September 9, 1994 Securities and Exchange Commission Washington, D.C. 20549 Gentlemen: Pursuant to the requirements of the Securities Exchange Act of 1934, we are transmitting herewith the attached Form 10-Q for the quarter ended July 29, 1994. Sincerely, KATHY GIES Kathy Gies Lands' End, Inc. One Lands' End Lane Dodgeville, WI 53595 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM 10-Q (Mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarter Ended July 29, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ...... to ...... Commission file number 1-9769 LANDS' END, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2512786 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Lands' End Lane, Dodgeville, WI 53595 (Address of principal executive (Zip code) offices) Registrant's telephone number, 608-935-9341 including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of September 9, 1994: Common stock, $.01 par value 34,879,405 shares outstanding LANDS' END, INC. & SUBSIDIARIES INDEX TO FORM 10-Q Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations for the Three Months Ended July 29, 1994, and July 30, 1993 ..................................... 3 Consolidated Statements of Operations for the Six Months Ended July 29, 1994, and July 30, 1993. 4 Consolidated Balance Sheets, at July 29, 1994, and January 28, 1994 .............................. 5 Consolidated Statements of Cash Flows for the Six Months Ended July 29, 1994, and July 30, 1993 .................................... 6 Notes to Consolidated Financial Statements ......... 7-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 15-18 PART II. OTHER INFORMATION Item 1. Legal Proceedings .................................... 19 Item 4. Submission of Matters to a Vote of Security Holders .................................. 19 Item 6. Exhibits and Reports on Form 8-K ..................... 19 Signature .................................................... 20 PART I. FINANCIAL INFORMATION Item 1. Financial Statements LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three Months Ended July 29, July 30, 1994 1993 (Unaudited) Net Sales ..................................... $179,833 $151,076 Cost of sales ............................... 102,509 88,390 Gross profit .................................. 77,324 62,686 Selling, general and administrative expenses .................................... 71,607 56,753 Income from operations ........................ 5,717 5,933 Other income (expense): Interest expense ........................ (273) (19) Interest income ......................... 7 40 Other ................................... 200 (36) Total other income (expense), net ........... (66) (15) Income before income taxes .................... 5,651 5,918 Income tax provision......................... 2,238 2,364 Net income .................................... $ 3,413 $ 3,554 Net income per share .......................... $ 0.10 $ 0.10 Note: Per share data reflects the two-for-one stock split declared in May, 1994. The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Six Months Ended July 29, July 30, 1994 1993 (Unaudited) Net Sales ..................................... $366,844 $307,333 Cost of sales ............................... 209,803 180,471 Gross profit .................................. 157,041 126,862 Selling, general and administrative expenses .................................... 143,514 114,289 Income from operations ........................ 13,527 12,573 Other income (expense): Interest expense ........................ (314) (38) Interest income ......................... 67 128 Other ................................... 437 106 Total other income (expense), net ........... 190 196 Income before income taxes and cumulative effect of change in accounting............... 13,717 12,769 Income tax provision......................... 5,418 4,972 Net income before cumulative effect of change in accounting......................... $ 8,299 $ 7,797 Cumulative effect of change in accounting for income taxes.................. - 1,300 Net income .................................... $ 8,299 $ 9,097 Net income per share before cumulative effect of change in accounting............. $ 0.23 $ 0.21 Cumulative effect of change in accounting ..... - 0.04 Net income per share .......................... $ 0.23 $ 0.25 Note: Per share data reflects the two-for-one stock split declared in May, 1994. The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) July 29, January 28, 1994 1994 Assets (Unaudited) Current assets: Cash and cash equivalents............ $ 1,790 $ 21,569 Receivables.......................... 1,721 3,644 Inventory............................ 194,716 149,688 Prepaid expenses..................... 12,040 11,787 Income taxes receivable 530 - Deferred income tax benefit.......... 5,588 5,588 Total current assets..................... 216,385 192,276 Property, plant and equipment, at cost: Land and buildings................... 61,107 60,866 Fixtures and equipment............... 64,352 57,769 Leasehold improvements............... 1,714 1,346 Construction in progress............. 2,861 - Total property, plant and equipment...... 130,034 119,981 Less - accumulated depreciation and amortization................... 