SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended July 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 July 29, 2000
----- -------------------------------
Common 16,336,555
<PAGE>
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
July 29, 2000, July 31, 1999 and January 29, 2000
(In thousands,except share data)
July 29, July 31, January 29,
2000 1999 2000
ASSETS (unaudited) (unaudited)
---------- ---------- ----------
Current assets:
Cash and cash equivalents $ - $ 1,868 $ -
Restricted investment - 2,300 2,365
Accounts receivable 40 273 83
Inventories 66,859 61,198 57,022
Income taxes refundable and deferred 1,920 272 1,920
Prepaid expenses 1,169 1,033 1,042
--------- --------- ---------
Total current assets 69,988 66,944 62,432
Property and equipment, net of
accumulated depreciation and amortization 17,106 17,518 16,737
Other assets:
Deferred income taxes 14,510 19,307 15,215
Intangible assets, net - 2,492 -
Other assets 519 3,988 693
--------- --------- ---------
Total assets $ 102,123 $ 110,249 $ 95,077
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,999 $ 12,379 $ 6,801
Accrued expenses and other current liabilities 10,110 6,471 8,324
Accrued rent 2,263 2,222 2,253
Reserve for severance and store closings 1,436 2,253 3,228
Notes payable 24,976 24,168 22,202
--------- --------- ---------
Total current liabilities 49,784 47,493 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, 16,942,000, 16,145,000 and 16,676,000
shares issued at July 29, 2000, July 31, 1999
and January 29, 2000, respectively 169 162 167
Additional paid-in capital 54,882 54,078 54,571
Retained earnings (deficit) (44) 10,454 (639)
Treasury stock at cost, 604,650 shares at
July 29, 2000 and 286,651 shares
at July 31, 1999 and January 29, 2000 (2,471) (1,830) (1,830)
Loan to executive (197) - -
Deferred compensation - (108) -
--------- --------- --------
Total stockholders' equity 52,339 62,756 52,269
--------- --------- --------
Total liabilities and stockholders' equity $ 102,123 $ 110,249 $ 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 Six Months Ended
------------------ -----------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
------------------ -----------------
Sales $45,693 $42,907 $85,072 $82,742
Cost of goods sold including
occupancy 32,272 31,519 60,999 61,137
---------------- ---------------
Gross profit 13,421 11,388 24,073 21,605
Expenses:
Selling, general and administrative 9,805 10,519 19,550 20,111
Depreciation and amortization 1,325 1,561 2,594 3,287
---------------- ----------------
Total expenses 11,130 12,080 22,144 23,398
---------------- ----------------
Operating income (loss) 2,291 (692) 1,929 (1,793)
Interest expense, net 430 159 845 478
---------------- ----------------
Net income (loss) before income taxes 1,861 (851) 1,084 (2,271)
Provision (benefit) for income taxes 777 (315) 474 (873)
---------------- ----------------
Net income (loss) $ 1,084 $ (536) $ 610 $(1,398)
================ ================
Earnings (loss) per share- basic $ 0.07 $ (0.03) $ 0.04 $ (0.09)
Earnings (loss) per share- diluted $ 0.06 $ (0.03) $ 0.04 $ (0.09)
Weighted average number of common shares
outstanding- basic 16,502 15,891 16,472 15,890
Weighted average number of common shares
outstanding- diluted 16,685 15,891 16,560 15,890
The accompanying notes are an intergral part of the consolidated
financial statements.
<PAGE>
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
--------------------------
July 29, July 31,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 610 $ (1,398)
Adjustments to reconcile to net cash
used for operating activities:
Depreciation and amortization 2,594 3,287
Issuance of common stock to Board of Directors 116 -
Changes in operating assets and liabilities:
Accounts receivable 43 (95)
Inventories (9,837) (3,273)
Prepaid expenses (127) (122)
Other assets 71 (3,638)
Reserve for severance and store closings (1,792) (2,119)
Income taxes 96 (737)
Accounts payable 4,198 3,661
Accrued expenses and other current liabilities 2,380 37
Accrued rent 10 207
----------- -----------
Net cash used for operating activities (1,638) (4,190)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (2,898) (2,411)
Proceeds from (establishment of)
terminated trust (note 6) 2,365 (2,300)
Proceeds from disposal of property and equipment 38 73
----------- -----------
Net cash used for investing activities (495) (4,638)
----------- -----------
Cash flows from financing activities:
Net borrowings under credit facility 2,774 10,343
Repurchase of common stock (641) -
Issuance of common stock under option program (1) - 200
----------- -----------
Net cash provided by financing activities 2,133 10,543
----------- -----------
Net increase in cash and cash equivalents - 1,715
Cash and cash equivalents:
Beginning of the year - 153
----------- ----------
End of the period $ - $ 1,868
=========== ===========
(1) Net of related tax effect.
