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 May 3, 1997 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 02194
- ----------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(617) 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 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 May 3, 1997
----- -----------------------------
Common 15,621,743 shares
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
May 3, 1997, May 4, 1996 and February 1, 1997
(In thousands, except share data)
(Unaudited)
May 3, May 4, February 1,
1997 1996 1997
-------- -------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 119 $ 21,435 $ 3,390
Short-term investments ---- ---- 5,887
Accounts receivable 467 576 558
Inventories 104,112 64,752 79,958
Deferred income taxes 1,160 922 1,160
Prepaid income taxes 1,019 1,154 ---
Pre-opening costs, net 602 492 524
Prepaid expenses 5,757 4,021 4,834
--------- --------- --------
Total current assets 113,236 93,352 96,311
Property and equipment, net
of accumulated depreciation
and amortization 40,851 39,281 39,216
Other assets:
Long-term investments ---- 5,665 ----
Deferred income taxes 2,700 2,763 2,743
Intangible assets 3,053 2,783 3,078
Other assets 303 850 412
-------- --------- ---------
Total Assets $ 160,143 $ 144,694 $ 141,760
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 25,390 $ 20,170 $ 12,194
Accrued expenses and other
current liabilities 7,779 9,886 7,046
Accrued rent 2,593 2,414 2,398
Income taxes payabl ---- ---- 1,353
Notes payable (Note 4) 10,600 1,000 1,000
------- ------ ------
Total Liabilities 46,362 33,470 23,991
Minority Interest (Note 2) 5,807 6,371 6,724
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, 15,622,000,
15,812,000 and 15,873,000
shares issued at May 3, 1997,
May 4, 1996 and February 1, 1997,
respectively 159 158 159
Additional paid-in capital 53,371 52,769 53,320
Retained earnings 56,271 51,926 59,393
Treasury stock at cost,
281,000 shares
at May 3, 1997 and
February 1, 1997 (1,827) ---- (1,827)
Total Stockholders' equity 107,974 104,853 111,045
------- ------- -------
Total Liabilities and
stockholders' equity $ 160,143 $ 144,694 $ 141,760
======= ======= =======
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 Twelve Months Ended
------------------ -------------------
May 3, May 4, May 3, May 4,
1997 1996 1997 1996
----- ----- ----- -----
Sale $ 55,470 $ 59,336 $ 285,727 $ 302,932
Cost of goods sold including
occupancy 41,984 43,179 202,169 213,895
------ ------ ------- -------
Gross profit 13,486 16,157 83,558 89,037
Expenses:
Selling, general and
administrative 16,055 16,060 65,931 70,991
Depreciation and amortization 2,786 2,484 10,705 7,253
------ ------ ------ ------
Total expenses 18,841 18,544 76,636 78,244
------ ------ ------ ------
Operating income (loss) (5,355) (2,387) 6,922 10,793
Interest expense 151 44 304 218
Interest income 55 318 903 1,438
------ ------ ----- ------
Income (loss) before minority
interest and income taxes (5,451) (2,113) 7,521 12,013
Less minority interest (16) (145) 624 140
------ ------ ----- ------
Income (loss) before income taxes (5,435) (1,968) 6,897 11,873
Provision (benefit) for
income taxes (2,251) (823) 2,672 4,819
------ ---- ----- -----
Net income (loss) $ (3,184) $ (1,145) $ 4,225 $ 7,054
====== ====== ===== =====
Net income per share $ (0.20) $ (0.07) $ 0.27 $ 0.45
Weighted average shares
outstanding 15,606 15,812 15,720 15,778
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
STATEMENTS OF CASH FLOWS
(In thousands-Unaudited)
Three Months Ended
--------------------
May 3, May 4,
1997 1996
------- -------
Cash flows from operating activities:
Net loss $ (3,184) $ (1,145)
Adjustments to reconcile to net cash
used for operating activities:
Depreciation and amortization 2,786 2,484
Minority interest (16) (145)
Loss on sale of investments 102 17
Loss/(Gain) from disposal of
property and equipment 3 (6)
Changes in operating assets and
liabilities:
Accounts receivable 91 97
Inventories (24,154) (6,809)
Prepaid expenses (1,942) (53)
Income taxes payable (1,353) (1,154)
Accounts payable 13,196 11,985
Accrued expenses and other
current liabilities 733 2,002
Accrued rent 195 (172)
------- ------
Net cash (used for) provided by
operating activities (13,543) 7,101
------- ------
Cash flows from investing activities:
Additions to property and
equipment (4,161) (5,872)
Incurrence of pre-opening costs (104) 8
Proceeds from disposal of property
and equipment 1 8
Sale and maturity of investments 5,785 6,190
Reduction in other assets 51 57
Distributions to joint venture partner (900) ----
------- ------
Net cash provided by investing activities 672 391
------- ------
Cash flows from financing activities:
Net borrowings under credit facility 9,600 ----
Issuance of common stock under
option program (1) ---- 2
------- -----
Net cash provided by financing activities 9,600 2
------- -----
Net increase (decrease) in cash and
cash equivalents (3,271) 7,494
Cash and cash equivalents:
Beginning of the year 3,390 13,941
------- --------
End of the quarter $ 119 $ 21,435
======= ========
Supplementary Cash Flow Disclosure
Cash paid:
Interest $ 63 $ 43
Taxes, net 236 199
(1) Net of related tax effect.
