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. The Company is engaged in three distribution channels which encompass its various product offerings: the full-price stores, the outlet stores and the warehouse sale events (see "RETAILING STRATEGY" below). 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 Giorgio Armani, Prada, Jil Sander, Donna Karan, Comme des Garcons, Robert Clergerie and Ermenegildo Zegna. Major branded goods include Oxxford and Hickey Freeman, and major cosmetics lines include, but are not limited to Chanel, Francois Nars and Kiehls.
Barneys was founded by Barney Pressman in 1923 under the name Barney's Clothes, Inc. Until its emergence from bankruptcy in January 1999, Barneys was owned by the Pressman Family, certain affiliates of the Pressman Family and certain trusts of which members of the Pressman Family were the beneficiaries. 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. For further information concerning the bankruptcy reorganization of the Company, refer to Note 12 to the Consolidated Financial Statements included herein.
RETAILING STRATEGY
During Fiscal 2000, the Company's sales were derived as follows: 85% from full-price stores (77% from three flagship stores, and 8% from five regional stores), 9% from outlet stores and 6% from warehouse sale events. These 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 range of high quality 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 (and which was formed in connection with the bankruptcy reorganization of the Company discussed in Note 12 to the Consolidated Financial Statements), 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.
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 several of its significant vendors (e.g., Giorgio Armani, Prada, Gucci and Helmut Lang) 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 shopping. The internet is beginning to permit the development of sales venues run by existing competitor stores or by new ventures that will also compete with the Company. Some of the retailers with which the Company competes have substantially greater financial resources than the Company and may have various other competitive advantages over the Company.
The trend toward vertical integration of designer resources poses additional competitive risk for the Company (e.g., Neiman Marcus' purchase of an interest in the Kate Spade accessories business, LVMH's stable of designer vendors sold 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 2000, the Company's top 10 vendor brands accounted for approximately 25% of total Company sales. The two top vendor brands each accounted for approximately 8% and 6%, respectively, of total Company sales. All of these brands are also sold by competitor retailers in certain markets; six 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 3, 2001, the Company employed approximately 1,400 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 550 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 $120,000,000 revolving credit facility, capital expenditures are limited, subject to certain adjustments, to $7,750,000 in each of fiscal years 2001 and 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 10 to the Consolidated Financial Statements.
LIMITED POST - CHAPTER 11 CASE OPERATING HISTORY
The Company's emergence from Chapter 11 reorganization occurred on January 28, 1999, and consequently the Company's subsequent operating history is limited. Financial statements for future periods will not be comparable to the historical financial statements included herein, for periods prior to January 28, 1999, for the reasons discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations."
FORWARD LOOKING INFORMATION
This Annual Report 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, but are not limited to, 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, but are not limited to, 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. 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.
The Company's facilities are located at the following locations:
Corporate Offices Regional Stores ----------------- ---------------
New York, NY New York, NY (World Financial Center) New York, NY (18th Street) Central Alterations Facility Manhasset, NY ---------------------------- Chestnut Hill, MA Seattle, WA New York, NY
Distribution Center ------------------- Outlet Stores Lyndhurst, NJ -------------
Harriman, NY Flagship Stores Cabazon, CA --------------- Camarillo, CA Clinton, CT New York, NY Riverhead, NY Beverly Hills, CA Wrentham, MA Chicago, IL Waikele, HI Carlsbad, CA Warehouse Sale Event Location Napa Valley, CA ----------------------------- Orlando, FL Allen, TX New York, NY 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.
On or about August, 1996, Barneys commenced an action against Circle Management Ltd. and Giuseppe Luongo for misappropriation of monies, an accounting and avoidance of certain post-petition transfers. Barneys alleged that Circle Management and Mr. Luongo, operators of the prior restaurant at the Company's Madison Avenue flagship store known as Mad 61, had not remitted monies from the operation of the restaurant which belonged to Barneys. Barneys sought unspecified monetary damages.
Defendants had answered the complaint and had asserted counterclaims. The counterclaims alleged breach of contract, breach of agency, libel and the making of false and fraudulent statements about the defendants. Defendants alleged that Barneys did not reimburse them for the operating expenses of the Mad 61 restaurant and that Barneys made libelous, false and fraudulent statements about the financial condition of defendants. They sought
monetary damages of not less than $1,000,000. This litigation was settled during the year, pursuant to an order of the United States Bankruptcy Court, on terms which maximized the liability of the Company at $15,000.
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 3, 2001. 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 21 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 Barneys 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 for almost five years 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, Inventory Control, Distribution, Management Information Systems, 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 consulting practices.
Michael Celestino has been with Barneys for nine years 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. He was promoted to Vice President in December 1997 and to Senior Vice President in May 1999. Additionally, in May 1999, Mr. Feldman was appointed as Chief Financial Officer. 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 is a certified public accountant and was responsible for reconciling all claims filed in connection with the Chapter 11 filing. Mr. Phelan was promoted to Vice President - - Treasurer in January 1999 and Senior Vice President in March 2000. Mr. Phelan 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 787,724 shares of Holdings Common Stock (exclusive of options to purchase 792,234 shares granted to Mr. Socol and subject to stockholder approval) are issuable upon exercise of outstanding options and warrants. 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, 2001 is 983.
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 new 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 the year ended February 3, 2001 ("Fiscal 2000"), Fiscal 1999, the six months ended January 30, 1999 and each of the three 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 historical financial data as of and for each of the three fiscal years in the period ended August 1, 1998, each of the two fiscal years in the period ended February 3, 2001, 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 Company was profitable in Fiscal 2000. Sales for the year increased 10.6% to $404.3 million fueled by a comparable store sales increase of 9.7%. Selling, general and administrative expenses declined as a percentage of sales to approximately 40% from approximately 42% in the prior year. The combination of the above increased earnings before interest, taxes, depreciation and amortization ("EBITDA") to $30.9 million in Fiscal 2000 from $25.4 million in the prior year.
The table which follows includes a percentage reconciliation of net sales to EBITDA and also includes net income (loss) as a percentage of sales for Fiscal 2000 (53 weeks), Fiscal 1999 (52 weeks), the twelve months ended January 30, 1999 (unaudited), the six months ended January 30, 1999 and January 31, 1998 (unaudited) and Fiscal 1998 (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 income (loss), the narratives that follow contain a discussion of interest expense, depreciation and amortization, and reorganization costs for the periods presented, as necessary.
- --------------------------- 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 Net income for the six months ended January 30, 1999 includes the effect of an extraordinary gain on discharge of debt of $285.9 million. Net income for the twelve months ended January 30, 1999 excludes the effect of the aforementioned extraordinary gain for comparability purposes.
REORGANIZATION PERIOD
Prior to the Effective Date, the Company's financial results were impacted as a result of its filing for reorganization under Chapter 11 of the Bankruptcy Code on the Filing Date. After the Filing Date, the Company devoted a significant amount of time to analyzing its cost structure to develop cost-reduction initiatives to improve the overall financial condition and operating results of the Company. During the reorganization period, the Company incurred significant reorganization costs principally related to the closure of under-performing stores, professional fees for legal, accounting and business advisory services, payroll and related costs including termination costs and a key employee retention program, and other reorganization costs.
On the Effective Date, the Company restructured its capitalization in accordance with the Plan. The application of "fresh start" reporting provisions of the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") as of the Effective Date included adjustments to record assets and liabilities at their fair market values. Also on the Effective Date, certain of the settlements contained in the Plan and the value of the cash and securities distributed by the Company in settlement of the claims resulted in an extraordinary gain of $285.9 million. Further, the Company recognized reorganization value in excess of amounts allocable to identifiable assets ("Excess Reorganization Value") of $177.8 million. This excess reorganization value is being amortized by the straight-line method over 20 years.
In January 1999, the Company entered into a $120,000,000 revolving credit facility (the "Credit Agreement") with Citicorp USA, Inc., General Electric Capital Corporation, BNY Financial Corporation, and National City Commercial Finance, Inc. that matures on January 28, 2003. The proceeds from this facility were used to repay borrowings under the debtor in possession credit agreement with BankBoston N.A., to pay certain claims, to pay professional fees and to provide working capital to the Company as it emerged from its Chapter 11 proceeding pursuant to the Plan.
The balance sheet information at January 30, 1999 included under "Selected Historical Financial Information" 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.
For further information regarding the reorganization period, the Plan, and Fresh-start reporting, see Note 12 to the Consolidated Financial Statements.
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 12.2% 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.
Fiscal 1999 Compared to the Twelve Months Ended January 30, 1999
Fiscal 1999 represents the first full year of operation for the Company subsequent to its emergence from Bankruptcy on the Effective Date. The primary settlements in the Plan impacting comparability and the 1999 operating results are those reached with Isetan and the Equipment Lessors. These settlements are more fully described in Note 12 to the Consolidated Financial Statements. In accordance with the Isetan settlement and the amended flagship leases, rent expense for these properties increased to approximately $15.8 million in 1999 compared to approximately $9.2 million in the prior twelve month period. In accordance with the Equipment Lessors settlement, the Company became the owner of the Equipment underlying the related leases eliminating approximately $5.5 million in rental payments in 1999. Both of these items are included in selling, general and administrative expenses, therefore, the net impact was an approximate $1.1 million increase to this expense caption. Additional factors impacting comparability was the closure of four outlet stores in Fiscal 1999, which contributed to a $2.6 million decline in year over year sales and the closure of the Costa Mesa, California full-price store in July 1998 generating a year over year sales decline of approximately $2.9 million.
In addition to the above, at the time of its emergence from bankruptcy, the Company changed its fiscal year-end to the Saturday closest to January 31. Therefore, the financial information for the twelve months ended January 30, 1999 includes the audited Fall 1998 stub period combined with the unaudited internal financial results for the six months ended August 1, 1998, which period also coincided with the end of Fiscal 1998 and therefore also subject to year-end adjustments as part of the Fiscal 1998 annual audit. These "year-end" adjustments affect the comparability of operating results.
Net Sales for Fiscal 1999 were $366.8 million compared to $344.8 million last year, an increase of 6.4%. Bulk sales of merchandise to jobbers ("Bulk Sales") was $1.2 million in Fiscal 1999 compared to $3.9 million in the prior 12 month period. Exclusive of these sales, sales to the Company's core consumers through its stores increased 7.3%. Net sales for Fiscal 1999 also includes $4.9 million generated from stores closed under the Company's store closing program, completed in March 2000. Comparable store sales increased approximately 9.0% in Fiscal 1999 principally due to a comparable store increase of 9.2% in the full-price stores. The Company's sales benefited from a strong economy as well as a strong flow of new receipts into the stores, the introduction of new vendor resources, strong trends in certain merchandise classifications including men's tailored clothing and women's accessories, as
well as the implementation of a strategy to initiate markdowns in a more timely fashion to maximize inventory turn.
Gross profit on sales increased 7.9% to $173.5 million in Fiscal 1999 from $160.9 million for the twelve months ended January 30, 1999, primarily due to the increased sales volume. Principally as a result of reduced volume, markdowns on Bulk Sales declined approximately $1.8 million in the current year. As a percentage of net sales, gross profit was 47.3% in Fiscal 1999 compared to 46.6% in the prior twelve months. The effect of the increased markdowns in Fiscal 1999 were more than offset by approximately $1.6 million of foreign exchange gains realized on settlement of foreign denominated merchandise purchases. In addition, the year ago period included an expense of approximately $0.7 million, principally to reserve for aged vendor chargebacks. Such expense was substantially reduced in the current year.
Selling, general and administrative expenses, including occupancy expenses, increased 3.8% in Fiscal 1999 to $152.4 million from $146.9 million in the prior twelve months. Selling, general and administrative expenses declined to 41.6% of sales in Fiscal 1999 from 42.6% in the prior twelve months principally due to tighter management and leveraging of expenses.
Selling, general and administrative expenses in the twelve months ended January 30, 1999 were impacted by year-end adjustments made to certain employee benefit costs. The most significant items impacted were pension expense which increased approximately $.8 million, and medical costs which increased approximately $.6 million. These increases were partially offset by a $1.1 million reduction in union pension expense as a result of a non-recurring charge recorded in the prior twelve month period, approximating $.9 million, to effectuate the withdrawal from one of the union-sponsored multi employer pension plans. There was no comparable charge in Fiscal 1999. Further, increases in costs such as legal fees, due in part to incremental services provided as a public registrant as well as renegotiations of several union contracts, and commission expense and credit card fees, in connection with the aforementioned sales growth, and occupancy costs in line with contractual inflationary increases, were offset in part by the non-recurring costs related to prior store closures.
As a direct consequence of the Plan of Reorganization becoming effective, occupancy expense for the Company's three flagship stores in New York, Beverly Hills and Chicago for Fiscal 1999 as compared to the prior twelve months increased more than $6.5 million due to increased rent expense in accordance with the renegotiated leases for these properties. This increase in occupancy costs, however, was substantially offset by the elimination of expense associated with certain equipment previously leased by the Predecessor Company, again as a direct consequence of the Plan of Reorganization becoming effective.
Depreciation and amortization expense increased 84.2% in Fiscal 1999 to $17.4 million from $9.5 million in the prior twelve months. This increase was primarily due to the amortization of the excess reorganization value.
Interest expense increased 16.3% in Fiscal 1999 to $13.0 million from $11.1 million in the prior twelve months. Interest associated with borrowings under the Company's credit facility declined significantly from the interest expense associated with the borrowings of the Predecessor Company under the debtor in possession credit agreement due to a lower effective interest rate, driven by a reduction in the portion of interest expense associated with the amortization of related bank fees, as well as lower average borrowings. This reduction was offset by approximately $6.4 million of interest expense associated with the new notes issued pursuant to the Plan of Reorganization.
