SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended April 29, 2000 Commission File Number 0-15898
DESIGNS, INC.
(Exact name of registrant as
specified in its charter)
Delaware 04-2623104
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
66 B Street, Needham, MA 02494
(Address of principal executive offices) (Zip Code)
(781) 444-7222
(Registrant's telephone
number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of April 29, 2000
----- --------------------------------
Common 16,441,000
<PAGE>
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
April 29, 2000, May 1, 1999 and January 29, 2000
(In thousands, except share data)
April 29, May 1, January 29,
2000 1999 2000
ASSETS (unaudited)(unaudited)
---------- ---------- ---------
Current assets:
Cash and cash equivalents $ - $ - $ -
Restricted investment - - 2,365
Accounts receivable 27 480 83
Inventories 51,672 52,480 57,022
Income taxes refundable and deferred 1,920 802 1,920
Prepaid expenses 1,153 3,031 1,042
------- -------- --------
Total current assets 54,772 56,793 62,432
Property and equipment, net of
accumulated depreciation and amortization 17,008 17,142 16,737
Other assets:
Deferred income taxes 15,403 18,456 15,215
Intangible assets, net - 2,549 -
Other assets 470 877 693
------- ------- --------
Total assets $ 87,653 $ 95,817 $ 95,077
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,702 $ 7,926 $ 6,801
Accrued expenses and other current liabilities 10,596 6,278 8,324
Accrued rent 2,322 1,990 2,253
Reserve for severance and store closings 2,172 3,598 3,228
Notes payable 15,000 12,829 22,202
------- -------- -------
Total current liabilities 35,792 32,621 42,808
------- -------- -------
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, 16,441,251, 16,217,000 and 16,389,490
shares issued at April 29, 2000, May 1, 1999
and January 29, 2000, respectively 167 162 167
Additional paid-in capital 54,637 53,996 54,571
Retained earnings (deficit) (1,113) 10,990 (639)
Treasury stock at cost, 286,650 shares (1,830) (1,830) (1,830)
Deferred compensation - (122) -
------- -------- -------
Total stockholders' equity 51,861 63,196 52,269
------- -------- -------
Total liabilities and stockholders' equity $ 87,653 $ 95,817 $ 95,077
======= ======== =======
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
--------------------------
April 29, May 1,
2000 1999
--------------------------
Sales $ 39,379 $ 39,835
Cost of goods sold including
occupancy 28,727 29,618
--------------------------
Gross profit 10,652 10,217
Expenses:
Selling, general and administrative 9,745 9,593
Depreciation and amortization 1,269 1,726
--------------------------
Total expenses 11,014 11,319
--------------------------
Operating loss (362) (1,102)
Interest expense, net 415 319
--------------------------
Loss before income taxes (777) (1,421)
Benefit for income taxes (303) (558)
--------------------------
Net Loss $ (474) $ (863)
==========================
Loss per share- Basic and Diluted $ (0.03) $ (0.05)
Weighted average number of common shares outstanding:
Basic 16,441 15,889
Diluted 16,441 15,889
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
April 29, May 1,
2000 1999
---------- ---------
Cash flows from operating activities:
Net loss $ (474) $ (863)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,269 1,726
Deferred income taxes (187) 114
Issuance of common stock to Board of Directors 66 103
Loss from disposal of property
and equipment - 112
Changes in operating assets and liabilities:
Accounts receivable 56 (302)
Inventories 5,350 5,445
Prepaid expenses (111) (2,120)
Other assets 171 (39)
Reserve for severance and store closings (1,056) (774)
Income taxes (594) (530)
Accounts payable (1,099) (3,273)
Accrued expenses and other current liabilities 2,866 2,327
Accrued rent 69 (25)
------- -------
Net cash provided by operating activities 6,326 1,901
------- -------
Cash flows from investing activities:
Additions to property and equipment (1,489) (1,131)
Proceeds from terminated trust (Note 6) 2,365 -
Proceeds from disposal of property and equipment - 73
------- -------
Net cash provided by (used for) investing activities 876 (1,058)
------- -------
Cash flows from financing activities:
Net borrowings (repayments) under credit facility (7,202) (996)
------- -------
Net cash used for financing activities (7,202) (996)
------- -------
Net decrease in cash and cash equivalents - (153)
Cash and cash equivalents:
Beginning of the year - 153
------- -------
End of the period $ - $ -
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
DESIGNS, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary for a fair
presentation of the interim financial statements. These financial statements do
not include all disclosures associated with annual financial statements and,
accordingly, should be read in conjunction with the notes to the Company's
audited consolidated financial statements for the year ended January 29, 2000
(filed on Form 10-K, as amended, with the Securities and Exchange Commission).
