View:
As of April 10, 2001
Mr. David A. Levin
150 Monadnock Road
Chestnut Hill, MA 02467
Dear David:
This will confirm the agreement between you and Designs, Inc. (the
"Company") that the initial term of your Employment Agreement with the
Company dated as of March 31, 2000 (the "Agreement") shall be extended for a
period of three (3) years from April 10, 2001, until April 10, 2004, in lieu
of the potential extension until April 10, 2003 originally contemplated by
Section 2 of the Agreement.
Accordingly, you and the Company hereby agree that effective as of April
10, 2001, Section 2 of the Agreement shall be amended to provide in its
entirety as follows:
The initial term of employment under this Agreement shall begin
on April 10, 2000 (the "Employment Date") and shall continue for a
period of four (4) years from that date, subject to prior termination
in accordance with the terms hereof. Thereafter, this Agreement
shall automatically be renewed for successive one-year terms on each
anniversary of the Employment Date, commencing on the fourth
anniversary of the Employment Date, unless either party shall give
the other at least ninety (90) days written notice prior to such
anniversary date that it will not renew this Agreement.
Very truly yours,
Designs, Inc.
By /S/ SEYMOUR HOLTZMAN
Seymour Holtzman
Chairman of the Board
Agreed and Accepted:
/S/ DAVID A. LEVIN
David A. Levin
KL2:2096905.1
KL2:2096905.1
April 25, 2001
Mr. Dennis Hernreich
428 Foundry Street
Easton, MA. 02356
Dear Dennis:
This will confirm the agreement between you and Designs, Inc. (the
"Company") that the initial term of your Employment Agreement with the
Company dated as of August 14, 2000 (the "Agreement") shall be extend
for a period of one year from September 3, 2001, until September 3,
2002, in lieu of the potential extension contemplated by Section 2 of
the Agreement.
Accordingly, you and the Company hereby agree that effective as of
April 25, 2001, Section 2 of the Agreement shall be amended to provide
in its entirety as follows:
The term of employment under this Agreement shall begin on
September 4, 2000 (the "Employment Date") and shall continue for a
period of two (2) years from that date, subject to prior termination
in accordance with the terms hereof. Upon the expiration of the
Executive's initial two (2) year term of employment, the Company
has the option to extend the term of this Agreement for an additional
one (1) year, under the terms and conditions set forth herein.
Very truly yours,
Designs, Inc.
By /S/ SEYMOUR HOLTZMAN
Seymour Holtzman
Chairman of the Board
Agreed and Accepted:
/S/ DENNIS R. HERNREICH
Dennis Hernreich
June 13, 2001
Board of Directors and Shareholders
Designs, Inc.
66 B Street
Needham, MA 02494
Dear Sirs:
Note 2 of Notes to the Consolidated Financial Statements of Designs,
Inc. (the "Company") included in its Quarterly Report on Form 10-Q for
the quarter ended May 5, 2001 describes a change in the method of
accounting for inventory wherein the Company has changed from the last-
in first-out ("LIFO") to the first-in first-out ("FIFO") method of
accounting. There are no authoritative criteria for determining a
preferable inventory cost-flow method based on the particular
circumstances; however, we conclude that such change in the method of
accounting is to an acceptable alternative method which, based on your
business judgment to make this change for the stated reasons, is
preferable in your circumstances. We have not conducted an audit in
accordance with generally accepted auditing standards of any financial
statements of the Company as of any date or for any period subsequent to
February 3, 2001, and therefore we do not express any opinion on any
financial statements of Designs, Inc. subsequent to that date.
Very truly yours,
/s/ Ernst & Young LLP
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended May 5, 2001 Commission File Number 0-15898
DESIGNS, INC.
