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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 January 31, 2004
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
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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
NEW YORK, NEW YORK 10017
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 450-8700
Securities registered pursuant Name of Each Exchange
to Section 12(b) of the Act: on Which Registered
Title of Each Class
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. [_]
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, 2003, the aggregate market value of the
registrant's voting common equity held by non-affiliates of the registrant,
based on the $6.00 last average bid and asked price of the common stock on
August 2, 2003, as reported on the Over-the-Counter Bulletin Board service, was
approximately $20.3 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.
On April 23, 2004, the registrant had outstanding 14,126,489 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 17, 2004, are incorporated by reference into Part III of this
report.
[Cover page 2 of 2 pages]
Item 1. Business............................................................................................1
Item 2. Properties..........................................................................................8
Item 3. Legal Proceedings...................................................................................8
Item 4. Submission of Matters to a Vote of Security Holders.................................................9
Executive Officers of Holdings......................................................................9
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..................................................11
Item 6. Selected Financial Data............................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................34
Item 8. Financial Statements and Supplementary Data........................................................36
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................................................36
Item 9A. Controls and Procedures............................................................................36
Item 10. Directors and Executive Officers of the Registrant.................................................37
Item 11. Executive Compensation.............................................................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................................................37
Item 13. Certain Relationships and Related Transactions.....................................................39
Item 14. Principal Accountant Fees and Services.............................................................39
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................40
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. These 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 some 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 9.000% 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, they are based on current expectations, speak only as of the date they
are made, and are subject to change by reason of the factors and risks noted
above, the passage of time or other circumstances. We undertake no obligation to
update publicly any forward-looking statements in light of new information or
future events, except as required by applicable laws, including the securities
laws of the United States.
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 21 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, three smaller regional
stores, and three CO-OP Barneys New York stores, all of which cater to customers
seeking contemporary, urban casual apparel and accessories. Our 12 outlet stores
cater to budget-minded yet fashion-conscious customers and 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. In September 2003, we also began selling a
limited and highly edited assortment of products on our newly re-launched
Barneys.com website further expanding our reach to both new and existing
customers. In addition, 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. In October 2004,
it is anticipated that this third party will be opening a third Barneys New York
store in Ginza, Japan.
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 over the years, 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 continue to seek
out new ways to reduce our operating costs which generally have the least impact
to our customers.
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 sell merchandise from leading designers
including 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
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identify and help to develop. By cultivating strong relationships with emerging
designers, we are able to introduce their merchandise to the 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. 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
16% of our net sales for our fiscal year ended January 31, 2004, 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. This coverage features
our merchandise and reports 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 customer service. We utilize third parties to
conduct customer surveys and mystery shopping programs to gain additional
insights about the shopping experience in our stores and to identify areas for
improvement. 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 contributes to the strong Barneys New York brand image. These
locations are Madison Avenue in New York City, Wilshire Boulevard off Rodeo
Drive in Beverly Hills and Oak Street in Chicago. 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 with 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 23
years, and Judith Collinson, our Executive Vice-President -- Women's
Merchandising, has been with us for 16 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.
2
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 a prior year the
restaurant in our New York City flagship store was moved 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. Additionally, in a prior year we also reallocated floor space in our
New York City flagship store to expand our women's shoe department. 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 continue 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 the current year we began significant projects in both our Beverly Hills and
Madison Avenue flagship stores. The renovation project in Beverly Hills includes
the consolidation of our men's offerings into two dedicated floors freeing up
space on the main floor to significantly intensify our women's shoes,
accessories and jewelry businesses. At Madison Avenue, we are relocating and
significantly expanding our Chelsea Passage (items for the home) business to
currently unproductive space on the ninth floor of that store. By doing this, we
are freeing up space to further expand and intensify our women's designer and
ready-to-wear businesses. The renovations in these two stores are expected to be
substantially complete by the end of the Spring 2004 season. In addition to the
above, 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. Over the last several years, we have reduced
fixed costs through the implementation of a number of expense reduction
initiatives, including reducing the number of our administrative personnel,
rebidding repair and maintenance contracts, reducing employee benefits and
reducing our packaging and general office overhead costs. In addition, we
continue to upgrade inventory controls and security measures in our stores in an
effort to reduce inventory shrinkage. We continuously review our operations and
the related expenses to identify cost reduction initiatives to improve
profitability.
Limited and Disciplined New Store Openings. In May 2000 we opened a CO-OP store
in the Chelsea neighborhood of New York City, and in March 2002 we opened a
second CO-OP store in the SoHo neighborhood of New York City. In September 2003,
we opened our first CO-OP store outside of the New York area in the South Beach
section of Miami, Florida. These stores, which are an extension of the CO-OP
departments in our flagship stores, achieved aggregate net sales of $11.2
million in the fiscal year ended January 31, 2004 (reflecting twelve months of
operations for the two New York stores and five months of operations for our
Miami store). We 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, 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.
3
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.
