discharge............ -- -- (285,905) (285,905) | -- -- -- --
Net (Loss) Income............ (19,953) (4,123) 277,576 261,746 | (5,346) 610 (15,171) 8,466
Basic and Diluted (Loss) |
Earnings Per Share(6)..... | $ (0.42) $ 0.04 $ (1.09) $ 0.61
|
SELECTED OPERATING DATA: |
Comparable Store Net Sales |
Increase (Decrease)....... 9.3% 1.0% 1.0% 4.3% | 9.0% 9.7% (7.7)% 2.9%
Number of Stores............. 20 20 20 20 | 16 18 19 20
|
OTHER FINANCIAL DATA: |
EBITDA(7).................... $ 17,696 $ 15,015 $ 14,972 $ 17,653 | $ 25,425 $ 30,906 $ 14,463 $ 30,862
Net Cash (Used in) Provided |
by Operating Activities... (10,444) (2,009) (18,250) (26,685) | 15,005 23,042 14,011 14,141
Capital Expenditures......... 3,047 2,167 2,112 2,992 | 6,224 8,499 11,982 11,082
PREDECESSOR COMPANY | SUCCESSOR COMPANY
----------------------------- | --------------------------------------------------------------------
AS OF AS OF |
AUGUST 1, JANUARY 28, | JANUARY 30, JANUARY 29, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
1998 1998 | 1999(2) 2000 2001 2002 2003
--------- ----------- | ----------- ----------- ----------- ----------- -----------
(UNAUDITED) |
(DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS)
BALANCE SHEET DATA: |
Cash and Cash Equivalents.... $ 3,478 $ 3,977 |$ 6,824 $ 10,333 $ 17,369 $ 10,835 $ 7,111
Fixed Assets at Cost, Less |
Accumulated Depreciation |
and Amortization.......... 114,639 115,837 | 51,356 48,974 48,170 50,141 50,463
Total Assets................. 217,043 212,637 | 343,954 324,482 323,859 299,823 308,448
Total Debt(8)................ 75,437 66,290 | 118,533 105,915 89,315 81,048 75,956
Redeemable Preferred Stock... -- -- | 500 500 500 500 500
Total Stockholders' |
(Deficit) Equity......... (467,634) (451,805) | 154,340 153,996 161,793 146,622 155,584
- ---------------------
(1) Effective January 1999, we changed our fiscal year to coincide with
the Saturday closest to the end of January.
(2) The statement of operations data presented above reflects the results
of operations for the Predecessor Company. The plan of reorganization
for Barneys and certain of its affiliates became effective on January
28, 1999 and the results of operations for the Successor Company for
the two-day period are immaterial and are not shown separately. The
balance sheet data presented as of January 30, 1999 is that of the
Successor Company.
13
(3) For comparison purposes, statement of operations data for the twelve
months ended January 30, 1999 (unaudited) was prepared using
management's internal financial statements for the six months ended
August 1, 1998 (unaudited) and the audited financial statements for the
six-month period ended January 30, 1999.
(4) Selling, General and Administrative Expenses for the fiscal year
ended February 3, 2001 include the benefit of a $1.5 million reversal
of a Predecessor Company liability favorably settled in that fiscal
year.
(5) Other Income -- Net primarily includes finance charge income generated
from our proprietary credit card operations. Other Income -- Net for the
fiscal year ended February 2, 2002 includes a non-recurring gain of $0.9
million related to insurance recoveries associated with the loss of one
of our stores due to the September 11 events and the benefit of a $0.9
million reversal of a Predecessor Company liability favorably settled in
that fiscal year. Other Income -- Net for the fiscal year ended February
1, 2003 includes a non-recurring gain of $0.5 million related to
additional insurance recoveries associated with the loss of one of our
stores in the prior fiscal year due to the September 11 events and the
benefit of a $0.4 million non-recurring gain from the sale of a
trademark.
(6) Basic and Diluted (Loss) Earnings Per Share of the Predecessor Company
has not been included because the computation would not provide
meaningful results, as the capital structure of the Successor Company is
not comparable to that of the Predecessor Company.
(7) EBITDA for each period represents the sum of (a) the respective amounts
of Net (Loss) Income set forth above for such period; plus (b) the
respective amounts of Interest and Financing Costs, Net of Interest
Income, Income Taxes and Depreciation and Amortization and (c) with
respect to the Predecessor Company only, the respective amounts of
Extraordinary Item -- Gain on Debt Discharge and Reorganization Costs.
