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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended August 4, 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 September 1, 2001
Common 14,490,809
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
August 4, 2001 and February 3, 2001
(In thousands, except share data)
August 4, February 3,
2001 2001
ASSETS (unaudited)
---------- ----------
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable 899 18
Inventories 69,662 57,675
Deferred income taxes 765 765
Prepaid expenses 2,866 3,093
---------- ----------
Total current assets 74,192 61,551
Property and equipment, net of
accumulated depreciation and amortization 20,297 18,577
Other assets:
Deferred income taxes 14,300 14,347
Other assets 621 595
---------- ----------
Total assets $ 109,410 $ 95,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,562 $ 6,280
Accrued expenses and other current liabilities 16,679 11,392
Accrued rent 2,437 2,376
Reserve for severance and store closings 398 852
Notes payable 31,000 24,345
---------- ----------
Total current liabilities 60,076 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, 17,517,081 and 17,488,000 shares issued
at August 4, 2001 and February 3, 2001, respectively 175 175
Additional paid-in capital 55,861 55,697
Retained earnings 1,922 2,577
Treasury stock at cost, 3,035,000 shares at
August 4, 2001 and February 3, 2001, respectively (8,427) (8,427)
Loan to executive (197) (197)
---------- ----------
Total stockholders' equity 49,334 49,825
---------- ----------
Total liabilities and stockholders' equity $ 109,410 $ 95,070
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
------------------ ------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
-------------------- ------------------
Sales $47,698 $ 45,693 $ 87,093 $ 85,072
Cost of goods sold including
occupancy 34,683 32,272 64,673 60,999
------------------- ------------------
Gross profit 13,015 13,421 22,420 24,073
Expenses:
Selling, general and administrative 10,065 9,805 19,771 19,550
Depreciation and amortization 1,418 1,325 2,814 2,594
------------------ -----------------
Total expenses 11,483 11,130 22,585 22,144
------------------ -----------------
Operating profit(loss) 1,532 2,291 (165) 1,929
Interest expense, net 534 430 1,081 845
------------------ -----------------
Income(loss) before income taxes 998 1,861 (1,246) 1,084
Provision(benefit) for income taxes 283 777 (591) 474
------------------ -----------------
Net income(loss) $ 715 $ 1,084 $ (655) $ 610
=================== =================
Income (loss) per share- Basic $ 0.05 $ 0.07 $ (0.05) $ 0.04
Income (loss) per share- Diluted $ 0.05 $ 0.06 $ (0.05) $ 0.04
Weighted average number of common shares
outstanding- Basic 14,477 16,502 14,468 16,472
- Diluted 15,524 16,685 14,468 16,560
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
--------------------------
August 4, July 29,
2001 2000
----------- -----------
Cash flows from operating activities:
Net (loss) income $ (655) $ 610
Adjustments to reconcile net (loss) income
to net cash used for operating activities:
Depreciation and amortization 2,814 2,594
Issuance of common stock and options 150 116
Gain on sale or disposal of fixed assets (21) -
Changes in operating assets and liabilities:
Accounts receivable (881) 43
Inventories (11,987) (9,837)
Prepaid expenses 227 (127)
Other assets (74) 71
Reserve for severance and store closings (454) (1,792)
Income taxes 47 96
Accounts payable 3,282 4,198
Accrued expenses and other current liabilities 2,788 743
Accrued rent 61 10
----------- -----------
Net cash used for operating activities (4,703) (3,275)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (1,985) (1,261)
Proceeds from terminated trust - 2,365
Proceeds from disposal of property and equipment 19 38
----------- -----------
Net cash used for investing activities (1,966) 1,142
----------- -----------
Cash flows from financing activities:
Net borrowings under credit facility 6,655 2,774
Repurchase of common stock - (641)
Issuance of common stock under option program 14 -
----------- -----------
Net cash provided by financing activities 6,669 2,133
----------- -----------
Net change in cash and cash equivalents - -
Cash and cash equivalents:
Beginning of the year - -
----------- -----------
End of the period $ - $ -
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments 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 (included in the Company's Annual Report 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.
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 Atlantic Harbor, Inc.
agreed to accept from the Company a cash payment of $450,000 in settlement of
all obligations outstanding under the Purchase Note, with an original principal
amount of $1 million, delivered by the Company in May 1995 in partial payment
for certain assets. In exchange, the Company agreed to transfer and assign all
trademarks and license agreements acquired as part of the related 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 the fourth quarter of 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 August 4, 2001, the Company had borrowings of approximately $31.0 million
outstanding under this credit facility and had three outstanding standby
letters of credit totaling approximately $2.3 million. Average borrowings
outstanding under this facility during the first six months of fiscal
2002 were approximately $29.8 million. The Company had average unused excess
availability under this facility of approximately $8.7 million during
the first six months of fiscal 2002, and unused availability of $7.6 million
at August 4, 2001. The Company was in compliance with all debt covenants under
the Amended Credit Agreement at August 4, 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 respective
period. 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 six months ended
August 4, July 29, August 4, July 29,
(In thousands) 2001 2000 2001 2000
-------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 14,477 16,502 14,468 16,472
Stock options, excluding the effect
of anti-dilutive options for 852
shares for the six months ended
August 4, 2001 1,047 183 -- 88
Diluted weighted average shares ------ ------ ------ ------
outstanding 15,524 16,685 14,468 16,560
Options to purchase 150,600 shares of the Company's common stock for the
three and six months ended August 4, 2001 and 247,200 shares of the Company's
Common Stock for the three and six months ended July 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 May 25, 2001, the Board of Directors approved the extension of the existing
consulting agreement with Jewelcor Management Inc. ("JMI") for an additional
one-year term commencing on April 29, 2001 and ending on April 28, 2002. As
payment for services rendered under this agreement, the Company issued to JMI
61,856 non-forfeitable and fully vested shares of the Company's Common Stock.
The fair value of those shares on May 25, 2001, the date of issuance, was
$240,000 or $3.88 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.
Also on May 25, 2001, the Board of Directors granted to Seymour Holtzman, as
Chairman of the Board of Directors and an employee of the Company, 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 at a rate of 100,000 shares annually
over three years and expires 10 years from the date of grant.