(Exact name of registrant as
specified in its charter)
Delaware 04-2623104
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
66 B Street, Needham, MA 02494
(Address of principal executive offices) (Zip Code)
(781) 444-7222
(Registrant's telephone
number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of June 4, 2001
Common 14,473,486
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
May 5, 2001 and February 3, 2001
(In thousands, except share data)
May 5, February 3,
2001 2001
ASSETS (unaudited)
---------- ----------
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable 119 18
Inventories 67,726 57,675
Income taxes refundable and deferred 765 765
Prepaid expenses 2,769 3,093
---------- ----------
Total current assets 71,379 61,551
Property and equipment, net of
accumulated depreciation and amortization 20,387 18,577
Other assets:
Deferred income taxes 14,862 14,347
Other assets 602 595
---------- ----------
Total assets $ 107,230 $ 95,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,986 $ 6,280
Accrued expenses and other current liabilities 13,400 11,392
Accrued rent 2,489 2,376
Reserve for severance and store closings 636 852
Notes payable 31,231 24,345
---------- ----------
Total current liabilities 58,742 45,245
---------- ----------
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000 shares
authorized, none issued - -
Common Stock, $0.01 par value, 50,000,000 shares
authorized, 17,501,155 and 17,488,000 shares issued
at May 5, 2001 and February 3, 2001, respectively 175 175
Additional paid-in capital 55,728 55,697
Retained earnings 1,209 2,577
Treasury stock at cost, 3,035,000 shares at
May 5, 2001 and February 3, 2001, respectively (8,427) (8,427)
Loan to executive (197) (197)
---------- ----------
Total stockholders' equity 48,488 49,825
---------- ----------
Total liabilities and stockholders' equity $ 107,230 $ 95,070
========== ==========
The accompanying notes are an intergral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
--------------------
May 5, April 29,
2001 2000
--------------------
Sales $39,395 $39,379
Cost of goods sold including
occupancy 29,990 28,727
--------------------
Gross profit 9,405 10,652
Expenses:
Selling, general and administrative 9,706 9,745
Depreciation and amortization 1,396 1,269
--------------------
Total expenses 11,102 11,014
--------------------
Operating loss (1,697) (362)
Interest expense, net 546 415
--------------------
Net loss before income taxes (2,243) (777)
Benefit from income taxes (875) (303)
--------------------
Net loss $(1,368) $ (474)
====================
Loss per share- Basic and Diluted $ (0.09) $ (0.03)
Weighted average number of common shares
outstanding- Basic and Diluted 14,459 16,441
The accompanying notes are an intergral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
--------------------------
May 5, April 29,
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $ (1,368) $ (474)
Adjustments to reconcile to net cash
(used for) provided by operating activities:
Depreciation and amortization 1,396 1,269
Deferred income taxes - (187)
Issuance of common stock to Board of Directors 30 66
Gain on sale of disposal of fixed assets (8) -
Changes in operating assets and liabilities:
Accounts receivable (101) 56
Inventories (10,051) 5,350
Prepaid expenses 324 (111)
Other assets (31) 171
Reserve for severance and store closings (216) (1,056)
Income taxes (515) (594)
Accounts payable 4,706 (1,099)
Accrued expenses and other current liabilities 2,008 2,866
Accrued rent 113 69
----------- -----------
Net cash (used for) provided by operating activities (3,713) 6,326
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (3,181) (1,489)
Proceeds from terminated trust - 2,365
Proceeds from disposal of property and equipment 7 -
----------- -----------
Net cash (used for) provided by investing activities (3,174) 876
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under credit facility 6,886 (7,202)
Issuance of common stock under option program 1 -
----------- -----------
Net cash (used for) provided by financing activities 6,887 (7,202)
----------- -----------
Net change in cash and cash equivalents - -
Cash and cash equivalents:
Beginning of the year - -
----------- -----------
End of the period $ - $ -
=========== ===========
The accompanying notes are an intergral part of the consolidated
financial statements.
DESIGNS, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary for a
fair presentation of the interim financial statements. These financial
statements do not include all disclosures associated with annual financial
statements and, accordingly, should be read in conjunction with the notes to
the Company's audited consolidated financial statements for the year ended
February 3, 2001 (filed on Form 10-K, as amended, with the Securities and
Exchange Commission). The information set forth in these statements may be
subject to normal year-end adjustments. The information reflects all
adjustments that, in the opinion of management, are necessary to present
fairly the Company's results of operations, financial position and cash
flows for the periods indicated. 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 disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company's business historically
has been seasonal in nature and the results of the interim periods presented
are not necessarily indicative of the results to be expected for the full
year.
2. Change in Accounting for Inventories
In the first quarter of fiscal 2002, the Company changed its method of
determining the cost of inventories from the last-in, first-out (LIFO) method
to the first-in, first-out (FIFO) method. Management believes that the FIFO
method better measures the current value of such inventories and provides a
more appropriate matching of revenues and expenses. In the current low-
inflationary environment, management believes that the use of the FIFO method
more accurately reflects the Company's financial position.
