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 July 31, 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 July 31, 1999
----- -------------------------------
Common 15,973,000
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
July 31, 1999, August 1, 1998 and January 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
July 31, August 1, January 30,
1999 1998 1999
ASSETS (Unaudited) (Unaudited)
---------- ---------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,868 $ 1,079 $ 153
Short-term restricted investment 2,300 - -
Accounts receivable 273 166 178
Inventories 61,198 62,176 57,925
Deferred income taxes 272 4,777 272
Prepaid expenses 1,033 4,885 911
-------------------------------------
Total current assets 66,944 73,083 59,439
Property and equipment, net of
accumulated depreciation and amortization 17,518 29,990 17,788
Other assets:
Deferred income taxes 19,307 6,362 18,570
Intangible assets, net 2,492 2,787 2,628
Other assets 3,988 934 892
-------------------------------------
Total assets $ 110,249 $ 113,156 $ 99,317
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,379 $ 17,582 $ 8,716
Accrued expenses and other current liabilities 6,471 6,832 6,433
Accrued rent 2,222 3,259 2,015
Reserve for severance and store closings 2,253 310 4,372
Notes payable 24,168 4,626 13,825
-------------------------------------
Total current liabilities 47,493 32,609 35,361
-------------------------------------
Minority interest - 4,276 -
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, 16,260,000, 16,145,000, and 16,178,000
shares issued at July 31, 1999, August 1, 1998
and January 30, 1999, respectively 162 161 162
Additional paid-in capital 54,078 53,862 53,908
Retained earnings 10,454 24,249 11,854
Treasury stock at cost, 286,650 shares at
July 31, 1999 and January 30, 1999 and
281,000 shares at August 1, 1998 (1,830) (1,827) (1,830)
Deferred compensation (108) (174) (138)
-------------------------------------
Total stockholders' equity 62,756 76,271 63,956
-------------------------------------
Total liabilities and stockholders' equity $ 110,249 $ 113,156 $ 99,317
=====================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-----------------------------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
-----------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 42,907 $ 47,078 $ 82,742 $ 90,478
Cost of goods sold including
occupancy 31,519 37,741 61,137 71,765
-----------------------------------------------
Gross profit 11,388 9,337 21,605 18,713
Expenses:
Selling, general and administrative 10,519 11,767 20,111 23,713
Depreciation and amortization 1,561 2,738 3,287 5,229
-----------------------------------------------
Total expenses 12,080 14,505 23,398 28,942
-----------------------------------------------
Operating loss (692) (5,168) (1,793) (10,229)
Interest expense, net 159 96 478 267
-----------------------------------------------
Loss before minority
interest and income taxes (851) (5,264) (2,271) (10,496)
Less minority interest - (190) - (416)
-----------------------------------------------
Loss before income taxes (851) (5,074) (2,271) (10,080)
Benefit for income taxes (315) (1,980) (873) (3,934)
-----------------------------------------------
Net loss $ (536) $ (3,094) $ (1,398) $ (6,146)
===============================================
Loss per share- Basic and Diluted $ (0.03) $ (0.20) $ (0.09) $ (0.39)
Weighted average number of common shares
outstanding- Basic and Diluted 15,891 15,773 15,890 15,755
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
------------------------------------
July 31, August 1,
1999 1998
---------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net loss (1,398) (6,146)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 3,287 5,229
Minority interest - (415)
Loss from disposal of property
and equipment - 204
Changes in operating assets and liabilities:
Accounts receivable (95) 49
Inventories (3,273) (7,204)
Prepaid expenses (122) (3,870)
Other assets (3,638) (651)
Reserve for severance and store closings (2,119) (1,490)
Income taxes (737) 9,080
Accounts payable 3,661 8,761
Accrued expenses and other current liabilities 37 832
Accrued rent 207 509
---------------- ----------------
Net cash (used for) provided by operating activities (4,190) 4,888
---------------- ----------------
Cash flows from investing activities:
Additions to property and equipment (2,411) (216)
Establishment of investment trust (see note 8) (2,300)
Proceeds from disposal of property and equipment 73 100
---------------- ----------------
Net cash used for investing activities (4,638) (116)
---------------- ----------------
Cash flows from financing activities:
Net borrowings (repayments) under credit facility 10,343 (5,202)
Issuance of common stock (1) 200 36
---------------- ----------------
Net cash provided by (used for) financing activities 10,543 (5,166)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,715 (394)
Cash and cash equivalents:
Beginning of the period 153 1,473
---------------- ----------------
End of the period 1,868 1,079
================ ================
(1) Net of related tax effect.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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 set forth in these statements is
subject to normal year-end adjustments. 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 period. 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.
2. Minority Interest
On January 28, 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 for the purpose of
selling 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. The joint
venture was known as The Designs/OLS Partnership (the "OLS Partnership").
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 and 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 six months ended
August 1, 1998. Minority interest at August 1, 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 joint venture discussed 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 July 31, 1999, the
remaining reserve balance related to these store closings is $963,000 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 July 31, 1999, the remaining reserve balance
related to these store closings is $2.4 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 $8.5 million and $13.5 million, respectively, for both fiscal 1999
and 2000.
4. Boston Trading Ltd., Inc. Litigation
On May 2, 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 stores 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.
At July 31, 1999 the Company had borrowings of approximately $23.2 million
outstanding under this facility and had four outstanding standby letters of
credit totaling approximately $1,036,250. Average borrowings outstanding
under this credit facility for the first six months of fiscal 1999 were
approximately $15.6 million. The Company was in compliance with all debt
covenants under the Credit Agreement at the end of the second quarter.
6. Net 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 is 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.
<TABLE>
<CAPTION>
For the For the
three months ended six months ended
(In thousands) 7/31/99 8/1/98 7/31/99 8/1/98
- -----------------------------------------------------------------------------------
Basic weighted average common
<S> <C> <C> <C> <C>
shares outstanding 15,891 15,773 15,890 15,755
Stock options, excluding anti-dilutive
options of 127 shares and 133 shares for
the three and six months ended
July 31, 1999, respectively,
and 2 shares and 7 shares for the three
and six months ended August 1, 1998,
respectively -- -- -- --
- -----------------------------------------------------------------------------------
Diluted weighted average shares
Outstanding 15,891 15,773 15,890 15,755
====== ====== ====== ======
Options to purchase shares of the Company's Common Stock of 1,758,700 and
1,749,950 for the three and six months ended July 31, 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 both the three and six months
ended August 1, 1998, 1,921,000 options were excluded from the computation
of diluted earnings per share.
</TABLE>
7. Segment Disclosures
The Company operates its business under two reportable store segments (i)
Outlet Store Group and (ii) Specialty Store Group. The Company also has
included 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 July 31, 1999, this store group included the
Company's 65 Levi's(R) and Dockers(R) Outlets by Designs stores, 20
Levi's(R) Outlet stores, 16 Dockers(R) Outlet stores and five Buffalo Jeans
Factory 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 vendors.
Specialty Store Group: At July 31, 1999, this store group consisted of five
Designs stores that the Company intends to operate through fiscal 1999.
These stores are located in enclosed regional shopping centers and offer a
broad selection of Levi Strauss & Co. branded merchandise together with
other complementary brands of tops and bottoms.
Closed Stores and Other: This group included 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
joint venture. Also included in this segment are the two BTC(TM) stores
that are planned, barring unforeseen circumstances, to close 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.