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 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 February 1,
1997. The Company's business has historically 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
jeans and jeans-related products in Original Levi's(R) StoresTM and Levi's(R)
Outlet stores. LDJV Inc. is a wholly-owned subsidiary of Levi's Only Stores,
Inc., which is a wholly-owned subsidiary of Levi Strauss & Co. The joint
venture that was established by the Partnership Agreement is known as The
Designs/OLS Partnership (the "OLS Partnership"). The operating results of
the OLS Partnership are consolidated with the financial statements of the
Company for the three and twelve months ended May 3, 1997. Minority interest
at May 3, 1997, represents LDJV Inc.'s 30% interest in the OLS Partnership.
During the first quarter of fiscal 1997, the OLS Partnership distributed $3.0
million in "excess cash" to its partners in accordance with the terms of the
Partnership Agreement. The OLS Partnership is also obligated to distribute
funds to its partners enabling them to pay taxes associated with the related
earnings. No cash distributions were made for this purpose during the first
quarters of fiscal 1996 and fiscal 1997.
3. Boston Trading Ltd., Inc. Acquisition
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 principal
amount of $1 million (the "Purchase Note") payable in two equal annual
installments through May 2, 1997. In the first quarter of fiscal 1996, the
Company asserted rights of indemnification under the Asset Purchase
Agreement. In accordance with the Asset Purchase 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. Accordingly, the Company did not
make either of the $500,000 payments of principal due on the Purchase Note
on May 2, 1996 and May 2, 1997. The Company paid all interest due through
May 2, 1997, in accordance with the terms of the Purchase Note.
4. Credit Facility
On July 24, 1996, the Company entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with BayBank, N.A. and State Street Bank
and Trust Company under which these banks established a credit facility for
the Company. This credit facility, which terminates on June 30, 1999,
consists of: (i) a revolving line of credit permitting the Company to borrow
up to $15 million, and (ii) a commercial and trade letters of credit
facility under which letters of credit, in aggregate amount up to
$45 million, may be issued for the Company's inventory purchases. Under the
revolving line of credit portion of the facility, the Company has the
ability to issue standby letters of credit up to $750,000. Loans made under
this portion of the facility bear interest, subject to adjustment, at
BayBank, N.A.'s prime rate or LIBOR-based fixed rate. The Company may
increase the commercial and trade letters of credit portion of the facility
in increments of $15 million up to a total of $45 million. Under the Credit
Agreement, the Company has agreed not to pay cash dividends on its Common
Stock if such payment would cause the Company to be in default of certain
financial ratios. To date, the Company has not paid any cash dividends.
The terms of the Credit Agreement require the Company to maintain certain
net worth, inventory turnover and cash flow ratios. The Company received
a written waiver of its non-compliance at May 3, 1997 with the inventory
turnover covenant in the Credit Agreement. At May 3, 1997, the Company
had outstanding commercial and trade letters of credit totaling
approximately $7.3 million and two outstanding standby letters of credit
totaling approximately $436,000.
