SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 1999 (Fiscal 1998) 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
incorporation of principal executive offices) Identification No.)
66 B Street, Needham, MA 02494
(Address of principal executive offices) (Zip Code)
(781) 444-7222
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
(Title of each Class)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant, based on the last sales price of such stock on
April 28, 1999 was approximately $30.5 million.
The registrant had 15,927,551 shares of Common Stock, $0.01 par value,
outstanding as of April 28, 1999.
continued
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DOCUMENTS INCORPORATED BY REFERENCE
Form 10-K Requirement Incorporated Document
- --------------------- ---------------------
Part III
Item 10 Directors and Executive All information under the caption
Officers "Nominees for Director and Executive
Officers" in the Company's definitive
Proxy Statement which is expected to be
filed within 120 days of the end of the
fiscal year ended January 30, 1999.
Item 11 Executive Compensation All information under the caption
"Executive Compensation" in the
Company's definitive Proxy Statement
which is expected to be filed within
120 days of the end of the fiscal
year ended January 30, 1999.
Item 12 Security Ownership of All information under the caption
Certain Beneficial Owners "Security Ownership of Certain
Beneficial Owners and Management"
in the Company's definitive Proxy
Statement which is expected to be
filed within 120 days of the end of the
fiscal year ended January 30, 1999.
Item 13 Certain Relationships and All information under the caption
Related Transactions "Certain Relationships and Related
Transactions" in the Company's definitive
Proxy Statement which is expected to be
filed within 120 days of the end of the
fiscal year ended January 30, 1999.
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DESIGNS, INC.
Index to Annual Report on Form 10-K
Year Ended January 30, 1999
PART I Page
Item 1. Business...................................................... 4
Item 2. Properties.................................................... 10
Item 3. Legal Proceedings............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders........... 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................... 12
Item 6. Selected Financial Data....................................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.... 25
Item 8. Financial Statements and Supplementary Data................... 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 25
PART III
Item 10. Directors and Executive Officers of the Registrant............ 26
Item 11. Executive Compensation........................................ 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 26
Item 13. Certain Relationships and Related Transactions................ 26
The information called for by Items 10, 11, 12 and 13, to
the extent not included in this document, is incorporated
herein by reference to the Company's definitive proxy
statement which is expected to be filed within 120 days
after the Company's fiscal year ending January 30, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 27
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PART I.
Item 1. Business
Summary
Designs, Inc. (the "Company) is a specialty retailer based in the United
States selling quality branded apparel and accessories. The Company markets a
broad selection of Levi Strauss & Co. and other well-known brand merchandise
through outlet stores under the names "Levi's(R) Outlet By Designs", "Dockers(R)
Outlet by Designs", "Buffalo Jeans(R) Factory Stores" and "Boston Traders(R)
Outlet Stores" and through mall-based first quality stores under the names
"Designs" and "BTC". Through October 31, 1998, the Company also owned a 70%
interest in a partnership that operated, as part of a joint venture (the "Joint
Venture") with a subsidiary of Levi's Only Stores, Inc. ("LOS"), stores under
the name "Original Levi's Stores(TM)" and outlet stores under the name
"Levi's(R) Outlet". The Company uses certain Levi Strauss & Co. trademarks on
its Levi's(R) Outlet and Dockers(R) Outlet by Designs stores pursuant to a
trademark license agreement with Levi Strauss & Co.
In fiscal year 1998, the Company re-aligned its store portfolio and
overhead structure to narrow its business to one focused on the profitable
Levi's(R) and Dockers(R) Outlet by Designs stores. The Company's Outlet segment
also includes its test of five Buffalo Jeans(R) Factory Stores, launched in
August 1998. As part of this re-alignment to primarily an outlet based business,
the Company closed eight of the eleven Boston Trading Co.(TM)/BTC(TM) mall
stores, and recorded a store closing reserve in the fourth quarter of fiscal
1998 for the remaining three BTC(TM) stores which are planned, barring
unforeseen circumstances, to close during the first half of fiscal 1999. In
addition, the Company closed 16 Designs stores, and recorded a store closing
reserve for the closing of one Designs store that is also planned to close in
the first half of fiscal 1999. Further, the Company closed seven Boston
Traders(R) Outlet stores, and recorded a store closing reserve for the remaining
four Boston Traders(R) outlet stores that are planned, barring unforeseen
circumstances, to close by the end of the first half of fiscal 1999.
In conjunction with the Company's decision to focus on its outlet
business, the Company purchased 25 Levi's(R) and Docker's(R) outlets from LOS on
September 30, 1998. On October 31, 1998, the Company assumed full ownership of
the 11 Joint Venture Levi's(R) Outlets stores and began the process of
dissolving the Joint Venture. In addition, the Joint Venture distributed three
Original Levi's Stores(R) to LOS. The remaining eight Original Levi's Stores(TM)
held in the Joint Venture were closed by year-end in connection with the process
of dissolving the Joint Venture. The purchase of the 25 Levi's(R) and
Docker's(R) Outlets was planned to enable the Company to leverage its existing
overhead and expense structure over a larger sales volume, in an effort to
produce incremental earnings estimated at $2.8 million and cash flows of $3.6
million on a full year basis.
These strategic actions return Designs Inc. to its' core competency as a
single branded outlet operator, with 95 of it's 105 stores devoted exclusively
to selling Levi Strauss & Co. brands of apparel and accessories.
On December 7, 1998, a consent with respect to 1,570,200 shares of Common
Stock executed on behalf of Jewelcor Management, Inc., a Nevada corporation
("Jewelcor"), and its controlling shareholder, Seymour Holtzman, was delivered
to the Company for the purpose of removing and replacing the members of the
Company's Board of Directors other than Chairman Stanley I. Berger. A
preliminary Consent Solicitation Statement was filed on December 7, 1998 by the
Holtzman Group with the Securities and Exchange Commission. On December 11,
1998, the Board of Directors of the Company determined to oppose the consent
solicitation (the "Consent Solicitation") by Jewelcor and Mr. Holtzman.
The Consent Solicitation expired without the election of any new members
to the Company's Board of Directors. Accordingly, Stanley I. Berger, Joel H.
Reichman, James G. Groninger, Melvin I. Shapiro, Peter L. Thigpen and Bernard M.
Manuel remained in office as members of the Company's Board of Directors
following the termination of the Consent Solicitation.
The Company did not enter into any settlement with Jewelcor or Mr.
Holtzman terminating the Consent Solicitation.
On December 11, 1998, the Company announced that its Board of Directors
had formed a committee of independent outside directors to consider the
Company's strategic alternatives, including a possible sale of the Company.
Store Formats
The Company's Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs
stores are located in outlet parks and shopping centers located primarily in the
eastern United States. These stores sell manufacturing overruns, discontinued
product, and irregulars purchased directly from Levi Strauss & Co. and its
licensees. In addition, these stores also sell end-of-season Levi's(R) and
Dockers(R) merchandise transferred from Designs and BTC(TM) stores. In Fiscal
1998, 5% of the inventory receipts for these stores were transferred from the
Designs and BTC(TM) stores.
Many of the manufacturers' outlet parks and shopping centers in which
Levi's(R) Outlet by Designs stores are located have matured, resulting in
limited year-to-year increases in customer traffic. The combination of this
maturing outlet store base, increased competition, and a limited merchandise mix
of Levi's(R) and Dockers(R) brand products resulted in unsatisfactory comparable
store performance in fiscal years 1997 and 1998.
The five Designs stores that are expected to remain open in fiscal 1999
are located in enclosed regional shopping centers and offer a broad selection of
Levi Strauss & Co. brands of merchandise, supplemented by additional brand names
where appropriate. The Company currently plans, barring unforeseen
circumstances, to carry a selection of Levi Strauss & Co brand
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products in these stores equal to approximately 70% of the merchandise mix. The
Company's strategy in these stores is to continue selling Levi Strauss & Co.
brands and complementary brands of tops and bottoms. The leases for two of these
five stores expire at the end of fiscal 1999.
Buffalo Jeans(R) Factory Stores, which operate in outlet parks on the
eastern seaboard, sell close-out and in-season Mens and Womens apparel under the
Buffalo Jeans(R) brand name at 30% off of regular retail prices. The Buffalo
Jeans(R) brand is currently sold in leading department stores and, as of today,
seems not to be subject to wide-spread discounting in its first quality
distribution channels. The Buffalo Jeans(R) line, which consists of jeans, tops,
dresses, skirts and outerwear, is focused predominantly on the junior customer,
with some basic jeans and tops designed to appeal to a broad spectrum of
customers. The Company believes that the Buffalo Jeans(R) Factory Stores
represent an opportunity to capitalize on the current growth in teen fashion in
the lower occupancy cost outlet channel.
Management believes that the Company competes with other apparel retailers
by offering quality merchandise, knowledgeable in-store service and competitive
price points. The Company stresses product training with its sales staff and,
with the assistance of Levi Strauss & Co. and merchandise materials supplied by
other brands sold in the Designs stores, provides its sales personnel with
substantial product knowledge training across all branded product lines.
The following table provides a summary of the number of stores in
operation at year end for the past three fiscal years. Levi Strauss & Co.
approves all new outlet store locations which carry Levi Strauss & Co. brands
and use any trademark owned by Levi Strauss & Co.
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
Levi's(R) Outlet by Designs 59 59 59
Levi's(R) Outlet previously operated
by the Joint Venture (1) 11 -
Levi's(R) Outlet stores acquired (2) 9 -
Dockers(R) Outlet stores acquired (2) 16 -
Buffalo Jeans(R) Factory Stores 5
Boston Trading Co.(R) (3) 3 11
Designs/BTC(TM) (3) 6 22 44
Boston Traders(R) outlet stores (3) 4 12 27
Joint Venture: (1)
Original Levi's Stores(R) - 11 11
Levi's(R) Outlets - 11 10
--- --- ---
Sub-total 113 126 151
=== ===
Stores planned to close in fiscal
1999 (4) (8)
---
Total stores 105
===
(1) In Fiscal 1998, the Company and Levi Strauss & Co. agreed to dissolve and
wind up the Joint Venture between subsidiaries of the two companies. As
part of the dissolution process, on October 31, 1998, the Joint Venture
distributed 11 Levi's(R) Outlet stores to the Company and three Original
Levi's Stores(R) to Levi's Only Stores, Inc., a wholly-owned subsidiary of
Levi Strauss & Co. The remaining eight Original Levi's Stores(R) were
closed by the end of fiscal 1998.
(2) On September 30, 1998, the Company acquired from Levi's Only Stores, Inc.
16 Dockers(R) Outlet stores and nine Levi's(R) Outlet stores for
approximately $9.7 million.
(3) In Fiscal 1998, the Company closed 38 stores as part of the Company's
store closing programs. Five Boston Traders(R) outlet stores were
converted to Buffalo Jeans(R) Factory Stores throughout fiscal 1998. In
fiscal 1997, the Company closed 16 Designs stores and 15 Boston Traders(R)
outlet stores.
(4) In the fourth quarter of fiscal 1998, the Company established reserves to
close four Boston Traders(R) outlet stores, three Boston Trading Co.(R)
stores and one Designs store.
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On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the
Company, and a subsidiary of Levi's Only Stores Inc. ("LOS"), a wholly-owned
subsidiary of Levi Strauss & Co., entered into a partnership agreement (the
"Partnership Agreement") to sell Levi's(R) brand jeans and jeans-related
products. The joint venture that was established by the Partnership Agreement is
known as The Designs/OLS Partnership (the "OLS Partnership"). In the third
quarter of fiscal 1998, the Company and Levi Strauss & Co. agreed to dissolve
and wind up the joint venture between subsidiaries of the two companies. As part
of the dissolution process, on October 31, 1998, the OLS Partnership distributed
11 Levi's(R) Outlet stores to the Company with a net book value of approximately
$6.4 million. In addition, the OLS Partnership distributed to LOS three Original
Levi's Stores(R) located in New York City and Boston, Massachusetts with a net
book value of $5.5 million. The remaining eight Original Levi's Stores(R) owned
by the OLS Partnership were closed during the fourth quarter of fiscal 1998.
The Company's present plans for expansion in fiscal 1999 include the
recent opening of three new Levi's(R)/Dockers(R) Outlet by Designs stores and
relocating seven existing Levi's(R) Outlet by Designs stores to new outlet
centers in the Eastern United States. All ten of these new stores are presently
planned to be built in the Company's new outlet store format, which features a
combined Dockers(R) Outlet by Designs store and Levi's(R) Outlet by Designs
store that separately displays each brand in its own unique environment. In
fiscal 1999, capital expenditures related to these new stores are expected,
barring unforeseen circumstances, to total approximately $1.7 million. The
Company continually evaluates the performance of all of its stores and may, from
time to time, decide to close or reduce the size of certain store locations.
Customer Base
In the Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs
stores, the Company believes that its customer base primarily reflects that of
the Levi's(R) and Dockers(R) brand customer. These stores also continue to
attract foreign travelers shopping for Levi's(R), Dockers(R) and Slates(R) brand
apparel and accessories. The Company's product selection offered in these stores
is designed to satisfy the casual apparel needs of customers in all age groups
and income brackets.
Merchandising and Distribution
In its Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs
stores, the Company offers a selection of Levi Strauss & Co. brands of
merchandise including manufacturing overruns, discontinued lines and irregulars
purchased by the Company directly from Levi Strauss & Co. and end-of-season
merchandise transferred from the Designs and BTC(TM) stores. The Company
continues to evaluate and act upon opportunities to purchase substantial
quantities of Levi Strauss & Co. brand merchandise offered to the Company by
Levi Strauss & Co. for sale in the Levi's(R) and Dockers(R) Outlet by Designs
stores.
All merchandising decisions, including pricing, markdowns, advertising and
promotional campaigns, inventory purchases and merchandise allocations, are made
centrally at the Company's headquarters with input from field operations
personnel.
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Trademarks
The Company is the owner of the "Boston Traders(R)" trademark and certain
other trademarks acquired as part of the acquisition of certain assets of Boston
Trading Ltd., Inc.
"Dockers(R)," "Levi's(R)" and "Slates(R)" are registered trademarks of
Levi Strauss & Co. Buffalo Jeans(R) is a registered trademark of Buffalo
DeFrance.
Store Operations
The Company currently employs one Vice President and Director of Store
Operations who reports directly to the President of the Company. Two Regional
Vice Presidents, who report to the Vice President and Director of Store
Operations, are responsible for the operations and profitability of stores
within specific geographic regions. All three of these Vice Presidents have over
15 years of service with the Company.
In order to provide management development and guidance to individual
store managers, the Company employs approximately 15 district managers, having
an average employment period of 6.5 years. Each district manager is responsible
for hiring and developing store managers at the stores assigned to that district
manager's area and for the sales and overall profitability of those stores.
District managers report directly to a Regional Vice President.
Designs and BTC(TM) stores average approximately 6,100 square feet in size
and are located in enclosed regional shopping malls usually anchored by
department stores. Levi's(R) Outlet by Designs stores are located in
manufacturers' outlet parks and destination shopping centers and average
approximately 12,000 square feet in size. The average square footage of the 25
acquired Dockers(R) and Levi's(R) Outlet stores and the 11 Levi's(R) Outlet
stores that were distributed to the Company from the Joint Venture is
approximately 5,200 square feet.
The Company's stores utilize interior design and merchandise layout plans
designed by the Company's visual merchandising team, which plans are
specifically designed to promote customer identification of the store as a
specialty store selling quality branded apparel and accessories. The merchandise
layout is further customized by store management and the Company's visual
merchandising department to suit each particular store location. The Dockers(R)
and Levi's(R) Outlet by Designs stores prominently display Levi's(R) and
Dockers(R) brand logos and utilize distinctive promotional displays. The Company
uses certain Levi Strauss & Co. logos and trademarks on store signs with the
permission of Levi Strauss & Co.
Customer Service & Training
"Designs University" was established in fiscal 1996 to implement associate
training and development programs throughout the organization. The Company's
Operational Support and Development team is responsible for developing and
teaching creative programs that will enhance associate performance.
Sales Associate expectations are established at all levels of training,
beginning with the Sales Associate Development Program. This program introduces
the associate to the Company's operational policies, product information and
customer service objectives. Through this program, associates are taught that
servicing the customer is the highest priority. Management believes that Sales
Associates are trained to accomplish the goal of reinforcing the customer's
perception of the Company's stores as branded outlet and specialty stores and of
differentiating its stores from those of the Company's competitors.
All members of store management participate in the Store Management
Development Program. Associates learn how to perform critical management
functions required to successfully operate a store. The Store Management
Development Program focuses on fundamental operational procedures, expense
control and personnel management. The store management team is responsible for
all operational matters in the store, including the hiring and training of sales
associates
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Designs, BTC(TM) and Buffalo Jeans(R) Factory Stores each employ
approximately 10 associates. Each Levi's(R) and Dockers(R) Outlet by Designs
store employs approximately 30 associates. Store staffing typically includes a
store manager, one or more assistant managers and shift supervisors, and a team
of full-time and part-time sales associates. Store manager candidates or
assistant manager candidates may also be included on the team in specific
stores.
Information Systems
The Company believes that management information systems are an important
factor in the continued growth of the Company. The Company continues to devote
significant resources to the development of information systems, which are
intended to enable the Company centrally to maintain inventory, pricing and
other financial controls. During fiscal 1998, the Company upgraded its JDA
merchandise management software to a new Year 2000 compliant version. This
software is designed to enhance the analytical capabilities of the Company's
merchandise and financial functions and to provide an integrated business
approach to the financial and merchandising systems. During fiscal 1999, the
Company will install a new point of sale system that has been designed to be
Year 2000 compliant. Point of sale data, in conjunction with a full complement
of EDI transactions handling invoicing, advanced shipment notices and purchase
orders are the primary sources of data input for the merchandise management
package. During fiscal 1999, the Company also expects to revamp its store and
processing center receiving processes and install electronic scanning for
receiving in all stores.
The Company makes use of software systems supporting vendor managed
replenishment for core merchandise. These processes utilize available sales and
inventory data to react to the individual needs of each store on a timely basis.
Presently, only Levi Strauss & Co. is providing vendor managed replenishment to
the Company.
The Company's status regarding Year 2000 readiness is discussed more fully
below. See Management's Discussion and Analysis.
Advertising
The Company relies on the visibility and recognition of the Levi's(R) and
Dockers(R) brand names, as well as the natural flow of traffic that results from
locating stores in areas of high retail activity including destination outlet
centers and regional malls. Historically, the Company has received co-operative
advertising allowances from Levi Strauss & Co. that fund a substantial portion
of the Company's advertising expenditures. In fiscal 1998 the Company received
allowances totaling approximately 36% of its advertising expenditures. The
cooperative advertising allowances associated with the Company's advertising
will fluctuate in proportion to amounts of regularly priced Levi Strauss & Co.
brand products purchased and Levi Strauss & Co.'s cooperative advertising
policies.
Competition
The United States casual apparel market is highly competitive with many
national and regional department stores, specialty apparel retailers and
discount stores offering a broad range of apparel products similar to those sold
by the Company. The Company considers any casual apparel manufacturer operating
in outlet parks throughout the United States competitors in the casual apparel
market.
A majority of the Company's business involves the sale of branded apparel
and accessories sold by or manufactured under license from Levi Strauss & Co. in
an outlet mall environment. Levi Strauss & Co. is involved in the highly
competitive fashion apparel industry. Levi's(R) brand jeans have been impacted
by the increased competition from private label as well as fashion jeans market
entrants, plus national sales trends of Levi's(R) brand products.
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Employees
As of January 30, 1999, the Company employed approximately 1,800
associates, of whom 600 were full-time personnel. The Company hires additional
temporary employees during the peak late summer and holiday seasons.
All qualified full-time employees are entitled, when eligible, to life,
medical, disability and dental insurance and to participate in the Company's
401(k) retirement savings plan. Store managers, district managers and vice
presidents are eligible to receive incentive compensation subject to the
achievement of specific performance objectives related primarily to sales and
profitability. Vice Presidents and District Managers are also entitled to use an
automobile provided by the Company or to receive an automobile allowance. Sales
personnel are compensated on an hourly basis and, generally, receive no
commissions; but from time to time are eligible to earn sales incentive payments
from sales contests. Vice Presidents, certain District and store managers and
certain other employees, have been granted stock options. None of the Company's
employees are represented by a union.
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Item 2. Properties
As of January 30, 1999, the Company operated 95 Levi's(R) Outlet and
Dockers(R) Outlet by Designs stores, five Buffalo Jeans(R) Factory Outlet
stores, nine Designs and BTC(TM) stores and four Boston Traders(R) outlet
stores. All such stores are leased by the Company directly from shopping mall
and outlet park owners. Designs and BTC(TM) store leases are generally ten years
in length with no renewal options. Outlet store leases are usually for a series
of shorter periods and certain leases contain renewal options extending their
terms to between 10 and 15 years. Most of the Company's outlet store leases
provide for annual rent based on a percentage of store sales, subject to
guaranteed minimum amounts.
Sites for store expansion are selected on the basis of several factors
intended to maximize the exposure of each store to the Company's target
customers. These factors include the demographic profile of the area in which
the site is located, the types of stores and other retailers in the area, the
location of the store within the mall and the attractiveness of the store
layout. The Company also utilizes financial models to project the profitability
of each location using assumptions such as mall sales per square foot averages,
estimated occupancy costs and return on investment requirements. The Company
believes that its selection of locations enables the Company's outlet and mall
stores to attract customers from the general shopping traffic and to generate
its own customers from surrounding areas.
The lease for the Company's headquarters office, which began in November
1995, is for a period of ten years. The lease provides for the Company to pay
all occupancy costs associated with the land and the 80,000 square foot
building. The Company entered into an agreement, effective April 1, 1998, to
sublease approximately 15,000 square feet to a sublessee for a term of five to
eight years. The Company also entered into a second agreement effective July 1,
1998 to sublease an additional 15,300 square feet to a sublessee for a term of
five to seven years. The Company leases two warehouse facilities to receive and
distribute merchandise for all of the Company's store locations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Capital Expenditures."
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Item 3. Legal Proceedings
The Company is a party to litigation and claims arising in the course of
its business. Management does not expect the results of these actions to have a
material adverse effect on the Company's business or financial condition.
