SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended May 3, 1997 Commission File Number 0-15898
DESIGNS, INC.
(Exact name of registrant as
specified in its charter)
Delaware 04-2623104
- ------------------------------- ------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
66 B Street, Needham, MA 02194
- ----------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(617) 444-7222
--------------------
(Registrant's telephone
number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 3, 1997
----- -----------------------------
Common 15,621,743 shares
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
May 3, 1997, May 4, 1996 and February 1, 1997
(In thousands, except share data)
(Unaudited)
May 3, May 4, February 1,
1997 1996 1997
-------- -------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 119 $ 21,435 $ 3,390
Short-term investments ---- ---- 5,887
Accounts receivable 467 576 558
Inventories 104,112 64,752 79,958
Deferred income taxes 1,160 922 1,160
Prepaid income taxes 1,019 1,154 ---
Pre-opening costs, net 602 492 524
Prepaid expenses 5,757 4,021 4,834
--------- --------- --------
Total current assets 113,236 93,352 96,311
Property and equipment, net
of accumulated depreciation
and amortization 40,851 39,281 39,216
Other assets:
Long-term investments ---- 5,665 ----
Deferred income taxes 2,700 2,763 2,743
Intangible assets 3,053 2,783 3,078
Other assets 303 850 412
-------- --------- ---------
Total Assets $ 160,143 $ 144,694 $ 141,760
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 25,390 $ 20,170 $ 12,194
Accrued expenses and other
current liabilities 7,779 9,886 7,046
Accrued rent 2,593 2,414 2,398
Income taxes payabl ---- ---- 1,353
Notes payable (Note 4) 10,600 1,000 1,000
------- ------ ------
Total Liabilities 46,362 33,470 23,991
Minority Interest (Note 2) 5,807 6,371 6,724
Stockholders' equity:
Preferred Stock, $0.01 par
value, 1,000,000 shares
authorized, none issued
Common Stock, $0.01 par
value, 50,000,000 shares
authorized, 15,622,000,
15,812,000 and 15,873,000
shares issued at May 3, 1997,
May 4, 1996 and February 1, 1997,
respectively 159 158 159
Additional paid-in capital 53,371 52,769 53,320
Retained earnings 56,271 51,926 59,393
Treasury stock at cost,
281,000 shares
at May 3, 1997 and
February 1, 1997 (1,827) ---- (1,827)
Total Stockholders' equity 107,974 104,853 111,045
------- ------- -------
Total Liabilities and
stockholders' equity $ 160,143 $ 144,694 $ 141,760
======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Twelve Months Ended
------------------ -------------------
May 3, May 4, May 3, May 4,
1997 1996 1997 1996
----- ----- ----- -----
Sale $ 55,470 $ 59,336 $ 285,727 $ 302,932
Cost of goods sold including
occupancy 41,984 43,179 202,169 213,895
------ ------ ------- -------
Gross profit 13,486 16,157 83,558 89,037
Expenses:
Selling, general and
administrative 16,055 16,060 65,931 70,991
Depreciation and amortization 2,786 2,484 10,705 7,253
------ ------ ------ ------
Total expenses 18,841 18,544 76,636 78,244
------ ------ ------ ------
Operating income (loss) (5,355) (2,387) 6,922 10,793
Interest expense 151 44 304 218
Interest income 55 318 903 1,438
------ ------ ----- ------
Income (loss) before minority
interest and income taxes (5,451) (2,113) 7,521 12,013
Less minority interest (16) (145) 624 140
------ ------ ----- ------
Income (loss) before income taxes (5,435) (1,968) 6,897 11,873
Provision (benefit) for
income taxes (2,251) (823) 2,672 4,819
------ ---- ----- -----
Net income (loss) $ (3,184) $ (1,145) $ 4,225 $ 7,054
====== ====== ===== =====
Net income per share $ (0.20) $ (0.07) $ 0.27 $ 0.45
Weighted average shares
outstanding 15,606 15,812 15,720 15,778
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
STATEMENTS OF CASH FLOWS
(In thousands-Unaudited)
Three Months Ended
--------------------
May 3, May 4,
1997 1996
------- -------
Cash flows from operating activities:
Net loss $ (3,184) $ (1,145)
Adjustments to reconcile to net cash
used for operating activities:
Depreciation and amortization 2,786 2,484
Minority interest (16) (145)
Loss on sale of investments 102 17
Loss/(Gain) from disposal of
property and equipment 3 (6)
Changes in operating assets and
liabilities:
Accounts receivable 91 97
Inventories (24,154) (6,809)
Prepaid expenses (1,942) (53)
Income taxes payable (1,353) (1,154)
Accounts payable 13,196 11,985
Accrued expenses and other
current liabilities 733 2,002
Accrued rent 195 (172)
------- ------
Net cash (used for) provided by
operating activities (13,543) 7,101
------- ------
Cash flows from investing activities:
Additions to property and
equipment (4,161) (5,872)
Incurrence of pre-opening costs (104) 8
Proceeds from disposal of property
and equipment 1 8
Sale and maturity of investments 5,785 6,190
Reduction in other assets 51 57
Distributions to joint venture partner (900) ----
------- ------
Net cash provided by investing activities 672 391
------- ------
Cash flows from financing activities:
Net borrowings under credit facility 9,600 ----
Issuance of common stock under
option program (1) ---- 2
------- -----
Net cash provided by financing activities 9,600 2
------- -----
Net increase (decrease) in cash and
cash equivalents (3,271) 7,494
Cash and cash equivalents:
Beginning of the year 3,390 13,941
------- --------
End of the quarter $ 119 $ 21,435
======= ========
Supplementary Cash Flow Disclosure
Cash paid:
Interest $ 63 $ 43
Taxes, net 236 199
(1) Net of related tax effect.
