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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 November 3, 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 December 13, 2001
Common 14,503,929
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
November 3, 2001 and February 3, 2001
(In thousands, except share data)
November 3, February 3,
2001 2001
ASSETS (unaudited)
---------- ----------
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable 1,136 18
Inventories 74,526 57,675
Deferred income taxes 765 765
Prepaid expenses 2,980 3,093
---------- ----------
Total current assets 79,407 61,551
Property and equipment, net of
accumulated depreciation and amortization 20,888 18,577
Other assets:
Deferred income taxes 14,300 14,347
Other assets 599 595
---------- ----------
Total assets $ 115,194 $ 95,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,760 $ 6,280
Accrued expenses and other current liabilities 15,300 11,392
Accrued rent 2,873 2,376
Reserve for severance and store closings 204 852
Notes payable 32,174 24,345
---------- ----------
Total current liabilities 65,311 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, 17,532,000 and 17,488,000 shares issued
at November 3, 2001 and February 3, 2001,
respectively 175 175
Additional paid-in capital 55,905 55,697
Retained earnings 2,460 2,577
Treasury stock at cost, 3,040,000 and 3,035,000 shares
at November 3, 2001 and February 3, 2001,
respectively (8,460) (8,427)
Loan to executive (197) (197)
---------- ----------
Total stockholders' equity 49,883 49,825
---------- ----------
Total liabilities and stockholders' equity $ 115,194 $ 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 Nine Months Ended
---------------------- ----------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---------------------- ----------------------
Sales $ 54,301 $ 56,587 $ 141,394 $ 141,659
Cost of goods sold including
occupancy 41,657 39,202 106,330 100,200
---------------------- ----------------------
Gross profit 12,644 17,385 35,064 41,459
Expenses:
Selling, general and
administrative 10,202 10,663 29,979 30,213
Depreciation and amortization 1,134 1,364 3,947 3,958
---------------------- ----------------------
Total expenses 11,336 12,027 33,926 34,171
---------------------- ----------------------
Operating profit 1,308 5,358 1,138 7,288
Interest expense, net 440 472 1,517 1,317
---------------------- ----------------------
Income(loss) before income taxes 868 4,886 (379) 5,971
Provision(benefit) for income taxes 330 1,995 (262) 2,469
---------------------- ----------------------
Net income(loss) $ 538 $ 2,891 $ (117) $ 3,502
====================== ======================
Income (loss) per share- Basic $ 0.04 $ 0.18 $ (0.01) $ 0.22
Income (loss) per share- Diluted $ 0.04 $ 0.18 $ (0.01) $ 0.21
Weighted average number of common
shares outstanding
- Basic 14,492 15,935 14,476 16,255
- Diluted 15,065 16,362 14,476 16,454
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
--------------------------
November 3, October 28,
2001 2000
----------- -----------
Cash flows from operating activities:
Net (loss) income $ (117) $ 3,502
Adjustments to reconcile net (loss) income
to net cash (used for) provided by
operating activities:
Depreciation and amortization 3,947 3,958
Issuance of common stock and options 189 156
Loss on sale or disposal of fixed assets 17 35
Changes in operating assets and liabilities:
Accounts receivable (1,118) 37
Inventories (16,851) (7,025)
Prepaid expenses 113 (75)
Other assets (75) 83
Reserve for severance and store closings (648) (1,977)
Income taxes (1,866) 2,077
Accounts payable 8,480 1,288
Accrued expenses and other current liabilities 2,159 3,134
Accrued rent 497 (9)
----------- -----------
Net cash (used for) provided by operating activities (5,273) 5,184
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (2,563) (2,255)
Proceeds from terminated trust - 2,365
Proceeds from disposal of property and equipment 21 44
----------- -----------
Net cash (used for) provided by investing activities (2,542) 154
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under credit facility 7,829 (3,465)
Repurchase of common stock (33) (1,874)
Issuance of common stock under option program 19 ( 196)
----------- -----------
Net cash provided by (used for )financing activities 7,815 (5,535)
----------- -----------
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, filed 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 $1 million promissory note 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 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 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 Agreement, 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 November 3, 2001, the Company had borrowings of approximately $32.2 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 nine months of fiscal
2002 were approximately $29.3 million. The Company had average unused excess
availability under this facility of approximately $8.5 million during
the first nine months of fiscal 2002, and unused availability of $6.3 million
at November 3, 2001. The Company was in compliance with all debt covenants under
the Amended Credit Agreement at November 3, 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 nine months ended
(In thousands) 11/3/01 10/28/00 11/3/01 10/28/00
- -------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 14,492 15,935 14,476 16,255
Stock options, excluding the effect
of anti-dilutive options for 600
shares for the nine months ended
November 3, 2001 573 427 -- 199
Diluted weighted average shares ------ ------ ------ ------
outstanding 15,065 16,362 14,476 16,454
Options to purchase 458,400 shares of the Company's common stock for the
three and nine months ended November 3, 2001 and options to purchase 173,600 and
238,350 shares, respectively, of the Company's common stock for the three and
nine months ended October 28, 2000,were excluded from the computations of
diluted earnings per share, in each case because the exercise price of such
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, in
connection with his becoming 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. Taxes
IRS SETTLEMENT
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 results of operations for the three and nine
months ended November 3, 2001 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 third quarter of fiscal 2002, which ended November 3, 2001, were
$54.3 million as compared to sales of $56.6 million in the third quarter of
fiscal 2001, ended October 28, 2000. Sales for the first nine months of fiscal
2002, ended November 3, 2001, were $141.4 million as compared with $141.7
million for the first nine months of fiscal 2001, ended October 28, 2000.
