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, 1995 Commission File Number 0-15898
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DESIGNS, INC.
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(Exact name of registrant as
specified in its charter)
Delaware 04-2623104
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1244 Boylston Street, Chestnut Hill, MA 02167
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(Address of principal executive offices) (Zip Code)
(617)739-6722
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(Registrant's telephone
number, 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 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
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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, 1995
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Common 15,762,730 shares
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
July 29, 1995, July 30, 1994 and January 28, 1995
(In thousands, except share data)
(Unaudited)
July 29, July 30, January 28,
1995 1994 1995
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ASSETS
Current Assets:
Cash and cash equivalents $ 8,293 $ 2,051 $ 22,424
Accounts receivable 909 714 4,223
Inventories 62,580 56,508 52,649
Deferred income taxes 1,579 4,741 1,579
Income tax receivable - 411 -
Prepaid expenses 1,382 1,301 1,213
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Total current assets 74,743 65,726 82,088
Property and equipment, net of accumulated
depreciation and amortization 33,049 24,332 26,503
Other assets:
Long-term investments 12,978 23,887 15,831
Deferred income taxes 1,505 1,889 1,771
Pre-opening costs, net 1,286 258 481
Intangible assets (Note 4) 2,563 - -
Other assets 771 742 621
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Total assets $126,895 $116,834 $127,295
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,909 $13,291 $ 13,210
Accrued expenses and other current
liabilities 8,782 4,771 5,944
Restructuring reserve (Note 3) - 12,845 -
Accrued rent 2,986 2,722 7,690
Income taxes payable 458 - -
Current portion of note payable (Note 4) 500 - -
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Total current liabilities 22,635 33,629 26,844
Long term portion of note payable (Note 4) 500 - -
Commitments and contingencies
Minority interest (Note 2) 4,808 - 4,749
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, 15,763,000, 16,005,000
and 15,755,000 shares issued at July 29,
1995, July 30, 1994 and January 28, 1995,
respectively 158 160 157
Additional paid-in capital 52,650 54,806 52,619
Retained earnings 46,144 28,239 42,926
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Total stockholders' equity 98,952 83,205 95,702
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Total liabilities and stockholders' equity $126,895 $116,834 $127,295
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The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
July 29, July 30,
1995 1994
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Sales $66,993 $56,390
Cost of goods sold occupancy 47,115 38,996
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Gross profit 19,878 17,394
Expenses:
Selling, general and administrative 15,939 13,223
Restructuring charges --- ---
Depreciation and amortization 2,083 1,715
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Total expenses 18,022 14,938
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Operating income 1,856 2,456
Interest expense 65 61
Interest income 252 355
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Income before minority interest and
income taxes 2,043 2,750
Less minority interest 16 ---
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Income before income taxes 2,027 2,750
Provision for income taxes 834 1,127
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Net income $ 1,193 $ 1,623
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Net income per common and common
equivalent share $ 0.08 $ 0.10
Weighted average common and common
equivalent shares outstanding 15,763 16,002
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Six Months Ended
July 29, July 30,
1995 1994
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Sales $124,329 $105,350
Cost of goods sold occupancy 88,255 74,747
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Gross profit 36,074 30,603
Expenses:
Selling, general and administrative 30,115 24,513
Restructuring charges (2,200) ---
Depreciation and amortization 3,947 3,346
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Total expenses 31,862 27,859
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Operating income 4,212 2,744
Interest expense 87 582
Interest income 723 757
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Income before minority interest and
income taxes 4,848 2,919
Less minority interest 106 ---
----- -----
Income before income taxes 4,742 2,919
Provision for income taxes 1,952 1,196
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Net income $ 2,790 $ 1,723
======= =======
Net income per common and common
equivalent share $ 0.18 $ 0.11
Weighted average common and common
equivalent shares outstanding 15,760 15,987
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Twelve Months Ended
July 29, July 30,
1995 1994
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Sales $284,889 $250,975
Cost of goods sold occupancy 195,292 172,384
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Gross profit 89,597 78,591
Expenses:
Selling, general and administrative 58,518 49,028
Restructuring charges (5,400) 15,000
Depreciation and amortization 7,480 6,526