Since the cost of merchandise inventories at May 5, 2001, using the FIFO
method, was the same value as under the LIFO method, there was no effect on
earnings for the three months ended May 5, 2001. The effect of this change
was immaterial to the financial results of the prior reporting periods of the
Company and therefore did not require retroactive restatement of results for
those prior periods.
3. Boston Trading Ltd., Inc. Litigation
During the first quarter of fiscal 2002, the Company entered into a
settlement agreement with Atlantic Harbor, Inc. whereby Atlantice Harbor, Inc.
agreed to accept from the Company a cash payment of $450,000 in settlement of
all obligations outstanding under the Purchase Note. In exchange, the Company
agreed to transfer and assign all trademarks and license agreements acquired as
part of the Asset Purchase Agreement to a new entity in which the Company would
have a 15% equity interest, with Atlantic Harbor, Inc and its affiliates
retaining the remaining equity interest. In addition, the Company would also be
entitled to receive up to an additional $150,000 from existing license royalties
over the next four years. At February 3, 2001, the Company recorded a gain on
settlement of this dispute in the amount of $550,000,which was included in
"Provision for impairment of assets, store closing and severance" on the
Consolidated Statements of Operations for fiscal 2001.
4. Credit Facility
On December 7, 2000, the Company amended and restated its credit facility
with Fleet Retail Finance Inc. (the "Amended Credit Agreement"). The Amended
Credit Agreement, among other things, provided for an extension of the credit
facility to November 30, 2003, reduced the borrowing costs and tied future
interest costs to excess borrowing availability, eliminated all existing
financial performance covenants and adopted a minimum availability covenant,
increased the amount that can potentially be borrowed by increasing the
advance rate formula to 68% from 60% of the Company's eligible inventory,
provided the Company the ability to enter into further stock buyback programs
and reduced the total commitment from $50 million to $45 million. Under the
Amended Credit Facility, the Company is also able to issue documentary and
standby letters of credit up to $10 million. The Company's obligations under
the Amended Credit Agreement continue to be secured by a lien on all of its
assets. The Company is subject to a prepayment penalty for the first two
years of the extended facility. The Amended Credit Agreement continues to
include certain covenants and events of default customary for credit
facilities of this nature, including change of control provisions and
limitations on payment of dividends by the Company.
At May 5, 2001, the Company had borrowings of approximately $30.8 million
outstanding under this credit facility and had three outstanding standby
letters of credit totaling approximately $2.5 million. Average borrowings
outstanding under this credit facility during the first quarter of fiscal
2002 were approximately $27.7 million. The Company had average unused excess
availability under this credit facility of approximately $9.2 million during
the first quarter of fiscal 2002. The unused availability under this credit
facility was $8.7 million at May 5, 2001. The Company was in compliance with
all debt covenants under the Amended Credit Agreement at May 5, 2001.
5. Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
requires the computation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the year.
Diluted earnings per share is determined by giving effect to the exercise of
stock options using the treasury stock method. The following table provides
a reconciliation of the number of shares outstanding for basic and diluted
earnings per share.
For the
three months ended
May 5, April 29,
(In thousands) 2001 2000
- -------------------------------------------------------------------------
Basic weighted average common
shares outstanding 14,459 16,441
Stock options, excluding the effect of
anti-dilutive options of 557 shares and
29 shares for May 5, 2001 and April 29,
2000, respectively -- --
Diluted weighted average shares ------ ------
outstanding 14,459 16,441
Options to purchase shares of the Company's Common Stock of 228,600 for the
three months ended May 5, 2001, and 348,700 for the three months ended April
29, 2000, were excluded from the computation of diluted earnings per share
because the exercise price of the options was greater than the average market
price per share of Common Stock for the periods reported.
6. Related Party Transactions
On June 26, 2000, the Company extended an existing consulting arrangement
with Jewelcor Management, Inc. ("JMI") for a one-year period commencing on
April 29, 2000 and ending on April 29, 2001. As payment for services
rendered under this extended agreement, the Company issued to JMI 182,857 non-
forfeitable and fully vested shares of the Company's Common Stock. The fair
value of those shares on June 26, 2000, the date of issuance, was $240,000 or
$1.3125 per share. Seymour Holtzman, Chairman of the Board of Directors of
the Company, is President and Chief Executive Officer of JMI, and indirectly,
with his wife, is the principal beneficial owner of the stock of JMI.