Transfers represented approximately five percent of the Outlet stores'
total receipts in fiscal 1998. 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 six months ended July 31, 1999 and August 1,
1998:
For the three months ended July 31, 1999
- ----------------------------------------
(in thousands) Outlet Specialty Closed and Other Total
- ------------------------------------------------------------------------------
Sales $41,128 $1,322 $457 $42,907
Merchandise margin 17,512 355 (244) 17,623
Occupancy costs 5,624 408 203 6,235
Gross margin 11,888 (53) (447) 11,388
Contribution to profit 4,044 (420) (864) 2,760
For the three months ended August 1, 1998
(in thousands) Outlet Specialty Closed and Other Total
- ------------------------------------------------------------------------------
Sales $33,922 $1,893 $11,263 $47,078
Merchandise margin 13,467 565 4,127 18,159
Occupancy costs 4,276 491 4,055 8,822
Gross margin 9,191 74 72 9,337
Contribution to profit 3,728 (358) (4,213) (843)
For the six months ended July 31, 1999
- --------------------------------------
(in thousands) Outlet Specialty Closed and Other Total
- ------------------------------------------------------------------------------
Sales $78,042 $2,866 $1,834 $82,742
Merchandise margin 32,929 884 291 34,104
Occupancy costs 10,926 826 747 12,499
Gross margin 22,003 58 (456) 21,605
Contribution to profit 7,343 (702) (1,337) 5,304
Segment Assets:
Inventory 58,992 2,014 192 61,198
Fixed assets, net 11,511 757 5,250 (1) 17,518
For the six months ended August 1, 1998
- ----------------------------------------
(in thousands) Outlet Specialty Closed and Other Total
- ------------------------------------------------------------------------------
Sales $63,202 $3,801 $23,475 $ 90,478
Merchandise margin 26,311 922 9,359 36,592
Occupancy costs 8,444 992 8,443 17,879
Gross margin 17,867 (70) 916 18,713
Contribution to profit 6,838 (897) (7,643) (1,702)
Segment Assets:
Inventory 47,135 1,904 13,137 62,176
Fixed assets, net 6,207 1,033 22,750 (1) 29,990
(1) Fixed assets for the Closed Stores and Other includes fixed assets for
the corporate office which were $5.3 million and $7.8 million as of
July 31, 1999 and August 1, 1998, respectively.
Reconciliation of Contribution to Profit to Operating Loss
- ----------------------------------------------------------
For the: three months six months
(in thousands) 7/31/99 8/1/98 7/31/99 8/1/98
- ------------------------------------------------------------------------------
Contribution to Profit:
Outlet store segment $4,044 $3,728 $7,343 $6,838
Specialty store segment (420) (358) (702) (897)
Closed store and other (864) (4,213) (1,337) (7,643)
General and Administrative Expenses (3,452) (4,325) (7,097) (8,527)
- ------------------------------------------------------------------------------
Total Operating Loss $(692) $(5,168) $(1,793) $(10,229)
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 will be held in a trust to pay the
amounts that may become due under the employment agreements in the event of
a change-in-control of the Company and also to pay any amounts that may
become due to them pursuant to 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 the 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.
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 six months ended July 31, 1999 and August 1, 1998. Of the
111 stores the Company operated as of July 31, 1999, 62 were comparable
stores.
Percentage
(In thousands, except Total Sales Change at
(percentage data) July 31, 1999 August 1, 1998 July 31, 1999
- -------------------------------------------------------------------------------
For the three months ended:
Comparable Stores $29,311 $31,276 (6.3%)
New and Remodeled Stores(1) 11,583 2,639 338.9%
Closed Stores(2) 2,013 13,163 (84.7%)
- -------------------------------------------------------------------------------
Total Sales $42,907 $47,078 (8.9%)
For the six months ended:
Comparable Stores $57,094 $58,450 (2.3%)
New and Remodeled Stores(1) 20,852 5,163 303.9%
Closed Stores(2) 4,796 26,865 (82.1%)
- -------------------------------------------------------------------------------
Total Sales $82,742 $90,478 (8.6%)
(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 scheduled to close in fiscal 1999 as part
of the Company's fiscal 1998 restructuring program.
The $4.2 million decline in total sales for the three months ended July 31,
1999 as compared with the same period in the prior year is comprised of a
$11.2 million decrease related to the closure of 34 stores and a $1.9 million
decrease in comparable store sales. This $13.1 million decrease was
substantially offset by sales from new and remodeled stores totaling $8.9
million in fiscal 1999. Similarly, the $7.7 million decrease in total sales
for the for the six months ended July 31, 1999 as compared with the same
period in the prior year is comprised of a $22.1 million decrease related
to the closure of 34 stores and a $1.4 million decrease in comparable store
sales. This $23.5 million decrease was substantially offset by sales from
new and remodeled stores totaling $15.7 million in fiscal 1999. The
Company's Outlet Store segment, which represents approximately 93% of
sales, had a comparable store sales decline of 5% for the three months
ended July 31, 1999 and was flat for the year to date period ending July
31, 1999 as compared to the same periods in the prior year.
Comparable store sales for the month of August declined 4%. This decrease
in comparable store sales was comprised of a 8% decrease in the first
half of the month partially offset by a 6% increase as the Company
entered into its important fall season. Positive comparable store sale
trends continued through September 12, 1999, with month to date total
comparable store sales increasing $247,000 or 4%. Comparable
Outlet store sales increased 383,000 or 6% through September 12, 1999.
Gross Margin
- ------------
Set forth below are merchandise and gross margin rates and occupancy costs
as a percentage of total sales for the three and six months ended July 31,
1999 and August 1, 1998.
Gross Margin Percentage
Rate Change at
July 31, 1999 August 1, 1998 July 31, 1999
- -------------------------------------------------------------------------------
For the three months ended:
Merchandise Margin 41.1% 38.6% 6.5%
Occupancy Costs 14.6% 18.8% (22.3%)
- ----------------------------------------------------------------------------
Gross Margin 26.5% 19.8% 33.8%
For the six months ended:
Merchandise Margin 41.2% 40.4% 2.0%
Occupancy Costs 15.1% 19.7% (23.4%)
- ----------------------------------------------------------------------------
Gross Margin 26.1% 20.7% 26.1%
The 6.7 percentage point increase in gross margin for the three months
ended July 31, 1999 compared to the same period in the prior year is due to
a 4.2 percentage point improvement in occupancy as a percentage of sales
and a 2.5 percentage point increase in merchandise margins. Similarly, the
5.4 percentage point increase in gross margin for the six months ended July
31, 1999 as compared to the same period in the prior year is due to the
positive leveraging of occupancy of 4.6 percentage points and an increase
in merchandise margins of 0.8 percentage points. The increase in
merchandise margins is the result of higher initial margins offset slightly
by increased promotional markdowns.
This year-to-date improvement in gross margin rate continued subsequent to
the end of the second quarter. For the month of August, the Company
recorded gross margin of 33.9 percent of sales as compared to 29.1 percent
of sales for the same period in the prior year. Consistent with the
year-to-date results through July 31, 1999, this 4.8 percentage point
increase was the result of 3.6 percentage points improvement in occupancy
and a 1.2 percentage point increase in merchandise margins.
Selling, General and Administrative Expenses
- --------------------------------------------
Set forth below is certain information concerning the Company's selling,
general and administrative expenses for the three and six months ended July
31, 1999 and August 1, 1998.
(In thousands, except July 31, 1999 August 1, 1998
percentage data) $ % of sales $ % of sales
- -----------------------------------------------------------------------------
For the three months ended $10,519 24.5% $ 11,767 25.0%
For the six months ended 20,111 24.3% 23,713 26.2%
The $1.2 million or 10.6% decrease in selling, general and administrative
expenses for the three months ended July 31, 1999 as compared with the same
period in the prior year was primarily due to the expense reduction actions
taken in fiscal 1998 and 1997 as well as ongoing expense reduction
programs. Store payroll expense, the largest component of selling, general
and administrative expenses, was 11.9 percent of sales in the second
quarter, compared with 11.6 percent of sales for the same period in the
prior year. This slight increase in store payroll was the result of initial
payroll costs incurred related to new and remodeled store openings. The
$3.6 million or 15.2% decrease in selling, general and administrative
expenses for the six months ended July 31, 1999 is similarly due to the
expense reduction efforts of the Company described above.
Continuing through August, the Company incurred selling, general and
administrative expense for the month of August of $3.5 million or 16.5% of
sales as compared to $4.4 million or 20.5% of sales for the same period in
the prior year. Store payroll for the month of August was 7.6% of sales as
compared to 8.0% for the same period in the prior year.
Depreciation and Amortization
- -----------------------------
Set forth below are depreciation and amortization expenses for the Company
for the three and six months ended July 31, 1999 and August 1, 1998.
Percentage
(In thousands, except July 31, August 1, Change at
percentage data) 1999 1998 July 31, 1999
- ----------------------------------------------------------------------------
For the three months ended $1,561 $2,738 (43.0%)
For the six months ended 3,287 5,229 (37.1%)
The decrease in depreciation and amortization expenses for the three and
six months ended July 31, 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 on new and remodeled stores.
Interest Expense, Net
- ---------------------
Interest expense was $159,000 and $96,000 for the three months ended July
31, 1999 and August 1, 1998, respectively. For the six months ended July
31, 1999 and August 1, 1998 interest expense was $478,000 and $267,000,
respectively. These increases in interest expense for the three and six
months ended July 31, 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 is the net loss for the Company for the three and six
months ended July 31, 1999 and August 1, 1998.