The following table reconciles Net (Loss) Income to EBITDA:
PREDECESSOR COMPANY | SUCCESSOR COMPANY
--------------------------------------------------- | --------------------------------------------------
FISCAL SIX SIX TWELVE | FISCAL FISCAL FISCAL FISCAL
YEAR MONTHS MONTHS MONTHS | YEAR YEAR YEAR YEAR
YEAR ENDED ENDED ENDED | ENDED ENDED ENDED ENDED
ENDED AUGUST JANUARY 28, JANUARY 30, JANUARY 30, | JANUARY 29, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
1, 1998 1998 1999* 1999* | 2000 2001 2002 2003
------------ ----------- ----------- ----------- | ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) |
(DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS)
Net (Loss) Income.......... $ (19,953) $ (4,123) $ 277,576 $ 261,746 | $ (5,346) $ 610 $ (15,171) $ 8,466
Interest and Financing |
Costs, Net of |
Interest Income......... 11,967 5,578 4,758 11,147 | 12,968 11,723 10,393 11,036
Income Taxes............... 77 39 38 76 | 363 546 439 600
Depreciation and |
Amortization............ 9,635 4,838 4,671 9,468 | 17,440 18,027 18,802 10,760
Extraordinary Item-- |
Gain on Debt Discharge.. -- -- (285,905) (285,905) | -- -- -- --
Reorganization Costs....... 15,970 8,683 13,834 21,121 | -- -- -- --
--------- --------- ----------- ----------- | --------- --------- ---------- ---------
EBITDA..................... $ 17,696 $ 15,015 $ 14,972 $ 17,653 | $ 25,425 $ 30,906 $ 14,463 $ 30,862
========= ========= =========== =========== | ========= ========= ========== =========
- ----------------
* See Note (2) above.
EBITDA is not an alternative measure of operating results or cash
flows from operations, as determined in accordance with accounting
principles generally accepted in the United States. We have included
EBITDA because we believe it is an indicative measure of our
operating performance and our ability to meet our debt service
requirements and is used by investors and analysts to evaluate
companies in our industry. EBITDA is also a measure utilized in a
covenant contained in our credit facility and in a covenant in the
indenture governing the 9% senior secured notes that limits our
ability to incur indebtedness.
14
As presented by us, EBITDA may not be comparable to similarly titled
measures reported by other companies. EBITDA should be considered in
addition to, not as a substitute for, operating income, net (loss)
income, cash flow and other measures of financial performance and
liquidity reported in accordance with accounting principles generally
accepted in the United States. In addition, a substantial portion of
our EBITDA must be dedicated to the payment of interest on our
indebtedness and to service other commitments, thereby reducing the
funds available to us for other purposes. Accordingly, EBITDA does
not represent an amount of funds that is available for management's
discretionary use. See "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(8) Predecessor Company balance sheet data does not include liabilities
subject to compromise set forth on the balance sheet of the
Predecessor Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a leading upscale retailer of men's, women's and children's apparel and
accessories and items for the home. We provide our customers with a wide variety
of merchandise across a broad range of prices, including a diverse selection of
Barneys label merchandise.
Barneys consummated a plan of reorganization under Chapter 11 of the Bankruptcy
Code on January 28, 1999. Pursuant to the plan, Holdings was formed and all the
equity interests in Barney's, Inc. were transferred to Holdings, making
Barney's, Inc. a wholly-owned subsidiary of Holdings. Holdings has no
independent operations and its primary asset consists of shares of Barney's,
Inc. In connection with its acquisition of Barney's, Inc., Holdings made an
election under Section 338(g) of the Internal Revenue Code, as a result of which
Barney's, Inc. and its subsidiaries are generally treated, for federal income
tax purposes, as having sold their assets at the time the plan of reorganization
was consummated and thereafter as a new corporation which purchased the same
assets as of the beginning of the following day. Consequently, Barney's, Inc.
recognized a gain at the time of the deemed sale in an amount equal to the
difference between the fair market value of its assets and its collective tax
basis of the assets at the time of the sale. We used existing net operating loss
carryforwards to eliminate the taxable gain recognized as a result of the deemed
sale. Nevertheless, we were subject to alternative minimum tax. Furthermore, as
a result of the Section 338(g) election, Barney's, Inc. surrendered certain
remaining tax attributes, including all unutilized net operating loss
carryforwards, and surrendered certain tax credits. See note 6 to our audited
consolidated financial statements.
RECENT DEVELOPMENTS
On April 1, 2003, we completed an offering to sell 106,000 units at a price of
$850 per unit, for gross proceeds of $90.1 million. Each unit consisted of
$1,000 principal amount at maturity of 9% senior secured notes due April 1, 2008
of Barney's, Inc. and one warrant to purchase 3.412 shares of common stock of
Holdings at an exercise price of $0.01 per share. Net proceeds to us were
approximately $81.7 million after deducting commissions, financial advisory fees
and estimated expenses of the offering. We used the net proceeds to repay a
substantial portion of our outstanding indebtedness and deferred lease
obligations. Holdings and all of our domestic restricted subsidiaries have
guaranteed the 9% senior secured notes on a senior secured basis.
In connection with the offering, we entered into a new revolving credit facility
(the "Restated Credit Facility") on the terms of the existing credit facility as
amended on April 1, 2003. The Restated Credit Facility, which matures on July
15, 2006, is a $70.0 million revolving credit facility under which we may borrow
15
up to $66 million, which may be increased to $70.0 million with the consent of
the required lenders, subject to a borrowing base test.
