-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QZKKSwOGHHU6mbH59Em0X6N4fbrs6skM1fgq9WbquPH5/jPgzqBmkztdveTf81ri OI8s5wRyUn5ldojF2GF7yg== 0000950148-97-000997.txt : 19970423 0000950148-97-000997.hdr.sgml : 19970423 ACCESSION NUMBER: 0000950148-97-000997 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970421 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARRYS JEWELERS INC /CA/ CENTRAL INDEX KEY: 0000790360 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-JEWELRY STORES [5944] IRS NUMBER: 953746316 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15017 FILM NUMBER: 97584589 BUSINESS ADDRESS: STREET 1: 111 W LEMON AVE CITY: MONROVIA STATE: CA ZIP: 91016 BUSINESS PHONE: 8183034741 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-15017 BARRY'S JEWELERS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-3746316 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 111 WEST LEMON AVENUE, MONROVIA, CA 91016 (Address of principal executive offices) Registrant's telephone number, including area code: (818) 303-4741 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 1, 1997: Common Stock, no par value, 4,029,372 shares 2 BARRY'S JEWELERS, INC. FORM 10-Q FEBRUARY 28, 1997 INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Balance Sheets February 28, 1997 and May 31, 1996 2 Statements of Operations Three and nine months ended February 28, 1997 and February 29, 1996 3 Statements of Cash Flows Nine months ended February 28, 1997 and February 29, 1996 4 Notes to Financial Statements - February 28, 1997 5 Item 2. Management's Discussion and Analysis of Financial 7 Condition and Results of Operations PART II - OTHER INFORMATION Item 3. Defaults Upon Senior Securities 11 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 3 BARRY'S JEWELERS, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT NUMBER OF COMMON SHARES)
February 28, May 31, 1997 1996 (Unaudited) (Note) --------- -------- Assets Current assets: Cash $ 236 $ 1,765 Customer receivables, net of allowance for doubtful accounts of $2,302 (February 28, 1997) and $10,930 (May 31, 1996) 68,960 68,374 Merchandise inventories 56,333 54,559 Prepaid expenses and other current assets 1,716 2,031 --------- -------- Total current assets 127,245 126,729 Net property and equipment 18,002 16,366 Deferred income taxes 122 122 Other assets, primarily deferred debt issue costs, net of accumulated amortization of $2,955 (February 28, 1997) and $1,864 (May 31, 1996) 3,077 2,756 --------- -------- Total assets $ 148,446 $145,973 ========= ======== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 62,153 $ 181 Accounts payable - trade 12,133 3,837 Other accrued liabilities 10,108 5,336 --------- -------- Total current liabilities 84,394 9,354 Long-term debt, less current maturities 50,000 103,398 Shareholders' equity Common stock, no par value: authorized - 8,000,000 shares; issued and outstanding 4,029,372 shares (February 28, 1997) and 3,999,416 shares (May 31, 1996) 33,247 33,196 (Accumulated deficit) Retained earnings (19,195) 25 --------- -------- Total shareholders' equity 14,052 33,221 --------- -------- Total liabilities and shareholders' equity $ 148,446 $145,973 ========= ========
Note: The balance sheet at May 31, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See Notes to Financial Statements. 2 4 BARRY'S JEWELERS, INC. STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF COMMON SHARES OUTSTANDING) (Unaudited)
Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- February 28, February 29, February 28, February 29, 1997 1996 1997 1996 ----------- ---------- ----------- ------------ Net sales $ 49,236 $ 50,868 $ 104,685 $ 110,732 Finance and credit insurance charges 3,593 4,004 10,775 12,051 ----------- ---------- ----------- ---------- 52,829 54,872 115,460 122,783 Costs and expenses: Cost of goods sold, buying and occupancy 32,022 27,865 68,765 63,559 Selling, general and administrative expenses 19,114 14,695 46,099 39,169 Provision for doubtful accounts 3,558 4,126 8,116 8,913 Restructuring expenses 1,336 -- 1,336 -- ----------- ---------- ----------- ---------- Operating (loss) income (3,201) 8,186 (8,856) 11,142 Interest expense, net 3,617 2,921 9,488 8,298 ----------- ---------- ----------- ---------- (Loss) income before income taxes and extraordinary item (6,818) 5,265 (18,344) 2,844 Income taxes -- 2,106 -- 1,138 ----------- ---------- ----------- ---------- (Loss) income before extraordinary item (6,818) 3,159 (18,344) 1,706 Extraordinary item -- -- 876 -- ----------- ---------- ----------- ---------- Net (loss) income ($ 6,818) $ 3,159 ($ 19,220) $ 1,706 =========== ========== =========== ========== (Loss) income per share: (Loss) income before extraordinary item ($ 1.70) $ 0.79 ($ 4.59) $ 0.43 Extraordinary item -- -- ($ 0.22) -- ----------- ---------- ----------- ---------- Net (loss) income per share ($ 1.70) $ 0.79 ($ 4.81) $ 0.43 =========== ========== =========== ========== Weighted average common shares outstanding 4,000,747 3,973,658 3,999,855 3,970,530 =========== ========== =========== ==========
See Notes to Financial Statements. 3 5 BARRY'S JEWELERS, INC. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (Unaudited)