In January 1998 Atlantic Harbor, Inc. filed a lawsuit against the Company
for failing to pay the outstanding principal amount of the Purchase Note. In
March 1998 the Company filed a counterclaim against Atlantic Harbor, Inc.
alleging that the Company was damaged in excess of $1 million because of the
breach of certain representations and warranties made by Atlantic Harbor, Inc.
and its stockholders 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 results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
On December 7, 1998, a consent with respect to 1,570,200 shares of Common
Stock executed on behalf of Jewelcor Management, Inc., a Nevada corporation
("Jewelcor"), and its controlling shareholder, Seymour Holtzman, was delivered
to the Company for the purpose of removing and replacing the members of the
Company's Board of Directors other than Chairman Stanley I. Berger. A
preliminary Consent Solicitation Statement was filed on December 7, 1998 by the
Holtzman Group with the Securities and Exchange Commission. On December 11,
1998, the Board of Directors of the Company determined to oppose the consent
solicitation (the "Consent Solicitation") by Jewelcor and Mr. Holtzman.
The Consent Solicitation expired without the election of any new members
to the Company's Board of Directors. Accordingly, Stanley I. Berger, Joel H.
Reichman, James G. Groninger, Melvin I. Shapiro, Peter L. Thigpen and Bernard M.
Manuel remained in office as members of the Company's Board of Directors
following the termination of the Consent Solicitation.
The Company did not enter into any settlement with Jewelcor or Mr.
Holtzman terminating the Consent Solicitation.
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PART II.
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "DESI."
The following table sets forth, for the periods indicated, the high and low per
share sales prices for the Common Stock, as reported on the Nasdaq consolidated
reporting system.
Fiscal Year Ending
January 30, 1999 High Low
- -------------------------------------------------------
First Quarter 2 3/4 1 7/8
Second Quarter 2 1/8 1 1/8
Third Quarter 2 1/32 1 11/32
Fourth Quarter 2 13/16 5/8
Fiscal Year Ending
January 31, 1998 High Low
- -------------------------------------------------------
First Quarter 6 5/8 4 1/4
Second Quarter 5 1/4 4
Third Quarter 5 1/8 3 3/4
Fourth Quarter 4 1/2 2 1/16
As of April 28, 1999, based upon data provided by independent shareholder
communication services and the transfer agent for the common stock, there were
approximately 377 holders of record of common stock and 5677 beneficial holders
of common stock.
The Company currently pays no cash dividends on its Common Stock. For a
description of financial covenants in the Company's loan agreement that may
restrict dividend payments, see Note D of Notes to Consolidated Financial
Statements.
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Fiscal Years Ended (1)
January 30, January 31, February 1, February 3, January 28,
1999 1998 1997 1996 1995
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $ 201,634 $ 265,726 $ 289,593 $ 301,074 $ 265,910
Gross profit, net of occupancy costs 42,249 38,358(3) 86,229 89,085 84,126
Pre-tax income (loss) (30,962)(2) (46,885)(3) 10,859 16,940(4) 28,399(4)
Net Income (loss) (18,541) (29,063) 6,254 9,773 16,903
Earnings pershare- basic $ (1.17) $ (1.86) $ 0.40 $ 0.62 $ 1.06
Earnings pershare- diluted $ (1.17) $ (1.86) $ 0.40 $ 0.61 $ 1.05
- --------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding
for earnings per share -basic 15,810 15,649 15,755 15,770 15,914
Weighted average shares outstanding
for earnings pershare -diluted 15,810 15,649 15,833 15,898 16,121
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 24,078 $ 42,104 $ 72,320 $ 64,557 $ 55,725
Inventories 57,925 54,972 79,958 58,008 52,649
Property and equipment, net 17,788 35,307 39,216 36,083 26,503
Total assets 99,317 116,399 141,760 132,649 127,295
Long-term debt (5) 1,000 1,000 1,000 1,000 --
Shareholders' equity 63,956 82,380 111,045 106,085 95,702
OPERATING DATA:
Net sales per square foot $ 187 $ 220 $ 234 $ 265 $ 256
Number of stores open at fiscal year end 113 126 151 157 120
</TABLE>
(1) The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 31. The fiscal year ended February 3, 1996 covered 53
weeks.
(2) Pre-tax loss for fiscal 1998 includes the $13.4 million charge taken in
the third quarter related to closing 30 unprofitable stores. Also included
in the pre-tax loss for fiscal 1998 is the $5.2 million charge related to
the closing of one Designs store, three BTC(TM) stores and four Boston
Traders(R) outlet stores, all eight of which are expected to be closed by
the end of the first quarter of fiscal 1999. In addition, the Company
recognized $2.9 million in restructuring income in the fourth quarter
which was the result of favorable lease negotiations associated with the
original estimated $13.4 million charge.
(3) Pre-tax loss for fiscal 1997 includes the $20 million charge taken in the
second quarter related to the Company's strategy shift and the fourth
quarter charge of $1.6 million for the Company's reduction in work force.
Of the $20 million charge, $13.9 million or 5.2% of sales, is reflected in
gross margin.
(4) Includes $2.2 million and $3.2 million of non-recurring income related to
the fiscal 1993 restructuring program recognized in the fiscal years ended
February 3, 1996 and January 28, 1995, respectively.
(5) Includes current portion of long-term debt. Fiscal 1998, 1997, 1996 and
1995 include a $1 million promissory note issued in conjunction with the
acquisition of certain assets of Boston Trading Ltd., Inc. on May 2, 1995.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following table provides a five-year history of the total sales results of
the Company, together with a summary of the number of stores in operation and
the change in the Company's comparable store sales. "Changes in comparable store
sales" measures the percentage change in sales in comparable stores, which are
those stores open for at least one full fiscal year.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED (1)
--------------------------------------------------------------------
Jan. 30, Jan. 31, Feb.1, Feb. 3, Jan. 28,
1999 1998 1997 1996 1995
(Fiscal (Fiscal (Fiscal (Fiscal (Fiscal
1998) 1997) 1996) 1995) 1994)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Sales (In Thousands) $ 201,634 $ 265,726 $ 289,593 $ 301,074 $ 265,910
Number of stores in operation at end of the fiscal year:
Store Type
Designs and BTC(TM) 9 22 44 49 51
Levi's(R) Outlet and Dockers(R) Outlet by Designs(2) 95 58 58 58 61
Buffalo Jeans(R) Factory Stores 5 -- -- -- --
Boston Trading Co.(R) -- 11
Boston Traders(R) outlets 4 12 27 35 --
Joint Venture:
Original Levi's Stores(R)(2) -- 11 11 11 8
Levi's(R) Outlet stores(2) -- 11 10 4
--------------------------------------------------------------------
Total stores 113 125 150 157 120
Comparable stores 80 112 142 97 91
Changes in total sales (24%) (8%) (4%) 13% 10%
Changes in comparable store sales (18%) (10%) (5%) 0.5% (5%)
</TABLE>
(1) The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 31. The fiscal year ended February 3, 1996 covered 53
weeks. Comparable store sales for fiscal 1996 were based upon 52-week
comparisons.
(2) During the third quarter of fiscal 1998, the Company and Levi Strauss &
Co. agreed to dissolve and wind up the Joint Venture between subsidiaries
of the two companies. As part of the dissolution process, on October 31,
1998, the Joint Venture distributed 11 Levi's(R) Outlet stores to the
Company and three Original Levi's Stores(R) to Levi's Only Stores, Inc., a
wholly-owned subsidiary of Levi Strauss & Co. The remaining eight Original
Levi's Stores(R) owned by the Joint Venture were closed by the end of
fiscal 1998. On September 30, 1998, the Company acquired from Levi's Only
Stores, Inc. 16 Dockers(R) Outlet stores and nine Levi's(R) Outlet stores.
14
<PAGE>
RESULTS OF OPERATIONS
OUTLET STORE EXPANSION, JOINT VENTURE WIND UP AND UNPROFITABLE STORE CLOSINGS
During fiscal 1998, the Company completed the following transactions that
narrowed the Company's business to one focused on its Levi's(R) and Dockers(R)
Outlet by Designs Stores.
On September 30, 1998, the Company purchased 16 Dockers(R) Outlet stores and
nine Levi's(R) Outlet stores from a subsidiary of Levi Strauss & Co. for
approximately $9.7 million. These 25 stores have generated $7.7 million in sales
for the four month period ended January 30, 1999. The Company believes, barring
unforeseen circumstances, that this group of stores will produce approximately
$2.8 million in earnings and $3.6 million in cash flow in fiscal 1999. The
acquisition included the purchase of $5.1 million of inventory and $4.6 million
of fixed assets associated with these stores. The Company also assumed the real
estate leases associated with these stores. The Company sees opportunities to
improve the performance of the 25 stores as these stores are integrated into its
existing store operations, thereby leveraging the Company's existing outlet
store infrastructure in areas such as store operating and payroll expenses.
Also during the third quarter of fiscal 1998, the Company and Levi Strauss & Co.
agreed to dissolve and wind up the Joint Venture between subsidiaries of the two
companies (the "OLS Partnership"). As part of the dissolution process, on
October 31, 1998, the joint venture distributed 11 Levi's(R) Outlet stores to
the Company with a net book value of approximately $6.4 million. The 11
Levi's(R) Outlet stores generated a total of approximately $751,000 in earnings
and $1.3 million in cash flow throughout all of fiscal year 1998. The Company
believes, barring unforeseen circumstances, that this group of stores will
produce approximately $1.0 million in earnings and $1.5 million in cash flow in
fiscal 1999. Since the Company previously owned only a 70% interest in these
stores, the only pro-forma adjustment for future earnings is the additional 30%
of earnings and cash flow that will be derived from these stores, which are now
wholly-owned by the Company.
In addition, the Joint Venture distributed to LDJV Inc., a subsidiary of Levi's
Only Stores, Inc., three Original Levi's Stores(R) located in New York City and
Boston, Massachusetts. The net book value of these distributed stores was
approximately $5.5 million, which was greater than LDJV Inc.'s equity ownership
in the Joint Venture. Consequently, LDJV Inc. made a $2.9 million capital
contribution to the Joint Venture on October 31, 1998. These three Original
Levi's Stores(TM) represented approximately $20 million in sales annually. These
stores had annual earnings and cash flows of approximately $1.9 million and $3.0
million, respectively, of which the Company's 70% interest in these stores was
approximately $1.3 million and $2.1 million, respectively.
As part of the termination of its operations, the Joint Venture closed eight
remaining Original Levi's Stores(R) through negotiated lease terminations and
expirations. The Joint Venture recorded a charge in connection with these store
closings, which is discussed below. The Company anticipates that the Joint
Venture will have sufficient cash to satisfy its remaining obligations. However,
if the Joint Venture does not have sufficient cash to pay its obligations, the
Company would be required to contribute additional funds in proportion to its
70% partnership interest.
During the third quarter of fiscal 1998, the Company also announced its plans to
close 14 unprofitable Designs stores and eight unprofitable 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 14 Designs
stores, eight Boston Trading Co.(R)/BTC(TM) and the eight Original Levi's
Stores(R) owned 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, or
$0.06 per share, in the fourth quarter of fiscal 1998. Total estimated cash
costs are $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 January 30, 1999,
the remaining reserve balance related to these store closings is $1.9 million
which primarily relates to landlord settlements and severance payments that will
be paid in fiscal 1999.
15
<PAGE>
During the fourth quarter of fiscal 1998, the Company recorded additional store
closing and severance reserves of $5.2 million, or $0.20 per share, related to
the decision to close three BTC(TM) mall stores, one Designs mall store, and
four Boston Traders(R) Outlet stores and to further reduce corporate headcount.
This pre-tax charge included cash costs of approximately $2.9 million related to
lease terminations and corporate severance, and $2.3 million of non-cash costs
related to store fixed asset write-offs and markdowns.
The combined earnings and cash flow benefits of these third and fourth quarter
charges are expected, barring unforeseen circumstances, to be $8.5 million and
$13.8 million, respectively, for each of the fiscal years 1999 and 2000.
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 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).The Outlet License Agreement now 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. As leases expire, the Company may lose the right to use the Levi's(R)
trademark in connection with certain Levi's(R) Outlet by Designs stores unless
the store is either renovated or replaced as described above. At January 30,
1999, the average remaining lease term (including extension options) of the
Company's Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs stores
was approximately 9.5 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 1998. The Company intends, barring unforseen circumstances, to move,
remodel or replace these stores over the next five years beginning in fiscal
1999. To date, the Company has closed one of its older 59 Levi's(R) Outlet by
Designs stores and opened three new Levi's(R)/Dockers(R) Outlet by Designs
stores.
Recent Developments
On December 7, 1998, a consent with respect to 1,570,200 shares of Common Stock
executed on behalf of Jewelcor Management, Inc., a Nevada corporation
("Jewelcor"), and its controlling shareholder, Seymour Holtzman, was delivered
to the Company for the purpose of removing and replacing the members of the
Company's Board of Directors other than Chairman Stanley I. Berger. A
preliminary Consent Solicitation Statement was filed on December 7, 1998 by the
Holtzman Group with the Securities and Exchange Commission. On December 11,
1998, the Board of Directors of the Company determined to oppose the consent
solicitation (the "Consent Solicitation") by Jewelcor and Mr. Holtzman.
The Consent Solicitation expired without the election of any new members to the
Company's Board of Directors. Accordingly, Stanley I. Berger, Joel H. Reichman,
James G. Groninger, Melvin I. Shapiro, Peter L. Thigpen and Bernard M. Manuel
remained in office as members of the Company's Board of Directors following the
termination of the Consent Solicitation.
The Company did not enter into any settlement with Jewelcor or Mr. Holtzman
terminating the Consent Solicitation.
On December 11, 1998, the Company announced that its Board of Directors had
formed a committee of independent outside directors to consider the Company's
strategic alternatives, including a possible sale of the Company, with a view
towards maximizing shareholder value in the near term.
SALES
Set forth below is the Company's total sales and comparable store sales for
fiscal 1998, 1997 and 1996. Of the 113 stores the Company operated as of January
30, 1999, 80 were comparable stores.
<TABLE>
<CAPTION>
Fiscal Percentage Fiscal Percentage Fiscal
(in thousands) 1998 Change 1997 Change 1996
- -------------- ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Outlet store segment $ 153,581 (13.4%) $ 177,326 (9.1%) $ 195,110
Specialty store segment 8,718 (14.0%) 10,141 (4.7%) 10,645
Closed and other segment(1) 39,335 (49.7%) 78,259 (6.7%) 83,838
--------- --------- ---------
Total Sales $ 201,634 $ 265,726 $ 289,593
Change in Total Sales (24%) (8%) (4%)
Change in Comp Sales (18%) (10%) (5%)
</TABLE>
(1) Includes all stores closed as part of the Company's store closing programs
in fiscal 1998 and 1997 and the eight stores that the Company expects to
close during fiscal 1999, see discussion above.
16
<PAGE>
The decrease in sales in fiscal 1998 was due to an 18% decrease in comparable
store sales and 37 store closings, partially offset by sales from the 25
acquired Levi's(R) and Dockers(R) outlet stores. The decrease in sales in fiscal
1997 was due to a 10% decrease in comparable store sales and 31 store closings,
partially offset by sales from new stores that were opened during the fiscal
year. Comparable store sales decreases in fiscal 1998 and 1997 were due
primarily to lower sales in men's Levi's(R) brand jeans and tops associated with
limited merchandise mix and reduced demand for Levi's(R) brand product. These
sales decreases were partially offset by increased sales of women's Levi's(R)
brand jeans and men's and women's Dockers(R) brand apparel. Based on current
sales trends and merchandise commitments, the Company anticipates an increase in
comparable store sales for fiscal 1999.
17
<PAGE>
GROSS MARGIN
Set forth below are gross margin dollars and gross margin rates as a percentage
of total sales for the fiscal years 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997 Fiscal 1996
Percentage Percentage Percentage
(in thousands) Dollars of sales Dollars of sales Dollars of sales
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Merchandise margin $ 76,076 37.7% $ 78,608 29.6% $124,550 43.0%
Occupancy costs (33,827) (16.8%) (40,250) (15.2%) (38,321) (13.2%)
-------- ---- -------- ---- -------- ----
Gross margin $ 42,249 20.9% $ 38,358 14.4% $ 86,229 29.8%
</TABLE>
The improved merchandise margin in fiscal 1998 as compared to fiscal 1997 is due
to the shift in the Company's store portfolio away from lower margin mall-based
stores towards the traditionally higher margin outlet store operations and
approximately an $800,000 benefit from LIFO. Included in gross margin for fiscal
1998 is approximately $800,000 for markdowns associated with the closing of
eight additional stores, which was discussed above. The decrease in fiscal 1997
merchandise margin was primarily attributable to a $13.9 million charge for
markdowns and fabric cancellation costs related to Boston Traders(R) brand
merchandise which was included in the second quarter charge for the termination
of the Company's private label product development program, discussed below
under "Restructuring"; approximately $5.6 million related to fourth quarter
adjustments for inventory shrinkage against physical inventory results and
reserves against pending resolution of vendor discussions regarding proof of
delivery of certain goods and increases in promotional markdowns associated with
Levi's(R) brand products in fiscal 1997. The Company experienced decreases in
initial margin on certain Levi's(R) brand merchandise in fiscal 1998 and 1997 as
compared to fiscal 1996.
Occupancy costs as a percentage of sales continued to increase in fiscal 1998 as
compared to fiscal 1997 and 1996, as a result of fixed occupancy costs on a
lower sales base due to comparable store sales decreases.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses as a percentage of sales were 23.8%
or $48.0 million in fiscal 1998, 24.7% or $65.7 million in fiscal 1997 and 22.8%
or $66.0 million in fiscal 1996. The decrease in selling, general and
administrative expenses as a percentage of sales in fiscal 1998 was due to
reduced store payroll expense from lower staffing in response to sales
decreases. Also contributing to this decrease was a series of expense reduction
actions started in fiscal 1997 that continue. In fiscal 1998, the Company
incurred expenses in connection with the consent solicitation discussed above.
In fiscal 1997, expenses on a dollar basis decreased slightly by $0.3 million as
compared to fiscal 1996 as a result of the Company's cost reduction efforts that
were initiated in fiscal 1997. Also in fiscal 1997, the Company recorded an
impairment charge of $378,000 in accordance with Statement of Financial
Accounting Standards No. 121, ("SFAS 121")"Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This charge
reflects the estimated unrecoverable carrying value of a store's assets as
compared to the fair value of those assets based on projected discounted future
cash flows. In the fourth quarter of fiscal 1998, the Company recorded a fourth
quarter charge that included $260,000 related to a further reduction of
corporate headcount.
FISCAL 1997 RESTRUCTURING
In the second quarter of fiscal 1997, the Company recorded a pre-tax charge of
$20 million related to its shift in strategy away from the vertically integrated
Boston Traders(R) private label concept to a strategy with greater emphasis on
name brands. This decision involved the liquidation of Boston Traders(R) brand
products, the closure of the Company's New York City product development office
and the closure of 17 Designs and 16 Boston Traders(R) Outlet stores. Total
actual costs to close related to this shift in strategy and the closure of the
stores were $19.9 million, which included cash costs of $6.0 million related to
lease terminations, the cost of canceling private label fabric commitments,
severance associated with the closing of the New York office, and other
miscellaneous expenses. The remainder of the $19.9 million charge consisted of
non-cash costs of approximately $13.9 million, which included $12.4 million of
markdowns at cost related to the liquidation of Boston Traders(R) brand product
and $1.5 million for write-offs of store fixed assets. Merchandise markdowns and
costs associated with the cancellation of fabric
18
<PAGE>
commitments, which total approximately $13.9 million, were accounted for in cost
of goods sold for the fiscal year ending January 31, 1998. The remaining amounts
related to lease termination costs, asset impairment charges, severance and
other costs, were accounted for in the restructuring charge in the Company's
Consolidated Statements of Operations for the year ending January 31, 1998.
In the fourth quarter of fiscal year 1997, the Company incurred an additional
pre-tax charge of $1.6 million relating primarily to severance, benefits and
other costs associated with a reduction in its home office and field staff. This
reduction in force resulted in the elimination of 47 positions, or approximately
25%, of the Company's headquarters and field management staff. This charge was
accounted for in the restructuring charge in the Company's Consolidated
Statements of Operations for the year ended January 31, 1998. Total actual costs
related to this reduction in staff were $1.4 million as compared to the original
charge of $1.6 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for fiscal year 1998 decreased to $9.7
million from $11.2 million in fiscal 1997 and $10.4 million in fiscal 1996,
primarily due to store closings in fiscal 1997 and fiscal 1998. "See Liquidity
and Capital Resources -- Capital Expenditures."
INTEREST EXPENSE
Interest expense for fiscal 1998 was $697,000 as compared to $851,000 in fiscal
1997 and $197,000 in fiscal 1996. This decrease as compared to fiscal 1997 is
primarily a result of lower average borrowing levels and decreased interest
rates under the Company's credit facility as compared to the prior year. The
Company had no borrowings under its credit facility in fiscal year 1996. See
"Liquidity and Capital Resources." The Company anticipates, barring unforeseen
circumstances, that interest expense will increase in fiscal 1999 as a result of
increased average borrowings under the credit facility as compared to fiscal
1998.
INTEREST INCOME
Interest income for fiscal 1998 decreased to $121,000 from $145,000 in fiscal
1997 and $1.2 million in fiscal 1996. This decrease was attributable to limited
investment activity during fiscal 1998 as compared to the two prior years. The
Company anticipates that interest income will be minimal through fiscal 1999.
See "Liquidity and Capital Resources."
NET INCOME (LOSS)
The Company reported a loss of $18.5 million or $1.17 per share for fiscal 1998
as compared with a loss of $29.1 million or $1.86 per share in fiscal 1997 and
net income of $6.3 million or $0.40 per share in fiscal 1996. Assuming current
sales trends in fiscal 1999 continue, the Company currently estimates total
sales for fiscal 1999 to be approximately $200 million. The Company currently
expects, barring unforeseen circumstances, to earn a profit of at least $0.25
per share for the fiscal year ending January 29, 2000. Below is a summary of
certain pre-tax charges included in the net loss for fiscal years 1998 and 1997.