5. Joint Venture Credit Agreement
During the third quarter of fiscal 1996 the Company entered into a Credit
Agreement (the "OLS Credit Agreement") with the OLS Partnership and Levi's
Only Stores, Inc. ("LOS") under which the Company and LOS are committed to
make advances to the OLS Partnership in the amount of $3.5 million and $1.5
million, respectively. The facility bears interest at BayBank, N.A.'s prime
rate and terminates September 30, 1997, unless terminated earlier pursuant to
the provisions of the OLS Credit Agreement. This Agreement provides that
there will be no unpaid credit advance outstanding on the last day of any
fiscal year and for at least 30 consecutive days immediately following the
last day of each fiscal year. No advances were outstanding under this
facility during the first quarter of fiscal 1997.
6. Subsequent Event
On June 10, 1997, the Company announced that it will re-focus the product
mix in its Designs and Boston Trading Co.(SM) stores to one focused on Levi
Strauss & Co. and other name brand apparel and accessories. The Company
plans to reduce the proportion of private label merchandise in its Designs
stores beginning with the 1997 "Back to School" selling season and increase
Levi Strauss & Co. and other name brand products to approximately 70%
of the total merchandise mix. The Company also plans to shift the product
mix in its Boston Trading Co.(SM) stores by increasing the proportion of Levi
Strauss & Co. and other name brand products in these stores for fiscal 1998.
In connection with the re-focused strategy, the Company will close its New
York City private label product development office and eliminate positions
associated with that office. The Company also announced a headcount freeze
in its corporate office and plans not to replace non-essential corporate
office positions for the remainder of fiscal 1997. The Company has private
label purchase commitments totaling approximately $12.9 million, at cost,
existing for the period from July 1997 through January 1998. At May 3, 1997,
the Company had approximately $15 million, at cost, in private label
nventory. Based upon the performance to date of its private label
merchandise, the Company anticipates increased markdown activity during the
remainder of fiscal 1997 in connection with the sale of excess inventory.
The Company plans to satisfy its future private label requirements with
open market purchases of selected items that will carry the Boston
Traders(R) label.
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Sales for the first quarter of fiscal 1997 were $55.5 million as compared to
sales of $59.3 million in the first quarter of fiscal 1996. Comparable store
sales decreased 7 percent for the first quarter as compared to the same period
in the prior year. Comparable stores are retail locations that have been in
operation for at least one full fiscal year. Of the 154 stores the Company
operated as of May 3, 1997, 140 were comparable stores. This decrease in
sales was primarily due to sales shortfalls in Levi's(R) brand men's jeans
and the poor performance of the Company's private label products.
Gross margin rate (including the costs of occupancy) for the first quarter of
fiscal 1997 equaled 24.3 percent of sales as compared with 27.2 percent in the
prior year. The decrease was attributable to a decrease in merchandise margin
resulting from markdowns associated with the Company's private label products
which did not perform as planned, and an increase in occupancy expense as a
percentage of sales due to the effect of a lower than anticipated sales base
compared to the same period in the prior year.
Selling, general and administrative expenses increased as a percentage of
sales to 28.9 percent, compared with 27.1 percent of sales in the prior year.
Selling general and administrative expenses totaled $16.1 million for each of
the first quarters of fiscal 1996 and fiscal 1997. Store payroll expense,
the largest component of selling, general and administrative expenses,
equaled 13.3 percent of sales, compared with 11.3 percent in the prior year.
Advertising expense increased 66 percent, or by $283,000, over the prior
year due to the marketing and promotion of the Company's new Boston Trading
Co.(SM) stores. These increases were offset by decreases in other store
operating expenses as the Company continues to focus on managing and
controlling costs.
Depreciation and amortization expense of $2.8 million for the first quarter
of fiscal 1997 represents an increase of 12 percent as compared with
depreciation and amortization expense of $2.5 million for the same period in
fiscal 1996 due to the cost of new store openings and remodeled stores. For
the rolling 12 month period, depreciation and amortization increased 48
percent, primarily due to capital expenditures associated with the Company's
new corporate offices, the timing of store openings as well as upgrades of
information and technology systems.