7. Subsequent Event
During the first quarter of fiscal year 1999, the Internal Revenue Service
("IRS") completed an examination of the Company's federal income tax returns for
fiscal years 1992 through 1996. Taxes on the adjustments proposed by the IRS,
excluding interest, amounted to approximately $4.9 million. The IRS challenged
the fiscal tax years in which various income and expense deductions were
recognized, resulting in potential timing differences of previously paid federal
income taxes. The Company appealed these proposed adjustments through the IRS
appeals process.
On August 25, 2001, the Company and the IRS reached a final settlement on the
audit of the Company's federal income tax returns for fiscal years 1992 through
1996. In accordance with this settlement, the Company paid to the IRS a total
of $1.5 million, including interest. The settlement of $1.5 million had no
material impact on the Company's second quarter earnings due to adequate
provisions previously established by the Company.
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Sales
Sales for the second quarter of fiscal 2002, ended August 4, 2001, were $47.7
million as compared to sales of $45.7 million in the second quarter of fiscal
2001, ended July 29, 2000. Sales for the first six months of fiscal 2002, ended
August 4, 2001, were $87.1 million as compared with $85.1 million for the six
months, ended July 29, 2000.
Sales for the thirteen weeks ended August 4, 2001 decreased 1.0% as compared to
$47.9 million for the corresponding thirteen weeks in the prior year which ended
August 5, 2000. Sales for the first six months of fiscal year 2002 decreased
1.1% as compared to $87.9 million for the corresponding twenty-six weeks in the
prior year which ended August 5,2000. Comparable store sales decreased 5
percent and 7 percent, respectively, for the second quarter and year to date
periods ended August 4, 2001.
The decrease of 5 percent in comparable store sales for the second quarter was
consistent with the Company's business plan and showed marked improvement over
the 10 percent comparable store sales decline in the first quarter of fiscal
2002.
Comparable stores are retail locations that have been open at least 13
months. Of the 104 stores that the Company operated at August 4, 2001, 97 were
comparable stores.
Gross Profit Margin
Gross profit margin, inclusive of occupancy costs, was 27.3% for the second
quarter of fiscal 2002 as compared to 29.4% in the second quarter of the
prior year. Merchandise margins decreased 2.1 percentage points for the second
quarter of fiscal 2002 as compared to the second quarter of the prior year.
For the six months ended August 4, 2001, gross profit margin, inclusive of
occupancy costs, was 25.7% as compared to 28.3% in the corresponding six months
of the prior year. Merchandise margins decreased 2.6 percentage points for the
six month period ended August 4, 2001 as compared to the first six months of the
prior year.
The decrease in merchandise margins for the second quarter and six month period
is due to several factors, principally:
1. decreasing initial margins resulting from an increase in lower merchandise
margin product mix;
2. higher promotional markdowns as compared to the prior year; and
3. the fact that prior year margins benefited from significant price reductions
funded from reserves previously established.
Merchandise margins were positively impacted by significantly lower inventory
losses due to results of the Company's shrinkage control programs.
The Company anticipates that it will experience a similar merchandise margin
rate during the remainder of fiscal 2002.
Selling, General and Administrative Expenses
Set forth below is certain information concerning the Company's selling,
general and administrative expenses for the three and six months ended August 4,
2001 and July 29, 2000, respectively.
(In thousands, except August 4, 2001 July 29, 2000
percentage data) $ % of sales $ % of sales
--------------------------------------------------------------------------
For the three months ended:
Store payroll $ 5,467 11.5% $ 5,268 11.5%
Other SG&A $ 4,598 9.6% $ 4,537 9.9%
For the six months ended:
Store payroll $10,453 12.0% $ 9,973 11.7%
Other SG&A $ 9,318 10.7% $ 9,577 11.3%
Store payroll, the largest component of selling, general and administrative
expenses, was 11.5 percent and 12.0 percent of sales, respectively, for the
three and six months ended August 4, 2001 compared with 11.5 percent and 11.7
percent of sales, respectively, in the prior year periods. Store payroll
expense includes the cost of warehouse labor which was 0.6 percent of sales for
the three and six months ended August 4, 2001 compared with 0.2 percent of sales
for the three and six months ended July 29, 2000. The increase in warehouse
labor was due to the opening of the Company's new distribution center during the
third quarter of fiscal 2001.
The decrease in other selling, general and administrative expenses, excluding
store payroll, for the three and six months ended August 4, 2001 as compared
with the three and six months of the prior year is due primarily to continued
cost reduction efforts. On a per store basis, expenses for the first six months
of fiscal 2002 have dropped by 4 percent.
Depreciation and Amortization
Set forth below are depreciation and amortization expenses for the Company
for the three and six months ended August 4, 2001 and July 29, 2000,
respectively.
Percentage
(In thousands, except August 4, July 29, Change at
percentage data) 2001 2000 August 4, 2001
-----------------------------------------------------------------------
For the three months ended $1,418 $1,325 7.0%
For the six months ended $2,814 $2,594 8.5%
The increase in depreciation and amortization expense for the three and six
months ended August 4, 2001 compared to the same periods in the prior year is
due to the opening of new stores and the remodeling of existing stores in
fiscal 2002 and 2001, in addition to the opening of the Company's new
distribution center in the third quarter of fiscal 2001. This increase is
partially offset by the write-off of certain fixed assets in fiscal 2001 due
to impairments and several assets becoming fully depreciated.
Interest Expense, Net
Net interest expense was $534,000 and $430,000 for the three months ended
August 4, 2001 and July 29, 2000, respectively. Net interest expense was $1.1
million and $845,000 for the six months ended August 4, 2001 and July 29, 2000,
respectively. These increases were attributable to higher average borrowing
levels under the Company's revolving credit facility for the three and six
months ended August 4, 2001 as compared to the same periods in the prior year.
These increases were offset slightly by improved borrowing rates as compared to
the prior periods.
Net Income (Loss)
Set forth below are the net income(loss) and income(loss) per share, presented
on a diluted basis, for the Company for the three and six months ended August 4,
2001 and July 29, 2000, respectively.
(In thousands, except August 4, 2001 July 29, 2000
per share data) $ per share $ per share
---------------------------------------------------------------------------
For the three months ended $ 715 $ 0.05 $ 1,084 $ 0.06
For the six months ended $ (655) $(0.05) $ 610 $ 0.04
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, essentially inventory
requirements, and capital expenditures. The Company's capital expenditure
program includes projects for new store openings, remodeling existing stores,
and improvements in 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 include
operations, trade credit and drawings under its $45 million bank credit
facility.
