XNAS:DFZ Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 001-08769

 

 

R.G. BARRY CORPORATION

(Exact name of Registrant as specified in its charter)

 

Ohio   31-4362899

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

13405 Yarmouth Road N.W.

Pickerington, Ohio 43147

 

(614) 864-6400

(Address of principal executive offices, including zip code)   (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Shares, Par Value $1.00 per share  

The NASDAQ Stock Market

(The NASDAQ Global Market)

Series II Junior Participating Class A

Preferred Share Purchase Rights

  The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the common shares (the only common equity of the Registrant) held by non-affiliates of the Registrant was $121,270,733 based on the closing price per common share of $12.08 on The NASDAQ Global Market on December 31, 2011 (the last business day of the most recently completed second fiscal quarter). For this purpose, executive officers and directors of the Registrant are considered affiliates.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 11,182,353 common shares, $1.00 par value, as of September 12, 2012.

 

 

DOCUMENT INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement to be furnished to shareholders of the Registrant in connection with the 2012 Annual Meeting of Shareholders to be held on November 2, 2012, which definitive Proxy Statement will be filed not later than 120 days after June 30, 2012, are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent provided herein.

 

 

 


Table of Contents

R.G. BARRY CORPORATION

FISCAL 2012

ANNUAL REPORT on FORM 10-K

 

 

TABLE OF CONTENTS

 

 

         Page  
    

Forward-Looking Statements

     3   

Definitions

     3   
PART I   

Item 1. Business

     4   

Item 1A. Risk Factors

     11   

Item 1B. Unresolved Staff Comments

     16   

Item 2. Properties

     16   

Item 3. Legal Proceedings

     17   

Item 4. Mine Safety Disclosures

     17   

Supplemental Item. Executive Officers of the Registrant

     17   
PART II   

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     18   

Item 6. Selected Financial Data

     20   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     34   

Item 8. Financial Statements and Supplementary Data

     35   

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     69   

Item 9A. Controls and Procedures

     69   

Item 9B. Other Information

     73   
PART III   

Item 10.* Directors, Executive Officers and Corporate Governance

     73   

Item 11.* Executive Compensation

     74   

Item 12.* Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     74   

Item 13.* Certain Relationships and Related Transactions, and Director Independence

     75   

Item 14.* Principal Accountant Fees and Services

     75   
PART IV   

Item 15. Exhibits and Financial Statement Schedules

     75   

Exhibit 10.29

Exhibit 21.1

Exhibit 23.1

Exhibit 24.1

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

 

* The information required to be disclosed under each Item is incorporated by reference from the Registrant’s definitive Proxy Statement to be furnished to shareholders of the Registrant in connection with the 2012 Annual Meeting of Shareholders to be held on November 2, 2012, which definitive Proxy Statement will be filed no later than 120 days after June 30, 2012.

 

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FORWARD-LOOKING STATEMENTS

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

Some of the disclosures in this Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (the “2012 Form 10-K”) contain forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “expect,” “could,” “should,” “anticipate,” “believe,” “estimate,” or words with similar meanings. Any statements that refer to projections of our future performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. These statements, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995, are based upon our current plans and strategies and reflect our current assessment of the risks and uncertainties related to our business. These risks include, but are not limited to: our continuing ability to source products from third parties located within and outside North America; competitive cost pressures; the loss of retailer customers to competitors, consolidations, bankruptcies or liquidations; shifts in consumer preferences; the impact of the global financial crisis and general economic conditions on consumer spending; the impact of the highly seasonal nature of our footwear business upon our operations; inaccurate forecasting of consumer demand; difficulties liquidating excess inventory; disruption of our supply chain or distribution networks; our ability to implement new enterprise resource information systems; a failure in or a breach of our operational or security systems or infrastructure, or those of our third-party suppliers and other service providers, including as a result of cyber-attacks; the unexpected loss of any of the skills and experience of any of our senior officers; our ability to successfully integrate any business acquisitions; and our investment of excess cash in variable rate demand note securities and other short-term investments. You should read this 2012 Form 10-K carefully, because the forward-looking statements contained in it (1) discuss our future expectations; (2) contain projections of our future results of operations or of our future financial condition; or (3) state other “forward-looking” information. The risk factors described in this 2012 Form 10-K and in our other filings with the Securities and Exchange Commission (the “SEC”), in particular “Item 1A. Risk Factors” of Part I of this 2012 Form 10-K, give examples of the types of uncertainties that may cause actual performance to differ materially from the expectations we describe in our forward-looking statements. If the events described in this “Safe Harbor” Statement or in “Item 1A. Risk Factors” of Part I of this 2012 Form 10-K occur, they could have a material adverse effect on our business, operating results and financial condition. You should also know that it is impossible to predict or identify all risks and uncertainties related to our business. Consequently, no one should consider any such list to be a complete set of all potential risks and uncertainties. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the statement is made to reflect unanticipated events. Any further disclosures in our filings with the SEC should also be considered.

DEFINITIONS

All references in this 2012 Form 10-K to “we”, “us”, “our”, and the “Company” refer to R.G. Barry Corporation, an Ohio corporation (the registrant) or, where appropriate, to R.G. Barry Corporation and its subsidiaries. The Company’s annual reporting period is either a fifty-two or fifty-three-week period (“fiscal year”) ending annually on the Saturday nearest June 30. For definitional purposes, as used herein, the terms listed below include the respective periods noted:

 

Fiscal 2013

   52 weeks ending June 29, 2013

Fiscal 2012

   52 weeks ended June 30, 2012

Fiscal 2011

   52 weeks ended July 2, 2011

Fiscal 2010

   53 weeks ended July 3, 2010

 

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PART I

Item 1. Business

BUSINESS AND PRODUCTS

Overview

R.G. Barry Corporation develops brands and markets products in three areas of the retail accessories category. These products include: footwear, such as slippers and sandals; foot and shoe care products, such as cushioned insoles; and handbags, tote bags and travel products. Our products are primarily sold in North America by a broad cross-section of retailers of varying size and classification.

Since its founding more than 65 years ago, the Company’s main product has been accessories-type footwear. As part of our current strategic growth plan, we acquired the principal assets of two businesses during fiscal 2011 that transformed our business profile from solely an accessories footwear provider into the marketer of a range of accessories products. Foot Petals, Inc. (“Foot Petals”) is a leading developer and marketer of premium insoles and comfort solutions for footwear problems; and Baggallini, Inc. (“Baggallini”) is a developer and marketer of handbags, tote bags and travel products.

We use a flexible sourcing model for our business. Many of the costs and expenses related to product procurement and distribution can expand and contract with our needs. Our products are all produced by contract manufacturers, primarily located in the People’s Republic of China (“China”) with the exception of certain foot and shoe care products, for which we also utilize a domestic-based supplier. Most of our products are warehoused and shipped by third-party logistics providers located in the United States.

We are an Ohio corporation with executive offices are located in a Company-owned facility at 13405 Yarmouth Road N.W., Pickerington, Ohio 43147. Our telephone number is 614.864.6400, and our corporate Internet website can be accessed at www.rgbarry.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate our website into this 2012 Form 10-K). We have been a public company since 1962. Our common shares are traded on The NASDAQ Global Market (“NASDAQ-GM”) under the trading symbol DFZ, which is meant to evoke the name of our flagship slipper brand, Dearfoams*.

Reporting Segments

Our business is divided into two reportable segments: the Footwear segment, which includes slippers and sandals; and the Accessories segment, which includes foot and shoe care products, handbags, tote bags and travel products. Approximately 79% of our consolidated net sales in fiscal 2012 came from the Footwear segment with the remainder of our net sales generated through the Accessories segment.

Our two reporting segments – Footwear and Accessories – currently are comprised of three individual business units (“BU”): 1) footwear; 2) foot and shoe care products; and 3) handbags, tote bags and travel products. These BUs are organized around specific accessories product categories and trademarked brand names that we own. We think our trademarks have significant commercial value. In general, trademarks remain valid and enforceable as long as they are used in connection with our products and services and the required registration renewals are filed. We intend to continue the use of each of our trademarks and to renew each registered trademark accordingly.

We established our reporting segments using generally accepted aggregation criteria under which we analyzed each business unit’s products, brand names, distribution channels, customer bases, sourcing and production methods and anticipated performance. Our Foot Petals and Baggallini business units share similar qualitative and quantitative characteristics that lend themselves to aggregation and that differentiate them from our footwear business. We believe that utilizing these two reporting segments allows us to fairly represent our business and its financial results.

 

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See additional information on results as well as total assets for each of our reporting segments in “Note (16)—Segment Reporting” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data.” in this 2012 Form 10-K.

Each of our business units is managed by a Business Unit President, who reports to the Company’s President and Chief Executive Officer. A team of design, marketing, sales, merchandising and finance professionals supports each BU. In-house corporate administrative, finance, human resources, information technology, logistics and creative services (“shared services”) are used in varying degrees by all of our business units. We maintain sales offices and showrooms at 9 East 37th Street in New York City, New York, which are shared by all BUs.

While many selling, general and administrative expenses (“SGA”) are direct to each business unit, certain corporate support expenses are incurred and assigned to the respective business units based on estimated usage of Company services. Operating profit as measured for each segment includes sales, cost of sales, direct and allocated SGA expenses. This segment measure of operating profit or loss, as defined, is the primary indicator of internal financial performance used by management.

Other corporate expenses incurred are deemed to be applicable to the Company as a whole and are not allocated to any specific business segment. These unallocated expenses primarily represent areas such as the Company’s corporate and governance functions, including the Chief Executive Officer, Chief Financial Officer and Board of Directors, as well as expense areas including incentive bonus, incentive stock compensation, pension, professional fees and similar corporate expenses.

Footwear

Our Footwear segment is a component of the overall accessories category and a subset of the highly competitive footwear industry. According to independent industry research, annual retail sales of accessories footwear total slightly under $1 billion. The category includes slippers, sandals, hybrid and active fashion footwear and slipper socks. We believe that we are one of the world’s largest marketers of accessories footwear products, and as such, estimate that we sell about 30% of the slippers purchased in the United States annually.

We have sold more than 1 billion pairs of accessory footwear under a variety of brand names since our founding in 1947. Today, Dearfoams* is our principal footwear brand. Since its introduction in 1958, Dearfoams* has, according to our proprietary consumer research, become one of the most-recognized brand names in accessories footwear. In addition to Dearfoams*, our current footwear brand names include Angel Treads*, DF by Dearfoams*, DF Sport by Dearfoams*, Utopia by Dearfoams* and Terrasoles*. We exited the Levi’s** brand slippers and sandals business, operated under license granted by Levi Strauss & Co., at the end of fiscal 2012. This was the final step in a strategy to exit all licensed footwear businesses in our portfolio. The decision had no material impact on fiscal 2012 results.

In recent years, several companies that are engaged in marketing apparel and footwear have begun selling accessories footwear. Many of these competitors have significantly greater financial, distribution and marketing resources than we do. We do not, however, believe that they have committed the necessary resources to effectively compete long-term within the category. In addition, some retailers have from time to time sought to source their own accessories footwear products directly from overseas manufacturers.

 

* Denotes Company trademark registered in the United States Department of Commerce Patent and Trademark Office
** Denotes a licensor trademark registered in the United States Department of Commerce Patent and Trademark Office

 

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Most competitors in this segment are either privately-owned sourcing companies, producing products under various licensed brand names, or retailers sourcing their own private or proprietary label goods. We compete in this segment primarily on the basis of the quality, innovation and comfort of our products; price; value; service to our customers; marketing and merchandising expertise; and reputation within the trade. Our long experience in accessories footwear and the advantages of scale gained as a category leader give us tremendous advantages over many competitors. We believe that we are the only accessories footwear resource capable of providing the high level of comprehensive service, quality and support that we offer retailers, and we expect to continue growing our branded business in this segment based upon these strengths.

We debut new footwear collections each spring and fall in conjunction with national retail accessory buying markets and other national trade events. We plan to continue the introduction of updated and new products in response to fashion changes, consumer taste preferences and changes in the demographic makeup of our business.

Several basic footwear profiles are standard in all of our footwear brand lines. Many of these classic footwear silhouettes are in demand throughout the year. The most significant changes to these traditional products are made in response to broadly-accepted fashion trends and can include slight variations in design elements, internal construction, ornamentation, fabric and color.

We license certain footwear brand names we own to Olivet International, Inc. (“Olivet”). The five-year exclusive agreement entered in July 2010 gives Olivet sole right to develop and market a variety of sleepwear, active wear and accessories products bearing the Dearfoams*, DF by Dearfoams*, DF Sport by Dearfoams* and Utopia by Dearfoams* trademarks in North and South American markets. We receive quarterly royalty payments under this agreement.

Although international sales of our footwear, primarily in Canada and Mexico, represented only 3% of our total footwear business during fiscal 2012, we do view international markets as a potential driver of future growth. As a result, we began a formalized effort during fiscal 2012 to develop and grow a stable of international distributors for each of our business units.

Our footwear products are sold through multiple retail channels including mass merchandisers, national chain stores, warehouse clubs, mid-tier department stores, specialty and independent stores, discount stores and e-commerce and catalog retailers. Suggested retail prices for our footwear products range from approximately $7-to-$50 per pair, depending upon the style, retail channel and retailer mark-up. Most buyers and consumers of our footwear are adult females.

We do not finance customers’ purchases beyond granting traditional payment terms at the time shipments to the retailers are made. We do grant limited return privileges and allowances to fund advertising and in-season promotional activities to certain footwear customers. Our direct-to-consumer footwear sales are nominal and limited to those conducted through www.dearfoams.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate our Dearfoams e-commerce website into this 2012 Form 10-K).

Our footwear business is comprised of two components, replenishment and seasonal. In the replenishment component, retailers carry a relatively consistent, planned assortment of products on a year-round basis. These products are purchased by consumers on a repeat basis and the in-store assortment is regularly replenished by us to ensure product availability for shoppers. The seasonal component is comprised of a variety of more fashion-forward and boxed items that generally are found in stores only during the key retail selling periods, such as the period around the Christmas holiday selling season. Approximately 73% of our annual net sales in the footwear BU have historically occurred from July through December. We have identified the popularity of slippers as a holiday gift item as the main reason for this heavy seasonal weighting.

 

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During fiscal 2012, we continued to invest in an on-going advertising/marketing initiative that is focused on increasing our dominance in accessories footwear and expanding the relevance of Dearfoams* to a broader consumer demographic. We also continued to use seasonal in-store merchandisers during the critical holiday period as a tool for managing the flow of our footwear to the retail selling floor. We believe that when combined with modern automatic demand-pull replenishment systems and various other merchandising and sales techniques, the use of temporary in-store merchandisers helps us optimize critical holiday sell-through of our footwear products.

Due to the seasonal nature of our Footwear segment, the backlogs of unfilled footwear orders as of fiscal August month-end periods that ended on September 1, 2012, September 3, 2011 and September 4, 2010 were $32.5 million, $34.3 million and $30.3 million, respectively. The backlogs of unfilled sales orders at the end of fiscal 2012, fiscal 2011 and fiscal 2010 were approximately $31.8 million, $31.3 million and $33.4 million, respectively; comparisons between years reflect differences in the timing of order receipts only and do not necessarily indicate a growth or decline in sales volume.

We operate a footwear sourcing office in Dongguan City, China, to facilitate the development and procurement of our products and help ensure their quality and timely delivery. Approximately 33 people work out of the Dongguan City office.

We purchase our footwear products from approximately 18 different third-party manufacturers, most of whom are located in China. Our overall experience with third-party footwear manufacturers has been very good in terms of reliability, delivery times and product quality. All of our third-party purchases are conducted on an open account basis and in U.S. Dollars.

We are dependent on methods of third-party transport to move our products from our third-party manufacturers to distribution facilities we utilize, and from those facilities to our customers. In our Footwear segment, we warehouse and distribute all goods from a third-party logistics facility in Fontana, California. In May 2012, we exited a leased distribution center we operated for many years in San Angelo, Texas. In addition to the cost savings that resulted from moving to our current third-party logistics provider, the elimination of the Texas legacy facility cut approximately two weeks off of the product distribution cycle for goods previously handled through the San Angelo facility. The closing had no material impact on fiscal 2012 financial results.

Accessories Products

The Foot Petals and Baggallini BUs collectively comprise our Accessories segment. Independent industry research indicates that the product classifications where these BUs compete—foot and shoe care, and handbags, tote bags and travel products—represent approximately 4% and 30%, respectively, of total annual accessories sales at retail. We believe that these subcategories present us with opportunities for faster and more profitable growth than the opportunities presented by the Footwear segment.

Foot Petals

Foot Petals sells approximately 30 foot and shoe care products priced between $7 and $45, which primarily are targeted toward the foot comfort of women between the ages of 14 and 55. Many Foot Petals products are made from high-performance urethane or similar man-made materials and various fabrics. The products generally are sold at premium, non-promotional prices and yield higher margins than those earned in our Footwear segment.

Foot Petals products are sold under a variety of brand names including Foot Petals*, Fab Feet*, Glamour Toez*, Heavenly Heelz* and Killer Kushionz*. Sales to the trade are handled by a combination of Company-employed and independent sales representatives. Products also are presented to retailers at various national markets and accessories trade shows. Foot Petals’ market share of the total retail comfort insert business is very nominal and Foot Petals emphasizes function coupled with fashion at a reasonable

 

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price, whereas many of our competitors emphasize only function. We do not finance retailers’ purchases beyond granting traditional payment terms at the time shipments to the retailers are made.

Foot Petals’ products principally are sold to consumers through mass-merchants, upper-tier department stores, independent retailers, internet and home shopping venues. We also sell direct-to-consumer via www.footpetals.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate our Foot Petals e-commerce website into this 2012 Form 10-K). Due in part to its non-seasonal nature, the business has minimal exposure to obsolete inventory and net sales are relatively evenly distributed across the fiscal year. The replenishment nature of the Foot Petals’ business model contributes to making it a fast-turning, low inventory volume business.

In conjunction with our efforts to develop international business for all of our business units, we signed several third-party distribution agreements for Foot Petals during the second half of fiscal 2012. The impact on the Company’s net earnings from these distribution agreements will not be material in fiscal 2013.

Foot Petals brand cushions are considered premium products within their category and carry the Seal of Acceptance of the American Podiatric Medical Association. Among Foot Petals major competitors are Dr. Scholl’s®, Implus® Footcare and Profoot®.

Foot Petals’ products primarily are manufactured by a third-party supplier based in Ohio, and warehoused and distributed through a third-party logistics provider located adjacent to the supplier’s manufacturing plant. We rely on third-party transport to move Foot Petals products to our customers.

In addition to showroom and office space in our New York City location, Foot Petals operates a sales office in Glen Rock, New Jersey.

Baggallini

Baggallini products consist of various styles of handbags, tote bags and travel accessories priced between $40 and $180, and are primarily targeted toward women between the ages of 34 to 55. Its products are principally made from durable nylons, leathers and other man-made materials and are sold at premium, non-promotional prices.