The information set forth in these statements may be subject to normal year-end
adjustments. The information reflects all adjustments that, in the opinion of
management, are necessary to present fairly the Company's results of operations,
financial position and cash flows for the periods indicated. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The Company's business
historically has been seasonal in nature and the results of the interim periods
presented are not necessarily indicative of the results to be expected for the
full year.
2. Charge for Store Closings
During the fourth quarter of fiscal 2000, the Company recorded a pre-tax charge
of $15.2 million, or $0.59 per share after tax, related to inventory markdowns,
the abandonment of the Company's Boston Traders(R) and related trademarks,
severance, and the closure of the Company's five Buffalo Jeans (R) Factory
Stores and its five remaining Designs stores. This pre-tax charge of $15.2
million included cash costs of approximately $3.6 million related to lease
terminations and corporate and store severance, and approximately $11.6 million
of non-cash costs related to inventory markdowns and the impairment of
trademarks and store assets. At April 29, 2000, the remaining reserve balance
related to this $15.2 million charge was $2.5 million, which primarily related
to landlord settlements and severance.
3. Boston Trading Ltd., Inc. Litigation
On May 2, 1995, the Company acquired certain assets of Boston Trading Ltd., Inc.
In accordance with the terms of the Asset Purchase Agreement dated April 21,
1995, the Company paid $5.4 million in cash, financed by operations, and
delivered a non-negotiable promissory note in the original principal amount of
$1 million (the "Purchase Note") payable in two equal annual installments
through May 2, 1997. In the first quarter of fiscal 1996, the Company asserted
rights of indemnification under the Asset Purchase Agreement. In accordance with
that Agreement, the Company, when exercising its indemnification rights, has the
right, among other courses of action, to offset against the payment of principal
and interest due and payable under the Purchase Note, the value of its
indemnification claim. Accordingly, based on these indemnification rights, the
Company ultimately did not make either of the $500,000 payments of principal due
on the Purchase Note on May 2, 1996 and May 2, 1997. Nevertheless, the Company
continued to pay interest on the original principal amount of the Purchase Note
through May 2, 1996 and continued to pay interest thereafter through November 2,
1997 on $500,000 of principal. In January 1998, Atlantic Harbor, Inc. (formerly
known as "Boston Trading Ltd., Inc.") filed a lawsuit against the Company for
refusing to pay the purportedly outstanding principal amount of the Purchase
Note. Thereafter, the Company filed claims against Atlantic Harbor, Inc. and its
stockholders alleging that the Company was damaged in excess of $1 million
because of the breach of certain representations and warranties concerning,
among other things, the existence and condition of certain foreign trademark
registrations and license agreements. Barring unforeseen circumstances,
management of the Company does not believe that the result of this litigation
will have a material adverse impact on the Company's business or financial
condition.
4. Credit Facility
On June 4, 1998 the Company entered into an Amended and Restated Loan and
Security Agreement with BankBoston Retail Finance, Inc. (now known as Fleet
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. 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
FleetBoston, N.A.'s (formerly known as BankBoston, N.A.) prime rate or at
LIBOR-based fixed rates. These interest rates at April 29, 2000 were 9.00% for
prime and 8.46% 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 if the
Credit Agreement terminates prior to May 4, 2001.
In the third quarter of fiscal 1999, the Credit Agreement was amended to, among
other things, permit and acknowledge the Company's acquisition of the 25 outlet
stores from Levi's Only Stores, Inc. 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.