The accompanying notes are an integral part of the consolidated
financial statements.
DESIGNS, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
interim financial statements. These financial statements do not include all
disclosures associated with annual financial statements and, accordingly,
should be read in conjunction with the notes contained in the Company's
audited consolidated financial statements for the year ended February 1,
1997. The Company's business has historically been seasonal in nature and
the results of the interim periods presented are not necessarily indicative
of the results to be expected for the full year.
2. Minority Interest
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the
Company, entered into a partnership agreement with LDJV Inc. (the
"Partnership Agreement") establishing a joint venture to sell Levi's(R) brand
jeans and jeans-related products in Original Levi's(R) StoresTM and Levi's(R)
Outlet stores. LDJV Inc. is a wholly-owned subsidiary of Levi's Only Stores,
Inc., which is a wholly-owned subsidiary of Levi Strauss & Co. The joint
venture that was established by the Partnership Agreement is known as The
Designs/OLS Partnership (the "OLS Partnership"). The operating results of
the OLS Partnership are consolidated with the financial statements of the
Company for the three and twelve months ended May 3, 1997. Minority interest
at May 3, 1997, represents LDJV Inc.'s 30% interest in the OLS Partnership.
During the first quarter of fiscal 1997, the OLS Partnership distributed $3.0
million in "excess cash" to its partners in accordance with the terms of the
Partnership Agreement. The OLS Partnership is also obligated to distribute
funds to its partners enabling them to pay taxes associated with the related
earnings. No cash distributions were made for this purpose during the first
quarters of fiscal 1996 and fiscal 1997.
3. Boston Trading Ltd., Inc. Acquisition
On May 2, 1995, the Company acquired certain assets of Boston Trading Ltd.,
Inc. In accordance with the terms of the Asset Purchase Agreement dated
April 21, 1995, the Company paid $5.4 million in cash, financed by
operations, and delivered a non-negotiable promissory note in the principal
amount of $1 million (the "Purchase Note") payable in two equal annual
installments through May 2, 1997. In the first quarter of fiscal 1996, the
Company asserted rights of indemnification under the Asset Purchase
Agreement. In accordance with the Asset Purchase Agreement, the Company,
when exercising its indemnification rights, has the right, among other
courses of action, to offset against the payment of principal and interest
due and payable under the Purchase Note. Accordingly, the Company did not
make either of the $500,000 payments of principal due on the Purchase Note
on May 2, 1996 and May 2, 1997. The Company paid all interest due through
May 2, 1997, in accordance with the terms of the Purchase Note.
4. Credit Facility
On July 24, 1996, the Company entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with BayBank, N.A. and State Street Bank
and Trust Company under which these banks established a credit facility for
the Company. This credit facility, which terminates on June 30, 1999,
consists of: (i) a revolving line of credit permitting the Company to borrow
up to $15 million, and (ii) a commercial and trade letters of credit
facility under which letters of credit, in aggregate amount up to
$45 million, may be issued for the Company's inventory purchases. Under the
revolving line of credit portion of the facility, the Company has the
ability to issue standby letters of credit up to $750,000. Loans made under
this portion of the facility bear interest, subject to adjustment, at
BayBank, N.A.'s prime rate or LIBOR-based fixed rate. The Company may
increase the commercial and trade letters of credit portion of the facility
in increments of $15 million up to a total of $45 million. Under the Credit
Agreement, the Company has agreed not to pay cash dividends on its Common
Stock if such payment would cause the Company to be in default of certain
financial ratios. To date, the Company has not paid any cash dividends.
The terms of the Credit Agreement require the Company to maintain certain
net worth, inventory turnover and cash flow ratios. The Company received
a written waiver of its non-compliance at May 3, 1997 with the inventory
turnover covenant in the Credit Agreement. At May 3, 1997, the Company
had outstanding commercial and trade letters of credit totaling
approximately $7.3 million and two outstanding standby letters of credit
totaling approximately $436,000.
5. Joint Venture Credit Agreement
During the third quarter of fiscal 1996 the Company entered into a Credit
Agreement (the "OLS Credit Agreement") with the OLS Partnership and Levi's
Only Stores, Inc. ("LOS") under which the Company and LOS are committed to
make advances to the OLS Partnership in the amount of $3.5 million and $1.5
million, respectively. The facility bears interest at BayBank, N.A.'s prime
rate and terminates September 30, 1997, unless terminated earlier pursuant to
the provisions of the OLS Credit Agreement. This Agreement provides that
there will be no unpaid credit advance outstanding on the last day of any
fiscal year and for at least 30 consecutive days immediately following the
last day of each fiscal year. No advances were outstanding under this
facility during the first quarter of fiscal 1997.