We invested significantly in restaging the Baggallini brand during fiscal 2012. In February 2012, we introduced an updated Baggallini line that included a second tier of higher-priced, more colorful and highly-styled products. Baggallini products traditionally are recognized for their lightweight construction and intelligent, solution-oriented organization. The Baggallini BU generates higher margins than those earned in our Footwear segment.

Baggallini’s principal trademarks include baggallini* and Le Bagg*. Sales are handled by a combination of Company-employed and independent sales representatives. Products also are presented to retailers at various gift and trade shows, conducted throughout the country at various times of the year. Baggallini’s market share of the total retail handbag business is very nominal and Baggallini emphasizes function coupled with fashion at a reasonable price whereas many of our competitors primarily emphasize fashion. We do not finance retailers’ purchases beyond granting traditional payment terms at the time shipments to the retailers are made.

Baggallini’s products primarily are sold to consumers through a network of several thousand independent retail locations, non-promotional department and chain stores and on-line retailers. We also sell direct-to-consumer via www.baggallini.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate our Baggallini e-commerce website into this 2012 Form 10-K).

 

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Branded competitors include Kipling® and LeSportsac®. The business is relatively non-seasonal and evenly distributed across the fiscal year.

Baggallini has a nominal international business, primarily in Canada. We expect to expand Baggallini’s international footprint, beginning in fiscal 2013, as part of our Company-wide international growth strategy.

All Baggallini products are developed and sourced through a network of contract manufacturers in China. This business unit utilizes a sourcing agent who is not affiliated with our China-based footwear sourcing operations. All of Baggallini’s third-party purchases are conducted on an open account basis and in U.S. Dollars. We are dependent on methods of third-party transport to move Baggallini products from contract manufacturers to our leased, Company-operated distribution facility in Oregon, and from our Oregon distribution center to retailers.

Although some of the BU products contain elements of fashion, they focus more on function, thus lessening our exposure to obsolete inventory resulting from changing fashion trends. The BU traditionally has operated with an inventory level that ensures quick customer order fulfillment and replenishment.

In addition to office and showroom space in our New York City location, Baggallini operates a leased administrative office, showroom and distribution center in suburban Portland (Milwaukie), Oregon.

BUSINESS ETHICS & SOCIAL RESPONSIBILITY

We strive to incorporate our core values of integrity, quality, innovation, leadership, teamwork and community into our business in a manner that leads to the long-term success of the Company, our shareholders and our team members. We strive to achieve the highest business and personal ethical standards, as well as compliance with all applicable governmental laws, rules and regulations. We believe that it is the responsibility of a good corporate citizen to embrace social, environmental and governance factors as part of its overall business strategy.

Equal Employment Opportunities

We offer the opportunity of equal employment to all individuals without regard to disability, race, color, religion, sex, national origin or age, and expect the same of all suppliers to our enterprise.

Fair Labor Practices

Our Code of Ethical Business Conduct details our intolerance of the use of forced labor — slavery, indentured, bonded, child or prison labor and human trafficking — by anyone with whom we do business.

We require our suppliers to provide workers with a clean, safe, and healthful work environment. Factories producing our merchandise must provide adequate medical facilities and ensure that all production and manufacturing processes are carried out in conditions that have proper considerations for the health and safety of the workers involved. Suppliers also must respect the rights of employees to associate with any group, so long as such groups are legal within their own country.

All of our suppliers and their contractors are randomly audited by independent third parties, both announced and unannounced, to help ensure adherence to our expectations related to forced labor and overall working conditions. We require that all vendors doing business with us to fairly compensate their employees by: providing wages and benefits that meet or exceed applicable local and national laws; scheduling reasonable work hours; and providing reasonable days off, vacation and leave privileges. Each supplier also must display a signed Terms of Engagement document detailing this information in a location visible to all employees working at their facilities.

 

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The Company is C-TPAT (Customs-Trade Partnership Against Terrorism) certified, which means we comply with the U.S. Government’s standards to ensure that our shipments out of other countries are safe from tampering during the exporting process. A part of this certification process also includes periodic inspections of our foreign manufacturers’ factories to ensure safe, fair working conditions for employees.

Corporate Sustainability

The Company works to promote sustainable, environmentally healthy business practices by identifying and sharing practical, innovative conservation methods; adopting appropriate environmental policies; and encouraging all of our team members, vendors and customers to incorporate green wherever possible.

We have adopted recommendations from the ENERGY STAR program of the U.S. Environmental Protection Agency and the U.S. Department of Energy at our facilities and encourage and expect our suppliers to: reduce excess packaging and use recycled, nontoxic materials; follow guidelines that will prevent the future depletion of natural resources; and ensure the use of safe materials in manufacturing. We anticipate no material capital expenditures for environmental controls facilities for the foreseeable future.

PRODUCT DESIGN AND DEVELOPMENT

Design and product development activities for all of our business units during fiscal 2012 were conducted in the United States of America and China.

The principal raw materials used in our footwear, foot care and handbag, tote bag and travel products are textile fabrics, threads, foams, nylons, other synthetic products, recycled micro fleece, mesh and high performance urethane. Raw materials also include organics such as leather, suede and cotton fibers; and various packaging materials. All of our raw materials are available from a wide range of suppliers. We have not experienced any significant difficulty in obtaining raw materials.

During fiscal 2012, fiscal 2011 and fiscal 2010, we spent approximately $1.7 million, $1.9 million and $2.3 million, respectively, to support the design and development of new products and make improvements in existing products. These design and development activities were primarily supported by 10 full-time team members.

SIGNIFICANT CUSTOMERS

As our business base has grown in recent years, the percentage of net sales from our largest customers has declined relative to our consolidated net sales. Walmart Stores, Inc. and its affiliates accounted for 29%, 32% and 35% of our consolidated net sales during fiscal 2012, fiscal 2011 and fiscal 2010, respectively. Our sales to Walmart Stores, Inc. and its affiliates are primarily in our Footwear segment and are less seasonal in nature than sales to many of our other footwear customers. J.C. Penney Company, Inc. accounted for 10% of our consolidated net sales during fiscal 2010.

FACILITIES

Our principal administrative, sales and distribution facilities are described above and more fully below under “Item 2. Properties.” of this 2012 Form 10-K.

EMPLOYEES

At the close of fiscal 2012, we employed 138 full-time team members. Approximately 76% of our team members are employed in the United States.

 

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AVAILABLE INFORMATION

We make available free of charge through our corporate Internet website all annual reports on Form 10-K, all quarterly reports on Form 10-Q, all current reports on Form 8-K, and all amendments to those reports, filed or furnished by the Company pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as our definitive annual meeting proxy materials as filed pursuant to Section 14 of the Exchange Act. These reports and proxy materials are available as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (the “SEC”).

Item 1A. Risk Factors.

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. The following risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this 2012 Form 10-K. Any of these risks could materially adversely affect our business, our operating results, or our financial condition and the actual outcome of matters as to which forward-looking statements are made.

The global financial and general economic conditions that are largely out of our control may adversely affect our financial condition and results of operations.

Uncertainty about current and future global economic conditions may affect consumer spending or our customers’ buying habits, which would adversely affect demand for our products. Our customers may be impacted by the significant decrease in available credit. If credit pressures or other financial difficulties result in insolvency for these customers, it could adversely impact our overall financial results.

Furthermore, reduced traffic in retail stores or limitations on the prices we can charge for our products could reduce our sales and profit margins and have a material adverse effect on our financial condition and results of operations. Our business, financial condition, results of operations and access to credit as well as the trading price of our common shares could be materially and adversely affected if the economy fails to stabilize, or if current economic conditions do not improve or worsen.

Our North America business, which is our primary business, is dependent on our ability to continue sourcing products from third-party manufacturers primarily from outside North America, and to a lesser extent, sourcing products for foot and shoe care products from third-party manufacturers in North America.

We do not own or operate any manufacturing facilities and depend upon independent third parties to manufacture all of our products. During fiscal 2012, most of our products were manufactured in China. The inability of our third-party manufacturers to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss customer delivery date requirements and could result in cancellation of orders, refusals to accept deliveries, returns or harm our ongoing business relationships. Furthermore, because quality is a leading factor when customers and retailers accept or reject goods, any decline in the quality of the products produced by our third-party manufacturers could be detrimental not only to a particular order but to future relationships with our customers.

We compete with other companies for the production capacity of our third-party manufacturers. Some of these competitors have greater financial and other resources than we have and may have an advantage in securing production from these manufacturers. If we experience a significant increase in demand for our products or if one of our existing third-party manufacturers must be replaced, we may have to find additional third-party manufacturing capacity. There can be no assurance that this additional capacity will be available when required or will be available on terms that are similar to the terms that we have with our existing third-party manufacturers or that are otherwise acceptable to us. If it is necessary for us to replace one or more of our third-party manufacturers, particularly one that we rely on for a substantial portion of

 

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our products, we may experience an adverse financial or operational impact, such as increased costs for replacement manufacturing capacity or delays in the distribution and delivery of our products to our customers, which could cause us to lose customers or revenues because of late shipments or customers being unwilling to absorb increased costs.

Our international manufacturing operations are subject to the risks of doing business abroad.

We currently purchase much of our product from China. We expect to continue to purchase our products from China at approximately the same levels in the future. This international sourcing subjects us to the risks of doing business abroad. These risks include:

 

   

the impact on product development, sourcing or manufacturing from public health and contamination risks in China or other countries where we obtain or market our products;

 

   

acts of war and terrorism;

 

   

the impact of disease pandemics;

 

   

social and political disturbances and instability and similar events;

 

   

strikes or other labor disputes;

 

   

export duties, import controls, tariffs, quotas and other trade barriers;

 

   

shipping and transport problems;

 

   

increased expenses, particularly those impacted by any increase in oil prices;

 

   

fluctuations in currency values; and

 

   

general economic conditions and regulatory environments in overseas markets.

Because we rely primarily on Chinese third-party manufacturers for a substantial portion of our product needs, any disruption in our relationships with these manufacturers could adversely affect our operations. While we believe these relationships are strong, if trade relations or regulatory changes between the United States and China deteriorate or are threatened by instability, our business could be adversely affected. Although we believe that we could find alternative manufacturing sources, there can be no assurance that these sources would be available on terms that are favorable to us or comparable to those with our current manufacturers. Furthermore, a material change in the valuation of the Chinese currency could adversely impact our product costs, resulting in a significant negative impact on our results of operations.

Our concentration of customers could have a material adverse effect on us, and our success is dependent on the success of our customers.

As a result of the continuing consolidation in the retail industry, our footwear customer base has decreased, thus increasing the concentration of our customers. Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 29%, 32% and 35% of our consolidated net sales in fiscal 2012, fiscal 2011 and fiscal 2010, respectively. If this customer reduced or discontinued its product purchases from us, it would adversely affect our results of operations. Additionally, in recent years, several major department stores have experienced consolidation and ownership changes. In the future, retailers may undergo additional changes that could decrease the number of stores that carry our products, which could adversely affect our results.

Our success is also impacted by the financial results and success of our customers. If any of our major customers, or a substantial portion of our customers, generally, experiences a significant downturn in business, fails to remain committed to our products or brands or realigns affiliations with suppliers or decides to purchase products directly from the manufacturer, then these customers may reduce or discontinue purchases from us, which could have a material adverse effect on our business, results of operations and financial condition. We are also subject to the buying plans of our customers, and if our

 

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customers do not inform us of changes in their buying plans until it is too late for us to make necessary adjustments to our product supply, we may be adversely affected. We do not have long-term contracts with our customers and sales normally occur on an order-by-order basis. As a result, customers can generally terminate their commercial relationship with us at any time.

Our business faces cost pressures, which could affect our business results.

While we rely on third-party manufacturers as the source of our products, the cost of these products depends, in part, on the manufacturers’ raw materials, labor and energy costs. Thus, our own costs are subject to fluctuations, particularly due to changes in the cost of raw materials and cost of labor in the locations where our products are manufactured, foreign exchange and interest rates.

The footwear and accessory product categories are highly competitive.

The product categories in which we do most of our business are highly competitive businesses. If we fail to compete effectively, we may lose market position. We operate in a relatively small segment of the overall footwear and accessory industries. We believe that we are among the world’s largest marketers of slipper footwear products. However, this category is a very small component of the overall footwear industry. In recent years, companies that are engaged in other areas of the footwear industry and apparel companies have begun to market slipper footwear and many of these competitors have substantially greater financial, distribution and marketing resources than we do. In addition, many of the retail customers for our products have sought to import competitive products directly from manufacturers in China and elsewhere for sale in their stores on a private label basis. The primary methods we use to compete in our industry include product design, product performance, quality, brand image, price, marketing and promotion and our ability to meet delivery commitments to retailers. A major marketing or promotional success or a technical innovation by one of our competitors could adversely impact our competitive position.

Our business is subject to consumer preferences, and unanticipated shifts in tastes or styles could adversely affect our sales and results of operations.

Our product categories can be subject to rapid changes in consumer preferences. Our performance may be hurt by our competitors’ product development, sourcing, pricing and innovation as well as general changes in consumer tastes and preferences. These categories are also subject to sudden shifts in consumer spending, and a reduction in such spending could adversely affect our results of operations. Consumer spending may be influenced by the amount of consumer disposable income, which may fluctuate based on a number of factors, including general economic conditions, consumer confidence and business conditions. Further, consumer acceptance of new products may fall below expectations and may result in excess inventories or the delay of the launch of new product lines.

If we inaccurately forecast consumer demand, we may experience difficulties in handling consumer orders or liquidating excess inventories and results of operations may be adversely affected.

The slipper footwear business is highly seasonal and has relatively long lead times for the design and manufacture of products. Consequently, we must commit to production in advance of orders based on our forecast of consumer demands. If we fail to forecast consumer demand accurately, we may under- or over-source a product and encounter difficulty in handling customer orders or liquidating excess inventory, and we may have to sell excess inventory at a reduced cost. Further, due to the fashion-oriented nature of our products, rapid changes in consumer preferences lead to an increased risk of inventory obsolescence. While we believe we have successfully managed this risk in recent years and believe we can successfully manage it in the future, our operating results will be adversely affected if we are unable to do so.

 

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We rely on distribution centers to store and distribute our products and if there is a natural disaster or other serious disruption affecting any of these facilities or our methods of transport, we may be unable to effectively deliver products to our customers.

We rely on our leased distribution centers as well as third-party logistics providers to store and distribute product to our customers. Significant disruptions affecting the flow of products to and from these facilities due to natural disasters, labor disputes such as dock strikes, or any other cause could delay receipt and shipment of a portion of our inventory. This could impair our ability to timely deliver our products to our customers and negatively impact our operating results. Although we have insured our finished goods inventory for the amount equal to its carrying cost plus normal profit expected in the sale of that inventory against losses due to fire, earthquake, tornado, flood and terrorist attacks, our insurance program does not protect us against losses due to delays in our receipt and distribution of products due to transport difficulties, cancelled orders or damaged customer relationships that could result from a major disruption affecting the flow of products to and from our distribution facilities.

Further, we are dependent on methods of third-party transport to move our products to and from these facilities. Circumstances may arise where we are unable to find available or reasonably priced shipping to the United States from our manufacturers in China and elsewhere or road and rail transport to our customers. If our methods of transport are disrupted or if costs increase sharply or suddenly, due to price increases of oil in the world markets or other inflationary pressures, we may not be able to affordably or timely deliver our products to our customers.

The seasonal nature of our footwear business makes management more difficult, and severely reduces cash flow and liquidity during certain parts of the year.

A significant portion of our footwear business is highly seasonal and much of the results of our operations are dependent on strong performance during the last six months of the calendar year, particularly the holiday selling season. The majority of our marketing and sales activities for our footwear business take place at industry market week and trade shows in the spring and fall. Our inventory is largest in the early fall to support our customers’ requirements for the fall and holiday selling seasons. Historically, our cash position is strongest in the first six months of the calendar year. Unfavorable economic conditions affecting retailers during the fall and through the holiday season in any year could have a material adverse effect on the results of our operations for the year. Although our acquisitions during fiscal 2011 have added businesses with year-round replenishment shipments, we can offer no assurance that the overall significant seasonal nature of our business will change in the future.

Our unsecured credit agreement includes financial and other covenants that impose restrictions on our financial and business operations.

Our unsecured credit agreement signed in March 2011 contains financial covenants that require us to maintain minimum levels regarding our financial condition and operating performance. If we fail to comply with the covenants and are unable to obtain a waiver or amendment, an event of default would result, and the lender could declare outstanding borrowings immediately due and payable. If that should occur, we cannot guarantee that we would have sufficient liquidity at that time to repay or refinance borrowings under the unsecured credit agreement.

Modifications and/or upgrades to our information technology systems may disrupt our operations.

We regularly evaluate our information technology systems and requirements and are currently implementing modifications and/or upgrades to the information technology systems that support our business. Modifications include replacing legacy systems with successor systems, making changes to legacy systems, or acquiring new systems with new functionality. We are aware of the inherent risks associated with replacing and modifying these systems, including inaccurate system information, system

 

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disruptions and user acceptance and understanding. We believe we are taking appropriate action to mitigate the risks through disciplined adherence to methodology, program management, testing and user involvement, as well as securing appropriate commercial contracts with third-party vendors supplying the replacement technologies. Information technology system disruptions and inaccurate system information, if not anticipated and appropriately mitigated, could have a material adverse effect on our financial condition and results of operations. Additionally, there is no assurance that a successfully implemented system will deliver the anticipated value to us.

A failure in or a breach of our operational or security systems or infrastructure, or those of our third-party suppliers and other service providers, including as a result of cyber-attack may disrupt our operations.

Our success depends, in part, on the secure and uninterrupted performance of our information technology systems. Our information technology systems, as well as those of our service providers, are vulnerable to damage from a variety of sources, including telecommunication failures, malicious human acts and natural disasters. Moreover, despite network security measures, some of our servers and those of our service providers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautions we have taken, unanticipated problems may nevertheless cause failures in our information technology systems. Sustained or repeated system failures that interrupt our ability to process orders and deliver products to the stores or impact our consumer’s ability to access our websites in a timely manner or expose confidential customer information could have a material adverse effect on our results of operations, financial condition and cash flows.

We rely on the experience and skills of our senior executive officers, the loss of whom could have a material adverse effect on our business.

Our senior executive officers closely supervise all aspects of our business. Our senior executive officers have substantial experience and expertise in our business and have made significant contributions to the growth and success of our brands. If we were to lose the benefit of their involvement without adequate succession plans, our business could be adversely affected. Competition for such senior executive officers is intense, and we cannot be sure we will be able to attract, retain and develop a sufficient number of qualified senior executive officers in the future.

For any business acquisitions we undertake, we depend on our ability to successfully integrate and operate those newly acquired businesses.

We may be unable to consummate, manage or integrate our acquisitions. A portion of our recent sales and profitability growth has occurred through acquisitions. We may from time to time seek opportunities to acquire attractive businesses. There are no assurances, however, that any acquisition opportunities will arise or, if they do, that they will be consummated, or that any needed additional financing for such opportunities will be available on satisfactory terms when required. In addition, acquisitions involve risks that the businesses acquired will not perform in accordance with expectations, and that business judgment concerning the value, strengths and weaknesses of businesses acquired will prove incorrect. The acquired businesses may not be integrated successfully and the acquisition may strain our management resources or divert management’s attention from other business concerns. Failure to successfully integrate any of our acquisitions may cause significant operating inefficiencies and could adversely affect our operations and financial condition.