Nine Months Ended ------------------------------- February 28, February 29, 1997 1996 -------- -------- Operating activities: Net (loss) income ($19,220) $ 1,706 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 5,088 3,444 Provision for doubtful accounts 8,116 8,913 Loss on sale or abandonment of property and equipment 75 114 Impairment of long-lived assets 1,970 -- Changes in operating assets and liabilities: Customer receivables (8,702) (13,117) Merchandise inventories (1,774) (6,019) Prepaid expenses and other current assets 365 (811) Other assets (2,460) (1,925) Accounts payable - trade 8,296 (7,093) Accrued liabilities 4,969 1,954 -------- -------- Net cash used in operating activities (3,277) (12,834) Investing activities: Purchase of property and equipment (6,923) (3,781) Proceeds from sale of equipment 83 9 -------- -------- Net cash used in investing activities (6,840) (3,772) Financing activities: Proceeds from issuance of common stock 14 87 Principal payments on long-term debt (135) (20,367) Net borrowings (repayment) under securitization facility (45,119) 47,713 Net borrowings (repayment) under revolving facility 53,828 (11,431) -------- -------- Net cash provided by financing activities 8,588 16,002 -------- -------- Decrease in cash (1,529) (604) Cash at beginning of period 1,765 954 -------- -------- Cash at end of period $ 236 $ 350 ======== ========
See Notes to Financial Statements. 4 6 BARRY'S JEWELERS, INC. NOTES TO FINANCIAL STATEMENTS PART I ITEM 1 - FOOTNOTES NOTE 1 The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and the nine months ended February 28, 1997 are not necessarily indicative of the results that may be expected for the year ending May 31, 1997. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended May 31, 1996 and its Annual Report on Form 10-K/A for the year ended May 31, 1995. NOTE 2 During the first quarter of fiscal 1997, the Company was notified that the agent under the accounts receivable securitization facility established in December 1995 (the "Securitization Facility") desired to extinguish the commitment under the facility. Consequently, on August 30, 1996, the Company entered into a Second Amended and Restated Revolving Credit Agreement with its syndicate of banks (the "Amended Revolving Credit Agreement"). Funds drawn under the Amended Revolving Credit Agreement were used, in part, to refinance the Securitization Facility, which was thereupon terminated. In connection with the Amended Revolving Credit Agreement, the Company incurred financing fees of approximately $2,300,000, which will be charged to earnings over the life of the Amended Revolving Credit Agreement. Such financing fees are included in the accompanying balance sheet. During the first quarter of 1997, the Company recorded an extraordinary charge of $876,000 that is composed of deferred financing fees related to the terminated Securitization Facility. The Amended Revolving Credit Agreement was amended on January 27, 1997 to cure certain covenant violations at November 30, 1996 as described in the Company's Form 10-Q for the quarter ended November 30, 1996 and to make other changes as described more fully in the "Liquidity and Capital Resources" section of this Form 10-Q. The amendment fee of $325,000 was charged to interest expense during the third fiscal quarter. NOTE 3 The Company currently accounts for its stock-based compensation plans using the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In 1995, the Financial Accounting Standards Board issued a new statement on accounting for stock-based compensation (SFAS 123). This statement became effective for the Company beginning June 1, 1996. Among other provisions, the statement allows companies to elect to account for stock-based compensation plans using a fair-value-based method or continue measuring 5 7 compensation expense for those plans using the intrinsic value method prescribed in APB 25. SFAS 123 requires that companies electing to continue using the intrinsic value method must make pro forma disclosures of net income and earnings per share as if the fair-value-based method of accounting had been applied. The adoption of SFAS 123 will be reflected in the Company's 1997 fiscal year-end financial statements. As the Company will continue to account for stock-based compensation using the intrinsic value method, SFAS 123 will not have an impact on the Company's results of operations or financial position but will require additional disclosures. NOTE 4 The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement is effective for the Company beginning June 1, 1996. Among other provisions, the statement standardizes the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets. The standard requires an entity to review long-lived assets for impairment and recognize a loss if expected future cash flows are less than the carrying value of the assets; such losses are measured as the difference between the carrying value and the fair market value of the assets. The fair value is determined by using quoted market prices, if available, or using a method based upon a multiple of annual earnings before income taxes, depreciation and amortization. During the quarter ended February 28, 1997, the Company recognized a $1,970,000 loss which is included within selling, general and administrative expenses in the accompanying financial statements, related principally to the impairment of leasehold improvements, property and equipment related to twenty-six under-performing stores as discussed further in Note 6. NOTE 5 During the quarter ended February 28, 1997, the Company changed its customer receivable write-off policy. Previously, the Company would fully reserve for accounts that fell within certain aged parameters but would continue internal collection efforts until such time as a determination was made that the accounts should be written off against the allowance for