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 August 2, 1997 Commission File Number 0-15898
DESIGNS, INC.
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(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)
(781) 444-7222
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(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
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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 August 2, 1997
----- --------------------------------
Common 15,623,046 shares
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
August 2, 1997, August 3, 1996 and February 1, 1997
(In thousands, except share data)
(Unaudited)
August 2, August 3, February 1,
1997 1996 1997
--------- --------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 355 $ 15,771 $ 3,390
Short-term investments ---- ---- 5,887
Accounts receivable 234 421 558
Inventories (Note 6) 80,376 64,610 79,958
Income taxes deferred and refundable 14,115 2,230 1,160
Pre-opening costs, net 434 251 524
Prepaid expenses 5,269 4,056 4,834
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100,783 87,339 96,311
Property and equipment, net of accumulated
depreciation and amortization 40,275 41,000 39,216
Other assets:
Long-term investments ---- 5,766 ----
Deferred income taxes 2,700 2,737 2,743
Intangible assets 3,040 2,716 3,078
Other assets 251 662 412
-------- -------- --------
Total assets $147,049 $140,220 $141,760
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,893 $ 12,868 $ 12,194
Accrued expenses and other current
liabilities 11,444 11,787 7,046
Accrued rent 2,848 2,739 2,398
Reserve for store closings (Note 6) 6,123 ---- ----
Income taxes payable ---- ---- 1,353
Notes payable (Note 4) 12,950 1,000 1,000
-------- ------- -------
Total liabilities 50,258 28,394 23,991
Minority interest (Note 2) 5,397 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, 15,904,000, 15,819,000
and 15,873,000 shares issued at August 2,
1997, August 3, 1996 and February 1, 1997,
respectively 159 158 159
Additional paid-in capital 53,373 52,784 53,320
Retained earnings 39,689 52,513 59,393
Treasury stock at cost, 281,000 shares
at August 2, 1997 and February 1, 1997 (1,827) ---- (1,827)
--------- -------- --------
Total stockholders' equity 91,394 105,455 111,045
--------- -------- --------
Total liabilities and stockholders' equity $147,049 $140,220 $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
---------------------
August 2, August 3,
1997 1996
--------- ---------
Sales $ 64,543 $ 66,524
Cost of goods sold including
occupancy 67,128 45,959
--------- ---------
Gross profit (loss) (Note 6) (2,585) 20,565
Expenses:
Selling, general and administrative 16,949 17,177
Provision for impairment of assets and
store closings 6,046 -
Depreciation and amortization 2,881 2,666
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Total expenses 25,876 19,843
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Operating income (loss) (28,461) 722
Interest expense 255 44
Interest income 13 262
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Income (loss) before minority interest
and income taxes (28,703) 940
Less minority interest (410) 1
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Income (loss) before income taxes (28,293) 939
Provision (benefit) for income taxes (11,712) 385
-------- -------
Net income (loss) $ (16,581) $ 554
======== =======
Net income (loss) per common and
common equivalent share $ (1.06) $ 0.04
Weighted average common and common
equivalent shares outstanding 15,622 15,817
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
---------------------
August 2, August 3,
1997 1996
----------- ----------
Sales $ 120,013 $ 125,860
Cost of goods sold including
occupancy 109,112 89,138
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Gross profit (loss) (Note 6) 10,901 36,722
Expenses:
Selling, general and administrative 33,004 33,237
Provision for impairment of assets and
store closings 6,046 -
Depreciation and amortization 5,667 5,150
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Total expenses 44,717 38,387
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Operating income (loss) (33,816) (1,665)
Interest expense 406 88
Interest income 68 580
------- -------
Income (loss) before minority interest
and income taxes (34,154) (1,173)
Less minority interest (427) (144)
-------- --------
Income (loss) before income taxes (33,727) (1,029)
Provision (benefit) for income
taxes (13,963) (438)
-------- -------
Net income (loss) $ (19,764) $ (591)
======== =======
Net income (loss) per common and common
equivalent share $ (1.27) $ (0.04)
Weighted average common and common
equivalent shares outstanding 15,613 15,814
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
-----------------------
August 2, August 3,
1997 1996
--------- ---------
Sales $ 283,746 $ 302,605
Cost of goods sold including
occupancy 223,338 212,872
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Gross profit (loss) (Note 6) 60,408 89,733
Expenses:
Selling, general and administrative 65,703 70,110
Provision for impairment of assets and
store closings 6,046 -
Depreciation and amortization 10,920 9,955
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Total expenses 82,669 80,065
Operating income (loss) (22,261) 9,668
Interest expense 515 197
Interest income 654 1,448
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Income (loss) before minority interest
and income taxes (22,122) 10,919
Less minority interest 212 175
-------- --------
Income (loss) before income taxes (22,334) 10,744
Provision (benefit) for income
taxes (9,425) 4,352
-------- --------
Net income (loss) $ (12,909) $ 6,392
======== ========
Net income (loss) per common and
common equivalent share $ (0.82) $ 0.40
Weighted average common and common
equivalent shares outstanding 15,658 15,793
The accompanying notes are an integral part of
the consolidated financial statements.