45,618 40,290 Property, plant and equipment, net....... 84,416 79,691 Intangibles, net......................... 4,335 1,863 Total assets............................. $305,136 $273,830 Liabilities and shareholders' investment Current liabilities: Lines of credit...................... $ 64,125 $ - Current maturities of long-term debt. 40 40 Accounts payable..................... 52,065 54,855 Reserve for returns.................. 2,450 3,907 Advance payment on orders............ 234 568 Accrued liabilities.................. 17,706 16,875 Accrued profit sharing............... 178 2,276 Income taxes payable................. - 12,528 Total current liabilities................ 136,798 91,049 Long-term debt, less current maturities.. 40 40 Deferred income taxes.................... 5,200 5,200 Minority interest........................ 440 256 Shareholders' investment: Common stock, 40,220,588 and 20,110,294 issued respectively................. 402 201 Donated capital...................... 8,400 8,400 Paid-in capital...................... 24,711 24,888 Deferred compensation................ (1,827) (2,001) Currency translation adjustments..... 214 246 Retained earnings.................... 201,771 193,460 Treasury stock, 5,373,670 and 2,154,235 shares at cost, respectively....... (71,013) (47,909) Total shareholders' investment........... 162,658 177,285 Total liabilities and shareholders' investment............................. $305,136 $273,830 Note: Per share data reflects the two-for-one stock split declared in May 1994. The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended July 29, July 30, 1994 1993 (Unaudited) Cash flows (used for) from operating activities: Net income before cumulative effect.. $ 8,299 $ 7,797 Adjustments to reconcile net income to net cash flows from operating activities - Depreciation and amortization.... 5,007 3,996 Deferred compensation expense.... 174 111 Loss on sales of fixed assets.... - 38 Changes in current assets and liabilities: Receivables.................. 1,923 (1,965) Inventory.................... (45,028) (28,582) Prepaid expenses............. (253) (3,672) Income taxes receivable (530) (636) Accounts payable............. (2,790) 8,713 Reserve for returns.......... (1,457) (1,684) Advance payment on orders.. (334) (746) Accrued liabilities........ 831 4,723 Accrued profit sharing..... (2,098) (1,225) Income taxes payable....... (12,528) (10,958) Other................................ 152 461 Net cash flows used for operating activities............... (48,632) (23,629) Cash flows (used for) from investing activities: Purchase of assets................... (9,656) (6,947) Proceeds from sales of fixed assets.. - 4 Purchase of subsidiary............... (2,536) - Net cash flows used for investing activities............. (12,192) (6,943) Cash flows (used for) from financing activities: Proceeds from short-term borrowing... 64,125 10,000 Tax effect of exercise of stock options............................ 24 - Purchases of treasury stock.......... (23,104) (1,881) Net cash flows from financing activities............. 41,045 8,119 Net increase (decrease) in cash and cash equivalents................... (19,779) (22,453) Beginning cash and cash equivalents 21,569 22,754 Ending cash and cash equivalents......... $ 1,790 $ 301 Supplemental cash flow disclosures: Interest paid........................ $ 193 $ 41 Income taxes paid.................... 18,035 16,540 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. LANDS' END, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information pertaining to July 29, 1994, and the three months ended July 29, 1994, and July 30, 1993, is unaudited.) The condensed consolidated financial statements included herein have been prepared by Lands' End, Inc. (the company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and in the opinion of management contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the interim periods disclosed within this report are not necessarily indicative of future financial results. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the company's latest annual report on Form 10-K, and Form 10-Q for the quarter ended April 29, 1994. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of business Lands' End, Inc., (the company) is a direct marketer of traditionally styled apparel, domestics (primarily bedding and bath items), soft luggage, and other products. Principles of consolidation The consolidated financial statements include the accounts of the company and its subsidiaries after elimination of intercompany accounts and transactions. Fiscal year The company utilizes a 52-53 week fiscal year ending on the Friday nearest January 31. Fair values of financial instruments The fair value of financial instruments does not materially differ from their carrying values. Inventory Inventory, primarily merchandise held for sale, is stated at last-in, first-out (LIFO) cost, which is lower than market. If the first-in, first-out (FIFO) method of accounting for inventory had been used, inventory would have been approximately $19.7 million and $19.1 million higher than reported at July 29, and January 28, 1994, respectively. Catalog costs Prepaid expenses primarily consist of catalog production and mailing costs that have not yet been fully amortized over the expected revenue stream, which is approximately three months from the date catalogs are mailed. LANDS' END, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information pertaining to July 29, 1994, and the three months ended July 29, 1994, and July 30, 1993, is