Sales for the thirteen weeks ended November 3, 2001 decreased 0.7% as compared
to $54.7 million for the corresponding thirteen weeks in the prior year which
ended November 4, 2000. The Company's sales were significantly impacted during
the third quarter by the tragic events of September 11, 2001 and by the general
economic trends affecting the retail industry as a whole. During the third
quarter prior to September 11, 2001, the Company's comparable store sales
percentage was trending at a 5.5% increase over the prior year but comparable
store sales for the full third quarter ended at a decrease of 4.4 percent. The
Company's tourist store locations, which are primarily located in the Florida
market, were more affected than the balance of the chain by these events.
Sales for the first nine months of fiscal year 2002 decreased 0.9% as compared
to $142.7 million for the corresponding thirty-nine weeks in the prior year
which ended November 4, 2000. For the nine months ended November 3, 2001,
comparable store sales decreased 6.1% from the prior year.
Comparable stores are retail locations that have been open at least 13
months. Of the 105 stores that the Company operated at November 3, 2001, 97
were comparable stores.
Gross Profit Margin
Gross profit margin, inclusive of occupancy costs, was 23.3% for the third
quarter of fiscal 2002 as compared to 30.7% in the third quarter of the
prior year. Merchandise margins for the third quarter of fiscal 2002 decreased
5.8 percentage points as compared to the third quarter of the prior year. In
response to the general weakness in the retail market, the Company took on an
aggressive promotional posture during the third quarter which negatively
impacted merchandise margins.
The Company anticipates that it will experience a similar merchandise margin
rate during the remainder of fiscal 2002.
For the nine months ended November 3, 2001, gross profit margin, inclusive of
occupancy costs, was 24.8% as compared to 29.3% in the corresponding nine months
of the prior year. Merchandise margins decreased 3.6 percentage points for the
nine month period ended November 3, 2001 as compared to the first nine months of
the prior year.
Overall, the decrease, year to date, in merchandise margins in fiscal 2002 as
compared to the prior year continues to be principally due to the following
factors:
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.
The Company's significant improvement in reducing inventory losses has partially
offset these other factors. For the nine months ended November 3, 2001, the
Company's shrinkage control programs have resulted in over a 30% improvement in
its shrink rate.
Selling, General and Administrative Expenses
Set forth below is certain information concerning the Company's selling,
general and administrative expenses for the three and nine months ended November
3, 2001 and October 28, 2000, respectively.
(In thousands, except November 3, 2001 October 28, 2000
percentage data) $ % of sales $ % of sales
- --------------------------------------------------------------------------
For the three months ended:
Store payroll $ 5,227 9.6% $ 5,381 9.5%
Other SG&A $ 4,975 9.2% $ 5,282 9.3%
For the nine months ended:
Store payroll $15,682 11.1% $15,354 10.8%
Other SG&A $14,297 10.1% $14,859 10.5%
Store payroll expense includes the cost of warehouse labor. Since the warehouse
distribution center did not open until the beginning of the third quarter of
fiscal 2001, warehouse labor for the nine months ended November 3, 2001 was
greater by 0.2 percent of sales as compared to the prior year.
The decrease in other selling, general and administrative expenses, excluding
store payroll, for the three and nine months ended November 3, 2001 as compared
with the three and nine months of the prior year is the result of the Company's
continued focus on cost reduction efforts.
Depreciation and Amortization
Set forth below are depreciation and amortization expenses for the Company
for the three and nine months ended November 3, 2001 and October 28, 2000,
respectively.
Percentage
(In thousands, except November 3, October 28, Change at
percentage data) 2001 2000 November 3, 2001
- -----------------------------------------------------------------------
For the three months ended $1,134 $1,364 (16.9)%
For the nine months ended $3,947 $3,958 (0.3)%
The decrease in depreciation and amortization expense for the three and nine
months ended November 3, 2001 compared to the same periods in the prior year is
due to several assets becoming fully depreciated and an increase in the average
life of new assets when compared to maturing assets. This decrease was
partially offset by added depreciation related 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.