DESIGNS, INC.
STATEMENTS OF CASH FLOWS
(In thousands-Unaudited)
Six Months Ended
----------------------
August 2, August 3,
1997 1996
----------- ----------
Cash flows from operating activities:
Net loss $ (19,764) $ (591)
Adjustments to reconcile to net cash
used for operating activities:
Depreciation and amortization 5,667 5,150
Minority interest (427) (144)
Loss on sale of investments 102 ------
Loss from disposal of property
and equipment 4 182
Changes in operating assets and liabilities:
Accounts receivable 239 52
Inventories (10,193) (6,602)
Income taxes deferred and refundable (14,308) (214)
Prepaid expenses (350) (1,182)
Reserve markdowns and store closings 17,123 ----
Accounts payable 4,700 4,683
Accrued expenses and other current
liabilities 4,398 3,995
Accrued rent 450 153
-------- -------
Net cash (used for) provided by operating
activities (12,359) 5,482
-------- -------
Cash flows from investing activities:
Additions to property and equipmet (7,399) (9,828)
Incurrence of pre-opening costs (320) (138)
Proceeds from disposal of property and
equipment 1 13
Sale and maturity of investments 5,888 6,168
Reduction in other assets 51 116
Distributions to joint venture partner (900) ----
-------- -------
Net cash used for investing activities (2,679) (3,669)
-------- -------
Cash flows from financing activities:
Increase in short-term notes payable 11,950 ----
Issuance of common stock under option
program (1) 53 17
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Net cash provided by financing activities 12,003 17
------- -------
Net increase (decrease) in cash and cash
equivalents (3,035) 1,830
Cash and cash equivalents:
Beginning of the year 3,390 13,941
------- ------
End of the quarter $ 355 $ 15,771
======= =======
Supplementary Cash Flow Disclosure
Cash paid:
Interest $ 395 $ 43
Taxes, net 287 722
(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 as well as a provision for
impairment of assets and store closings described in Note 6) 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 Stores(TM) 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, six and twelve
months ended August 2, 1997. Minority interest at August 2, 1997,
represents LDJV Inc.'s 30% interest in the OLS Partnership. During
the first six months 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 for payment
of taxes were required during the six months ended August 2, 1997
and August 3, 1996, respectively.
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 BankBoston, N.A., formerly 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
amounts 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 BankBoston, 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. At August 2, 1997, the Company was not in compliance with the
cash flow ratio covenant. The Company received a written waiver of this
covenant for the quarter ended August 2, 1997. At August 2, 1997, the
Company had outstanding commercial and trade letters of credit totaling
approximately $4.8 million and two outstanding standby letters of credit
totaling approximately $335,000.
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 BankBoston, 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 advances outstanding on the
last day of any fiscal year. No advances were outstanding under this
facility during the second quarter of fiscal 1997.