unaudited.) Depreciation Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets, which are 20 to 30 years for buildings and land improvements and 5 to 10 years for leasehold improvements and furniture, fixtures, equipment, and software. The company provides one-half year of depreciation in the year of addition and retirement. Intangibles Intangible assets consist primarily of goodwill, the excess of cost over the fair market value of net assets of businesses purchased. Goodwill is being amortized over 40 years on a straight-line basis. Other intangibles are amortized over a shorter life. Total accumulated amortization of all intangibles was $201,000 as of July 29, 1994. Net income per share Net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. The weighted average common shares outstanding were 35.0 million and 35.9 million after the two-for-one stock split (See Note 2) for the three-month periods ended July 29, 1994, and July 30, 1993, respectively; and 35.4 million and 36.0 million for the six-month periods ended July 29, 1994, and July 30, 1993, respectively. Common stock equivalents consisting of awards, grants and stock options which have been issued by the company. The common stock equivalents do not significantly dilute basic earnings per share. Reserve for losses on customer returns At the time of sale, the company provides a reserve equal to the gross profit on projected merchandise returns, based on its prior returns experience. Forward exchange contracts and import letters of credit 1. Forward exchange contracts are for delivery or purchase of foreign currencies at specified future dates. These contracts are entered into by the company as a hedge against foreign currency exposures. At July 29, 1994, the company had forward exchange contracts maturing during fiscal 1995 to sell approximately 1.7 million British pounds and 47.3 million yen, and to purchase about 1.2 million British pounds and 3.0 million Canadian dollars. 2. Import letters of credit are for commitments issued through third parties to guarantee payments for merchandise within specified time periods according to terms of the agreements. Import letters of credit were approximately $15.6 million as of July 29, 1994. Foreign currency translation Financial statements of the foreign subsidiaries are translated into U.S. dollars in accordance with the provisions of SFAS 52. Foreign currency transaction gains were $214,000 and $218,000 for the six-month periods ended July 29, 1994, and July 30, 1993, respectively. LANDS' END, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information pertaining to July 29, 1994, and the three months ended July 29, 1994, and July 30, 1993, is unaudited.) Postretirement benefits The company does not currently provide any postretirement benefits for employees other than profit sharing. Reclassification Certain financial statement amounts have been reclassified to be consistent with the fiscal 1995 presentation. NOTE 2. SHAREHOLDERS' INVESTMENT Capital stock Upon shareholder approval, the company increased its authorized shares from 30 million shares of $0.01 par value common stock to 160 million. The company has authorized 5 million shares of preferred stock, $0.01 par value. The company's board of directors has the authority to issue shares and to fix dividend, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions of the preferred stock. Two-for-one stock split In May 1994, the company declared a two-for-one split in the company's common stock, that was effected as a stock dividend payable on June 15, 1994, to shareholders of record as of May 31, 1994. The stock split resulted in an increase in the stated capital of the company from $201,103 to $402,206 with a corresponding reduction in paid-in capital. This has been reflected retroactively in the share presentation and earnings per share calculations presented. Treasury stock The company's board of directors authorized the additional purchase of 1.0 million shares of the company's common stock. Total shares authorized to be purchased increased from 3.1 million to 4.1 million. After the two-for-one stock split, this number increased from 4.1 million shares to 8.2 million. After the effect of the stock split, a total of 5.9 million and 4.8 million shares had been purchased as of July 29, and January 28, 1994, respectively. Stock awards and grants Shareholders of the company have approved the company's restricted stock award plan. Under the provisions of the plan, a committee of the company's board of directors may award shares of the company's common stock to its officers and key employees. Such shares generally vest over a ten-year period on a straight- line basis from the date of the award. In addition, the company has granted shares of its common stock to individuals as an inducement to enter the employ of the company. The shares granted are subject to vesting on a straight-line basis over a ten-year period. LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Information pertaining to July 29, 1994, and the three months ended July 29, 1994, and July 30, 1993, is unaudited.) After the effect of the two-for-one stock split, the following table reflects the activity under the stock award and stock grant plans: Awards Grants Balance at January 31, 1991 100,000 22,000 Granted - Forfeited 2,880 - Balance at January 31, 1992 97,120 22,000 Granted 74,000 - Forfeited - - Balance at January 29, 1993 171,120 22,000 Granted 27,200 - Forfeited 3,600 - Balance at January 28, 1994 194,720 22,000 Granted - - Forfeited 2,400 - Balance at July 29, 1994 192,320 22,000 A total of 60,120 shares awarded and granted have vested as of July 29, 1994. The granting of the above awards and grants has been recorded as deferred compensation based on the fair market value of the shares at the date of grant. Compensation expense under these plans is recorded as shares vest. Stock options Upon shareholder approval, the company increased its reserved shares from 1.0 million to 1.3 million shares of common stock, either authorized and unissued shares or treasury shares, for use by the plan. After the two-for-one stock split, the shares increased from 1.3 million to 2.5 million. Options are granted at the discretion of a committee of the company's board of directors to officers and key employees of the company. No option may have an exercise price less than the fair market value per share of the common stock at the date of grant. After the effect of the two-for-one stock split, activity under the stock option plan is as follows: Average Exercise Options Price Balance at January 31, 1991 900,000 $ 6.38 Granted 480,000 $12.69 Exercised - - Balance at January 31, 1992 1,380,000 $ 8.57 Granted 80,000 $13.96 Exercised 400,000 $ 6.38 Balance at January 29, 1993 1,060,000 $ 9.81 Granted 637,200 $19.12 Exercised 8,000 $12.69 Balance at January 28, 1994 1,689,200 $13.31 Granted - - Exercised 5,000 6.38 Balance at July 29, 1994 1,684,200 $13.33 LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Information pertaining to July 29, 1994, and the three months ended July 29, 1994, and July 30, 1993, is unaudited.) The above options outstanding vest over a 5 year period from the date of grant (1,084,200) or on the fifth anniversary from the date of grant (600,000). A total of 371,000 options have vested as of July 29, 1994. The outstanding options expire as follows: 1995 - 495,000 2001 - 472,000 2002 - 80,000 2003 - 637,200 1,684,200 NOTE 3. INCOME TAXES In January 1993, the company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the liability method prescribed by SFAS 109, deferred taxes are provided based upon enacted tax laws and rates applicable to the periods in which taxes become payable. Temporary differences which give rise to deferred tax assets and liabilities are as follows (in thousands): Net Current Deferred Net Long-term Deferred Tax Benefit Tax Liabilities Catalog advertising $(1,988) $ - Inventory 5,585 - Employee benefits 673 - Reserve for returns 482 - Depreciation - 5,200 Foreign operating loss carryforwards - (933) Valuation allowance - 933 Other 836 - $ 5,588 $ 5,200 A valuation allowance has been established for the deferred income tax benefits related to certain subsidiary loss carryforwards, which may not be realized. In all periods presented, the differences between income taxes at the statutory federal income tax rate of 35 percent, and income taxes reported in the consolidated statements of operations are due primarily to the effect of state income taxes. LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Information pertaining to July 29, 1994, and the three months ended July 29, 1994, and July 30, 1993, is unaudited.) NOTE 4. LINES OF CREDIT On September 2, 1994, the company increased its unsecured lines of credit from a total of $110 million to $130 million. Borrowings bear interest at the banks' prime rates, or at the company's option, LIBOR plus a fixed percentage, or Federal Funds rate-based negotiated pricing or the banks' Wholesale Certificate of Deposit rate plus a fixed percentage. There was $61 million outstanding at July 29, 1994, at interest rates averaging 4.9%, compared to no outstanding amount on January 28, 1994. In addition, the company has unsecured lines of credit with foreign banks totaling the equivalent of $20 million for a wholly owned foreign subsidiary. There was $3 million outstanding at July 29, 1994, at interest rates averaging 3.0%, compared to none as of January 28, 1994. NOTE 5. LONG-TERM DEBT Long-term debt was $40,000 as of July 29, 1994, and January 28, 1994. The company has an agreement which expires December 31, 1994, with a bank for a $20 million credit facility. As of September 2, 1994, this facility has been temporarily converted to unsecured lines of credit (see Note 4 above). Outstanding balances will bear interest at the bank's prime rate or, at the company's option, LIBOR plus a fixed percentage. The company is currently in compliance with all lending conditions and covenants related to this debt facility. NOTE 6. LEASES AND PURCHASE COMMITMENTS The company leases store and office space and equipment under various leasing arrangements. The leases are accounted for as operating leases. Total rental expense under these leases was $2.0 million and $1.5 million for the three-month periods ended July 29, 1994, and July 30, 1993, respectively. Rental expense for the six-month periods ended July 29, 1994, and July 30, 1993, was $4.1 million and $3.3 million, respectively. Total future fiscal year commitments under these leases as of July 29, 1994, are as follows (in thousands): 1995 (six months) $ 2,884 1996 5,256 1997 4,385 1998 2,599 1999 894 After 1999 2,102 $ 18,120 Purchase commitments as of July 29, 1994, for property, plant and equipment were $9.3 million. LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Information pertaining to July 29, 1994, and the three months ended July 29, 1994, and July 30, 1993, is unaudited.) NOTE 7. RETIREMENT PLAN AND ACCRUED COMPENSATION The company has a retirement plan which covers most regular employees and provides for annual contributions at the discretion of the board of directors. Also included in the plan is a 401(k) feature which allows employees to make contributions and the company to match a portion of those contributions. Total expense provided under this plan was $364,000 and $469,000 for the three- month periods ended July 29, 1994, and July 30, 1993, respectively. Total expenses were $1.1 million for the six-month periods ended July 29, 1994, and July 30, 1993. Accrued liabilities include accrued compensation of $1.1 million and $1.6 million at July 29, 1994, and January 28, 1994, respectively. NOTE 8. STATE SALES AND USE TAX A Supreme Court decision confirmed in May 1992, that the Commerce Clause of the United States Constitution prevents a state from requiring the collection of its use tax by a mail order company unless the company has a physical presence in the state. The company believes that the decision invalidated laws adopted by a number of states, including California and Tennessee, which purported to require out-of-state mail order companies to collect and remit sales and use taxes with respect to mail order sales in such states. However, the decision also established that Congress has the power to enact legislation which would permit states to require such collection by mail order companies. Congress is currently addressing a bill which would require mail order companies to collect and remit sales and use tax in all states. It is anticipated that the change, if adopted, will be applied prospectively. Although such a change would likely influence the buying decisions of some customers, the company believes there would be no material adverse effect on financial results. NOTE 9. ACQUISITION In July 1994, the company formed a wholly-owned subsidiary that acquired the marketing rights and assets of MontBell America, Inc., which designs, develops and distributes premier technical outdoor clothing and equipment through the wholesale channel to outdoor specialty stores, primarily in the United States. MontBell America, Inc., had sales of $2.3 million in 1993. LANDS' END, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Information pertaining to July 29, 1994, and the three months ended July 29, 1994, and July 30, 1993, is unaudited.) In March 1993, the company purchased a majority interest in a catalog company, The Territory Ahead. Merchandise offered in the catalog consists of private label sportswear, accessories and luggage. They design casual merchandise that is colorful and has an outdoor flavor. The emphasis is on fine detailing, unique fabrications, updated styling, and excellent quality. Beginning in 2003, the minority shareholders have the option to require the company to purchase their shares, and the company will have the option to require the minority shareholders to sell their shares in The Territory Ahead. The price per share would be based on the fair market value of The Territory Ahead. Results of operations of MontBell America, Inc., and The Territory Ahead were not material to the company, and as a result, no pro forma data is presented. The transactions were accounted for using the purchase method. The excess of the purchase price over the fair value of net assets was recorded as goodwill. The operating results of MontBell America, Inc., and The Territory Ahead are included in the consolidated financial statements of the company from their respective dates of acquisition. Item 2. Management's Discussion and Analysis Results of Operations Three Months Ended July 29, 1994, compared with Three Months Ended July 30, 1993 The company's net sales in the second quarter of fiscal 1995 increased 19.0 percent to $179.8 million, from $151.1 million in the second quarter of fiscal 1994. Net sales for the quarter just ended rose mainly due to increased circulation of primary and specialty catalogs and continued strength in the women's apparel lines. Additional benefit to net sales came from strong performances from the company's international and new businesses, The Territory Ahead and Corporate Sales. Inventory at the end of the second quarter was $194.7 million, up from $134.6 million a year ago. The company has brought in imported goods for the fall season earlier than usual to avoid possible quota closing problems similar to those experienced in fall 1993. These early deliveries, combined with the increased carryover of last fall's merchandise, account for about 40 percent of the rise in inventory. In addition, the major spring/summer clearance catalog is not mailed until mid- August. Also, the growth in the UK and TTA and the addition of Montbell has contributed to the overall increase in inventory. While higher inventory levels may result in greater product liquidations in future periods, they allow the company to achieve higher order fulfillment and stronger sales performance. Gross profit in the quarter just ended was $77.3 million, or 43.0 percent of net sales, compared with $62.7 million, or 41.5 percent of net sales, in the second quarter of the prior year. The increase in gross profit margin was due to lower merchandise