Net Loss
(In thousands, except July 31, 1999 August 1, 1998
per share data) $ per share $ per share
- -------------------------------------------------------------------------------
Three months ended $ (536) $(0.03) $( 3,094) ($0.20)
Six months ended (1,398) (0.09) (6,146) (0.39)
In the first six months of fiscal 1999, the Company had almost eliminated
operating losses compared to the same period a year ago, having reduced net
losses by 77.3% as compared to the prior year. This improvement continued
subsequent to the end of the second quarter. For the month of August 1999,
the Company had net income of $1.8 million or $0.11 per share as compared
to $531,000 or $0.03 per share for the same month in the prior year.
For the seven months ended August 28, 1999, the Company returned to
profitability, having earned net income of $408,000 or $0.03 per share as
compared to a net loss of $5.6 million or $0.36 per share for the same
seven month period in the prior year.
Segment Information
- -------------------
The Company operates its business under two reportable store segments (i)
Outlet Store Group and (ii) Specialty Store Group. The Company also has
included 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 July 31, 1999, this store group included the
Company's 65 Levi's(R) and Dockers(R) Outlets by Designs stores, 20
Levi's(R) Outlet stores, 16 Dockers(R) Outlet stores and five Buffalo Jeans
Factory 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 vendors.
Specialty Store Group: At July 31, 1999, this store group consisted of five
Designs stores that the Company intends to operate through fiscal 1999.
These stores are located in enclosed regional shopping centers and offer a
broad selection of Levi Strauss & Co. branded merchandise together with
other complementary brands of tops and bottoms.
Closed Stores and Other: This group included 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
joint venture. Also included in this segment are the two BTC(TM) that are
planned, barring unforeseen circumstances, to close 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.
Transfers represented approximately five percent of the Outlet stores'
total receipts in fiscal 1998. 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 six months ended July 31, 1999 and August 1,
1998:
For the three months ended July 31, 1999
- ----------------------------------------
(in thousands) Outlet Specialty Closed and Other Total
- ------------------------------------------------------------------------------
Sales $41,128 $1,322 $457 $42,907
Merchandise margin 17,512 355 (244) 17,623
Occupancy costs 5,624 408 203 6,235
Gross margin 11,888 (53) (447) 11,388
Contribution to profit 4,044 (420) (864) 2,760
For the three months ended August 1, 1998
- -----------------------------------------
(in thousands) Outlet Specialty Closed and Other Total
- ------------------------------------------------------------------------------
Sales $33,922 $1,893 $11,263 $47,078
Merchandise margin 13,467 565 4,127 18,159
Occupancy costs 4,276 491 4,055 8,822
Gross margin 9,191 74 72 9,337
Contribution to profit 3,728 (358) (4,213) (843)
For the six months ended July 31, 1999
- --------------------------------------
(in thousands) Outlet Specialty Closed and Other Total
- ------------------------------------------------------------------------------
Sales $78,042 $2,866 $1,834 $82,742
Merchandise margin 32,929 884 291 34,104
Occupancy costs 10,926 826 747 12,499
Gross margin 22,003 58 (456) 21,605
Contribution to profit 7,343 (702) (1,337) 5,304
Segment Assets:
Inventory 58,992 2,014 192 61,198
Fixed assets, net 11,511 757 5,250 (1) 17,518
For the six months ended August 1, 1998
- ---------------------------------------
(in thousands) Outlet Specialty Closed and Other Total
- ------------------------------------------------------------------------------
Sales $63,202 $3,801 $23,475 $ 90,478
Merchandise margin 26,311 922 9,359 36,592
Occupancy costs 8,444 992 8,443 17,879
Gross margin 17,867 (70) 916 18,713
Contribution to profit 6,838 (897) (7,643) (1,702)
Segment Assets:
Inventory 47,135 1,904 13,137 62,176
Fixed assets, net 6,207 1,033 22,750 (1) 29,990
(2) Fixed assets for the Closed Stores and Other includes fixed assets for
the corporate office which were $5.3 million and $7.8 million as of
July 31, 1999 and August 1, 1998, respectively.
Reconciliation of Contribution to Profit to Operating Loss
- ----------------------------------------------------------
For the: three months six months
(in thousands) 7/31/99 8/1/98 7/31/99 8/1/98
- ------------------------------------------------------------------------------
Contribution to Profit:
Outlet store segment $4,044 $3,728 $7,343 $6,838
Specialty store segment (420) (358) (702) (897)
Closed store and other (864) (4,213) (1,337) (7,643)
General and Administrative Expenses (3,452) (4,325) (7,097) (8,527)
- ------------------------------------------------------------------------------
Total Operating Loss $ (692) $(5,168) $(1,793) $(10,229)
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 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 July 31, 1999, the remaining reserve balance related to
these store closings is $963,000 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 July 31, 1999, the remaining reserve balance
related to these store closings is $2.4 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 charges are expected, barring unforeseen circumstances, to be $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 because of the shift in the Company's store
mix to outlet stores and away from mall-based specialty 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 and 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, and borrowings under the Company's
credit facility. Cash used for operations for the first six months of
fiscal 1999 was $4.2 million as compared to cash provided for operations of
$4.9 million for the same period in the prior year. This $9.1 million
change is primarily the result of the receipt of a federal income tax
refund of $12.9 million received in the first quarter of fiscal 1998.
Unrestricted cash and investment position at July 31, 1999 was $1.9 million
as compared to $1.1 million at August 1, 1998. At July 31, 1999, the
Company had borrowings of approximately $23.2 million outstanding under
its revolving credit facility as compared to $3.6 million at August 1, 1998.
The increase in the Company's net borrowing position at July 31, 1999 as
compared to August 1, 1998 is primarily due to the $12.9 million income tax
refund received in the first quarter of fiscal 1998. In addition, in September
1998, the Company purchased from Levi's Only Stores, Inc. 16 Dockers(R)
Outlet stores and nine Levi's(R) Outlet stores for $9.7 million, which was
financed by borrowings under the Company's credit facility. 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, as described above. At the end of
August 1999, the Company had borrowings of $21.1 million outstanding under its
revolving credit facility as compared to $23.3 million at the end of the
second quarter of fiscal 1999.
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 will be held in a trust to pay the
amounts that may become due under the employment agreements in the event of
a change in control of the Company and also to pay any amounts that may
become due to them pursuant to indemnification agreements and the Company's
by-laws.
The Company's working capital at July 31, 1999 was approximately $19.5
million, compared to $40.5 million at August 1, 1998. This decrease in
working capital was primarily attributable to operating losses for the
twelve months ending July 31, 1999 and costs incurred as part of the
Company's store closing program in fiscal 1998. At July 31, 1999, total
inventory equaled $61.2 million, compared to $62.2 million at August 1,
1998. The decrease of 2 percent in the Company's inventory level was
primarily due to store closings in fiscal 1998 offset by new stores.
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 July 31, 1999, the accounts payable balance was $12.4 million as
compared with a balance of $17.6 million at August 1, 1998. This 29.6
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. 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.
At July 31, 1999, the Company had borrowings of $23.2 million outstanding
under this facility and had four outstanding standby letters of credit
totaling approximately $1,036,250. The Company was in compliance with all
debt covenants at the end of the second quarter.
On May 2, 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 whether its
claims are satisfied by Boston Trading and its stockholders. 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 Issue
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, they may not recognize "00" as representing the
year 2000, but rather the year 1900 which could result in errors or
system failures. The Company is in the process of converting
technology and its information systems to be Year 2000 compliant.
Barring unforeseen circumstances, the Company anticipates that the
conversion will be complete by the end of calendar year 1999.
The Company's primary data processing systems for financial
reporting, and merchandise management have been upgraded with new
releases of year 2000 compliant software and have been operating
under fiscal 2000 since January 31, 1999. The payroll system was
updated by ADP to a Year 2000 compliant version in May 1999. A
conversion of our point of sales system was completed in June 1999.
All non-compliant personal computers and network software will be
converted by the end of November 1999.
Management is reviewing embedded systems impacted by the year 2000
issue and a plan has been developed to address embedded systems
based upon how critical they are to the business. During the third
quarter of fiscal 1999 the Company expects to implement a plan to
determine the year 2000 readiness of the Company's vendors
including, Levi Strauss & Co. and the Company's other merchandise
vendors.
