##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    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
 
  OHIO
    
    31-4362899(State or other jurisdiction 
of incorporation or organization)
    
    (IRS Employer
Identification Number)13405 Yarmouth Road NW, Pickerington, Ohio
    
    43147(Address of principal executive offices)
    
    (Zip Code)
 
   
  þ o
  o o þ
 o þ




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##### Table of Contents



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONITEM 2  Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3  Quantitative and Qualitative Disclosures About Market RiskITEM 4  Controls and Procedures
ITEM 4T  Controls and ProceduresPART II  OTHER INFORMATIONITEM 1  Legal ProceedingsITEM 1A  Risk FactorsITEM 2  Unregistered Sales of Equity Securities and Use of ProceedsITEM 3  Defaults Upon Senior SecuritiesITEM 4  Submission of Matters to a Vote of Security HoldersITEM 5  Other InformationITEM 6  ExhibitsSIGNATURESINDEX TO EXHIBITSEX-31.1EX-31.2EX-32.1EX-31.1EX-31.2EX-32.1
 2




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March 31, 2007
    
    
    July 1, 2006(unaudited)ASSETS:Cash and cash equivalents
    
    $
    16,939
    
    
    $
    988Accounts receivable (less allowances of $4,255 and $2,180, respectively)
    
    
    11,366
    
    
    
    6,683Inventory
    
    
    12,440
    
    
    
    25,977Current deferred income taxes
    
    
    8,967
    
    
    
    Prepaid expenses
    
    
    662
    
    
    
    1,161Total current assets
    
    
    50,374
    
    
    
    34,809Property, plant and equipment, at cost
    
    
    11,789
    
    
    
    11,214Less accumulated depreciation and amortization
    
    
    9,215
    
    
    
    8,795Net property, plant and equipment
    
    
    2,574
    
    
    
    2,419Non-current deferred income taxes
    
    
    4,746
    
    
    
    Other assets
    
    
    3,017
    
    
    
    3,216Total assets
    
    $
    60,711
    
    
    $
    40,444LIABILITIES AND SHAREHOLDERS EQUITY:Short-term notes payable
    
    
    2,200
    
    
    
    2,200Current installments of long-term debt
    
    
    333
    
    
    
    395Accounts payable
    
    
    4,502
    
    
    
    9,085Accrued expenses
    
    
    5,850
    
    
    
    7,136Total current liabilities
    
    
    12,885
    
    
    
    18,816Long-term debt, excluding current installments
    
    
    290
    
    
    
    439Accrued retirement costs and other
    
    
    11,039
    
    
    
    12,193Total liabilities
    
    
    24,214
    
    
    
    31,448Shareholders equity:Preferred shares, $1 par value per share: Authorized 3,775 Class A
shares, 225 Series I 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 10,098 and 10,017 shares, respectively
(excluding treasury shares of 1,000 and 969, respectively)
    
    
    10,098
    
    
    
    10,017Additional capital in excess of par value
    
    
    13,683
    
    
    
    13,192Accumulated other comprehensive loss
    
    
    (4,241
    )
    
    
    (4,353
    )Retained earnings (deficit)
    
    
    16,957
    
    
    
    (9,860
    )Total shareholders equity
    
    
    36,497
    
    
    
    8,996Total liabilities and shareholders equity
    
    $
    60,711
    
    
    $
    40,444
  3




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Thirteen weeks ended
    
    
    Thirty-nine weeks endedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    19,176
    
    
    $
    17,160
    
    
    $
    97,572
    
    
    $
    89,439Cost of sales
    
    
    12,460
    
    
    
    10,405
    
    
    
    60,117
    
    
    
    52,081Gross profit
    
    
    6,716
    
    
    
    6,755
    
    
    
    37,455
    
    
    
    37,358Selling, general and administrative expenses
    
    
    6,812
    
    
    
    6,855
    
    
    
    24,061
    
    
    
    26,739Gain on disposal of land
    
    
    
    
    
    
    
    
    
    
    (878
    )
    
    
    Restructuring and asset impairment charges
    
    
    91
    
    
    
    41
    
    
    
    163
    
    
    
