1
EXHIBIT 13
TABLE OF CONTENTS
1 Corporate Profile
3 Store Formats
4 Letter to Shareholders
7 The Year in Review
9 Building for the Future
16 Selected Financial Data
17 Management's Discussion and Analysis
22 Consolidated Financial Statements
26 Notes to Consolidated Financial Statements
37 Corporate and Shareholder Information
[LOGO]
ANNUAL REPORT 1995
(Year ended February 3, 1996)
Designs, Inc. is a specialty retailer that provides internationally recognized,
quality branded merchandise in a manner which creates a shopping experience that
satisfies our target customers' casual lifestyle requirements. This is done
through channels of distribution aimed at our customers, in an environment which
optimizes our associates' and shareholders' satisfaction.
Based in Needham, Massachusetts, Designs, Inc. opened its first Designs store in
1977, selling exclusively Levi Strauss & Co. apparel and accessories. In 1994,
the company expanded its brand offering with the Timberland[Registered
Trademark] brand, as part of a strategy to offer a broader merchandise
selection to customers. In 1995, Designs, Inc. completed a joint venture
agreement with Levi Strauss & Co. to own and operate retail stores throughout
11 northeast states and the District of Columbia, further strengthening the
long-standing relationship between the two companies. In 1995, Designs, Inc.
completed the purchase of the Boston Traders[Registered Trademark] brand as the
next step in developing an exclusive brand to augment existing product lines.
The company operates 157 full-price and outlet stores located throughout the
United States in enclosed regional shopping malls, urban locations and outlet
centers.
1 Designs, Inc. Annual Report 1995
2
[PHOTO: INSIDE VIEW OF ORIGINAL LEVI'S[REGISTERED TRADEMARK] STORE LOCATED IN
NEW YORK CITY, NEW YORK]
3
[PHOTO: INSIDE VIEW OF A ORIGINAL LEVI'S[REGISTERED TRADEMARK] STORE]
STORE FORMATS
Designs stores feature merchandise for men and women, including
Levi's[Registered Trademark] brand traditional denim products and
Dockers[Registered Trademark] brand casual apparel. The well-known, established
Boston Traders[Registered Trademark] brand, acquired in May 1995, provides an
exclusive brand to complement and strengthen the merchandise mix.
[PHOTO: INSIDE VIEW OF A BOSTON TRADERS[REGISTERED TRADEMARK] OUTLET STORE]
Levi's[Registered Trademark] Outlet by Designs stores, located in manufacturers'
outlet centers in the eastern half of the United States, target the
value-conscious consumer. The Levi's[Registered Trademark] Outlets offer
selected Levi Strauss & Co. merchandise from the Levi's[Registered Trademark]
and Dockers[Registered Trademark] brand product lines, including manufacturing
overruns, discontinued lines, irregulars and end-of-season merchandise.
Original Levi's[Registered Trademark] Stores, located in upscale malls and
urban locations, focus on the Levi's[Registered Trademark] brand jeans
customer. In addition to traditional men's and women's products, Original
Levi's[Registered Trademark] Stores offer SilverTab[Trademark] products,
exclusive merchandise from Levi's[Registered Trademark] Europe and Levi's
Personal Pair[Registered Trademark] individually fitted jeans for women. The
Original Levi's[Registered Trademark] Stores are operated in a joint venture
between wholly-owned subsidiaries of Designs, Inc. and Levi Strauss & Co.
The joint venture also operates Levi's[Registered Trademark] Outlet stores that
sell only Levi's[Registered Trademark] brand products, including close-out
products of the Original Levi's[Registered Trademark] Stores.
[PHOTO: INSIDE VIEW OF A DESIGN'S STORE]
Boston Traders[Registered Trademark] outlet stores offer Boston
Traders[Registered Trademark] brand product lines to the value-conscious
consumer. The Boston Traders[Registered Trademark] outlet stores, located in
manufacturers' outlet centers throughout the United States, feature
end-of-season and close-out Boston Traders[Registered Trademark] brand product
lines from the Designs stores.
3 Designs, Inc. Annual Report 1995
4
To Shareholders and Valued Designs Associates:
Fiscal 1995, my first full year as Chief Executive Officer, has been a year
focused on my commitment to strengthen the long-term performance of our company.
Our vision is to provide internationally recognized, quality branded merchandise
in a manner that creates a shopping experience that satisfies our target
customers' casual lifestyle. We endeavor to fulfill and exceed our customers'
expectations for quality, selection and value, supported by superior customer
service. As shareholders and fellow associates , you should be proud of the
progress we have made to differentiate ourselves as a specialty retailer of
internationally recognized, quality branded merchandise.
During my 20 years at Designs, we have prospered through a multitude of changes
in the retail industry. Change occurred through evolving customer demand and
preferences, new specialty retail formats, department store consolidations, mass
merchant growth and new technology.
[PHOTO: JOEL H. REICHMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER]
We believe that it has been an advantage to have retail formats that target
various customer preferences. In the malls, we have the Designs and Original
Levi's[Registered Trademark] Stores (in our joint venture with a subsidiary of
Levi Strauss & Co.). Our Levi's[Registered Trademark] Outlet by Designs, Boston
Traders[Registered Trademark] and joint venture Levi's[Registered Trademark]
Outlet stores are in manufacturers' outlet centers throughout the United States.
In key urban locations, such as New York, Boston and Washington, D.C. we operate
Original Levi's[Registered Trademark] Stores in the joint venture.
As mall-based retailing has become highly competitive and promotional, we made a
decision to change our focus in the malls. We decided to become a vertically
integrated retailer. Vertical integration, that is to design, source and
distribute our own products, presents us with a greater gross margin opportunity
than previously. This past year Designs made significant progress toward
achieving one of the primary goals inherent in our vision: to expand our
horizons beyond being a single vendor retailer and to become a vertically
integrated retailer of quality branded casual apparel.
In May 1995, we acquired the Boston Traders[Registered Trademark] brand. Through
the Boston Traders[Registered Trademark] brand we will complement the product
lines we already offer with high quality tops, sweaters, outerwear and
accessories. I believe that the Boston Traders[Registered Trademark] brand
acquisition reduced the time and expense usually associated with developing a
line of branded casual apparel. With an expanded product offering, our Designs
stores present us with the opportunity for an improved tops-to-bottoms sales
ratio, enhanced margins and sales improvements. Historically, the authentic
Boston Traders[Registered Trademark] brand line of tops, sweaters and outerwear
enjoyed excellent customer recognition and awareness. Founded in 1967, we
believe in the inherent brand equity and reputation of the Boston
Traders[Registered Trademark] brand name.
In September 1995, Mark Lisnow joined us as Senior Vice President of
Merchandising as part of our long-term plan to establish the Boston
Traders[Registered Trademark] brand as a product leader. Mark immediately
organized our merchandising department along brand lines and began to assemble
an experienced product development and sourcing group. Led by Neal Vantosky,
formerly Senior Vice President of Product Development and Design for Gap, Inc.,
our New York City based design, development and sourcing team was fully
operational in December 1995.
The Boston Traders[Registered Trademark] brand product team designed and is in
full scale production of a Fall 1996 line that is scheduled to be in all of our
Designs stores in September 1996. This same team is also focusing on enhancing
the Boston
4 Designs, Inc. Annual Report 1995
5
[WATERMARK: TEAM EFFORT]
[PHOTO: OUTSIDE VIEW OF LEVI'S[REGISTERED TRADEMARK] OUTLET STORE IN FREEPORT,
MAINE]
[PHOTO: OUTSIDE VIEW OF BOSTON TRADERS[REGISTERED TRADEMARK] OUTLET STORE IN
GURNEE MILLS, ILLINOIS]
Traders[Registered Trademark] brand product offering, packaging, labeling, logos
and other brand enhancements for presentation in Spring 1997. Our store design
and construction team is working closely with the brand team to test
complementary fixtures, visual presentation formats and, ultimately, a unique
store environment designed to optimize customer acceptance of and bring a new
focus to the Boston Traders[Registered Trademark] brand and product lines. Our
estimated $5.0 million annual investment in the product development, sourcing
and logistics resources needed to implement our Boston Traders[Registered
Trademark] brand strategy is partially reflected in the results for this past
year and is expected to remain an ongoing component of our future overhead. The
return from this investment will shape our company's future.
[WATERMARK: STRONG MANAGEMENT]
[WATERMARK: RECOGNIZED BRANDED MERCHANDISE]
It is important to keep in mind that we are building our own brand and
establishing ourselves as a vertically integrated retailer from a position of
strength, leveraging our traditional customer base that recognizes us as a
retailer of Levi Strauss & Co. merchandise. We are pleased with the progress of
our joint venture partnership and we plan to expand the number of stores under
the joint venture through fiscal year 1999. This strong base, along with our
solid financial resources, should allow us to undertake our transition to a
successful vertically integrated retailer. Once we have developed the new Boston
Traders[Registered Trademark] brand product lines and the new brand imaging is
in place, we plan to expand this unique concept throughout the United States as
we continue to build brand equity and grow the retail presence of the Boston
Traders[Registered Trademark] brand. We will capitalize on our strengths as we
invest in our long-term strategy for future growth.
[WATERMARK: SPECIALTY RETAIL STORES]
During a year characterized by weak consumer demand for apparel, with
corresponding sales and earnings results for both the "Back to School" and
"Holiday" seasons, we managed expenses well and maintained a strong balance
sheet while funding 10 new store openings and eight remodels. In addition, we
acquired 33 Boston Traders[Registered Trademark] outlets and assembled the team
that is launching the Boston Traders[Registered Trademark] brand.
[WATERMARK: MERCHANDISE MIX]
We achieved record sales this past year of $301.1 million, a 13 percent increase
over fiscal 1994. Comparable store sales increased a half of a percent for the
year. Net income for the 53-week year was $9.8 million, or $0.62 per share,
compared with the prior year's 52-week net income of $16.9 million, or $1.06 per
share. Both fiscal 1995 and 1994 reflect non-recurring pretax income of $2.2
million, or $0.08 per share, and $4.2 million, or $0.16 per share, respectively.
Adjusting for this non-recurring income, comparative earnings per share were
$0.54 this year and $0.90 for last year.
As we look ahead, we are fully committed to our vision of establishing our
specialty retail stores as a source for internationally recognized, quality
branded merchandise, predominantly featuring our exclusive Boston
Traders[Registered Trademark] brand. Our ability to deliver the right
combination of value, quality and selection to the customer is supported by
strong management and dedicated associates. We are committed to our associates
by providing a "people-first" work culture that encourages initiative and
innovation and rewards excellence. We are committed to our corporate values and
we regard the knowledge, creativity and expertise of our associates as one of
the significant competitive advantages that will affect our future growth.
[WATERMARK: SUPERIOR CUSTOMER SERVICE]
5 Designs, Inc. Annual Report 1995
6
[WATERMARK: CASUAL LIFESTYLE]
[PHOTO: STORE FRONT VIEW OF DESIGNS STORE IN MANCHESTER, NEW HAMPSHIRE]
With our plans for growth come opportunities. We are committed to enhancing
long-term value for our shareholders by strengthening our company and its
financial performance. Future earnings growth over time will require a
combination of increased comparable store sales, improved gross margins,
incremental revenue generated from the opening of new stores, and continued
monitoring and controlling of expenses.