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Store closing and severance reserve
recorded in the fourth quarter of fiscal 1998 $ 5,200 -- --
Store closing reserve recorded in
the third quarter of fiscal 1998 13,400 -- --
Excess store closing reserve taken into income
in the fourth quarter of fiscal 1998 (2,900) -- --
Reduction in force recorded in the fourth
quarter of fiscal 1997 -- $ 1,600 --
Store closing reserve and abandonment of
vertical integration in the second quarter
of fiscal 1997 -- 20,000 --
- ----------------------------------------------------------------------------------------------
Total charges $ 15,700 $21,600 $ --
Earnings (loss) per share impact of charges, adjusted
for minority interest portion of related charges ($ 0.61) ($ 0.81) $ --
- ----------------------------------------------------------------------------------------------
Earnings (loss) per share, exclusive of the above
charges ($ 0.56) ($ 1.05) $ 0.40
</TABLE>
19
<PAGE>
SEASONALITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
FISCAL 1998 FISCAL 1997 FISCAL 1996
- ------------------------------------------------------------------------------------------------------------
(SALES DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
First quarter $ 43,400 21.5% $ 55,470 20.9% $ 59,336 20.5%
Second quarter 47,078 23.4% 64,543 24.3% 66,524 23.0%
Third quarter 58,714 29.1% 77,459 29.1% 84,958 29.3%
Fourth quarter 52,442 26.0% 68,254 25.7% 78,755 27.2%
--------------------------------------------------------------------------------
$201,634 100.0% $265,726 100.0% $289,593 100.0%
</TABLE>
A comparison of sales in each quarter of the past three fiscal years is
presented above. The amounts shown are not necessarily indicative of actual
trends, since such amounts also reflect the addition of new stores and the
remodeling and closing of others during these periods. Historically, the Company
has experienced seasonal fluctuations in revenues and income, exclusive of
non-recurring charges, with increases occurring during the Company's third and
fourth quarters as a result of "Fall" and "Holiday" seasons. In recent years,
the Company's focus has shifted towards its outlet store business and the
percentage of mall-based business has declined. Accordingly, the Company's third
and fourth quarters, although continuing to generate a greater proportion of
total sales, have become less significant to total sales as had previously been
the case. This change is due to the seasonality of the Company's outlet business
as compared with the mall-based specialty stores. A comparison of quarterly
sales, gross profit, net income (loss) and net income (loss) per share for the
past two fiscal years is presented in Note P of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for operating expenses, including cash
outlays associated with inventory purchases, and capital expenditures for new
and remodeled stores. The Company expects that cash flow from operations,
short-term revolving borrowings and trade credit will enable it to finance its
current working capital, remodeling and expansion requirements.
The following table sets forth financial data regarding the Company's liquidity
position at the end of the past three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash provided by (used in)
operations $ 1,820 $ (7,182) $ (1,823)
Working Capital 24,078 42,104 72,320
Current Ratio 1.7:1 2.4:1 4.0:1
</TABLE>
To date, the Company has financed its working capital requirements, acquisitions
and expansion program with cash flow from operations, borrowings under the
Company's credit facility, and proceeds from common stock offerings. Cash
provided by (used in) operating activities was $1.8 million, ($7.2) million and
($1.8) million in fiscal 1998, 1997 and 1996, respectively. The Company's
improved cash flow from operations in fiscal 1998 is principally due to improved
operating results and an income tax refund of $12.9 million related to fiscal
1997 operating losses.
20
<PAGE>
At January 30, 1999, the Company was in a net borrowing position of $13.7
million compared to a net borrowing position of $8.4 million at January 31,
1998. The increased level of borrowing in fiscal 1998 is due to the Company's
acquisition of 25 outlet stores in September 1998 for $9.7 million as well as
cash outlays associated with its fiscal 1997 and 1998 restructuring programs.
The following table provides a comparative analysis of the Company's cash and
borrowings at the end of fiscal years 1998 and 1997:
(in thousands) January 30, 1999 January 31, 1998
- -----------------------------------------------------------------------------
Cash and cash equivalents $ 153 $1,473
Borrowings under credit facility 12,825 8,828
Promissory note payable 1,000 1,000
------- ------
Net borrowing position $13,672 $8,355
======= ======
At January 30, 1999, total inventories increased 5.4% to $58.0 million from
$55.0 million at January 31, 1998. This increase was comprised of the following
components:
<TABLE>
<CAPTION>
Number Number
(in thousands) January 30, 1999 of stores January 31, 1998 of stores
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outlet stores $53,146 100 $38,324 70
Specialty stores 1,802 5 2,394 5
Closed stores 2,977 8 14,456 50
------- --- ------- ---
Total inventories $57,925 113 $54,972 125
======= === ======= ===
</TABLE>
The majority of the increase in inventories at January 30, 1999 as compared to
the prior year is the result of the acquisition of 25 outlet stores offset by 37
closed stores during fiscal 1998. The Company continues to evaluate and, within
the discretion of management, act upon opportunities to purchase substantial
quantities of Levi's(R) and Dockers(R) brand products for its Levi's(R) Outlet
and Dockers(R) Outlet stores.
The Company's trade payables to Levi Strauss & Co., its principal vendor,
generally are due 30 days after the date of invoice. In fiscal 1998, the Company
was current with all outstanding merchandise payables to vendors. The Company
expects, barring unforeseen circumstances, that any purchases of branded
merchandise from vendors other than Levi Strauss & Co. will be limited and 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").
The Credit Agreement, which terminates on June 4, 2001, consists of a revolving
line of credit permitting the Company to borrow up to $50 million. Under this
credit 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, except the assets of the OLS Partnership. 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 to $500,000
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 the 25 outlet
stores from LOS and the transactions associated with the agreement to dissolve
and wind up the OLS Partnership. These amendments included an increase in the
minimum tangible net worth that the Company must maintain, which was
21
<PAGE>
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 its 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 lender.
At January 30, 1999, the Company had borrowings of approximately $12.8 million
outstanding under this facility and had two outstanding standby letters of
credit totaling approximately $84,000. The Company was in compliance with all
debt covenants under the Credit Agreement at the end of the fiscal year.
On May 2, 1995, the Company delivered a non-negotiable promissory note in the
principal amount of $1,000,000 in connection with the acquisition of certain
assets of Boston Trading Ltd., Inc. ("Boston Trading") in accordance with the
terms of an Asset Purchase Agreement dated April 21, 1995 among Boston Trading,
its stockholders, Designs Acquisition Corp., and the Company (the "Purchase
Agreement"). The principal amount of the Purchase Note is payable in two equal
annual installments through May 1997. The note bears interest at the published
prime rate and is payable semi-annually from the date of acquisition.
In the first quarter of fiscal 1996, the Company asserted certain
indemnification rights under the Purchase Agreement. In accordance with the
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. Accordingly, the
Company did not make the $500,000 payments of principal on the Purchase Note
that were due on May 2, 1996 and May 2, 1997. The Company paid interest on the
original principal amount of the Purchase Note through May 2, 1996 and continued
to pay interest thereafter through January 31, 1998 on $500,000 of principal.
In January 1998, Atlantic Harbor, Inc. filed a lawsuit against the Company for
failing to pay the outstanding principal amount of the Purchase Note. In March
1998, the Company filed a counterclaim against Atlantic Harbor, Inc. alleging
that the Company was damaged in excess of $1 million because of the breach of
certain representations and warranties made by Atlantic Harbor, Inc. and its
stockholders 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.
In March 1998, the Company received a federal income tax refund of approximately
$12.9 million because of losses incurred by the Company during fiscal 1997,
which were carried back against federal income tax payments in prior years. The
Company used a portion of the cash received to reduce outstanding borrowings
under its credit facility.
During the first quarter of fiscal year 1998, the Internal Revenue Service (IRS)
completed an examination of the Company's federal income tax returns for fiscal
years 1991 through 1995. Taxes on the adjustments proposed by the IRS, excluding
interest, amount to approximately $4.9 million. The IRS has challenged the
fiscal tax years in which various income and expense deductions were recognized,
resulting in potential timing differences of previously paid federal income
taxes. The Company intends to protest the proposed adjustments through the IRS
appeals process. The Company believes that these adjustments will be reduced
through the appeals process and, in the opinion of management, adequate
provisions have been made for all income taxes and interest. The Company
believes that any adjustments to prior periods that may arise as a result of
this process, will not have a material impact on the results of operation and
financial condition of the Company.
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. Other significant systems utilized by the Company,
which
22
<PAGE>
include point of sale register systems, are in the process of being
upgraded and will be complete in the second quarter of fiscal 1999. The
payroll system is in the process of being reviewed and the Company plans
to upgrade this system in fiscal 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 second 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
approximately $600,000 in total, which will be expensed in the Company's
financial statements as incurred, in the conversion and upgrade costs.
Through the end of fiscal year 1998, the Company has spent and expensed
approximately $300,000 in this area. 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
worse 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
The following table sets forth the stores opened, remodeled and closed and the
associated capital expenditures incurred for the fiscal years presented:
1998 1997 1996
- -------------------------------------------------------------------------------
Designs -- -- --
Boston Trading Co.(R) -- 6 --
Boston Traders(R)outlets -- 1 1
Joint Venture:
Original Levi's Stores(TM) -- -- --
Levi's(R)Outlet stores -- 1 6
----------------------------------
Total new stores (1) -- 8 7
Remodeled Levi's(R) Outlet
by Designs -- 5 5
Remodeled Designs -- -- --
Remodeled Boston Traders(R)
Outlets -- 6 1
----------------------------------
Total remodeled stores -- 11 6
----------------------------------
Total closed stores 37 32 15
----------------------------------
Capital expenditures (000's) $ -- $6,554 $2,775
----------------------------------
(1) Excludes 16 Dockers(R) Outlet stores and nine Levi's(R) Outlet stores
acquired by the Company on September 30, 1998.
Exclusive of the acquisition described above, the Company did not remodel or
open any new stores in fiscal 1998. The Company incurred capital expenditures of
$510,000 in fiscal 1998 related to miscellaneous store capital improvements,
leasehold improvements and technology expenditures.
The Company's present plans for expansion in fiscal 1999, barring unforeseen
circumstances, includes opening three new Levi's(R)/Dockers(R) Outlet by Designs
stores and relocating seven existing Levi's(R) Outlet by Designs stores to new
outlet centers
23
<PAGE>
in the Eastern United States. The capital expenditures related to these new
stores are expected, barring unforeseen circumstances, to total approximately
$1.7 million. This amount is net of committed landlord allowances that the
Company expects to receive during fiscal 1999.
The approximate cost to remodel or build a new Levi's(R)/Dockers(R) Outlet store
is approximately $35 per square foot. If the Company remodels or replaces twelve
of its 59 oldest Levi's(R) Outlet by Designs stores each year beginning in
fiscal 1999, the capital expenditures associated with this construction,
excluding any landlord allowances that the Company may receive, are expected to
be approximately $4.2 million per year for each of the next five years. See
Recent Developments above.
The Company continues to seek opportunities to open and operate outlet stores
for other manufacturers of branded apparel. The Company continues to evaluate
the performance of its existing stores and to consider ways to enhance its
businesses. As a result of this process, certain store locations could be closed
or relocated within a shopping center in the future.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded in current earnings or other
comprehensive income, depending on whether the derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. The Company
will be required to adopt SFAS No. 133 in fiscal 2000. The Company does not
anticipate that the adoption of SFAS No. 133 will have a significant effect on
the Company's results of operations or financial position.
Effects of Inflation
Although the Company's operations are influenced by general economic trends, the
Company does not believe that inflation has had a material effect on the results
of its operations in the last three fiscal years.
Risks and Uncertainties
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
the Company's Current Report on Form 8-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.
24
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements and other information required by this item
are listed in the "Index to Financial Statements" on page 34 of this
Report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
25
<PAGE>
PART III.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors and executive officers of the Company is
incorporated herein by reference to the Company's definitive proxy statement
expected to be filed within 120 days of the end of the fiscal year ended January
30, 1999.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated herein by
reference to the Company's definitive proxy statement expected to be filed
within 120 days of the end of the fiscal year ended January 30, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Company's definitive proxy
statement expected to be filed within 120 days of the end of the fiscal year
ended January 30, 1999.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions is
incorporated by reference to the Company's definitive proxy statement to be
filed within 120 days of the fiscal year ended January 30, 1999.
26
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
14(a)(1) Financial Statements
The list of consolidated financial statements and notes required by this Item
14(a)(1) is set forth in the "Index to Financial Statements" on page XX of this
Report.
14(a)(2) Financial Statement Schedules
Schedule II- Valuation and Qualifying Accounts for the three years ended January
30, 1999, January 31, 1998 and February 1, 1997 on page 28 of this Report.
All other schedules, other than the one listed above, have been omitted because
the required information is not applicable or is not present in amounts
sufficient to require submission of the schedules, or because the information
required is included in the financial statements or notes thereto.
14(a)(3) Exhibits
The list of exhibits required by this Item 14(a)(3) is set forth in the "Index
to Exhibits" on pages 29 to 32 of this Report.
14(b) Reports on Form 8-K
The Company reported under Item 5 of Form 8-K, dated December 3, 1998, that the
Company (i) purchased nine Levi's(R) Outlet stores and 16 Dockers(R) Outlet
stores from Levi's Only Stores, Inc. (LOS), (ii) entered into an Amendment and
Distribution Agreement with LDJV Inc., a wholly owned subsidiary of LOS to
dissolve and wind up the OLS Partnership, (iii) entered into a Guaranty on
October 31, 1998, in connection with the Distribution Agreement, (iv) entered
into an Amended and Restated Trademark License Agreement with Levi Strauss & Co.
dated October 31, 1998, (v) entered into a First Amendment on September 29, 1998
to the Amended and Restated Loan and Security Agreement, dated June 4, 1998 and
(vi) entered into a Second Amendment on October 31, 1998 to the Amended and
Restated Loan and Security Agreement, dated June 4, 1998.
27
<PAGE>
SCHEDULE II
DESIGNS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended January 30, 1999
<TABLE>
<CAPTION>
Balance at Balance
Beginning of Net Charges/ At End
Description Year Provision Write-offs Year
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued Restructuring Reserves
Year ended February 1, 1997 -- -- -- --
Year ended January 31, 1998 -- $ 21,600(1) $ ( 18,672) $ 2,629(3)
Year ended January 30, 1999 $ 2,629 15,706(2) ( 11,174) 7,161(4)
</TABLE>
(1) In Fiscal 1997, the Company recorded charges of $21.6 million related to
severance and its shift in strategy away from the vertically integrated
Boston Traders(R) private label concept to a strategy with greater
emphasis on name brands. Included in this charge was $13.9 million for
merchandise markdowns and costs associated with the cancellation of fabric
commitments which were included in cost of goods sold for the fiscal year
ending January 31, 1998.
(2) Included in the severance and store closing charge for fiscal 1998 of
$15.7 million, is a markdown reserve of $808,000 which was included in
cost of goods sold for the fiscal year ending January 30, 1999.
(3) Included in the reserve balance at year end is a markdown reserve of
$830,000 which was included in inventory on the consolidated balance
sheet.
(4) Included in the reserve balance at year end is a markdown reserve of
$808,000 which was included in inventory and $1,981,000 of fixed asset
reserves which were included in fixed assets on the consolidated balance
sheet.
28
<PAGE>
Exhibits
3.1 Restated Certificate of Incorporation of the Company, as
amended (included as Exhibit 3.1 to Amendment No. 3 of the
Company's Registration Statement on Form S-1 (No. 33-13402),
and incorporated herein by reference). *
3.2 Certificate of Amendment to Restated Certificate of
Incorporation, as amended, dated June 22, 1993 (included as
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
dated June 17, 1996, and incorporated herein by reference). *
3.3 Certificate of Designations, Preferences and Rights of a
Series of Preferred Stock of the Company establishing Series
A Junior Participating Cumulative Preferred Stock dated May
1, 1995 (included as Exhibit 3.2 to the Company's Annual
Report on Form 10-K dated May 1, 1996, and incorporated
herein by reference). *
3.4 By-Laws of the Company, as amended.
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 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). *
10.1 1987 Incentive Stock Option Plan, as amended (included as
Exhibit 10.1 to the Company's Annual Report on Form 10-K
dated April 29, 1993, and incorporated herein by reference). *
10.2 1987 Non-Qualified Stock Option Plan, as amended (included as
Exhibit 10.2 to the Company's Annual Report on Form 10-K
dated April 29, 1993, and incorporated herein by reference). *
10.3 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). *
10.4 Senior Executive Incentive Plan for the fiscal year ending
January 29, 2000.
10.5 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). *
10.6 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). *
10.7 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). *
10.8 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). *
10.9 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). *
29
<PAGE>
10.10 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). *
10.11 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). *
10.12 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). *
10.13 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). *
10.14 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). *
10.15 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). *
10.16 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). *
10.17 Administrative Services Agreement between the Company and the
OLS Partnership dated January 28, 1995 (included as Exhibit
10.7 to the Company's Current Report on Form 8-K dated April
24, 1995, and incorporated herein by reference). *
10.18 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). *
10.19 Guaranty by the Company of the indemnification obligation of
the Designs Partner dated as of October 31, 1998 in favor of
LS& Co. (included as Exhibit 10.3 to the Company's Current
Report on Form 8-K dated December 3, 1998, and incorporated
herein by reference). *
10.20 Credit Agreement among the Company, LOS and the OLS
Partnership dated as of October 1, 1996 (included as Exhibit
10.15 to the Company's Quarterly Report on Form 10-Q dated
December 17, 1996, and incorporated herein by reference). *
10.21 First Amendment to Credit Agreement among the Company, LOS
and the OLS Partnership dated as of October 29, 1997
(included as Exhibit 10.16 to the Company's Quarterly Report
on Form 10-Q dated December 16, 1997, and incorporated herein
by reference). *
10.22 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). *
30
<PAGE>
10.23 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). *
10.24 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). *
10.25 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). *
10.26 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). *
10.27 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). *
10.28 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). *
10.29 Separation Agreement dated as of February 9, 1998 between the
Company and Mark S. Lisnow (included as Exhibit 10.26 to the
Company's Annual Report on Form 10-K dated May 1, 1998, and
incorporated herein by reference). *
10.30 Indemnification Agreement between the Company and James G.
Groninger, dated December 10, 1998.
10.31 Indemnification Agreement between the Company and Bernard M.
Manuel, dated December 10, 1998.
10.32 Indemnification Agreement between the Company and Peter L.
Thigpen, dated December 10, 1998.
10.33 Indemnification Agreement between the Company and Melvin
Shapiro, dated December 10, 1998.
10.34 Indemnification Agreement between the Company and Joel H.
Reichman, dated December 10, 1998.
10.35 Indemnification Agreement between the Company and Scott N.
Semel, dated December 10, 1998.
10.36 Indemnification Agreement between the Company and Carolyn R.
Faulkner, dated December 10, 1998.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule.
31
<PAGE>
99 Report of the Company on Form 8-K, dated May 1, 1998
concerning certain cautionary statements of the Company to be
taken into account in conjunction with consideration and
review of the Company's publicly-disseminated documents
(including oral statements made by others on behalf of the
Company) that include forward looking information. *
* Previously filed with the Securities and Exchange Commission.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DESIGNS, INC.
April 30, 1999
By: /s/ JOEL H. REICHMAN
----------------------------
Joel H. Reichman
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Company in the capacities indicated, on April 30, 1999.
Signatures
/s/ JOEL H. REICHMAN
- ---------------------------------- President and Chief Executive Officer
Joel H. Reichman and Director (Principal Executive Officer)
/s/ CAROLYN R. FAULKNER
- ---------------------------------- Vice President, Chief Financial Officer
Carolyn R. Faulkner and Treasurer
- ---------------------------------- Chairman of the Board and Director
Stanley I. Berger
/s/ JAMES G. GRONINGER
- ---------------------------------- Director
James G. Groninger
/s/ MELVIN SHAPIRO
- ---------------------------------- Director
Melvin Shapiro
/s/ BERNARD M. MANUEL
- ---------------------------------- Director
Bernard M. Manuel
/s/ PETER L. THIGPEN
- ---------------------------------- Director
Peter L. Thigpen
33
<PAGE>
DESIGNS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Management's Responsibility for Financial Reporting 35
Reports of Independent Public Accountants 36
Consolidated Financial Statements
Consolidated Balance Sheets at January 30, 1999
and January 31, 1998 39
Consolidated Statements of Operations for the three years ended
January 30, 1999, January 31, 1998 and February 1, 1997 40
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended January 30, 1999,
January 31, 1998 and February 1, 1997 41
Consolidated Statements of Cash Flows for the three years
ended January 30, 1999, January 31, 1998 and
February 1, 1997 42
Notes to Consolidated Financial Statements 43
34
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The integrity and objectivity of the financial statements and the related
financial information in this report are the responsibility of the management of
the Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, where necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization and the
accounting records provide a reliable basis for the preparation of the financial
statements. The system of internal accounting control is regularly reviewed by
management and improved and modified as necessary in response to changing
business conditions.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with management and the Company's independent
accountants to review matters relating to the Company's financial reporting, the
adequacy of internal accounting control and the scope and results of audit work.
The independent accountants have free access to the Committee.
Arthur Andersen LLP, independent public accountants, have been engaged to
examine the financial statements of the Company. The Report of Independent
Public Accountants expresses an opinion as to the fair presentation of the
financial statements in accordance with generally accepted accounting principles
and is based on an audit conducted in accordance with generally accepted
auditing standards.
/s/ JOEL H. REICHMAN /s/ CAROLYN R. FAULKNER
Joel H. Reichman Carolyn R. Faulkner
President and Chief Executive Officer Vice President, Chief Financial
Officer & Treasurer
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Designs, Inc:
We have audited the accompanying consolidated balance sheet of Designs, Inc. and
subsidiaries as of January 30, 1999 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Designs, Inc. and
subsidiaries as of January 30, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14(a)(2) is presented
for purposes of complying with the Securities and Exchange Commissions rules and
is not part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Boston, Massachusetts /s/ ARTHUR ANDERSEN LLP
March 16, 1999
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Designs, Inc:
We have audited the accompanying consolidated balance sheet of Designs, Inc. as
of January 31, 1998 and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the two years in the period
ended January 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits. We have not audited the consolidated
financial statements of Designs, Inc. for any period subsequent to January 31,
1998.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Designs, Inc. as
of January 31, 1998, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended January 31, 1998 in
conformity with generally accepted accounting principles.
Boston, Massachusetts
March 17, 1998, except as to
the segment information for the
two years in the period ended
January 31, 1998 presented in
Note N, for which the date is
April 29, 1999.