doubtful accounts. With this change in policy, the internal collection efforts for these fully reserved accounts will be discontinued and the accounts will be sent to outside collection agencies, at which time the account balances will be written off against the allowance for doubtful accounts. The Company adopted this change as a result of their cost savings initiatives (as discussed in Note 6) in an effort to reduce internal collection and other expenses. Concurrent with this change, the Company accelerated the write-off of approximately $6,780,000 of customer receivables against the allowance for doubtful accounts. Such charge was fully reserved for and had no material impact on current operations. NOTE 6 On January 14, 1997, the Company announced its intent to implement Company-wide restructuring and other cost savings initiatives during the third and fourth quarters of fiscal 1997 to reduce operating and administrative costs and debt. Those initiatives included declining to renew leases on twelve stores and closing eighteen to twenty-four additional under-performing stores with concurrent reductions in 6 8 overhead at the Company's remaining stores and reductions in corporate expenses. Those initiatives were expected to require various charges to third quarter operations of between $10 - $14 million. Such charges primarily included, but were not limited to, mall store rent settlements, write-off of certain leasehold improvements, employee severance costs and other related costs. Except for the mall store rent settlements, employee severance and other related costs, the charges would be non-cash in nature. The restructuring was expected to be substantially completed by May 31, 1997. During the quarter ended February 28, 1997, the Company declined to renew leases on eleven stores. Additionally, the Company replaced its executive management team late in the quarter. The new executive management team has been reviewing and reevaluating the restructuring and cost savings initiatives previously identified and has not yet determined if all initiatives will be adopted or whether certain initiatives may be added due to new operating strategies being developed. As a result, the composition of the charges will change and such charges will occur in both the third and fourth quarters as the initiatives are finalized. However, management does not currently anticipate that the magnitude of the various charges will significantly increase as compared to what was previously announced. However, due to uncertainties regarding the components of the various initiatives, an estimate of these charges cannot be reasonably determined until management's reevaluation is completed. Restructuring charges taken in the third quarter ended February 28, 1997 total $1,336,000 and primarily relate to severance and costs associated with the eleven stores closed during the quarter. Additionally, the Company established a $1,095,000 reserve during the third quarter to reduce the carrying value of its merchandise inventory. The reserve was established to recognize the probable diminution in value of certain of the Company's aged inventory that will be recognized as it returns such merchandise to vendors, sells it in bulk or marks it down below cost for sale to its customers. The Company's decision to hasten the liquidation of this aged inventory is part of the cost savings initiatives identified in an effort to improve the Company's cash flow. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below should be read in conjunction with the Financial Statements of the Company and the Notes to the Financial Statements included elsewhere in this Form 10-Q. Except for the historical information contained herein, certain of the matters discussed in this quarterly report are "forward-looking statements," as defined in Section 21E of the Securities Exchange Act of 1934, which involve certain risks and uncertainties, which could cause actual results to differ materially from those discussed herein including, but not limited to, risks 7 9 relating to general economic conditions, especially as such conditions impact retail sales in general and sales in the retail credit jewelry market in particular, bad debt experience, which is also impacted by general economic conditions, the transition to value pricing as the Company's principal marketing strategy, the Company's operating losses, the Company's need for additional financing or liquidity, growth and acquisition risks, collection of accounts receivable and competition. See the relevant discussion elsewhere herein and in the Company's periodic reports and other documents filed with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the fiscal year ended May 31, 1996, for a further discussion of these and other risks and uncertainties applicable to the Company's business. Results of Operations Net sales in the third quarter of fiscal year 1997 decreased $1,632,000 or 3.2%, versus net sales in the comparable quarter of the previous year. Net sales from comparable stores (those open both the entire quarter this year and the corresponding quarter of the previous year) decreased by 7.3%. The decrease in comparable store sales was partially offset by sales from the addition of two net new stores opened since November 30, 1995. For the first nine months of fiscal year 1997, net sales of $104,685,000 were $6,047,000 or 5.5% lower than the comparable period of the prior year. Net sales in comparable stores decreased 9.6% over the prior year's nine month period. The comparable store