SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended October 30, 1999 Commission File Number 0-15898
DESIGNS, INC.
(Exact name of registrant as
specified in its charter)
Delaware 04-2623104
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
66 B Street, Needham, MA 02494
(Address of principal executive offices) (Zip Code)
(781) 444-7222
(Registrant's telephone
number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of October 30, 1999
----- ----------------------------------
Common 16,013,000
<PAGE>
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
Ocotber 30, 1999, October 31, 1998 and January 30, 1999
(In thousands, except per share data)
October 30, October 31, January 30,
1999 1998 1999
ASSETS (Unaudited) (Unaudited)
---------- ---------- --------
Current assets:
Cash and cash equivalents $ - $ 1,490 $ 153
Short-term restricted investment 2,316 - -
Accounts receivable 163 3,282 178
Inventories 63,622 58,938 57,925
Deferred income taxes 272 10,196 272
Prepaid expenses 1,081 1,422 911
---------- ---------- --------
Total current assets 67,454 75,328 59,439
Property and equipment, net of
accumulated depreciation and
amortization 17,688 19,897 17,788
Other assets:
Deferred income taxes 18,951 6,362 18,570
Intangible assets, net 2,435 2,707 2,628
Other assets 795 1,201 892
---------- ---------- --------
Total assets $ 107,323 $ 105,495 $ 99,317
========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,613 $ 11,610 $ 8,716
Accrued expenses and other
current liabilities 8,500 5,879 6,433
Accrued rent 2,313 2,005 2,015
Income tax payable 1,507 - -
Reserve for severance and
store closings 1,222 7,111 4,372
Notes payable 17,147 11,340 13,825
---------- ---------- --------
Total current liabilities 41,302 37,945 35,361
Stockholders' equity:
Preferred Stock, $0.01 par value,
1,000,000 shares authorized,
none issued
Common Stock, $0.01 par value,
50,000,000 shares authorized,
16,665,000, 16,160,000, and 16,178,000
shares issued at October 30, 1999,
October 31, 1998 and January 30, 1999,
respectively 167 161 162
Additional paid-in capital 54,538 53,867 53,908
Retained earnings 13,146 15,503 11,854
Treasury stock at cost, 286,650 shares
at October 30, 1999 and January 30,
1999 and 281,000 shares at
October 31, 1998 (1,830) (1,827) (1,830)
Deferred compensation - (154) (138)
---------- ---------- --------
Total stockholders' equity 66,021 67,550 63,956
---------- ---------- --------
Total liabilities and stockholders' equity $ 107,323 $ 105,495 $ 99,317
========= ========== ========
The accompanying notes are an intergral part
of the consolidated financial statements.
<PAGE>
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
-----------------------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ------------ ----------- ----------
Sales $ 56,703 $ 58,714 $ 139,445 $ 149,193
Cost of goods sold including
occupancy 38,260 45,247 99,397 117,013
--------- ---------- ---------- ---------
Gross profit 18,443 13,467 40,048 32,180
Expenses:
Selling, general and
administrative 11,868 12,699 31,980 36,420
Store closing charge - 13,407 - 13,407
Depreciation and amortization 1,588 2,632 4,875 7,859
--------- ---------- ---------- ---------
Total expenses 13,456 28,738 36,855 57,686
--------- ---------- ---------- ---------
Operating income (loss) 4,987 (15,271) 3,193 (25,506)
Interest expense, net 390 132 868 399
--------- ---------- ---------- --------
Income (loss) before minority
interest and income taxes 4,597 (15,403) 2,325 (25,905)
Less minority interest - (1,278) - (1,692)
--------- ---------- ---------- --------
Income (loss) before income taxes 4,597 (14,125) 2,325 (24,213)
Provision (benefit) for income taxes 1,905 (5,379) 1,031 (9,321)
--------- ---------- ---------- --------
Net income (loss) $ 2,692 $(8,746) $ 1,294 $(14,892)
======== ========== ========= ========
Earnings (loss) per share- Basic $ 0.17 $ (0.55) $ 0.08 $ (0.94)
Earnings (loss) per share- Diluted $ 0.17 $ (0.55) $ 0.08 $ (0.94)
Weighted average number of common
shares outstanding- Basic 16,018 15,867 15,997 15,789
Weighted average number of common
shares outstanding- Diluted 16,100 15,867 16,114 15,789
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
October 30, October 31,
1999 1998
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,294 $ (14,892)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 4,875 7,859
Minority interest - (1,701)
Loss from disposal of property
and equipment - 986
Changes in operating assets and liabilities:
Accounts receivable 15 (651)
Inventories (5,697) (918)
Prepaid expenses (170) (407)
Other assets (61) (1,052)
Reserve for severance and store closings 1,126 3,661
Accounts payable 1,896 2,789
Accrued expenses and other current liabilities 2,070 (249)
Accrued rent 298 1,176
----------- --------
Net cash provided by operating activities 2,496 8,467
----------- --------
Cash flows from investing activities:
Additions to property and equipment (4,496) (388)
Payment for acquisition of outlet stores - (9,737)
Establishment of investment trust (see note 8) (2,316) -
Proceeds from disposal of property and equipment 73 102
------------ ---------
Net cash used for investing activities (6,739) (10,023)
------------ ---------
Cash flows from financing activities:
Net borrowings under credit facility 3,322 1,512
Issuance of common stock 768 61
------------ ---------
Net cash provided by financing activities 4,090 1,573
------------ ---------
Net increase (decrease) in cash and cash equivalents (153) 17
Cash and cash equivalents:
Beginning of the period 153 1,473
------------ ---------
End of the period $ - $ 1,490
============ =========
The accompanying notes are an intergral part
of the consolidated financial statements.
<PAGE>
DESIGNS, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary for a fair
presentation of the interim financial statements. These financial statements do
not include all disclosures associated with annual financial statements and,
accordingly, should be read in conjunction with the notes to the Company's
audited consolidated financial statements for the year ended January 30, 1999
(filed on Form 10-K, as amended, with the Securities and Exchange Commission).
The information reflects all adjustments that, in the opinion of management, are
necessary to present fairly the Company's results of operations, financial
position and cash flows for the periods indicated. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The Company's business historically has
been seasonal in nature and the results of the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
The information set forth in the accompanying financial statements is subject
to normal year-end adjustments and to an expected fourth quarter charge related
to the Company's preliminary decision to seek to sell or close 10 additional
stores. On November 24, 1999, the Company announced that it had reached a
preliminary decision to seek to sell or close its five Buffalo Jeans Factory
Stores and its five remaining Designs stores by the end of fiscal 1999. At the
end of the third quarter of fiscal 1999, the amount of this charge had not yet
been determined. Further, the Company previously announced that it had engaged
the independent accounting and consulting firm of Deloitte & Touche LLP to
review the Company's operations in order to seek to improve operating
efficiencies and reduce overhead. Based on information presented to the
Company's Board of Directors, the Board is reviewing all operations and assets
and may make decisions or dispositions with respect to the Company's operations
and assets that could result in an additional charge for the fourth quarter of
fiscal 1999. There are no assurances that the Board of Directors will make any
such determinations or asset dispositions.
2. Minority Interest
In 1995 Designs JV Corp., a wholly-owned subsidiary of the Company ("Designs JV
Subsidiary"), and LDJV Inc., a subsidiary of Levi's Only Stores, Inc. ("LOS"),
which is a wholly-owned subsidiary of Levi Strauss & Co., entered into a
partnership agreement (the "Partnership Agreement"). The joint venture
established under the Partnership Agreement was known as The Designs/OLS
Partnership (the "OLS Partnership"). The purpose of the OLS Partnership was to
sell Levi's(R) brand jeans and jeans-related products in Original Levi's
Stores(TM) and Levi's(R) Outlet stores in a specified territory.
In October 1998, the Company reached an agreement with LOS to dissolve and wind
up the OLS Partnership. Pursuant to this agreement, the OLS Partnership
distributed to Designs JV Subsidiary 11 Levi's(R) Outlet stores, with a net book
value of approximately $6.3 million. In addition, the OLS Partnership
distributed three Original Levi's Stores(TM) to LDJV Inc. The net book value of
these three Original Levi's Stores(TM) was approximately $5.5 million, which was
greater than LDJV Inc.'s equity interest in the OLS Partnership. Consequently,
LDJV Inc. made a $2.9 million capital contribution of cash to the OLS
Partnership at October 31, 1998.
Additionally, in connection with the plan to dissolve and wind up the OLS
Partnership, the OLS Partnership recorded a pre-tax charge of $4.5 million
during the third quarter of fiscal 1998, related to the closing of the eight
Original Levi's Stores(TM) that it did not distribute. This $4.5 million charge
was included in the total $13.4 million charge recorded by the Company discussed
in Note 3 below. The total estimated cost to close these stores was $1.3 million
less than the original charge, primarily due to favorable lease termination
payments. This $1.3 million was part of the total $2.9 million that the Company
recognized as restructuring income in the fourth quarter of fiscal 1998. All
eight of these stores were closed by the end of fiscal 1998.
The operating results of the OLS Partnership are consolidated with the financial
statements of the Company for the three and nine months ended October 31, 1998.
Minority interest at October 31, 1998 represents LDJV Inc.'s 30% interest in the
OLS Partnership.
3. Charge for Store Closings
During the third quarter of fiscal 1998, the Company announced its plans to
close 22 unprofitable Designs and Boston Trading Co.(R)/BTC(TM) stores through
lease terminations and expirations. This store closing strategy and the
dissolution of the OLS Partnership discussed in Note 2 above resulted in the
Company recording a pre-tax charge of $13.4 million, or $0.47 per share after
tax. The total revised estimated cost to close these stores is $10.5 million,
which is $2.9 million less than the original charge, primarily due to favorable
landlord negotiations on lease termination payments. As a result, the Company
recognized pre-tax income of $2.9 million in the fourth quarter of fiscal 1998.