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Total expenses 60,598 70,554
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Operating income 28,999 8,037
Interest expense 114 1,258
Interest income 1,443 1,470
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Income before minority interest and
income taxes 30,328 8,249
Less minority interest 106 ---
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Income before income taxes 30,222 8,249
Provision for income taxes 12,252 3,340
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Net income $17,970 $ 4,909
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Net income per common and common
equivalent share $ 1.14 $ 0.31
Weighted average common and common
equivalent shares outstanding 15,812 15,968
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
STATEMENTS OF CASH FLOWS
(In thousands- Unaudited)
Six Months Ended
July 29, July 30,
1995 1994
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Cash flows from operating activities:
Net income $ 2,790 $ 1,723
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 3,947 3,346
Deferred income taxes --- (355)
Minority interest 106 ---
Loss from the sale of investments 48 ---
Loss from disposal of property and equipment 212 270
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable 3,267 107
Inventories (6,914) (10,624)
Prepaid expenses (169) (99)
Prepaid income taxes --- 604
Income taxes payable 458 (1,374)
Accounts payable (3,301) 6,583
Restructuring reserve --- (906)
Accrued expenses and other current liabilities 2,838 2,057
Accrued rent (4,704) 145
Net cash (used for) provided by operating ------- ------
activities (1,422) 1,477
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Cash flows from investing activities:
Additions to property and equipment (9,808) (5,065)
Incurrence of pre-opening costs (1,198) (239)
Proceeds from disposal of property and equipment 170 68
Sale and maturity of investments 3,501 2,190
Increase in other assets 23 (280)
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Net cash used in investing activities (7,312) (3,326)
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Cash flows from financing activities:
Payment for acquisition of a business (5,428) ---
Repayments of long-term debt --- (10,000)
Issuance of common stock under option program (1) 31 299
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Net cash used in financing activities (5,397) (9,701)
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Net decrease in cash and cash equivalents (14,131) (11,550)
Cash and cash equivalents:
Beginning of the year 22,424 13,601
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End of the quarter $ 8,293 $ 2,051
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Supplementary Cash Flow Disclosure
Cash paid, net:
Interest $ 46 $ 739
Taxes 1,592 2,199
(1) Including related tax benefit
The accompanying notes are an integral part of the consolidated financial
statements.
DESIGNS, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of Designs, Inc. (the "Company"), the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring 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
contained in the Company's audited consolidated financial statements for the
year ended January 28, 1995. Historically, the Company's business 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. Minority Interest
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the
Company, entered into a partnership agreement with LDJV Inc. (the "Partnership
Agreement") establishing a joint venture to sell Levi's(R) brand products and
jeans-related products in Original Levi's(R) Stores and Levi's(R) Outlets.
LDJV Inc. is a wholly-owned subsidiary of Levi's Only Stores, Inc., which
is a wholly-owned subsidiary of Levi Strauss & Co. This partnership is known
as The Designs/OLS Partnership (the "Partnership").
The operating results of the Partnership are consolidated with the
financial statements of the Company for the three, six and twelve months ended
July 29, 1995. Minority interest at July 29, 1995 represents LDJV Inc.'s 30%
interest in the Partnership.
In accordance with the Partnership Agreement, the Partnership made
capital distributions of $155,000 to its partners for the six months ended
July 29, 1995. These capital distributions represented funds sufficient to pay
taxes associated with the earnings of the Partnership for the six month period
ended July 29, 1995.
3. Restructuring
During fiscal 1994, the Company recorded a nonrecurring pre-tax charge of
$15 million to cover the expected costs associated with the closing of ten of
its poorest performing Designs stores. In connection with the Company's
ongoing review of Designs store performance, in November 1994, the Company
decided to close up to five more of the poorest performing Designs stores
during fiscal 1995. The $15 million is reflected in the consolidated statement
of income as a restructuring charge for the twelve month period ended July 30,
1994.
As of the end of fiscal 1995, the estimated cost to close these fifteen
stores was $11.8 million. This estimated amount included an accrual of $4.1
million for future lease obligations. In the fourth quarter of fiscal 1995,
the Company recognized pre-tax income of $3.2 million which represented the
Company's estimated excess restructuring reserve at January 28, 1995.
During the first quarter of fiscal 1996, the Company reached final
lease agreements with certain landlords for $1.9 million. The remaining
accrual of $2.2 million was recognized as pre-tax income for the six month
period ended July 29, 1995.