sales decrease in the third quarter and first nine months was due, in part, to a more restrictive credit policy implemented in November 1995, which has reduced sales in the short term but is expected to result in higher quality receivables. Additionally, net sales were adversely impacted by late receipt of merchandise in the stores for the Christmas selling season which resulted in excessive stock outs as well as the sales mix of promotionally priced merchandise and a competitive discounting environment. Finance and insurance revenues decreased $411,000 or 10.3%, and $1,276,000 or 10.6%, for the three- and nine-month periods ended February 28, 1997 versus the comparable periods of the previous year due, in part, to a decrease in the average total outstanding customer receivables. The average total outstanding customer receivables for the nine months ended February 28, 1997 were $75,847,000, a decrease of $3,819,000, or 4.8%, from the prior year. The remaining decrease in finance and insurance revenues was due primarily to a decrease in the average effective finance charge rate. Cost of goods sold, buying and occupancy expenses were 65.0% and 54.8% of net sales for the third quarter of fiscal years 1997 and 1996, respectively. For the comparable nine month periods, cost of goods sold, buying and occupancy expenses were 65.7%, and 57.4% of net sales. Included in cost of goods sold, buying and occupancy expenses for the quarter and nine months ended February 28, 1997 was a $1,095,000 non-cash charge in connection with the Company's cost savings initiatives to hasten the liquidation of aged inventory in an effort to improve cash flow, as further described in Note 6 to the financial statements of this Form 10-Q. This charge increased cost of goods sold by 2.2% and 1.0% of net sales for the three and nine month periods ended February 28, 1997. The remaining increases in both periods were primarily due to a combination of the Company's continued value pricing strategy, rent, which is largely a fixed expense, and a higher shrinkage reserve in fiscal 1997 than in fiscal 1996. Cost of goods sold was also impacted by the sales mix of promotionally priced merchandise and a competitive discounting environment. 8 10 Selling, general and administrative expenses were 38.8% and 28.9% of net sales for the three months ended February 28, 1997 and February 29, 1996, respectively. For the nine months ended February 28, 1997 and February 29, 1996, selling, general and administrative expenses as a percentage of net sales were 44.0% and 35.4%, respectively. In the current quarter, $1,970,000 of expense was recognized for selected impaired assets in accordance with SFAS No. 121 as more fully described in Note 4 to the financial statements of this Form 10-Q. Excluding such charge, selling, general and administrative expenses as a percentage of net sales for the three and nine month periods of fiscal 1997 and 1996 would have been 34.8% and 28.9%, and 42.2% and 35.4%, respectively. The increases as a percentage of net sales were attributable to a combination of the decline in net sales for both periods and the increase in total expenses. The dollar increases for the three and nine month periods were primarily the result of increases in the cost of advertising and display, professional services and shipping. The provision for doubtful accounts was 7.2% of net sales in the third quarter of fiscal year 1997 compared to 8.1% for the prior year. For the comparable nine month periods, the provision for doubtful accounts was 7.8% and 8.0% for fiscal year 1997 and 1996, respectively. The decrease of such provision as a percentage of sales was primarily due to a more restrictive credit policy being implemented in November 1995 which has reduced sales but is expected to result in higher quality receivables. Additionally, with the change in the Company's customer receivables write-off policy, as described in Note 5 to the financial statements of this Form 10-Q, the Company believes that the amount of uncollected finance charges will diminish as accounts will be written off against the allowance for doubtful accounts earlier, which also favorably impacted the provision this fiscal quarter. During the current quarter, and as part of the restructuring described in Note 6 to the financial statements of this Form 10-Q, $1,336,000 was charged to restructuring expense for the three months ended February 28, 1997. This charge consisted of $949,000 for severance items; $93,000 and $241,000 for costs associated with terminating leases and abandoning or selling the leasehold improvements, fixtures and equipment, respectively, for the eleven closed stores; and $53,000 for other items related to the restructuring. Net interest expense increased $696,000 and $1,190,000 in the three and nine month periods ended February 28, 1997, respectively, versus the comparable periods of the prior year. Such increase in the third quarter of the current year was primarily due to a combination of an increase in the amortization of deferred financing fees associated with the Amended Revolving Credit Agreement, an amendment fee in connection with an amendment to the Amended Revolving Credit Agreement as described more fully in Note 2 to the financial statements of this Form 10-Q and an increase in average revolving debt. The average total revolving debt for the third quarter of the current year was approximately $4.9 million higher than the comparable period of the prior year. The effective tax rates in both the three and nine month periods ended February 28, 1997 were 0%, compared to 40% in the same periods of the prior year. The benefit for income taxes was calculated based on the Company's expected annual effective tax rate for each year. As described more fully below under "Liquidity and Capital Resources," the Company has available net operating loss carryovers (the "NOL") to offset future taxable income. As a result of the foregoing, the net loss for the quarter was 6,818,000, or $1.70 per share, versus net income of $3,159,000 or $0.79 per share in the comparable period of fiscal 1996. The net loss for the fiscal 1997 nine month period was a loss of $19,220,000, or $4.81 per share versus net income of $1,706,000 or $0.43 per share for the comparable period of fiscal 1996. 