ITEM 1. BUSINESS
GENERAL
Barneys New York, Inc., a Delaware corporation ("Holdings"), is the parent company of Barney's, Inc., a New York corporation ("Barneys"), which together with its subsidiaries (collectively, the "Company"), is a leading upscale retailer of men's, women's and children's apparel and accessories, and items for the home. Creative merchandising, store design and displays, advertising campaigns and publicity events develop the image of Barneys as a fashion leader. In addition, the Company is involved in licensing arrangements pursuant to which the "Barneys New York" trade name is licensed for use in Asia (see "LICENSING ARRANGEMENTS" below).
Barneys product assortment and price points can generally be categorized within the luxury market and appeal typically to a more fashion-conscious and sophisticated customer. Its merchandising philosophy stresses a variety of fashion viewpoints, and includes established and new designers, as well as branded and private label goods. Merchandise is sourced from a variety of domestic and foreign vendors, with a significant portion of the product being manufactured in Europe (primarily Italy). The Company's vendors include major designers such as Prada, Giorgio Armani, Jil Sander, Manolo Blahnik, Ermenegildo Zegna and Marc Jacobs. Major branded goods include Hickey Freeman and Oxxford, and major cosmetics lines include, among others, Chanel, Francois Nars and Kiehls.
Barneys was founded by Barney Pressman in 1923 under the name Barney's Clothes, Inc. Barneys and certain of its subsidiaries commenced proceedings under Chapter 11 of title 11, United States Code (the "Bankruptcy Code") on January 10, 1996 (the "Filing Date") and emerged therefrom on January 28, 1999. Pursuant to the Plan of Reorganization for Barneys and certain of its affiliates (the "Plan") as confirmed by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"), Holdings was formed and all the equity interests in Barneys were transferred to Holdings, making Barneys a wholly-owned subsidiary of Holdings.
RETAILING STRATEGY
The Company sells to consumers primarily through three inter-related distribution channels. These distribution channels are broadly defined as full-price stores, outlet stores, and warehouse sale events. While these three distribution channels differ in both size and price-points, they are each merchandised, in their own way, with a wide-range of high quality products that generally appeal to a more fashion-oriented customer. The Company's inventory supply chain is managed throughout these three distribution channels. The outlet stores provide a clearance venue for residual full-price store merchandise, and the warehouse sale events also serve the same purpose for residual merchandise from the other two distribution channels. Both the outlet stores and the warehouse sale events leverage the strength of the Barneys New York brand, which has been established by our full-price stores in general, but more specifically by our flagship stores. The three distribution channels are discussed in more detail below.
Full-price Stores
The Company operates eight full-price stores as follows: i) three large flagship stores in prime retail locations in New York, Beverly Hills and Chicago; flagship stores in New York and Beverly Hills include restaurants managed by third party contractors, and ii) five smaller regional stores in the following locations: New York City, NY (2 stores), Manhasset, NY, Seattle, WA and Chestnut Hill, MA.
The three large flagship stores establish and promote the Barneys New York image as a pre-eminent retailer of men's and women's fashion. These stores provide customers with a wide variety of products, including apparel, accessories, cosmetics and items for the home, catering to affluent, fashion-conscious men and women. The five smaller regional stores, which provide a limited selection of the assortments offered in the flagship stores, aim to serve similar customers in smaller urban markets.
Outlet Stores
The Company operates 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, branded and private label apparel and accessories, cater to budget-minded yet fashion-conscious men and women. They are located in high-end outlet centers and serve a high number of destination shoppers and tourists.
Warehouse Sale Events
The Company operates four warehouse sale events annually, one each spring and fall season in New York City, New York and Santa Monica, California. The warehouse sale events provide another vehicle for liquidation of end of season residual merchandise, as well as a low cost extension of the Barneys New York brand to a wider audience. The events attract a wide range of shoppers, mostly bargain hunters who value quality and fashion.
LICENSING ARRANGEMENTS
BNY Licensing Corp. ("BNY Licensing"), a wholly-owned subsidiary of Barneys, is party to licensing arrangements pursuant to which (i) 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 Ltd. ("Isetan"), and (ii) 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). Licensing agreements governing these arrangements were entered into in connection with Barneys' emergence from bankruptcy (see Note 7 to the Consolidated Financial Statements).
TRADEMARKS AND SERVICE MARKS
The Company owns its principal trademarks and service marks worldwide, including the "Barneys New York" and "Barneys" marks. In addition to these marks, the Company owns other important trademarks and service marks used in its business. The Company's trademarks and service marks are registered in the United States and internationally. 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. The Company is not aware of any claims of infringement or other challenges to its right to register or use its marks in the United States.
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, the Company's 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. The Company's dependence on the holiday selling season for sales and income is less than that of many retailers, because of the significant sales and income generated by the warehouse sale events held in February and August.
COMPETITION
The retail industry, in general, and the specialty retail store business, in particular, are intensely competitive. Generally, the Company's full-price stores compete with both specialty stores and department stores, while the Company's outlet stores and warehouse sale events compete with certain categories of off-price and discount stores, in the geographic areas in which they operate. In addition, Barneys faces increasing competition from its significant designer vendors which have entered or expanded their presence with their own dedicated stores. Several department store, specialty store, and vendor store competitors also offer mail order catalog and internet shopping
that also competes with the Company. Some of the retailers with which Barneys competes have substantially greater financial resources than the Company and may have various other competitive advantages over the Company.
The trend toward consolidation and vertical integration of designer brands poses additional competitive risk for the Company (e.g., Prada and Gucci each own several other designer brands, and LVMH has a stable of designer vendors which it sells through its Duty Free Shops and Galleria stores as well as individual designer boutiques). Competition is strong not only for retail customers, but also for vendor resources. In the Company's luxury retail business, exclusivity of merchandise brands is very valuable, and retail stores compete for exclusive distribution arrangements with key designer vendors.
MERCHANDISING
In Fiscal 2001, the Company's top 10 vendor brands accounted for approximately 25% of total Company sales. The two top vendor resources (including all designer brands owned by the vendor resource) each accounted for approximately 10% and 4%, respectively, of total Company sales. All of these vendor resources are also sold by competitor retailers in certain markets; nine of the ten vendors also have their own dedicated retail stores. Exclusivity of distribution of designer brands is a valuable resource in the luxury retail business. The Company faces risk to its business if certain designer vendors withdraw Barneys from their distribution, or, conversely, if they provide distribution to competitors. Management does not expect that the trend toward vertical integration discussed above or the withdrawal from Barneys of the distribution of certain designer vendors will have a material impact on the operations of the Company. If certain vendors were to withdraw distribution from Barneys, the Company might, in the short term, have difficulty identifying comparable sources of supply. However, management believes that alternative supply sources do exist to fulfill the Company's requirements in the event of such a disruption.
EMPLOYEES
At February 2, 2002, the Company employed approximately 1,300 people. The Company's staffing requirements fluctuate during the year as a result of the seasonality of the retail apparel industry, adding approximately 100 employees during the holiday selling season. Approximately 500 of the Company's employees are represented by unions and the Company believes that overall its relationship with its employees and the unions is good. During its more than fifty-year relationship with unions representing its employees, the Company has never been subjected to a strike.
CAPITAL EXPENDITURES
The Company's capital expenditure plan is designed to allocate funds to projects that are necessary to support the Company's strategic plan. Under the terms of its $105,000,000 revolving credit facility, capital expenditures are limited, subject to certain adjustments, to $5,000,000 in fiscal year 2002. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
CERTAIN TAX MATTERS
Federal and State Income Taxes
Pursuant to the Plan, Holdings acquired 100% of Barneys' stock. Holdings made a Section 338(g) election (the "Election") with respect to the acquisition under applicable provisions of the Internal Revenue Code ("IRC"). The tax effects of making the Election resulted in Barneys and each of its subsidiaries generally being treated, for federal income tax purposes, as having sold its assets at the time the Plan was consummated and thereafter, as a new corporation which purchased the same assets as of the beginning of the following day. As a result, Barneys incurred a gain at the time of the deemed sale in an amount equal to the difference between the fair market value of its assets and its collective tax basis of the assets at the time of the sale.
The Company used existing net operating loss carryforwards to reduce the gain incurred as a result of this sale. Nevertheless, the Company was subject to alternative minimum tax. Furthermore, immediately after the sale, as a result of the IRC Section 338(g) election, Barneys was stripped of any remaining tax attributes, including any unutilized net operating loss carryforwards and any unutilized tax credits. See Note 6 to the Consolidated Financial Statements.
FORWARD LOOKING INFORMATION
This Annual Report on Form 10-K contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," and variations of such words and similar expressions are intended to identify such forward looking statements which include, among others, projections of revenues, earnings and cash flows. These forward looking statements are subject to risks and uncertainties which could cause the Company's actual results or performance to differ materially from those expressed or implied in such statements. These risks and uncertainties include, among others, the following: general economic and business conditions, both nationally and in those areas in which the Company operates; demographic changes; prospects for the retail industry; competition; changes in business strategy or development plans; the loss of management and key personnel; the availability of capital to fund the expansion of the Company's business; changes in consumer preferences or fashion trends; adverse weather conditions, particularly during peak selling seasons; and changes in the Company's relationships with designers, vendors and other suppliers.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal facilities include corporate offices, a central alterations facility, a distribution center and three flagship stores. Prior to the Company's emergence from bankruptcy, Barneys formed three subsidiaries (each, a "Lease Subsidiary"), each of which acts as lessee and sublessor for one of the flagship stores. On January 28, 1999, pursuant to the Plan, (i) the fee interest in the properties on which the New York and the Chicago flagship stores are located, and the leasehold interest in the property on which the Beverly Hills flagship store is located, were transferred to an affiliate of Isetan, (ii) such affiliate, as lessor, entered into amended and restated leases with each of the tenants in each of the properties, and (iii) each of such tenants assigned the leasehold interest in the related property to one of the Lease Subsidiaries, which in turn entered into a sublease with Barneys, in the case of the New York and Beverly Hills stores, and with Barneys America, Inc., a subsidiary of Barneys, in the case of the Chicago store. In June 2001, Isetan conveyed its right, title and interest as lessor pursuant to each of the flagship store leases to a third party. The lease for the New York store contained an original term of twenty years, with four options to renew of ten years each. The lease for the Chicago store contained an original term of ten years, with three options to renew of ten years each. The lease for the Beverly Hills store contained an original term of twenty years, with three options to renew of ten years each. The leases for the flagship stores are all triple-net leases. In the case of the Beverly Hills flagship store, Barneys is also responsible for the rent payable pursuant to the existing ground lease.