/s/ PRICEWATERHOUSECOOPERS LLP
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Designs, Inc:
Our audits of the consolidated financial statements referred to in our report
dated March 17, 1998, except as to the segment information for the two years in
the period ended January 31, 1998 presented in Note N, for which the date is
April 29, 1999, appearing on page 37 of the Fiscal 1998 Annual Report on Form
10-K to Stockholders of Designs, Inc. also included an audit of the financial
statement schedule for the period ended January 31, 1998 listed in Item 14(a)(2)
of this Form 10-K. In our opinion, the financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Boston, Massachusetts
April 29, 1999
/s/ PRICEWATERHOUSECOOPERS LLP
38
<PAGE>
CONSOLIDATED BALANCE SHEETS
January 30, 1999 and January 31, 1998
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
(Fiscal 1998) (Fiscal 1997)
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 153 $ 1,473
Accounts receivable 178 115
Inventories 57,925 54,972
Income taxes refundable and deferred 272 13,857
Prepaid expenses 911 1,015
------------------------------------
Total current assets 59,439 71,432
------------------------------------
Property and equipment, net of
accumulated depreciation and amortization 17,788 35,307
Other assets:
Deferred income taxes 18,570 6,362
Intangible assets, net 2,628 2,945
Other assets 892 353
------------------------------------
Total assets $ 99,317 $ 116,399
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,716 $ 8,821
Accrued expenses and other current liabilities 6,030 6,129
Accrued rent 2,015 2,751
Reserve for severance and store closings 4,372 1,799
Payable to affliliate 403 --
Notes payable 13,825 9,828
------------------------------------
Total current liabilities 35,361 29,328
------------------------------------
Commitments and contingencies (Note F)
Minority interest -- 4,691
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,
16,178,000 and 16,012,000 shares issued at
January 30, 1999 and January 31, 1998, respectively 162 160
Additional paid-in capital 53,908 53,652
Retained earnings 11,854 30,395
Treasury stock at cost, 286,650 and 281,000 shares at
January 30, 1999 and January 31, 1998, respectively (1,830) (1,827)
Deferred compensation (138) --
------------------------------------
Total stockholders' equity 63,956 82,380
------------------------------------
Total liabilities and stockholders' equity $ 99,317 $ 116,399
====================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
39
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the fiscal years ending January 30, 1999, January 31, 1998
and February 1, 1997
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1998 1997 1996
---------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Sales $ 201,634 $ 265,726 $ 289,593
Cost of goods sold including occupancy 159,385 227,368 203,364
---------------------------------------------------
Gross profit 42,249 38,358 86,229
Expenses:
Selling, general and administrative 47,979 65,657 65,936
Charges for severance and store closings 14,929 7,646 -
Depreciation and amortization 9,727 11,234 10,403
---------------------------------------------------
Total expenses 72,635 84,537 76,339
---------------------------------------------------
Operating income (loss) (30,386) (46,179) 9,890
Interest expense 697 851 197
Interest income 121 145 1,166
---------------------------------------------------
Income (loss) before minority interest and income taxes (30,962) (46,885) 10,859
Less minority interest (1,693) (323) 495
---------------------------------------------------
Income (loss) before income taxes (29,269) (46,562) 10,364
Provision (benefit) for income taxes (10,728) (17,499) 4,100
---------------------------------------------------
Net income (loss) $ (18,541) $ (29,063) $ 6,264
===================================================
Earnings (loss) per share - Basic and Diluted ($1.17) ($1.86) $0.40
Weighted average number of common shares outstanding:
Basic 15,810 15,649 15,755
Diluted 15,810 15,649 15,833
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the fiscal years ending January 30, 1999, January 31, 1998
and February 1, 1997
Additional
Common Stock Treasury Stock Paid-in Deferred Retained
Shares Amounts Shares Amounts Capital Compensation Earnings Total
---------------- ----------------- ----------- ------------ --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 15,818 $ 158 -- $ -- $ 52,767 $ -- $ 53,160 $106,085
Issuance of Common Stock:
Exercises under option programs 5 24(1) 24
Repurchase of 281,000 shares
under the stock repurchase program (281) (1,827) (1,827)
Issuance of 50,000 shares as part of the
Boston Trading Ltd., Inc. Acquistion 50 1 529 530
Unrealized loss on investments (31) (31)
Net income 6,264 6,264
--------------------------------------------------------------------------------------
Balance at February 1, 1997 15,873 $ 159 (281) $ (1,827) $ 53,320 $ -- $ 59,393 $111,045
--------------------------------------------------------------------------------------
Issuance of Common Stock:
Exercises under option programs 144 1 351(1) 352
Retirement of shares (5) (19) (19)
Unrealized gain on investments 65 65
Net loss (29,063) (29,063)
--------------------------------------------------------------------------------------
Balance at January 31, 1998 16,012 $ 160 (281) $ (1,827) $ 53,652 $ -- $ 30,395 $ 82,380
======================================================================================
Issuance of Common Stock:
Board of Directors compensation 50 1 78 78
Restricted Stock Award to associates 116 1 178 $ (178) 1
Restricted Stock vesting 38 38
Restricted Stock cancelled (5) (3) - 2 (1)
Net loss (18,541) (18,541)
--------------------------------------------------------------------------------------
Balance at January 30, 1999 16,178 $ 162 (286) $ (1,830) $ 53,908 $ (138) $ 11,854 $ 63,956
======================================================================================
</TABLE>
(1) Net of related tax benefit.
The accompanying notes are an integral part of the
consolidated financial statements.
41
<PAGE>
STATEMENTS OF CASH FLOWS
For the fiscal years ending January 30, 1999, January 31, 1998
and February 1, 1997
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1998 1997 1996
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(18,541) $(29,063) $ 6,264
Adjustments to reconcile to net cash
provided by (used for) operating activities:
Depreciation and amortization 9,727 11,234 10,403
Deferred income taxes (10,213) (5,015) (262)
Minority interest (1,693) (323) 495
Loss from sale of investments -- 102 17
Loss (gain) from disposal of property and equipment 161 398 (35)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (761) 443 (85)
Inventories (712) 12,598 (21,950)
Prepaid expenses 104 3,819 (993)
Other assets (739) (153) 322
Income taxes 12,469 (12,697) 1,480
Accounts payable (105) (3,373) 4,009
Reserve for severance and store closing 11,206 15,412 --
Accrued expenses and other current liabilities (269) (917) (1,300)
Accrued rent 1,186 353 (188)
----------- ---------- ----------
Net cash provided by (used for) operating activities 1,820 (7,182) (1,823)
----------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (510) (7,762) (12,290)
Payment for aquisition of outlet stores (9,737) -- --
Incurrence of pre-opening costs -- (325) (640)
Proceeds from disposal of property and equipment 102 13 151
Sale of investments -- 5,888 6,072
----------- ---------- ----------
Net cash used for investing activities (10,145) (2,186) (6,707)
----------- ---------- ----------
Cash flows from financing activities:
Net borrowings under credit facility 3,997 8,828 --
Repurchase of common stock -- -- (1,827)
Capital contribution from minority equityholder of joint venture 2,892 -- --
Distributions to minority equityholder of joint venture -- (1,710) (218)
Issuances, net of cancellations, of restricted stock 38 -- --
Issuances of common stock to Board of Directors 78 -- --
Issuance of common stock under option program (1) -- 333 24
----------- ---------- ----------
Net cash provided by (used for) financing activities 7,005 7,451 (2,021)
----------- ---------- ----------
Net decrease in cash and cash equivalents (1,320) (1,917) (10,551)
Cash and cash equivalents:
Beginning of the year 1,473 3,390 13,941
----------- ---------- ----------
End of the year $ 153 $ 1,473 $ 3,390
=========== ========== ==========
</TABLE>
(1) Net of related tax benefit.
The accompanying notes are an integral part of the
consolidated financial statements.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Line of Business
Designs, Inc. (the "Company") operates a chain of outlet stores and specialty
apparel stores located primarily in the eastern part of the United States, which
sells clothing and accessories. Levi Strauss & Co. is the most significant
vendor of the Company, representing a substantial portion of the Company's
merchandise purchases.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries and affiliates. All material intercompany accounts,
transactions and profits have been eliminated.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. 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 disclosures of contingent liabilities as of the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from estimates.
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 31. Fiscal years 1998, 1997 and 1996 ended on January 30,
1999, January 31, 1998 and February 1, 1997, respectively. Fiscal years 1998,
1997 and 1996 were 52-week periods.
Cash and Cash Equivalents
Short-term investments, which have a maturity of ninety days or less when
acquired, are considered cash equivalents. The carrying value approximates fair
value.
Inventories
Substantially all merchandise inventories are valued at the lower of cost or
market using the retail method on the last-in first-out basis ("LIFO"). At
January 30, 1999 and January 31, 1998, approximately $606,000 and $1.6 million
of Boston Traders(R) liquidation merchandise was valued on the first-in
first-out ("FIFO") basis, respectively. If all inventory had been valued on the
FIFO basis, inventory at January 30, 1999 and January 31, 1998 would have been
approximately $58,841,000 and $56,698,000 respectively. The (provision) benefit
for LIFO was $795,000, ($534,000), and ($391,000) in fiscal 1998, 1997 and 1996,
respectively.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while repairs and maintenance are charged to expense as incurred.
Upon retirement or other disposition, the cost and related depreciation of the
assets are removed from the accounts and the resulting gain or loss is reflected
in income. Depreciation is computed on the straight-line method over the assets'
estimated useful lives as follows:
Motor vehicles Five years
Store furnishings Five to ten years
Equipment Five to eight years
Leasehold improvements Lesser of useful lives or related lease life
Software development Three to five years
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangibles
Trademarks and licensing agreements acquired are amortized on a straight line
basis over 15 years and 3 years, respectively. Amortization expense for
trademarks and licensing agreements was $317,000 and $312,000 for fiscal 1998
and 1997, respectively. Accumulated amortization for trademark and licensing was
$1,143,000 and $826,000 at January 30, 1999 and January 31, 1998, respectively.
Preopening Costs
In fiscal 1997, the Company adopted Statement of Position (SOP) 98-5, Reporting
on the Costs of Start-Up Activities. In accordance with this SOP, the Company
expenses all pre-opening costs as incurred. Adoption of this pronouncement in
fiscal 1997 did not have a material effect on the Company's financial
statements.
Advertising costs
Advertising costs, which are included in Selling, general and administrative
expenses are expensed when incurred. Advertising expense was $1.2 million, $2.7
million and $2.7 million for fiscal 1998, 1997 and 1996, respectively.
Minority Interest
As more fully discussed in Note K, minority interest represents LDJV Inc.'s 30%
interest in The Designs/OLS Partnership (the "OLS Partnership"), a joint venture
between Designs JV Corp., a wholly-owned subsidiary of the Company, and LDJV
Inc., a wholly-owned subsidiary of Levi's Only Stores, Inc. which is a
wholly-owned subsidiary of Levi Strauss & Co. As discussed more fully in Note K,
during the fourth quarter of fiscal 1998, Designs JV Corp. and LDJV, Inc. agreed
to dissolve and wind up the Partnership.
Net Income Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") 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.
<TABLE>
<CAPTION>
(In thousands) Fiscal Years Ending
January 30, 1999 January 31, 1998 February 1, 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Basic weighted average common shares
outstanding 15,810 15,649 15,755
Stock options, excluding anti-dilutive
options of 80 shares and 34 shares
for January 30, 1999, and
January 31, 1998, respectively -- -- 78
---------- --------- --------
Diluted weighted average shares outstanding 15,810 15,649 15,833
---------- --------- --------
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options to purchase shares of the Company's common stock of 1,876,350, 2,026,700
and 1,670,300 for fiscal years 1998, 1997 and 1996, respectively, were
outstanding during the respective periods but were not included in the
computation of diluted EPS because the price of the options was greater than the
average market price of the common stock for the period reported. These options,
which all expire between June 2, 2002 and June 10, 2007, have exercise prices
that range from $4.44 to $21.50 in fiscal 1998, $4.88 to $21.50 in fiscal 1997
and $6.63 to $21.50 in fiscal 1996.
During fiscal 1994, the Company's Board of Directors authorized the repurchase
of up to two million shares of the Company's Common Stock. The Company
repurchased 280,900 shares of the Company's Common Stock during fiscal 1996 at
an aggregate cost of $1,827,000. These shares were recorded by the Company as
treasury stock, and accounted for as a reduction in shareholders' equity. Shares
owned by the Company are not considered outstanding for the computation of
earnings per share until re-issued by the Company.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." The Company
reviews its long-lived assets for events or changes in circumstances that might
indicate the carrying amount of the assets may not be recoverable. The Company
assesses the recoverability of the assets by determining whether the
depreciation of such assets over the remaining lives can be recovered through
projected undiscounted future cash flows. The amount of impairment, if any, is
measured based on projected discounted future cash flows using a discount rate
reflecting the Company's average cost of funds. At January 30, 1999, no such
impairment of assets was indicated. In fiscal 1997, the Company recorded an
impairment charge of $378,000 for a write-down of fixed assets which is included
in selling, general, and administrative expenses in the accompanying statements
of operations.
Comprehensive Income
During fiscal 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which established standards for reporting and display of comprehensive
income and its components. Comprehensive income is the total of net income and
all other nonowner changes in stockholders' equity. The adoption of this
pronouncement did not have a material effect on the Company's financial
statements.
Segment Disclosures
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. SFAS 131 becomes effective for fiscal years
beginning after December 15, 1997. The Company has adopted this standard for the
fiscal year ending January 30, 1999 (see note N).
Derivative Instruments and Hedging
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded in current earnings or other
comprehensive income, depending on whether the derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. The Company
will be required to adopt SFAS No. 133 in fiscal 2000. The Company does not
anticipate that the adoption of SFAS No. 133 will have a significant effect on
the Company's results of operations or financial position.
Reclassifications
Certain amounts from prior years have been reclassified to conform to the
current year presentation.
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
January 30, January 31,
1999 1998
-----------------------------------
(In Thousands)
Motor vehicles $ 356 $ 388
Store furnishings 15,338 22,182
Equipment 7,513 9,662
Leasehold improvements 15,690 31,948
Purchased software 5,008 5,550
Construction in progress -- 388
-----------------------------------
43,905 70,118
Less accumulated depreciation 26,117 34,811
-----------------------------------
Total property and equipment $ 17,788 $ 35,307
-----------------------------------
Depreciation expense for fiscal 1998, 1997 and 1996 was $9,209,942, $10,040,000
and $9,042,000, respectively.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. INVESTMENTS
The Company held no investments during fiscal 1998. During fiscal 1997, the
Company sold investment securities with a cost of $5,992,000 for $5,890,000.
D. DEBT OBLIGATIONS
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").
The Credit Agreement, which terminates on June 4, 2001, consists of a revolving
line of credit permitting the Company to borrow up to $50 million. Under this
credit 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, except the assets of the OLS Partnership. 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. These interest rates at January 30, 1999 were 7.75% for
prime and 7.375% for LIBOR. 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 to $500,000
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 the 25 outlet
stores from LOS and the transactions associated with the agreement to dissolve
and wind up 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 its 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 January 30, 1999, the Company had borrowings of approximately $12.8 million
outstanding under this facility and had two outstanding standby letters of
credit totaling approximately $84,000. Average borrowings outstanding under this
credit facility for fiscal year 1998 were approximately $6.4 million. The
Company was in compliance with all debt covenants under the Credit Agreement at
January 30, 1999.
On May 2, 1995, the Company delivered a non-negotiable promissory note in the
principal amount of $1,000,0000 in connection with the acquisition of certain
assets of Boston Trading Ltd., Inc. ("Boston Trading") in accordance with the
terms of an Asset Purchase Agreement dated April 21, 1995 among Boston Trading,
its stockholders, Designs Acquisition Corp., and the Company (the "Purchase
Agreement"). The principal amount of the Purchase Note was payable in two equal
annual installments through May 1997. The note bears interest at the published
prime rate and is payable semi-annually from the date of acquisition.
In the first quarter of fiscal 1996, the Company asserted certain
indemnification rights under the Purchase Agreement. In accordance with the
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. Accordingly, the
Company did not make the $500,000 payments of principal on the Purchase Note
that were due on May 2, 1996 and May 2, 1997. The Company paid interest on the
original principal amount of the Purchase Note through May 2, 1996 and continued
to pay interest thereafter through January 31, 1998 on $500,000 of principal.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 1998, Atlantic Harbor, Inc. filed a lawsuit against the Company for
failing to pay the outstanding principal amount of the Purchase Note. In March
1998, the Company filed a counterclaim against Atlantic Harbor, Inc. alleging
that the Company was damaged in excess of $1 million because of the breach of
certain representations and warranties made by Atlantic Harbor, Inc. and its
stockholders 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 results of operations or
financial position.
The Company paid interest and fees on all the above described debt obligations
totaling $1,062,000, $833,000 and $253,000 for the fiscal years 1998, 1997 and
1996, respectively.
E. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. SFAS 109 requires current recognition of
net deferred tax assets to the extent that it is more likely than not that such
net assets will be realized. To the extent that the Company believes that its
net deferred tax assets will not be realized, a valuation allowance must be
placed against those assets.
As of January 30, 1999, the Company has net operating loss carryforwards of
$29,881,000 for federal income tax purposes and $72,802,000 for state income tax
purposes which are available to offset future taxable income through fiscal year
2018. Additionally, the Company has alternative minimum tax credit carryforwards
of $1,138,000 which are available to reduce further income taxes over an
indefinite period.
The components of the net deferred tax assets as of January 30, 1999 and January
31, 1998 are as follows:
January January 31,
30, 1999 1998
-------------------------------
(In Thousands)
Deferred tax assets - current:
Inventory reserves $ 426 $ 3,312
-------------------------------
Subtotal 426 3,312
Deferred tax liabilities - current:
LIFO reserve (154) (1,924)
-------------------------------
Net deferred tax assets- current $ 272 $ 1,388
-------------------------------
Deferred tax asset - noncurrent
Excess of book over tax
depreciation/amortization $ 2,691 $ 2,168
Capital loss carryforward 165 165
Net operating loss carryforward 15,121 2,891
Alternative minimum tax credit carryforward 1,138 1,138
-------------------------------
Subtotal $ 19,115 $ 6,362
Valuation Allowance (545) --
-------------------------------
Total deferred tax assets - noncurrent $ 18,570 $ 6,362
-------------------------------
Realization of the Company's deferred tax assets is dependent on generating
sufficient taxable income during the carryforward period. The valuation
allowance at January 30, 1999 is primarily attributable to the potential that
certain deferred state tax assets will not be realizable. Although realization
is not assured, management believes it is more likely than not that all of the
remaining deferred tax asset will be realized. The amount of the deferred tax
assets considered realizable, however, could be reduced in the near term, if
estimates of future taxable income during the carryforward period are reduced.
In reaching this determination, management reviewed the Company's historical
performance and projections of future results. These projections provide
positive evidence of future probable realization of the remaining deferred tax
asset within the prescribed carryforward time frame.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision (benefit) for income taxes consists of the following:
FISCAL YEARS ENDING
January 30, January 31, February
1999 1998 1, 1997
(In Thousands)
Current:
Federal $ -- $ (12,964) $ 3,234
State 364 (688) 1,149
--------------------------------------------
364 (13,652) 4,383
--------------------------------------------
Deferred:
Federal (10,006) (1,639) (223)
State (1,086) (2,208) (60)
--------------------------------------------
(11,092) (3,847) (283)
--------------------------------------------
Total Provision (Benefit) $ (10,728) $ (17,499) $ 4,100
--------------------------------------------
The following is a reconciliation between the statutory and effective income tax
rates:
FISCAL YEARS ENDING
January January February
30, 1999 31, 1998 1, 1997
Statutory Federal income tax rate (35.0%) (35.0%) 35.0%
State income and other taxes,
net of federal tax benefit (4.4) (2.6) 5.8
Permanent items and tax credits -- -- (1.2)
Change in valuation allowance 1.9 --
--------------------------------------
Effective tax rate (37.5%) (37.6%) 39.6%
--------------------------------------
The Company received an income tax refund of $12,984,000 for fiscal year 1998,
and the Company paid income taxes of $195,000 and $2,888,000 during fiscal years
1997 and 1996, respectively. These figures represent the net of payments and
receipts. The above refund of $12.9 million related to losses incurred by the
Company in fiscal 1997, which were carried back against federal income tax
payments in prior years.
During the first quarter of fiscal year 1998, the Internal Revenue Service (IRS)
completed an examination of the Company's federal income tax returns for fiscal
years 1991 through 1995. Taxes on the adjustments proposed by the IRS, excluding
interest, amount to approximately $4.9 million. The IRS has challenged the
fiscal tax year in which various income and expense deductions were recognized,
resulting in potential timing differences of previously paid federal income
taxes. The Company intends to protest the proposed adjustments through the IRS
appeals process. The Company believes that these adjustments will be reduced
through the appeals process and in the opinion of management, adequate
provisions have been made for all income taxes and interest. The Company
believes that any adjustments to prior periods that may arise as a result of
this process, will not have a material impact on the results of operations or
the financial position of the Company.
F. COMMITMENTS AND CONTINGENCIES
At January 30, 1999, the Company was obligated under operating leases covering
store and office space, automobiles and certain equipment for future minimum
rentals as follows:
TOTAL
FISCAL (In Thousands)
1999 $16,847
2000 15,119
2001 12,913
2002 11,108
2003 9,905
Thereafter 10,603
----------------
$76,495
The Company signed a lease for its corporate headquarters in Needham,
Massachusetts during fiscal 1995. The term of the lease is for ten years ending
in November 2005. The lease provides for the
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company to pay all related costs associated with the land and headquarters
building. The Company entered into a lease agreement effective April 1, 1998 to
sublease approximately 15,000 square feet to a sublessee for a term of five to
eight years. The Company also entered into a second lease agreement effective
July 1, 1998 to sublease an additional 15,300 square feet to a sublessee for a
term of five to seven years. The Company's commitment under this lease has been
reduced by the expected future rental income to be received from the Company's
two sublessees.
In addition to future minimum rental payments, many of the store leases include
provisions for common area maintenance, mall charges, escalation clauses and
additional rents based on percentage of store sales above designated levels.
