[FRONT COVER]
(logo) DESIGNS INC
1995
ANNUAL REPORT
<PAGE>
[INSIDE FRONT COVER]
(logo) DESIGNS
DESIGNS, INC. INTRODUCES ITS NEW CORPORATE LOGO, ADOPTED IN MARCH 1995. THE NEW
LOGO REPRESENTS THE CONFIDENT SPIRIT AND PROGRESSIVE ENERGY OF DESIGNS, INC. IT
ALSO REFLECTS OUR CORPORATE VISION AND STRATEGY, AS THE COMPANY EVOLVES AND WE
CONTINUE TO ESTABLISH OUR SPECIALTY RETAIL STORES AS A SOURCE FOR
SUPERIOR-QUALITY BRANDED CASUAL APPAREL.
TABLE OF CONTENTS
Corporate Profile 2
Letter to Stockholders 3
Interview with Joel H. Reichman,
President and Chief Executive Officer 6
Elements of Success
Quality Casual Apparel 10
Retailing and Merchandising Expertise 12
Superior Customer Service 14
Selected Financial Data 16
Management's Discussion and Analysis 17
Consolidated Financial Statements 24
Notes to Consolidated Financial Statements 28
Corporate Information 37
Store Locations Inside Back Cover
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ELEMENTS QUALITY
OF CASUAL
SUCCESS APPAREL
SUPERIOR RETAILING AND
CUSTOMER MERCHANDISING
SERVICE EXPERTISE
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[Photo: Inside clothing store, Associate helping Customer]
SUPERIOR CUSTOMER SERVICE
[Photo: 2 men and a woman modeling clothes at beach]
QUALITY CASUAL APPAREL
[Photo: Wide-angle view -- inside of store]
RETAILING AND MERCHANDISING EXPERTISE
DESIGNS, INC.'S VISION IS TO GENERATE CUSTOMER EXCITEMENT,
SATISFACTION AND LOYALTY, ESTABLISHING OUR SPECIALTY
RETAIL STORE LOCATIONS AS A SOURCE FOR QUALITY BRANDED
APPAREL AND ACCESSORIES TO COMPLEMENT A CASUAL, RELAXED
LIFESTYLE. WE WANT TO BE RECOGNIZED AS FULFILLING CUSTOMER
EXPECTATIONS WITH EXCELLENT SELECTION AND VALUE, SUPPORTED
BY SUPERIOR CUSTOMER SERVICE. AS CASUAL APPAREL BECOMES
THE STANDARD IN THE WORK ENVIRONMENT, WE WANT TO BE THE RETAIL
DESTINATION OF CHOICE FOR AMERICA'S WORKFORCE.
<PAGE>
DESIGNS, INC. is a specialty retailer featuring quality casual apparel and
accessories for the entire family. The company emphasizes the power of
brand-name merchandising with its broad selection of Levi Strauss & Co.,
Timberland(R) and private-label merchandise. Superior customer service is an
integral part of the company's strategy, which the company believes
differentiates it from competitors. Based in Chestnut Hill, Massachusetts,
Designs, Inc. began selling exclusively Levi Strauss & Co. apparel
and accessories in its first Designs store in 1977. In 1994, Designs, Inc.
introduced Timberland(R) brand apparel, outerwear and footwear, as well as
private-label apparel, to provide a broader, enhanced merchandise selection to
customers.
Designs, Inc. operates a balanced mix of three store formats: the multi-brand
Designs stores; Levi's(R) Outlet stores, for the value-conscious Levi's(R) and
Dockers(R) brand consumer; and the upscale, fashion-forward Original Levi's(R)
Stores. Designs, Inc. markets Levi Strauss & Co. merchandise in each of the
store formats. A joint venture between subsidiaries of Designs, Inc. and Levi's
Only Stores, Inc., a wholly owned subsidiary of Levi Strauss & Co., operates the
Original Levi's(R) Stores. Timberland(R) and private-label product lines are
sold in several Designs store locations. The company's stores are located
throughout the eastern half of the United States and the District of Columbia.
DESIGNS STORES offer Levi Strauss & Co. merchandise for men, women and youth,
including Levi's(R) brand traditional denim products and Dockers(R) brand casual
apparel and accessories. Several Designs stores also feature a selection of
Timberland(R) brand apparel and accessories, as well as quality private-label
products to complement the evolving branded merchandise mix in these stores.
ORIGINAL LEVI'S(R) STORES, located in upscale malls and urban locations, focus
on the Levi's(R) brand jeans customer. In addition to traditional Levi's(R)
brand men's and women's products, Original Levi's(R) Stores offer the most
fashion-forward jeanswear products in the Levi's(R) brand clothing lines.
Included in these styles are exclusive merchandise from Levi's(R) Europe,
SilverTab(TM) jeans products and Levi's Personal Pair(TM) individually fitted
jeans for women. Original Levi's(R) Stores are operated in a joint venture
between wholly owned subsidiaries of the company and Levi Strauss & Co.
LEVI'S(R) OUTLET STORES,located in manufacturers' outlet parks and destination
shopping areas, target the value-conscious consumer. Levi's(R) Outlets offer
selected Levi Strauss & Co. merchandise from the Levi's(R) and Dockers(R)
branded product lines, including manufacturing overruns, discontinued lines,
irregulars and end-of-season merchandise.
<PAGE>
TO OUR STOCKHOLDERS:
This has been a year of extraordinary change for Designs, Inc. We are reporting
to you for the first time since I was named the company's chief executive
officer in December 1994, under our management succession plan. Stanley Berger
continues with us as chairman and I am very pleased to have the benefit of his
expertise and counsel.
Many of the initiatives taken this year were designed to help ensure that we
continue to develop a dominant and productive base of specialty retail apparel
stores. Designs, Inc. is truly a family specialty retailer offering quality
casual apparel and accessories to complement a relaxed, comfortable lifestyle.
The changes that we implemented in fiscal 1995 should strengthen our position in
the marketplace and serve us well in the years to come.
Clearly, the most significant development this year was the introduction of
private-label and Timberland(R) product lines in several of our Designs stores.
These product lines were introduced to supplement our existing casual apparel
lines and to add key products such as tops, outerwear and footwear to our
merchandise mix. By featuring Levi's(R) and Timberland(R) brand products, we
offer our customers a broad and exciting array of casual apparel and
accessories. These well-known, premium-quality brand names give us a strong
foundation on which to build a quality private-label program.
As we open new Designs stores throughout the United States and remodel existing
ones, we plan to introduce Timberland(R) and private-label products into each of
these stores. New Designs stores feature updated fixtures within a modular
format to display our multiple brand merchandise mix and create an exciting,
appealing shopping environment. We anticipate that the combination of powerful
brands and an inviting store format will build store traffic, increase sales
levels, improve the tops-to-bottoms sales ratio and ultimately increase gross
profit margin in the Designs stores. Thus far, the introduction of the new
product lines has generated considerable customer excitement, with promising
levels of sell-through. We plan to offer expanded product lines of men's and
women's Timberland(R) and private-label clothing and accessories this year.
Our expansion efforts are evidenced in the recent announcement that we signed a
purchase and sale agreement to acquire certain assets of Boston Trading Ltd.,
Inc. We expect the well-known Boston Traders(R) brand product lines to further
establish our Designs stores as a source for superior-quality branded casual
apparel. The strength of the Boston Traders(R) product lines is demonstrated in
the quality, variety and classic appeal of its tops, shirts and sweaters. If we
are able to complete the transaction, Designs, Inc. will acquire the Boston
Traders(R), TraderKids(R), Trader Blue(R) and other brand names and inventory,
and will own and operate approximately 33 existing Boston Traders(R) outlet
stores. Completion of the transaction is subject to a number of conditions,
which are customary for this type of asset purchase transaction.
[Photo: Joel H. Reichman, Stanley I. Berger]
LEFT:
JOEL H. REICHMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
RIGHT:
STANLEY I. BERGER, CHAIRMAN OF THE BOARD OF DIRECTORS
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RECENT EVENTS
JANUARY 1994
$15.0 million restructuring charge established to close up
to ten of the company's poorest performing Designs stores
during fiscal 1995. The restructuring is expected to have a
positive impact on earnings and cash flow.
APRIL
The company makes a prepayment of $6.0 million on its $10.0
million of outstanding long-term debt.
JUNE
The balance of the long-term debt is retired with a $4.0
million scheduled payment. For the first time since 1989,
the company has no long-term debt obligations.
SEPTEMBER
The company announces plans to test private-label products
in select Designs stores to supplement the company's
existing Levi Strauss & Co. brand products.
OCTOBER
Adoption of stock repurchase program. The company is
authorized to repurchase up to two million shares of its
common stock.
NOVEMBER
The company announces the introduction of Timberland(R)
products in select Designs stores to supplement Levi Strauss
& Co. brands and private-label merchandise.
The ten store restructuring plan is completed during the
third quarter of fiscal 1995. Based upon an ongoing review,
the
We are pleased to report that the restructuring plan announced in January 1994
has been completed. Our announced intent for this restructuring was to focus on
more profitable operations and new store opening opportunities by closing up to
ten of our poorest performing Designs stores. This restructuring plan was
completed during the third quarter of fiscal 1995. At that time, in connection
with an ongoing review of store performance, we decided to close up to five more
Designs stores as a part of previously established restructuring reserves. Those
five stores were closed during the fourth quarter, thus successfully completing
the store closing plan.
For the year, costs associated with the closing of all 15 stores totaled $11.8
million, less than the $15.0 million reserved for the closings. As a result, the
remaining $3.2 million, or $0.12 per share, was recognized as income for the
fiscal year. During the first quarter of fiscal 1996, negotiations of certain
leases related to the restructuring plan were completed, reducing future
obligations and resulting in the recognition of $2.2 million, or $0.08 per
share, income.
Our relationship with Levi Strauss & Co. continues to evolve and grow stronger.
Our joint venture agreement to own and operate 35 to 50 Original Levi's(R)
Stores throughout 11 northeast states and the District of Columbia was finalized
on January 28, 1995. The Original Levi's(R) Store format is intended as a
showcase for the Levi's(R) branded product lines and to enhance the image of the
Levi's(R) brand. We believe that displaying the full range of Levi's(R) brand
products, including merchandise exclusive to the Original Levi's(R) Stores, in
exciting, contemporary surroundings encourages increased sales and
profitability.
We are very pleased with the growth that we have achieved from new store
openings this year, as we continue to build a strong, productive group of
stores. During fiscal 1995, we opened four Original Levi's(R) Stores, one new
Designs store and 15 Levi's(R) Outlet stores, adding approximately 115,000
square feet of selling space, an increase of 14 percent even after deducting the
square footage of the 15 closed Designs stores. Today, we operate 120 stores,
representing a balanced mix of multi-brand, mall-based Designs stores, Levi's(R)
Outlet stores for the value-conscious consumer, and the upscale, fashion-forward
Original Levi's(R) Stores.
With the expansion of the Original Levi's(R) Stores and Levi's(R) Outlet stores,
a greater percentage of business is now generated from these higher margin
formats. In fiscal 1995, these store formats represented 75 percent of total
sales volume, up from 68 percent in the previous year. We expect to continue to
benefit from operating these productive, higher margin stores and by
repositioning our mall-based Designs stores to be competitive and prosperous. We
remain committed to controlled growth with a focus on profitability,
strengthening margins and containing expenses.
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Designs, Inc.'s total sales increased 10 percent to $265.9 million for the
fiscal year ended January 28, 1995. Comparable store sales decreased 5 percent
for the year. Net income for the fiscal year equaled $16.9 million, or $1.06 per
share, compared with net income of $5.7 million, or $0.36 per share, in the
prior year. Excluding the $3.2 million of pretax income from the restructuring
program and a $1.0 million pretax gain from the transfer of stores related to
the joint venture, fiscal 1995 net income would have equaled $14.4 million, or
$0.90 per share. Excluding the effect of the $15.0 million restructuring charge,
fiscal 1994 net income would have equaled $14.6 million, or $0.92 per share.
Our balance sheet at fiscal year end demonstrates the company's strong financial
condition. We continue to benefit from our positive cash flow, managed inventory
levels and the retirement of our long-term debt. In April 1994, we prepaid $6.0
million of outstanding long-term debt, and in June 1994 we repaid the remaining
$4.0 million balance. As a result, for the first time since 1989, Designs, Inc.
has no long-term debt obligations.
As always, we are committed to building value for our shareholders. Our
commitment to shareholder value was a factor in the implementation of our stock
repurchase program in October 1994. This program reflects management's
confidence in the company's prospects for continued profitable growth in the
years ahead. Under the program, Designs, Inc. is authorized to purchase up to
two million shares of the company's common stock. As of January 28, 1995, we had
repurchased 300,000 shares under the program.
Designs, Inc. will continue to draw upon our retail and merchandising expertise
to establish our specialty retail stores as a source of quality casual apparel
for today's families. Our ability to deliver the product to the customer is
supported by efficient and effective systems and operations, strong management
and dedicated associates. Identifying consumer preferences, and building and
retaining customer loyalty are two of our top priorities and are an integral
part of our corporate strategy.
Our customers know that they can rely on us for quality, value and superior
customer service. Our emphasis on customer service remains a factor that
differentiates us from competitors. We believe that satisfied customers will
lead to increased store traffic and ultimately increased sales and earnings,
which will further strengthen our company and assure its ongoing success. We are
pleased with our accomplishments and are enthusiastic about our company's future
and the opportunities ahead.
Sincerely,
/s/ Joel H. Reichman /s/ Stanley I. Berger
Joel H. Reichman Stanley I. Berger
President and Chief Executive Officer Chairman of the Board of Directors
April 28, 1995
company decides to close an additional five Designs stores
as part of previously established reserves.