Interest Expense, Net
Net interest expense was $440,000 and $472,000 for the three months ended
November 3, 2001 and October 28, 2000, respectively. Net interest expense was
$1.5 million and $1.3 million for the nine months ended November 3, 2001 and
October 28, 2000, respectively. These increases were attributable to higher
average borrowing levels under the Company's revolving credit facility for the
three and nine months ended November 3, 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 nine months ended November
3, 2001 and October 28, 2000, respectively.
(In thousands, except November 3, 2001 October 28, 2000
per share data) $ per share $ per share
- ---------------------------------------------------------------------------
For the three months ended $ 538 $ 0.04 $ 2,891 $ 0.18
For the nine months ended $ (117) $(0.01) $ 3,502 $ 0.21
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. In that the Company's retail stores are
primarily in the outlet channel of distribution, opportunistically acquiring
close-out merchandise is an integral part of Designs business. In addition, the
Company's capital expenditure program has included projects for new store
openings, remodeling existing stores, and improvements in its systems
infrastructure. In that the Company has substantially completed its projects
for systems infrastructure and existing store improvements, on a go forward
basis, much of the Company's capital requirements will be used for expansion of
other branded retail stores. Strategically, the Company believes it has
substantial growth opportunity in the expansion of its core competency of
operating recognizable branded retail stores in cooperation with various other
manufacturers with strong brands similar in stature to Levi Strauss & Co.
During the first nine months of fiscal 2002, cash used for operations was $5.3
million as compared to cash provided by operations of $5.2 million for the first
nine months of the prior year. Cash from operations as compared to the prior
year decreased $10.7 million due primarily to a decrease in earnings of $3.6
million, increases in inventory levels as a result of opportunistic purchases
and settlement with the Internal Revenue Service during the third quarter of
fiscal 2002 for $1.5 million.
At November 3, 2001, total inventory equaled $74.5 million, compared to $57.7
million at February 3, 2001. This increase in inventory is in part seasonal and
reflects the receipt of merchandise in preparation for the holiday 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 their 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 nine months of fiscal 2002 were $2.6 million compared to $2.3 million
during the first nine months of fiscal 2001. During the first nine months of
fiscal 2002, the Company opened five new Levi's(R)/Dockers(R) stores, one of
which is located in Puerto Rico, 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 seven of its older stores and combined three
additional pairs of its stand-alone Dockers(R) and Levi's(R) outlet stores that
were adjacent to each other into three 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.
On October 23, 2001, the Company announced that it had reached an agreement in
principle with Candies, Inc., a leading designer and marketer of young women's
footwear, apparel and accessories, under which the Company will open and
operate, under a license agreement, Candies branded retail stores in outlet
malls throughout the United States. This license agreement is the Company's
first step towards its strategy of seeking to diversify into operating branded
retail stores in cooperation with various other manufacturers. Although the
Candies license agreement will not benefit the Company's performance this year,
the Company believes that this direction provides the Company with significant
future growth potential. Since the Company's announcement, several other
interested manufacturers that do not currently have an outlet presence have
contacted the Company. The Company's requirements for capital expenditures are
expected to be primarily associated with the expansion of retail stores pursuant
to the Candies' license agreement and other arrangements which may be formed
with other manufacturers.
During the first nine months of fiscal 2002, a portion of the Company's cash
needs came from borrowings under its bank credit facility. At November 3, 2001,
the Company had borrowings of approximately $32.2 million outstanding under
this credit facility and had three outstanding standby letters of credit
totaling approximately $2.3 million.
The Company's working capital at November 3, 2001 was approximately $14.1
million, compared to $16.3 million at February 3, 2001. This decrease in
working capital was primarily 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 November 3, 2001 were 5.50% for prime
and of 4.220% to 5.520% on varying LIBOR contracts. Based upon sensitivity
analysis as of November 3, 2001, a 10% increase in interest rates would result
in a potential cost to the Company of approximately $160,000 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 (the "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 for fiscal 2001.
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 earnings for
the three and nine months ended November 3, 2001 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
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 September 18,
2001 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 Extension to Consulting Agreement, dated as of April 28, 2001,
between the Company and Jewelcor Management, Inc. (included as
Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q dated
September 18, 2001 and incorporated herein by reference). *
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 Employment Agreement dated as of October 22, 2001 between the
Company and Ronald N. Batts.
10.26 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). *
10.27 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). *
10.28 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). *
10.29 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). *
10.30 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). *
10.31 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.