Amounts charged to operations for the above occupancy costs, automobile and
leased equipment expense, excluding a related party lease in the prior years,
were $30,480,000, $36,458,000 and $35,921,000 in fiscal years 1998, 1997 and
1996, respectively. Of these amounts charged to operations, $173,000, $402,000
and $780,000 represent payments based upon a percentage of adjusted gross sales
as provided in the lease agreement for the fiscal years ended 1998, 1997 and
1996, respectively. In fiscal 1996, occupancy costs included $150,000 which was
charged to operations for a related party lease. The Company did not make any
payments for occupancy costs to a related party in fiscal 1998 and 1997. See
Note H for additional information regarding the related party lease. As a result
of the fiscal 1997 and 1998 store closing programs, the Company has eliminated
approximately $50 million in minimum store lease obligations since January 31,
1998.
As more fully discussed in Note K, the Company remains principally liable on
three leases which were assigned to Levi's Only Stores, Inc., a wholly-owned
subsidiary of Levi Strauss & Co., in connection with the sale of the Company's
Original Levi's(R) Store(TM) located in Minneapolis, Minnesota and the two
Dockers(R) Shops located in Minneapolis, Minnesota and Cambridge, Massachusetts.
The store leases in Minneapolis and Cambridge expire in January 2003 and January
2002, respectively.
The Company has employment agreements with each of its executive officers. The
initial three year terms of two of the agreements expired on October 16, 1998
and have since then been extended on a year to year basis in accordance with the
terms of each agreement. The initial three year term of the third agreement
expires on May 9, 2000. Such agreements provide for minimum salary levels,
adjusted for cost of living increases as well as bonuses as determined by the
Compensation Committee of the Company's Board of Directors. The aggregate
commitment for future salaries at January 30, 1999, excluding bonuses, was
$806,000.
During fiscal 1998, the Company entered into retention agreements with a group
of key associates. Under the terms of the agreements, if the employment of the
key associate is terminated, other than for certain causes, during the nine
months ending October 1999, that associate may receive salary continuation
payments until the earlier of a fixed number of weeks after the date of
termination or the date that the associate is again employed. A maximum amount
of $1.1 million would be payable if all of the covered associates are terminated
within the covered period and if all of them are unable to find new employment
during that period.
On December 7, 1998, a consent with respect to 1,570,200 shares of Common Stock
executed on behalf of Jewelcor Management, Inc., a Nevada corporation
("Jewelcor"), and its controlling shareholder, Seymour Holtzman, was delivered
to the Company for the purpose of removing and replacing the members of the
Company's Board of Directors other than Chairman Stanley I. Berger. A
preliminary Consent Solicitation Statement was filed on December 7, 1998 by the
Holtzman Group with the Securities and Exchange Commission. On December 11,
1998, the Board of Directors of the Company determined to oppose the consent
solicitation (the "Consent Solicitation") by Jewelcor and Mr. Holtzman.
The Consent Solicitation expired without the election of any new members to the
Company's Board of Directors. Accordingly, Stanley I. Berger, Joel H. Reichman,
James G. Groninger, Melvin I. Shapiro, Peter L. Thigpen and Bernard M. Manuel
remained in office as members of the Company's Board of Directors following the
termination of the Consent Solicitation.
The Company did not enter into any settlement with Jewelcor or Mr. Holtzman
terminating the Consent Solicitation.
On December 11, 1998, the Company announced that its Board of Directors had
formed a committee of independent outside directors to consider the Company's
strategic alternatives, including a possible sale of the Company, with a view
towards maximizing shareholder value in the near term. The Company also
announced that its Board had determined to oppose a consent solicitation
initiated by Jewelcor Management, Inc. and its controlling shareholder, Seymour
Holtzman. On February 8, 1999, the Company announced that the stockholder
consent solicitation initiated by Jewelor Management, Inc. was not successful.
The Company is also subject to various legal proceedings and claims that arise
in the ordinary course of business. Management believes that the resolution of
these matters will not have a material adverse impact on the results of
operations or the financial position of the Company.
G. STOCK OPTIONS
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's Board of Directors and its stockholders previously approved the
1987 Incentive Stock Option Plan (the "Incentive Plan") pursuant to which, as
amended, stock options to purchase up to 787,500 shares of Common Stock may be
issued to key employees (including executive officers and directors who are
employees). The Incentive Plan is administered by the Compensation Committee of
the Company's Board of Directors, which designates the optionees, number of
shares for each option grant, option prices (which may not be less than fair
value on the date of grant), date of grant, vesting schedule (ranging from three
to five years) and period of option (which may not be more than ten years). All
Incentive Plan options are non-assignable. The Incentive Plan terminates when
all shares issuable thereunder have been issued.
The Company's Board of Directors and its stockholders also previously approved
the 1987 Non-Qualified Stock Option Plan (the "Non-Qualified Plan") pursuant to
which stock options to purchase up to 337,500 shares of Common Stock which are
not "incentive stock options" (as defined in Section 422 of the Internal Revenue
Code, as amended) may be issued to key employees (including executive officers
and directors of the Company) and directors who are not employees of the
Company. The Non-Qualified Plan is administered by the Compensation Committee of
the Company's Board of Directors, which designates the optionees, number of
shares for each option grant, option prices (which may not be less than 85% of
the fair market value on the date of grant), date of grant, vesting schedule
(ranging from three to five years) and period of option (which may not be more
than ten years). All Non-Qualified Plan options are non-assignable. The
Non-Qualified Plan terminates when all shares issuable have been issued.
Outstanding options under both the Incentive Plan and the Non-Qualified Plan
expire seven to ten years after the date of grant.
On April 3, 1992, the Board of Directors adopted the 1992 Stock Incentive Plan
(the "1992 Plan"), which became effective on June 9, 1992 when it was approved
by the stockholders of the Company. Under the 1992 Plan, as amended, up to
1,850,000 shares of Common Stock may be issued pursuant to "incentive stock
options" (as defined in Section 422 of the Internal Revenue Code, as amended),
options which are not "incentive stock options," conditioned stock awards,
unrestricted stock awards and performance share awards. The 1992 Plan is
administered by the Compensation Committee, all of the members of which are
non-employee directors. The Compensation Committee makes all determinations with
respect to amounts and conditions covering awards under the 1992 Plan. No
Incentive Stock Options may be granted under the 1992 Plan after April 2, 2002.
Options have never been granted at a price less than fair value on the date of
the grant. Options granted to employees, executives and directors typically vest
over five, three and three years, respectively, with the exception of the
premium priced options issued to the executives which vest over a five year
period. Options granted under the 1992 Plan expire ten years from the date of
grant. The 1992 Plan terminates when all shares issuable thereunder have been
issued.
By written consent dated as of April 28,1997, the Board of Directors authorized
an increase in the number of shares issuable under the 1992 Plan to 2,430,000.
In addition, the Board of Directors authorized an increase in the number of
shares that may be granted during any fiscal year to any individual participant
from 75,000 to 270,000 shares, but only if all such stock options have a per
share exercise price not less than 200% of fair market value of one share of
Common Stock on the date of grant. Furthermore, they authorized the elimination
of certain provisions of the 1992 Plan that are no longer required by Rule 16b-3
under the Exchange Act. The stockholders approved this increase and the other
amendments to the 1992 Plan at the Annual Meeting held on June 10,1997.
In order to focus management on business performance that creates stockholder
value and to reward management only for superior results, the Compensation
Committee concluded that an important element of the Company's executive
incentive compensation program should be a significant grant of premium priced
options to the executive officers of the Company. Accordingly, on April 28,
1997, the Compensation Committee granted premium priced options to purchase a
total of 580,000 shares to the Company's four executive officers. Before an
executive officer can exercise these options, the price must appreciate to
$12.00 per share, which is 140% higher than the closing price of shares of
Common Stock on the date of grant. To encourage the executive officers further
to achieve superior performance and to create stockholder value within a defined
time frame, the premium priced options will be forfeited if within five years
from the date of stockholder approval of the 1992 Plan, the per share price of
the Common Stock does not close at or above $12.00 for at least five trading
days during a period of ten consecutive trading days. In addition, the options
are subject to time-based vesting at a rate of 20% per annum over five years. If
the option price of $12.00 is reached before the end of five years, the
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options will continue in effect for a period of ten years from the date of grant
and the five year time-based vesting would continue. The stockholders approved
the amendment to the 1992 Plan at the Annual Meeting on June 10, 1997.
A summary of shares subject to the option plans described above is as follows:
1987 Incentive Stock Option Plan
<TABLE>
<CAPTION>
FISCAL YEAR
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at
beginning of year 9,000 97,306 96,339
Options granted -- -- 18,500
Options canceled -- 20,900 6,000
Options exercised -- 67,406 11,533
------------------------------------------------------------
Outstanding at end of year 9,000 9,000 97,306
------------------------------------------------------------
Options exercisable at
end of year 9,000 9,000 76,406
Common shares reserved for
future grants at end
of year -- -- 9,105
Weighted average exercise price per
option:
Outstanding at beginning of year $ 11.17 $ 4.01 $ 3.71
Granted during the year -- -- $ 6.62
Canceled during the year -- $ 7.15 $ 11.17
Exercised during the year -- $ 2.07 $ 2.05
Outstanding at end of year $ 11.17 $ 11.17 $ 4.01
</TABLE>
1987 Non-Qualified Stock Option Plan
<TABLE>
<CAPTION>
FISCAL YEAR
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Outstanding at
beginning of year -- 76,948 76,948
Options granted -- -- --
Options canceled -- -- --
Options exercised -- 76,948 --
------------------------------------------------------------
Outstanding at end of year -- -- 76,948
------------------------------------------------------------
Options exercisable at
end of year -- -- 76,948
Weighted average exercise price per
option:
Outstanding at beginning of year -- $ 2.53 $ 2.53
Exercised during the year -- 2.53 --
Outstanding at end of year -- -- 2.53
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1992 Stock Incentive Plan
<TABLE>
<CAPTION>
FISCAL YEAR
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at
beginning of year 2,041,749 1,660,400 1,520,050
Options granted 304,478 708,750 301,250
Options canceled 191,649 327,401 160,900
Options exercised 51,353 -- --
------------------------------------------------------------
Outstanding at end of year 2,103,225 2,041,749 1,660,400
------------------------------------------------------------
Options exercisable at
end of year 1,272,615 1,145,397 937,496
Common shares reserved
for future grants at
end of year 259,772 372,851 174,200
Weighted average exercise price per option
Outstanding at beginning of year $12.02 $ 12.00 12.85
Granted during the year 0.97 10.65 6.72
Canceled during the year 9.09 8.99 10.10
Exercised during the year 1.66 -- --
Outstanding at end of year 10.94 12.02 12.00
</TABLE>
The following table summarizes information about stock options outstanding under
the 1992 Plan at January 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------------
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$0.00 to $2.15 235,875 8.3 years $ 0.79 -- --
4.30 to 6.45 107,200 7.1 years 4.91 32,933 $ 5.25
6.46 to 8.60 263,300 6.5 years 7.48 158,932 7.56
8.61 to 10.75 175,300 5.5 years 9.86 160,400 9.94
10.76 to 12.90 780,050 6.4 years 11.70 380,050 11.39
12.91 to 15.05 12,000 5.4 years 13.75 12,000 13.75
15.06 to 17.20 111,000 5.2 years 15.36 109,800 15.36
17.21 to 19.35 405,000 4.1 years 18.03 405,000 18.03
19.36 to $21.50 13,500 4.4 years 21.50 13,500 21.50
--------- ---------
$ 0.66 to $21.50 2,103,225 1,272,615
</TABLE>
On July 26, 1993 stock options covering an aggregate of 67,500 shares of Common
Stock were granted outside of the Incentive Plan, the Non-Qualified Plan and the
1992 Plan to the non-employee directors of the Company. Each of these options
has an exercise price of $17.50 per share and each remained outstanding at
January 30, 1999. These options become exercisable in three equal installments
commencing twelve months following the date of grant and have a 10 year term.
When shares are sold within one year of exercise or within two years from date
of grant, the Company derives a tax deduction measured by the excess of the
market value over the option price at the date the shares are sold, which
approximated $18,256 and $27,980 in fiscal years 1997 and 1996, respectively.
There was no tax deduction taken for fiscal 1998.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. FASB Statement No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") was issued by the FASB in 1995
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and requires the Company to elect either expense recognition under SFAS 123 or
its disclosure-only alternative for stock-based employee compensation. The
Company has elected the disclosure-only alternative and accordingly no
compensation cost has been recognized. The Company has disclosed the pro forma
net income or loss and per share amounts using the fair value based method.
Had compensation costs for the Company's grants for stock-based compensation
been determined consistent with SFAS 123, the Company's net income (loss), and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------
(In Thousands, Except per Share Amounts) January 30, 1999 January 31, 1998 February 1, 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)- as reported $ (18,541) $ (29,063) $ 6,264
Net income (loss)- pro forma $ (18,782) $ (29,383) $ 5,933
Earnings (loss) per share- basic and diluted as reported $ (1.17) $ (1.86) $ 0.40
Earnings (loss) per share- basic and diluted pro forma $ (1.19) $ (1.88) $ 0.38
</TABLE>
The effects of applying SFAS 123 in this pro-forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards prior to 1995 and additional awards are
anticipated.
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1997 and 1996: expected volatility
of 92.8% in fiscal 1998, 63.97% in fiscal 1997 and 51.96% in fiscal 1996; risk
free interest rate of 5.0%, 6.2% and 6.3% in fiscal 1998, 1997 and 1996,
respectively; and expected lives of 4.5 years. No dividend rate was used for
fiscal 1998, 1997 and 1996. The weighted average fair value of options as well
as restricted stock granted in fiscal 1998, 1997 and 1996 was $0.97, $1.93 and
$3.35, respectively.
H. RELATED PARTIES
Until April 30, 1996, the Company leased its headquarters in Chestnut Hill,
Massachusetts, from Durban Trust, a nominee trust of which the sole beneficiary
is a partnership affiliated with Stanley I. Berger, the Chairman of the Board of
the Company, and Calvin Margolis, a former executive officer and director of the
Company. The general partner of the beneficiary is a corporation controlled by
Mr. Berger and the estate of Mr. Margolis, and the only limited partners of the
beneficiary are Mr. Berger and the estate of Mr. Margolis, individually. When
the lease expired April 30, 1996 the Company moved its headquarters to Needham,
Massachusetts. See Note F. There were no rent payments made to Durban Trust in
fiscal 1998 or fiscal 1997. Total rent paid to Durban Trust in fiscal 1996 was
approximately $150,000. The Company believes that the lease arrangements between
the Company and Durban Trust were on terms at least as favorable to the Company
as it would have expected to receive from a landlord unrelated to the Company,
Mr. Berger or the estate of Mr. Margolis for office facilities of equal quality.
I. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan that covers all eligible
employees who have completed one year of service. Under this plan, the Company
may provide matching contributions up to a stipulated percentage of employee
contributions. The expenses of the plan are fully funded by the Company; and the
matching contribution, if any, is established each year by the Board of
Directors. For fiscal 1998, the matching contribution by the Company was set at
50% of contributions by eligible employees up to a maximum of 6% of salary. The
Company recognized $241,000, $279,000 and $231,000 of expense under this plan in
fiscal 1998, 1997 and 1996, respectively.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. RESTRUCTURING
During the third quarter of fiscal 1998, the Company announced its plans to
close, through lease terminations and expirations, 14 unprofitable Designs
stores, eight unprofitable Boston Trading Co.(R)/BTC(TM) stores and eight
Original Levi's Stores(TM) operated by the OLS Partnership, see Note K below.
This store closing strategy resulted in the Company recording a pre-tax charge
of $13.4 million. 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 $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 primarily related to store fixed asset write-offs. All of these stores
were closed by the end of fiscal 1998. At January 30, 1999, the remaining
reserve balance related to these store closings is $1.9 million which primarily
relates to landlord settlements and severance payments that will be paid in
fiscal 1999.
During the fourth quarter of fiscal 1998, the Company recorded an additional
pre-tax store closing and severance charge of $5.2 million related to the
decision to close three BTC(TM) stores, one Designs mall store, and four Boston
Traders(R) Outlet stores and to further reduce corporate headcount. This 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. Merchandise markdowns of approximately
$800,000 were included in cost of goods sold for the fiscal year ending January
30, 1999. The remaining amount related to lease termination costs, fixed asset
write-offs and severance were included in the charges for severance and store
closings on the Company's Consolidated Statement of Operations for the year
ended January 30, 1999. The total charge of $5.2 million was reserved on the
consolidated balance sheet at January 30, 1999.
In the second quarter of fiscal 1997, the Company recorded a pre-tax charge of
$20 million related to its shift in strategy away from the vertically integrated
Boston Traders(R) private label concept to a strategy with greater emphasis on
name brands. This decision involved the liquidation of Boston Traders(R) brand
products, the closure of the Company's New York City product development office
and the closure of 17 Designs stores and 16 Boston Traders(R) Outlet stores.
Total actual costs to close related to this shift in strategy and the closure of
the stores was $19.9 million which included cash costs of $6.0 million related
to lease terminations, the cost of canceling private label fabric commitments,
severance associated with the closing of the New York office, and other
miscellaneous expenses. The remainder of the $19.9 million charge consisted of
non-cash costs of approximately $13.9 million, which included $12.4 million of
markdowns at cost related to the liquidation of Boston Traders(R) brand product
and $1.5 million for write-offs of store fixed assets. Merchandise markdowns and
costs associated with the cancellation of fabric commitments, which total
approximately $13.9 million, were included in cost of goods sold for the fiscal
year ending January 31, 1998. The remaining amounts related to lease termination
costs, asset impairment charges, severance and other costs, were included in the
restructuring charge on the Company's Consolidated Statements of Operations for
the year ending January 31, 1998. The remaining reserve balance at January 31,
1998 was $1.3 million. There was no remaining reserve balance related to this
$20 million charge at January 30, 1999.
In the fourth quarter of fiscal year 1997, the Company incurred an additional
pre-tax charge of $1.6 million relating primarily to severance, benefits and
other costs associated with a reduction in its home office and field staff. This
reduction in force resulted in the elimination of 47 positions, or approximately
25%, of the Company's headquarters and field management staff. This charge was
included in the restructuring charge in the Company's Consolidated Statements of
Operations for the year ended January 31, 1998. Total actual costs related to
this reduction in staff were $1.4 million as compared to the original charge of
$1.6 million. The remaining reserve balance at January 31, 1998 was $1.3 million
There was no reserve balance remaining related to this charge at January 30,
1999.
K. FORMATION OF JOINT VENTURE
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 (the "Partnership Agreement"). The purpose of the
Partnership Agreement was to sell Levi's(R) brand jeans and jeans-related
products in Original Levi's Stores(R) and Levi's(R) Outlet stores in a specified
territory. The joint venture established under the Partnership Agreement is
known as The Designs/OLS Partnership (the "OLS Partnership").
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1998, the Company announced that it had reached an agreement with LOS
to dissolve and wind up the OLS Partnership. Pursuant to this agreement the OLS
Partnership distributed to the 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(R) to LDJV Inc. The net
book value of these three Original Levi's Stores(R) 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.
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 related to the closing of
the eight Original Levi's Stores(R) that it did not distribute. This $4.5
million charge is included in the total $13.4 million charge recorded by the
Company and discussed in Note J above. The total estimated costs to close these
stores is $1.3 million less then the original charge, primarily due to favorable
landlord negotiations on lease termination payments. This $1.3 million was part
of the total $2.9 million recognized as restructuring income in fiscal 1998, see
Note J above.
L. OUTLET STORE ACQUISITION
On September 30, 1998, the Company completed the acquisition of 25 outlet stores
from LOS for a purchase price of approximately $9.7 million. These stores, 16 of
which now operate under the names "Dockers(R) Outlet by Designs" and nine of
which operate under the name "Levi's(R) Outlet by Designs", are located in the
eastern United States. A portion of the purchase price for these stores,
approximately $5.1 million, was for inventory. The remainder of the purchase
price, approximately $4.6 million, was for fixed assets associated with these
stores. The Company also assumed the obligations associated with the real estate
leases for the stores.
M. PRO-FORMA RESULTS OF OPERATIONS
The following pro-forma summary presents the consolidated results of operations
of the Company, adjusted for: (a) the acquisition of the 25 outlet stores, and
(b) 30% of the earnings of the 11 Levi's(R) Outlet stores that were distributed
by the OLS Partnership.
The results of operations for fiscal 1998 include actual results of operations
since September 30, 1998 of the 25 outlet stores acquired from LOS. The
following pro-forma results have been adjusted to include results of operations
for these stores for the period November 3, 1996 through September 30, 1998.
In addition, the results of operations for fiscal 1998 include the results of
operations for the 11 Levi's(R) Outlet stores that were owned and operated by
the OLS Partnership until October 31,1998. The following pro-forma results have
been adjusted to assume that these 11 stores were wholly-owned by the Company
for the period November 1, 1996 through January 31, 1999.
(In thousands,
except per share data) Fiscal 1998 Fiscal 1997
Revenue $ 213,347 $291,973
Net income (loss) (18,186) 26,856
Net income (loss)
per share $ (1.15) $ (1.72)
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. SEGMENT DISCLOSURES
In fiscal 1998, the Company adopted Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which requires the Company to report information about its operating segments.
During fiscal 1998, the Company completed the following transactions:
o The Company acquired 16 Dockers(R) Outlet and nine Levi's(R) Outlet
stores.
o The Company received a distribution of 11 additional Levi's(R) Outlet
stores from the OLS Partnership.
o The Company announced plans to dissolve and wind up the OLS Partnership.
o The Company closed 30 unprofitable stores.
As a result of these transactions, the Company now operates and manages its
business under two reportable store segments (i) Outlet Store group and (ii)
Specialty Store Group. Closed stores and other includes the operations of all
stores closed through the end of fiscal 1998 and stores that are expected to
close through the second quarter of fiscal 1999.
Outlet Store Group: At January 30, 1999, this store group included the Company's
59 Levi's(R) Outlet by Designs stores, the 25 acquired Dockers(R) and Levi's(R)
outlet stores, the 11 Levi's(R) Outlet stores that were previously owned and
operated by OLS Partnership through October 31, 1998 and five Buffalo Factory
Jeans Outlet Stores. These outlet stores all operate in outlet parks located
primarily in the Eastern United States and primarily sell close out and end of
season merchandise from vendors.