Average borrowings under the Revolving Credit Facility for Fiscal 1999 and under the Predecessor Company's debtor in possession credit agreement for the twelve months ended January 30, 1999 were $62.9 million and $75.5 million, respectively, and the effective interest rate on this portion of the Company's outstanding debt was 11.2% in Fiscal 1999 compared to 13.6% in the comparable period of the prior year.
There were no reorganization costs incurred subsequent to the Plan of Reorganization becoming effective.
The Company's net loss for Fiscal 1999 was $5.3 million which cannot be meaningfully compared to the prior twelve month period as a result of the fresh start adjustments recorded in that period. Basic and diluted net loss per common share for Fiscal 1999 was $0.42 per common share. Earnings per common share of the Predecessor Company has not been included herein as the computation would not provide meaningful results as the capital structure of the Successor Company is not comparable to that of the Predecessor Company.
Six Months Ended January 30, 1999 Compared to the Six Months Ended January 31,
The emergence from Chapter 11 proceedings effective January 28, 1999 as well the implementation of the store closing program announced in 1997 are the primary factors affecting comparability of operating results. The store closings in 1998 were as follows: the 17th Street flagship store in mid-August 1997; the Connecticut full-price store in January 1998; and the Costa Mesa, California full-price store in July 1998. In the six months ended January 31, 1998, the Company opened new outlet stores in Hawaii, Massachusetts and California.
In addition to the above, the six months ended January 30, 1999 represented an abbreviated reporting period of the Predecessor Company whereas the six months ended January 31, 1998 coincided with the end of the second quarter of the Predecessor Company. As a result, there are certain "year-end" adjustments in the six months ended January 30, 1999, discussed below, which affect the comparability of operating results with the same periods in Fiscal 1998. Until its emergence from bankruptcy in January 1999, Barneys was owned by the Pressman Family, certain affiliates of the Pressman Family and certain trusts of which members of the Pressman Family were the beneficiaries. In prior years, the Company had entered into various transactions and agreements with Pressman-family controlled entities, including Preen Realty Inc. ("Preen") and certain of its subsidiaries. Preen and certain of its subsidiaries were shareholders of the Predecessor Company and were primarily engaged in the operation of real estate properties, certain of which were leased to the Company. The type of property leased included store, warehouse and office space. Prior to the Filing Date through the Effective Date, the Company incurred certain normal operating costs, principally personnel costs, on behalf of Preen. This situation arose as both entities shared the same corporate office space and certain employees (including officers) of the Company were providing services to Preen. After the Filing Date, the Company also incurred and paid reorganization costs, including legal, accounting and business advisory services, on behalf of Preen which was also operating as a debtor in possession pursuant to the Bankruptcy Code. While the Company routinely allocated to Preen a share of both the normal operating costs and reorganization costs incurred on its behalf, it was unclear (because of the bankruptcy) whether Preen would have the ability to repay such amounts in the future. Accordingly, at the time of such charges reserves were provided in the operating results of the Predecessor Company. In December 1998, principally in connection with the approval of the Plan and the settlements included therein, collectibility issues of certain amounts due from Preen were resolved. Accordingly, the Company was able to reduce its affiliate receivable reserve by approximately $1.9 million, principally representing cash payments from Preen in satisfaction of a portion of the outstanding receivable balance. This reserve reversal reduced selling, general and administrative expenses and reorganization costs by approximately $0.5 million and $1.4 million, respectively, in the six months ended January 30, 1999.
Net Sales for the six months ended January 30, 1999 were $182.6 million compared to $183.8 million a year ago, a decrease of 0.7%. This decrease is primarily attributable to the three full-price store closings since July 1997. Included in net sales for the six months ended January 31, 1998 is $5.8 million generated from stores closed under the Company's store closing program, completed in July 1998. Comparable store sales increased approximately 1%, principally due to an increase at full-price stores offset by weakness in both the outlet and warehouse sale event locations.
Gross profit on sales decreased 3.7% to $86.6 million for the six months ended January 30, 1999 from $89.9 million for the six months ended January 31, 1998, primarily due to lower revenues as a result of the store closings. As a percentage of net sales, gross profit was 47.4% for the six months ended January 30, 1999 compared to 48.9% in the year ago period. The decrease resulted primarily from increased promotional markdowns in the outlet and warehouse sale event locations, markdowns associated with the bulk sale of merchandise to jobbers and non-recurrence of favorable variances on foreign currency denominated purchases in the year ago period.
Selling, general and administrative expenses, including occupancy expenses, declined 5.7% in the six month period ended January 30, 1999 to $73.6 million from $78.1 million in the prior year. This decrease was due in part to reductions in personnel and occupancy costs of $1.9 million related to the store closings and corporate headcount reductions as well as continuing improvements from the Company's cost-reduction initiatives.
In addition to the above, in the six months ended January 30, 1999 "year-end" adjustments were made to certain employee benefit costs. The most significant items impacted were pension expense, which in the six months ended January 30, 1999 was recorded at the actual amount of the contribution as compared to an estimated contribution in the six months ended January 30, 1998 and medical costs. Medical costs were significantly below the prior year due principally to savings from a carrier change, which reduced annual premiums approximately $1.0 million, and to an extent, positive trends in this cost. Combined savings in these two areas alone exceeded $1.5 million. These savings were partially offset in the six months ended January 30, 1999 by an approximate $.9 million charge to effectuate the withdrawal from one of the union-sponsored multi-employer pension plans. There was no comparable charge in the six months ended January 30, 1998.
There was no royalty income in the six months ended January 30, 1999, compared to $1.7 million in the prior year. The six months ended January 31, 1998 includes $1.3 million received by the Company in consideration for terminating a license agreement at the request of the third party licensee, during the year.
Interest expense decreased 14.7% in the six months ended January 30, 1999 to $4.8 million from $5.6 million a year ago. Higher interest expense associated with the Company's short-term borrowings was offset by a significant reduction in the portion of interest expense associated with the amortization of related bank fees. The fee to extend the Revolving Credit and Guaranty Agreement with BankBoston, N.A. and other lenders party thereto (the "DIP Credit Agreement") to February 1, 1999 from August 1, 1998 was minimal in relation to the original DIP Credit Agreement fees. Average borrowings for the 26 week periods ended January 30, 1999 and January 31, 1998 were $82.0 million and $67.0 million, respectively, and the effective interest rate on the Company's outstanding debt was 10.0% in the six months ended January 30, 1999 compared to 16.5% in the prior year.
Reorganization costs increased 59.3% to $13.8 million in the six months ended January 30, 1999 from $8.7 million in the year ago period. This increase is mainly attributable to costs triggered in connection with the negotiation and consummation of the Plan as well as higher employee separation costs. Included in these amounts for the respective periods are professional fees of $3.6 million (including $2.4 million for professionals retained by the Plan Investors) and $5.1 million, respectively. Professional fees include legal fees which increased to $3.4 million in the current period from $3.3 million in the year ago period; accounting and tax fees which declined to $(0.3) million in the current period from $0.4 million in the year ago period; and investment advisory fees which declined to $0.6 million in the current period from $1.3 million in the year ago period. In the current year, substantially all of the professional fees discussed above were reduced by settlements reached with the various professional services firms with respect to fees held back but not paid throughout the bankruptcy case and, as discussed above, the cash payment from Preen reimbursing certain reorganization costs. In the case of the accounting and tax fees, the settlement and reimbursement reduced the expenses for the six months ended January 30, 1999 below zero. Additionally, investment advisory fees declined principally due to a reduction in fees negotiated with the firm providing services to the debtors since the firm representing the official committee of unsecured creditors was assuming a larger role in the bankruptcy resolution process. In addition, Reorganization costs include provisions of $1.0 million and $1.3 million for a key employee retention program, other payroll and related costs of $4.3 million and $1.0 million which include separation costs of $3.0 million covering 11 individuals (inclusive of employees of Meridian Ventures, Inc.) and $0.5 million covering 6 individuals, respectively and other miscellaneous costs (including principally administrative costs of the bankruptcy, public relations costs and costs attributed to closed stores) of $4.9 million and $1.3 million. The increase in other miscellaneous costs is principally attributed to the remaining fee due Dickson Concepts of $3.5 million in connection with the termination of the Dickson Concepts proposed purchase agreement.
The Company recognized a gain of $285.9 million principally related to settlements pursuant to the Plan and debt discharged in the Company's emergence from Chapter 11 reorganization in January 1999.
LIQUIDITY AND CAPITAL
Liquidity and Capital Resources
Cash Provided by (Used in) Operations and Working Capital. For the reporting periods below, net cash provided by (used in) operations was as follows ($ 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, continued operating improvements and enhanced credit support from the vendor community have lessened the Company's dependence on this source of liquidity.
Prior to the Effective Date the Company's inability to generate sufficient cash from operations and, accordingly, its need to provide liquidity through credit facility borrowings were primarily due to: the lack of full credit support from the vendor community, due to the chapter 11 reorganization, which necessitated certain prepayment of merchandise vendors; and the growth of the Company's private label credit card portfolio, which was financed by the Company's credit facilities.
Due to the items described above, prior to the Effective Date, the Company had a working capital deficiency after the first post chapter 11 fiscal year-end through the emergence from chapter 11 on January 28, 1999. The Company's working capital position at each year-end or period is as follows ($ in thousands):
Working capital (deficiency) for all periods above are inclusive of the amount then outstanding on the credit facilities that existed at the time, except for February 3, 2001 and January 30, 1999, where the amounts then outstanding on the credit facility of $32,232,000, and $49,177,000, respectively, are classified as long term. The classifications are based on the terms of the credit facilities that existed at the time.
For the reporting periods below, net cash (used in) provided by financing activities was as follows:
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.
Capital Expenditures. The Company incurred approximately $8,500,000 for Capital Expenditures for Fiscal 2000. Of the total capital expenditures, $6,065,000 represented leasehold improvements, $1,646,000 was spent on furniture, fixtures and equipment and $789,000 was spent on management information systems.
A significant portion of the amount spent pertained to building out and reconfiguring existing retail space and new store openings. Included in Fiscal 2000 are costs associated with the reconfiguration of certain space at the New York flagship store in connection with the planned relocation of the existing restaurant and cosmetics businesses, as well as 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 is expected to be completed in the third quarter of fiscal 2001. 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 provides 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 unencumbered assets of the Company.
Revolving credit availability is calculated as a percentage of eligible inventory (including undrawn letters of credit) and Barneys New York credit card receivables plus $20,000,000 in Trademark availability (such amount subject to a downward adjustment as defined). The amount of Trademark availability at the end of February 2, 2002 will be $10,000,000. Interest rates on the Credit Agreement are either the Base Rate (as defined) plus 1.25% or LIBOR plus 2.25%, subject to adjustment after the first year. The Credit Agreement also provides for a fee of 1.25% to 1.75% 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 various financial covenants principally relating to net worth, leverage, 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 remaining covenants discussed herein are required to be measured on a quarterly basis. During the fiscal year-ending February 2, 2002, the Credit Agreement covenants do not allow for any material deviation from the Company's business plan for such year. As of February 3, 2001, the Company was in compliance with each of the covenants contained in the Credit Agreement.
Minimum consolidated net worth. Shall not be less than $140,000,000 through 2000 and $150,000,000 through 2002.
Leverage ratio. On a consolidated basis, as determined as of the last day of each fiscal quarter for the twelve-month period ending on such day, shall not be greater than 7.0 at February 3, 2001; 4.5 at the end of 2000; 3.5 at the end of 2001; and 3.0 at the end of 2002.
Minimum consolidated EBITDA. As of the last day of each fiscal quarter for the trailing twelve-month period ending on such day, EBITDA shall not be less than certain minimum amounts, subject to escalation during the fiscal year. The minimum amount at the end of Fiscal 1999 is $20,000,000; $25,000,000 at the close of Fiscal 2000; $30,000,000 at the close of Fiscal 2001; and $35,000,000 at the close of Fiscal 2002.
Capital Expenditures. The Company's total capital expenditures for Fiscal 2000 were capped at $7,500,000 with gradual increases throughout the term of the agreement, and are subject to upward adjustment and, if certain conditions are met, may be eligible for carryover to a future period. For Fiscal 2001, the cap on capital expenditures is $7,750,000 subject to upward adjustments.
At February 3, 2001, the Company had approximately $38,788,000 of availability under the Credit Agreement, after consideration of $32,232,000 of revolving loans and $25,731,000 of letters of credit outstanding.
Effective March 2001, the Company and the lenders under the Revolving Credit Facility entered into an amendment reducing the earnings before interest, taxes, depreciation and amortization ("EBITDA") covenant for the second and third quarters of Fiscal 2001 each by $5 million to $25 million.
Effective June 1999 and March 2000, the Company and the lenders under the Revolving Credit Facility entered into amendments thereto adjusting 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 during the fiscal year ended January 29, 2000 and the succeeding two fiscal years as part of EBITDA, as defined.
Management believes that it will be in compliance with the financial covenants contained in the Credit Agreement for the fiscal year ending February 2, 2002. 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.
During fiscal year 1996 through January 28, 1999, the Company's working capital was provided by various credit facilities in effect during the period. Credit facilities that existed at the Filing Date were ultimately not repaid in full, but settled as part of the Plan. During the Chapter 11 period, the Company entered into two debtor-in-possession credit facilities, the first of which was repaid in full pursuant to a refinancing on July 16, 1997 and the second which was repaid in full pursuant to the Credit Agreement dated January 28, 1999.