    1,310Operating profit (loss)
    
    
    (187
    )
    
    
    (141
    )
    
    
    14,109
    
    
    
    9,309Other income
    
    
    35
    
    
    
    124
    
    
    
    131
    
    
    
    419Interest income (expense), net
    
    
    164
    
    
    
    (67
    )
    
    
    (391
    )
    
    
    (716
    )Income (loss) from continuing operations, before income tax
    
    
    12
    
    
    
    (84
    )
    
    
    13,849
    
    
    
    9,012Income tax expense (benefit)
    
    
    (196
    )
    
    
    27
    
    
    
    (12,968
    )
    
    
    82Earnings (loss) from continuing operations
    
    $
    208
    
    
    $
    (111
    )
    
    $
    26,817
    
    
    $
    8,930Earnings from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22Net earnings (loss)
    
    $
    208
    
    
    $
    (111
    )
    
    $
    26,817
    
    
    $
    8,952Earnings (loss) per common share: continuing operationsBasic
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    2.67
    
    
    $
    0.90Diluted
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    2.58
    
    
    $
    0.87Earnings (loss) per common share: discontinued operationsBasic
    
    
    
    
    
    
    
    
    
    
    
    
    
    nmDiluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    nmEarnings (loss) per common share: totalBasic
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    2.67
    
    
    $
    0.90Diluted
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    2.58
    
    
    $
    0.87Average number of common shares outstandingBasic
    
    
    10,069
    
    
    
    9,930
    
    
    
    10,043
    
    
    
    9,909Diluted
    
    
    10,482
    
    
    
    9,930
    
    
    
    10,395
    
    
    
    10,257
  4




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Thirty-nine weeks endedMarch 31, 2007
    
    
    April 1, 2006Operating activities:Net earnings
    
    $
    26,817
    
    
    $
    8,952Earnings from discontinued operations
    
    
    
    
    
    
    22Earnings from continuing operations
    
    
    26,817
    
    
    
    8,930Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization of property, plant and equipment
    
    
    369
    
    
    
    388Deferred income tax benefit
    
    
    (13,713
    )
    
    
    Stock-based compensation expense
    
    
    440
    
    
    
    72Loss on disposal of property, plant and equipment
    
    
    26
    
    
    
    132Gain on disposal of land
    
    
    (878
    )
    
    
    Changes in:Accounts receivable
    
    
    (4,569
    )
    
    
    (4,157
    )Inventory
    
    
    13,628
    
    
    
    1,177Prepaid expenses and other
    
    
    704
    
    
    
    400Accounts payable
    
    
    (4,648
    )
    
    
    (1,753
    )Accrued expenses
    
    
    (1,406
    )
    
    
    1,344Accrued retirement costs and other, net
    
    
    (1,155
    )
    
    
    (2,266
    )Net cash provided by continuing operations
    
    
    15,615
    
    
    
    4,267Net cash provided by discontinued operations
    
    
    
    
    
    
    22Net cash provided by operating activities
    
    
    15,615
    
    
    
    4,289Investing activities:Purchases of property, plant and equipment
    
    
    (540
    )
    
    
    (308
    )Proceeds from the sale of property, plant and equipment
    
    
    888
    
    
    
    4Net cash provided by (used in) investing activities
    
    
    348
    
    
    
    (304
    )Financing activities:Repayment of debt
    
    
    (228
    )
    
    
    (4,259
    )Proceeds from common shares issued
    
    
    202
    
    
    
    215Net cash used in financing activities
    
    
    (26
    )
    
    
    (4,044
    )Effect of exchange rates on cash
    
    
    14
    
    
    
    18Net increase (decrease) in cash
    
    
    15,951
    
    
    
    (41
    )Cash at the beginning of the period
    
    
    988
    
    
    
    1,029Cash and cash equivalents at the end of the period
    
    $
    16,939
    
    
    $
    988Supplemental cash flow disclosures:Interest paid
    
    $
    651
    
    
    $
    768Income taxes paid
    
    
    236
    
    
    
    193
  5




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R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
for the thirteen-week and thirty-nine-week periods ended March 31, 2007 and April 1, 2006
(dollar amounts in thousands, except per share data)
       Transition period
    