Specialty Store Group: At January 30, 1999, this store group consisted of the
five remaining Designs/BTC(TM) 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
with complementary brands of tops and bottoms.
Closed Stores and Other: This group included the Designs, Boston Trading Co.(TM)
and Boston Traders(R) Outlet stores that were closed as part of the fiscal 1997
and fiscal 1998 store closing programs. The operations of the three Original
Levi's Stores(TM) that were distributed to LDJV, Inc in October 1998 and the
operations of the eight Original Levi's Stores(TM) that were closed in fiscal
1998 are included in this group. The four Boston Traders(R) Outlet stores, three
BTC(TM) and one Designs store that are all expected to close by the end of the
second quarter of fiscal 1999 are also included in Closed Stores and Other.
The accounting policies of the reportable segments are the same as those
described in Note A. The Company evaluates individual store profitability in
terms of a store's "Contribution to Profit" which is defined by the Company as
merchandise 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. In fiscal
1998, approximately 5% of the Outlet stores receipts were from transferred
merchandise. 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 the Outlet Store Group,
Specialty Store Group and Closed Stores and Other for the three years ended
January 30, 1999:
For the year ended January 30, 1999
<TABLE>
<CAPTION>
(in thousands) Outlets Specialty Closed and Other Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 153,581 $ 8,718 $ 39,335 $ 201,634
Merchandise margin 63,148 2,618 10,310 76,076
Occupancy costs 18,974 1,868 12,985 33,827
Gross profit (loss) 44,174 750 (2,675) 42,249
Depreciation/amortization 3,197 740 3,383 7,320
Contribution to profit 18,840 (978) (15,848) 2,014
Charges for severance and
store closings (15,700) (15,700)
Segment Assets:
Inventories 53,146 1,802 2,977 57,925
Fixed assets, net 10,026 584 7,178 17,788
Capital expenditures 18 -- 492 510
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended January 31, 1998
<TABLE>
<CAPTION>
(in thousands) Outlets Specialty Closed and Other Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 177,326 $ 10,141 $ 78,259 $ 265,726
Merchandise margin 69,578 2,401 6,628(1) 78,607
Occupancy costs 17,396 1,824 21,029 40,249
Gross profit (loss) 52,182 577 (14,401)(1) 38,358
Depreciation/amortization 3,162 402 5,232 8,796
Contribution to profit 24,322 (1,338) (21,782) 1,202
Charges for severance and
store closings (21,600) (21,600)
Segment Assets:
Inventories 38,122 2,394 14,456 54,972
Fixed assets, net 7,574 1,199 26,534 35,307
Capital expenditures 517 -- 7,245 7,762
</TABLE>
(1) Included in the $21.6 million charge related to the liquidation of the
Boston Traders(R) brand product is $13.9 of markdown and fabric cancellation
reserves, which were included in gross margin.
For the year ended February 1, 1997
<TABLE>
<CAPTION>
(in thousands) Outlets Specialty Closed and Other Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 195,110 $ 10,645 $ 83,838 $ 289,593
Merchandise margin 90,623 3,722 30,205 124,550
Occupancy costs 16,558 1,665 20,098 38,321
Gross profit 74,065 2,057 10,107 86,229
Depreciation/amortization 3,031 402 4,980 8,413
Contribution to profit 46,628 238 (14,347) 32,519
Segment Assets:
Inventory 45,950 2,168 31,840 79,958
Fixed assets, net 9,990 1,674 27,552 39,216
Capital expenditures 2,172 7 10,111 12,290
</TABLE>
Reconciliation of Contribution to Profit to Operating Income (Loss)
<TABLE>
<CAPTION>
(in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contribution to Profit:
Outlet store segment $ 18,840 $ 24,322 $ 46,628
Specialty store segment (978) (1,338) 238
Closed store and other (15,848) (21,782) (14,347)
Charges for severance and store closings (15,700) (21,600) --
General and administrative expenses (16,700) (25,781) (22,629)
- ---------------------------------------------------------------------------------------------
Total operating income (loss) $ (30,386) $ (46,179) $ 9,890
</TABLE>
Reconciliation of depreciation/amortization to Consolidated Statements of
Operations
(in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996
- --------------------------------------------------------------------------------
Segment depreciation/amortization $ 7,320 $ 8,796 $ 8,413
Corporate depreciation/amortization 2,409 2,438 1,990
Total depreciation/amortization per ----------- ----------- -----------
Consolidated Statements of Operations $ 9,729 $ 11,234 $ 10,403
=========== =========== ===========
O. SHAREHOLDERS RIGHTS PLAN
On May 1, 1995, the Board of Directors of the Company adopted a Shareholder
Rights Plan. Pursuant to the Plan, the Company entered into a Shareholder Rights
Agreement ("Rights Agreement") between the Company and its transfer agent,
Boston EquiServe, the successor to The First National Bank of Boston, the
Company's transfer agent. Pursuant to the Rights Agreement, the Board of
Directors declared a dividend distribution of one preferred stock purchase right
(the "Right(s)") for each outstanding share of the Company's Common Stock to
stockholders of record as of the close of business on May 15, 1995. Initially,
these Rights are not exercisable and will trade with the shares of the Company's
Common Stock. In the event that a person becomes an "Acquiring Person" or is
declared an "Adverse Person" as each such term is defined in the Rights
Agreement, each holder of a Right (other than the Acquiring Person or the
Adverse Person) would be entitled to acquire such number of
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of preferred stock which are equivalent to the Company's Common Stock
having a value of twice the then-current exercise price of the Right. If the
Company is acquired in a merger or other business combination transaction after
any such event, each holder of a Right would then be entitled to purchase, at
the then-current exercise price, shares of the acquiring company's Common Stock
having a value of twice the exercise price of the Right.
On October 6, 1997, the Board of Directors approved an amendment to the Rights
Agreement, pursuant to which the definition of an "Acquiring Person" was
amended. The definition of Acquiring Person now allows a person who is and
continues to be permitted to file Schedule 13G, in lieu of Schedule of 13D,
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder, to be a beneficial owner of less than 20% of
the shares of the Company's Common Stock then outstanding without becoming an
"Acquiring Person".
P. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
---------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
FISCAL YEAR 1998
Net Sales $ 43,400 $ 47,078 $ 58,714 $ 52,442 $ 201,634
Gross Profit 9,376 9,337 13,467 10,069 42,249
Net Income (Loss) (1) (3,052) (3,094) (8,746) (3,649) (18,541)
Earnings per Share - Basic (0.19) (0.20) (0.55) (0.23) (1.17)
Earnings per Share - Diluted (0.19) (0.20) (0.55) (0.23) (1.17)
FISCAL YEAR 1997
Net Sales $ 55,470 $ 64,543 $ 77,459 $ 68,254 $ 265,726
Gross Profit 13,486 (2,585) 18,800 8,657 38,358
Net Income (Loss) (2) (3,184) (16,581) (567) (8,732) (29,063)
Earnings per Share - Basic (0.20) (1.06) (0.04) (0.56) (1.86)
Earnings per Share - Diluted (0.20) (1.06) (0.04) (0.56) (1.86)
</TABLE>
(1) The results of the fourth quarter of fiscal 1998 includes a pre-tax charge,
net, for store closings and severance of $2.3 million.
(2) The results for the fourth quarter of fiscal 1997 include approximately $7.6
million pre-tax adjustments related to shrink, reserves for vendor discussions
regarding receipt and payment of inventory, the Company's reduction in force and
a charge for impairment of long-lived assets.
Historically, the Company has experienced seasonal fluctuations in net sales,
gross profit and net income, with increases occurring during the Company's third
and fourth quarters as a result of "Fall" and "Holiday" seasons. As the
Company's percentage of outlet business increases in relation to total sales,
the Company expects that the third and fourth quarters will decrease as a
percentage to total sales. Quarterly sales comparisons are not necessarily
indicative of actual trends, since such amounts also reflect the addition of new
stores, closing of stores and the remodeling of stores during these periods.
58
<PAGE>
OTHER SHAREHOLDER INFORMATION
Board of Directors
Stanley I. Berger
Chairman of the Board of Directors
James G. Groninger
President
The BaySouth Company
Bernard M. Manuel
Chairman of the Board and Chief Executive Officer
Cygne Designs, Inc.
Joel H. Reichman
President and Chief Executive Officer
Melvin I. Shapiro
Retired Partner
Tofias, Fleishman & Shapiro & Co., P.C.
Peter L. Thigpen
Partner
Executive Reserves
Executive Officers
Joel H. Reichman
President and Chief Executive Officer
Scott N. Semel
Executive Vice President
General Counsel and Secretary
Carolyn R. Faulkner
Vice President
Chief Financial Officer and Treasurer
Corporate Officers
Lisa Brennan
Vice President
Planning
Alan B. Gruber
Vice President
Director of Stores
George F. Cavedon
Regional Vice President
Jan Falcione
Regional Vice President
59
<PAGE>
Martin Goldstein
Vice President
Construction and Design
Anthony E. Hubbard
Vice President
Deputy General Counsel and Assistant Secretary
Ben P. Lentini
Vice President
General Merchandise Manager
Shelly E. Mokas
Controller
Daniel O. Paulus
Vice President
General Merchandise Manager
Mary Ann Ryan
Vice President
Human Resources
Bob Wilbur
Vice President
Technology and Information Systems
Corporate Offices
66 B Street
Needham, MA 02494
(781) 444-7222
Financial Information
Requests for financial information should be directed to the Investor Relations
Department at the Company's headquarters: Designs, Inc., 66B Street, Needham, MA
02494, (781) 444-7222. A copy of the Company's Annual Report on Form 10-K for
the fiscal year ended January 30, 1999, filed with the Securities and Exchange
Commission, may be obtained without charge upon request to the Investor
Relations Department.
Approximate reporting dates for fiscal year 1999 quarterly earnings are:
Quarter 1: May 17, 1999
Quarter 2: July 16, 1999
Quarter 3: November 15, 1999
Quarter 4 and fiscal year end: March 20, 2000
60
<PAGE>
Transfer Agent and Registrar
Inquiries regarding stock transfer requirements, address changes and lost stock
certificates should be directed to:
BankBoston
c/o Boston EquiServe Limited Partnership
P.O. Box 8040
Boston, MA 02266-8040
(781) 575-3120
Independent Accountants
Arthur Andersen LLP
Boston, Massachusetts
Trademarks
Boston Trading Co.(R) and Boston Traders(R) are registered trademarks of
Designs, Inc.
Levi's(R), Dockers(R) and Slates(R) are registered trademarks, and Original
Levi's Store(R) is a trademark, of Levi Strauss & Co.
Buffalo Jeans(R) is a registered trademark of Buffalo DeFrance
61
BY-LAWS
OF
DESIGNS, INC.
Section 1. CERTIFICATE OF INCORPORATION AND BY-LAWS
1.1 These By-Laws are subject to the Certificate of Incorporation of the
Corporation. In these By-Laws, references to the Certificate of Incorporation
and By-Laws mean the provisions of the Certificate of Incorporation and the
By-Laws as are from time to time in effect.
Section 2. OFFICES
2.1 Registered Office. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
2.2 Other Offices. The Corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
Section 3. STOCKHOLDERS
3.1 Location of Meetings. All meetings of the stockholders shall be held
at such place either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors. Any adjourned session of
any meeting shall be held at the place designated in the vote of adjournment.
3.2 Annual Meeting. The annual meeting of stockholders shall be held for
the election of directors on the second Tuesday in June in each year, unless
that day be a legal holiday at the place where the meeting is to be held, in
which case the meeting shall be held at the same hour on the next succeeding day
not a legal holiday, or at such other date and time as shall be designated from
time to time by the Board of Directors. Any other business as may be required or
permitted by law or these By-Laws may properly come before the annual meeting.
3.3 Special Meeting in Place of Annual Meeting. If the election for
directors shall not be held on the day designated by these By-Laws, the
directors shall cause the election to be held as soon thereafter as convenient,
and to that end, if the annual meeting is omitted on the day herein provided
therefor or if the election of directors shall not be held thereat, a special
meeting of the stockholders may be held in place of such omitted meeting or
election, and any business transacted or election held at such special meeting
shall have the same effect as if transacted or held at the annual meeting, and
in such case all references in these By-Laws to the annual meeting of the
stockholders, or to the annual election of directors, shall be deemed to refer
to or include such special
<PAGE>
meeting. Any such special meeting shall be called and the purposes thereof shall
be specified in the call, as provided in Section 3.4.
3.4 Notice of Annual Meeting. Written notice of the annual meeting stating
the place, date and hour of the meeting shall be given to each stockholder
entitled to vote at such meeting not less than ten nor more than sixty days
before the date of the meeting. Such notice may specify the business to be
transacted and actions to be taken at such meeting. No action shall be taken at
such meeting unless such notice is given, or unless waiver of such notice is
given by the holders of outstanding stock having not less than the minimum
number of votes necessary to take such action at a meeting at which all shares
entitled to vote thereon were voted. Prompt notice of all action taken in
connection with such waiver of notice shall be given to all stockholders not
present or represented at such meeting.
3.5 Special Meetings. Except as otherwise required by law and subject to
the rights, if any, of the holders of any series of preferred stock, special
meetings of the stockholders of the Corporation may be called only by the Board
of Directors pursuant to a resolution approved by the affirmative vote of a
majority of the directors then in office.
3.6 Notice of Special Meeting. Written notice of a special meeting of
stockholders stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given not less than ten nor
more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting. No action shall be taken at such meeting unless such
notice is given, or unless waiver of such notice is given by the holders of
outstanding stock having not less than the minimum number of votes necessary to
take such action at a meeting at which all shares entitled to vote thereon were
voted. Prompt notice of all action taken in connection with such waiver of
notice shall be given to all stockholders not present or represented at such
meeting.
3.7 Stockholder List. The Secretary shall prepare and make, at least ten
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
3.8 Quorum of Stockholders. The holders of a majority of the
-2-
<PAGE>
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise required by
law, or by the Certificate of Incorporation or by these By-Laws. Except as
otherwise provided by law, no stockholder present at a meeting may withhold his
shares from the quorum count by declaring his shares absent from the meeting.
3.9 Adjournment. Any meeting of stockholders may be adjourned from time to
time to any other time and to any other place at which a meeting of stockholders
may be held under these By-Laws, which time and place shall be announced at the
meeting, by a majority of votes cast upon the question, whether or not a quorum
is present. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the original meeting. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
3.10 Proxy Representation. Every stockholder may authorize another person
or persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, objecting to
or voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. Except as otherwise
provided by law, a stockholder may revoke any proxy which is not irrevocable by
attending the meeting for which the proxy was given and voting in person or by
filing an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date with the Secretary of the Corporation. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and, if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. The authorization of a proxy may but need
not be limited to specified action, provided, however, that if a proxy limits
its authorization to a meeting or meetings of stockholders, unless otherwise
specifically provided such proxy shall entitle the holder thereof to vote at any
adjourned session but shall not be valid after the final adjournment thereof.
3.11 Inspectors. The directors or the person presiding at the meeting may,
but need not, appoint one or more inspectors of election and any substitute
inspectors to act at the meeting or any adjournment thereof. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors, if any,
shall determine
-3-
<PAGE>
the number of shares of stock outstanding and the voting power of each, the
shares of stock represented at the meeting, the existence of a quorum and the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such acts as are proper to conduct the election or vote with
fairness to all stockholders. On request of the person presiding at the meeting,
the inspectors shall make a report in writing of any challenge, question or
matter determined by them and execute a certificate of any fact found by them.
3.12 Action by Vote. When a quorum is present at any meeting, whether the
same be an original or an adjourned session, a plurality of the votes properly
cast for election to any office shall elect to such office and a majority of the
votes properly cast upon any question other than an election to an office shall
decide the question, except when a larger vote is required by law, by the
Certificate of Incorporation or by these By-Laws. No ballot shall be required
for any election unless requested by a stockholder present or represented at the
meeting and entitled to vote in the election.
3.13 Action Without Meetings. Unless otherwise provided in the Certificate
of Incorporation, any action required to be taken at any annual or special
meeting of stockholders of the Corporation, or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
3.14 Matters to be Considered at Annual Meetings. At any annual meeting of
stockholders or any special meeting in lieu of annual meeting of stockholders
(for purposes of this Section 3.14 and Section 4.16 hereof, hereinafter referred
to as an "Annual Meeting"), only such business shall be conducted, and only such
proposals shall be acted upon, as shall have been properly brought before such
Annual Meeting. To be considered as properly brought before an Annual Meeting,
business must be: (a) specified in the notice of the Annual Meeting, (b)
otherwise properly brought before the annual meeting by, or at the direction of,
the Board of Directors, or (c) otherwise properly brought before the Annual
Meeting by any holder of record (both as of the time notice of such proposal is
given by the stockholder as set forth below and as of the record date for the
Annual Meeting in question) of any shares of capital stock of the Corporation
entitled to vote at such Annual Meeting who complies with the requirements set
forth in this Section 3.14.
-4-
<PAGE>
In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder of record of any
shares of capital stock entitled to vote at such Annual Meeting, such
stockholder shall: (i) give timely notice as required by this Section 3.14 to
the Secretary of the Corporation and (ii) be present at such Annual Meeting,
either in person or by a representative. A stockholder's notice shall be timely
if delivered to, or mailed to and received by, the Corporation at its principal
executive office not less than seventy-five days nor more than one hundred
twenty days prior to the anniversary date of the immediately preceding Annual
Meeting (for purposes of this Section 3.14 and Section 4.16 hereof, hereinafter
referred to as the "Anniversary Date"); provided, however, that in the event the
Annual Meeting is scheduled to be held on a date more than thirty days before
the Anniversary Date or more than sixty days after the Anniversary Date, a
stockholder's notice shall be timely if delivered to, or mailed to and received
by, the Corporation at its principal executive office not later than the close
of business on the later of (A) the seventy-fifth day prior to the scheduled
date of such Annual Meeting or (B) the fifteenth day following the day on which
public announcement of the date of such Annual Meeting is first made by the
Corporation.
For purposes of these By-Laws, "public announcement" shall mean: (i)
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service, (ii) a report or other document filed
publicly with the Securities and Exchange Commission (including, without
limitation, a Form 8-K), or (iii) a letter or report sent to all stockholders of
record of the Corporation at the time of the mailing of such letter or report.
A stockholder's notice to the Secretary shall set forth as to each matter
proposed to be brought before an Annual Meeting: (i) a brief description of the
business the stockholder desires to bring before such Annual Meeting and the
reasons for conducting such business at such Annual Meeting, (ii) the name and
address, as they appear on the Corporation's stock transfer books, of the
stockholder proposing such business, (iii) the class and number of shares of the
Corporation' s capital stock beneficially owned by the stockholder proposing
such business, (iv) the names and addresses of the beneficial owners, if any, of
any capital stock of the Corporation registered in such stockholder's name on
such books, and the class and number of shares of the Corporation's capital
stock beneficially owned by such beneficial owners, (v) the names and addresses
of other stockholders known by the stockholder proposing such business to
support such proposal, and the class and number of shares of the Corporation's
capital stock beneficially owned by such other stockholders, and (vi) any
material interest of the stockholder proposing to bring such business before
such meeting (or any other stockholders known to be supporting such proposal) in
such proposal.
If the Board of Directors or a designated committee thereof
-5-
<PAGE>
determines that any stockholder proposal was not made in a timely fashion in
accordance with the provisions of this Section 3.14 or that the information
provided in a stockholder's notice does not satisfy the information requirements
of this Section 3.14 in any material respect, such proposal shall not be
presented for action at the Annual Meeting in question. If neither the Board of
Directors nor such committee makes a determination as to the validity of any
stockholder proposal in the manner set forth above, the presiding officer of the
Annual Meeting shall determine whether the stockholder proposal was made in
accordance with the terms of this Section 3.14. If the presiding officer
determines that any stockholder proposal was not made in a timely fashion in
accordance with the provisions of this Section 3.14 or that the information
provided in a stockholders notice does not satisfy the information requirements
of this Section 3.14 in any material respect, such proposal shall not be
presented for action at the Annual Meeting in question. If the Board of
Directors, a designated committee thereof or the presiding officer determines
that a stockholder proposal was made in accordance with the requirements of this
Section 3.14, the presiding officer shall so declare at the Annual Meeting and
ballots shall be provided for use at the Annual Meeting with respect to such
proposal.
Notwithstanding the foregoing provisions of this Section 3.14, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder with respect to the matters set forth in this Section
3.14, and nothing in this Section 3.14 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation' s proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 4. DIRECTORS
4.1 Number; Qualifications. The Board of Directors shall consist of one or
more members, the number thereof to be determined from time to time by
resolution of the Board of Directors. Directors need not be stockholders.
4.2 Election; Vacancies. The Board of Directors shall initially consist of
persons elected as such by the incorporator. At the first annual meeting of
stockholders and at each annual meeting thereafter, the stockholders shall elect
directors to replace those directors whose terms then expire. Vacancies and any
newly created directorships resulting from any increase in the number of
directors may be filled by vote of the stockholders at a meeting called for the
purpose, or by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. When one or more directors shall resign
from the Board, effective at a future date, a majority of the directors then in
office, including those who have resigned, shall have power to fill such vacancy
or vacancies, the vote or action by writing thereon to take effect when such
resignation or resignations shall become effective. The directors shall have and
may
-6-
<PAGE>
exercise all their powers notwithstanding the existence of one or more vacancies
in their number, subject to any requirements of law or of the Certificate of
Incorporation or of these By-Laws as to the number of directors required for a
quorum or for any vote or other actions.
4.3 Tenure. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each director shall hold office until the
next annual meeting and until his successor is elected and qualified, or until
he sooner dies, resigns, is removed or becomes disqualified.
4.4 Powers. The business of the Corporation shall be managed by or under
the direction of the Board of Directors which shall have and may exercise all
the powers of the Corporation and do all such lawful acts and things as are not
by law, the Certificate of Incorporation or these By-Laws directed or required
to be exercised or done by the stockholders.