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 income (loss) for Fiscal 2000 and Fiscal 1999. 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. The principal currencies hedged are the Euro, Italian lira, German mark, British pound, and the French franc. A uniform 10% weakening as of January 29, 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 year-ended February 3, 2001. Comparatively, the result of a uniform 10% weakening as of January 31, 1999 in the value of the dollar relative to the currencies in which the purchases are denominated would have resulted in a $7.7 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 2000, the Company's interest expense would have increased, and income before taxes would decrease by $0.9 million. Comparatively, if short-term interest rates averaged 2% more in Fiscal 1999, the Company's interest expense would have increased, and loss before taxes would have increased by $2.1 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 20, 2001 (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 3, 2001, 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
(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) Filed herewith.
(b) - Reports on Form 8-K - On January 10, 2001 the Company filed a report under Item 5, Other Events, on Form 8-K, incorporating by reference the Company's press release announcing the appointment of Howard Socol as President, Chairman and Chief Executive Officer.
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: May 1, 2001
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 May 1, 2001 - ------------------------------- Shelley F. Greenhaus Director
/s/John Halpern May 1, 2001 - ------------------------------- John Halpern Director
/s/Yasuo Okamoto May 1, 2001 - --------------------------- Yasuo Okamoto Director
/s/Allen I. Questrom May 1, 2001 - ------------------------------- Allen I. Questrom Director
/s/Howard Socol May 1, 2001 - ------------------------------- Howard Socol Chairman, President, Chief Executive Officer and Director
/s/Carl Spielvogel May 1, 2001 - ------------------------------- Carl Spielvogel Director
/s/David A. Strumwasser May 1, 2001 - ------------------------------- David A. Strumwasser Director
/s/Robert J. Tarr, Jr. May 1, 2001 - ------------------------------- Robert J. Tarr, Jr. Director
/s/Douglas P. Teitelbaum May 1, 2001 - ------------------------------- Douglas P. Teitelbaum Director
/s/Steven A. Van Dyke May 1, 2001 - ------------------------------- Steven A. Van Dyke Director
/s/Shelby S. Werner May 1, 2001 - ------------------------------- Shelby S. Werner Director
/s/Steven M. Feldman May 1, 2001 - ------------------------------- 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 3, 2001
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, and Barney's, Inc. and subsidiaries, included in the Annual Report on Form 10-K of the Company for the year ended February 3, 2001, are incorporated by reference in Item 8:
Consolidated Balance Sheets--February 3, 2001, January 29, 2000 and January 30,
Consolidated Statements of Operations-- Year ended February 3, 2001, January 29, 2000, six months ended January 30, 1999, and the fiscal year ended August 1, 1998
Consolidated Statements of Changes in Stockholders' Equity (Deficit) -- Year ended February 3, 2001, January 29, 2000, six months ended January 30, 1999, and the fiscal year ended August 1, 1998
Consolidated Statements of Cash Flows Year ended February 3, 2001, January 29, 2000, six months ended January 30, 1999 and the fiscal year ended August 1, 1998
Notes to Financial Statements
The following consolidated financial statement schedule of Barneys New York, Inc. and subsidiaries, and Barney's, 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 3, 2001, January 29, 2000 and January 30, 1999, and the related consolidated statements of operations, cash flows, and changes in stockholder's equity (deficit) for the fiscal year-ended February 3, 2001 and January 29, 2000 (Successor Company), and the six months ended January 30, 1999 and the fiscal year ended August 1, 1998 (Predecessor Company). 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.
As more fully described in Note 12 to the consolidated financial statements, effective January 28, 1999, the Company emerged from protection under Chapter 11 of the U.S. Bankruptcy Code pursuant to a Reorganization Plan which was confirmed by the Bankruptcy Court on December 21, 1998. Accordingly, the accompanying January 30, 1999 balance sheet was prepared in conformity with AICPA Statement of Position 90-7 "Financial Reporting for Entities in Reorganization Under the Bankruptcy Code," for the Successor Company as a new entity with assets, liabilities and a capital structure having carrying values not comparable with prior periods as described in Note 12.
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 as of February 3, 2001, January 29, 2000 and January 30, 1999, and the consolidated results of their operations and their cash flows for the fiscal years ended February 3, 2001, January 29, 2000 and the six months ended January 30, 1999 and for the fiscal year ended August 1, 1998, 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, 2001
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 (Deficit)
(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 which are leased from an affiliate of Isetan Co. Ltd. ("Isetan"), a minority stockholder of Holdings. The Company has also entered into licensing arrangements, pursuant to which the Barneys New York trade name is licensed for use in Asia.
The consolidated financial statements of the Company during the bankruptcy proceedings (the "Predecessor Company financial statements") 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.
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 Company changed its fiscal year-end to the Saturday closest to January 31 to coincide with its emergence from bankruptcy and to be more comparable with industry practices. References in these financial statements to "2000", "1999" and "1998" are for the 53 weeks ended February 3, 2001 and the 52 weeks ended January 29, 2000 and August 1, 1998, respectively.
As used herein, Successor Company refers to Barneys New York, Inc. and subsidiaries from the Effective Date to February 3, 2001 and Predecessor Company refers to Barney's, Inc. and subsidiaries prior to the Effective Date.
2. Summary of Significant Accounting Policies:
(a) Principles of Consolidation -
The consolidated financial statements include the accounts of the Predecessor or Successor Company 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) 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.
(c) 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 2000 and 1999 approximated $4,462,000 and $4,216,000, respectively. Finance charge income recorded in the six months ended January 30, 1999 and in Fiscal 1998 approximated $1,978,000 and $3,280,000 respectively, and is included in other-net in the statement of operations.
Notes to Consolidated Financial Statements (continued)
(d) 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 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.
(e) Fixed Assets -
Pursuant to 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.
(f) 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.
(g) 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 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 Notes 9(b) and 12(b)) were not included in the computation of diluted EPS for Fiscal 2000 and Fiscal 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. EPS of the Predecessor Company has not been included herein as the computation would not provide meaningful results as the capital structure of the Successor Company is not comparable to that of the Predecessor Company.
(h) 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)
(i) Foreign Exchange Contracts -
The Company enters into certain foreign currency hedging instruments (forward and option contracts), from time to time, to reduce the risk associated with currency movement related to committed inventory purchases denominated in foreign currency. Gains and losses that offset the movement in the underlying transactions are recognized as part of such transactions.
As of February 3, 2001, the Company had outstanding forward foreign currency contracts with a notional value approximating $12,322,000 maturing in Fiscal 2001. Utilizing quotes from external sources, the fair value of these contracts is approximately $12,404,000 at February 3, 2001.
The notional and estimated fair value of the individual currencies is detailed below:
Foreign Currency Notional Amount Estimated Fair Value Italian Lira $ 9,877,000 $ 9,940,000 German Marc 635,000 625,000 British Pound 768,000 749,000 French Franc 774,000 819,000 Euro 267,000 281,000
(j) 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, $1,225,000, $958,000, $2,968,000 in Fiscal 2000, Fiscal 1999, the six months ended January 30, 1999 and Fiscal 1998, respectively.
(k) Advertising Expenses -
The Company expenses advertising costs upon first showing. Advertising expenses were approximately $6,558,000, $3,646,000, $2,041,000, and $3,324,000 in Fiscal 2000, 1999, the six months ended January 30, 1999, and Fiscal 1998, respectively.
(l) 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.
(m) 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:
4. Debt - Successor Company:
(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. The proceeds from this Credit Agreement were used to repay borrowings under the debtor in possession credit agreement, to pay certain claims, to pay professional fees and to provide working capital to the Company as it emerged from its Chapter 11 proceeding pursuant to the Plan (as hereafter defined). At February 3, 2001, there were outstanding loans of approximately $32,232,000 and $16,048,000 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 $9,683,000. At January 29, 2000 there were outstanding loans of approximately $49,177,000 under this credit agreement.
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 $13,750,000 (such amount subject to a downward adjustment as defined). Interest rates on borrowings under the Credit Agreement are the Base Rate (as defined), which approximates Prime plus 1.25% or LIBOR plus 2.25%, subject to adjustment after the first year. The interest rate at February 3, 2001 was 8.75%.
The Credit Agreement contains various financial covenants principally relating to net worth, leverage, earnings and capital expenditures. The Company believes that it will be in compliance with the financial covenants contained in the Credit Agreement for the fiscal year ending February 2, 2002. 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.
Obligations under the Credit Agreement are secured by a first priority and perfected lien on all unencumbered property of the Company. The Credit Agreement provides for a fee of 1.25% to 1.75% 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.
Notes to Consolidated Financial Statements (continued)
In connection with the origination of the Credit Agreement, the Company incurred fees of $2,825,000 that are being amortized over the life of the Credit Agreement as interest and financing costs. These fees were principally paid in December 1998 and January 1999 and are included in Other assets at February 3, 2001.
(b) $22,500,000 Subordinated Note -
Barneys originally issued this note to Isetan, who sold this note in Fiscal 2000 to an unrelated third party (See Note 12 to consolidated financial statements). This note bears interest at the stated rate of 10% per annum payable semi-annually, and matures on January 29, 2004. The first four interest payments which payments commenced on August 15, 1999, were to be paid in cash unless a majority of independent directors of the Company determined, with respect to those first four interest payments due, that it is in the best interests of Barneys to defer those payments and add them to the outstanding principal amount. No interest payments were deferred in Fiscal 1999 or Fiscal 2000.
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 $21,294,000 and $20,949,000 at February 3, 2001 and January 29, 2000, respectively.
(c) Equipment Lessors Notes -
Barneys issued subordinated promissory notes (the "Equipment Lessors Notes") in an aggregate principal amount of $35,788,865 (See Note 12 to consolidated financial statements ). Such promissory notes bear interest at the stated rate of 11 1/2% per annum payable semi-annually, mature on January 29, 2004, and are secured by a first priority lien on the equipment that was the subject of each of the respective equipment leases. The first interest payments were made on February 15, 1999.
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, one of the Successor Company's principal shareholders after the Effective Date, 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 2000 and Fiscal 1999, the Successor Company paid interest of approximately $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 3, 2001, total minimum rentals at contractual rates are as follows for the respective fiscal years:
Third Parties Isetan Total ---------------------------------------------- (In thousands)
2001 $ 8,538 $ 12,720 $ 21,258 2002 8,194 12,960 21,154 2003 7,327 28,200 35,527 2004 7,472 15,000 22,472 2005 7,097 15,000 22,097 Thereafter 129,579 184,995 314,574 ----------------------------------------------
Total minimum rentals $ 168,207 $ 268,875 $ 437,082 ==============================================
Total rent expense in Fiscal 2000, Fiscal 1999, the six months ended January 30,1999 and Fiscal 1998, was $29,464,000, $30,886,000, $14,632,000 and $31,696,000, respectively, which included percentage rent of $135,000, $86,000, $57,000 and $319,000 in each of the respective periods.
(b) Litigation -
The Company is party to certain other litigation and asserted claims and is aware of other potential claims. Management believes that pending litigation in the aggregate will not have a material effect on the Company's future financial position, cash flows or results of operations.
6. Income Taxes:
Pursuant to the Plan, 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 as a "fresh-start" adjustment.
For Fiscal 2000, Fiscal 1999, the six months ended January 30, 1999 and Fiscal 1998, the Company recorded a provision for income taxes of approximately $546,000, $363,000, $38,000, and $77,000, respectively, which principally relates to state and local income and franchise taxes. The Company continues to be subject to AMT. The AMT credit carryforward can be carried forward indefinitely while the net operating loss carryforwards expire in 2020. In the comparable periods, the Company paid capital, franchise and income taxes, net of refunds, of approximately $542,000, $80,000, $19,000 and $18,000, respectively.
Notes to Consolidated Financial Statements (continued)
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. On the Effective Date, the significant differences of the Predecessor Company related to deferred credits, net operating loss carryforwards and its reserve for affiliate receivables.
The components of the Successor Company's deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
February 3, January 29, 2001 2000 -------------- --------------- Inventory $ 2,713 $ 972 Compensation - 739 Provision for doubtful accounts 342 360 Tax credit and loss carryforward 2,436 1,326 Other 637 343 -------------- ---------------
Gross deferred tax assets 6,128 3,740 Less: Valuation Allowance (2,862) (2,686) -------------- ---------------
Deferred tax assets 3,266 1,054 Deferred tax liabilities: Depreciation & Amortization 3,197 489 -------------- --------------- Net deferred tax asset $ 69 $ 565 ============== ===============
As of January 28, 1999 the components of the Predecessor Company deferred taxes were as follows (in thousands):
January 28, -----------
Current deferred tax assets $ 17,953 Noncurrent deferred tax assets 181,584 ----------- Total deferred tax assets 199,537 Less: Valuation allowance (199,537) -----------
Net deferred tax asset $ - ===========
As of January 30, 1999, as a result of the Election, the remaining tax attributes associated with the Predecessor Company's deferred tax amounts are no longer available.
For Fiscal 2000, Fiscal 1999, the six months ended January 28, 1999 and Fiscal 1998, income taxes reported differ from the amounts that would result from applying statutory tax rates, as net operating loss carryforwards which arose in such periods provided no tax benefit since their future utilization was uncertain. Accordingly, the Successor Company recorded a valuation allowance of $2,862,000 and $2,686,000 in Fiscal 2000 and 1999, respectively. In addition, the Predecessor Company increased its valuation allowance by approximately $5,667,000 and $7,321,000, in the remaining respective periods.
For the six months ended January 30, 1999, no income taxes were reported in conjunction with the gain on discharge of debt as such amounts are excluded from taxable income under IRC Section 108.
Notes to Consolidated Financial Statements (continued)
7. Related Party Transactions:
(a) Flagship store leases - Isetan -
Subsidiaries of Holdings lease the Madison Avenue, Beverly Hills and Chicago stores from Isetan. 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 $15,635,000 and $15,767,000 in Fiscal 2000 and Fiscal 1999, respectively, $4,611,000 in the six months ended January 30, 1999 and $9,223,000 in Fiscal 1998.