Fiscal 1996 will continue to be one of building for the future. We will continue
to move forward with the development of our Boston Traders[Registered Trademark]
brand product lines and new store format. Once consumer acceptance of the new
product lines has been established, we believe that the Boston
Traders[Registered Trademark] brand will attract the finest mall and urban
locations in the country, where we plan to grow and expand our presence. Our
store expansion plans for 1996 will focus on the joint venture, with up to 10
new stores planned for the year.
[WATERMARK: DEDICATED ASSOCIATES]
We continue our long tradition of innovation in technology and education. We
have recently upgraded our information systems hardware, merchandise management
software and point of sale register systems to keep us in line with retail
technology trends. These systems will provide our merchants and our store
management team with enhanced information and management systems with which to
leverage their resources, grow our business and respond to our customers' needs
with greater speed and customized service. Our commitment to training our
associates is stronger than ever and this year we brought into our company a new
Director of Training to keep us at the leading edge of educational trends. Our
people and their knowledge will be a critical and differentiating asset as we
proceed with our long-term plans.
[WATERMARK: VERTICAL INTEGRATION]
In order to provide shareholders with more timely information and reduce
production and distribution costs, we have established the Designs, Inc.
Shareholder Information Line. By dialing 1-888-DESI-333, shareholders can hear a
summary of Designs' most recent financial information and major news
developments, including monthly sales and quarterly earnings releases. In
addition, the shareholder information line enables shareholders to request
financial information via mail or fax.
[WATERMARK: TECHNOLOGY AND EDUCATION]
Retail means change and I do not believe that any successful company rests on
its laurels and past accomplishments. That is why we are building the vertically
integrated Boston Traders[Registered Trademark] brand. In doing this, we are
positioning Designs, Inc. to do what we do best: serve our customers. We will
continue to seek out and satisfy our customers' wants and needs, solidifying our
relationship with them, communicating with them, keeping their business and
growing our customer base. To do this, we must become a product leader and we
have focused our people, our energy and our resources on achieving this goal.
This will strengthen our company, making it a place people want to shop, invest
and work in, now and in the future.
[WATERMARK: FINANCIAL RESOURCES]
Sincerely,
[WATERMARK: QUALITY, SELECTION AND VALUE]
Joel H. Reichman
President and Chief Executive Officer
April 5, 1996
6 Designs, Inc. Annual Report 1995
7
THE YEAR IN REVIEW
In January, Designs, Inc. introduced its new corporate logo, representing the
company's confident spirit and progressive energy. It also reflects Designs,
Inc.'s vision and strategy of establishing the company's specialty retail stores
as a source for superior-quality branded casual apparel.
Designs, Inc. announced the appointment of William D. Richins as Chief Financial
Officer effective April, 1995.
[PHOTO: A PAIR OF TIMBERLAND SHOES]
Designs, Inc. announced the signing of a purchase and sale agreement for certain
assets of Boston Trading Ltd., Inc. to further establish the Designs stores as a
source for superior-quality branded apparel. The assets acquired, at a cost of
$6.0 million, included Boston Traders[Registered Trademark] and 18 other brand
names, inventory and 33 existing Boston Traders[Registered Trademark] outlet
store locations.
In May, the company's Board of Directors adopted a Shareholder Rights Plan
designed to enhance the Board's ability to protect shareholder interests and to
ensure that shareholders receive fair treatment in the event any coercive
attempt to take over Designs, Inc. is made in the future. Also in May, Designs,
Inc. completed its acquisition of certain assets of Boston Trading Ltd., Inc.
In September, Designs, Inc. announced the appointment of Mark S. Lisnow as
Senior Vice President of Merchandising, to lead the merchandising and product
development teams. Both teams will play an integral role in the development of
the Boston Traders[Registered Trademark] brand product lines and the overall
execution of Designs, Inc.'s strategy to establish the company as a
superior-quality casual apparel retailer.
The company's joint venture Original Levi's[Registered Trademark] Store, located
at 57th Street and Fifth Avenue in Manhattan, was awarded first place in the
"Retail Store of the Year" design competition in the category of "Apparel Store
over 10,000 Square Feet." The design competition was sponsored by CHAIN STORE
AGE EXECUTIVE MAGAZINE.
[PHOTO: WOMAN IN LEVI'S[REGISTERED TRADEMARK] KNEELING ON CHAIR WITH MAN IN
LEVI'S[REGISTERED TRADEMARK]]
[PHOTO: LEVI'S[REGISTERED TRADEMARK] JEAN JACKET]
In December, the company appointed J. Neal Vantosky as Vice President of Product
Development, to direct the New York product development and sourcing office and
oversee the designing and repositioning of the Boston Traders[Registered
Trademark] brand product lines.
Also in December, Designs, Inc.'s product development and sourcing team, based
in the company's office in New York City, was completely assembled, bringing
together a talented team of seasoned veterans with significant experience in
designing and sourcing private-label merchandise.
7 Designs, Inc. Annual Report 1995
8
[PHOTO: INSIDE VIEW OF SILVERTAB[TRADEMARK] SECTION OF MANCHESTER, NEW
HAMPSHIRE DESIGNS STORE]
9
[PHOTO: PAIR OF LEVI'S[REGISTERED TRADEMARK] 501[REGISTERED TRADEMARK] JEANS]
For nearly twenty years, Designs, Inc. has maintained a pledge to its customers:
to offer quality branded merchandise, value and service. We have prospered by
knowing our customer and responding to his or her needs. This commitment has
formed the cornerstone of our accomplishments, prepared us for future growth and
positioned us well to pursue emerging opportunities.
[PHOTO: WOMAN LEANING AGAINST STOOL]
[CAPTION: FOR NEARLY TWENTY YEARS, DESIGNS, INC. HAS MAINTAINED A PLEDGE TO ITS
CUSTOMERS: TO OFFER QUALITY BRANDED MERCHANDISE, VALUE AND SERVICE.]
CAPITALIZING ON OUR STRENGTHS
By sustaining our commitment to our customers, we believe we will continue to
succeed as consumer and societal trends place increasing pressure on retailers.
In general, customers are allocating less disposable income to apparel
purchases, thus placing pressure on retailers to offer increasingly competitive
pricing, value and selection to attract each dollar spent. Retail organizations
must be able to respond quickly as the importance and rate of change in
technology accelerate, creating customers who are more technologically aware and
advanced. In light of faster-paced lifestyles and increased time pressure,
customers also are seeking greater ease and convenience in their shopping
experience. One trend is certain to remain constant: customers will continue to
demand quality and value, accompanied by excellent service and competitive
prices.
At Designs, Inc. we remain focused on our vision: to be a specialty retailer
that provides internationally recognized, quality branded merchandise in a
manner which creates a shopping experience that satisfies our target customers'
casual lifestyle requirements. Designs, Inc. has a number of strengths that
support this vision: extensive expertise in merchandising quality casual
apparel; financial strength, as reflected in our balance sheet and cash flow; a
customer base that appreciates the quality and value of recognized brand names;
a strong, long-standing relationship with Levi Strauss & Co.; and a business
strategy that incorporates new elements and leverages our traditional strengths
to reposition the company in a new, stronger way.
Designs, Inc. is engaged in a multi-year effort to apply our strength and
expertise as a retail merchandiser, developing our Boston Traders[Registered
Trademark] brand and establishing ourselves as a vertically integrated retailer.
More than a year ago, we identified our need to have a strong private label
brand
9 Designs, Inc. Annual Report 1995
10
[PHOTO: DOCKERS[REGISTERED TRADEMARK] SECTION OF THE DESIGNS STORE IN
MANCHESTER, NEW HAMPSHIRE]
that would accomplish two important objectives. First, it should expand our
presence in product lines underrepresented in our merchandise mix, such as tops,
sweaters and outerwear, while complementing the other brands we offer. Second,
it should give us the ability to provide value to our customers, yet create the
opportunity for improved margins and profitability for our stores.
[PHOTO: LEVI'S[REGISTERED TRADEMARK] SHIRTS]
[CAPTION: IN KEEPING WITH OUR VISION OF WHO WE ARE, OUR STRATEGY SUPPORTS AND
ENHANCES OUR COMMITMENT TO OFFER OUR CUSTOMERS QUALITY, SELECTION AND VALUE.]
Our merchandising experience led us to focus on and acquire the Boston
Traders[Registered Trademark] brand. This acquisition also underscores our
financial strength. We were able to acquire Boston Traders[Registered Trademark]
and invest the capital and operating resources necessary to realize the
potential that we perceive in the Boston Traders[Registered Trademark] brand. To
date, this has included recruiting top-notch talent in product development,
sourcing, logistics and merchandising to develop a new, updated Boston
Traders[Registered Trademark] brand product line, including distinctive
packaging and labeling for the brand. We also are redefining the brand identity
for Boston Traders[Registered Trademark], including redesigning the logo and
developing new store visual merchandising and fixturing to showcase the Boston
Traders[Registered Trademark] brand product lines.
With a vision in place, high-quality brand name product lines offered in
customer-friendly store formats, a sound balance sheet, and the help of our
committed and talented associates, we believe that we will be able to execute
our strategy effectively. In keeping with our vision of who we are, our strategy
supports and enhances our commitment to offer our customers quality, selection
and value.
FOCUSING ON GROWTH OPPORTUNITIES
Our strategy is to develop and market the Boston Traders[Registered Trademark]
brand and new store design, establishing our exclusive private-label brand as an
internationally known consumer brand with a unique identity.
We have set out to build upon the 25-year history and reputation of the
well-known Boston Traders[Registered Trademark] brand of casual apparel, to
ensure that our customers can continue to rely on it for quality, fit and style.
It is our goal to have our Boston Traders[Registered Trademark] brand product
lines be known as comfortable, classic clothing that is honest, authentic and
functional. At the same time, the product lines will be modern,
10 DESIGNS, INC. ANNUAL REPORT 1995
11
[PHOTO: MAN AND WOMAN POSING IN KHAKIS AND SWEATERS]
[CAPTION: WE HAVE SET OUT TO BUILD UPON THE 25-YEAR HISTORY AND REPUTATION OF
THE WELL-KNOWN BOSTON TRADERS[REGISTERED TRADEMARK] BRAND OF CASUAL APPAREL,
TO ENSURE THAT OUR CUSTOMERS CAN CONTINUE TO RELY ON IT FOR QUALITY, FIT AND
STYLE.]
12
[PHOTO: MAN AND CHILD POSING IN CASUAL APPAREL]
[CAPTION: WE BELIEVE THAT OUR DEDICATION TO PROVIDING THE CUSTOMER WITH A
PRODUCTIVE, ENJOYABLE SHOPPING EXPERIENCE WILL HELP TO FOSTER LOYALTY TO OUR
STORES AND ULTIMATELY CONTRIBUTE TO OUR...COMPANY'S SUCCESS.]
13
[PHOTO: INSIDE VIEW OF BOSTON TRADERS[REGISTERED TRADEMARK] OUTLET STORE,
GURNESS MILLS, ILLINOIS]
eclectic and innovative, giving the customer a chance to reveal his or her own
personality and sense of style.
Together with our other branded product lines, our balanced Boston
Traders[Registered Trademark] brand merchandise assortment for men and women
will provide a complete casual lifestyle wardrobe for our customers. It will
establish our stores as the source to fulfill all of their casual apparel needs
and it will build consumer loyalty for the Boston Traders[Registered Trademark]
brand. It also will establish a strategic niche within the retail industry for
Designs, Inc.