DECEMBER
Joel H. Reichman, president becomes chief executive officer
under the company's management succession plan. Stanley I.
Berger, a co-founder of the company, remains as chairman of
the board and a consultant to the company.
JANUARY 1995
The company and Levi Strauss & Co. announce the signing of a
joint venture agreement to own and operate Original
Levi's(R) Stores. The stores are planned to be opened
throughout 11 northeast states and the District of Columbia
over the next three to five years.
Five additional Designs stores are closed, thus completing
the store closing program at a fiscal 1995 cost of $11.8
million. The $3.2 million balance of the restructuring
reserve positively affects fiscal 1995 net income.
MARCH
The company announces letter of intent to acquire certain
assets of Boston Trading Company; Ltd. to further establish
the Designs stores as a source for superior-quality branded
apparel.
The company completed negotiations of lease terminations
related to the restructuring program, resulting in $2.2 million
income for the first quarter of fiscal 1996.
<PAGE>
[Photo: Joel H. Reichman]
INTERVIEW WITH JOEL H. REICHMAN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HOW WOULD YOU CHARACTERIZE
DESIGNS, INC.'S PERFORMANCE
IN FISCAL 1995?
"Designs, Inc. had a great year in 1995 in light of a tough retail environment.
Total sales increased a respectable 10 percent, in spite of comparable store
sales being down five percent. We were able to sustain our margins and control
expenses and inventory levels. We opened 20 new stores and remodeled three
existing ones. We completed a program of closing 15 sub-performing stores, at a
lower cost than we had anticipated. We also paid down our long-term debt and,
for the first time in several years, Designs, Inc. has no long-term debt on its
balance sheet."
WHAT FASHION TRENDS ARE HAVING
THE GREATEST IMPACT ON DESIGNS, INC.?
"We watch trends very closely and believe that the demand for more comfortable,
casual apparel will continue to increase. Just look at how many companies are
moving to casual Fridays. The media has picked up on it as well, which we have
seen in recent articles and advertising. One constant trend is that consumers
want to purchase clothing that they know is of high quality and will last.
Fortunately, Designs, Inc. is able to capitalize on these trends, since we have
always carried high-quality, comfortable casual apparel product lines. Our focus
on the Levi's(R), Dockers(R) and Timberland(R) brands, together with a
private-label product which we are proud of, will enable us to satisfy the needs
of these consumers."
WHAT ARE THE MOST IMPORTANT EVENTS
TAKING PLACE WITHIN DESIGNS, INC.?
"There are several, but I would have to say the development of the multi-brand
Designs store format and our evolution from our exclusively Levi's(R) and
Dockers(R) brand image. The multi-brand Designs store was developed to increase
customer traffic and sales. We want to provide a more pleasing and exciting
shopping environment for customers in the mall-based Designs stores and we are
very pleased with the outcome. This is the look that will carry us through the
'90s. In addition to the Timberland(R) and private-label test lines, the store
carries the full Levi's(R) and Dockers(R) lines for the entire family, with the
most knowledgeable sales staff in the industry to assist customers.
"Our greatest opportunity right now is the test of the private-label line in the
Designs stores, and certainly the inclusion of Timberland(R) in our product mix.
Before, as an exclusively Levi Strauss and Co. retailer, we were selling three
pairs of pants for every top sold. We call this the tops-to-bottoms ratio. By
introducing a strong private-label brand and a powerful brand like
Timberland(R), we believe we could ultimately sell two or three tops for every
bottom. There is potential for a tremendous increase in sales and revenue
because tops command a greater margin. We are conducting a test of a
private-label line because there are no two brands that we think are going to be
able to accomplish a three-to-one tops-to-bottoms ratio. We believe that the
private label is the right approach and the test will prove that."
<PAGE>
WHAT IS THE FUTURE OF DESIGNS, INC.'S
RELATIONSHIP WITH LEVI STRAUSS AND CO.?
"Our relationship is very strong, as evidenced by our January 1995 joint venture
announcement. We have a long-standing and very warm relationship with Levi
Strauss & Co. and I personally appreciate and will support that relationship as
we grow. We will continue to expand the Original Levi's(R) Stores format as
outlined in the joint venture. Both the Original Levi's(R) Stores and the
Levi's(R) Outlets will continue to offer 100 percent Levi Strauss and Co.
product. Although we will be including other brands in our nationwide expansion
of Designs stores, Levi Strauss and Co. brands will continue to represent up to
70 percent of our product mix in those stores. Levi Strauss and Co. manufactures
the highest quality casual apparel in the world and we are committed to Levi
Strauss & Co. products. We want the customer to feel comfortable with our
products because we are proud of what we sell, whether it is Levi's(R),
Dockers(R), Timberland(R) or our own private-label product lines."
WHAT ARE DESIGNS, INC.'S
COMPETITIVE ADVANTAGES?
"Strategic focus is one of our biggest competitive advantages. We have a loyal
following of Levi's(R) and Dockers(R) brand customers, and we carry Levi's(R)
and Dockers(R) lines for the family. We will continue to serve these customers
but we have no intention of stopping there. Customers can find private-label and
Timberland(R) products in certain Designs stores where we are test marketing
them, and we believe the new multi-brand Designs stores provide us with a
competitive edge.
[Photo: Joel H. Reichman]
Designs, Inc.'s strongest advantage is our talented sales associates and their
absolute commitment to providing superior customer service. Our people are the
most powerful force at Designs, Inc. Everyone asks me if I find it difficult to
hire good people. The answer is no because Designs, Inc. happens to be a great
company. Good people and good companies are attracted to one another. Our
customers love us too, and we receive many letters and calls from them
commenting on the way our people go the extra mile to provide superior service.
I am extremely proud of Designs, Inc. and our team."
WHAT IS DESIGNS, INC.'S
STRATEGY IN THE NEAR TERM?
"Our goal is to create excitement in all of our stores, which we believe is a
vital component of a successful retail chain.
"OUR GOAL IS TO CREATE EXCITEMENT
IN ALL OF OUR STORES, WHICH WE BELIEVE IS A
VITAL COMPONENT OF A SUCCESSFUL RETAIL
CHAIN. WE WANT TO GROW THE COMPANY AND
THE WAY TO DO THAT IS TO BE MULTI-LINE,
BE IT PRIVATE-LABEL, LEVI'S(R),
DOCKERS(R) OR TIMBERLAND(R)."
<PAGE>
"WE WANT THE CUSTOMER TO RECOGNIZE THAT DESIGNS, INC. CAN
PROVIDE THEIR COMPLETE OUTFIT, WHETHER IT IS JEANS, JACKETS,
TOPS, FOOTWEAR OR ACCESSORIES. WE WANT THE CASUAL LIFESTYLE
CUSTOMER TO SEE OUR DESIGNS STORES AS THE SOURCE TO FIND
EVERYTHING THAT THEY NEED IN ONE PLACE."
[Photo: Joel H. Reichman]
We want to grow the company and the way to do that is to be multi-line, be it
private-label, Levi's(R), Dockers(R) or Timberland(R). I have always believed
that Designs, Inc. has the potential to be a national company. If a company has
a great product, then it should expand it across the country. From a product
perspective, Designs, Inc. is different because we offer several options to the
entire family within one store. We want the customer to recognize that Designs,
Inc. can provide their complete outfit, whether it is jeans, jackets, tops,
footwear or accessories. We want the casual lifestyle customer to see our
Designs stores as the source to find everything that they need in one place. It
is part of Designs, Inc.'s commitment to retaining our customers and attracting
new ones."
WHAT ARE YOUR PLANS FOR BOSTON TRADERS(R)?
"Boston Trading Ltd., Inc. is a great fit with Designs, Inc. Our expected
ownership of the Boston Traders(R) brand names will help Designs, Inc. to
continue developing a line of high-quality, branded casual apparel. Boston
Traders(R) is a recognized brand and, rather than having to create a
private-label brand, it allows us to fulfill the need for private-label
merchandise with a recognized brand. The Boston Traders(R) expansive line of
shirts, sweaters and outerwear also will help us achieve our strategic goal of
increasing the tops-to-bottoms sales ratio. We expect to acquire 33 Boston
Traders(R) outlet stores that will carry only Boston Traders(R) product lines
and end of season private-label merchandise from the multi-brand Designs stores.
Boston Traders(R) has a strong brand image and recognition, and we are very
pleased with the possibilities of this potential acquisition."
WHAT ARE YOUR GOALS FOR FISCAL 1996?
"We are testing the Timberland(R) and private-label product lines and will be
evaluating their success this year. Initial response and results have been very
favorable and we will be introducing broader selections in both product lines
this Spring. Once the pending acquisition of Boston Trading Ltd., Inc. is
completed, we will be working to introduce the Boston Traders(R) product line as
our private-label product, focusing on how it integrates with the existing
products and how the customer views the Boston Traders(R) brand. The priority
must to remain--how does it work for the customer? Our other goals are to
continue
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with the store remodeling plan for our older Designs stores, to increase foot
traffic and to pursue our plans for national expansion. We also continue to
explore the possibility of opening single brand retail stores for other
companies with branded product lines."
WHAT ARE DESIGNS, INC.'S FUTURE
PLANS FOR EXPANSION?
"For the next couple of years, our expansion plans are twofold. First, we plan
to expand our multi-brand Designs store format. We believe that the malls across
the country are alive and well, and we will seek to secure prime locations in
successful malls. In addition to mall expansion, we are planning to open stores
in urban locations. Second, through our joint venture, we plan to add 27 to 42
new stores to our existing base of eight Original Levi's(R) Stores. Some number
of these stores may be Levi's(R) Outlet stores that will sell only Levi's(R)
brand products and close-out product of the Original Levi's(R) Stores."
WHAT ARE THE KEYS TO SUCCESS FOR
DESIGNS, INC.?
"There are two primary keys to our success. First, we have strong financial
controls in place and we are using our resources wisely in growing our business.
Designs, Inc. is debt-free, and we will continue to strictly manage our growth
while building the infrastructure necessary for future planned expansion. By
infrastructure, I mean the designing, sourcing and marketing of our stores and
private-label product lines, as well as operational resources, such as
warehousing and distribution, that go along with it.
Second, one of the greatest keys to our success is our people and the customer
service they provide. A customer can buy a competitively priced product
anywhere, but superior service is critical. That is the single achievement that
separates the winners from the losers. We consider ourselves a leader in the
industry in this regard, and we continue
[Photo: Joel H. Reichman]
to strive to achieve excellence in specialty retailing. Our associates are
well-trained, bright and intimately familiar with our product lines. We want
customers to be happy. Listening to the customer is key; customers tell you what
they want. If all other things are equal, the difference has to be in the sales
associate and the shopping experience - and we are wholly committed to our
customers. Superior customer service will always be our priority and is our
ultimate competitive advantage."
"ONE OF THE GREATEST KEYS TO OUR SUCCESS IS OUR PEOPLE AND
THE CUSTOMER SERVICE THEY PROVIDE. A CUSTOMER CAN BUY A
COMPETITIVELY PRICED PRODUCT ANYWHERE, BUT SUPERIOR SERVICE
IS CRITICAL. THAT IS THE SINGLE ACHIEVEMENT THAT SEPARATES
THE WINNERS FROM THE LOSERS."
<PAGE>
[Photo: Man and woman sitting on bench in the sun]
BASED UPON RECENT MARKET RESEARCH, DESIGNS, INC.'S CUSTOMERS
ARE WELL-EDUCATED AND AFFLUENT. APPROXIMATELY 75 PERCENT OF
OUR CUSTOMERS ARE REPEAT PATRONS, EVIDENCE OF A LOYAL
CUSTOMER BASE. OUR STORES HAVE A REPUTATION FOR OFFERING A
WIDE SELECTION OF COMPETITIVELY-PRICED, QUALITY BRANDED
MERCHANDISE, OFTEN PERCEIVED AS BETTER THAN OTHER APPAREL
RETAILERS. SELL-THROUGH DATA INDICATES THAT OUR CUSTOMERS
ARE PLEASED WITH THE MERCHANDISE AND SHOPPING EXPERIENCE
THAT WE OFFER, AND OUR SALES ASSOCIATES ARE NOTED FOR THEIR
ATTENTIVE AND KNOWLEDGEABLE APPROACH.
Our strategy is to provide a complete line of branded casual apparel for
customers who demand quality and value. We want to be recognized for outfitting
the entire family with an integrated wardrobe of clothes to fit a comfortable,
relaxed lifestyle. Selecting and merchandising quality casual apparel are two of
Designs, Inc.'s key strengths.
We have carefully chosen well-known, distinctive brand-name product lines that
have achieved brand equity. Brand equity is the sum total of brand awareness,
perceived product quality and customer loyalty. It is fostered by a
manufacturer's commitment to product quality and innovation as well as an
investment in brand image through advertising and merchandising. Consumers
differentiate quality brands from other products and recognize their inherent
value, which helps to give Designs, Inc. a competitive edge.
We are pleased to offer the broadest selection of Levi's(R) and Dockers(R) brand
apparel and accessories manufactured by Levi Strauss & Co., one of the
best-known apparel companies in the world. In spite of our success with Levi
Strauss & Co. product lines, for some time now we have been conscious of the
absence of key product categories from our merchandise mix. While we were
confident that customers considered Designs, Inc. their primary source for jeans
and casual pants, we felt strongly that we were missing the profits from
incremental sales of tops, outerwear and footwear.