9 11 Liquidity and Capital Resources The Company's operations require working capital to fund the purchase of inventory and growth of customer receivables. Also, the seasonality of the Company's business requires a significant build-up of inventory for the December holiday selling period. These additional inventory needs must be funded during the late summer and fall months because of the necessary lead time to obtain additional inventory. The heavy holiday selling period leads to a seasonal build-up of customer receivables that must be funded during the winter and spring months. In addition, the Company requires working capital to fund capital expenditures. Capital expenditures for the first nine months of fiscal year 1997 and 1996 were $6,923,000 and $3,781,000, respectively. Such expenditures were made primarily in connection with the opening of seventeen new stores and the remodeling of twelve stores during the first nine months of the fiscal year 1997, and the opening of seven new stores and remodeling of fourteen stores in the same period of fiscal year 1996, respectively. On January 27, 1997, the Company's Amended Revolving Credit Agreement was amended, and the bank group waived the Company's non-compliance with certain financial covenants therein for the quarter ended November 30, 1996 and reduced its commitment to lend to the Company. The total commitment of the bank group was reduced from $85,000,000 to $70,000,000 as of January 27, 1997 through May 31, 1997, and will be further reduced to $65,000,000 from June 1, 1997 through the final maturity date of August 31, 1999. The Company may borrow 75% of Eligible Accounts Receivable (as defined in the Amended Revolving Credit Agreement) plus 40% of Eligible Inventory (as defined in the Amended Revolving Credit Agreement) less a Landlord Lien Reserve (as defined in the Amended Revolving Credit Agreement) and less $1,250,000 from January 27, 1997 through March 31, 1997 and $1,500,000 after March 31, 1997. The Amended Revolving Credit Agreement requires the Company to comply with certain customary financial covenants and restrictions, some of which were adjusted in the above described amendment, to take into account the various charges to be incurred in connection with the Company-wide restructuring and cost savings initiatives as more fully described in Note 6 to the financial statements of this Form 10-Q. At February 28, 1997, the Company had outstanding borrowings of $62,018,000 and had available borrowing capacity of $1,169,000 under the Amended Revolving Credit Agreement, as amended. Outstanding borrowings bear interest at the agent bank's reference rate plus 1.5% unless an Event of Default (as defined in the Amended Revolving Credit Agreement) has occurred and is continuing, or is not waived, in which case such outstanding borrowings bear interest at 2.0% above the rate otherwise payable. The Company failed to meet certain financial covenants contained in the Amended Revolving Credit Agreement as of the February 28, 1997 testing date. The failure to meet such covenants constitutes an Event of Default under the Amended Revolving Credit Agreement. While the Company is continuing negotiations with the bank group to obtain a forbearance or waiver of the Event of Default, or a modification of the covenants, there can be no assurance that the Company will be able to obtain such forbearance or waiver, or that such forbearance or waiver can be obtained on acceptable terms. Under the terms of the Amended Revolving Credit Agreement, the Company may not make the interest payment due on April 30, 1997 or any subsequent payment due under its 11% Senior Secured Notes due December 22, 2000 after an Event of Default under the Amended Revolving Credit Agreement has occurred and is continuing unless such Event of Default has been waived. 10 12 The Company is uncertain as to whether its existing cash, plus funds provided by operations and borrowing capacity under the Amended Revolving Credit Agreement will be sufficient to fund operations for the coming twelve months. The Company is exploring various financing alternatives, including the sale of its customer receivables to a national provider and servicer of consumer credit, refinancing its existing Amended Revolving Credit Agreement, bulk sales of certain of its inventory, returning certain merchandise inventory to vendors, and increasing the percentage of total inventory that is consignment inventory to finance its business and provide adequate working capital for operations. In addition, the expense reductions resulting from the restructuring and other cost savings initiatives are anticipated to provide additional funds from operations in future quarters. Any decision to obtain financing through debt or other markets will depend on various factors, including, among