Controlling and managing our own private brand presents opportunities for growth
and expansion. With a broader merchandise selection, we hope to increase sales
and improve the tops-to-bottoms sales ratio with incremental sales of shirts,
sweaters and knitwear. We also have a unique opportunity to reposition the image
of the Boston Traders[Registered Trademark] brand, creating a distinct line of
high-quality casual apparel that is intended to allow us to extend our new store
format and presence into new markets.
CREATING A DISTINCTIVE SHOPPING EXPERIENCE
In addition to our merchandising strategy, we continue to develop our store
design and fixturing to showcase our product lines. We want our stores to be
attractive, exciting and inviting - to differentiate them from other retail
stores and to provide our customers with an atmosphere that is consistent,
readily identifiable and easy to shop.
By far, the most important factor which differentiates us from competitors is
our absolute commitment to customer service. We believe that our dedication to
providing the customer with a productive, enjoyable shopping experience will
help to foster loyalty to our stores and ultimately contribute to our company's
success. Our sales associates consistently receive praise from our customers for
their attentive, knowledgeable service and courteous professionalism.
Our success as a company is due to the contribution of each of our associates
and, accordingly, they represent one of our most valuable assets. Designs, Inc.
provides training and professional development programs for our associates
throughout their careers, strengthening their skills and enhancing their
responsibilities. In addition, we encourage a sense of personal responsibility,
initiative and balance in the lives of each of our associates. We do this while
fostering a strong commitment to the company, teamwork, a solid work ethic, and
the attainment of our common goals.
13 Designs, Inc. Annual Report 1995
14
STRENGTHENING OUR ORGANIZATION
As we continue to plan for our company's future growth and development, we have
devoted the energy and resources necessary to ensure that we have the
infrastructure in place to achieve our goals. This past year, Designs, Inc.
hired several key executives in merchandising, product development and finance
who possess substantial experience in the retail industry, deepening and
broadening the experience and knowledge base of our management team.
[PHOTO: TIMBERLAND[REGISTERED TRADEMARK]-- BOOTS]
[CAPTION: OUR GROWTH STRATEGY FOCUSES ON CREATING A BALANCE BETWEEN CONTINUING
AND STRENGTHENING THE CONTRIBUTION OF OUR EXISTING BUSINESSES AND EXPANDING
OUR MARKET PRESENCE THROUGH NEW VENTURES.]
As we have done in the past, we continue to invest in state-of-the-art systems
and technology to meet our evolving needs. Our New York City product development
team has significant experience in designing and sourcing merchandise and is
working to redesign and further develop our Boston Traders[Registered Trademark]
brand product line. We also have assembled a logistics team and established a
third-party warehouse to provide storage and distribution capacity to move our
Boston Traders[Registered Trademark] brand merchandise and to ensure on-time,
cost-effective delivery.
Going forward, we will continue to develop our worldwide sourcing capabilities,
management information systems and training programs to support the company's
expansion. In fiscal 1996, we will invest in a significant upgrade and expansion
of our merchandising and store point-of-sale information systems to effectively
manage our expanding product lines. With the growth and development of our
organization, we have moved and expanded our corporate offices to accommodate
our additional space requirements, and to provide us with educational and
training facilities as well as space to experiment with new visual merchandising
formats, fixtures and store design. Our continuous improvements in the company's
infrastructure are intended to better serve the needs of our customers and our
stores.
Our growth strategy focuses on creating a balance between continuing and
strengthening the contribution of our existing businesses and expanding our
market presence through new ventures. Our efforts in developing both aspects of
our business are executed with a diligent commitment to monitoring and
controlling costs, and to using our resources wisely. While we build the
infrastructure necessary for our planned future expansion, we will maintain our
objective of controlled growth, focused on enhanced competitiveness and
long-term profitability.
[PHOTO: MAN POSING IN CASUAL APPAREL]
Our experience and resources will serve us well during this period of transition
and growth. We have a very strong foundation on which we are building our own
unique brand identity. Our strategy is being implemented for the purpose of both
creating opportunity and strengthening our position in the marketplace. At
Designs, Inc. we are committed to establishing our company and our stores as a
product leader of quality branded casual apparel.
[CAPTION: Levi's[REGISTERED TRADEMARK] Outlet Store,
Freeport, Maine]
14 Designs, Inc. Annual Report 1995
15
[PHOTO: INSIDE VIEW OF THE LEVI'S[REGISTERED TRADEMARK] OUTLET STORE IN
FREEPORT, MAINE]
16
SELECTED FINANCIAL DATA
Fiscal Years Ended(1)
------------------------------------------------------------------------
February 3, January 28, January 29, January 30, February 1,
1996 1995 1994 1993 1992(2)
------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING DATA)
INCOME STATEMENT DATA:
Sales $301,074 $265,910 $240,925 $204,329 $150,820
Gross profit, net of occupancy costs 89,085 84,126 75,221 65,465 44,331
Income before provision
for income taxes 16,940(3) 28,399(3) 9,507(4) 20,587 8,157
Net income 9,773 16,903 5,748 12,320 4,784
Net income per common
and common equivalent share(5) 0.62 1.06 0.36 0.84 0.40
Weighted average common and common equivalent
shares outstanding(5) 15,770 15,914 15,916 14,666 11,954
BALANCE SHEET DATA:
Working capital $ 64,557 $ 55,725 $ 35,671(4) $ 55,913 $ 32,848
Inventories 58,008 52,649 46,664 42,578 28,713(2)
Property and equipment, net 36,083 26,503 22,922 20,747 20,270
Total assets 132,649 127,295 119,556 102,465 69,427
Long-term debt(6) 1,000 -- 10,000 13,000 20,000
OPERATING DATA:
Number of stores open at end of period 157(8) 120(7) 120 110 106
<FN>
(1) The Company's fiscal year is a 52- or 53-week period ending on the Saturday
closest to January 31. The fiscal years ended February 3, 1996 and February
1, 1992 covered 53 weeks.
(2) Reflects a change in the method of valuing merchandise inventories from
lower of cost or market under the first-in, first-out method to the lower
of cost or market under the last-in, first-out method.
(3) Includes $2.2 million and $3.2 million of non-recurring income in fiscal
years 1995 and 1994, respectively related to the fiscal 1993 restructuring
program.
(4) Includes $15.0 million restructuring charge.
(5) Adjusted to give retroactive effect to two 50% stock dividends paid on June
22, 1993 and June 1, 1992 to holders of Common Stock at the close of
business on June 8, 1993 and April 21, 1992, respectively.
(6) Includes current portion of long-term debt. Fiscal 1995 includes the $1
million promissory note issued in conjunction with the acquisition of
certain assets of Boston Trading Ltd., Inc. ("Boston Trading") on May 2,
1995.
(7) Excludes the two Dockers[Registered Trademark] Shops and one Original
Levi's[Registered Trademark] Store which were sold on January 28, 1995 as
well as the fifteen stores which were closed in connection with the
restructuring program.
(8) Includes the 33 Boston Traders[Registered Trademark] outlet stores which
were acquired as part of the acquisition of certain assets of Boston
Trading.
16 Designs, Inc. Annual Report 1995
17
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table provides a five year history of the sales results of the
Company, together with a summary of the number of stores in operation and the
Company's sales growth. "Comparable store sales growth" measures the percentage
change in sales in comparable stores, which were those stores open for at least
one full fiscal year as of the beginning of the fiscal year.
Fiscal Years Ended (1)
--------------------------------------------------------------------------
Feb. 3, Jan. 28, Jan. 29, Jan. 30, Feb. 1,
1996 1995 1994 1993 1992
(Fiscal 1995) (Fiscal 1994) (Fiscal 1993) Fiscal 1992) (Fiscal 1991)
- -------------------------------------------------------------------------------------------------------------------------------
Total Sales ($000's) $301,074 $265,910 $240,925 $204,329 $150,820
Number of stores in operation at end of year:
STORE TYPE
Designs 49 51 64 64 68
Levi's[Registered Trademark] Outlets by Designs 58 61 48 41 38
Boston Traders[Registered Trademark] outlets 35 -- -- -- --
Joint Venture(2) 15 8 8 5 --
==========================================================================
157 120 120 110 106
Comparable stores 97 91 102 97 82
Store sales growth 13% 10% 18% 35% 25%
Comparable store sales growth 0.5% (5%) 6% 26% 7%
<FN>
(1) The Company's fiscal year is a 52- or 53-week period ending on the Saturday
closest to January 31. The fiscal years ended February 3, 1996 and February 1,
1992 covered 53 weeks. Comparable store sales for fiscal 1995 were compared to
the comparable store sales for the same 53-week period in fiscal 1994.
(2) Until January 28, 1995, the eight then existing Original Levi's[Registered Trademark]
Stores were 100% owned by the Company. See discussion of the Joint Venture
below.
- -------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
SALES
Sales for fiscal 1995, which ended on February 3, 1996, rose to $301.1 million,
compared with fiscal 1994 sales of $265.9 million and fiscal 1993 sales of
$240.9 million. There were 53 weeks in fiscal 1995 and 52 weeks in each of
fiscal 1994 and 1993. Total sales growth in fiscal 1995 and 1994 is primarily
attributable to the opening of new stores, net of stores closed, and the
expansion of existing stores. Comparable store sales decreased 5% in fiscal 1994
as compared with fiscal 1993, due primarily to a decrease in unit sales of 11%,
partially offset by an 8% increase in average unit price as compared to the
prior year.
GROSS MARGIN
Gross margin rate (including the costs of occupancy) equaled 29.6% of sales for
fiscal 1995, 31.6% in fiscal 1994 and 31.2% in fiscal 1993. The decrease in
fiscal 1995 of 2 percentage points as compared to fiscal 1994 was primarily
attributable to a 1.3 percentage point decrease in merchandise margins as a
result of increased promotional activity associated with the competitive retail
environment, partially offset by a $924,000 benefit for LIFO. In addition, there
was an increase in occupancy costs of 0.7 percentage points. The increase in
fiscal 1994 from fiscal 1993 was primarily due to an increase in the percentage
of business generated from the higher margin Levi's[Registered Trademark]
Outlet by Designs stores and Original Levi's[Registered Trademark] Stores and
a $200,000 benefit for LIFO. This increase was offset slightly by a decrease in
initial markups in the Levi's[Registered Trademark] Outlet by Designs stores
and Designs stores, continued price competition in the Designs stores, and
higher occupancy costs in the Original Levi's[Registered Trademark] Stores and
remodeled Designs stores. The increased total sales at this gross margin rate
resulted in a 12% increase in gross margin dollars to $84.1 million for fiscal
1994 versus $75.2 million in fiscal 1993. The Company reviews its inventory
levels in order to identify slow-moving merchandise and uses markdowns to clear
merchandise.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses as a percentage of sales were 22.2%
in fiscal 1995 as compared to 19.9% in fiscal 1994. The increase was primarily
attributable to ongoing infrastructure expenses incurred in fiscal 1995
associated with the development of the Boston Traders[Registered Trademark]
brand. This increase was offset by one half of a percentage point decrease in
store payroll. For fiscal 1994, selling, general and administrative expenses
were 19.9% of sales as compared with 18.5% of sales in fiscal year 1993. Store
payroll, which was the largest component of these
17 Designs, Inc. Annual Report 1995
18
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
operating expenses, increased to 10.7% of sales in fiscal 1994 from 10.2% in
fiscal 1993, due primarily to increased payroll as a percentage of sales in the
Levi's[Registered Trademark] Outlet by Designs stores and Designs stores. The
increase in selling, general and administrative expenses in fiscal 1994 also
included increased advertising costs attributable to enhanced corporate
marketing efforts. These increases in fiscal 1994 were partially offset by a
$1.0 million gain related to the sale of the Company's Original
Levi's[Registered Trademark] Store in Minneapolis, Minnesota, and the Company's
two Dockers[Registered Trademark] Shops located in Minneapolis, Minnesota and
Cambridge, Massachusetts. In addition, Levi's Only Stores, Inc. paid the
Company $875,000 for services, contributions and risks taken by the Company for
its assistance in the development of the Original Levi's[Registered Trademark]
Store concept in the United States. A substantial portion of this amount offset
previously recognized costs which were incurred by the Company during fiscal
1994.