6. Provision for Impairment of Assets and Store Closings
In the second quarter of fiscal 1997, the Company recorded a pre-tax
charge of $20 million, or ($0.75) per share after tax, related to the
shift in strategy away from the Boston Traders(R) vertically integrated
private label concept to a strategy with greater emphasis on name brands.
This plan involves the liquidation of Boston Traders(R) brand products,
the closure of the Company's New York City product development office and the
planned closing of 17 Designs stores and 16 Boston Traders(R) Outlet
stores. The Company anticipates that its future private label requirements
will be satisfied by open market purchases of selected items that will
include the Boston Traders(R) label.
This pre-tax charge includes cash costs of approximately $6.1 million
related to lease terminations, cancellation of private label fabric
commitments for the remainder of fiscal 1997, severance associated with
the closing of the New York office, and other costs related to the
strategy shift. The remainder of the $20 million charge consists of
non-cash costs of approximately $13.9 million which include approximately
$12.4 million of markdowns at cost related to the liquidation of
existing and on order Boston Traders(R) brand product through the
end of fiscal 1997. The non-cash costs also include asset impairment charges
associated with the planned store closings. Merchandise markdowns and costs
associated with the cancellation of fabric commitments, which total
approximately $14 million, are accounted for in cost of goods sold. The
remaining amounts related to lease termination costs, asset impairment
charges, severance benefits, and other costs, which total approximately
$6 million, are accounted for in the provision for impairment of assets
and store closings. At August 2, 1997, $6.1 million is accrued in the
reserve for store closings and a $9.8 million markdown reserve is included
in inventory.
The estimated earnings and cash flow benefits expected, barring unforeseen
circumstances, to be derived from these actions for fiscal 1998 are $6.8
million and $7.7 million, and for fiscal 1999 are $10.6 million and
$8.7 million, respectively. These estimates include anticipated federal
income tax refunds related to net operating losses carried back to
prior years' taxable income, offset by cash outflows for lease termination
costs, severance benefits and other costs. Future cash flows are based
upon management's estimate of the period of time between store closings
and the final termination of the lease obligations. Barring unforeseen
circumstances, the Company anticipates that 12 to 14 of the stores
scheduled for closing during the next 18 months will be closed by the end
of fiscal 1997.
7. Recently Issued Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128 "Earnings per Share"("SFAS 128"), which modifies
the way in which earnings per share ("EPS") is calculated and disclosed. Upon
adoption of SFAS 128 for the fiscal period ending January 31, 1998, the
Company will disclose basic and diluted EPS and will restate all prior EPS
data presented. Basic EPS excludes dilution and is computed by dividing the
income available to the commom shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS, similiar to fully
diluted EPS, reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
commom stock or resulted in the issuance of commom stock that then shared in
the earnings of the entity. Management believes the adoption of SFAS 128
will not have a material impact on previously reported earnings per share.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 requires that changes in comprehensive income be shown
in a separate financial statement that is displayed with the same prominence
as other financial statements. SFAS 130 becomes effective for
fiscal years beginning after December 15, 1997. The Company will adopt this
Standard beginning in the first quarter of the fiscal year ending
January 30, 1999.
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standard No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies
new guidlines for determining a company's operating segments and related
requirements for disclosure. SFAS 131 becomes effective for fiscal
years beginning after December 15, 1997. The Company will adopt this
Standard for the fiscal year ending January 30, 1999.
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 1997 were $64.5 million as compared to
sales of $66.5 million in the second quarter of fiscal 1996. Sales for
the six month year to date and rolling twelve month periods decreased 5
percent and 6 percent, respectively, compared to the same periods in
the prior year. Comparable store sales decreased 5 percent for the second
quarter of fiscal 1997 and 6 percent for the six month year to date period
as compared to the same periods in fiscal 1996. Comparable stores are
retail locations open at least 13 months. Of the 155 stores that the
Company operated as of August 2, 1997, 143 were comparable stores. The
decreases in sales during these periods are 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 second quarter
of fiscal 1997 equaled (4.0) percent of sales as compared with 30.9 percent
of sales for the second quarter in the prior year. The decrease was
primarily due to merchandise markdowns related to Boston Traders(R) brand
products of $12.4 million and fabric commitment charges, recorded in the
second quarter. These charges negatively impacted gross margin by 21.6
percentage points. In addition, gross margin was affected negatively by
increased promotional activity in men's products across all store formats
and inventory shrink results recorded during the quarter. For the six month
and rolling twelve month periods ended August 2, 1997, gross margin
rate was 9 percent and 21 percent of sales respectively, as compared to 29
percent and 30 percent of sales for the same periods ended August 3, 1996.