This year, to supplement our existing merchandise mix, we introduced
Timberland(R) brand apparel and accessories, a recognized manufacturer of
rugged, durable casual apparel. Throughout the holiday season, we featured a
selection of men's apparel, as well as men's and women's footwear, in several of
our Designs stores, and we plan to expand our offering of Timberland(R) products
with a broader selection of men's and women's apparel.
The well-known, premium-quality brand names of Levi Strauss & Co. and The
Timberland Company provide a base on which to build a quality private-label
program. During the holiday season, we began to test a line of private-label
merchandise under the name "EFD, Exclusively for Designs". We selectively source
our products, ensuring that premium natural material and fibers are used. Our
rigorous requirements will help to ensure that the private-label product is of a
quality at least equal to our branded merchandise. We have been very pleased
with customer response and plan to expand our private-label product offerings
this Spring.
Our efforts to expand our merchandise mix are evidenced by the recent signing of
a purchase and sale agreement to acquire certain assets of Boston Trading Ltd.,
Inc. The strength of the Boston Traders(R) product lines is demonstrated in the
quality, variety and classic appeal of its tops, shirts and sweaters. We expect
the well known Boston Traders(R) brand product line to further establish our
Designs stores as a source for superior-quality branded apparel.
In keeping with our strategy to provide premium-quality casual apparel for the
entire family, we will continue to draw upon our retail and merchandising
experience to create a role for powerful brands as well as private-label product
lines in specialty retailing. The multi-brand Designs store format will continue
to evolve. Our Original Levi's(R) Stores and Levi's(R) Outlet stores will
continue to offer solely Levi Strauss & Co. product, maintaining our strong
20-year relationship with Levi Strauss & Co., which has been an integral part of
our success.
<PAGE>
QUALITY CASUAL APPAREL
[4 Photos: Various displays of store interiors]
LEVI'S(R) BRAND APPAREL
AND ACCESSORIES
TIMBERLAND(R)
BRAND APPAREL
AND FOOTWEAR
<PAGE>
RETAILING AND
MERCHANDISING EXPERTISE
[3 Photos: Store exteriors of Attleboro, MA, Freeport, ME, and Boston, MA]
DESIGNS STORE, ATTLEBORO, MA
LEVI'S(R) OUTLET STORE, FREEPORT, ME
ORIGINAL LEVI'S(R) STORE, BOSTON, MA
<PAGE>
To be successful in today's competitive environment a retailer must establish a
distinct and unique identity. For many consumers, shopping is evolving from a
specific purchase or destination orientation to a form of entertainment.
At Designs, Inc., we believe that shopping should be exciting and fun. In
addition to our merchandise mix, the atmosphere and look of our stores can make
the difference in whether a customer shops with us or another retailer.
Consequently, we make significant investments in determining the style, look and
features of our store design and merchandise presentation. We have talented,
dedicated people to execute our store development and design strategy.
Real estate location is key to establishing a successful store. Our real estate
team is very discerning and seeks prime retail locations. Their primary
considerations relating to potential store locations center around demographics
and market conditions. Chief factors to be considered are the population, the
demographic profile of the customer base, accessibility, tenant mix and,
finally, the cost of procuring the location.
In building the stores, our construction and visual merchandising teams are
committed to creating an exciting, appealing environment for our customers.
Store design and merchandise presentation are continually reviewed and updated
to display our branded and private-label product lines most creatively and
effectively. We pride ourselves on providing a store environment that makes our
customers' shopping experience easy, efficient and enjoyable.
Our merchandising strategy is to provide the style and selection of product our
customers want when they want it, on time, every time. It is directed by strong
merchandising management with years of retail industry experience, and supported
by a staff with merchandising expertise in both the men's and women's clothing
industries. Central to our merchandising strategy is our ability to tailor a
particular store's merchandise mix according to the local customer base
composition. Our inventory tracking systems facilitate regional and individual
store merchandise planning to meet geographic, seasonal and demographic sales
trends.
Our commitment to anticipating and fulfilling customer expectations is evidenced
in our balanced mix of store formats, which we believe meet our customers'
needs. Our multi-brand Designs stores satisfy the customer for whom selection
and accessibility is of primary consideration. Our Levi's(R) Outlet stores
attract the value-conscious customer looking for quality at a lower price. The
Original Levi's(R) Stores target those customers who seek a shopping experience
in the upscale setting of the Original Levi's(R) Store with a selection of
Levi's(R) brand fashion-forward merchandise.
All of our marketing and merchandising efforts are executed with a diligent
commitment to controlling costs and maintaining overall profitability. Designs,
Inc. places great emphasis on operational efficiency and continually seeks ways
to improve productivity. Toward that end, we have invested in sophisticated
information technology and systems to facilitate inventory management, pricing
and other financial controls. Monitoring and controlling inventory levels and
expenses, such as store payroll and other administrative costs, are top
priorities. Our efforts have resulted in greater efficiency of inventory
management and containment of expenses, in keeping with our commitment to
controlled growth focused on profitability and enhanced competitiveness.
[Photo: Close-up of man wearing long-sleeve jersey]
OUR STORES ARE CONTEMPORARY SETTINGS THAT FEATURE HARDWOOD
FLOORS, CUSTOM WOOD FIXTURES AND NUMEROUS VISUAL
MERCHANDISING ELEMENTS. WE FEATURE OUR MERCHANDISE MIX IN AN
ATTRACTIVE AND INVITING WAY TO PROMOTE IDENTIFICATION OF OUR
BRANDED PRODUCT LINES. TO ILLUSTRATE, WE HAVE INCORPORATED
DOUBLE-BINNING STORAGE ALONG THE WALLS THAT SERVES TWO
PURPOSES. FIRST, WE CREATE INCREASED CAPACITY, REDUCING
REQUIRED STORAGE SPACE AND INCREASING VALUABLE SELLING
SPACE. SECOND, THE MERCHANDISE IS PRESENTED IN AN ORGANIZED,
IDENTIFIABLE MANNER, ENABLING CUSTOMERS TO EASILY FIND THE
STYLE, SIZE AND COLOR THAT THEY SEEK.
<PAGE>
"I WAS PLEASANTLY SURPRISED TO FIND A STORE THAT OFFERED A
GENUINELY FRIENDLY ATMOSPHERE. IT WAS NOT ONLY
WELL-ORGANIZED AND ATTRACTIVE, BUT THE EMPLOYEES WENT OUT OF
THEIR WAY TO MEET OUR NEEDS."
DECEMBER 1994
[Photo: 5 young people, linked arm in arm, walking down the street]
"I WAS IMMEDIATELY STRUCK BY THE SERVICE ORIENTATION AT THE
STORE. EVERYWHERE YOU WENT SOMEONE WAS THERE TO ASSIST YOU
WITHOUT BEING OBTRUSIVE. YOU CAN IMAGINE THE DELIGHTFUL
SURPRISE AND JOY IT WAS TO BE 'WAITED ON'. I CONGRATULATE
YOU ON YOUR EMPHASIS ON SERVICE AND HOPE MORE BUSINESSES
TAKE YOUR LEAD."
OCTOBER 1994
"WITH ALL OF THE COMPETITION, SERVICE IS ESSENTIAL TO
ACHIEVE SUCCESS. AS THE CUSTOMER I WAS VERY IMPORTANT IN THE
EYES OF YOUR EMPLOYEES AND THAT WILL BRING ME BACK EVERY
TIME."
DECEMBER 1994
Customers are our lifeblood and our goal is to provide them with excellent
customer service. We believe that this goal will foster loyalty to our brands
and our stores, and ultimately contribute to our company's success. We conduct
customer surveys and market studies to maintain contact with our customers. We
listen to our customers and respond to their needs. Customers initially come
into our stores for our selection of quality casual apparel and accessories, but
they return because we provide exceptional customer service. This conviction is
shared and executed by every associate at Designs, Inc.
Since staff training and development are key competitive advantages, new sales
associates are assigned to a regional training store to learn about our approach
to customer service and become familiar with our merchandise. Our sales
associates wear our products to ensure that they know as much as possible about
the clothing, including fabric, cut, fit and care. This approach enhances the
company's effectiveness in responding to customer questions and conveying
product benefits.
Training continues throughout the careers of our field staff. Designs, Inc.
maintains a very strong commitment to promoting dedicated, hard-working sales
associates into store manager and field management positions. Further training
at these management levels ensures that they provide the necessary leadership to
help the stores achieve their objectives. Our approach has resulted in lower
than average employee turnover in sales associate and field staff positions.
At Designs, Inc. we believe that managing human resources is a key to our
competitive advantage. We must be successful at recruiting, retaining and
motivating people to attain the company's objectives, as well as their personal
goals. If we accomplish this we will provide our customers with superior
customer service and our associates with a desirable working environment. Our
management style at Designs, Inc. is twofold. We encourage a sense of personal
responsibility and initiative in all of our associates. At the same time, we
foster a commitment to teamwork, the company and the attainment of our common
goals.
Looking ahead, we plan to expand further our base of productive stores that
contribute to increased sales and profitability. We plan to remodel existing
mall-based Designs stores and open new multi-brand Designs stores throughout the
United States. Under the joint venture agreement, we will expand the Original
Levi's(R) Store format in our territory to provide a showcase for our Levi
Strauss & Co. branded product lines. We also plan to continue and strengthen the
contribution of the Levi's(R) Outlet stores. The Levi's(R) Outlet stores offer
manufacturing overruns, discontinued lines and irregular merchandise purchased
from Levi Strauss & Co. In addition, the Levi's(R) Outlet stores enable us to
keep our Designs store and Original Levi's(R) Store inventories clean and
current by transferring Levi's(R) and Dockers(R) brand merchandise at the end of
each season.
Designs, Inc.'s vision is to generate customer excitement and satisfaction,
establishing our specialty retail store locations as a source for quality
apparel and accessories to complement a casual, relaxed lifestyle. We want to be
recognized as fulfilling customer expectations with excellent selection and
value, supported by superior customer service. We view brand identity and
satisfied customers as the means to create customer loyalty, build store
traffic, expand sales levels and increase earnings.
<PAGE>
SUPERIOR CUSTOMER SERVICE
[3 Photos: various customers being assisted by helpful associates]
DESIGNS INC.'S COMMITMENT
TO SUPERIOR SERVICE IS
DEMONSTRATED BY EACH OF
OUR SALES ASSOCIATES.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Years Ended(1)
January 28, January 29, January 30, February 1, January 26,
1995 1994 1993 1992( (2)) 1991
(In thousands, except per share data and number of stores)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $265,910 $240,925 $204,329 $150,820 $120,750
Gross profit, net of occupancy
costs 84,126 75,221 65,465 44,331 35,386
Income before provision for income taxes 28,399(3) 9,507(4) 20,587 8,157 3,675
Net income 16,903 5,748 12,320 4,784 2,096
Net income per common and common
equivalent share(5) $ 1.06 $ 0.36 $ 0.84 $ 0.40 $ 0.19
Weighted average common and common
equivalent shares outstanding(5) 15,914 15,916 14,666 11,954 11,252
BALANCE SHEET DATA:
Working capital $ 55,244 $ 35,671(4) $ 55,913 $ 32,848 $ 17,918
Inventories 52,649 46,664 42,578 28,713(2) 22,667
Property and equipment, net 26,503 22,922 20,747 20,270 22,419
Total assets 127,295 119,556 102,465 69,427 50,505
Long-term debt(6) -- 10,000 13,000 20,000 21,666
OPERATING DATA:
Number of stores open at end of period 120(7) 120 110 106 101
</TABLE>
(1) The Company's fiscal year is a 52 or 53 week period ending on the
Saturday closest to January 31. The fiscal year ended February 1, 1992
covered 53 weeks.
(2) Reflects a change in the method of valuing merchandise inventories from
lower of cost or market under the first-in, first-out method to the lower
of cost or market under the last-in, last-out method.
(3) Includes $3.2 million of income from the restructuring program through
January 28, 1995.
(4) Includes $15.0 million restructuring charge.
(5) Adjusted to give retroactive effect to two 50% stock dividends paid on
June 22, 1993 and June 1, 1992 to holders of Common Stock at the close of
business on June 8, 1993 and April 21, 1992, respectively.
(6) Includes current portion of long-term debt.
(7) Includes the eight Original Levi's(R) Stores which were transferred to
the joint venture on January 28, 1995; excludes the two Dockers(R) Shops
and an Original Levi's(R) Store in Minneapolis, Minnesota which were sold
on January 28, 1995, as well as the fifteen Designs stores which were
closed in connection with the restructuring program.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table provides a five-year history of the sales results of the
Company, together with a summary of the number of stores in operation and the
Company's comparable store sales growth. "Comparable store sales growth"
measures the percentage change in sales in comparable stores, which are those
stores open for at least one full fiscal year as of the beginning of the
fiscal year.
<TABLE>
<CAPTION>
Fiscal Years Ended
Jan. 28, Jan. 29, Jan. 30, Feb. 1, Jan. 26,
1995 1994 1993 1992 1991
Sales (In thousands)
<S> <C> <C> <C> <C> <C>
Designs stores $ 69,777 $ 76,170 $ 78,419 $ 72,407 $ 70,286
Outlet stores 170,313 145,375 119,983 78,413 50,464
Concept stores(1) 25,820 19,380 5,927 --- --
$265,910 $240,925 $204,329 $150,820 $120,750
Number of stores in operation at year end:
Designs stores 51 64 64 68 69
Outlet stores 61 48 41 38 32
Concept stores 8 8 5 -- --
120 120 110 106 101
Comparable store sales growth (5%) 6% 26% 7% 14%
</TABLE>
(1) Includes sales for the Company's two Dockers(R) Shops and an Original
Levi's(R) Store in Minneapolis, Minnesota which were sold on January 28,
1995, see discussion below.