RESTRUCTURING
In fiscal 1993, the Company recorded a non-recurring pre-tax charge of $15.0
million to cover the costs associated with the closing of 15 of its poorest
performing Designs stores. The earnings and cash flow benefit derived from the
restructuring totaled $2.7 million and $2.0 million for fiscal 1995 and $1.6
million and $1.4 million for fiscal year 1994, respectively. The costs to close
these 15 stores totaled $9.6 million, comprised of $6.1 million cash and $3.5
million of noncash costs. Total costs of $9.6 million to close the 15 stores
were less than the original pre-tax $15.0 million estimate, primarily due to
favorable negotiations with landlords. The remaining reserve was recognized in
fiscal 1995 and fiscal 1994 as non-recurring pre-tax income in the amounts of
$2.2 million and $3.2 million, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for fiscal year 1995 increased to $8.8
million from $6.9 million in fiscal 1994 and $5.9 million in fiscal 1993,
primarily due to costs associated with new and remodeled stores. See "Liquidity
and Capital Resources - Capital Expenditures."
INTEREST EXPENSE
Interest expense in fiscal 1995 decreased to $196,000, compared with $609,000 in
fiscal 1994 and $1.5 million in fiscal 1993. This decrease is attributable to
interest cost savings associated with the prepayment of $6.0 million in the
first quarter of fiscal year 1994 and the retirement of the remaining $4.0
million of the Company's 1989 Senior Notes in the second quarter of fiscal 1994.
Fiscal 1994 interest expense also included a prepayment penalty and accelerated
write-off of debt issuance costs of approximately $350,000 related to the
prepayment.
INTEREST INCOME
Interest income for fiscal 1995 increased to $1,591,000 from $1,477,000 in
fiscal 1994 and $1,382,000 in fiscal 1993. This increase in fiscal 1995 was
primarily attributable to improved interest rates. The increase in interest
income for fiscal 1994 as compared to fiscal 1993 is attributable to higher cash
and investments levels offset by $433,000 of losses associated with the sale of
certain long-term investments. See "Liquidity and Capital Resources."
NET INCOME
Net income for fiscal 1995 was $9.8 million or $0.62 per share compared with
$16.9 million or $1.06 per share in fiscal 1994 and $5.7 million or $0.36 per
share in fiscal 1993. Each of these years have been impacted by income (charge)
related to restructuring, as discussed above, of $2.2 million or $0.08 per
share, $3.2 million or $0.12 per share and ($15 million) or ($0.56) per share
for the fiscal years 1995, 1994 and 1993, respectively. In fiscal 1994, the
Company also recognized non-recurring pre-tax income of $1.0 million or $0.04
per share related to the sale of certain stores, as discussed above.
- -------------------------------------------------------------------------------------------------
SEASONALITY
--------------------------------------------------------------------------
Fiscal 1995 Fiscal 1994 Fiscal 1993
- -------------------------------------------------------------------------------------------------
(Sales Dollars In Thousands)
First quarter $ 57,337 19.0% $ 48,960 18.4% $ 43,944 18.2%
Second quarter 66,993 22.3% 56,390 21.2% 51,337 21.3%
Third quarter 89,217 29.6% 80,755 30.4% 73,525 30.5%
Fourth quarter 87,527 29.1% 79,805 30.0% 72,119 30.0%
==========================================================================
$301,074 100.0% $265,910 100.0% $240,925 100.0%
18 Designs, Inc. Annual Report 1995
19
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
A comparison of sales in each quarter of the past three fiscal years is
presented on the preceding page. The amounts shown are not necessarily
indicative of actual trends, since such amounts also reflect the addition of
new stores, closing of stores and the remodeling of others during these
periods. Historically, the Company has experienced seasonal fluctuations in
revenues and income, with increases occurring during the Company's third and
fourth quarters as a result of "Back to School" and "Holiday" seasons. A
comparison of quarterly sales, gross profit, net income and net income per
share for the past two fiscal years is presented in Note N of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of the Company's liquidity, capital resources, and
capital expansion plans 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. Actual results and
strategic directions may differ from those estimates and assumptions. The
Company encourages readers of this information to refer to the Company's Current
Report on Form 8-K, previously filed with the United States Securities and
Exchange Commission on April 30, 1996, which identifies certain risks and
uncertainties that may impact the future earnings and direction of the Company.
The Company's primary cash needs are for operating expenses, including cash
outlays associated with the development of the Boston Traders[Registered
Trademark] brand product line, seasonal inventory purchases, and capital
expenses for new and remodeled stores and acquisitions.
In June 1994, Levi Strauss & Co. informed the Company that it wanted to focus
the future relationship between the two companies on the Original
Levi's[Registered Trademark] Stores joint venture and to reduce the Company's
dependency on Levi Strauss & Co. brands. Levi Strauss & Co. informed the Company
that it did not see a growth opportunity for the Company's Designs stores in the
exclusively Levi's[Registered Trademark] format. However, Levi Strauss & Co.
informed the Company that it did see an opportunity for growth of the Company's
Designs stores if the format was changed to a multi-brand format. Levi Strauss &
Co. advised the Company that it believed that this would avoid consumer
confusion between the Original Levi's[Registered Trademark] Stores and Designs
stores. According to Levi Strauss & Co., this would require that not more than
70% of the product mix in the Designs stores be Levi Strauss & Co. product, that
the format and presentation of the stores be "supportive" of its marketing and
brand objectives and that Levi Strauss & Co. approve that format beforehand. If
the Company does change the format and expand the Designs store chain, Levi
Strauss & Co. has said that it will require that the Company's existing Designs
stores be converted to the new multi-brand format over a mutually agreeable
period of time.
In the second quarter of fiscal 1995 the Company acquired certain assets of
Boston Trading, as discussed more fully below. This acquisition was completed so
that the Company would own the Boston Traders[Registered Trademark] brand and
certain Boston Traders[Registered Trademark] outlet store assets. The Company
currently plans to use the Boston Traders[Registered Trademark] brand to
transition from a single vendor retailer to a vertically integrated retailer
featuring the Boston Traders[Registered Trademark] brand and select Levi Strauss
& Co. brands. As a result of this acquisition, the Company expects to incur, on
an annual basis, approximately $5.0 million of on-going expenses associated with
the design, sourcing, distribution and merchandising of the Boston
Traders[Registered Trademark] brand and increased working capital needs to
support the merchandising of the Boston Traders[Registered Trademark] brand in
its stores. In fiscal 1997 the Company plans to open new speciality stores which
will predominantly feature Boston Traders[Registered Trademark] brand product.
Based on the level of consumer acceptance of the brand, the Company plans,
barring unforeseen circumstances, to expand this new concept nationally. The
Company believes that Levi Strauss & Co. would apply the same new branch opening
policies and practices to the Company's expansion of this new store format that
are applicable to other retailers of Levi Strauss & Co. products. The Company
currently plans to fund this expansion through existing cash from operations.
WORKING CAPITAL AND CASH FLOWS
The following table provides financial data regarding the Company's liquidity
position for each fiscal year:
Fiscal Years
---------------------------------
1996 1995 1994
- ---------------------------------------------------------------
(Dollars in thousands)
Cash provided
by operations $10,770 $20,818 $13,491
Working Capital 64,557 55,725 35,671
Current Ratio 4.3:1 3.1:1 2.1:1
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 provided by operating activities was $10.8 million, $20.8
million and $13.5 million in fiscal 1995, 1994, and 1993, respectively. The
Company's reduced cash flow from operations in
19 Designs, Inc. Annual Report 1995
20
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
fiscal 1995 reflects a decrease in earnings before depreciation due to
additional infrastructure costs associated with the development of the Boston
Traders[Registered Trademark] brand, increased operating expenses associated
with the acquired Boston Traders[Registered Trademark] outlet stores and the
timing of other working capital accounts. The Company's working capital at
February 3, 1996 was approximately $64.6 million as compared to $55.7 million in
the prior year. The $8.9 million increase was attributable to an increase in
inventory in connection with the Boston Trading acquisition, the maturity of
certain long-term investments and final payments under the Company's
restructuring program.
At February 3, 1996, the Company had cash and investments totaling $26.0 million
and a $1.0 million promissory note issued in connection with the Boston Trading
acquisition discussed below. The following table provides a comparative analysis
of the Company's cash and investments at the end of fiscal 1995 and 1994:
--------------------------------
February 3, January 28,
1996 1995
(Fiscal 1995) (Fiscal 1994)
- -----------------------------------------------------------------------
(In thousands)
Cash and cash equivalents $13,941 $22,424
Short-term investments 5,978 --
Long-term investments 6,050 15,831
---------------------------
Total cash and investments $25,969 $38,255
===========================
Long-term investments of $6.1 million at February 3, 1996 consisted of
government securities with a weighted-average maturity of 2.7 years and an
average interest rate of 5.1%. Long-term investments of $15.8 million at January
28, 1995 consisted of government securities with a weighted-average maturity of
approximately 3.2 years and an average interest rate of 6.2%.
At February 3, 1996, total inventories were up $5.4 million, or 10%, from
January 28, 1995. This increase is primarily due to an increase in the number of
joint venture stores and inventory purchased as part of the Boston Trading
acquisition, offset partially by a reduction of inventory due to closed stores
and continued efforts by the Company to manage inventory levels.
In August 1995, Levi Strauss & Co., the Company's principal vendor, changed its
payment terms with the Company to payment due within 30 days of invoice from
payment within 10 days after the month in which the goods are received. In the
second quarter of fiscal 1995, the Company began sourcing its own merchandise
with various off-shore vendors. To date, payment to these vendors have been
through the issuance of letters of credit, which require payment upon shipment
of merchandise.
The Company anticipates that use of this payment method will be proportionate to
its Boston Traders[Registered Trademark] product purchases.
The Company entered into a revolving credit agreement which provides for a $20.0
million facility through May 31, 1997. During the second quarter of fiscal 1995,
the Company signed an amendment to this agreement, which provides that $5.0
million of the $20.0 million line of credit may be used as a letter of credit
facility for purchases of inventory. At February 3, 1996, $3.0 million of the
$5.0 million was available for the issuance of letters of credit. During fiscal
year 1995, the Company had average short-term borrowings of $341,000.
During the third quarter of fiscal 1994, the Company's Board of Directors
authorized the repurchase of up to two million shares of the Company's Common
Stock. The Company did not repurchase any shares of the Company's Common Stock
during fiscal 1995. In fiscal 1994, the Company repurchased and retired 300,000
shares at a cost of $2.3 million. The retirement of shares was accounted for as
a reduction in Common Stock and additional paid-in capital.
CAPITAL EXPENDITURES
The Company believes that its cash and liquid assets, operating cash flows,
access to capital markets and borrowing capacity taken together provide adequate
resources to fund ongoing operating requirements and planned capital
expenditures.