costs from improvements in domestic and off-shore sourcing. Liquidations of excess inventory were about 10 percent of net sales in the quarter just ended, compared to approximately 9 percent in the prior year. Selling, general and administrative expenses increased 26 percent to $71.6 million in the quarter just ended, compared with $56.8 million in the same period last year. As a percentage of sales, SG&A was 39.8 percent, compared with 37.6 percent in the similar period a year ago. The rise in the SG&A percentage was mainly due to a continuation of the company's strategy of aggressive investment spending to expand its customer acquisition programs in advance of next year's postal rate increase, to grow its international businesses, to build its new businesses, and to improve its information systems. In mid-June, the company instituted a new two-day UPS delivery service utilizing tiered shipping that cut its standard delivery time in half. The cost of providing this higher level of customer service also had a negative effect on the SG&A percentage. While catalog mailings were increased during the quarter, the associated expenses were mostly offset by reductions in catalog production costs. As management had anticipated, the heavy investments made for long- term growth had a negative impact on the SG&A ratio and on profits. The company, however, is pleased with the strong sales performance and the improvement in gross profit margin for the quarter, especially while maintaining its value positioning in today's competitive retail market. Net income in the second quarter of fiscal 1995 was $3.4 million or $0.10 per weighted average common share outstanding compared with net income of $3.6 million, or $0.10 per share in the second quarter last year. Six Months Ended July 29, 1994, compared with Six Months Ended July 30, 1993 The company's net sales in the first six months of fiscal 1995 increased 19 percent to $366.8 million from $307.3 million in the same period last year. The increase in net sales was due primarily to the same factors disclosed above for the three months ended July 29, 1994. Gross profit of $157.0 million for the first six months of fiscal 1995 increased 23.8 percent from $126.9 million in the same six-month period last year. The increase in gross profit was due principally to the same factors disclosed above for the second quarter ended July 29,1994. As a percentage of net sales, gross profit increased from 41.3 percent in fiscal 1994 to 42.8 percent in fiscal 1995. The percentage of increase was due in part to reduced merchandise costs and increased margin through better sourcing. Year-to-date liquidation sales have been about the same percentage as last year. Selling, general and administrative expenses increased 25.6 percent to $143.5 million in the first six months of fiscal 1995 from $114.3 million in the same period last year. This increase was due primarily to the increased sales volume. As a percentage of net sales, selling, general and administrative expenses increased to 39.1 percent in fiscal 1995 from 37.2 percent in fiscal 1994. The percentage increased as a result of increased catalog advertising, relatively higher variable costs (due primarily to higher shipping and handling costs), and greater fixed expenses related to the previously mentioned increase in investment spending. Net income in the first half of fiscal 1995 was $8.3 million, or 23 cents per share, compared with $7.8 million, or 21 cents per share, earned in the first half of the prior year before the cumulative effect of an accounting change. During the first quarter last year, the company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as required. This added $1.3 million of net income, or 4 cents per share, to the results for the first six months of fiscal 1994, bringing the total for that period to 25 cents per share. (All per share amounts have been adjusted to reflect the two-for-one stock split declared in May 1994.) The Financial Accounting Standards Board recently issued Statement Nos. 112 and 115, "Employer's Accounting for Post- employment benefits" and "Accounting for Certain Investments in Debt and Equity Securities," respectively. The company adopted these standards in the first quarter of fiscal 1995, and they do not have a material impact. Seasonality The company's business is highly seasonal. The fall/winter season, which the company regards as a five-month period ending in December, includes the peak selling season during the Thanks- giving and Christmas holidays in the company's fourth quarter. In the longer spring/summer season, orders are fewer and the merchandise offered generally has lower unit selling prices than products offered in the fall/winter season. As a result, net sales are usually substantially greater in the fall/winter season and SG&A as a percentage of net sales is usually higher in the spring/summer season. In addition, as the company continues to refine its marketing efforts by experimenting with the timing of its catalog mailings, quarterly results may fluctuate. Liquidity and Capital Resources To date, the bulk of the company's working capital needs have been met through funds generated from operations and from short-term bank lines. The company's principal need for working capital has been to meet peak inventory requirements associated with its seasonal sales pattern. In addition, the company's