On October 14, 1999, the Company was notified that, by virtue of the recent
change in the members of the Company's Board of Directors, a "Change in Control"
occurred within the meaning of the Credit Agreement, giving rise to an event of
default. On October 29, 1999, the lenders, the former BankBoston Retail Finance,
Inc. and the Company entered into an amendment to the Credit Agreement. This
amendment waives the event of default arising because of the "Change in
Control," and includes new events of default for material adverse changes in the
Company's financial condition or its business relationship with Levi Strauss &
Co. compared to the Company's financial condition and its relationship with Levi
Strauss & Co., respectively, as of October 8, 1999. On March 28, 2000, the
Credit Agreement was amended to, among other things, exclude certain
non-recurring charges and tax valuation reserves from the Company's financial
covenants, effective for the fiscal year ending January 29, 2000.
At April 29, 2000, the Company had borrowings of approximately $14.0 million
outstanding under this facility and had five outstanding standby letters of
credit totaling approximately $4.0 million. Average borrowings outstanding under
this credit facility for the first quarter of fiscal 2001 were approximately
$17.9 million. The Company was in compliance with all debt covenants under the
Credit Agreement at April 29, 2000.
5. Net Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
requires the computation of basic and diluted earnings per share. Basic earnings
per share is computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
per share is determined by giving effect to the exercise of stock options using
the treasury stock method. The following table provides a reconciliation of the
number of shares outstanding for basic and diluted earnings per share.
For the
three months ended
(In thousands) April 29, 2000 May 1, 1999
------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 16,441 15,889
Stock options, excluding the effect
of anti-dilutive options of 29 shares and
139 shares for April 29, 2000 and May 1, 1999,
respectively -- --
------- ------
Diluted weighted average shares outstanding 16,441 15,889
Options to purchase shares of the Company's Common
Stock of 348,700 and 1,867,832 for April 29, 2000 and May 1, 1999, respectively,
were excluded from the computation of diluted EPS because the exercise price of
the options was greater than the average market price per share of Common Stock
for the periods reported.
<PAGE>
6. Restricted Investment
In May 1999, the Company deposited $2.3 million in a trust established for the
purpose of securing pre-existing obligations of the Company to certain
executives under their respective employment agreements. These funds were being
held in a trust to pay the amounts that may become due under their employment
agreements and to pay any amounts that may become due to them pursuant to their
indemnification agreements and the Company's by-laws. In March 2000, subsequent
to the Company's fiscal year-end, the trust was terminated, and accordingly, the
funds were no longer restricted. The proceeds from the trust were paid directly
to Fleet Boston Retail, Inc. to paydown the outstanding balance on the Company's
credit facility with Fleet Boston Retail Finance, Inc.
<PAGE>
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Sales
Sales for the first quarter of fiscal 2001 were $39.4 million as compared to
sales of $39.8 million in the first quarter of fiscal 2000. Comparable store
sales decreased 3 percent for the first quarter of fiscal 2001 as compared with
the first quarter of fiscal 2000. Comparable stores are retail locations that
have been open at least 13 months. Of the 103 stores that the Company operated
at April 29, 2000, 93 were comparable stores.
The decline in total sales of $400,000 or 1.1% for the three months ended April
29, 2000 as compared to the same period in the prior year is due to the
comparable store decrease of 3 percent and $4.2 million related to the closed
stores in fiscal 2000. This decrease was partially offset by sales generated by
new stores of $5.0 million.
Gross Margin
Set forth below are merchandise and gross margin rates and occupancy costs as a
percentage of total sales for the first quarter of fiscal 2001 and fiscal 2000.
Gross Margin Percentage
Rate Change at
April 29, 2000 May 1, 1999 April 29, 2000
-------------------------------------------------------------------------------
Merchandise Margin 42.0% 41.4% 1.7%
Occupancy Costs 14.9% 15.7% 4.5%
Gross Margin 27.1% 25.7% 5.5%
The 1.4 percentage point increase in gross margin in the first quarter of fiscal
2001 compared to the first quarter of fiscal 2000 is primarily the result of
favorable occupancy costs of 0.8 percentage points and an improved merchandise
margin of 0.6 percentage points. Merchandise margin was positively impacted by
merchandise mix and higher initial margins on selected merchandise
Selling, General and Administrative Expenses
Set forth below is certain information concerning the Company's selling, general
and administrative expenses for the first quarter of fiscal 2001 and fiscal
2000.
