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 November 1, 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)
(781) 444-7222
------------------------
(Registrant's telephone
number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities 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 November 1, 1997
------ ----------------------------------
Common 15,688,416 shares
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
November 1, 1997, November 2, 1996 and February 1, 1997
(In thousands, except share data)
(Unaudited)
November 1, November 2, February 1,
1997 1996 1997
----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,402 $ 19,954 $ 3,390
Short-term investments ---- ---- 5,887
Accounts receivable 358 838 558
Inventories (Note 6) 82,849 70,766 79,958
Income taxes deferred and
refundable 14,603 922 1,160
Pre-opening costs, net 242 202 524
Prepaid expenses 4,362 5,142 4,834
-------- -------- --------
104,816 97,824 96,311
Property and equipment, net of
accumulated depreciation and
amortization 38,205 39,652 39,216
Other assets:
Long-term investments ---- 5,847 ----
Deferred income taxes 2,700 2,720 2,743
Intangible assets 3,010 3,128 3,078
Other assets 253 586 412
--------- --------- ---------
Total Assets $ 148,984 $ 149,757 $ 141,760
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,229 $ 17,476 $ 12,194
Accrued expenses and other
current liabilities 7,551 10,354 7,046
Accrued rent 2,739 2,737 2,398
Reserve for store closings
(Note 6) 5,040 ---- ----
Income taxes payable ---- 1,789 1,353
Notes payable (Note 4) 10,000 1,000 1,000
--------- --------- ---------
Total Liabilities 52,559 33,356 23,991
Minority Interest (Note 2) 5,427 6,510 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, 15,969,000,
15,752,000 and 15,873,000 shares
issued at November 1, 1997,
November 2, 1996 and February 1,
1997, respectively 160 159 159
Additional paid-in capital 53,541 53,307 53,320
Retained earnings 39,124 57,201 59,393
Treasury stock at cost, 281,000
shares at November 1, 1997 and
February 1, 1997 and 120,500
shares at November 2, 1996 (1,827) (776) (1,827)
--------- --------- ---------
Total Stockholders' equity 90,998 109,891 111,045
--------- --------- ---------
$ 148,984 $ 149,757 $ 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
-------------------------
November 1, November 2,
1997 1996
----------- ----------
Sales $ 77,459 $ 84,958
Cost of goods sold including
occupancy 58,659 57,312
---------- ----------
Gross profit (Note 6) 18,800 27,646
Expenses:
Selling, general and administrative 16,466 17,025
Provision for impairment of assets
and store closings (Note 6) ---- ----
Depreciation and amortization 2,799 2,704
---------- ----------
Total expenses 19,265 19,729
---------- ----------
Operating income (loss) (465) 7,917
Interest expense 258 46
Interest income 26 325
---------- ----------
Income (loss) before minority interest
and income taxes (697) 8,196
Less minority interest 240 248
---------- ----------
Income (loss) before income taxes (937) 7,948
Provision (benefit) for income
taxes (370) 3,284
---------- ----------
Net income (loss) $ (567) $ 4,664
========== ==========
Net income (loss) per common and
common equivalent share $ (0.04) $ 0.30
Weighted average common and
common equivalent shares outstanding 15,641 15,810
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)
Nine Months Ended
-------------------------
November 1, November 2,
1997 1996
----------- -----------
Sales $ 197,472 $ 210,818
Cost of goods sold including
occupancy 167,771 146,450
---------- ----------
Gross profit (Note 6) 29,701 64,368
Expenses:
Selling, general and administrative 49,470 50,262
Provision for impairment of assets
and store closings (Note 6) 6,046 ----
Depreciation and amortization 8,466 7,854
---------- ---------
Total expenses 63,982 58,116
---------- ---------
Operating income (loss) (34,281) 6,252
Interest expense 664 134
Interest income 94 905
---------- ---------
Income (loss) before minority
interest and income taxes (34,851) 7,023
Less minority interest (187) 104
---------- ---------
Income (loss) before income
taxes (34,664) 6,919
Provision (benefit) for income