6. Subsequent Event
On June 10, 1997, the Company announced that it will re-focus the product
mix in its Designs and Boston Trading Co.(SM) stores to one focused on Levi
Strauss & Co. and other name brand apparel and accessories. The Company
plans to reduce the proportion of private label merchandise in its Designs
stores beginning with the 1997 "Back to School" selling season and increase
Levi Strauss & Co. and other name brand products to approximately 70%
of the total merchandise mix. The Company also plans to shift the product
mix in its Boston Trading Co.(SM) stores by increasing the proportion of Levi
Strauss & Co. and other name brand products in these stores for fiscal 1998.
In connection with the re-focused strategy, the Company will close its New
York City private label product development office and eliminate positions
associated with that office. The Company also announced a headcount freeze
in its corporate office and plans not to replace non-essential corporate
office positions for the remainder of fiscal 1997. The Company has private
label purchase commitments totaling approximately $12.9 million, at cost,
existing for the period from July 1997 through January 1998. At May 3, 1997,
the Company had approximately $15 million, at cost, in private label
nventory. Based upon the performance to date of its private label
merchandise, the Company anticipates increased markdown activity during the
remainder of fiscal 1997 in connection with the sale of excess inventory.
The Company plans to satisfy its future private label requirements with
open market purchases of selected items that will carry the Boston
Traders(R) label.
Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Sales for the first quarter of fiscal 1997 were $55.5 million as compared to
sales of $59.3 million in the first quarter of fiscal 1996. Comparable store
sales decreased 7 percent for the first quarter as compared to the same period
in the prior year. Comparable stores are retail locations that have been in
operation for at least one full fiscal year. Of the 154 stores the Company
operated as of May 3, 1997, 140 were comparable stores. This decrease in
sales was primarily due to sales shortfalls in Levi's(R) brand men's jeans
and the poor performance of the Company's private label products.
Gross margin rate (including the costs of occupancy) for the first quarter of
fiscal 1997 equaled 24.3 percent of sales as compared with 27.2 percent in the
prior year. The decrease was attributable to a decrease in merchandise margin
resulting from markdowns associated with the Company's private label products
which did not perform as planned, and an increase in occupancy expense as a
percentage of sales due to the effect of a lower than anticipated sales base
compared to the same period in the prior year.
Selling, general and administrative expenses increased as a percentage of
sales to 28.9 percent, compared with 27.1 percent of sales in the prior year.
Selling general and administrative expenses totaled $16.1 million for each of
the first quarters of fiscal 1996 and fiscal 1997. Store payroll expense,
the largest component of selling, general and administrative expenses,
equaled 13.3 percent of sales, compared with 11.3 percent in the prior year.
Advertising expense increased 66 percent, or by $283,000, over the prior
year due to the marketing and promotion of the Company's new Boston Trading
Co.(SM) stores. These increases were offset by decreases in other store
operating expenses as the Company continues to focus on managing and
controlling costs.
Depreciation and amortization expense of $2.8 million for the first quarter
of fiscal 1997 represents an increase of 12 percent as compared with
depreciation and amortization expense of $2.5 million for the same period in
fiscal 1996 due to the cost of new store openings and remodeled stores. For
the rolling 12 month period, depreciation and amortization increased 48
percent, primarily due to capital expenditures associated with the Company's
new corporate offices, the timing of store openings as well as upgrades of
information and technology systems.
Interest expense was $151,000 and $44,000 in the first quarter of fiscal 1997
and fiscal 1996, respectively. On a rolling 12 month basis, interest expense
increased to $304,000 as compared to $218,000 in the prior comparable period.
This increase is primarily attributable to borrowings under the Company's
revolving credit facility during the first quarter of fiscal 1997. The
Company anticipates that interest expense will continue to increase in fiscal
1997 as a result of borrowings under the Company's credit facility.
Interest income for the first quarter of fiscal 1997 was $55,000 compared to
$318,000 in fiscal year 1996. For the rolling 12 month period, interest
income of $903,000 decreased by 37 percent from $1.4 million in the prior
comparable period. The decrease in interest income is attributable to a
lower average investment balance compared to the same periods last year.
The Company anticipates that interest income will continue to decline in
fiscal 1997 reflecting further declines in investment balances.
Net loss for the first quarter of fiscal year 1997 equaled ($3.2) million or
($0.20) per share, as compared with a net loss of ($1.1) million, or ($.07)
per share in the first quarter of fiscal 1996. Net income, on a rolling 12
month basis, was $4.2 million or $0.27 per share in the 12 month period, as
compared with $7.1 million, or $0.45 per share in the prior comparable
period.
SEASONALITY
The Company's business is seasonal, reflecting increased consumer buying in
the "Fall" and "Holiday" seasons. Historically, the second half of each
fiscal year provides a greater portion of the Company's annual sales and
operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for operating expenses, including cash
outlays associated with inventory purchases, the development of the Company's
private label product line and capital expenditures for new and remodeled
stores, information technology and acquisitions.