    
    Comparable six-month periodended July 1, 2006
    
    
    ended July 2, 2005Net sales
    
    $
    32,883
    
    
    $
    33,209Gross profit
    
    
    12,865
    
    
    
    13,666Income tax expense
    
    
    34
    
    
    
    57Loss from continuing operations
    
    
    (4,199
    )
    
    
    (1,082
    )Earnings from discontinuedoperations
    
    
    
    
    
    
    68Net loss
    
    $
    (4,199
    )
    
    $
    (1,014
    )Loss per share-continuing
operations:Basic
    
    $
    (0.42
    )
    
    $
    (0.11
    )Diluted
    
    $
    (0.42
    )
    
    $
    (0.11
    )Earnings per share-discontinued
operations:Basic
    
    $
    
    
    
    $
    0.01Diluted
    
    $
    
    
    
    $
    0.01Loss per share-total:Basic
    
    $
    (0.42
    )
    
    $
    (0.10
    )Diluted
    
    $
    (0.42
    )
    
    $
    (0.10
    )
  6




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Shared-Based Payment Accounting for Stock Issued to Employees Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB No. 25
 Accounting for Stock-Based Compensation
     Thirty-nine weeks endedApril 1, 2006Net earnings:As reported
    
    $
    8,952Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effect
    
    
    (385
    )Pro forma
    
    $
    8,567Net earnings per share:Basic  as reported
    
    $
    0.90Basic  pro forma
    
    $
    0.86Diluted  as reported
    
    $
    0.87Diluted  pro forma
    
    $
    0.84
   7




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Number of
    
    
    Number of
    
    
    Weighted-common shares
    
    
    common shares
    
    
    averagesubject to ISOs
    
    
    subject to NQs
    
    
    exercise priceOutstanding at July 1, 2006
    
    
    556,100
    
    
    
    552,800
    
    
    $
    5.27Granted
    
    
    5,000
    
    
    
    
    
    
    $
    7.25Exercised
    
    
    (62,600
    )
    
    
    (50,000
    )
    
    $
    2.93Expired/Cancelled
    
    
    (27,600
    )
    
    
    
    
    
    $
    4.03Outstanding at March 31, 2007
    
    
    471,000
    
    
    
    502,800
    
    
    $
    5.59Options exercisable at March 31, 2007
    
    
    388,800
    
    
    
    349,500
  Grant DateShares
    
    
    Fair ValueNonvested at July 1, 2006
    
    
    106,200
    
    
    $
    6.18Granted
    
    
    10,800
    
    
    $
    7.25Vested
    
    
    
    
    
    
    Forfeited
    
    
    (15,000
    )
    
    $
    6.18Nonvested at March 31, 2007
    
    
    102,000
    
    
    $
    6.29
    Thirty-nine weeks endedMarch 31,
    
    
    April 1,2007
    
    
    2006Computed expected tax expense
    
    $
    4,709
    
    
    $
    3,072State income taxes benefit, net of federal income taxes
    
    
    394
    
    
    
    483Change in valuation allowance
    
    
    (18,273
    )
    
    
    (4,359
    )Expiration of state net operating loss carry-forward
    
    
    
    
    
    
    472Effect of liquidation of Mexico-based subsidiaries
    
    
    
    
    
    
    303Effect of state tax rate revision on deferred tax asset and liability valuation
    
    
    (147
    )
    
    
    Other, net
    
    
    349
    
    
    
    113Total expense (benefit)
    
    
    (12,968
    )
    
    
    84Total expense allocated to discontinued operations
    
    
    
    
    
    
    2Total expense (benefit) on continuing operations
    
    $
    (12,968
    )
    
    $
    82
 , Accounting for Income Taxes
 8




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Thirteen weeks ended
    
    
    Thirty-nine weeks endedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net earnings (loss)
    
    $
    208
    
    
    $
    (111
    )
    
    $
    26,817
    
    
    $
    8,952Denominator:Weighted average common shares outstanding
    
    
    10,069
    
    
    
    9,930
    
    
    
    10,043
    
    
    