On May 25, 2001, subsequent to the end of the first quarter of fiscal 2002,
the Board of Directors extended the JMI consulting agreement for an additional
one-year term commencing on April 29, 2001 and ending on April 29, 2002,
subject to further negotiation and documentation.
Also on May 25, 2001, the Board of Directors determined to hire Seymour
Holtzman, who has served as the Company's non-employee Chairman of the
Company, as an officer and employee of the Company. In connection with the
hiring of Mr. Holtzman, the Board determined to grant Mr. Holtzman an option
to purchase an aggregate of 300,000 shares of the Company's Common Stock at
an exercise price of $3.88 per share, equal to the closing price of the Common
Stock on that date. The option will vest annually over three years and expires
10 years from the date of grant.
7. Derivative Instruments and Hedging
The Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", in July 1999 making SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at their fair value. Gains or losses resulting from
changes in value of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. The
adoption of SFAS No. 133 did not have a significant effect on the Company's
results of operations or financial position for the period ended May 5, 2001.
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Sales
Sales for the first quarter of fiscal 2002 ended May 5, 2001 were $39.4
million as compared to sales of $39.4 million in the first quarter of fiscal
2001 ended April 29, 2000.
Sales for the thirteen weeks ended May 5, 2001 decreased 1.5% as compared to
$40.0 million for the corresponding thirteen weeks ended May 6, 2000.
Comparable store sales decreased 9.9% percent for the thirteen weeks ended
May 5, 2001 when compared with the corresponding prior year period. However,
during the fiscal month of April 2001, comparable store sales increased 0.5%,
which represented a significant improvement from the first two months of the
quarter. During February and March 2001 the sales were compared against
prior year months which benefited from significant price reductions on
inventories funded from reserves previously established in fiscal 2000. In
addition, the recently completed liquidation of Bugle Boy, a 300-store retail
chain selling similar categories of casual apparel, negatively impacted the
Company's sales.
Furthermore, Dockers(R) sales for the first quarter of fiscal 2002 have shown
significant sales improvement due to Spring merchandising initiatives, while
inventory deficiencies within certain categories of Levi's(R) brand have
adversely affected Levi's(R) sales. New inventory deliveries of the Levi's(R)
brand are expected in time for the key Back-to-School and holiday selling
seasons which the Company expects will positively impact sales in the third and
fourth quarters of fiscal 2002.
Comparable stores are retail locations that have been open at least 13
months. Of the 103 stores that the Company operated at May 5, 2001, 93 were
comparable stores.
Gross Profit Margin
Gross profit margin, inclusive of occupancy costs, was 23.9% for the first
quarter of fiscal 2002 as compared to 27.0% in the first quarter of the
prior year
Merchandise margins decreased 2.1 percentage points for the first quarter of
fiscal 2002 as compared to the first quarter of the prior year because of
decreasing initial margins resulting from an increase in product mix to lower
margin merchandise. As previously noted, the prior year merchandise margin also
benefited from significant price reductions funded from reserves previously
established in the fourth quarter of fiscal 2000. The Company anticipates
that it will experience a similar merchandise margin rate during the
remainder of fiscal 2002.
Occupancy costs were also a factor in the Company's decreased gross profit
margin for the first quarter of fiscal 2002. Occupancy costs as a percentage
of sales increased 1.2 percentage points resulting from added square footage
and therefore greater occupancy costs while total sales were flat to last year.
Selling, General and Administrative Expenses
Set forth below is certain information concerning the Company's selling,
general and administrative expenses for the three months ended May 5, 2001
and April 29, 2000.
(In thousands, except May 5, 2001 April 29, 2000
percentage data) $ % of sales $ % of sales
- --------------------------------------------------------------------------
Store payroll $4,403 11.2% $4,110 10.4%
Other SG&A $5,303 13.4% $5,635 14.3%
Store payroll expense, the largest component of selling, general and
administrative expenses, was 11.2 percent of sales for the three months ended
May 5, 2001, compared with 10.4 percent of sales for the same period in the
prior year. The decrease in other selling, general and administrative
expenses, excluding store payroll, for the three months ended May 5, 2001 as
compared with the first quarter of the prior year is due primarily to continued
cost reduction efforts.