II. Cost to Address Year 2000 Issues: The Company expects to spend a
total of approximately $600,000,which will be expensed in the
Company's financial statements as incurred, in conversion and
upgrade costs. Through the end of fiscal year 1998, the Company had
spent $300,000. The Company expects that cash flow from operations,
and short-term revolving borrowings will enable it to fund its Year
2000 remediation.
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 its merchandise vendors 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's stores, which could
have an adverse impact on sales. In a worst case scenario,
telecommunications or electrical power interruptions on a regional or
national scale could adversely affect all merchants' ability to
operate.
IV. Company's Contingency Plan: The Company's contingency plan in the
event that a slow down of shipments from Levi Strauss & Co. occurs
includes increasing purchases in advance of the beginning of the
year 2000 to ensure adequate supplies of merchandise would be
available.
CAPITAL EXPENDITURES
Total cash outlays for capital expenditures for the first six months of
fiscal 1999 were $2,411,000, which primarily represents the cost of new and
remodeled stores. Total cash outlays for capital expenditures for the first
six months of fiscal 1998 were $216,000. During the first six months of
fiscal 1999, the Company opened five new Levi's(R)/Dockers(R) Outlet by
Designs stores and completed the remodeling of four of its older Levi's(R)
Outlet by Designs stores.
The Company's present plans for expansion for the remainder of fiscal 1999,
barring unforeseen circumstances, includes relocating an additional eight
Levi's(R)/Dockers(R) Outlet by Designs stores and opening two Dockers(R)
Outlet stores and one Levi's(R) Outlet store. Levi Strauss & Co. has given
the Company tentative approval to open up to four new Levi's(R)/Dockers(R)
Outlet by Designs stores in fiscal 2000, and the Company is currently at
various stages of discussions 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 May 1,
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 9.8 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 move, remodel or replace these stores over the next five
years beginning in fiscal 1999. To date, the Company had closed two of its
older 59 Levi's(R) Outlet stores and has opened five new
Levi's(R)/Dockers(R) Outlet by Designs stores.
RECENT DEVELOPMENTS
On April 30, 1999, the Company announced that Jewelcor Management, Inc., a
Nevada corporation ("Jewelcor"), and its controlling shareholder, Seymour
Holtzman, had submitted a proposal to the Company to explore the purchase
by Jewelcor or its affiliates of all of the outstanding Common Stock of the
Company for $3.65 per share in cash. The proposal was subject to various
contingencies, including obtaining adequate financing, completion of
certain due diligence matters and obtaining the prior consent of Levi
Strauss & Co. under the Outlet License Agreement. On May 6, 1999, the
Special Committee of the Board of Directors responded to the proposal in a
letter to Jewelcor that indicated its willingness to explore the
acquisition by Jewelcor and its affiliates of all of the outstanding Common
Stock of the Company, subject to the resolution of the contingencies
outlined above. On May 19, 1999 and July 7, 1999, the Company amended its
Shareholder Right Agreement with its transfer agent to, among other things,
(a) permit Jewelcor, together with the assistance of Stanley I. Berger, to
take the actions necessary to obtain the consent of Levi Strauss & Co. to
the Company's assignment of its rights and obligations under the Outlet
License Agreement to Jewelcor, and (b) to permit Jewelcor and others to
contact the Company's five largest shareholders to determine their interest
in participating as an equity investor in Jewelcor's proposal of another
similar proposal to purchase all outstanding capital stock at $3.65 per
share in cash.
On June 24, 1999, Seymour Holtzman withdrew his proposal to explore an
acquisition of Designs at a price of $3.65 per share in cash. On September
3, 1999 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 is soliciting proxies to elect a new slate of directors,
in opposition to the Company's current Board, and to adopt a shareholder
proposal recommending termination of the Company's Shareholder Rights
Agreement.
Levi Strauss & Co. sent a letter dated July 29, 1999, to Jewelcor and the
Company indicating that it had reviewed preliminary proxy materials filed
by Jewelcor and the Company. Levi Strauss & Co. said, among other
things, in its letter that it disagreed with the assertion in Jewelcor's
preliminary proxy materials that the election of Jewelcor's nominees is not
a transfer of control and would not be a significant concern under the
Outlet License Agreement. After reviewing Jewelcor's revised proxy
materials, in which Jewelcor continued to assert that the election of the
Jewelcor nominees would not be viewed as a transfer of control under the
Outlet License Agreement, Levi Strauss & Co. sent a second letter to
Jewelcor dated August 27, 1999. In this letter, Levi Strauss & Co.
reiterated its position that the election of the Jewelcor nominees would
fall within the transfer of control provisions of the Outlet License
Agreement. The Company has not taken a position on this matter.
The foregoing discussion of the Company's results of operations, liquidity,
capital resources and capital expenditures includes 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.
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
None.
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 May 25, 1999,
that on May 19, 1999 the Board of Directors approved a second amendment to
the Company's Shareholder Rights Agreement dated May 1, 1995, as amended.
The Company reported under item 5 on Form 8-K, dated July 13, 1999,
that on July 7, 1999 the Board of Directors approved a third amendment to
the Company's Shareholder Rights Agreement dated May 1, 1995, as amended.
The Company reported under item 5 on Form 8-K, dated July 20, 1999,
that on July 20, 1999 the Board of Directors of the Company rescheduled the
Company's 1999 Annual Meeting of Stockholders to September 22, 1999.
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 Noof 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 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). *
10.10 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). *
10.11 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). *
10.12 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). *
10.13 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). *
10.14 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). *
10.15 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
incorporaed herein by reference). *
10.16 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). *
10.17 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). *
10.18 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). *
10.19 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). *
10.20 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). *
10.21 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). *
10.22 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). *
10.23 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). *
10.24 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). *
10.25 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). *
10.26 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). *
10.27 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). *
10.28 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). *
10.29 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). *
10.30 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). *
10.31 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). *
10.32 Trust Agreement between the Company and State Street Bank and
Trust Company, dated as of May 12, 1999.
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. *
99.2 Letter dated July 29, 1999, from Levi Strauss & Co. to the Company and
Jewelcor Management, Inc.
99.3 Letter dated August 27, 1999, from Levi Strauss & Co. to Jewelcor
Management, Inc.
* Previously filed with the Securities and Exchange Commission.
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.
September 14, 1999 By: /s/ Carolyn R. Faulkner
-------------------------------------
Carolyn R. Faulkner, Vice President,
Chief Financial Officer and Treasurer
TRUST AGREEMENT
This Agreement made as of this 12th day of May, 1999, by and
between Designs, Inc., a Delaware corporation (the "Company"), and State Street
Bank and Trust Company (the "Trustee");
WHEREAS, the Company has entered into the agreements listed in
Appendix A hereto (collectively, the "Executive Agreements") with certain of its
employees (the "Executives"); and
WHEREAS, the Company has incurred or expects to incur
liability under the terms of such Executive Agreements with respect to the
individuals party to such Executive Agreements (the "Executives"); and
WHEREAS, in order to encourage the Executives to remain in the
employ of the Company, the Company wishes to establish a trust (hereinafter
called "Trust") and to contribute to the Trust, subject to the terms hereof,
assets that shall be held therein, subject to the claims of the Company's
creditors in the event of the Company's Insolvency, as herein defined, for
payment to the Executives and their beneficiaries in such manner and at such
times as specified in the Executive Agreements; and
WHEREAS, it is the intention of the parties that this Trust
shall constitute an unfunded arrangement and shall not affect the status of
certain of the Executive Agreements as unfunded arrangements maintained for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees for purposes of Title I of the Employee Retirement
Income Security Act of 1974, as amended; and
WHEREAS, subject to the terms hereof, it is the intention of
the Company to make contributions to the Trust to provide itself with a source
of funds to assist it in the meeting of its liabilities under the Executive
Agreements;
NOW, THEREFORE, the parties do hereby establish the Trust and
agree that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment Of Trust
(a) The Company hereby deposits with the Trustee in trust the
sum of $2,300,000, which is available for the account of the Trustee and which
shall become the principal of the Trust to be held, administered and disposed of
by the Trustee as provided in this Trust Agreement.
(b) The Trust hereby established is revocable by the Company;
provided, however, that it shall be irrevocable (i) for a period of six months
commencing on the date hereof and (ii) subject to Section 4 hereof, for a period
of twenty-eight months following a Change in Control, as defined herein; and
further provided, however, that in the event a claim is pending (pursuant to
Section 2(b) hereof) upon the expiration of any such period of irrevocability,
the Trust shall remain irrevocable as to the amount of the Trust assets subject
to such claim, until such time as such claim is resolved (as determined by the
Trustee in its sole and absolute discretion). At any time prior to a Change in
Control, the Company may extend any period of irrevocability and may designate
additional periods of irrevocability, by notice to the Trustee.