Interest expense was $151,000 and $44,000 in the first quarter of fiscal 1997
and fiscal 1996, respectively. On a rolling 12 month basis, interest expense
increased to $304,000 as compared to $218,000 in the prior comparable period.
This increase is primarily attributable to borrowings under the Company's
revolving credit facility during the first quarter of fiscal 1997. The
Company anticipates that interest expense will continue to increase in fiscal
1997 as a result of borrowings under the Company's credit facility.
Interest income for the first quarter of fiscal 1997 was $55,000 compared to
$318,000 in fiscal year 1996. For the rolling 12 month period, interest
income of $903,000 decreased by 37 percent from $1.4 million in the prior
comparable period. The decrease in interest income is attributable to a
lower average investment balance compared to the same periods last year.
The Company anticipates that interest income will continue to decline in
fiscal 1997 reflecting further declines in investment balances.
Net loss for the first quarter of fiscal year 1997 equaled ($3.2) million or
($0.20) per share, as compared with a net loss of ($1.1) million, or ($.07)
per share in the first quarter of fiscal 1996. Net income, on a rolling 12
month basis, was $4.2 million or $0.27 per share in the 12 month period, as
compared with $7.1 million, or $0.45 per share in the prior comparable
period.
SEASONALITY
The Company's business is seasonal, reflecting increased consumer buying in
the "Fall" 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, including cash
outlays associated with inventory purchases, the development of the Company's
private label product line and capital expenditures for new and remodeled
stores, information technology and acquisitions.
On June 10, 1997, the Company announced that it will re-focus the product
mix in its Designs and Boston Trading Co.(SM) stores to one focused on Levi
Strauss & Co. and other name brand apparel and accessories. The Company
plans to reduce the proportion of private label merchandise in its Designs
stores beginning with the 1997 "Back to School" selling season and increase
Levi Strauss & Co. and other name brand products to approximately 70% of the
total merchandise mix. The Company also plans to shift the product mix in
its Boston Trading Co.(SM) stores by increasing the proportion of Levi
Strauss & Co. and other name brand products in these stores for fiscal 1998.
In connection with the re-focused strategy, the Company will close its New
York City private label product development office and eliminate positions
associated with that office. The Company also announced a headcount freeze
in its corporate office and plans not to replace non-essential corporate
office positions for the remainder of fiscal 1997. The Company plans to
satisfy its future private label requirements with open market purchases of
selected items that will carry the Boston Traders(R) label.
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 in operations for the first three
months of fiscal 1997 was $13.5 million as compared to cash provided by
operations of $7.1 million for the same period in the prior year. Cash used
in operations in the first quarter of fiscal 1997 is primarily attributable
to increased purchases for the Levi's(R) Outlet stores, inventory purchases
of private label products associated with the opening of Boston Trading
Co.(SM) stores, and the timing of other working capital accounts, combined
with slower than expected sales of Levi's(R) brand men's jeans and the
Company's private label products.
The Company's cash position at May 3, 1997 was approximately $119,000,
compared to $21.4 million at the end of the first quarter of fiscal 1996.
During the first quarter of fiscal 1997, the Company sold its remaining
short-term investments of $5.9 million. As a result of this sale, the
Company realized a loss of $102,300. As described below, at May 3, 1997,
the Company had net borrowings outstanding equal to $9.6 million under its
revolving credit facility, compared to no borrowings under this facility at
the end of the first quarter of fiscal 1996. The Company anticipates that
it will borrow up to a total of $15 million under the revolving line of
credit portion of the credit facility during the second and third quarters
of fiscal 1997. The Company also anticipates that the amount of the
outstanding letters of credit will decrease during this same period.
The Company's working capital at May 3, 1997 was approximately $66.9 million,
compared to $59.8 million at May 4, 1996. This increase in working capital
was primarily attributable to seasonal inventory purchases. At May 3, 1997,
total inventory equaled $104.1 million, reflecting an increase of 61 percent,
or $39.4 million, as compared to total inventory at the end of the first
quarter of fiscal 1996. This increase was primarily due to seasonal
inventory purchases described above, and special purchases of Levi's(R)
brand products for the Levi's(R) Outlet stores. At the end of the first
quarter of fiscal 1997, the Company had approximately $15 million, at cost,
in private label inventory, and purchase commitments totaling approximately
$12.9 million, at cost, existing for the period from July 1997 through
January 1998. Based upon the performance to date of its private label
merchandise, the Company anticipates increased markdown activity during the
remainder of fiscal 1997 in connection with the sale of excess inventory.