During the first six months of fiscal 2002, cash used for operations was $4.7
million as compared to $3.3 million during last year's first six months. Cash
from operations as compared to the prior year decreased by $1.4 million due
primarily to an increase in inventory as a result of opening three new stores
and opportunistic purchases of inventory.
At August 4, 2001, total inventory equaled $69.7 million, compared to $57.7
million at February 3, 2001. This increase in inventory is seasonal and reflects
the receipt of merchandise in preparation for the fall selling seasons, as well
as an increase in the number of store locations and certain opportunistic
purchases of inventory. The Company stocks its stores with Levi's(r) and
Dockers(r) 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, are 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, net of landlord allowances, for the
first six months of fiscal 2002 were $1.9 million compared to $1.3 million
during the first six months of fiscal 2001. During the first six months of
fiscal 2002, the Company opened two new Levi's(R)/Dockers(R) stores and two new
Dockers(R) stores, both of which were in real estate locations where there were
existing Levi's(R) only stores. The Company also remodeled six of its older
stores and combined two additional pairs of its standalone Dockers(R) and
Levi's(R) outlet stores that were adjacent to each other into two combined
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 two
existing outlet stores and opening up to three additional Levi's(R)/Dockers(R)
stores, one of which will be located in Puerto Rico.
During the first six months of fiscal 2002, a portion of the Company's cash
needs came from borrowings on its bank credit facility. At August 4, 2001,
the Company had borrowings of approximately $31.0 million outstanding under
this credit facility and had three outstanding standby letters of credit
totaling approximately $2.3 million.
Average borrowings outstanding under this credit facility for the first six
months of fiscal 2002 were approximately $29.8 million. The Company had average
unused excess availability under this facility of approximately $8.7
million during the first six months of fiscal 2002, and unused availability of
$7.6 million at August 4, 2001. The Company was in compliance with all debt
covenants under this credit facility at August 4, 2001.
The Company's working capital at August 4, 2001 was approximately $14.1
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.
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 to the Company's Form 8-K,
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 seek 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. Borrowings under the Company's bank credit
agreement, which expires in November 2003, bear interest at variable rates
based on FleetBoston, N.A.'s prime rate or the London Interbank Offering
Rate ("LIBOR"). These interest rates at August 4, 2001 were 6.75% for prime and
rates on varying LIBOR contracts of 5.700% to 5.948%. Based upon sensitivity
analysis as of August 4, 2001, a 10% increase in interest rates would result in
a potential cost to the Company of approximately $200,000 on an annualized
basis. In addition, the Company has available letters of credit as sources of
financing for its working capital requirements.
Part II. Other Information
ITEM 1. Legal Proceedings
The Company is a party to litigation and claims arising in the ordinary 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 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.
On August 25, 2001, the Company and the Internal Revenue Service ("IRS")
reached a final settlement on the audit of the Company's federal income tax
returns for fiscal years 1992 through 1996. In accordance with this settlement,
the Company paid the IRS a total of $1.5 million, including interest. The
settlement of $1.5 million had no material impact on the Company's second
quarter earnings due to adequate provisions previously established by the
Company.
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
(a) The Company held its Annual Meeting of Stockholders on July 31, 2001. The
matters submitted to a vote of the Company's stockholders were (i) the election
of nine directors, (ii) the approval of an amendment to the Company's 1992 Stock
Incentive Plan and (iii) the ratification of Ernst & Young LLP as independent
auditors for the Company for the current fiscal year.
(b) The Company's stockholders elected nine directors to hold office until the
2002 Annual Meeting of Stockholders and until their respective successors are
duly elected and qualified. The results of the voting were as follows:
FOR WITHHELD NON-VOTES
Seymour Holtzman 12,260,409 944,913 --
David A. Levin 12,262,409 942,913 --
Stanley I. Berger 12,236,042 969,280 --
Alan Cohen 12,262,409 942,913 --
Jesse Choper 12,262,409 942,913 --
Robert L. Patron 12,262,209 943,113 --
George T. Porter 12,261,909 943,413 --
Jeremiah P. Murphy, Jr. 12,262,409 942,913 --
Joseph Pennacchio 12,262,209 943,113 --
(c) The Company's stockholders also approved an amendment to the Company's 1992
Stock Incentive Plan to allow the Company to grant options with respect to up to
270,000 shares of its common stock to any individual participant during any
fiscal year with an exercise price not less than the fair market value of such
stock on the date of grant. The results of the voting were as follows:
For: 11,356,136
Against: 1,810,211
Abstain: 38,975
(d) The Company's stockholders also ratified the selection of Ernst & Young LLP
as the Company's independent auditors for the current fiscal year. The results
of the voting were as follows:
For: 13,180,867
Against: 16,345
Abstain: 8,110
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
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 Extension to Consulting Agreement, dated as of April 28, 2001,
between the Company and Jewelcor Management, Inc.
10.16 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). *
10.17 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). *
10.18 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. *
10.19 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). *
10.20 Amendment to Employment Agreement dated as of March 31, 2000
between the Company and David A. Levin. (included as Exhibit 10.19 to
the Company's Form 10-Q dated June 19,2001, and incorporated
herein by reference). *
10.21 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). *
10.22 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). *
10.23 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). *
10.24 Amendment to Employment Agreement dated as of August 14, 2000
between the Company and Dennis R. Hernreich(included as Exhibit 10.23
to the Company's Form 10-Q dated June 19,2001, and incorporated herein
by reference). *
10.25 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). *
10.26 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). *
10.27 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). *
10.28 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). *
10.29 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). *
10.30 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 (included
as Exhibit 18.1 to the Company's Form 10-Q dated June 19,2001 and
incorporated herein by reference). *
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.
September 18, 2001 By: /S/ DENNIS R. HERNREICH
Dennis R. Hernreich, Senior Vice President,
Chief Financial Officer, Treasurer and
Secretary
DESIGNS, INC.
1992 STOCK INCENTIVE PLAN, AS AMENDED
SECTION 1. General Purpose Of The Plan; Definitions.
The name of the plan is the Designs, Inc. 1992 Stock Incentive Plan (the
"Plan"). The purpose of the Plan is to encourage and enable the officers,
employees and directors of Designs, Inc. (the "Company") and its Subsidiaries
upon whose judgment, initiative and efforts the Company largely depends for the
successful conduct of its business to acquire a proprietary interest in the
Company. It is anticipated that providing such persons with a direct stake in
the Company's welfare will assure a closer identification of their interests
with those of the Company, thereby stimulating their efforts on the Company's
behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards", except where referring to a particular category
of grant under the Plan, shall include Incentive Stock Options, Non-Qualified
Stock Options, Conditioned Stock Awards, Unrestricted Stock Awards and
Performance Share Awards.