4. Acquisition
On May 2, 1995, the Company acquired certain assets of Boston Trading
Ltd., Inc. ("Boston Trading") in accordance with the terms of an Asset
Purchase Agreement dated April 21, 1995 among Boston Trading, Designs
Acquisition Corp., the Company and others. The Company paid $5,428,000 million
in cash, financed by operations, and delivered a non-negotiable promissory
note in the principal amount of $1,000,000. The principal amount of the
promissory note is payable in two equal annual installments through May 1997.
The note bears interest at the published prime rate and is payable semi-
annually from the date of acquisition. The purchase price has been allocated
to the assets acquired, including certain intangible assets, principally
trademarks and license agreements, based on their respective fair values.
Trademarks and license agreements are being amortized on a straight-line
basis over 15 years and 4 years, respectively. Other assets acquired included
all inventory, fixed assets and leasehold improvements associated with 33
Boston Traders(R) outlet stores.
The Company is a party to two consulting agreements with former
employees of Boston Trading. Pursuant to the consulting agreements, the
Company agreed to issue, as part of the consulting fees, a total of 50,000
shares of the Company's $0.01 par value Common Stock ("Common Stock"). These
shares are contingent upon the completion the two year consulting agreements.
The following pro forma summary presents the consolidated results of
operation of the Company as if the acquisition had occurred as of the
beginning of the periods presented, after giving effect to certain
adjustments, including amortization of intangibles, decreased interest income
related to cash used to finance the acquisition and related income tax
effects. Pro forma results of operations for the six month ended July 29,
1995 and July 30, 1994 include Boston Trading unaudited results of operations
for the period January 29, 1995 through May 1, 1995 and January 30, 1994
through July 30, 1994, respectively. Pro forma results of operations for the
twelve month period ended July 29, 1995 and July 30, 1994 assume that the
acquisition occurred at July 30, 1994 and July 31, 1993, respectively.
Six Months Ended Twelve Months Ended
July 29, 1995 July 30, 1994 July 29, 1995 July 30, 1994
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Revenue $ 126,127 $ 110,292 $ 295,337 $ 264,711
Net income 1,880 (136) 15,865 1,917
Net income per share $0.12 $(0.01) $1.00 $0.12
5. Amendment to Credit Agreement
During the second quarter of fiscal 1996, the Company signed an amendment
to the $20.0 million revolving credit agreement dated as of November 17, 1994
among the Company, BayBank Boston, N.A. and State Street Bank and Trust
Company. This amendment provides that $5.0 million of the $20.0 million line
of credit will be used as a letter of credit facility for purchases of
inventory related to the development and growth of the Company's Boston
Traders(R) product line. At July 29, 1995, $3.1 million of the $5.0 million
was available for the issuance of letters of credit.
6. Adoption of a Shareholders Rights Plan
On May 1, 1995, the Board of Directors of the Company adopted a
Shareholder Rights Plan. Pursuant to such Plan, the Company entered into a
Shareholder Rights Agreement ("Rights Agreement") between the Company and its
transfer agent, The First National Bank of Boston. Pursuant to the Rights
Agreement, the Board of Directors declared a dividend distribution of one
preferred stock purchase right for each outstanding share of the Company's
Common Stock, to stockholders of record as of the close of business on May 15,
1995. Initially, these rights will not be exercisable and will trade with the
shares of the Common Stock. In the event that a person becomes an "acquiring
person" or is declared an "adverse person" each such term as defined in the
Rights Agreement, each holder of a right (other than the acquiring person or
the adverse person) would be entitled to acquire such number of shares of
preferred stock which are equivalent to the Common Stock having a value of
twice the then-current exercise price of the right. If the Company is
acquired in a merger or other business combination transaction after any such
event, each holder of a right would then be entitled to purchase, at the
then-current exercise price, shares of the acquiring company's common stock
having a value of twice the exercise price of the right.
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Sales for the second quarter of fiscal 1996 increased 19% to $67.0
million from $56.4 million in the second quarter of 1995. Comparable store
sales increased 4% for the three month period. Of the 155 stores that Designs,
Inc. (the "Company") operates, 101 are comparable stores. Comparable store
sales increased primarily due to an increase in average unit price of 3%, and
a 1% increase in unit sales for the three month period. Comparable Outlet
store sales increased 3% for the three month period as compared to the prior
year. Comparable Designs store sales increased by 1% for the three month
period as compared to the same period in the preceding year. Comparable
Original Levi's(R) Stores sales increased 27% for the three month period as
compared to the same period in the prior year. For the six month period, sales
rose 18% to $124.3 million in the current year as compared to $105.4 million
in the prior year. Comparable store sales increased 5% for the six month
period principally due to an increase in average unit price of 6% offset by a
1% decrease in unit sales for the six month period. Comparable Outlet store
sales increased 4% for the six month period as compared to the prior year.