Depreciation and Amortization
Set forth below is depreciation and amortization expenses for the Company
for the three months ended May 5, 2001 and April 29, 2000.
Percentage
(In thousands, except May 5, April 29, Change at
percentage data) 2001 2000 May 5, 2001
- -----------------------------------------------------------------------
For the three months ended $1,396 $1,269 10.0%
The increase in depreciation and amortization expense for the three months
ended May 5, 2001 compared to the same period in the prior year is due to
the opening of six new stores and the remodeling of nine stores in fiscal
2001, in addition to the opening of the distribution center in the third
quarter of fiscal 2001. This increase is partially offset by the write-off
of fixed assets in fiscal 2001 due to impairments and several assets
becoming fully depreciated.
Interest Expense, Net
Net interest expense was $546,000 and $415,000 for the three months ended
May 5, 2001 and April 29, 2000, respectively. This increase was
attributable to higher average borrowing levels under the Company's
revolving credit facility for the three months ended May 5, 2001 as compared
to the same period in the prior year. This increase was offset slightly by
improved borrowing rates as compared to the prior period.
Net Loss
Set forth below is the net loss and net loss per share, presented on a
diluted basis, for the Company for the three months ended May 5, 2001 and
April 29, 2000.
(In thousands, except May 5, 2001 April 29, 2000
per share data) $ per share $ per share
- ---------------------------------------------------------------------------
For the three months ended $(1,368) $(0.09) $(474) $(0.03)
As previously reported, prior-year first quarter earnings benefited from
significant price reductions funded from reserves previously established in
fiscal 2000.
SEASONALITY
Historically, the Company has experienced seasonal fluctuations in revenues and
income, exclusive of non-recurring charges, with increases occurring during the
Company's third and fourth quarters as a result of "Fall" and "Holiday"
seasons. Although, the Company's strategic focus has shifted towards its
outlet retail business selling exclusively Levi Strauss & Co. product, the
Company continues to experience a significant portion of its revenue and income
in the second half of the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for working capital, primarily inventory
requirements, and capital expenditures. The Company's capital expenditure
program includes projects for new store openings, remodeling existing stores,
and improvements with its systems infrastructure. In addition, the Company is
testing a new store format in a power center location, an alternative retail
channel to the outlet retail channel. The Company's sources of funds includes
operations, trade credit and its $45 million credit facility.
During the first quarter, the Company used cash from operations of $3.7 million
as compared to cash provided from operations of $6.3 million during last year's
first quarter. Cash from operations decreased by $10.0 million due primarily
to an increase of inventory as a result of opening three new stores and
opportunistic purchases of inventory.
At May 5, 2001, total inventory equaled $67.7 million, compared to $57.7
million at February 3, 2001. The Company stocks its stores with Levi and Docker
manufacturing overruns, merchandise specifically manufactured for the outlet
stores and discontinued lines and irregulars all purchased primarily from Levi
Strauss & Co. By its nature, manufacturing overruns, and discontinued or
irregular merchandise, including the most popular Levi Strauss & Co. styles of
merchandise and the breadth of the mix of this merchandise, is subject to
limited availability. The Company continues to evaluate additional opportunities
to purchase quantities of Levi's(R), Dockers(R) and Slates(R) brand products.
Total cash outlays for capital expenditures for the first three months of fiscal
2002 were $3.1 million compared to $1.5 million during the first quarter of
fiscal 2001. During the first three months of fiscal 2002, the Company opened
two new Levi's(R)/Dockers(R) stores, one new Dockers(R) store in a real estate
location where there was an existing Levi's(R) only store, remodeled four of its
older stores, and the Company also combined two pairs of its standalone
Dockers(R) and Levi's(R) outlet stores that were adjacent to each other into two
Levi's(R)/Dockers(R) stores. By combining the individual stores into one store,
the Company was able to reduce total square footage, reduce labor costs and
provide a cross-over environment for the brands.
The Company's present plans for expansion for the remainder of fiscal 2002,
barring unforeseen circumstances, include remodeling up to an additional three
existing outlet stores and opening up to four additional Levi's(R)/Dockers(R)
stores, one of which will be located in Puerto Rico.