(b) Licensing arrangements -
Pursuant to the terms of the trademark license agreement between BNY Licensing and an affiliate of Isetan (as more fully discussed in Note 12(d) to the consolidated financial statements), the Company is entitled to receive a minimum royalty over the term of this agreement ranging from 42,405,000 to 61,195,106 Japanese Yen ($367,000 to $529,000 at the February 2, 2001 conversion rate of 115.6 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 $330,000 and $240,000 in royalty income for Fiscal 2000 and Fiscal 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 (c) 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. See note 12 to Consolidated Financial Statements. The Unsecured Creditors Warrants became exercisable on the Effective Date and 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) 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 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"). The shares contributed to the Trust 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.
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.
(d) Predecessor Company -
(i) Series A-1 Convertible Preferred Stock
In a prior year, Barneys America authorized and issued 120,000 Series A-1 Convertible Preferred Stock (Series A-1) to Isetan of America Inc. for an aggregate purchase price of $12,000,000. Such amount was recorded by the Company as Minority interest at August 1, 1998. Pursuant to the Plan, Isetan contributed this investment to Barneys. In accordance with the Plan, a component of the various settlements reached with Isetan included the contribution of this investment to Barneys.
(ii) Other preferred stock
The Predecessor Company was authorized to issue 400,000 shares of preferred stock with a par value of $100 per share. Each share of preferred stock was entitled to one vote and dividends were non-cumulative. Each share also had a liquidation preference of $100 plus declared dividends. There were 327,695 shares outstanding prior to the Effective Date and no dividends were in arrears. This preferred stock was owned directly or indirectly by members of the Pressman Family. Pursuant to one of the settlements contained in the Plan, there was a cash payment of $50,000 to certain members of the Pressman Family on account of the existing preferred (and common) stock held by such members of the Pressman Family.
Notes to Consolidated Financial Statements (continued)
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.
(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. During Fiscal 2000, plan participants were granted options to purchase 455,000 shares of Holdings Common Stock at an exercise price of $10.25 per share. The weighted average fair value of these options, estimated at the date of grant using the Black Scholes option-pricing model was $2.23. The fair value was estimated at the date of grant using the following weighted average assumptions: risk-free interest rate of 6.66%; dividend yield of 0%; stock price at date of grant $7.50 and weighted average expected life of the option of 10 years. As the Company's stock is not actively traded, expected volatility was considered not applicable for purposes of this calculation. Subsequent to these grants, there were 199,000 shares available for future grant under this option plan. There were 91,000 options exercisable at February 3, 2001.
Pursuant to his agreement with the Company, Mr. Socol was granted options to purchase 792,234 shares of Holdings Common Stock at an exercise price of $9.625 per share, which are to vest over the term of his employment. This grant is subject to stockholder approval. The weighted average fair value of these options, estimated at the date of grant using the Black Scholes option-pricing model was $0.95. The fair value was estimated at the date of grant using the following weighted average assumptions: risk-free interest rate of 5.18%; dividend yield of 0%; stock price at date of grant $8.00 and weighted average expected life of the option of 6 years. As the Company's stock is not actively traded, expected volatility was considered not applicable for purposes of this calculation.
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. On March 11, 1999, each of the non-employee directors was granted an option to purchase 5,000 shares of Holdings Common Stock at an exercise price of $8.68 per share. The weighted average fair value of these options, estimated at the date of grant using the Black-Scholes option-pricing model, was $3.84. The fair value was estimated at the date of grant using the following weighted-average assumptions: risk-free interest rate of 5.84%; dividend yield of 0%; stock price at date of grant of $8.68 and a weighted-average expected life of the option of 10 years. As the Company's stock is not actively traded, expected volatility was considered not applicable for purposes of this calculation. As options to purchase an aggregate of 45,000 shares of Holding Common Stock were granted on March 11, 1999, subsequent to
Notes to Consolidated Financial Statements (continued)
these grants, there were 255,000 shares available for future grant under this option plan. There were 45,000 options exercisable at February 3, 2001.
Pursuant to his agreement with the Company, in a prior year, Mr. Questrom was granted options to purchase up to 15% of the outstanding shares of the Company's common stock, which were to vest over the term of his employment. Effective with Mr. Questrom's resignation in September 2000, these options were terminated. The weighted average fair value of these options, estimated at the date of grant using the Black Scholes option-pricing model was $3.37. The fair value was estimated at the date of grant using the following weighted average assumptions: risk-free interest rate of 6.14%; dividend yield of 0%; stock price at date of grant $8.68 and weighted average expected life of the option of 8 years. As the Company's stock is not actively traded, expected volatility was considered not applicable for purposes of this calculation.
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 net income and earnings per share 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 both the options discussed above.
Fiscal Fiscal 2000 1999 ----------------------- ------------------------ Net income (loss) As reported $ 610 $ (5,346) Pro-forma 979 (6,108) Basic EPS As reported $ 0.04 $ (0.42) Pro-forma 0.07 (0.48)
(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 $768,000 and $722,000 in Fiscal 2000 and 1999, respectively, $1,329,000 in the six months ended January 30, 1999, and $1,014,000 in Fiscal 1998.
With Court approval, the Predecessor Company elected to withdraw from one of the union-sponsored multi-employer plans. Accordingly, Union pension expense in the six months ended January 30, 1999 includes a charge of approximately $862,000 to effectuate the withdrawal.
The value of the remaining plans unfunded vested liabilities allocable to the Company, and for which it may be liable upon withdrawal is estimated to be $1,365,000 at January 30, 1999. The Company, at present, has no intentions of withdrawing from this plan.
(d) Money Purchase Plan -
The Company's Money Purchase Plan is a noncontributory defined contribution plan covering substantially all nonunion employees fulfilling minimum age and service requirements. Prior to its amendment in Fiscal 2000, this Plan provided for contributions of 5% of compensation (as defined) not to exceed the maximum allowable as a deduction for income tax purposes. Pursuant to the amendment, the amount of the Company's contribution was reduced to 3% of a participant's eligible compensation subject to a cap. Money Purchase Plan expense was $1,054,000 and $1,320,000 in Fiscal 2000 and Fiscal 1999,
Notes to Consolidated Financial Statements (continued)
respectively, $295,000 in the six months ended January 30, 1999 and $1,023,000 in Fiscal 1998.
(e) 401(k) Plan -
The Company has a 401(k) defined contribution plan for the benefit of its eligible employees who elect to participate. Employer contributions are made to the plan in amounts equal to 50% of employee contributions, less than or equal to 6% of their salary, as defined. During Fiscal 2000, this Plan was amended to include a profit sharing feature whereby the Company could make an additional discretionary contribution of up to 3% of a participant's eligible compensation subject to a cap. Plan expense aggregated $928,000, $582,000, $292,000 and $596,000 in Fiscal 2000, Fiscal 1999, the six months ended January 30, 1999 and Fiscal 1998, respectively.
10. Other
Allen 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 2000, Fiscal 1999, the six months ended January 30, 1999, and Fiscal 1998, the Company or Predecessor Company purchased at retail approximately $2,758,000, $2,682,000, $1,012,000 and $1,814,000, respectively, of products from Polo Ralph Lauren Corporation.
Bay Harbour and Whippoorwill 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) restrict the transferability of such shares prior to January 28, 2000, (ii) grant rights of first offer as well as tag along rights in the event of a transfer of shares, (iii) grant the right to participate in an acquisition of additional shares of Holdings Common Stock by one of them, and (iv) 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 and Ms. Werner, 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 New Isetan Leases and the new Licensing Arrangements.
Approximately 38% of the Company's employees are covered under collective bargaining agreements.
The Company is adopting in the first quarter of Fiscal 2001, Financial Accounting Standards Board Statement No. 133 - Accounting for Derivatives Instruments and Hedging Activities. SFAS No. 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 transaction and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. The adoption of SFAS No. 133 will not have a material impact on the consolidated financial position, results of operations and cash flows of the Company.
Notes to Consolidated Financial Statements (continued)
11. Quarterly Financial Data (Unaudited)
(in thousands, except per share amounts) 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
1999 - Quarter Ended ------------------------------------------------- 5/1/99 7/31/99 10/30/99 1/29/00 ------ ------- -------- ------- Net sales $ 85,841 $ 77,923 $100,988 $ 102,050 Gross profit 40,066 36,175 47,382 49,892 Net (loss) income (3,791) (6,983) 2,151 3,277 Basic and diluted EPS (0.30) (0.56) 0.17 0.25
12. Predecessor Company - Including the Reorganization and Affiliate Transactions:
(a) Plan of Reorganization -
On January 10, 1996 (the "Filing Date"), Barney's, Inc. ("Barneys") and certain subsidiaries of Barneys (collectively the "Barneys Debtors") and an affiliate, Preen Realty, Inc. ("Preen") and certain subsidiaries of Preen (collectively the "Preen Debtors") (together the Barneys Debtors and Preen Debtors referred to as the "Debtors") filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). Pursuant to an order of the Court (as hereafter defined), the individual Chapter 11 cases of the Debtors were consolidated for procedural purposes only and were jointly administered by the United States Bankruptcy Court for the Southern District of New York (the "Court"). Subsequent to the Filing Date, the Debtors operated their businesses as debtors in possession subject to the jurisdiction and supervision of the Court.
Prior to the Filing Date, and to a lesser extent thereafter, the Predecessor Company engaged in numerous transactions with Preen and certain of its subsidiaries as discussed further below. Preen is owned by various trusts established for the benefit of certain Pressman Family members and, prior to the Effective Date, Preen also owned approximately 55% of the outstanding common stock of Barneys. Preen was previously engaged in the ownership and operation of real estate properties, including certain buildings used in connection with the Predecessor Company's retail and back office operations. Additionally, Preen leased commercial and retail space to third parties and operated a parking lot used by Barneys employees.
In the Chapter 11 cases, substantially all liabilities as of the Filing Date were subject to compromise under a plan of reorganization pursuant to the provisions of the Bankruptcy Code. Under the Bankruptcy Code, the Barneys Debtors assumed or rejected real estate leases, employment contracts, personal property leases, service contracts and other unexpired executory pre-petition contracts, subject to Court approval. Parties affected by the rejections filed claims with the Court in accordance with the reorganization process.
On January 28, 1999 (the "Effective Date"), the Company emerged from reorganization proceedings (the "Reorganization") under the Bankruptcy Code pursuant to a Second Amended Joint Plan of Reorganization, dated November 13, 1998, as supplemented and as confirmed on December 21, 1998 by the Bankruptcy Court (the "Plan"). Consequently, the Company has applied the reorganization and fresh-start reporting adjustments to the consolidated balance sheet as of January 30, 1999, the closest fiscal month end to the Effective Date.
Notes to Consolidated Financial Statements (continued)
Pursuant to the Plan, Holdings was formed and, on the Effective Date, all of the outstanding capital stock of Barneys was transferred to Holdings by the holders thereof. In addition, prior to the Effective Date, Barneys formed three subsidiaries (two of which, Barneys (CA) Lease Corp. and Barneys (NY) Lease Corp., are direct, wholly-owned subsidiaries of Barneys, and one of which, Barneys America (Chicago) Lease Corp., is a direct, wholly-owned subsidiary of Barneys America, Inc., which is a direct, wholly-owned subsidiary of Barneys and which was in existence since before the Filing Date), each of which acts as a lessee and sublessor for one of the flagship stores. BNY Licensing Corp. ("BNY Licensing"), a wholly-owned subsidiary of Barneys, is party to certain licensing arrangements. Barneys Asia Co. LLC is 70% owned by BNY Licensing and 30% owned by an affiliate of Isetan Company Ltd. ("Isetan"), and was formed prior to the Effective Date pursuant to the Plan. Since the Company has a controlling interest in this affiliated Company, this subsidiary is included in the consolidated financial statements of the Company.
The Plan was primarily an equity conversion plan, pursuant to which all of the Allowed Claims (as hereafter defined) against Barneys and certain of its affiliates (including Preen and its affiliates), were converted into Equity Interests in Holdings. The Plan, which also included the issuance of options and warrants, was premised on three primary settlements among the Debtors and each of Isetan, the Pressman Family and the Equipment Lessors. The result of the settlements was that all litigation among the Debtors, Isetan, the Equipment Lessors and the Pressman Family was settled. The Plan also provided for the infusion of at least $62,500,000 in new equity (see Rights Offering below), which when combined with the new credit facility, enabled the Debtors to exit Chapter 11 with sufficient capital to support the new business plan and provide the necessary liquidity for future operations.
The official committee of unsecured creditors and the Plan Investors (as hereafter defined) proposed the Plan. The Plan Investors were creditors of the Debtors and held approximately $149,600,000 in claims against the Debtors, representing approximately 47.9% of the estimated $312,500,000 million in Allowed General Unsecured Claims (the "Allowed Claims"). The estimated percent recovery for the Allowed Claims approximated 18% and was determined based on the assumed value of the shares and warrants issued to the holders of the Allowed Claims. The Plan Investors would own the majority of the equity interests in Holdings and Isetan, the Pressman Family and the other general unsecured creditors would own the remaining minority equity interests. The percentage of Holdings Common Stock owned by the holders of allowed General Unsecured Claims was dependant on the extent to which such holders participated in the Rights Offering.
At the Effective Date, the percentage ownership of Holdings was approximately allocated as follows: 69.7% to the Plan Investors; 21.5% to the general unsecured creditors; 7.3% to Isetan and 1.5% to the Pressman Family.
A brief summary of the primary settlements is discussed below and a more detailed discussion is included in (b), (c), and (d) below.