"Board" means the Board of Directors of the Company.
"Cause" means and shall be limited to a vote of the Board of
Directors at a meeting of the Board of Directors resolving that the participant
should be dismissed as a result of (i) any material breach by the participant
of any agreement to which the participant and the Company or any Subsidiary are
both parties, (ii) any act (other then retirement) or omission to act by the
participant which may have a material and adverse effect on the business of the
Company or any Subsidiary or on the participant's ability to perform services
for the Company or any Subsidiary, including, without limitation, the
commission of any crime (other than ordinary traffic violations), or (iii) any
material misconduct or neglect of duties by the participant in connection with
the business or affairs of the Company or any Subsidiary of the Company.
"Change of Control" shall have the meaning set forth in Section 13.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" shall have the meaning set forth in Section 2.
"Conditioned Stock Award" means Awards granted pursuant to Section
6.
"Disability" means disability as set forth in Section 22(e)(3) of
the Code.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 15.
"Fair Market Value" on any given date means the last reported sale
price at which Stock is traded on such date or, if no Stock is traded on such
date, the most recent date on which Stock was traded, as reflected in the NASDAQ
National Market System or, if applicable, any national stock exchange on which
the Stock is traded.
"Incentive Stock Option" means any Stock Option designated and
qualified as an "incentive stock option" as defined in Section 422 of the Code.
"Non-Employee Director" means a member of the Board who is not also
an employee of the Company or any Subsidiary.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Normal Retirement" means retirement from active employment with the
Company and its Subsidiaries in accordance with the retirement policies of the
Company and its Subsidiaries then in effect.
"Option" or "Stock Option" means any option to purchase shares of
Stock granted pursuant to Section 5.
"Performance Share Award" means Awards granted pursuant to Section
8.
"Stock" means the Common Stock, $.01 par value per share, of the
Company, subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities, beginning
with the Company if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the total combined voting power of all classes of
stock or other interests in one of the other corporations or entities in the
chain.
"Unrestricted Stock Award" means Awards granted pursuant to
Section 7.
SECTION 2. Administration Of Plan; Committee Authority To Select
Participants And Determine Awards.
(a) Committee. The Plan shall be administered by all of the Non-Employee
Director members of the Stock Option Committee of the Board, or any other
committee of not less than two Non-Employee Directors performing similar
functions, as appointed by the Board from time to time (the "Committee"). Each
member of the Committee shall be an "outside director" within the meaning of
Section 162(m) of the Code and the regulations promulgated thereunder and a
"non-employee director" within the meaning of Rule 16-3b(3)(i) promulgated
under the Act, or any successor definition under said Rule.
(b) Powers of Committee. The Committee shall have the power and authority
to grant Awards consistent with the terms of the Plan, including the power and
authority:
(i) to select the officers and other employees of the Company and its
Subsidiaries to whom Awards may from time to time be granted;
(ii) to determine the time or times of grant, and the extent, if any, of
Incentive Stock Options, Non-Qualified Stock Options, Conditioned Stock,
Unrestricted Stock and Performance Shares, or any combination of the foregoing,
granted to any one or more participants.
(iii) to determine the number of shares to be covered by any Award;
(iv) to determine and modify the terms and conditions, including
restrictions, not inconsistent with the terms of the Plan, of any Award, which
terms and conditions may differ among individual Awards and participants, and
to approve the form of written instruments evidencing the Awards;
(v) to accelerate the exercisability or vesting of all or any portion of
any Award;
(vi) subject to the provisions of Section 5(a)(ii), to extend the period
in which Stock Options may be exercised;
(vii) to determine whether, to what extent, and under what circumstances
Stock and other amounts payable with respect to an Award shall be deferred
either automatically or at the election of the participant and whether and to
what extent the Company shall pay or credit amounts equal to interest (at rates
determined by the Committee) or dividends or deemed dividends on such deferrals;
and
(viii) to adopt, alter and repeal such rules, guidelines and practices
for administration of the Plan and for its own acts and proceedings as it shall
deem advisable; to interpret the terms and provisions of the Plan and any Award
(including related written instruments); to make all determinations it deems
advisable for the administration of the Plan; to decide all disputes arising in
connection with the Plan; and to otherwise supervise the administration of the
Plan; to decide all disputes arising in connection with the Plan; and to
otherwise supervise the administration of the Plan (including the power and
authority to waive the requirement set forth in Section 7(c) of the Plan that
an irrevocable written election to receive Unrestricted Stock, in lieu of
directors' fees otherwise due, be delivered prior to the commencement of the
calendar year in which the Non-Employee Director serves on the Board.
All decisions and interpretations of the Committee shall be binding on all
persons, including the Company and Plan participants.
SECTION 3. Shares Issuable Under The Plan; Mergers; Substitution.
(a) Shares Issuable. The maximum number of shares of Stock reserved and
available for issuance under the Plan shall be 4,430,000. For purposes of this
limitation, the shares of Stock underlying any Awards which are forfeited,
canceled, reacquired by the Company, satisfied without the issuance of Stock or
otherwise terminated (other than by exercise) shall be added back to the shares
of Stock available for issuance under the Plan. Subject to such overall
limitation, shares may be issued up to such maximum number pursuant to any type
or types of Award, including Incentive Stock Options. Shares issued under the
Plan may be authorized but unissued shares or shares reacquired by the Company.
No individual participant in the Plan may, during any fiscal year of the
Company, be granted one or more Stock Options the sum of which cover more than
270,000 shares of Stock (such amount being subject to adjustment in accordance
with Section 3(b) hereof).
(b) Stock Dividends, Mergers, Etc. In the event that after
approval of the Plan by the stockholders of the Company in accordance with
Section 15, the Company effects a stock dividend, stock split or similar
change in capitalization affecting the Stock, the Committee shall make
appropriate adjustments in (i) the number and kind of shares of stock or
securities on which Awards may thereafter be granted, (ii) the number and kind
of shares remaining subject to outstanding Awards, and (iii) the option or
purchase price in respect of such shares. In the event of any merger,
consolidation, dissolution or liquidation of the Company, the Committee in
its sole discretion may, as to any outstanding Awards, make such substitution
or adjustment in the aggregate number of shares reserved for issuance under the
Plan and in the number and purchase price (if any) of shares subject to such
Awards as it may determine and as may be permitted by the terms of such
transaction, or accelerate, amend or terminate such Awards upon such terms and
conditions as it shall provide (which, in the case of the termination of the
vested portion of any Award, shall require payment or other consideration which
the Committee deems equitable in the circumstances), subject, however, to the
provisions of Section 13.