taxes (14,333) 2,846
---------- ---------
Net income (loss) $ (20,331) $ 4,073
========== =========
Net income (loss) per common
and common equivalent share $ (1.30) $ 0.26
Weighted average common and
common equivalent shares outstanding 15,623 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
-------------------------
November 1, November 2,
1997 1996
----------- -----------
Sales $ 276,247 $ 298,346
Cost of goods sold including
occupancy 224,685 210,281
---------- ---------
Gross profit (Note 6) 51,562 88,065
Expenses:
Selling, general and administrative 65,144 68,682
Provision for impairment of assets
and store closings (Note 6) 6,046 ----
Depreciation and amortization 11,015 10,312
---------- ---------
Total expenses 82,205 78,994
---------- ---------
Operating income (loss) (30,643) 9,071
Interest expense 727 176
Interest income 355 1,380
---------- ---------
Income (loss) before minority
interest and income taxes (31,015) 10,275
Less minority interest 204 134
---------- ---------
Income (loss) before income taxes (31,219) 10,141
Provision (benefit) for income
taxes (13,079) 4,119
---------- ---------
Net income (loss) $ (18,140) $ 6,022
========== =========
Net income (loss) per common and
common equivalent share $ (1.16) $ 0.38
Weighted average common and
common equivalent shares outstanding 15,616 15,803
The accompanying notes are an integral part of
the consolidated financial statements.
DESIGNS,INC.
STATEMENTS OF CASH FLOWS
(In thousands-Unaudited)
Nine months ended
---------------------------
November 1, November 2,
1997 1996
----------- -----------
Cash flows from operating
activities:
Net income (loss) $ (20,331) $ 4,073
Adjustments to reconcile to net cash
used for operating activities:
Depreciation and amortization 8,466 7,854
Minority interest (187) 104
Loss on sale of investments 102 17
Loss from disposal of property
and equipment 26 390
Changes in operating assets and
liabilities:
Accounts receivable 200 (365)
Inventories (2,891) (12,758)
Prepaid expenses 472 (1,173)
Reserve for store closing 5,347 ----
Income taxes payable (14,796) 1,789
Accounts payable 15,035 9,291
Accrued expenses and other
current liabilities 505 2,464
Accrued rent 341 151
------- -------
Net cash (used for) provided by
operating activities (7,711) 11,837
------- -------
Cash flows from investing activities:
Additions to property and
equipment (7,115) (11,163)
Incurrence of pre-opening costs (327) (265)
Proceeds from disposal of
property and equipment 154 61
Sale and maturity of investments 5,888 6,126
Reduction in other assets 12 171
Distributions to joint venture partner (1,110) ----
------- --------
Net cash used for investing activities (2,498) (5,070)
------- --------
Cash flows from financing activities:
Net borrowings under credit facility 9,000 ----
Purchase of treasury stock ---- (776)
Issuance of common stock under
option program (1) 221 22
------- -------
Net cash provided by (used for)
financing activities 9,221 (754)
------- -------
Net increase (decrease) in cash and
cash equivalents (988) 6,013
Cash and cash equivalents:
Beginning of the year 3,390 13,941
-------- --------
End of the quarter $ 2,402 $ 19,954
======== ========
Supplementary Cash Flow Disclosure
Cash paid:
Interest $ 508 $ 84
Taxes, net 415 940
(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 StoresTM and Levi's(R) Outlet
stores. LDJV Inc. is a wholly-owned subsidiary of Levi's Only Stores, Inc.
("LOS"), 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, nine and twelve months ended November 1, 1997.
Minority interest at November 1, 1997, represents LDJV Inc.'s 30% interest
in the OLS Partnership. During the first nine months of fiscal 1997, the
OLS Partnership distributed $3.7 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 nine months ended November 1, 1997
and $110,000 was paid to the partners for this purpose for the nine months
ended November 2, 1996.
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 interest on the original principal amount of
the Purchase Note through May 2, 1996 and has continued to pay interest
thereafter through November 2, 1997 on $500,000 of principal.