Total estimated cash costs are expected to be $4.2 million related to lease
terminations, employee severance and other related expenses. The remainder of
the $10.5 million charge consists of non-cash costs of approximately $6.3
million in store fixed asset write-offs. All of these stores were closed by the
end of fiscal 1998. At October 30, 1999, the remaining reserve balance related
to these store closings is $169,000 which primarily relates to landlord
settlements that the Company anticipates will be paid in fiscal 1999.
During the fourth quarter of fiscal 1998, the Company recorded additional store
closing and severance reserves of $5.2 million, or $0.20 per share after tax,
related to the decision to close three BTC(TM) stores, one Designs store, and
four Boston Traders(R) Outlet stores and to further reduce corporate headcount.
This pre-tax charge included cash costs of approximately $2.9 million related to
lease terminations and corporate severance, and $2.3 million of non-cash costs
related to store fixed asset write-offs and markdowns. At October 30, 1999, the
remaining reserve balance related to these store closings is $1.9 million, which
primarily relates to landlord settlements and reserves for the write-off of
fixed assets.
The combined earnings and cash flow benefits of the third and fourth quarter
fiscal 1998 charges are expected, barring unforeseen circumstances, to be
approximately $8.5 million and $13.5 million, respectively, for both fiscal 1999
and 2000.
On November 24, 1999, the Company announced that it had reached a preliminary
decision to seek to sell or close its five Buffalo Jeans Factory Stores and its
five remaining Designs stores by the end of fiscal 1999. At the end of the third
quarter of fiscal 1999, the amount of this charge had not yet been determined.
4. Boston Trading Ltd., Inc. Litigation
In 1995 the Company acquired certain assets of Boston Trading Ltd., Inc. In
accordance with the terms of the Asset Purchase Agreement dated April 21, 1995,
the Company paid $5.4 million in cash, financed by operations, and delivered a
non-negotiable promissory note in the original principal amount of $1 million
(the "Purchase Note") payable in two equal annual installments through May 2,
1997. In fiscal 1996 the Company asserted rights of indemnification under the
Asset Purchase Agreement. In accordance with that Agreement, the Company, when
exercising its indemnification rights, has the right, among other courses of
action, to offset against the payment of principal and interest due and payable
under the Purchase Note, the value of its indemnification claim. Accordingly,
based on these indemnification rights, the Company ultimately did not make
either of the $500,000 payments of principal due on the Purchase Note on May 2,
1996 and May 2, 1997. Nevertheless, the Company continued to pay interest on the
original principal amount of the Purchase Note through May 2, 1996 and continued
to pay interest thereafter through November 2, 1997 on $500,000 of principal. In
January 1998, Atlantic Harbor, Inc. (formerly known as "Boston Trading Ltd.,
Inc.") filed a lawsuit against the Company for refusing to pay the purportedly
outstanding principal amount of the Purchase Note. Thereafter, the Company filed
claims against Atlantic Harbor, Inc. and its stockholders alleging that the
Company was damaged in excess of $1 million because of the breach of certain
representations and warranties concerning, among other things, the existence and
condition of certain foreign trademark registrations and license agreements.
Barring unforeseen circumstances, management of the Company does not believe
that the result of this litigation will have a material adverse impact on the
Company's business or financial condition.
5. Credit Facility
On June 4, 1998 the Company entered into an Amended and Restated Loan and
Security Agreement with a subsidiary of BankBoston, N.A., BankBoston Retail
Finance Inc., as agent for the lenders named therein (the "Credit Agreement").
This credit facility, which terminates on June 4, 2001, consists of a revolving
line of credit permitting the Company to borrow up to $50 million. Under this
facility, the Company has the ability to cause the lenders to issue documentary
and standby letters of credit up to $5 million. The Company's obligations under
the Credit Agreement are secured by a lien on all of the Company's assets. The
ability of the Company to borrow under the Credit Agreement is subject to a
number of conditions including the accuracy of certain representations and
compliance with tangible net worth and fixed charge coverage ratio covenants.
The availability of the unused revolving line of credit is limited to specified
percentages of the value of the Company's eligible inventory determined under
the Credit Agreement, ranging from 60% to 65%. At the option of the Company,
borrowings under this facility bear interest at BankBoston N.A.'s prime rate or
at LIBOR-based fixed rates. The Credit Agreement contains certain covenants and
events of default customary for credit facilities of this nature, including
change of control provisions and limitations on payment of dividends by the
Company. The Company is subject to a prepayment penalty of $250,000 if the
Credit Agreement terminates prior to June 4, 2000.
In the third quarter of fiscal 1998, the Credit Agreement was amended to, among
other things, permit and acknowledge the Company's acquisition of nine Levi's(R)
Outlet and 16 Dockers(R) Outlet stores from LOS and to permit and acknowledge
the transactions associated with the dissolution and winding up of the OLS
Partnership. These amendments included an increase in the minimum tangible net
worth that the Company must have, which was adjusted to recognize the value of
the assets distributed to the Company by the OLS Partnership. Prior to these
amendments, the tangible net worth of the OLS Partnership was excluded from the
calculation of the Company's tangible net worth for purposes of these financial
covenants. Subject to certain limitations and conditions, the Credit Agreement
permits the Company, without the prior permission of the lenders, to consummate
certain acquisitions and to repurchase shares of the Company's Common Stock.
These amendments, among other things, reduced the amount that the Company may
expend for such purposes without obtaining the prior permission of its lenders.
On October 14, 1999 the Company was notified that, by virtue of the recent
change in the members of the Company's Board of Directors, a "Change in Control"
occurred within the meaning of the Credit Agreement, giving rise to an event of
default. On October 28, 1999, the lenders, BankBoston Retail Finance Inc. and
the Company entered into an amendment to the Credit Agreement. This amendment
waives the event of default arising because of the Change in Control,
modifies the definition of "Change in Control," and includes new events of
default for material adverse changes in the Company's financial condition or its
business relationship with Levi Strauss & Co. compared to the Company's
financial condition and its relationship with Levi Strauss & Co., respectively,
as of October 8, 1999.
At October 30, 1999 the Company had borrowings of approximately $16.1 million
outstanding under this facility and had four outstanding standby letters of
credit totaling approximately $3.9 million. Average borrowings outstanding under
this credit facility for the first nine months of fiscal 1999 were approximately
$16.7 million. The Company was in compliance with all debt covenants under the
Credit Agreement at the end of the third quarter.
6. Net Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
requires the computation of basic and diluted earnings per share. Basic earnings
per share is computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
per share are determined by giving effect to the exercise of stock options using
the treasury stock method. The following table provides a reconciliation of the
number of shares outstanding for basic and diluted earnings per share.
For the For the
three months ended nine months ended
(In thousands) 10/30/99 10/31/98 10/30/99 10/31/98
Basic weighted average common
shares outstanding 16,018 15,867 15,997 15,789
Stock options, excluding anti-dilutive
options of 115 shares and 66 shares
for the three and nine months ended
October 31, 1998, respectively. 82 -- 117 --
- ------------------------------------------------------------------------------
Diluted weighted average shares
Outstanding 16,100 15,867 16,114 15,789
====== ====== ====== ======
Options to purchase shares of the Company's Common Stock of 1,835,575 and
1,734,450 for the three and nine months ended October 30, 1999, respectively,
were excluded from the computation of diluted EPS because the exercise price of
the options was greater than the average market price per share of Common Stock
for the periods reported. For the three and nine months ended October 31, 1998,
2,012,000 and 1,892,000 options were excluded from the computation of diluted
earnings per share, respectively.
7. Segment Disclosures
Through the end of the third quarter of fiscal 1999, the Company operated its
business under two reportable store segments: (i) Outlet Store Group and (ii)
Specialty Store Group. On November 24, 1999, the Company announced that its
Board of Directors had reached a preliminary decision to seek to sell or close
its five Buffalo Jeans Factory Stores and its five remaining Designs stores by
the end of fiscal 1999. As a result of this decision, the Company expects to
operate only one reportable store segment beginning in fiscal 2000, the Outlet
Store Group. The Company has included the operations of these ten stores in a
segment for "Closed Stores and Other", which includes the operations of all
closed stores and stores that are expected to close in fiscal 1999.
Outlet Store Group: At October 30, 1999, this store group included the Company's
58 Levi's(R)/Dockers(R) Outlets by Designs stores, 20 Levi's(R) Outlet by
Designs stores, and 17 Dockers(R) Outlet by Designs stores. These outlet stores
all operate in outlet parks located throughout the eastern United States and
primarily sell close out and end-of-season merchandise from Levi Strauss & Co.
and its licensees.
Closed Stores and Other: This group includes the Designs, Boston Trading
Co.(R)/BTC(TM) and Boston Traders(R) Outlet stores that were closed as part of
prior store closing programs and the 11 Original Levi's Stores(TM) that were
distributed to LDJV Inc or closed as part of the dissolution of the OLS
Partnership. Also included in this segment are the two BTC(TM) stores that were
closed in the third quarter of fiscal 1999 and the five remaining Designs stores
and five Buffalo Jeans Factory Stores that are expected to close or be sold by
the end of fiscal 1999.