Isetan Settlement - Isetan had asserted numerous claims against the Company totaling approximately $365 million plus undetermined amounts for, among other things, breach of contract, unpaid interest and legal fees, and fraud in the inducement. The totality of these claims, as discussed below, was settled pursuant to the Plan.
Prior to the Filing Date, as discussed below, the Predecessor Company entered into various agreements with Isetan to, among other things, (i) exploit the "Barneys New York" trademark in the United States and Asia, (ii) expand its United States business through the acquisition of real estate properties and development of major stores in New York, Beverly Hills and Chicago, (iii) establish Barneys America to develop a series of smaller, leased stores in other cities across the United States, (iv) jointly design, develop and produce product, (v) develop the Barneys New York brand and/or other designer wholesale businesses, and (vi) open Barneys New York stores in Japan and throughout the Pacific Rim area. Isetan agreed to contribute up to 95% of the development costs of the three major stores in the United States and to operate the stores in Asia, subject to the terms of various agreements. The Company agreed to contribute (i) its knowledge and skills in the United States specialty retailing business and the application of these skills and knowledge to the acquisition of real estate properties and development of stores both within and outside of the United States, (ii) certain use in Asia of the "Barneys New York" trade name and associated goodwill value, and (iii) the remaining 5% of the development costs of the three major stores. During the Company's bankruptcy proceedings, the Company and certain of its affiliates and Isetan and certain of its affiliates were engaged in litigation as discussed below.
Notes to Consolidated Financial Statements (continued)
The Company and Preen commenced a lawsuit on January 11, 1996 against Isetan, Isetan of America Inc., and parties involved in the leasing of its three flagship stores, Newireen Associates (Madison Avenue), Calireen Realty Corp. (Beverly Hills) and Rush Oak Limited Partnership (Chicago). The lawsuit arose out of various transactions involving one or more of the plaintiffs and one or more of the defendants and sought, among other relief: (i) a declaration that certain agreements relating to the Company's Madison Avenue, Beverly Hills and Chicago stores should not be treated as leases and should be recharacterized, (ii) damages in the approximate amount of $50,000,000 and (iii) restructuring of the relationship between the Company and its affiliates, on one hand, and Isetan and its affiliates on the other, to reflect the true economic interest of the parties and to convert the interests of Isetan and its affiliates into equity. In submitting their answer to the complaint, Isetan asserted certain counterclaims against Barneys, Preen, certain of their respective subsidiaries and Reen Japan Corp., an affiliate, and sought, among other relief, damages against Barneys and Preen in an amount not less than $180,000,000 and a declaration that the above agreements for the Madison Avenue, Beverly Hills and Chicago stores should be considered leases.
In September 1996, BNY Licensing provided Isetan and Japan Company with notice of the termination of the License Agreement by reason of breaches of such agreement, which termination was to be effective September 23, 1996. BNY Licensing also advised Isetan and Japan Company that they were liable under the License Agreement and Services Agreement for the payments under such agreements (including the present value of the unpaid minimum royalties). As the occurrence of an event of default under the License Agreement constituted an event of default pursuant to the Services Agreement, the Company simultaneously provided Isetan and Japan Company with a notice of termination of the Services Agreement, also to be effective September 23, 1996. Barneys and BNY Licensing also filed a demand for arbitration with the American Arbitration Association, which arbitration was to be held in New York City, pursuant to which proceeding such parties sought an award providing for, among other relief, the following: (i) a declaration that the License Agreement and the Services Agreement have terminated in accordance with their respective terms, (ii) payment by Japan Company and Isetan of the royalties due (including the present value of the minimum royalties) together with damages by reason of the breaches of the License Agreement and the Services Agreement, and (iii) compliance by Japan Company and Isetan with all the "Effect of Termination" provisions contained in the License Agreement and the Services Agreement. The Company and BNY Licensing also commenced litigation on September 19, 1996 against Isetan and Japan Company seeking, among other things, to avoid certain unperfected liens on royalties and fees payable (which were collaterally assigned as security) and to recover from such parties, payments of royalties and fees.
As discussed below in the Isetan Settlement, the License Agreement and Services Agreement between the Company and Isetan were terminated. Accordingly, the Deferred Credits of $162,446,000 which recognition was, in part, contingent on the payment of amounts due pursuant to these agreements were determined to be no longer collectible and were reversed into income as a component of the extraordinary gain on discharge of debt. See (g) and (l) below for additional discussion.
The Debtors combined owed prepetition liabilities to Isetan in excess of $260,000,000. Of that total, approximately $51,000,000 was recorded by the Barneys Debtors. On the Effective Date, any and all of the claims of Isetan against the Debtors, the Barneys Affiliates, and Reen Japan (collectively, the "Affiliated Parties") including but not limited to those claims asserted in adversary proceedings were resolved and compromised and Isetan exchanged its claims against and equity interests in the Affiliated Parties pursuant to the following settlements:
1) All litigation between the Debtors and Isetan was settled and dismissed with prejudice; 2) Isetan was named sole owner of the real estate encompassing the Flagship Stores and the Company entered into modified long-term leases for such stores; Accordingly, the net book value of those leasehold interests approximating $97 million at the Effective Date were eliminated from the Predecessor Company's books. 3) A cash payment to Isetan of approximately $23,275,000, which included a payment of $3,122,000 on account of deferred rent payments arising after the Filing Date; 4) Contribution of Isetan's minority interest in Barneys America to Barneys (See Note 8 (d) to the consolidated financial statements); 5) Issuance to Isetan of a $22,500,000 subordinated note; 6) Assignment to Isetan of 90% of the minimum royalty stream arising from the new license agreement;
Notes to Consolidated Financial Statements (continued)
7) Issuance to Isetan of 7.3% of the common stock of Holdings; and 8) Issuance to Isetan of a three-year warrant to purchase 2.25% of the new common stock of Holdings at an aggregate exercise price of $14.68 per share.
Pressman Family Settlement - The Pressman Family had asserted claims against the Debtors in excess of $23 million in the aggregate, as well as equity interests in various Debtors.
Prior to the Effective Date, members of the Pressman Family, entities controlled by the Pressman Family and certain trusts of which members of the Pressman Family were the beneficiaries, owned Barneys.
The Barneys Debtors had recorded prepetition liabilities to members of the Pressman Family or Pressman controlled entities in excess of $2,500,000. On the Effective Date, any and all of the claims and equity interests of the Pressman Family were resolved and compromised and the Pressman Family, in accordance with the Plan, exchanged their claims against and equity interests in the Debtors for the following consideration:
1) 1.5% of the stock in Holdings; 2) A $50,000 cash payment in consideration for the 327,695 shares of preferred stock that was held by the Pressman Family at the Filing Date; 3) Consulting agreements with Holdings for each of Phyllis, Robert, Eugene and Holly Pressman; 4) The exchange of mutual general releases by the Pressman Family, the Company and the Plan proponents; and 5) The dismissal of the Isetan litigation as well as the exchange of general releases by Isetan and the Pressman Family.
Pursuant to the consulting agreements, each of which terminated on the first anniversary of the Effective Date, each of Phyllis Pressman, Robert Pressman, Gene Pressman and Holly Pressman have agreed to make himself or herself available to Barneys (up to 60% of full-time for Phyllis Pressman, and 80% of full time for each of Robert, Gene and Holly Pressman) to furnish consulting services to Barneys, its subsidiaries and affiliates with respect to their business and potential business opportunities. The aggregate compensation payable under the consulting agreements ranged from $410,000 to $1,400,000, payable in four equal semi-annual installments, commencing with the Effective Date. The Company entered into these consulting agreements to ensure that each of Phyllis Pressman, Robert Pressman, Gene Pressman and Holly Pressman, each of whom had been part of senior management of Barneys until the Effective Date, would be available to the Company on an as-needed basis from and after the Effective Date. The Company was also required to pay Nanelle Associates, an entity controlled by members of the Pressman Family, in respect of its claims in the bankruptcy case, $400,000, payable in four equal semi-annual installments commencing on the Effective Date. Nanelle held the license agreement for the Kilgour, French & Stanbury brand of apparel sold in the Company's stores and the payment to Nanelle settled approximately $739,000 in claims filed by Nanelle against the Company.
Equipment Lessors Settlement - The Equipment Lessors had asserted in the aggregate over $60 million in secured, unsecured and administrative claims against the Debtors.
Prior to the Filing Date, the Company had utilized a significant amount of equipment pursuant to arrangements with several equipment-leasing companies. See Note 8 to the Consolidated Financial Statements. The nature of the equipment included furniture and fixtures and certain equipment used in the operations of the business. The majority of this equipment was located in the Flagship stores. The Predecessor Company made monthly payments pursuant to these financing arrangements. On the Effective Date, there were remaining payments due at the contractual rates specified in the agreements, exclusive of the amount to purchase the assets, of approximately $2,800,000.
On the Effective Date, the Equipment Lessors received cash payments totaling $2,114,000 on account of deferred rent payments arising after the Filing Date, retained the security deposits deposited with them in connection with the related leases and transferred all right, title, and interest in the equipment subject to these leases to the Company. In exchange therefore, the Company issued subordinated promissory notes to such lessors in an aggregate principal amount of $35,789,000.
Notes to Consolidated Financial Statements (continued)
The following is a more detailed discussion of the equity and debt issued and other settlements reached pursuant of the Plan that became effective on the Effective Date.
(b) Equity -
Pursuant to the Plan, the following equity was issued:
Common Stock Issued In Exchange for Claims. The equity in Barneys was exchanged for shares of common stock in a new company created under the Plan, Barneys New York, Inc. ("Holdings Common Stock"), and certain allowed general unsecured claims and claims held by Isetan against Barneys and certain of its affiliates exchanged for, among other things, shares of Holdings Common Stock and warrants (as defined below).
Rights Offering. Shares of Holdings Common Stock were issued to certain holders of allowed general unsecured claims pursuant to the exercise by them of rights to subscribe for shares of Holdings Common Stock ("Subscription Rights") which were issued in accordance with the Plan and exercised prior to consummation of the Plan. The $62.5 million offering of Subscription Rights was guaranteed by Bay Harbour Management L.C. ("Bay Harbour") and Whippoorwill Associates, Inc. ("Whippoorwill", and, together with Bay Harbour, the "Plan Investors") on behalf of their discretionary and/or managed accounts to the extent the other holders of allowed general unsecured claims did not elect to participate in the offering. Bay Harbour and Whippoorwill agreed to guarantee the offering of Subscription Rights pursuant to the Amended and Restated Stock Purchase Agreement dated as of November 13, 1998 among Barneys, Bay Harbour, Whippoorwill and the Official Committee of Unsecured Creditors of Barneys (the "Stock Purchase Agreement"). Prior to the Effective Date, the Plan Investors were the two largest creditors of Barneys. On the Effective Date, pursuant to the Plan, the Plan Investors became the two largest holders of Holdings Common Stock. The offering of Subscription Rights was made to enable the Company to emerge from bankruptcy with sufficient capital to support its new business plan and provide the necessary liquidity for its future operations. Pursuant to the offering, Subscription Rights to purchase an aggregate of 7,200,461 shares of Holdings Common Stock at a purchase price of $8.68 per share were issued. In order to ensure that the Company received the maximum amount of funds possible pursuant to the offering, the offering was guaranteed by the Plan Investors. In the offering, the Plan Investors purchased an aggregate of 6,707,531 shares of Holdings Common Stock for an aggregate price of approximately $58.2 million and holders of general unsecured claims purchased an aggregate of 492,930 shares of Holdings Common stock for an aggregate price of approximately $4.4 million, generating combined proceeds from the Rights Offering of $62.2 million.
Option. Pursuant to the Stock Purchase Agreement, the Plan Investors were granted an option to purchase, at an aggregate exercise price of $5.0 million, a total of 576,122 shares of Holdings Common Stock. Pursuant to the option, each of the Plan Investors has the right to purchase the greater of (i) 288,061 shares of Holdings Common Stock, and (ii) 576,122 shares of Holdings Common Stock, less the number of shares purchased by the other Plan Investor. This option was exercised prior to its expiration date of November 15, 1999. No claims were satisfied through the issuance of these options. These options were issued to the Plan Investors in exchange for their guarantee of the offering of Subscription Rights. Holdings estimated equity value of $153,500,000 determined by Peter J. Solomon Company Limited ("PJSC"), which firm was retained by the official committee of unsecured creditors to determine the reorganization value of Holdings, excluded any value related to these options.
Isetan Warrant. Isetan was issued a warrant (the "Isetan Warrant") to purchase 287,724 shares of Holdings Common Stock at an exercise price of $14.68 per share. This warrant expires on January 29, 2002. In preparing its analysis of reorganization value, the investment banking firm retained by the creditors committee did not consider the exercise of the Isetan Warrant based upon its considerable exercise premium over the total reorganization value. Accordingly, the Company did not assign a fair market value to this warrant.
Unsecured Creditors Warrants. Holders of certain allowed general unsecured claims were issued 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. These warrants expired on May 30, 2000. The investment banking firm retained by the creditors committee computed the theoretical value of the Unsecured Creditor Warrants using a variant of a standard computation methodology for the valuation of warrants. Based on (i) an assumed trading price equal to a common equity value for Holdings of approximately $153,500,000; (ii) distribution of 12,500,000 shares of Holdings common stock and (iii) an estimated trading volatility of between 55% and 65% (based on historical trading volatilities of publicly traded companies that are comparable to Holdings), the
Notes to Consolidated Financial Statements (continued)
aggregate value was determined to be in a range from $5,180,000 to $5,550,000 with a midpoint of $5,360,000. The Company utilized the midpoint to value the Unsecured Creditor Warrants. The warrants were issued to all general unsecured creditors in settlement of their allowed claim amounts, other than holders of general unsecured claims whose claims were for less than $2,300 and holders of general unsecured claims of greater than $2,300 who elected to receive cash in settlement of their claims.