4. Credit Facility
On December 10, 1997, subsequent to the end of the third quarter, the Company
entered into a Credit Agreement (the "Credit Agreement") with BankBoston, N.A.
The credit facility established by the Credit Agreement, which terminates on
June 30, 1999, consists of a revolving line of credit permitting the Company
to borrow up to $25 million. Under the facility, the Company may cause
BankBoston to issue documentary and standby letters of credit up to
$2 million. Availability of the unused revolving line of credit is subject to
borrowing base requirements and compliance with certain earnings, net worth
and inventory turnover covenants and a cash flow ratio covenant which is
effective for the fourth quarter of fiscal 1998. The Company's borrowings
under the credit facility are secured by a security interest in all of the
Company's Levi Strauss & Co. brand inventory, accounts receivable and certain
intangible assets of the Company, excluding the assets of the OLS Partnership
and the Company's Boston Traders(R) trademark and related trademarks. The
security interest may be released when the Company achieves certain minimum
cash flow ratio requirements. At the option of the Company, borrowings under
this facility bear interest at BankBoston, N.A.'s prime rate or at LIBOR-based
fixed rates (depending upon the Company's quarterly ratio of cash flow to
fixed charges). 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.
At November 1, 1997, the Company was not in compliance with the cash flow
ratio covenant included in its previous Amended and Restated Credit Agreement
dated as of July 24, 1996 with BankBoston, N.A. and State Street Bank and
Trust Company (the "1996 Credit Agreement"). Upon entering into the new
Credit Agreement, BankBoston, N.A. and State Street Bank and Trust Company
waived compliance with this covenant under the 1996 Credit Agreement for the
quarter ended November 1, 1997. At November 1, 1997, the Company had no
outstanding commercial and trade letters of credit and two outstanding standby
letters of credit totaling approximately $212,000.
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 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. During the
third quarter of fiscal year 1997, the term of the OLS Credit Agreement was
extended through September 30, 1998, unless earlier terminated 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 through the
third 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
back to name brands. This plan involves the liquidation of Boston Traders(R)
brand products and the closure of the Company's New York City product
development office. Concurrent with this shift in strategy, the Company
plans to close 17 Designs stores and 16 Boston Traders(R) Outlet stores. The
Company anticipates that its future private label requirements may 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 then 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 for the nine and twelve months ended November 1, 1997. 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 for the nine and twelve months ended November 1, 1997. At
November 1, 1997, $5.0 million is accrued in the reserve for store closings and
a $5.4 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 closing all 33 stores by or near
the end of fiscal 1997.
7. Amendment to the Shareholders Rights Plan
On October 6, 1997, the Board of Directors approved an amendment to the
Company's Shareholder Rights Agreement dated May 1, 1995, pursuant to which
the definition of an "Acquiring Person" was amended. The definition of
Acquiring Person now allows a person who is and continues to be permitted to
file Schedule 13G, in lieu of Schedule 13D, pursuant to the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder, to be beneficial owner of less than 20% of the shares of the
Company's Common Stock then outstanding without becoming an
"Acquiring Person."
8. 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 common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS, similar 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
common stock or resulted in the issuance of common 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 on 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 Standards Board issued Statement of
Financial Accouting Standard No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new
guidelines 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 third quarter of fiscal 1997 were $77.5 million as compared to
sales of $84.9 million in the third quarter of fiscal 1996. Sales for the
nine month year to date and rolling twelve month periods decreased 6 percent
and 7 percent, respectively, compared to the same periods in the prior year.
Comparable store sales decreased 11 percent for the third quarter of fiscal
1997 and 8 percent for the nine 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
November 1, 1997, 146 were comparable stores. The decreases in sales during
these periods are primarily due to continued sales decreases in Levi's(R)
brand men's jeans and tops, partially offset by increased sales of women's
Levi's(R) brand jeans and men's and women's Dockers(R) brand apparel.