We periodically invest funds in marketable securities, and the ultimate repayment of amounts invested depends on the financial capacity of the related financial institutions and corporations involved.

We periodically invest funds in marketable securities for which the ultimate repayment of invested amounts is dependent on the financial capacity of the related financial institutions and corporations involved. At June 30, 2012, as part of our cash management and investment program, we maintained a portfolio of $25.6 million in short-term investments, including $17.1 million in marketable investment

 

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securities consisting of variable rate demand notes and $8.5 million in other short-term investments. The marketable investment securities are classified as available-for-sale. These marketable investment securities are carried at cost, which approximates fair value. The other short-term investments are classified as held-to-maturity securities and include several commercial paper investments, which matured by August 2012.

Item 1B. Unresolved Staff Comments.

No response required.

Item 2. Properties.

The Company owns its corporate headquarters and executive offices located at 13405 Yarmouth Road N.W. in Pickerington, Ohio, a facility that contains approximately 55,000 square feet. The Company leases space aggregating approximately 89,400 square feet at an approximate total annual rent of $600,300. The following table describes the Company’s principal leased properties during fiscal 2012 and the operating status of those properties at June 30, 2012:

 

Location

  

Use

   Approximate
Square Feet
     Approximate
Annual Rental
     Lease
Expires
   Renewals

1887 SE Milport,

Milwaukie, Oregon

   Office, Shipping, Distribution Center      70,000       $ 285,900       2014    1 year

9 East 37th Street, 11th Floor

New York City, New York

   Sales Office/Showroom      5,000       $ 200,000       2015    None

Room 1101, Huiye Building,

No. 17 Dongguan Ave.,

Dongcheng District,

Dongguan City, Guangdong

Province, China

   Sourcing Representative Office      8,700       $ 62,800       2014    None

194 Rock Road

Glen Rock, New Jersey

   Sales office      1,500       $ 25,500       2013    None

903 S.E. 28th Street Suite 7

Bentonville, Arkansas

   Sales Administration Office      1,300       $ 19,500       Month to
month
   Month to
month

Room 106, Building No. 8

Tianzeyuan Block, No. 588

Zhushan Road, Jiangning

Science Area, Nanjing,

Jiangsu, China

   Sourcing Quality Control Office      2,900       $ 6,600       2015    None

 

The Company believes that all of our owned or leased buildings are well maintained, in good operating condition and suitable for their present uses.

 

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Item 3. Legal Proceedings.

The Company is from time to time involved in claims and litigation considered normal in the ordinary course of our business. There are no significant legal proceedings pending for the Company. While it is not feasible to predict the ultimate outcome, in the opinion of management, the resolution of pending legal proceedings is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures.

Not applicable

Supplemental Item. Executive Officers of the Registrant.

The following table lists the names and ages of the executive officers of the Company as of September 12, 2012, the positions with the Company presently held by each executive officer and the business experience of each executive officer during the past five years. Unless otherwise indicated, each individual has had his or her principal occupation for more than five years. The executive officers serve at the discretion of the Board of Directors subject, when applicable, to their respective contractual rights with the Company and, in the case of Mr. Tunney and Mr. Eckols, pursuant to an employment agreement. There are no family relationships among any of the Company’s executive officers or directors.

 

Name

   Age   

Position(s) Held with the Company and

Principal Occupation (s) for Past Five or More Years

Greg A. Tunney

   51    Chief Executive Officer of the Company since May 2006; President of the Company since February 2006; Director of the Company since August 2006; Chief Operating Officer of the Company from February 2006 to May 2006; President, Chief Operating Officer and a Director of Phoenix Footwear Group Inc., a supplier of a diversified selection of men’s and women’s dress and casual footwear, belts, personal items, outdoor sportswear and travel apparel, from 1998 to February 2005.

Jose G. Ibarra

   53    Senior Vice President – Finance and Chief Financial Officer of the Company since January 2009; Secretary of the Company from January 2009 to October 2009; Senior Vice President – Treasurer of the Company from July 2008 to January 2009; Vice President – Treasurer of the Company from December 2004 to June 2008.

Glenn D. Evans

   51    Senior Vice President – Global Operations of the Company since July 2010; Senior Vice President-Supply Chain and Logistics of the Company from November 2006 to July 2010; Senior Vice President – Creative Services and Sourcing of the Company from November 2003 to November 2006.

Yvonne E. Kalucis

   47    Senior Vice President – Human Resources of the Company since February 2008; Vice President – Human Resources of the Company from September 2007 to February 2008; Director of Human Resources for Limited Brands, Inc., a specialty retailer of women’s intimate and other apparel, beauty and personal care products and accessories under various trade names, from September 2005 to September 2007.

Lee F. Smith

   50    Senior Vice President – Creative Services of the Company since January 2009; Senior Vice President – Design and Product Development of the Company from December 2006 to January 2009; President of Pacific Footwear Services, a footwear business development company engaged primarily in the research, design, development and commercialization of footwear products for a variety of customers, from 2004 to 2006.

 

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Nancy N. Coons    52    Business Unit President – Footwear since June 2011; President, Dearfoams, from July 2010 to June 2011; Principal of Coons Consulting Co., a company providing brand strategy, product development and merchandising consultant services, from April 2008 to June 2010; General Manager, Apparel of New Balance Athletic Shoe, Inc., a privately-held performance athletic and lifestyle brand, from February 2005 to October 2007.
Dennis D. Eckols    63    Business Unit President – Baggallini, Inc. since June 2011; President, Baggallini, Inc., from April 2011 to June 2011; Chief Operating Officer, baggallini, Inc. (prior to its acquisition by the Company), January 2003 to April 2011.
Mark W. Zobel    45    Business Unit President – Foot Petals, Inc. since January 2012; Vice President of Marketing from August 2010 to January 2012; Director of Marketing of the Company from November 2009 to August 2010; Director of Business Development & Strategy, Blue Ribbon Digital, an interactive advertising agency based in New York, New York from June 2007 to February 2008.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market and Dividend Information

Sales Price Per Common Share

 

    

Quarter

   High      Low      Close      Dividends
Declared  per
Common Share
 

Fiscal 2012

   First    $ 11.82       $ 8.15       $ 10.60       $ 0.07   
  

Second

     13.00         9.58         12.08         0.07   
  

Third

     14.21         11.30         12.20         0.08   
  

Fourth

     13.85         11.23         13.59         0.08   

Fiscal 2011

   First    $ 11.99       $ 9.53       $ 10.38       $ 0.07   
  

Second

     11.80         9.91         11.12         0.07   
  

Third

     13.35         9.48         13.09         0.07   
  

Fourth

     13.30         10.36         11.44         0.07   

Since March 1, 2008, common shares of the Company have traded on NASDAQ-GM under the “DFZ” symbol. The high, low and close sales prices per common share shown above reflect the prices as reported in NASDAQ-GM.

Approximate Number of Registered Shareholders: 1,900 as of September 12, 2012.

The declaration and payment of future dividends with respect to the Company’s common shares will depend on the net earnings, financial condition, shareholders’ equity levels, cash flow and business requirements of the Company, as determined by the Board of Directors.

The unsecured Credit Agreement (the “New Facility”) between the Company and The Huntington National Bank (“Huntington”), as entered into on March 1, 2011, places no direct restrictions on the Company’s ability to pay cash dividends. See the discussion of the New Facility in “Note (6)—Short-term Notes Payable and Long-Term Debt” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data.” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” in this 2012 Form 10-K.

 

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Information Regarding Recent Sales of Unregistered Securities

No disclosure is required under Item 701 of SEC Regulation S-K.

Purchases of Equity Securities by Registrant

Neither the Company nor any “affiliated purchaser,” as defined in Rule 10b-18(a) (3) under the Securities Exchange Act of 1934, as amended, purchased any common shares of the Company during the fiscal quarter ended June 30, 2012. The Company does not currently have in effect a publicly-announced repurchase plan or program. However, with respect to stock awards granted to employees, the Company is authorized under the terms of its stock-based compensation plans to withhold common shares which would otherwise be issued in order to satisfy related individual tax liabilities upon issuance of common shares in accordance with the terms of restricted stock unit (“RSU”) agreements.

Stock Performance Graph and Cumulative Total Shareholder Return

The graph below shows the cumulative total shareholder return, assuming the investment of $100 on June 30, 2007 (and the reinvestment of dividends thereafter), on each of R.G. Barry Corporation’s common shares and the NASDAQ Composite-Total Returns, the Russell 2000, the Dow Jones U.S. Footwear and the Dow Jones U.S. Clothing & Accessories indices. With the acquisition of accessory product businesses during fiscal 2011, the Dow Jones U.S. Clothing &Accessories index has been added to reflect this new segment for the Company. The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of R.G. Barry Corporation’s common shares.

 

LOGO

 

Company/Market/Peer Group    6/30/2007      6/28/2008      6/27/2009      7/3/2010      7/2/2011      6/30/2012  

R.G. Barry Corporation

     100.00         71.98         67.07         100.87         104.86         127.68   

NASDAQ Composite-Total Returns

     100.00         89.60         71.85         82.50         112.11         118.20   

Russell 2000 Index

     100.00         84.84         63.45         75.04         106.51         102.73   

Dow Jones US Footwear Index

     100.00         94.39         77.73         104.33         150.68         135.63   

Dow Jones US Clothing & Accessories Index

     100.00         68.01         53.36         73.21         127.88         128.23   

 

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Item 6. Selected Financial Data.

Selected Financial Data (1) (2)

(Dollars in thousands, except per common share amounts)

 

     2012     2011     2010     2009     2008  

Net sales

   $ 155,938      $ 129,568      $ 123,787      $ 113,817      $ 109,499   

Gross profit

     67,168        48,163        51,359        43,467        44,979   

Gross profit as percent of net sales

     43.1     37.2     41.5     38.2     41.1

Selling, general and administrative expenses

     43,795        36,483        36,623        32,971        32,126   

Gain on insurance recovery

     —          —          —          —          1,362   

Operating profit

     23,373        11,680        14,736        10,496        14,215   

Net earnings

     14,549        7,510        9,400        6,992        9,785   

Basic earnings per common share

     1.30        0.68        0.86        0.66        0.93   

Diluted earnings per common share

     1.27        0.67        0.85        0.65        0.92   

Dividends declared per common share

     0.30        0.28        0.15        0.25        —     

Long-term debt, excluding current installments

     20,357        24,643        —          97        187   

Total assets

     128,266        115,979        83,369        75,083        67,643   

Other Data

          

Capital expenditures

     1,834        676        1,181        1,365        1,569   

Depreciation and amortization expense

     3,045        1,891        867        775        641   

 

(1) See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” for information regarding the factors that have affected the financial results of the Company. The Company’s annual reporting period is either a fifty-two or fifty-three-week period (“fiscal year”). Fiscal 2010 was a fifty-three week period. For all periods, the selected financial data set forth above is derived from the Company’s audited consolidated financial statements.
(2) Results for fiscal 2011 include those businesses acquired during fiscal 2011 (Foot Petals on January 27, 2011 and Baggallini on March 31, 2011) starting from the date of the respective acquisitions.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide investors and others with information we believe is necessary to understand the Company’s financial condition, changes in financial condition, results of operations and cash flows. This MD&A should be read in conjunction with our Consolidated Financial Statements and related Notes to Consolidated Financial Statements and other information included in “Item 8. Financial Statements and Supplementary Data.” in this 2012 Form 10-K. All dollar amounts, except as stated on a per common share basis, are rounded and represent approximate amounts when cited in the text within this section.

Unless the context otherwise requires, references in this MD&A to “our”, “us”, “we” or the “Company” refer to R.G. Barry Corporation and its consolidated subsidiaries.

Our Company and its subsidiaries, Foot Petals Inc. and Baggallini, Inc., are engaged in designing, sourcing, marketing and distributing footwear, foot and shoe care products and hand bags, tote bags and other travel accessories. We operate with three operating segments, two of which are aggregated into a single reportable segment. The two reportable segments include: footwear that encompasses primarily slippers, sandals, hybrid and fashion footwear; and accessories with products including foot and shoe care products, handbags, tote bags and other travel accessories. Our products are sold predominantly in North America through the accessory sections of department stores, chain stores, warehouse clubs, specialty stores, independent stores, television shopping networks, e-tailing/internet based retailers, discount stores and mass merchandising channels of distribution.

All comments made herein relative to period over period comparisons refer to results reported for fiscal 2012 as compared to fiscal 2011 and for fiscal 2011 as compared to fiscal 2010 when applicable.

Summary of Results for Fiscal 2012

During fiscal 2012, we remained focused on achieving our principal goals:

 

   

grow our business profitably by pursuing key initiatives based on innovation within our product lines and acquisition opportunities outside of our core footwear business;

 

   

continue efforts to strengthen the relationships with our retailing partners and open distribution of our products in new retail channels; and

 

   

further enhance the image of our brands through both customer and consumer advertising.

During fiscal 2012, we accomplished the following:

 

   

We successfully integrated the two acquisitions we made in the last half of fiscal 2011 and achieved the profitability targets established for that Accessories segment for fiscal 2012.

 

   

We achieved significant gains in both sales volume and operating profitability in our Footwear segment business.

 

   

We reported consolidated after-tax earnings of $14.5 million, or 9.3% of net sales.

 

   

We reported cash, cash equivalents and short-term investments of nearly $42.0 million at the end of fiscal 2012.

Looking Ahead to Fiscal 2013 and Beyond

Looking ahead to fiscal 2013 and beyond, our strategy continues to center on growing our business through acquisitions; increasing our distribution channels within our footwear business; growing our newly-acquired accessory products businesses within their traditional as well as new channels, achieving levels of profitability that are at or above a top quartile performance within our peer group, and ultimately delivering financial performance that drives growth and long-term shareholder value.

 

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See the discussion under the caption “Item 1A. Risk Factors” in this 2012 Form 10-K.

Summary of Consolidated Results of Operations – Fiscal 2012 Compared to Fiscal 2011

Effective with the first quarter of fiscal 2012, the Company implemented organizational changes in its reporting structure including the creation of a separate Business Unit President for each business unit, with each President reporting to the Chief Executive Officer (CEO) of R.G. Barry Corporation. This Business Unit President has financial performance responsibility for the operating unit. The measure of such operating unit operating profit was redefined and our internal financial reporting structure changed accordingly.

Under this reporting structure, the operating profit or loss measure for an operating unit includes sales, cost of sales, direct SGA expenses and allocated SGA expenses from certain corporate support areas for which expenses incurred are allocated to each operating unit based on estimated usage of Company services. Other corporate expenses were deemed applicable to the Company as a whole and not allocated to any specific operating unit. Such expenses include costs associated with the Company’s corporate and governance functions, including the CEO, Chief Financial Officer and Board of Directors, as well as such areas as incentive bonus, stock compensation, pension, professional fees and corporate expense areas.

Our Footwear and Accessories segments’ results reported below for fiscal 2012, fiscal 2011 and fiscal 2010 have been presented based on this reporting approach.

Consolidated Results of Operations

Listed below are excerpts from our consolidated statements of income for fiscal 2012 and fiscal 2011:

 

(all amounts are in 000’s)    Fiscal 2012     % of
Net Sales
    Fiscal 2011     % of
Net Sales
    Increase/
(Decrease)
 

Net sales

   $ 155,938        100.0      $ 129,568        100.0      $ 26,370   

Gross profit

     67,168        43.1        48,163        37.2        19,005   

Selling, general and administrative expense

     43,795        28.1        36,483        28.2        7,312   

Operating profit

     23,373        15.0        11,680        9.0        11,693   

Other income

     651        0.4        365        0.3        286   

Interest income

     131        0.1        163        0.1        (32

Interest expense

     (895     (0.6     (370     (0.3     525   

Income before income taxes

     23,260        14.9        11,838        9.1        11,422   

Income tax expense

     8,711        5.6        4,328        3.3        4,383   

Net earnings

     14,549        9.3        7,510        5.8        7,039   

Consolidated net sales increased by 20.4% due primarily to an increase of $21.9 million in sales from our Accessories segment reflecting the benefit of a full year of sales since we acquired Foot Petals at the end of January 2011 and Baggallini at the end of March 2011. Within the Footwear segment, shipments increased by $5.5 million primarily to customers in the department store and mass merchandising channels, offset in part by a decrease in shipments to customers in the specialty and independent store channels.

Consolidated gross profit dollars increased by 39.5% and gross profit as a percentage of net sales increased by 5.9 percentage points. The increases in gross profit dollars and gross profit as a percentage of net sales were due to the incremental gross profit contribution of $11.9 million from higher margin Accessories segment sales during the period; and the margin expansion on shipments by the Footwear segment, due principally to lower freight costs incurred during fiscal 2012 and the non-recurrence of costs incurred during fiscal 2011 associated with expediting product to our Footwear segment customers.

Consolidated SGA expense in dollars increased by 20.0%, due to: (1) incremental $8.8 million in SGA expense associated with our Accessories segment businesses and (2) an increase in incentive bonus expense, due to the Company’s fiscal

 

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2012 profitability against our annual incentive plan targets; offset in part by (3) lower advertising and other marketing related expenses and improved efficiencies in support of our business segments.

Consolidated interest expense increased due to the carrying of term debt incurred in support of the acquisitions made during fiscal 2011 for the full year in fiscal 2012. Other income and interest income were nominally higher for the period, reflecting increased minimum royalties from an existing royalty agreement and additional royalties from a licensing agreement executed during fiscal 2012 with a Canadian footwear distributor.

The effective tax rates for fiscal 2012 and fiscal 2011 were 37.5% and 36.6%, respectively. The change in the effective tax rate year-over-year reflected primarily the impact from: (1) a higher federal income tax rate based on our expected taxable income for fiscal 2012; and (2) the net effect of higher state income tax rates associated with our Accessories segment businesses; offset by (3) the beneficial effect in fiscal 2012 of revaluing our deferred tax assets at higher tax rate levels based on future rates expected for the Company.

Based on the results of operations noted above, we reported an increase in consolidated net earnings of 94% at $14.5 million or $1.27 per diluted common share for fiscal 2012.

Results of Operations—Footwear segment

Our Footwear segment encompasses designing, sourcing, marketing and distributing footwear products. We define footwear as a product category that includes primarily slippers, sandals and hybrid and active fashion footwear. Our footwear products are sold through multiple retail channels including mass merchandisers, national chain stores, warehouse clubs, mid-tier department stores, specialty and independent stores, discount stores and e-commerce and catalog retailers.

Selected financial results for fiscal 2012 and fiscal 2011 were:

 

(all amounts in 000’s)    Fiscal 2012      % of
Net Sales
     Fiscal 2011      % of
Net Sales
     Increase  

Net sales

   $ 123,336         100.0       $ 118,844         100.0       $ 4,492   

Gross profit

     48,901         39.6         41,776         35.2         7,125   

Operating profit

     28,248         22.9         16,909         14.2         11,339   

Net sales increased by 3.8% due primarily to higher shipments to customers in the department store and mass merchandising channel, offset in part by decreased shipments to customers in the specialty and independent store channels.