others, financial market conditions and investors' perceptions about the Company. Also, there is no assurance that additional financing will be available or, if available, will be available on acceptable terms. Should vendor shipments of products be delayed or should the Company experience significant shortfalls in planned revenues, or not achieve sufficient cost savings as a result of the restructuring and other cost savings initiatives, or experience unforeseen fixed expenses, the Company has limited abilities to make further additional reductions to variable expenses to extend its capital. At February 28, 1997, the Company had available approximately $14,000,000 of the remaining pre-reorganization usable NOL for federal income tax purposes which expire in the years ending May 31, 2006 through 2008. Additionally, the Company had approximately $1,336,000 of post-reorganization net operating loss carryovers that originated in fiscal 1996 and expire in 2011. The utilization of the remaining NOL is limited to approximately $1,159,000 of taxable income annually. PART II - OTHER INFORMATION ITEM 3. Defaults Upon Senior Securities. See Item 2 -- "Liquidity and Capital Resources" regarding defaults under the Company's Amended Revolving Credit Agreement. 11 13 ITEM 5. Other Information. Effective February 13, 1997, the Company entered into a non-binding letter of intent with Sam Merksamer to employ him as President and Chief Executive Officer of the Company for a term of three years. The agreement provides for an annual salary of $300,000, plus customary benefits, plus an annual bonus of up to 100% of base salary, plus an incentive bonus of up to 300% of base salary, subject to performance targets. The letter of intent provides that Mr. Merksamer will purchase from the Company 202,000 shares of the Company's common stock at fair market value as of February 13, 1997, with the Company financing the purchase of 100,000 of such shares by a loan secured by all of the common stock, payable within 20 months and bearing interest at the applicable federal rate. In addition, the letter of intent provides that the Company will grant to Mr. Merksamer the right to purchase up to 190,000 shares of the Company's common stock at an exercise price equal to the fair market value of the common stock as of February 13, 1997. The parties agreed to negotiate a definitive employment contract in good faith by May 15, 1997. Effective February 13, 1997, the Company entered into a non-binding letter of intent with E. Peter Healey to employ him as Executive Vice President, Chief Financial Officer and Secretary of the Company for a term of three years. While this letter of intent has not been executed, Mr. Healey has commenced his employment, subject to the parties negotiating a definitive employment contract in good faith. The agreement provides for an annual salary of $200,000, plus customary benefits, plus an annual bonus of up to 75% of base salary, plus an incentive bonus of up to 200% of base salary, subject to performance targets. The letter of intent provides that Mr. Healey will purchase from the Company 100,000 shares of the Company's common stock at fair market value as of February 13, 1997, with the Company financing the purchase of 50,000 of such shares by a loan secured by all of the common stock, payable within 20 months and bearing interest at the applicable federal rate. In addition, the letter of intent provides that the Company will grant to Mr. Healey the right to purchase up to 100,000 shares of the Company's common stock at an exercise price equal to the fair market value of the common stock as of February 13, 1997. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.1 Amendment No. 2 to Second Amended and Restated Revolving Credit Agreement 27 Financial Data Schedule (b) Reports on Form 8-K None filed for the quarter ended February 28, 1997. 12 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BARRY'S JEWELERS, INC. Date: April 21, 1997 /S/SAMUEL J. MERKSAMER ----------------------------------- Samuel J. Merksamer President and Chief Executive Officer Date: April 21, 1997 /S/E. PETER HEALEY ----------------------------------- E. Peter Healey Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: April 21, 1997 /S/DANIEL L. FELSENTHAL ---------------------------------- Daniel L. Felsenthal Vice President, Finance (Chief Accounting Officer) 13 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 AMENDMENT NO. 2 TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This Amendment No. 2 (the "Amendment"), dated as of January 27, 1997 is by and among BARRY'S JEWELERS, INC., a California corporation (the "Borrower"), THE FIRST NATIONAL BANK OF BOSTON and the other lending institutions which may become party to the Credit Agreement (as defined herein) (collectively, the "Lenders") and THE FIRST NATIONAL BANK OF BOSTON, as Agent for the Lenders (the "Agent"). Capitalized terms used herein unless otherwise defined shall have the respective meanings set forth in the Credit Agreement. WHEREAS, the Borrower, the Lenders and the Agent are parties to that certain Second Amended and Restated Revolving Credit Agreement, dated as of August 30, 1996 (as so amended and as further amended and in effect from time to time, the "Credit Agreement"); and WHEREAS, the Borrower, the Lenders and the Agent are agreeable to making certain amendments to the Credit Agreement upon the terms and conditions described herein; NOW, THEREFORE, in consideration of the foregoing premises, the parties hereby agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows: (a) The definition of "Borrowing Base" set forth in Section 1.1 of the Credit Agreement is amended by inserting after paragraph (c) thereof the following new paragraph (d): "minus (d) (i) until March 31, 1997, $1,250,000, and (ii) at all times after March 31, 1997, $1,500,000." (b) The definition of "Borrowing Base Report" set forth in Section 1.1 of the Credit Agreement is amended by deleting such definition in its entirety and substituting therefor the following definition: "Borrowing Base Report. A Borrowing Base Report signed by the chief financial officer of the Borrower in such form and including such supporting documentation as the Agent may require from time to time." (c) The definition of "Consolidated EBITDA" set forth in Section 1.1 of the Credit Agreement is amended by deleting such definition in its entirety and substituting therefor the following definition: "Consolidated EBITDA. Consolidated EBIT for any period plus (a) depreciation for such period, plus (b) amortization for such period, plus (c) the amount of 1997 Restructuring Charges for such period to the extent taken into account in connection with 2 -2- the calculation of EBIT during such period, all determined in accordance with generally accepted accounting principles." (d) Section 1.1 of the Credit Agreement is amended by adding the following definition: "GBFC. GBFC, Inc., an affiliate of the Agent." (e) The definition of "Shareholders Equity" set forth in ss.1.1 of the Credit Agreement is amended by deleting such definition in its entirety and substituting therefor the following definition: "Shareholders Equity. An amount equal to Consolidated Total Assets less Consolidated Total Liabilities plus 1997 Restructuring Charges." (f) The definition of "Total Commitment" set forth in Section 1.1 of the Credit Agreement is amended by deleting such definition in its entirety and substituting therefor the following definition: "Total Commitment. The sum of the Commitments of the Lenders which, (i) from the Closing Date through January 26, 1997 is $85,000,000, from January 27, 1997 through May 31, 1997 is $70,000,000 and (iii) after May 31, 1997 is $65,000,000, as the same may be reduced from time to time in accordance with the provisions hereof, or if the Commitments are terminated pursuant to the provisions hereof, zero." (g) Section 1.1 of the Credit Agreement is amended by adding the following definition: "1997 Restructuring Charges. Restructuring charges taken by the Borrower in its fiscal year ending May 31, 1997 relating to the closing of up to 36 retail locations of the Borrower; provided, however, that the aggregate amount of such restructuring charges shall not exceed $13,000,000 and the cash amount of such restructuring charges shall not exceed $6,000,000." (h) Section 8.4 of the Credit Agreement is amended by deleting sub paragraphs (f) and (g) thereof in their entirety and substituting therefor the following: "(f) within three (3) Business Days after the end of each calendar week or at such earlier time as the Agent may reasonably request, a Borrowing Base Report; (g) INTENTIONALLY OMITTED." (i) Section 10.1 of the Credit Agreement is amended by deleting the table set forth therein in its entirety and substituting therefor the following:
Quarter Ending Amount for 2 Quarters Amount for 1 Quarter -------------- --------------------- -------------------- 11/30/96 ($ 5,000,000) ($ 2,500,000)
3 -3-
02/28/97 $ 3,800,000 $ 6,200,000 05/31/97 $ 8,200,000 $ 2,000,000 08/31/97 $ 4,000,000 $ 2,000,000 11/30/97 $ 6,100,000 $ 4,000,000 02/28/98 $14,700,000 $10,650,000 05/31/98 $14,200,000 $ 3,550,000 08/31/98 $ 3,000,000 $ 1,200,000 11/30/98 $ 3,400,000 $ 2,200,000 02/28/99 $12,000,000 $ 9,300,000 05/31/99 $11,500,000 $ 2,000,000
(j) Section 10.3 of the Credit Agreement is amended by deleting the table set forth therein in its entirety and substituting therefor the following:
Quarter Ending Ratio -------------- ----- 11/30/96 7.00:1.00 02/28/97 7.00:1.00 05/31/97 6.60:1.00 08/31/97 6.90:1.00 11/30/97 7.30:1.00 02/28/98 5.70.1.00 05/31/98 and quarters ending thereafter 5.50:1.00
(k) Section 10.5 of the Credit Agreement is amended by adding the following subparagraph (d): "(d) Notwithstanding anything to the contrary contained herein, the Borrower will not open any new retail store locations during its 1998 fiscal year; provided, however, the Borrower may open up to four (4) new retail stores in substitution for existing retail stores which are closed to the extent that as of January 27, 1997 the Borrower has entered into binding agreements to open such stores." (l) Section 13.1 of the Credit Agreement is amended by adding the following subparagraph (o): "(o) the physical count of the Borrower's inventory in March, 1997 shall yield a dollar valuation which is less than 90% of the Borrower's inventory as carried on the Borrower's books as of the end of the Borrower's February, 1997 or March, 1997 fiscal months, all determined in accordance with generally accepted accounting principles." SECTION 2. MODIFICATIONS TO THE BORROWING BASE. The Borrower and the Lenders acknowledge and agree that notwithstanding any provision in the Credit Agreement to the contrary, (a) the Agent may rely on GBFC in connection with determining the Borrowing Base, the components thereof, and the form of the Borrowing Base Report and (b) following the execution of this Amendment the Agent, GBFC and their representatives will conduct periodic reviews of the Borrowing Base components and, as a result of