Gross margin rate (including the costs of occupancy) for the third quarter of
fiscal 1997 equaled 24.3 percent of sales as compared with 32.5 percent of
sales for the third quarter in the prior year. The decrease was primarily
due to a decrease in merchandise margin resulting from promotional markdowns
associated with Levi's(R) brand products, a decrease in initial margins on
certain outlet store merchandise, inventory shrinkage and an increase in
occupancy costs as a percentage of sales due to the effect of the lower
sales base as compared to the prior year. For the nine month and rolling
twelve month periods ended November 1, 1997, gross margin rate was
15.2 percent and 18.9 percent of sales, respectively, as compared to
30.5 percent and 29.5 percent of sales, respectively, for the same periods
ended November 2, 1996. The decreases for the nine and rolling twelve month
periods are primarily attributable to merchandise markdowns of $12.4 million
and fabric commitment charges of $1.6 million taken in the second quarter of
fiscal 1997 related to Boston Traders(R) brand products as well as increased
promotional markdowns on Levi's(R) brand products and unfavorable shrink
results recorded during the nine month period ended November 1, 1997.
Selling, general and administrative expenses for the third quarter equaled
$16.5 million or 21.3 percent of sales, compared with $17.0 million, or
20.0 percent of sales in the third quarter in the prior year. Store payroll,
the largest component of selling, general and administrative expenses, equaled
9.9 percent of sales for the three months ended November 1, 1997, compared
with 9.0 percent of sales for the same period last year. This increase is
primarily a result of sales decreases in the third quarter. The increase in
store payroll was partially offset by decreases in other operating expenses as
the Company continued to focus on managing and controlling costs. Selling,
general and administrative expenses for the nine month and rolling twelve
month periods ended November 1, 1997 equaled 25.1 percent and 23.6 percent of
sales, respectively, as compared to 23.8 percent and 23.0 percent of sales
in the comparable periods in the prior year. These increases, as a
percentage of sales, are primarily 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
back to name brands. This plan involves the liquidation of Boston Traders(R)
brand products and the closure of the Company's New York City product
development office. Concurrent with this shift in strategy, the Company plans
to close 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 may include the
Boston Traders(R) label. This pre-tax charge include 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 consisted of
non-cash costs of approximately $13.9 million which include approximately
$12.4 million of markdowns at cost related to the liquidation of then
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 for the nine months and
twelve months ended November 1, 1997. 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 for the nine and twelve
months ended November 1, 1997. At November 1, 1997, $5.0 million is accrued
in the reserve for store closings and a $5.4 million markdown reserve is
included in inventory.
Depreciation and amortization expense of $2.8 million for the third quarter of
fiscal 1997 increased by 3.5 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 nine month and rolling twelve month periods,
depreciation and amortization expense increased by 7.8 percent and
6.8 percent, respectively, primarily due to Boston Trading Co.(R) store
openings, remodeled stores and one Levi's(R) Outlet store opened under the
joint venture.
Interest expense was $258,000 and $46,000 in the third quarter of fiscal 1997
and fiscal 1996, respectively. For the nine month and rolling 12 month
periods, interest expense was $664,000 and $727,000 as compared to $134,000
and $176,000 in prior comparable periods, respectively. 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 third quarter of fiscal 1997 was $26,000 compared to
$325,000 in fiscal year 1996. For the nine month and rolling 12 month periods
interest income was $94,000 and $355,000 as compared to $905,000 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 third quarter of fiscal year 1997 equaled ($567,000) or
($0.04) per share, as compared with net income of $4.7 million, or $0.30 per
share in the third quarter of fiscal 1996. Net loss for the nine month
periods ended November 1, 1997 and November 2, 1996 equaled ($20.3) million or
($1.30) per share as compared to net income of $4.1 million or $0.26 per
share, respectively. Net loss, on a rolling 12 month basis ending
November 1, 1997, was ($18.1) million or ($1.16) per share, as compared with
income of $6.0 million, or $0.38 per share for the comparable period in the
prior year. The results for the nine and twelve months ended
November 1, 1997 include the recognition of a pre-tax charge of $20 million,
or ($0.75) per share, related to the Company's shift in strategy away from
the Boston Traders(R) vertically integrated private label concept back to name
brands as mentioned above.