The Company's facilities are located at the following locations:
Corporate Offices Regional Stores ----------------- ---------------
New York, NY New York, NY (Wooster Street) New York, NY (18th Street) Central Alterations Facility Manhasset, NY ---------------------------- Chestnut Hill, MA New York, NY Seattle, WA
Distribution Center ------------------- Outlet Stores Lyndhurst, NJ Harriman, NY Flagship Stores Cabazon, CA --------------- Camarillo, CA New York, NY Clinton, CT Beverly Hills, CA Riverhead, NY Chicago, IL Wrentham, MA Waikele, HI Warehouse Sale Event Location Carlsbad, CA ----------------------------- Napa Valley, CA New York, NY Orlando, FL Allen, TX Leesburg, VA
The Company also leases certain other facilities for its semi-annual Beverly Hills warehouse sale event. The Company believes that all of its facilities are suitable and adequate for the current and anticipated conduct of its operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Barneys and certain of its subsidiaries commenced proceedings under Chapter 11 of title 11, United States Code (the "Bankruptcy Code") on January 10, 1996 (the "Filing Date"), and emerged therefrom on January 28, 1999 (the "Effective Date"). In addition, Holdings and its subsidiaries are involved in various legal proceedings which are routine and incidental to the conduct of their business. Management believes that none of these proceedings, if determined adversely to Holdings or any of its subsidiaries, would have a material adverse effect on the financial condition or results of operations of such entities.
Administrative Claims
As a result of the bankruptcy, the Company is subject to various Administrative Claims filed by various claimants throughout the bankruptcy case. In connection with the Plan, the Company was required to establish a Disputed Administrative Claims Cash Reserve ("Cash Reserve") while the Administrative Claims are negotiated and settled. The initial total amount of the Cash Reserve was $4.6 million, of which approximately $0.2 million remains as of February 2, 2002. The Company has reserved in its financial statements the amount it deems will be necessary to settle these claims, however, there can be no assurances that the results of the settlement of these Administrative Claims will be on terms that will not exceed the amount reserved.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Annual elections are held in June to elect officers for the ensuing year. Interim elections are held as required. Except as otherwise indicated, each executive officer has held his current position for the past five years.
Set forth below are the names, positions and business backgrounds of all of the executive officers of Holdings.
Howard Socol became Chairman, President and Chief Executive Officer of Holdings on 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 Burdine's, 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.
Judy 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.
Tom Kalenderian has been at Barneys for 22 years. His responsibilities have increased over time until he was promoted to Executive Vice President and General Merchandising Manager for all men's merchandising in
July 1997. Mr. Kalenderian is responsible for developing and implementing menswear strategy and manages many of the key vendor relationships for the menswear, children's and gifts for the home businesses.
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, facilities 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 the Company's Central Alterations department. Mr. Hermanns was promoted to Executive Vice President in February 2000. Prior to joining Barneys, Mr. Hermanns spent 10 years with Ernst & Young LLP in their audit and corporate finance practices.
Michael Celestino has been with Barneys since November 1991 and has served in a number of store operations capacities during that period. Mr. Celestino is currently responsible for all store operations including full-price stores, outlet stores and the Company's 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 Seventeenth 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, and taxes.
None of the executive officers listed herein is related to any director or executive officer.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
There is no current public trading market for Holdings Common Stock. An aggregate of 1,734,634 shares of Holdings Common Stock are issuable upon exercise of outstanding options. In addition, Holdings' Series A Preferred Stock, par value $0.01 per share (the "Preferred Stock"), under certain circumstances, is convertible into 162,500 shares of Holdings Common Stock. The Company does not presently intend to apply to list the Holdings Common Stock on any national securities exchange or The Nasdaq Stock Market. The Company believes that all of the shares of Holdings Common Stock held by Bay Harbour Management L.C. ("Bay Harbour"), Whippoorwill Associates, Inc. ("Whippoorwill") and Isetan could be sold pursuant to Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). Resales under Rule 144 are subject to limitations relating to current public information, volume and manner of sales. Pursuant to a Registration Rights Agreement, Holdings has agreed to register under the Securities Act all shares of Holdings Common Stock held by Bay Harbour, Whippoorwill and, pursuant to piggyback registration rights, Isetan. See "Security Ownership of Certain Beneficial Owners and Management," in the Proxy Statement, which is incorporated herein by reference and which sets forth the number of shares of Holdings Common Stock owned by each of Bay Harbour, Whippoorwill and Isetan.
Holders
The number of record holders of Holdings Common Stock as of April 25, 2002 is 964.
Dividends
Each share of Holdings Common Stock will be entitled to participate equally in any dividend declared by the Board of Directors and paid by Holdings. The guarantee by Holdings of the Company's working capital facility prohibits Holdings from declaring dividends on shares of its capital stock, with the exception of dividends payable to the holders of the Preferred Stock. The Company has no present intention to declare dividends on the Holdings Common Stock.
Significant Stockholders
Bay Harbour and Whippoorwill collectively beneficially own approximately 77% of the outstanding shares of Holdings Common Stock. See "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement which is incorporated herein by reference. Accordingly, they may be in a position to control the outcome of actions requiring stockholder approval, including the election of directors. This concentration of ownership could also facilitate or hinder a negotiated change of control of Holdings and, consequently, have an impact upon the value of Holdings Common Stock. Further, the possibility that either Bay Harbour or Whippoorwill may determine to sell all or a large portion of their shares of Holdings Common Stock in a short period of time may adversely affect the market price of Holdings Common Stock. In addition, Bay Harbour and Whippoorwill have entered into a stockholders' agreement with respect to their ownership in, and the voting of the capital stock of, Holdings. See "Certain Relationships and Related Transactions."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected Historical Financial Data
The following table presents selected historical financial data as of and for each of the three fiscal years in the period ended February 2, 2002, the six months ended January 30, 1999 (the "Fall 1998 Stub Period") and January 28, 1998, and each of the two fiscal years in the period ended August 1, 1998. The selected historical 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations."
In conjunction with its emergence from Chapter 11, the Company changed its fiscal year-end to the Saturday closest to January 31. Previously, the fiscal year-end fell on the Saturday closest to July 31. A January fiscal year-end is in line with retail industry practice as it coincides with the end of the fall/holiday season. Unless otherwise specified, all historical information prior to August 1, 1998 reflects the July fiscal year-end. The Fall 1998 Stub Period represents the six month transition period to the new fiscal year.
The consolidated financial statements of the Company during the bankruptcy proceedings are presented in accordance with American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Pursuant to guidance provided by SOP 90-7, the Company adopted fresh start reporting as of January 28, 1999 (the "Effective Date") upon its emergence from bankruptcy.
As hereinafter used, Successor Company refers to Barneys New York, Inc. and subsidiaries from the Effective Date to February 2, 2002 and Predecessor Company refers to Barney's, Inc. and subsidiaries prior to the Effective Date.
Under fresh start reporting, a new reporting entity is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the Effective Date. Black lines have been drawn to separate the Successor Company's financial information from that of the Predecessor Company to signify that they are different reporting entities and such financial information has not been prepared on the same basis. The operating results of the Successor Company for the intervening period from January 28, 1999 to January 30, 1999 were immaterial and therefore included in the operations of the Predecessor Company.
The balance sheet data at January 30, 1999 in the following table, reflects the Plan and the application of the principles of "fresh start" reporting in accordance with the provisions of SOP 90-7. Accordingly, such financial information is not comparable to the Company's historical financial information prior to the Effective Date. The historical financial data as of and for each of the two fiscal years in the period ended August 1, 1998, each of the three fiscal years in the period ended February 2, 2002, and for the six months ended January 30, 1999 are derived from financial statements audited by Ernst & Young LLP, independent auditors. Information for the twelve months ended January 30, 1999 and the six months ended January 28, 1998 is derived from management's internal financial statements.
- -------- 1 Effective January 1999, the Company changed its fiscal year to coincide with the Saturday closest to the end of January.
2 For comparison purposes the twelve months ended January 30, 1999 (unaudited) was prepared using management's internal financial statements for the six months ended August 1, 1998 (unaudited) and the audited financial statements for the Fall 1998 Stub Period. The income statement data excludes the effects of the extraordinary item ($285,905) recorded in the Fall 1998 Stub Period.
3 The income statement data presented above reflects the results of operations for the Predecessor Company. The Plan became effective on January 28, 1999 and the results of operations for the Successor Company for the two-day period are immaterial and are not shown separately. The balance sheet data presented as of January 30, 1999 is that of the Successor Company.
4 Net sales excludes bulk sales of merchandise to jobbers in order to enhance comparability of data presented.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
The operating results for 2001 reflect the impact of a weak economy exacerbated by the tragic events of September 11, 2001 (the "September 11 events"). The business disruption caused by the terrorist attacks and the indirect impact the attacks have had on consumer spending and tourism, continues to have a lingering effect and was a significant factor that affected full year operating results. Approximately 50% of the Company's annual revenues are generated from properties located within New York City. In the days immediately following the September 11 events, the Company experienced a significant decline in sales from the prior year. Total Company comparable store sales declined approximately 34% in the month of September, which is in stark contrast to the 2.7% comparable store sales decline for the entire spring 2001 season. Sales continued to improve from their low-point in September with a comparable store sales decline of 3.7% in the fourth quarter of Fiscal 2001 as compared to a 19.6% decline for the immediately preceding third quarter. While the Company did lose its full-price store located at the World Financial Center (in New York City) as a result of the September 11 events, this store only represented approximately 1% of annual revenues in Fiscal 2000. Due to the size of the store, and as a result of insurance recoveries related thereto, the loss of this one store did not have a significant impact on the financial position or operating results of the Company.
The table which follows includes a percentage reconciliation of net sales to earnings before interest, taxes, depreciation and amortization ("EBITDA") and also includes net income (loss) as a percentage of sales for Fiscal 2001 (52 weeks), Fiscal 2000 (53 weeks), and Fiscal 1999 (52 weeks). The Company believes EBITDA is a useful statistic since it eliminates both the cost of the capital structure and non-cash charges (which can vary dramatically by company) from the operating results of the Company. However, 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. While the table below excludes a reconciliation of EBITDA to net (loss) income, the narratives that follow contain a discussion of interest expense, and depreciation and amortization for the periods presented, as necessary.