The Restated Credit Facility and the related guarantees thereof are secured by a
first-priority lien on substantially all of our assets, other than real property
leaseholds. The 9% senior secured notes are guaranteed by Holdings and each of
the existing and future domestic restricted subsidiaries of Barney's, Inc. The
9% senior secured notes and the related guarantees are secured by a
second-priority lien on the same assets as secure the Restated Credit Facility.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements is based on the
application of significant accounting policies, many of which require us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. See note 2 to our consolidated financial statements. On an ongoing
basis, we evaluate our estimates, including those related to goodwill (including
excess reorganization value and other intangible assets), bad debt, inventory,
taxes, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Excess Reorganization Value. Excess reorganization value represents the amount
of goodwill attributed to a company under accounting principles generally
accepted in the United States upon its emergence from Chapter 11, as adjusted
from time to time pursuant to SFAS No. 142, "Goodwill and Other Intangible
Assets," which was issued in June 2001. As of February 1, 2003, the amount of
excess reorganization value which we recognized in our financial statements was
$147.8 million, and our total stockholders' equity (including such excess
reorganization value) was $155.6 million.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets, including excess reorganization value. Among other
things, SFAS No. 142 requires that goodwill no longer be amortized, but rather
be tested annually for impairment. This statement was effective for fiscal years
beginning after December 15, 2001. Accordingly, on February 3, 2002, we adopted
SFAS No. 142, and were required to analyze our excess reorganization value for
impairment issues during the first six months of the fiscal year ended February
1, 2003, and then on a periodic basis thereafter. In accordance with SFAS No.
142, in the fiscal year ended February 1, 2003, we completed the required
testing for impairment of our excess reorganization value as of both the
beginning and end of the fiscal year ended February 1, 2003. Based upon our
re-evaluation of the first step of the impairment test which screens for
potential impairment, we concluded that the fair value of the enterprise
exceeded its book value. Accordingly, we did not need to perform the second step
of the test, which measures the amount of the impairment. For the fiscal year
ended February 1, 2003, we did not record an impairment loss related to excess
reorganization value. However, our excess reorganization value was reduced by
approximately $1.7 million during the fiscal year ended February 1, 2003 due to
a reversal of a tax reserve resulting from the resolution of tax contingencies
existing at the time of our emergence from bankruptcy.
16
During the fiscal year ended February 2, 2002 (and prior fiscal years), when
SFAS No. 142 was not in effect, we amortized excess reorganization value over a
twenty-year period. If excess reorganization value had not been amortized during
the fiscal years ended February 3, 2001 and February 2, 2002, our adjusted net
income (loss) and basic and diluted income (loss) per share would have been as
follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 3, 2001 FEBRUARY 2, 2002
------------------------ ------------------------------
(dollars in thousands, except per share data)
BASIC AND BASIC AND
DILUTED DILUTED (LOSS)
NET INCOME NET (LOSS) INCOME PER
INCOME PER SHARE INCOME SHARE
------ --------- ------ -----
As Reported.............................................. $ 610 $ 0.04 $ (15,171) $ (1.09)
Amortization of Excess Reorganization Value.............. 8,741 0.64 8,791 0.63
---------- -------- ----------- ---------
As Adjusted.............................................. $ 9,351 $ 0.68 $ (6,380) $ (0.46)
========== ======== =========== =========
Bad Debt. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If our
estimates prove to be incorrect and our allowances are therefore inadequate, we
may be required to make additional allowances, which will reduce our net
earnings, if any.
Inventory. We write down our inventory for estimated obsolescence based upon
assumptions about future demand and market conditions. If our estimates prove to
be incorrect and our write-downs are therefore inadequate, we may be required to
make additional inventory write-downs, which will reduce our net earnings, if
any.
Deferred Taxes. The operating period after emergence from bankruptcy and the
cumulative losses incurred by us make the future utilization of deferred tax
assets uncertain. Accordingly, we record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
In the event we were to determine that we would be able to realize our deferred
tax assets in the future in excess of the net recorded amount, an adjustment to
the deferred tax asset would increase income in the period such determination
was made.
Derivative Instruments and Hedging Activities. In June 1998, the Financial
Accounting Standards Board, or FASB, issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and for Hedging
Activities", or SFAS No. 133, which we adopted, as amended, on February 4, 2001.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments. Specifically, SFAS No. 133 requires an entity to
recognize all derivative instruments as either assets or liabilities in the
balance sheet and to measure those instruments at fair value. Additionally, the
fair value adjustments will affect either stockholders' equity or net income
depending on whether the derivative instrument qualifies as a hedge for
accounting purposes and, if so, the nature of the hedging activity.
RESULTS OF OPERATIONS
We returned to profitability in the fiscal year ended February 1, 2003, despite
a continued weak economy and retail sector. Our operating results for the fiscal
year ended February 2, 2002 reflect the impact of a weak economy exacerbated by
the events of September 11, 2001. The business disruption caused by the
terrorist attacks and the indirect impact the attacks had on consumer spending
and tourism were significant factors that adversely affected our operating
results for the fiscal year ended February 2, 2002.
