SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended October 28, 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 October 28, 2000
----- -------------------------------
Common 15,777,498
<PAGE>
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
October 28, 2000, October 30, 1999 and January 29, 2000
(In thousands,except share data)
October 28, October 30, January 29,
2000 1999 2000
ASSETS (unaudited) (unaudited)
---------- ---------- ----------
Current assets:
Cash and cash equivalents $ - $ - $ -
Restricted investment - 2,316 2,365
Accounts receivable 46 163 83
Inventories 64,047 63,622 57,022
Income taxes refundable and deferred 1,920 272 1,920
Prepaid expenses 1,117 1,081 1,042
--------- --------- ---------
Total current assets 67,130 67,454 62,432
Property and equipment, net of
accumulated depreciation and amortization 18,040 17,688 16,737
Other assets:
Deferred income taxes 12,544 18,951 15,215
Intangible assets, net - 2,435 -
Other assets 455 795 693
--------- --------- ---------
Total assets $ 98,169 $ 107,323 $ 95,077
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,089 $ 10,613 $ 6,801
Accrued expenses and other current liabilities 13,796 10,007 8,324
Accrued rent 2,244 2,313 2,253
Reserve for severance and store closings 1,251 1,222 3,228
Notes payable 18,737 17,147 22,202
--------- --------- ---------
Total current liabilities 44,117 41,302 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, 16,946,148, 16,665,000 and 16,676,000
shares issued at October 28, 2000, October 30,
1999 and January 29, 2000, respectively 169 167 167
Additional paid-in capital 54,922 54,538 54,571
Retained earnings (deficit) 2,861 13,146 (639)
Treasury stock at cost, 1,168,650 shares at
October 28, 2000 and 286,650 shares
at October 30, 1999 and January 29, 2000 (3,703) (1,830) (1,830)
Loan to executive (197) - -
--------- --------- -------
Total stockholders' equity 54,052 66,021 52,269
--------- --------- --------
Total liabilities and stockholders' equity $ 98,169 $ 107,323 $ 95,077
========= ========= ========
The accompanying notes are an intergral part of the consolidated
financial statements.
<PAGE>
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
October October October October
28,2000 30,1999 28,2000 30,1999
------------------ -----------------
Sales $56,587 $56,703 $141,659 $139,445
Cost of goods sold including
occupancy 39,202 38,260 100,200 99,397
---------------- ----------------
Gross profit 17,385 18,443 41,459 40,048
Expenses:
Selling, general and administrative 10,663 11,868 30,213 31,980
Depreciation and amortization 1,364 1,588 3,958 4,875
---------------- ----------------
Total expenses 12,027 13,456 34,171 36,855
---------------- ----------------
Operating income 5,358 4,987 7,288 3,193
Interest expense, net 472 390 1,317 868
---------------- ----------------
Net income before income taxes 4,886 4,597 5,971 2,325
Provision for income taxes 1,995 1,905 2,469 1,031
---------------- ----------------
Net income $ 2,891 $ 2,692 $ 3,502 $ 1,294
================ ================
Earnings per share- basic $ 0.18 $ 0.17 $ 0.22 $ 0.08
Earnings per share- diluted $ 0.18 $ 0.17 $ 0.21 $ 0.08
Weighted average number of common shares
outstanding- basic 15,935 16,018 16,255 15,997
Weighted average number of common shares
outstanding- diluted 16,362 16,100 16,454 16,114
The accompanying notes are an intergral part of the consolidated
financial statements.