On June 10, 1997, the Company announced that it will re-focus the product
mix in its Designs and Boston Trading Co.(SM) stores to one focused on Levi
Strauss & Co. and other name brand apparel and accessories. The Company
plans to reduce the proportion of private label merchandise in its Designs
stores beginning with the 1997 "Back to School" selling season and increase
Levi Strauss & Co. and other name brand products to approximately 70% of the
total merchandise mix. The Company also plans to shift the product mix in
its Boston Trading Co.(SM) stores by increasing the proportion of Levi
Strauss & Co. and other name brand products in these stores for fiscal 1998.
In connection with the re-focused strategy, the Company will close its New
York City private label product development office and eliminate positions
associated with that office. The Company also announced a headcount freeze
in its corporate office and plans not to replace non-essential corporate
office positions for the remainder of fiscal 1997. The Company plans to
satisfy its future private label requirements with open market purchases of
selected items that will carry the Boston Traders(R) label.
WORKING CAPITAL AND CASH FLOWS
To date, the Company has financed its working capital requirements and
expansion program with cash flow from operations, borrowings and proceeds
from Common Stock offerings. Cash used in operations for the first three
months of fiscal 1997 was $13.5 million as compared to cash provided by
operations of $7.1 million for the same period in the prior year. Cash used
in operations in the first quarter of fiscal 1997 is primarily attributable
to increased purchases for the Levi's(R) Outlet stores, inventory purchases
of private label products associated with the opening of Boston Trading
Co.(SM) stores, and the timing of other working capital accounts, combined
with slower than expected sales of Levi's(R) brand men's jeans and the
Company's private label products.
The Company's cash position at May 3, 1997 was approximately $119,000,
compared to $21.4 million at the end of the first quarter of fiscal 1996.
During the first quarter of fiscal 1997, the Company sold its remaining
short-term investments of $5.9 million. As a result of this sale, the
Company realized a loss of $102,300. As described below, at May 3, 1997,
the Company had net borrowings outstanding equal to $9.6 million under its
revolving credit facility, compared to no borrowings under this facility at
the end of the first quarter of fiscal 1996. The Company anticipates that
it will borrow up to a total of $15 million under the revolving line of
credit portion of the credit facility during the second and third quarters
of fiscal 1997. The Company also anticipates that the amount of the
outstanding letters of credit will decrease during this same period.
The Company's working capital at May 3, 1997 was approximately $66.9 million,
compared to $59.8 million at May 4, 1996. This increase in working capital
was primarily attributable to seasonal inventory purchases. At May 3, 1997,
total inventory equaled $104.1 million, reflecting an increase of 61 percent,
or $39.4 million, as compared to total inventory at the end of the first
quarter of fiscal 1996. This increase was primarily due to seasonal
inventory purchases described above, and special purchases of Levi's(R)
brand products for the Levi's(R) Outlet stores. At the end of the first
quarter of fiscal 1997, the Company had approximately $15 million, at cost,
in private label inventory, and purchase commitments totaling approximately
$12.9 million, at cost, existing for the period from July 1997 through
January 1998. Based upon the performance to date of its private label
merchandise, the Company anticipates increased markdown activity during the
remainder of fiscal 1997 in connection with the sale of excess inventory.
The Company will satisfy its future private label requirements with open
market purchases of selected items that carry the Boston Traders(R) label.
The Company continues to evaluate and, within the discretion of management,
act upon opportunities to purchase substantial quantities of Levi's(R) brand
products for the Levi's(R) Outlet stores.
The Company's trade payables to Levi Strauss & Co., its principal vendor,
generally are due 30 days after the date of invoice. The Boston Traders(R)
brand product requires the Company to source its own product predominantly
with various offshore vendors. To date, payment to these vendors has been
through the use of letters of credit, which require payment upon
presentation of shipping documents. The Company anticipates that the
use of this payment method will be proportional to its Boston Traders(R)
brand product purchases.
On July 24, 1996, the Company entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with BayBank, N.A. and State Street Bank
and Trust Company. The facility, which terminates June 30, 1999, consists
of: (i) a revolving line of credit permitting the Company to borrow up to
$15 million, and (ii) a commercial and trade letters of credit facility
under which letters of credit, in aggregate amount up to $45 million, may
be issued for the Company's inventory purchases. Under the revolving line
of credit portion of the facility, the Company has the ability to issue
standby letters of credit up to $750,000. Loans made under this portion of
the facility bear interest, subject to adjustment, at BayBank, N.A.'s prime
rate or LIBOR-based fixed rate. The Company may increase the commercial and
trade letters of credit portion of the facility in increments of $15 million
up to a total of $45 million. The terms of the Credit Agreement require the
Company to maintain certain net worth, inventory turnover and cash flow
ratios. The Company received a written waiver of its non-compliance at May
3, 1997, with the inventory turnover covenant in the Credit Agreement. At
the end of the first quarter, the Company had outstanding letters of credit
totaling approximately $7.3 million and two outstanding standby letters of
credit totaling approximately $436,000.