2001 2000 1999 ----------------------------------
Net sales 100.0% 100.0% 100.0% Cost of sales 56.3 53.6 52.7 ---------------------------------- Gross profit 43.7 46.4 47.3
Selling, general and administrative expenses (including occupancy expenses)1 41.7 40.0 41.6 Other (income) expense, net2 (1.9) (1.2) (1.2) ---------------------------------- Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) 3.9 7.6 6.9 Net (loss) income (4.1)% 0.2% (1.5)% ==================================
- ------------------------------- 1 Selling, general and administrative expenses in 2000 include the benefit of a $1.5 million reversal of a Predecessor Company liability favorably settled in the current year. Excluding such amount, the category as a percent of sales would have been 40.3%.
2 Other (income) expense, net in 2001 includes a non-recurring gain of $0.9 million related to insurance recoveries associated with the loss of one of the Company's stores due to the September 11 events and the benefit of an $0.9 million reversal of a predecessor company liability favorably settled in the current year. Excluding such amounts, the category as a percent of sales would have been (1.4)%.
Fiscal 2001 Compared to Fiscal 2000
Net sales for Fiscal 2001 (including $7.8 million related to new stores) were $371.2 million compared to $404.3 million in Fiscal 2000, a decrease of 8.2%. Fiscal 2000 included 53 weeks; after adjusting for the impact of the 53rd week in Fiscal 2000, sales decreased 6.9%. Comparable store sales decreased approximately 7.7% in Fiscal 2001 principally due to reduced consumer spending in response to a weak economy which became more magnified after the September 11 events.
Gross profit on sales decreased 13.5% to $162.3 million in Fiscal 2001 from $187.6 million in Fiscal 2000, primarily due to the decline in sales volume. As a percentage of net sales, gross profit was 43.7% in Fiscal 2001 compared to 46.4% in the prior year. The decline from the prior year principally relates to the effect of increased markdowns to both drive sales and cleanse the inventory pipeline in light of weak consumer demand as discussed above.
Selling, general and administrative expenses, including occupancy expenses, decreased 4.2% in Fiscal 2001 to $154.8 million from $161.5 million in Fiscal 2000. Exclusive of certain non-recurring items, selling, general and administrative expenses declined approximately $9.4 million. Personnel expense reductions of approximately $6.8 million were driven by position eliminations; reductions in and eliminations of certain employee benefits, including the annual bonus program; lower commission expense commensurate with reduced sales; reduced hours for many employees; and temporary
pay cuts for senior executives. In addition to reductions in other expenses commensurate with the sales decline, most notably an approximate $600,000 reduction in third-party credit card fees, the Company was able to further reduce other expenses in Fiscal 2001 by, among other things, re-bidding products and services including insurance, packaging supplies (also impacted by the lower sales volume), and maintenance contracts; and by general reductions in consumption of products and services including office supply and telephone usage, training, and travel (also impacted by the September 11 events). Expense reductions in these other areas discussed herein aggregated in excess of $2.0 million. Overall, expense reductions were partially offset by not only additional costs to operate four new outlet stores during the year, but also by higher operating costs attributable principally to our stores related to increased real estate taxes, common area maintenance charges and utilities. Incremental costs in the latter areas mentioned approximated $1.0 million. As a percent of sales, selling, general and administrative expenses increased to 41.7% in Fiscal 2001 from 40.0% in the prior year, reflecting a reduction in the leveraging of expenses, principally due to the dramatic sales decline in the period.
Other (income) expense, net increased 43.9% in Fiscal 2001 to $7.0 million from $4.8 million in the prior year. This increase was principally driven by a non-recurring gain of $0.9 million related to insurance recoveries associated with the loss of one of the Company's stores due to the September 11 events and the benefit of an $0.9 million reversal of a predecessor company liability favorably settled in the current year. Excluding such amounts the increase was approximately 6.7%.
Depreciation and amortization expense increased 4.3% in Fiscal 2001 to $18.8 million from $18.0 million in the prior year. This increase was primarily due to higher depreciation on new assets placed in service.
Interest expense, net decreased 11.3% in Fiscal 2001 to $10.4 million from $11.7 million a year ago. Interest associated with borrowings under the Company's credit facility declined principally as a result of lower average borrowings. Average borrowings under the credit facility for Fiscal 2001 and Fiscal 2000 were $35.2 million and $44.4 million, respectively, and the effective interest rate on this portion of the Company's outstanding debt was 9.94% and 11.90%, respectively, in the comparable periods.
The Company's net loss for Fiscal 2001 was $15.2 million compared to net income of $0.6 million in Fiscal 2000. Basic and diluted net loss was $1.09 per common share in Fiscal 2001 compared to basic and diluted net income per common share of $0.04 in Fiscal 2000
Fiscal 2000 Compared to Fiscal 1999
Net sales for Fiscal 2000 (including $2.5 million related to new stores) were $404.3 million compared to $366.8 million in Fiscal 1999, an increase of 10.2%. Fiscal 2000 included 53 weeks; after adjusting for the impact of the 53rd week in Fiscal 2000, sales increased 8.7%. Exclusive of bulk sales of merchandise to jobbers ("Bulk Sales") of $1.2 million in Fiscal 1999, sales to the Company's core consumers through its stores increased 9.1%. Net sales for Fiscal 2000 and Fiscal 1999 also includes $0.2 million and $4.9 million, respectively, generated from stores closed under the Company's store closing program, completed in March 2000. Comparable store sales increased approximately 9.7% in Fiscal 2000 principally due to a comparable store increase of 12.3% in the full-price and outlet stores offset by reduced sales in the Company's warehouse sale events attributed, in part, to an abbreviated selling period for certain of the events. Though sales trends weakened in the fourth quarter, the Company's sales for the year generally benefited from a strong economy, a strong flow of new receipts into the stores, increased advertising and marketing efforts, strong trends in certain merchandise classifications including men's casual and designer sportswear and women's ready-to-wear and jewelry, as well as the continuing efforts to initiate markdowns in a timely fashion.
Gross profit on sales increased 8.1% to $187.6 million in Fiscal 2000 from $173.5 million in Fiscal 1999, primarily due to the increased sales volume. As a percentage of net sales, gross profit was 46.4% in Fiscal 2000 compared to 47.3% in the prior year. The decline from the prior year principally relates to the effect of increased markdowns and inventory reserves in light of the softening sales trends.
Selling, general and administrative expenses, including occupancy expenses, increased 6.0% in Fiscal 2000 to $161.5 million from $152.4 million in Fiscal 1999. This increase was principally driven by higher personnel
costs of $5.4 million associated in part with annual wage increases; higher energy costs including a $0.7 million increase in utilities; and increases in certain expenses, such as commission costs, third party credit card fees and customer loyalty program expenses associated with the increased sales volume. In addition, advertising costs increased $2.9 million from the year ago period to 1.6% of sales in Fiscal 2000 from 1.0% in Fiscal 1999 as part of the Company's continuing efforts to both drive sales and strengthen its brand equity. These increases were partially offset by a $1.5 million reversal of a Predecessor Company liability favorably settled in the current year. As a percent of sales, selling, general and administrative expenses declined to 40.0% in Fiscal 2000 from 41.6% in the prior year principally due to tighter management and leveraging of expenses against the approximate 10% increase in sales.
Depreciation and amortization expense increased 3.4% in Fiscal 2000 to $18.0 million from $17.4 million in the prior year. This increase was primarily due to higher depreciation on new assets placed in service.
Interest expense, net decreased 9.6% in Fiscal 2000 to $11.7 million from $13.0 million a year ago. Interest associated with borrowings under the Company's credit facility declined principally as a result of lower average borrowings. Average borrowings under the credit facility for Fiscal 2000 and Fiscal 1999 were $44.4 million and $62.9 million, respectively, and the effective interest rate on this portion of the Company's outstanding debt was 11.9% and 11.2%, respectively, in the comparable periods.
The Company's net income for Fiscal 2000 was $0.6 million compared to a loss of $5.3 million in Fiscal 1999. Basic and diluted net income per common share for Fiscal 2000 was $0.04 per common share compared to a $0.42 loss per common share in Fiscal 1999.
LIQUIDITY AND CAPITAL
Liquidity and Capital Resources
Cash Provided by Operations and Working Capital. For the reporting periods below, net cash provided by operations was as follows ($ in thousands):
In the periods presented, the Company's primary source of liquidity has been borrowings under various credit facilities (see description of the various credit facilities in the following section). However, enhanced credit support from the vendor community has lessened the Company's dependence on this source of liquidity.
The Company's working capital position at each year-end is as follows ($ in thousands):
----------------------
Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 -------------- -------------- --------------
Working capital $42,909 $55,751 $48,547 ============== ============== ==============
For the reporting periods below, net cash used in financing activities was as follows:
($ in thousands) Fiscal Fiscal Fiscal Year Year Year 2001 2000 1999 -------------- --------------- -------------- Net cash used in financing activities $(9,176) $(9,750) $(7,911) ============== =============== ==============
Net cash used in financing activities for Fiscal 2000 and Fiscal 1999 includes approximately $7 million and $5 million, respectively, from the exercise of stock options and warrants principally by Bay Harbour and Whippoorwill. Exclusive of such amounts, the significant decline in the net repayment of debt for Fiscal 2001 is directly attributable to the decline in Fiscal 2001 operating results and the resulting reduction in cash flow.
Capital Expenditures. Prior to the receipt of construction allowances from landlords in Fiscal 2001, the Company incurred approximately $12.3 million for capital expenditures. Of the total capital expenditures, $6.9 million represented 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 amount spent pertained to building out and reconfiguring existing retail space and new store openings. Included in Fiscal 2001 are significant costs associated with the reconfiguration of certain space at the New York flagship store which included the relocation of the existing restaurant and which also encompasses in Fiscal 2002, a relocation and expansion of our existing cosmetics businesses, and the expansion of the main floor women's accessories business. In addition, the Company began implementing a project to replace all the point of sale registers in its retail facilities. This project, which was delayed as a result of the September 11 events, is expected to be completed in the second quarter of Fiscal 2002. Notwithstanding this project, significant additional capital expenditures will be required for the Company to upgrade its management information systems.
Credit Facilities. On January 28, 1999, the Company entered into a four year Credit Agreement with several financial institutions led by Citicorp USA, Inc. The Credit Agreement provided a $120,000,000 revolving credit facility with a $40,000,000 sublimit for the issuance of letters of credit. The proceeds from this facility were used to refinance the debtor-in-possession credit agreement with BankBoston N.A., to pay certain claims pursuant to the Chapter 11 plan of reorganization, to pay professional fees, to fund working capital in the ordinary course of business and for other general corporate purposes not prohibited thereunder. Obligations under the Credit Agreement are secured by a first priority and perfected lien on substantially all of the assets of the Company.