The Company evaluates individual store profitability in terms of a store's
"Contribution to Profit" which is defined by the Company as gross margin less
occupancy costs and all store specific expenses such as payroll, advertising,
insurance and depreciation. The Company may transfer end-of-season merchandise
from its Specialty Stores to its Outlet Stores. These transfers represent less
than five percent of the Outlet Stores' total receipts. The Company transfers
merchandise at the receiving store's retail price with any associated markdowns
being recorded by the sending store.
Below is a summary of the results of operations for each of the reportable
segments for the three and nine months ended October 30, 1999 and October 31,
1998:
For the three months ended October 30, 1999
(in thousands) Outlet Closed and Other Total
- ------------------------------------------------------------------------------
Sales $53,580 $3,123 $56,703
Merchandise margin 23,972 804 24,776
Occupancy costs 5,639 694 6,333
Gross margin 18,333 110 18,443
Contribution to profit 10,246 (708) 9,538
For the three months ended October 31, 1998
(in thousands) Outlet Closed and Other Total
- ------------------------------------------------------------------------------
Sales $43,893 $14,821 $58,714
Merchandise margin 17,430 4,922 22,352
Occupancy costs 5,288 3,597 8,885
Gross margin 12,142 1,325 13,467
Contribution to profit 5,315 (16,474) (11,159)
For the nine months ended October 30, 1999
(in thousands) Outlet Closed and Other Total
- ------------------------------------------------------------------------------
Sales $130,287 $9,158 $139,445
Merchandise margin 56,268 2,614 58,882
Occupancy costs 16,192 2,642 18,834
Gross margin 40,076 (28) 40,048
Contribution to profit 17,699 (2,852) 14,847
Segment Assets:
Inventory 60,555 3,067 63,622
Fixed assets, net 11,573 6,115(1) 17,688
For the nine months ended October 31, 1998
(in thousands) Outlet Closed and Other Total
- -------------------------------------------------------------------------------
Sales $106,706 $42,487 $ 149,193
Merchandise margin 43,652 15,290 58,942
Occupancy costs 13,634 13,128 26,762
Gross margin 30,018 2,162 32,180
Contribution to profit 12,242 (25,106) (12,864)
Segment Assets:
Inventory 48,658 10,280 58,938
Fixed assets, net 10,009 9,888(1) 19,897
(1) Fixed assets for the Closed Stores and Other includes fixed assets for the
corporate office which were $5.1 million and $7.4 million as of
October 30,1999 and October 31, 1998, respectively.
Reconciliation of Contribution to Profit to Operating Loss
For the: three months nine months
(in thousands) 10/30/99 10/31/98 10/30/99 10/31/98
Contribution to Profit:
Outlet store segment $10,246 $5,315 $17,699 $12,242
Closed store and other (708) (16,474) (2,852) (25,106)
General and Administrative Expenses (4,551) (4,112) (12,522) (12,642)
- -------------------------------------------------------------------------------
Total Operating Income (Loss) $4,987 $(15,271) $3,193 $(25,506)
<PAGE>
8. Establishment of Trust
In May 1999, the Company deposited $2.3 million in a trust established for the
purpose of securing pre-existing obligations of the Company to Mr. Joel H.
Reichman, Mr. Scott N. Semel and Mrs. Carolyn R. Faulkner under their employment
agreements. These funds are being held in a trust to pay the amounts that may
become due under their employment agreements following the recent change in the
membership of the Company's Board of Directors and also to pay any amounts that
may become due to them pursuant to their indemnification agreements and the
Company's by-laws.
9. Recently Issued Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Accounting - Deferral of the Effective Date
of SFAS No. 133 in July 1999. SFAS No. 133 is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000; earlier adoption is
allowed. SFAS No. 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not yet determined the effect that adoption of SFAS
No. 133 will have or when the provisions of the statement will be adopted.
However, the Company currently expects that, due to its relatively limited use
of derivative instruments, the adoption of SFAS No. 133 will not have material
effect on the Company's results of operations or financial position.
<PAGE>
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Sales
Set forth below are the Company's total sales and comparable store sales for the
three and nine months ended October 30, 1999 and October 31, 1998. Of the 112
stores the Company operated as of October 30, 1999, 70 were comparable stores.
Percentage
(In thousands, except Total Sales Change at
percentage data) 10/30/99 10/31/98 10/30/99
For the three months ended:
Comparable Stores $42,137 $42,966 (1.9%)
New and Remodeled Stores(1) 14,305 3,900 266.8%
Closed Stores(2) 261 11,848 (97.8%)
- -----------------------------------------------------------------------------
Total Sales $56,703 $58,714 (3.4%)
For the nine months ended:
Comparable Stores $103,892 $106,147 (2.1%)
New and Remodeled Stores(1) 32,870 6,649 394.4%
Closed Stores(2) 2,683 36,397 (92.6%)
- ------------------------------------------------------------------------------
Total Sales $139,445 $149,193 (6.5%)
(1) New and Remodeled Stores include stores that have been operating less
than 13 months or are currently in the process of being remodeled.
(2) Closed Stores include stores closed in fiscal 1998 and 1999 and those
scheduled to close in fiscal 1999 as part of the Company's store closing
programs.
The $2 million decline in total sales for the three months ended October 30,
1999 as compared with the same period in the prior year is comprised of a $11.6
million decrease related to the closure of 34 stores and a $0.8 million decrease
in comparable store sales. This $12.4 million decrease was substantially offset
by sales from new and remodeled stores totaling $10.4 million in fiscal 1999.
Similarly, the $9.8 million decrease in total sales for the nine months ended
October 30, 1999 as compared with the same period in the prior year is comprised
of a $33.7 million decrease related to the closure of 34 stores and a $2.3
million decrease in comparable store sales. This $36 million decrease was
substantially offset by sales from new and remodeled stores totaling $26.2
million. The Company's Outlet Store segment, which represents approximately 94
percent of sales, had a comparable store sales decline of 1 percent for the
three and nine month periods ended October 30, 1999 as compared to the same
periods in the prior year.
Gross Margin
Set forth below are merchandise and gross margin rates and occupancy costs as a
percentage of total sales for the three and nine months ended October 30, 1999
and October 31, 1998.
Gross Margin Percentage
Rate Change at
10/30/99 10/31/98 10/30/99
For the three months ended:
Merchandise Margin 43.7% 38.1% 14.7%
Occupancy Costs 11.2% 15.2% (26.3)
- -----------------------------------------------------------------------------
Gross Margin 32.5% 22.9% 41.9%
For the nine months ended:
Merchandise Margin 42.2% 39.5% 6.8%
Occupancy Costs 13.5% 17.9% (26.6%)
- ------------------------------------------------------------------------------
Gross Margin 28.7% 21.6% 32.9%
The 9.6 percentage point increase in gross margin for the three months ended
October 30, 1999 compared to the same period in the prior year is the result of
a 5.6 percentage point increase in merchandise margins and a 4.0 percentage
point decrease in occupancy costs as a percentage of sales. The increase in
merchandise margin is due to an increase in initial margins which was favorably
impacted by an improved availability of tops as well as a result of the
Company's shift to a store base comprised of mostly Levi's(R) and Dockers(R)
Outlet by Designs stores, which have historically had higher margin rates as
compared to the mall-based specialty stores. Similarly, the 7.1 percentage
point increase in gross margin for the nine months ended October 30, 1999 as
compared to the same period in the prior year is due a 4.4 percentage point
decrease in occupancy costs as a percentage of sales and an increase in
merchandise margins of 2.7 percentage points. The increase in merchandise
margins is similarly due to improved availability of tops and the shift towards
a greater proportion of Levi's(R) and Dockers(R) Outlet by Designs stores.
Selling, General and Administrative Expenses
Set forth below is certain information concerning the Company's selling, general
and administrative expenses for the three and nine months ended October 30, 1999
and October 31, 1998.
(In thousands, except October 30, 1999 October 31, 1998
percentage data) $ % of sales $ % of sales
For the three months ended $11,868 20.9% $ 12,699 21.6%
For the nine months ended 31,980 22.9% 36,420 24.4%
Selling, general and administrative expenses decreased by $800,000 or 6.3% for
the three months ended October 30, 1999 as compared with the same period in the
prior year. Store payroll expense, the largest component of selling, general and
administrative expenses, was 9.2 percent of sales in the third quarter, compared
with 9.4 percent of sales for the same period in the prior year. Selling,
general and administrative expenses for the third quarter included approximately
$1.5 million in expenses related the recent annual stockholders meeting and
proxy solicitation. These expenses consisted of the Company's proxy expenses,
expenses reimbursed to Jewelcor Management, Inc., costs related to the
termination of the Company's Shareholder Rights Plan and other costs associated
with the recent change in the membership of the Company's Board of Directors.
Excluding these costs and expenses, selling, general and administrative expenses
were reduced by $2.3 million as a result of the expense reduction actions taken
in fiscal 1997 and 1998 as well as ongoing expense reduction programs
implemented by the Company. The $4.4 million or 12.2% decrease in selling,
general and administrative expenses for the nine months ended October 30, 1999
is similarly due to the expense reduction actions taken by the Company and
similarly impacted by the proxy solicitation and other costs related to the
recent change in the membership of the Companys' Board of Directors.
Depreciation and Amortization
Set forth below are depreciation and amortization expenses for the Company for
the three and nine months ended October 30, 1999 and October 31, 1998.
Percentage
(In thousands, except October 30, October 31, Change at
percentage data) 1999 1998 October 30, 1999
For the three months ended $1,588 $2,632 (39.7%)
For the nine months ended 4,875 7,859 (38.0%)
The decrease in depreciation and amortization expenses for the three and nine
months ended October 30, 1999 as compared to the same periods in the prior year
is principally due to the write off of fixed assets in fiscal 1998 as part of
the Company's store closing program, offset slightly by increases in
depreciation related to new and remodeled stores.