<PAGE>
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
--------------------------
October 28, October 30,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income $ 3,502 $ 1,294
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 3,958 4,875
Issuance of common stock to Board of Directors 156 -
Loss on sale of disposal of fixed assets 35 -
Changes in operating assets and liabilities:
Accounts receivable 37 15
Inventories (7,025) (5,697)
Prepaid expenses (75) (170)
Other assets 83 (61)
Reserve for severance and store closings (1,977) (3,150)
Income taxes 2,077 1,126
Accounts payable 1,288 1,896
Accrued expenses and other current liabilities 6,066 2,070
Accrued rent (9) 298
----------- -----------
Net cash provided by operating activities 8,116 2,496
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (5,222) (4,496)
Proceeds from (establishment of)
terminated trust 2,365 (2,316)
Proceeds from disposal of property and equipment 79 73
----------- -----------
Net cash used for investing activities (2,778) (6,739)
----------- -----------
Cash flows from financing activities:
Net borrowings under credit facility (3,465) 3,322
Repurchase of common stock (1,873) -
Issuance of common stock under option program (1) - 768
----------- -----------
Net cash (used for) provided by financing activities (5,338) 4,090
----------- -----------
Net change in cash and cash equivalents - (153)
Cash and cash equivalents:
Beginning of the year - 153
----------- ----------
End of the period $ - $ -
=========== ===========
(1) Net of related tax effect.
The accompanying notes are an intergral part of the consolidated
financial statements.
<PAGE>
DESIGNS, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary for a fair
presentation of the interim financial statements. These financial statements do
not include all disclosures associated with annual financial statements and,
accordingly, should be read in conjunction with the notes to the Company's
audited consolidated financial statements for the year ended January 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 October 28, 2000, the remaining reserve balance related to this $15.2
million charge was $1.3 million, which primarily related to severance and
landlord settlements. For the three months ended October 28, 2000, the Company
paid approximately $185,000 of severance costs and landlord settlements.
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 1997, 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's entered into an Amended and Restated Loan and
Security Agreement with BankBoston Retail Finance, Inc. (now known as Fleet
Retail Finance Inc.) (as amended, the "Credit Agreement")which provided for
a revolving line of credit of up to $50 million. Under this Credit Agreement,
the Company had the ability to cause the lenders to issue documentary and
standby letters of credit up to $5 million. 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 October 28, 2000 were 9.50% for prime and 8.90%
for LIBOR. The Credit Agreement contained 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.
This Credit Agreement was amended on July 17, 2000 to, among other things,
exclude the stock repurchase program, which was approved by the Company's Board
of Directors on June 26, 2000, from the Company's financial covenants. In
addition, the Credit Agreement was amended to allow for the Company to provide
an interest bearing loan to its Chief Executive Officer which has a maturity
date which extends beyond the 90 days allowed under the Credit Agreement. For
further discussion, see Note 6.
On December 7, 2000, the Company entered into the Second Amended and Restated
Loan and Security Agreement with Fleet Retail Finance Inc. which, among other
things extended the term of the credit facility to November 30, 2003 and reduced
the total committment from $50 million to $45 million. For further discussion,
See Note 10.
At October 28, 2000, the Company had borrowings of approximately $17.7 million
outstanding under this facility and had three outstanding standby letters of
credit totaling approximately $3.9 million. Average borrowings outstanding under
this credit facility for the first nine months of fiscal 2001 were approximately
$18.3 million. The Company was in compliance with all debt covenants under this
Credit Agreement at October 28, 2000.
5. Earnings 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 For the
three months ended nine months ended
October October October October
(In thousands) 28,2000 30,1999 28,2000 30,1999
--------------------------------------------------------------------------------
Basic weighted average common
shares outstanding ......... 15,935 16,018 16,255 15,997
Stock options ................. 427 82 199 117
------ ------ ------ ------
Diluted weighted average shares
outstanding ................ 16,362 16,100 16,454 16,114
====== ====== ====== ======
Options to purchase 173,600 and 238,350 shares of the Company's Common Stock for
the three and nine months ended October 28, 2000, respectively, and
1,835,575 and 1,734,450 shares for the three and nine months October 30, 1999,
respectively, were excluded from the computation of diluted EPS because the
exercise price of such options was greater than the average market price per
share of Common Stock for the periods reported.