4.5 Committees. The Board of Directors may, by vote of a majority of the
whole Board, (a) designate, change the membership of or terminate the existence
of any committee or committees, each committee to consist of one or more of the
directors; (b) designate one or more directors as alternate members of any such
committee who may replace any absent or disqualified member at any meeting of
the committee; and (c) determine the extent to which each such committee shall
have and may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, including the power
to authorize the seal of the Corporation to be affixed to all papers which
require it and the power and authority to declare dividends or to authorize the
issuance of stock; excepting, however, such powers which by law, by the
Certificate of Incorporation or by these By-Laws they are prohibited from so
delegating. In the absence or disqualification of any member of such committee
and his alternate, if any, the member or members thereof present at any meeting
and not disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Except as the
Board of Directors may otherwise determine, any committee may make rules for the
conduct of its business, but unless otherwise provided by the Board or such
rules, its business shall be conducted as nearly as may be in the same manner as
is provided by these By-Laws for the conduct of business by the Board of
Directors. Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors upon request.
4.6 Regular Meeting. Regular meetings of the Board of Directors may be
held without call or notice at such place within or without the State of
Delaware and at such times as the Board may from time to time determine,
provided that notice of the first regular meeting following any such
determination shall be given to absent directors. A regular meeting of the
directors may be held without
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call or notice immediately after and at the same place as the annual meeting of
the stockholders.
4.7 Special Meetings. Special meetings of the Board of Directors may be
held at any time and at any place within or without the State of Delaware
designed in the notice of the meeting, and may be called only by the Secretary
upon the request of persons constituting a majority of the Special Committee of
the Board of directors formed by resolution adopted by the Board of Directors on
December 1, 1998, reasonable notice thereof being given to each director by the
Secretary or any member of such Special Committee.
4.8 Notice. It shall be reasonable and sufficient notice to a director to
send notice by mail at least forty-eight hours or by telegram at least
twenty-four hours before the meeting, addressed to him at his usual or last
known business or residence address or to give notice to him in person or by
telephone at least twenty-four hours before the meeting. Notice of a meeting
need not be given to any director if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
director who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. Neither notice of a meeting nor a waiver
of a notice need specify the purposes of the meeting.
4.9 Quorum. Except as may be otherwise provided by law, by the Certificate
of Incorporation or by these By-Laws, at any meeting of the directors a majority
of the directors then in office shall constitute a quorum; a quorum shall not in
any case be less than one-third of the total number of directors constituting
the whole Board. Any meeting may be adjourned from time to time by a majority of
the votes cast upon the question, whether or not a quorum is present, and the
meeting may be held as adjourned without further notice.
4.10 Action by Vote. Except as may be otherwise provided by law, by the
Certificate of Incorporation or by these By-Laws, when a quorum is present at
any meeting the vote of a majority of the directors present shall be the act of
the Board of Directors.
4.11 Action Without a Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all the members of the Board or of such
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the records of the meetings of the Board or of such
committee. Such consent shall be treated for all purposes as the act of the
Board or of such committee, as the case may be.
4.12 Participation in Meetings by Conference Telephone. Unless otherwise
restricted by the Certificate of Incorporation or these By-
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Laws, members of the Board of Directors or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Such participation shall
constitute presence in person at such meeting.
4.13 Compensation. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, the Board of Directors shall have the authority
to fix from time to time the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and the performance of their responsibilities as directors and may be
paid a fixed sum for attendance at each meeting of the Board of Directors and/or
a stated salary as director. No such payment shall preclude any director from
serving the Corporation or its parent or subsidiary corporations in any other
capacity and receiving compensation therefor. The Board of Directors may also
allow compensation for members of special or standing committees for service on
such committees.
4.14 Interested Directors and Officers.
(a) No contract or transaction between the Corporation and one or
more of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of the Corporation's directors or officers are directors or officers, or
have a financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the Board or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if:
(1) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or
(2) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the stockholders.
(b) Common or interested directors may be counted in
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determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
4.15 Resignation or Removal of Directors. Unless otherwise restricted by
the Certificate of Incorporation or by law, any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the stock issued and outstanding and entitled to vote at an election of
directors. Any director may resign at any time by delivering his resignation in
writing to the President or the Secretary or to a meeting of the Board of
Directors. Such resignation shall be effective upon receipt unless specified to
be effective at some other time; and without in either case the necessity of its
being accepted unless the resignation shall so state. No director resigning and
(except where a right to receive compensation shall be expressly provided in a
duly authorized written agreement with the Corporation) no director removed
shall have any right to receive compensation as such director for any period
following his resignation or removal, or any right to damages on account of such
removal, whether his compensation be by the month or by the year or otherwise;
unless in the case of a resignation, the directors, or in the case of removal,
the body acting on the removal, shall in their or its discretion provide for
compensation.
4.16 Director Nominations. Nominations of candidates for election as
directors of the Corporation at any Annual Meeting may be made only (a) by, or
at the direction of, a majority of the directors then in office or (b) by any
holder of record (both as of the time notice of such nomination is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of the capital stock of the Corporation entitled to
vote at such Annual Meeting who complies with the timing, informational and
other requirements set forth in this Section 4.16. Any stockholder who has
complied with the timing, informational and other requirements set forth in this
Section 4.16 and who seeks to make such a nomination, or such stockholder's
representative, must be present in person at the Annual Meeting. Only persons
nominated in accordance with the procedures set forth in this Section 4.16 shall
be eligible for election as directors at an Annual Meeting.
Nominations, other than those made by, or at the direction of, the Board
of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 4.16. A stockholder's
notice shall be timely if delivered to, or mailed to and received by, the
Corporation at its principal executive office not less than seventy-five days
nor more than one hundred twenty days prior to the Anniversary Date; provided,
however, that in the event the Annual Meeting is scheduled to be held on a date
more than thirty days before the Anniversary Date or more than sixty days after
the Anniversary Date, a stockholder's notice shall be timely if delivered to, or
mailed and received by, the Corporation at its principal executive office not
later than the close of business on
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the later of (i) the seventy-fifth day prior to the scheduled date of such
Annual Meeting or (ii) the fifteenth day following the day on which public
announcement of the date of such Annual Meeting is first made by the
Corporation.
A stockholder's notice to the Secretary shall set forth as to each person
whom the stockholder proposes to nominate for election or re-election as a
director: (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation' s capital stock which are
beneficially owned by such person on the date of such stockholder notice, and
(iv) the consent of each nominee to serve as a director if elected. A
stockholder' s notice to the Secretary shall further set forth as to the
stockholder giving such notice: (i) the name and address, as the appear on the
Corporation's stock transfer books, of such stockholder and of the beneficial
owners (if any) of the Corporation's capital stock registered in such
stockholder' s name and the name and address of other stockholders known by such
stockholder to be supporting such nominee(s), (ii) the class and number of
shares of the Corporation's capital stock which are held of record, beneficially
owned or represented by proxy by such stockholder and by any other stockholders
known by such stockholder to be supporting such nominee(s) on the record date
for the Annual Meeting in question (if such date shall then have been made
publicly available) and on the date of such stockholder' s notice, and (iii) a
description of all arrangements or understandings between such stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by such
stockholder.
If the Board of Directors or a designated committee thereof determines
that any stockholder nomination was not made in accordance with the terms of
this Section 4.16 or that the information provided in a stockholder's notice
does not satisfy the informational requirements of this Section 4.l6 in any
material respect, then such nomination shall not be considered at the Annual
Meeting in question. If neither the Board of Directors nor such committee makes
a determination as to whether a nomination was made in accordance with the
provisions of this Section 4.16, the presiding officer of the Annual Meeting
shall determine whether a nomination was made in accordance with such
provisions. If the presiding officer determines that any stockholder nomination
was not made in accordance with the terms of this Section 4.16 or that the
information provided in a stockholder's notice does not satisfy the
informational requirements of this Section 4.16 in any material respect, then
such nomination shall not be considered at the Annual Meeting in question. If
the Board of Directors, a designated committee thereof or the presiding officer
determines that a nomination was made in accordance with the terms of this
Section 4.16, the presiding officer shall so declare at the Annual Meeting and
ballots shall be provided for use at the Annual Meeting with respect to such
nominee.
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Notwithstanding anything to the contrary in the second sentence of the
second paragraph of this Section 4.16, in the event that the number of directors
to be elected to the Board of Directors of the Corporation is increased and
there is no public announcement by the Corporation naming all of the nominees
for director or specifying the size of the increased Board of Directors at least
seventy-five days prior to the Anniversary Date, a stockholder's notice required
by this Section 4.16 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if such notice shall be
delivered to, or mailed to and received by, the Corporation at its principal
executive office not later than the close of business on the fifteenth day
following the day on which such public announcement is first made by the
Corporation.
No person shall be elected by the stockholders as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 4.16. Election of directors at an Annual Meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or presiding officer
at such Annual Meeting. If written ballots are to be used, ballots bearing the
names of all the persons who have been nominated for election as directors at an
Annual Meeting in accordance with the procedures set forth in this Section 4.16
shall be provided for use at such Annual Meeting.
Section 5. NOTICES
5.1 Form of Notice. Whenever, under the provisions of law, or of the
Certificate of Incorporation or of these By-Laws, notice is required to be given
to any director or stockholder, such notice may be given by mail, addressed to
such director or stockholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Unless written notice by mail is required by law, written notice may also be
given by telegram, cable, telecopy, commercial delivery service, telex or
similar means, addressed to such director or stockholder at his address as it
appears on the records of the Corporation, in which case such notice shall be
deemed to be given when delivered into the control of the persons charged with
effecting such transmission, the transmission charge to be paid by the
Corporation or the person sending such notice and not by the addressee. Oral
notice or other in-hand delivery (in person or by telephone) shall be deemed
given at the time it is actually given.
5.2 Waiver of Notice. Whenever notice is required to be given under the
provisions of law, the Certificate of Incorporation or these By-Laws, a written
waiver thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because
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the meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the stockholders, directors or
members of a committee of the directors need be specified in any written waiver
of notice.
Section 6. OFFICERS AND AGENTS
6.1 Enumeration; Qualification. The officers of the Corporation shall be a
Chairman of the Board of Directors, a President, a Treasurer, a Secretary and
such other officers, if any, as the Board of Directors from time to time may in
its discretion elect or appoint including without limitation one or more Vice
Presidents. Any officer may be, but none need be, a director or stockholder. Any
two or more offices may be held by the same person. Any officer may be required
by the Board of Directors to secure the faithful performance of his duties to
the Corporation by giving bond in such amount and with sureties or otherwise as
the Board of Directors may determine.
6.2 Powers. Subject to law, to the Certificate of Incorporation and to the
other provisions of these By-Laws, each officer shall have, in addition to the
duties and powers herein set forth, such duties and powers as are commonly
incident to his office and such additional duties and powers as the Board of
Directors may from time to time designate.
6.3 Election. The Board of Directors at its first meeting after each
annual meeting of stockholders, or special meeting in place of an annual
meeting, shall choose a Chairman, a President, a Secretary and a Treasurer.
Other officers may be appointed by the Board of Directors at such meeting, at
any other meeting or by written consent. At any time or from time to time, the
directors may delegate to any officer their power to elect or appoint any other
officer or any agents.
6.4 Tenure. Each officer shall hold office until the first meeting of the
Board of Directors following the next annual meeting of the stockholders and
until his successor is elected and qualified unless a shorter period shall have
been specified in terms of his election or appointment, or in each case until he
sooner dies, resigns, is removed or becomes disqualified. Each agent of the
Corporation shall retain his authority at the pleasure of the directors, or the
officer by whom he was appointed or by the officer who then holds agent
appointive power.
6.5 Resignation and Removal. Any officer may resign at any time by
delivering his resignation in writing to the President or the Secretary or to a
meeting of the Board of Directors. Such resignation shall be effective upon
receipt unless specified to be effective at some other time, and without in any
case the necessity of its being accepted unless the resignation shall so state.
The Board of Directors may at any time remove any officer either with or without
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cause. The Board of Directors may at any time terminate or modify the authority
of any agent. No officer resigning and (except where a right to receive
compensation shall be expressly provided in a duly authorized written agreement
with the Corporation) no officer removed shall have any right to any
compensation as such officer for any period following his resignation or
removal, or any right to damages on account of such removal, whether his
compensation be by the month or by the year or otherwise; unless in the case of
a resignation, the directors, or in the case of removal, the body acting on the
removal, shall in their or its discretion provide for compensation.
6.6 Vacancies. If the office of the Chairman, the President, the Treasurer
or the Secretary becomes vacant, the directors may elect a successor by vote of
a majority of the directors then in office. If the office of any other officer
becomes vacant, any person or body empowered to elect or appoint that office may
choose a successor. Each such successor shall hold office for the unexpired term
of his predecessor, and in the case of the Chairman, the President, the
Treasurer and the Secretary until his successor is chosen and qualified, or in
each case until he sooner dies, resigns, is removed or becomes disqualified.
Section 7. CAPITAL STOCK
7.1 Stock Certificates. Each stockholder shall be entitled to a
certificate stating the number and the class and the designation of the series,
if any, of the shares held by him, in such form as shall, in conformity to law,
the Certificate of Incorporation and the By-Laws, be prescribed from time to
time by the Board of Directors. Such certificate shall be signed by the
President or a Vice-President and (i) the Treasurer or an Assistant Treasurer or
(ii) the Secretary or an Assistant Secretary. Any of or all the signatures on
the certificate may be a facsimile. In case an officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed on such
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent, or registrar at the time
of its issue.
7.2 Lost Certificates. The Board of Directors may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost,
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stolen or destroyed.
Section 8. TRANSFER OF SHARES OF STOCK
8.1 Transfer on Books. Subject to any restrictions with respect to the
transfer of shares of stock, shares of stock may be transferred on the books of
the Corporation by the surrender to the Corporation or its transfer agent of the
certificate therefor properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the Board of Directors
or the transfer agent of the Corporation may reasonably require. Except as may
be otherwise required by law, by the Certificate of Incorporation or by these
By-Laws, the Corporation shall be entitled to treat the record holder of stock
as shown on its books as the owner of such stock for all purposes, including the
payment of dividends and the right to receive notice and to vote or to give any
consent with respect thereto and to be held liable for such calls and
assessments, if any, as may lawfully be made thereon, regardless of any
transfer, pledge or other disposition of such stock until the shares have been
properly transferred on the books of the Corporation.
It shall be the duty of each stockholder to notify the Corporation of his
post office address.
Section 9. GENERAL PROVISIONS
9.1 Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty days nor less than ten days before the date
of such meeting, nor more than sixty days prior to any other action to which
such record date relates. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting. If no record date is fixed,
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held;
(b) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be
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the day on which the first written consent is expressed; and
(c) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating to such purpose.
9.2 Dividends. Dividends upon the capital stock of the Corporation may be
declared by the Board of Directors at any regular or special meeting or by
written consent, pursuant to law. Dividends may be paid in cash, in property, or
in shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
9.3 Payment of Dividends. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the directors shall think conducive to the interest of
the Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
9.4 Checks. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
9.5 Fiscal Year. The fiscal year of the Corporation shall end the Saturday
closest to the 31st of January unless otherwise determined by the Board of
Directors.
9.6 Seal. The Board of Directors may, by resolution, adopt a corporate
seal. The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the word "Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. The seal may be altered from time to time by the Board
of Directors.
Section 10. INDEMNIFICATION
10.1 It being the intent of the Corporation to provide maximum
protection available under the law to its officers and directors, the
Corporation shall indemnify its officers and directors to the full extent the
Corporation is permitted or required to do so by the General Corporation Law of
Delaware as the same exists or hereafter may be amended. Such indemnification
shall include payment by the Corporation, in advance of the final disposition of
a civil or criminal action, suit or proceedings, of expenses incurred by a
director or officer in defending any such action, suit or proceeding upon
receipt of any undertaking by or on behalf of such director or officer to repay
such payment if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation. The
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Corporation may accept any such undertaking without reference to the financial
ability of the person to make such repayment. As used in this paragraph, the
terms "director" and "officer" include their respective heirs, executors, and
administrators.
Section 11. AMENDMENTS
11.1 These By-Laws may be altered, amended or repealed or new By-Laws may
be adopted by the stockholders or by the Board of Directors when such power is
conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors. If the power
to adopt, amend or repeal By-Laws is conferred upon the Board of Directors by
the Certificate of Incorporation, it shall not divest or limit the power of the
stockholders to adopt, amend or repeal By-Laws.
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DESIGNS, INC.
SENIOR EXECUTIVE INCENTIVE PLAN
FEBRUARY 1999-JANUARY 29, 2000
This plan has been developed for Senior Executives of Designs, Inc. The purpose
of the Plan is to reward overall corporate accomplishments when pre-determined
measures of company-wide performance are exceeded.
o The Plan is for FY99 and is effective for the period from February
1999 through January 29, 2000.
o Any incentive payments will be made within 30 days after the fiscal
year results have been audited by the Company's independent
accountants, unless otherwise determined by the Compensation
Committee of the Board of Directors.
COMPONENTS
The plan is designed to be measurable and monitorable; and, to reward
performance based on certain measures of success of the Company. Accordingly,
this Plan will pay out from 7% up to 50% of base salary upon exceeding the
budget target for Earnings Before Interest and Taxes (EBIT). The EBIT Budget for
the year is $8,077,000 ($0.25 per share)
EBIT TARGET PAYOUT AS A % INCENTIVE AS
FOR INCENTIVE OF INCENTIVE TARGET A % OF SALARY
------------- ------------------- -------------
$ 8,077,000 -0- -0-
$ 8,884,700 14% 7.0%
$ 9,288,550 21% 10.5%
$ 9,692,400 28% 14.0%
$10,096,250 35% 17.5%
$10,500,100 42% 21.0%
$11,307,800 56% 28.0%
$12,115,500 70% 35.0%
$12,923,200 84% 42.0%
$13,730,900 98% 49.0%
$14,538,600 100% 50.0%
ELIGIBILITY
To be eligible for payment under the Plan, associates must be employed by
DESIGNS, INC. as of the end of FY99; and employed on the date the payment is
made.
Those hired after the beginning of FY99 will receive a prorated payment based on
their months of employment during FY99. Those who leave voluntarily between the
fiscal year-end and the payment date will forfeit their right to any incentive
payment. Those who involuntarily leave employment will be paid any prorated
incentive due (payable on the incentive payment date). Anyone with a counseling,
corrective or performance improvement plan will not be eligible for an incentive
payment. For use in this plan, a current counseling, corrective or performance
plan will be defined as one that was delivered within 120 days prior to the
payment. Incentive payment is calculated on base salary paid during FY99. All
decisions concerning this Plan are at the sole discretion of the Compensation
Committee of the Board of Directors and/or their delegatees.
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of December 10,1998, between Designs, Inc.,
a Delaware corporation (the "Company"), and James G. Groninger (the
"Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers of public companies in today's environment;
WHEREAS, the By-laws of the Company permit the Company to indemnify
and advance expenses to its directors and officers to the full extent permitted
by law and the Indemnitee has been serving and continues to serve as a director
or officer of the Company in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, and Indemnitee's reliance on the
aforesaid By-laws, and in part to provide Indemnitee with specific contractual
assurance that the protection permitted by such By-laws will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of
such By-laws or any change in the composition of the Company's Board of
Directors or acquisition transaction relating to the Company), the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions:
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation
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owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 15% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into Voting Securities of the surviving entity)
at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of (in
one transaction or a series of transactions) all or substantially
all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action,
suit or proceeding, whether instituted by the Company or any other
party and, whether civil, criminal, administrative, investigative or
other.
(c) Expenses: include attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in,
any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or is or was serving at the request of the
Company as a director, officer, employee, trustee, agent or
fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by Indemnitee in any such
2
<PAGE>
capacity, including without limitation any action taken or omitted
to be taken by Indemnitee in connection with or arising out of the
consent solicitation of Jewelcor Management, Inc.
(e) Independent Legal Counsel: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or Indemnitee
within the last five years (other than with respect to matters
concerning the rights of Indemnitee under this Agreement, or of
other indemnitees under similar indemnity agreements).
(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other
person or body appointed by the Board who is not a party to the
particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is
or becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee to the fullest extent permitted by law as soon as practicable but in
any event no later than thirty days after written demand is presented to the
Company, against any and all Expenses, judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) of such Claim. If so requested by
Indemnitee, the Company shall advance (within two business days of such request)
any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Claim
initiated by Indemnitee or anyone acting in concert with the Indemnitee (other
than a Claim seeking to enforce Indemnitee's rights under this Agreement) unless
the Board of Directors has authorized or consented to the initiation of such
Claim.
(b) Notwithstanding the foregoing, (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be
3
<PAGE>
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). If there has not been a Change in Control, the Reviewing
Party shall be selected by the Board of Directors, and if there has been such a
Change in Control (other than a Change in Control which has been approved by a
majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referred to in Section 3 hereof. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the States of Massachusetts or Delaware having
subject matter jurisdiction thereof and in which venue is proper seeking an
initial determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company By-law now or
hereafter in effect relating to Claims for Indemnifiable Events, the Company
shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent the Indemnitee would
be permitted to be indemnified under applicable law. The Company agrees to pay
the reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under
4
<PAGE>
this Agreement or any other agreement or Company By-law now or hereafter in
effect relating to Claims for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
6. Burden of Proof. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's By-laws or
the Delaware General Corporation Law or otherwise. To the extent that a change
in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's By-laws and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
5
<PAGE>
9. Liability Insurance. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
11. Amendments, Etc. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
13. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or of any
other enterprise at the Company's request.
15. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such
6
<PAGE>
provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired and shall remain enforceable to the fullest extent
permitted by law.
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this 7th day of January, 1999.
DESIGNS, INC.
By /s/ SCOTT N. SEMEL, AS
-------------------
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL &
SECRETARY
/s/ JAMES G. GRONINGER
--------------------------
James G. Groninger
7
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of December 10,1998, between Designs, Inc.,
a Delaware corporation (the "Company"), and Bernard M. Manuel (the
"Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers of public companies in today's environment;
WHEREAS, the By-laws of the Company permit the Company to indemnify
and advance expenses to its directors and officers to the full extent permitted
by law and the Indemnitee has been serving and continues to serve as a director
or officer of the Company in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, and Indemnitee's reliance on the
aforesaid By-laws, and in part to provide Indemnitee with specific contractual
assurance that the protection permitted by such By-laws will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of
such By-laws or any change in the composition of the Company's Board of
Directors or acquisition transaction relating to the Company), the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions:
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation
1
<PAGE>
owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 15% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into Voting Securities of the surviving entity)
at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of (in
one transaction or a series of transactions) all or substantially
all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action,
suit or proceeding, whether instituted by the Company or any other
party and, whether civil, criminal, administrative, investigative or
other.