Interest Expense, Net
Interest expense was $390,000 and $132,000 for the three months ended October
30, 1999 and October 31, 1998, respectively. For the nine months ended October
30, 1999 and October 31, 1998 interest expense was $868,000 and $399,000,
respectively. These increases in interest expense for the three and nine months
ended October 30, 1999 as compared to the prior year are attributable to higher
average borrowing levels under the Company's revolving credit facility.
Net Profit/Loss
Set forth below are is the net earnings (losses) for the Company for the three
and nine months ended October 30, 1999 and October 31, 1998.
(In thousands, except October 30, 1999 October 31, 1998
per share data) $ per share $ per share
- -------------------------------------------------------------------------------
Three months ended $ 2,692 $ 0.17 $( 8,746) ($0.55)
Nine months ended 1,294 0.08 (14,892) (0.94)
Segment Information
Through the end of the third quarter of fiscal 1999, the Company operated its
business under two reportable store segments (i) Outlet Store Group and (ii)
Specialty Store Group. On November 24, 1999, the Company announced that its
Board of Directors had reached a preliminary decision to seek to sell or close
its five Buffalo Jeans Factory Stores and its five remaining Designs stores by
the end of fiscal 1999. As a result of this decision, the Company expects to
operate only one reportable store segment beginning in fiscal 2000, the Outlet
Store Group. The Company has included the operations of these ten stores in a
segment for "Closed Stores and Other", which includes the operations of all
closed stores and stores that are expected to close in fiscal 1999.
Outlet Store Group: At October 30, 1999, this store group included the Company's
58 Levi's(R)/Dockers(R) Outlets by Designs stores, 20 Levi's(R) Outlet by
Designs stores, and 17 Dockers(R) Outlet by Designs stores. These outlet stores
all operate in outlet parks located throughout the eastern United States and
primarily sell close out and end-of-season merchandise from Levi Strauss & Co.
and its licensees.
Closed Stores and Other: This group includes the Designs, Boston Trading
Co.(R)/BTC(TM) and Boston Traders(R) Outlet stores that were closed as part of
prior store closing programs and the 11 Original Levi's Stores(TM) that were
distributed to LDJV Inc or closed as part of the dissolution of the OLS
Partnership. Also included in this segment are the two BTC(TM) stores that were
closed in the third quarter of fiscal 1999 and the five remaining Designs stores
and five Buffalo Jeans Factory Stores that are expected to close or be sold by
the end of fiscal 1999.
The Company evaluates individual store profitability in terms of a store's
"Contribution to Profit" which is defined by the Company as gross margin less
occupancy costs and all store specific expenses such as payroll, advertising,
insurance and depreciation. The Company may transfer end-of-season merchandise
from its Specialty Stores to its Outlet Stores. These transfers represent less
than five percent of the Outlet Stores' total receipts. The Company transfers
merchandise at the receiving store's retail price with any associated markdowns
being recorded by the sending store.
Below is a summary of the results of operations for each of the reportable
segments for the three and nine months ended October 30, 1999 and October 31,
1998:
For the three months ended October 30, 1999
(in thousands) Outlet Closed and Other Total
- ------------------------------------------------------------------------------
Sales $53,580 $3,123 $56,703
Merchandise margin 23,972 804 24,776
Occupancy costs 5,639 694 6,333
Gross margin 18,333 110 18,443
Contribution to profit 10,246 (708) 9,538
For the three months ended October 31, 1998
(in thousands) Outlet Closed and Other Total
- ------------------------------------------------------------------------------
Sales $43,893 $14,821 $58,714
Merchandise margin 17,430 4,922 22,352
Occupancy costs 5,288 3,597 8,885
Gross margin 12,142 1,325 13,467
Contribution to profit 5,315 (16,474) (11,159)
For the nine months ended October 30, 1999
(in thousands) Outlet Closed and Other Total
- ------------------------------------------------------------------------------
Sales $130,287 $9,158 $139,445
Merchandise margin 56,268 2,614 58,882
Occupancy costs 16,192 2,642 18,834
Gross margin 40,076 (28) 40,048
Contribution to profit 17,699 (2,852) 14,847
Segment Assets:
Inventory 60,555 3,067 63,622
Fixed assets, net 11,573 6,115(1) 17,688
For the nine months ended October 31, 1998
(in thousands) Outlet Closed and Other Total
- -------------------------------------------------------------------------------
Sales $106,706 $42,487 $ 149,193
Merchandise margin 43,652 15,290 58,942
Occupancy costs 13,634 13,128 26,762
Gross margin 30,018 2,162 32,180
Contribution to profit 12,242 (25,106) (12,864)
Segment Assets:
Inventory 48,658 10,280 58,938
Fixed assets, net 10,009 9,888(1) 19,897
(1) Fixed assets for the Closed Stores and Other includes fixed assets for the
corporate office which were $5.1 million and $7.4 million as of
October 30,1999 and October 31, 1998, respectively.
Reconciliation of Contribution to Profit to Operating Loss
For the: three months nine months
(in thousands) 10/30/99 10/31/98 10/30/99 10/31/98
Contribution to Profit:
Outlet store segment $10,246 $5,315 $17,699 $12,242
Closed store and other (708) (16,474) (2,852) (25,106)
General and Administrative Expenses (4,551) (4,112) (12,522) (12,642)
- -------------------------------------------------------------------------------
Total Operating Income (Loss) $4,987 $(15,271) $3,193 $(25,506)
STORE CLOSING PROGRAMS
During the third quarter of fiscal 1998, the Company announced its plans to
close 22 unprofitable Designs and Boston Trading Co.(R)/BTC(TM) stores through
lease terminations and expirations. This store closing strategy resulted in the
Company recording a pre-tax charge of $13.4 million, or $0.47 per share after
tax, related to the closing of these Designs stores and Boston Trading
Co.(R)/BTC(TM) stores and the eight Original Levi's Stores(TM) closed by the
joint venture. The total revised estimated cost to close these stores is $10.5
million, which is $2.9 million less than the original charge, primarily due to
favorable landlord negotiations on lease termination payments. As a result, the
Company recognized pre-tax income of $2.9 million in the fourth quarter of
fiscal 1998. Total estimated cash costs are expected to be $4.2 million related
to lease terminations, employee severance and other related expenses. The
remainder of the $10.5 million charge consists of non-cash costs of
approximately $6.3 million in store fixed asset write-offs. All of these stores
were closed by the end of fiscal 1998. At October 30, 1999, the remaining
reserve balance related to these store closings is $169,000 which primarily
relates to landlord settlements that the Company anticipates will be paid in
fiscal 1999.
During the fourth quarter of fiscal 1998, the Company recorded additional store
closing and severance reserves of $5.2 million, or $0.20 per share, related to
the decision to close three BTC(TM) stores, one Designs mall store, and four
Boston Traders(R) Outlet stores and to further reduce corporate headcount. This
pre-tax charge included cash costs of approximately $2.9 million related to
lease terminations and corporate severance, and $2.3 million of non-cash costs
related to store fixed asset write-offs and markdowns. At October 30, 1999, the
remaining reserve balance related to these store closings is $1.9 million, which
primarily relates to landlord settlements and reserves for the write-off of
fixed assets.
The combined earnings and cash flow benefits of the third and fourth quarter
fiscal 1998 charges are expected, barring unforeseen circumstances, to be
approximately $8.5 million and $13.5 million, respectively, for both fiscal 1999
and 2000.
Seasonality
The Company's business historically has been seasonal, reflecting increased
consumer buying in the "Fall" and "Holiday" seasons. Historically, the second
half of each fiscal year provides a greater portion of the Company's annual
sales and operating income. In recent years, the Company's focus has shifted
towards its outlet store business. The percentage of the Company's outlet
business has increased and is anticipated to continue to increase because of the
shift in the Company's store mix towards one consisting exclusively of outlet
stores.
Liquidity and Capital Resources
The Company's primary cash needs have been for operating expenses, including
cash outlays associated with inventory purchases, capital expenditures for new
and remodeled stores, and the purchase of 25 outlet stores from Levi's Only
Stores, Inc. in fiscal 1998. During fiscal 1999, the Company expects to incur
capital expenditures, net of landlord construction allowances, related to
building new outlet stores, outlet store remodels and relocations, and system
enhancements of $2.6 million. The Company expects that cash flow from
operations, short-term revolving borrowings and trade credit will enable it to
finance its current working capital, store remodeling and opening requirements.
Working Capital and Cash Flows
To date, the Company has financed its working capital requirements, store
opening and store closing programs and remodeling programs with cash flow from
operations, income tax refunds, tax loss carryforwards, and borrowings under
the Company's credit facility. Cash provided by operations for the first nine
months of fiscal 1999 was $2.5 million as compared to $8.5 million for the same
period in the prior year. This $6.0 million change is primarily the result of
a federal income tax refund of $12.9 million received in the first quarter of
fiscal 1998.
There was no unrestricted cash and investments at October 30, 1999 as compared
to $1.5 million at October 31, 1998. At October 30, 1999, the Company had
borrowings of $16.1 million outstanding under its revolving credit facility as
compared to $10.3 million at October 31, 1998. The increase in the Company's net
borrowing position at October 30, 1999 as compared to October 31, 1998 is
primarily due to the $12.9 million federal income tax refund received in the
first quarter of fiscal 1998. The Company expects that average borrowings for
fiscal 1999 will be higher than those in fiscal 1998 as a result of borrowings
in the third quarter of fiscal 1998 to fund the acquisition of the 25 outlet
stores, increases in fiscal 1999 inventory purchases and the cost of lease
terminations associated with the closing of unprofitable stores.