The decreases for the six and rolling twelve month periods are similarly
attributable to markdowns associated with the liquidation of the Boston
Traders(R) brand products, increased promotional activities as well as
physical inventory shrink results recorded during the periods.
Selling, general and administrative expenses for the second quarter equaled
$16.9 million or 26.3 percent of sales, compared with $17.2 million, or 25.8
percent of sales in the prior year. Store payroll, the largest component of
selling, general and administrative expenses, equaled 12.1 percent of sales
for the three months ended August 2, 1997, compared with 11.6 percent of
sales for the same period last year. This increase is primarily a result
of sales decreases in the second quarter. The increase in store payroll
was partially offset by decreases in other store operating expenses as
the Company continued to focus on managing and controlling costs.
Selling, general and administrative expenses for the six months and rolling
twelve months ended August 2, 1997 equaled 27.5 percent and 23.2 percent
of sales as compared to 26.4 percent and 23.2 percent of sales in the
comparable periods in the prior year. The increase for the six month
period, as a percentage of sales, is similarly attributable to sales
decreases.
In the second quarter of fiscal 1997, the Company recorded a pre-tax
charge of $20 million, or ($0.75) per share after tax, related to the
shift in strategy away from the Boston Traders(R) vertically integrated
private label concept to a strategy with greater emphasis on name brands.
This plan involves the liquidation of Boston Traders(R) brand products,
the closure of the Company's New York City product development office and
the planned closing of 17 Designs stores and 16 Boston Traders(R) Outlet
stores. The Company anticipates that its future private label requirements
will be satisfied by open market purchases of selected items that will
include the Boston Traders(R) label. This pre-tax charge includes cash costs
of approximately $6.1 million related to lease terminations, cancellation of
private label fabric commitments for the remainder of fiscal 1997, severance
associated with the closing of the New York office, and other costs related
to the strategy shift. The remainder of the $20 million charge consists of
non-cash costs of approximately $13.9 million which include approximately
$12.4 million of markdowns at cost related to the liquidation of
existing and on order Boston Traders(R) product through the end of fiscal
1997. The non-cash costs also include asset impairment charges associated
with the planned store closings. Merchandise markdowns and costs
associated with the cancellation of fabric commitments, which total
approximately $14 million, are accounted for in cost of goods sold. The
remaining amounts related to lease termination costs, asset impairment
charges, severance benefits, and other costs, which total approximately
$6 million, are accounted for in the provision for impairment of assets
and store closings. At August 2, 1997, $6.1 million is accrued in
the reserve for store closings and a $9.8 million markdown reserve
is included in inventory.
Depreciation and amortization expense of $2.9 million for the second quarter
of fiscal 1997 increased by 8.0 percent compared with depreciation and
amortization expense of $2.7 million for the same period in fiscal 1996.
This increase is primarily due to capital expenditures for new store openings
and remodeled stores. For the six month and rolling twelve month periods,
depreciation and amortization expense increased by 10.0 percent and 9.7
percent, respectively, primarily due to Boston Trading Co.(R) store openings,
remodeled stores and the opening of one Levi's(R) Outlet store under the
joint venture.
Interest expense was $255,000 and $44,000 in the second quarter of fiscal
1997 and fiscal 1996, respectively. For the six months and rolling
12 month periods, interest expense was $406,000 and $515,000 as
compared to $88,000 and $197,000 in prior comparable periods. This
increase is primarily attributable to borrowings under the Company's
revolving credit facility during fiscal 1997. The Company anticipates
that interest expense will continue to exceed the expense recorded in
similar periods in fiscal 1996 as a result of borrowings under the
Company's credit facility. The Company had no borrowings under this
facility in the prior year.