any such reviews, the Agent may, in its discretion, consistent with the Agent's usual business practices 4 -4- and polices, change the Borrowing Base, the AR Advance Rate, the advance rate for inventory, or those items considered Eligible Accounts Receivable or Eligible Inventory; provided, however, without the consent of all of the Lenders, the Agent will not make any changes to such items which would result in the Borrowing Base being greater than the Borrowing Base as calculated in the Credit Agreement. SECTION 3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment shall be conditioned upon the satisfaction of the following conditions precedent: SECTION 3.1. DELIVERY OF DOCUMENTS. This Amendment shall have been authorized, executed and delivered to the Agent by the Borrower, the Lenders and the Agent. SECTION 3.2. PAYMENT OF AMENDMENT FEE. The Borrower shall have paid to the Agent, for the pro rata accounts of the Lenders, an amendment fee of $325,000. SECTION 3.3. PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the transactions contemplated by this Amendment and all documents incidental thereto shall be in form and substance satisfactory to the Lenders, the Agent and the Agent's special counsel and the Lenders, the Agent and such counsel shall have received all information and such counterpart originals or certified or other copies of all such documents as the Agent shall have reasonably requested. SECTION 4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lenders as follows: (a) The representations and warranties of the Borrower contained in the Credit Agreement, as amended hereby, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with the Credit Agreement were true and correct when made and continue to be true and correct on the date hereof (except that the financial statements referred to therein shall be the financial statements of the Borrower most recently delivered to the Agent, and except as such representations and warranties are affected by the transactions contemplated hereby and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly to an earlier date) and no Default or Event of Default has occurred and is continuing; (b) The execution, delivery and performance by the Borrower of this Amendment and the transactions contemplated hereby (i) are within the corporate authority of the Borrower, (ii) have been duly authorized by all necessary corporate proceedings, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which the Borrower or any of its Subsidiaries is subject or any judgment, order, writ, injunction, license or permit applicable to the Borrower or any of its Subsidiaries and (iv) do not conflict with any provision of the corporate charter or bylaws of, or any agreement or other instrument binding upon, the Borrower or any of its Subsidiaries. (c) This Amendment, the Credit Agreement as amended hereby, and the other Loan Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, provided that (i) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors, and (ii) enforcement may be subject to general principles of equity, and the availability of the remedies of specific performance and injunctive relief may be subject to the discretion of the court before which any proceeding for such remedies may be brought. 5 -5- SECTION 5. CONFIRMATION OF SECURITY DOCUMENTS. The Borrower hereby ratifies and confirms each of the respective Security Documents and pledges of security interests granted thereby to secure the obligations of the Borrower under the Credit Agreement, as amended hereby, and the Notes. SECTION 6. NO OTHER AMENDMENTS. Except as expressly provided in this Amendment, all of the terms and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect. SECTION 7. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument. In proving this Amendment, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. SECTION 8. EFFECTIVE DATE. Subject to the satisfaction of the conditions precedent set forth in ss.2 hereof, this Amendment shall be deemed to be effective as of the date hereof (the "Effective Date"). SECTION 9. MISCELLANEOUS. This Amendment is intended to take effect as a sealed instrument and shall for all purposes be governed by, and construed in accordance with the laws of The Commonwealth of Massachusetts (without reference to conflicts of law). 6 -6- IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have duly executed this Amendment as of the date first above written. BARRY'S JEWELERS, INC. By: /s/ Thomas S. Liston ---------------------------------- Title: Vice Chairman and CFO THE FIRST NATIONAL BANK OF BOSTON, individually and as Agent By: /s/ William Sherald ---------------------------------- Title: Vice President THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Frank A. Grimaldi ---------------------------------- Title: Vice President SANWA BUSINESS CREDIT CORPORATION By: /s/ Victor Alarcon ---------------------------------- Title: Vice President JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM America, Inc., as its attorney-in-fact By: /s/ Bradley E. Sher ---------------------------------- Title: Vice President EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE NINE MONTHS ENDED FEBRUARY 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS MAY-31-1997 JUN-1-1996 FEB-28-1997 1 236 0 71,262 2,302 56,333 127,245 29,916 11,914 148,446 84,394 50,000 0 0 33,247 (19,195) 148,446 104,685 115,460 68,765 46,099 1,336 8,116 9,488 (18,344) 0 (18,344) 0 876 0 (19,220) (4.81) (4.81)
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