Preferred Stock. Holdings issued 15,000 shares of Series A Preferred Stock, par value $0.01 per share (the "Preferred Stock"), to the Barneys Employees Stock Plan Trust (the "Trust"), which was established for the benefit of employees of the Company. In addition, Holdings issued 5,000 shares of Preferred Stock for an aggregate purchase price of $500,000 in government securities to Bay Harbour, which it resold to a third party under a prearranged agreement.
In settlement of the approximately $320,000,000 in general unsecured claims (which does not include the Isetan, Pressman Family, and Equipment Lessors' claims which were settled separately and holders of general unsecured claims whose claims were for less than $2,300 and holders of general unsecured claims of greater than $2,300 who elected to receive cash in settlement of their claims), the Company issued 4,198,916 common shares and 1,103,514 warrants to acquire additional common shares at a purchase price of $8.68. The allocation of the shares and warrants was based on the total available shares and warrants divided by the total dollar value of the claims, multiplied by the amount of each individual vendor claim. The Plan Investors, as the two largest creditors of Barneys, received approximately 48% of each of the shares and warrants that were issued.
(c) Indebtedness -
Pursuant to the Plan, the following debt securities were issued:
Isetan. Barneys issued a subordinated promissory note in the principal amount of $22,500,000 to Isetan. This note, which was sold by Isetan in July 2000 to an unrelated third party, bears interest at the rate of 10% per annum payable semi-annually, and matures on January 29, 2004.
Equipment Lessors. Barneys issued the Equipment Lessors Notes in an aggregate principal amount of $35,788,865. Such promissory notes bear interest at the rate of 11-1/2% per annum payable semi-annually, mature on January 29, 2004, and are secured by a first priority lien on the equipment that was the subject of each of the respective equipment leases.
(d) Other Settlements -
Pursuant to the Plan, and in addition to the other settlements reached with Isetan and the Pressman Family as discussed above, the following occurred:
Licensing. 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 (and which was formed in connection with the Reorganization discussed above), has the exclusive right to sublicense the BARNEYS NEW YORK trademark throughout Asia (excluding Japan). In satisfaction of amounts outstanding pursuant to the BNY Licensing Yen loan payable to Isetan, valued at $49,129,000 at the Filing Date, Isetan received an absolute assignment of 90% of the annual minimum royalties pursuant to item (i) above.
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 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
Notes to Consolidated Financial Statements (continued)
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.
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.
Intercompany Claims. On the Effective Date, substantially all intercompany claims against the Debtors were either released and cancelled by means of contribution, distribution or otherwise, or were offset against any mutual intercompany claims with any remaining amount released and discharged with no further consideration.
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 while the Administrative Claims are negotiated and settled. The total amount of the cash reserve was $4,600,000 and was included in restricted cash at January 30, 1999. At the time, the Company reserved approximately $2,000,000 in its financial statements which was the amount it believed was necessary to settle these claims.
(e) Extraordinary Gain on Discharge of Debt -
The value of cash and securities required to be distributed under the Plan was less than the value of the allowed claims on and interests in the Predecessor Company; accordingly, the Predecessor Company recorded an extraordinary gain of $285,905,000 related to the discharge of prepetition liabilities and certain of the settlements pursuant to the Plan in the six months ended January 30, 1999. Payments, distributions associated with the prepetition claims and obligations and provisions for settlements are reflected in the January 30, 1999 balance sheet. The Consolidated Financial Statements at January 30, 1999 give effect to the issuance of all common stock and notes in accordance with the Plan.
The extraordinary gain recorded by the Predecessor Company was determined as follows:
Settlements pursuant to the Plan includes the elimination of the $162,446,000 of Deferred Credits (discussed in (l) below); offset by the $97,029,000 write-off of the net book value of the leasehold interests transferred to Isetan; the $871,000 write-off of security deposits retained by the Equipment Lessors and the remaining accrual of $2,665,000 pertaining to the
Notes to Consolidated Financial Statements (continued)
final three payments due the Pressman Family pursuant to their consulting agreements.
Cash distributions pursuant to the plan includes:
1) $20,153,000 paid to Isetan pursuant to its settlement. This amount excludes the $3,122,000 payment for deferred rent which arose after the Filing Date and was recorded as an accrued expense of the Predecessor Company; 2) $1,156,000 principally paid to Banks holding prepetition debt as a result of cash residing in accounts at the related banks which was to be applied against outstanding borrowings at the Filing Date; and 3) $955,000 paid to members of the Pressman Family principally in connection with their consulting agreements.
The $60,580,000 of new common stock, exclusive of the value of stock acquired through the Rights Offering, issued to prepetition creditors was allocated (as a percentage of the total shares issued or subscribed to of 12,500,000) as follows:
1) The Plan Investors received 16.1% or 2,009,036 shares; 2) the other unsecured creditors received 17.5% or 2,189,702 shares: 3) Isetan received 7.3% or 913,061 shares; and 4) the Pressman Family received 1.5% or 187,500 shares.
The prepetition liabilities of the Predecessor Company assumed by the Successor Company related principally to claims settled pursuant to the Plan and to a reserve for disputed claims pending resolution; such amounts were to be paid (or resolved) after the Effective Date and were related to the following:
1) Convenience class claims - Represented (a) an allowed general unsecured claim equal to $2,300 or less or (b) an allowed general unsecured claim of a creditor that has irrevocably elected to reduce their claim to $2,300. These claims were settled by the issuance of $0.40 in cash for every $1.00 in claim. 2) Vendor reclamation claims - Represented claims that arose out of the limited right of a vendor to reclaim goods when the buyer was insolvent upon receipt of the goods, and the vendor was unaware of the insolvency. 3) Priority Tax Claims - Represented claims that arose from claims of a governmental unit specified in the U.S. Bankruptcy Code (the "Code") relating to; a tax measured by income or gross receipts; a property tax; a tax required to be withheld or collected; an employment tax on a wage, salary or commission; an excise tax; and a customs duty arising out of the importation of merchandise. 4) Executory Contract Claims - Represented claims arising from a contractual relationship, which contract the debtor assumed at the Effective Date and was, therefore, required to cure any default under the contract. 5) Priority Non-tax Claims - Represented claims specified pursuant to the Code, which in the case of the Debtors, related to claims filed by the service providers of certain employee benefit plans of the Company.
(f) Restructuring Programs -
As a result of continuing efforts to improve Predecessor Company profitability, during the third quarter of 1997, management of the Predecessor Company approved a plan to close six stores and reduce personnel (the "1997 Restructuring Program"). The store closings and personnel reductions were expected to result in headcount reductions in excess of 300 employees. Sales and operating results (without corporate overhead allocations) respectively relating to the stores closed were $7,954,000 and $(527,000) for 1998. Included in these results are depreciation and amortization charges of $425,000 for 1998.
In 1997, the Predecessor Company recorded $52,510,000 of reorganization costs resulting from the aforementioned decisions. $38,767,000 of the costs represented the unamortized value of the leasehold improvements, furniture, fixtures and equipment attributable to the stores at each of their respective closing dates, net of management's immaterial estimates for proceeds to be
Notes to Consolidated Financial Statements (continued)
received on disposal of certain of these assets or the estimated value of certain assets (notably fixtures) to be re-used in other stores. The Company continued to depreciate the assets through the store-closing date, which coincided with the last day of operations of each of the stores. A majority of this charge related to the unamortized value of leasehold improvements which were abandoned after the stores closed. $15,038,000 of the costs represented the estimated cost of claims (the "lease rejection claims") which could have been filed against the Predecessor Company by the landlords of the stores in connection with rejection of the store leases and $2,519,000 related to employee termination costs covering an estimated 300 employees in both the stores and administrative offices. In accordance with SOP 90-7, prepetition liabilities, including claims that become known after a petition is filed, should be reported on the basis of the expected amount of the allowed claims. When a lease is rejected pursuant to a bankruptcy proceeding, the calculation to determine the value of the lessor's claim against the lessee is governed by, and was calculated in accordance with, the Bankruptcy Code. Accordingly, at the time the decision was made to close the stores, the Company was able to calculate the Lease Rejection Claims, and it believed that an accrual was appropriate in accordance with both FASB Statement No. 5, "Accounting for Contingencies" and SOP 90-7 and included such amount in the charge. Offsetting these costs in 1997 was a $3,814,000 reversal of accrued rent previously recorded to straight-line rent over the lease term. In 1998 and the six months ended January 30, 1999, the Predecessor Company recorded additional employee termination costs of $1,881,000 and $3,139,000, respectively, either as a result of continuing efforts to improve Predecessor Company profitability or to fulfill certain contractual obligations pursuant to employee separations. The employee termination costs in 1998 and the six months ended January 30, 1999 covered 13 individuals and 11 individuals, respectively, all of whom were principally administrative employees.
Pursuant to the 1997 Restructuring Program, the Predecessor Company closed five regional mall stores, three in July 1997, and one each in January 1998 and July 1998 and the original flagship store on 17th Street in New York City in August 1997. After the closings of the four stores between July and August 1997, and the related charges against the reserve for the disposition of fixed assets, the remaining reserve (exclusive of amounts provided for lease rejection costs) was not significant to the total amount provided in Fiscal 1997.
At the time of the recording of the charge relating to the 1997 Restructuring Program, the Company wrote down the related fixed assets by $38,767,000. A rollforward of the remaining restructuring charges related to this program and any additional charges taken in subsequent periods is provided below.
The Lease rejection claims were treated as general unsecured claims and resolved pursuant to the Plan.
In the six months ended January 30, 1999, and in each of Fiscal 1998, 1997 and 1996, the Predecessor Company reduced its headcount as part of the ongoing reorganization efforts, including the 1997 Restructuring Program, by 28 associates, 137 associates, 143 associates and 37 associates, respectively. As of January 30, 1999, the severance related reserves provided in 1998 and 1997 have been utilized as intended. At January 30, 1999, the Successor Company had a severance reserve of approximately $3.5 million related to future on-going severance commitments for previously terminated employees, which was substantially utilized as intended by February 3, 2001.
Notes to Consolidated Financial Statements (continued)
At January 30, 1999, the Company had recorded a fresh-start adjustment for the closure of certain outlet stores. As of March 2000, the related stores have been closed and the reserve was substantially utilized as intended. This adjustment was reflected in the Successor Company balance sheet at January 30, 1999.
(g) Fresh Start Reporting -
As indicated in Note 1, the Company adopted fresh-start reporting as of January 28, 1999. The use of fresh start reporting is appropriate because holders of the existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and the reorganization value of the assets of the emerging entity, immediately before the date of confirmation of the Plan, was less than the total of all post-petition liabilities and allowed claims. Prior to the Effective Date, the majority of common shares of the Predecessor Company were owned by the Pressman Family, certain affiliates of the Pressman Family and certain trusts of which members of the Pressman Family were the beneficiaries. On the Effective Date, the Pressman Family was issued an aggregate of 1.5% of the outstanding shares of Holdings Common Stock. After the Effective Date, the majority of Common Shares of Holdings were owned by the Plan Investors. In adopting fresh start reporting, the Company was required to determine its enterprise value, which represents the fair value of the entity before considering its liabilities.
The official committee of unsecured creditors retained and was advised by PJSC with respect to the value of Holdings. PJSC undertook its valuation analysis for the purpose of determining the value available to distribute to creditors pursuant to the Plan and to analyze the relative recoveries to creditors thereunder. The analysis was based on the financial projections provided by the Predecessor Company's management as well as current market conditions and statistical data. The values were as of an assumed Effective Date of January 30, 1999 and were based upon information available to and analyses undertaken by PJSC in October 1998.
PJSC used discounted cash flow, comparable publicly traded company multiple and comparable merger and acquisition transaction multiple analyses to arrive at total reorganization value. These valuation techniques reflect the levels at which comparable public companies trade and have been acquired as well as the intrinsic value of future cash flow projections in the Company's business plan. The valuation was also based on a number of additional assumptions, including a successful reorganization of the business and finances in a timely manner, the achievement of the forecasts reflected in the financial projections, the amount of available cash at emergence, the availability of certain tax attributes, the continuation of current market conditions through the Effective Date and the Plan becoming effective.
In performing their analysis, PJSC used a number of significant assumptions when determining the value of Holdings. For their discounted cash flow analysis, they used a discount range of 16% to 18% and a multiple of 8.0 times trailing twelve months earnings before interest, taxes depreciation and amortization ("EBITDA"). These assumptions led to a range in values between $302,000,000 to $353,000,000.
For the comparable publicly traded company analysis, PJSC used a range of trailing twelve months EBITDA of 7.7 times to 10.4 times. This was indicative of some of Barneys' competitors during the relevant time period. PJSC then took the multiple and multiplied it by a control premium to factor in the estimated premium that would be required to gain control of a publicly traded company. This premium was estimated at 30%. Using the above premium and the trailing twelve months EBITDA of the Predecessor Company of $25,000,000, the range in values based on comparable company transactions fell between $211,000,000 to $299,000,000.
The last valuation method employed by PJSC was using comparable merger and acquisition transaction multiple analyses. For this method, PJSC looked at the most recent transactions involving comparable retailers. PJSC used the time frame of July 1996 to July 1998 and analyzed eleven comparable transactions. Based on this review, they came up with a range of multiples from 7.9 times EBITDA to 13.3 times EBITDA. Using the aforementioned $25,000,000 trailing twelve months EBITDA, PJSC determined a range of values for comparable companies from $197,000,000 to $332,000,000.