(In thousands, except April 29, 2000 May 1, 1999
percentage data) $ % of sales $ % of sales
Selling, General and Administrative $9,745 24.7% $ 9,593 24.1%
Store payroll expense, the largest component of selling, general and
administrative expenses, was 11.9 percent of sales, compared with 11.7 percent
of sales in the prior year. Selling, general and administrative expenses were
slightly higher than the prior year due to increased promotional expenses such
as advertising and sales incentives for sales associates and higher insurance
costs. These expenses were offset by continued cost reductions in corporate
overhead.
Depreciation and Amortization
Set forth below are depreciation and amortization expenses for the Company for
the first quarter of fiscal 2001 and fiscal 2000.
Percentage
(In thousands, except Change at
percentage data) April 29, 2000 May 1, 1999 April 29,2000
------------------------------------------------------------------------------
Depreciation and
Amortization $1,269 $1,726 (26.5%)
The decrease in depreciation and amortization expenses in the first quarter of
fiscal year 2001 compared to the first quarter of fiscal year 2000 is due to the
write-off of fixed assets in fiscal 2000 as part of the Company's store closing
program offset slightly by depreciation for new and remodeled stores.
Interest Expense, Net
Net interest expense was $415,000 and $319,000 in the first quarter of fiscal
2001 and fiscal 2000, respectively. This increase was attributable to higher
average borrowing levels under the Company's revolving credit facility for the
three months ended April 29, 2000 as compared to the same period in the prior
year. The Company anticipates, barring unforeseen circumstances, that interest
expense for the remainder of fiscal 2001 will be greater than the prior year due
to the anticipated additional borrowings under the Company's revolving credit
facility. These additional borrowings primarily will fund payments necessary for
capital expenditures related to new store openings and a warehouse facility,
merchandise purchases for the Levi's(R) and Dockers(R) Outlets by Designs stores
and lease terminations in connection with store closings that occurred in the
fourth quarter of fiscal 2000.
Net Loss
Set forth below is the net loss for the Company for the first quarter of fiscal
2001 and fiscal 2000.
(In thousands, except April 29, 2000 May 1, 1999
per share data) $ per share $ per share
------------------------------------------------------------------------------
Three months ended $ (474) $(0.03) $( 863) $0.05)
STORE CLOSING PROGRAMS
During the fourth quarter of fiscal 2000, the Company recorded a pre-tax charge
of $15.2 million, or $0.59 per share after tax, related to inventory markdowns,
the abandonment of the Company's Boston Traders(R) and related trademarks,
severance, and the closure of the Company's five Buffalo Jeans (R) Factory
Stores and its five remaining Designs stores. This pre-tax charge of $15.2
million included cash costs of approximately $3.6 million related to lease
terminations and corporate and store severance, and approximately $11.6 million
of non-cash costs related to inventory markdowns and the impairment of
trademarks and store assets. At April 29, 2000, the remaining reserve balance
related to this $15.2 million charge was $2.5 million, which primarily related
to landlord settlements and severance.
Seasonality
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 been eliminated.
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.
Liquidity and Capital Resources
The Company's primary cash needs have been for operating expenses, including
cash outlays associated with inventory purchases, capital expenditures for new
and remodeled stores, severance and lease terminations. During fiscal 2001, the
Company expects to incur capital expenditures related to building new outlet
stores and outlet store relocations and system enhancements of $5.6 million. The
Company expects that cash flow from operations, short-term revolving borrowings
and trade credit will enable it to finance its current working capital, store
remodeling and opening requirements.
Working Capital and Cash Flows
To date, the Company has financed its working capital requirements, store
opening and store closing programs and remodeling programs with cash flow from
operations, income tax refunds, and borrowings under the Company's credit
facility. Cash provided by operations for the first three months of fiscal 2001
was $6.3 million as compared to cash provided for operations of $1.9 million for
the same period in the prior year. This $4.4 million change is primarily due to
the timing of cash payments for merchandise and various other monthly expenses.
There was no cash and investment position at April 29, 2000 or May 1, 1999. At
April 29, 2000, the Company had borrowings of $14.0 million outstanding under
its revolving credit facility as compared to $11.8 million of outstanding
borrowings at May 1, 1999 and $21.2 million at January 29, 2000. This decrease
in the Company's net borrowing position from January 29, 2000 is primarily due
to the positive cash flow from operations which was generated in the three
months ended April 29, 2000.