December 14, 2001 By: /S/ DENNIS R. HERNREICH
Dennis R. Hernreich, Senior Vice President,
Chief Financial Officer, Treasurer and
Secretary
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made as of October 22, 2001
between DESIGNS, INC., a Delaware corporation with an office at 66 B Street,
Needham, Massachusetts, 02494 (the "Company"), and Ronald N. Batts (the
"Executive").
WITNESSETH:
WHEREAS, the Company desires that Executive be employed to serve in a
senior executive capacity with the Company, and Executive desires to be so
employed by the Company, upon the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and the mutual promises,
representations and covenants herein contained, the parties hereto agree as
follows:
1. EMPLOYMENT
The Company hereby employs Executive and Executive hereby accepts such
employment, subject to the terms and conditions herein set forth. Executive
shall hold the office of Senior Vice President of Operations of the Company.
2. TERM
The term of employment under this Agreement shall begin on October
22, 2001(the "Employment Date") and shall continue for a period of one (1)
year from that date ("Initial Term"), subject to prior termination in
accordance with the terms hereof. The term hereof shall automatically be
extended for an additional one (1) year unless either party gives written
notice to the other, at least sixty (60) days prior to the end of the Initial
Term, of such party's intention to not extend this Agreement.
3. COMPENSATION
(a) As compensation for the employment services to be rendered by
Executive hereunder, the Company agrees to pay to Executive, and Executive
agrees to accept, payable in equal installments in accordance with Company
practice, an annual base salary of $240,000.
(b) In addition to the annual base salary, Executive may receive a
discretionary annual bonus of up to forty- percent (40%) of his annual base
salary (the "Discretionary Bonus"), depending on the performance of the Company.
The Compensation Committee of the Board of Directors shall determine, in its
sole discretion, the amount of any bonus to be paid to Executive. Executive
will receive a prepayment of the Discretionary Bonus in the amount of $2,000 per
month for the Initial Term only. Any Discretionary Bonus that the Compensation
Committee determines shall be paid to Executive shall be reduced by the amount
of any prepayments made to Executive.
(c) The Company will pay Executive the total amount of $85,000 for
moving costs associated with Executive's relocation to the Boston, Massachusetts
metropolitan area. ("Boston"), payable upon the listing of the Executive's
current home. However, if the Executive resigns his position with the Company
during the Initial Term, Executive shall reimburse to the Company the $85,000
payment within forty-five (45) days after the effective date of his resignation.
(d) The Executive must permanently relocate to Boston on or before
June 15, 2002. The Company will reimburse the Executive's reasonable air fare
related to his travel (round trip coach air fare with fourteen day advance
purchase only) between Boston and Dallas, TX. (which shall be limited to two
(2) trips per month) and provide Executive with temporary living quarters in
Boston. The Company's obligation to reimburse Executive for the reasonable
air fare and provide temporary living quarters as set forth in this Subsection
shall cease upon the earlier of (a) the date the Executive permanently
relocates to Boston or (b) June 15, 2002. If Executive resigns his position
with the Company during the term of this Agreement, Executive shall reimburse
to the Company the costs of any and all expenses for temporary living quarters
paid by the Company within forty-five (45) days after the effective date of
his resignation, based upon the following schedule: (a) If Executive resigns
during the first 90 days of the Initial Term then Executive shall be required
to reimburse the Company for 75% of such expenses, (b) If Executive resigns
between the 91st and 180th day of the Initial Term, then Executive shall be
required to reimburse the Company for 50% of such expenses, (c) If Executive
resigns between the 181st and the 270th day of the Initial Term, then Executive
shall be required to reimburse the Company for 25% of such expenses, and (d)
If Executive resigns subsequent to the 270th, then Executive shall not be
required to reimburse the Company for any of such expenses.
4. OPTIONS
The Company shall grant to the Executive 50,000 options under the
Company's 1992 Stock Incentive Plan, which are exercisable at a purchase price
per share equal to the closing price of the Common Stock on October 22, 2001.
The options will vest pro rata over a three (3) year period commencing on the
Employment Date, with one third of the total vesting and becoming exercisable
on each of the first, second and third anniversaries of the Employment Date.
In addition, the Executive must execute a standard Stock Option Agreement,
which sets the terms and conditions for the Executive's options. The stock
options must be exercised by October 22, 2011 or they shall become null and
void.
5. EXPENSES
The Company shall pay or reimburse Executive, in accordance with the
Company's policies and procedures and upon presentment of suitable vouchers,
for all reasonable business and travel expenses, which may be incurred or paid
by Executive in connection with his employment hereunder. Executive shall
comply with such restrictions and shall keep such records as the Company may
reasonably deem necessary to meet the requirements of the Internal Revenue
Code of 1986, as amended from time to time, and regulations promulgated
thereunder.