(c) The Trust is intended to be a grantor trust, of which the
Company is the grantor, within the meaning of subpart E, part I, subchapter J,
chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended (the
"Code"), and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon,
shall be held separate and apart from other funds of the Company and shall be
used exclusively for the uses and purpose of the Executives and general
creditors as herein set forth. The Executives and their beneficiaries shall have
no preferred claim on, or any beneficial ownership interest in, any assets of
the Trust. Any rights created under the Executive Agreements and this Trust
Agreement shall be mere unsecured contractual rights of the Executives and their
beneficiaries against the Company. Any assets held by the Trust will be subject
to the claims of the Company's general creditors under federal and state law in
the event of Insolvency, as defined in Section 3(a) herein, provided, however,
that as long as the June 4, 1998 Loan and Security Agreement between the
Company, the Lenders party thereto and BankBoston Retail Finance Inc., as Agent
(the "Agent") for the Lenders (as amended and in effect from time to time the
"Loan Agreement") has not been terminated and all Liabilities (as therein
defined) have not been repaid in full, the claims of the Agent in and to the
assets of the Trust shall be prior and superior to the right of any other of the
Company's creditors and in the event of Insolvency the Trustee shall distribute
such assets as the Agent may from time to time direct. Upon the satisfaction of
the Company's obligations under the Loan Agreement, the provisions of this Trust
referring to the Lenders, the Agent or the Loan Agreement shall be of no further
effect.
(e) The Company shall make contributions to the Trust (i) at
least annually prior to a Change in Control (as defined herein), in an amount
the Company deems necessary to pay all benefits which could become payable under
the Executive Agreements and (ii) for the twenty-eight-month period following a
Change in Control, at three-month intervals following the date of such Change in
Control, in such additional amounts as may be necessary, in the determination of
the Trustee based upon the most recent Payment Schedule (as defined in Section
2(a) hereof), to make payment of all amounts which may become payable under the
Executive Agreements, together with a reserve for the Trustee for the payment of
any fees and expenses. After a Change in Control, the Trustee may compel any
contribution that is required under the Trust.
Section 2. Payments to Executives and Their Beneficiaries;
Claims Procedure.
(a) The Company is delivering to the Trustee on the date
hereof and shall update prior to a Change in Control on an annual basis (or more
frequently in the Company's discretion) a schedule (the "Payment Schedule") that
indicates the amounts payable in respect of each Executive (and his or her
beneficiaries) under the Executive Agreements, that provides a formula or other
instructions acceptable to the Trustee for determining the amounts so payable,
the form in which such amount is to be paid and the time of commencement for
payment of such amounts (all as provided for or available under the Executive
Agreements). Except as otherwise provided herein, the Trustee shall make
payments to the Executives and their beneficiaries in accordance with the most
recent Payment Schedule delivered to the Trustee prior to a Change in Control.
The Trustee shall make provision for the reporting and withholding of any
federal, state or local taxes that may be required to be withheld with respect
to the payment of benefits pursuant to the terms of the Executive Agreements and
shall pay amounts withheld to the appropriate taxing authorities or determine
that such amounts have been reported, withheld and paid by the Company.
(b) Payments will be made to the Executives pursuant to the
Payment Schedule without the necessity of a formal claim. In addition,
Executives (or an Executive's beneficiary) may make a claim for payment from the
Trust in writing to the Trustee at the following address, including any
supporting documentation which the Trustee may reasonably require to assess the
validity of such claim:
State Street Bank and Trust Company
Trust & Investments
Two International Place
Floor 21
Boston, Massachusetts 02110
The entitlement of an Executive or his or her beneficiaries to benefits under
the Executive Agreements shall be determined under the Executive Agreements, and
any claim for such benefits shall be considered and reviewed under the
procedures, if any, set out in the Executive Agreements.
(c) The Company may make payment of benefits directly to the
Executives or their beneficiaries as they become due under the terms of the
Executive Agreements. The Company shall notify the Trustee of its decision to
make payment of benefits directly prior to the time amounts are payable to the
Executives or their beneficiaries and shall provide evidence of such payments to
the Trustee. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms of the Executive Agreements, the Company shall make the balance of each
such payment as it falls due. The Trustee shall notify the Company where
principal and earnings are not sufficient and the Company shall, if necessary,
make additional contributions to the Trust as described in Section 1(e) hereof.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary When the Company Is Insolvent.
(a) The Trustee shall cease payment of benefits to the
Executives and their beneficiaries if the Company is Insolvent. The Company
shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the
Company is unable to pay its debts as they become due, (ii) the Company is
subject to a pending proceeding as a debtor under the United States Bankruptcy
Code or, (iii) the Agent accelerates the time for payment of the Liabilities
and/or commences the enforcement of any of its rights and remedies upon default
under the Loan Agreement, provided, however, that the Company shall not be
considered Insolvent pursuant to this clause (iii) unless (1) the Agent has
exercised its rights to proceed against the Collateral (as defined in the Loan
Agreement) and (2) the amount realized pursuant to such proceeding is not
sufficient to pay all amounts due from the Company under the Loan Agreement.
(b) At all times during the continuance of this Trust, as
provided in Section 1(d) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of the Company under federal and state
law as set forth below.
(1) The Board of Directors and the Chief Executive
Officer of the Company shall have the duty to inform the Trustee in
writing of the Company's Insolvency. If a person claiming to be a
creditor of the Company alleges in writing to the Trustee that the
Company has become Insolvent, the Trustee shall, in its sole
discretion, determine whether the Company is Insolvent and, pending
such determination, the Trustee shall discontinue payment of benefits
to the Executives or their beneficiaries provided, however, that in the
event that the Agent notifies the Trustee in writing that the Company
has become Insolvent (as defined in Section 3(a)(iii) above), the
Trustee shall deliver all of the Trust's assets to the Agent, as the
Agent may direct (without further authorization or consent of the
Company), and shall not make any further payments to the Executives or
their beneficiaries.
(2) Unless the Trustee has actual knowledge of the
Company's Insolvency, or has received notice from the Company or a
person claiming to be a creditor alleging that the Company is
Insolvent, the Trustee shall have no duty to inquire whether the
Company is Insolvent. The Trustee may in all events rely on such
evidence concerning the Company's solvency as may be furnished to the
Trustee and that provides the Trustee with a reasonable basis for
making a determination concerning the Company's solvency.
(3) If at any time the Trustee has determined that
the Company is Insolvent or if the Trustee is notified by the Agent
that the Agent has commenced a proceeding against the Collateral, the
Trustee shall discontinue payments to Executives or their beneficiaries
and shall hold the assets of the Trust first for the benefit of the
Agent as provided herein and thereafter for the benefit of the
Company's general creditors. Nothing in this Trust Agreement shall in
any way diminish any rights of the Executives or their beneficiaries to
pursue their rights as general creditors of the Company with respect to
benefits due under the Executive Agreements or otherwise.
(4) The Trustee shall resume the payment of benefits
to the Executives or their beneficiaries in accordance with Section 2
of this Trust Agreement only after the Trustee has determined that (i)
the Company is not Insolvent (or is no longer Insolvent) or (ii) in the
case of a proceeding against the Collateral by the Agent, either (a)
the Agent is no longer making a claim against the Collateral or (b) all
amounts due from the Company under the Loan Agreement have been paid or
otherwise satisfied.
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to the
Executives or their beneficiaries under the terms of the Executive Agreements
for the period of such discontinuance, less the aggregate amount of any payments
made to the Executives or their beneficiaries by the Company in lieu of the
payments provided for hereunder during any such period of discontinuance, plus
interest on such unpaid amount, determined for the period commencing on the date
such amount should have been paid and ending on the date of such payment, at an
annual rate equal to the prime rate (as in effect from time to time at
BankBoston Corporation).
Section 4. Payments to the Company.
(a) Except as provided in this Section 4 hereof, while the
Trust is irrevocable, the Company shall have no right or power to direct the
Trustee to return to the Company or to divert to others any of the assets of the
Trust before (a) all payments of benefits have been made to the Executives and
their beneficiaries pursuant to the terms of the Executive Agreements and (b)
all expenses of the Trust have been paid.