The Company financed its cash needs during the first quarter of fiscal 2002 with
borrowings from its credit facility. At May 5, 2001, the Company had borrowings
of approximately $30.8 million outstanding under this credit facility and had
three outstanding standby letters of credit totaling approximately $2.5 million.
Average borrowings outstanding under this credit facility for the first three
months of fiscal 2002 were approximately $27.7 million. The Company had average
unused excess availability under this credit facility of approximately $9.2
million during the first quarter of fiscal 2002. The unused availability under
this credit facility was $8.7 million at May 5, 2001. The Company was in
compliance with all debt covenants under this credit facility at May 5, 2001.
The Company's working capital at May 5, 2001 was approximately $12.6
million, compared to $16.3 million at February 3, 2001. This decrease in
working capital was attributable to capital expenditures incurred for new
and remodeled stores and a negative cash flow incurred during the first
quarter.
The foregoing discussion of the Company's results of operations, liquidity,
capital resources and capital expenditures includes certain forward-looking
information. Such forward-looking information requires management to make
certain estimates and assumptions regarding the Company's expected strategic
direction and the related effect of such plans on the financial results of
the Company. Accordingly, actual results and the Company's implementation
of its plans and operations may differ materially from forward-looking
statements made by the Company. The Company encourages readers of this
information to refer to Exhibit 99 of the Company's Form 8-K, previously
filed with the United States Securities and Exchange Commission on April 28,
2000, which identifies certain risks and uncertainties that may have an
impact on future earnings and the direction of the Company.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial position and results of
operations of the Company are routinely subject to a variety of risks,
including market risk associated with interest rate movements on borrowings.
The Company regularly assesses these risks and has established policies and
business practices to protect against the adverse effect of these and other
potential exposures.
The Company utilizes cash from operations and short-term borrowings to
fund its working capital needs. This debt instrument is viewed as a risk
management tool and is not used for trading or speculative purposes. In
addition, the Company has available letters of credit as sources of financing
for its working capital requirements. Borrowings under this credit
agreement, which expires in June 2001, bears interest at variable rates based
on FleetBoston, N.A.'s prime rate or the London Interbank Offering Rate
("LIBOR"). These interest rates at May 5, 2001 were 7.5% for prime and with
rates on varying LIBOR contracts of 6.384% to 7.573%. Based upon sensitivity
analysis as of May 5, 2001, a 10% increase in interest rates would result in
a potential cost of approximately $231,000 on an annualized basis.
Part II. Other Information
ITEM 1. Legal Proceedings
The Company is a party to litigation and claims arising in the course of its
business. Management does not expect the results of these actions to have a
material adverse effect on the Company's business or financial condition.
In May 1995, the Company purchased from Boston Trading Ltd., Inc. (d/b/a
Atlantic Harbor, Inc.) certain assets including various trademarks and license
agreements. The terms of the Asset Purchase Agreement, which was dated April
25, 1995 (the "Purchase Agreement"), included the Company delivering a $1
million promissory note ("Purchase Note") for the balance of the purchase price
The principal amount of the Purchase Note was stated to be payable in two equal
annual installments through May 1997. In the first quarter of fiscal 1997, the
Company asserted certain indemnification rights under the Purchase Agreement.
In accordance with the terms of the Purchase Agreement, the Company, when
exercising its indemnification rights, had the right, among other courses of
action, to offset against the payment of principal and interest due and
payable under the Purchase Note. Accordingly, the Company did not make the
two $500,000 principal payments on the Purchase Note that were due on May 2,
1996 and May 2, 1997. The Company paid all interest on the original
principal amount through May 2, 1996 and continued to pay interest thereafter
through January 31, 1998 on $500,000 of principal. In January 1998, Atlantic
Harbor, Inc. filed a lawsuit against the Company for failing to pay the
outstanding principal amount of the Purchase Note. In March 1998, the Company
filed a counterclaim against Atlantic Harbor, Inc. alleging that the Company
suffered damages in excess of $1 million because of the breach of certain
representations and warranties made by Atlantic Harbor, Inc. and its
stockholders concerning the existence and condition of certain foreign
trademark registrations and license agreements.