6 OTHER BENEFITS
(a) Executive shall be entitled to such vacations and to participate
in and receive any other benefits customarily provided by the Company to its
senior management (including any profit sharing, pension, 401 (k), short and
long-term disability insurance, major medical insurance and group life
insurance plans in accordance with the terms of such plans), all as determined
from time to time by the Compensation Committee of the Board of Directors.
However, the vacation, fully accrued, shall not be less than 4 weeks per year.
Said vacation time shall be pro rated in the event Executive does not complete
any full year of employment.
(b) The Company will, during the term of Executive's employment
hereunder, provide Executive with an automobile for his use in performing his
employment duties and obligations hereunder. If the Company provides an
automobile, the Company shall pay for the costs of insurance, repairs and
maintenance. If the Company does not provide Executive within automobile, the
Company will pay an automobile allowance to Executive in the total amount of
$600.00 per month. In that event, Executive shall pay and be responsible for
all insurance, repairs and maintenance costs associated with operating that
automobile. In either case, Executive is responsible for his gasoline, unless
the gasoline expense is reimbursable under the Company's policies and
procedures.
7. DUTIES
(a) Executive shall perform such duties and functions consistent with
his position as Senior Vice President, and as the President and/or as the
Board of Directors of the Company shall from time to time determine and
Executive shall comply in the performance of his duties with the policies of,
and be subject to the direction of, the Board of Directors. If requested,
Executive shall serve as a corporate officer and or director of the Company
without further compensation.
(b) At the request of President or the Board of Directors, Executive
shall serve, without further compensation, as an executive officer, corporate
officer and/or director of any subsidiary or affiliate of the Company and, in
the performance of such duties, Executive shall comply with the directives and
policies of the Board of Directors of each such subsidiary or affiliate.
(c) During the term of this Agreement, Executive shall devote
substantially all of his time and attention, vacation time and absences for
sickness excepted, to the business of the Company, as necessary to fulfill his
duties. Executive shall perform the duties assigned to him with fidelity and
to the best of his ability. Notwithstanding anything herein to the contrary,
and subject to the foregoing, Executive may engage in other activities so long
as such activities do not unreasonably interfere with Executive's performance
of his duties hereunder and do not violate Section 10 hereof.
(d) The principal location at which the Executive shall perform his duties
hereunder shall be at the Company's offices in Needham, Massachusetts or at such
other location as may be designated from time to time by the Board of Directors
of the Company. Notwithstanding the foregoing, Executive shall perform such
services at such other locations as may be required for the proper performance
of his duties hereunder, and Executive recognizes that such duties may involve
travel.
8. TERMINATION OF EMPLOYMENT; EFFECT OF TERMINATION
(a) Executive's employment hereunder may be terminated by the Company
at any time:
(i) upon the determination by the President or the Board of
Directors that Executive's performance of his duties has not been fully
satisfactory for any reason which would not constitute justifiable cause (as
hereinafter defined) upon thirty (30) days' prior written notice to Executive;
or
(ii) upon the reasonable determination by the President or the
Board of Directors that there is justifiable cause (as hereinafter defined)
for such termination upon ten (10) days' prior written notice to Executive.
(b) Executive's employment shall terminate upon:
(i) the death of Executive; or
(ii) the "disability" of Executive (as hereinafter defined in
Subsection(c) herein) pursuant to Subsection (g) hereof.
(c) For the purposes of this Agreement, the term "disability" shall
mean the inability of Executive, due to illness, accident or any other physical
or mental incapacity, substantially to perform his duties for a period of two
(2) consecutive months or for a total of four (4) months (whether or not
consecutive) in any twelve (12) month period during the term of this
Agreement, as reasonably determined by the Board of Directors of the Company
after examination of Executive by an independent physician reasonably
acceptable to Executive.
(d) For the purposes hereof, the term "justifiable cause" shall mean:
any repeated willful failure or refusal to perform any of the duties pursuant
to this Agreement where such conduct shall not have ceased within 5 days
following written warning from the Company; Executive's conviction (which,
through lapse of time or otherwise, is not subject to appeal) of any crime or
offense involving money or other property of the Company or its subsidiaries
or affiliates or which constitutes a felony in the jurisdiction involved;
Executive's performance of any act or his failure to act, as to which if
Executive were prosecuted and convicted, a crime or offense involving money or
property of the Company or its subsidiaries or affiliates, or a crime or
offense constituting a felony in the jurisdiction involved, would have
occurred; any unauthorized disclosure by Executive to any person, firm or
corporation other than the Company, its subsidiaries or affiliates and their
respective directors, officers and employees (or other persons fulfilling
similar functions), of any confidential information or trade secret of the
Company or any of its subsidiaries or affiliates; any attempt by Executive to
secure any personal profit in connection with the business of the Company or
any of its subsidiaries and affiliates; or the engaging by Executive in any
business other than the business of the Company and its subsidiaries and
affiliates which unreasonably interferes with the performance of his duties
hereunder. Upon termination of Executive's employment for justifiable cause,
this Agreement shall terminate immediately and Executive shall not be entitled
to any amounts or benefits hereunder other than such portion of Executive's
annual salary and reimbursement of expenses pursuant to Section 5 hereof as
have been accrued through the date of his termination of employment.