The Company's working capital at April 29, 2000 was approximately $19.0 million,
compared to $24.2 million at May 1, 1999. This decrease in working capital was
primarily attributable to costs incurred as part of the Company's store closing
program in fiscal 2001.
At April 29, 2000, total inventory equaled $51.7 million, compared to $52.5
million at May 1, 1999. The decrease of 1.5 percent in the Company's inventory
level was primarily due to the Company's effort to improve inventory management.
Total inventory per square foot is down 2.4 percent from the prior year. 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) and Dockers(R) Outlet by Designs stores.
The Company stocks its Levi's(R) Outlet by Designs and Dockers(R) Outlet by
Designs stores with manufacturing overruns, merchandise specifically
manufactured for the outlet stores and discontinued lines and irregulars
purchased directly from Levi Strauss & Co. By its nature, this merchandise,
including the most popular Levi Strauss & Co. styles of merchandise and the
breadth of the mix of this merchandise, is subject to limited availability. The
Company may act upon opportunities to purchase substantial quantities of
Levi's(R) brand products for its Levi's(R) and Dockers(R) outlet stores.
At April 29, 2000, the accounts payable balance was $5.7 million as compared
with a balance of $7.9 million at May 1, 1999. The Company's trade payables to
Levi Strauss & Co., its principal vendor, generally are due 30 days after the
date of invoice. The Company expects, barring unforeseen circumstances, that any
purchases of branded merchandise from vendors other than Levi Strauss & Co. will
be limited and will be in accordance with customary industry credit terms.
On June 4, 1998 the Company entered into an Amended and Restated Loan and
Security Agreement with BankBoston Retail Finance, Inc. (now known as Fleet
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. 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
FleetBoston, N.A.'s (formerly known as BankBoston, N.A.) prime rate or at
LIBOR-based fixed rates. These interest rates at April 29, 2000 were 9.00% for
prime and 8.46% 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 if the
Credit Agreement terminates prior to May 4, 2001.
In the third quarter of fiscal 1999, the Credit Agreement was amended to, among
other things, permit and acknowledge the Company's acquisition of the 25 outlet
stores from Levi's Only Stores, Inc. 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.
On October 14, 1999, the Company was notified that, by virtue of the recent
change in the members of the Company's Board of Directors, a "Change in Control"
occurred within the meaning of the Credit Agreement, giving rise to an event of
default. On October 29, 1999, the lenders, the former BankBoston Retail Finance,
Inc. and the Company entered into an amendment to the Credit Agreement. This
amendment waives the event of default arising because of the "Change in
Control," and includes new events of default for material adverse changes in the
Company's financial condition or its business relationship with Levi Strauss &
Co. compared to the Company's financial condition and its relationship with Levi
Strauss & Co., respectively, as of October 8, 1999.
On March 28, 2000, the Credit Agreement was amended to, among other things,
exclude certain non-recurring charges and tax valuation reserves from the
Company's financial covenants, effective for the fiscal year ending January 29,
2000.
At April 29, 2000, the Company had borrowings of approximately $14.0 million
outstanding under this facility and had five outstanding standby letters of
credit totaling approximately $4.0 million. Average borrowings outstanding under
this credit facility for the first quarter of fiscal 2001 were approximately
$17.9 million.
Capital Expenditures
Total cash outlays for capital expenditures for the first three months of fiscal
2001 were $1,488,000, which represents the cost of new and remodeled stores.
Total cash outlays for the first three months of fiscal 2000 were $1,131,000.
During the first three months of fiscal 2001, the Company remodeled two
Levi's(R) Outlet stores, both located in Florida.
The Company's present plans for expansion for the remainder of fiscal 2001,
barring unforeseen circumstances, include remodeling an additional nine
Levi's(R) Outlet stores and opening five new Levi's(R)/Dockers(R) Outlet by
Designs stores.