In May 1999, the Company deposited $2.3 million in a trust established for the
purpose of securing pre-existing obligations of the Company to Mr. Joel H.
Reichman, Mr. Scott N. Semel and Mrs. Carolyn R. Faulkner under their employment
agreements. These funds are being held in a trust to pay the amounts that may
become due under their employment agreements following the recent change in the
membership of the Company's Board of Directors and also to pay any amounts that
may become due to them pursuant to their indemnification agreements and the
Company's by-laws.
The Company's working capital at October 30, 1999 was approximately $26.2
million, compared to $37.4 million at October 31, 1998. This decrease in working
capital was primarily attributable to costs incurred as part of the Company's
store closing program in fiscal 1998 and fiscal 1999. At October 30, 1999, total
inventory equaled $63.6 million, compared to $58.9 million at October 31, 1998.
The increase of 8 percent in the Company's inventory level was primarily due to
the addition of outlet stores to the Company's store base offset by store
closings in fiscal 1998 and 1999.
The Company stocks its Levi's(R) Outlet by Designs and Dockers(R) Outlet by
Designs stores with manufacturing overruns, merchandise specifically
manufactured for the outlet stores, discontinued lines and irregulars purchased
directly from Levi Strauss & Co., and end-of-season merchandise transferred from
the Company's mall-based stores. By its nature, this merchandise, including the
most popular Levi Strauss & Co. styles of merchandise and the breadth of the mix
of this merchandise, is subject to limited availability. The Company continues
to evaluate and, within the discretion of management, act upon opportunities to
purchase substantial quantities of Levi's(R), Dockers(R) and Slates(R) brand
products for its Levi's(R) and Dockers(R) Outlet by Designs stores.
At October 30, 1999, the accounts payable balance was $10.6 million as compared
with a balance of $11.6 million at October 31, 1998. This 8.6 percent decrease
was primarily related to the timing of payments to vendors. The Company's trade
payables to Levi Strauss & Co., its principal vendor, generally are due 30 days
after the date of invoice. The Company expects, barring unforeseen
circumstances, that any purchases of branded merchandise from vendors other than
Levi Strauss & Co. and its licensees will be limited and will be in accordance
with customary industry credit terms.
On June 4, 1998 the Company entered into an Amended and Restated Loan and
Security Agreement with a subsidiary of BankBoston, N.A., BankBoston Retail
Finance Inc., as agent for the lenders named therein (the "Credit Agreement").
This credit facility, which terminates on June 4, 2001, consists of a revolving
line of credit permitting the Company to borrow up to $50 million. Under this
facility, the Company has the ability to cause the lenders to issue documentary
and standby letters of credit up to $5 million. The Company's obligations under
the Credit Agreement are secured by a lien on all of the Company's assets. The
ability of the Company to borrow under the Credit Agreement is subject to a
number of conditions including the accuracy of certain representations and
compliance with tangible net worth and fixed charge coverage ratio covenants.
The availability of the unused revolving line of credit is limited to specified
percentages of the value of the Company's eligible inventory determined under
the Credit Agreement, ranging from 60% to 65%. At the option of the Company,
borrowings under this facility bear interest at BankBoston N.A.'s prime rate or
at LIBOR-based fixed rates. The Credit Agreement contains certain covenants and
events of default customary for credit facilities of this nature, including
change of control provisions and restrictions on payment of dividends by the
Company. The Company is subject to a prepayment penalty of $250,000 if the
Credit Agreement terminates prior to June 4, 2000.
In the third quarter of fiscal 1998, the Credit Agreement was amended to, among
other things, permit and acknowledge the Company's acquisition of nine Levi's(R)
Outlet and 16 Dockers(R) Outlet stores from Levi's Only Stores, Inc. and to
permit and acknowledge the transactions associated with the dissolution and
winding up of The Designs/OLS Partnership (the "OLS Partnership"). These
amendments include an increase in the minimum tangible net worth that the
Company must have, which was adjusted to recognize the value of the assets
distributed to the Company by the OLS Partnership. Prior to these amendments,
the tangible net worth of the OLS Partnership was excluded from the calculation
of the Company's tangible net worth for purposes of these financial covenants.
Subject to certain limitations and conditions, the Credit Agreement permits the
Company, without the prior permission of the lenders, to consummate certain
acquisitions and to repurchase shares of the Company's Common Stock. These
amendments, among other things, reduced the amount that the Company may expend
for such purposes without obtaining the prior permission of its lenders.
On October 14, 1999 the Company was notified that, by virtue of the recent
change in the members of the Company's Board of Directors, a "Change in Control"
occurred within the meaning of the Credit Agreement, giving rise to an event of
default. On October 28, 1999, the lenders, BankBoston Retail Finance Inc. and
the Company entered into an amendment to the Credit Agreement. This amendment
waives the event of default arising because of the Change in Control, modifies
the definition of "Change in Control," and includes new events of default for
material adverse changes in the Company's financial condition or its business
relationship with Levi Strauss & Co. compared to the Company's financial
condition and its relationship with Levi Strauss & Co., respectively, as of
October 8, 1999.
At October 30, 1999, the Company had borrowings of $16.1 million outstanding
under this facility and had four outstanding standby letters of credit totaling
approximately $3.9 million. Average borrowings under this credit facility for
the first nine months of fiscal 1999 were approximately $16.7 million. The
Company was in compliance with all debt covenants at the end of the third
quarter.
In 1995 the Company acquired certain assets of Boston Trading Ltd., Inc.
("Boston Trading") in accordance with the terms of an Asset Purchase Agreement
dated April 21, 1995. The Company paid $5.4 million in cash, financed by
operations, and delivered a non-negotiable promissory note in the original
principal amount of $1 million (the "Purchase Note"). The principal amount of
the Purchase Note was payable in two equal installments through May 1997. In
fiscal 1996, the Company asserted certain indemnification rights under the Asset
Purchase Agreement. In accordance with the Asset Purchase Agreement, the
Company, when exercising its indemnification rights, has the right, among other
courses of action, to offset against the payment of principal and interest due
and payable under the Purchase Note the value of its indemnification claim.
Accordingly, based on these indemnification rights, the Company ultimately did
not make either of the $500,000 payments of principal on the Purchase Note that
were due on May 2, 1996 and May 2, 1997. Nevertheless, the Company continued to
pay interest on the original principal amount of the Purchase Note through May
2, 1996 and continued to pay interest thereafter through November 2, 1997 on
$500,000 of principal. The portion of the principal amount of the Purchase Note
ultimately to be paid by the Company depends upon the result of this litigation.
Barring unforeseen circumstances, management of the Company does not believe
that the result of this litigation will have a material adverse impact on the
Company's business or financial condition.
YEAR 2000 REMEDIATION PROGRAM
I. State of Readiness: Most of the Company's computer and process control
systems were designed to use only two digits to represent years. As a
result, prior to the implementation of the Company's Year 2000
remediation program, they may not have recognized "00" as representing
the year 2000, but rather the year 1900 which could have resulted in
errors or system failures. The Company has completed the conversion of
all of its business critical technology and information systems to
Year 2000 compliant systems.
The Company's primary data processing systems for financial reporting,
and merchandise management were upgraded with new releases of year
2000 compliant software and have been operating under fiscal 2000 since
January 31, 1999. ADP updated the payroll system to a Year 2000
compliant version in May 1999. A conversion of our electronic point of
sales system was completed in June 1999. Non-compliant personal
computers and network software were converted by the end of November
1999.
Management reviewed all business critical embedded systems that may
be impacted by the year 2000 issue and they have been found to be Year
2000 compliant were upgraded or replaced with Year 2000 compliant
components and equipment. In the third quarter of fiscal 1999 the
Company was informed by Levi Strauss & Co., the supplier of more than
90 percent of the merchandise sold by the Company, that Levi Strauss
& Co. had successfully upgraded and converted its information
technology systems to Year 2000 compliant systems. The Company orders
a substantial portion of the merchandise purchased from Levi Strauss
& Co. through an electronic data interchange system ("EDI"). The
Company and Levi Strauss & Co. have both been using Year 2000 compliant
EDI systems since July 1999.
II. Cost to Address Year 2000 Issues: The Company has spent an amount not
exceeding $600,000 in conversion and upgrade costs, which has been
expensed in the Company's financial statements as incurred. The
Company spent $300,000 in fiscal year 1998 and expects to expense not
more than $300,000 in fiscal 1999. Cash flow from operations, and
short-term revolving borrowings have enabled the Company to fund its
Year 2000 remediation program.
III. Risks related to the Company's Year 2000 Issues: The Company's ability
to operate would be impacted by the lack of electronic transmission of
data from Levi Strauss & Co. and would result in the implementation of
manual processes to account for receipt of merchandise. The
implementation of manual processes would result in a slow down of
product shipments to the Company, which could have an adverse impact on
sales. In a worst case scenario, telecommunications or electical power
interruptions on a regional or national scale would adversely affect
all merchants' ability to operate.
IV. Company's Contingency Plan: In the unlikely event of an interruption of
shipments from Levi Strauss & Co., the Company's contingency plan
involved increased purchases in advance of the beginning of December
31, 1999 to ensure adequate supplies of merchandise would be available.
Management currently believes that the Company now has an adequate
supply of merchandise in inventory to mitigate the impact of any such
interruption through the first quarter of fiscal 2000.