Full-Price Stores. We operate nine 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 Barneys New York 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 three smaller CO-OP stores in the
following locations: two in New York City and one in Miami. 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. CO-OP stores provide us with the opportunity to
develop one of our fastest growing merchandise categories in a less capital
intensive manner, relative to our other full-price stores. These stores give us
the opportunity to enter new markets and expand in our existing markets while
broadening our client base by targeting the younger designer customer. In
addition, since we will be attracting our Barneys customer earlier in their life
cycle, we also believe this format can serve as the initial entree for the
shopper who will ultimately develop into our regional and flagship store
customers. 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.
4
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.
These arrangements were established, under the plan of reorganization pursuant
to which Barneys emerged from bankruptcy, as part of the settlement of claims
filed by Isetan and its affiliates in the bankruptcy aggregating more than $365
million and pending litigation and arbitration proceedings involving Barneys and
Isetan and its affiliates. With regard to the first licensing agreement, Isetan
was given an assignment of 90% of the annual minimum royalties, pursuant to the
plan of reorganization. The amount of the annual royalty assigned to Isetan
increases each year from $3.2 million for the first twelve months of the
agreement to $5.2 million for the final license year ending in December 2015. As
a result of the assignment, Barneys only receives ten percent (10%) of the total
royalty payable pursuant to the trademark license agreement. As the royalty is
paid in Japanese Yen, Barneys determined the U.S. dollar equivalent of the
royalty as of January 31, 2004 using a conversion rate of 105.8. For a
description of the terms of the licensing arrangements, see note 7 to our
audited 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 some 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 January 31, 2004 and February 1, 2003. This quarterly financial data
is unaudited but gives effect to all adjustments necessary, in the opinion of
Barneys' management, to present fairly this information.
5
FISCAL 2003 - QUARTER ENDED FISCAL 2002 - QUARTER ENDED
---------------------------------------------- -------------------------------------------------
($ in thousands) 5/3/03 8/2/03 11/1/03 1/31/04 5/4/02 8/3/02 11/2/02 2/1/03
----------- ----------- ---------- ----------- ---------- ----------- ------------ -------------
Net sales $91,385 $88,707 $111,893 $ 117,492 $92,475 $81,603 $103,299 $ 105,986
As % of period 22% 22% 27% 29% 24% 21% 27% 28%
Net (loss) income (1,210) (2,102) 4,141 6,311 478 (439) 2,877 5,550
=========== =========== ========== =========== ========== =========== ============ =============
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
they operate. Several department store, specialty store, and vendor store
competitors also offer catalog and more extensive 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
In addition to selling the products of a number of leading designers, including
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 January 31, 2004, our ten top designers (including all brands owned by
those designers) accounted for approximately 27% of our total sales, and our two
top designers (including all brands owned by those designers) accounted for
approximately 10% 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 January 31, 2004, we employed approximately 1,400 people. Our staffing
requirements fluctuate during the year as a result of the seasonality of the
retail apparel industry, and we add approximately 200 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.
6
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.
AVAILABLE INFORMATION
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports are available
free of charge through our website at www.Barneys.com as soon as reasonably
practicable after such material is electronically filed with or furnished to the
Securities and Exchange Commission. Also, copies of the Company's annual report
on Form 10-K will be made available, free of charge, upon written request.
7
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 with multiple ten-year renewal
options. The following table lists the location, type, and approximate gross and
selling square footage of each of our facilities as of January 31, 2004:
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
Miami, FL...................................... CO-OP Store 9,038 6,858
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
The Company is 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.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF HOLDINGS
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 JANUARY 31, 2004 POSITION
- ---- ----------------------- -------------------------------------------------
Howard Socol.................... 58 Chairman, President and Chief Executive Officer
Judith Collinson................ 52 Executive Vice President-- Women's Merchandising
Thomas Kalenderian.............. 46 Executive Vice President-- Men's Merchandising
Marc H. Perlowitz............... 49 Executive Vice President-- General Counsel and
Human Resources,Secretary
Karl Hermanns................... 39 Executive Vice President-- Operations
Michael Celestino............... 47 Executive Vice President-- Store Operations
Steven M. Feldman............... 40 Executive Vice President and Chief Financial Officer
David New....................... 47 Executive Vice President-- Creative Services
Vincent Phelan.................. 38 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 Liz Claiborne 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 23 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.
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.
9
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.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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 3, 2002 through
January 31, 2004. 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 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
FISCAL YEAR ENDED JANUARY 31, 2004:
First Quarter (February 2, 2003 - May 3, 2003)............. 5.50 3.80
Second Quarter (May 4, 2003 - August 2, 2003).............. 6.50 4.49
Third Quarter (August 3, 2003 - November 1, 2003).......... 6.05 5.00
Fourth Quarter (November 2, 2003 - January 31, 2004)....... 10.25 5.50
HOLDERS
As of April 23, 2004, there were 888 holders of record of Holdings common stock.
DIVIDENDS
The terms of the indenture governing Barney's, Inc.'s 9.000% 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated historical financial data set forth in the table below
as of and for each of the five fiscal years in the period ended January 31,
2004, are derived from our consolidated financial statements for such periods.
11
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."