(b) At such time, if any, which follows the six-month
anniversary of the date hereof and is prior to a Change in Control, the Company
shall have the right or power to direct the Trustee to return to the Company any
of the assets of the Trust. If the Company directs the Trustee to return to the
Company any of the assets of the Trust, the Trustee shall distribute such assets
to the Agent, or as the Agent may otherwise direct, without further
authorization or consent of the Company.
(c) Notwithstanding anything to the contrary contained herein,
at any time following the establishment of this Trust, including any periods
during which the Trust would otherwise be irrevocable, an Executive may present
to the Trustee, in a form reasonably acceptable to the Trustee, a complete and
unconditional waiver (a "Waiver") of his or her rights under one or more
Executive Agreements. Following delivery of a Waiver to the Trustee, the Company
shall have the right to direct the Trustee to return to the Company or to divert
to others any assets of the Trust attributable to the Executive Agreements with
respect to which a Waiver has been executed. For purposes of this Section 4(c),
the amounts attributable to each Employee Agreement are those set forth in the
then applicable Payment Schedule.
Section 5. Investment Authority.
(a) All rights associated with assets of the Trust shall be
exercised by the Trustee or the person designated by the Trustee, and shall in
no event be exercisable by or rest with the Executives.
(b) The Trustee shall not be liable in discharging its duties
hereunder if it acts for the exclusive benefit of the Executives and their
beneficiaries, in good faith and as a prudent person would act in accomplishing
a similar task and in accordance with the terms of this Trust Agreement and any
applicable federal or state laws, rules or regulations.
(c) Subject to investment guidelines agreed to in writing from
time to time by the Company and the Trustee prior to a Change in Control, the
Trustee shall have the power in investing and reinvesting the assets of the
Trust in its sole discretion:
(1) To invest and reinvest in certificates of deposit
or demand or time deposits (including any such deposits with the
Trustee) and United States Treasury instruments;
(2) To commingle for investment purposes all or any
portion of the assets of the Trust with assets of any other similar
trust or trusts established by the Company with the Trustee for the
purpose of safeguarding deferred compensation of its employees and/or
directors;
(3) To retain any property at any time received by
the Trustee;
(4) To sell or exchange any property held by it at
public or private sale, for cash or on credit, to grant and exercise
options for the purchase or exchange thereof, to exercise all
conversion or subscription rights pertaining to any such property and
to enter into any covenant or agreement to purchase any property in the
future;
(5) To participate in any plan of reorganization,
consolidation, merger, combination, liquidation or other similar plan
relating to property held by it and to consent to or oppose any such
plan or any action thereunder or any contract, lease, mortgage,
purchase, sale or other action by any person;
(6) To deposit any property held by it with any
protective, reorganization or similar committee, to delegate
discretionary power thereto, and to pay part of the expenses and
compensation thereof any assessments levied with respect to any such
property to deposited;
(7) To extend the time of payment of any obligation
held by it;
(8) To hold uninvested any moneys received by it,
without liability for interest thereon, but only in anticipation of
payments due for investments, reinvestments, expenses or disbursements;
(9) To exercise all voting or other rights with
respect to any property held by it and to grant proxies, discretionary
or otherwise;
(10) For the purposes of the Trust, to borrow money
from a bank, to issue its promissory note or notes therefor, and to
secure the repayment thereof by pledging any property (including but
not limited to any insurance policies) held by it;
(11) To employ and rely upon suitable contractors and
counsel, who may be counsel to the Company or to the Trustee, and to
pay their reasonable expenses and compensation from the assets of the
Trust to the extent not paid by the Company;
(12) To register investments in its own name or in
the name of a nominee; to hold any investment in bearer form; and to
combine certificates representing securities with certificates of the
same issue held by it in other fiduciary capacities or to deposit or to
arrange for the deposit of such securities with any depository, even
though, when so deposited, such securities may be held in the name of
the nominee of such depository with other securities deposited
therewith by other persons, or to deposit or to arrange for the deposit
of any securities issued or guaranteed by the United States government,
or any agency or instrumentality thereof, including securities
evidenced by book entries rather than by certificates, with the United
States Department of the Treasury or a Federal Reserve Bank, even
though, when so deposited, such securities may not be held separate
from securities deposited therein by other persons; provided, however,
that no securities held in the Trust shall be deposited with the United
States Department of the Treasury or a Federal Reserve Bank or other
depository in the same account as any individual property of the
Trustee, and provided, further, that the books and records of the
Trustee shall at all times show that all such securities are part of
the assets of the Trust;
(13) To settle, compromise or submit to arbitration
any claims (other than claims for benefits under the Executive
Agreements), debts or damages due or owing to or from the Trust,
respectively, to commence or defend suits or legal proceedings to
protect any interest of the Trust, and to represent the Trust in all
suits or legal proceedings in any court or before any other body or
tribunal; provided, however, that the Trustee shall not be required to
take any such action unless it shall have been indemnified by the
Company to its reasonable satisfaction against liability or expenses it
might incur therefrom;
(14) To hold and retain policies of life insurance,
annuity contracts, and other property of any kind which policies are
contributed to the Trust by the Company or are purchased by the
Trustee;
(15) To hold any other class of assets which may be
contributed by the Company and that is deemed reasonable by the
Trustee, unless expressly prohibited herein; and
(16) Generally, to do all acts, whether or not
expressly authorized, that the Trustee may deem necessary or desirable
for the protection of the assets of the Trust.
Section 6. Disposition of Income.
During the term of this Trust, all income received by the
Trust, net of expenses and taxes, shall be accumulated and reinvested.
Section 7. Accounting by Trustee.
The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
made, including such specific records as shall be agreed upon in writing between
the Company and the Trustee. Within ninety days following the close of each
calendar year and within thirty days after the removal or resignation of the
Trustee, the Trustee shall deliver to the Company and the Agent a written
account of its administration of the Trust during such year or during the period
from the close of the last preceding year to the date of such removal or
resignation, setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all securities and
investments purchased and sold with the cost or net proceeds of such purchases
or sales (accrued interest paid or receivable being shown separately), and
showing all cash, securities and other property held in the Trust at the end of
such year or as of the date of such removal or resignation, as the case may be.
Section 8. Responsibility of Trustee.
(a) The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims; provided, however, that the
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which is contemplated by,
and in conformity with, the terms of the Executive Agreements or this Trust and
is given in writing by the Company. Following a Change in Control, the Trustee
may rely on a certificate or documentation provided by an Executive regarding
entitlement to benefits under the Executive Agreements. In the event of a
dispute between the Company and an Executive as to any other matter, the Trustee
may apply to a court of competent jurisdiction to resolve the dispute.
(b) If the Trustee undertakes or defends any litigation
arising in connection with this Trust, the Company agrees to indemnify the
Trustee against the Trustee's costs, expenses and liabilities (including,
without limitation, attorneys' fees and expenses) relating thereto and to be
primarily liable for such payments.
(c) The Trustee may consult with legal counsel (who may also
be counsel for the Company generally prior to a Change in Control) with respect
to any of its duties or obligations hereunder.
(d) The Trustee may hire agents, accountants, actuaries,
investment advisors, financial consultants or other professionals and rely on
advice given by such professionals to assist it in performing any of its duties
or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers
conferred on the Trustees by applicable law, unless expressly provided otherwise
herein, provided, however, that if an insurance policy is held as an asset of
the Trust, the Trustee shall have no power to name a beneficiary of the policy
other than the Trust, to assign the policy (as distinct from conversion of the
policy to a different form) other than to a successor Trustee, or to loan to any
person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee pursuant
to this Trust Agreement or to applicable law, the Trustee shall not have any
power that could give this Trust the objective of carrying on a business and
dividing the gains therefrom, within the meaning of section 301.7701-2 of the
Procedure and Administrative Regulations promulgated pursuant to the Code.
Section 9. Compensation and Expenses of Trustee.
The Company shall pay the Trustee's administrative fees and
expenses (including, without limitation, any attorney's fees incurred by the
Trustee). If such payments are not made within a reasonable time, the Trustee
may charge the Trust for such fees and expenses.
Section 10. Resignation and Removal of Trustee.
(a) The Trustee may resign at any time by written notice to
the Company, which shall be effective sixty days after receipt of such notice
unless the Company and the Trustee agree otherwise.
(b) The Trustee may be removed by the Company on sixty days
notice or upon shorter notice accepted by the Trustee; provided, however, that
on and after the occurrence of a Change in Control, as defined herein, the
Trustee may only be removed with the approval of all of the Executives (or their
beneficiaries, as applicable).