The Company will satisfy its future private label requirements with open
market purchases of selected items that carry the Boston Traders(R) label.
The Company continues to evaluate and, within the discretion of management,
act upon opportunities to purchase substantial quantities of Levi's(R) brand
products for the Levi's(R) Outlet stores.
The Company's trade payables to Levi Strauss & Co., its principal vendor,
generally are due 30 days after the date of invoice. The Boston Traders(R)
brand product requires the Company to source its own product predominantly
with various offshore vendors. To date, payment to these vendors has been
through the use of letters of credit, which require payment upon
presentation of shipping documents. The Company anticipates that the
use of this payment method will be proportional to its Boston Traders(R)
brand product purchases.
On July 24, 1996, the Company entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with BayBank, N.A. and State Street Bank
and Trust Company. The facility, which terminates June 30, 1999, consists
of: (i) a revolving line of credit permitting the Company to borrow up to
$15 million, and (ii) a commercial and trade letters of credit facility
under which letters of credit, in aggregate amount up to $45 million, may
be issued for the Company's inventory purchases. Under the revolving line
of credit portion of the facility, the Company has the ability to issue
standby letters of credit up to $750,000. Loans made under this portion of
the facility bear interest, subject to adjustment, at BayBank, N.A.'s prime
rate or LIBOR-based fixed rate. The Company may increase the commercial and
trade letters of credit portion of the facility in increments of $15 million
up to a total of $45 million. The terms of the Credit Agreement require the
Company to maintain certain net worth, inventory turnover and cash flow
ratios. The Company received a written waiver of its non-compliance at May
3, 1997, with the inventory turnover covenant in the Credit Agreement. At
the end of the first quarter, the Company had outstanding letters of credit
totaling approximately $7.3 million and two outstanding standby letters of
credit totaling approximately $436,000.
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the
Company, and a subsidiary of Levi's Only Stores, Inc., a wholly-owned
subsidiary of Levi Strauss & Co., entered into a partnership agreement (the
"Partnership Agreement") to sell Levi's(R) brand jeans and jeans-related
products. The joint venture that was established by the Partnership
Agreement is known as The Designs/OLS Partnership (the "OLS Partnership").
The term of the joint venture is ten years; however, the Partnership
Agreement contains certain exit rights that enable either partner to buy or
sell its interest in the joint venture after five years. The Company
previously announced that the OLS Partnership may open up to thirty-five to
fifty Original Levi's(R) StoresTM and Levi's(R) Outlet stores throughout
eleven Northeast states and the District of Columbia throughout the end of
fiscal 1999. At the end of the first quarter of fiscal 1997 there were
eleven Original Levi's(R) Stores and eleven Levi's(R) Outlet stores.
During the first quarter of fiscal 1997, the OLS Partnership distributed $3.0
million in "excess cash" to its partners in accordance with the terms of the
Partnership Agreement. It is the intention of the partners in the joint
venture that additional working capital for the joint venture's future
expansion will come from its operations, capital contributions, loans from
the partners and borrowings from third parties.
During the third quarter of fiscal 1996, the Company entered into a Credit
Agreement (the "OLS Credit Agreement") with the OLS Partnership and Levi's
Only Stores, Inc. under which the Company and Levi's Only Stores, Inc. are
committed to make advances to the OLS Partnership in amounts up to $3.5
million and $1.5 million, respectively. This credit facility bears interest
at BayBank, N.A.'s prime rate and terminates on September 30, 1997, unless
terminated earlier pursuant to other provisions of the OLS Credit Agreement.
The OLS Credit Agreement also provides that there may not be credit advances
outstanding on the last day of any fiscal year and for at least 30 consecutive
days immediately following the last day of each fiscal year. There were no
borrowings under this facility through May 3, 1997. The Company has not
established a cash reserve to fund this commitment.