The following table lists the stores opened and remodeled and capital
expenditures for those stores for the fiscal years presented:
1995 1994 1993
- ------------------------------------------------------------------------
Levi's[Registered Trademark]
Outlet by Designs -- 15 7
Designs 11 --
Boston Traders[Registered
Trademark] outlets 2 -- --
Dockers[Registered Trademark]
Shop -- -- 1
Joint venture:
Original Levi's[Registered
Trademark] Stores 3 4 2
Levi's[Registered Trademark]
Outlets 4 -- --
-----------------------------------
Total new stores 10 20 10
Remodeled Designs 11 3 3
Remodeled Levi's[Registered
Trademark] Outlet by Designs 7 14 --
-----------------------------------
Total remodeled stores 18 17 3
Capital expenditures (000's) $10,971 $ 9,500 $ 5,100
===================================
20 Designs, Inc. Annual Report 1995
21
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
On May 2, 1995, the Company acquired certain assets of Boston Trading in
accordance with the terms of an Asset Purchase Agreement dated April 21, 1995.
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
principal amount of the promissory note is payable in two equal annual
installments through May 1997. The purchase price has been allocated to the
assets acquired, including certain intangible assets, such as trademarks and
licensing agreements, based on their respective values. Other assets acquired
included all inventory and fixed assets associated with 33 then existing Boston
Traders[Registered Trademark] outlet stores.
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[Registered Trademark] brand products and
jeans-related products. The joint venture that was established by the
Partnership Agreement is known as The Designs/OLS Partnership (the
"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 their interest in the joint venture after five years. The Company
previously announced that the Partnership may open up to thirty-five to fifty
Original Levi's[Registered Trademark] Stores and Levi's[Registered Trademark]
Outlets throughout eleven Northeast states and the District of Columbia through
the end of fiscal 1999. At the end of fiscal 1995, there were eleven Original
Levi's[Registered Trademark] Stores and four Levi's[Registered Trademark]
Outlets.
In connection with the formation of the joint venture, Designs JV Corp.
contributed, for a 70% interest in the joint venture, eight of the Company's
then existing Original Levi's[Registered Trademark] Stores and three leases for
unopened stores. At the same time, LDJV Inc., the joint venture subsidiary of
Levi's Only Stores, Inc., contributed approximately $4.7 million in cash to the
joint venture in exchange for a 30% interest. During fiscal 1995, the
Partnership opened three Original Levi'sRegistration Mark Stores and four
Levi's[Registered Trademark] Outlet stores, which were funded by working capital
and partner contributions of $3.6 million and $1.6 million from Designs JV Corp.
and LDJV Inc., respectively.
It is the intention of the partners in the joint venture that the joint
venture's working capital and funds for its future expansion will come from the
joint venture's operations, capital contributions, loans from the partners and
borrowings from third parties.
In June 1994, Levi Strauss & Co. advised the Company that it did not see any
additional growth in the Levi's[Registered Trademark] Outlet by Designs store
format, other than additional outlet stores that might be opened by the
Partnership. As such, the Company does not currently plan to open any
Levi's[Registered Trademark] Outlet by Designs stores during fiscal 1996. In
addition, the joint venture is opening its own outlets, which may impact the
availability of goods to the Levi'sRegistration Mark Outlet by Designs stores.
Present plans are that future growth of the Company will be derived from the
expansion of new stores that will feature the Boston Traders[Registered
Trademark] brand and stores opened under the joint venture. The Company
estimates that capital expenditures during fiscal 1996 will be approximately
$17.0 million, which will be used to remodel three existing stores, open up to
ten new joint venture stores, relocate corporate facilities, and enhance
management information systems.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed of" was issued. This
statement establishes guidelines for recognizing and measuring impairment
losses, requiring the carrying amount of impaired assets to be reduced to fair
value whenever events or changes in circumstances suggest that the carrying
value of the assets may not be recoverable. The Company will be required to
adopt this statement for fiscal year 1996.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") was issued and requires
the Company to elect either expense recognition under FAS 123 or its
disclosure-only alternative for stock-based employee compensation. FAS 123 must
be adopted in the Company's fiscal 1996 financial statements with comparable
disclosures for prior years. The Company has elected the disclosure-only
alternative and accordingly, the Company will be required to disclose the pro
forma net income or loss and per share amounts in the notes to the consolidated
financial statements using the fair value based method beginning in fiscal 1996
with comparable disclosures for fiscal 1995. The Company has not yet determined
the impact of these pro forma adjustments.
EFFECTS OF INFLATION
Although the Company's operations are influenced by general economic trends, the
Company does not believe that inflation has had a material effect on the results
of its operations in the last three fiscal years.
21 Designs, Inc. Annual Report 1995
22
================================================================================
CONSOLIDATED BALANCE SHEETS
February 3, 1996 and January 28, 1995
February 3, 1996 January 28, 1995
-----------------------------------
(Fiscal 1995) (Fiscal 1994)
- -------------------------------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 13,941 $ 22,424
Short-term investments 5,978 --
Accounts receivable 473 4,223
Inventories 58,008 52,649
Deferred income taxes (Note E) 922 1,579
Pre-opening costs, net 884 481
Prepaid expenses 3,968 1,213
--------------------------
Total current assets 84,174 82,569
Property and equipment, net of
accumulated depreciation and amortization (Note B) 36,083 26,503
Other assets:
Long-term investments (Note C) 6,050 15,831
Deferred income taxes (Note E) 2,698 1,771
Intangible assets (Note L) 2,901 --
Other assets 743 621
--------------------------
Total assets $132,649 $127,295
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,185 $ 13,210
Accrued expenses and other current liabilities 8,346 5,944
Accrued rent 2,586 7,690
Current portion of long-term note (Note L) 500 --
--------------------------
Total current liabilities 19,617 26,844
--------------------------
Long-term note payable (Note L) 500 --
Commitments and contingencies (Note F)
Minority interest (Note K) 6,447 4,749
Stockholders' equity (Note G):
Preferred Stock, $0.01 par value, 1,000,000 shares
authorized, none issued
Common Stock, $0.01 par value, 50,000,000 shares
authorized, 15,818,000, and 15,755,000 shares issued
at February 3, 1996 and January 28, 1995, respectively 158 157
Additional paid-in capital 52,767 52,619
Retained earnings 53,160 42,926
--------------------------
Total stockholders' equity 106,085 95,702
--------------------------
Total liabilities and stockholders' equity $132,649 $127,295
==========================
The accompanying notes are an integral part of the consolidated financial
statements.
22 Designs, Inc. Annual Report 1995
23
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
For the fiscal years ending February 3, 1996, January 28, 1995 and January 29, 1994
Fiscal Fiscal Fiscal
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $301,074 $265,910 $240,925
Cost of goods sold including occupancy 211,989 181,784 165,704
----------------------------------
Gross profit 89,085 84,126 75,221
----------------------------------
Expenses:
Selling, general and administrative 66,988 52,916 44,677
Restructuring (income) charges (Note J) (2,200) (3,200) 15,000
Depreciation and amortization 8,752 6,879 5,885
----------------------------------
Total expenses 73,540 56,595 65,562
==================================
Operating income 15,545 27,531 9,659
Interest expense 196 609 1,534
Interest income 1,591 1,477 1,382
----------------------------------
Income before minority interest, income taxes and
cumulative effect of change in accounting for income taxes 16,940 28,399 9,507
Less minority interest (Note K) 425 -- --
==================================
Income before income taxes and cumulative effect 16,515 28,399 9,507
of change in accounting for income taxes
Provision for income taxes (Note E) 6,742 11,496 3,838
----------------------------------
Income before cumulative effect of change in
accounting for income taxes 9,773 16,903 5,669
Cumulative effect of change in
accounting for income taxes (Note A) -- -- 79
----------------------------------
Net income $ 9,773 $ 16,903 $ 5,748
==================================
Income before cumulative effect of change in
accounting per common and common equivalent share $ 0.62 $ 1.06 $ 0.36
Cumulative effect of change in accounting per common
and common equivalent share -- -- N/M
----------------------------------
Net income per common and common equivalent share $ 0.62 $ 1.06 $ 0.36
==================================
Weighted average common and common 15,770 15,914 15,916
equivalent shares outstanding
The accompanying notes are an integral part of the consolidated financial
statements.
23 Designs, Inc. Annual Report 1995
24
================================================================================
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the fiscal years ending February 3, 1996, January 28, 1995 and January 29,
1994
Additional
Paid-in Retained
Common Stock Capital Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Balance at January 30, 1993 15,858 $159 $53,449 $20,768 $ 74,376
============================================================
Issuance of Common Stock:
Exercises under option programs 102 1 1,058(1) -- 1,059
Net income -- -- -- 5,748 5,748
------------------------------------------------------------
Balance at January 29, 1994 15,960 $160 $54,507 $26,516 $ 81,183
============================================================
Issuance of Common Stock:
Exercises under option programs 95 -- 438(1) -- 438
Retirement of shares under the stock repurchase program (300) (3) (2,326) -- (2,329)
Unrealized loss on investments (493) (493)
Net income 16,903 16,903
------------------------------------------------------------
Balance at January 28, 1995 15,755 $157 $52,619 $42,926 $ 95,702
============================================================
Issuance of Common Stock:
Exercises under option programs 63 1 148(1) -- 149
Unrealized gain on investments -- -- -- 461 461
Net income 9,773 9,773
------------------------------------------------------------
Balance at February 3, 1996 15,818 $158 $52,767 $53,160 $106,085
============================================================
<FN>
(1)Including related tax benefit.
The accompanying notes are an integral part of the consolidated financial
statements.
24 Designs, Inc. Annual Report 1995
25
================================================================================
STATEMENTS OF CASH FLOWS
For the fiscal years ending February 3, 1996, January 28, 1995, and January
29, 1994
Fiscal Fiscal Fiscal
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 9,773 $ 16,903 $ 5,748
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 8,752 6,879 5,885
Deferred income taxes (560) 4,251 (6,385)
Minority interest 425 -- --
Gain on sale of stores -- (1,069) --
Loss from sale of investments 71 464 145
Loss (Gain) from disposal of property and equipment 1,382 134 (348)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 3,750 (13) (219)
Inventories (2,342) (8,360) (4,086)
Prepaid expenses (2,656) 15 (533)
Prepaid income taxes -- (28) --
Income taxes payable (98) (1,374) 1,301
Accounts payable (5,025) 6,502 (2,904)
Restructuring reserve -- (6,422) 15,000
Accrued expenses and other current liabilities 2,402 2,948 (703)
Accrued rent (5,104) (12) 590
---------------------------------------
Net cash provided by operating activities 10,770 20,818 13,491
---------------------------------------
Cash flows from investing activities:
Additions to property and equipment (18,021) (12,604) (8,116)
Incurrence of pre-opening costs (1,582) (809) (440)
Proceeds from disposal of property and equipment 92 75 1,061
Sale (Purchase) of investments 4,483 8,971 (13,912)
(Increase) Reduction in other assets (218) (486) 97
---------------------------------------
Net cash used for investing activities (15,246) (4,853) (21,310)
---------------------------------------
Cash flows from financing activities:
Payment for acquisition of a business (5,428) -- --
Repayments of long-term debt -- (10,000) (3,000)
Repurchase of common stock -- (2,329) --
Proceeds from minority shareholder of joint venture 1,560 4,749 --
Distributions to minority shareholder (287) -- --
Issuance of common stock under option program (1) 148 438 1,059
---------------------------------------
Net cash used for financing activities (4,007) (7,142) (1,941)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (8,483) 8,823 (9,760)
Cash and cash equivalents:
Beginning of the year 22,424 13,601 23,361
---------------------------------------
End of the year $ 13,941 $ 22,424 $ 13,601
=======================================
<FN>
(1)Including related tax benefit.