<PAGE>
Capital Expenditures
Total cash outlays for capital expenditures for the first nine months of fiscal
1999 were approximately $4.5 million, which excludes landlord construction
allowances of approximately $1.6 million. These cash outlays were primarily
for new and remodeled stores with the balance expended primarily for information
systems enhancements. Total cash outlays for capital expenditures for the first
nine months of fiscal 1998 were $391,000, which represents the cost of store
and corporate capital expenditures. During the first nine months of fiscal 1999,
the Company opened one new Dockers(R) Outlet by Designs store, eight new
Levi's(R)/Dockers(R) Outlet by Designs stores (five of which replace older
locations), and completed the remodeling of five of its older Levi's(R) Outlet
by Designs stores to the new combined Levi's(R)/Dockers(R) Outlet by Designs
store format.
The Company's plans for the fourth quarter of fiscal 1999, barring unforeseen
circumstances, include the opening of two new Levi's(R)/Dockers(R) Outlet by
Designs stores (one of which replaces an older location), opening one new
Dockers(R) Outlet by Designs store, and remodeling one older Levi's(R) Outlet
location to the new combined Levi's(R)/Dockers(R) Outlet by Designs store
format. As previously announced, Levi Strauss & Co. has given the Company
tentative approval to open two Levi's(R)/Dockers(R) Outlet by Designs stores in
Puerto Rico in fiscal 2000, and the Company continues to negotiate with outlet
landlords and developers for suitable real estate lease terms.
On October 31, 1998 the Company and Levi Strauss & Co. amended the trademark
license agreement (as amended, the "Outlet License Agreement") that authorizes
the Company to use certain Levi Strauss & Co. trademarks in connection with the
operation of the Company's Levi's(R) Outlet by Designs and Dockers(R) Outlet by
Designs stores in more than 25 states in the eastern portion of the United
States. Subject to certain default provisions, the term of the Outlet License
Agreement was extended to September 30, 2004, and the license for any particular
store is the period co-terminous with the lease term for such store (including
extension options). Beginning with the amendment to the Outlet License Agreement
effective on October 31, 1998, the Outlet License Agreement provides that the
Company has the opportunity to extend the term of the license associated with
one or more of the Company's older Levi's(R) Outlet by Designs stores by either
renovating the store or replacing the store with a new store with an updated
format and fixturing. In order to extend the license associated with each of the
Company's 59 older outlet stores, the Company must, subject to certain grace
periods, complete these renovations or the construction of replacement stores by
December 31, 2004. At October 30, 1999, the average remaining lease term
(including extension options) of the Company's Levi's(R) Outlet by Designs and
Dockers(R) Outlet by Designs stores was approximately 9.6 years.
The Company, with the approval of Levi Strauss & Co., initiated a program to
remodel or replace its 59 oldest Levi's(R) Outlet by Designs stores beginning in
fiscal 1999. The Company intends, barring unforeseen circumstances, to continue
to move, remodel or replace these the remaining portion of these stores over the
next four years. To date, the Company had closed two of its older 59 Levi's(R)
Outlet stores, remodeled six of these stores and opened six new
Levi's(R)/Dockers(R) Outlet by Designs stores as replacements for these stores.
Recent Developments
On September 3, 1999 Jewelcor Management, Inc., a Nevada corporation
("Jewelcor"), filed with the Securities and Exchange Commission a definitive
proxy statement relating to a solicitation by Jewelcor of proxies in connection
with the annual meeting of stockholders of the Company. Jewelcor successfully
solicited proxies to elect a new slate of directors, in opposition to the
members of the Company's then Board of Directors, and to adopt a shareholder
proposal recommending termination of the Company's Shareholder Rights Agreement.
The results of the vote of the stockholders of the Company at the annual meeting
of stockholders held on October 4, 1999 were certified by an independent
inspector of elections on October 8, 1999.
On October 20, 1999 the Company announced, among other things, that Joel H.
Reichman, its President and Chief Executive Officer, would be leaving the
Company in 30 days. The Company also announced that, as a result, John J.
Schultz, a member of the Company's Board of Directors, would be assuming the
duties of President and CEO on an interim basis. The Company has agreed to
compensate Mr. Schultz at the rate of $2,000 per day, payable at his election
in cash or in shares of Common Stock, plus reimbursement of reasonable
out-of-pocket expenses, for his service as the Company's interim President and
CEO. Mr. Schultz' compensation also includes the grant of stock options
exercisable for up to 15,000 shares of Common Stock for each year in which Mr.
Schultz serves as President and CEO. The per share exercise price of these
options will be the closing price of shares of Common Stock on the date of
grant.
The Company has agreed to retain Mr. Robert L. Patron, Jr., a member of the
Company's Board of Directors, as a consultant to advise the Company with regard
to real estate matters. The Company has agreed to compensate Mr. Patron
at the rate of $2,000 per day for his services, payable at his election in cash
or in shares of Common Stock, plus reimbursement of reasonable out-of-pocket
expenses. Mr. Patron's compensation also includes the grant of stock options
exercisable for up to 15,000 shares of Common Stock for each year in which Mr.
Patron furnishes real estate consulting services to the Company. The per share
exercise price of these options will be the closing price of shares of Common
Stock on the date of grant.
In a letter dated October 25, 1999, Levi Strauss & Co. stated that, although it
believed that the recent change in the membership of the Company's Board of
Directors and senior management triggered its right to declare a breach under
the Outlet License Agreement, Levi Strauss & Co. was reluctant to exercise its
rights until it had an opportunity to hear about the Company's future business
and strategic plans. Levi Strauss & Co. requested that the Company prepare and
submit a written business and strategic plan, and thereafter meet with
Levi Strauss & Co. to discuss that plan. In response, the Company informed
Levi Strauss & Co., among other things, that the Company was fully committed to
the store improvement and operating initiatives begun in 1999 and that the
Company had no plans to change the current Levi's(R) and Dockers(R) Outlet by
Designs strategy. The Company said it would promptly submit its business and
strategic plan and that it looked forward to meeting with representatives of
Levi Strauss & Co. At a meeting held in San Francisco, California on December 8,
1999 John J. Schultz, the Company's President and CEO, and Daniel O. Paulus, the
Company's Vice President and General Merchandise Manager, met with
representatives of Levi Strauss & Co. and submitted the requested plan. A follow
up meeting with senior Levi Strauss & Co. executives is scheduled to take place,
barring unforeseen circumstances, in January 2000.
On October 29, 1999 the Company announced, among other things, that its Board
of Directors had unanimously voted to increase the size of the Board from five
to seven and that that Mr. George T. Porter, formerly President of the
Levi's(R) brand at Levi Strauss & Co., San Francisco, California, and Mr. James
Mitarotonda, Chief Executive Officer and founder of Barington Capital Group, an
investment banking firm located in New York City, had been elected to the Board
of Directors. The Company also announced that it would retain Jewelcor, a 9.9%
stockholder of the Company, to act as a consultant to assist in developing and
implementing a strategic plan for the Company, and for other related consulting
services as may be agreed upon on terms prevailing in the market to be
determined on the advice of independent consultants and reflected in a
definitive agreement. The Company said that Jewelcor had agreed to accept a
portion of its compensation for its consulting services in the form of options
to purchase Common Stock, up to a maximum of 400,000 shares, exercisable at the
closing price on October 28, 1999, as a reduction to cash compensation otherwise
due. The Company also announced that Jewelcor had agreed to accept its
$400,000 reimbursement for expenses incurred in connection with the recent proxy
solicitation in the form of shares of Common Stock, valued at the closing price
on October 28, 1999 payable after final termination of the Company's
Shareholders Rights Plan. The Board of Directors voted to terminate the
Shareholder Rights Plan and, after the Company redeemed the Rights under the
Plan outstanding on November 10, 1999, that Plan was no longer in effect.
On October 29, 1999 the Company also announced that it had engaged the
independent accounting and consulting firm of Deloitte & Touche LLP to review
the Company's operations in order to seek to improve operating efficiencies and
reduce overhead. After the end of the third quarter of fiscal 1999, on
November 24, 1999, the Company said that based on information presented to the
Company's Board of Directors, the Board is reviewing all operations and assets
and may make decisions or dispositions with respect to the Company's operations
and assets that could result in an additional charge for the fourth quarter of
fiscal 1999. Further, the Company anticipates that additional business
analyses, consulting and related expenses and other decisions potentially
resulting from the ongoing review of operations will additionally impact fourth
quarter results. There are no assurances that the Board of Directors will make
any such determinations or asset dispositions.
On November 24, 1999, the Company announced that it had made a preliminary
decision to seek to sell or close its five Buffalo Jeans Factory Stores and its
five remaining Designs stores by the end of fiscal 1999. Such sales and
closures are expected to result in an as yet undetermined charge to fourth
quarter earnings, which charges are expected, barring unforeseen circumstances,
to include, but not be limited to, asset write-downs associated with lease
terminations, employee severance payments, mark-downs associated with inventory
liquidations and related fees and expenses. At the end of the third quarter of
fiscal 1999, the amount of this charge had not yet been determined.
The foregoing discussion certain forward-looking information. Such
forward-looking information requires management to make certain estimates and
assumptions regarding the Company's expected strategic direction and the related
effect of such plans on the financial results of the Company. Accordingly,
actual results and the Company's implementation of its plans and operations may
differ materially from forward-looking statements made by the Company. The
Company encourages readers of this information to refer to Exhibit 99 of the
Company's Annual Report on Form 10-K, previously filed with the United States
Securities and Exchange Commission on May 1, 1998, which identifies certain
risks and uncertainties that may have an impact on future earnings and the
direction of the Company.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Part II. Other Information
ITEM 1. Legal Proceedings
In January 1998 Atlantic Harbor, Inc. (formerly known as "Boston
Trading Ltd., Inc.") filed a lawsuit against the Company for failing to pay the
outstanding principal amount of the Purchase Note. Thereafter, the Company filed
claims against Atlantic Harbor, Inc. and its stockholders alleging that the
Company was damaged in excess of $1 million because of the breach of certain
representations and warranties concerning the existence and condition of certain
foreign trademark registrations and license agreements. Barring unforeseen
circumstances, management of the Company does not believe that the result of
this litigation will have a material adverse effect on the Company's business or
financial condition.