The following table includes earnings before Interest and Financing Costs, Net
of Interest Income, Income Taxes and Depreciation and Amortization (or EBITDA)
as a percentage of Net Sales and also includes Net Income (Loss) as a percentage
17
of Net Sales. EBITDA is not an alternative measure of operating results or cash
flows from operations, as determined in accordance with accounting principles
generally accepted in the United States. We have included EBITDA because we
believe it is an indicative measure of our operating performance and our ability
to meet our debt service requirements and is used by investors and analysts to
evaluate companies in our industry. EBITDA is also a measure utilized in a
covenant contained in our credit facility and in a covenant in the indenture
governing the 9% senior secured notes that limits our ability to incur
indebtedness. As presented by us, EBITDA may not be comparable to similarly
titled measures reported by other companies. EBITDA should be considered in
addition to, not as a substitute for, operating income, net income (loss), cash
flow and other measures of financial performance and liquidity reported in
accordance with accounting principles generally accepted in the United States.
In addition, a substantial portion of our EBITDA must be dedicated to the
payment of interest on our indebtedness and to service other commitments,
thereby reducing the funds available to us for other purposes. Accordingly,
EBITDA does not represent an amount of funds that is available for management's
discretionary use.
FISCAL YEAR ENDED
-------------------------------------------
FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
2001 2002 2003
---- ---- ----
Net Sales........................................................................ 100.0% 100.0% 100.0%
Cost of Sales.................................................................... 53.6 56.3 53.2
------- ------ -------
Gross Profit..................................................................... 46.4 43.7 46.8
Selling, General and Administrative Expenses (Including Occupancy Expenses)(1)... 40.0 41.7 40.4
Other Income-- Net(2)............................................................ (1.2) (1.9) (1.7)
------- ------ -------
Earnings before Interest and Financing Costs, Net of Interest Income,
Income Taxes and Depreciation and Amortization (EBITDA)....................... 7.6 3.9 8.1
Interest and Financing Costs, Net of Interest Income, Income Taxes
and Depreciation and Amortization............................................. 7.4 8.0 5.9
------- ------ -------
Net Income (loss)................................................................ 0.2% (4.1)% 2.2%
======= ====== =======
- ----------
(1) Selling, General and Administrative Expenses for the fiscal year ended
February 3, 2001 include the benefit of a $1.5 million reversal of a
Predecessor Company liability favorably settled in that fiscal year.
Excluding such amount, the category as a percentage of Net Sales would
have been 40.3%.
(2) Other Income -- Net primarily includes finance charge income generated
from our proprietary credit card operations. Other Income -- Net for the
fiscal year ended February 2, 2002 also includes a non-recurring gain of
$0.9 million related to insurance recoveries associated with the loss of
one of our stores due to the September 11 events and the benefit of a
$0.9 million reversal of a Predecessor Company liability favorably
settled in that fiscal year. Excluding such amounts, the category as a
percentage of Net Sales would have been (1.4)%. Other Income -- Net for
the fiscal year ended February 1, 2003 also includes a non-recurring
gain of $0.5 million related to additional insurance recoveries
associated with the loss of one of our stores in the prior fiscal year
due to the September 11 events and the benefit of a $0.4 million
non-recurring gain from the sale of a trademark. Excluding these
amounts, the category as a percentage of Net Sales would have been
(1.4)%.
18
FISCAL YEAR ENDED FEBRUARY 1, 2003 COMPARED TO FISCAL YEAR ENDED
FEBRUARY 2, 2002
Net sales for the fiscal year ended February 1, 2003 were $383.4 million
compared to $371.2 million for the fiscal year ended February 2, 2002, an
increase of 3.3%. Comparable stores sales increased approximately 2.9% in the
fiscal year ended February 1, 2003. Net sales for the fiscal year ended February
1, 2003 benefited from increased full-price sales as compared to the fiscal year
ended February 2, 2002 and particularly benefited from strong third and fourth
quarter sales which had been adversely affected in the prior year by the
business disruption caused by the September 11 events. In addition, in the
fiscal year ended February 1, 2003 sales were positively impacted by, among
other things, continued maximization of retail selling space in our stores,
particularly in our flagship stores, and additional direct mail and print
marketing campaigns throughout the year.
Gross profit on sales increased 10.5% to $179.3 million in the fiscal year ended
February 1, 2003 from $162.3 million in the fiscal year ended February 2, 2002,
primarily due to the increase in sales discussed above and reduced markdowns and
inventory shrinkage. As a percentage of net sales, gross profit was 46.8% in the
fiscal year ended February 1, 2003, compared to 43.7% in the fiscal year ended
February 2, 2002.
Selling, general and administrative expenses, including occupancy expenses, were
$154.8 million in the fiscal year ended February 1, 2003, unchanged from the
fiscal year ended February 2, 2002. In the fiscal year ended February 1, 2003,
personnel and related costs decreased in the aggregate by approximately $0.5
million. This net decrease occurred as we offset higher personnel related costs,
particularly related to our bonus program (which was cancelled during the fiscal
year ended February 2, 2002 in the aftermath of the September 11 events), and
higher commission costs in line with higher sales, by approximately $0.8 million
of savings from a one-time concession related to a renegotiated collective
bargaining agreement and the annualized benefit of the personnel cost reduction
measures implemented in the fiscal year ended February 2, 2002. Various
additional expense reductions of approximately $1.9 million primarily reflect
the benefit of expense reduction initiatives implemented in the prior and
current fiscal year, including, among other things, re-bidding products and
services, and general reductions in consumption of products and services, as
well as a $0.4 million reduction in bad debt expense associated with our
proprietary credit card operations. The above expense reductions were in part
offset by higher variable operating costs commensurate with higher sales,
increased advertising costs of $0.5 million, increased professional fees of $0.2
million, increased insurance premiums of $0.6 million and increased occupancy
and related costs of $0.7 million, principally as a result of higher real estate
taxes and the costs attributed to opening one new CO-OP store in the period.