The accompanying notes are an integral part of the consolidated financial
statements.
25 Designs, Inc. Annual Report 1995
26
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
LINE OF BUSINESS
Designs, Inc. (the "Company") is engaged in the retail sales of clothing and
accessories. Levi Strauss & Co. is the most significant vendor of the Company,
representing a majority of the Company's merchandise purchases.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts, transactions and profits are
eliminated. Certain prior year amounts have been reclassified to conform with
current year presentation.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
FISCAL YEAR
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 31. Fiscal years 1995, 1994, and 1993 ended on February 3,
1996, January 28, 1995, and January 29, 1994, respectively. Fiscal year 1995 was
a 53 week period, whereas fiscal 1994 and 1993 were 52 week periods.
CASH AND CASH EQUIVALENTS
Short-term investments, which have a maturity of ninety days or less when
acquired, are considered cash equivalents. The carrying value approximates fair
value.
INVENTORIES
Merchandise inventories are valued at the lower of cost or market using the
retail method on the last-in first-out basis ("LIFO"). If inventories had been
valued on the first-in first-out basis ("FIFO"), inventories at February 3, 1996
and January 28, 1995 would be approximately $58,809,000 and $54,372,000
respectively. The benefit from LIFO was $924,000 and $200,000 in fiscal 1995 and
1994, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while repairs and maintenance are charged to expense as incurred.
Upon retirement or other disposition, the cost and related depreciation of the
assets are removed from the accounts and the resulting gain or loss is reflected
in income. Depreciation is computed on the straight-line method over the
estimated useful lives as follows:
Motor vehicles Five years
Store furnishings Five to ten years
Equipment Five to eight years
Leasehold improvements Lesser of useful lives
or related lease life
Software development Five years
INVESTMENTS
The Company's investments, consisting primarily of government securities, are
classified as available for sale and are recorded at fair value, in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Fair value is based upon
quoted market prices on the last day of the fiscal year. Unrealized changes in
value are recorded as a separate component of stockholders' equity, net of the
related deferred tax asset or liability.
PRE-OPENING COSTS
Store opening costs, consisting primarily of payroll, are capitalized when
incurred and charged to expense during the first 12 months of store operations.
Amortization expense of pre-opening costs were $1,180,000 and $433,000 for
fiscal 1995 and 1994, respectively.
INCOME TAXES
In the first quarter of fiscal 1993, the Company adopted SFAS No. 109
"Accounting for Income Taxes". In connection with such adoption, the Company
recorded an income tax benefit of $79,000 or $0.01 per share. This amount has
been reflected in the consolidated statement of income for the year ended
January 29, 1994 as the cumulative effect of an accounting change.
MINORITY INTEREST
As more fully discussed in Note K, minority interest at February 3, 1996 and
January 28, 1995 represents LDJV Inc.'s 30% interest in a joint venture with
Designs JV Corp., a wholly-owned subsidiary of the Company. LDJV Inc. is a
wholly-owned subsidiary of Levi's Only Stores, Inc., which is a wholly-owned
subsidiary of Levi Strauss & Co.
BANK CHARGES
Bank charges related to credit card sales are recorded as selling expenses.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
26 Designs, Inc. Annual Report 1995
27
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STOCK SPLITS
Retroactive effect is given to the Company's payment on June 22, 1993 of a
3-for-2 stock split effected in the form of a 50% stock dividend on its Common
Stock to its stockholders of record on June 8, 1993. All share and per share
data have been restated to reflect this stock split.
NET INCOME PER SHARE
Net income per share of Common Stock is based upon the weighted average number
of common, and when greater than 3% dilutive, common equivalent shares
outstanding during the period. Common equivalent shares result from the assumed
exercise of dilutive stock options.
During fiscal 1994, the Company's Board of Directors authorized the repurchase
of up to two million shares of the Company's common stock. The Company did not
repurchase any shares of the Company's common stock during fiscal 1995. During
fiscal 1994, the Company repurchased and retired 300,000 shares at a cost of
$2,329,000. The retirement of shares was accounted for as a reduction in common
stock and additional paid-in capital.
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
February 3, January 28,
1996 1995
------------------------------
(IN THOUSANDS)
Motor vehicles $ 169 $ 79
Store furnishings 20,589 16,273
Equipment 7,708 6,503
Leasehold improvements 30,978 25,513
Purchased software 2,576 1,054
Construction in progress 365 34
---------------------------
62,385 49,456
Less accumulated depreciation 26,302 22,953
---------------------------
Total property and equipment $36,083 $26,503
===========================
C. INVESTMENTS
At February 3, 1996, and January 28, 1995, the Company's investment securities
were classified as available-for-sale and reported at fair value, including net
unrealized losses of $68,000 and $804,000 respectively.
Investments were as follows:
February 3, January 28,
1996 1995
---------------------------------------------
Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Short Term Investments:
Mortgage-backed securities $5,993 $5,978 -- --
=============================================
Total $5,993 5,978 -- --
=============================================
Long Term Investments:
Mortgage-backed securities -- -- $ 6,039 $ 5,800
U.S. Government $5,834 $5,781 8,937 8,418
Municipal bonds 269 269 1,659 1,613
---------------------------------------------
Total $6,103 $6,050 $16,635 $15,831
=============================================
The Company's investment
portfolio matures as follows:
Less than one year $5,978
1-5 years 6,050
---------------------------------------------
$12,028
=============================================
The Company incurred realized losses on the sale of certain long-term
investments of $71,000 and $464,000 in fiscal 1995 and 1994, respectively.
D. DEBT OBLIGATIONS
The Company entered into a revolving credit agreement on November 17, 1994 under
which BayBank Boston, N.A. and State Street Bank and Trust Company provided the
Company with a $20.0 million facility. Under the credit agreement, the line of
credit terminates on May 31, 1997 and bears interest at BayBank Boston, N.A.'s
prime rate or LIBOR-based fixed rates. The terms of the credit agreement require
the Company to maintain specific net worth, inventory turnover and cash flow
ratios. Under the revolving credit agreement, the Company has agreed not to pay
dividends on its Common Stock if such payment would cause the Company to be in
default of certain financial ratios. The Company did not pay any dividends in
fiscal years 1995 and 1994.
During the second quarter of fiscal 1995, the Company signed an amendment to
this agreement which provides that $5.0 million of the $20.0 million line of
credit can be used
27 Designs, Inc. Annual Report 1995
28
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
as a letter of credit facility for purchases of inventory. At February 3, 1996,
$3.0 million of the $5.0 million was available for the issuance of letters of
credit.
The Company paid interest of $172,000, $799,000 and $1,550,000 for the fiscal
years 1995, 1994 and 1993, respectively. Fiscal year 1994 includes a prepayment
penalty and accelerated write off of debt issuance costs of $350,000.
E. INCOME TAXES
The components of the net deferred tax asset as of February 3, 1996 and January
28, 1995 are as follows:
February 3, January 28,
1996 1995
---------------------------
(IN THOUSANDS)
Deferred tax assets - current:
Inventory reserves $1,145 $ 319
Restructuring reserve -- 2,362
Accrued expenses 641 --
--------------------
Subtotal 1,786 2,681
Deferred tax liabilities - current:
LIFO reserve 864 1,102
--------------------
Net deferred tax asset - current $ 922 $1,579
====================
Deferred tax asset - noncurrent:
Excess of book over tax
depreciation/amortization $2,560 $1,460
Capital loss carryforward 117 --
Unrealized loss on investment 21 311
--------------------
Total deferred tax assets - noncurrent $2,698 $1,771
====================
The provision for income taxes consists of the following:
Fiscal Years Ending
------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
- ----------------------------------------------------------------------------
(IN THOUSANDS)
Current:
Federal $6,241 $ 5,561 $ 7,855
State 1,031 1,783 2,303
------------------------------------------
7,272 7,344 10,158
Deferred:
Federal (481) 3,382 (5,029)
State (49) 770 (1,291)
------------------------------------------
(530) 4,152 (6,320)
Total provision $6,742 $11,496 $ 3,838
==========================================
The following is a reconciliation between the statutory and effective income tax
rates:
Fiscal Years Ending
----------------------------------------
February 3, January 28, January 29,
1996 1995 1994
- --------------------------------------------------------------------
Statutory federal
income tax rate 35.0% 35.0% 35.0%
State income and
other taxes,
net of federal
tax benefit 5.8 5.5 5.4
----------------------------------------
Effective tax rate 40.8% 40.5% 40.4%
========================================
The Company paid income taxes of $7,452,000, $8,579,000 and $8,388,000 during
fiscal years 1995, 1994 and 1993, respectively. These figures represent the net
of payments and receipts.
F. COMMITMENTS AND CONTINGENCIES
At February 3, 1996, the Company was obligated under operating leases covering
store and office space, automobiles and certain equipment (with both
unaffiliated and related parties) for future minimum rentals as follows:
Unaffiliated Related Parties Total
- ----------------------------------------------------------------------
(IN THOUSANDS)
1996 $ 28,384 $118 $ 28,502
1997 25,713 -- 25,713
1998 23,814 -- 23,814
1999 20,320 -- 20,320
2000 18,031 -- 18,031
Thereafter 56,707 -- 56,707
----------------------------------------------
$172,969 $118 $173,087
==============================================
28 Designs, Inc. Annual Report 1995
29
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In addition to minimum rental payments, many of the store leases include
provisions for common area maintenance, mall charges, escalation clauses and
additional rents based on percentage of store sales above designated levels.
Amounts charged to operations, excluding the related party lease, were
$32,998,000, $27,250,000 and $25,920,000 in fiscal years 1995, 1994 and 1993,
respectively. Amounts charged to operations for the related party lease were
$764,000, $498,000 and $515,000 in fiscal years 1995, 1994 and 1993,
respectively. See Note H for additional information regarding the related party
lease. The Company remains principally liable on three leases which were
assigned to Levi's Only Stores, Inc., a wholly-owned subsidiary of Levi Strauss
& Co., in connection with the sale of the Company's Original Levi's[Registered
Trademark] Store located in Minneapolis, Minnesota and two Dockers[Registered
Trademark] Shops located in Minneapolis, Minnesota and Cambridge, Massachusetts.
The store leases in Minneapolis and Cambridge expire in January 2003 and January
2002, respectively.
The Company has signed a new lease for its corporate headquarters in Needham,
Massachusetts. The term of the lease is for ten years beginning in November
1995. The lease provides for the Company to pay all related occupancy costs
associated with the land and headquarters building.
G. STOCK OPTIONS
The Company's Board of Directors and its stockholders previously approved the
1987 Incentive Stock Option Plan (the "Incentive Plan") pursuant to which stock
options to purchase up to 562,500 shares of Common Stock may be issued to key
employees (including executive officers and directors who are employees). The
Incentive Plan is administered by the Compensation Committee of the Company's
Board of Directors, which designates the optionees, number of shares for each
option grant, option prices (which may not be less than fair value on the date
of grant), date of grant, vesting schedule and period of option (which may not
be more than ten years). All Incentive Plan options are non-assignable. The
Incentive Plan terminates when all shares issuable thereunder have been issued.
On March 23, 1989, the Board of Directors authorized an increase in the number
of shares issuable under the Incentive Plan to 787,500. At the Special Meeting
in Lieu of Annual Meeting held on June 13, 1989, the stockholders approved this
increase and the amendment to the Incentive Plan.