Interest income for the second quarter of fiscal 1997 was $13,000 compared
to $262,000 in fiscal year 1996. For the six month and rolling 12
month periods interest income was $68,000 and $654,000 as compared to
$580,000 and $1.4 million for comparable periods in the prior year.
The decrease in interest income is attributable to a lower average
investment balance compared to the same periods in the prior year.
Net loss for the second quarter of fiscal year 1997 equaled ($16.6) million
or ($1.06) per share, as compared with net income of $554,000, or $0.04
per share in the second quarter of fiscal 1996. Net loss for the six month
periods ended August 2, 1997 and August 3, 1996 equaled ($19.8) million or
($1.27) per share as compared to ($591,000) or ($0.04) per share,
respectively. Net loss, on a rolling 12 month basis ending August 2, 1997,
was ($12.9) million or ($0.82) per share, as compared with income
of $6.4 million, or $0.40 per share for the comparable period in the
prior year. The results for the three, six and twelve months ended
August 2, 1997 include the recognition of a pre-tax charge of $20 million,
or ($0.75) per share after tax, related to the Company's shift in strategy
away from the Boston Traders(R) vertically integrated private label concept
to a strategy with greater emphasis on name brands as mentioned above.
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 and capital expenditures for
new and remodeled stores. The Company expects that cash flow from operations
and short-term borrowings will enable it to finance its current working
capital and remodeling requirements during the remainder of the
fiscal year.
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 six
months of fiscal 1997 was $12.4 million compared to cash provided by
operations of $5.5 million for the same period in the prior year.
Cash used in operations in the six months ended August 2, 1997 is primarily
attributable to the opening of six Boston Trading Co.(R) stores, one
Levi's(R) Outlet opened under the joint venture, increased purchases of
inventory for the Levi's(R) Outlet stores, and the timing of other working
capital accounts, combined with net losses.
The Company's cash and investment position at August 2, 1997 was
approximately $355,000, compared to approximately $21.5 million at the end of
the second 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 the sale, the Company realized a loss of $102,300. At the end of the
second quarter of fiscal 1997 the Company had net borrowings outstanding of
approximately $11.9 million under its revolving credit facility, described
below, compared to no borrowings under this facility at the end of the second
quarter of fiscal 1996.
The Company's working capital at August 2, 1997 was approximately $50.5
million, compared to $58.9 million at August 3, 1996. This decrease in
working capital was primarily attributable to negative cash flow from
operations, partially offset by the tax benefit recognized as a result
of net operating losses. Inventory, net of reserves, at August 2,
1997 was $80.4 million compared to $64.6 million at August 3, 1996.
The $15.8 million increase is primarily due to purchases for the Levi's(R)
Outlet stores and purchases of Boston Traders(R) brand products,
combined with slower than expected sales of Boston Traders(R) brand
merchandise during the second quarter of fiscal 1997. This increase was
partially offset by the liquidation of Boston Traders(R) brand products
beginning in the second quarter of fiscal 1997. Total inventory, net of
reserves, at the end of the first and second quarters of fiscal 1997 was
$104.1 million and $80.4 million, respectively. The $23.7 million
decrease in inventory from the end of the first quarter of fiscal 1997 is
attributable to the liquidation of Boston Traders(R) brand products as
well as increased sales in the Levi's(R) Outlet stores in the second quarter
as compared to the first quarter of fiscal 1997. At the end of the
second quarter of fiscal 1997 approximately $4.5 million (net of
markdown reserve), or 6 percent, of the total inventory consisted of Boston
Traders(R) brand product. The Company intends to satisfy its future
private label requirements with open market purchases of selected
items that will include 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)
and Dockers(R) brand products for the Levi's(R) Outlet stores.