6. Loan to Executive
On June 26, 2000, the Company extended a loan to David A. Levin, its President
and Chief Executive Officer, in the amount of $196,875 in order for Mr. Levin to
acquire from the Company 150,000 newly issued shares of the Company's Common
Stock at the closing price of the Common Stock on that day. The Company and Mr.
Levin entered into a secured promissory note, whereby Mr. Levin agrees to pay to
the Company the principal sum of $196,875 plus interest due and payable on June
26, 2003. The promissory note bears interest at a rate of 6.53% per annum and is
secured by the 150,000 acquired shares of the Company's Common Stock.
7. Dutch Auction Tender Offer; Stock Repurchase Program
On November 15, 2000, subsequent to the end of the third quarter, the Company
commenced a "Dutch Auction" tender offer for up to 1.5 million shares of the
Company's Common Stock, while reserving the option to purchase up to an
additional 1.0 million shares. Unless extended by the Company, the tender offer
is presently scheduled to expire on December 14, 2000.
Under the terms of the offer, the Company invited its shareholders to tender
their shares to the Company at prices specified by the tendering shareholders
not in excess of $3.00 nor less than $2.20 per share, in ten-cent ($0.10)
increments. The Company will select the lowest single per-share purchase price
that will allow it to buy 1.5 million shares, or up to an additional 1.0 million
shares at the Company's option.
Through October 28, 2000, the Company had previously repurchased 863,000 shares
at an aggregate cost of $1,861,000 under a Stock Repurchase Program that was
approved by the Company's Board of Directors in June 2000 and terminated in
August 2000. These shares were purchased in the open market and were recorded
by the Company as treasury stock and are reflected as a reduction in
stockholders' equity.
The Company utilized two brokerage firms in connection with the repurchase of
the 863,000 shares. Sterling Financial Investment Group, Inc. ("Sterling
Financial"), one of the firms used, is owned by a family relation of Seymour
Holtzman, the Chairman of the Company's Board of Directors. The Company
negotiated a commission of $0.03 per share with each brokerage firm for trades
executed as part of the Company's stock repurchase program. The Company paid
Sterling Financial total commissions of $20,940 for trades they executed as
part of the Company's stock repurchase program.
Treasury shares also include restricted shares of the Company which were
forfeited by associates.
8. Consulting Agreement with Chairman
On October 28, 1999, the Company entered into a consulting agreement with
Jewelcor Management, Inc. ("JMI"), currently a 15.5% stockholder of the Company,
to assist in developing and implementing a strategic plan for the Company and
for other related consulting services as may be agreed upon between JMI and the
Company. As compensation for these services, JMI was given the right to receive
a non-qualified stock option to purchase up to 400,000 shares of the Company's
Common Stock, exercisable at the closing price on October 28, 1999. Any
remaining compensation due would be paid to JMI in cash or stock.
On June 26, 2000, the Board of Directors of the Company extended JMI's
consulting agreement for a period of one year, the terms of which have not been
finalized.
Seymour Holtzman, Chairman of the Board of Directors of the Company, is
President and Chief Executive Officer of JMI.
9. Lease Buyout Option
On November 13, 2000, the Company announced that it had entered into an option
agreement with the landlord of its corporate headquarters at 66 B Street,
Needham, MA. The agreement provides the landlord with the option, if exercised
within the next 15 months, to terminate the Company's lease for its corporate
headquarters, which currently will expire on January 31, 2006. If such option
is exercised by the landlord, then the Company will be entitled to receive
$8.9 million provided that certain conditions in connection with vacating the
leased property are met. If the option is exercised, the Company would have
seven months thereafter to vacate the premises. If the Company failed to
perform all the conditions of the option agreement, the Company would forfeit
its right up to the entire $8.9 million payment.
As of October 28, 2000, the Company had approximately $2.0 million in
unamortized leasehold improvements relating to its corporate headquarters.
10. Subsequent Event
On December 7, 2000, the Company amended and restated its existing credit
facility with Fleet Retail Finance Inc. (the "Second Credit Agreement").