(c) Substitute Awards. The Committee may grant Awards under the Plan in
substitution for stock and stock based awards held by employees of another
corporation who concurrently become employees of the Company or a Subsidiary as
the result of a merger or consolidation of the employing corporation with the
Company or a Subsidiary or the acquisition by the Company or a Subsidiary of
property or stock of the employing corporation. The Committee may direct that
the substitute awards be granted on such terms and conditions as the Committee
considers appropriate in the circumstances. The shares which may be delivered
under such substitute awards shall be in addition to the maximum number of
shares provided for in Section 3(a) only to the extent that the substitute
Awards are granted in substitution for awards issued under a plan approved by
the stockholders of the entity which issued such predecessor awards.
SECTION 4. Eligibility.
Participants in the Plan will be such full or part-time officers and
other employees of the Company and its Subsidiaries who are responsible for or
contribute to the management, growth or profitability of the Company and its
Subsidiaries and who are selected from time to time by the Committee, in its
sole discretion. Non-Employee Directors are also eligible to participate in the
Plan but only to the extent provided in Section 5(c) and Section 7 below.
An employee who is employed primarily to render services within the
jurisdiction of a labor union and whose compensation, hours of work, or
condition of employment are determined by collective bargaining with such union
shall not be an Eligible Employee for purposes of this Plan unless the
applicable collective bargaining agreement expressly provides that such employee
shall be eligible to participate in this Plan, in which event, however, such
employee shall be entitled to participate in the Plan only to the extent and on
the terms and conditions specified in such collective bargaining agreement.
SECTION 5. Stock Options.
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
Stock Options granted under the Plan may be either Incentive Stock Options
or Non-Qualified Stock Options. To the extent that any option does not qualify
as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after April 2,
2007.
(a) Stock Options Granted to Employees. The Committee in its discretion
may grant Stock Options to employees of the Company or any Subsidiary. Stock
Options granted to employees pursuant to this Section 5(a) shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee shall
deem desirable:
(i) Exercise Price. The exercise price per share for the Stock covered
by a Stock Option granted pursuant to this Section 5(a) shall be determined by
the Committee at the time of grant but shall be not less than 100% of Fair
Market Value on the date of grant whether such Stock Option be an Incentive
Stock Option or a Non-Qualified Stock Option. If an employee owns or is deemed
to own (by reason of the attribution rules applicable under Section 424(d) of
the Code) more than 10% of the combined voting power of all classes of stock of
the Company or any Subsidiary or parent corporation and an Incentive Stock
Option is granted to such employee, the option price shall be not less than
110% of Fair Market Value on the grant date.
(ii) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is deemed
to own (by reason of the attribution rules of Section 424(d) of the Code) more
than 10% of the combined voting power of all classes of stock of the Company
or any Subsidiary or parent corporation and an Incentive Stock Option is
granted to such employee, the term of such option shall be no more than five
years from the date of grant.
(iii) Exercisability; Rights of a Shareholder. Stock Options
shall become vested and exercisable at such time or times, whether or not in
installments, as shall be determined by the Committee at or after the grant
date. The Committee may at any time accelerate the exercisability of all or
any portion of any Stock Option. An optionee shall have the rights of a
shareholder only as to shares acquired upon the exercise of a Stock Option
and not as to unexercised Stock Options.
(iv) Method of Exercise. Stock Options may be exercised in whole
or in part, by giving written notice of exercise to the Company, specifying
the number of shares to be purchased. Payment of the purchase price may be made
by one or more of the following methods:
(A) In cash, by certified or bank check or other instrument
acceptable to the Committee;
(B) In the form of shares of Stock that are not then subject to
restrictions under any Company plan, if permitted by the Committee, in its
discretion. Such surrendered shares shall be valued at Fair Market Value on the
exercise date; or
(C) By the optionee delivering to the Company a properly executed
exercise notice together with irrevocable instructions to a broker to promptly
deliver to the Company cash or a check payable and acceptable to the Company to
pay the purchase price; provided that in the event the optionee chooses to pay
the purchase price as so provided, the optionee and the broker shall comply with
such procedures and enter into such agreements of indemnity and other agreements
as the Committee shall prescribe as a condition of such payment procedure.
Payment instruments will be received subject to collection.
The delivery of certificates representing shares of Stock to be purchased
pursuant to the exercise of a Stock Option will be contingent upon receipt from
the Optionee (or a purchaser acting in his stead in accordance with the
provisions of the Stock Option) by the Company of the full purchase price for
such shares and the fulfillment of any other requirements contained in the Stock
Option or applicable provisions of laws.
(v) Termination by Death. If any optionee's employment by the
Company and its Subsidiaries terminates by reason of death, the Stock Option may
thereafter be exercised, to the extent exercisable at the date of death, by the
legal representative or legatee of the optionee, for a period of 180 days (or
such longer period as the Committee shall specify at any time) from the date of
death, or until the expiration of the stated term of the Option, if earlier.
(vi) Termination by Reason of Disability or Normal
Retirement.
(A) Any Stock Option held by an optionee whose employment by the
Company and its Subsidiaries has terminated by reason of Disability may
thereafter be exercised, to the extent it was exercisable at the time of such
termination, for a period of 180 days (or such longer period as the Committee
shall specify at any time) from the date of such termination of employment, or
until the expiration of the stated term of the Option, if earlier.
(B) Any Stock Option held by an optionee whose employment by the Company
and its Subsidiaries has terminated by reason of Normal Retirement may
thereafter be exercised, to the extent it was exercisable at the time of such
termination, for a period of 90 days (or such longer period as the Committee
shall specify at any time) from the date of such termination of employment, or
until the expiration of the stated term of the Option, if earlier.
(C) The Committee shall have sole authority and discretion to
determine whether a participant's employment has been terminated by reason of
Disability or Normal Retirement.