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 July 29, 2000, the remaining reserve balance
related to this $15.2 million charge was $1.4 million, which primarily related
to severance 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 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 (as amended 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 July 29, 2000 were 9.50% for
prime and 8.91% 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.
On July 17, 2000, the Credit Agreement was amended 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 Facility. For
further discussion, see Note 7.
At July 29, 2000, the Company had borrowings of approximately $23.9 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 six months of fiscal 2001 were approximately
$17.3 million. The Company was in compliance with all debt covenants under the
Credit Agreement at July 29, 2000.
5. Earnings (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 For the
three months ended six months ended
July 29, July 31, July 29, July 31,
(In thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 16,502 15,891 16,472 15,890
Stock options, excluding the effect
of anti-dilutive options of
127 shares and 132 shares
for the three and six months ended
July 29, 1999, respectively 183 -- 88 --
------- ------- ------- -------
Diluted weighted average shares
outstanding 16,685 15,891 16,560 15,890
======= ======= ======= =======
Options to purchase shares of the Company's Common Stock of 247,200 for the
three and six months ended July 29, 2000 and 1,758,700 and 1,749,950 for the
three and six months July 31, 1999, respectively, were excluded from the
computation of diluted EPS because the exercise price of the options was greater
than the average market price per share of Common Stock for the periods
reported.
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 used to
pay-down the outstanding balance on the Company's credit facility with Fleet
Boston Retail Finance, Inc.
7. Loan to Executive
On June 26, 2000, the Company extended a loan to David 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.
8. Stock Repurchase Program
In June 2000, the Company's Board of Directors authorized the repurchase of up
to 10% of the Company's outstanding Common Stock. As of July 29, 2000, the
Company had repurchased 318,000 shares at a cost of $606,000. These shares were
recorded by the Company as treasury stock and are reflected as a reduction in
shareholders' equity.
The Company utilized two brokerage firms in connection with this repurchase
program. Sterling Financial Investment Group, Inc. ("Sterling Financial"), one
of the firms used, is owned by a family relation of Seymour Holtzman, the
Company's Chairman. 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.
Subsequent to the end of the quarter, the Company announced on September 1, 2000
that it has completed its repurchase program. As of September 1, 2000, the
Company had repurchased 863,000 shares at a cost of $1,861,000.
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.
9. Consulting Agreement with Chairman
On October 28, 1999, the Company entered into a consulting agreement with
Jewelcor Management, Inc. ("JMI"), a 14.7% 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. Compensation for services is $20,000 per month, payable in Common
Stock as determined by the closing price of the Company's Common Stock on the
last day of each fiscal month.
Seymour Holtzman, Chairman of the Board of Directors of the Company, is
President and Chief Executive Officer of JMI.
<PAGE>
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Sales
Sales for the second quarter of fiscal 2001 were $45.7 million as compared to
sales of $42.9 million in the second quarter of fiscal 2000. Sales for the six
month period of fiscal 2001 were $85.1 million as compared to $82.7 million for
the six month period in the prior year. Comparable store sales increased 1
percent for the second quarter of fiscal 2001 as compared with the second
quarter of fiscal 2000. Comparable stores are retail locations that have been
open at least 13 months. Of the 105 stores that the Company operated at July 29,
2000, 93 were comparable stores.
The increase in total sales of $2.8 million or 6.5% for the three months ended
July 29, 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.
Gross Margin
Set forth below is merchandise and gross margin rates and occupancy costs as a
percentage of total sales for the three and six months ended July 29, 2000 and
July 31, 1999.