Comparable Designs store sales remained unchanged for the six month period as
compared to the same period in the preceding year. Comparable Original
Levi's(R) Stores sales increased 31% for the six month period as compared to
the same period in the prior year. On a rolling 12 month basis, sales
increased 14% to $284.9 million for the twelve month period ended July 29,
1995 compared to $251.0 million for the twelve month period ended July 30,
1994.
Gross margin rate (including the costs of occupancy) decreased to 29.7%
as compared to 30.8% in the second quarter of fiscal 1995 principally due to
continued price competition and promotional activity in the marketplace. The
increased total sales at this gross margin rate resulted in a 14.3% increase
in gross margin dollars to $19.9 million for the second quarter of fiscal 1996
as compared with $17.4 million in fiscal 1995. For the six month period, gross
margin rate remained unchanged at 29.0% as compared to the prior period. For
the rolling twelve month period, gross margin rate increased to 31.4% as
compared to 31.3% in the prior year.
For the quarter, selling, general and administrative expenses of $15.9
million increased to 23.8% of sales as compared with 23.4% in the
corresponding period in the prior year due, primarily due to expenses
associated with the development of the Boston Traders(R) product line and
increased healthcare costs. For the six month period, selling, general and
administrative expenses increased to 24.2% of sales as compared with 23.3% in
the prior year period. For the rolling 12 month period, selling, general and
administrative expenses increased to 20.5% of sales compared with 19.5% in the
prior period principally due to increased advertising and healthcare costs.
During fiscal 1994, the Company recorded a non-recurring pre-tax charge
of $15.0 million to cover the expected costs associated with the closing of up
to ten of its poorest performing Designs stores. In November 1994, in
connection with the Company's ongoing review of Designs store performance, the
Company decided to close up to five more of the poorest performing Designs
stores during fiscal 1995. The $15.0 million is reflected in the consolidated
statement of income as a restructuring charge for the twelve month period
ended July 30, 1994.
As of the end of fiscal 1995, the estimated costs to close these fifteen
stores was an estimated $11.8 million. This estimated amount included an
accrual of $4.1 million for future lease obligations. For the fiscal year
ended January 28, 1995, the Company recognized pre-tax income of $3.2 million
which represented the Company's estimated excess accrual at January 28, 1995.
During the first quarter of fiscal 1996, the Company reached final lease
agreements with certain landlords for $1.9 million. The remaining accrual of
$2.2 million was recognized as pre-tax income for the six month period ended
July 29, 1995.
Depreciation and amortization expense of $2.1 million and $3.9 million
for the three and six month periods increased 21.5% and 18.0%, respectively,
as compared with the same periods in fiscal 1995 due to the cost of new store
openings, remodeled Designs stores and the acquisition of 33 Boston Traders(R)
outlet stores. For the rolling 12 month period, depreciation and amortization
increased 14.6%, primarily due to the timing of store openings.
Interest expense for the second quarter of fiscal year 1996 was $65,000,
and remained unchanged as compared to the same period in fiscal year 1995.
Interest expense for the six months decreased 85% to $87,000 as compared to
$582,000 in the prior year due to interest cost savings and a prepayment
penalty of $290,000 associated with the retirement of the Company's Senior
Notes in the second quarter of fiscal 1995. On a rolling 12 month basis,
interest expense decreased 91% to $114,000 as compared to $1.3 million in the
prior period.
Interest income for the second quarter decreased to $252,000 in fiscal
year 1996 from $355,000 in fiscal year 1995 due to lower cash and investment
levels and realized losses on the sale of investments of $48,000 in the second
quarter of fiscal 1996. For the six month period, interest income of $723,000
decreased 4% as compared to $757,000 for the same period in the prior year.
For the rolling 12 months, interest income remained unchanged at $1.4 million
as compared to the prior period. See Liquidity and Capital Resources - Working
Capital and Cash Flows.
Net income for the second quarter of fiscal year 1996 was $1.2 million or
$0.08 per share, as compared with $1.6 million or $.10 per share in the second
quarter of fiscal 1995. For the six month period, the Company recorded net
income of $2.8 million, or $0.18 per share in the current year as compared to
$1.7 million, or $0.11 per share in the prior year. Net income for the six
month period ended July 29, 1995 includes pre-tax income of $2.2 million or
$0.08 per share related to the Company's previously discussed restructuring
program.