(c) Upon resignation or removal of the Trustee and appointment
of a successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed as soon as practicable, but
in any event within sixty days after receipt of notice of resignation, removal
or transfer.
(d) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraphs (a) or (b) of this section. If no such
appointment has been made, the Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses of
the Trustee in connection with the proceeding shall be allowed as administrative
expenses of the Trust.
Section 11. Appointment of Successor.
(a) If the Trustee resigns or is removed in accordance with
Section 10 hereof, the Company may appoint, subject to Section 11(b) below, any
third party bank with a market capitalization exceeding $1,000,000,000 to
replace the Trustee upon resignation or removal. The successor Trustee shall
have all of the rights and powers of the former Trustee, including ownership
rights in the Trust. The former Trustee shall execute any instrument necessary
or reasonably requested by the Company or the successor Trustee to evidence the
transfer.
(b) If the Trustee resigns after a Change in Control, as
defined herein, the appointment by the Company of a successor Trustee in
accordance with Section 11(a) above shall be subject to the approval of all of
the Executives.
(c) The successor Trustee need not examine the records and
acts of any prior Trustee and may retain or dispose of existing assets of the
Trust, subject to Sections 7 and 8 hereof. The successor Trustee shall not be
responsible for and the Company shall indemnify and defend the successor Trustee
from any claim or liability resulting from any action or inaction of any prior
Trustee or from any other past event, or any condition existing at the time it
becomes successor Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement (including Appendix A hereto) may be
amended by a written instrument executed by the Trustee and the Company.
Notwithstanding the foregoing, (i) no such amendment shall conflict with the
terms of the Executive Agreements or shall amend or make the Trust revocable
after it has become irrevocable in accordance with Section 1(b) hereof other
than with the approval of all of the Executives and (ii) Appendix A may not be
amended following a Change in Control. The Trust may not be amended so as to in
any way adversely affect the rights of the Agent without the Agent's written
consent.
(b) The Trust shall not terminate until the date on which the
Executives and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Executive Agreements and all expenses of the Trust have been
paid unless sooner revoked in accordance with Section 1(b) hereof. Upon
termination of the Trust, any assets remaining in the Trust shall be returned to
the Company; provided that upon any such termination, the Trustee shall
distribute the assets of its Trustee to the Agent, or as the Agent may otherwise
direct, without further authorization or consent of the Company.
(c) Notwithstanding anything contained herein to the contrary,
no provision of this Trust Agreement may be amended by the Company in any manner
adverse to the Executives and beneficiaries following a Change in Control, as
defined herein.
Section 13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law
shall be ineffective to the extent of any such prohibition, without invalidating
the remaining provisions hereof.
(b) Benefits payable to the Executives and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
(d) For purposes of this Trust, a "Change in Control" shall be
deemed to have occurred if (i) the Company shall enter into a definitive
agreement providing for (x) any consolidation or merger of the Company in which
the Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's common stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders of the
Company's common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company shall
approve any plan or proposal for liquidation or dissolution of the Company, or
(iii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall become
the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act)
of 40% or more of the Company's outstanding common stock other than pursuant to
a plan or arrangement entered into by such person and the Company, or (iv)
either (x) during any period of two consecutive years, individuals who at the
beginning of such period constitute the entire Board of Directors of the Company
shall cease for any reason to constitute a majority thereof unless the election,
or the nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period or (y) the
Company shall at any time enter into a definitive agreement pursuant to which
individuals who on the date of such agreement constitute the entire Board of
Directors of the Company will cease to constitute a majority thereof.
Notwithstanding anything to the contrary contained in this Section 13, a "Change
in Control" shall not be deemed to have occurred by virtue of any sale, lease,
exchange, transfer or other disposition of all or substantially of the assets of
the Company by the Agent pursuant to its rights under the Loan Agreement.
Section 14. Effective Date.
The effective date of this Trust Agreement shall be May 12,
1999.
IN WITNESS WHEREOF, this instrument has been executed under
seal as of the day and year first above written.
DESIGNS, INC.
By: /s/ James G. Groniger
Name: James G. Groniger
Title: Board of Directors
STATE STREET BANK AND TRUST COMPANY
By:/s/ Peter H. Talbot
Name: Peter H. Talbot
Title: Vice President
APPENDIX A
1. Employment Agreement, dated as October 16, 1995 between Designs, Inc.
and Joel H. Reichman.
2. Employment Agreement, dated as October 16, 1995 between Designs, Inc.
and Scott N. Semel.
3. Employment Agreement, dated as May 9, 1997 between Designs, Inc. and
Carolyn Faulkner.
4. Indemnification Agreement, effective as of December 10, 1998 between
Designs, Inc. and Joel H. Reichman.
5. Indemnification Agreement, effective as of December 10, 1998 between
Designs, Inc. and Scott N. Semel.
6. Indemnification Agreement, effective as of December 10, 1998 between
Designs, Inc. and Carolyn Faulkner.
7. Obligations to any Executive pursuant to Section 10 of the By-laws of
Designs, Inc.
EX-11
EARNINGS PER SHARE
Exhibit 11. Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
For the three months ended For the six months ended
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
----------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator:
Net loss $ (536) $ (3,094) $ (1,398) $ (6,146)
Denominator:
Weighted average common shares
outstanding 15,891 15,773 15,890 15,755
-----------------------------------------------------------
Basic EPS $ (0.03) $ (0.20) $ (0.09) $ (0.39)
===========================================================
Diluted EPS Computation
Numerator:
Net loss $ (536) $ (3,094) $ (1,398) $ (6,146)
Denominator:
Stock options, excluding anti-dilutive
options of 127 shares and 133 shares
for the three and six months ended
July 31, 1999, respectively, and
2 shares and 7 shares for the three
and six months ended August 1, 1998,
respectively --- --- --- ---
----------------------------------------------------------
Total Shares 15,891 15,773 15,890 15,755
Diluted EPS $ (0.03) $ (0.20) $ (0.09) $ (0.39)
===========================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information
extracted from the consolidated Balance Sheets of Designs,
Inc. as of July 31, 1999 and the Consolidated Statements of
Income for the six months ending July 31, 1999 and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 1,868
<SECURITIES> 2,300
<RECEIVABLES> 273
<ALLOWANCES> 0
<INVENTORY> 61,198
<CURRENT-ASSETS> 66,944
<PP&E> 46,310
<DEPRECIATION> 28,792
<TOTAL-ASSETS> 110,249
<CURRENT-LIABILITIES> 47,493
<BONDS> 0
0
0
<COMMON> 162
<OTHER-SE> 62,594
<TOTAL-LIABILITY-AND-EQUITY> 110,249
<SALES> 82,742
<TOTAL-REVENUES> 82,742
<CGS> 61,137
<TOTAL-COSTS> 61,137
<OTHER-EXPENSES> 23,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 478
<INCOME-PRETAX> (2,271)
<INCOME-TAX> (873)
<INCOME-CONTINUING> (1,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,398)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
[LEVI STRAUSS & CO. LETTERHEAD]
VIA FACSIMILE and FEDERAL EXPRESS
July 29, 1999
Joel Reichman Seymour Holtzman
President and CEO Chairman and CEO
Designs, Inc. Jewelcor Management, Inc.
66 B Street 100 North Wilkes-Barre Blvd.
Needham, MA 02494 4th Floor
Wilkes-Barre, PA 18702
Re: The Designs, Inc./Levi Strauss & Co. License Agreement
Dear Messrs. Reichman and Holtzman:
We note with interest the recent filing of proxy statements by
Designs, Inc. and Jewelcor Management, Inc., respectively, in connection
with the 1999 Annual Meeting of Shareholders of Designs currently scheduled
for September 22, 1999.
Designs is very important to Levi Strauss & Co., both as a large
customer and as its licensee under a trademark license agreement to operate
Levi's(R) and Dockers(R) outlet stores in more than 25 states. Due to this
relationship, as well as the significance of the License Agreement to
Designs(1), we thought that some comment from LS&CO. regarding certain of the
statements in the proxy filings might help to inform the coming months for
you and Designs' shareholders.
First, LS&CO. does not agree with the Jewelcor proxy's assertion
that the proposed election of JMI Nominees "is not a transfer of control
and will not cause a concern under the License Agreement with Levi
Strauss." To the contrary, and as Jewelcor's proxy materials go on to
contemplate, LS&CO.'s view is that displacement of Designs' current Board
by the JMI Nominees would fall within the License Agreement's provisions
prohibiting transfers. That is, Designs would need LS&CO.'s consent for the
License Agreement to continue in effect if and after the JMI Nominees
displace the current Designs directors.