Gross profit increased in dollars and as a percentage of net sales due to the increase in shipments for the period; the benefit of the non-recurrence of costs incurred during fiscal 2011 associated with expediting product to our customers; and lower freight costs incurred during fiscal 2012 to transport product from China to our warehouses.

Operating profit increased due to increased shipments and gross profit as noted above, and a decrease of $2.9 million in advertising, and other marketing related expenses as well as improved efficiencies in SGA expenses from leveraging existing resources to support our Footwear and Accessories segments.

Results of Operations—Accessories segment

The Accessories segment, comprised of Foot Petals and Baggallini, encompasses the designing, sourcing, marketing and distribution of a variety of accessory category products. These consumer product offerings range from shoe and foot care products to handbags, tote bags and other travel accessories. These products are sold predominately in North America through customers primarily in the specialty and independent store, television shopping network, e-tailing/internet based retail, upper tier department store and mass merchandising channels. Our business activity with these customers is primarily replenishment in nature, with sales spread evenly throughout the year.

 

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Selected financial results for fiscal 2012 and fiscal 2011 were:

 

(all amounts in 000’s)    Fiscal 2012      % of
Net Sales
     Fiscal 2011      % of
Net Sales
     Increase  

Net sales

   $ 32,602         100.0       $ 10,724         100.0       $ 21,878   

Gross profit

     18,267         56.0         6,387         59.6         11,880   

Operating profit

     6,096         18.7         2,987         27.9         3,109   

Incremental sales from our Accessories segment for the periods presented reflect the benefit of sales for the full year in fiscal 2012 in comparison to fiscal 2011 since we acquired Foot Petals at the end of January 2011 and Baggallini at the end of March 2011.

Gross profits in both dollars and as a percentage of net sales to Accessory segment customers during the reported periods were consistent with our expectations for this business segment, with fiscal 2012 reflecting full annual sales over various channels. Fiscal 2012 spending includes incremental spending in advertising which approximated $672 thousand on an annualized basis.

Results of Operations – Unallocated Corporate Expenses

Consistent with our internal reporting structure, certain corporate expenses deemed applicable to the Company as a whole were not allocated to any business segment. Such costs included those associated with the Company’s corporate and governance functions, including the CEO, Chief Financial Officer and Board of Directors, as well as such expense areas as annual incentive, stock compensation, pension charges, professional fees and other corporate expense areas. These unallocated costs are shown below:

 

(all amounts are in 000’s)    Fiscal 2012      Fiscal 2011      Increase  

Unallocated corporate expenses

   $  10,970       $  8,216       $  2,754   

The increase of $2.8 million primarily reflected higher annual incentive expense.

Summary of Consolidated Results of Operations – Fiscal 2011 Compared to Fiscal 2010

Fiscal 2010 had fifty-three weeks compared to fifty-two weeks for fiscal 2011; however, the additional week in fiscal 2010 had no significant effect on sales or operating results as compared to fiscal 2011.

Listed below are excerpts from our consolidated statements of income:

 

     Fiscal 2011      % of
Net Sales
     Fiscal 2010      % of
Net Sales
     Increase
(Decrease)
 

Net sales

   $ 129,568         100.0       $ 123,787         100.0       $ 5,781   

Gross profit

     48,163         37.2         51,359         41.5         (3,196

Selling, general and administrative expenses

     36,483         28.2         36,623         29.6         (140

Operating profit

     11,680         9.0         14,736         11.9         (3,056

Other income and interest, net

     158         0.1         247         0.2         (89

Income before income tax

     11,838         9.1         14,983         12.1         (3,145

Income tax expense

     4,328         3.3         5,583         4.5         (1,255

Net earnings

     7,510         5.8         9,400         7.6         (1,890

Net sales increased by 4.7% due primarily to incremental net sales from our newly-acquired businesses of $10.7 million. Net sales achieved by our new businesses were consistent with their pre-acquisition historical levels and also reflected the benefit of revenue synergies obtained through efficiencies in customer order fulfillment identified during our acquisition due diligence process. Excluding the net sales from our new businesses, our footwear business net sales decreased by

 

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4.0%, reflecting some of the challenges we experienced in certain of our key distribution channels during fiscal 2011. See further comments to this effect in the Footwear segment’s results of operations section below.

Gross profit in dollars and as a percent of net sales decreased primarily due to the lower volume of footwear shipments during the period and the impact from higher costs paid to our third-party footwear manufacturers and other third-party supply chain providers, offset in part by the additive gross profit on accessory segment shipments, which typically yield higher margins as a percent of net sales as compared to our footwear shipments.

SGA expenses were relatively flat, reflecting the net of $5.1 million in lower payroll and incentive bonus expenses, $1.6 million in higher trade advertising-related expense in support of our Dearfoams® brand name, $1.1 million in acquisition-related expenses, $3.1 million incremental expenses related to the operations of the new businesses and $900 thousand in net lower expense in other areas.

Other income increased due to royalty income from the licensing agreement with Olivet. The increase in other income was offset primarily by higher interest expense from borrowings made in the period to fund our business acquisitions.

The effective tax rates for fiscal 2011 and fiscal 2010 were 36.6% and 37.3%, respectively. The year-over-year change to tax rates was due to permanent tax items, primarily represented by higher investment income on cash surrender assets held in the form of two insurance policies we own.

Based on the results of operations noted above, we reported net earnings of approximately $7.5 million in fiscal 2011, or $0.67 per diluted common share, which represented a 20.2% decrease when compared to the net earnings of $9.4 million in fiscal 2010, or $0.85 per common diluted share.

Fiscal 2011 Compared to Fiscal 2010 Results of Operations—Footwear segment

Selected financial results for fiscal 2011 and fiscal 2010 were:

 

     Fiscal 2011      % of
Net Sales
     Fiscal 2010      % of
Net Sales
     Decrease  

Net sales

   $ 118,844         100.0       $ 123,787         100.0       $ 4,943   

Gross profit

     41,776         35.2         51,359         41.5         9,583   

Operating profit

     16,909         14.2         25,687         20.8         8,778   

The year-over-year decrease in net sales of 4.0% was due primarily to lower shipments to customers in the warehouse club, department store and mass merchandising channels, offset in part by higher shipments to customers in the discount store channel.

Gross profit decreased in both dollars and as a percentage of net sales due primarily to the following: (i) higher product costs incurred with our third-party manufacturers, reflecting the cost pressures we experienced in our supply chain during fiscal 2011; (ii) lower volume of shipments; and (iii) additional costs incurred during the fall 2010 season, which supported the actions we took in order to ensure timely delivery to our customers and to provide adequate promotional funding to certain of our key customers.

The decrease in operating profit reflected primarily the impact of the decline of approximately 19% in gross profit for the reasons noted above, net of lower net operating expenses. Operating expenses were lower due primarily to lower payroll and other expenses, net of increased spending for advertising expense.

 

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Fiscal 2011 Compared to Fiscal 2010 Results of Operations—Accessories segment

Our Accessories segment is comprised of Foot Petals and Baggallini. Since these two business acquisitions occurred during fiscal 2011, on January 27 and March 31, respectively, there were no comparable financial results for fiscal 2010. Selected financial results for fiscal 2011 are shown below:

 

     Fiscal 2011      % of
Net Sales
 

Net sales

   $ 10,724         100.0   

Gross profit

     6,387         59.6   

Operating profit

     2,987         27.9   

Net sales included shipments primarily to customers in the specialty and independent store, television shopping network, mass merchandising, department store, internet/e- tailing based retail and other channels. Gross profit on shipments to these customers during the period was consistent with their historical levels and uniformly at higher rates than our Footwear segment.

Operating income reflected SGA expenses incurred related to this segment’s selling, marketing and distribution activities, and costs incurred in a variety of corporate-support expenses. In addition, we reported as part of operating expenses non-cash, amortization expense with respect to the customer relationship intangible assets that resulted from the assignment of a portion of the purchase price to the assets acquired in the acquisition of the Foot Petals and Baggallini businesses.

Results of Operations – Unallocated Corporate Expenses

Consistent with our internal reporting structure, certain corporate expenses deemed applicable to the Company as a whole were not allocated to any business segment. Such costs included those associated with the Company’s corporate and governance functions, including the CEO, Chief Financial Officer and Board of Directors, as well as such expense areas as incentive bonus, stock compensation, pension charges, professional fees and other corporate expense areas. These unallocated costs are shown below:

 

(all amounts are in 000’s)    Fiscal 2011      Fiscal 2010      Decrease  

Unallocated corporate expenses

   $  8,216       $  10,951       $  2,735   

The decrease in unallocated corporate expenses primarily reflected lower annual incentive expense applicable to individuals working in all areas of the Company.

Liquidity and Capital Resources

Our primary source of revenue and cash flow is our operating activities in North America. When cash inflows are less than cash outflows, we also have access to amounts under our New Facility subject to its terms, as described below. We may seek to finance future capital investment programs through various methods, including, but not limited to, cash flow from operations and borrowings under our current or additional credit facilities.

Our liquidity requirements arise from the funding of our working capital needs, which include primarily inventory, other operating expenses and accounts receivable, funding of capital expenditures and repayment of our indebtedness. Most of our product purchases from third-party manufacturers are acquired on an open account basis, and to a lesser extent, through trade letters of credit.

Total cash and cash equivalents were $16.1 million at June 30, 2012, compared to $9.1 million at July 2, 2011. Short-term investments were $25.6 million at June 30, 2012, compared to $15.6 million at July 2, 2011.

At June 30, 2012, as part of our cash management and investment program, we maintained a portfolio of $25.6 million in short-term investments, including $17.1 million in marketable investment securities consisting of variable rate demand notes and $8.5 million in other short-term investments. The marketable investment securities are classified as available-for-sale. These marketable investment securities are carried at cost, which approximates fair value. The other short-term

 

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investments are classified as held-to-maturity securities and include several commercial paper investments, which matured by August 2012.

Operating Activities

During fiscal 2012, our operations generated $25.3 million in cash. This operating cash flow was primarily the result of our net earnings of $14.5 million for the period, adjusted for: (a) non-cash activities such as deferred income tax expense of $976 thousand with an offsetting $123 thousand excess tax benefit credit recognized on stock options exercised and restricted stock unit vested; depreciation and amortization expense of $3.0 million; stock-based compensation expense of $1.3 million; and a $1.7 million decrease in customer-related return and program accruals and (b) changes in our working capital accounts and (c) payments on our pension and other obligations. In fiscal 2012, significant changes in working capital accounts included lower amounts of accounts receivable and inventory and higher amounts of trade payables and accrued expenses.

During fiscal 2011, our operations generated $2.5 million in cash. This operating cash flow was primarily the result of our net earnings of $7.5 million for the period, adjusted for (a) non-cash activities such as deferred income tax expense of $932 thousand with an offsetting $128 thousand excess tax benefit credit recognized on stock options exercised and restricted stock unit vested; depreciation and amortization expense of $1.9 million; and stock-based compensation expense of $1.2 million, (b) changes in our working capital accounts and (c) payments on our pension and other obligations. In fiscal 2011, significant changes in working capital accounts included higher amounts of inventory and lower amounts of accrued expenses, which were partially offset by lower amounts of accounts receivable and higher trade payables.

During fiscal 2010, our operations generated $6.8 million in cash. This operating cash flow was primarily the result of our net earnings of $9.4 million for the period, adjusted for (a) non-cash activities such as deferred income tax expense of $4.0 million, with an offsetting $1.3 million excess tax benefit credit recognized on stock options exercised and restricted stock unit vested; depreciation expense of $867 thousand; stock-based compensation expense of $840 thousand, and an increase of $721 thousand in customer-related return and program accruals and (b) changes in our working capital accounts and (c) payments on our pension and other debt obligations. In fiscal 2010, significant changes in working capital accounts included higher amounts of inventory, which were partially offset by lower amounts of accounts receivable and higher amounts of accrued expenses.

Our working capital ratio, which is calculated by dividing total current assets by total current liabilities, was 3.5:1 at June 30, 2012 and 3.7:1 at July 2, 2011.

Changes during fiscal 2012 in the primary components of our working capital accounts were as follows:

 

   

Accounts receivable decreased by approximately $379 thousand during fiscal 2012 as driven by timing of shipments to customers and the timing of cash collections and customer deductions.

 

   

Inventories decreased by $4.4 million, primarily in the Footwear segment, during fiscal 2012, reflecting improved alignments in the timing of customer shipments with related purchases of inventory, as well as our ongoing efforts to efficiently manage inventory.

 

   

Accounts payable increased by $1.1 million during fiscal 2012, due primarily to the timing of and payment for inventory purchased from third-party manufacturers.

 

   

Accrued expenses increased by $3.9 million during fiscal 2012, primarily due to incentive bonus accruals provided for in fiscal 2012 and to an increase in income tax related accruals, as compared to fiscal 2011.

Investing Activities

During fiscal 2012, investing activities used $11.9 million in cash. Purchases, net of sales and redemptions, of short-term investments used $10.0 million. Capital expenditures were $1.8 million and primarily consisted of purchases of software and computer equipment as well as leasehold improvements.

During fiscal 2011, investing activities used $36.0 million in cash. We used $47.8 million in cash for acquisitions completed during fiscal 2011. Sales and redemptions, net of purchases, of short-term investments generated $12.4

 

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million. Capital expenditures were $676 thousand and primarily consisted of building and leasehold improvements as well as purchases of software and computer equipment.

During fiscal 2010, investing activities used $4.2 million in cash. Purchases, net of sales and redemptions, of short-term investments comprised $3.0 million of this amount. Capital expenditures were $1.2 million and primarily consisted of building and leasehold improvements as well as purchases of software and computer equipment.

Financing activities

During fiscal 2012, financing activities used $6.4 million in cash, with debt payments of $3.9 million and dividend payments of $3.3 million, offset by $827 thousand in funds provided through option exercises and related tax benefits on option exercises and RSU vesting during the period.

During fiscal 2011, financing activities provided $25.6 million in cash. Debt proceeds of $30 million were obtained to fund the acquisitions made during fiscal 2011. Debt payments of $1.5 million and dividend payments of $3.1 million were made during the period.

During fiscal 2010, financing activities provided $74 thousand in cash. This financing cash inflow was primarily due to $1.3 million in gross excess tax benefits realized on the exercise of stock options and vesting of restricted stock units granted to certain employees of the Company and directors of R.G. Barry Corporation, $468 thousand provided from the exercise of employee stock options, offset, in part, by a $1.6 million payment of cash dividends.

2013 Liquidity

We believe our sources of cash and cash equivalents on hand, short-term investments and funds available under our New Facility described below will be adequate to fund our operations and capital expenditures through fiscal 2013.

Credit Agreement

In March 2011, we entered into an unsecured Credit Agreement (the “New Facility”) with The Huntington National Bank (“Huntington”). The New Facility replaced the previously existing unsecured revolving credit agreement with Huntington dated March 29, 2007 (as amended, the “Prior Credit Agreement”), which would have expired December 31, 2011. The Prior Credit Agreement with Huntington was terminated in connection with the New Facility.

Under the terms of the New Facility, Huntington is obligated to advance funds to us for a period of three years under a revolving credit facility (the “Revolving Credit Facility”). We may have outstanding indebtedness of up to $5 million under the Revolving Credit Facility from January through June of each calendar year and up to $10 million from July through December of each calendar year. Under the terms of the New Facility, we may request that Huntington increase the Revolving Credit Facility by an amount of up to $5 million. The termination and maturity date of the Revolving Credit Facility is March 1, 2014. The interest rate on the Revolving Credit Facility is a rate equal to LIBOR plus 1.75%. The Revolving Credit Facility must not have any outstanding borrowings for at least 30 consecutive days during each period commencing on July 1 and continuing through June 30 of the following year.

The applicable interest rate on the Revolving Credit Facility based on a 30-day LIBOR rate of 0.25% at June 30, 2012 was 2.00%. Additionally, the Revolving Credit Facility requires the Company to pay a quarterly unused line fee at the rate of 0.25% of the average unused Revolving Credit Facility balance. During fiscal 2012, the Company used the revolver only for a short period of time and incurred unused line fees of $16 thousand. We incurred a commitment fee of $25 thousand when the Revolving Credit Facility was signed. This fee is being amortized over the term of the Revolving Credit Facility.

At June 30, 2012, we had $5 million available under the Revolving Credit Facility.

In addition, under the terms of the New Facility, Huntington provided us $30 million under a term loan facility (the “Term Loan Facility”). Under the Term Loan Facility, Huntington disbursed $15 million on March 1, 2011 and the remaining $15 million on March 31, 2011. Beginning on April 1, 2011, we made and will continue to make equal monthly principal payments in the amount of $357 thousand, together with accrued interest, beginning on April 1, 2011, with the then remaining outstanding balance and accrued interest due and payable on March 1, 2016. The interest rate on the Term Loan Facility is a rate equal to LIBOR plus 1.85%. Under the terms of the New Facility, we entered into an interest rate

 

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contract that provided for a fixed interest rate of 3.94% on a notional amount of at least 50% of the outstanding principal balance of the Term Loan Facility.

The applicable interest rate on the Term Loan Facility at June 30, 2012 was 2.10%, based on a 30-day LIBOR rate of 0.25%.

We paid Huntington a one-time facility commitment fee of $75 thousand in connection with the Term Loan Facility and this fee is being amortized over the term of the loan.

Under the terms of the New Facility, we are required to satisfy certain financial covenants, including (a) satisfying a minimum fixed charge coverage ratio test of not less than 1.1 to 1.0, which has been and will be calculated quarterly on a trailing 12-month basis beginning with the fiscal quarter ended March 31, 2012, (b) satisfying a funded debt leverage ratio test of not greater than 2.25 to 1.00, which has been and will be calculated quarterly beginning with the fiscal quarter ended March 31, 2012 and (c) maintaining a consolidated net worth of at least $52 million, increased annually by an amount equal to 50% of the Company’s consolidated net income subsequent to June 30, 2012. At June 30 2012, we were in compliance with all these financial covenants.

Other Short-term Debt

We previously borrowed against the cash surrender value of life insurance policies insuring our non-executive chairman. Approximately $1.8 million of this indebtedness was classified within short-term notes payable in each of our Consolidated Balance Sheets at June 30, 2012 and July 2, 2011.

Other Long-term Indebtedness and Current Installments of Long-term Debt

As of June 30, 2012, we reported approximately $4.3 million as current installments of long-term debt, under the Term Loan Facility.

Other Matters Impacting Liquidity and Capital Resources

Contractual Obligations

We have traditionally leased facilities under operating lease transactions for varying term lengths, ranging generally from two years to seven years, often with options for renewal. On occasion, we have also leased certain equipment utilizing operating leases. These leasing arrangements have allowed us to pay for the facilities and equipment over the time periods they are utilized, rather than committing our resources initially to acquire the facilities or equipment. All leases have been accounted for as operating leases, consistent with the provisions of U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). Our off-balance sheet non-cancelable operating lease obligations are discussed in “Note (8)—Lease Commitments” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data.” in this 2012 Form 10-K.