Net income, on a rolling 12 month basis, was $18.0 million or $1.14 per
share in the twelve month period, as compared with $4.9 million, or $0.31 per
share in the prior comparable period. Net income includes the impact of a
restructuring income (charge) of $5.4 million or $0.20 per share for the
twelve month period ended July 29, 1995 and ($15.0) million or ($0.56) per
share for the twelve month period ended July 30, 1994.
SEASONALITY
The Company's business is seasonal, reflecting increased consumer buying
in the "Back to School" and "Holiday" seasons. Historically, the second
half of each fiscal year provides a greater portion of the Company's annual
sales and operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for operating expenses of the
Company and the joint venture, seasonal inventory purchases, capital expenses
for new and remodeled stores, cash outlays associated with restructuring, and
the development of the Boston Traders(R) branded product line.
Working Capital and Cash Flows
To date, the Company has financed its working capital requirements and
expansion program with cash flow from operations, borrowings and proceeds from
Common Stock offerings. Cash used for operations for the first six months of
fiscal 1996 was $1.4 million as compared to cash provided by operations of
$1.5 million for the same period in the prior period. The decrease in cash
from operations is primarily due to $1.9 million paid to landlords in
connection with lease terminations associated with the Company's
restructuring program.
The Company's working capital at July 29, 1995 was approximately $52.1
million as compared to $32.1 million at July 30, 1994. The increase is
attributable to the completion of the Company's restructuring program and a
reduction in the average maturity of the Company's investment portfolio.
Inventory in dollars in comparable stores decreased 4.1% and units
remained unchanged from July 30, 1994 to July 29, 1995 due principally to a
decrease in purchases of inventory for the quarter as compared to last year.
Total inventory at July 29, 1995 increased $6.1 million or 10.7% from July 30,
1994. This increase primarily reflects the fair value of the inventory
purchased as part of the Boston Trading Ltd., Inc. ("Boston Trading")
acquisition and an increase in the proportion of Levi's(R) Outlet stores to
total stores at the end of the second quarter of fiscal 1996 as compared
fiscal 1995.
The Company stocks its Levi's(R) Outlet stores exclusively with
manufacturing overruns, discontinued lines and irregulars purchased by the
Company directly from Levi Strauss & Co. and end-of-season Levi's(R)
merchandise transferred from Designs stores and Original Levi's(R) Stores. By
its nature, this merchandise is subject to limited availability. The Company
stocks its Boston Traders(R) outlet stores with the end-of-season Boston
Traders(R) merchandise from the Designs stores and merchandise that is
specifically produced for the Boston Traders(R) outlet stores.
The Company's trade payables to Levi Strauss & Co., its principal vendor,
generally are due within ten days after the end of the month in which the
goods are received. The Company has been current with its payments to Levi
Strauss & Co. from fiscal 1987 to date. Trade payables with other vendors are
generally payable within 30 days of invoice. Variations in the amount of trade
payables outstanding at the end of different periods relate to the timing of
purchases. In the second quarter of fiscal 1996, the Company began sourcing
its own merchandise with various off-shore vendors. To date, payment to these
vendors have been through the issuance of letters of credit, which require
payment upon shipment of merchandise. The Company anticipates that these
payment methods will continue during the remainder of fiscal 1996.
On May 31, 1995, the Company signed an amendment to the $20.0 million
revolving credit agreement dated November 17, 1994 among the Company, BayBank
Boston, N.A. and State Street Bank and Trust Company. This amendment provides
that $5.0 million of the $20.0 million line of credit will be used as a letter
of credit facility for purchases of inventory related to the development and
growth of the Company's Boston Traders(R) product line. At July 29, 1995, $3.1
million of the $5.0 million was available for the issuance of letters of
credit.
At July 29, 1995, there were no short-term or long-term borrowings
outstanding, with the exception of a $1.0 million promissory note which was
issued in connection with the acquisition of assets of Boston Trading, as
discussed below. The Company had average outstanding borrowings, excluding the
$1.0 million promissory note, of $1.4 million for the quarter ended July 29,
1995.