(e) If the Company terminates this Agreement without "justifiable
cause" as provided in Subsection 8 (a)(i) above, the Company shall pay
Executive the greater of: (i) the base salary for the remaining term of this
Agreement (plus, only in the event the termination occurs during the Initial
Term, the applicable remainder of the Discretionary Bonus payable with respect
to the remainder of the Initial Term) or (ii) an amount equal to one half of
Executive's annual base salary (plus, only in the event the termination occurs
during the Initial Term, one half of the Discretionary Bonus payable with
respect to the Initial Term). However, if Executive is employed or retained,
as an employee, independent contractor, consultant or in any other capacity
("New Employment") during the time he receives payment under this Subsection
or Subsection 3 (b), the Company is entitled to a credit for all sums paid or
earned by Executive during this period of time. The Executive must make a
good faith effort to find New Employment and mitigate the amount of money to
be paid by the Company to Executive under this Subsection or Subsection 3(b).
The Company will pay any amount due and owing under 8 (a)(i) and 8(a)(ii)
above in accordance with the payment schedule in 3(a), until paid in full.
(f) If Executive shall die during the term of his employment
hereunder, this Agreement shall terminate immediately. In such event, the
estate of Executive shall thereupon be entitled to receive such portion of
Executive's annual salary and reimbursement of expenses pursuant to Section 5
as have been accrued through the date of his death.
(g) Upon Executive's "disability", the Company shall have the right to
terminate Executive's employment. Notwithstanding any inability to perform
his duties, Executive shall be entitled to receive his base salary and
reimbursement of expenses pursuant to Section 5 as provided herein until he
begins to receive long-ten-n disability insurance benefits under the policy
provided by the Company pursuant to Section 6 hereof. Any termination
pursuant to this Subsection (g) shall be effective on the later of (i) the
date 30 days after which Executive shall have received written notice of the
Company's election to terminate or (ii) the date he begins to receive long-
term disability insurance benefits under the policy provided by the Company
pursuant to Section 6 hereof
(h) Upon the resignation of Executive in any capacity, that
resignation will be deemed to be a resignation from all offices and positions
that Executive holds with respect to the Company and any of its subsidiaries
and affiliates.
(i) Executive may terminate his employment with the Company upon (a)
ten (10) days' prior written notice to the Company, for "Cause" (as defined
below). For the purposes of this paragraph, "Cause" shall mean: (w) the
assignment to Executive, without his express consent, of a substantial amount
of duties which are inconsistent with his position with the Company, or a
change in Executive's responsibilities which materially diminishes his
responsibilities with the Company when considered as a whole; (x) a reduction
by the Company in Executive's base salary (or during the Initial Term only, a
reduction of the minimum discretionary bonus payable with respect to the
Initial Term); (y) failure by the Company to comply with Sections 5 or 6
hereof; or (z) the Company's requiring Executive to be permanently based
anywhere other than the Company's offices in Needham, Massachusetts, or within
fifty (50) miles of said office. If the Executive terminates his employment
hereunder for Cause (as defined in this paragraph), Executive shall be
entitled to receive the payments described in Section 8(e) of this Agreement,
and Executive shall not be required to make the reimbursements to the Company
described in Sections 3(c) and 3(d)of this Agreement.
9. REPRESENTATION AND AGREEMENTS OF EXECUTIVE
(a) Executive represents and warrants that he is free to enter into
this Agreement and to perform the duties required hereunder, and that there
are no employment contracts or understandings, restrictive covenants or other
restrictions, whether written or oral, preventing the performance of his
duties hereunder.
(b) Executive agrees to submit to a medical examination and to
cooperate and supply such other information and documents as may be required
by any insurance company in connection with the Company's obtaining life
insurance on the life of Executive, and any other type of insurance or fringe
benefit as the Company shall determine from time to time to obtain.
(c) Executive represents and warrants that he has never been convicted
of a felony and he has not been convicted or incarcerated for a misdemeanor
within the past five years, other than a first conviction for drunkenness,
simple assault, speeding, minor traffic violations, affray, or disturbance of
the peace.
(d) Executive represents and warrants that he has never been a party
to any judicial or administrative proceeding that resulted in a judgement,
decree, or final order (i) enjoining him from future violations of, or
prohibiting any violations of any federal or state securities law, or (ii)
finding any violations of any federal or state securities law.
(e) Executive represents and warrants that he has never been accused of
any impropriety in connection with any employment;Any breach of any of the above
representations and warranties is "justifiable cause" for termination under
Section 8 of this Agreement.