RESULTS OF OPERATIONS
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 28, 1995 AND JANUARY 29, 1994.
Sales for fiscal year 1995 rose 10% to $265.9 million from $240.9 million in
fiscal 1994. Comparable store sales decreased 5% for the year ended January
28, 1995 over the prior year. The decrease in comparable store sales was
primarily due to a decrease in unit sales of 11%, partially offset by an 8%
increase in average unit price as compared to the prior year. Comparable
Outlet store sales decreased 7% for fiscal year 1995 as compared with fiscal
1994, principally due to a decrease in the level of available goods, the
impact of a trucking strike in the first quarter of fiscal 1995, as well as
reduced Canadian tourism resulting from an unfavorable exchange rate.
Comparable Designs store sales decreased 3% for fiscal 1995, due to continued
competitive pressures from other mall-based retailers. Comparable Concept
store sales increased 16% for the fiscal 1995 as compared with fiscal 1994.
This increase is mainly attributable to our Original Levi's(R) Store located
in New York City. Of the 120 stores open at fiscal year end, 91 were
comparable stores.
Gross margin rate (including the costs of occupancy) equaled 31.6% of sales
for fiscal year 1995, and increased slightly from 31.2% in the prior year.
This increase was principally due to an increase in the percentage of business
generated from the higher margin Levi's(R) Outlet stores and Original
Levi's(R) Stores and decreased costs for LIFO ($200,000 benefit in fiscal 1995
versus $500,000 provision in fiscal 1994). This increase was offset slightly
by a decrease in initial markups in the Levi's(R) Outlet stores and Designs
stores, continued price competition in the Designs stores, and higher
occupancy costs in the Concept and remodeled Designs stores. The increased
total sales at this gross margin rate resulted in a 12% increase in gross
margin dollars to $84.1 million for fiscal 1995 versus $75.2 million in fiscal
1994.
For fiscal 1995, selling, general and administrative expenses were 19.9% of
sales as compared with 18.5% of sales for fiscal 1994. Store payroll, which is
the largest component of these operating expenses, increased to 10.7% of sales
in fiscal 1995 from 10.2% in fiscal 1994, due primarily to increased payroll
as a percentage of sales in the Levi's(R) Outlet and Designs stores. The
increase in selling, general and administrative expenses also included
increased advertising costs attributable to enhanced corporate marketing
efforts. These increases were partially offset by a $1.0 million gain related
to the sale of the Company's Original Levi's(R) Store in Minneapolis,
Minnesota, and the Company's two Dockers(R) Shops located in Minneapolis,
Minnesota and Cambridge, Massachusetts. In addition, Levi's Only Stores, Inc.
paid the Company $875,000 for services, contributions and risks taken by the
Company for its assistance in the development of the Original Levi's(R) Store
concept in the United States. A substantial portion of this amount offset
previously recognized costs which were incurred by the Company during the
fiscal year. Other expenses, which included store supplies and credit card
fees, were small and tend to vary with inflation.
<PAGE>
During the fourth quarter of fiscal 1994, the Company recorded a non-recurring
pre-tax charge of $15.0 million to cover the expected costs associated with
the closing of up to 10 of its poorest performing Designs stores. This charge
is reflected in the consolidated statement of income for the fiscal year ended
January 29, 1994 as a restructuring charge. In November 1994, in connection
with the Company's ongoing review of Designs store performance, the Company
decided to close up to five more of the poorest performing Designs stores
during the remainder of fiscal year 1995. Due to the elimination of estimated
losses which would have been incurred from the continued operations of the
stores, the earnings and cash flow benefit derived from the restructuring for
fiscal 1995 totaled $1.6 million and $1.4 million, respectively. For the same
reason, the expected earnings and cash flow benefit for fiscal 1996 are $2.7
million and $2.0 million, respectively.
The costs to close these 15 stores totaled $11.8 million, comprised of $8.3
million estimated cash and $3.5 million of noncash costs. Included in the $8.3
million of cash costs is $4.1 million of estimated future payments to
landlords. These total anticipated costs of $11.8 million to close the 15
stores are less than the original pre-tax $15.0 million estimate, primarily
due to favorable negotiations with various landlords. As a result, the
remaining $3.2 million reserve balance was recognized as pre-tax income in the
fourth quarter of fiscal 1995. See Note J of Notes to the Consolidated
Financial Statements.
As stated above, at January 28, 1995, the Company had estimated $4.1 million
for future payments to landlords for stores which were closed in connection
with the Company's restructuring program. In March 1995, the Company
negotiated termination of certain leases and as a result reduced the Company's
future obligations to $1.9 million. The $2.2 million balance was recognized by
the Company as pre-tax income during the first quarter of fiscal 1996. In
connection with the Company's restructuring program, the Company has also
accrued approximately $800,000, which represents the Company's estimated
exposure, for legal and settlement costs for one remaining lease termination.
See Notes F and L of Notes to the Consolidated Financial Statements.
Depreciation and amortization expense for fiscal year 1995 increased 16.9% or
$994,000 over fiscal 1994 to $6.9 million, primarily reflecting the costs of
new store openings and remodeled stores. Twenty stores were opened and three
Designs stores were remodeled in fiscal 1995 and 10 stores were opened and
three Designs stores were remodeled in fiscal 1994. See "Liquidity and Capital
Resources--Capital Expenditures."
Interest expense in fiscal 1995 decreased 60.3% or $925,000 to $609,000,
compared with $1.5 million in fiscal 1994. This decrease is attributable to
interest cost savings associated with the prepayment of $6.0 million in the
first quarter and the retirement of the remaining $4.0 million of the
Company's Senior Notes in the second quarter of fiscal 1995. Interest expense
for fiscal 1995 includes a prepayment penalty and accelerated write-off of
debt issuance costs of approximately $350,000. The Company had no short-term
or long-term borrowings outstanding at January 28, 1995. See "Liquidity and
Capital Resources."
Interest income for fiscal 1995 increased to $1,477,000 from $1,382,000 in
fiscal 1994. The increase is attributable to higher cash and investment
levels, offset by $433,000 of losses associated with the sale of certain
long-term investments. See "Liquidity and Capital Resources."
Net income for fiscal 1995 was $16.9 million or $1.06 per share compared with
$5.7 million, or $0.36 per share, in the prior year. The income related to the
excess restructuring reserve, as discussed above, was $3.2 million or $0.12
per share.
COMPARISON OF FISCAL YEARS 1994 AND 1993
Sales for fiscal year 1994 rose 18% to $240.9 million from $204.3 million in
fiscal 1993. Comparable store sales increased 6% for the year ended January
29, 1994 over the prior year. The growth in comparable store sales was
primarily attributable to increased demand for the Levi Strauss & Co. products
offered in Levi's(R) Outlet stores, and the Company's ability to meet that
demand through improved product availability and increased breadth of Levi
Strauss & Co. product lines offered. The comparable store sales increase of 6%
was comprised of approximately 4% in unit sales increases and a 2% increase in
average unit price, attributable to a shift in the mix of products sold toward
higher priced goods. Of the Company's 120 stores, 102 were comparable stores.
Gross margin rate (including the costs of occupancy) equaled 31.2% of sales
for fiscal year 1994, and decreased from 32.0% for the prior year. This
decrease resulted principally from increased promotional markdowns in the
Designs stores and higher occupancy costs in the Concept stores, offset in
part by an increase in the percentage of business generated from the higher
margin Levi's(R) Outlet stores. Chainwide, a higher initial markup and reduced
LIFO costs ($500,000 in fiscal 1994 versus $1.2 million in fiscal 1993) were
offset by increased markdowns and shrink resulting in a slight decline in the
net merchandise margin for the year. The
<PAGE>
increased total sales at this gross margin rate resulted in a 15% increase in
gross margin dollars to $75.2 million for fiscal 1994 versus $65.5 million in
fiscal 1993.
For fiscal 1994 and 1993, selling, general and administrative expenses were
18.5% of sales. Store payroll, which was the largest component of these
operating expenses, increased to 10.2% of sales in fiscal 1994 from 9.5% in
fiscal 1993, due primarily to increased payroll costs in the Concept stores.
This increase was partially offset by a decrease in administrative payroll
expense to 2.1% of sales in fiscal 1994 from 2.4% in fiscal 1993. In addition,
fiscal 1993 selling, general and administrative expenses included a provision
of $850,000 to cover the costs of fixed asset write-offs associated with store
remodeling. Other expenses, which included store supplies, advertising and
credit card fees, were small and tend to vary with inflation. Fiscal 1993
selling, general and administrative expenses also included a non-recurring
charge of $750,000 for the termination of the Company's defined benefit
retirement plan. See Note I of Notes to Consolidated Financial Statements.
In connection with a year end review of individual store performance and
profitability, in the fourth quarter of fiscal 1994, the Board of Directors
decided to close up to 10 of the Company's poorest performing Designs stores.
As a result of this decision, the Company established a $15.0 million
restructuring reserve to cover the cash costs of approximately $12.0 million
for lease obligations, professional and consulting services and employee
relocation and termination costs; and noncash charges of approximately $3.0
million related to fixed asset disposals and inventory markdowns. This amount
was reflected in the consolidated statement of income for the year ended
January 29, 1994 as a restructuring charge. See Note J of Notes to
Consolidated Financial Statements.
Depreciation and amortization expense for fiscal year 1994 increased 19% or
$921,000 over 1993, primarily reflecting the costs of new store openings. Ten
stores were opened in fiscal 1994 and nine stores were opened in fiscal 1993.
Interest expense decreased 47% or $1.4 million in fiscal 1994 to $1.5 million
as compared to $2.9 million in fiscal 1993. This decrease was attributable to
a reduced level of long-term borrowings outstanding in fiscal 1994, as well as
a $670,000 prepayment penalty relating to the early retirement of $5.0 million
of the Company's Senior Notes recorded in fiscal 1993. The Company had no
short-term borrowings outstanding during fiscal 1994 or 1993. See "Liquidity
and Capital Resources."
Pretax income, after restructuring charges, decreased $11.1 million to $9.5
million compared with $20.6 million in the prior year. Pretax income before
restructuring charges increased $3.9 million or 19% over fiscal year 1993 to
$24.5 million.
In the first quarter of fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes". In
connection with such adoption, the Company recorded an income tax benefit of
$79,000 or $0.01 per share. This amount was reflected in the consolidated
statement of income as the cumulative effect of an accounting change. The
increase in the federal income tax rate from 34.0% in fiscal 1993 to 35.0% in
fiscal 1994 was offset by a reduction in the effective state tax rate. Such
reduction was attributable to a shift in the distribution of taxable income
earned in each state where the Company operated toward lower tax rate states.
As a result, the effective federal and state income tax rate remained level at
40.0% of income before taxes in both years. See Note E of Notes to
Consolidated Financial Statements.
The impact of the restructuring charge on net income and earnings per share
was $9.0 million or $0.56 per share. Net income, after the restructuring
charge, for fiscal year 1994 was $5.7 million or $0.36 per share compared with
$12.3 million, or $0.84 per share, in the prior year.
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1995 Fiscal 1994 Fiscal 1993
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
First quarter $ 48,960 18.4% $ 43,944 18.2% $ 35,918 17.6%
Second quarter 56,390 21.2% 51,337 21.3% 40,789 20.0%
Third quarter 80,755 30.4% 73,525 30.5% 63,713 31.2%
Fourth quarter 79,805 30.0% 72,119 30.0% 63,909 31.2%
$265,910 100.0% $240,925 100.0% $204,329 100.0%
</TABLE>
SEASONALITY
A comparison of sales in each quarter of the past three fiscal years is
presented above. The amounts shown are not necessarily indicative of actual
trends, since such amounts also reflect the addition of new stores and the
remodeling of others during these periods.
The third and fourth quarters of fiscal 1995 reflect the impact of Designs
stores closed as part of the restructuring program.
Historically, the Company has experienced seasonal fluctuations in revenues
and income, with increases occurring during the Company's third and fourth
quarters as a result of "Back to School" and "Holiday" seasons.
A comparison of quarterly sales, gross profit, net income and net income per
share for the past two fiscal years is presented in Note M of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for operating expenses, seasonal
inventory purchases, capital expenses for new and remodeled stores, cash
outlays associated with the restructuring and the Company's investment in the
development of its private-label product line and the cost of acquiriing
and/or developing new businesses.
WORKING CAPITAL AND CASH FLOWS
To date, the Company has financed its working capital requirements and
expansion program with cash flow from operations, borrowings and proceeds from
Common Stock offerings. Cash provided by operating activities was $20.8
million, $13.5 million and $6.0 million in fiscal 1995, 1994, and 1993,
respectively. The increase in cash generated from operating activities in
fiscal 1995 is primarily due to growth in earnings offset by cash costs of
$3.3 million incurred in connection with the restructuring program.
The Company's working capital at January 28, 1995 was approximately $55.2
million as compared to $35.7 million in the prior year. The $19.5 million
increase was attributable to an increase in cash and cash equivalents, the
completion of the Company's restructuring program and the retirement of the
Company's Senior Notes. The increase in cash and cash equivalents was due to a
reduction in the average maturity of the investment portfolio and also due to
$4.7 million in cash which was received by the joint venture on January 28,
1995 in connection with its formation of the joint venture, see discussion
below.
At January 28, 1995, the Company had no short-term or long-term borrowings
outstanding and had cash and investments totaling $38.3 million. The following
table provides a comparative analysis of the Company's cash and investments at
the end of fiscal 1995 and 1994:
<TABLE>
<CAPTION>
January 28, 1995 January 29, 1994
(In thousands)
<S> <C> <C>
Cash and cash equivalents $22,424 $13,601
Long-term investments 15,831 26,077
Total cash and investments $38,255 $39,678
</TABLE>
Long-term investments of $15.8 million at January 28, 1995 consisted of
government securities with a weighted average maturity of approximately 3.2
years and a weighted average interest rate of 6.2%. Long-term investments of
$26.1 million at January 29, 1994 consisted of government securities with a
weighted average maturity of 5.5 years and a weighted average interest rate of
6.0%.