The Company's Board of Directors and its stockholders also previously approved
the 1987 Non-Qualified Stock Option Plan (the "Non-Qualified Plan") pursuant to
which stock options to purchase up to 337,500 shares of Common Stock which are
not "incentive stock options" (as defined in Section 422 of the Internal Revenue
Code, as amended) may be issued to key employees (including executive officers
and directors of the Company) and directors who are not employees of the
Company. The Non-Qualified Plan is administered by the Compensation Committee of
the Company's Board of Directors, which designates the optionees, number of
shares for each option grant, option prices (which may not be less than 85% of
the fair market value on the date of grant), date of grant, vesting schedule and
period of option. All Non-Qualified Plan options are non-assignable. The
Non-Qualified Plan terminates when all shares issuable have been issued.
Outstanding options under both the Incentive Plan and the Non-Qualified Plan
expire no more than seven years after the date of grant.
On April 3, 1992, the Board of Directors adopted the 1992 Stock Incentive Plan
(the "1992 Plan"), which became effective on June 9, 1992 when it was approved
by the stockholders of the Company. Under the 1992 Plan, up to 1,350,000 shares
of common stock may be issued pursuant to "incentive stock options" (as defined
in Section 422 of the Internal Revenue Code, as amended), options which are not
"incentive stock options," conditioned stock awards, unrestricted stock awards
and performance share awards. The 1992 Plan is administered by the Compensation
Committee, all of the members of which are non-employee directors. The
Compensation Committee makes all determinations with respect to amounts and
conditions covering awards under the 1992 Plan. Options have never been granted
at any price less than fair value on the date of the grant. Options granted to
employees, executives and directors typically vest over five, three and three
years, respectively. Options granted under the 1992 Plan expire ten years from
the date of grant. The 1992 Plan terminates when all shares issuable thereunder
have been issued.
On April 26, 1994, the Board of Directors authorized an increase in the number
of shares issuable under the 1992 Plan to 1,850,000. The stockholders approved
this increase and an amendment to the 1992 Plan at the Annual Meeting held on
June 14, 1994.
29 Designs, Inc. Annual Report 1995
30
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of shares subject to the option plans described above is as
follows:
1987 INCENTIVE STOCK OPTION PLAN
Fiscal Year
------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------
Outstanding at
beginning of year 160,561 241,365 302,498
Options granted -- -- --
Options canceled 1,670 14,720 2,986
Options exercised 62,552 66,084 58,147
------------------------------------
Outstanding at end of year 96,339 160,561 241,365
====================================
Options exercisable at
end of year 89,139 129,273 167,311
Common shares reserved
for future grants
at end of year 21,605 19,935 5,215
Option prices per common share:
Granted during the year -- -- --
Canceled during the year $ 2.22 $ 2.00 $ 2.00
to to to
$ 2.67 $ 11.17 $ 2.67
Exercised during the year $ 1.62 $ 1.62 $ 1.62
to to to
$ 2.67 $ 11.17 $ 11.17
Outstanding at
end of year $ 1.62 $ 1.62 $ 1.62
to to to
$ 11.17 $ 11.17 $ 11.17
1987 NON-QUALIFIED STOCK OPTION PLAN
Fiscal Year
------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------
Outstanding at
beginning of year 76,948 99,448 198,583
Options granted -- -- --
Options canceled -- -- 63,690
Options exercised -- 22,500 35,445
------------------------------------
Outstanding at end of year 76,948 76,948 99,448
====================================
Options exercisable at
end of year 76,948 66,148 77,848
Common shares reserved
for future grants at
end of year -- -- --
Option prices per common share:
Granted during the year -- -- --
Canceled during the year -- -- $ 11.17
Exercised during the year -- $ 2.34 $ 2.78
to
$ 11.17
Outstanding at
end of year $ 2.34 $ 2.34 $ 2.34
to to to
$ 2.67 $ 2.67 $ 2.67
30 Designs, Inc. Annual Report 1995
31
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1992 STOCK INCENTIVE PLAN
FISCAL YEAR
------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Outstanding at
beginning of year 1,298,950 1,091,150 710,715
Options granted 440,500 406,000 410,000
Options canceled 219,400 191,600 20,765
Options exercised -- 6,600 8,000
------------------------------------
Outstanding at end of year 1,520,050 1,298,950 1,091,150
====================================
Options exercisable at
end of year 698,180 445,966 188,880
Common shares reserved
for future grants at
end of year 314,550 535,650 250,050
Option prices per common share:
Granted during the year $ 7.38 $ 9.00 $ 17.50
to to to
$ 10.50 $ 17.50 $ 21.50
Canceled during the year $ 8.00 $ 9.00 $ 11.17
to to
$ 18.00 $ 18.34
Exercised during the year -- $ 11.17 $ 11.17
Outstanding at
end of year $ 7.38 $ 9.00 $ 11.17
to to to
$ 21.50 $ 21.50 $ 21.50
On July 26, 1993 stock options covering an aggregate of 67,500 shares of Common
Stock were granted outside of the Incentive Plan, the Non-Qualified Plan and the
1992 Plan to the non-employee directors of the Company. Each of these options
has an exercise price of $17.50 per share and each remained outstanding as of
the end of fiscal 1995. These options become exercisable in three equal
installments commencing twelve months following the date of grant and have a 10
year term.
When shares are sold within one year of exercise or within two years from date
of grant, the Company derives a tax deduction measured by the excess of the
market value over the option price at the date the shares are sold, which
approximated $239,000, $511,000, and $1,200,000 in fiscal years 1995, 1994 and
1993, respectively.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation (FAS 123) was issued and requires the
Company to elect either expense recognition under FAS 123 or its disclosure-only
alternative for stock-based employee compensation. The expense recognition
provision encouraged by FAS 123 would require fair-value based financial
accounting to recognize compensation expense for employee stock compensation
plans. FAS 123 must be adopted in the Company's fiscal 1996 financial statements
with comparable disclosures for prior years. The Company has elected the
disclosure-only alternative and accordingly, the Company will be required to
disclose the pro forma net income or loss and per share amounts in the notes to
the financial statements using the fair value based method beginning in fiscal
1996 with comparable disclosures for fiscal 1995. The Company has not yet
determined the impact of these pro forma adjustments.
H. RELATED PARTIES
The Company leases its headquarters in Chestnut Hill, Massachusetts, from Durban
Trust, a nominee trust of which the sole beneficiary is a partnership affiliated
with Stanley I. Berger, the Chairman of the Board of the Company and the estate
of Calvin Margolis, a former director of the Company. The general partner of the
beneficiary is a corporation controlled by Mr. Berger and the estate of Mr.
Margolis, and the only limited partners of the beneficiary are Mr. Berger and
the estate of Mr. Margolis, individually. Total rent paid to Durban Trust in
fiscal 1995, 1994 and 1993 was approximately $764,000, $491,000 and $515,000,
respectively. The Company believes that the lease arrangements between the
Company and Durban Trust are on terms at least as favorable to the Company as it
would have expected to receive from a landlord unrelated to the Company, Mr.
Berger or the estate of Mr. Margolis for office facilities of equal quality. The
lease expires in fiscal 1996. See Note F.
Bernard M. Manuel, a Director of the Company, is the Chairman of the Board of
Cygne Designs, Inc. During fiscal year 1995 and 1994, Cygne Designs, Inc.
provided sourcing for the Company's private label products in its Designs
stores. The Company paid approximately $311,000 and $121,000 for merchandise
purchased from Fenn Wright & Manson, Inc. a division of Cygne Designs, Inc., for
fiscal years 1995 and 1994, respectively.
31 Designs, Inc. Annual Report 1995
32
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
James G. Groninger, a Director of the Company, is President of The BaySouth
Company. Prior to that he was a Managing Director of PaineWebber Incorporated.
During fiscal 1995, the Company paid The BaySouth Company $29,000 in fees and
expenses in connection with the development of the Company's Shareholders'
Rights Plan. During fiscal year 1994, the Company paid nominal fees to
PaineWebber related to the Company's stock repurchase program which is discussed
further in Note A. The Company believes that the investment banking services
provided by The BaySouth Company and PaineWebber Incorporated were provided on
terms at least as favorable to the Company as it would have expected to receive
from an investment bank unrelated to the Company or Mr. Groninger.
I. EMPLOYEE BENEFIT PLANS
On April 3, 1992, the Board of Directors of the Company voted to terminate the
Company's non-contributory defined benefit pension plan which covered all
employees. The termination was effective September 1, 1992, and all participants
in the plan became fully vested at that time. Total plan assets of approximately
$1.6 million were distributed to participants in fiscal 1994. The Company
recognized pension expense of $750,000 in fiscal year 1993 related to the plan
termination.
In fiscal 1992, the Company replaced the terminated plan described above with a
defined contribution 401(k) plan which covers all employees who have completed
one year of service. Under this plan, the Company may provide matching
contributions up to a stipul ated percentage of employee contributions. The plan
is fully funded by the Company and the matching contribution, if any, is
established each year by the Board of Directors. For fiscal 1995, the matching
contribution by the Company was set at 50% of contributions by eligible
employees up to a maximum of 6% of salary. The Company recognized $229,000,
$205,000 and $118,000 of expense under this plan in fiscal 1995, 1994 and 1993,
respectively.
J. RESTRUCTURING
In fiscal 1993, the Company recorded a non-recurring pre-tax charge of $15.0
million to cover the costs associated with the closing of 15 of its poorest
performing Designs stores. The earnings and cash flow benefit derived from the
restructuring totaled $2.7 million and $2.0 million for fiscal 1995 and $1.6
million and $1.4 million for fiscal year 1994, respectively. The costs to close
these 15 stores totaled $9.6 million, comprised of $6.1 million cash and $3.5
million of noncash costs. Total costs of $9.6 million to close the 15 stores
were less than the original pre-tax $15.0 million estimate, primarily due to
favorable negotiations with landlords. The remaining reserve was recognized in
fiscal 1995 and fiscal 1994 as non-recurring pre-tax income in the amounts of
$2.2 million and $3.2 million, respectively.
K. FORMATION OF JOINT VENTURE
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[Registered Trademark] brand products and jeans-related products. The
joint venture that was established by the Partnership Agreement is known as The
Designs/OLS Partnership (the "Partnership"). The Company previously announced
that the Partnership plans to open and operate thirty-five to fifty Original
Levi's[Registered Trademark] Stores and Levi's[Registered Trademark] Outlets
throughout eleven Northeast states and the District of Columbia through the end
of fiscal 1999. This includes the eleven Original Levi's[Registered Trademark]
Stores and four Levi's[Registered Trademark] Outlets open at the end of fiscal
1995. The Levi's[Registered Trademark] Outlet stores in the Partnership sell
only Levi's[Registered Trademark] brand products and close-out products of the
Original Levi's[Registered Trademark] Stores.
In connection with the formation of the joint venture, Designs JV Corp.
contributed, for a 70% interest in the joint venture, eight of the Company's
then existing Original Levi's[Registered Trademark] Stores and three leases for
then unopened stores in New York City, Nanuet, New York, and White Plains, New
York. These stores are included in the 35 to 50 stores described above. At the
same time, LDJV Inc., the joint venture subsidiary of Levi's Only Stores, Inc.,
contributed approximately $4.7 million in cash to the joint venture in exchange
for a 30% interest.