As a result of the prevailing economic conditions in 2001, and the resulting financial impact on the Company, in December 2001, the Company entered into an amendment to its Credit Agreement, which among other things, amended and/or eliminated certain of the financial covenants contained therein through Fiscal 2002 and decreased the commitment pursuant to that agreement to $105,000,000. In addition, the maturity of the Credit Agreement was extended to February 15, 2003.
A summary of the renegotiated terms is discussed below:
Revolving credit availability is calculated as a percentage of eligible inventory (including undrawn letters of credit) and Barneys New York credit card receivables plus trademark availability (such amount subject to a downward adjustment as defined). The amount of trademark availability is currently $5,000,000. Interest rates pursuant to the Credit Agreement are either the Base Rate (as defined) plus 1.75% or LIBOR plus 2.75%. The Credit Agreement
also provides for a fee of 1.50% to 2.50% per annum on the daily average letter of credit amounts outstanding and a commitment fee of 0.375% on the unused portion of the facility.
The Credit Agreement contains financial covenants relating to net worth, earnings and capital expenditures as outlined below. With the exception of the capital expenditures covenant, which is a covenant measured on an annual basis, the covenants discussed herein are required to be measured on a quarterly basis.
Minimum consolidated net worth. Eliminated for the third quarter of Fiscal 2001. At the end of each of the next five fiscal quarters, starting with the fourth fiscal quarter of 2001, shall not be less than $136,000,000, $128,000,000, $124,000,000, $126,000,000 and $132,000,000, respectively.
Minimum consolidated EBITDA. Eliminated for the third quarter of Fiscal 2001. As of the last day of each of the next five fiscal quarters (for the defined trailing periods), starting with the fourth fiscal quarter of 2001, shall not be less than $1,000,000, $1,000,000, $2,000,000, $8,000,000 and $16,000,000, respectively. Pursuant to prior amendments to the Credit Agreement, the Company and the lenders under the Revolving Credit Facility adjusted the definition of earnings before interest, taxes, depreciation and amortization ("EBITDA") to allow for the inclusion of up to $3 million of cash equity contributed to the Company.
Capital Expenditures. The Company's total capital expenditures for Fiscal 2002 were reduced to $5,000,000, and are subject to upward adjustment if certain conditions are met.
In addition to the above, the Company is subject to a 30 day clean-down provision within the 90 day period commencing December 1 of each year wherein the Company's outstanding revolving loans and letter of credit obligations may not exceed $65,000,000.
At February 2, 2002, the Company had approximately $30,245,000 of availability under the Credit Agreement, after consideration of $23,581,000 of revolving loans and $23,060,000 of letters of credit outstanding.
Management believes that it will be in compliance with the financial covenants contained in the Credit Agreement for the fiscal year ending February 1, 2003. However, any material deviations from the Company's forecasts could require the Company to seek additional waivers or amendments of covenants, alternative sources of financing or to reduce expenditures. There can be no assurance that such waivers, amendments or alternative financing could be obtained, or if obtained, would be on terms acceptable to the Company.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's 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 the Company 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 the Consolidated Financial Statements). On an on-going basis, the Company evaluates its estimates, including those related to inventories, bad debts, merchandise returns, customer loyalty programs, intangible and tangible assets, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed 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.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Bad Debt. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Barneys' customer were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventory. The Company writes down its inventory for estimated obsolescence based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Excess Reorganization Value. In assessing the recoverability of the Company's excess reorganization value, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of this asset. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment charge for this asset not previously recorded. On February 3, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and will be required to analyze its excess reorganization value for impairment issues during the first six months of Fiscal 2002, and then on a periodic basis thereafter. During the year ended February 2, 2002, the Company did not record an impairment loss related to excess reorganization value.
Deferred Taxes. The operating period after emergence from bankruptcy and the cumulative losses incurred by the Company makes the future utilization of deferred tax assets uncertain. Accordingly, the Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. In the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Seasonality
The Company's business is seasonal, with higher sales and earnings occurring in the quarters ending in October and January of each year. These two quarters, which include the holiday selling season, coincide with the Company's Fall selling season. Additionally, net sales and cash flow are favorably impacted in the quarters ending in April and October by the seasonal warehouse sale events in New York and Santa Monica.
The following table sets forth sales and net (loss) income for Fiscal 2001 and Fiscal 2000. This quarterly financial data is unaudited but gives effect to all adjustments necessary, in the opinion of management of the Company, to present fairly this information. In addition, EBITDA is presented in accordance with the definition above.
Inflation
Inflation over the past few years has not had a significant impact on the Company's sales or profitability.
Economic Climate Risk
As a luxury goods retailer, the Company is subject to economic risk conditioned upon the general health and stability of the United States economy. A downturn in the stock market could cause the Company's business to soften, especially in the New York area.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Assessment
Market risks relating to the Company's operations result primarily from changes in interest rates and foreign exchange rates. To address some of these risks the Company enters into various hedging transactions as described below. The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives.
Foreign Currency Risk
The Company periodically enters into foreign exchange forward contracts and option contracts to hedge some of its foreign exchange exposure. The Company's objective in managing the exposure to changes in foreign currency exchange is to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues and challenges. The Company uses such contracts to hedge exposure to changes in foreign currency exchange rates, primarily in Western Europe, associated with purchases denominated in foreign currency. During Fiscal 2001, the principal currencies hedged were the Euro, Italian lira, German mark, British pound, and the French franc. On an on-going basis, the principal currencies hedged will be the Euro and the British Pound. A uniform 10% weakening as of February 4, 2001 in the value of the dollar relative to the currencies in which the purchases are denominated would have resulted in a $8.3 million decrease in gross profit for fiscal year-ended February 2, 2002. Comparatively, the result of a uniform 10% weakening as of January 30, 2000 in the value of the dollar relative to the currencies in which the purchases are denominated would have resulted in a $8.7 million decrease in gross profit for Fiscal 2000.
This calculation assumes that each exchange rate would change in the same direction relative to the United States dollar. In addition to the direct effects in exchange rates, which are a changed dollar value of the resulting purchases, changes in exchange rates also affect the volume of purchases or the foreign currency purchase price as competitor's prices become more or less attractive.
Interest Rate Risk
The Company's earnings are affected by changes in short-term interest rates as a result of its revolving credit agreement. If short-term interest rates averaged 2% more in Fiscal 2001, the Company's interest expense would have increased, and net loss before taxes would have increased by $0.7 million. Comparatively, if short-term interest rates averaged 2% more in Fiscal 2000, the Company's interest expense would have increased, and income before taxes would have decreased by $0.9 million. In the event of a change of such magnitude, management would likely take actions to mitigate its exposure to the change. However, due to uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data listed below are included in the report on the page indicated.
All other schedules are omitted either because they are not applicable or the required information is disclosed in the Consolidated financial statements or notes thereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information to be set forth in the section entitled "Election of Directors" in the definitive proxy statement involving the election of directors in connection with the Annual Meeting of Stockholders of Holdings to be held on June 19, 2002 (the "Proxy Statement"), which section (other than the Compensation Committee Report and the Audit Committee Report) is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after February 2, 2002, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
The information required with respect to executive officers is set forth in Part I of this report under the heading "Executive Officers of the Registrant," pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information to be set forth in the section entitled "Election of Directors" in the Proxy Statement, which section (other than the Compensation Committee Report and the Audit Committee Report) is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information to be set forth in the section entitled "Voting Rights" and "Security Ownership of Management" in the Proxy Statement, which sections are incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information to be set forth in the section entitled "Election of Directors" in the Proxy Statement, which section (other than the Compensation Committee Report and the Audit Committee Report) is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) - The response to this portion of Item 14 is submitted as a separate section of this report entitled "List of Financial Statements and Financial Statement Schedules."
(3) Exhibits:
Exhibit Name of Exhibit
2.1 Second Amended Joint Plan of Reorganization for Barney's, Inc. ("Barneys") and certain of its affiliates proposed by Whippoorwill Associates, Inc. ("Whippoorwill"), Bay Harbour Management L.C. ("Bay Harbour") and the Official Committee of Unsecured Creditors dated November 13, 1998 (the "Plan of Reorganization") (1)
2.2 Supplement to the Plan of Reorganization dated December 8, 1998 (1)
2.3 Second Supplement to the Plan of Reorganization dated December 16, 1998 (1)
3.1 Certificate of Incorporation of Barneys New York, Inc. ("Holdings"), filed with the Secretary of State of the State of Delaware on November 16, 1998 (1)
3.2 Certificate of Designation for Series A Preferred Stock of Holdings filed with the Secretary of State of the State of Delaware on December 24, 1998 (1)
3.3 By-laws of Holdings (1)
4.1 Specimen of Holdings' Common Stock Certificate (1)
10.1 Credit Agreement, among Barneys, Barneys (CA) Lease Corp., Barneys (NY) Lease Corp., Basco All-American Sportswear Corp., BNY Licensing Corp. and Barneys America (Chicago) Lease Corp., as Borrowers, the lenders party thereto, Citicorp USA, Inc. ("CUSA"), as Administrative Agent for such lenders, and General Electric Capital Corporation, as Documentation Agent (the "Credit Agreement"), dated as of January 28, 1999 (1)
10.2 First Amendment to the Credit Agreement dated as of March 23, 1999 (1)
10.3 Second Amendment to the Credit Agreement dated as of June 2, 1999 (2)
10.4 Third Amendment to the Credit Agreement dated as of November 30, 1999 (3)
10.5 Fourth Amendment to the Credit Agreement dated as of March 17, 2000 (5)
10.6 Fifth Amendment to the Credit Agreement dated as of March 30, 2001 (8)
10.7 Sixth Amendment to the Credit Agreement dated as of December 12, 2001 ( 7 )
10.8 Guarantee by Holdings in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.9 Security Agreement by Holdings in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.10 Pledge Agreement by Holdings in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.11 Pledge Agreement by Barneys in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.12 Security Agreement by Barneys in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
Exhibit Name of Exhibit
10.13 Trademark Security Agreement by Barneys and BNY Licensing Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.14 Cash Collateral Pledge Agreement by Barneys in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.15 Pledge Agreement by Barneys America, Inc. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.16 Security Agreement by Barneys America, Inc. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.17 Security Agreement by PFP Fashions Inc. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.18 Security Agreement by Barneys (CA) Lease Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.19 Security Agreement by Barneys (NY) Lease Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.20 Security Agreement by Basco All-American Sportswear Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.21 Security Agreement by Barneys America (Chicago) Lease Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.22 Security Agreement by BNY Licensing Corp. in favor of CUSA as Administrative Agent dated as of January 28, 1999 (1)
10.23 Subordinated Note issued by Barneys and payable to Isetan of America, Inc. ("Isetan") dated January 28, 1999 (the "Isetan Note") (1)
10.24 Guarantee by Holdings of the Isetan Note dated January 28, 1999 (1)
10.25 Subordinated Note issued by Barneys and payable to Bi-Equipment Lessors LLC, dated January 28, 1999 (the "Bi-Equipment Lessors Note") (1)
10.26 Guarantee by Holdings of the Bi-Equipment Lessors Note dated as of January 28, 1999 (1)
10.27 Security Agreement by Barneys in favor of Bi-Equipment Lessors LLC dated as of January 28, 1999 (1)
10.28 License Agreement among Barneys, BNY Licensing Corp. and Barneys Japan Co. Ltd. dated as of January 28, 1999 (1)
10.29 Stock Option Plan for Non-Employee Directors effective as of March 11, 1999. (1)
10.30 Employee Stock Option Plan (6)
10.31 Registration Rights Agreement by and among Holdings and the Holders party thereto dated as of January 28, 1999 (the "Registration Rights Agreement) (1)
10.32 Amendment No.1 dated as of February 1, 2000, to the Registration Rights Agreement (3)
10.33 Letter Agreement, dated January 28, 1999, among Bay Harbour, Whippoorwill, Isetan and Holdings (4)
Exhibit Name of Exhibit
10.34 Employment Agreement between Holdings and Howard Socol effective as of January 8, 2001 (8)
10.35 Registration Rights Agreement between Holdings and Howard Socol dated as of January 8, 2001 (8)
21 Subsidiaries of the registrant (9)
23 Consent of Independent Auditors (9)
(1) Incorporated by reference to Barneys' Registration Statement on Form 10 (the "Form 10") filed with the Securities and Exchange Commission (the "Commission") on June 1, 1999.