During the first quarter of fiscal 2002, the Company entered into a settlement
agreement with Atlantic Harbor, Inc. whereby Atlantic Harbor, Inc. agreed to
accept from the Company a cash payment of $450,000 to Atlantic Harbor, Inc. in
settlement of all obligations under the Purchase Note. In exchange, the Company
agreed to transfer and assign all trademarks and license agreements acquired as
part of the Purchase Agreement to a new entity in which the Company would have a
15% equity interest, with Atlantic Harbor, Inc. and its affiliates retaining
the remaining interest. The Company would also be entitled to receive up to
an additional $150,000 from existing license royalties over the next four
years. At February 3, 2001, the Company recorded a gain related to the
settlement of this matter in the amount of $550,000, which was included in
"Provision for impairment of assets, store closings and severance" on the
Consolidated Statements of Operations.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Default Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 6. Exhibits and Reports on Form 8-K
A. Reports on Form 8-K:
None.
B. Exhibits:
3.1 Restated Certificate of Incorporation of the Company, as
amended (included as Exhibit 3.1 to Amendment No. 3 of the
Company's Registration Statement on Form S-1 (No. 33-13402),
and incorporated herein by reference). *
3.2 Certificate of Amendment to Restated Certificate of
Incorporation, as amended, dated June 22, 1993 (included as
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
dated June 17, 1996, and incorporated herein by reference). *
3.3 Certificate of Designations, Preferences and Rights of a
Series of Preferred Stock of the Company established Series A
Junior Participating Cumulative Preferred Stock dated May 1,
1995 (included as Exhibit 3.2 to the Company's Annual Report
on Form 10-K dated May 1, 1996 and incorporated herein by
reference). *
3.4 By-Laws of the Company, as amended (included as Exhibit 3.4 to
the Company's Quarterly Report on Form 10-Q dated December 12,2000,
and incorporated herein by reference). *
10.1 1992 Stock Incentive Plan, as amended (included as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated December 12, 2000, and
incorporated herein by reference). *
10.2 License Agreement between the Company and Levi Strauss & Co.
dated as of April 14, 1992 (included as Exhibit 10.8 to the
Company's Annual Report on Form 10-K dated April 29, 1993, and
incorporated herein by reference). *
10.3 Amended and Restated Trademark License Agreement between the
Company and Levi Strauss & Co. dated as of October 31, 1998
(included as Exhibit 10.4 to the Company's Current Report on
Form 8-K dated December 3, 1998, and incorporated herein by
reference). *
10.4 Amendment to the Amended and Restated Trademark License
Agreement dated March 22, 2000 (included as Exhibit 10.7 to
the Company's Form 10-K dated April 28, 2000, and incorporated
herein by reference). *
10.5 Second Amended and Restated Loan and Security Agreement dated
as of December 7, 2000 among the Company and Fleet Retail
Finance Inc., as agent for the Lender(s) identified therein.
(included as Exhibit 10.12 to the Company's Form 10-Q dated
October 28, 2000, and incorporated herein by reference). *
10.6 Amendment and Distribution Agreement dated as of October 31,
1998 among the Designs Partner, the LOS Partner and the OLS
Partnership (included as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated December 3, 1998, and incorporated
herein by reference). *
10.7 Guaranty by the Company of the indemnification obligation of
the Designs Partner dated as of October 31, 1998 in favor of
LS & Co. (included as Exhibit 10.3 to the Company's Current
Report on Form 8-K dated December 3, 1998, and incorporated
herein by reference). *
10.8 Asset Purchase Agreement between LOS and the Company relating
to the sale by the Company of stores located in Minneapolis,
Minnesota dated January 28, 1995 (included as Exhibit 10.9 to
the Company's Current Report on Form 8-K dated April 24,
1995, and incorporated herein by reference). *
10.9 Asset Purchase Agreement among Boston Trading Ltd., Inc.,
Designs Acquisition Corp., the Company and others dated April
21, 1995 (included as Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q dated September 12, 1995, and incorporated
herein by reference). *
10.10 Non-Negotiable Promissory Note between the Company and
Atlantic Harbor, Inc., formerly know as Boston Trading Ltd.,
Inc., dated May 2, 1995 (included as Exhibit 10.17 to the
Company's Quarterly Report on Form 10-Q dated September 12,
1995, and incorporated herein by reference). *