Inventory in units in comparable stores at January 28, 1995 was 18% less than
at January 29, 1994 due to fewer comparable stores at year end, a decrease in
the availability of inventory in the Levi's(R) Outlet stores and the Company's
continued efforts to control inventory levels in its Original Levi's(R) Stores
and its Designs stores. The Company stocks its Levi's(R) Outlet stores
exclusively with manufacturing overruns, discontinued lines and irregulars
purchased by the Company directly from Levi Strauss & Co. and end-of-season
merchandise transferred from Designs and Concept stores. By its nature, this
merchandise is subject to limited availability. At January 28, 1995, total
inventories were up $6.0 million, or 13%, from January 29, 1994. This increase
primarily reflects the increase in the percentage of Levi's(R) Outlet stores
to total stores in fiscal 1995 as compared with fiscal 1994. Outlet stores
typically require a larger percentage of inventory levels than the other store
formats.
The Company's trade payables to Levi Strauss & Co., the principal vendor,
generally are due within 10 days
<PAGE>
after the end of the month in which the goods are received. The Company has
been current with its payments to Levi Strauss & Co. from fiscal 1987 to date.
Trade payables with other vendors are generally payable within 30 days of
invoice. Variations in the amount of trade payables outstanding at the end of
different periods relate to the timing of purchases. The current payment
methods and terms are expected to change in fiscal 1996 as the Company
continues to develop its private-label product line and begins its own
sourcing of merchandise.
On June 15, 1989, the Company borrowed $20.0 million under a Note Purchase
Agreement at a fixed interest rate of 11.91%. At January 29, 1994, the balance
under this Note Purchase Agreement was $10.0 million, of which the current
portion was $4.0 million. During the first quarter of fiscal 1995, the Company
prepaid $6.0 million in principal on the 11.91% Senior Notes, which resulted
in a prepayment penalty and writedown of debt issuance costs of approximately
$350,000. The remaining balance under the Note Purchase Agreement of $4.0
million was paid on June 1, 1994. There were no long-term debt obligations
outstanding at January 28, 1995. During fiscal year 1995, the Company had
average outstanding borrowings, excluding long-term debt, of $266,000.
The Company entered into a revolving credit agreement on November 17, 1994
under which BayBank Boston, N.A. and State Street Bank and Trust Company
provided the Company with a revolving line of credit of up to $20.0 million.
Under the credit agreement, the line of credit terminates on May 31, 1997 and
bears interest at BayBank Boston, N.A.'s prime rate or LIBOR-based fixed
rates. The terms of the credit agreement require the Company to maintain
specific net worth, inventory turnover and cash flow ratios. Under the
revolving credit agreement, the Company has agreed not to pay dividends on its
Common Stock if such payment would cause the Company to be in default of
certain financial covenants. In addition, the Company will pay a quarterly
commitment fee of 0.4% per annum on the average daily unused balance and an
annual agent fee of $15,000. At January 28, 1995, there were no outstanding
borrowings under this facility.
During the third quarter of fiscal 1995, the Company's Board of Directors
authorized the repurchase of up to two million shares of the Company's common
stock. At January 28, 1995, the Company had repurchased and retired 300,000
shares at a cost of $2.3 million. The retirement of shares has been accounted
for as a reduction in common stock and additional paid-in capital.
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the
Company, and a subsidiary of Levi's Only Stores, a wholly-owned subsidiary of
Levi Strauss & Co., entered into a partnership agreement establishing a joint
venture to sell Levi's(R) brand products and jeans-related products. The joint
venture plans to open and operate up to 35 to 50 Original Levi's(R) Stores and
Levi's(R) Outlets throughout 11 Northeast states and the District of Columbia
over the next three to five years. The Levi's(R) Outlet stores in the joint
venture will sell only Levi's(R) brand products and service the close-out
products of the Original Levi's(R) Stores.
In connection with the formation of the joint venture, Designs JV Corp.
contributed, for a 70% interest in the joint venture, eight of the Company's
existing Original Levi's(R) Stores and three leases for unopened stores in New
York City, Nanuet, New York, and White Plains, New York. These stores are
included in the planned 35 to 50 stores described above. At the same time, the
joint venture subsidiary of Levi's Only Stores, Inc. contributed approximately
$4.7 million in cash to the joint venture in exchange for a 30% interest.
Levi's Only Stores, Inc., also paid the Company $875,000, which is included in
accounts receivable at year end, for services, contributions and risks taken
by the Company in establishing the transferred Original Levi's(R) Stores and
in the development of the Original Levi's(R) Store concept in the United
States. A substantial portion of this amount offset previously recognized
costs which were incurred by the Company in formation of the joint venture
during fiscal year 1995.
It is the intention of the partners in the joint venture that the joint
venture's working capital and funds for its future expansion will come from
the joint venture's operations and borrowings from third parties. However, the
partners may also decide that they or their affiliates should contribute or
loan additional funds to the joint venture or guaranty third-party debt.
Neither partner will be required to make any further contribution to the
capital of the joint venture, any loan to the joint venture or any such
guaranty unless both partners agree. Excess cash (as defined in the
partnership agreement) will be distributed by the joint venture once per year.
No assurance can be given that the Company will not be required to make such
capital contributions, loans or guaranties or that cash will be distributed to
the Company by the joint venture.
The term of the joint venture is 10 years. However, the partnership agreement
contains certain exit rights that enable either partner to buy or sell its
interest in the joint venture or particular stores of the joint venture after
five years.
<PAGE>
In a related transaction in fiscal 1995, the Original Levi's(R) Store located
in Minneapolis, Minnesota and two Dockers(R) Shops located in Minneapolis and
Cambridge, Massachusetts were sold to Levi's Only Stores, Inc. The Company
received $2.2 million for the sale of these three stores in fiscal 1996. The
gain relating to the sale of these stores reduced selling, general and
administrative expense by approximately $1.0 million in fiscal year 1995. The
$2.2 million is included in the Company's accounts receivable balance at
January 28, 1995.
In June 1994, Levi Strauss & Co. informed the Company that it wanted to focus
the future relationship between the two companies on the Original Levi's(R)
Stores joint venture and to reduce the Company's dependency on Levi Strauss &
Co. Levi Strauss & Co. informed the Company that it did not see growth
opportunity for the Company's Designs stores in the exclusively Levi's(R)
format, however, Levi Strauss & Co. did see an opportunity for growth of the
Company's Designs stores if the format was changed to a multi-brand format.
Levi Strauss & Co. advised the Company that it believes that this will avoid
consumer confusion between the Original Levi's(R) Stores and Designs stores.
According to Levi Strauss & Co., this would require that not more than 70% of
the product mix in the stores be Levi Strauss & Co. product, that the format
and presentation of the stores be "supportive" of its marketing and brand
objectives and that Levi Strauss & Co. approve that format beforehand. The
Company has received favorable Levi Strauss & Co. comment regarding the look
of the multi-brand Designs stores and believes that the format will be
acceptable to Levi Strauss & Co. for Designs store expansion throughout the
United States. Levi Strauss & Co. would apply the new branch opening policies
and practices to the Company that are applicable to other multi-brand
retailers of Levi Strauss & Co. products. Levi Strauss & Co. advised the
Company that if the Company does not decide to expand the Designs store chain,
Levi Strauss & Co. would not require change to a multi-brand format. If the
Company does change the format and expand the Designs store chain, Levi
Strauss & Co. has said that it will require that the Company's existing
Designs stores be converted to the new multi-brand format over a mutually
agreeable period of time.
During fiscal year 1995, the Company introduced private-label and
Timberland(R) brand products into the merchandise mix in certain of its
Designs stores. This was primarily due to the Company's desire to offset
decreased gross profit margin in Designs stores caused by increased price
competition with other Levi Strauss & Co. retailers in and around regional
malls, the absence of certain key products in the Levi Strauss & Co. line and
increased opportunities for expansion of the Designs store chain throughout
the United States. Accordingly, beginning in November of fiscal 1995, the
Company began to test private-label and Timberland(R) products in 10 of its
Designs stores. Because of the sales increases generated in the newly
remodeled and renovated Designs stores, the test is being conducted in the six
newly remodeled Designs stores and the recently opened Designs store in
Saugus, Massachusetts as well as three other Designs stores. Based upon the
overall performance of these stores and the performance of the private label
merchandise, the Company could decide to add Timberland(R) products and
private label merchandise to the merchandise mix in some or all of its Designs
stores.
In June 1994, Levi Strauss & Co. advised the Company that it did not see any
additional growth in the Levi's(R) Outlet by Designs store format, other than
additional Outlet stores that might be part of the Original Levi's(R) Stores
joint venture, as discussed above. The company stocks its Outlets exclusively
with manufacturing overruns, discontinued lines and irregulars purchased by
the Company directly from Levi Strauss & Co. and end-of-season merchandise
transferred from the Designs and Concept stores. By its nature, this
merchandise is subject to limited availability. In addition, the joint venture
will be opening its own outlets, which will also impact the availability of
goods to the Levi's(R) Outlet by Designs stores. As such, the Company does not
currently plan to open any Levi's(R) Outlet by Designs stores during fiscal
1996.
On April 26, 1995, the Company announced the signing of a purchase and sale
agreement to acquire, subject to the satisfaction of certain conditions and
barring unforeseen circumstances, certain assets of Boston Trading Ltd., Inc.
The assets to be acquired include the Boston Traders(R) brands and all
inventory, fixed assets and leasehold improvements associated with 33 existing
Boston Traders(R) Outlet stores. The Company is expected to pay up to $6.0
million for assets being acquired, subject to adjustment. This acquisition, if
consummated, will expand the Company's current operations to include off-shore
sourcing of inventory. Among other things, the retail distribution of the
Boston Traders(R) product will require the Company to expend resources for a
design and sourcing staff, and storage and distribution facilities in order to
assure timely delivery and restocking of merchandise.
The Company continues to have conversations with a number of other companies
with branded products and/or prominent brand names concerning the possi-
<PAGE>
bility of the Company (i) opening single brand retail stores for these
companies, (ii) opening single brand retail stores jointly with these
companies or (iii) featuring these branded products in the Designs stores. No
assurances can be given that the Company will reach agreement with any other
manufacturer concerning such stores or brand offerings or that, if a decision
is made to go forward, such stores or brand offerings will be successful.
As previously discussed, the Company recorded a $15.0 million pre-tax
restructuring charge in the fourth quarter of fiscal 1994 to cover the costs
of closing up to 10 of its poorest performing Designs stores. In November of
fiscal 1995, in connection with the ongoing review of Designs store
performance, the Company decided to close up to five more Designs stores. The
total estimated costs to close these 15 stores totaled $11.8 million. The
estimated cash costs to close these stores totaled $8.3 million, which
includes $4.1 million of estimated future payments to landlords as part of
lease settlements. The $4.1 million is part of the Company's accrued rent at
January 28, 1995. As previously discussed, the Company negotiated termination
of certain leases and as a result reduced the estimated $4.1 million of future
obligations to $1.9 million, which will be paid to the respective landlords in
fiscal 1996.
CAPITAL EXPENDITURES
The following table sets forth the stores opened and remodeled and capital
expenditures for those stores for the fiscal years presented:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Levi's(R) Outlet Stores 15 7 4
Original Levi's(R) Stores 4 2 4
Dockers(R) Shops -- 1 1
Designs Stores 1 -- --
Total New Stores 20 10 9
Remodeled Designs Stores 3 3 --
Remodeled Levi's(R) Outlet Stores 14 -- --
Total Remodeled Stores 17 3 --
Capital expenditures (000's) $9,500 $5,100 $3,600
</TABLE>
During fiscal year 1996, as part of the joint venture, the Company plans to
open three Original Levi's(R) Stores (two mall-based and one urban location)
and three Levi's(R) Outlet stores. The estimated costs to open the two
mall-based stores are expected to be approximately $1.2 million while the
estimated costs of the urban Original Levi's(R) store in New York City is
expected to be approximately $4.2 million. The estimated costs of opening the
three Levi's(R) Outlets are expected to be $550,000, resulting in a total
estimated cost of capital expenditures for the joint venture of approximately
$5.9 million.
In the past two years, the Company has remodeled six Designs stores, utilizing
updated fixtures and merchandise presentation. The average total cost per
store of such remodeling recently has approximated $350,000 for furniture,
fixtures and leasehold improvements. The Company intends to remodel 10
additional stores in fiscal year 1996 at an estimated cost of $4.0 million.
In addition, the Company intends to open five urban-based, multi-brand Designs
stores in fiscal year 1996. Until now, Designs stores have been specifically
mall-based locations. By opening Designs stores in urban locations, the
Company expects to soften the impact of price competition that is prevalent in
the mall-based stores. The estimated costs to open these stores are expected
to be approximately $4.3 million.
As discussed previously, the Company does not anticipate opening any
additional Levi's(R) Outlets, other than those opened by the joint venture.
The Company does expect to remodel five existing Levi's(R) Outlet by Designs
stores during fiscal year 1996. The estimated costs of these remodels are
expected to approximate $1.0 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-7, "Reporting of Advertising Costs" which is
effective in 1996. The Company has historically accounted for advertising
costs in accordance with the provisions of this statement. See Note A to the
Notes to Consolidated Financial Statements.