    9,909Effect of potentially dilutive securities:employee stock options and RSUs
    
    
    413
    
    
    
    
    
    
    
    352
    
    
    
    348Weighted average common shares
outstanding, assuming dilution
    
    
    10,482
    
    
    
    9,930
    
    
    
    10,395
    
    
    
    10,257Basic earnings (loss) per common share
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    2.67
    
    
    $
    0.90Diluted earnings (loss) per common share
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    2.58
    
    
    $
    0.87
 9




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March 31, 2007
    
    
    July 1, 2006Raw materials
    
    $
    759
    
    
    $
    724Work in process
    
    
    127
    
    
    
    174Finished goods
    
    
    11,554
    
    
    
    25,079Total inventory
    
    $
    12,440
    
    
    $
    25,977
    Non-CashWrite-Offs &As of
    
    
    Charges in
    
    
    Estimate
    
    
    Paid in
    
    
    As ofJuly 1, 2006
    
    
    Fiscal 2007
    
    
    Adjustments
    
    
    Fiscal 2007
    
    
    March 31, 2007Employee separations
    
    $
    335
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    334
    
    
    $
    Other exit costs
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    131
    
    
    
    Noncancelable lease costs
    
    
    2,909
    
    
    
    1
    
    
    
    32
    
    
    
    2,942
    
    
    
    Total restructuring costs
    
    $
    3,244
    
    
    $
    132
    
    
    $
    31
    
    
    $
    3,407
    
    
    $
    
   Thirteen weeks ended
    
    NorthMarch 31, 2007
    
    America
    
    
    Europe
    
    
    TotalNet sales
    
    $
    16,375
    
    
    $
    2,801
    
    
    $
    19,176Income (loss) from continuing operations, before income taxes
    
    (119
    )
    
    
    131
    
    
    
    12
 Thirteen weeks ended
    
    NorthApril 1, 2006
    
    America
    
    
    Europe
    
    
    TotalNet sales
    
    $
    14,490
    
    
    $
    2,670
    
    
    $
    17,160Income (loss) from continuing operations, before income taxes
    
    (166
    )
    
    
    82
    
    
    
    (84
    )


10



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Thirty-nine weeks ended
    
    NorthMarch 31, 2007
    
    America
    
    
    Europe
    
    
    TotalNet sales
    
    $
    91,192
    
    
    $
    6,380
    
    
    $
    97,572Income from continuing operations, before income taxes
    
    13,488
    
    
    
    361
    
    
    
    13,849Total assets
    
    
    56,437
    
    
    
    4,274
    
    
    
    60,711
 Thirty-nine weeks ended
    
    NorthApril 1, 2006
    
    America
    
    
    Europe
    
    
    TotalNet sales
    
    $
    83,503
    
    
    $
    5,936
    
    
    $
    89,439Income from continuing operations, before income taxes
    
    8,869
    
    
    
    143
    
    
    
    9,012Total assets
    
    
    35,281
    
    
    
    3,768
    
    
    
    39,049
     Thirteen weeks ended
    
    
    Thirty-nine weeks endedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    19
    
    
    $
    17
    
    
    $
    56
    
    
    $
    17Interest cost
    
    
    445
    
    
    
    538
    
    
    
    1,334
    
    
    
    1,636Expected return on plan assets
    
    
    (370
    )
    
    
    (474
    )
    
    
    (1,111
    )
    
    
    (1,398
    )Net amortization
    
    
    107
    
    
    
    133
    
    
    
    320
    
    
    
    358Total pension expense
    
    $
    200
    
    
    $
    214
    
    
    $
    599
    
    
    $
    613
   Thirteen weeks ended
    
    
    Thirty-nine weeks endedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings (loss)
    
    $
    208
    
    
    $
    (111
    )
    
    $
    26,817
    
    
    $
    8,952Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,007
    )Foreign currency translation adjustments
    
    
    21
    
    
    
    (29
    )
    
    
    111
    
    
    
    (3
    )Total comprehensive income (loss)
    
    $
    229
    
    
    $
    (140
    )
    