Other (income) expense, net, which principally includes finance charge income
generated by our proprietary credit card operations, decreased 9.1% in the
fiscal year ended February 1, 2003 to $6.3 million from $7.0 million in the
fiscal year ended February 2, 2002. Other income in the fiscal year ended
February 1, 2003 and the fiscal year ended February 2, 2002 also includes non
recurring gains of $0.5 million and $0.9 million, respectively, related to
insurance recoveries associated with the loss of one of our stores in the fiscal
year ended February 2, 2002 due to the September 11 events. In addition, other
income in the fiscal year ended February 1, 2003 includes a non-recurring gain
of $0.4 million related to the assignment of a subsidiary's interest in a
trademark unrelated to our business.
Depreciation and amortization expense decreased in the fiscal year ended
February 1, 2003 to $10.8 million from $18.8 million in the fiscal year ended
February 2, 2002. This decrease was due to SFAS No. 142, which first became
effective for the fiscal year ended February 1, 2003, and which eliminated the
mandatory amortization of excess reorganization value.
19
Interest expense, net increased 6.2% in the fiscal year ended February 1, 2003
to $11.0 million from $10.4 million a year ago, primarily as a result of our
write-off of approximately $600,000 in unamortized fees associated with the
replacement of our prior revolving credit facility in the second quarter of the
fiscal year ended February 1, 2003. Interest associated with borrowings under
our credit facility declined principally as a result of lower average
borrowings. Average borrowings under the credit facility for the fiscal year
ended February 1, 2003 and the fiscal year ended February 2, 2002 were $30.7
million and $35.2 million, respectively, and the effective interest rate on this
portion of our outstanding debt was 10.52% and 9.94%, respectively, in the
comparable periods.
Our net income for the fiscal year ended February 1, 2003 was $8.5 million
compared to a net loss of $15.2 million for the fiscal year ended February 2,
2002. Basic and diluted net income per common share was $0.61 per common share
for the fiscal year ended February 1, 2003 compared to a $1.09 loss per common
share for the fiscal year ended February 2, 2002.
FISCAL YEAR ENDED FEBRUARY 2, 2002 COMPARED TO FISCAL YEAR ENDED
FEBRUARY 3, 2001
Net sales for the fiscal year ended February 2, 2002 (including $7.8 million
related to new stores) were $371.2 million compared to $404.3 million for the
fiscal year ended February 3, 2001, a decrease of 8.2%. The fiscal year ended
February 3, 2001 included 53 weeks; after adjusting for the impact of the 53rd
week, sales decreased 6.9%. Comparable store sales decreased approximately 7.7%
in the fiscal year ended February 2, 2002 principally due to reduced consumer
spending in response to a weak economy which became more magnified after the
September 11 events.
Gross profit on sales decreased 13.5% to $162.3 million in the fiscal year ended
February 2, 2002 from $187.6 million in the fiscal year ended February 3, 2001,
primarily due to the decline in sales volume. As a percentage of net sales,
gross profit was 43.7% in the fiscal year ended February 2, 2002 compared to
46.4% in the fiscal year ended February 3, 2001. The decline from the fiscal
year ended February 3, 2001 principally relates to the effect of increased
markdowns to both drive sales and cleanse the inventory pipeline in light of
weak consumer demand.
Selling, general and administrative expenses, including occupancy expenses,
decreased 4.2% in the fiscal year ended February 2, 2002 to $154.8 million from
$161.5 million in the fiscal year ended February 3, 2001. Exclusive of certain
non-recurring items, selling, general and administrative expenses declined
approximately $9.4 million. Personnel expense reductions of approximately $6.8
million were driven by position eliminations; reductions in and eliminations of
certain employee benefits, including the annual bonus program; lower commission
expenses commensurate with reduced sales; reduced hours for many employees; and
temporary pay cuts for senior executives. In addition to reductions in other
expenses commensurate with the sales decline, most notably an approximate $0.6
million reduction in third-party credit card fees, we were able to further
reduce other expenses in the fiscal year ended February 2, 2002 by, among other
things, re-bidding products and services including insurance, packaging supplies
(also impacted by the lower sales volume), and maintenance contracts; and by
general reductions in consumption of products and services including office
supply and telephone usage, training, and travel (also impacted by the September
11 events). Expense reductions in these other areas aggregated in excess of $2.0
million. Overall, expense reductions were offset by additional costs to operate
four new outlet stores during the year, as well as higher operating costs
attributable principally to increased real estate taxes, common area maintenance
charges and utilities. Incremental costs in the latter areas approximated $1.0
million. As a percentage of net sales, selling, general and administrative
expenses increased to 41.7% in the fiscal year ended February 2, 2002 from 40.0%
in the fiscal year ended February 3, 2001, reflecting a reduction in the
leveraging of expenses, principally due to the dramatic sales decline in the
period.