(2) Incorporated by reference to Barneys' Quarterly Report on Form 10-Q for the quarter ended May 1, 1999.
(3) Incorporated by reference to Amendment No. 2 to the Form 10 filed with the Commission on February 15, 2000.
(4) Incorporated by reference to Amendment No. 1 to the Form 10 filed with the Commission on October 13, 1999.
(5) Incorporated by reference to Amendment No. 3 to the Form 10 filed with the Commission on April 21, 2000.
(6) Incorporated by reference to Exhibit A to the Proxy Statement of the Company for its annual meeting of Stockholders held on June 27, 2000.
(7) Incorporated by reference to Barneys' Quarterly Report on Form 10-Q for the quarter ended November 3, 2001.
(8) Incorporated by reference to Barneys' Annual Report on Form 10-K for the year ended February 3, 2001.
(9) Filed herewith.
b. Reports on Form 8-K - The Company did not file any reports on Form 8-K during the quarter ended February 2, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BARNEYS NEW YORK, INC. (Registrant)
By: /s/ Steven M. Feldman ----------------------------------- Name: Steven M. Feldman Title: Executive Vice President and Chief Financial Officer
Date: April 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Name Date
/s/ Shelley F. Greenhaus April 27, 2002 - ------------------------------------ Shelley F. Greenhaus Director
/s/John Halpern April 27, 2002 - ------------------------------------ John Halpern Director
/s/Yasuo Okamoto April 27, 2002 - ------------------------------------ Yasuo Okamoto Director
/s/Allen I. Questrom April 27, 2002 - ------------------------------------ Allen I. Questrom Director
/s/Howard Socol April 27, 2002 - ------------------------------------ Howard Socol Chairman, President, Chief Executive Officer and Director
/s/Carl Spielvogel April 27, 2002 - ------------------------------------ Carl Spielvogel Director
/s/David A. Strumwasser April 27, 2002 - ------------------------------------ David A. Strumwasser Director
/s/Robert J. Tarr, Jr. April 27, 2002 - ------------------------------------ Robert J. Tarr, Jr. Director
/s/Douglas P. Teitelbaum April 27, 2002 - ------------------------------------ Douglas P. Teitelbaum Director
/s/Steven A. Van Dyke April 27, 2002 - ------------------------------------ Steven A. Van Dyke Director
/s/Steven M. Feldman April 27, 2002 - ------------------------------------ Steven M. Feldman Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Annual Report on Form 10-K
Item 14(a) (1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedules
Certain Exhibits
Financial Statement Schedules
Year-ended February 2, 2002
Barneys New York, Inc.
New York, New York
Form 10-K--Item 14(a) (1) and (2)
BARNEYS NEW YORK, INC. AND SUBSIDIARIES
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Barneys New York, Inc. and subsidiaries, included in the Annual Report on Form 10-K of the Company for the year ended February 2, 2002, are incorporated by reference in Item 8:
Consolidated Balance Sheets--February 2, 2002 and February 3, 2001
Consolidated Statements of Operations-- Year ended February 2, 2002, February 3, 2001 and January 29, 2000
Consolidated Statements of Changes in Stockholders' Equity -- Year ended February 2, 2002, February 3, 2001 and January 29, 2000
Consolidated Statements of Cash Flows Year ended February 2, 2002, February 3, 2001 and January 29, 2000
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of Barneys New York, Inc. and subsidiaries, is included in Item 14(d):
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Barneys New York, Inc.
We have audited the accompanying consolidated balance sheets of Barneys New York, Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended February 2, 2002. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Barneys New York, Inc. and subsidiaries at February 2, 2002 and February 3, 2001, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York April 5, 2002
Barneys New York, Inc. and Subsidiaries
Consolidated Balance Sheets (In thousands, except share data)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
Barneys New York, Inc. and Subsidiaries
Consolidated Statements of Operations (In thousands, except per share data)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
Barneys New York, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
Barneys New York, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation:
Barneys New York, Inc. ("Holdings") and Subsidiaries (collectively the "Company") is a retailer of men's and women's apparel and accessories and items for the home. The Company operates 20 stores throughout the United States, including its three flagship stores in New York, Beverly Hills and Chicago. The Company has also entered into licensing arrangements, pursuant to which the Barneys New York trade name is licensed for use in Asia.
2. Summary of Significant Accounting Policies:
(a) Principles of Consolidation -
The consolidated financial statements include the accounts of Holdings and its wholly-owned and majority-owned subsidiaries in which the Company has a controlling financial interest and exercises control over their operations. Intercompany investments and transactions have been eliminated in consolidation.
(b) Fiscal Years -
References in these financial statements to "2001", "2000" and "1999" are for the 52 weeks ended February 2, 2002, the 53 weeks ended February 3, 2001 and the 52 weeks ended January 29, 2000, respectively.
(c) Cash and Cash Equivalents -
All highly liquid investments with a remaining maturity of three months or less at the date of acquisition are classified as cash equivalents. The carrying value approximates their fair value.
(d) Accounts Receivable and Finance Charges -
The Company provides credit to its customers and performs on-going credit reviews of its customers. Concentration of credit risk is limited because of the large number of customers. Finance charge income recorded in Fiscal 2001, 2000 and 1999 approximated $4,661,000, $4,462,000 and $4,216,000, respectively, and is included in other-net in the statement of operations.
Notes to Consolidated Financial Statements (continued)
(e) Inventories -
Merchandise inventories are stated at the lower of FIFO (first-in, first-out) cost or market, as determined by the retail inventory method. Merchandise is purchased from many different vendors based throughout the world. In certain instances, the Company has formal and informal arrangements with vendors covering the supply of goods. While no vendor supplies the Company with an individual designer brand equal to more than 10% of its inventory, if certain vendors were to suspend shipments, the Company might, in the short term, have difficulty identifying comparable sources of supply. However, management believes that alternative supply sources do exist to fulfill the Company's requirements should a supply disruption occur with any major vendor.
(f) Fixed Assets -
Pursuant to American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), property and equipment were restated at approximate fair market value at January 30, 1999. Fixed assets acquired after January 30, 1999 are recorded at cost. Depreciation is computed using the straight-line method. Fully depreciated assets are written off against accumulated depreciation. Furniture, fixtures and equipment are depreciated over their useful lives. Leasehold improvements are amortized over the shorter of the useful life or the lease term.
(g) Excess Reorganization Value -
Excess reorganization value represents the adjustment of the Company's balance sheet for reorganization value in excess of amounts allocable to identifiable assets. Excess reorganization value is being amortized using the straight-line method over 20 years.
(h) Earnings per Common Share ("EPS") -
Basic EPS is computed as net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding. Diluted EPS reflects the incremental increase in common shares outstanding assuming the exercise of stock options and warrants that would have had a dilutive effect on earnings per common share. Options and warrants to acquire an aggregate of 1,734,634 and 787,724 and 1,810,547 shares of common stock (issued pursuant to the Company's stock option plans and other outstanding options and warrants, all of which are discussed in Note 9(b)) were not included in the computation of diluted EPS for Fiscal 2001, 2000 and 1999, respectively, as including them would have been anti-dilutive. Net income (loss) attributed to common stockholders is not materially affected by the 1% dividend on the 5,000 issued and outstanding shares of preferred stock.
(i) Impairment of Assets -
The Company records impairment losses on long-lived assets (including excess reorganization value) when events and circumstances indicate that the assets might be impaired. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of the individual stores and consolidated undiscounted net cash flows for long-lived assets, not identifiable to individual stores. An impairment loss recognized will be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. If quoted market prices are not available, the estimate of fair value will be based on the best information available under the circumstances, such as prices for similar assets or the present value of estimated expected future cash flows.
Notes to Consolidated Financial Statements (continued)
(j) Foreign Exchange Contracts -
On February 4, 2001, the Company was required to adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded for each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings.
The Company in the normal course of business routinely enters into forward foreign currency contracts to reduce the risk associated with currency movement related to committed inventory purchases denominated in foreign currency. The Company does not enter into these contracts for the purpose of trading or speculation. In addition, the Company does not designate these transactions as hedges of the anticipated purchases, and therefore, unrealized gains and losses are recognized currently in earnings. Accordingly, in connection with these forward foreign currency contracts outstanding at year end, the Company recognized a loss of approximately $300,000 which was included in cost of sales in the statement of operations and as a reduction to inventory.