    $
    26,928
    
    
    $
    6,942
  March 31, 2007
    
    
    July 1, 2006Accumulated foreign currency translation adjustments
    
    $
    338
    
    
    $
    226Minimum pension liability, net of taxes
    
    
    (4,579
    )
    
    
    (4,579
    )Accumulated other comprehensive loss
    
    $
    (4,241
    )
    
    $
    (4,353
    )


11



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Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109. Accounting for Income
Taxes.
 ,
Fair Value Measurements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132
(R), (
 12




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Employers Accounting for Pensions
  The Fair Value for Financial Assets and
Liabilities Including an amendment of FASB Statement No. 115
 13




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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
  Introduction
  Change in Fiscal Year End
   Results of Operations
   14




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q
    
    a $346 thousand decrease in shipping expenses, which resulted primarily from
our continued improvements in handling and shipping product to our customers; andq
    
    a $283 thousand increase in incentive bonus expense.
    q
    
    a $2.0 million reduction in shipping expenses, which resulted primarily from
our improved efficiencies in handling and shipping product to customers;q
    
    a $426 thousand one-time charge to earnings, recorded in the third quarter of
fiscal 2005, which ended October 1, 2005; the one-time charge represented the net present
value of the obligation resulting from the purchase from the mother of our chairman of all
of her product designs and patent rights;
 15




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q
    
    a $407 thousand reduction in recruiting agency and relocation costs, which
resulted mainly from a reduced level of recruiting and related relocating activities over
the comparable thirty-nine week period ended April 1, 2006; andq
    
    the decreases above were offset by $268 thousand of share-based compensation
expense, which resulted from the implementation of SFAS 123R, effective January 1, 2006.
        Looking ahead to the remainder of fiscal 2007 and beyond
  16




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§
    
    Sustained innovation within our product lines;§
    
    Continuing efforts to strengthen our relationships with existing retailing partners and
to expand distribution of products into new retail channels;§
    
    Further enhancement of the image of our brands; and§
    
    Introduction of new licensed brands.
  Liquidity and Capital Resources
    §
    
    We ended the third quarter of fiscal 2007 with $16.9 million in cash and cash
equivalents, compared to $1.0 million in cash at the end of the comparable quarter of the
2006 transition period, and $1.0 million in cash at the end of the 2006 transition period.
The significant increase in cash and cash equivalents of approximately $15.9 million as
compared to the previous reporting periods just noted is due mainly to net earnings
reported for the past twelve months and the reduction in finished goods inventories.§
    
    Net accounts receivable increased to $11.4 million at the end of fiscal 2007s third
quarter from $9.4 million at the end of the comparable quarter in the 2006 transition year.
The $2.0 million quarter-on-quarter increase in net accounts receivable is due primarily
to a decrease in our reserve for customer returns at the end of the third quarter of fiscal
2007. The reduction in the reserve for customer returns is consistent with our ongoing
approach to collaborate with key retailing partners to reduce or eliminate returns. Net
accounts receivable were $6.7 million at the end of the 2006 transition period. The
increase in net accounts receivable of approximately $4.7 million from the end of the 2006
transition period to the end of the third quarter of fiscal 2007 was principally due to the
seasonality of our business.
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
    
    Net inventories at the third quarter-end of fiscal 2007, the comparable quarter-end of
the 2006 transition period, and at the end of the 2006 transition period were $12.4
million, $21.8 million and $26.0 million, respectively. The quarter-on-quarter decrease in
inventories of $9.4 million occurred primarily in finished goods, and reflected the
improvement in the timing of ordering and receipt of product from our third-party suppliers
and shipment of goods to our customers, as well as the effect of lower levels of closeout
inventory on hand at quarter-end.
    
    Due to the reversal of our deferred tax valuation allowance noted earlier, which was
recorded during the second quarter of the fiscal 2007 year, our current deferred income tax
assets were $9.0 million at the end of the third quarter of fiscal 2007. We had maintained
a full valuation allowance against our deferred assets from the end of fiscal 2003 through
the end of the first quarter of fiscal 2007.
    