The estimated earnings and cash flow benefits expected, barring unforeseen
circumstances, to be derived from the previously described $20 million
pre-tax charge taken for markdowns and store closings for fiscal 1998 are
$6.8 million and $7.7 million, and for fiscal 1999 are $10.6 million
and $8.7 million, respectively. These estimates include anticipated federal
income tax refunds related to net operating losses carried back to prior
years' taxable income, offset by cash outflows for lease termination costs,
severance benefits and other costs. Future cash flows are based upon
management's estimate of the period of time between store closings and the
final termination of the lease obligations. Barring unforeseen
circumstances, the Company anticipates that 12 to 14 of the stores scheduled
for closing during the next 18 months will be closed by the end of
fiscal 1997.
On August 2, 1997, the Company had outstanding commitments for Boston
Traders(R) brand product of approximately $7.4 million relating to Fall
and Holiday 1997 merchandise.
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 required the Company to source its own product
predominantly with vairous offshore vendors. To date, payment to these
vendors has been through the use of letters of credit. The Company
anticipates that the use of this payment method will be proportional to
its Boston Traders(R) brand product purchases and that the use of letters
of credit will decrease as remaining purchase commitments for Boston
Traders(R) brand products are satisfied.
On July 24, 1996, the Company entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with BankBoston, N.A., formerly BayBank,
N.A., and State Street Bank and Trust Company. The facility, which
terminates June 30, 1999, consists: (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 amounts
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 BankBoston, 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. At August 2,
1997, the Company was not in compliance with the cash flow covenant.
The Company received a written waiver of this covenant for the quarter
ended August 2, 1997. At the end of the second quarter, the Company
had outstanding letters of credit totaling approximately $4.8 million
and two outstanding standby letters of credit totaling approximately
$335,000.
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 Stores(TM) 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 second quarter of
fiscal 1997 the OLS Partnership owned and operated eleven Original Levi's
Stores(TM) and eleven Levi's(R) Outlet stores. The OLS Partnership does not
anticipate opening any additional stores for the remainder of fiscal 1997.
During the first six months 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 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 BankBoston, 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 the fiscal year.
There were no borrowings under this facility through August 2, 1997.
CAPITAL EXPENDITURES
During the first six months of fiscal 1997, the Company opened six new Boston
Trading Co.(R) stores, remodeled one Levi's(R) Outlet by Designs store and
five Boston Traders(R) Outlet stores. The OLS Partnership opened one new
Levi's(R) Outlet store. Total cash outlays of $7.1 million and $9.8 million
during the first six months 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. During the six month period ended
August 2, 1997, the Company closed one Designs store for which the lease
had expired.
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 through May 2, 1997. The
portion of the principal amount of the Purchase Note paid by the Company
depends upon whether its claims are satisfied by Boston Trading and its
stockholders.
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 August 2, 1997 expire in or
prior to fiscal 2009 and all, except for four such leases, expire in or
prior to fiscal 2011.
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 read 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 August 2, 1997
with the cash flow ratio covenant in the Credit Agreement.
ITEM 4. Submission of Matters to a Vote of Security Holders
On June 10, 1997, the Company held its Annual Meeting of Stockholders.
At the meeting, stockholders holding at 11,094,156 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 I. Shapiro and Peter L. Thigpen as directors of the
Company and no more than 3,776,921 shares were withheld from any one of
the foregoing.
At the meeting, stockholders holding 11,567,920 shares of Common Stock
cast votes in favor of a proposal to approve the Company's 1992 Stock
Incentive Plan, as amended, 2,234,141 shares were cast against the proposal
and stockholders holding 97,489 shares abstained from voting.
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 herein 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, BankBoston
N.A., formerly 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. ("SAI") 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 (included as Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q dated June 17, 1997, 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 (included as
Exhibit 99.2 to the Company's Quarterly Report on Form 10-Q dated
June 17, 1997, and incorporated herein by reference). *
* 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/ CAROLYN R. FAULKNER
-----------------------
Carolyn R. Faulkner
Vice President and
Chief Financial Officer
Dated September 15, 1997