(D) Except as otherwise provided by the Committee at the time of
grant, the death of an optionee during a period provided in this Section
5(a)(vi) for the exercise of a Non-Qualified Stock Option, shall extend such
period for 180 days from the date of death, subject to termination on the
expiration of the stated term of the Option, if earlier.
(vii) Termination for Cause. If any optionee's employment by the
Company and its Subsidiaries has been terminated for Cause, any Stock Option
held by such optionee shall immediately terminate and be of no further force
and effect; provided, however, that the Committee may, in its sole discretion,
provide that such stock option can be exercised for a period of up to 30 days
from the date of termination of employment or until the expiration of the stated
term of the Option, if earlier.
(viii) Other Termination. Unless otherwise determined by the
Committee, if an optionee's employment by the Company and its Subsidiaries
terminates for any reason other than death, Disability, Normal Retirement or
for Cause, any Stock Option held by such optionee may thereafter be exercised,
to the extent it was exercisable on the date of termination of employment, for
30 days (or such longer period as the Committee shall specify at any time) from
the date of termination of employment or until the expiration of the stated
term of the Option, if earlier.
(ix) Annual Limit on Incentive Stock Options. To the extent
required for "incentive stock option" treatment under Section 422 of the Code,
the aggregate Fair Market Value (determined as of the time of grant) of the
Stock with respect to which incentive stock options granted under this Plan and
any other plan of the Company or its Subsidiaries become exercisable for the
first time by an optionee during any calendar year shall not exceed $100,000.
(x) Form of Settlement. Shares of Stock issued upon exercise of a
Stock Option shall be free of all restrictions under the Plan, except as
otherwise provided in this Plan.
(b) Reload Options. At the discretion of the Committee, Options granted
under this Section 5(a) may include a so-called "reload" feature pursuant to
which an optionee exercising an option by the delivery of a number of shares of
Stock in accordance with Section 5(a)(iv)(B) hereof would automatically be
granted an additional Option (with an exercise price equal to the Fair Market
Value of the Stock on the date the additional Option is granted and with the
same expiration date as the original Option being exercised, and with such
other terms as the Committee may provide) to purchase that number of shares of
Stock equal to the number delivered to exercise the original Option.
(c) Stock Options Granted to Non-Employee Directors.
(i) Grant of Options Upon Election to Board. Each Non-employee Director
who is elected by the stockholders of the Company to the Board on or subsequent
to October 8, 1999 shall automatically be granted, upon such election, a Non-
Qualified Stock Option to purchase 15,000 shares of Stock. Each Non-Employee
Director who is re-elected by the stockholders of the Company to the Board on
or subsequent to October 8, 1999 shall automatically be granted, upon each
such re-election, a Non-qualified Stock Option to purchase 15,000 shares of
Stock.
(ii) Exercise Price. The exercise price per share for the Stock covered
by a Stock Option granted pursuant to this Section 6(c) shall be equal to the
Fair Market Value of the Stock on the date the Stock Option is granted.
(iii) Exercise; Termination; Non-transferability.
(A) Options granted under this Section 5(c) shall be vested at the
rate of 33 1/3% of such options shall be exercisable on the date of grant, an
additional 33 1/3% of such options shall be exercisable on the first anniversary
of the grant thereof, and an additional 33 1/3% of such options shall become
exercisable on the second anniversary of grant thereof; subject to the
provisions of Section 5(c)(iii)(B), any Option so granted shall be exercisable
after the termination of service of the Non-Employee Director, whether because
of death, disability or otherwise. No Option issued under this Section 5(c)
shall be exercisable after the expiration of ten years from the date upon which
such Option is granted.
(B) The rights of a Non-Employee Director in an Option granted under
Section 5(c) shall terminate 90 days after such Director ceases to be a Director
of the Company or the specified expiration date, if earlier; provided, however,
that if the Non-Employee ceases to be a Director for Cause, the rights shall
terminate immediately on the date on which he ceases to be a Director.
(C) Any Option granted to a Non-Employee Director and outstanding on
the date of his or her death may be exercised by the legal representative or
legatee of the optionee for a period of 180 days from the date of death or until
the expiration of the stated term of the option, if earlier.
(D) Options granted under this Section 5(c) may be exercised only by
written notice to the Company specifying the number of shares to be purchased.
Payment of the full purchase price of the shares to be purchased may be made by
one or more of the methods specified in Section 5(a)(iv). An optionee shall have
the rights of a shareholder only as to shares acquired upon the exercise of a
Stock Option and not as to unexercised Stock Options.
(iv) Limited to Non-Employee Directors. The provisions of this
Section 5(c) shall apply only to Options granted or to be granted to Non-
Employee Directors, and shall not be deemed to modify, limit or otherwise apply
to any other provision of this Plan or to any Option issued under this Plan to
a participant who is not a Non-Employee Director of the Company. To the extent
inconsistent with the provisions of any other Section of this Plan, the
provisions of this Section 5(c) shall govern the rights and obligations of the
Company and Non-Employee Directors respecting Options granted or to be granted
to Non-Employee Directors.
(d) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the
Committee may permit the optionee to transfer, without consideration for the
transfer, his Non-Qualified Stock Options to members of his immediate family,
to trusts for the benefit of such family members, or to partnerships in which
such family members are the only partners; provided that the transferee agrees
in writing with the Company to be bound by all terms and conditions of the Plan
and the applicable Stock Option.
SECTION 6. Conditioned Stock Awards.
(a) Nature of Conditioned Stock Award. The Committee may grant
Conditioned Stock Awards to any employees of the Company or any Subsidiary. A
Conditioned Stock Award is an Award entitling the recipient to acquire, at no
cost or for a purchase price determined by the Committee, shares of Stock
subject to such restrictions and conditions as the Committee may determine at
the time of grant ("Conditioned Stock"). Conditions may be based on continuing
employment and/or achievement of pre-established performance goals and
objectives. In addition, a Conditioned Stock Award may be granted to an
employee by the Committee in lieu of a cash bonus due to such employee
pursuant to any other plan of the Company.
(b) Acceptance of Award. A participant who is granted a Conditioned
Stock Award shall have no rights with respect to such Award unless the
participant shall have accepted the Award within 60 days (or such shorter date
as the Committee may specify) following the award date by making payment to the
Company, if required, by certified or bank check or other instrument or form of
payment acceptable to the Committee in an amount equal to the specified
purchase price, if any, of the shares covered by the Award and by executing and
delivering to the Company a written instrument that sets forth the terms and
conditions of the Conditioned Stock in such form as the Committee shall
determine.