    At the end of the third quarter of fiscal 2007, the comparable quarter of the 2006
transition period, and the end of the 2006 transition period, we had no borrowings
outstanding under the New Facility (described below) or under the CIT ABL Facility, when
applicable. The amount owed under the CIT ABL Facility or the New Facility, when
applicable, is reported as short-term notes payable. We ended the third quarter of fiscal
2007 with $2.2 million in short-term notes payable, compared with $2.5 million at the end
of the comparable quarter in the 2006 transition period, and $2.2 million at the end of the
2006 transition period. At the end of the third quarter of fiscal 2007, the comparable
quarter in the 2006 transition period, and the end of the 2006 transition period, short
term notes payable included $2.2 million, borrowed against the cash surrender value of life
insurance policies on our chairman. At the end of comparable quarter of the 2006
transition period, there were $300 thousand in short-term borrowings by our Fargeot
subsidiary.
    
    Accounts payable at the end of the third quarter of fiscal 2007 were $4.5 million,
compared to $4.6 million at the end of the comparable quarter of the 2006 transition period
and $9.1 million at the end of the 2006 transition period. The $4.6 million decrease in
accounts payable from the end of the 2006 transition period reflects the seasonal timing of
purchases and payments over the thirty-nine-week period of fiscal 2007.
    
    We reported $5.9 million in accrued expenses at the end of the third quarter of
fiscal 2007, compared to $5.5 million at the end of the comparable quarter of the 2006
transition period, and $7.1 million at the end of the 2006 transition period. The
quarter-on-quarter $400 thousand increase in accrued expenses primarily reflected the net
of a reduction in reorganization lease loss and related accruals of $1.2 million and an
increase in payroll costs related accruals of $1.4 million. Compared to the end of the
2006 transition period, the third quarter of fiscal 2007 accrual is lower due primarily to
a $3.2 million reduction in reorganization lease loss accruals due to the agreement reached
with the landlord of our former distribution facility in Nuevo Laredo, Mexico. This
reduction was offset by a $1.4 million increase in accrued payroll costs, primarily related
to incentive expense and an increase of $600 thousand associated with accruals in a wide
range of other expense areas.
    
    Capital expenditures during the thirty-nine-week period of fiscal 2007 were $540
thousand, compared with $308 thousand during the same thirty-nine-week period ended April
1, 2006. Capital expenditures in both periods were funded from working capital and
reflected a significant reduction in capital asset spending compared to years prior to
fiscal 2005, when we operated our own manufacturing plants. We expect future capital
expenditures to be in line with the current business model going forward.
 CIT Facilities
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New Revolving Credit Agreement
  
   Other Long-Term Indebtedness and Current Installments of Long-Term Debt
  Off-Balance Sheet Arrangements and Contractual Obligations
  Critical Accounting Policies and Use of Significant Estimates
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(a)
    