CAPITAL EXPENDITURES
During the first quarter of fiscal 1997, the Company opened five new Boston
Trading Co.(SM) stores and remodeled one Levi's(R) Outlet by Designs store.
Total cash outlays of $4.1 million and $5.9 million during the first quarters
of fiscal 1997 and fiscal 1996, respectively, represent the costs of new and
remodeled stores as well as corporate office capital spending during the
periods. As of the quarter end, the Company had closed one Designs store for
which the lease had expired. Subsequent to the quarter ended May 3, 1997,
the OLS Partnership opened one new Levi's(R) Outlet store.
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. The Company paid $5.4 million in cash,
financed by operations, and delivered a non-negotiable promissory note in
the principal amount of $1.0 million (the "Purchase Note"). The principal
amount of the Purchase Note was payable in two equal installments through
May 1997. In the first quarter of fiscal 1996, the Company asserted certain
indemnification rights under the Asset Purchase Agreement. In accordance
with the Asset Purchase 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. Accordingly, the Company did not make either of the
$500,000 payments of principal on the Purchase Note that were due on May 2,
1996 and May 2, 1997. The Company has paid all interest in accordance with
the terms of the Purchase Note. Any portion of the principal amount of the
Purchase Note which may be paid by the Company depends upon whether the
Company's claims are satisfied by Boston Trading and its stockholders.
In the first quarter of fiscal 1997, the Company introduced a retail store
concept featuring its Boston Traders(R) brand under the name "Boston Trading
Co." These stores are located in upscale malls and one urban location. The
Company recently announced its plans to increase the percentage of Levi
Strauss & Co. and other brand name products in these stores for fiscal 1998.
The Company also announced that it plans to satisfy its future private label
requirements with open market purchases of selected items that will carry
the Boston Traders(R) label. Barring any unforeseen circumstances, the
Company plans to open one additional Boston Trading Co.(SM) store in fiscal
1997.
In November 1996, the Company and Levi Strauss & Co. entered into a trademark
license agreement (the "Outlet License Agreement") which provides the terms
upon which the Company is permitted to use the Levi Strauss & Co. batwing
trademark in connection with the operations of the Company's Levi's(R)
Outlet by Designs stores. The Outlet License Agreement authorizes the
Company, subject to certain terms and conditions, to operate the Levi's(R)
Outlet by Designs stores using the Levi's(R) batwing trademark in 25 states
in the eastern portion of the United States. Subject to certain default
provisions, the term of the Outlet License Agreement will expire on
July 31, 2001, and the license for any store will be for a period
co-terminous with the lease term for such store (including extension
options), unless Levi Strauss & Co. otherwise extends the term of the
license for that particular store. Levi Strauss & Co. has no obligation to
extend the license beyond the initial term described above. The leases
(including extension options) relating to approximately one-half of the
Levi's(R) Outlet by Designs stores open at May 3, 1997 expire in or prior to
fiscal 2009 and all, except for four such leases, expire in or prior to fiscal
2011.
The Company expects that cash flow from operations and short-term borrowings
will enable it to finance its current working capital, remodeling and
expansion requirements during the remainder of the fiscal year.
The Company continually evaluates discretionary investments in new projects
that may complement its existing business. Further, as leases expire,
the Company continues to evaluate the performance of its existing stores.
As a result of this process, certain store locations could be closed
or relocated within a center in the future.
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 the Company's Current Report on Form 8-K, previously filed with
the United States Securities and Exchange Commission on April 22, 1997,
which identifies certain risks and uncertainties that may have an impact
on future earnings and the direction of the Company.
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 3. Default Upon Senior Securities
As discussed above, the Credit Agreement requires the Company to maintain
certain net worth, inventory turnover and cash flow ratios. The Company
received a written waiver of its non-compliance at May 3, 1997 with the
inventory turnover covenant in the Credit Agreement.
ITEM 6. Exhibits and Reports on Form 8-K
A. Reports on Form 8-K:
The Company reported under item 5 on Form 8-K, dated April 22, 1997,
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.