(c) Rights as a Shareholder. Upon complying with Section 6(b) above, a
participant shall have all the rights of a shareholder with respect to the
Conditioned Stock, including voting and dividend rights, subject to non-
transferability restrictions and Company repurchase or forfeiture rights
described in this Section 6 and subject to such other conditions contained in
the written instrument evidencing the Conditioned Award. Unless the Committee
shall otherwise determine, certificates evidencing shares of Conditioned Stock
shall remain in the possession of the Company until such shares are vested as
provided in Section 6(e) below.
(d) Restrictions. Shares of Conditioned Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein. In the event of termination of employment by the
Company and its Subsidiaries for any reason (including death, Disability,
Normal Retirement and for Cause), the Company shall have the right, at the
Discretion of the Committee, to repurchase shares of Conditioned Stock with
respect to which conditions have not lapsed at their purchase price, or to
require forfeiture of such shares to the Company if acquired at no cost, from
the participant or the participant's legal representative. The Company must
exercise such right of repurchase or forfeiture not later than the 90th day
following such termination of employment (unless otherwise specified in the
written instrument evidencing the Conditioned Award).
(e) Vesting of Conditioned Stock. The Committee at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the
nontransferability of the Conditioned Stock and the Company's right of
repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or
the attainment of such pre-established performance goals, objectives and other
conditions, the shares on which all restrictions have lapsed shall no longer be
Conditioned Stock and shall be deemed "vested." The Committee at any time may
accelerate such date or dates and otherwise waive or, subject to Section 11,
amend any conditions of the Award.
(f) Waiver, Deferral and Reinvestment of Dividends. The written
instrument evidencing the Conditioned Stock Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on the
Restricted Stock.
SECTION 7. Unrestricted Stock Awards.
(a) Grant or Sale of Unrestricted Stock. The Committee may, in its sole
discretion, grant (or sell at a purchase price determined by the Committee which
shall in no event be less than 85% of Fair Market Value) to any employees of the
Company or any Subsidiary shares of Stock free of any restrictions under the
Plan ("Unrestricted Stock"). Shares of Unrestricted Stock may be granted or sold
as described in the preceding sentence in respect of past services or other
valid consideration.
(b) Elections to Receive Unrestricted Stock in Lieu of Compensation. Upon
the request of an employee and with the consent of the Committee, each employee
may, pursuant to an irrevocable written election delivered to the Company no
later than the date or dates specified by the Committee, receive a portion of
the cash compensation otherwise due to him in Unrestricted Stock (valued at Fair
Market Value on the date or dates the cash compensation would otherwise be
paid). Such Unrestricted Stock may be paid to the employee at the same time as
the cash compensation would otherwise be paid, or at a later time, as specified
by the employee in the written election.
(c) Elections to Receive Unrestricted Stock in Lieu of Directors' Fees.
Each Non-Employee Director may, pursuant to an irrevocable written election
delivered to the Company no later than December 31 of any calendar year, receive
all or a portion of the directors' fees otherwise due to him in the subsequent
calendar year in Unrestricted Stock (valued at Fair Market Value on the date or
dates the directors' fees would otherwise be paid). Such Unrestricted Stock may
be paid to the Non-Employee Director at the same time the directors' fees would
otherwise have been paid, or at a later time, as specified by the Non-Employee
Director in the written election.
(d) Restrictions on Transfers. The right to receive Unrestricted Stock
may not be sold, assigned, transferred, pledged or otherwise encumbered, other
than by will or the laws of descent and distribution.
SECTION 8. Performance Share Awards.
(a) Nature of Performance Shares. A Performance Share Award is an award
entitling the recipient to acquire shares of Stock upon the attainment of
specified performance goals. The Committee may make Performance Share Awards
independent of or in connection with the granting of any other Award under the
Plan. Performance Share Awards may be granted under the Plan to any employees of
the Company or any Subsidiary, including those who qualify for awards under
other performance plans of the Company. The Committee in its sole discretion
shall determine whether and to whom Performance Share Awards shall be made, the
performance goals applicable under each such Award, the periods during which
performance is to be measured, and all other limitations and conditions
applicable to the awarded Performance Shares; provided, however, that the
Committee may rely on the performance goals and other standards applicable to
other performance-based plans of the Company in setting the standards for
Performance Share Awards under the Plan.
(b) Restrictions of Transfer. Performance Share Awards and all rights
with respect to such Awards may not be sold, assigned, transferred, pledged or
otherwise encumbered.
(c) Rights as a Shareholder. A participant receiving a Performance Share
Award shall have the rights of a shareholder only as to shares actually received
by the participant under the Plan and not with respect to shares subject to the
Award but not actually received by the participant. A participant shall be
entitled to receive a stock certificate evidencing the acquisition of shares of
Stock under a Performance Share Award only upon satisfaction of all conditions
specified in the written instrument evidencing the Performance Share Award (or
in a performance plan adopted by the Committee).
(d) Termination. Except as may otherwise be provided by the Committee at
any time prior to termination of employment, a participant's rights in all
Performance Share Awards shall automatically terminate upon the participant's
termination of employment by the Company and its Subsidiaries for any reason
(including death, Disability, Normal Retirement and for Cause).
(e) Acceleration, Waiver, Etc. At any time prior to the participant's
termination of employment by the Company and its Subsidiaries, the Committee may
in its sole discretion accelerate, waive or, subject to Section 11, amend any or
all of the goals, restrictions or conditions imposed under any Performance Share
Award.
SECTION 9. Tax Withholding.
(a) Payment by Participant. Each participant shall, no later than the
date as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of any Federal, state, or local
taxes of any kind required by law to be withheld with respect to such income.
The Company and its Subsidiaries shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
participant.
(b) Payment in Shares. With the approval of the Committee, a participant may
elect to have such tax withholding obligation satisfied, in whole or in part, by
(i) authorizing the Company to withhold from shares of Stock to be issued
pursuant to any Award a number of shares with an aggregate Fair Market Value (as
of the date the withholding is effected) that would satisfy the withholding
amount due with respect to such Award, or (ii) transferring to the Company
shares of Stock owned by the participant with an aggregate Fair Market Value (as
of the date the withholding is effected) that would satisfy the withholding
amount due.