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the
Company, and a subsidiary of Levi's Only Stores, a wholly-owned subsidiary of
Levi Strauss & Co., entered into a partnership agreement establishing a joint
venture to sell Levi's(R) brand products and jeans-related products. The
partnership plans to open and operate a total of 35 to 50 Original Levi's(R)
Stores and Levi's(R) Outlets throughout 11 Northeast states and the District
of Columbia over approximately the next three to five fiscal years. This
number of stores includes the ten Original Levi's(R) Stores which were open
at July 29, 1995. The Levi's(R) Outlet stores in the partnership will sell
only Levi's(R) brand products and service the close-out products of the
Original Levi's(R) Stores.
In connection with the formation of the joint venture, Designs JV Corp.
contributed, in exchange for a 70% interest in the joint venture, eight of the
Company's existing Original Levi's(R) Stores and three leases for then
unopened stores in New York City, Nanuet, New York, and White Plains, New York.
These stores are included in the 35 to 50 stores described above. At the same
time, LDJV Inc., the joint venture subsidiary of Levi's Only Stores, Inc.,
contributed approximately $4.7 million in cash to the joint venture in
exchange for a 30% interest.
It is the current intention of the joint venture partners to fund the
joint venture's working capital and funds for its future expansion from the
partnership's operations and borrowings from third parties. However, the
partners may also decide that they or their affiliates should contribute or
loan additional funds to the joint venture or guaranty third-party debt.
Neither partner will be required to make any future contribution to the
capital of the joint venture, any loan to the joint venture or any such
guaranty unless both partners agree. Excess cash (as defined in the
partnership agreement) will be distributed by the joint venture in accordance
with the terms of the partnership agreement. No assurance can be given that
Designs JV Corp. will not make such capital contributions, loans or
guaranties or that cash will be distributed to Designs JV Corp. out of the
partnership.
In June 1994, Levi Strauss & Co. informed the Company that it wanted to
focus the future relationship between the two companies on the Original
Levi's(R) Stores joint venture and to reduce the Company's dependency on Levi
Strauss & Co. Levi Strauss & Co. informed the Company that it did not see a
growth opportunity for the Company's Designs stores in the exclusively
Levi's(R) format. However, Levi Strauss & Co. informed the Company that it did
see an opportunity for growth of the Company's Designs stores if the format
was changed to a multi-brand format. Levi Strauss & Co. advised the Company
that it believes that this would avoid consumer confusion between the Original
Levi's(R) Stores and Designs stores. According to Levi Strauss & Co., this
would require that not more than 70% of the product mix in the stores be Levi
Strauss & Co. product, that the format and presentation of the stores be
"supportive" of its marketing and brand objectives and that Levi Strauss &
Co. approve that format beforehand. The Company has received favorable Levi
Strauss & Co. comment regarding the look of the multi-brand Designs stores and
believes that the format will be acceptable to Levi Strauss & Co. for Designs
store expansion throughout the United States. Levi Strauss & Co. would apply
the new branch opening policies and practices to Designs stores that are
applicable to other multi-brand retailers of Levi Strauss & Co. products. Levi
Strauss & Co. advised the Company that if the Company does not decide to
expand the Designs store chain, Levi Strauss & Co. would not require change to
a multi-brand format. If the Company does change the format and expand the
Designs store chain, Levi Strauss & Co. has said that it will require that the
Company's existing Designs stores be converted to the new multi-brand format
over a mutually agreeable period of time.
During fiscal year 1995, the Company introduced private label and
Timberland(R) brand products into the merchandise mix in certain of its
Designs stores. This was primarily due to the Company's desire to offset
decreased gross profit margins in Designs stores caused by increased price
competition with other retailers that sell Levi Strauss & Co. merchandise in
and around regional malls, the absence of certain key products in the Levi
Strauss & Co. line and increased opportunities for expansion of the Designs
store chain throughout the United States. Based upon the overall performance
of the Timberland(R) merchandise, the Company has added Timberland(R) products
to the merchandise mix in the remodeled Designs stores and some of the Boston
Traders(R) outlet stores.
On May 2, 1995, the Company acquired certain assets of Boston Trading in
accordance with the terms of an Asset Purchase Agreement dated April 21, 1995
among Boston Trading, Designs Acquisition Corp., the Company and others. The
Company paid $5,428,000 million in cash, financed by operations, and delivered
a non-negotiable promissory note in the principal amount of $1,000,000. The
principal amount of the promissory note is payable in two equal annual
installments through May 1997. The purchase price has been allocated to the
assets acquired, including certain intangible assets, such as trademarks and
licensing agreements, based on their respective fair values. Other assets
acquired included all inventory, fixed assets and leasehold improvements
associated with 33 Boston Traders(R) outlet stores.