10. NON-COMPETITION
(a) Executive agrees that during his employment by the Company and
during the six month period following the termination of Executive's employment
hereunder (the "Non-Competitive Period"), Executive shall not, directly or
indirectly, as owner, partner, joint venturer, stockholder, employee, broker,
agent, principal, trustee, corporate officer, director, licensor, or in any
capacity whatsoever, engage in, become financially interested in, be employed
by, render any consultation or business advice with respect to, or have any
connection with, any business which is competitive with products or services of
the Company or any subsidiaries and affiliates, of the Company with respect to
whom the Executive exercised any significant responsibilities (as reasonably
determined by the Company) in any geographic area in the United States of
America and Puerto Rico where, at the time of the termination of his employment
hereunder, the business of the Company or any of such subsidiaries and
affiliates was being conducted or was proposed to be conducted in any manner
whatsoever; provided, however, that Executive may own any securities of any
corporation which is engaged in such business and is publicly owned and traded
but in an amount not to exceed at any one time one percent (1%) of any class of
stock or securities of such corporation. In addition, Executive shall not,
during the Non-Competitive Period, directly or indirectly, request or cause any
suppliers or customers with whom the Company or any of its subsidiaries and
affiliates has a business relationship to cancel or terminate any such business
relationship with the Company or any of its subsidiaries and affiliates or
solicit, hire, interfere with or entice from the Company any employee (or
former employee) of the Company.
(b) If any portion of the restrictions set forth in this Section 10
should, for any reason whatsoever, be declared invalid by a court of competent
jurisdiction, the validity or enforceability of the remainder of such
restrictions shall not thereby be adversely affected. For the purposes of
this Section 10, a business shall be deemed to be competitive with the
products and services of the Company (or such subsidiaries and affiliates) if
it sells exclusively in outlet or factory stores (i) a product assortment
comprised exclusively of Levi Strauss & Co. products (ii) a product assortment
of a singular nationally recognized brand that constitutes at least 80% of the
merchandise assortment of the Company stores or the stores of such Company
subsidiaries and affiliates.
(c) Executive acknowledges that the Company conducts business
throughout the Eastern portion of United States (all states east of the
Mississippi River and Missouri) and Puerto Rico, that its sales and marketing
prospects are for continued expansion throughout the United States and
therefore, the territorial and time limitations set forth in this Section 10
are reasonable and properly required for the adequate protection of the
business of the Company and its subsidiaries and affiliates. In the event any
such territorial or time limitation is deemed to be unreasonable by a court of
competent jurisdiction, Executive agrees to the reduction of the territorial
or time limitation to the area or period which such court shall deem
reasonable.
(d) The existence of any non-material claim or cause of action (a
"non-material" claim or cause of action is defined as a claim or cause of
action which results from something other than a material breach of the terms
and provisions of this Agreement by the Company) by Executive against the
Company or any subsidiary or affiliate shall not constitute a defense to the
enforcement by the Company or any subsidiary or affiliate of the foregoing
restrictive covenants, but such claim or cause of action shall be litigated
separately.
11. INVENTIONS AND DISCOVERIES
(a) Upon execution of this Agreement and thereafter, Executive shall
promptly and fully disclose to the Company, and with all necessary detail for
a complete understanding of the same, all existing and future developments,
know-how, discoveries, inventions, improvements, concepts, ideas, writings,
formulae, processes and Methods (whether copyrightable, patentable or
otherwise) made, received, conceived, acquired or written during working
hours, or otherwise, by Executive (whether or not at the request or upon the
suggestion of the Company) during the period of his employment with, or
rendering of advisory or consulting services to, the Company or any of its
subsidiaries and affiliates, solely or jointly with others, in or relating to
any activities of the Company or its subsidiaries and affiliates known to him
as a consequence of his employment or the rendering of advisory and consulting
services hereunder (collectively the "Subject Matter").
(b) Executive hereby assigns and transfers, and agrees to assign and
transfer, to the Company, all his rights, title and interest in and to the
Subject Matter, and Executive further agrees to deliver to the Company any and
all drawings, notes, specifications and data relating to the Subject Matter,
and to execute, acknowledge and deliver all such further papers, including
applications for copyrights or patents, as may be necessary to obtain
copyrights and patents for any thereof in any and all countries and to vest
title thereto to the Company. Executive shall assist the Company in obtaining
such copyrights or patents during the term of this Agreement, and at any time
thereafter on reasonable notice and at mutually convenient times, and
Executive agrees to testify in any prosecution or litigation involving any of
the Subject Matter; provided, however, that Executive shall be compensated in
a timely manner at the rate of $250 per day (or portion thereof), plus out-of-
pocket expenses incurred in rendering such assistance or giving or preparing
to give such testimony if it is required after the termination of this
Agreement.
12. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
(a) Executive shall not, during the term of this Agreement or at any
time following termination of this Agreement, directly or indirectly, disclose
or permit to be known (other than as is required in the regular course of his
duties (including without limitation disclosures to the Company's advisors and
consultants), as required by law (in which case Executive shall give the
Company prior written notice of such required disclosure) or with the prior
written consent of the Board of Directors of the Company), to any person,
firm, corporation, or other entity, any confidential information acquired by
him during the course of, or as an incident to, his employment or the
rendering of his advisory or consulting services hereunder, relating to the
Company or any of its subsidiaries and affiliates, the directors of the
Company or its subsidiaries and affiliates, any supplier or customer of the
Company or any of their subsidiaries and affiliates, or any corporation,
partnership or other entity owned or controlled, directly or indirectly, by
any of the foregoing, or in which any of the foregoing has a beneficial
interest, including, but not limited to, the business affairs of each of the
foregoing. Such confidential information shall include, but shall not be
limited to, proprietary technology, trade secrets, patented processes,
research and development data, know-how, market studies and forecasts,
financial data, competitive analyses, pricing policies, employee lists,
personnel policies, the substance of agreements with customers, suppliers and
others, marketing or dealership arrangements, servicing and training programs
and arrangements, supplier lists, customer lists and any other documents
embodying such confidential information. This confidentiality obligation
shall not apply to any confidential information which is or becomes publicly
available other than pursuant to a breach of this Section 12(a) by Executive.
(b) All information and documents relating to the Company and its
affiliates as hereinabove described (or other business affairs) shall be the
exclusive property of the Company, and Executive shall use commercially
reasonable best efforts to prevent any publication or disclosure thereof.
Upon termination of Executive's employment with the Company, all documents,
records, reports, writings and other similar documents containing confidential
information, including copies thereof then in Executive's possession or
control shall be returned and left with the Company.
13. SPECIFIC PERFORMANCE
Executive agrees that if he breaches, or threatens to commit a breach of,
any of the
provisions of Sections 10, 11 or 12 (the "Restrictive Covenants"), the Company
shall have, in addition to, and not in lieu of, any other rights and remedies
available to the Company under law and in equity, the right to have the
Restrictive Covenants specifically enforced by a court of competent
jurisdiction, it being agreed that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury to the Company and that
money damages would not provide an adequate remedy to the Company.
Notwithstanding the foregoing, nothing herein shall constitute a waiver by
Executive of his right to contest whether a breach or threatened breach of any
Restrictive Covenant has occurred.
14. AMENDMENT OR ALTERATION
No amendment or alteration of the terms of this Agreement shall be valid
Unless made in writing and signed by both of the parties hereto.
15. GOVERNING LAW
This Agreement 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.
16. SEVERABILITY
The holding of any provision of this Agreement to be invalid or
unenforceable by a court of competent jurisdiction shall not affect any other
provision of this Agreement, which shall remain in full force and effect.
17. NOTICES
Any notices required or permitted to be given hereunder shall be
sufficient if in writing, and if delivered by hand or courier, or sent by
certified mail, return receipt requested, to the addresses set forth above or
such other address as either party may from time to time designate in writing
to the other, and shall be deemed given as of the date of the delivery or at
the expiration of three days in the event of a mailing.
18. WAIVER OR BREACH
It is agreed that a waiver by either party or a breach of any provision of
this Agreement shall not operate, or be construed as a waiver of any
subsequent breach by that same party.
19. ENTIRE AGREEMENT AND BINDING EFFECT
This Agreement contains the entire agreement of the parties with respect
to the subject matter hereof, supersedes all prior agreements, both written and
oral, between the parties with respect to the subject matter hereof, and shall
be binding upon and inure to the benefit of the parties hereto and their
respective legal representatives, heirs, distributors, successors and assigns.
20. SURVIVAL.
Except as otherwise expressly provided herein, the termination of Executive's
employment hereunder or the expiration of this Agreement shall not affect the
enforceability of Sections 5, 8, 10, 11, 12 and 13 hereof.
21. ARBITRATION
If any dispute arises between the parties that they cannot settle, the
parties agree to submit the dispute to arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and both
parties agree to be bound by the arbitration award.
22. FURTHER ASSURANCES
The parties agree to execute and deliver all such further documents,
agreements and instruments and take such other and further action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.
23. HEADINGS
The Section headings appearing in this Agreement are for the purposes of
easy reference and shall not be considered a part of this Agreement or in any
way modify, amend or affect its provisions.
24. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
under seal, as of the date and year first above written.
DESIGNS, INC.
By: /s/ DAVID A. LEVIN
Its: President
EXECUTIVE
/s/ RONALD N. BATTS
Ronald N. Batts
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