    We recognize revenue when goods are shipped from our warehouses and other third-party
distribution locations, at which point our customers take ownership and assume risk of loss;
collection of the related receivable is probable; persuasive evidence of a sale arrangement
exists; and the sales price is fixed and determinable. In certain circumstances, we sell
products to customers under special arrangements, which provide for return privileges,
discounts, promotions and other sales incentives. At the time we recognize revenue, we reduce
our measurement of revenue by an estimated cost of potential future returns and allowable
retailer promotions and 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.Allowances established for returns were approximately $300 thousand, $2.0 million, and $900
thousand at the end of the third quarter of fiscal 2007, at the end of the comparable quarter of
the 2006 transition period, and at the end of the 2006 transition period, respectively. The
quarter-on-quarter decrease of $1.7 million in return allowances is consistent with our current
business practice of collaborating more closely with our retailing partners to promote product
sell-through during the season, thus reducing future returns. During the third quarter of fiscal
2007 and the comparable quarter of the 2006 transition period, we recorded approximately $1.7
million and $2.7 million, respectively, as the sales value of merchandise returned by customers.
During the thirty-nine-week period of fiscal 2007 and the comparable nine-month period ended
April 1, 2006, we recorded approximately $2.6 million and $2.9 million, respectively, as the
sales value of merchandise returned by customers. The quarterly and nine-month period decreases
of $1.0 million and $300 thousand, respectively, in the sales value of merchandise returned were
due to the net of an increase in returns of branded merchandise from one customer, which
transitioned to a private label program with us, and a reduction of returns during the fall 2006
selling season compared to the fall 2005 season, which is consistent with our ongoing approach to
collaborate with key retailing partners to reduce or eliminate returns.During the third quarter of fiscal 2007 and the comparable period of the 2006 transition period,
reductions in sales for future returns were $36 thousand and $318 thousand, respectively. During
the thirty-nine-week period of fiscal 2007 and the comparable thirty-nine-week period ended April
1, 2006, reductions in sales for future returns were $1.9 million and $5.0 million, respectively.
The decreases in the reductions in sales for future returns for the quarter and the
thirty-nine-week period of $282 thousand and $3.1 million, respectively, are consistent with our
current approach of collaborating closely with key retailing partners to reduce or eliminate
returns.Allowances for promotions and other sales incentives established at the end of the third quarter
of 2007 and the end of the comparable quarter of the 2006 transition period were approximately
$3.7 million and $3.9 million, respectively, and $1.2 million at the end of the 2006 transition
period. The $200 thousand quarter-on-quarter decrease in promotions and sales incentives
allowances reflects primarily the net of an increase in customer claims recorded during the
quarter in support of calendar 2007 spring business and a reduction in customer claims processed
and paid at the end of the quarter associated primarily with fall 2006 business.Charges to earnings for consumer promotion and sales incentive activities for the third quarter
of fiscal 2007 and the comparable quarter of the 2006 transition period were $1.0 million and
$800 thousand, respectively. Charges to earnings for consumer promotion and sales incentives for
the thirty-nine-week period of fiscal 2007 and the comparable nine-month period ended April 1,
2006, were $10.0 million and $9.2 million, respectively. The increases in consumer promotion and
sales incentives in the comparative quarter and nine-month periods of $200 thousand and $800
thousand, respectively, were primarily due to a higher than expected level of support provided to
our retailing partners to stimulate sell-through during and after the 2006 holiday season, as
well as increased sales support for the calendar 2007 spring season. The increased support
associated with the 2006 holiday season primarily resulted from warmer than expected weather
during that season.
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We have been successful thus far in our initiatives of collaborating with our retail partners to
achieve mutually satisfactory sell-through rates by providing sales incentives for goods in
season, thus positively impacting the level of returns. However, due to the continuing seasonal
nature of our business, 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.(b)
    
    We 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 the third quarter of fiscal 2007 and at the end of the comparable
quarter of the 2006 transition period, we estimated the FIFO cost of a portion of our
inventory exceeded the estimated net realizable value of that inventory by $200 thousand, as
compared with a similar estimate of $463 thousand at the end of the 2006 transition periodInventory write-downs, recognized as part of cost of sales for continuing operations, were $200
thousand and $49 thousand during the third quarter of fiscal 2007 and the comparable quarter
of the 2006 transition period, respectively. Inventory write-downs, recognized as part of cost of
sales for continuing operations, were $1.1 million and $1.2 million during the thirty-nine-week
period of fiscal 2007 and the comparable nine-month period ended April 1, 2006.Approximately $600 thousand and $900 thousand of inventory that had been previously written down
was sold during the third quarter of fiscal 2007 and the comparable quarter of the 2006
transition period, respectively. Similarly, $5.1 million and $5.2 million of inventory that had
been previously written down was sold during the thirty-nine-week period of fiscal 2007 and the
comparable nine-month period ended April 1, 2006, respectively.(c)
    