 

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The following table summarizes our contractual obligations for both short-term and long-term obligations as of June 30, 2012:

 

     Payments due by period  
     Total      Less than
1 year
    1 – 3
years
    3 – 5
Years
    More
than 5
years
    Other  
     (in thousands of dollars)  

Short-Term Debt

   $ 1,750       $ 1,750        None        None        None        None   

Long-Term Debt, Current and Non-Current Portions *

   $ 24,643       $ 4,286      $ 8,572      $ 11,785        None        None   

Other Long-Term Liabilities reflected on the Consolidated Balance Sheet of the Company **

   $ 10,803         *     *     *     *   $ 10,803 ** 

OTHER CONTRACTUAL OBLIGATIONS:

             

Operating Leases – see also Note (8) of the Notes to Consolidated Financial Statements

   $ 1,384       $ 666      $ 718        None        None        None   

Purchase obligations in the ordinary course of business ***

   $ 28,000       $ 28,000        None        None        None        None   

OFF-BALANCE SHEET ARRANGEMENTS:

             

None

             

 

* Interest has been excluded from the amount shown under Long-Term Debt, Current and Non-Current Portions above. The interest amounts are determined using a floating interest rate, with 50% of the loan balance effectively hedged with an interest rate contract, which results in a fixed annual interest rate of 3.94% on 50% of the loan balance.
** Other Long-Term Liabilities reflected on the Consolidated Balance Sheet of the Company as of June 30, 2012 represented accrued cumulative obligations under our Associates’ Retirement Plan of approximately $3.1 million; accrued cumulative obligations under our Supplemental Retirement Plan of approximately $7.1 million; and various other accruals of approximately $600 thousand. The timing of future cash outflows related to most of these obligations is not readily determinable, as it is primarily dependent upon the annual actuarially-determined qualified pension plan contributions as well as the timing of future associate retirements.
*** We acquire inventory and merchandise from our suppliers in the ordinary course of business, issuing both purchase orders and, to a lesser extent, letters of credit. Commitments in the ordinary course of business outstanding as of June 30, 2012 are included above. There were no material outstanding commitments other than those represented as part of our ordinary course of business.

 

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Other Matters Relevant to Financial Condition and Results of Operations

Critical Accounting Policies and Use of Significant Estimates

The preparation of financial statements in accordance with U.S. GAAP requires that we make certain estimates. These estimates can affect reported revenues, expenses and results of operations, as well as the reported values of certain assets and liabilities. We make these estimates based on information from as many resources, both internal and external, as are available at the time. After reasonably assessing the conditions that exist at the time, we make these estimates and prepare consolidated financial statements accordingly. These estimates are made in a consistent manner from period to period, based upon historical trends and conditions and after review and analysis of current events and circumstances. We believe these estimates reasonably reflect the current assessment of the financial impact of events whose actual outcomes will not become known to us with certainty until sometime in the future.

The following discussion of critical accounting policies is intended to bring to the attention of readers those accounting policies that management believes are critical to the Company’s consolidated financial statements and other financial disclosures. It is not intended to be a comprehensive list of all of our significant accounting policies that are more fully described in Notes (1) (a) through (1) (t) of the Notes to Consolidated Financial Statements in this 2012 Form 10-K.

A summary of the critical accounting policies requiring management estimates follows:

 

(a) Revenue recognitionWe recognize revenue when the following criteria are met:

 

   

goods are shipped from our warehouse and other third-party distribution locations, at which point our customers take ownership and assume risk of loss;

 

   

collection of the relevant receivable is probable;

 

   

persuasive evidence of an arrangement exists; and

 

   

the sales price is fixed or determinable.

In certain circumstances, we sell products to customers under special arrangements, which provide for return privileges, discounts, promotions and other sales incentives. When selling under these special arrangements, at the time we recognize revenue, we reduce our measurement of revenue by an estimate of the potential future returns and allowable retailer promotions and sales incentives, and recognize a corresponding reduction in reported trade accounts receivable. These estimates have traditionally been, and continue to be, sensitive to and dependent on a variety of factors including, but not limited to, quantities sold to our customers and the related selling and marketing support programs; channels of distribution; sell-through rates at retail; the acceptance of the styling of our products by consumers; the overall economic environment; consumer confidence leading towards and through the holiday selling season; and other related factors.

The estimates established for these allowances at the end of these reporting periods reflected our current practice of collaborating closely with key retailing partners to offer the appropriate in-season consumer promotions and sales incentives to achieve mutually satisfactory sell-through rates, thus reducing or eliminating returns. As of June 30, 2012, our allowance for returns was $587 thousand. A hypothetical change of 10 percent in our returns allowance, net of the value of related inventory to be returned, would have an impact on income before income taxes of approximately $36 thousand. As of June 30, 2012, our allowance for promotions, cooperative advertising and other sales incentives was $1.1 million. A hypothetical change of 10 percent in this allowance would have an impact on income before income taxes of $114 thousand.

Due to the continuing seasonal nature of our business and the current economic climate, it is possible that allowances for returns, promotions and other sales incentives, and the related charges reported in our consolidated results of operations could be different than those estimates noted above.

We monitor the creditworthiness of our customers and the related collection of monies owed to us. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations, a specific reserve for doubtful accounts is taken as a reduction to accounts receivable to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other customers, we recognize estimated reserves for bad debts based on

 

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our historical collection experience, the financial condition of our customers, an evaluation of current economic conditions and anticipated trends, each of which is subjective and requires certain assumptions. At the end of fiscal 2012 and fiscal 2011, our allowance for doubtful accounts was $57 thousand and $229 thousand, respectively.

 

(b) Inventory valuationWe value inventories using the lower of cost or market, based upon the first-in, first-out (“FIFO”) costing method. We evaluate our inventories for any reduction in realizable value in light of the prior selling season, the overall economic environment and our expectations for the upcoming selling seasons, and we record the appropriate write-downs based on this evaluation. At the end of fiscal 2012 and the end of fiscal 2011, we estimated the FIFO cost of a portion of our inventory exceeded the estimated net realizable value of that inventory by $582 thousand and $1.1 million, respectively. The decrease from fiscal 2011 to fiscal 2012 reflected actions during fiscal 2012 to liquidate inventory related to discontinued licensed brands as well as our on-going initiatives to properly manage our inventory investment.

 

(c) Deferred tax asset realizability and uncertain tax positionsWe make an assessment of the amount of income taxes that will become currently payable or recoverable for the just concluded period, and the deferred tax costs or benefits that will become realizable for income tax purposes in the future, as a consequence of differences between results of operations as reported in conformity with U.S. GAAP, and the requirements of the income tax codes existing in the various jurisdictions where we operate. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income. Management considers scheduled reversal of deferred items, projected future taxable income and tax planning strategies in making this assessment. In addition, we make ongoing assessments of income tax exposures that may arise at the Federal, state or local tax levels. U.S. GAAP principles require that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon settlement. Any identified exposures will be subjected to continuing assessment and estimates will be revised accordingly as information becomes available to us. We did not have any reserve for uncertain tax positions at the end of fiscal 2012 or fiscal 2011, since there were no tax positions at the federal, state or local tax levels which did not meet the more likely than not recognition threshold as determined by management.

 

(d) Impairment of long-lived assetsWe review the carrying value of our long-lived assets, including property, plant and equipment and intangible assets with finite useful lives, for impairment whenever events or change in circumstances warrant such review. Impairment testing involves a comparison of the sum of the undiscounted future cash flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, which would be recorded as an impairment charge in our consolidated statements of income. There were no impairment indicators present during fiscal 2012.

Goodwill and intangible assets with indefinite lives are not amortized, but instead are be tested for impairment annually, during the Company’s second fiscal quarter, or more frequently if events or changes in circumstances indicate that impairment may be present. Application of goodwill impairment testing involves judgment, including but not limited to, the identification of reporting units and estimating the fair value of each reporting unit. A reporting unit is defined as an operating segment or one level below an operating segment. We test goodwill at the reporting unit level. The goodwill impairment test consists of comparing the fair value of each reporting unit, determined using discounted cash flows, to each reporting unit’s respective carrying value. If the estimated fair value of a reporting unit exceeds its carrying value, there is no impairment. If the carrying amount of the reporting unit exceeds its estimated fair value, goodwill impairment is indicated. The amount of the impairment is determined by comparing the fair value of the net assets of the reporting unit, excluding goodwill, to its estimated fair value, with the difference representing the implied fair value of the goodwill. If the implied fair value of the goodwill is lower than its carrying value, the difference is recorded as an impairment charge in the consolidated statements of income.

During the second quarter of fiscal 2012, the Company completed the annual impairment test of goodwill and intangible assets with indefinite lives, under the provisions of FASB ASC 350. The estimated fair value of each

 

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reporting unit exceeded its respective carrying value as of the end of October in fiscal 2012, and there was no goodwill or indefinite-lived intangible assets impairment indicated at that time. There were no impairment indicators present during and at the end of fiscal 2012.

 

(e) Pension liabilityOur noncontributory retirement plan for the benefit of salaried and nonsalaried employees, the Associates’ Retirement Plan (“ARP”) was frozen effective March 31, 2004, and has remained frozen since that time. Our Supplemental Retirement Plan (“SRP”) for certain officers and other key employees as designated by our Board of Directors was also frozen effective March 31, 2004. The SRP is unfunded, noncontributory, and provides for the payment of monthly retirement benefits.

The actuarial valuations of our ARP and SRP benefit costs, assets and obligations affect our financial position, results of operations and cash flow. These valuations require the use of assumptions and long-range estimates. These assumptions include, among others, assumptions regarding interest and discount rates, and assumed long-term rates of return on pension plan assets. We regularly evaluate these assumptions and estimates as new information becomes available. Changes in assumptions, which may be caused by conditions in the debt and equity markets, changes in asset mix, and plan experience, could have a material effect on our pension obligations and expenses, and can affect our net income, assets and shareholders’ equity. In addition, changes in assumptions such as rates of return, fixed income rates used to value liabilities or declines in the fair value of plan assets, may result in voluntary decisions or mandatory requirements to make additional contributions to our ARP.

The discount rate was determined based on an analysis of interest rates for high-quality, long-term corporate debt at each measurement date. In order to appropriately match the bond maturities with expected future cash payments, we utilize differing bond portfolios to estimate the discount rates for the defined benefit plans. The weighted average discount rate used to determine the defined benefit plans’ obligation as of the balance sheet date is the rate in effect at the measurement date. The same rate is also used to determine the defined benefit plans’ expense for the following fiscal year. The long-term rate of return for the defined benefit plans’ assets is based on our historical experience, the defined benefit plans’ investment guidelines and our expectations for long-term rates of return. The defined benefit plans’ investment guidelines are established based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. Holding all other assumptions constant, we estimate that a 100 basis point decrease in the expected discount rate would decrease our annual pretax earnings by approximately $165 thousand, and it would increase our total pension liability by approximately $4.3 million as of June 30, 2012.

We establish assumptions to measure our pension liabilities and project the long-term rate of return expected on the invested pension assets in our qualified ARP. Changes in assumptions, which may be caused by conditions in the debt and equity markets, changes in asset mix, and plan experience, could have a material effect on our pension obligations and expenses, and can affect our net income, assets, and shareholders’ equity. Changes in assumptions may also result in voluntary or mandatory requirements to make additional contributions to our qualified ARP. These assumptions are reviewed and reset as appropriate at the pension measurement date commensurate with the end of our fiscal year end, and we monitor these assumptions over the course of the fiscal year.

Expected rate of return on ARP assets is also an important element of plan expense. In fiscal 2012, we used 6.75% as the rate of return on ARP assets. To determine the rate of return on plan assets, we consider the historical experience and expected future performance of the plan assets, as well as the current and expected allocation of the plan assets. Our ARP’s asset allocation as of June 30, 2012, the measurement date for fiscal 2012, was approximately 33% in domestic and foreign equity investments, 65% in domestic fixed income securities, and 2% in cash investments. This asset allocation was in line with our investment policy guidelines and the transitioning of our asset portfolio from an equity dominant mix to a debt dominant mix more in line with future cash outflows expected with our pension payment obligations. As this shifting in equity versus debt mix within our asset portfolio continues, the return on asset assumption will change as well. We periodically evaluate the allocation of plan assets among the different investment classes to ensure that they are within our investment policy guidelines. Holding all other assumptions constant, we estimate that a 100 basis point decrease in the expected rate of return on ARP assets would lower our annual pre-tax earnings by approximately $306 thousand.

 

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(f) Stock-based compensationFASB ASC 718 (the Stock Compensation topic) requires the recognition of the fair value of stock-based compensation in the results of operations. The Company historically has issued service based awards with respect to which stock-based compensation expense is recognized over the requisite service period of the individual grantees, which generally equals the vesting period. For example, when such restricted stock units were granted, the fair value of the grant was determined based on the market value of the underlying common shares at the date of grant, if settlement was to occur by issuance of stock, and was adjusted for anticipated forfeitures based on our historical experience and management judgment. In fiscal 2012, the Company also granted performance-based RSUs, where a defined portion of the award, if earned is to be settled in common shares and a portion is to be settled in cash with the amount to be paid equivalent to the market value of Company common shares underlying the units granted at the time of settlement. For RSUs to be settled in common shares or by payment of cash equivalent in market value to the common shares underlying the units, vesting was based on achievement of earnings per share objectives for the year of grant as well as service requirements. All grants made in fiscal 2012 had three-year terms over which settlement is to occur in a pro rata fashion. Forfeiture assumptions based on experience and expectations are used in estimating and recognizing compensation expense over the term of these grants. The time-based portion and the portion of the performance-based award to be settled by cash payment are recognized in expense ratably over the three-year term of the grant, with expense related to units underlying the cash payment portion adjusted based on changes in market value of common shares over that period prior to settlement. The portion of the performance-based award to be settled by issuance of our common shares is recognized in expense over the grant term using a tranche method for the respective segments expected to be settled.

 

(g) OtherThere are various other accounting policies that also require management’s judgment. We follow these policies consistently from year to year and period to period. For an additional discussion of all of our significant accounting policies, please see Notes (1) (a) through (1) (t) of the Notes to Consolidated Financial Statements.

Actual results may vary from these estimates as a consequence of activities after the period-end estimates have been made. These subsequent activities will have either a positive or negative impact upon the results of operations in a period subsequent to the period when we originally made the estimate.

Recently Issued Accounting Standards

See Note 1 (u) of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data.” in this 2012 Form 10-K for disclosure, of any significant recently issued accounting standards that, as of June 30, 2012, would impact the Company when these standards are implemented.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rates

Our principal market risk exposure relates to the impact of changes in short-term interest rates that may result from the floating rate nature of the Company’s New Facility. At June 30, 2012, we had $24.6 million in acquisition financing related term-debt outstanding under the New Facility and no outstanding balance on the revolving credit portion of the New Facility. Based on our projected funding needs for operations during fiscal 2013, we do not expect any significant borrowings under the revolving credit portion of our New Facility. With respect to the term debt under the New Facility, we entered into an interest rate contract which matches the loan term for 50% of the outstanding loan balance, and this contract fixes our interest rate on that 50% portion to a fixed annual interest rate of 3.94%. We typically do not hedge our exposure to floating interest rates in the normal course of business.

Interest rate changes impact the level of earnings for short-term investments. Changes in long-term interest rates also affect the measurement of pension liabilities performed on an annual basis.

Market Risk Sensitive Instruments—Foreign Currency

During fiscal 2012, substantially all of our sales were conducted in North America and all were denominated in U.S. Dollars. At the end of fiscal 2012, fiscal 2011 and fiscal 2010, the Company did not have any foreign exchange contracts outstanding.

 

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Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

R.G. Barry Corporation:

We have audited the accompanying consolidated balance sheets of R.G. Barry Corporation and subsidiaries as of June 30, 2012 and July 2, 2011, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for the fiscal years ended June 30, 2012, July 2, 2011 and July 3, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of R.G. Barry Corporation and subsidiaries as of June 30, 2012 and July 2, 2011, and the results of their operations and their cash flows for the fiscal years ended June 30, 2012, July 2, 2011 and July 3, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), R.G. Barry Corporation and subsidiaries’ internal control over financial reporting as of June 30, 2012, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 12, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Columbus, Ohio

September 12, 2012

 

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R.G. BARRY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

      June 30, 2012     July 2, 2011  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 16,112      $ 9,107   

Short-term investments

     25,599        15,565   

Accounts receivable:

    

Trade (less allowances of $1,786 and $3,522, respectively)

     13,011        11,782   

Other

     165        37   

Inventory

     21,149        25,500   

Deferred tax assets

     2,190        1,996   

Prepaid expenses

     674        799   
  

 

 

   

 

 

 

Total current assets

     78,900        64,786   
  

 

 

   

 

 

 

Property, plant and equipment, at cost

     12,238        12,805   

Less accumulated depreciation and amortization

     8,052        8,822   
  

 

 

   

 

 

 

Net property, plant and equipment

     4,186        3,983   
  

 

 

   

 

 

 

Deferred tax assets-noncurrent

     4,043        4,303   

Goodwill

     15,510        15,510   

Trade names

     9,200        9,200   

Other intangible assets (net of accumulated amortization of $2,798 and $1,059, respectively)

     13,530        15,253   

Other assets

     2,897        2,944   
  

 

 

   

 

 

 

Total assets

   $ 128,266      $ 115,979   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities:

    

Short-term notes payable

   $ 1,750      $ 1,750   

Current installments of long-term debt

     4,286        3,928   

Accounts payable

     10,962        10,118   

Accrued expenses

     5,701        1,947   
  

 

 

   

 

 

 

Total current liabilities

     22,699        17,743   
  

 

 

   

 

 

 

Long-term debt, excluding current installments

     20,357        24,643   

Accrued retirement costs and other

     10,803        11,070   
  

 

 

   

 

 

 

Total liabilities

     53,859        53,456   
  

 

 

   

 

 

 

Commitments and contingencies (note 17)

    

Shareholders’ equity:

    

Preferred shares, $1 par value per share: Authorized 3,775 Class A shares, 225 Series II Junior Participating Class A shares and 1,000 Class B shares; none issued

     —          —     

Common shares, $1 par value per share: Authorized 22,500 shares; issued and outstanding 11,182 and 11,053 shares, respectively (excluding treasury shares of 1,048 and 1,047, respectively)

  

 

11,182

  

 

 

11,053

  

Additional capital in excess of par value

     22,281        20,271   

Accumulated other comprehensive loss

     (11,679     (10,242

Retained earnings

     52,623        41,441   
  

 

 

   

 

 

 

Total shareholders’ equity

     74,407        62,523   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 128,266      $ 115,979   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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R.G. BARRY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Fiscal Years Ended June 30, 2012, July 2, 2011 and July 3, 2010

(in thousands, except per common share data)

 

     2012     2011     2010  

Net sales

   $ 155,938      $ 129,568      $ 123,787   

Cost of sales

     88,770        81,405        72,428   
  

 

 

   

 

 

   

 

 

 

Gross profit

     67,168        48,163        51,359   

Selling, general and administrative expenses

     43,795        36,483        36,623   
  

 

 

   

 

 

   

 

 

 