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the
Company, and a subsidiary of Levi's Only Stores, Inc., a wholly-owned
subsidiary of Levi Strauss & Co., entered into a partnership agreement (the
"Partnership Agreement") to sell Levi's(R) brand jeans and jeans-related
products. The joint venture that was established by the Partnership
Agreement is known as The Designs/OLS Partnership (the "OLS Partnership").
The term of the joint venture is ten years; however, the Partnership
Agreement contains certain exit rights that enable either partner to buy or
sell its interest in the joint venture after five years. The Company
previously announced that the OLS Partnership may open up to thirty-five to
fifty Original Levi's(R) StoresTM and Levi's(R) Outlet stores throughout
eleven Northeast states and the District of Columbia throughout the end of
fiscal 1999. At the end of the first quarter of fiscal 1997 there were
eleven Original Levi's(R) Stores and eleven Levi's(R) Outlet stores.
During the first quarter of fiscal 1997, the OLS Partnership distributed $3.0
million in "excess cash" to its partners in accordance with the terms of the
Partnership Agreement. It is the intention of the partners in the joint
venture that additional working capital for the joint venture's future
expansion will come from its operations, capital contributions, loans from
the partners and borrowings from third parties.
During the third quarter of fiscal 1996, the Company entered into a Credit
Agreement (the "OLS Credit Agreement") with the OLS Partnership and Levi's
Only Stores, Inc. under which the Company and Levi's Only Stores, Inc. are
committed to make advances to the OLS Partnership in amounts up to $3.5
million and $1.5 million, respectively. This credit facility bears interest
at BayBank, N.A.'s prime rate and terminates on September 30, 1997, unless
terminated earlier pursuant to other provisions of the OLS Credit Agreement.
The OLS Credit Agreement also provides that there may not be credit advances
outstanding on the last day of any fiscal year and for at least 30 consecutive
days immediately following the last day of each fiscal year. There were no
borrowings under this facility through May 3, 1997. The Company has not
established a cash reserve to fund this commitment.
CAPITAL EXPENDITURES
During the first quarter of fiscal 1997, the Company opened five new Boston
Trading Co.(SM) stores and remodeled one Levi's(R) Outlet by Designs store.
Total cash outlays of $4.1 million and $5.9 million during the first quarters
of fiscal 1997 and fiscal 1996, respectively, represent the costs of new and
remodeled stores as well as corporate office capital spending during the
periods. As of the quarter end, the Company had closed one Designs store for
which the lease had expired. Subsequent to the quarter ended May 3, 1997,
the OLS Partnership opened one new Levi's(R) Outlet store.
On May 2, 1995, the Company acquired certain assets of Boston Trading Ltd.,
Inc. ("Boston Trading") in accordance with the terms of an Asset Purchase
Agreement dated April 21, 1995. The Company paid $5.4 million in cash,
financed by operations, and delivered a non-negotiable promissory note in
the principal amount of $1.0 million (the "Purchase Note"). The principal
amount of the Purchase Note was payable in two equal installments through
May 1997. In the first quarter of fiscal 1996, the Company asserted certain
indemnification rights under the Asset Purchase Agreement. In accordance
with the Asset Purchase Agreement, the Company, when exercising its
indemnification rights, has the right, among other courses of action, to
offset against the payment of principal and interest due and payable under
the Purchase Note. Accordingly, the Company did not make either of the
$500,000 payments of principal on the Purchase Note that were due on May 2,
1996 and May 2, 1997. The Company has paid all interest in accordance with
the terms of the Purchase Note. Any portion of the principal amount of the
Purchase Note which may be paid by the Company depends upon whether the
Company's claims are satisfied by Boston Trading and its stockholders.
In the first quarter of fiscal 1997, the Company introduced a retail store
concept featuring its Boston Traders(R) brand under the name "Boston Trading
Co." These stores are located in upscale malls and one urban location. The
Company recently announced its plans to increase the percentage of Levi
Strauss & Co. and other brand name products in these stores for fiscal 1998.
The Company also announced that it plans to satisfy its future private label
requirements with open market purchases of selected items that will carry
the Boston Traders(R) label. Barring any unforeseen circumstances, the
Company plans to open one additional Boston Trading Co.(SM) store in fiscal
1997.
In November 1996, the Company and Levi Strauss & Co. entered into a trademark
license agreement (the "Outlet License Agreement") which provides the terms
upon which the Company is permitted to use the Levi Strauss & Co. batwing
trademark in connection with the operations of the Company's Levi's(R)
Outlet by Designs stores. The Outlet License Agreement authorizes the
Company, subject to certain terms and conditions, to operate the Levi's(R)
Outlet by Designs stores using the Levi's(R) batwing trademark in 25 states
in the eastern portion of the United States. Subject to certain default
provisions, the term of the Outlet License Agreement will expire on
July 31, 2001, and the license for any store will be for a period
co-terminous with the lease term for such store (including extension
options), unless Levi Strauss & Co. otherwise extends the term of the
license for that particular store. Levi Strauss & Co. has no obligation to
extend the license beyond the initial term described above. The leases
(including extension options) relating to approximately one-half of the
Levi's(R) Outlet by Designs stores open at May 3, 1997 expire in or prior to
fiscal 2009 and all, except for four such leases, expire in or prior to fiscal
2011.