This acquisition will expand the Company's current operations to include
the design, off-shore sourcing and retailing of Boston Traders(R) products.
Among other things, the retail distribution of Boston Traders(R) products has
required the Company to expend resources for a design and sourcing staff, and
storage and distribution facilities in order to assure timely delivery and
restocking of merchandise. The Company anticipates that the additional
expenses associated with the acquisition and development of the Boston
Traders(R) product line will total $4 to $5 million over the next 12 to 18
months. During the second quarter, the Company contracted with a third-party
warehouse to facilitate the receiving, storage and distribution of the Boston
Traders(R) products. The addition of the Boston Traders(R) outlet stores,
which have no geographic restrictions, provides the Company with the
opportunity to expand the Company's operations throughout the United States.
The Boston Traders(R) product line replaces the "Exclusively for
Designs" product line which was introduced in certain Design stores in fiscal
1995. The Company began introducing the Boston Traders(R) products into its
Designs stores in June 1995. The Company does not expect that the percentage
of Boston Traders(R) inventory or sales will be significant until the fall of
fiscal 1997. The Company has no plans to continue the wholesale trade business
of the Boston Traders(R) product lines.
Capital Expenditures
During the first six months of fiscal 1996, the Company remodeled eight
Designs stores and the joint venture partnership opened two Original Levi's(R)
Stores. During the first six months of fiscal 1995, the Company opened six
Levi's Outlet(R) stores, two Original Levi's(R) Stores and remodeled three
Designs stores. Total cash outlays of $9.8 million and $5.1 million during the
first six months of fiscal year 1996 and 1995, respectively, represent the
costs of new and remodeled stores as well as corporate capital spending during
the periods.
During the remainder of fiscal year 1996, barring unforeseen
circumstances, the Company plans to open one mall-based Designs store and two
Boston Traders(R) outlet stores. The estimated costs to open these stores are
expected to be approximately $1.0 million.
Subsequent to the end of the quarter, as part of the joint venture, the
Company opened one Original Levi's(R) store and two Levi's(R) Outlet stores.
During the remainder of fiscal year 1996, barring unforeseen circumstances,
the Company plans to open two additional Levi's(R) Outlet stores as part of
the joint venture. The estimated costs to open these stores are expected to be
approximately $625,000.
The Company expects that cash flow from operations, short-term borrowings
and available cash will enable it to finance its current working capital,
remodeling and expansion requirements during the remainder of the fiscal year.
Part II. Other Information
ITEM 1. Legal Proceedings
The Company is a party to 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 4. Submission of Matters to a Vote of Security Holders
On June 13, 1995, the Company held its Annual Meeting of Stockholders.
At the meeting stockholders holding at least 14,665,174 shares of the
Company's Common Stock, $0.01 par value, cast votes in favor of the election
of each of Stanley I. Berger, Joel H. Reichman, James G. Groninger, Bernard M.
Manuel, Melvin Shapiro and Peter L.Thigpen as directors of the Company and no
more than 228,101 shares were withheld from any one of the foregoing.
ITEM 6. Exhibits and Reports on Form 8-K
A. Reports on Form 8-K:
Report on Form 8-K, dated May 1, 1995, was filed by the Company to
announce that its Board of Directors had adopted a Shareholder
Rights Plan. Pursuant to the terms of a Shareholder Rights
Agreement dated as of May 1, 1995 between the Company and its
transfer agent, First National Bank of Boston, the Board of
Directors declared a dividend distribution of one Preferred Stock
Purchase Right for each outstanding share of Common Stock to
stockholders of record as of the close of business on May 15,
1995.
B. Exhibits:
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 A to the Company's definitive proxy
statement dated May 10, 1994, 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 Executive Incentive Plan effective through the
fiscal year ended January 28, 1995 (included as
Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended January 28, 1994, and
incorporated herein by reference). *
10.6 Credit Agreement among the Company, BayBank
Boston, N.A., and State Street Bank and Trust
Company dated as of November 17, 1994 (included as
Exhibit 1 to the Company's current report on
Form 8-K dated November 22, 1994, and incorporated
herein by reference). *
10.7 Consulting Agreement between the Company and
Stanley I. Berger dated December 21, 1994 (included
as Exhibit 10.7 to the Company's Annual Report on
Form 10-K, dated April 26, 1995, and incorporated
herein by reference). *
10.8 Employee Separation Agreement between the Company
and Geoffrey M. Holczer dated December 27, 1994 (included
as Exhibit 10.8 to the Company's Annual Report on
Form 10-K, dated April 26, 1995, and incorporated
herein by reference). *
10.9 Participation Agreement among Designs JV Corp.
(the "Designs Partner"), the Company, LDJV Inc.