Gross Margin Percentage
Rate Change at
July 29, 2000 July 31, 1999 July 29, 2000
--------------------------------------------------------------------------------
For the three months ended:
Merchandise Margin 42.6% 41.1% 1.5%
Occupancy Costs (13.2%) (14.6%) 1.4%
Gross Margin 29.4% 26.5% 2.9%
For the six months ended:
Merchandise Margin 42.3% 41.2% 1.1%
Occupancy Costs (14.0%) (15.1%) 1.1%
Gross Margin 28.3% 26.1% 2.2%
The 2.9 percentage point increase in gross margin for the three months ended
July 29, 2000 compared to the same period in the prior year is due to a 1.4
percentage point improvement in occupancy as a percent of sales and a 1.5
percentage point increase in merchandise margins. Similarly, the 2.2 percentage
point increase in gross margin for the six months ended July 29, 2000 compared
to the same period in the prior year is due to the positive leveraging of
occupancy of 1.1 percentage points and an increase in merchandise margins of 1.1
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 three and six months ended July 29, 2000 and
July 31, 1999.
(In thousands, except July 29, 2000 July 31, 1999
percentage data) $ % of sales $ % of sales
--------------------------------------------------------------------------------
For the three months ended $ 9,805 21.5% $ 10,519 24.5%
For the six months ended 19,550 22.9% 20,111 24.3%
The decreases in selling, general and administrative expenses for the three and
six months ended July 29, 2000 as compared with the prior year is due primarily
to continued cost reduction efforts. Store payroll expense, the largest
component of selling, general and administrative expenses, was 11.5 percent of
sales, compared with 11.9 percent of sales in the prior year.
Depreciation and Amortization
Set forth below is depreciation and amortization expenses for the Company for
the three and six months ended July 29, 2000 and July 31, 1999.
Percentage
(In thousands, except Change at
percentage data) July 29, 2000 July 31, 1999 July 29,2000
--------------------------------------------------------------------------------
For the three months ended $1,325 $1,561 (15.1%)
For the six months ended` 2,594 3,287 (21.1%)
The decrease in depreciation and amortization expenses for the three and six
months ended July 29, 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. This decrease is offset slightly by additional depreciation for
new and remodeled stores.
Interest Expense, Net
Net interest expense was $430,000 and $159,000 for the three months ended July
29, 2000 and July 29, 1999, respectively. Net interest expense was $845,000 and
$478,000 for the six months ended July 29, 2000 and July 31, 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
six months ended July 29, 2000 as compared to the same periods 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.
<PAGE>
Net Income (Loss)
Set forth below is the net income (loss) and earnings per share, presented on a
diluted basis, for the Company for the three and six months ended July 29, 2000
and July 31, 1999.
(In thousands, except July 29, 2000 July 31, 1999
per share data) $ per share $ per share
--------------------------------------------------------------------------------
For the three months ended $ 1,084 $0.06 $ ( 536) ($0.03)
For the six months ended $ 610 $0.04 $(1,398) ($0.09)
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 $1.4 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
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, 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 used for
operations for the first six months of fiscal 2001 was $1.6 million as compared
to cash used for operations of $4.2 million for the same period in the prior
year. This $2.6 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 July 29, 2000. Total unrestricted
cash and investment position at July 31, 1999 was $1.9 million. At July 29,
2000, the Company had borrowings of $23.9 million outstanding under its
revolving credit facility as compared to $23.2 million of outstanding borrowings
at July 31, 1999 and $21.2 million at January 29, 2000. This increase in the
Company's net borrowing position from January 29, 2000 is primarily due to
increases in the Company's inventory position as it heads into its peak selling
season and borrowings to fund capital expenditures for new and remodeled stores.
The Company's working capital at July 29, 2000 was approximately $20.2 million,
compared to $19.5 million at July 31, 1999. This increase in working capital was
primarily attributable to the positive operating results of the Company during
the first six months of fiscal 2001.
At July 29, 2000, total inventory equaled $66.9 million, compared to $61.2
million at July 31, 1999. The increase of 9.3 percent in the Company's inventory
level was primarily due to timing of receipts in preparation for the fall
selling season. 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 July 29, 2000, the accounts payable balance was $10.9 million as compared
with a balance of $12.4 million at July 31, 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.
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 (as amended 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 July 29, 2000 were 9.50% for
prime and 8.91% 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.
On July 17, 2000, the Credit Agreement was amended 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 Facility. For
further discussion, see Note 7.