The Company expects that cash flow from operations and short-term borrowings
will enable it to finance its current working capital, remodeling and
expansion requirements during the remainder of the fiscal year.
The Company continually evaluates discretionary investments in new projects
that may complement its existing business. Further, as leases expire,
the Company continues to evaluate the performance of its existing stores.
As a result of this process, certain store locations could be closed
or relocated within a center in the future.
The foregoing discussion of the Company's results of operations, liquidity,
capital resources and capital expenditures includes certain forward-looking
information. Such forward-looking information requires management to make
certain estimates and assumptions regarding the Company's expected strategic
direction and the related effect of such plans on the financial results of the
Company. Accordingly, actual results and the Company's implementation of its
plans and operations may differ materially from forward-looking statements
made by the Company. The Company encourages readers of this information
to refer to the Company's Current Report on Form 8-K, previously filed with
the United States Securities and Exchange Commission on April 22, 1997,
which identifies certain risks and uncertainties that may have an impact
on future earnings and the direction of the Company.
Part II. Other Information
ITEM 1. Legal Proceedings
The Company is a party to litigation and claims arising in the normal course
of its business. Barring unforeseen circumstances, management does not
expect the results of these actions to have a material adverse effect on the
Company's business or financial condition.
ITEM 3. Default Upon Senior Securities
As discussed above, the Credit Agreement requires the Company to maintain
certain net worth, inventory turnover and cash flow ratios. The Company
received a written waiver of its non-compliance at May 3, 1997 with the
inventory turnover covenant in the Credit Agreement.
ITEM 6. Exhibits and Reports on Form 8-K
A. Reports on Form 8-K:
The Company reported under item 5 on Form 8-K, dated April 22, 1997,
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.
B. Exhibits:
3.1 Restated Certificate of Incorporation of the Company, as amended
(included as Exhibit 3.1 to Amendment No. 3 of the Company's
Registration Statement on Form S-1 (No. 33-13402), and incorporated
herein by reference). *
3.2 Certificate of Amendment to Restated Certificate of Incorporation,
as amended, dated June 22, 1993 (included as Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q dated June 17, 1996, and
incorporated herein by reference). *
3.3 Certificate of Designations, Preferences and Rights of a Series
of Preferred Stock of the Company establishing Series A Junior
Participating Cumulative Preferred Stock dated May 1, 1995
(included as Exhibit 3.2 to the Company's Annual Report on Form
10-K dated May 1, 1996, and incorporated herein by reference). *
3.4 By-Laws of the Company, as amended (included as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q dated December 12, 1995,
and incorporated herein by reference). *
4.1 Shareholder Rights Agreement dated as of May 1, 1995 between the
Company and its transfer agent (included as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated May 1, 1995, and
incorporated herein by reference). *
10.1 1987 Incentive Stock Option Plan, as amended (included as Exhibit
10.1 to the Company's Annual Report on Form 10-K dated April 29,
1993, and incorporated herein by reference). *
10.2 1987 Non-Qualified Stock Option Plan, as amended (included as
Exhibit 10.2 to the Company's Annual Report on Form 10-K dated
April 29, 1993, and incorporated by herein by reference). *
10.3 1992 Stock Incentive Plan, as amended (included as Exhibit A to the
Company's definitive proxy statement dated May 9, 1997, and
incorporated by reference). *
10.4 Senior Executive Incentive Plan effective beginning with the fiscal
year ended February 1, 1997 (included as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q dated September 17, 1996,
and incorporated herein by reference). *
10.5 Trademark License Agreement between the Company and Levi Strauss &
Co. dated as of November 15, 1996 (included as Exhibit 10.5 to the
Company's Annual Report on Form 10-K dated May 1, 1997, and
incorporated herein by reference). *
10.6 Amended and Restated Credit Agreement among the Company, BayBank,
N.A., and State Street Bank and Trust Company dated as of July 24,
1996 (included as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated August 7, 1996, and incorporated herein by
reference). *
10.7 Consulting Agreement between the Company and Stanley I. Berger
dated December 21, 1994 (included as Exhibit 10.7 to the Company's
Annual Report on Form 10-K dated April 28, 1995, and incorporated
herein by reference). *
10.8 Participation Agreement among Designs JV Corp. (the "Designs
Partner"), the Company, LDJV Inc. (the "LOS Partner"), Levi's Only
Stores, Inc. ("LOS"), Levi Strauss & Co. ("LS&CO") and Levi
Strauss Associates Inc. ("LSAI") dated January 28, 1995 (included
as Exhibit 10.1 to the Company's Current Report on Form 8-K dated
April 24, 1995, and incorporated herein by reference). *
10.9 Partnership Agreement of The Designs/OLS Partnership (the "OLS
Partnership") between the LOS Partner and the Designs Partner dated