FISCAL FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Net Sales.......................... $ 409,477 $ 383,363 $ 371,169 $ 404,321 $ 366,802
Gross Profit....................... 187,981 179,348 162,324 187,596 173,515
Selling, General and Administrative
Expenses (including occupancy
expenses)(1).................... 159,364 154,813 154,818 161,523 152,445
Depreciation and
Amortization(2)................. 11,531 10,760 18,802 18,027 17,440
Other Income-- Net(3).............. (5,872) (6,327) (6,957) (4,833) (4,355)
Interest and Financing Costs, Net of
Interest Income................. 15,143 11,036 10,393 11,723 12,968
Income Taxes....................... 675 600 439 546 363
Net Income (Loss).................. 7,140 8,466 (15,171) 610 (5,346)
Basic Earnings (Loss) Per Share.... $ 0.51 $ 0.61 $ (1.09) $ 0.04 $ (0.42)
Diluted Earnings (Loss) Per Share.. $ 0.50 $ 0.61 $ (1.09) $ 0.04 $ (0.42)
SELECTED OPERATING DATA:
Comparable Store Net Sales Increase
(Decrease) (4).................. 6.2% 2.9% (7.7)% 9.7% 9.0%
Number of Stores................... 21 20 19 18 16
OTHER FINANCIAL DATA:
EBITDA(5).......................... $ 34,489 $ 30,862 $ 14,463 $ 30,906 $ 25,425
Net Cash Provided by Operating Activities 25,272 14,141 14,011 23,042 15,005
Net Cash Used in Investing
Activities........................ 9,036 10,882 11,369 6,256 3,585
Capital Expenditures............... 9,036 11,082 11,982 8,499 6,224
Net Cash Used in Financing
Activities........................ 7,781 6,983 9,176 9,750 7,911
BALANCE SHEET DATA:
Cash and Cash Equivalents.......... $ 15,566 $ 7,111 $ 10,835 $ 17,369 $ 10,333
Fixed Assets at Cost, Less Accumulated
Depreciation and Amortization... 47,769 50,463 50,141 48,170 48,974
Total Assets....................... 318,600 301,793 296,980 323,859 324,482
Total Debt......................... 90,536 75,956 81,048 89,315 105,915
Redeemable Preferred Stock......... 500 500 500 500 500
Total Stockholders' Equity......... 165,792 155,584 146,622 161,793 153,996
- ----------
(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.
(2) In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
beginning in the fiscal year ended February 1, 2003, we stopped amortizing
our excess reorganization value. Amortization of excess reorganization
value was approximately $8.8 million, $8.7 million and $8.8 million in the
fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000,
respectively.
(3) 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 gain of $926,000 related to
insurance recoveries associated with the loss of one of our stores due to
the September 11 events and the benefit of a $913,000 reversal of a
12
Predecessor Company liability favorably settled in that fiscal year. Other
Income -- Net for the fiscal year ended February 1, 2003 includes a gain of
$523,000 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 $400,000 gain from the sale of a trademark.
Other Income - Net for the fiscal year ended January 31, 2004 includes
$750,000 representing the receipt of the first of two equal payments
pursuant to the first amendment of the trademark license agreement with
Isetan (see note 7 to our consolidated financial statements).
(4) All stores that are open as of the beginning and end of the pertinent
fiscal periods, regardless of relocation or expansion of existing square
footage, are considered to be comparable stores for purposes of determining
the comparable net store sales increases (decreases). All stores closed
during a fiscal period are excluded from the determination of the
comparable net store sales increases (decreases) effective with the date of
closing.
(5) EBITDA for each period represents the sum of (a) the respective amounts of
Net Income (Loss) set forth above for that period and (b) the respective
amounts of Interest and Financing Costs, Net of Interest Income, Income
Taxes and Depreciation and Amortization. The following table reconciles Net
Income (Loss) to EBITDA:
FISCAL FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
($ IN THOUSANDS)
Net Income (Loss)................ $ 7,140 $ 8,466 $ (15,171) $ 610 $ (5,346)
Interest and Financing Costs, Net of
Interest Income............... 15,143 11,036 10,393 11,723 12,968
Income Taxes..................... 675 600 439 546 363
Depreciation and
Amortization.................. 11,531 10,760 18,802 18,027 17,440
------------- ------------- ------------- ------------- -------------
EBITDA........................... $ 34,489 $ 30,862 $ 14,463 $ 30,906 $ 25,425
============= ============= ============= ============= =============
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 9.000% 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 (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."
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
OVERVIEW
Overall, the fiscal 2003 operating results reflect our continued focus on
driving sales, controlling expenses, providing exceptional customer service and
executing key merchandising initiatives. Strong sales growth in the last three
quarters of the year were bolstered, to an extent, by a recovery in the luxury
sector, driven in part by stronger financial markets and consumer confidence. In
contrast, first quarter comparable store sales results were negatively impacted
by unusually harsh weather in the Northeast, as well as other external factors
including the threat of war in Iraq, continued weakness in the economy and soft
financial markets.