Operating profit

     23,373        11,680        14,736   

Interest income

     131        163        341   

Interest expense

     (895     (370     (94

Other income

     651        365        —     
  

 

 

   

 

 

   

 

 

 

Income before income tax

     23,260        11,838        14,983   

Income tax expense

     8,711        4,328        5,583   
  

 

 

   

 

 

   

 

 

 

Net earnings

   $ 14,549      $ 7,510      $ 9,400   
  

 

 

   

 

 

   

 

 

 

Net earnings per common share

      

Basic

   $ 1.30      $ 0.68      $ 0.86   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.27      $ 0.67      $ 0.85   
  

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding

      

Basic

     11,207        11,097        10,893   
  

 

 

   

 

 

   

 

 

 

Diluted

     11,414        11,227        11,036   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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R.G. BARRY CORPORATION

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

Fiscal Years Ended June 30, 2012, July 2, 2011 and July 3, 2010

(in thousands)

 

     Common
shares
     Additional
capital in
excess of par
value
    Accumulated
other
comprehensive
(loss)
    Retained
earnings
    Net
shareholders’
equity
 

Balance at June 27, 2009

   $ 10,722       $ 16,940      $ (11,049   $ 29,295      $ 45,908   

Comprehensive income:

           

Net earnings

     —           —          —          9,400        9,400   

Other comprehensive loss:

           

Pension liability adjustment, net of tax of $946

     —           —          (1,545     —          (1,545
           

 

 

 

Total comprehensive income

              7,855   
           

 

 

 

Stock-based compensation expense on equity awards

     —           840        —          —          840   

Stock-based compensation tax benefit realized

     —           1,285        —          —          1,285   

Unrestricted common shares issued, restricted stock units vested, and stock options exercised, net of common shares withheld for taxes

     208         130        —          —          338   

Dividends declared at $0.15 per common share

     —           —          —          (1,630     (1,630
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 3, 2010

   $ 10,930       $ 19,195      $ (12,594   $ 37,065      $ 54,596   

Comprehensive income:

           

Net earnings

     —           —          —          7,510        7,510   

Other comprehensive income (loss):

           

Cash flow hedging derivative, net of tax of $95

          (161       (161

Pension liability adjustment, net of tax of $(1,476)

     —           —          2,513        —          2,513   
           

 

 

 

Total comprehensive income

              9,862   
           

 

 

 

Stock-based compensation expense on equity awards

     —           1,186        —          —          1,186   

Stock-based compensation tax benefit realized

     —           128        —          —          128   

Unrestricted common shares issued, restricted stock units vested, and stock options exercised, net of common shares withheld for taxes

     123         (238     —          —          (115

Dividends declared at $0.28 per common share

     —           —          —          (3,134     (3,134
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 2, 2011

   $ 11,053       $ 20,271      $ (10,242   $ 41,441      $ 62,523   

Comprehensive income:

           

Net earnings

     —           —          —          14,549        14,549   

Other comprehensive loss:

           

Cash flow hedging derivative, net of tax of $80

          (128       (128

Pension liability adjustment, net of tax of $837

     —           —          (1,309     —          (1,309
           

 

 

 

Total comprehensive income

              13,112   
           

 

 

 

Stock-based compensation expense on equity awards

     —           1,107        —          —          1,107   

Stock-based compensation tax benefit realized

     —           123        —          —          123   

Unrestricted common shares issued, restricted stock units vested, and stock options exercised, net of common shares withheld for taxes

     129         780        —          —          909   

Dividends declared at $0.30 per common share

     —           —          —          (3,367     (3,367
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 11,182       $ 22,281      $ (11,679   $ 52,623      $ 74,407   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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R.G. BARRY CORPORATION

Consolidated Statements of Cash Flows

Fiscal Years Ended June 30, 2012, July 2, 2011 and July 3, 2010

(in thousands)

 

     2012     2011     2010  

Operating activities:

      

Net earnings

   $ 14,549      $ 7,510      $ 9,400   

Adjustments to reconcile net earnings to net cash provided by operating activities:

      

Depreciation and amortization

     3,045        1,891        867   

Loss on disposal of property, plant and equipment, net

     48        10        47   

Deferred income tax expense

     976        932        2,640   

Gross excess tax benefit from exercise of stock options and vesting of restricted stock units

     (123     (128     (1,327

Stock-based compensation expense on equity awards and issuance of unrestricted stock for services rendered

     1,327        1,186        840   

Change in customer return and program accruals

     (1,736     76        721   

Changes in:

      

Accounts receivable, gross

     379        420        480   

Inventory

     4,350        (7,089     (4,986

Prepaid expenses and other assets

     200        42        (107

Accounts payable

     1,080        4,414        (289

Accrued expenses

     3,875        (3,038     1,929   

Accrued retirement cost, net

     (2,385     (3,659     (3,260

Other liabilities

     (268     (29     (142
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     25,317        2,538        6,813   
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Funds used in purchase of short-term investments

     (42,435     (9,865     (34,823

Proceeds from the sale of short-term investments

     32,401        22,254        31,846   

Purchases of property, plant and equipment

     (1,834     (676     (1,181

Acquisitions of principal assets of Foot Petals, LLC and baggallini, Inc. business operations, net of assumed liabilities

     —          (47,750     —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (11,868     (36,037     (4,158
  

 

 

   

 

 

   

 

 

 

Financing activities:

      

Proceeds from long-term debt

     —          30,000        —     

Repayment of short-term and long-term debt

     (3,929     (1,525     (91

Gross excess tax benefit from exercise of stock options and vesting of restricted stock units

     123        128        1,327   

Proceeds from common shares issued

     704        107        468   

Dividends paid

     (3,342     (3,092     (1,630
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (6,444     25,618        74   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     7,005        (7,881     2,729   

Cash and cash equivalents at the beginning of the year

     9,107        16,988        14,259   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the year

   $ 16,112      $ 9,107      $ 16,988   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow disclosures:

      

Interest paid

   $ 779      $ 352      $ 96   

Income taxes paid, net of taxes refunded

     7,235        2,599        2,464   

See accompanying notes to consolidated financial statements.

 

39


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

(1) Summary of Significant Accounting Policies

 

  (a) Principal Business Activity

R.G. Barry Corporation, an Ohio corporation, is engaged, with its subsidiaries, including Foot Petals Inc. and Baggallini, Inc. (collectively, the “Company”), in designing, sourcing, marketing and distributing footwear, foot and shoe care products and hand bags, tote bags and other travel accessories. The Company operates in two reportable segments: (1) footwear that encompasses primarily slippers, sandals, hybrid and fashion footwear; and (2) accessories with products including foot and shoe care products, handbags, tote bags and other travel accessories. The Company’s products are sold predominantly in North America through the accessory sections of department stores, chain stores, warehouse clubs, specialty stores, independent stores, television shopping networks, e-tailing/internet based retailers, discount stores and mass merchandising channels of distribution.

The Company’s reporting period is a fifty-two or fifty-three-week period (“fiscal year”), ending annually on the Saturday nearest June 30. For definitional purposes, as used herein, the terms listed below include the respective periods noted:

 

Fiscal 2012    52 weeks ended June 30, 2012
Fiscal 2011    52 weeks ended July 2, 2011
Fiscal 2010    53 weeks ended July 3, 2010

 

  (b) Principles of Consolidation

The financial statements include the accounts of the Company. All inter-company balances and transactions, where appropriate, have been eliminated in consolidation.

 

  (c) Use of Estimates

The Company’s financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), and accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

  (d) Cash and Cash Equivalents

Cash includes deposits with banks and other financial institutions, which are accessible at any time without prior notice or penalty. Cash equivalents include $13,620 and $5,803 in money market accounts at June 30, 2012 and July 2, 2011, respectively, with original maturities of three months or less.

 

  (e) Short-Term Investments

At June 30, 2012, as part of its cash management and investment program, the Company maintained a portfolio of $25,599 in short-term investments, including $17,145 in marketable investment securities consisting of variable rate demand notes and $8,454 in other short-term investments. The marketable investment securities are classified as available-for-sale. These marketable investment securities are carried at cost, which approximates fair value. The other short-term investments are classified as held-to-maturity securities and include several commercial paper investments, which matured in August, 2012. Held-to-maturity debt

 

40


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

securities are those debt securities as to which the Company has the ability and intent to hold until maturity. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.

At July 2, 2011, as part of its cash management and investment program, the Company maintained a portfolio of $15,565 in short-term investments, including $12,073 in marketable investment securities consisting of variable rate demand notes and $3,492 in other short-term investments. The marketable investment securities were classified as available-for-sale. These marketable investment securities were carried at cost, which approximated fair value. The other short-term investments were classified as held-to-maturity securities and included several commercial paper investments, which matured in August 2011.

 

  (f) Inventory

Inventory is valued at the lower of cost or market, with cost determined on the first-in, first-out (FIFO) basis.

 

  (g) Depreciation and Amortization

Depreciation and amortization expense has been computed using the straight-line method over the estimated useful lives of the assets. Depreciation and amortization expense is reflected as part of selling, general and administrative expenses in the accompanying consolidated statements of income.

 

  (h) Trademarks, Patents and Acquired Customer Relationships

The Company incurs costs in obtaining and perfecting trademarks and patents related to its products and production-related processes. These costs are generally amortized over a period subsequent to asset acquisition not to exceed five years. The value of acquired customer relationships is amortized over their projected economic life using the straight-line method.

 

  (i) Revenue Recognition and Trade Accounts Receivable

The Company recognizes revenue when the following criteria are met:

 

   

goods are shipped from its warehouse and other third-party distribution locations, at which point the Company’s customers take ownership and assume risk of loss;

 

   

collection of the relevant receivable is probable;

 

   

persuasive evidence of an arrangement exists; and

 

   

the sales price is fixed or determinable.

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. In certain circumstances, the Company sells to its customers under special arrangements, which in certain instances provide for return privileges, as well as discounts, promotions and other sales incentives. When selling under these special arrangements, the Company reduces its measurement of revenue by the estimated cost of potential future returns and allowable retailer promotions and sales incentives. The Company bases its estimates for sales returns and promotions and sales incentive allowances on current and historical trends and experience.

Allowances established for returns were approximately $587 and $1,088 at the end of fiscal 2012 and fiscal 2011, respectively, and are classified in trade accounts receivable on the

 

41


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

accompanying consolidated balance sheets; these allowances were for specific spring season programs initiated with certain customers in each respective fiscal year. During fiscal 2012 and fiscal 2011, the Company recorded approximately $4,654 and $4,054, respectively, as the sales value of merchandise returned by customers.

Allowances for promotions, cooperative advertising and other sales incentives established at the end of fiscal 2012 and fiscal 2011 were approximately $1,142 and $2,205, respectively, and are classified in trade accounts receivable on the accompanying consolidated balance sheets. Charges to revenue for consumer promotion, cooperative advertising and other sales incentive activities, including support for display fixtures, for fiscal 2012, fiscal 2011 and fiscal 2010 were approximately $10,611, $13,445 and $11,467, respectively.

 

  (j) Distribution and Warehousing Costs

Distribution and warehousing costs for finished product, including occupancy costs, are classified within selling, general and administrative expenses in the accompanying consolidated statements of income. These costs amounted to $7,763, $6,872 and $6,123 for fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

 

  (k) Advertising and Promotion

The Company uses a variety of programs to advertise and promote the sale of its products to customers and consumers. Customer advertising is expensed as incurred. The cost of consumer advertising is expensed when first used. For fiscal 2012, fiscal 2011 and fiscal 2010, advertising and promotion expenses of $3,308, $4,924 and $3,285, respectively, have been reported in selling, general and administrative expenses in the accompanying consolidated statements of income.

 

  (l) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the realizability of deferred tax assets, the Company’s management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income or the ability to carry back tax losses for recovery against prior years with taxable income. Management considers the scheduled reversal of deferred items, projected future taxable income and tax planning strategies in making this assessment.

 

  (m) Per Common Share Information

Basic net earnings per common share is based on the weighted average number of common shares outstanding during each reporting period. Diluted net earnings per common share are based on the weighted average number of common shares outstanding as well as, when their effect is dilutive, potential common shares consisting of certain common shares subject to stock options and restricted stock units.

 

42


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

  (n) Comprehensive Income

Comprehensive income, consisting of net earnings, deferred gains and losses on interest rate hedging contracts and pension liability adjustments, is presented in the accompanying consolidated statements of shareholders’ equity and comprehensive income.

 

  (o) Shareholders’ Equity

The Company recognizes the stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. All of the stock-based compensation is accounted for as an equity instrument, and expense is recognized over the service period for the entire award. This recognition is subject to the requirement that the cumulative amount of stock-based compensation expense recognized at any point in time must at least equal to the portion of the grant-date fair value of the award that is vested at that date. Awards issued during fiscal 2012 included new performance-based restricted stock units, where a defined portion of the award, if earned, is to be settled in common shares and a portion is to be settled in cash with the amount to be paid equivalent in market value to the common shares underlying the restricted stock units granted at the time of settlement. This “cash” portion of the award is treated as a liability award, with mark to market adjustments made in expense recognition over the term of the award for those units to be settled in cash payment to the respective grantee. The time-based portion and the portion of the performance-based award to be settled by cash payment are recognized in expense ratably over the three-year term of the grant, with expense related to units underlying the cash payment portion adjusted based on changes in market value of common shares over that period prior to settlement. The portion of the performance-based award to be settled by issuance of common shares is recognized in expense over the grant term using a tranche method for the respective segments expected to be settled.

The Company’s Amended and Restated 2005 Long-Term Incentive Plan (the “2005 Plan”) is the only equity-based compensation plan under which future awards may be made to employees and non-employee directors of R.G. Barry Corporation other than the employee stock purchase plan in which employees of the Company may participate, as described in further detail in Note (12). The Company’s previous equity-based compensation plans remained in effect with respect to the then outstanding awards following the approval of the 2005 Plan.

During fiscal 2012, fiscal 2011 and fiscal 2010, the Company recognized net excess federal, state and local tax benefit of $123, $128 and $1,285, respectively, associated with stock-based compensation and recognized this excess benefit as an addition to the paid-in capital account. Excess tax benefits are recognized only when they impact taxes paid or payable.

 

  (p) Fair Value Measurements

Fair value measurements of assets and liabilities are recognized or disclosed in the financial statements based upon a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

   

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

43


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

   

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

   

Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

  (q) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The carrying value of long-lived assets including property, plant and equipment and intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances warrant such review. Impairment testing involves a comparison of the sum of the undiscounted future cash flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, which would be recorded as an impairment charge in the consolidated statements of earnings. There were no impairment indicators present during the fiscal year ended June 30, 2012.

Assets to be disposed of, if any, would be presented separately in the consolidated balance sheets, reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated.

Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, during the Company’s second fiscal quarter, or more frequently, if events or changes in circumstances indicate that impairment may be present. Application of goodwill impairment testing involves judgment, including but not limited to, the identification of reporting units and estimating the fair value of each reporting unit. A reporting unit is defined as an operating segment or one level below an operating segment. Goodwill is tested at the reporting unit level. The goodwill impairment test consists of comparing the fair value of each reporting unit, determined using discounted cash flows, to each reporting unit’s respective carrying value. If the estimated fair value of a reporting unit exceeds its carrying value, there is no impairment. If the carrying amount of the reporting unit exceeds its estimated fair value, goodwill impairment is indicated. The amount of the impairment is determined by comparing the fair value of the net assets of the reporting unit, excluding goodwill, to its estimated fair value, with the difference representing the implied fair value of the goodwill. If the implied fair value of the goodwill is lower than its carrying value, the difference is recorded as an impairment charge in the consolidated statements of income.

During the second quarter of fiscal 2012, the Company completed the annual impairment test of goodwill and intangible assets with indefinite lives. The estimated fair value of each reporting unit exceeded its carrying value as of the end of October in fiscal 2012, and there was no goodwill or indefinite-lived intangible assets impairment indicated at that time. There were no impairment indicators present during or at the end of fiscal 2012.

 

  (r) Allowances Granted to Resellers

The Company provided consideration to customers in the form of discounts and other allowances, which were reflected as a reduction of net sales of approximately $9,746, $12,150 and $10,188 for fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

 

44


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

  (s) Interest and Penalties Associated with Income Tax

The Company’s policy is to recognize and classify any interest and penalties associated with unrecognized tax benefits relating to uncertain tax positions as part of the Company’s income tax expense.

 

  (t) Derivative Instruments and Hedging

A derivative instrument, an interest rate contract, is used as part of the Company’s interest rate risk management strategy to manage cash flow exposure from changes in interest rates. An interest rate contract generally involves the exchange of fixed-rate and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date. Under an interest rate contract, the Company agrees with another party to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts, which is calculated based on an agreed-upon notional amount. A derivative instrument deemed highly effective qualifies for hedge accounting treatment under GAAP, and accordingly, the effective portion of unrealized gains and losses on interest rate swaps accounted for as a cash flow hedge is deferred as a component of accumulated other comprehensive income (loss). Any deferred portion is a component of interest expense when the interest expense is incurred. Any ineffective portion is directly recorded as a component of interest expense.

At the end of each quarter, the interest rate contract is recorded on the consolidated balance sheet at fair value and re-tested under GAAP criteria to determine and/or reconfirm status with regards to being an effective cash flow hedge. If determined to be effective, any gain or loss outstanding on the interest rate contract is recorded to other comprehensive income (loss). If some or all of the interest rate contract is deemed ineffective as a cash flow hedge, any gain or loss on the ineffective portion of the interest rate contract is recognized immediately in earnings.

 

  (u) Recently Issued Accounting Standards

In August 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This amended accounting guidance as issued is intended to simplify how an entity is to test goodwill for impairment. The amended guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The two-step quantitative impairment test is required if, based on its qualitative assessment, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning in fiscal 2013. We do not expect the adoption of this amended accounting guidance to have a material impact on our financial position or results of operations.

The FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, in June 2011. The ASU will supersede some of the guidance in Topic 220 of the accounting Codification. The main provisions of this ASU provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements. One option involves use of a single statement which must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. The second option involves a two-statement approach, in which an entity must present the components of net income and total net income

 

45


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income and a total for comprehensive income. The prior option in current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity will be eliminated upon adoption of this new ASU. The amendments in this ASU are to be applied retrospectively. For the Company, the amendments are effective for fiscal 2013, and interim periods within that year. Adoption of this standard change will only affect the presentation format of the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220), which deferred the effective date for applying ASU 2011-05 provisions relating to the presentation of separate line items on the income statement for reclassifications of items out of accumulated other comprehensive income into income, in order for the FASB to further evaluate this change in standard before implementation. The deferral is temporary and other provisions of ASU 2011-05 are effective for the Company starting in fiscal 2013 as noted above.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This update requires additional disclosures about offsetting and related arrangements on assets and liabilities to enable users of financial statements to understand the effect of such arrangements on an entity’s financial position as reported. This amendment is effective for fiscal 2014, and adoption of this standard change will only affect the footnote disclosures within the consolidated financial statements. Once adopted, these disclosure provisions will apply retrospectively for all comparative periods presented.