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. Section
19 of this agreement was subsequently amended on March 22, 2000 to change
certain of the Change in Control provisions. Subject to certain default
provisions, the term of the Outlet License Agreement was extended to September
30, 2004, and the license for any particular store is the period co-terminous
with the lease term for such store (including extension options). Beginning with
the amendment to the Outlet License Agreement effective on October 31, 1998, the
Outlet License Agreement provides that the Company has the opportunity to extend
the term of the license associated with one or more of the Company's older
Levi's(R) Outlet by Designs stores by either renovating the store or replacing
the store with a new store with an updated format and fixturing. In order to
extend the license associated with each of the Company's 59 older outlet stores,
the Company must, subject to certain grace periods, complete these renovations
or the construction of replacement stores by December 31, 2004.
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 over a five
year period, beginning in fiscal 1999. As of April 29, 2000, the Company had
closed two of its older 59 Levi's(R) Outlet stores, remodeled eight of the older
Levi's Outlet stores and opened ten new Levi's(R)/Dockers(R) Outlet by Designs
stores and two Dockers(R) Outlet stores.
The foregoing discussion of the Company's results of operations, liquidity,
capital resources and capital expenditures includes certain forward-looking
information. Such forward-looking information requires management to make
certain estimates and assumptions regarding the Company's expected strategic
direction and the related effect of such plans on the financial results of the
Company. Accordingly, actual results and the Company's implementation of its
plans and operations may differ materially from forward-looking statements made
by the Company. The Company encourages readers of this information to refer to
Exhibit 99 of the Company's Annual Report on Form 10-K, previously filed with
the United States Securities and Exchange Commission on April 28, 2000, which
identifies certain risks and uncertainties that may have an impact on future
earnings and the direction of the Company.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial position and results
of operations of the Company are routinely subject to a variety of risks,
including market risk associated with interest rate movements on borrowings. The
Company regularly assesses these risks and has established policies and business
practices to protect against the adverse effect of these and other potential
exposures.
The Company utilizes cash from operations and short-term borrowings
to fund its working capital needs. This debt instrument is viewed as risk
management tools and is not used for trading or speculative purposes. In
addition, the Company has available letters of credit as sources of financing
for its working capital requirements. Borrowings under this credit agreement,
which expires in June 2001, bears interest at variable rates based on
FleetBoston, N.A.'s prime rate or the London Interbank Offering Rate ("LIBOR").
These interest rates at April 29, 2000 were 9.0% for prime and 8.42% for LIBOR.
Based upon sensitivity analysis as of April 29, 2000, a 10% increase in interest
rates would result in a potential loss to future earnings of approximately
$161,000 on an annualized basis. .
Part II. Other Information
ITEM 1. Legal Proceedings
In January 1998 Atlantic Harbor, Inc. (formerly known as "Boston
Trading Ltd., Inc.") filed a lawsuit against the Company for failing to pay the
outstanding principal amount of the Purchase Note. Thereafter, the Company filed
claims against Atlantic Harbor, Inc. and its stockholders alleging that the
Company was damaged in excess of $1 million because of the breach of certain
representations and warranties concerning the existence and condition of certain
foreign trademark registrations and license agreements. Barring unforeseen
circumstances, management of the Company does not believe that the result of
this litigation will have a material adverse effect on the Company's business or
financial condition.
The Company is a party to other litigation and claims arising in the
normal course of its business. Barring unforeseen circumstances, management does
not expect the results of these actions to have a material adverse effect on the
Company's business or financial condition.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Default Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 6. Exhibits and Reports on Form 8-K
A. Reports on Form 8-K:
The Company reported under Item 6 of Form 8-K, dated April 11, 2000,
that the Company announced that Mr. James Mitarotonda had resigned as a Director
of the Company's Board of Directors on April 4, 2000 and that on April 10, 2000
the Company announced the election of Seymour Holtzman to the Board of Directors
to fill the vacancy created by Mr. Mitarotonda.
The Company reported under Item 5 of Form 8-K, dated April 28, 2000,
that the Company announced that Seymour Holtzman was elected Chairman of the
Board of Directors. In addition, the Company also announced that David A. Levin,
President and Chief Executive Officer and Stanley I. Berger, one of the
Company's original founders, were appointed as Directors of the Company,
increasing the Company's Board of Directors to nine members.
The Company reported under Item 5 of Form 8-K, dated May 26, 2000, that
the Company announced on May 5, 2000 that Alan Cohen was appointed a Director of
the Company's Board of Directors, increasing the board to ten members.