During the year, we continued to focus on improving sales productivity within
our existing stores by continuing to reconfigure and reallocate existing selling
space to more productive merchandise categories or by creating additional
selling space by recapturing "non-productive" space. In addition, we sought to
grow our sales by strategically increasing the breadth and depth of our product
offerings of our new or established brands. We continued the roll-out of our
CO-OP stores with the opening of our third free-standing store in Miami in
September 2003 and we also re-launched the Barneys.com website, which includes
information about the Company and an e-tailing component featuring a limited
assortment of merchandise. Our comparable store sales growth of approximately
10% in the fourth quarter helped us end the year with a record sales
performance. Sales in fiscal 2003 continued to be positively impacted by
additional direct mail and print marketing campaigns, particularly in the fourth
quarter which included the production of our largest holiday mailer to date.
Sales efforts during that important holiday selling season were also supported
with the addition of extra selling associates in our stores to appropriately
service our customers.
GENERAL
Comparable Store Net Sales. We determine comparable store net sales increases or
decreases using the net sales of all stores that are open as of the beginning
and end of the pertinent fiscal period, regardless of store relocation or
expansion of existing square footage. Net sales of all stores closed during a
fiscal period are excluded from the determination of the comparable net store
sales increases (decreases) effective with the date of closing.
Expense classification. Cost of sales includes the cost of merchandise sold as
well as costs associated with the purchase of that merchandise, primarily
including inbound freight and duty costs, buying agent costs, foreign exchange
gains and losses on settlement of foreign denominated purchases, sample costs
and label costs. All other expenses, except depreciation and amortization,
interest and income taxes, but including internal transfer costs and warehousing
and distribution expenses, are included in selling, general and administrative
expenses, because the predominant costs associated with these expenses, most
notably occupancy costs and personnel costs, are general and administrative in
nature. Based on these classifications, our gross margins may not be comparable
to those of other entities, since some entities include the costs related to
their distribution network and retail store rent expenses in cost of sales,
whereas others, like us, exclude these costs from gross margin, including them
instead in selling, general and administrative expenses.
14
RESULTS OF OPERATIONS
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
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 9.000% 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
------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
-------- -------- --------
Net Sales........................................................................ 100.0% 100.0% 100.0%
Cost of Sales.................................................................... 54.1 53.2 56.3
-------- -------- --------
Gross Profit..................................................................... 45.9 46.8 43.7
Selling, General and Administrative Expenses (Including
Occupancy Expenses).......................................................... 38.9 40.4 41.7
Other Income-- Net(1)............................................................ (1.4) (1.7) (1.9)
-------- -------- --------
Earnings before Interest and Financing Costs, Net of
Interest Income, Income Taxes and Depreciation
and Amortization (EBITDA) (2)................................................ 8.4 8.1 3.9
Interest and Financing Costs, Net of Interest Income,
Income Taxes and Depreciation and Amortization................................ 6.7 5.9 8.0
-------- -------- --------
Net Income (Loss)................................................................ 1.7% 2.2% (4.1)%
======== ======== ========
- ----------------------
(1) 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 gain of $926,000 related to
insurance recoveries associated with the loss of one of our stores due to
the September 11 events and the benefit of a $913,000 reversal of a
Predecessor Company liability favorably settled in that fiscal year. Other
Income -- Net for the fiscal year ended February 1, 2003 also includes a
gain of $523,000 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 $400,000 gain from the sale of a trademark.
Other Income - Net for the fiscal year ended January 31, 2004 includes
$750,000 representing the receipt of the first of two equal payments
received pursuant to the first amendment of the trademark license agreement
with Isetan (see note 7 to our consolidated financial statements).
15
(2) EBITDA as a percentage of net sales for each period represents the sum of
(a) the respective amounts of Net Income (Loss) 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 for such
period. The following table reconciles Net Income (Loss) as a percentage of
net sales to EBITDA as a percentage of net sales:
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
-------- -------- --------
Net Income (Loss)................................................................ 1.7% 2.2% (4.1)%
Plus
Interest and Financing Costs, Net of Interest Income............................. 3.7 2.9 2.8
Income Taxes..................................................................... 0.2 0.2 0.1
Depreciation and Amortization.................................................... 2.8 2.8 5.1
-------- -------- --------
EBITDA........................................................................... 8.4% 8.1% 3.9%
======== ======== ========
FISCAL YEAR ENDED JANUARY 31, 2004 COMPARED TO FISCAL YEAR ENDED FEBRUARY 1,
2003
Net sales for the fiscal year ended January 31, 2004 were $409.5 million
compared to $383.4 million for the fiscal year ended February 1, 2003, an
increase of 6.8%. Comparable store sales increased approximately 6.2% in the
fiscal year ended January 31, 2004. Net sales for the fiscal year ended January
31, 2004 benefited from increased full-price sales as compared to the prior year
and particularly benefited from strong third and fourth quarter sales.
Gross profit on sales increased 4.8% to $188.0 million in the fiscal year ended
January 31, 2004 from $179.3 million in the fiscal year ended February 1, 2003.
The continued weak US Dollar put pressure on gross margin throughout the year.