January 28, 1995 (included as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.10 Glossary executed by the Designs Partner, the Company, the LOS
Partner, LOS, LS&CO, LSAI and the OLS Partnership dated January 28,
1995 (included as Exhibit 10.3 to the Company's Current Report on
Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.11 Sublicense Agreement between LOS and the LOS Partner dated January
28, 1995 (included as Exhibit 10.4 to the Company's Current Report
on Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.12 Sublicense Agreement between the LOS Partner and the OLS
Partnership dated January 28, 1995 (included as Exhibit 10.5 to the
Company's Current Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.13 License Agreement between the Company and the OLS Partnership dated
January 28, 1995 (included as Exhibit 10.6 to the Company's Current
Report on Form 8-K dated April 24, 1995, and incorporated herein
by reference). *
10.14 Administrative Services Agreement between the Company and the OLS
Partnership dated January 28, 1995 (included as Exhibit 10.7 to the
Company's Current Report on Form 8-K dated April 24, 1995, and
incorporated herein by reference). *
10.15 Credit Agreement among the Company, LOS and the OLS Partnership
dated as of October 1, 1996 (included as Exhibit 10.15 to the
Company's Quarterly Report on Form 10-Q dated December 17, 1996,
and incorporated herein by reference). *
10.16 Asset Purchase Agreement between LOS and the Company relating to
the sale of stores located in Minneapolis, Minnesota dated January
28, 1995 (included as Exhibit 10.9 to the Company's Current Report
on Form 8-K dated April 24, 1995, and incorporated herein by
reference). *
10.17 Asset Purchase Agreement between LOS and the Company relating to
the sale of a store located in Cambridge Massachusetts dated
January 28, 1995 (included as Exhibit 10.10 to the Company's
Current Report on Form 8-K dated April 24, 1995, and incorporated
herein by reference). *
10.18 Asset Purchase Agreement among Boston Trading Ltd., Inc., Designs
Acquisition Corp., the Company and others dated April 21, 1995
(included as 10.16 to the Company's Quarterly Report on Form 10-Q
dated September 12, 1995, and incorporated herein by reference). *
10.19 Non-Negotiable Promissory Note between the Company and Atlantic
Harbor, Inc., formerly known as Boston Trading Ltd., Inc., dated
May 2, 1995 (included as 10.17 to the Company's Quarterly Report on
Form 10-Q dated September 12, 1995, and incorporated herein by
reference). *
10.20 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). *
10.21 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). *
10.22 Employment Agreement dated as of October 16, 1995 between the
Company and Mark S. Lisnow (included as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated December 6, 1995, and
incorporated herein by reference). *
10.23 Employment Agreement dated as of May 9, 1997 between the Company
and Carolyn R. Faulkner.
10.24 Employment Separation Agreement dated as of August 7, 1996 between
the Company and William D. Richins (included as Exhibit 10.26 to
the Company's Quarterly Report on Form 10-Q dated September 17,
1996, and incorporated herein by reference). *
11 Statement re: computation of per share earnings.
27 Financial Data Schedule.
99.1 Report of the Company dated April 22, 1997 concerning certain
cautionary statements of the Company to be taken into account in
conjunction with consideration and review of the Company's
publicly-disseminated documents (including oral statements made by
others on behalf of the Company) that include forward looking
information (included as Exhibit 99 to the Company's Annual Report
on Form 10-K dated May 1, 1997, and incorporated herein by
reference). *
99.2 Press release of the Company dated June 10, 1997.
* Previously filed with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESIGNS, INC.
By:/s/ JOEL H. REICHMAN
-----------------------
Joel H. Reichman
President and
Chief Executive Officer
Dated: June 17, 1997
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of May 9, 1997, between DESIGNS, INC., a Delaware
corporation with an office at 66 B Street, Needham, Massachusetts, 02194 (the
"Company"), and CAROLYN FAULKNER, residing at 252 Main Street, West Newbury,
Massachusetts 01985 (the "Executive").
W I T N E S S E T H:
-------------------
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 of 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 condition herein set forth.
Executive shall hold the office of Vice President, Chief Financial Officer
reporting to the Chief Executive Officer of the Company (the "Chief Executive
Officer").
2. TERM
----
The initial term of employment under this Agreement shall begin on
the date hereof (the "Employment Date") and shall continue for a period of
three (3) years from that date, subject to prior termination in accordance with
the terms hereof. Thereafter, this Agreement shall automatically be renewed
for successive one year terms unless either party shall give the other ninety
(90) days prior written notice of its intent not to renew this Agreement.
3. COMPENSATION
------------
As compensation for the employment services to be rendered by Executive
hereunder, including all services as an officer of the Company and any of its
subsidiaries and affiliates, the Company agrees to pay, or cause to be paid, to
Executive, and Executive agrees to accept, payable in equal installments in
accordance with Company practice, an initial annual salary of $210,000.