During the quarter, the Company began to test a selection of new name brands
in a small group of its Designs stores. This test is part of the Company's
strategic shift, announced in June 1997, back to name brands and away from its
former private label product development strategy. New brands featured
include Polo Jeans(R), Tommy Jeans(R) (by Tommy Hilfiger), Lucky Brand(R),
Boss(R) by I.G. Design, Tag Rag(R), BuffaloJeans(R), EnyceTM, Dollhouse(R),
Fubu(R), Mossimo(R), Phat Farm(R), Interstate Jeans(R), S SilverTM Jeans and
other brands with a similar point of view. As of mid-November, the Company's
six Boston Trading Co.(R) stores also carry a majority of the same brands.
As part of this test, the product selection and quantities of Levi's(R) brand
product in these stores have been significantly narrowed and reduced from
prior levels. The Company intends to continue to test these name brands
through the Holiday season and into fiscal year 1998.
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,
short-term borrowings and trade credit will enable it to finance its current
working capital, remodeling and expansion 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 nine
months of fiscal 1997 was $7.9 million compared to cash provided by operations
of $11.8 million for the same period in the prior year. Cash used in
operations in the nine months ended November 1, 1997 is primarily
attributable to net losses, the liquidation of the Boston Traders(R) brand,
and the timing of other working capital accounts.
The Company's cash and investment position at November 1, 1997 was
approximately $2.4 million, compared to approximately $19.9 million at the
end of the third 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 third quarter of fiscal 1997 the Company had net borrowings
outstanding of approximately $9.0 million under its revolving credit
facility, described below, compared to no borrowings under this facility at
the end of the third quarter of fiscal 1996. The Company anticipates
that borrowing levels at the end of fiscal 1997 will be above borrowing levels
at November 1, 1997.
The Company's working capital at November 1, 1997 was approximately $52.3
million, compared to $64.5 million at November 2, 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 November 1, 1997 was $82.8
million compared to $70.8 million at November 2, 1996. This $12.0 million
increase is primarily due to the early receipt of goods purchased for the
Holiday 1997 selling season and the third quarter sales results. This
increase was partially offset by the liquidation of Boston Traders(R) brand
products beginning in the second quarter of fiscal 1997. At the end of the
third quarter of fiscal 1997 approximately $4.0 million (net of a markdown
reserve), or 5 percent, of the total inventory consisted of Boston Traders(R)
brand product. Merchandise purchases for the balance of the fiscal year are
planned at lower levels than last year. At November 1, 1997, the Company had
$813,000 of outstanding fabric commitments associated with the Boston
Traders(R) brand product for which the Company previously recorded adequate
reserves.
The estimated earnings and cash flow benefits expected, barring unforeseen
circumstances, to be derived from the $20 million charge taken for markdowns
and store closings, described previously, 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. To date, arrangements have been made for the closing of 23 of
these stores by the end of fiscal 1997. Barring unforeseen circumstances,
the Company anticipates closing all 33 stores by or near the end of
fiscal 1997.
The Company's trade payables to Levi Strauss & Co., its principal vendor,
generally are due 30 days after the date of invoice. At November 1, 1997,
approximately $6 million of the accounts payable balance was past due (by five
days on average) to Levi Strauss & Co. 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, subject to the availability of funds with which to
do so. The Boston Traders(R) brand product required the Company to source
its own product predominantly from various offshore vendors. Payment to
these vendors were through the use of letters of credit. Given the Company's
shift in strategy away from its own product development, the Company
anticipates that the use of letters of credit as a payment method will be
minimal and expects that it will purchase branded merchandise under customary
industry credit terms.
On December 10, 1997, subsequent to the end of the third quarter, the Company
entered into a Credit Agreement (the "Credit Agreement") with BankBoston,N.A.