The Company is a party to other litigation and claims arising in the
normal course of its business. Barring unforeseen circumstances, management does
not expect the results of these actions to have a material adverse effect on the
Company's business or financial condition.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Default Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
On October 4, 1999, the Company held its 1999 Annual Meeting of Stockholders. At
the meeting, stockholders holding 13,473,465 shares of the Company's Common
Stock, $0.01 par value ("Common Stock"), were present in person or represented
by proxy at the meeting. On October 8, 1999, an independent inspector of
elections certified the following results of (a) the election of members of the
Company's Board of Directors, and (b) a proposal recommending that the Board of
Directors terminate the Company's Shareholders Rights Agreement dated as of
May 1, 1995, together with any amendments thereto.
Election of Directors
The following named nominees received the following votes cast "For" and
"Withheld" with respect to the election of directors:
Number of Number of
Name of Nominee Votes For Votes Withheld
Jesse H. Choper 6,962,126 5,655
Jeremiah P. Murphy, Jr. 6,962,126 5,655
Robert L. Patron, Jr. 6,962,126 5,655
Joseph Pennacchio 6,962,126 5,655
John J. Schultz 6,962,126 5,655
James G. Groninger 6,324,099 181,585
Bernard M. Manuel 6,324,230 181,454
Joel H. Reichman 6,321,999 183,685
Melvin I. Shapiro 6,325,899 179,785
Peter L. Thigpen 6,325,530 180,154
Proposal Recommending Termination
of the Company's Shareholder Rights Agreement
The votes cast "For," "Against" and "Abstaining" from voting with respect to
this proposal were as follows:
Number of Number of Number of
Votes For Votes Against Votes Abstaining
7,497,257 5,848,370 127,838
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
A. Reports on Form 8-K:
The Company reported under item 5 on Form 8-K, dated August 25, 1999,
that on August 25, 1999 the Board of Directors of the Company
rescheduled the Company's 1999 Annual Meeting of Stockholders to
Monday, October 4, 1999 at 11:00 a.m.
B. Exhibits:
3.1 Restated Certificate of Incorporation of the Company, as amended
(included as Exhibit 3.1 to Amendment No. 3 of the Company's
Registration Statement on Form S-1 (No. 33-13402), and incorporated
herein by reference). *
3.2 Certificate of Amendment to Restated Certificate of Incorporation, as
amended, dated June 22, 1993 (included as Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q dated June 17, 1996, and
incorporated herein by reference). *
3.3 Certificate of Designations, Preferences and Rights of a Series of
Preferred Stock of the Company establishing Series A Junior
Participating Cumulative Preferred Stock dated May 1, 1995 (included
as Exhibit 3.2 to the Company's Annual Report on Form 10-K dated May
1, 1996, and incorporated herein by reference). *
3.4 By-Laws of the Company, as amended (included as Exhibit 3.4 to the
Company's Amendment No. 1 to Annual Report on Form 10-K/A dated May
28, 1999, and incorporated herein by reference). *
4.1 Shareholder Rights Agreement dated as of May 1, 1995 between the
Company and its transfer agent (included as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated May 1, 1995, and
incorporated herein by reference). *
4.2 First Amendment dated as of October 6, 1997 to the Shareholder Rights
Agreement dated as of May 1, 1995 between the Company and its
transfer agent (included as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated October 9, 1997, and incorporated herein by
reference). *
4.3 Second Amendment dated as of May 19, 1999 to the Shareholder Rights
Agreement between the Company and its transfer agent, as amended
(included as Exhibit 4.1 to the Company's Current Report on Form 8-K
dated May 25, 1999, and incorporated herein by reference). *
4.4 Third Amendment dated as of July 7, 1999 to the Shareholder Rights
Agreement between the Company and its transfer agent, as amended
(included as Exhibit 4.1 to the Company's Current Report on Form 8-K
dated July 13, 1999, and incorporated herein by reference). *
10.1 1992 Stock Incentive Plan, as amended (included as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q dated June 16, 1998, and
incorporated herein by reference). *
10.2 Senior Executive Incentive Plan for fiscal year ending January 29,
2000 (included as Exhibit 10.4 to the Company's Annual Report on
Form 10-K dated April 30, 1999 and incorporated herein by reference).*
10.3 License Agreement between the Company and Levi Strauss & Co. dated as
of April 14, 1992 (included as Exhibit 10.8 to the Company's Annual
Report on Form 10-K dated April 29, 1993, and incorporated herein by
reference). *
10.4 Amended and Restated Trademark License Agreement between the Company
and Levi Strauss & Co. dated as of October 31, 1998 (included as
Exhibit 10.4 to the Company's Current Report on Form 8-K dated
December 3, 1998, and incorporated herein by reference). *
10.5 Amended and Restated Loan and Security Agreement dated as of June 4,
1998, between the Company and BankBoston Retail Finance Inc., as
agent for the Lender(s) identified therein ("BRBF"), and the
Lender(s) (included as Exhibit 10.1 to the Company's Current Report
on Form 8-K dated June 11, 1998, and incorporated herein by
reference). *
10.6 Fee letter dated as of June 4, 1998, between the Company and BBRF
(included as Exhibit 10.2 to the Company's Current Report on Form 8-K
dated June 11, 1998, and incorporated herein by reference). *
10.7 First Amendment to Loan and Security Agreement dated as of September
29, 1998 among the Company, BBRF and the Lender(s) identified therein
(included as Exhibit 10.5 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.8 Second Amendment to Loan and Security Agreement dated as of October
31, 1998 among the Company, BBRF and the Lender(s) identified therein
(included as Exhibit 10.6 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.9 Third Amendment to Loan and Security Agreement dated as of October 28,
1999 among the Company, BBRF and the Lender(s) identified therein.
10.10 Participation Agreement among Designs JV Corp. (the "Designs Partner"),
the Company, LDJV Inc. (the "LOS Partner"), Levi's Only Stores, Inc.
("LOS"), Levi Strauss & Co. ("LS&CO") and Levi Strauss Associates Inc.
("LSAI") dated January 28, 1995 (included as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.11 Partnership Agreement of The Designs/OLS Partnership (the "OLS
Partnership") between the LOS Partner and the Designs Partner dated
January 28, 1995 (included as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.12 Glossary executed by the Designs Partner, the Company, the LOS
Partner, LOS, LS&CO, LSAI and the OLS Partnership dated January 28,
1995 (included as Exhibit 10.3 to the Company's Current Report on
Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.13 Sublicense Agreement between LOS and the LOS Partner dated January 28,
1995 (included as Exhibit 10.4 to the Company's Current Report on Form
8-K dated April 24, 1995, and incorporated herein by reference). *
10.14 Sublicense Agreement between the LOS Partner and the OLS Partnership
dated January 28, 1995 (included as Exhibit 10.5 to the Company's
Current Report on Form 8-K dated April 24, 1995, and incorporated
herein by reference). *
10.15 License Agreement between the Company and the OLS Partnership dated
January 28, 1995 (included as Exhibit 10.6 to the Company's Current
Report on Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.16 Administrative Services Agreement between the Company and the OLS
Partnership dated January 28, 1995 (included as Exhibit 10.7 to the
Company's Current Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.17 Amendment and Distribution Agreement dated as of October 31, 1998
among the Designs Partner, the LOS Partner and the OLS Partnership
(included as Exhibit 10.2 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.18 Guaranty by the Company in favor of LS&CO. of the indemnification
obligation of the Designs Partner dated as of October 31, 1998
(included as Exhibit 10.3 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.19 Asset Purchase Agreement between LOS and the Company relating to the
sale by the Company of stores located in Minneapolis, Minnesota dated
January 28, 1995 (included as Exhibit 10.9 to the Company's Current
Report on Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.20 Asset Purchase Agreement among Boston Trading Ltd., Inc., Designs
Acquisition Corp., the Company and others dated April 21, 1995
(included as 10.16 to the Company's Quarterly Report on Form 10-Q
dated September 12, 1995, and incorporated herein by reference). *
10.21 Non-Negotiable Promissory Note between the Company and Atlantic Harbor,
Inc., formerly known as Boston Trading Ltd., Inc., dated May 2, 1995
(included as 10.17 to the Company's Quarterly Report on Form 10-Q
dated September 12, 1995, and incorporated herein by reference). *
10.22 Asset Purchase Agreement dated as of September 30, 1998 between the
Company and LOS relating to the purchase by the Company of 16
Dockers(R) Outlet and nine Levi's(R) Outlet stores (included as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
December 3, 1998, and incorporated herein by reference). *
10.23 Employment Agreement dated as of October 16, 1995 between the Company
and Joel H. Reichman (included as Exhibit 10.1 to the Company's
Current Report on Form 8-K dated December 6, 1995, and incorporated
herein by reference). *
10.24 Employment Agreement dated as of October 16, 1995 between the Company
and Scott N. Semel (included as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated December 6, 1995, and incorporated herein by
reference). *
10.25 Employment Agreement dated as of May 9, 1997 between the Company and
Carolyn R. Faulkner (included as Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q dated June 17, 1997, and incorporated