At July 29, 2000, the Company had borrowings of approximately $23.9 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
$17.3 million.
In June 2000, the Company's Board of Directors authorized the repurchase of up
to 10% of the Company's outstanding Common Stock. As of July 29, 2000, the
Company had repurchased 318,000 shares at a cost of $606,000. These shares were
recorded by the Company as treasury stock and are reflected as a reduction in
shareholders' equity.
Subsequent to the end of the quarter, the Company announced on September 1, 2000
that it has completed its repurchase program. As of September 1, 2000, the
Company had repurchased 863,000 shares at a cost of $1,861,000.
Capital Expenditures
Total cash outlays for capital expenditures for the first six months of fiscal
2001 were $2.9 million, which represents the cost of new and remodeled stores.
Total cash outlays for the first six months of fiscal 2000 were $2.4 million.
During the first six 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. 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 July 29, 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
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 July 29, 2000 were 9.5% for prime and 8.91% for LIBOR.
Based upon sensitivity analysis as of July 29, 2000, a 10% increase in interest
rates would result in a potential loss to future earnings of approximately
$164,000 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
(a) The Company held its Annual Meeting of the Stockholders on June 26,
2000. The matters submitted to a vote of the Company's stockholders were (i)
the election of ten directors and (ii) the approval of an amendment to the
Company's 1992 Stock Incentive Plan.
(b) The Company's stockholders elected ten directors to hold office
until the 2001 Annual Meeting of Stockholders and until their respective
successors are duly elected and qualified. The results of the voting were as
follows:
For Withheld Non-Votes
Seymour Holtzman 14,182,653 847,299 -
David A. Levin 14,193,178 836,774 -
Stanley I. Berger 13,778,511 1,251,441 -
Jesse Choper 14,193,178 836,774 -
Alan Cohen 14,193,178 836,774 -
Jeremiah P. Murphy, Jr. 14,193,178 836,774 -
Robert L. Patron 14,192,978 836,974 -
Joseph Pennacchio 14,193,178 836,774 -
George T. Porter, Jr. 14,192,978 836,974 -
John J. Schultz 14,192,978 836,974 -
(c) The Company's stockholders also approved an amendment to the Company's 1992
Stock Incentive Plan to increase the number of shares available for issuance
thereunder and to extend the termination date of the Plan until April 2, 2007.
The results of the voting were as follows:
For: 4,405,048
Against: 3,286,462
Abstain: 1,236
Non-Votes: 7,337,206
ITEM 6. Exhibits and Reports on Form 8-K
A. Reports on Form 8-K:
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). *
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 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). *
10.5 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). *
10.6 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). *
10.7 Amended and Restated Loan and Security Agreement dated as of June 4,
1998, between the Company and BankBoston Retail Finance Inc., as agent
for the Lender(s) identified therein ("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). *
10.8 Fee letter dated as of June 4, 1998, between the Company and BBRF
(included as Exhibit 10.2 to the Company's Current Report on Form 8-K
dated June 11, 1998, and incorporated herein by reference). *
10.9 First Amendment to Loan and Security Agreement dated as of September
29, 1998 among the Company, BBRF and the Lender(s) identified therein
(included as Exhibit 10.5 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.10 Second Amendment to Loan and Security Agreement dated as of October 31,
1998 among the Company, BBRF and the Lender(s) identified therein
(included as Exhibit 10.6 to the Company's Current Report on Form 8-K
dated December 3, 1998, and incorporated herein by reference). *
10.11 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). *
10.12 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). *
10.13 Fifth Amendment to Loan and Security Agreement dated as of July 17,
2000 among the Company, Fleet Retail Finance and the Lender(s)
identified therein.
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 Secured Promissory Note dated as of June 26, 2000 between the Company
and David A. Levin.
10.29 Pledge and Security Agreement dated June 26, 2000 between the Company
and David A. Levin.
10.30 Employment Agreement dated as of August 14, 2000 between the Company
and Dennis Hernreich.
10.31 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). *
10.32 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). *
10.33 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).*
10.34 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). *
10.35 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). *
10.36 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). *
10.37 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). *
10.38 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). *
10.39 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). *
10.40 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.
September 12, 2000 By: /S/ DAVID A. LEVIN
_______________________________
David A. Levin, President,
Chief Executive Officer and
Director