EFFECTS OF INFLATION
Although the Company's operations are influenced by general economic trends,
the Company does not believe that inflation has had a material effect on the
results of its operations in the last three fiscal years.
<PAGE>
CONSOLIDATED BALANCE SHEETS
January 28, 1995 and January 29, 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,424 $ 13,601
Accounts receivable (Note K) 4,223 821
Inventories 52,649 46,664
Deferred income taxes (Note E) 1,579 5,756
Prepaid expenses 1,213 1,202
Total current assets 82,088 68,044
Property and equipment, net of accumulated depreciation and amortization (Note B) 26,503 22,922
Other assets:
Long-term investments 15,831 26,077
Deferred income taxes (Note E) 1,771 1,534
Pre-opening costs, net 481 287
Other assets 621 692
Total assets $127,295 $119,556
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,210 $ 6,708
Accrued expenses and other current liabilities 5,944 2,714
Restructuring reserve (Note J) -- 15,000
Accrued rent (Note J) 7,690 2,577
Income taxes payable -- 1,374
Current portion of long-term debt (Note D) -- 4,000
Total current liabilities 26,844 32,373
Long-term debt (Note D) -- 6,000
Commitments and contingencies (Note F)
Minority Interest (Note K) 4,749 --
Stockholders' equity (Note G):
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, none issued
Common Stock, $0.01 par value, 50,000,000 shares authorized, 15,755,000 and
15,960,000 shares issued at January 28, 1995 and January 29, 1994, respectively 157 160
Additional paid-in capital 52,619 54,507
Retained earnings 42,926 26,516
Total stockholders' equity 95,702 81,183
Total liabilities and stockholders' equity $127,295 $119,556
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the fiscal years ending January 28, 1995, January 29, 1994 and January 30,
1993
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands, except per share data)
<S> <C> <C> <C>
Sales $265,910 $240,925 $204,329
Cost of goods sold including occupancy 181,784 165,704 138,864
Gross profit 84,126 75,221 65,465
Expenses:
Selling, general and administrative 52,916 44,677 37,743
Restructuring charges (Note J) (3,200) 15,000 --
Depreciation and amortization 6,879 5,885 4,964
Total expenses 56,595 65,562 42,707
Operating income 27,531 9,659 22,758
Interest expense 609 1,534 2,893
Interest income 1,477 1,382 722
Income before income taxes and cumulative effect of change in accounting for
income taxes 28,399 9,507 20,587
Provision for income taxes (Note E) 11,496 3,838 8,267
Income before cumulative effect of change in accounting for income taxes 16,903 5,669 12,320
Cumulative effect of change in accounting for income taxes (Note E) -- 79 --
Net income $ 16,903 $ 5,748 $ 12,320
Income before cumulative effect of change in accounting per common and common
equivalent share $ 1.06 $ 0.36 $ 0.84
Cumulative effect of change in accounting per common and common
equivalent share -- N/M --
Net income per common and common equivalent share $ 1.06 $ 0.36 $ 0.84
Weighted average common and common equivalent shares outstanding 15,914 15,916 14,666
Net income per common and common equivalent shares outstanding - assuming full
dilution N/A N/A $ 0.83
Weighted average common and common equivalent shares outstanding - assuming
full dilution N/A N/A 14,841
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the fiscal years ending January 28, 1995, January 29, 1994 and January 30,
1993
<TABLE>
<CAPTION>
Additional
Paid-in
Common Stock Capital Retained Earnings Total
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at February 1, 1992 13,875 $139 $26,921 $ 8,448 $35,508
Issuance of Common Stock:
Offering of shares, net of offering expenses of
$284 1,725 17 24,998 25,015
Exercises under option programs 258 3 1,530(1) 1,533
Net income 12,320 12,320
Balance at January 30, 1993 15,858 159 53,449 20,768 74,376
Issuance of Common Stock:
Exercises under option programs 102 1 1,058(1) 1,059
Net income 5,748 5,748
Balance at January 29, 1994 15,960 160 54,507 26,516 81,183
Issuance of Common Stock:
Exercises under option programs 95 438(1) 438
Retirement of shares under the stock repurchase
program (300) (3) (2,326) (2,329)
Unrealized loss on investments (493) (493)
Net income 16,903 16,903
Balance at January 28, 1995 15,755 $157 $52,619 $42,926 $95,702
</TABLE>
(1) Including related tax benefit.
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
For the fiscal years ending January 28, 1995, January 29, 1994 and January 30,
1993
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,903 $ 5,748 $ 12,320
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 6,879 5,885 4,964
Deferred income taxes 4,251 (6,385) (1,192)
Gain from sale of stores (1,069) -- --
Loss from sale of investments 464 145 --
Loss (gain) from disposal of property and equipment 134 (348) 492
Changes in operating asset and liabilities:
Accounts receivable (13) (219) (488)
Inventories (8,360) (4,086) (13,865)
Prepaid expenses 15 (533) 2,343
Prepaid income taxes (28) -- --
Income taxes payable (1,374) 1,301 (804)
Accounts payable 6,502 (2,904) 867
Restructuring reserve (6,422) 15,000 --
Accrued expenses and other current liabilities 2,948 (703) 764
Accrued rent (12) 590 630
Net cash provided by operating activities 20,818 13,491 6,031
Cash flows from investing activities:
Additions to property and equipment (12,604) (8,116) (5,658)
Incurrence of pre-opening costs (809) (440) (591)
Proceeds from disposal of property and equipment 75 1,061 140
Sale (purchase) of investments 8,971 (13,912) (12,310)
(Increase) reduction in other assets (486) 97 (440)
Net cash used for investing activities (4,853) (21,310) (18,859)
Cash flows from financing activities:
Repayments of long-term debt (10,000) (3,000) (7,000)
Repurchase of Common Stock (2,329) -- --
Proceeds of Common Stock offering, net of offering expenses -- -- 25,015
Proceeds from minority shareholder of joint venture 4,749 -- --
Issuance of Common Stock under option program(1) 438 1,059 1,533
Net cash (used for) provided by financing activities (7,142) (1,941) 19,548
Net increase (decrease) in cash and cash equivalents 8,823 (9,760) 6,720
Cash and cash equivalents:
Beginning of the year 13,601 23,361 16,641
End of the year $ 22,424 $ 13,601 $ 23,361
</TABLE>
(1) Including related tax benefit.
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LINE OF BUSINESS
Designs, Inc. (the "Company") is engaged in the retail sales of clothing and
accessories. Levi Strauss & Co. is the most significant vendor of the Company,
representing substantially all of the Company's vendor purchases.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31.
CASH AND CASH EQUIVALENTS
Short-term investments, which have a maturity of ninety days or less when
acquired, are considered cash equivalents. The carrying value approximates
fair value.
INVENTORIES
Merchandise inventories are valued at the lower of cost or market using the
retail method on the last-in first-out basis ("LIFO"). If inventories had been
valued on the first-in first-out basis ("FIFO"), inventories at January 28,
1995 and January 29, 1994 would be approximately $54,372,000 and $48,589,000,
respectively. The benefit (provision) for LIFO was $200,000 in 1995 and
$(500,000) in 1994.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major additions and improvements
are capitalized, while repairs and maintenance are charged to expense as
incurred. Upon retirement or other disposition, the cost and related
depreciation of the assets are removed from the accounts and the resulting
gain or loss is reflected in income. Depreciation is computed on the
straight-line method over the estimated useful lives as follows:
<TABLE>
<CAPTION>
<S> <C>
Motor vehicles Five years
Store furnishings Five to ten years
Equipment Five to eight years
Leasehold Lesser of useful lives or
improvements related lease life
Software development Five years
</TABLE>
INVESTMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", in fiscal 1995. This statement requires that, except for
securities classified as "held to maturity," investments in debt and equity
securities be reported at fair value. Changes in unrealized gains and losses
for securities classified as "available for sale" are recorded as a separate
component of stockholders' equity, net of applicable taxes. In accordance with
the statement, prior period financial statements have not been restated to
reflect the change in accounting principle. The impact of the adoption of this
statement was a decrease in stockholders' equity of $493,000 (net of $311,000
in deferred income taxes) which reflects the net unrealized loss on securities
that were previously valued at amortized cost.
PRE-OPENING COSTS
Store opening costs, consisting primarily of payroll, are capitalized when
incurred and charged to expense during the first 12 months of store
operations.
DEBT ISSUANCE COSTS
Debt issuance costs associated with the placement
of the $20.0 million debt described in Note D were capitalized and amortized
until June 1994 when the debt was retired.
MINORITY INTEREST
As more fully discussed in Note K, minority interest at January 28, 1995
represents LDJV Inc.'s 30% interest in a joint venture with Designs JV Corp.,
a wholly-owned subsidiary of the Company. LDJV Inc. is a wholly-owned
subsidiary of Levi's Only Stores, Inc. which is a wholly-owned subsidiary of
Levi Strauss & Co.
BANK CHARGES
Bank charges related to credit card sales are recorded as selling expenses.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
STOCK SPLITS
Retroactive effect is given to the Company's payments on June 22, 1993 and
June 1, 1992 of 3-for-2 stock splits effected in the form of a 50% stock
dividend on its Common Stock to its stockholders of record on June 8, 1993 and
April 21, 1992, respectively. All share and per share data have been restated
to reflect these stock splits.
NET INCOME PER SHARE
Net income per share of Common Stock is based upon the weighted average number
of common, and when greater than 3% dilutive, common equivalent shares
outstanding during the period. Common equivalent shares result from the
assumed exercise of dilutive stock options.
During the third quarter of fiscal 1995, the Company's Board of Directors
authorized the repurchase of up to two million shares of the Company's Common
Stock. At January 28, 1995, the Company had repurchased and retired 300,000
shares at a cost of $2,329,000. The retirement of shares has been accounted
for as a reduction in Common Stock and additional paid-in capital.
In November, 1992, the Company sold 1,725,000 shares of its Common Stock. Had
the sale taken place
<PAGE>
at the beginning of fiscal year 1993, primary and fully diluted net income per
share would have been $0.86 and $0.85, respectively.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts, transactions and profits are
eliminated. Certain prior year amounts have been reclassified to conform with
current year presentation.
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
January 28, January 29,
1995 1994
(In thousands)
<S> <C> <C>
Motor vehicles $ 79 $ 226
Store furnishings 16,273 13,691
Equipment 6,503 5,361
Leasehold improvements 25,513 25,228
Purchased software 1,054 905
Construction in progress 34 143
49,456 45,554
Less accumulated depreciation 22,953 22,632
Total property and equipment $26,503 $22,922
</TABLE>
C. INVESTMENTS
At January 28, 1995, the Company's investment securities were classified as
available-for-sale and reported at fair value, including net unrealized losses
of $804,000. At January 29, 1994, the investment securities were carried at
amortized cost.
Investments were as follows (in thousands):
<TABLE>
<CAPTION>
January 28, January 29,
1995 1994
Cost Fair Value Cost Fair Value
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government $ 8,937 $ 8,418 $ 8,449 $ 8,506
Municipal bonds 1,659 1,613 1,692 1,725
Mortgage-backed
securities 6,039 5,800 15,936 15,582
$16,635 $15,831 $26,077 $25,813
</TABLE>
The Company's investment portfolio matures as follows:
<TABLE>
<CAPTION>
<S> <C>
1-5 years $14,174
5-10 years 1,657
$15,831
</TABLE>
The Company had realized losses on the sale of certain long term investment of
$464,000 and $145,000 in fiscal 1995 and 1994, respectively.
D. DEBT OBLIGATIONS
On June 15, 1989, the Company borrowed $20.0 million under a Note Purchase
Agreement at a fixed interest rate of 11.91%. At January 29, 1994, the balance
under this Note Purchase Agreement was $10.0 million, of which the current
portion was $4.0 million. During the first quarter of fiscal 1995, the Company
prepaid $6.0 million in principal on the 11.91% Senior Notes, which resulted
in a prepayment penalty and writedown of debt issuance costs of approximately
$350,000. The remaining balance under the Note Purchase Agreement of $4.0
million was paid on June 1, 1994. There were no long-term debt obligations
outstanding at January 28, 1995.
The Company entered into a revolving credit agreement on November 17, 1994
under which BayBank Boston, N.A. and State Street Bank and Trust Company
provided the Company with a revolving line of credit of up to $20.0 million.
Under the credit agreement, the line of credit terminates on May 31, 1997 and
bears interest at BayBank Boston, N.A.'s prime rate or LIBOR-based fixed
rates. The terms of the credit agreement require the Company to maintain
specific net worth, inventory turnover and cash flow ratios. Under the
revolving credit agreement, the Company has agreed not to pay dividends on its
Common Stock if such payment would cause the Company to be in default of
certain financial ratios. The Company did not pay any dividends in fiscal
years 1995 and 1994. In addition, the Company will pay a quarterly commitment
fee of 0.4% per annum on the average daily unused balance and an annual agent
fee of $15,000. At January 28, 1995, there were no outstanding borrowings
under this facility.
The Company paid interest of $799,000, $1,549,999 and $3,101,000 for the
fiscal years 1995, 1994 and 1993, respectively. Fiscal years 1995 and 1993
amounts include prepayment penalties of $285,000 and $670,000, respectively.
E. INCOME TAXES
In the first quarter of fiscal 1994, the Company adopted SFAS No. 109
"Accounting for Income Taxes". In connection with such adoption, the Company
recorded an income tax benefit of $79,000 or $0.01 per share. This amount has
been reflected in the consolidated statement of income for the year ended
January 29, 1994 as the cumulative effect of an accounting change.