During October 1995, the Designs JV Corp. and LDJV Inc. agreed to provide an
additional capital contribution of cash totaling $5.2 million to the Partnership
to fund the Partnership's capital expenditures needs. Designs JV Corp. and LDJV
Inc. contributed $3,640,000 and $1,560,000, respectively. In accordance with the
Partnership Agreement, the Partnership distributed $670,000 and $287,000 to
Designs JV Corp. and LDJV Inc., respectively. These distributions represented
funds sufficient for each of the partners to pay taxes associated with the
earnings of the Partnership for the fiscal year ended February 3, 1996.
32 Designs, Inc. Annual Report 1995
33
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The term of the Partnership is ten years, however, the partnership agreement
contains certain exit rights that enable either partner to buy or sell their
interest in the Partnership after five years. The partnership agreement provides
for certain special capital account allocations and cash distributions, but
otherwise allocates and distributes income in proportion to the partners'
percentage ownership.
For financial reporting purposes, the Partnership's assets, liabilities and
results of operations are consolidated with those of the Company and LDJV Inc.'s
30% interest in the Partnership is included in the Company's financial
statements as minority interest.
L. BOSTON TRADING LTD., INC. ACQUISITION
On May 2, 1995, the Company acquired certain assets of Boston Trading Ltd., Inc.
("Boston Trading") in accordance with the terms of an Asset Purchase Agreement
dated April 21, 1995 among Boston Trading, Designs Acquisition Corp., the
Company and others (the "Purchase Agreement"). The Company paid $5,428,000
million in cash, financed by operations, and delivered a non-negotiable
promissory note in the principal amount of $1,000,000. The principal amount of
the promissory note is payable in two equal annual installments through May
1997. The note bears interest at the published prime rate and is payable
semi-annually from the date of acquisition. The purchase price has been
allocated to the assets acquired, including certain intangible assets,
principally trademarks and licensing agreements, based on their respective fair
values. Trademarks and licensing agreements are being amortized on a
straight-line basis over 15 years and 4 years, respectively. Other assets
acquired included all inventory and fixed assets associated with 33 Boston
Traders[Registered Trademark] outlet stores.
The following pro forma summary presents the consolidated results of operation
of the Company as if the acquisition had occurred as of the beginning of the
periods presented, after giving effect to certain adjustments, including
amortization of intangibles, decreased interest income related to cash used to
finance the acquisition and related income tax effects. Pro forma results of
operations for the twelve months ended February 3, 1996 and January 28, 1995
include Boston Trading results of operations for the period January 29, 1995
through May 1, 1995 and January 30, 1994 through January 28, 1995, respectively.
Pro forma results of operations for the twelve month period ended February 3,
1996 and January 28, 1995 assume that the acquisition occurred at January 29,
1995 and January 30, 1994, respectively.
1995 1994
- ---------------------------------------------------------------
Revenue $302,862 $279,512
Net income 9,086 14,723
Net income per share $ 0.58 $ 0.92
M. SHAREHOLDERS' RIGHTS PLAN
On May 1, 1995, the Board of Directors of the Company adopted a Shareholder
Rights Plan. Pursuant to the Plan, the Company entered into a Shareholder Rights
Agreement ("Rights Agreement") between the Company and its transfer agent.
Pursuant to the Rights Agreement, the Board of Directors declared a dividend
distribution of one preferred stock purchase right (the "Right(s)") for each
outstanding share of the Company's $0.01 par value Common Stock ("Common Stock")
to stockholders of record as of the close of business on May 15, 1995.
Initially, these Rights will not be exercisable and will trade with the shares
of the Company's Common Stock. In the event that a person becomes an "acquiring
person" or is declared an "adverse person" as each such term is defined in the
Rights Agreement, each holder of a Right (other than the acquiring person or the
adverse person) would be entitled to acquire such number of shares of preferred
stock which are equivalent to the Company's Common Stock having a value of twice
the then-current exercise price of the Right. If the Company is acquired in a
merger or other business combination transaction after any such event, each
holder of a Right would then be entitled to purchase, at the then-current
exercise price, shares of the acquiring company's common stock having a value of
twice the exercise price of the Right.
33 Designs, Inc. Annual Report 1995
34
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
N. SELECTED QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER FULL YEAR
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR 1995
Net Sales $57,337 $66,993 $89,217 $87,527 $301,074
Gross Profit 16,197 19,877 29,314 23,697 89,085
Non-recurring income on restructuring 2,200 -- -- -- 2,200
Net income 1,597 1,193 5,034 1,949 9,773
Net income per common and common equivalent share 0.10 0.08 0.32 0.12 0.62
FISCAL YEAR 1994
Net Sales $48,960 $56,390 $80,755 $79,805 $265,910
Gross Profit 13,209 17,394 27,016 26,507 84,126
Non-recurring income on restructuring -- -- -- 3,200 3,200
Net income 100 1,623 6,661 8,519 16,903
Net income per common and common equivalent share 0.01 0.10 0.42 0.54 1.06
Historically, the Company has experienced seasonal fluctuations in net sales,
gross profit and net income, with increases occurring during the Company's third
and fourth quarters as a result of "Back to School" and "Holiday" seasons.
Quarterly sales comparisons are not necessarily indicative of actual trends,
since such amounts also reflect the addition of new stores, closing of stores
and the remodeling of stores during these periods.
34 Designs, Inc. Annual Report 1995
35
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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The integrity and objectivity of the financial statements and the related
financial information in this report are the responsibility of the management of
the Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, where necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization and the
accounting records provide a reliable basis for the preparation of the financial
statements. The system of internal accounting control is regularly reviewed by
management and improved and modified as necessary in response to changing
business conditions.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with management and the Company's independent
accountants to review matters relating to the Company's financial reporting, the
adequacy of internal accounting control and the scope and results of audit work.
The independent accountants have free access to the Committee.
Coopers & Lybrand L.L.P., independent accountants, have been engaged to examine
the financial statements of the Company. The Report of Independent Accountants
expresses an opinion as to the fair presentation of the financial statements in
accordance with generally accepted accounting principles and is based on an
audit conducted in accordance with generally accepted auditing standards.
/s/ Joel H. Reichman /s/ William D. Richins
Joel H. Reichman William D. Richins
President and Chief Executive Officer Chief Financial Officer
35 Designs, Inc. Annual Report 1995
36
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Designs, Inc.:
We have audited the accompanying consolidated balance sheets of Designs, Inc. as
of February 3, 1996 and January 28, 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended February 3, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Designs, Inc. as
of February 3, 1996 and January 28, 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
February 3, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 11, 1996
36 Designs, Inc. Annual Report 1995
37
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CORPORATE AND SHAREHOLDER INFORMATION
BOARD OF DIRECTORS CORPORATE OFFICERS
Stanley I. Berger George F. Cavedon Brian J. Sequin
Chairman of the Regional Vice President, Regional Vice President,
Board of Directors Northeast Region Midatlantic Region
James G. Groninger Mary Ann Chenell Susan Shepherd
President, Vice President, Regional Manager,
The BaySouth Company Human Resources The Designs/OLS Partnership
Bernard M. Manuel James F. Duval Michael E. Strubing
Chairman of the Board, Regional Vice President, Vice President,
Cygne Designs, Inc. South Region Logistics
Joel H. Reichman Jan Falcione J. Neal Vantosky
President and Regional Manager, Vice President,
Chief Executive Officer Midwest Region Product Development
Melvin I. Shapiro Carolyn R. Faulkner Roderick M. Wills
Partner, Vice President, Vice President,
Tofias, Fleishman Controller Allocation
& Shapiro & Co., P.C.
Martin Goldstein
Peter L. Thigpen Vice President, CORPORATE OFFICES
Partner, Construction and Design
Executive Reserves 66 B Street
Alan B. Gruber Needham, MA 02194
Vice President, (617) 444-7222
EXECUTIVE OFFICERS Ethics and Corporate Compliance
Joel H. Reichman Marc G. Levy
President and Vice President,
Chief Executive Officer Levi's[Registered Trademark] Merchandising
Scott N. Semel Vincent Jay Maffucci
Executive Vice President, Treasurer
Secretary and General Counsel
Maria T. McLeod
Vice President,
Mark S. Lisnow Technology and
Senior Vice President, Information Systems
Merchandising
Daniel O. Paulus
William D. Richins General Manager,
Chief Financial Officer The Designs/OLS Partnership
37 Designs, Inc. Annual Report 1995
38
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CORPORATE AND SHAREHOLDER INFORMATION - CONTINUED
SHAREHOLDER INFORMATION
STOCK LISTING
The company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "DESI."
COMMON STOCK PRICES
The following table sets forth, for the periods indicated, the high and low per
share sales prices of the common stock, as reported on the Nasdaq consolidated
reporting system.
FISCAL YEAR ENDING
-----------------
FEBRUARY 3, 1996 HIGH LOW
- -------------------------------------------------------------
First Quarter 10 5/8 7 1/4
Second Quarter 11 1/4 8
Third Quarter 10 6 3/4
Fourth Quarter 8 7/8 5 5/8
FISCAL YEAR ENDING
-----------------
JANUARY 28, 1995 HIGH LOW
- -------------------------------------------------------------
First Quarter 17 1/2 12 3/4
Second Quarter 15 1/4 8 1/2
Third Quarter 10 6 5/8
Fourth Quarter 9 3/4 6 3/4
As of March 31, 1996, based upon data provided by independent shareholder
communication services and the transfer agent for the common stock, there were
approximately 500 holders of record of common stock and 13,500 beneficial
holders of common stock.
DIVIDEND POLICY
The company currently pays no cash dividends on its common stock. See Note D of
Notes to Consolidated Financial Statements.
ANNUAL MEETING
The 1996 Annual Meeting of Stockholders of Designs, Inc. will be held on
Tuesday, June 11, 1996 at 8:00 a.m. at the Sheraton Needham Hotel, 100 Cabot
Street, Needham, Massachusetts.
FINANCIAL INFORMATION
Requests for financial information should be directed to the Investor Relations
Department at the company's headquarters: Designs, Inc., 66 B Street, Needham,
MA 02194 (617) 444-7222. A copy of the company's Annual Report on Form 10-K for
the fiscal year ended February 3, 1996, filed with the Securities and Exchange
Commission, may be obtained without charge upon request to the Investor
Relations Department.
DESIGNS, INC. SHAREHOLDER INFORMATION LINE
Beginning in May 1996, Designs, Inc. is introducing an information service for
news announcements, including sales and earnings releases. The service also may
be used for printed material requests via mail or fax. To access the service,
call 1-888-DESI-333.
This service is intended to help keep shareholders informed of key events and
announcements at Designs, Inc. It will not affect the Company's practice of
mailing annual reports and proxy statements. Since it will provide timely new
information throughout the year, Designs, Inc. will discontinue the printing and
distribution of its quarterly report to shareholders to improve efficiency and
reduce expense.
TRANSFER AGENT AND REGISTRAR
Inquiries regarding stock transfer requirements, address changes and lost stock
certificates should be directed to:
Boston EquiServe Limited Partnership
c/o The First National Bank of Boston
Shareholder Services Department
Investor Relations Unit 45-02-09
P.O. Box 644
Boston, MA 02102-0644
(617) 575-2900
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand
Boston, Massachusetts
TRADE NAMES
Boston Traders[Registered Trademark] is a registered trademark of Designs, Inc.
Levi's[Registered Trademark] and Dockers[Registered Trademark] are registered
trademarks of Levi Strauss & Co.
Timberland[Registered Trademark] is a registered trademark of The Timberland
Company.
38 Designs, Inc. Annual Report 1995