Based upon the foregoing assumptions and the three valuation methods, the pro-forma organizational structure, and advice from PJSC, the going concern value for Holdings post-reorganization was determined to be $285,000,000 (the "Total Reorganization Value") as of the Effective Date. This value was the approximate midpoint of values derived from three valuation methods. Based on the established Total Reorganization Value for Holdings, and assumed total debt
Notes to Consolidated Financial Statements (continued)
of approximately $129,500,000 and $2,000,000 in new preferred stock upon emergence, the Plan Investors and the official committee of unsecured creditors employed an assumed common equity value for Holdings of approximately $153,500,000 which was subject to adjustment after giving effect to the exercise of warrants and options. The Total Reorganization Value of the Debtors' business assumed a projected average exit financing facility revolver balance for the 12 months subsequent to the Effective Date equal to $71,200,000 and included cash of $3,500,000 upon emergence.
The adjustments to reflect the provisions of the Plan and the adoption of fresh start reporting, including the adjustments to record assets and liabilities at their fair market values, have been reflected in the following balance sheet reconciliation as of January 30, 1999 as fresh start adjustments. In addition, the Successor Company's balance sheet was further adjusted to eliminate existing equity and to reflect the aforementioned $285,000,000 Total Reorganization Value, which includes the establishment of $177,767,000 of reorganization value in excess of amounts allocable to net identifiable assets ("Excess Reorganization Value"). In accordance with SOP 90-7, the Company allocated the $285,000,000 reorganization value (or capitalization) as follows: first to the long-term debt issued (outstanding) as discussed below; then to the pre-petition liabilities of the Predecessor Company assumed by the Successor Company or paid on the Effective Date approximating $10,275,000 and the remainder of $154,340,000 was attributed to the new equity of Holdings issued in satisfaction of the remaining unsecured claims of the Predecessor Company. The Excess Reorganization Value is being amortized using the straight-line method over a 20-year useful life.
The Successor Company established a 20-year useful life after considering the financial health of the emerging entity, the principal investors, the luxury goods sector of the specialty retail industry, and the strength of the Barneys New York trademark. Additionally, but to a lesser extent, the Successor Company considered the terms of the renegotiated leases with Isetan for the three flagship stores in New York, California and Chicago. The base terms of two of the three leases, including the lease for the Madison Avenue store, is 20 years. If the Successor Company exercises all renewal options, the lease terms could range from a minimum of 40 years to a high of 60 years.
The reorganization value was allocated to the net assets of the Predecessor Company as part of fresh-start accounting. The Reorganization column on the following page reflects the effects of transactions or settlements arising pursuant to the Plan as Reorganization adjustments. In addition, the Company also recorded fresh-start adjustments. In accordance with SOP 90-7, the Company included in this column the adjustments required to eliminate the Predecessor Company's equity; to record the reported assets and liabilities at their fair market value; to establish certain liabilities pursuant to Accounting Principles Bulletin Opinion 16, "Accounting for Business Combinations" ("APB No. 16"); and to reflect the $285,000,000 Total Reorganization Value.
Reconciliation of the Predecessor Company balance sheet as of January 30, 1999 to that of the Successor Company showing the adjustments thereto to give effect to the discharge of prepetition debt and fresh-start reporting appears on the following page.
Notes to Consolidated Financial Statements (continued)
The balance sheet captions impacted and the nature of the more significant reorganization adjustments are discussed in further detail below:
Cash and Restricted Cash ("Cash"). The $58,221,000 proceeds from the Rights Offering received from the Plan Investors in January and borrowings pursuant to the Credit Agreement (approximately $62,100,000), combined aggregating $120,321,000, were used to: repay $83,389,000 outstanding under the debtor in possession credit agreement; pay Isetan $23,275,000 (including a $3,122,000 administrative claim payment for unpaid rent, hereinafter referred to as the Isetan Administrative Claim Payment) on account of its allowed claims (the "Isetan Payments"); to establish the restricted cash amount of $5,082,000 (which includes the $4,600,000 administrative claim reserve); pay $2,626,000 for professional fees (the "Professional Fee Payment"); pay $2,114,000 as an allowed
Notes to Consolidated Financial Statements (continued)
administrative claim payment to the Equipment Lessors (the "Equipment Lessors Payment"); pay Dickson Concepts $3,500,000 in connection with the termination of an asset purchase agreement (the "Dickson Payment"); pay $1,600,000 in bank fees in connection with the Credit Agreement (the "Bank Payment"); pay $1,156,000 to holders of certain general unsecured claims; and pay $955,000 to members of the Pressman Family in connection with their consulting agreements. The net amount of the above transactions increased cash and restricted cash by $1,714,000 to $11,906,000. Such amount was then allocated between restricted and non-restricted cash. The primary component of the restricted cash pertains to the Administrative Claim reserve of $4,600,000 as discussed in (d) above.
Other current assets. Other current assets increased as a result of Holdings' issuance of 5,000 shares of preferred stock for an aggregate purchase price of $500,000 in government securities.
Fixed Assets. The adjustment to fixed assets arose pursuant to the Isetan and Equipment Lessors Settlements. Pursuant to the Isetan settlement, Isetan received outright ownership of the leasehold improvements in the three flagship stores. Accordingly, the Company reduced its fixed assets by $97,029,000. Such amount was included in Settlements pursuant to the Plan in the calculation of the extraordinary gain on discharge of debt as discussed in (e) above. Pursuant to the Equipment Lessors settlement, certain lessors of equipment to the Company transferred all right, title and interest in such equipment to the Company. The Company issued the Equipment Lessors Notes in an aggregate principal amount of $35,789,000 with a corresponding increase to fixed assets.
Other Assets. Other assets increased principally as a result of the Bank Payment discussed above offset by the write-off of $871,000 in long-term security deposits compromised in connection with the Equipment Lessors settlement pursuant to the Plan. The $871,000 was included in Settlements pursuant to the Plan in the calculation of the extraordinary gain on discharge of debt discussed in (e) above.
Accrued Expenses. Accrued expenses were impacted principally by the disbursement of cash for the Professional Fee Payment ($2,626,000), the administrative claim payments of Isetan and the Equipment Lessors ($5,236,000), and the Dickson Payment ($3,500,000) all of which aggregate $11,362,000 principally offset by the assumption of pre-petition liabilities aggregating $9,119,000 to be paid subsequent to the emergence from bankruptcy and the recording of $2,665,000 related to the remaining payments due pursuant to the consulting agreements with certain members of the Pressman Family.
Subscription Rights Offering Liability. In December 1998, the Predecessor Company received $4,386,000 in cash from certain general unsecured creditors in connection with the Subscription Rights offering. The cash was recorded as Restricted cash on the Balance sheet. On the Effective Date, these cash proceeds were aggregated with the $58,221,000 cash proceeds discussed in cash and restricted cash above, and were used to consummate the provisions of the Plan and the related equity in Holdings was issued. The aggregate cash received from the Subscription Rights offering was combined with the proceeds from the new credit facility to pay the obligations discussed in further detail in cash and restricted cash above.
Long-term Debt. Long-term debt adjustment consists of $62,096,000 outstanding pursuant to the Credit Facility, $35,789,000 outstanding pursuant to the Equipment Lessor Notes, and $22,500,000 issued pursuant to the Isetan Note.
Liabilities Subject to Compromise. Such amounts were settled pursuant to the Plan. The Predecessor Company recognized an extraordinary gain on debt discharge of $285,905,000.
Deferred Credits and Minority Interest. In a prior year, the Predecessor Company had recorded deferred credits of $162,446,000 relating to the cash sale to an affiliate of participation rights in future payments to be received pursuant to the License Agreement and Services Agreement (collectively the "Agreements") with Isetan discussed in (l) below. Pursuant to the Isetan settlements in the Plan, the Agreements were terminated and the amounts due pursuant to these agreements were no longer deemed collectible. Accordingly, the $162,446,000 was included in Settlements pursuant to the Plan in the calculation of the extraordinary gain on discharge of debt discussed in (e) above.
Notes to Consolidated Financial Statements (continued)
Additionally, in a prior year, Barneys America issued preferred stock to Isetan of America, Inc. for an aggregate purchase price of $12,000,000. Such amount was recorded as minority interest. Pursuant to the Isetan settlements in the Plan, Isetan's investment in Barneys America was contributed to Barneys and accordingly was treated as a contribution of capital.
Redeemable Preferred Stock. 20,000 shares of New Preferred Stock, with an aggregate liquidation preference of $2,000,000, were issued pursuant to the Plan. Holdings issued 5,000 shares for an aggregate purchase price of $500,000 in government securities to Bay Harbour, which it resold to a third party, and 15,000 shares were issued to the Barneys Employees Stock Plan Trust (the "Trust"). The shares contributed to the Trust 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. Accordingly, the Reorganization adjustment pertains solely to the aforementioned 5,000 shares.
Common Stock and Additional Paid-in-Capital. The adjustments reflect principally the issuance of Holdings common stock pursuant to the Plan. In the aggregate, 12,500,000 shares of Holdings common stock were issued either in settlement of Allowed Claims or in connection with the Rights offering. These shares equate to a par value of $125,000 that is the reorganization adjustment to the Common stock.
On the Effective Date, the Plan Investors received or acquired approximately 8,717,000 shares with an aggregate value of $107,631,000; the general unsecured creditors received or acquired approximately 2,683,000 shares with an aggregate value of $33,128,000; Isetan received approximately 913,000 shares with an aggregate value of $11,273,000; and the Pressman Family received approximately 187,000 shares with an aggregate value of $2,308,000.
Accumulated Deficit. Accumulated deficit of the Predecessor Company was reduced by both the extraordinary gain on discharge of prepetition debt and the contribution of Capital related to the Isetan minority interest in Barneys America, all of which are discussed above.
The balance sheet captions impacted and the nature of the more significant Fresh-start adjustments are discussed in further detail below:
Receivables. Concurrent with the emergence from bankruptcy, management of the Successor Company elected to modify the treatment of special order sales of merchandise. This adjustment reflects a reduction of the receivable balance recorded by the Predecessor Company in connection with these sales. See related discussion below in Accrued expenses.
Inventory. Concurrent with the emergence from bankruptcy, management of the Successor Company approved a plan to close certain outlet stores and discontinue certain private label cosmetic lines. In accordance with APB No.16, a $1,400,000 inventory valuation reserve was recorded to reduce the acquired assets to fair market value.
Fixed Assets. Prior to the emergence from Bankruptcy, the Company retained a third party asset appraisal service to value all the fixed assets of the Company (including those acquired pursuant to the Equipment Lessors Settlement). The fixed asset adjustment includes a $2,716,000 fair market value adjustment required to value the fixed assets of the Successor Company at the appraised amount and a $2,200,000 write down of the fixed assets in the outlet stores to be closed.
Excess Reorganization Value and Shareholders' Equity (Deficit). The adjustments reflect the elimination of the Predecessor Company's old stock, accumulated deficit (after taking into account the impact of the Reorganization adjustments discussed above and the fresh start revaluation), and the adjustment to reflect the Successor Company's total reorganization value of $285,000,000.
Excess reorganization value was determined as follows:
Total Reorganization Value $ 285,000,000 Normal operating liabilities* 61,462,000 Other adjustments - net* (2,508,000) ----------------------- Total Liabilities and equity 343,954,000 Less: Tangible Assets* (166,187,000) ----------------------- Excess Reorganization Value $ 177,767,000 =======================
*Normal operating liabilities is net of the $9,119,000 of prepetition liabilities assumed by the Successor Company. Such amounts will be paid for or settled by the Successor Company. Other adjustments - net includes the $1,852,000 fair market value adjustment to the Isetan debt; $1,156,000 principally paid in settlement of prepetition bank debt; and $500,000 which represented the fair market value of the preferred stock issued and outstanding. Tangible Assets includes total Current assets, Fixed and Other assets of the Successor Company.
Accrued Expenses. Principally includes individually immaterial accruals recorded in accordance with both SOP 90-7 and APB No. 16, principally related to professional fees, severance, taxes, registration fees as well the establishment of a liability to customers for deposits on special orders (see Receivables discussion above). The total of such accruals, aggregating $5,213,000, is included in the allocation of the total reorganization value of the Company.
Long-term debt. This adjustment represents the difference between the principal amount of the Isetan Note of $22,500,000 and the fair market value of the Isetan Note of $20,648,000 (see Note 4 (b)).
Other Long Term Liabilities. Other long-term liabilities of the Predecessor Company represented amounts recorded in accordance with FASB 13 "Accounting for Leases" ("FAS No. 13") pertaining to both contractual rent escalations and landlord contributions for build-outs. A fair market value was not assigned to these liabilities since, in accordance with APB No.16, the existing leases are treated as new leases of the Successor Company. This requires the Successor Company to amortize the remaining scheduled lease commitments over the remaining lease periods on a straight-line basis beginning with the Effective Date. The $5,894,000 write-down to fair market value of the Other long-term liabilities is included in the allocation of the total reorganization value of the Company.
(h) Debtor in Possession Credit Agreement - Interest Paid
From January 11, 1996 through the Effective Date, Barneys had debtor in possession revolving credit facilities (the "DIP Facility"). Pursuant to such facilities, the Company paid interest of $4,095,000, and $5,614,000 during the six months ended January 30, 1999 and Fiscal 1998, respectively.
(i) Rent Expense - Flagship Stores and Equipment Leases
On January 10, 1996, the Predecessor Company ceased accruing stated rent expense (both base rent and percentage rent) to Isetan and its affiliated companies for the Madison Avenue, Beverly Hills and Chicago stores and to substantially all of its equipment lessors as a result of disputes on the characterization of these obligations. These matters were resolved as part of the Plan.
Notes to Consolidated Financial Statements (continued)
During the bankruptcy, in accordance with interim stipulations, orders of the Court and the debtor-in-possession credit agreements the Predecessor Company made "on account" cash payments to Isetan and the equipment lessors at rates substantially below the contractual amounts. The amount of these payments, included in Selling, general and administrative expenses are detailed below along with the corresponding contractual amount for each of the periods reported.