10.11 Asset Purchase Agreement dated as of September 30, 1998
between the Company and LOS relating to the purchase by the
Company of 16 Dockers(R) Outlet and nine Levi's(R) Outlet stores
(included as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated December 3, 1998, and incorporated herein by
reference). *
10.12 Agreement Regarding Leases dated November 2, 2000 between the
Company and O.M. 66 B Street LLC (included as Exhibit 10.36 to
the Company's Form 10-Q dated October 28, 2000, and
incorporated herein be reference). *
10.13 Consulting Agreement dated as of December 15, 1999 between the
Company and George T. Porter, Jr. (included as Exhibit 10.22
to the Company's Form 10-K dated April 28, 2000, and
incorporated herein by reference). *
10.14 Consulting Agreement dated as of November 14, 1999 between the
Company and Business Ventures International, Inc. (included as
Exhibit 10.23 to the Company's Form 10-K dated April 28, 2000,
and incorporated herein by reference). *
10.15 Employment Agreement dated as of October 16, 1995 between the
Company and Joel H. Reichman (included as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated December 6, 1995,
and incorporated herein by reference). *
10.16 Employment Agreement dated as of October 16, 1995 between the
Company and Scott N. Semel (included as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated December 6, 1995,
and incorporated herein by reference). *
10.17 Employment Agreement dated as of May 9, 1997 between the
Company and Carolyn R. Faulkner (included as Exhibit 10.23 to
the Company's Quarterly Report on Form 10-Q dated June 17,
1997, and incorporated herein by reference. *
10.18 Employment Agreement dated as of March 31, 2000 between the
Company and David A. Levin (included as Exhibit 10.27 to the
Company's Form 10-K dated April 28, 2000, and incorporated
herein by reference). *
10.19 Amendment to Employment Agreement dated as of March 31, 2000
between the Company and David A. Levin.
10.20 Secured Promissory Note dated as of June 26, 2000 between the
Company and David A. Levin (included as Exhibit 10.29 to the
Company's Form 10-Q dated September 12, 2000, and incorporated
herein by reference). *
10.21 Pledge and Security Agreement dated June 26, 2000 between the
Company and David A. Levin (included as Exhibit 10.29 to the Company's
Form 10-Q dated September 12, 2000, and incorporated herein by
reference). *
10.22 Employment Agreement dated as of August 14, 2000 between the
Company and Dennis R. Hernreich (included as Exhibit 10.30 to the
Company's Form 10-Q dated September 12, 2000, and incorporated
herein by reference). *
10.23 Amendment to Employment Agreement dated as of August 14, 2000
between the Company and Dennis R. Hernreich.
10.24 Severance Agreement dated as of January 12, 2000 between the
Company and Joel H. Reichman (included as Exhibit 10.23 to the
Company's Form 10-K dated April 28, 2000, and incorporated
herein by reference). *
10.25 Severance Agreement dated as of January 20, 2000 between the
Company and Scott N. Semel (included as Exhibit 10.23 to the
Company's Form 10-K dated April 28, 2000, and incorporated
herein by reference). *
10.26 Severance Agreement dated as of January 15, 2000 between the
Company and Carolyn R. Faulkner (included as Exhibit 10.23 to
the Company's Form 10-K dated April 28, 2000, and incorporated
herein by reference). *
10.27 Indemnification Agreement between the Company and Joel H.
Reichman, dated December 10, 1998 (included as Exhibit 10.34
to the Company's Annual Report on Form 10-K dated April 30,
1999 and incorporated herein by reference). *
10.28 Indemnification Agreement between the Company and Scott N.
Semel, dated December 10, 1998 (included as Exhibit 10.35 to
the Company's Annual Report on Form 10-K dated April 30, 1999
and incorporated herein by reference). *
10.29 Indemnification Agreement between the Company and Carolyn R.
Faulkner, dated December 10, 1998 (included as Exhibit 10.36
to the Company's Annual Report on Form 10-K dated April 30,
1999 and incorporated herein by reference). *
18.1 Letter of Preferability from Ernst & Young dated June 13, 2001.
99 Report of the Company on Form 8-K, dated April 28, 2000 *
concerning certain cautionary statements of the Company to be
taken into account in conjunction with consideration and
review of the Company's publicly-disseminated documents
(including oral statements made by others on behalf of the
Company) that include forward looking information.
* Previously filed with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESIGNS, INC.
June 19, 2001 By: /S/ DENNIS R. HERNREICH
Dennis R. Hernreich, Senior Vice President,
Chief Financial Officer and Treasurer