Among other things, improved full-price selling in fall 2003 helped reduce our
annual markdown expense and at least partially offset the margin erosion caused
by the deterioration in our initial markup. While we attempt to hedge a
significant portion of our exposure related to foreign denominated purchases, we
expect that the continued weakness in the US Dollar, relative to the Euro, will
continue to put pressure on our gross profit. The more significant components
impacting the increase in our gross margin are the following: the sales increase
discussed above, which improved our gross profit by approximately $10.0 million;
decreased promotional selling, which improved our gross profit by approximately
$1.5 million; reduced initial mark-up and foreign exchange losses (driven by the
weak US dollar) on settlement of foreign denominated purchases, unfavorably
impacted our gross profit by approximately $3.5 million; an increase in our
actual and estimated inventory shortage unfavorably impacted our gross profit by
approximately $700,000; the reversal of an accrual no longer considered
necessary favorably impacted our gross profit by approximately $600,000; and the
implementation of EITF 02-16 favorably impacted our gross profit by
approximately $1.3 million. As a percentage of net sales, gross profit was 45.9%
in the fiscal year ended January 31, 2004, compared to 46.8% in the fiscal year
ended February 1, 2003.
Selling, general and administrative expenses, including occupancy expenses, were
$159.4 million in the fiscal year ended January 31, 2004, compared to $154.8
million for the fiscal year ended February 1, 2003. As a percentage of sales,
selling, general and administrative expenses declined to 38.9% in fiscal 2003
from 40.4% in the prior fiscal year.
In the fiscal year ended January 31, 2004, personnel and related costs increased
in the aggregate by approximately $1.9 million. This increase principally
relates to raises, higher variable costs associated with the sales increases
discussed above and higher employee benefit costs. The Company's benefit costs
were generally higher in fiscal 2003 as compared to the prior year which
included an approximate $800,000 benefit for a concession received by the
16
Company related to a renegotiated collective bargaining agreement. Other than
personnel related costs, some of the other variable expenses which increased as
a result of the higher sales volume were costs associated with our settlement of
third party credit card transactions and our proprietary credit card loyalty
program. These two expenses increased approximately $750,000, in the aggregate,
versus the year ago period. For the fiscal year, insurance expense increased
approximately $480,000, due primarily to higher premiums, and net occupancy
costs increased approximately $1.4 million, primarily driven by significant
increases in real estate taxes associated with our New York area locations and
the operation of two additional stores. In addition, there were other
individually less significant increases, driven in part by increased sales,
which were partially offset by individually less significant reductions in
various overhead expenses resulting from the Company's continued cost reduction
efforts.
In connection with the provisions of EITF 02-16, for the fiscal year ended
January 31, 2004, the Company recorded approximately $1.3 million of vendor
cooperative advertising contributions as a reduction of cost of sales rather
than a reduction of advertising expense. As a result of this new treatment, net
advertising expense for the full fiscal year is approximately $1.2 million
greater than the year ago period. Excluding the impact of EITF 02-16, our
advertising costs were about flat with last year. This was a combination of
increased advertising costs on a gross basis, offset by an increase in vendor
cooperative advertising contributions.
Other income, net, which principally includes finance charge income generated by
our proprietary credit card operations, decreased 7.2% in the fiscal year ended
January 31, 2004 to $5.9 million from $6.3 million in the fiscal year ended
February 1, 2003. Other income in the fiscal year ended January 31, 2004
includes $750,000 representing the first of two payments pursuant to the first
amendment of the trademark license agreement with Isetan (see note 7 to our
consolidated financial statements). The fiscal year ended February 1, 2003 also
includes gains of $523,000 related to the final 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 and approximately $400,000 related to the assignment
of a subsidiary's interest in a trademark unrelated to our business.
Depreciation and amortization expense increased in the fiscal year ended January
31, 2004 to $11.5 million from $10.8 million in the fiscal year ended February
1, 2003 principally as a result of the additional depreciation related to the
capital projects completed over the last couple of years, principally in the
Company's Madison Avenue flagship store
Interest expense, net increased 37.2% in the fiscal year ended January 31, 2004
to $15.1 million from $11.0 million a year ago, principally as a result of the
increased cost of capital associated with Barney's, Inc.'s senior notes issued
on April 1, 2003. The Company's dependence on borrowings from its credit
facility are largely seasonal in nature, especially with the new long-term debt
in place. Accordingly, average borrowings under the credit facility for the
fiscal year ended January 31, 2004 declined to $8.2 million from $30.7 million
in the fiscal year ended February 1, 2003.
We continue to have significant net operating losses available to us to offset
future taxable earnings. In the current year, we were able to partially reduce
our deferred tax asset valuation allowance primarily as a result of the
significant increase in our deferred tax liabilities principally related to
fixed asset depreciation. For the most part, the reported taxes were not based
on income. Rather they relate principally to state franchise and capital taxes
and foreign taxes associated with the receipt of royalty payments from Japan. As
a result, currently, there is no consistent correlation between the amount of
income and the amount of taxes reported. As a percentage of our income, this tax
expense will decrease with an increase in income and increase with a decrease in
income. Our effective tax rate for the years ended January 31, 2004 and February
1, 2003 was 12.0% and 7.0%, respectively.