B. Exhibits:
3.1 Restated Certificate of Incorporation of the Company, as amended
(included as Exhibit 3.1 to Amendment No. 3 of the Company's
Registration Statement on Form S-1 (No. 33-13402), and incorporated
herein by reference). *
3.2 Certificate of Amendment to Restated Certificate of Incorporation, as
amended, dated June 22, 1993 (included as Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q dated June 17, 1996, and incorporated
herein by reference). *
3.3 Certificate of Designations, Preferences and Rights of a Series of
Preferred Stock of the Company established Series A Junior Participating
Cumulative Preferred Stock dated May 1, 1995(included as Exhibit 3.2 to
the Company's Annual Report on Form 10-K dated May 1, 1996 and
incorporated herein by reference). *
3.4 By-Laws of the Company, as amended (included as Exhibit 3.4 to the
Company's Amendment No. 1 to Annual Report on Form 10-K/A dated May 28,
1999, and incorporated herein by reference). *
4.1 Shareholder Rights Agreement dated as of May 1, 1995 between the Company
and its transfer agent (included as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated May 1, 1995, and incorporated herein by
reference). *
4.2 First Amendment dated as of October 6, 1997 to the Shareholder Rights
Agreement dated as of May 1, 1995 between the Company and its transfer
agent (included as Exhibit 4.1 to the Company's Current Report on Form
8-K dated October 9, 1997, and incorporated herein by reference). *
4.3 Second Amendment dated as of May 19, 1999 to the Shareholder Rights
Agreement between the Company and its transfer agent, as amended
(included as Exhibit 4.1 to the Company's Current Report on Form 8-K
dated May 25, 1999, and incorporated herein by reference). *
4.4 Third Amendment dated as of July 7, 1999 to the Shareholder Rights
Agreement between the Company and its transfer agent, as amended
(included as Exhibit 4.1 to the Company's Current Report on Form 9-K
dated July 13, 1999, and incorporated herein by reference). *
4.5 Notice to Holder of Rights dated November 10, 1999 regarding
termination of the Shareholder Rights Agreement (included as Exhibit
4.5 to the Company's Form 10-K dated April 28, 2000, 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 (included as Exhibit 10.4 to the Company's Annual Report on Form
10-K dated April 30, 1999, and incorporated herein by reference). *
10.5 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 Amendment to the Amended and Restated Trademark License Agreement dated
March 22, 2000 (included as Exhibit 10.7 to the Company's Form 10-K
dated April 28, 2000, and incorporated herein by reference). *
10.8 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 ("BBRF") 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). *
10.9 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). *
10.10 First Amendment to Loan and Security Agreement dated as of
September 29, 1998 among the Company, BBRF and the Lender(s) identified
therein (included as Exhibit 10.5 to the Company's Current Report on
Form 8-K dated December 3, 1998, and incorporated herein by reference). *
10.11 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). *
10.12 Third Amendment to Loan and Security Agreement dated as of October 28,
1999 among the Company, BBRF and the Lender(s) identified therein
(included as Exhibit 10.9 to the Company's Form 10-Q dated December 14,
1999, and incorporated herein by reference). *
10.13 Fourth Amendment to Loan and Security Agreement dated as of March 20,
2000 among the Company, Fleet Retail Finance (f/k/a BankBoston Retail
Finance) and the Lender(s) identified therein (included as Exhibit
10.13 to the Company's Form 10-K dated April 28, 2000, and incorporated
herein by reference). *
10.14 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). *
10.15 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). *
10.16 Asset Purchase Agreement between LOS and the Company relating to the
sale by the Company of stores located in Minneapolis, Minnesota dated
January 28, 1995 (included as Exhibit 10.9 to the Company's Current
Report on Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.17 Asset Purchase Agreement among Boston Trading Ltd., Inc., Designs
Acquisition Corp., the Company and others dated April 21, 1995 (included
as Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q dated
September 12, 1995, and incorporated herein by reference). *
10.18 Non-Negotiable Promissory Note between the Company and Atlantic
Harbor, Inc., formerly know as Boston Trading Ltd., Inc., dated