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 establishing 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 3.1 to the
Company's Quarterly Report on Form 10-Q dated December 12, 1995,
and incorporated herein by reference). *
4.1 Shareholder Rights Agreement dated as of May 1, 1995 between the
Company and its transfer agent (included as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated May 1, 1995, and
incorporated herein by reference). *
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 by herein by reference). *
10.3 1992 Stock Incentive Plan, as amended (included as Exhibit A to the
Company's definitive proxy statement dated May 9, 1997, and
incorporated by reference). *
10.4 Senior Executive Incentive Plan effective beginning with the fiscal
year ended February 1, 1997 (included as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q dated September 17, 1996,
and incorporated herein by reference). *
10.5 Trademark License Agreement between the Company and Levi Strauss &
Co. dated as of November 15, 1996 (included as Exhibit 10.5 to the
Company's Annual Report on Form 10-K dated May 1, 1997, and
incorporated herein by reference). *
10.6 Amended and Restated Credit Agreement among the Company, BayBank,
N.A., and State Street Bank and Trust Company dated as of July 24,
1996 (included as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated August 7, 1996, 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 28, 1995, and incorporated
herein by reference). *
10.8 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). *
10.9 Partnership Agreement of The Designs/OLS Partnership (the "OLS
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). *
10.10 Glossary executed by the Designs Partner, the Company, the LOS
Partner, LOS, LS&CO, LSAI and the OLS 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). *
10.11 Sublicense Agreement between LOS and the LOS Partner dated January
28, 1995 (included as Exhibit 10.4 to the Company's Current Report
on Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.12 Sublicense Agreement between the LOS Partner and the OLS
Partnership dated January 28, 1995 (included as Exhibit 10.5 to the
Company's Current Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.13 License Agreement between the Company and the OLS Partnership dated
January 28, 1995 (included as Exhibit 10.6 to the Company's Current
Report on Form 8-K dated April 24, 1995, and incorporated herein
by reference). *
10.14 Administrative Services Agreement between the Company and the OLS
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). *
10.15 Credit Agreement among the Company, LOS and the OLS Partnership
dated as of October 1, 1996 (included as Exhibit 10.15 to the
Company's Quarterly Report on Form 10-Q dated December 17, 1996,
and incorporated herein by reference). *
10.16 Asset Purchase Agreement between LOS and the Company relating to
the sale 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 between LOS and the Company relating to
the sale of a store located in Cambridge Massachusetts dated
January 28, 1995 (included as Exhibit 10.10 to the Company's
Current Report on Form 8-K dated April 24, 1995, and incorporated
herein by reference). *
10.18 Asset Purchase Agreement among Boston Trading Ltd., Inc., Designs
Acquisition Corp., the Company and others dated April 21, 1995
(included as 10.16 to the Company's Quarterly Report on Form 10-Q
dated September 12, 1995, and incorporated herein by reference). *
10.19 Non-Negotiable Promissory Note between the Company and Atlantic
Harbor, Inc., formerly known as Boston Trading Ltd., Inc., dated
May 2, 1995 (included as 10.17 to the Company's Quarterly Report on
Form 10-Q dated September 12, 1995, and incorporated herein by
reference). *
10.20 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). *
10.21 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). *
10.22 Employment Agreement dated as of October 16, 1995 between the
Company and Mark S. Lisnow (included as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated December 6, 1995, and
incorporated herein by reference). *
10.23 Employment Agreement dated as of May 9, 1997 between the Company
and Carolyn R. Faulkner.
10.24 Employment Separation Agreement dated as of August 7, 1996 between
the Company and William D. Richins (included as Exhibit 10.26 to
the Company's Quarterly Report on Form 10-Q dated September 17,
1996, and incorporated herein by reference). *
11 Statement re: computation of per share earnings.
27 Financial Data Schedule.
99.1 Report of the Company dated April 22, 1997 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 (included as Exhibit 99 to the Company's Annual Report
on Form 10-K dated May 1, 1997, and incorporated herein by
reference). *
99.2 Press release of the Company dated June 10, 1997.
* Previously filed with the Securities and Exchange Commission.
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/ JOEL H. REICHMAN
-----------------------
Joel H. Reichman
President and
Chief Executive Officer
Dated: June 17, 1997