The Second Credit Agreement, among other things, provided for an extension of
the credit facility to November 30, 2003, reduced the borrowing costs and tied
future interest costs to excess borrowing availability, eliminated all existing
financial performance covenants and adopted a minimum availability covenant,
increased the amount that can potentially be borrowed by increasing the advance
rate formula to 68% of the Company's eligible inventory, provided the Company
the ability to enter into further stock buyback programs and reduced the total
commitment from $50 million to $45 million. The Company's obligation under the
Second Credit Agreement continues to be secured by a lien on all of its assets.
The Company is subject to a prepayment penalty for the first two years of the
extended facility.
<PAGE>
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RECENT DEVELOPMENTS
"Dutch Auction" Tender Offer
On November 3, 2000, the Company announced that its Board of Directors
authorized a proposed "Dutch Auction" tender offer for up to 1.5 million shares
of the Company's Common Stock, reserving the option to purchase up to an
additional 1 million shares. The tender offer commenced on November 15, 2000,
and expires on December 14, 2000, unless extended by the Company.
Lease Buyout Option
On November 3, 2000, the Company also announced that it had entered into an
option agreement with the Landlord of its Corporate Headquarters. The agreement
provides the Landlord with the option, if exercised within the next 15 months,
to terminate the Company's lease for its Corporate Headquarters, which has a
current remaining term of 5 years and 3 months. If such option is exercised by
the Landlord, then the Company will be entitled to receive $8.9 million provided
that certain conditions in connection with vacating its Corporate Headquarters
are met. If the option is exercised, the Company would have seven months
thereafter to vacate the premises. If the Company failed to perform all the
conditions of the option agreement, the Company would forfeit its right up to
the entire $8.9 million payment.
In the event the option is exercised, the Company will be required to relocate
its Headquarters. The Company will then have to write off up to approximately
$2.0 million in current unamortized leasehold improvements, and incur additional
costs of approximately $1 million associated with the move to a new location.
Furthermore, the Company anticipates having to incur significantly higher rental
expenses if the Company were to re-locate.
Amendment and Restatement of Credit Facility
On December 7, 2000, the Company amended and restated its existing credit
facility with Fleet Retail Finance Inc. (the "Second Credit Agreement").
The Second Credit Agreement, among other things, provided for an extension of
the credit facility to November 30, 2003, reduced the borrowing costs and tied
future interest costs to excess borrowing availability, eliminated all existing
financial performance covenants and adopted a minimum availability covenant,
increased the amount that can potentially be borrowed by increasing the advance
rate formula to 68% of the Company's eligible inventory, provided the Company
the ability to enter into further stock buyback programs and reduced the total
commitment from $50 million to $45 million.
RESULTS OF OPERATIONS
Sales
Sales for the third quarter of fiscal 2001 were $56.6 million as compared to
sales of $56.7 million in the third quarter of fiscal 2000. Sales for the
nine-month period of fiscal 2001 were $141.7 million as compared to $139.4
million for the nine month period in the prior year. Comparable store sales
decreased 2.75% percent for the third quarter of fiscal 2001 as compared with
the third quarter of fiscal 2000. Comparable stores are retail locations that
have been open at least 13 months. Of the 107 stores that the Company operated
at October 28, 2000, 96 were comparable stores.
The increase in total sales of $2.2 million or 1.6% for the nine months ended
October 28, 2000 as compared to the same period in the prior year is due to
sales generated by new stores and a comparable store increase offset by stores
closed in fiscal 2000.
<PAGE>
Gross Profit Margin
Set forth below is merchandise and gross profit margin and occupancy costs as a
percentage of total sales for the three and nine months ended October 28, 2000
and October 30, 1999.