(the "LOS Partner"), Levi's Only Stores, Inc. ("LOS"),
Levi Strauss & Co. ("LS&CO") and Levi Strauss
Associates Inc. ("LSAI") dated January 28, 1995
(included as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.10 Partnership Agreement of The Designs/OLS Partnership
(the "Partnership") between the LOS Partner and the
Designs Partner dated January 28, 1995 (included as
Exhibit 10.2 to the Company's Current Report on Form 8-K
dated April 24, 1995, and incorporated herein by reference). *
10.11 Glossary executed by the Designs Partner, the Company,
the LOS Partner, LOS, LS&CO, LSAI and the Partnership
dated January 28,1995 (included as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated April 24, 1995,
and incorporated herein by reference). *
10.12 Sublicense Agreement between LOS and the LOS Partner
(included as Exhibit 10.4 to the Company's Current
Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.13 Sublicense Agreement between the LOS Partner and the
Partnership (included as Exhibit 10.5 to the Company's
Current Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.14 License Agreement between the Company and the
Partnership (included as Exhibit 10.6 to the Company's
Current Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.15 Administrative Services Agreement between the Company
and the Partnership dated January 28, 1995 (included
as Exhibit 10.7 to the Company's Current Report on
Form 8-K dated April 24, 1995, and incorporated herein
by reference). *
10.16 Asset Purchase Agreement among Boston Trading, Designs
Acquisition Corp., the Company and others dated
April 21, 1995.
10.17 Non-Negotiable Promissory Note between the Company
and Atlantic Harbor, Inc., formerly known as Boston
Trading Ltd., Inc., dated May 2, 1995.
10.18 Amendment dated June 2, 1995 to the Credit Agreement
among the Company, BayBank Boston, N.A., and State Street
Bank and Trust Company dated as of November 17, 1994.
11 Schedule re: computation of per share earnings
* Previously filed with the Securities and Exchange Commission.
Exhibit 11. Statement Re: Computation of Per Share Earnings
Three Months Ended
7/29/95 7/30/94
------- -------
(In thousands, except per share data)
Net income $ 1,193 $ 1,623
Weighted average shares
outstanding during the period 15,763 16,002
Common equivalent shares --- ---
------ ------
Number of shares for purpose
of calculating net income per
common and common equivalent
share 15,763 16,002
====== ======
Incremental shares to
reflect full dilution N/A N/A
Total shares for purposes
of calculating fully
diluted net income
per share
N/A N/A
Net income per common
share $0.08 $0.10
====== ======
Exhibit 11. Statement Re: Computation of Per Share
Earnings, cont.
Six Months Ended
7/29/95 7/30/94
------- -------
(In thousands, except per share data)
Net income $ 2,790 $ 1,723
Weighted average shares
outstanding during the period 15,760 15,987
Common equivalent shares --- ---
------ ------
Number of shares for purpose
of calculating net income per
common and common equivalent
share 15,760 15,987
====== ======
Incremental shares to
reflect full dilution N/A N/A
Total shares for purposes
of calculating fully
diluted net income
per share
N/A N/A
Net income per common
share $0.18 $0.11
====== ======
Exhibit 11. Statement Re: Computation of Per Share
Earnings, cont.
Twelve Months Ended
7/29/95 7/30/94
------- -------
(In thousands, except per share data)
Net income $ 17,970 $ 4,909
Weighted average shares
outstanding during the period 15,812 15,968
Common equivalent shares --- ---
------ -------
Number of shares for purpose
of calculating net income per
common and common equivalent
share 15,812 15,968
====== ======
Incremental shares to
reflect full dilution N/A N/A
Total shares for purposes
of calculating fully
diluted net income
per share N/A N/A
Net income per common
share $1.14 $0.31
====== =====
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.
By:/s/ William D. Richins
----------------------
William D. Richins
Chief Financial Officer
Dated: September 12, 1995