20
Other (income) expense, net increased 43.9% in the fiscal year ended February 2,
2002 to $7.0 million from $4.8 million in the fiscal year ended February 3,
2001. This increase was principally driven by a non-recurring gain of $0.9
million related to insurance recoveries associated with the loss of one of our
stores due to the September 11 events and the benefit of a $0.9 million reversal
of a Predecessor Company liability favorably settled in the fiscal year ended
February 2, 2002. Excluding such amounts the increase was approximately 6.7%.
Depreciation and amortization expense increased 4.3% in the fiscal year ended
February 2, 2002 to $18.8 million from $18.0 million in the fiscal year ended
February 3, 2001. This increase was primarily due to higher depreciation on new
assets placed in service.
Interest expense, net decreased 11.3% in the fiscal year ended February 2, 2002
to $10.4 million from $11.7 million in the fiscal year ended February 3, 2001.
Interest associated with borrowings under our credit facility declined
principally as a result of lower average borrowings. Average borrowings under
the credit facility for the fiscal year ended February 2, 2002 and the fiscal
year ended February 3, 2001 were $35.2 million and $44.4 million, respectively,
and the effective interest rate on this portion of our outstanding debt was
9.94% and 11.90%, respectively, in the comparable periods.
Our net loss for the fiscal year ended February 2, 2002 was $15.2 million
compared to net income of $0.6 million in the fiscal year ended February 3,
2001. Basic and diluted net loss per common share for the fiscal year ended
February 2, 2002 was $1.09 per common share compared to net income of $0.04 per
common share for the fiscal year ended February 3, 2001.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS AND WORKING CAPITAL
For the reporting periods below, Net Cash Provided by Operating Activities, on a
consolidated basis, was as follows:
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
2001 2002 2003
---- ---- ----
(dollars in thousands)
Net Income (Loss)............................................ $ 610 $ (15,171) $ 8,466
Depreciation and Amortization................................ 19,107 19,994 12,020
Other Non-Cash Charges....................................... 2,999 2,667 2,825
Changes in Current Assets and Liabilities.................... 326 6,521 (9,170)
----------- ------------- -----------
Net Cash Provided by Operating Activities.................... $ 23,042 $ 14,011 $ 14,141
=========== ============= ===========
Our consolidated working capital position at each of the dates shown below was
as follows:
FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
2001 2002 2003
---- ---- ----
(dollars in thousands)
Working Capital................................................ $ 23,519 $ 19,328 $ 44,202
For the reporting periods below, Net Cash Used in Financing Activities was as
follows:
21
FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
2001 2002 2003
---- ---- ----
(dollars in thousands)
Net Cash Used in Financing Activities........................... $ (9,750) $ (9,176) $ (6,983)
Net cash used in financing activities for the fiscal year ended February 3, 2001
includes proceeds of approximately $7.2 million from the exercise of stock
options and warrants principally by Bay Harbour and Whippoorwill. Exclusive of
such amounts, the significant decline in the net repayment of debt for the
fiscal year ended February 2, 2002 is directly attributable to the decline in
operating results and the resulting reduction in cash flow during such year.
CAPITAL EXPENDITURES
We have principally funded our capital expenditures through a combination of
borrowings under our prior credit facilities and the use of cash received in
connection with the exercise of options and warrants in the fiscal years ended
February 3, 2001, as described above, and January 29, 2000.
During the fiscal year ended February 1, 2003, we incurred capital expenditures
of approximately $11.1 million. Of the total capital expenditures, $5.8 million
was spent on leasehold improvements, $3.2 million was spent on furniture,
fixtures and equipment and $2.1 million was spent on management information
systems, including new point-of-sale registers. During the fiscal year ended
February 2, 2002, we incurred capital expenditures of approximately $12.3
million, without giving effect to approximately $0.4 million of offsetting
construction allowances which we received from our landlords. Of the total
capital expenditures, $6.9 million was spent on leasehold improvements, $2.8
million was spent on furniture, fixtures and equipment and $2.6 million was
spent on management information systems, including new point of sale registers.
During the fiscal year ended February 3, 2001, we incurred approximately $8.5
million of capital expenditures, net of approximately $0.2 million of offsetting
construction allowances which we received from our landlords, of which $6.1
million was spent on leasehold improvements, $1.6 million was spent on
furniture, fixtures and equipment and $0.8 million was spent on management
information systems. A significant portion of the amounts spent in each fiscal
year pertained to building out and reconfiguring existing retail space and/or
new store openings.
The amount of capital expenditures that we make in any year depends on a number
of factors, including general economic conditions. We currently estimate that
capital expenditures for the fiscal year ending January 31, 2004 will be
approximately $12.4 million, consisting of approximately $8.6 million for
leasehold improvements, approximately $3.0 million for furniture, fixtures and
equipment, and approximately $0.8 million for management information systems.