In July 2012, the FASB issued ASU 2012-2, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This update provides an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired and then determine whether it should perform a quantitative impairment test. The amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. The additional option for evaluating impairment will not have a material impact on the Company’s financial statements.

 

(2) Fair Value Measurements

Fair Value of Financial Instruments

Cash, cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses, and short-term notes payable, as reported in the consolidated financial statements, approximate their fair value because of the short-term maturity of those instruments. The fair value of the Company’s long-term debt is based on the present value of expected cash flows, considering expected maturities and using current interest rates available to the Company for borrowings with similar terms. The carrying amount of the Company’s long-term debt approximates its fair value. The fair value of the Company’s long-term debt is disclosed in Note (6).

The following table presents assets and liabilities that were measured at fair value on a recurring basis at June 30, 2012:

 

46


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

 

            Fair Value Measurements at Reporting Date Using:  
           

Quoted Prices

in Active

Markets for

Identical

Assets

    

Significant

Other

Observable

Inputs

    

Significant

Unobservable

Inputs

 
     Carrying Amount      (Level 1)      (Level 2)      (Level 3)  

Assets:

           

Available-for-sale securities

   $ 17,145         —         $ 17,145         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,145         —         $ 17,145         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Interest rate contract

   $ 472         —         $ 472         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 472         —         $ 472         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents assets and liabilities that were measured at fair value on a recurring basis at July 2, 2011:

 

            Fair Value Measurements at Reporting Date Using:  
           

Quoted Prices

in Active

Markets for

Identical

Assets

    

Significant

Other

Observable

Inputs

    

Significant

Unobservable

Inputs

 
     Carrying Amount      (Level 1)      (Level 2)      (Level 3)  

Assets:

           

Available-for-sale securities

   $ 12,073         —         $ 12,073         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,073         —         $ 12,073         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Interest rate contract

   $ 268         —         $ 268         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 268         —         $ 268         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(3) Inventory

Inventory by category at June 30, 2012 and July 2, 2011 consisted of the following:

 

     2012      2011  

Raw materials

   $ 666       $ 1,097   

Finished goods

     20,483         24,403   
  

 

 

    

 

 

 

Total Inventory

   $ 21,149       $ 25,500   
  

 

 

    

 

 

 

Inventory was valued at the lower of cost or market at the end of fiscal 2012 and the end of fiscal 2011; adjustments to market at the end of each of these periods were $582 and $1,142, respectively.

 

47


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

Inventory adjustments to reduce cost to market recognized as a part of cost of sales were $776, $2,114 and $1,617 in fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

 

(4) Property, Plant and Equipment

Property, plant and equipment at cost at June 30, 2012 and July 2, 2011 consisted of the following:

 

     2012      2011      Estimated
life in years
 

Land and improvements

   $ 279       $ 279         5–15   

Buildings and improvements

     3,782         3,738         5–45   

Machinery and equipment

     6,050         7,198         2–10   

Leasehold improvements

     906         1,241         2–6   

Construction in progress

     1,221         349      
  

 

 

    

 

 

    

Total property, plant and equipment

   $ 12,238       $ 12,805      

Less total accumulated depreciation

     8,052         8,822      
  

 

 

    

 

 

    

Net property, plant and equipment

   $ 4,186       $ 3,983      
  

 

 

    

 

 

    

 

(5) Goodwill and Other Intangible Assets

The Company uses the acquisition method of accounting for any business acquisitions and recognizes intangible assets separately from goodwill. The acquired assets and assumed liabilities in an acquisition are measured and recognized based on their estimated fair value at the date of acquisition, with goodwill representing the excess of the consideration transferred over the fair value of the identifiable net assets.

With the purchase of the principal business assets of Foot Petals, LLC in January 2011, the Company recognized goodwill of $5,420, a finite life intangible asset of $3,200 and indefinite life intangible assets of $3,600. The finite life intangible asset consisted of customer relationships and is being amortized over a seven-year expected life, as determined through valuation analysis at the time of acquisition, using the straight-line method. The indefinite life intangible assets acquired for $3,600 consisted of trade names. All goodwill and intangible assets recognized were reported within the Company’s Accessories segment.

Also, in March 2011, the Company recognized goodwill of $10,089, a finite life intangible asset of $12,400 and indefinite life intangible assets of $5,600 as a result of the purchase of the principal business assets of baggallini, Inc. The finite life intangible asset consisted of customer relationships and is being amortized over a ten-year expected life, as determined through valuation analysis at the time of acquisition, using the straight-line method. The indefinite life intangible assets acquired for $5,600 consisted of trade names. All goodwill and acquisition related intangible assets were recognized and reported within the Company’s Accessories segment.

Purchased goodwill and intangible assets with indefinite lives are not amortized, but instead will be tested for impairment annually, during the second fiscal quarter, or more frequently if events or changes in circumstances indicate that impairment may be present. The Company’s impairment testing for both goodwill and other long-lived assets, including intangible assets with finite useful lives, is primarily based on cash flow models that require significant judgment and assumptions about future trends, revenue and expense growth rates, and in addition, external factors such as changes in economic trends and cost of capital. Significant changes in any of these assumptions could impact the outcome of the tests performed.

 

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Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

Goodwill and indefinite life intangible assets included the following:

 

     Goodwill      Trade names  

Balance as of July 3, 2010

   $ —           —     

Acquired during fiscal 2011

     15,510         9,200   
  

 

 

    

 

 

 

Balance as of July 2, 2011

   $ 15,510       $ 9,200   

Acquired during fiscal 2012

     —           —     
  

 

 

    

 

 

 

Balance as of June 30, 2012

   $ 15,510       $ 9,200   
  

 

 

    

 

 

 

Other intangible assets included the following:

 

     June 30, 2012  
     Weighted
average
amortization
period
     Gross
Carrying
amount
     Accumulated
amortization
    Net carrying
amount
 

Amortizing intangible assets:

          

Customer relationships

     9.4 years       $ 15,600       $ (2,198   $ 13,402   

Trademarks, patents and fees

     5 years         728         (600     128   
     

 

 

    

 

 

   

 

 

 

Total amortizing intangible assets

      $ 16,328       $ (2,798   $ 13,530   
     

 

 

    

 

 

   

 

 

 

 

     July 2, 2011  
     Weighted
average
amortization
period
     Gross
Carrying
amount
     Accumulated
amortization
    Net carrying
amount
 

Amortizing intangible assets:

          

Customer relationships

     9.4 years       $ 15,600       $ (500   $ 15,100   

Trademarks, patents and fees

     5 years         712         (559     153   
     

 

 

    

 

 

   

 

 

 

Total amortizing intangible assets

      $ 16,312       $ (1,059   $ 15,253   
     

 

 

    

 

 

   

 

 

 

The Company recognized aggregate customer relationships and trademarks, patents and fees amortization expense of $1,739, $625 and $191 in fiscal 2012, fiscal 2011 and fiscal 2010, respectively, and reported that expense as part of selling, general and administrative expenses in the accompanying consolidated statements of income.

Based on the Company’s amortization methods, remaining customer relationships and trademarks, patents and fees costs will be recognized as amortization expense of $1,742, $1,733, $1,724, $1,715 and $1,967 in each of the next five years, respectively. The Company would accelerate the expensing of these costs should circumstances change and an impairment condition be determined for customer relationships, trademarks or patents that have a remaining value.

 

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Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

(6) Short-term Notes Payable and Long-term Debt

On March 1, 2011, the Company and The Huntington National Bank (“Huntington”) entered into an unsecured Credit Agreement (the “New Facility”). The New Facility replaced the previously existing unsecured revolving credit agreement between the Company and Huntington dated March 29, 2007 (as amended, the “Prior Credit Agreement”), which would have expired December 31, 2011. The Prior Credit Agreement with Huntington was terminated in connection with the New Facility.

Under the terms of the New Facility, Huntington is obligated to advance funds to the Company for a period of three years under a revolving credit facility (the “Revolving Credit Facility”). The Company may have outstanding indebtedness of up to $5,000 under the Revolving Credit Facility from January through June of each calendar year and up to $10,000 from July through December of each calendar year. Under the terms of the New Facility, the Company may request that Huntington increase the Revolving Credit Facility by an amount of up to $5,000. The termination and maturity date of the Revolving Credit Facility is March 1, 2014. The interest rate on the Revolving Credit Facility is a rate equal to the 30-day LIBOR rate plus 1.75% and the applicable rate on this Revolving Credit Facility was 2.0% at June 30, 2012. Additionally, the Company agreed to pay a quarterly fee equal to 0.25% of the daily average unused amount of the Revolving Credit Facility, as well as a one-time $25 deemed to be paid facility fee effective as of March 1, 2011 in connection with the Revolving Credit Facility. The facility fee is being amortized over the term of the Revolving Credit Facility. Further, the Revolving Credit Facility must be without any outstanding borrowings for at least 30 consecutive days during each period commencing on July 1 and continuing through June 30 of the following year. At June 30, 2012, there were no outstanding borrowings under the Revolving Credit Facility. At June 30, 2012, the Company had available borrowing capacity under the Revolving Credit Facility of $5,000.

Under the terms of the New Facility, the Company borrowed $30,000 in funds made available under a term loan facility (the “Term Loan Facility”). Under the Term Loan Facility, Huntington disbursed $15,000 on March 1, 2011 and the remaining $15,000 on March 31, 2011. The Company started making equal monthly principal payments in the amount of $357, together with accrued interest, beginning on April 1, 2011, with the then remaining outstanding balance and accrued interest due and payable on March 1, 2016. The interest rate under the Term Loan Facility is a rate equal to LIBOR plus 1.85%. As required under the terms of the New Facility, the Company entered into an interest rate contract that provided for a fixed interest rate of 3.94% on a notional amount equal to fifty percent of the outstanding principal balance of the term loan. See “Note (7)—Derivative Instruments and Hedging Activities”.

The Company paid Huntington a one-time facility commitment fee of $75 in connection with the Term Loan Facility, and this fee is being amortized over the term of the term loan. The applicable interest rate on the Term Loan Facility at June 30, 2012 was 2.10% based on a 30-day LIBOR rate of .25% on that date.

Under the terms of the New Facility, the Company is required to satisfy certain financial covenants, including (a) satisfying a minimum fixed charge coverage ratio test of not less than 1.1 to 1.0, which has been or will be calculated quarterly on a trailing 12-month basis beginning with the fiscal quarter ended March 31, 2012, (b) satisfying a funded debt leverage ratio test of not greater than 2.25 to 1.00, which has been or will be calculated quarterly beginning with the fiscal quarter ended on March 31, 2012 and (c) maintaining a consolidated net worth of at least $52,000, increased annually by an amount equal to 50% of the Company’s consolidated net income subsequent to June 30, 2012. At June 30, 2012, the Company was in compliance with all of these financial covenants.

 

50


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

The fair value of the Company’s long-term debt is based upon the present value of expected cash flows, considering expected maturities and using current interest rates available to the Company for borrowings with similar terms. The carrying amount of the Company’s long-term debt approximates its fair value. Long-term debt consisted of the following:

 

     June 30, 2012      July 2, 2011  

Long-term debt

   $ 24,643       $ 28,571   

Less current installments

     4,286         3,928   
  

 

 

    

 

 

 

Long-term debt excluding current installments

   $ 20,357       $ 24,643   
  

 

 

    

 

 

 

The aggregate minimum principal maturities of the long-term debt for each of the next four years following June 30, 2012 are as follows:

 

2013

   $ 4,286   

2014

     4,286   

2015

     4,286   

2016

     3,571   

2016 due at end of term loan

     8,214   
  

 

 

 
   $ 24,643   
  

 

 

 

 

(7) Derivative Instruments and Hedging Activities

The Company may utilize derivative financial instruments to manage exposure to certain risks related to its ongoing operations. The primary risk managed through the use of derivative instruments is interest rate risk. In January 2011, the Company entered into an interest rate contract with an initial notional amount of $15,000 and a maturity date of March 1, 2016 to hedge the changes in cash flows attributable to changes in the LIBOR rate associated with the Term Loan Facility. Under this interest rate contract, the Company pays a fixed interest rate of 3.94% and receives a variable rate based on LIBOR plus 1.85%. The notional amount of this interest rate contract is required to be 50% of the amount of the term loan through the expiration of the term loan under the Term Loan Facility described in Note (6), —“Short-term Notes Payable and Long-term Debt”.

The Company’s objective is to manage the impact of interest rate changes on cash flows and the market value of its borrowings under the floating rate term loan. In addition, the Company may enter into interest rate contracts to further manage exposure to interest rate variations related to borrowings and to lower overall borrowing costs. The Company does not use derivative instruments for trading or speculative purposes. The Company’s derivative instrument is designated as a hedging instrument, which is adjusted to fair value at the end of each reporting period with the effective portion of the adjustment recorded to other comprehensive income. Any ineffective portion is recorded in earnings.

The Company is exposed to counterparty credit risk on any derivative instrument. Accordingly, the Company has established and maintains strict counterparty credit guidelines and enters into any derivative instrument only with a major financial institution. The Company does not have significant exposure to any counterparty and management believes the risk of loss is remote and, in any event, would not be material.

Refer to “Note (2)—Fair Value Measurements” for additional information regarding the fair value of the derivative instrument.

 

51


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

The following table summarizes the fair value of the Company’s derivative instrument and the line item in which it was recorded in the consolidated balance sheet at June 30, 2012:

 

          Liability Derivative Fair Value  
     Balance Sheet Location    at June 30, 2012      at July 2, 2011  

Derivative designated as hedging instrument:

        

Interest rate contract

   Accrued expenses    $ 186       $ —     
   Accrued retirement costs

    and other

     286         268   
     

 

 

    

 

 

 
      $ 472       $ 268   
     

 

 

    

 

 

 

Cash Flow Hedges

The Company may enter into derivative instruments to hedge exposure to changes in cash flows attributable to interest rate fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on any such derivative instrument is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in earnings immediately.

The following table summarizes the loss recognized in OCI and the loss reclassified from accumulated OCI into pretax earnings for the derivative instrument designated as a cash flow hedge during the fiscal year ended June 30, 2012:

 

     Gross Loss
Recognized
in OCI
(Effective
Portion)
     Location of Loss
Reclassified from
Accumulated OCI
(Effective Portion)
     Loss
Reclassified
from
Accumulated
OCI (Effective
Portion)
     Location of Loss
(Ineffective
Portion)
Excluded from
Effectiveness
Testing
     Loss
(Ineffective
Portion)
Excluded from
Effectiveness
Testing
 

Interest rate contract

   $ 458         Interest expense       $ 250         Interest expense       $ —     

 

52


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

The following table summarizes the loss recognized in OCI and the loss reclassified from accumulated OCI into earnings for the derivative instrument designated as a cash flow hedge during the fiscal year ended July 2, 2011:

 

     Gross Loss
Recognized
in OCI
(Effective
Portion)
     Location of Loss
Reclassified from
Accumulated OCI
(Effective Portion)
     Loss
Reclassified
from
Accumulated
OCI (Effective
Portion)
     Location of Loss
(Ineffective
Portion)
Excluded from
Effectiveness
Testing
     Loss
(Ineffective
Portion)
Excluded from
Effectiveness
Testing
 

Interest rate contract

   $ 350         Interest expense       $ 94         Interest expense       $ 13   

The estimated net amount of the loss in accumulated OCI at June 30, 2012 expected to be reclassified into pretax earnings within the next twelve months is $186.

 

(8) Lease Commitments

The Company occupies certain distribution and office sales facilities under cancelable and noncancelable operating lease arrangements. A summary of the noncancelable operating lease commitments at June 30, 2012 is as follows:

 

2013

   $ 666   

2014

     528   

2015

     190   

2016

     —     

2017

     —     

Thereafter

     —     
  

 

 

 
   $ 1,384   
  

 

 

 

Substantially all of these operating lease agreements have no further contractual renewals and require the Company to pay insurance, taxes and maintenance expenses. Rent expense under cancelable and non-cancelable operating lease arrangements in fiscal 2012, fiscal 2011 and fiscal 2010 was $1,098, $1,028 and $1,046, respectively.

 

(9) Income Taxes

Income tax expense for fiscal 2012, fiscal 2011 and fiscal 2010, consisted of the following:

 

     2012      2011      2010  

Current expense:

        

Federal

   $ 6,538       $ 2,959       $ 2,439   

State

     1,197         437         504   
  

 

 

    

 

 

    

 

 

 
     7,735         3,396         2,943   

Deferred expense

     976         932         2,640   
  

 

 

    

 

 

    

 

 

 

Total expense

   $ 8,711       $ 4,328       $ 5,583   
  

 

 

    

 

 

    

 

 

 

 

53


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

The difference between income taxes computed by applying the statutory federal income tax rates of 35%, 34% and 34% in fiscal 2012, fiscal 2011 and fiscal 2010, respectively, and income tax expense reported in the consolidated statements of income is:

 

     2012     2011     2010  

Computed “expected” tax expense

   $ 8,141      $ 4,025      $ 5,094   

State income taxes expense, net of federal income tax

     915        361        437   

Revaluation of net deferred tax assets

     (338     —          —     

Other, net

     (7     (58     52   
  

 

 

   

 

 

   

 

 

 

Total expense

   $ 8,711      $ 4,328      $ 5,583   
  

 

 

   

 

 

   

 

 

 

The tax effects of temporary differences and loss carryforwards that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below.

 

     2012     2011  

Deferred tax assets:

    

Current assets

   $ 895      $ 1,267   

Accrued expenses

     1,366        795   

Pension liability

     6,806        5,663   

Interest rate contract liability

     175        95   

Acquisition intangible assets and expenses

     —          99   

Capital loss carryforward

     508        482   
  

 

 

   

 

 

 

Total deferred tax assets

     9,750        8,401   

Less valuation allowance

     (508     (482
  

 

 

   

 

 

 

Deferred tax assets, net

     9,242        7,919   

Deferred tax liabilities:

    

Accrued pension costs

     2,559        1,509   

Acquisition intangible assets and expenses

     270        —     

Prepaid insurance

     70        66   

Property, plant and equipment

     108        45   
  

 

 

   

 

 

 

Total deferred tax liabilities

     3,007        1,620   
  

 

 

   

 

 

 

Net deferred tax assets

   $ 6,235      $ 6,299   
  

 

 

   

 

 

 

During fiscal 2012, the Company concluded, based on its forecast of future operations and estimated federal, state and local effective tax rates, the likely rate at which net temporary difference will reversed has changed. Accordingly, deferred tax assets and liabilities, as of the beginning of fiscal 2012, have been revalued at the new higher tax rate resulting in a deferred tax benefit of $338, which was recorded during the fourth quarter.

The net temporary differences incurred to date will reverse in future periods as the Company generates taxable earnings. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets recorded. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

54


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

The Company generated a capital loss deferred tax asset is subject to expiration after five years. Capital gains generated by the Company during the period prior to expiration can be utilized to offset the capital loss deferred tax asset. At the end of fiscal 2012 and fiscal 2011, the Company has recorded a valuation allowance of $508 and $482, respectively.

At the end of fiscal 2012, fiscal 2011 and fiscal 2010, there were no net operating loss carryforwards available for U.S. federal, state, and local income tax purposes. All net operating loss carryforwards were used during fiscal 2010, and the Company recognized both deferred prior year and current year excess tax benefits as additional paid in capital during fiscal 2010.