17
Our net income for the fiscal year ended January 31, 2004 was $7.1 million
compared with $8.5 million for the fiscal year ended February 1, 2003. Basic and
diluted net income per common share was $0.51 and $0.50, respectively, and $0.61
per common share for the fiscal years ended January 31, 2004 and February 1,
2003, respectively.
FISCAL YEAR ENDED FEBRUARY 1, 2003 COMPARED TO FISCAL YEAR ENDED FEBRUARY 2,
2002
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.
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.
This net increase is primarily attributable to the following: the sales increase
discussed above, which improved our gross profit by approximately $5 million;
decreased promotional selling, which improved our gross profit by approximately
$11 million; foreign exchange losses (driven by the weakening US dollar) on
settlement of foreign currency denominated purchases, which impacted our gross
profit by approximately $1 million and decreased inventory shortage, which
improved our gross profit by approximately $1 million. 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
$550,000. 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 $800,000
of savings from a 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
reductions in expenses including packaging, supplies, postage and travel
aggregating 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 $400,000
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
approximately $500,000, increased professional fees of approximately $200,000,
increased insurance premiums of approximately $600,000 and increased occupancy
and related costs of approximately $700,000, principally as a result of higher
real estate taxes and the costs attributed to opening one new CO-OP store in the
period.
18
Other income, 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 gains of $500,000 and $900,000,
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 gain of approximately $400,000 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.
Interest expense, net increased 6.2% in the fiscal year ended February 1, 2003
to $11.0 million from $10.4 million in the fiscal year ended February 2, 2002,
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. Generally,
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.
We continue to have significant net operating losses available to us to offset
future taxable earnings. In the fiscal year ended February 1, 2003, we were able
to reduce our deferred tax asset valuation allowance primarily as a result of
the significant increase in our deferred tax liabilities principally related to
fixed asset depreciation. The reported state taxes were principally franchise
and capital taxes that, for the most part, are not based on income. As a result,
there is no consistent correlation between the amount of income and the amount
of state taxes reported. As a percentage of our income, this tax expense will
decrease with an increase in income and increase with a decrease in income. Our
effective tax rate for the years ended February 1, 2003 and February 2, 2002 was
7.0% and (3.0)%, respectively.
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.
LIQUIDITY AND CAPITAL RESOURCES
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. Net proceeds to us were
approximately $81.7 million after deducting commissions, financial advisory fees
and expenses of the offering. We used the net proceeds from the offering 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 then
existing credit facility and to pay a substantial portion of our deferred lease
obligations pursuant to our flagship leases.
Upon consummation of this offering, the Company entered into a restated credit
facility which, among other things, reduced the size of the existing credit
facility from $105.0 million to $70.0 million and extended the maturity date to
July 15, 2006. Continued improvements in our operating results, as well as the
partial pay down of amounts outstanding under the then existing credit facility,
enabled the Company to reduce its credit facility by $35.0 million. At January
31, 2004, there were no revolving loans outstanding under the restated credit
facility.
19
CASH PROVIDED BY OPERATIONS AND WORKING CAPITAL
For the reporting periods below, Net Cash Provided by Operating Activities, on a
consolidated basis, was as follows:
FISCAL YEAR ENDED
-------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------- -------------
($ in thousands)
Net Income (Loss) ............................................................... $ 7,140 $ 8,466 $ (15,171)
Depreciation and Amortization.................................................... 15,844 12,020 19,994
Other Non-Cash Charges........................................................... 3,943 2,825 2,667
Changes in Current Assets and Liabilities........................................ (1,655) (9,170) 6,521
------------ ------------- -------------
Net Cash Provided by Operating Activities........................................ $ 25,272 $ 14,141 $ 14,011
============ ============= =============
Net cash provided by operating activities improved over the prior year primarily
as a result of improved operating results and reduced working capital
requirements primarily related to inventory. The Company's primary source of
liquidity has been borrowings under its credit facility, although such reliance
has been lessened with the new long term debt structure resulting from the
senior notes offering and the Company's operating performance.
Our consolidated working capital position at each of the dates shown below was
as follows:
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------- -------------
($ in thousands)
Working Capital.................................................................. $ 58,703 $ 37,547 $ 16,485
Working capital at January 31, 2004 improved over the prior year primarily as a
result of an $8.5 million increase in cash and an $11.0 million reduction in
short term borrowings, largely as a result of our improved operating results and
the debt refinancing completed in April 2003. Working capital at February 1,
2003 improved over the prior year primarily as a result of a $12.7 million
reduction in short term borrowings, largely as a result of our improved
operating results and a $9.9 million increase in inventory. Inventory levels at
February 2, 2002 were unusually low largely as a result of diminished
requirements in the aftermath of the September 11, 2001 terrorist attacks.
For the reporting periods below, Net Cash Used in Financing Activities was as
follows:
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
------------ ------------- -------------
($ in thousands)
Net Cash Used in Financing Activities............................................ $ (7,781) $ (6,983) $ (9,176)
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 prior years.