At February 2, 2002, the notional amount and estimated fair value, utilizing quotes from external sources, of the Company's outstanding forward foreign currency contracts is detailed below:
Foreign Currency Notional Amount Estimated Fair Value
Euro 18,146,000 17,772,000 British Pound 1,625,000 1,549,000
(k) Revenue Recognition -
Sales, recognized at the point of sale, consist of sales of merchandise, net of returns. Net sales in the Statement of Operations include bulk sales of merchandise to jobbers and an estimate for merchandise returns, where a right of return exists, in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists." Bulk sales of merchandise to jobbers were $0 in Fiscal 2001 and Fiscal 2000, and $1,225,000 in Fiscal 1999.
(l) Advertising Expenses -
The Company expenses advertising costs upon first showing. Advertising expenses were approximately $6,647,000, $6,558,000, and $3,646,000 in Fiscal 2001, 2000, and 1999, respectively.
(m) Income Taxes -
The Company records income tax expense using the liability method. Under this method, deferred tax assets and liabilities are estimated for the future tax effects attributable to temporary differences between the financial statement and tax basis of assets and liabilities.
(n) Estimates -
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Notes to Consolidated Financial Statements (continued)
3. Fixed Assets:
Fixed assets consist of the following:
February 2, February 3, Useful Life ($ in thousands) 2002 2001 (In Years) ---------- ---------- ----------- Furniture, fixtures and equipment $ 31,404 $ 29,365 3 to 7 Leasehold improvements 45,267 36,390 2 to 14 ---------- ---------- Total 76,671 65,755 Accumulated depreciation and amortization (26,530) (17,585) ---------- ---------- Net fixed assets $ 50,141 $ 48,170 ========== ==========
4. Debt:
(a) Revolving Credit Facility -
In January 1999, the Company entered into a $120,000,000 revolving credit facility with a $40,000,000 sublimit for the issuance of letters of credit (the "Credit Agreement") with Citicorp USA, Inc., General Electric Capital Corporation, BNY Financial Corporation, and National City Commercial Finance, Inc. maturing on January 28, 2003. As a result of the prevailing economic conditions in 2001, and the resulting financial impact on the Company, in December 2001, the Company entered into an amendment to its Credit Agreement (the "December Amendment"), which among other things, amended and/or eliminated certain of the financial covenants contained therein through fiscal 2002 and decreased the commitment pursuant to that agreement to $105,000,000. In addition, the maturity of the Credit Agreement was extended to February 15, 2003. At February 2, 2002, there were outstanding loans of approximately $23,581,000 and $12,677,000 was committed under unexpired letters of credit. Additionally, as collateral for performance on certain leases and as credit guarantees, Barneys is contingently liable under standby letters of credit in the amount of approximately $10,383,000.
Revolving credit availability is calculated as a percentage of eligible inventory (including undrawn documentary letters of credit) and a percentage of the Barneys private label credit card receivables plus trademark availability (such amount subject to a downward adjustment as defined). The amount of trademark availability is currently $5,000,000. Interest rates on borrowings under the Credit Agreement are either the Base Rate (as defined), which approximates Prime plus 1.75%, or LIBOR plus 2.75%. The interest rate at February 2, 2002 was 4.8%.
The Credit Agreement, as amended, contains financial covenants relating to net worth, earnings (specifically earnings before interest, taxes, depreciation and amortization ("EBITDA")) and capital expenditures. In addition, the Company is subject to a 30 day clean-down provision within the 90 day period commencing December 1 of each year wherein the Company's outstanding revolving loans and letter of credit obligations may not exceed $65,000,000. Pursuant to prior amendments to the Credit Agreement, the Company and the lenders under the Revolving Credit Facility adjusted the definition of EBITDA to allow for the inclusion of up to $3 million of cash equity contributed to the Company.
The Company believes that it will be in compliance with the financial covenants and clean down provision contained in the Credit Agreement for the fiscal year ending February 1, 2003. However, any material deviations from the Company's forecasts could require the Company to seek additional waivers or amendments of covenants, alternative sources of financing or to reduce expenditures. There can be no assurance that such waivers, amendments or alternative financing could be obtained, or if obtained, would be on terms acceptable to the Company.
Notes to Consolidated Financial Statements (continued)
Obligations under the Credit Agreement are secured by a first priority and perfected lien on substantially all of the assets of the Company. The Credit Agreement provides for a fee of 1.50% to 2.50% per annum on the daily average letter of credit amounts outstanding and a commitment fee of 0.375% on the unused portion of the Credit Agreement.
In connection with the origination of the Credit Agreement and the December Amendment, the Company incurred fees of $2,825,000 and $525,000, respectively. Such fees are being amortized over the life of the Credit Agreement as interest and financing costs. The unamortized portion of these fees are included in Other assets at February 2, 2002.
(b) $22,500,000 Subordinated Note -
This note bears interest at the stated rate of 10% per annum payable semi-annually, and matures on January 28, 2004.
The fair value of this note was estimated to be approximately $20,648,000 at January 30, 1999. This amount was not necessarily representative of the amount that could be realized or settled. The difference between the face amount and the fair market value was recorded as a debt discount and is being amortized using the effective interest method. The fair market value was based upon a valuation from an investment banking firm utilizing discounted cash flows and comparable company methodology. After amortization of the debt discount, this note was recorded at $21,678,000 and $21,294,000 at February 2, 2002 and February 3, 2001, respectively.
(c) Equipment Lessors Notes -
These promissory notes, totaling $35,789,000, bear interest at the stated rate of 11 1/2% per annum payable semi-annually, mature on January 28, 2004, and are secured by a first priority lien on the equipment that was the subject of each of the respective equipment leases. The estimated fair value of the Equipment Lessors Notes approximates face value as estimated by an investment banking firm utilizing discounted cash flows and comparable company methodology.
Whippoorwill Associates, Inc. ("Whippoorwill"), one of the Company's principal shareholders, owns an approximate 25% beneficial interest in the holder of one of the Equipment Lessor Notes with an aggregate principal amount of $34.2 million.
(d) Other -
During Fiscal 2001, 2000 and 1999, the Company paid interest of approximately $9,835,000, $12,100,000 and $8,200,000, respectively.
Notes to Consolidated Financial Statements (continued)
5. Commitments and Contingencies:
(a) Leases -
The Company leases real property and equipment under agreements that expire at various dates. Certain leases contain renewal provisions and generally require the Company to pay utilities, insurance, taxes and other operating expenses. In addition, certain real estate leases provide for escalation rentals based upon increases in lessor's costs or provide for additional rent contingent upon the Company increasing its sales.
At February 2, 2002, total minimum rentals at contractual rates are as follows for the respective fiscal years:
(000's) -------------- 2002 $ 21,695 2003 36,108 2004 23,070 2005 22,712 2006 21,166 Thereafter 295,012 -------------- Total minimum rentals $ 419,763 ==============
Total rent expense in Fiscal 2001, 2000, and 1999, was $31,701,000, $29,464,000, and $30,886,000, respectively, which included percentage rent of $37,000, $135,000, and $86,000, in each of the respective periods.
(b) Litigation -
The Company is party to certain litigation and asserted claims and is aware of other potential claims. Management believes that pending litigation in the aggregate will not have a material adverse effect on the Company's financial position, cash flows or results of operations.
6. Income Taxes:
Upon emergence from bankruptcy, Holdings made a Section 338(g) election (the "Election") with respect to the acquisition under applicable provisions of the Internal Revenue Code ("IRC"). The tax effects of making the Election resulted in Barneys and each of its subsidiaries being treated, for federal income tax purposes, as having sold its assets to a new corporation which purchased the same assets as of the beginning of the following day. The Company used existing net operating loss carryfowards to reduce any gain incurred as a result of the sale. The Company was, however, subject to alternative minimum tax ("AMT") and such liability was recorded by the Company.
For Fiscal 2001, 2000, and 1999, the Company recorded provisions for income taxes of approximately $439,000, $546,000, and $363,000, respectively, which principally relates to state and local income and franchise taxes. The AMT credit carryforward of $69,000 can be carried forward indefinitely while the net operating loss carryforwards of $25,656,000 begin to expire in 2020. In the comparable periods, the Company paid capital, franchise and income taxes, net of refunds, of approximately $359,000, $542,000, and $80,000, respectively.
Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company's deferred tax assets and liabilities are as follows ($ in thousands):
Notes to Consolidated Financial Statements (continued)
For Fiscal 2001, 2000 and 1999, the recorded income tax expense differs from the amount that would result from applying statutory tax rates because the Company sustained net operating losses for which no tax benefit was recorded since their future utilization was uncertain. Accordingly, the Company recorded a valuation allowance of $9,168,000 and $2,862,000 in Fiscal 2001 and 2000, respectively.
7. Related Party Transactions:
(a) Flagship store leases -
Until June 26, 2001, subsidiaries of Holdings leased the Madison Avenue, Beverly Hills and Chicago stores from Isetan Co. Ltd. ("Isetan"), a minority stockholder of Holdings. Effective on such date, Isetan conveyed its right, title and interest as lessor pursuant to each of the flagship store leases to a third party. The lease for the New York store is for a term of twenty years, with four options to renew of ten years each. The lease for the Chicago store is for a term of ten years, with three options to renew of ten years each. The lease for the Beverly Hills store is for a term of twenty years, with three options to renew of ten years each. The leases for the flagship stores are all triple-net leases. In the case of the Beverly Hills flagship store, Barneys is also responsible for the rent payable pursuant to the existing ground lease.
Pursuant to the terms of these leases, the Company is required to pay base rent, as defined, and all operating expenses. Total rent expense (excluding operating expenses) related to these leases was approximately $6,536,000 through June 2001, and $15,635,000 and $15,767,000 in Fiscal 2000 and Fiscal 1999, respectively.
(b) Licensing arrangements -
BNY Licensing, a wholly-owned subsidiary of Barneys, is party to licensing arrangements pursuant to which (i) 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, and (ii) 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).
Pursuant to the trademark license agreement between BNY Licensing and Barneys Japan Company ("Barneys Japan") (an affiliate of Isetan), a royalty-bearing, exclusive right and license has been granted to Barneys Japan to operate retail store locations in Japan and a royalty-bearing, non-exclusive right and license to operate a department within a retail store in Singapore, under the trademark and trade names "BARNEYS NEW YORK" (the "Trademark License
Notes to Consolidated Financial Statements (continued)
Agreement"). In addition, Barneys Japan has been granted a license to make, sell and distribute certain products bearing the trademark "BARNEYS NEW YORK" and to use "BARNEYS NEW YORK" as part of its corporate name. The Trademark License Agreement expires on December 31, 2015; however, Barneys Japan may renew the agreement for up to three additional ten year terms provided certain conditions are met. Under the terms of the agreement, Barneys Japan pays BNY Licensing or its assignee a minimum royalty of 2.50% of a minimum net sales figure set forth in the agreement (the "Minimum Royalty") and an additional royalty of 2.50% of net sales in excess of the minimum net sales and sales generated from the expansion of Barneys Japan store base (beyond three stores) and business methods. In accordance with a prior arrangement, Isetan received an absolute assignment of 90% of the annual minimum royalties.