The credit facility established by the Credit Agreement, which terminates on
June 30, 1999, consists of a revolving line of credit permitting the Company
to borrow up to $25 million. Under the facility, the Company may cause
BankBoston to issue documentary and standby letters of credit up to
$2 million. Availability of the unused revolving line of credit is subject to
borrowing base requirements and compliance with certain earnings, net worth
and inventory turnover covenants and a cash flow ratio covenant which is
effective for the fourth quarter of fiscal 1998. The Company's borrowings
under the credit facility are secured by a security interest in all of the
Company's Levi Strauss & Co. brand inventory, accounts receivable and certain
intangible assets of the Company, excluding the assets of the joint venture
and the Company's Boston Traders(R) trademark and related trademarks.
The security interest may be released when the Company achieves certain
minimum cash flow ratio requirements. At the option of the Company,
borrowings under this facility bear interest at BankBoston, N.A.'s prime rate
or LIBOR-based fixed rates (depending upon the Company's quarterly ratio of
cash flow to fixed charges). 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.
At November 1, 1997, the Company was not in compliance with the cash flow
ratio covenant included in its previous Amended and Restated Credit Agreement
dated as of July 24, 1996 with BankBoston, N.A. and State Street Bank and
Trust Company (the "1996 Credit Agreement"). Upon entering into the new
Credit Agreement, BankBoston, N.A. and State Street Bank and Trust Company
waived compliance with this covenant under the 1996 Credit Agreement for the
quarter ended November 1, 1997. At November 1, 1997, the Company had no
outstanding commercial and trade letters of credit and two outstanding standby
letters of credit totaling approximately $212,000.
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 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 third quarter of fiscal 1997 the OLS
Partnership owned and operated eleven Original Levi's StoresTM 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 nine months of fiscal 1997, the OLS Partnership distributed
$3.7 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 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. During the third quarter of
fiscal year 1997, the term of the OLS Credit Agreement was extended through
September 30, 1998, unless earlier terminated 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 November 1, 1997.
CAPITAL EXPENDITURES
During the first nine 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 $7.2 million and $11.1
million during the first nine 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. In addition to the 33
stores that the Company plans to close before the end of fiscal 1997, the
Company closed one Designs store for which the lease had expired during the
nine month period ended November 1, 1997.
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 continued to pay interest
through the maturity date of the Purchase Note and thereafter through
November 2, 1997 on $500,000 of the principal of the Purchase Note. The
portion of the principal amount of the Purchase Note to be 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 November 1, 1997 expire in or prior to fiscal 2009 and all,
except for four such leases, expire in or prior to fiscal 2011.
On October 6, 1997, the Board of Directors approved an amendment to the
Company's Shareholder Rights Agreement dated May 1, 1995, pursuant to which
the definition of an "Acquiring Person" was amended. The definition of
Acquiring Person now allows a person who is and continues to be permitted to
file a Schedule 13G, in lieu of Schedule 13D, pursuant to the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder, to be beneficial owner of less than 20% of the shares of the
Company's Common Stock then outstanding without becoming an
"Acquiring Person."
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 1996 Credit Agreement required the Company to
maintain certain net worth, inventory turnover and cash flow ratios. The
Company received a written waiver of its non-compliance at November 1, 1997
with the cash flow ratio covenant in the 1996 Credit Agreement.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
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 October 9, 1997,
that on October 6, 1997 the Board of Directors approved an amendment to
the Company's Shareholder Rights Agreement dated May 1, 1995, pursuant
to which the definition of an "Acquiring Person" was amended. The
definition of Acquiring Person now allows a person who is and continues
to be permitted to file Schedule 13G, in lieu of Schedule 13D, pursuant
to the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder, to be beneficial owner of less than
20% of the shares of the Company's Common Stock then outstanding without
becoming an "Acquiring Person."
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). *
4.2 First Amendment dated as of October 6, 1997 to the 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 October 9, 1997, 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. ("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 First Amendment to Credit Agreement among the Company, LOS and
the OLS Partnership dated as of October 29, 1997.
10.17 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). *
10.18 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). *
10.19 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). *
10.20 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). *
10.21 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). *
10.22 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). *
10.23 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). *
10.24 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). *
* 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
December 16, 1997