- -----------
(1) Designs' proxy filing states: "The Company also believes that its
relationship with Levi Strauss is the most significant asset of the
Company ..."
Second, the Jewelcor proxy further indicates that in the event
LS&CO. takes this view, Jewelcor will "seek to have Levi Strauss confirm
that no 'transfer' or breach has occurred or waive the occurrence of any
'transfer' or breach." Jewelcor is, of course, free to approach LS&CO., as
it deems appropriate. Based on its direct experience to date with Jewelcor
and its principals (described in more detail below), however, LS&CO. is not
presently inclined to waive any of its rights under the License Agreement
and indeed, intends to exercise them fully.
Third, the Jewelcor proxy indicates that if the JMI Nominees are
elected, Jewelcor would take the immediate step, among other things, of
selling Designs, through the retention of a New York investment banking
firm.(2) Whether or not the JMI Nominees' displacement of the current Board
(should it occur) is ultimately found to constitute a prohibited transfer
under the License Agreement, there is no doubt that Jewelcor's proposed
sale of Designs to a third party without LS&CO.'s consent would fall within
the prohibited transfer provisions.
On the face of Jewelcor's proxy, then, there are at least two events
which implicate the License Agreement's prohibited transfer provisions -
the potential election of the JMI Nominees, and, should the election occur
and a buyer be located, the proposed sale of Designs to a third party.
Should these eventualities ever arise, LS&CO. would of course consider in
good faith the facts then before it in determining whether to consent to
any transfer of Designs, and whether the event in question resulted in a
material breach of the License Agreement.
- --------------------
(2) Designs' proxy filing, as well as previous correspondence filed with
the Securities and Exchange Commission, indicates that during early
1999 the Special Committee of the Board of Designs, "acting through
Shields & Company, contacted 72 third parties which [they] believed
might be interested in purchasing the Company. Of these 72 third
parties, 17 expressed interest and thereafter received a detailed
memorandum describing the Company and its business." This process of
courting potential buyers led to discussions with Jewelcor regarding
its potential acquisition of Designs, but to LS&CO.'s knowledge no
other potential buyers made a bid. The Jewelcor proxy does not
elaborate on what additional steps it would take to successfully
locate a potential buyer, or why it would succeed when Shields &
Company failed.
Given the importance of the continuation of the LS&CO. relationship
to Designs' successful operation(3), however, let me identify for you some of
LS&CO.'s substantial concerns which have developed as we have observed the
battle for control of Designs unfold over recent months. These
considerations would factor substantially into LS&CO.'s evaluation of any
transfer.
o Our trademarks, notably the Levi's(R) and Dockers(R) brand names
which are the subject of the License Agreement, are LS&CO.'s crown
jewels. Should our marks ever become associated in consumers' minds
with shoddy or even average business practices, this devalues LS&CO.
We will not enter into, or remain in business with, any business
partner who does not afford our marks appropriate respect and
treatment.
o Designs is one of LS&CO.'s largest accounts as measured by sales volume
and number of store locations. Designs currently operates more than
100 Levi's(R)and Dockers(R)outlet stores in 27 states, representing a
substantial product flow in an increasingly important retail channel.
The potential disruption of Designs' retail presence and approach which
could result from Jewelcor's proposed changes in Designs' Board
membership, management and ownership gives rise to substantial business
risk to LS&CO.
- -----------------
(3) Even Jewelcor's proxy indicates that "if . . . Levi Strauss were to
ultimately terminate the License Agreement, the Company's business
could be materially adversely effected [sic]."
o In recent years the LS&CO. and Designs' relationship has variously
included vendor/manufacturer, licensor/licensee and joint venturers'
dynamics. Through these experiences doing business together, the
crucial importance of open, timely communications and a successful,
indeed intimate, day to day working relationship between LS&CO. and
Designs has become increasingly apparent. Indeed, representatives of
our companies communicate virtually daily about a broad range of
operational issues associated with running the outlet stores. LS&CO.
continues to believe that a strong working relationship based on
communication, trust and confidence is critical to its and Designs'
business success.
o LS&CO.'s entire direct experience with Jewelcor and its principals
occurred in Spring 1999, during the course of Jewelcor's discussions
with Designs regarding a prospective acquisition of Designs. In
anticipation of being asked to consent to an assignment of the License
Agreement to Jewelcor, and seeking information relevant to the
anticipated consent request (e.g., information about Jewelcor's and its
principals' retail and apparel experience, business plan for Designs,
financial strength, etc.), LS&CO. provided Jewelcor's principals with a
written information request and confidentiality agreement under which
the requested information could be provided. Jewelcor acknowledged
receipt of LS&CO.'s request; however, no responsive information
whatsoever was ever provided. LS&CO. had no further communications
from Jewelcor until, after LS&CO. sent a letter to Jewelcor withdrawing
its information request in light of public reports that Jewelcor's bid
for Designs had been withdrawn, Jewlecor sent LS&CO. a letter
indicating that it had withdrawn its bid. In our opinion, even if
Jewelcor furnished the information now and LS&CO. concluded that the
information met LS&CO.'s criteria, this bodes poorly for the future of
a successful working relationship between LS&CO. and a
Jewelcor-controlled Designs.
o Jewlecor's lack of communication with LS&CO., which by any measure
is an important participant in Designs' business, persists even as
this proxy fight gets underway.
o Finally, since early 1999 (within several weeks of Jewelcor's
acquisition of an approximately 9.9% share of Designs at record low
share prices), this series of initiatives seeking to gain control of
Designs has created a substantial distraction and cloud of uncertainty
for the Designs' business and incumbent management. In LS&CO.'s view,
Designs' resources would be more productively dispatched to concentrate
on managing and building the Designs business without disruptions such
as this proxy fight, which promises continuing turmoil through at least
September 22, 1999. Recognizing Jewelcor's understandable interest in
maximizing shareholder value, we submit that these continuing control
plays themselves impair Designs' ability to improve all participants'
return on their investments.
Let me summarize LS&CO.'s key positions regarding Designs and the Jewelcor
proxy's proposals. LS&CO. views both the proposed displacement of the
Designs Board in its entirety, and the stated plan to sell Designs to a
third party, as triggering events under its License Agreement's prohibition
against transfers without its consent. LS&CO. will not waive its rights
under the License Agreement and presently intends to exercise them fully.
Finally, LS&CO.'s direct experience with Jewelcor's and its principals'
communication approach and lack of responsiveness leads LS&CO. to believe
that it is unlikely that Jewelcor will successfully establish a productive
working relationship with LS&CO., should Jewelcor gain control of Designs.
Very truly yours,
/s/ Lauren Miller
Lauren Miller
Vice President, Finance, Business Development
[LEVI STRAUSS & CO. LETTERHEAD]
VIA FACSIMILE and FEDERAL EXPRESS
August 27, 1999
Seymour Holtzman
Chairman and CEO
Jewelcor Management, Inc.
100 North Wilkes-Barre Blvd., 4th Floor
Wilkes-Barre, PA 18702
Re: The Designs, Inc./Levi Strauss & Co. License Agreement
Dear Mr. Holtzman:
Thank you for your letter of August 16, 1999. You had told me, when
you called me on July 29, 1999, that you and perhaps others from your group
desired to meet with representatives of Levi Strauss & Co. We assumed you
wanted to furnish us with the information we had requested last May, and
also try to persuade us to waive our rights under our License Agreement
with Designs. I expressed to you LS&CO.'s willingness to participate in
such a meeting.
We advise you, again, that LS&CO. believes the displacement of
current Designs directors by Jewelcor nominees falls within Section 19 of
the License Agreement. I mention this because your revised proxy materials
state then, if and after the Jewelcor nominees are elected, they will seek
to have LS&CO. confirm that their election does not fall within Section 19.
The nominees already have LS&CO.'s views on that subject, i.e., before the
election.
Finally, though I am reluctant to entertain this sort of diversion,
let me say that I am genuinely perplexed by your letter's assertions about
"ad hominem comments" and "shoddy business practices." There is nothing,
expressed or implied, in my letter that remotely fits that description.
Very truly yours,
/s/ Lauren Miller
Lauren Miller
Vice President, Finance, Business
Development
Cc: Joel Reichman