Gross Profit Percentage
Margins Change at
October October October
28,2000 30,1999 28,2000
-------------------------------------------------------------------------------
For the three months ended:
Merchandise Margin ........ 41.8% 43.7% (1.9%)
Occupancy Costs ........... (11.1%) (11.2%) (0.1%)
Gross Profit Margins ...... 30.7% 32.5% (1.8%)
For the nine months ended:
Merchandise Margin ........ 42.1% 42.2% (0.1%)
Occupancy Costs ........... (12.8%) (13.5%) (0.7%)
Gross Profit Margins ...... 29.3% 28.7% 0.6%
The 1.8 percentage point decrease in gross profit margin for the three months
ended October 28, 2000 compared to the same period in the prior year is due to a
1.9 percentage point decrease in merchandise margins, offset by a 0.1 percentage
point improvement in occupancy costs as a percent of sales. The 0.6 percentage
point increase in gross profit margin for the nine months ended October 28, 2000
compared to the same period in the prior year is due to the positive leveraging
of occupancy of 0.7 percentage points, offset by a decrease in merchandise
margins of 0.1 percentage point. The decrease in merchandise margin for the
three and nine months ended October 28, 2000 as compared to the prior year was
primarily attributable to decreasing initial margins. This decreasing initial
margin is the result of a change in product mix resulting from a higher sales
volume of lower margin merchandise. The Company anticipates that it will
experience a similar impact on merchandise margin during the fourth quarter of
fiscal 2001.
Selling, General and Administrative Expenses
Set forth below is certain information concerning the Company's selling, general
and administrative expenses for the three and nine months ended October 28, 2000
and October 30, 1999.
(In thousands, except October 28, 2000 October 30, 1999
percentage data) $ % of sales $ % of sales
--------------------------------------------------------------------------------
For the three months ended $10,663 18.8% $11,868 20.9%
For the nine months ended $30,213 21.3% $31,980 22.9%
The decreases in selling, general and administrative expenses for the three and
nine months ended October 28, 2000 as compared with the same periods in the
prior year is due primarily to continued cost reduction efforts. Store payroll
expense, the largest component of selling, general and administrative expenses,
remained flat at 10.8 percent of sales for the nine months ended October 28,
2000, compared with the same period in the prior year.
Depreciation and Amortization
Set forth below is depreciation and amortization expenses for the Company for
the three and nine months ended October 28, 2000 and October 30, 1999.
Percentage
(In thousands, except October 28, October 30, Change at
percentage data) 2000 1999 October 28,2000
--------------------------------------------------------------------------------
For the three months ended $1,364 $1,588 (14.1%)
For the nine months ended $3,958 $4,875 (18.8%)
The decrease in depreciation and amortization expense for the three and nine
months ended October 28, 2000 compared to the same periods in the prior year is
due to the write-off of fixed assets in fiscal 2000 as part of the Company's
store closing program and several assets becoming fully depreciated during
fiscal 2001. This decrease is offset slightly by additional depreciation for new
and remodeled stores.
Interest Expense, Net
Net interest expense was $472,000 and $390,000 for the three months ended
October 28, 2000 and October 30, 1999, respectively. Net interest expense was
$1,317,000 and $868,000 for the nine months ended October 28, 2000 and October
30, 1999, respectively. These increases were attributable to higher average
borrowing levels and higher interest rates under the Company's revolving credit
facility for the three and nine months ended October 28, 2000 as compared to the
same periods in the prior year.
Net Income
Set forth below is the net income and earnings per share, presented on a diluted
basis, for the Company for the three and nine months ended October 28, 2000 and
October 30, 1999.
(In thousands, except October 28, 2000 October 30, 1999
per share data) $ per share $ per share
--------------------------------------------------------------------------------
For the three months ended $2,891 $ 0.18 $2,692 $ 0.17
For the nine months ended $3,502 $ 0.21 $1,294 $ 0.08
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 October 28, 2000, the remaining reserve balance
related to this $15.2 million charge was $1.3 million, which primarily related
to severance and landlord settlements.