20
During the fiscal year ended January 31, 2004, we incurred capital expenditures
of approximately $9.0 million. Of the total capital expenditures, $5.4 million
was spent on leasehold improvements, $2.9 million was spent on furniture,
fixtures and equipment and $700,000 was spent on management information systems,
including new point-of-sale registers. 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 $400,000
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. 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 management information systems capital expenditures for the
fiscal years ended February 1, 2003 and February 2, 2002, relate primarily to
the upgrade and replacement of all point-of-sale registers in our stores which
occurred during the two fiscal years which ended on February 1, 2003.
The amount of capital expenditures that we make in any year depends on a number
of factors, including general economic conditions. Pursuant to the covenants
contained in our restated credit facility, our total capital expenditures for
the fiscal year ended January 31, 2004 were established at a base level of $10.0
million subject to permitted adjustments. We currently estimate that capital
expenditures for the fiscal year ending January 29, 2005, including permitted
carryover amounts from the prior year, will be approximately $13.5 million,
consisting of approximately $8.1 million for leasehold improvements,
approximately $4.4 million for furniture, fixtures and equipment, and
approximately $1.0 million for management information systems.
SENIOR NOTES ISSUANCE
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 9.000% senior secured notes due April 1,
2008 of Barney's, Inc., a wholly-owned subsidiary of Holdings, 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. These commissions, fees and expenses of approximately $8.4 million
were deferred, are included in other assets, and are being amortized to interest
expense over the term of the notes.
We used the net proceeds from the offering to repay a substantial portion of our
outstanding indebtedness at the time, 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 then existing credit
facility and to pay a substantial portion of the Company's deferred lease
obligations. Other than the amounts outstanding pursuant to the existing credit
facility, the outstanding indebtedness and deferred lease obligations had
original scheduled maturities of January 28, 2004.
As part of the offering process, we requested a rating on the 9.000% senior
secured notes. Standard and Poor's assigned a rating of B- and Moody's assigned
a rating of B3.
21
In connection with the offering, we entered into a restated credit facility, as
more fully described below. The restated credit facility and its related
guarantees are secured by a first-priority lien on substantially all of our
assets, other than real property leaseholds. The 9.000% senior secured notes are
guaranteed by Holdings and each of the existing and future domestic restricted
subsidiaries of Barney's, Inc. on a senior secured basis. The 9.000% senior
secured notes and the related guarantees are secured by a second-priority lien
on the same assets as secure the restated credit facility.
CREDIT FACILITY
On July 15, 2002, we entered into a $105.0 million credit facility, which
replaced our prior credit facility. On April 1, 2003, contemporaneously with the
senior notes issuance we entered into a restated credit facility. The restated
credit facility provides 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. At January 31, 2004 we
had approximately $40.9 million of availability under the credit facility and
approximately $0 and $22.2 million of loans and letters of credit, respectively,
outstanding. In addition, upon consummation of the offering we wrote off
approximately $364,000 in deferred financing costs relating to the credit
facility and incurred additional costs of approximately $400,000 in connection
with the restated credit facility. A summary of the financial covenants and
other terms of the restated credit facility are as follows:
The 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, among others, 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 $136.0 million for the fiscal year
ended 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.
22
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
January 31, 2004 is $25.0 million; $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 January 31, 2004 and for fiscal years ending
thereafter, were limited to $10.0 million per fiscal year,
subject to increase if certain conditions are met.
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 our 9.000% senior secured
notes 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
Our material obligations under firm contractual arrangements, including
commitments for future payments under long-term debt arrangements and operating
lease arrangements, as of January 31, 2004, are summarized below and are more
fully disclosed in notes 4 and 5 of our consolidated financial statements. Total
Debt does not include commitments under unexpired letters of credit under our
restated credit facility. As of January 31, 2004, we had approximately $22.2
million of such letters of credit outstanding.
PAYMENTS DUE BY PERIOD
- ------------------------------------------------------ -----------------------------------------------------------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
- ------------------------------------------------------ ----- ------ --------- --------- -----
($ in thousands)
Total Debt............................................ $ 106,000 $ -- $ -- $ 106,000 $ --
Operating Leases...................................... 440,167 27,700 52,342 47,331 312,794
Firm Purchase Commitments............................. 49,188 49,188 -- -- --
----------- ------------ ----------- ------------ -----------
Total Contractual Obligations......................... $ 595,355 $ 76,888 $ 52,342 $ 153,331 $ 312,794
=========== ============ =========== ============ ===========
As reflected in the January 31, 2004 balance sheet, there were no loans
outstanding under the restated credit facility.
We lease real property and equipment under agreements that expire at various
dates. As of January 31, 2004, minimum rent payments at contractual rates over
the next five years aggregate approximately $440.2 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.
23
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 was 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. See "Certain Relationships and Related Transactions."
OTHER COMMERCIAL COMMITMENTS
At January 31, 2004, our primary commercial commitments included commitments of
approximately $10.5 million under unexpired letters of credit under our credit
facility and firm purchase commitments of approximately $49.0 million related to
purchases of merchandise from vendors which will be received by the Company
generally within the next six months. 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 $11.7 million. These standby letters of credit generally mature within one
year and generally contain provisions for annual renewals. At January 31, 2004,
we had total letters of credit outstanding under our credit facility of
approximately $22.2 million.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet financing or unconsolidated special
purpose entities.