Pursuant to the license agreement between BNY Licensing and Barneys Asia Co., BNY Licensing has granted to Barneys Asia, a royalty-free, exclusive right and license to sublicense the right to operate retail store locations and departments with retail stores in Taiwan, Korea, Singapore, Thailand, Malaysia, Hong Kong, Indonesia, India, China and the Philippines, and a non-exclusive right and license to sublicense the same activities in Singapore, under the trademark and trade name "BARNEYS NEW YORK". In addition, Barneys Asia has been granted a license to sublicense the right to make, sell and distribute certain products bearing the trademark "BARNEYS NEW YORK". Further, Barneys Asia has been granted a license to use "BARNEYS NEW YORK" as part of its corporate name. All sublicenses granted by Barneys Asia under this agreement must be royalty-bearing. The Barneys Asia License Agreement expires on December 31, 2015; however, Barneys Asia may renew the agreement for up to three additional ten year terms.
Pursuant to the terms of the trademark license agreement between BNY Licensing and an affiliate of Isetan, the Company is entitled to receive a minimum royalty over the term of this agreement ranging from 44,102,000 to 61,195,106 Japanese Yen ($332,000 to $460,000 at the February 2, 2002 conversion rate of 133.0 Japanese yen to one United States dollar) a year. The minimum royalty revenue is recognized monthly as the license fee accrues. The Company recognized approximately $326,000, $330,000 and $240,000 in royalty income for Fiscal 2001, 2000 and 1999, respectively.
8. Stockholders' Equity:
Holdings' Certificate of Incorporation (the "Charter") provides that the total number of all classes of stock which Holdings will have authority to issue is 35,000,000 shares, of which 25,000,000 will be Holdings common stock, and 10,000,000 shares will be preferred stock (of which 20,000 shares have been issued (see (d) below)), both having a par value of $0.01 per share. The rights and preferences of preferred stock are established by the Company's Board of Directors upon issuance. Holdings is prohibited by its Charter from issuing any class or series of non-voting securities.
(a) Holdings Common Stock -
Each share of Holdings common stock entitles its holder to one vote. The holders of record of Holdings common stock will be entitled to participate equally in any dividend declared by the Board of Directors of Holdings. Each share of Holdings common stock is entitled to share ratably in the net worth of Holdings upon dissolution. So long as any shares of Preferred Stock are outstanding, no dividends on Holdings common stock may be paid until all accrued and unpaid dividends on the preferred stock have been paid.
(b) Unsecured Creditors Warrants -
Pursuant to the Company's plan of reorganization, holders of certain allowed general unsecured claims were issued warrants (the "Unsecured Creditors Warrants") to purchase an aggregate of up to 1,013,514 shares of Holdings Common Stock at an exercise price of $8.68 per share. The Unsecured Creditors Warrants expired on May 30, 2000. Holders of 826,961 warrants exercised their rights to acquire an equivalent amount of Holdings common stock. Aggregate proceeds to the Company were approximately $7,200,000.
Notes to Consolidated Financial Statements (continued)
(c) Isetan Warrants -
Pursuant to the Company's plan of reorganization, Isetan was issued a warrant (the "Isetan Warrants") to purchase 287,724 shares of Holdings Common Stock at an exercise price of $14.68 per share. This warrant expired on January 29, 2002.
(d) Preferred Stock -
The 20,000 shares of Series A preferred stock have an aggregate liquidation preference of $2,000,000 (the "Liquidation Preference"), plus any accrued and unpaid dividends thereon (whether or not declared). Dividends on the preferred stock are cumulative (compounding annually) from January 28, 1999 (the "Effective Date") and are payable when and as declared by the Board of Directors of Holdings, at the rate of 1% per annum on the Liquidation Preference. No dividends shall be payable on any shares of Holdings common stock until all accrued and unpaid dividends on the preferred stock have been paid.
In accordance with SAB No. 64, Redeemable Preferred Stock, the Company recorded the two separate issuances of redeemable preferred stock at their respective fair values. The 5,000 shares originally issued to Bay Harbour were valued at $500,000. The remaining 15,000 shares were issued to the Barneys Employees Stock Plan Trust (the "Trust"). See Note 9(a) Employees Stock Plan below.
The shares of preferred stock will not be redeemable prior to the sixth anniversary of the Effective Date. On or after the sixth anniversary of the Effective Date, the preferred stock will be redeemable at the option of Holdings for cash, in whole or in part, at an aggregate redemption price equal to the Liquidation Preference, plus any accrued and unpaid dividends thereon. In addition, Holdings will be required to redeem the preferred stock in whole on the tenth anniversary of the Effective Date at an aggregate redemption price equal to the Liquidation Preference, plus any accrued and unpaid dividends thereon.
The shares of preferred stock will be convertible, in whole or in part, at the option of the holders thereof, any time on or after the earlier of the fifth anniversary of the Effective Date and the consummation of a rights offering by Holdings (which offering meets certain conditions), into 162,500 shares of Holdings common stock. Any accrued and unpaid dividends on the preferred stock will be cancelled upon conversion. Conversion rights will be adjusted to provide antidilution protection for stock splits, stock combinations, mergers or other capital reorganization of Holdings. In addition, upon a sale of Holdings, Holdings' right to redeem the preferred stock and the holders' right to convert the preferred stock will be accelerated. The preferred stock has one vote per share and votes together with the Holdings common stock on all matters other than the election of directors.
9. Employee Benefit Plans:
(a) Employees Stock Plan -
Pursuant to the plan of reorganization, Holdings established the Barneys Employees Stock Plan effective January 28, 1999 for all eligible employees and 15,000 shares of new Holdings Preferred Stock were contributed to the Barneys Employees Stock Plan Trust. This Preferred Stock will be issued to existing employees of Barneys as incentive compensation in connection with future services to be rendered to the Company. Since the 15,000 shares issued to the Trust have not yet been issued to existing employees, they are not considered as issued or outstanding. When such shares are issued to the employees, the Company will record compensation expense based on the fair value of the shares at such time. Any difference between the fair value at that time and the ultimate redemption value will be accreted as a dividend over the period up through the date on which they must be redeemed. This Plan is a profit sharing plan covering all eligible employees other than those covered by a collective bargaining agreement. Contributions under this plan are at the discretion of the Company.
Notes to Consolidated Financial Statements (continued)
(b) Stock options -
The Company has a stock option plan that provides for the granting of stock options to officers and key employees for purchase of the Company's common shares. This plan is administered by the compensation committee of the Board of Directors, whose members are not eligible for grants under this plan. These options expire ten years from the date of grant and vest 20% on the date of grant with the remainder vesting ratably over the next four years. The option price is determined by the compensation committee, but cannot be less than 100% of the fair market value of the stock (as defined) at the date the option is granted. In Fiscal 2000, pursuant to his employment agreement with the Company, Howard Socol, Chairman, President and Chief Executive Officer, was granted 792,234 options from this plan to purchase an equivalent number of shares of Holdings common stock which are to vest over the term of his employment. As of February 2, 2002, there were 315,366 shares available for future grant under this option plan.
In addition to the above, in Fiscal 1999, the Company adopted a stock option plan that provides for the granting of non-qualified stock options to non-employee members of the Company's Board of Directors. Each Eligible Director (as defined in the option plan) is granted an option to purchase 5,000 shares of Holdings common stock upon their initial appointment to the Board of Directors, exercisable at the fair market value of Holdings common stock at the date of grant. These options expire ten years from the date of grant and vest 50% on the date of grant with the remainder on the first anniversary therefrom. At the discretion of the Board of Directors, additional options may be granted to Eligible Directors on the date of the annual stockholders' meeting that takes place after the initial grant. As of February 2, 2002, all shares had been granted under this option plan.
Following is a summary of the stock option plan activity for each of the respective years:
The weighted average fair value of options granted during Fiscal 1999, 2000 and 2001 estimated on the date of grant using the Black Scholes option-pricing model was $3.39, $1.42, and $1.69, respectively. The fair values were estimated on the date of grant using the following weighted average assumptions: risk-free interest rate range of 4.38% to 6.66% depending on grant date; dividend yield of 0%; and a weighted average expected life ranging from two to 10 years. As the Company's stock is not actively traded, expected volatility was considered not applicable for purposes of this calculation.
Notes to Consolidated Financial Statements (continued)
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related Interpretations in accounting for its employee stock options. Under APB No. 25, no compensation expense is recognized because the exercise price of the stock options equals the assumed market price of the underlying stock on the date of grant.
Pro-forma disclosures, as required by Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation", are computed as if the Company recorded compensation expense based on the fair value for stock-based awards or grants. The following pro-forma information includes the effects of the options discussed above.
(c) Union Plan -
Pursuant to agreements with unions, the Company is required to make periodic pension contributions to union-sponsored multiemployer plans which provide for defined benefits for all union members employed by the Company. Union pension expense aggregated $771,000, $768,000 and $722,000 in Fiscal 2001, 2000 and 1999, respectively. The Company, at present, has no intentions of withdrawing from this plan.
(d) 401(k) and Money Purchase Plan -
Through December 2001, the Company maintained both a 401(k) Savings Plan and a Money Purchase Plan. All employees of the Company, except for certain employees covered by specific collective bargaining agreements, were eligible to participate in both plans. Pursuant to the terms of the 401(k) Plan, eligible participating employees can elect to contribute between 1% and 13% of their annual compensation up to the annual dollar limits set by the Internal Revenue Service. The Company will match 50% of the first 6% of the participant's elective contributions resulting in a maximum of 3% of total compensation. Effective January 2002, the Company amended the 401(k) Plan and the Money Purchase Plan. Prior to the effective date of the amendments, contributions to the Money Purchase Plan were made 100% by the Company in an amount equal to 3% of a participant's eligible compensation for the year in question subject to a specified cap. In addition, the 401(k) included a profit sharing feature whereby the Company could make a discretionary contribution of up to 3% of a participant's eligible compensation. The determination of whether or not a contribution is made and, if so, the amount of same, is determined by the Compensation Committee. Pursuant to the amendments, the following occurred: 1) further contributions to the Money Purchase Plan were eliminated commencing with contributions for the 2002 plan year, 2) the plans were consolidated with the new plan now called the Barneys New York Retirement Plan, 3) the adding of a non-discretionary contribution of 1.5% of a participant's eligible compensation for the year in question subject to a specified cap and 4) an increase in the maximum discretionary contribution from 3% to 4% of a participant's eligible compensation.