The recorded equipment lessor costs in the six months ended January 30, 1999 and Fiscal 1998 exclude amounts recorded as reorganization costs related to closed stores.
(j) Reorganization Costs
The effects of transactions occurring as a result of the Barneys Debtors' Chapter 11 filings and reorganization efforts have been segregated from ordinary operations and are comprised of the following:
Six Months ended January 30, Fiscal Year 1999 1998 -------------------------------- (in thousands)
Professional fees $ 3,637 $ 7,381 Asset write-offs, net - 29 Payroll and related costs 5,274 4,565 Other 4,923 3,995 -------------------------------- Total reorganization costs $ 13,834 $ 15,970 ================================
During the six months ended January 30, 1999, the Company paid Reorganization costs of $12,511,000, net of amounts received from an affiliate (see (k) below). During Fiscal 1998, the Company paid Reorganization costs of $18,105,000.
Professional fees -- principally relate to legal, accounting and business advisory services provided to the Predecessor Company and the unsecured creditors committee to the Predecessor Company from the Filing Date to the Effective Date. Substantially all of these fees were expensed as incurred, in accordance with the provisions of SOP 90-7.
Asset write-offs -- each of the stores closed by the Predecessor Company was fully operational until the established closing date. As such, the Predecessor Company continued to depreciate the related store assets up to such date. Accordingly, the amount provided by the Predecessor Company for asset write-offs, net included the unamortized value of the leasehold improvements, furniture, fixtures and equipment attributable to the store at the respective stores closing date, net of an estimated recovery for future use or disposition of the related assets. A majority of the assets written off related to unamortized leasehold improvements which were abandoned.
Payroll and related costs -- principally represent costs associated with the Bankruptcy Court approved key employee retention and bonus program, severance costs attributable to either employee headcount reductions or contractual obligations of the Predecessor Company, and certain other fees earned by certain individuals retained by the Predecessor Company, for their
Notes to Consolidated Financial Statements (continued)
expertise in bankruptcy related matters. For the six months ended January 30, 1999 and for Fiscal 1998, the severance included in payroll related costs and the related employees severed were $3,139,000 and 11 (managerial and support employees, inclusive of employees of Meridian Ventures, Inc.) and $1,881,000 and 13 (managerial employees), respectively. See (f) above for actual employees severed and utilization of reserves.
Other costs -- the six months ended January 30, 1999 and Fiscal 1998 includes $3,500,000 and $1,500,000, respectively, paid to Dickson Concepts (International) Limited in connection with the termination of an asset purchase agreement and the consummation of the Plan.
In addition to the above, other costs includes costs incurred by the Predecessor Company related to its reorganization, including but not limited to ancillary costs associated with the decision to close certain stores, administrative costs of the bankruptcy such as for trustee fees and public relations costs.
Accrued expenses at January 30, 1999 includes fees payable to professionals pertaining to court approved "holdbacks" or fees not awarded, during the bankruptcy of approximately $6,900,000. Substantially all of these fees were paid in 1999.
(k) Affiliate companies and other related parties -
The Predecessor Company entered into various transactions and agreements with affiliate companies and other related parties. The affiliates were or had been primarily engaged in the operation of real estate properties, Barneys New York credit card operations, and certain leased departments. The following information summarizes the activity between the Predecessor Company and balances due to or from these related parties at January 30, 1999 and for the six months ended January 30, 1999 and the fiscal year 1998, respectively. Unless otherwise indicated below, all revenues and expenses recognized by the Predecessor Company pursuant to the arrangements discussed below are included in selling, general and administrative expenses in the respective periods. Substantially all of the agreements and transactions described below had either ceased or been terminated prior to November 1997.
The Predecessor Company leased various retail, office and parking lot properties principally from subsidiaries of Preen but also from companies owned by certain members of the Pressman Family. Included was (1) office and office related premises; (2) properties used in connection with the operation of the Predecessor Company's 17th Street store in New York City; and (3) parking lots on 17th Street. Each of the above properties were vacated by the Predecessor Company during the bankruptcy and each of the respective leases were rejected by orders of the Court during 1997 or 1998. Under the terms of these leases, the Predecessor Company was required to pay base rents plus operating expenses and real estate taxes as defined. Total rent expense (including operating expenses) relating to these leases was approximately $272,000 in Fiscal 1998.
Barneys subleased retail and warehouse space from a third party that leased said space from Fener Realty Co. ("Fener"). Fener was a non-debtor entity owned by certain members of the Pressman Family. Fener owned the property at 249 West 17th Street and triple-net leased the property located at 245 West 17th Street (collectively the "properties") from Renef Realty (also owned by certain members of the Pressman Family). Prior to January 1995, the Predecessor Company leased approximately 10% of these properties directly from Fener for use in connection with the semi-annual warehouse sales. Fener leased the remaining 90% of the properties to a third party. In January 1995, Fener and Renef refinanced their mortgages on the Properties. In connection therewith, ownership of the Properties was transferred to two limited liability companies, Pine Associates LLC ("Pine") and Spruce Associates LLC, which were indirectly owned by Fener and Renef, respectively. As part of this transaction, the lease between Fener and the third party was restructured as a triple-net lease between Pine and the third party for the Properties in their entirety and the lease between the Predecessor Company and Fener was restructured as a triple-net sublease (the "Sublease") between the third party and the Predecessor Company (collectively the "New Lease Arrangements"). Pursuant to the New Lease Arrangements, the third party, in addition to its fixed rent, was responsible for paying all operating expenses of the Properties, and the Predecessor Company was responsible for fixed rent, all operating expenses and 90% of the taxes of the Properties, except for amounts which were the third party's responsibility pursuant to its prior lease. The sublease between the third party and the Predecessor Company was rejected by order of the Court in December 1998. Total rent expense (including operating expenses) related to this sublease was approximately $374,000 in the six months ended January 30, 1999 and $2,055,000 in Fiscal 1998.
Notes to Consolidated Financial Statements (continued)
In prior years, the Company had entered into various transactions and agreements with Preen. Prior to the Filing Date as well as through the Effective Date, the Company incurred certain normal operating costs, principally personnel costs, on behalf of Preen. This situation arose as both entities shared the same corporate office space and certain employees (including officers) of the Company were also providing services to Preen. After the Filing Date, the Company also incurred and paid reorganization costs, including legal, accounting and business advisory services, on behalf of Preen which was also operating as a debtor in possession pursuant to the Bankruptcy Code. The Company routinely allocated to Preen a share of both the normal operating costs and reorganization costs incurred on their behalf, however, it was unclear (because of the bankruptcy) whether Preen would have the ability to repay such amounts in the future. The normal operating costs principally covered an allocation of certain employees' salaries. The allocation was based on an estimated percentage of time that the employee spent working on the matters of Preen. Such allocations ranged from 2% to 100% depending on the year of allocation with the allocation percentages declining over time during the bankruptcy proceedings as the workload for Preen declined as properties were sold. Accordingly, at the time of the recording of such charges that reduced expenses and generated receivables for the Predecessor Company, reserves were provided in the operating results either as a selling, general and administrative expense or a reorganization expense, depending on the nature of the charge. During the six months ended January 30, 1999 and Fiscal 1998 the Predecessor Company charged Preen approximately $1,000,000 and $418,000, respectively, for various expenses. The Company had allocated both operating expenses and reorganization expenses, principally of a legal nature in connection with the litigation discussed in above and the sale of or negotiations surrounding the real estate properties owned by Preen. In December 1998, in connection with the approval of the Plan and the settlements included therein, collectibility issues of these receivables from affiliated entities were resolved. Accordingly, the Predecessor Company was able to reduce its affiliate receivable reserve by approximately $1,900,000, principally representing cash payments from an affiliate in settlement of a portion of the outstanding receivable. This reserve reversal reduced Selling, general and administrative expenses and reorganization costs by approximately $500,000 and $1,400,000, respectively, in the six months ended January 30, 1999.
Barneys licensed the right to sell certain branded merchandise from Nanelle. Nanelle, owned by certain members of the Pressman Family, held the license to use the Kilgour, French and Stanbury trademarks (the "Mark"). Royalty expense incurred related to this license was $24,790 in Fiscal 1999, $86,322 in the six months ended January 30, 1999 and $171,000 in Fiscal 1998, respectively. This expense is included in cost of sales. Pursuant to the Plan, Nanelle transferred its rights in this license to Barneys.
(l) Isetan relationship - Prior to the Effective Date -
In 1989, the Predecessor Company entered into agreements with Isetan to, among other things, (i) exploit the "Barneys New York" trademark in the United States and Asia, (ii) expand its United States business through the acquisition of real estate properties and development of major stores in New York, Beverly Hills and Chicago, (iii) establish Barneys America, Inc. to develop a series of smaller, leased stores in other cities across the United States, (iv) jointly design, develop and produce product, (v) develop the Barneys New York brand and/or other designer wholesale businesses, and (vi) open Barneys New York stores in Japan and throughout the Pacific Rim area. Isetan agreed to contribute up to 95% of the development costs of the three major stores in the United States and to operate the stores in Asia, subject to the terms of various agreements. The Company agreed to contribute (i) its knowledge and skills in the United States specialty retailing business and the application of these skills and knowledge to the acquisition of real estate properties and development of stores both within and outside of the United States, (ii) certain use in Asia of the "Barneys New York" trade name and associated goodwill value, and (iii) the remaining 5% of the development costs of the three major stores. As part of the ongoing relationship between Isetan and the Company, Isetan and/or their respective affiliates (i) established Barneys America, (ii) established a Barneys New York retail business in Asia and in connection therewith entered into license and technical assistance agreements providing for payment of royalties and other fees and a loan agreement secured by the minimum royalties and technical assistance payments, (iii) acquired and developed retail properties in New York, Beverly Hills and Chicago, (iv) established Barneys New York Credit Co., L.P. to operate the Barneys New York private label credit card, and (v) trained Isetan employees in the operation of the specialty retail business.
In 1989, BNY Licensing entered into an operating license agreement with Isetan (the "License Agreement") to license the "Barneys New York" name in Japan and certain other Asian countries in connection with the operation of retail stores and the manufacturing and distributing of licensed products. The License Agreement provided for royalties based upon a percentage of net sales. The
Notes to Consolidated Financial Statements (continued)
Predecessor Company was also entitled to receive future minimum royalties over the remaining term of the License Agreement ranging from 265,650,000 to 663,933,000 Japanese yen a year. In June 1990, Isetan assigned its interest in the License Agreement and in the Services Agreement to Barneys Japan, a majority owned subsidiary of Isetan. After the Filing Date, as a result of the Chapter 11 filings and the litigation surrounding these agreements as discussed in (a) above, the Predecessor Company ceased recognizing royalty income pursuant to these agreements. The License Agreement was terminated as part of the Plan.
Simultaneously with entering into the License Agreement, Barneys entered into a technical assistance agreement with Isetan (the "Services Agreement") in connection with the operation of retail stores and the manufacturing and distributing of licensed products in Japan and other Asian countries. The Services Agreement was coterminous with the License Agreement. The Services Agreement provided for the payment of an annual fee based upon the excess of a percentage of gross profit, if any, as defined in the Services Agreement, plus other fees. The Services Agreement was terminated as part of the Plan.
In December 1989, BNY Licensing borrowed four billion Japanese yen from an affiliate of Isetan and executed a promissory note to evidence that obligation (the "BNY Licensing Note"). BNY Licensing assigned as collateral its rights to receive future royalties and Barneys assigned as collateral its rights to Services Agreement fees, due from Isetan, to be used to pay interest and principal due under the loan. The loan called for quarterly payments of principal and interest at 7.48% a year (subject to adjustment in 1999) through March 31, 2011. If calculated interest was greater than royalties and fees, the shortfall would be added to principal and all unpaid principal will be deferred until March 31, 2011. Gains and losses resulting from the translation of this obligation to its United States dollar equivalent were recognized in current operations prior to the Filing Date when the obligation became subject to compromise. As a result of the Chapter 11 filings, the Predecessor Company ceased accruing interest on this debt as of the Filing Date. Pursuant to the Plan and in satisfaction of the BNY Licensing Note, BNY Licensing assigned to Isetan 90% of the minimum royalty payable during the initial term of the amended and restated license agreement that replaced the License Agreement.
In a prior year, the Predecessor Company sold to Preen, for $162,446,000 in cash (the "Deferred Credits"), undivided interests in the future payments to become due under the Services Agreement as well as royalty payments in excess of the future minimum royalties due pursuant to the License Agreement, each of which is discussed above. Preen had obtained the cash as a result of various loans made by Isetan to Preen. The Predecessor Company would have recognized the Deferred Credits as earned over the remaining terms of the respective agreements or in accordance with the outcome of certain litigation commenced between Barneys and Isetan. Pursuant to the Plan, both the License Agreement and the Services Agreement were terminated. Accordingly, the outstanding balance of the Deferred Credits was reversed into income as a component of the extraordinary gain on discharge of debt (See (e) above).
During the Company's bankruptcy proceedings involving the Company, the Company and certain of its affiliates and Isetan and certain of its affiliates were engaged in litigation involving the various aspects of the relationship outlined above. That litigation was resolved pursuant to the Plan.
Schedule II -- Valuation and Qualifying Accounts
Barneys New York, Inc. and Subsidiaries
February 3, 2001
- ---------------------- (a) Primarily provisions for doubtful accounts (b) Primarily uncollectible accounts charged against the allowance provided therefor. The year ended January 29, 2000 also includes a $750 fair market value adjustment in connection with the finalization of the purchase accounting reserves.
(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) Filed herewith.