resources have been used to make asset additions, to purchase treasury stock, pay cash dividends to shareholders, to acquire the marketing rights and assets of MontBell America, Inc., and to purchase a majority interest in a specialty catalog company, The Territory Ahead. The company could experience an adverse impact to expenses if there is a legislated change in health care benefits provided to temporary employees. Due to the seasonal nature of the business, it is a necessity that the company utilize temporary employees during the busy holiday season. During the peak winter season of fiscal 1994, approximately 3,500 of the company's 6,400 employees were temporary employees. Currently, health care benefits are not provided to temporary employees. The company continues to explore investment opportunities arising from the expansion of its international business, the development of new businesses and the acquisition of existing businesses. These efforts, which could have a negative impact on earnings during the initial years of the investments, are not expected to have a material effect on liquidity. As of September 2, 1994, the company increased its unsecured bank credit lines from a total of $110 million to $130 million. At July 29, 1994, the company had $61 million outstanding on its short-term lines of credit compared to $10 million as of July 30, 1993. The company has a separate $20 million bank facility available to fund treasury stock purchases and capital expenditures. This agreement has been temporarily converted to unsecured lines of credit and is included in the $130 million above. The facility runs through December 31, 1994. In addition, the company obtained lines of credit with foreign banks totaling the equivalent of $20 million for a wholly owned foreign subsidiary. The company had about $3 million outstanding on these short-term lines of credit as of July 29, 1994. The company purchased 5,975,383 shares of its common stock from February 1, 1990, through September 9, 1994. As of September 9, 1994, the company was authorized to purchase up to an additional 2,224,617 shares. For further information, see note 2 to the consolidated financial statements. Capital expenditures for fiscal 1995 are currently planned to be about $24 million, of which $9.3 million had been expended through July 29, 1994. Major projects will include constructing a second distribution center in Reedsburg, Wisconsin, new computer hardware and software, and new materials handling equipment. The company believes that its cash flow from operations and borrowings under its credit facilities will be adequate to meet its capital requirements and operational needs for the foreseeable future. PART II. OTHER INFORMATION Item 1. Legal Proceedings There are no material legal proceedings presently pending, except for routine litigation incidental to the business, to which Lands' End, Inc., is a party or of which any of its property is the subject. Items 2 and 3 are not applicable and have been omitted. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders for the quarter ended July 29, 1994, other than those disclosed in the Form 10-Q dated April 29, 1994, reporting the results of the company's annual meeting. Item 5. Other Information On August 17, 1994, David F. Dyer, vice chairman of merchandising and sales resigned to accept the position of chief operating officer with Home Shopping Network in Florida. Dyer had been a member of the company's board of directors since 1991. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed as a part of this report: Table Exhibit Number Description Number (3) Amendment to Certificate of Incorporation 4 of the company, dated May 20, 1994. (11) Statement of recomputation of earnings per share 1 (b) Reports on Form 8-K A report on Form 8-K was filed July 6, 1994, reporting a meeting with members of the financial community in New York, New York, on Thursday, May 19, 1994. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, its duly authorized officer and chief financial officer. LANDS' END, INC. Date: September 9, 1994 By: STEPHEN A. ORUM Stephen A. Orum Senior Vice President (Chief Financial Officer) LIST OF DOCUMENTS INCORPORATED BY REFERENCE In addition to the exhibits filed with this report, the exhibits listed below have been heretofore filed with the Securities and Exchange Commission as exhibits to the company's registration statement on Form S-8 (File No. 33-46133) and on Form S-1 (File No. 33-08217) or to other filings with the Commission and are incorporated herein as exhibits by reference, pursuant to Rule 24 of the SEC Rules of Practice. The exhibit number of each document so filed is stated next to the description of such exhibit. The file number for all other documents is 1-9769. Table Exhibit Document Number Description of Item Number Description (3) Articles of Incorporation and By-laws: Certificate of Incorporation of the company, as amended through October 3, 1986. 