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 different
seasonality of the Company's outlet business as compared with the seasonality of
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, stock
repurchase programs and 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 and borrowings under the Company's credit facility. Cash provided by
operations for the first nine months of fiscal 2001 was $8.1 million as compared
to cash provided by operations of $2.5 million for the same period in the prior
year. This $5.6 million change is primarily due to improved results of
operations and the timing of cash payments for merchandise and various other
monthly expenses.
There was no cash and investment position at October 28, 2000. Total
unrestricted cash and investment position at October 30, 1999 was $2.3 million.
At October 28, 2000, the Company had borrowings of $17.7 million outstanding
under its revolving credit facility as compared to $16.1 million of outstanding
borrowings at October 30, 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 improved results of operations and the timing of various
payables.
The Company's working capital at October 28, 2000 was approximately $23.0
million, compared to $26.2 million at October 30, 1999. This decrease in working
capital was partly attributable to the Company's stock repurchase program, which
occurred in July and August 2000.
At October 28, 2000, total inventory equaled $64.0 million, compared to $63.6
million at October 30, 1999. However, on a per square foot basis, inventory
decreased from $66.68 to $63.28 which is in line with the Company's efforts to
improve inventory management. The Company continues to evaluate and, within the
discretion of management, act upon opportunities to purchase substantial
quantities of Levi's(R), Dockers(R) and Slates 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 October 28, 2000, the accounts payable balance was $8.1 million as compared
with a balance of $10.6 million at October 30, 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 merchandise from vendors other than Levi
Strauss & Co. will be limited and will be in accordance with customary industry
credit terms.
At October 28, 2000, the Company had borrowings of approximately $17.7 million
outstanding under this facility and had three outstanding standby letters of
credit totaling approximately $3.9 million. Average borrowings outstanding under
this credit facility for the third quarter of fiscal 2001 were approximately
$18.3 million.
As of October 28, 2000, the Company had repurchased 863,000 shares at an
aggregate cost of $1,861,000, under a stock repurchase program which was
approved by the Company's Board of Directors in June 2000. These shares were
recorded by the Company as treasury stock and are reflected as a reduction in
stockholders' equity.
Capital Expenditures
Total cash outlays for capital expenditures for the first nine months of fiscal
2001 were $5.2 million, which represents the cost of new and remodeled stores.
Total cash outlays for the first nine months of fiscal 2000 were $4.5 million.
During the first nine months of fiscal 2001, the Company opened four new
Levi's(R)/Dockers(R) Outlet by Designs stores and remodeled six of its older
outlets.
The Company's present plans for expansion for the remainder of fiscal 2001,
barring unforeseen circumstances, include remodeling an additional five
Levi's(R) Outlet stores and opening one additional 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. 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 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 October 28, 2000, the Company had
closed two of its older 59 Levi's(R) Outlet stores, remodeled 11 of the older
Levi's Outlet stores and opened 13 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 under a
credit facility to fund its working capital needs. This debt instrument is
viewed as a risk management tool 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
facility, which expires in November 2003, bears interest at variable rates
based on FleetBoston, N.A.'s prime rate or the London Interbank Offering Rate
("LIBOR"). These interest rates at October 28, 2000 were 9.50% for prime and
8.90% for LIBOR. Based upon sensitivity analysis as of October 28, 2000, a 10%
increase in interest rates would result in a potential loss to future earnings
of approximately $168,000 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 4 of Form 8-K, dated October 3, 2000,
that Deloitte & Touche LLP resigned as the Company's independent accountants and
Ernst & Young LLP has been engaged as the Company's new principal independent
accountants.
The Company reported under Item 7 of Form 8-KA, dated November 2, 2000,
the letter from Deloitte & Touche LLP regarding its concurrence with the
Company's disclosure in Item 4 of Form 8-K dated October 3, 2000.
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.
10.1 1992 Stock Incentive Plan, as amended.