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. The Company's management has discussed the selection of
these critical accounting policies with the Audit Committee of the Board of
Directors and the Audit Committee has reviewed the disclosure relating to these
critical accounting policies in this Management's Discussion and Analysis.
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 January 31, 2004, the amount of
excess reorganization value which we recognized in our financial statements was
$147.2 million, and our total stockholders' equity, including the excess
reorganization value, was $165.8 million.
24
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. In accordance with SFAS No. 142, in the
fiscal years ended January 31, 2004 and February 1, 2003, we completed the
required testing for impairment of our excess reorganization value. Based upon
our testing, 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 years ended January
31, 2004 and February 1, 2003, we did not record an impairment loss related to
excess reorganization value. However, our excess reorganization value was
reduced by approximately $538,000 and $1.7 million during the fiscal years ended
January 31, 2004 and February 1, 2003, respectively, due to a reversal of a tax
reserve resulting from the resolution of tax contingencies existing at the time
of our emergence from bankruptcy in January 1999.
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 year ended February 2, 2002, our adjusted net income (loss) and basic
and diluted income (loss) per share would have been as follows:
FISCAL YEAR ENDED
FEBRUARY 2, 2002
------------------------------
(dollars in thousands, except
per share data)
-----------------------------
BASIC AND
DILUTED
(LOSS)
NET (LOSS) INCOME PER
INCOME SHARE
---------- ----------
As Reported.............................................. $ (15,171) $ (1.09)
Amortization of Excess Reorganization Value.............. 8,791 0.63
---------- ----------
As Adjusted.............................................. $ (6,380) $ (0.46)
========== ==========
Bad Debt. We maintain allowances for doubtful accounts for estimated losses
resulting from the failure of our customers to make required payments on their
outstanding proprietary credit card balances. Accounts are generally written off
automatically after 180 days have passed without our having received a full
scheduled monthly payment. Accounts are written off sooner in the event of
bankruptcy or other factors that make collection seem unlikely. We estimate the
appropriate allowance using a model that considers the current aging of the
accounts, historical write-off and recovery rates and other portfolio data. This
estimate is then reviewed by management to assess whether additional analysis is
required to appropriately estimate expected losses. We believe that our
allowance for doubtful accounts is adequate to cover anticipated losses in our
proprietary credit card portfolio under current conditions. Significant
deterioration in any of the factors noted above or in the economy could require
us to provide additional allowances that would reduce our net earnings. At
January 31, 2004, a 0.5% increase in our net historical write-off rate would not
have a material impact on our net earnings.
Inventory. We value our inventory at the lower of cost or market, or LCM, as
determined by the first-in, first-out method using the retail inventory method,
or RIM. Under RIM, the valuations of inventory at cost and the resulting gross
margins are calculated by applying a cost-to-retail ratio to the retail value of
our inventories. RIM is inherently an averaging method that is widely used in
the retail industry. The use of RIM will result in inventories being valued at
the LCM as markdowns are currently recorded as a reduction of the retail
inventory value.
Based on a review of historical business trends, on-hand inventory levels,
discontinued merchandise categories and assumptions regarding future demand and
market conditions, we calculate a markdown reserve for our inventory to reflect
additional markdowns which are estimated to be necessary for obsolescence and to
25
reduce our inventories to the LCM. We believe that our markdown reserve is
adequate under current conditions. If current conditions deteriorate, we may be
required to increase our markdown reserve which would reduce our net earnings.
At January 31, 2004, a 0.5% increase in our markdown reserve as a percentage of
our inventory would increase our cost of sales and decrease our net earnings by
approximately $300,000.
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 that determination
was made. At January 31, 2004, the valuation allowance was $2.8 million.
Derivative Instruments and Hedging Activities. We purchase approximately 40% to
50% of the goods which we sell from vendors outside of the United States, and we
generally pay for a portion of those goods in foreign currencies (particularly
the Euro, but also the British pound). We periodically enter into foreign
exchange forward contracts and option contracts in order to hedge some of our
foreign exchange exposure. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities ("VIE's"), an interpretation of Accounting Research
Bulletin No. 51" ("Interpretation No. 46"). In December 2003, the FASB issued a
revision to Interpretation No. 46 to make certain technical corrections and
address certain implementation issues that had arisen. Interpretation No. 46
requires the consolidation of entities in which an enterprise absorbs a majority
of the entity's expected losses, receives a majority of the entity's expected
residual returns, or both, as a result of ownership, contractual or other
financial interests in an entity. Currently, entities are generally consolidated
by an enterprise when it has a controlling financial interest through ownership
of a majority voting interest in the entity. Interpretation No. 46 was effective
immediately for VIE's created after January 31, 2003. The provisions of
Interpretation No. 46, as revised, are required to be applied by the Company no
later than the end of the Company's first quarter ending May 1, 2004. The
Company is currently evaluating the requirements and impact of Interpretation
No. 46, however, at the present time, the Company does not believe there are any
additional entities that will require disclosure or consolidation as a result of
the provisions of Interpretation No. 46.
In April 2003, the FASB issued SFAS No. 149, "Amendm