CREDIT FACILITY
On July 15, 2002, we entered into a $105.0 million credit facility, which
replaced our prior credit facility. At February 1, 2003, we had approximately
$29.8 million of availability under the credit facility and approximately $18.1
million and $28.3 million of loans and letters of credit, respectively,
outstanding. Contemporaneously with the consummation of the offering discussed
under "Recent Developments" above, we repaid the term loan outstanding under our
credit facility and entered into the Restated Credit Facility on the terms of
the existing credit facility as amended on April 1, 2003, to provide for a $70.0
million revolving credit facility pursuant to which we may borrow up to $66.0
million, with a $40.0 million sub-limit for the issuance of letters of credit,
subject to a borrowing base test. With the consent of the required lenders under
the Restated Credit Facility, the maximum borrowing amount may be increased to
up to $70.0 million. After giving effect to the offering as if it occurred on
February 1, 2003 and the restatement of our credit facility, we would have had
approximately $6.2 million and $28.3 million of short-term borrowings and
letters of credit, respectively, outstanding, and approximately $26.6 million of
22
availability under the Restated Credit Facility as of February 1, 2003. In
addition, upon consummation of the offering we wrote off approximately $0.4
million in deferred financing costs relating to the credit facility. A summary
of the financial covenants and other terms of the Restated Credit Facility are
as follows:
Our Restated Credit Facility is secured by a first-priority lien on
substantially all of our assets, other than real property leaseholds. The assets
that secure our Restated Credit Facility include, but are not limited to, our
accounts receivable, inventories, general intangibles (including software),
equipment and fixtures, equity interests of subsidiaries owned by us,
intellectual property and cash. In addition, each borrower under the Restated
Credit Facility is required to cross-guarantee each of the other borrowers'
obligations under the Restated Credit Facility, and the assets of each borrower
secure such borrower's cross guarantee.
Availability under the Restated Credit Facility is calculated as a percentage of
eligible inventory and receivables, including finished inventory covered by
undrawn documentary letters of credit and Barneys private label credit card
receivables, less certain reserves.
Interest rates on borrowings under the Restated Credit Facility are either the
"base rate," as defined in the Restated Credit Facility, plus 1.00% or LIBOR
plus 2.50%, subject to quarterly adjustment after August 2, 2004. The Restated
Credit Facility also provides for a fee of 2.0% per annum on the maximum amount
available to be drawn under each outstanding letter of credit and a tiered
unused commitment fee with a weighted average of approximately 0.45% on the
unused portion of the credit facility.
The Restated Credit Facility contains financial covenants relating to net worth,
earnings (specifically, earnings before interest, taxes, depreciation and
amortization, or "EBITDA"), capital expenditures and minimum excess borrowing
base availability as outlined below. With the exception of the capital
expenditures covenant, with which compliance is measured on an annual basis, and
the minimum excess borrowing base availability covenant, with which we must be
in compliance at all times, the covenants discussed below are required to be
satisfied on a quarterly basis.
o Minimum consolidated net worth -- As of the last day of
every fiscal quarter, starting with the first fiscal
quarter of 2002, consolidated net worth must not be less
than specified minimum amounts. The minimum amount is
$132.0 million at the end of the fiscal year ended
February 1, 2003; $136.0 million at the end of the fiscal
year ending January 31, 2004; $147.0 million at the end of
the fiscal year ending January 29, 2005; and $147.0
million at the end of the fiscal year ending January 28,
2006.
o Minimum consolidated EBITDA -- As of the last day of every
fiscal quarter (for defined trailing periods), starting
with the first quarter of the fiscal year ended February
1, 2003, EBITDA must not be less than certain minimum
amounts, measured on a quarterly basis. The minimum amount
at the end of the fiscal year ended February 1, 2003 is
$16.0 million; $25.0 million at the end of the fiscal year
ending January 31, 2004; $29.0 million at the end of the
fiscal year ending January 29, 2005; and $30.0 million at
the end of the fiscal year ending January 28, 2006.
o Capital expenditures -- Our total capital expenditures for
the fiscal year ended February 1, 2003 were limited to
$5.0 million. For the fiscal year ending January 31, 2004
and thereafter, the limitation on capital expenditures is
$10.0 million per fiscal year, subject to increase if
certain conditions are met.
23
o Minimum excess borrowing base availability-- We are
required to maintain minimum excess borrowing base
availability of $8.0 million at all times.
The Restated Credit Facility matures on July 15, 2006.
Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our Restated Credit
Facility will be adequate to meet our liquidity needs for at least the next 12
months, including scheduled payments of interest on the 9% senior secured notes
issued in the offering and payments of interest on borrowings under the Restated
Credit Facility. Our ability to make payments on and to refinance our
indebtedness and to fund planned capital expenditures will depend on our ability
to generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive, regulatory and other factors that are beyond
our control. See "Forward-Looking Statements -- Due to events that are beyond
our control, we may not be able to generate sufficient cash flow to make
interest payments on our indebtedness" below.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
After giving effect to the offering described above under "Recent Developments",
our material obligations under firm contractual arrangements, including
commitments for future payments under long-term debt arrangements and operating
lease arrangements, as of February 1, 2003, are summarized below and are more
fully disclosed in notes 4, 5, and 11 of our consolidated financial statements.