SECTION 10. Transfer, Leave Of Absence, Etc.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or from
the Company to a Subsidiary, or from one Subsidiary to another;
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to re-
employment is guaranteed either by a statute or by contract or under the policy
pursuant to which the leave of absence was granted or if the Committee otherwise
so provides in writing.
SECTION 11. Amendments And Termination.
The Board may at any time amend or discontinue the Plan and the Committee
may at any time amend or cancel any outstanding Award (or provide substitute
Awards at the same or reduced exercise or purchase price or with no exercise or
purchase price, but such price, if any, must satisfy the requirements which
would apply to the substitute or amended Award if it were then initially granted
under this Plan) for the purpose of satisfying changes in law or for any other
lawful purpose, but no such action shall adversely affect rights under any
outstanding Award without the holder's consent. However, no such amendment,
unless approved by the stockholders of the Company, shall be effective if it
would cause the Plan to fail to satisfy the incentive stock option requirements
of the Code or if it would increase the limitation set forth in Section 3(a) on
the number of shares of Stock covered by Options that may be granted to any
individual participant during any fiscal year.
SECTION 12. Status Of Plan.
With respect to the portion of any Award which has not been exercised and
any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the Company unless the Committee shall otherwise expressly determine
in connection with any Award or Awards. In its sole discretion, the Committee
may authorize the creation of trusts or other arrangements to meet the Company's
obligations to deliver Stock or make payments with respect to Awards hereunder,
provided that the existence of such trusts or other arrangements is consistent
with the provision of the foregoing sentence.
SECTION 13. Change Of Control Provisions.
(a) Upon the occurrence of a Change of Control as defined in this Section
13:
(i) Each Stock Option shall automatically become fully exercisable
notwithstanding any provision to the contrary hereof.
(ii) Restrictions and conditions on Awards of Conditioned Stock shall
automatically be deemed waived, and the recipients of such Awards shall become
entitled to receipt of the stock subject to such Awards.
(b) The Committee may at any time prior to a Change of Control accelerate
the exercisability of any Stock Options, Conditioned Stock, and Performance
Share Awards to the extent it shall in its sole discretion determine.
(c) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Act) becomes a "beneficial owner" (as such term is defined in
Rule 13d-3 promulgated under the Act) (other than the Company, any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, or any corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company), directly or indirectly, of securities of the Company
representing thirty-five percent (35%) or more of the combined voting power of
the Company's then outstanding securities; or, in the case of any person which
as of October 20, 2000, is the beneficial owner, directly or indirectly, of
securities of the Company representing more than [10%] of the combined voting
power of the Company's then outstanding securities, such person shall become the
beneficial owner, directly or indirectly, of securities of the Company
representing [thirty-five percent (35%)] or more of the combined voting power of
the Company's then outstanding securities in addition to the securities
beneficially owned, directly or indirectly, by such person as of October 20,
2000 (excluding, for the avoidance of doubt, becoming the beneficial owner of
such percentage of securities by reason of any acquisition, retirement or
cancellation of securities by the Company).
(ii) at any time after October 20, 2000, persons who, as of October 20,
2000, constituted the Company's Board (the "Incumbent Board") cease for any
reason, including without limitation as a result of a tender offer, proxy
contest, merger or similar transaction, to constitute at least a majority of the
Board, provided that any person becoming a director of the Company subsequent to
October 20, 2000 whose election was approved by, or who was nominated with the
approval of, at least a majority of the directors then comprising the Incumbent
Board shall, for purposes of this Plan, be considered a member of the Incumbent
Board; or
(iii) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation or other entity, other than (a) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 65% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (b) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 50% of the combined voting
power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
SECTION 14. General Provisions.
(a) No Distribution; Compliance with Legal Requirements. The Committee
may require each person acquiring shares pursuant to an Award to represent to
and agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange requirements have
been satisfied. The Committee may require the placing of such stop-orders and
restrictive legends on certificates for Stock and Awards as it deems
appropriate.
(b) Delivery of Stock Certificates. Delivery of stock certificates to
participants under this Plan shall be deemed effected for all purposes when the
Company or a stock transfer agent of the Company shall have delivered such
certificates in the United States mail, addressed to the participant, at the
participant's last known address on file with the Company.
(c) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, subject to stockholder approval if
such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan or any
Award under the Plan does not confer upon any employee any right to continued
employment with the Company or any Subsidiary.
SECTION 15. Effective Date Of Plan.
The Plan shall become effective upon approval by the holders of a majority
of the shares of capital stock of the Company present or represented and
entitled to vote at a meeting of stockholders.
SECTION 16. Governing Law.
This Plan shall be governed by, and construed and enforced in accordance
with, the substantive laws of The Commonwealth of Massachusetts without regard
to its principles of conflicts of laws.
G:legal\maura\stockopt\stock\plans\1992Plan\92amend2000
3
As of April 28, 2001
Jewelcor Management, Inc.
100 North Wilkes-Barre Boulevard
Wilkes-Barre, PA 18702
Ladies and Gentlemen:
This will confirm the agreement between Jewelcor Management, Inc. (the
"Independent Contractor") and Designs, Inc. (the "Corporation") regarding the
extension of the term of the Consulting Agreement between the Independent
Contractor and the Corporation dated as of April 29, 2000 (the "Agreement").
1. The term of the Agreement shall be extended for an additional period of one
(1)year commencing on April 29, 2001 and ending on April 28, 2002. Unless
the context otherwise requires, April 28, 2002 shall be the "Expiration Date"
of the Agreement as so extended.
2. Subject to the provisions of Section 4 of the Agreement, the consideration
to be furnished to the Independent Contractor by the Corporation for the
Services rendered by the Independent Contractor under the Agreement during
the period from April 29, 2001 through April 28, 2002 shall consist of
(a) 61,856 non-forfeitable, fully paid and non-assessable shares of the
Corporation's Common Stock (the fair value of which Common Stock on May
25, 2001, the date of the approval of the extension of the Agreement as
set forth herein, was $240,000 or $3.88 per share) and (b) the reimbursement
of actual and direct out-of-pocket expenses incurred by the Independent
Contractor in the rendering of Services under the agreement.
The remaining terms of the Agreement shall remain in full force and effect
without change. For the avoidance of doubt, the parties hereby agree and
acknowledge that the foregoing extension does not change the compensation or
other rights or obligations of the parties originally provided in the Agreement
with respect to any prior period.
Very truly yours,
Designs, Inc.
Agreed and Accepted:
Jewelcor Management, Inc.
KL2:2120019.1