FASB ASC 740-10 (the overall Subtopic of topic 740 on income taxes) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company did not record an accrual for tax related uncertainties or unrecognized tax positions at the end of fiscal 2012 or the end of fiscal 2011. The Company does not expect a change to the reserve for uncertain tax positions within the next twelve months that would have a material impact on the consolidated financial statements.

The Company recorded no interest or penalties during or at the end of fiscal 2012, fiscal 2011 and fiscal 2010 in either its consolidated statement of income or consolidated balance sheet.

The Company files a consolidated U.S. Federal income tax return and consolidated and separate company income tax returns in various state and local jurisdictions. Generally, the Company is no longer subject to income tax examinations by federal tax authorities through the tax year ended June 28, 2008 and by state and local tax authorities for the tax years through June 30, 2007.

 

(10) Accrued Expenses

Accrued expenses at June 30, 2012 and July 2, 2011 consisted of the following:

 

     2012      2011  

Salaries and wages

   $ 3,308       $ 418   

Other taxes

     147         110   

Current pension liabilities

     585         685   

Other

     1,661         734   
  

 

 

    

 

 

 
   $ 5,701       $ 1,947   
  

 

 

    

 

 

 

 

55


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

(11) Employee Retirement Plans

The Company maintains a tax qualified pension plan, the Associates’ Retirement Plan (“ARP”). The Company intends to fund the minimum amounts required under the Employee Retirement Income Security Act of 1974 (ERISA). The Company also sponsors a tax nonqualified pension plan, the Supplemental Retirement Plan (“SRP”), for certain officers and other key employees as designated by R.G. Barry Corporation’s Board of Directors. The SRP is unfunded, noncontributory and provides for the payment of monthly retirement benefits. Benefits are based on a formula applied to the recipients’ final average monthly compensation, reduced by a certain percentage of their social security benefits. For certain participants, the SRP provides an alternative benefit formula for years worked past the normal retirement age assumed by the SRP. Effective as of close of business on March 31, 2004, both the ARP and SRP were frozen.

The funded status of the ARP and the SRP and the accrued retirement costs, measured on June 30, 2012 and July 2, 2011, respectively, were:

 

     ARP     SRP  
     2012     2011     2012     2011  

Change in projected benefit obligation:

        

Benefit obligation at the beginning of the year

   $ 32,778      $ 33,139      $ 7,620      $ 7,650   

Interest cost

     1,644        1,606        379        367   

Actuarial loss

     3,675        334        397        290   

Benefits paid

     (2,376     (2,301     (686     (687
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at the end of the year

   $ 35,721      $ 32,778      $ 7,710      $ 7,620   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

        

Fair value of plan assets at the beginning of the year

   $ 29,238      $ 21,988      $ —        $ —     

Actual return on plan assets

     2,639        5,608        —          —     

Contributions

     3,286        4,155        686        687   

Expenses

     (177     (212     —          —     

Benefits paid

     (2,376     (2,301     (686     (687
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of the year

   $ 32,610      $ 29,238      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status at end of the year

   $ (3,111   $ (3,540   $ (7,710   $ (7,620
  

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

   $ —        $ —        $ (655   $ (685

Noncurrent liabilities

     (3,111     (3,540     (7,055     (6,935
  

 

 

   

 

 

   

 

 

   

 

 

 

Net pension liability at end of year

   $ (3,111   $ (3,540   $ (7,710   $ (7,620
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in accumulated other comprehensive loss-pretax

        

Prior service costs

   $ —        $ —        $ —        $ 13   

Net actuarial loss

     15,034        13,187        2,350        2,039   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance in accumulated other comprehensive loss at end of year-pretax

   $ 15,034      $ 13,187      $ 2,350      $ 2,052   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

56


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

 

     ARP     SRP  
     2012     2011     2012     2011  

Other changes in plan assets and benefit obligations recognized in other comprehensive loss-pretax

    

Net actuarial loss (gain)

   $ 3,139      $ (3,019   $ 397      $ 290   

Amortization of:

        

Prior service cost

     —          —          (13     (42

Net actuarial losses

     (1,292     (1,149     (85     (70
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recognized in comprehensive loss (income)

   $ 1,847      $ (4,168   $ 299      $ 178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Actuarial gains and losses on assets reflects the differences between expected and actual rates of return on pension plan assets. Actuarial gains and losses on pension obligations primarily reflects the effect of changes in discount rate on the measure of pension liabilities at the end of each fiscal year and demographic differences between actual and projected mortality and other factors. The actuarial loss reported for pension obligations in fiscal 2012 reflects primarily the decrease of 106 basis points in the discount rate from the end of fiscal 2011 to fiscal 2012. The estimated net actuarial loss and prior service cost for the defined benefit plans that will be amortized from accumulated OCI into net periodic benefit cost during fiscal 2013 are $1,699 and $100, respectively.

At June 30, 2012, expected benefit payments to plan participants in the ARP and the SRP for each of the next five years and the five-year period thereafter in the aggregate are:

 

     ARP      SRP  

2013

   $ 2,383       $ 655   

2014

     2,394         657   

2015

     2,384         690   

2016

     2,385         682   

2017

     2,377         669   

2018-2022

     11,805         3,066   

 

     2012     2011     2010  

Weighted average assumptions used to determine net costs for both the ARP and the SRP:

      

Discount rate

     5.20     5.02     6.42

Rate of compensation increase

     —          —          4.00

Expected return on plan assets

     6.75     7.90     8.25

Components of Net Periodic Benefit Cost:

      

Service cost

   $ —        $ —        $ 9   

Interest cost

     2,023        1,974        2,285   

Expected return on plan assets

     (1,926     (2,043     (1,973

Net amortization

     1,390        1,261        693   

Settlement expense

     —          —          185   
  

 

 

   

 

 

   

 

 

 

Total pension expense

   $ 1,487      $ 1,192      $ 1,199   
  

 

 

   

 

 

   

 

 

 

 

57


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

     2012     2011     2010  

Weighted average assumptions used to determine benefit obligations:

      

Discount rate

     4.14     5.20     5.02

The ARP is funded on a periodic basis as required under ERISA/IRS guidelines. The general principles guiding investment of pension plan assets are those embodied under ERISA. These principles include discharging the Company’s investment responsibilities for the exclusive benefit of plan participants and in accordance with the “prudent expert” standards and other ERISA rules and regulations. Investment objectives for the Company’s pension plan assets are to optimize the long-term return on plan assets while maintaining an acceptable level of risk, diversify assets among asset classes and investment styles and maintain a long-term focus. The plan asset allocation shown below is consistent with the Company’s investment policy objectives and reflects the ongoing transition of the asset portfolio from an equity-based investment portfolio to a debt-security investment portfolio. This change over time is designed to better match assets and anticipated cash outflows with the underlying future expected payment streams associated with the Company’s ARP obligation. With the assistance of a consulting firm, the plan fiduciaries are responsible for selecting investment managers, setting asset allocation targets and monitoring asset allocation and investment performance.

The qualified plan assets invested as of the measurement date for fiscal 2012 and fiscal 2011were as follows:

 

     2012     2011  

Cash and equivalents

     2     3

Domestic equities

     18     23

Domestic fixed income securities

     65     56

Foreign equities

     15     18

Hedge funds

     0     0
  

 

 

   

 

 

 

Total pension plan assets invested

     100     100
  

 

 

   

 

 

 

 

58


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

The table below highlights assets held in trust in the ARP, and the fair value categories applicable to the various investments held at June 30, 2012:

 

            Fair Value Measurements at Reporting Date Using:  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Cash and equivalents

   $ 762       $ 762       $ —         $ —     

Domestic equities

     5,833         5,833         —           —     

Domestic fixed income securities

     21,231         21,231         —           —     

Foreign equities

     4,784         4,784         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total pension plan assets

   $ 32,610       $ 32,610       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below highlights assets held in trust in the ARP, and the fair value categories applicable to the various investments held at July 2, 2011:

 

            Fair Value Measurements at Reporting Date Using:  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Cash and equivalents

   $ 864       $ 864       $ —         $ —     

Domestic equities

     6,679         6,679         —           —     

Domestic fixed income securities

     16,415         16,415         —           —     

Foreign equities

     5,280         5,280         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total pension plan assets

   $ 29,238       $ 29,238       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The expected return on plan assets used in the pension computations for the qualified ARP is based on management’s best judgment of future anticipated performance of those invested assets based on past long-term experience and judgment on how future long-term performance will occur.

 

59


Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

The Company’s SRP is unfunded and payments, as required, are made when due from the Company’s general funds. In fiscal 2013, the Company anticipates total payments and qualified plan contributions of $1,522 related to its SRP and ARP.

The discount rate was determined based on an analysis of interest rates for high-quality, long-term corporate debt at each measurement date. In order to appropriately match the bond maturities with expected future cash payments, the Company utilizes differing bond portfolios to estimate the discount rates for the defined benefit plans. The weighted average discount rate used to determine the defined benefit plans obligation as of the balance sheet date is the rate in effect at the measurement date. The same rate is also used to determine the defined benefit plans expense for the following fiscal year.

The Company sponsors a 401(k) plan for all its eligible salaried and non-salaried employees. Effective January 1, 2005, the Company adopted a 3% non-contributory Safe Harbor 401 provision for all eligible plan participants. The Company’s contributions in cash to the 401(k) plan were $269, $267 and $375 for fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

 

(12) Shareholders’ Equity

As of June 30, 2012, there were approximately 106 employees and seven non-employee directors who were eligible to participate in the 2005 Plan.

The 2005 Plan authorizes the issuance of 1,000,000 common shares, plus:

 

   

the number of common shares that were authorized to be the subject of awards under the 1997 Incentive Stock Plan (the “1997 Plan”) and the 2002 Stock Incentive Plan (the “2002 Plan”), but which had not yet been granted as of May 20, 2005; and

 

   

any common shares underlying awards granted under the 1997 Plan and the 2002 Plan, which are forfeited after May 20, 2005.

At June 30, 2012, the number of common shares available for future grants pursuant to the 2005 Plan was 373,200.

The selection of participants and the nature and size of awards granted under the 2005 Plan is within the discretion of the Compensation Committee of R.G. Barry Corporation’s Board of Directors (the “Committee”), in the case of grants to employees of the Company or the full Board of Directors, in the case of grants to non-employee directors of R.G. Barry Corporation. The 2005 Plan provides for the following types of awards, each as defined in the 2005 Plan:

 

   

nonqualified stock options (“NQs”) and incentive stock options (“ISOs”) that qualify under Section 422 of the Internal Revenue Code of 1986, as amended;

 

   

stock appreciation rights;

 

   

restricted stock and restricted stock units (“RSUs”); and

 

   

stock grants, stock units and cash awards.

Grants of restricted stock, RSUs, stock units and cash awards may, as determined by the Committee or the full Board of Directors, as appropriate, also be performance-based awards, as defined in the 2005 Plan.

 

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Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

If an award granted under the 2005 Plan is forfeited, cancelled, terminated, relinquished, exchanged or otherwise settled without the issuance of common shares or the payment of cash equal to the difference between the fair market value of the award and any exercise price, the common shares associated with that award will be available for future grants. The maximum number of common shares with respect to which awards may be issued under the 2005 Plan to any individual during any calendar year is 200,000. The common shares issued pursuant to the 2005 Plan may consist of authorized and unissued common shares or treasury shares.

Prior to the 2005 Plan, the Company had various equity-based compensation plans, under which ISOs and NQs had been granted, some of which remain outstanding. All outstanding ISOs and NQs are currently exercisable for periods of up to ten years from the date of grant at exercise prices of not less than the fair market value of the underlying common shares at the grant date.

The Company recorded, as part of selling, general and administrative expenses, $1,555 of stock-based compensation expense for fiscal 2012. This amount includes expense from all ISOs, NQs and RSUs granted whether to be settled with common shares issuance or by equivalent cash payment, and the value of common shares issued for services rendered by members of the Company’s Board of Directors.

The total unrecognized compensation cost of RSUs granted but not yet vested as of June 30, 2012 was approximately $1,191. The Company expects to recognize the total remaining compensation cost with respect to these RSUs over the weighted-average period of approximately two years.

Total unrecognized compensation cost of stock options granted, but not yet vested, as of June 30, 2012 was $23. This amount is expected to be recognized over the remaining pro-rata vesting period of three years associated with these stock option grants. The following assumptions were used to value these stock options:

 

Dividend yield

     2.6

Expected volatility

     48.4

Risk-free interest rate

     1.4

Expected term

     3 years   

The risk-free interest rate was based on the United States Treasury daily yield curve rates for the expected term of the stock options. The expected volatility was based on the historical volatility of the Company’s common shares.

 

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Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

Plan activity for grants under the 2005 Plan and the other equity-based compensation plans under which ISOs and NQs have been granted was as follows:

 

     Number of
common  shares
subject to ISOs
    Number of
common  shares
subject to NQs
    Weighted-
average
exercise price
 

Outstanding at June 27, 2009

     117,000        146,200      $ 5.21   

Granted

     —          —          —     

Exercised

     (81,000     (40,700     4.03   

Expired/Cancelled

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Outstanding at July 3, 2010

     36,000        105,500      $ 6.11   

Granted

     —          12,300        11.36   

Exercised

     (13,300     (5,000     5.85   

Expired/Cancelled

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Outstanding at July 2, 2011

     22,700        112,800      $ 6.63   

Granted

     —          —          —     

Exercised

     (15,200     (94,200     6.43   

Expired/Cancelled

     —          (1,600     12.55   
  

 

 

   

 

 

   

 

 

 

Outstanding at June 30, 2012

     7,500        17,000      $ 7.12   
  

 

 

   

 

 

   

 

 

 

Options exercisable at June 30, 2012

     7,500        9,800     
  

 

 

   

 

 

   

 

     Options outstanding      Options exercisable  

Range of

exercise

prices

   Number
outstanding  at
June 30, 2012
     Weighted-
average
remaining
contractual
life (years)
     Weighted-
average
exercise
price
     Number
exercisable  at
June 30, 2012
     Weighted-
average
exercise
price
 

$ 2.51 – 5.00

     13,800         1.0       $ 3.96         13,800       $ 3.96   

5.01 – 10.00

     —           —           —           —           —     

10.01 – 15.00

     10,700         8.6         11.18         3,500         11.18   
  

 

 

          

 

 

    
     24,500               17,300      
  

 

 

          

 

 

    

The intrinsic values of the stock options exercisable and outstanding at the end of fiscal 2012 were $141 and $158, respectively. The intrinsic value of stock options exercised during fiscal 2012 was $733.

At the end of fiscal 2012, fiscal 2011 and fiscal 2010, the stock options outstanding under these equity-based compensation plans were held by 5, 9 and 8 individuals, respectively, and had expiration dates ranging from 2012 to 2021.

 

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Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

Consistent with its non-employee director’s compensation policy, the Company also awarded an aggregate of 20,370 common shares (i.e., unrestricted stock) with immediate vesting to the non-employee directors of R.G. Barry Corporation during the second quarter of fiscal 2012. The aggregate fair value of this award of common shares was $257 based on the market price of the Company’s common shares at the date of grant, and was included as part of the total stock-based compensation expense cited above.

In fiscal 2012, the Company granted 550 time-based RSUs to a member of management. Upon vesting, the RSUs will be settled in an equivalent number of common shares. The RSUs awarded to the member of management will vest in full on the fifth anniversary of the date of the award, although 20% of the RSUs may vest on each of the first four anniversaries of the date of the award if the Company meets certain financial performance goals. The intrinsic value of RSUs that vested during fiscal 2012 was $47.

During fiscal 2012, the Company granted performance-based RSUs to certain members of management. Each performance-based RSU is equivalent to one common share. The number of RSUs eligible for settlement to participants is ultimately based on the level of diluted earnings per share achieved by the Company, at certain established minimum, target and maximum levels, for the fiscal year in which such performance-based RSUs are granted. If the minimum level of diluted earnings per share is not achieved for the fiscal year of grant, all of the performance-based RSUs underlying the award will be forfeited. If diluted earnings per share exceed the minimum level, the number of RSUs underlying the award eligible for settlement will be determined when the annual financial results are finalized by the Company and one-third of those RSUs will be settled. For fiscal 2012, the Company’s diluted earnings per share reported resulted in the maximum level of RSUs eligible for settlement. The remaining performance-based RSUs eligible for settlement will vest to the participants based on continued service rendered to the Company over the following two-fiscal year periods, with annual pro rata vesting based on employment during the relevant fiscal year and settlement occurring at the end of each fiscal year. Except in instances of death or retirement where pro rata vesting would be applied, participants must be employed by the Company at the time of settlement in order to be vested in any portion of the award otherwise to be settled.

The performance-based RSUs described in the preceding paragraph will be settled, if eligible, through an issuance of common shares for 50% of the performance-based RSUs and through cash payment for the other 50% of the performance-based RSUs valued at the fair value of a common share at the time of settlement. Based on the diluted earnings per share achieved by the Company for fiscal 2012, the number of total eligible performance-based RSUs was computed at 105,200 of which 50% was accounted for as an equity award and 50% was accounted for as a cash settlement award. The fair value of the equity award was determined based on the closing market price of a common share at the date of grant of $10.51. Similarly, the fair value of the cash settlement award was initially based on the market price of a common share at the date of grant but is subject to periodic revaluation as changes occur in the market price of a common share over the time period of the award.

In addition, consistent with its employee compensation policy, the Company granted an aggregate of 23,550 time-based RSUs, which vest in equal annual installments over three years, to certain members of management.

At the end of fiscal 2012, fiscal 2011 and fiscal 2010, RSUs outstanding under the 2005 Plan were held by 27, 26 and 38 employees, respectively, and had vesting dates ranging from 2013 to 2017.

 

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Table of Contents

Notes to Consolidated Financial Statements

R.G. Barry Corporation and Subsidiaries

(dollar amounts in thousands, except share and per common share data)

 

These RSU vesting dates were subject to partial acceleration on an annual basis if certain Company financial performance objectives were met for a fiscal year.

The following is a summary of the status of the Company’s time-based RSUs as of June 30, 2012, July 2, 2011 and July 3, 2010 and activity during the fiscal year then ended:

 

     2012      2011      2010  
     RSUs     Weighted
average
grant-
date fair
value
     RSUs     Weighted
average
grant-
date fair
value
     RSUs     Weighted
average
grant-
date fair
value
 

Unvested at beginning of the year

     319,900      $ 8.24         314,000      $ 7.49         319,500      $ 6.86   

Granted

     24,100        10.51         124,500        9.92         145,400        8.08   

Vested

     (4,200     6.46         (94,600     8.05         (119,000     6.56   

Forfeited/Cancelled

     (14,900     8.40         (24,000     7.80         (31,900     7.25   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Unvested at the end of the year

     324,900      $ 8.43         319,900      $ 8.24         314,000      $ 7.49   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Activity for fiscal 2012 with respect to performance-based RSUs, with future settlement at vesting in common shares, was as follows:

 

     Number of
common shares
underlying RSUs
    Grant Date</