Total Debt does not include commitments under unexpired letters of credit under
our credit facility. As of February 1, 2003, we had approximately $28.3 million
of such letters of credit outstanding.
PAYMENTS DUE BY PERIOD
- ------------------------------------------------ --------------------------------------------------------------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
----------------------- ----- ------ --------- --------- -----
(DOLLARS IN THOUSANDS)
Total Debt...................................... $ 112,177 $ 6,177 $ -- $ -- $ 106,000
Operating Leases................................ 389,890 25,460 47,803 42,731 273,896
----------- ----------- ---------- ---------- -----------
Total Contractual Obligations................... $ 502,067 $ 31,637 $ 47,803 $ 42,731 $ 379,896
=========== =========== ========== ========== ===========
As reflected in the February 1, 2003 balance sheet and inclusive of current
amounts due, we had approximately $18.1 million of loans outstanding under our
credit facility, consisting of approximately $10.5 million of borrowings under
the revolving portion of the facility and $7.6 million in term loan borrowings.
Effective February 2, 2003, we made a principal repayment on the term loan of
approximately $0.4 million. Additionally, at February 1, 2003, long-term debt
also included amounts outstanding under our $22.5 million subordinated note and
approximately $35.8 million of obligations under our 11 1/2 % promissory notes,
all of which were scheduled to mature on January 28, 2004.
We used the net proceeds from the offering discussed above to repay a
substantial portion of our outstanding indebtedness, including our obligations
pursuant to our $22.5 million subordinated note, approximately $35.8 million due
under our 11 1/2 % promissory notes, the remaining portion of term loan
borrowings and a portion of the revolver loans outstanding under our credit
facility and to pay a substantial portion of the deferred lease obligations
discussed below. After giving effect to the offering as if it occurred on
February 1, 2003 and the restatement of our credit facility, we would have had
$88.2 million of long-term debt (representing the issuance of the 9% senior
secured notes) and approximately $6.2 million and $28.3 million of short-term
borrowings and letters of credit, respectively, outstanding under the Restated
Credit Facility as of February 1, 2003. After giving effect to the offering, all
of our long-term debt will mature in approximately five years and the Restated
Credit Facility will expire on July 15, 2006.
24
We lease real property and equipment under agreements that expire at various
dates. After giving effect to the offering, as of February 1, 2003, minimum rent
payments at contractual rates over the next five years aggregated approximately
$389.9 million. In accordance with SFAS No. 13 "Accounting for Leases," we
account for the rental payments due under our operating leases on a
straight-line basis, and record an annual rent expense for each lease by
dividing the total rent payments due during the term of the lease by the number
of years in the term of the respective lease.
We used approximately $12.0 million of proceeds from the offering to pay a
portion of an aggregate $15.0 million of deferred rent payments that we were
required to make on January 28, 2004 pursuant to the terms of the leases for our
flagship stores. This payment resulted in a reduction of our annual cash rent
obligations for the fiscal year ending January 31, 2004. Accordingly, included
in our operating lease obligations set forth in the "Less than 1 year" column in
the table above is the remaining $3.0 million deferred rent payment that we are
required to make on January 28, 2004 pursuant to the terms of the lease for one
of our flagship stores.
Pursuant to an agreement between Holdings and Howard Socol, our Chairman,
President and Chief Executive Officer, Mr. Socol receives a base salary of $1.0
million per year and annual performance bonuses. For the fiscal year ended
February 2, 2002, Mr. Socol was guaranteed and paid a $1.0 million performance
bonus, and for the annual period ended January 31, 2003, he is entitled to a
performance bonus of up to 125% of his base salary. In addition, for the period
commencing on February 1, 2003 and ending on January 31, 2005, Mr. Socol is
entitled to an annual performance bonus based on the amount by which Holdings
exceeds certain financial target amounts, which bonus is not limited to 125% of
his base salary.
OTHER COMMERCIAL COMMITMENTS
At February 1, 2003, our primary commercial commitments included commitments of
approximately $18.0 million under unexpired letters of credit under our credit
facility related to purchases of merchandise primarily from foreign vendors. In
addition, as collateral for performance on certain leases and as credit
guarantees, Barney's, Inc. is contingently liable under standby letters of
credit under our credit facility in the amount of $10.3 million. These standby
letters of credit generally mature within one year and generally contain
provisions for annual renewals. At February 1, 2003, we had total letters of
credit outstanding under our credit facility of approximately $28.3 million,
consisting of the commitments described in this paragraph which include a $3.5
million letter of credit issued to Citibank, N.A. as security for letters of
credit previously issued by us under our prior credit facility.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 145. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," known as SFAS No. 145. This statement, among other things,
rescinded SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
which required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of tax. In
accordance with the provisions of SFAS No. 145, we have elected to adopt this
statement early. Accordingly, in connection with the early extinguishment of a
prior revolving credit facility, the unamortized fees of approximately $0.6
million related to such facility were written off and are included in interest
expense.
SFAS No. 146. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which changes the accounting for
costs, such as lease termination costs and certain employee severance costs,
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity initiated after December 31, 2002. The
standard requires companies to recognize the fair value of costs associated with
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exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. We do not expect the adoption of