1 S-1 Amendment to Certificate of 3 10-Q Incorporation of the company, October 1987 dated August 10, 1987. Amended and Restated By-Laws of 2 10-K 1993 the company. (4) Equity Instrument and Agreements relating to Debt Obligations: Form of Certificate to evidence 1 10-Q the Common stock. August 1990 (10) Material Contracts: Form of letter from bank approving 7 10-K 1992 the company's unsecured line of credit and corresponding note. Term Loan Note and Loan Agreement 11 10-Q between the company and the August 1990 American National Bank and Trust Company of Chicago. First Amendment to Loan Agreement 13 10-Q between the company and the August 1991 American National Bank and Trust Company of Chicago, dated June 1, 1991. Second Amendment to Loan Agreement 15 10-K 1992 between the company and the American National Bank and Trust Company of Chicago, dated January 27, 1992. Table Exhibit Document Number Description of Item Number Description (10) Third Amendment to Loan Agreement 16 10-K 1993 between the company and the American National Bank and Trust Company of Chicago, dated December 11, 1992. Fourth Amendment to Loan Agreement 1 10-K 1994 between the company and the American National Bank and Trust Company of Chicago, dated December 1, 1993. Buying Agreement between the company 7 10-Q and European Buying Agency, Ltd. November 1990 Salaried Incentive Bonus Plan. 9 S-1 Second Amended and Restated 1989 12 10-Q Restricted Stock Plan of the November 1991 company. Amended and Restated Additional 17 10-Q Incentive Bonus Plan of the November 1991 company. Stock Option Plan of the company. 2 10-K 1994 Amended and Restated Retirement Plan, 3 10-K 1994 dated February 1, 1992. (13) Annual Report to Shareholders for the 10-K 1994 fiscal year ended January 28, 1994. Exhibit 3.4: State of Delaware Office of the Secretary of State --------------------------------- I, William T. Quillen, Secretary of State of the State of Delaware, do hereby certify the attached is a true and correct copy of the certificate of Amendment of "Lands' End, Inc.", filed in this office on the nineteenth day of May, A.D. 1994, at 9 o'clock a.m. A certified copy of this certificate has been forwarded to the Kent County Recorder of Deeds for recording. WILLIAM T. QUILLEN William T. Quillen, Secretary of State AUTHENTICATION: 7125684 DATE: 05-20-94 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF LANDS' END, INC. ____________________________ Adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware * * * * * William T. End and Robert S. Osborne, being the President and Secretary of Lands' End, Inc., a corporation organized and existing under and by virtue of the laws of the State of Delaware (the "Corporation"), do hereby certify as follows: FIRST: The Certificate of Incorporation of the Corporation (the "Certificate of Incorporation") is hereby amended by deleting the first paragraph of ARTICLE FOURTH and substituting in lieu thereof the following: "The total number of shares of stock which which the Corporation has authority to issue is 165,000,000 shares, of which 5,000,000 shares shall be designated Serial Preferred Stock, par value $.01 per share, and 160,000,000 shares shall be Common Stock, par value $.01 per share." SECOND: The Board of Directors of the Corporation approved the foregoing amendment pursuant to the provisions of Sections 141 and 242 of the General Corporation Law of the State of Delaware and directed that the amendment be submitted to the stockholders of the Corporation for their consideration and approval. THIRD: The stockholders of the Corporation approved the foregoing amendment pursuant to the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. * * * IN WITNESS WHEREOF, the undersigned, being the President and Secretary hereinabove named, for the purpose of amending the Certificate of Incorporation of the Corporation pursuant to the General Corporation Law of the State of Delaware, under penalties of perjury do each hereby declare and certify that this is the act and deed of the Corporation and the facts stated herein are true, and accordingly have hereunto signed this Certificate of Amendment of Certificate of Incorporation this 18th day of May, 1994. LANDS END, INC. WILLIAM T. END William T. End, President ATTEST: ROBERT S. OSBORNE Robert S. Osborne, Secretary Exhibit 11.1: Computation of Earnings Per Share LANDS' END, INC. & SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts) Three Months Ended Six Months Ended 07/29/94 07/30/93 07/29/94 07/30/93 Net income before cumulative effect of change in accounting............ $ 3,413 $ 3,554 $ 8,299 $ 7,797 Cumulative effect of change in accounting for income taxes........ - - - 1,300 Net income .......................... $ 3,413 3,554 8,299 9,097 Average shares of common stock outstanding during the period...... 35,046 35,924 35,446 35,966 Incremental shares from assumed exercise of stock options (primary).................. 605 358 690 337 35,651 36,282 36,136 36,303 Net income per share before cumulative effect of change in accounting..... $ 0.10 $ 0.10 $ 0.23 $ 0.21 Cumulative effect of change in accounting...................... - - - 0.04 Primary earnings per share........... $ 0.10 $ 0.10 $ 0.23 $ 0.25 Average shares of common stock outstanding during the period...... 35,046 35,924 35,446 35,966 Incremental shares from assumed exercise of stock options (fully diluted).................... 605 350 690 350 35,651 36,274 36,136 36,316 Net income per share before cumulative effect of accounting change........ $ 0.10 $ 0.10 $ 0.23 $ 0.21 Cumulative effect of change in accounting...................... - - - 0.04 Fully diluted earnings per share..... $ 0.10 $ 0.10 $ 0.23 $ 0.25 Average shares of common stock outstanding during the period...... 35,046 35,924 35,446 35,966 Basic earnings per share............. $ 0.10 $ 0.10 $ 0.23 $ 0.25