herein by reference). *
10.26 Indemnification Agreement between the Company and James G. Groninger,
dated December 10, 1998 (included as Exhibit 10.30 to the Company's
Annual Report on Form 10-K dated April 30, 1999, and incorporated
herein by reference). *
10.27 Indemnification Agreement between the Company and Bernard M. Manuel,
dated December 10, 1998 (included as Exhibit 10.31 to the Company's
Annual Report on Form 10-K dated April 30, 1999, and incorporated
herein by reference). *
10.28 Indemnification Agreement between the Company and Peter L. Thigpen,
dated December 10, 1998 (included as Exhibit 10.32 to the Company's
Annual Report on Form 10-K dated April 30, 1999, and incorporated
herein by reference). *
10.29 Indemnification Agreement between the Company and Melvin I. Shapiro,
dated December 10, 1998 (included as Exhibit 10.33 to the Company's
Annual Report on Form 10-K dated April 30, 1999, and incorporated
herein by reference). *
10.30 Indemnification Agreement between the Company and Joel H. Reichman,
dated December 10, 1998 (included as Exhibit 10.34 to the Company's
Annual Report on Form 10-K dated April 30, 1999, and incorporated
herein by reference). *
10.31 Indemnification Agreement between the Company and Scott N. Semel,
dated December 10, 1998 (included as Exhibit 10.35 to the Company's
Annual Report on Form 10-K dated April 30, 1999, and incorporated
herein by reference). *
10.32 Indemnification Agreement between the Company and Carolyn R. Faulkner,
dated December 10, 1998 (included as Exhibit 10.36 to the Company's
Annual Report on Form 10-K dated April 30, 1999, and incorporated
herein by reference). *
10.33 Trust Agreement between the Company and State Street Bank and Trust
Company, dated as of May 12, 1999. (included as Exhibit 10.32 to the
Company's Quarterly Report on Form 10-Q dated September 14, 1999,
and incorporated herein by reference). *
11 Statement re: computation of per share earnings.
27 Financial Data Schedule.
99.1 Report of the Company dated May 1, 1998 concerning certain cautionary
statements of the Company to be taken into account in conjunction
with consideration and review of the Company's publicly-disseminated
documents (including oral statements made by others on behalf of the
Company) that include forward looking information. *
* Previously filed with the Securities and Exchange Commission.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESIGNS, INC.
December 14, 1999 By: /s/ Carolyn R. Faulkner
-------------------------------------
Carolyn R. Faulkner, Vice President,
Chief Financial Officer and Treasurer
THIRD AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Third Amendment to Amended and Restated Loan and Security
Agreement is made as of the 28th day of October, 1999 by and between
BankBoston Retail Finance Inc. (in such capacity, the
"Agent"), as Agent for the Lenders party to a certain
Amended and Restated Loan and Security Agreement dated as of
June 4, 1998,
the Lenders party thereto, and
Designs, Inc. (the "Borrower"), a Delaware corporation with
its principal executive offices at 66 B Street, Needham,
Massachusetts 02194
in consideration of the mutual covenants herein contained and
benefits to be derived herefrom.
W I T N E S S E T H:
WHEREAS, on June 4, 1998, the Agent, the Lenders and the Borrower
entered in a certain Amended and Restated Loan and Security Agreement (as
amended and in effect, the "Agreement"); and
WHEREAS, the Agent has notified the Borrower of the
occurrence of certain Events of Default under the Agreement; and
WHEREAS, the Agent, the Lenders and the Borrower desire to waive such
Events of Default and to modify certain of the provisions of the Agreement as
set forth herein.
NOW, THEREFORE, it is hereby agreed among the Agent, the Lenders and
the Borrowers as follows:
1. Capitalized Terms. All capitalized terms used herein
and not otherwise defined shall have the same meaning
herein as in the Agreement.
2. Amendments to Article 1. The provisions of Article 1 of the
Agreement are hereby amended by deleting subparagraph (b) of
the definition of "Change in Control" in its entirety and
substituting the following in its stead:
1
<PAGE>
(b) More than one-third of the persons who were
directors of the Borrower on the first day of any
period consisting of Twelve (12) consecutive
calendar months (the first of which Twelve (12)
month periods commences on the first day of
November, 1999), cease, for any reason other than
death or disability, to be directors of the Borrower.
(c) The persons who are directors of the Borrower as
of October 28, 1999 cease, for any reason, to
constitute a majority of the board of directors of
the Borrower.
3. Amendments to Article 10. The provisions of Article 10 of the
Loan Agreement are hereby amended by adding the following new
Events of Default at the end thereof:
10-19 Material Adverse Change. An event
shall have occurred or failed to occur,
which occurrence or failure is or could have
a materially adverse effect upon the
Borrower's financial condition when compared
with such financial condition as of October
8, 1999.
10-20 Levi Strauss Changes. There shall have
occurred any material adverse change in or
to the Borrower's business relationship with
Levi Strauss & Co. when compared to such
relationship as of October 8, 1999.
4. Waiver of Event of Default. The Agent and the Lenders waive
any Event of Default which arose as a result of the Change
in Control which occurred on or about October 8, 1999. This
waiver is a one time waiver and relates only to the events
described in this paragraph. This waiver shall not modify
any rights of the Agent and the Lenders under the Agreement
in the event of any future Change in Control or on account of
any other Event of Default.
5. Ratification of Loan Documents. Except as provided herein,
all terms and conditions of the Agreement on the other Loan
Documents remain in full force and effect.
6. Miscellaneous.
(a) This Third Amendment to Amended and Restated Loan
and Security Agreement may be executed in several counterparts
and by each party on a separate counterpart, each of which
when so executed and delivered shall be an original, and all
of which together shall constitute one instrument.
(b) This Third Amendment to Amended and Restated
Loan and Security Agreement expresses the entire
2
<PAGE>
understanding of the parties with respect to the transactions
contemplated hereby. No prior negotiations or discussions
shall limit, modify, or otherwise affect the provisions
hereof.
(c) Any determination that any provision of this
Third Amendment or any application hereof is invalid, illegal
or unenforceable in any respect and in any instance shall not
affect the validity, legality, or enforceability of such
provision in any other instance, or the validity, legality or
enforceability of any other provisions of this Third Amendment
to Amended and Restated Loan and Security Agreement.
(d) The Borrower shall pay on demand all costs and
expenses of the Agent and each Lender, including, without
limitation, reasonable attorneys' fees in connection with the
preparation, negotiation, execution and delivery of this Third
Amendment to Amended and Restated Loan and Security Agreement.
(e) The Borrower warrants and represents that the
Borrower has consulted with independent legal counsel of the
Borrower's selection in connection with this Third Amendment
and is not relying on any representations or warranties of the
Agent or any Lender or their respective counsel in entering
into this Third Amendment.
3
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto caused this Third
Amendment to be executed and their seals to be hereto affixed as of the date
first above written.
AGENT
BANKBOSTON RETAIL FINANCE INC.
By: /s/ James R. Dore
Name: James R. Dore
Title: Vice President
LENDERS
BANKBOSTON RETAIL FINANCE INC.
By: /s/ James R. Dore
Name: James R. Dore
Title: Vice President
NORWEST BUSINESS CREDIT, INC.
By: /s/ Scott Fiore
Name: Scott Fiore
Title: Assistant Vice President
BORROWER
DESIGNS, INC.
By: /s/ Scott N. Semel, as EVP
Name: Scott N. Semel, as
Title: Executive Vice President
526088.2
4
EX-11
EARNINGS PER SHARE
Exhibit 11. Statement Re: Computation of Per Share Earnings
Three months ended Nine months ended
10/30/99 10/31/98 10/30/99 10/31/98
-------- -------- -------- --------
Basic EPS Computation
Numerator: $ 2,692 $(8,746) $ 1,294 $(14,892)
Net income (loss)
Denominator:
Weighted average common shares 16,018 15,867 15,997 15,789
outstanding
-------- -------- ------- --------
Basic EPS $ 0.17 $ (0.55) $ 0.08 $ (0.94)
======== ======== ======= ========
Diluted EPS Computation
Numerator: $ 2,692 $(8,746) $ 1,294 $(14,892)
Net income (loss)
Denominator:
Weighted average common shares 16,018 15,867 15,997 15,789
outstanding
Stock options, excluding anti-dilutive
options of 115 shares and 66 shares for
the three and nine months ended
October 31, 1998, respectively 82 -- 117 --
-------- -------- ------- --------
Total Shares 16,100 15,867 16,114 15,789
-------- -------- ------- --------
Diluted EPS $ 0.17 $ (0.55) $ 0.08 $ (0.94)
======== ======== ======= ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
consolidated Balance Sheets of Designs, Inc. as of October 30, 1999 and the
Consolidated Statements of Income for the nine months ending Ocotber 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 2,316
<SECURITIES> 0
<RECEIVABLES> 163
<ALLOWANCES> 0
<INVENTORY> 63,622
<CURRENT-ASSETS> 67,454
<PP&E> 47,306
<DEPRECIATION> 29,618
<TOTAL-ASSETS> 107,323
<CURRENT-LIABILITIES> 41,302
<BONDS> 0
0
0
<COMMON> 167
<OTHER-SE> 65,854
<TOTAL-LIABILITY-AND-EQUITY> 107,323
<SALES> 139,445
<TOTAL-REVENUES> 139,445
<CGS> 99,397
<TOTAL-COSTS> 99,397
<OTHER-EXPENSES> 36,855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 868
<INCOME-PRETAX> 2,325
<INCOME-TAX> 1,031
<INCOME-CONTINUING> 1,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,294
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