<PAGE>
The components of the net deferred tax asset as of January 28, 1995 and
January 29, 1994 are as follows:
<TABLE>
<CAPTION>
January 28, January 29,
1995 1994
(In thousands)
<S> <C> <C>
Deferred tax assets--current:
Restructuring reserve $2,362 $6,017
Shrinkage reserve 136 330
Inventory capitalization and other 183 495
Subtotal 2,681 6,842
Deferred tax liabilities--current:
LIFO reserve 1,102 1,086
Net deferred tax asset - current $1,579 $5,756
Deferred tax asset--noncurrent:
Excess of book over
tax depreciation $1,460 $1,534
Unrealized loss on investment 311 --
Total deferred tax assets--
noncurrent $1,771 $1,534
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Years Ending
January 28, January 29, January 30,
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 5,561 $ 7,855 $ 8,183
State 1,783 2,303 2,451
7,344 10,158 10,634
Deferred:
Federal 3,382 (5,029) (1,846)
State 770 (1,291) (521)
4,152 (6,320) (2,367)
Total provision $11,496 $ 3,838 $ 8,267
</TABLE>
Deferred tax expense (benefits) included in the provision for income taxes
results from:
<TABLE>
<CAPTION>
Fiscal Years Ending
January 28, January 29, January 30,
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Restructuring charges $3,744 $(6,017) $ --
Excess of book over
tax depreciation 18 (592) (733)
LIFO reserve 15 (216) (638)
Shrinkage reserve -- 54 (138)
Pension expense -- 117 (337)
Installment sale 338 -- --
Inventory capitalization (22) 334 (521)
$4,152 $(6,320) $(2,367)
</TABLE>
The following is a reconciliation between the statutory and effective income
tax rates:
<TABLE>
<CAPTION>
Fiscal Years Ending
January 28, January 29, January 30,
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% 35.0% 34.0%
State income and other
taxes, net of federal tax
benefit 5.5 5.4 6.2
Effective tax rate 40.5% 40.4% 40.2%
</TABLE>
The Company paid income taxes of $8,579,000, $8,388,000 and $9,028,000 during
fiscal years 1995, 1994 and 1993, respectively. These figures represent the
net of payments and receipts.
F. COMMITMENTS AND CONTINGENCIES
At January 28, 1995, the Company was obligated under operating leases covering
store and office space, automobiles and certain equipment (with both
unaffiliated and related parties) for future minimum rentals as follows:
<TABLE>
<CAPTION>
Unaffiliated Related Parties Total
(In thousands)
<S> <C> <C> <C>
1996 $ 22,539 $ 470 $ 23,009
1997 20,222 78 20,300
1998 17,639 --- 17,639
1999 15,557 --- 15,557
2000 11,970 --- 11,970
Thereafter 30,059 --- 30,059
$117,986 $ 549 $118,535
</TABLE>
In addition to minimum rental payments, many of the store leases include
provisions for common area maintenance, mall charges, escalation clauses and
additional rents based on percentage of store sales above designated levels.
Amounts charged to operations, excluding the related party lease, were
$27,250,000, $25,920,000 and $21,788,000 in fiscal years 1995, 1994 and 1993,
respectively. Amounts charged to operations for the related party lease were
$498,000, $515,000 and $485,000 in fiscal years 1995, 1994 and 1993,
respectively. See Note H for additional information regarding the related
party lease. As more fully discussed in Note K, the Company remains
contingently liable on three leases which were assigned to Levi's Only Stores,
in connection with the sale of the Company's Original Levi's(R) Store located
in Minneapolis, Minnesota and the two Dockers(R) Shops located in Minneapolis,
Minnesota and Cambridge, Massachusetts. The store leases in Minneapolis and
Cambridge expire in January, 2003 and January, 2002, respectively.
<PAGE>
In connection with the Company's restructuring program, the Company has also
accrued approximately $800,000, which represents the Company's estimated
exposure, for legal and settlement costs for one remaining lease termination.
G. STOCK OPTIONS
The Company's Board of Directors and its stockholders previously approved the
1987 Incentive Stock Option Plan (the "Incentive Plan") pursuant to which
stock options to purchase up to 562,500 shares of Common Stock may be issued
to key employees (including executive officers and directors who are
employees). The Incentive Plan is administered by the Compensation Committee
of the Company's Board of Directors, which designates the optionees, number of
shares or each option grant, option prices (which may not be less than fair
value on the date of grant), date of grant, vesting schedule and period of
option (which may not be more than 10 years). All Incentive Plan options are
non-assignable. The Incentive Plan terminates when all shares issuable
thereunder have been issued. On March 23, 1989, the Board of Directors
authorized an increase in the number of shares issuable under the Incentive
Plan to 787,500. At the Special Meeting in Lieu of Annual Meeting held on June
13, 1989, the stockholders approved this increase and the amendment to the
Incentive Plan.
The Company's Board of Directors and its stockholders also previously approved
the 1987 Non-Qualified Stock Option Plan (the Non-Qualified Plan) pursuant to
which stock options to purchase up to 337,500 shares of Common Stock which are
not "incentive stock options" (as defined in Section 422 of the Internal
Revenue Code, as amended) may be issued to key employees (including executive
officers and directors of the Company) and directors who are not employees of
the Company. The Non-Qualified Plan is administered by the Compensation
Committee of the Company's Board of Directors, which designates the optionees,
number of shares for each option grant, option prices (which may not be less
than 85% of the fair market value on the date of grant), date of grant,
vesting schedule and period of option. All Non-Qualified Plan options are
non-assignable. The Non-Qualified Plan terminates when all shares issuable
have been issued. Outstanding options under both the Incentive Plan and the
Non-Qualified Plan expire no more than seven years after the date of grant.
On April 3, 1992, the Board of Directors adopted the 1992 Stock Incentive Plan
(the "1992 Plan"), which became effective on June 9, 1992 when it was approved
by the stockholders of the Company. Under the 1992 Plan, up to 1,350,000
shares of Common Stock may be issued pursuant to "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code, as amended), options
which are not "incentive stock options," conditioned stock awards,
unrestricted stock awards and performance share awards. The 1992 Plan is
administered by the Compensation Committee, all of the members of which are
non-employee directors. The Compensation Committee makes all determinations
with respect to amounts and conditions covering awards under the 1992 Plan.
Options have never been granted at any price less than fair value on the date
of the grant. Options granted to employees, executives and directors typically
vest over five, three and three years, respectively. Options granted under the
1992 Plan expire 10 years from the date of grant. The 1992 Plan terminates
when all shares issuable thereunder have been issued.
On April 26, 1994, the Board of Directors amended the 1992 Plan to increase
the number of shares issuable under the Plan to 1,850,000, to require that
non-qualified stock options granted under the Plan have an exercise price of
not less than 100% of fair market value on the date of grant and to limit the
number of shares of Common Stock covered by stock options granted during any
fiscal year to any individual participant to 75,000 shares. The stockholders
approved this increase and these amendments at the Annual Meeting held on June
14, 1994.
A summary of shares subject to the option plans described above is as follows:
1987 INCENTIVE STOCK OPTION PLAN
<TABLE>
<CAPTION>
Fiscal Year 1995 1994 1993
<S> <C> <C> <C>
Outstanding at beginning of year 241,365 302,498 472,256
Options granted -- -- 29,250
Options canceled 14,720 2,986 12,891
Options exercised 66,084 58,147 186,117
Outstanding at end of year 160,561 241,365 302,498
Options exercisable at end of
year 129,273 167,311 132,627
Common shares reserved for
future grants at end of year 19,935 5,215 1,122
Option prices per common share:
Granted during the year -- -- $ 11.17
$ 2.00 $ 2.00 $ 1.62
to to to
Canceled during the year $ 11.17 $ 2.67 $ 2.78
$ 1.62 $ 1.62 $ 1.62
to to to
Exercised during the year $ 11.17 $ 11.17 $ 2.78
$ 1.62 $ 1.62 $ 1.62
to to to
Outstanding at end of year $ 11.17 $ 11.17 $ 11.17
</TABLE>
<PAGE>
1987 NON-QUALIFIED STOCK OPTION PLAN
<TABLE>
<CAPTION>
Fiscal Year 1995 1994 1993
<S> <C> <C> <C>
Outstanding at beginning of year 99,448 198,583 176,193
Options granted -- --- 95,535
Options canceled -- 63,690 --
Options exercised 22,500 35,445 73,145
Outstanding at end of year 76,948 99,448 198,583
Options exercisable at end of
year 66,148 77,848 22,050
Common shares reserved for
future grants at end of year -- 63,692 --
Option prices per common share:
Granted during the year -- --- $ 11.17
Canceled during the year -- $ 11.17 --
Exercised during the year $ 2.34 $ 2.78 $ 2.34
to to
$ 11.17 $ 2.78
Outstanding at end of year $ 2.34 $ 2.34 $ 2.34
to to to
$ 2.67 $ 2.67 $ 11.17
</TABLE>
1992 STOCK INCENTIVE PLAN
<TABLE>
<CAPTION>
Fiscal Year 1995 1994 1993
<S> <C> <C> <C>
Outstanding at beginning of year 1,091,150 710,715 ---
Options granted 406,000 410,000 725,715
Options canceled 191,600 20,765 15,000
Options exercised 6,600 8,800 ---
Outstanding at end of year 1,298,950 1,091,150 710,715
Options exercisable at end of
year 445,966 188,880 ---
Common shares reserved for
future grants at end of year 535,650 250,050 639,285
Option prices per common share:
Granted during the year $ 9.00 $ 17.50 $ 11.17
to to to
$ 17.50 $ 21.50 $ 18.34
$ 9.00
to
Canceled during the year $ 18.34 $ 11.17 $ 11.17
Exercised during the year $ 11.17 $ 11.17 ---
$ 9.00 $ 11.17 $ 11.17
to to to
Outstanding at end of year $ 21.50 $ 21.50 $ 18.34
</TABLE>
On July 26, 1993 stock options covering an aggregate of 67,500 shares of
Common Stock were granted outside of the Incentive Plan, the Non-Qualified
Plan and the 1992 Plan to the non-employee directors of the Company. Each of
these options has an exercise price of $17.50 per share and each remained
outstanding as of the end of fiscal 1994. These options become exercisable in
three equal installments commencing 12 months following the date of grant and
have a 10 year term.
When shares are sold within one year of exercise or within two years from date
of grant, the Company derives a tax deduction measured by the excess of the
market value over the option price at the date the shares are sold, which
approximated $511,000, $1,200,000 and $910,000 in fiscal years 1995, 1994 and
1993, respectively.
H. RELATED PARTIES
The Company leases its headquarters in Chestnut Hill, Massachusetts, from
Durban Trust, a nominee trust of which the sole beneficiary is a partnership
affiliated with Stanley Berger, the Chairman of the Board and Calvin Margolis,
a former director of the Company. The general partner of the beneficiary is a
corporation controlled by Mr. Berger and the estate of Mr. Margolis, and the
only limited partners of the beneficiary are Mr. Berger and the estate of Mr.
Margolis, individually. Total rent paid to Durban Trust in fiscal 1995, 1994
and 1993 was approximately $491,000, $515,000 and $485,000, respectively. See
Note F.
James G. Groninger, a Director of the Company, was a Managing Director of
PaineWebber Incorporated until December 31, 1994. During fiscal year 1995, the
Company paid nominal fees to PaineWebber related to the Company's stock
repurchase program which is discussed further in Note A. In addition, the
Company also paid fees to PaineWebber in fiscal year 1993 of $1,346,000 in
connection with the Company's Common Stock offering. The Company believes that
the investment banking services provided by PaineWebber Incorporated were
provided on terms at least as favorable to the Company as it would have
expected to receive from an investment bank unrelated to the Company or Mr.
Groninger.
Bernard M. Manuel, a Director of the Company, is the Chairman of the Board of
Cygne Designs, Inc. During fiscal year 1995, Cygne Designs, Inc. provided
sourcing for the Company's private label products in its Desgins stores. The
Company paid $121,000 for merchandise purchased from Fenn Wright & Manson,
Inc. a subsidiary of Cygne Designs, Inc. for fiscal year 1995.
I. EMPLOYEE BENEFIT PLANS
On April 3, 1992, the Board of Directors of the Company voted to terminate the
Company's non-contributory defined benefit pension plan which covered all
employees. The termination was effective September 1, 1992, and all
participants in the plan became fully vested at that time. Total plan assets
of approximately $1.6 million were distributed to participants in fiscal 1994.
The Company recognized pension expense of $750,000 in fiscal year 1993 related
to the plan termination.
<PAGE>
In fiscal 1993, the Company replaced the terminated plan described above with
a defined contribution 401(k) plan which covers all employees who have
completed one year of service. Under this plan, the Company may provide
matching contributions up to a stipulated percentage of employee
contributions. The plan is fully funded by the Company and the matching
contribution, if any, is established each year by the Board of Directors. For
fiscal 1995, the matching contribution by the Company was set at 50% of
contributions by eligible employees up to a maximum of 6% of salary. The
Company recognized $205,000 and $118,000 of expense under this plan in fiscal
1995 and 1994, respectively. No expense was recognized under this plan in
fiscal 1993.
J. RESTRUCTURING
During the fourth quarter of fiscal 1994, the Company recorded a non-recurring
pre-tax charge of $15.0 million to cover the expected costs associated with
the closing of up to 10 of its poorest performing Designs stores. This amount
is reflected in the consolidated statement of income for the fiscal year 1994
as a restructuring charge. In connection with the Company's ongoing review of
Designs store performance, in November the Company decided to close up to five
more of the poorest performing Designs stores during the remainder of fiscal
year 1995. The earnings and cash flow benefit derived from the restructuring
for fiscal 1995 are $1.6 million and $1.4 million, respectively. The expected
earnings and cash flow benefit for fiscal 1996 are $2.7 million and $2.0
million, respectively.