10.2 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). *
10.3 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). *
10.4 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). *
10.5 Amended and Restated Loan and Security Agreement dated as of June 4,
1998, between the Company and BankBoston Retail Finance Inc., as agent
for the Lender(s) identified therein ("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). *
10.6 Fee letter dated as of June 4, 1998, between the Company and BBRF
(included as Exhibit 10.2 to the Company's Current Report on Form 8-K
dated June 11, 1998, and incorporated herein by reference). *
10.7 First Amendment to Loan and Security Agreement dated as of September
29, 1998 among the Company, BBRF and the Lender(s) identified therein
(included as Exhibit 10.5 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.8 Second Amendment to Loan and Security Agreement dated as of October 31,
1998 among the Company, BBRF and the Lender(s) identified therein
(included as Exhibit 10.6 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.9 Third Amendment to Loan and Security Agreement dated as of October 28,
1999 among the Company, BBRF and the Lender(s) identified therein
(included as Exhibit 10.9 to the Company's Form 10-Q dated December 14,
1999, and incorporated herein by reference). *
10.10 Fourth Amendment to Loan and Security Agreement dated as of March 20,
2000 among the Company, Fleet Retail Finance Inc.(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). *
10.11 Fifth Amendment to Loan and Security Agreement dated as of July 17,
2000 among the Company, Fleet Retail Finance Inc. and the Lender(s)
identified therein (included as Exhibit 10.13 to the company's
Form 10-Q dated September 12, 2000 and incorporated herein by
reference). *
10.12 Second Amended and Restated Loan and Security Agreement dated as of
December 7, 2000 among the Company and Fleet Retail Finance Inc.,as
agent for the Lender(s) identified therein
10.13 Amendment and Distribution Agreement dated as of October 31, 1998 among
the Designs JV Corp., LDJV Inc. and The Desigsn/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). *
10.14 Guaranty by the Company of the indemnification obligation of the
Designs JC Corp. dated as of October 31, 1998 in favor of LDJV, Inc.
(included as Exhibit 10.3 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.15 Asset Purchase Agreement between Levi's Only Stores, Inc. ("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). *
10.16 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). *
10.17 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). *
10.18 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). *
10.19 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). *
10.20 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). *
10.21 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).*
10.22 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). *
10.23 Employment Agreement dated as of October 16, 1995 between the Company
and Joel H. Reichman (included as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated December 6, 1995, and incorporated herein by
reference). *
10.24 Employment Agreement dated as of October 16, 1995 between the Company
and Scott N. Semel(included as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated December 6, 1995, and incorporated herein by
reference). *
10.25 Employment Agreement dated as of May 9, 1997 between the Company and
Carolyn R. Faulkner(included as Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q dated June 17, 1997, and incorporated
herein by reference). *
10.26 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). *
10.27 Secured Promissory Note dated as of June 26, 2000 between the Company
and David A. Levin (included as Exhibit 10.28 to the Company's
Form 10-Q dated September 12, 2000, and incorporated herein by
reference). *
10.28 Pledge and Security Agreement dated June 26, 2000 between the Company
and David A. Levin (included as Exhibit 10.29 to the Company's Form
10-Q dated September 12, 2000, and incorporated herein by reference). *
10.29 Employment Agreement dated as of August 14, 2000 between the Company
and Dennis Hernreich (included as Exhibit 10.30 to the Company's
Form 10-Q dated September 12, 2000, and incorporated herein by
reference). *
10.30 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). *
10.31 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). *
10.32 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).*
10.33 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). *
10.34 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). *
10.35 Indemnification Agreement between the Company and Carolyn R. Faulkner,
dated December 10, 1998 (included as Exhibit 10.36 to the Company's
Annual Report on Form 10-K dated April 30, 1999 and incorporated herein
by reference). *
10.36 Agreement Regarding Leases dated November 2, 2000 between the Company
and O.M. 66 B Street LLC.
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.
December 12, 2000 By: /S/ DAVID A. LEVIN
------------------------------------
David A. Levin, President,
Chief Executive Officer and Director