May 2, 1995 (included as Exhibit 10.17 to the Company's Quarterly Report
on Form 10-Q dated September 12, 1995, and incorporated herein by
reference). *
10.19 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 6, 1995, and incorporated herein by reference). *
10.20 Consulting Agreement dated as of October 28, 1999 between the
Company and Jewelcor Management, Inc. (included as Exhibit 10.20
to the Company's Form 10-K dated April 28, 2000, and incorporated
herein by reference). *
10.21 Consulting Agreement dated as of October 29, 1999 between the Company
and John J. Schultz (included as Exhibit 10.21 to the Company's Form
10-K dated April 28, 2000, and incorporated herein by reference). *
10.22 Consulting Agreement dated as of December 15, 1999 between the Company
and George T.Porter, Jr. (included as Exhibit 10.22 to the Company's
Form 10-K dated April 28, 2000, and incorporated herein by reference). *
10.23 Consulting Agreement dated as of November 14, 1999 between the Company
and Business Ventures International, Inc. (included as Exhibit 10.23 to
the Company's Form 10-K dated April 28, 2000, and incorporated herein
by reference). *
10.24 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). *
10.25 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). *
10.26 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). *
10.27 Employment Agreement dated as of March 31, 2000 between the Company and
David A. Levin (included as Exhibit 10.27 to the Company's Form 10-K
dated April 28, 2000, and incorporated herein by reference). *
10.28 Severance Agreement dated as of January 12, 2000 between the Company
and Joel H. Reichman (included as Exhibit 10.23 to the Company's Form
10-K dated April 28, 2000, and incorporated herein by reference). *
10.29 Severance Agreement dated as of January 20, 2000 between the Company
and Scott N. Semel (included as Exhibit 10.23 to the Company's Form
10-K dated April 28, 2000, and incorporated herein by reference). *
10.30 Severance Agreement dated as of January 15, 2000 between the Company
and Carolyn R. Faulkner (included as Exhibit 10.23 to the Company's
Form 10-K dated April 28, 2000, and incorporated herein by reference). *
10.31 Indemnification Agreement between the Company and James G. Groninger,
dated December 10, 1998 (included as Exhibit 10.30 to the Company's
Annual Report on Form 10-K dated April 30, 1999 and incorporated herein
by reference). *
10.32 Indemnification Agreement between the Company and Bernard M. Manuel,
dated December 10, 1998 (included as Exhibit 10.31 to the Company's
Annual Report on Form 10-K dated April 30, 1999 and incorporated herein
by reference). *
10.33 Indemnification Agreement between the Company and Peter L. Thigpen,
dated December 10, 1998 (included as Exhibit 10.32 to the Company's
Annual Report on Form 10-K dated April 30, 1999 and incorporated herein
by reference). *
10.34 Indemnification Agreement between the Company and Melvin I. Shapiro,
dated December 10, 1998 (included as Exhibit 10.33 to the Company's
Annual Report on Form 10-K dated April 30, 1999 and incorporated herein
by reference). *
10.35 Indemnification Agreement between the Company and Joel H. Reichman,
dated December 10, 1998(included as Exhibit 10.34 to the Company's
Annual Report on Form 10-K dated April 30, 1999 and incorporated herein
by reference). *
10.36 Indemnification Agreement between the Company and Scott N. Semel, dated
December 10, 1998 (included as Exhibit 10.35 to the Company's Annual
Report on Form 10-K dated April 30, 1999 and incorporated herein by
reference). *
10.37 Indemnification Agreement between the Company and Carolyn R. Faulkner,
dated December 10, 1998 (included as Exhibit 10.36 to the Company's
Annual Report on Form 10-K dated April 30, 1999 and incorporated herein
by reference). *
11 Statement re: computation of per share earnings.
27 Financial Data Schedule.
99 Report of the Company on Form 8-K, dated April 28, 2000 concerning
certain cautionary statements of the Company to be taken into account
in conjunction with consideration and review of the Company's publicly-
disseminated documents (including oral statements made by others on
behalf of the Company) that include forward looking information. *
* Previously filed with the Securities and Exchange Commission.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESIGNS, INC.
June 13, 2000 By: /s/ DAVID A. LEVIN
________________________________
David A. Levin, President,
Chief Executive Officer and
Director