(c) Expenses: include attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in,
any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or is or was serving at the request of the
Company as a director, officer, employee, trustee, agent or
fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by Indemnitee in any such
2
<PAGE>
capacity, including without limitation any action taken or omitted
to be taken by Indemnitee in connection with or arising out of the
consent solicitation of Jewelcor Management, Inc.
(e) Independent Legal Counsel: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or Indemnitee
within the last five years (other than with respect to matters
concerning the rights of Indemnitee under this Agreement, or of
other indemnitees under similar indemnity agreements).
(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other
person or body appointed by the Board who is not a party to the
particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(g) Voting Securities: any securities of the Company which
vote generally in the election of directors.
2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is
or becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee to the fullest extent permitted by law as soon as practicable but in
any event no later than thirty days after written demand is presented to the
Company, against any and all Expenses, judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) of such Claim. If so requested by
Indemnitee, the Company shall advance (within two business days of such request)
any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Claim
initiated by Indemnitee or anyone acting in concert with the Indemnitee (other
than a Claim seeking to enforce Indemnitee's rights under this Agreement) unless
the Board of Directors has authorized or consented to the initiation of such
Claim.
(b) Notwithstanding the foregoing, (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be
3
<PAGE>
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). If there has not been a Change in Control, the Reviewing
Party shall be selected by the Board of Directors, and if there has been such a
Change in Control (other than a Change in Control which has been approved by a
majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referred to in Section 3 hereof. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the States of Massachusetts or Delaware having
subject matter jurisdiction thereof and in which venue is proper seeking an
initial determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company By-law now or
hereafter in effect relating to Claims for Indemnifiable Events, the Company
shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent the Indemnitee would
be permitted to be indemnified under applicable law. The Company agrees to pay
the reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under
4
<PAGE>
this Agreement or any other agreement or Company By-law now or hereafter in
effect relating to Claims for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
6. Burden of Proof. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's By-laws or
the Delaware General Corporation Law or otherwise. To the extent that a change
in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's By-laws and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
5
<PAGE>
9. Liability Insurance. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
11. Amendments, Etc. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
13. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or of any
other enterprise at the Company's request.
15. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such
6
<PAGE>
provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired and shall remain enforceable to the fullest extent
permitted by law.
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this 30th day of December, 1998.
DESIGNS, INC.
By /s/ SCOTT N. SEMEL, AS
-------------------
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL &
SECRETARY
/s/ BERNARD M. MANUEL
------------------------
Bernard M. Manuel
7
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of December 10,1998, between Designs, Inc.,
a Delaware corporation (the "Company"), and Peter L. Thigpen (the "Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers of public companies in today's environment;
WHEREAS, the By-laws of the Company permit the Company to indemnify
and advance expenses to its directors and officers to the full extent permitted
by law and the Indemnitee has been serving and continues to serve as a director
or officer of the Company in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, and Indemnitee's reliance on the
aforesaid By-laws, and in part to provide Indemnitee with specific contractual
assurance that the protection permitted by such By-laws will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of
such By-laws or any change in the composition of the Company's Board of
Directors or acquisition transaction relating to the Company), the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions:
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation
1
<PAGE>
owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 15% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into Voting Securities of the surviving entity)
at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of (in
one transaction or a series of transactions) all or substantially
all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action,
suit or proceeding, whether instituted by the Company or any other
party and, whether civil, criminal, administrative, investigative or
other.
(c) Expenses: include attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in,
any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or is or was serving at the request of the
Company as a director, officer, employee, trustee, agent or
fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by Indemnitee in any such
2
<PAGE>
capacity, including without limitation any action taken or omitted
to be taken by Indemnitee in connection with or arising out of the
consent solicitation of Jewelcor Management, Inc.
(e) Independent Legal Counsel: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or Indemnitee
within the last five years (other than with respect to matters
concerning the rights of Indemnitee under this Agreement, or of
other indemnitees under similar indemnity agreements).
(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other
person or body appointed by the Board who is not a party to the
particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is
or becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee to the fullest extent permitted by law as soon as practicable but in
any event no later than thirty days after written demand is presented to the
Company, against any and all Expenses, judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) of such Claim. If so requested by
Indemnitee, the Company shall advance (within two business days of such request)
any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Claim
initiated by Indemnitee or anyone acting in concert with the Indemnitee (other
than a Claim seeking to enforce Indemnitee's rights under this Agreement) unless
the Board of Directors has authorized or consented to the initiation of such
Claim.
(b) Notwithstanding the foregoing, (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be
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<PAGE>
permitted to be indemnified under applicable law, and (ii) the obligation of the
Company to make an Expense Advance pursuant to Section 2(a) shall be subject to
the condition that, if, when and to the extent that the Reviewing Party
determines that Indemnitee would not be permitted to be so indemnified under
applicable law, the Company shall be entitled to be reimbursed by Indemnitee
(who hereby agrees to reimburse the Company) for all such amounts theretofore
paid; provided, however, that if Indemnitee has commenced or thereafter
commences legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has not been a Change
in Control, the Reviewing Party shall be selected by the Board of Directors, and
if there has been such a Change in Control (other than a Change in Control which
has been approved by a majority of the Company's Board of Directors who were
directors immediately prior to such Change in Control), the Reviewing Party
shall be the Independent Legal Counsel referred to in Section 3 hereof. If there
has been no determination by the Reviewing Party or if the Reviewing Party
determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation in any court in the States of Massachusetts or
Delaware having subject matter jurisdiction thereof and in which venue is proper
seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company By-law now or
hereafter in effect relating to Claims for Indemnifiable Events, the Company
shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent the Indemnitee would
be permitted to be indemnified under applicable law. The Company agrees to pay
the reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under
4
<PAGE>
this Agreement or any other agreement or Company By-law now or hereafter in
effect relating to Claims for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
6. Burden of Proof. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's By-laws or
the Delaware General Corporation Law or otherwise. To the extent that a change
in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's By-laws and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
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<PAGE>
9. Liability Insurance. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
11. Amendments, Etc. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
13. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or of any
other enterprise at the Company's request.
15. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such
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provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired and shall remain enforceable to the fullest extent
permitted by law.
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this 30th day of December, 1998.
DESIGNS, INC.
By /s/ SCOTT N. SEMEL, AS
-------------------
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL &
SECRETARY
/s/ PETER L. THIGPEN
----------------------
Peter L. Thigpen
7
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of December 10,1998, between Designs, Inc.,
a Delaware corporation (the "Company"), and Melvin Shapiro (the "Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers of public companies in today's environment;
WHEREAS, the By-laws of the Company permit the Company to indemnify
and advance expenses to its directors and officers to the full extent permitted
by law and the Indemnitee has been serving and continues to serve as a director
or officer of the Company in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, and Indemnitee's reliance on the
aforesaid By-laws, and in part to provide Indemnitee with specific contractual
assurance that the protection permitted by such By-laws will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of
such By-laws or any change in the composition of the Company's Board of
Directors or acquisition transaction relating to the Company), the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions:
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation
1
<PAGE>
owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 15% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into Voting Securities of the surviving entity)
at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of (in
one transaction or a series of transactions) all or substantially
all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action,
suit or proceeding, whether instituted by the Company or any other
party and, whether civil, criminal, administrative, investigative or
other.
(c) Expenses: include attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in,
any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or is or was serving at the request of the
Company as a director, officer, employee, trustee, agent or
fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by Indemnitee in any such
2
<PAGE>
capacity, including without limitation any action taken or omitted
to be taken by Indemnitee in connection with or arising out of the
consent solicitation of Jewelcor Management, Inc.
(e) Independent Legal Counsel: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or Indemnitee
within the last five years (other than with respect to matters
concerning the rights of Indemnitee under this Agreement, or of
other indemnitees under similar indemnity agreements).
(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other
person or body appointed by the Board who is not a party to the
particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is
or becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee to the fullest extent permitted by law as soon as practicable but in
any event no later than thirty days after written demand is presented to the
Company, against any and all Expenses, judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) of such Claim. If so requested by
Indemnitee, the Company shall advance (within two business days of such request)
any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Claim
initiated by Indemnitee or anyone acting in concert with the Indemnitee (other
than a Claim seeking to enforce Indemnitee's rights under this Agreement) unless
the Board of Directors has authorized or consented to the initiation of such
Claim.
(b) Notwithstanding the foregoing, (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be
3
<PAGE>
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). If there has not been a Change in Control, the Reviewing
Party shall be selected by the Board of Directors, and if there has been such a
Change in Control (other than a Change in Control which has been approved by a
majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referred to in Section 3 hereof. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the States of Massachusetts or Delaware having
subject matter jurisdiction thereof and in which venue is proper seeking an
initial determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company By-law now or
hereafter in effect relating to Claims for Indemnifiable Events, the Company
shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent the Indemnitee would
be permitted to be indemnified under applicable law. The Company agrees to pay
the reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under
4
<PAGE>
this Agreement or any other agreement or Company By-law now or hereafter in
effect relating to Claims for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
6. Burden of Proof. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's By-laws or
the Delaware General Corporation Law or otherwise. To the extent that a change
in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's By-laws and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
5
<PAGE>
9. Liability Insurance. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
11. Amendments, Etc. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
13. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or of any
other enterprise at the Company's request.
15. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such
6
<PAGE>
provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired and shall remain enforceable to the fullest extent
permitted by law.
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this 29th day of December, 1998.
DESIGNS, INC.
By /s/ SCOTT N. SEMEL, AS
-------------------
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL &
SECRETARY
/s/ MELVIN SHAPIRO
--------------------
Melvin Shapiro
7
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of December 10,1998, between Designs, Inc.,
a Delaware corporation (the "Company"), and Joel H. Reichman (the "Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers of public companies in today's environment;
WHEREAS, the By-laws of the Company permit the Company to indemnify
and advance expenses to its directors and officers to the full extent permitted
by law and the Indemnitee has been serving and continues to serve as a director
or officer of the Company in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, and Indemnitee's reliance on the
aforesaid By-laws, and in part to provide Indemnitee with specific contractual
assurance that the protection permitted by such By-laws will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of
such By-laws or any change in the composition of the Company's Board of
Directors or acquisition transaction relating to the Company), the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions:
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation
1
<PAGE>
owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 15% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into Voting Securities of the surviving entity)
at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of (in
one transaction or a series of transactions) all or substantially
all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action,
suit or proceeding, whether instituted by the Company or any other
party and, whether civil, criminal, administrative, investigative or
other.
(c) Expenses: include attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in,
any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or is or was serving at the request of the
Company as a director, officer, employee, trustee, agent or
fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by Indemnitee in any such
2
<PAGE>
capacity, including without limitation any action taken or omitted
to be taken by Indemnitee in connection with or arising out of the
consent solicitation of Jewelcor Management, Inc.
(e) Independent Legal Counsel: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or Indemnitee
within the last five years (other than with respect to matters
concerning the rights of Indemnitee under this Agreement, or of
other indemnitees under similar indemnity agreements).
(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other
person or body appointed by the Board who is not a party to the
particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is
or becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee to the fullest extent permitted by law as soon as practicable but in
any event no later than thirty days after written demand is presented to the
Company, against any and all Expenses, judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) of such Claim. If so requested by
Indemnitee, the Company shall advance (within two business days of such request)
any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Claim
initiated by Indemnitee or anyone acting in concert with the Indemnitee (other
than a Claim seeking to enforce Indemnitee's rights under this Agreement) unless
the Board of Directors has authorized or consented to the initiation of such
Claim.
(b) Notwithstanding the foregoing, (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be
3
<PAGE>
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). If there has not been a Change in Control, the Reviewing
Party shall be selected by the Board of Directors, and if there has been such a
Change in Control (other than a Change in Control which has been approved by a
majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referred to in Section 3 hereof. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the States of Massachusetts or Delaware having
subject matter jurisdiction thereof and in which venue is proper seeking an
initial determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company By-law now or
hereafter in effect relating to Claims for Indemnifiable Events, the Company
shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent the Indemnitee would
be permitted to be indemnified under applicable law. The Company agrees to pay
the reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under
4
<PAGE>
this Agreement or any other agreement or Company By-law now or hereafter in
effect relating to Claims for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
6. Burden of Proof. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's By-laws or
the Delaware General Corporation Law or otherwise. To the extent that a change
in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's By-laws and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
5
<PAGE>
9. Liability Insurance. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
11. Amendments, Etc. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
13. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or of any
other enterprise at the Company's request.
15. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such
6
<PAGE>
provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired and shall remain enforceable to the fullest extent
permitted by law.
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this 30th day of December, 1998.
DESIGNS, INC.
By /s/ ANTHONY E. HUBBARD
-----------------------
Name: Anthony E. Hubbard
Title: Assistant Secretary
/s/ JOEL H. REICHMAN
-----------------------
Joel H. Reichman
7
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of December 10,1998, between Designs, Inc.,
a Delaware corporation (the "Company"), and Scott N. Semel (the "Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers of public companies in today's environment;
WHEREAS, the By-laws of the Company permit the Company to indemnify
and advance expenses to its directors and officers to the full extent permitted
by law and the Indemnitee has been serving and continues to serve as a director
or officer of the Company in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, and Indemnitee's reliance on the
aforesaid By-laws, and in part to provide Indemnitee with specific contractual
assurance that the protection permitted by such By-laws will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of
such By-laws or any change in the composition of the Company's Board of
Directors or acquisition transaction relating to the Company), the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions:
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation
1
<PAGE>
owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 15% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into Voting Securities of the surviving entity)
at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of (in
one transaction or a series of transactions) all or substantially
all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action,
suit or proceeding, whether instituted by the Company or any other
party and, whether civil, criminal, administrative, investigative or
other.
(c) Expenses: include attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in,
any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or is or was serving at the request of the
Company as a director, officer, employee, trustee, agent or
fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by Indemnitee in any such
2
<PAGE>
capacity, including without limitation any action taken or omitted
to be taken by Indemnitee in connection with or arising out of the
consent solicitation of Jewelcor Management, Inc.
(e) Independent Legal Counsel: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or Indemnitee
within the last five years (other than with respect to matters
concerning the rights of Indemnitee under this Agreement, or of
other indemnitees under similar indemnity agreements).
(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other
person or body appointed by the Board who is not a party to the
particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is
or becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee to the fullest extent permitted by law as soon as practicable but in
any event no later than thirty days after written demand is presented to the
Company, against any and all Expenses, judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) of such Claim. If so requested by
Indemnitee, the Company shall advance (within two business days of such request)
any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Claim
initiated by Indemnitee or anyone acting in concert with the Indemnitee (other
than a Claim seeking to enforce Indemnitee's rights under this Agreement) unless
the Board of Directors has authorized or consented to the initiation of such
Claim.
(b) Notwithstanding the foregoing, (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be
3
<PAGE>
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). If there has not been a Change in Control, the Reviewing
Party shall be selected by the Board of Directors, and if there has been such a
Change in Control (other than a Change in Control which has been approved by a
majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referred to in Section 3 hereof. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the States of Massachusetts or Delaware having
subject matter jurisdiction thereof and in which venue is proper seeking an
initial determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company By-law now or
hereafter in effect relating to Claims for Indemnifiable Events, the Company
shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent the Indemnitee would
be permitted to be indemnified under applicable law. The Company agrees to pay
the reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under
4
<PAGE>
this Agreement or any other agreement or Company By-law now or hereafter in
effect relating to Claims for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
6. Burden of Proof. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's By-laws or
the Delaware General Corporation Law or otherwise. To the extent that a change
in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's By-laws and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
5
<PAGE>
9. Liability Insurance. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
11. Amendments, Etc. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
13. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or of any
other enterprise at the Company's request.
15. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such
6
<PAGE>
provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired and shall remain enforceable to the fullest extent
permitted by law.
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this 28th day of December, 1998.
DESIGNS, INC.
By /s/ ANTHONY E. HUBBARD
-----------------------
Name: Anthony E. Hubbard
Title: Assistant Secretary
/s/ SCOTT N. SEMEL
----------------------
Scott N. Semel
7
INDEMNIFICATION AGREEMENT
AGREEMENT, effective as of December 10,1998, between Designs, Inc.,
a Delaware corporation (the "Company"), and Carolyn R. Faulkner (the
"Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims being asserted against directors and
officers of public companies in today's environment;
WHEREAS, the By-laws of the Company permit the Company to indemnify
and advance expenses to its directors and officers to the full extent permitted
by law and the Indemnitee has been serving and continues to serve as a director
or officer of the Company in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, and Indemnitee's reliance on the
aforesaid By-laws, and in part to provide Indemnitee with specific contractual
assurance that the protection permitted by such By-laws will be available to
Indemnitee (regardless of, among other things, any amendment to or revocation of
such By-laws or any change in the composition of the Company's Board of
Directors or acquisition transaction relating to the Company), the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain Definitions:
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation
1
<PAGE>
owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 15% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of
the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into Voting Securities of the surviving entity)
at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of (in
one transaction or a series of transactions) all or substantially
all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action,
suit or proceeding, whether instituted by the Company or any other
party and, whether civil, criminal, administrative, investigative or
other.
(c) Expenses: include attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in,
any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or is or was serving at the request of the
Company as a director, officer, employee, trustee, agent or
fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by Indemnitee in any such
2
<PAGE>
capacity, including without limitation any action taken or omitted
to be taken by Indemnitee in connection with or arising out of the
consent solicitation of Jewelcor Management, Inc.
(e) Independent Legal Counsel: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services for the Company or Indemnitee
within the last five years (other than with respect to matters
concerning the rights of Indemnitee under this Agreement, or of
other indemnitees under similar indemnity agreements).
(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other
person or body appointed by the Board who is not a party to the
particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.
2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is
or becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee to the fullest extent permitted by law as soon as practicable but in
any event no later than thirty days after written demand is presented to the
Company, against any and all Expenses, judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) of such Claim. If so requested by
Indemnitee, the Company shall advance (within two business days of such request)
any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Claim
initiated by Indemnitee or anyone acting in concert with the Indemnitee (other
than a Claim seeking to enforce Indemnitee's rights under this Agreement) unless
the Board of Directors has authorized or consented to the initiation of such
Claim.
(b) Notwithstanding the foregoing, (i) the obligations of the
Company under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which the
Independent Legal Counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be
3
<PAGE>
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). If there has not been a Change in Control, the Reviewing
Party shall be selected by the Board of Directors, and if there has been such a
Change in Control (other than a Change in Control which has been approved by a
majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referred to in Section 3 hereof. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the States of Massachusetts or Delaware having
subject matter jurisdiction thereof and in which venue is proper seeking an
initial determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company By-law now or
hereafter in effect relating to Claims for Indemnifiable Events, the Company
shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent the Indemnitee would
be permitted to be indemnified under applicable law. The Company agrees to pay
the reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under
4
<PAGE>
this Agreement or any other agreement or Company By-law now or hereafter in
effect relating to Claims for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
6. Burden of Proof. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's By-laws or
the Delaware General Corporation Law or otherwise. To the extent that a change
in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's By-laws and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
5
<PAGE>
9. Liability Insurance. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
11. Amendments, Etc. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
13. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or of any
other enterprise at the Company's request.
15. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such
6
<PAGE>
provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired and shall remain enforceable to the fullest extent
permitted by law.
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this 30th day of December, 1998.
DESIGNS, INC.
By /s/ SCOTT N. SEMEL, AS
-------------------
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL &
SECRETARY
/s/ CAROLYN R. FAULKNER
---------------------------
Carolyn R. Faulkner
7
EX-11
EARNINGS PER SHARE
Exhibit 11. Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Fiscal Years Ending
January 30, 1999 January 31, 1998 February 1, 1997
--------------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C>
Basic EPS Computation
Numerator:
Net income (loss) $ (18,541) $ (29,063) $ 6,264
Denominator:
Weighted average common shares outstanding 15,810 15,649 15,755
--------- ----------- ---------
Basic EPS $ (1.17) $ (1.86) $ 0.40
========= =========== =========
Diluted EPS Computation
Numerator:
Net income (loss) $ (18,541) $ (29,063) $ 6,264
Denominator:
Weighted average common shares outstanding 15,810 15,649 15,755
Stock Options, excluding anti-dilutive options
of 80 and 34 shares for January 30, 1999
and January 31, 1998, respectively -- -- 78
--------- ----------- ---------
Total Shares 15,810 15,649 15,833
--------- ----------- ---------
Diluted EPS $ (1.17) $ (1.86) $ 0.40
========= =========== =========
</TABLE>
Exhibit 21
Subsidiaries of the Registrant
Designs Securities Corporation
(a Massachusetts securities corporation)
Designs JV Corp.
(a Delaware corporation)
Designs Acquisition Corp.
(a Delaware corporation)
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated March 16, 1999, included in this Form 10-K, into
registration statements previously filed by Designs, Inc. on Form S-8 (File No.
33-22957, File No. 33-32690, File No. 33-32687 and File No. 33-52892).
Boston, Massachusetts /s/ ARTHUR ANDERSEN LLP
April 30, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-22957, 33-32690, 33-32687 and 33-52892) of
Designs, Inc. of our report dated March 17, 1998 except as to the segment
information for the two years in the period ended January 31, 1998 presented in
Note N, for which the date is April 29, 1999, relating to the consolidated
financial statements which appear in this Form 10-K.
Boston, Massachusetts
April 29, 1999 /s/ PRICEWATERHOUSECOOPERS, L.L.P.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 153
<SECURITIES> 0
<RECEIVABLES> 178
<ALLOWANCES> 0
<INVENTORY> 57,925
<CURRENT-ASSETS> 59,439
<PP&E> 43,905
<DEPRECIATION> 26,117
<TOTAL-ASSETS> 99,317
<CURRENT-LIABILITIES> 35,361
<BONDS> 0
0
0
<COMMON> 160
<OTHER-SE> 63,794
<TOTAL-LIABILITY-AND-EQUITY> 99,317
<SALES> 201,634
<TOTAL-REVENUES> 201,634
<CGS> 159,385
<TOTAL-COSTS> 159,385
<OTHER-EXPENSES> 72,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 697
<INCOME-PRETAX> (29,269)
<INCOME-TAX> (10,728)
<INCOME-CONTINUING> (18,541)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,541)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