    We make an assessment of the amount of income taxes that will become currently payable or
recoverable for the just concluded period, and what deferred tax costs or benefits 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 evaluating the
future benefits of deferred tax assets, we examine our capacity for refund of federal income
taxes due to our net operating loss carry-forward position, and our projections of future
profits. We recorded a valuation allowance when it was more likely than not that some portion
or all of our deferred tax assets would not be realized. Accordingly, beginning with year-end
fiscal 2003, we established a valuation allowance against the value of those deferred tax
assets. At that time, there was not sufficient historical assurance that future taxable income
would be generated to offset these deferred deductible items. Accordingly, we established a
valuation allowance against the net deferred tax assets in the amount of $18.3 million at the
end of the 2006 transition period.This full valuation allowance reserve was maintained through the first quarter of fiscal 2007. In
the second quarter of fiscal 2007, the Company determined, based on the existence of sufficient
positive evidence, represented primarily by three years of cumulative income before restructuring
charges, a valuation allowance against net deferred tax assets was no longer required because it
is more likely than not that the Companys deferred tax assets will be realized in future
periods. Accordingly, a complete reversal of the valuation allowance was recognized in closing
out the second quarter of fiscal 2007. This action resulted in and accounts for substantially
most of the net income tax benefit of $13.0 million reflected in our results for the thirty-nine
week period of fiscal 2007.In addition, we make ongoing assessments of income tax exposures that may arise at the federal,
state or local tax levels. As a result of these evaluations, any exposure deemed probable will be
quantified and accrued as tax expense during the period and reported in a tax contingency
reserve. Any identified exposures will be subjected to continuing assessment and estimates will
be revised accordingly as information becomes available to us. Our tax contingency reserve at the
end of the third quarter of fiscal 2007 was $500 thousand, representing an increase of $351
thousand for the thirty-nine week period of fiscal 2007.
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Recently Issued Accounting Standards
  Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109. Accounting for Income
Taxes.
 ,
Fair Value Measurements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132
(R), (
 Employers Accounting for Pensions
  The Fair Value for Financial Assets and Liabilities -
Including an amendment of FASB Statement No. 115
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##### Table of Contents



a.
    
    information required to be disclosed by the Company in this Quarterly Report on Form 10-Q
and the other reports that it files or submits under the Exchange Act would be accumulated
and communicated to the Companys management, including its principal executive officer and
its principal financial officer, as appropriate to allow timely decisions regarding required
disclosure;b.
    
    information required to be disclosed by the Company in this Quarterly Report on Form 10-Q
and the other reports that it files or submits under the Exchange Act would be recorded,
processed, summarized and reported within the time periods specified in the SECs rules and
forms; andc.
    
    the Companys disclosure controls and procedures were effective as of the end of the
quarterly period covered by this Quarterly Report on Form 10-Q.
   
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Our North America business, which is our primary business, is dependent on our ability to continue
sourcing products from outside North America.
   Our concentration of customers could have a material adverse effect on us, and our success is
dependent on the success of our customers.
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The footwear industry is highly competitive.
  
    
   
   
   
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R. G. BARRY CORPORATIONRegistrantDate: May 14, 2007/s/ Daniel D. VirenDaniel D. VirenSenior Vice President  Finance, Chief Financial
Officer and Secretary (Principal Financial Officer)
(Duly Authorized Officer)
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Exhibit No.
    
    Description
    
    Location10.1
    
    Revolving Credit Agreement between R.G. Barry Corporation and The Huntington National
Bank, made and entered into to be effective on March 29, 2007
    
    Incorporated herein
by reference to
Exhibit 10.1 to
R.G. Barry
Corporations
Current Report on
Form 8-K dated
April 3, 2007 and
filed on April 4,
2007 (File No.
001-08769)10.2
    
    Revolving Credit Note given by R.G. Barry Corporation to The Huntington National Bank,
dated March 29, 2007
    
    Incorporated herein
by reference to
Exhibit 10.2 to
R.G. Barry
Corporations
Current Report on
Form 8-K dated
April 3, 2007 and
filed on April 4,
2007 (File No.
001-08769)10.3
    
    First Modification of Revolving Credit Agreement, made and entered into to be effective
April 16, 2007, between R.G. Barry Corporation and The Huntington National Bank
    
    Incorporated herein
by reference to
Exhibit 10.1 to
R.G. Barry
Corporations
Current Report on
Form 8-K dated
April 17, 2007 and
filed April 18,
2007 (File No.
001-08769)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
    
    Filed herewith31.2
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
    
    Filed herewith32.1
    
    Section 1350 Certifications (Principal Executive Officer and Principal Financial Officer)
    
    Filed herewith
 27