The costs to close these 15 stores totaled $11.8 million, comprised of $8.3
million estimated cash and $3.5 million of noncash costs. Included in the $8.3
million of cash costs is $4.1 million of estimated future payments to
landlords. These total anticipated costs of $11.8 million to close the 15
stores are less than the original pre-tax $15.0 million estimate, primarily
due to favorable negotiations with various landlords. As a result, the
remaining $3.2 million reserve balance was recognized as pre-tax income in the
fourth quarter of fiscal 1995.
The estimated future payments of $4.1 million represented the Company's future
obligations under the respective lease agreements. As discussed in Note L, the
Company subsequently settled with these various landlords.
K. FORMATION OF JOINT VENTURE
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the
Company, entered into a joint venture agreement with LDJV Inc. to sell
Levi's(R) brand products and jeans-related products. The new partnership is
known as The Designs/OLS Partnership (the "Partnership") and became effective
January 28, 1995. The Company plans that the Partnership will open and operate
up to 35 to 50 Original Levi's(R) Stores and Levi's(R) Outlet stores
throughout 11 Northeast states and the District of Columbia over the next
three to five years. This includes the eight Original Levi's(R) Stores open at
the end of fiscal 1995. The Levi's(R) Outlet stores will sell only Levi's(R)
brand products and service the close-out products of the Original Levi's(R)
Stores included in the joint venture.
In connection with the formation of the Partnership, Designs JV Corp.
contributed eight of the Company's existing Original Levi's(R) Stores, valued
at $11.1 million, and three leases for unopened stores in New York City,
Nanuet, New York, and White Plains, New York in exchange for a 70% interest in
the Partnership. At the same time, LDJV Inc. contributed approximately $4.7
million in cash in exchange for a 30% interest in the Partnership. In
addition, Levi's Only Stores, Inc. paid the Company $875,000, which is
included in accounts receivable at January 28, 1995, for services,
contributions and risks taken by the Company in establishing the transferred
Original Levi's(R) Stores and in the development of the Original Levi's(R)
Store concept in the United States. A substantial portion of this amount
offset previously recognized costs which were incurred by the Company during
fiscal year 1995.
The Partnership has a management committee comprised of six individuals, two
appointed by Levi Strauss & Co. and four appointed by the Company. The
committee has the overall responsibility for management and control of the
business and affairs of the Partnership. The term of the Partnership is 10
years, however, the partnership agreement contains certain exit rights that
enable either partner to buy or sell its interest in the Partnership or
particular stores of the Partnership after five years. The partnership
agreement provides for certain cash distributions, but otherwise allocates and
distributes income in proportion to the partners' percentage ownership.
It is the intention of the partners that the Partnership's working capital and
funds for its future expansion will come from the Partnership's operations and
borrowings from third parties. However, the partners may also decide that they
or their affiliates should contribute or loan additional funds to the
Partnership or guaranty third-party debt. Neither partner will be required to
make any further contribution to the capital of the Partnership, any loan to
the Partnership or any such guaranty unless both partners agree. Excess cash
(as
<PAGE>
defined in the partnership agreement) will be distributed by the Partnership
once per year. No assurance can be given that the Company will not be required
to make such capital contributions, loans or guaranties or that cash will be
distributed to the Company by the Partnership.
For financial reporting purposes, the Partnership's assets, liabilities and
results of operations are consolidated with those of the Company and LDJV
Inc.'s 30% interest in the Partnership is included in the Company's financial
statements as minority interest.
In a related but separate transaction, the Original Levi's(R) Store located in
Minneapolis, Minnesota, was sold to Levi's Only Stores, Inc., as were two
Dockers(R) Shops located in Minneapolis, Minnesota and Cambridge,
Massachusetts. The Company received $2.2 million for the sale of these three
stores, which is included in accounts receivable at January 28, 1995. The gain
relating to the sale of these stores reduced selling, general and
administrative expense by approximately $1.0 million in fiscal year 1995.
L. SUBSEQUENT EVENTS (UNAUDITED)
On April 26, 1995, the Company announced the signing of a purchase and sale
agreement to acquire, subject to the satisfaction of certain conditions and
barring unforeseen circumstances, certain assets of Boston Trading Ltd., Inc.
The assets to be acquired include the Boston Traders(R) brands and all
inventory, fixed assets and leasehold improvements associated with 33 existing
Boston Traders(R) Outlet stores. The Company is expected to pay up to $6.0
million for the assets being acquired, subject to adjustment.
Also in March 1995, the Company favorably negotiated termination of certain
leases for closed stores which were part of the Company's restructuring
program. At January 28, 1995, the Company had accrued an estimate of $4.1
million for future obligations under these respective leases. Based on
subsequent negotiations, the Company paid the respective landlords $1.9
million. The excess accrual of $2.2 million was recognized by the Company as
pre-tax income in the first quarter of fiscal 1996.
M. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Full Year
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Fiscal Year 1995
Net sales $48,960 $56,390 $80,755 $79,805 $265,910
Gross profit 13,209 17,394 27,016 26,507 84,126
Restructuring charges (3,200) (3,200)
Net income 100 1,623 6,661 8,519 16,903
Net income per common and common equivalent share $ 0.01 $ 0.10 $ 0.42 $ 0.54 $ 1.06
Fiscal Year 1994
Net sales $43,944 $51,337 $73,525 $72,119 $240,925
Gross profit 12,113 15,148 24,658 23,302 75,221
Restructuring charges -- -- -- 15,000 15,000
Income before effect of change in accounting 552 1,932 6,768 (3,583) 5,669
Cumulative effect of change in accounting 79 -- -- -- 79
Net income (loss) 631 1,932 6,768 (3,583) 5,748
Income (loss) before cumulative effect of change in
accounting per common and common equivalent share $ 0.03 $ 0.12 $ 0.42 $ (0.22) $ 0.36
Net income (loss) per common and common equivalent
share $ 0.04 $ 0.12 $ 0.42 $ (0.22) $ 0.36
</TABLE>
Historically, the Company has experienced seasonal fluctuations in net sales,
gross profit and net income, with increases typically occurring during the
Company's third and fourth quarters as a result of "Back to School" and
"Holiday" seasons.
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The integrity and objectivity of the financial statements and related
financial information in this report are the responsibility of the management
of the Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, where necessary, the
best estimates and judgments of management.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance, at appropriate cost, that assets are
safeguarded, transactions are executed in accordance with management's
authorization and the accounting records provide a reliable basis for the
preparation of the financial statements. The system of internal accounting
control is regularly reviewed by management and improved and modified as
necessary in response to changing business conditions.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with management and the Company's independent
accountants to review matters relating to the Company's financial reporting,
the adequacy of internal accounting control and the scope and results of audit
work. The independent accountants have free access to the Committee.
Coopers & Lybrand L.L.P., independent accountants, have been engaged to
examine the financial statements of the Company. The Report of Independent
Accountants expresses an opinion as to the fair presentation of the financial
statements in accordance with generally accepted accounting principles and is
based on an audit conducted in accordance with generally accepted auditing
standards.
/s/ Joel H. Reichman
Joel H. Reichman
President and Chief Executive Officer
/s/ Stanley I. Berger
Stanley I. Berger
Chairman of the Board of Directors
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Designs, Inc.:
We have audited the accompanying consolidated balance sheets of Designs, Inc.
as of January 28, 1995 and January 29, 1994, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the three years in the period ended January 28, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Designs, Inc. as
of January 28, 1995 and January 29, 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 28, 1995, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 24, 1995
<PAGE>
CORPORATE INFORMATION
BOARD OF
DIRECTORS
STANLEY I. BERGER
Chairman of the Board of Directors
JAMES G. GRONINGER
President, The BaySouth Company
BERNARD M. MANUEL
Chairman of the Board, Cygne Designs, Inc.
JOEL H. REICHMAN
President and Chief Executive Officer
MELVIN SHAPIRO
Partner, Tofias, Fleishman & Shapiro & Co., P.C.
PETER L. THIGPEN
Partner, Executive Reserves
EXECUTIVE OFFICERS
JOEL H. REICHMAN
President and Chief Executive Officer
WILLIAM D. RICHINS
Chief Financial Officer
SCOTT N. SEMEL
Senior Vice President, Secretary and General Counsel
CORPORATE OFFICERS
MARY ANN CHENELL
Vice President, Human Resources
CAROLYN R. FAULKNER
Vice President, Controller
MARTIN GOLDSTEIN
Vice President, Construction and Design
ALAN B. GRUBER
Vice President, Ethics and Corporate Compliance
MARC G. LEVY
Vice President, Merchandising
RODERICK M. WILLS
Vice President, Marketing and Planning
OPERATIONAL DIRECTORS
THERESA NEHMER BAYBUTT
Training
JOE CIACCIO
Purchasing, Risk and Office Services
JAMES J. CULHANE
Assistant Controller
DANA E. GIANNOTTI
Loss Prevention
LYNN M. HARRISON
Investor Relations
ANTHONY E. HUBBARD
Legal
BARBARA S. KATES
Visual Merchandising
ELISABETH A. LIPTON
Legal
MARIA T. MCLEOD
Corporate Technology and Systems
DANIEL O. PAULUS
General Manager of The Designs/OLS Partnership
BARBARA A. ST. PIERRE
Lease Administration
MARK E. RUBIN
Real Estate
SHELLY E. WOODY
Financial Reporting
STORE OPERATIONS
NORTHEAST REGION
GEORGE F. CAVEDON
Regional Vice President
District Managers
DAVID R. CIULLO
LISA B. RICHMOND
MICHAEL SMITH
ROBERT W. WYRICK
JOHN D. KAMINSKY
MIDWEST REGION
JAN FALCIONE
Regional Manager
District Managers
BRIAN J. ROETHLE
JOE LEITHEIM
KARIN SCHUMACHER
SCOTT CORRIGAN
MARTIN J. DOODY
MIDATLANTIC REGION
BRIAN J. SEQUIN
Regional Vice President
District Managers
BYRON (ED) BRIDE
WADE E. CEPULIS
Senior Store Manager
CAROL E. GREEN
SOUTH REGION
JAMES F. DUVAL
Regional Vice President
District Managers
BILL KIRSCHMANN
MICHAEL E. SMOLLER
JEANINE ROBERTSON
DAN PRICE
THE DESIGNS/OLS PARTNERSHIP
District Managers
SUSAN SHEPERD
DUNCAN EASTWOOD
CORPORATE SUBSIDIARIES
DESIGNS JV CORP.
DESIGNS SECURITIES CORPORATION
<PAGE>
CORPORATE OFFICES
1244 Boylston Street
Chestnut Hill, MA 02167
(617) 739-6722
STOCK LISTING
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on the NASDAQ National Market System under the symbol "DESI".
COMMON STOCK PRICES
The following table sets forth, for the periods indicated, the high and low per
share sales prices of the Common Stock, as reported on the NASDAQ consolidated
reporrting system. All data presented has been adjusted to give retroactive
effect to a 50 percent stock dividend paid on June 22, 1993.
Fiscal Year Ending High Low
January 28, 1995
First Quarter 17-1/2 12-3/4
Second Quarter 15-1/4 8-1/2
Third Quarter 10 6-5/8
Fourth Quarter 9-3/4 6-3/4
January 29, 1994
First Quarter 22 15-5/8
Second Quarter 25-1/4 16
Third Quarter 21-1/4 13
Fourth Quarter 18 12-1/4
As of March 31, 1995, based upon data provided by independent shareholder
communication services and the transfer agent for the Common Stock, there were
approximately 640 holders of record of Common Stock and 11,200 beneficial
holders of Common Stock.
DIVIDEND POLICY
The company currently pays no cash dividends on its Common Stock. See Note D of
Notes to Consolidated Financial Statements.
ANNUAL MEETING
The 1995 Annual Meeting of Stockholders of Designs, Inc. will be held on June
13, 1995 at 8:00 a.m. at the Hyatt Regency Cambridge, 575 Memorial Drive,
Cambridge, Massachusetts.
FINANCIAL INFORMATION
Requests for financial information should be directed to the Investor Relations
Department at the company's headquarters: Designs, Inc., 1244 Boylston Street,
Chestnut Hill, MA 02167 (617) 739-6722. A copy of the company's Annual Report on
Form 10-K for the fiscal year ended January 28, 1995, filed with the Securities
and Exchange Commission, may be obtained without charge upon request to the
Investor Relations Department.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., Boston, Massachusetts
TRANSFER AGENT AND REGISTRAR
Inquiries regarding transfer requirements, address changes and lost certificates
should be directed to:
The First National Bank of Boston
Shareholder Services Department
Investor Relations Unit 45-02-09
P.O. Box 644
Boston, MA 02102-0644
(617) 575-2900
Levi's(R) and Dockers(R) are registered trademarks of Levi Strauss & Co.
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(logo) DESIGNS
DESIGNS STORES
ORIGINAL LEVI'S(R) STORES
LEVI'S(R) OUTLET STORES
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STORE LOCATIONS
DESIGNS STORES
Birmingham AL
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ORIGINAL LEVI'S(R) STORES
Washington DC
Boston (2) MA
Cambridge MA
Natick MA
Peabody MA
New York City (2) NY
LEVI'S(R) OUTLET STORES
Boaz AL
Foley AL
Ellenton FL
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Byron GA
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Flemington NJ
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Aurora OH
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Grove City PA
Lancaster PA
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Hilton Head SC
North Charleston SC
Spartanburg SC
Nashville TN
Pigeon Forge TN
Williamsburg VA
Potomac Mills VA
Oshkosh WI
Martinsburg WV
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DESIGNS INC (logo)
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