The aggregate expense of these plans was $1,695,000, $1,982,000 and $1,902,000 in Fiscal 2001, 2000 and 1999, respectively.
Notes to Consolidated Financial Statements (continued)
10. Other
Mr. Questrom, a member of the Board of Directors and former Chairman, President and Chief Executive Officer of the Company is also a member of the board of Polo Ralph Lauren Corporation. During Fiscal 2001, 2000 and 1999, the Company purchased at retail approximately $1,558,000, $2,758,000, and $2,682,000, respectively, of products from Polo Ralph Lauren Corporation.
Bay Harbour Management L.C. ("Bay Harbour") and Whippoorwill, who collectively beneficially own approximately 77% of the outstanding shares of Holdings common stock, are parties to a Stockholders Agreement, dated as of November 13, 1998 (the "Stockholders Agreement"), which sets forth their agreement with respect to certain matters relating to the shares of Holdings common stock held by them. Pursuant to the Stockholders Agreement, each of Bay Harbour and Whippoorwill have agreed to (i) grant rights of first offer as well as tag along rights in the event of a transfer of shares, (ii) grant the right to participate in an acquisition of additional shares of Holdings common stock by one of them, and (iii) give the other a right of first refusal to purchase shares of Holdings common stock which one of them has requested Holdings to register pursuant to the Registration Rights Agreement entered into on the Effective Date. In addition, Bay Harbour and Whippoorwill have agreed to take all actions necessary to elect three designees of each, one designee of Isetan, the chief executive officer of Holdings, and three independent directors, to the Board of Directors of Holdings. The Stockholders Agreement also generally prohibits each of Bay Harbour and Whippoorwill from voting the shares of Holdings common stock held by it in favor of amending Holdings' Certificate of Incorporation or Bylaws or a sale of the Company without the consent of the other.
On the Effective Date, pursuant to the plan of reorganization, Messrs. Greenhaus and Strumwasser, who are principals and officers of Whippoorwill (which is a stockholder of Holdings), and Messrs. Teitelbaum and Van Dyke, who are principals of Bay Harbour (which is a stockholder of Holdings), and Mr. Halpern, became members of the board of directors of Holdings.
Holdings guaranteed the obligations of Barneys and its subsidiaries under the $22,500,000 Subordinated Note, the Equipment Lessors Notes, the flagship store leases and the new Licensing Arrangements.
Approximately 39% of the Company's employees are covered under collective bargaining agreements and approximately 34% of the Company's employees are covered under collective bargaining agreements expiring prior to February 1, 2003.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets, including excess reorganization value. Among other things, SFAS No. 142 requires that goodwill no longer be amortized, but rather be tested annually for impairment. This statement is effective for fiscal years beginning after December 15, 2001. Accordingly, we will adopt SFAS No. 142 effective Fiscal 2002 and are evaluating the effect such adoption may have on our consolidated results of operations and financial position. Amortization expense related to excess reorganization value was $8,800,000 in each of Fiscal 2001 and 2000.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets" was issued. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Accordingly, the Company will adopt SFAS No. 144 effective Fiscal 2002 and does not expect that the adoption will have a material impact on its consolidated results of operations or financial position.
Notes to Consolidated Financial Statements (continued)
11. Quarterly Financial Data (Unaudited)
(in thousands, except per share amounts)
2001 - Quarter Ended ------------------------------------------------- 5/5/01 8/4/01 11/3/01 2/2/02 ------ ------ ------- ------ Net sales $94,069 $ 85,146 $ 89,408 $ 102,546 Gross profit 43,220 38,808 36,623 43,673 Net (loss) income (3,301) (3,860) (8,448) 438 Basic and diluted EPS (0.24) (0.28) (0.61) 0.03
2000 - Quarter Ended ------------------------------------------------- 4/29/00 7/29/00 10/28/00 2/3/01 ------- ------- -------- ------ Net sales $96,611 $ 84,252 $ 110,228 $ 113,230 Gross profit 44,569 40,856 51,688 50,483 Net (loss) income (934) (3,589) 3,283 1,850 Basic and diluted EPS (0.07) (0.26) 0.24 0.13
Schedule II -- Valuation and Qualifying Accounts
Barneys New York, Inc. and Subsidiaries
February 2, 2002
(in thousands)
- ---------------------- (a) Primarily provisions for doubtful accounts. (b) Primarily uncollectible accounts charged against the allowance provided therefor.
EXHIBIT INDEX -------------
Exhibit Name of Exhibit - ------- ---------------
2.1 Second Amended Joint Plan of Reorganization for Barney's, Inc. ("Barneys") and certain of its affiliates proposed by Whippoorwill Associates, Inc. ("Whippoorwill"), Bay Harbour Management L.C. ("Bay Harbour") and the Official Committee of Unsecured Creditors dated November 13, 1998 (the "Plan of Reorganization") (1)
2.2 Supplement to the Plan of Reorganization dated December 8, 1998 (1)
2.3 Second Supplement to the Plan of Reorganization dated December 16, 1998 (1)
3.1 Certificate of Incorporation of Barneys New York, Inc. ("Holdings"), filed with the Secretary of State of the State of Delaware on November 16, 1998 (1)
3.2 Certificate of Designation for Series A Preferred Stock of Holdings filed with the Secretary of State of the State of Delaware on December 24, 1998 (1)
3.3 By-laws of Holdings (1)
4.1 Specimen of Holdings' Common Stock Certificate (1)
10.1 Credit Agreement, among Barneys, Barneys (CA) Lease Corp., Barneys (NY) Lease Corp., Basco All-American Sportswear Corp., BNY Licensing Corp. and Barneys America (Chicago) Lease Corp., as Borrowers, the lenders party thereto, Citicorp USA, Inc. ("CUSA"), as Administrative Agent for such lenders, and General Electric Capital Corporation, as Documentation Agent (the "Credit Agreement"), dated as of January 28, 1999 (1)
10.2 First Amendment to the Credit Agreement dated as of March 23, 1999 (1)
10.3 Second Amendment to the Credit Agreement dated as of June 2, 1999 (2)
10.4 Third Amendment to the Credit Agreement dated as of November 30, 1999 (3)
10.5 Fourth Amendment to the Credit Agreement dated as of March 17, 2000 (5)
10.6 Fifth Amendment to the Credit Agreement dated as of March 30, 2001 (8)
10.7 Sixth Amendment to the Credit Agreement dated as of December 12, 2001 ( 7 )
10.8 Guarantee by Holdings in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.9 Security Agreement by Holdings in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.10 Pledge Agreement by Holdings in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.11 Pledge Agreement by Barneys in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.12 Security Agreement by Barneys in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.13 Trademark Security Agreement by Barneys and BNY Licensing Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.14 Cash Collateral Pledge Agreement by Barneys in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
Exhibit Name of Exhibit - ------- ---------------
10.15 Pledge Agreement by Barneys America, Inc. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.16 Security Agreement by Barneys America, Inc. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.17 Security Agreement by PFP Fashions Inc. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.18 Security Agreement by Barneys (CA) Lease Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.19 Security Agreement by Barneys (NY) Lease Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.20 Security Agreement by Basco All-American Sportswear Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.21 Security Agreement by Barneys America (Chicago) Lease Corp. in favor of CUSA as the Administrative Agent dated as of January 28, 1999 (1)
10.22 Security Agreement by BNY Licensing Corp. in favor of CUSA as Administrative Agent dated as of January 28, 1999 (1)
10.23 Subordinated Note issued by Barneys and payable to Isetan of America, Inc. ("Isetan") dated January 28, 1999 (the "Isetan Note") (1)
10.24 Guarantee by Holdings of the Isetan Note dated January 28, 1999 (1)
10.25 Subordinated Note issued by Barneys and payable to Bi-Equipment Lessors LLC, dated January 28, 1999 (the "Bi-Equipment Lessors Note") (1)
10.26 Guarantee by Holdings of the Bi-Equipment Lessors Note dated as of January 28, 1999 (1)
10.27 Security Agreement by Barneys in favor of Bi-Equipment Lessors LLC dated as of January 28, 1999 (1)
10.28 License Agreement among Barneys, BNY Licensing Corp. and Barneys Japan Co. Ltd. dated as of January 28, 1999 (1)
10.29 Stock Option Plan for Non-Employee Directors effective as of March 11, 1999. (1)
10.30 Employee Stock Option Plan (6)
10.31 Registration Rights Agreement by and among Holdings and the Holders party thereto dated as of January 28, 1999 (the "Registration Rights Agreement) (1)
10.32 Amendment No.1 dated as of February 1, 2000, to the Registration Rights Agreement (3)
10.33 Letter Agreement, dated January 28, 1999, among Bay Harbour, Whippoorwill, Isetan and Holdings (4)
10.34 Employment Agreement between Holdings and Howard Socol effective as of January 8, 2001 (8)
Exhibit Name of Exhibit - ------- ---------------
10.35 Registration Rights Agreement between Holdings and Howard Socol dated as of January 8, 2001 (8)
21 Subsidiaries of the registrant (9)
23 Consent of Independent Auditors (9)
(1) Incorporated by reference to Barneys' Registration Statement on Form 10 (the "Form 10") filed with the Securities and Exchange Commission (the "Commission") on June 1, 1999.
(2) Incorporated by reference to Barneys' Quarterly Report on Form 10-Q for the quarter ended May 1, 1999.
(3) Incorporated by reference to Amendment No. 2 to the Form 10 filed with the Commission on February 15, 2000.
(4) Incorporated by reference to Amendment No. 1 to the Form 10 filed with the Commission on October 13, 1999.
(5) Incorporated by reference to Amendment No. 3 to the Form 10 filed with the Commission on April 21, 2000.
(6) Incorporated by reference to Exhibit A to the Proxy Statement of the Company for its annual meeting of Stockholders held on June 27, 2000.
(7) Incorporated by reference to Barneys' Quarterly Report on Form 10-Q for the quarter ended November 3, 2001.
(8) Incorporated by reference to Barneys' Annual Report on Form 10-K for the year ended February 3, 2001.
(9) Filed herewith.