Executive's annual salary hereunder for the remaining years of employment shall
be determined by the Compensation Committee of the Board of Directors in its
sole discretion; provided, however, that Executive's salary shall be increased
each year effective as of the first day of the Company's fiscal year and
commencing with the beginning of fiscal 1998, by at least the percentage
increase, if any, in the cost of living shown on the Consumer Price Index for
all
items in the Boston, Massachusetts Area (published by the Bureau of Labor
Statistics of the United States Department of Labor) ("CPI) between the first
day of the immediately preceding calendar year and the last day of that same
year, first such adjustment to occur on January 1, 1998. By way of example, on
January 1, 1998 the adjustment will be computed by multiplying the Executive's
base salary in effect during fiscal 1997 by the percentage increase in the CPI
from January 1, 1997 to February 1, 1998. In addition, Executive shall be
entitled to bonuses from time to time in such amounts as may be determined by
the Compensation Committee of the Board of Directors in its sole discretion.
4. EXPENSES
--------
The Company shall pay or reimburse Executive, upon presentment of
suitable vouchers, for all reasonable business and travel expenses which may be
incurred or paid by Executive in connection with her employment hereunder.
Executive shall comply with such restrictions and shall keep such records as
the Company may deem necessary to meet the requirements of the Internal Revenue
Code of 1986, as amended from time to time, and regulations promulgated
thereunder.
5. 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 personnel (including any bonus, profit sharing, pension,
401(k), short and long-term disability insurance, hospital, major medical
insurance and group life insurance plans in accordance with the terms of such
plans) and including stock option and/or stock purchase plans, all as
determined from time to time by the Compensation Committee of the Board of
Directors of the Company.
(b) The Company shall, during the term of Executive's employment
hereunder, provide Executive with a full size automobile for her use in
performing her employment duties and obligations hereunder, including
maintenance of and fuel for such automobile.
6. DUTIES
------
(a) Executive shall perform such duties and functions as the Chief
Executive Officer and the Board of Directors of the Company shall from time to
time determine and Executive shall comply in the performance of her duties with
the policies of, and be subject to the direction of, the Chief Executive
Officer and/or the Board of Directors. Executive shall serve as an officer of
the Company without further compensation.
At the request of the Chief Executive Officer and/or the Board of Directors,
Executive shall serve, without further compensation, as an executive officer of
any subsidiary or affiliate of the
2
Company and, in the performance of such duties, Executive shall comply with
the policies of the Board of Directors of each such subsidiary or affiliate.
(b) During the term of this Agreement, Executive shall devote
substantially all of her time and attention, vacation time and absences for
sickness excepted, to the business of the Company, as necessary to fulfill her
duties. Executive shall perform the duties assigned to him with fidelity and
to the best of her ability. Notwithstanding anything herein to the contrary,
Executive may engage in other activities so long as such activities do not
unreasonably interfere with Executive's performance of her duties hereunder
and do not violate Section 9 hereof.
(c) Nothing in this Section 6 or elsewhere in this Agreement shall
be construed to prevent Executive from investing or trading in nonconflicting
investments as he sees fit for her own account, including real estate, stocks,
bonds, securities, commodities or other forms of investments.
(d) The principal location at which the Executive shall perform her
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; provided that if the principal location of
Executive's duties is transferred from Needham, Massachusetts, the new
principal location of Executive's duties shall not be transferred beyond a
15-mile radius of Needham, Massachusetts without Executive's consent.
Notwithstanding, the foregoing, Executive shall perform such services at such
other locations as may be required for the proper performance of her duties
hereunder, and Executive recognizes that such duties may involve travel.
7. TERMINATION OF EMPLOYMENT; EFFECT OF TERMINATION
------------------------------------------------
(a) Executive's employment hereunder may be terminated at any time
upon written notice from the Company to Executive:
(i) upon the determination by the Chief Executive Officer and
the Board of Directors that Executive's performance of her
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 determination by the Chief Executive Officer and
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
3
(ii) the "disability" of Executive (as hereinafter defined
pursuant to subsection (c) herein) pursuant to subsection
(f) 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 her duties for a period of three
(3) consecutive months or for a total of six (6) months (whether or not
consecutive) in any twelve (12) month period during the term of this Agreement,
as reasonably determined by the Chief Executive Officer and 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
and be limited to: any repeated willful failure or refusal to perform any of
the duties pursuant to this Agreement where such conduct shall not have ceased
within 30 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 her failure to
act, for which if Executive were prosecuted and convicted, a crime or offense
involving money or property of the Company or its subsidiaries or affiliates,
or which would constitute 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 her 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 4 hereof as
has been accrued through the date of her termination of employment.
(e) If Executive shall die during the term of her 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 4
as has been accrued through the date of her death. If Executive's death shall
occur while he is on Company business, the estate of Executive shall be
entitled to receive, in addition to the other amounts set forth in this
subsection (e), an amount equal to one-half her then annual salary.
(f) Upon Executive's "disability", the Company shall have the right
to terminate Executive's employment. Notwithstanding any inability to perform
her duties,
4
Executive shall be entitled to receive her compensation (including
bonus, if any) and reimbursement of expenses pursuant to Section 4 as provided
herein until he begins to receive long-term disability insurance benefits
under the policy provided by the Company pursuant to Section 5 hereof. Any
termination pursuant to this subsection (f) 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 5 hereof.
(g) Notwithstanding any provision to the contrary contained herein,
in the event that Executive's employment is terminated by the Company at any
time for any reason other than justifiable cause, disability or death, or in
the event the Company shall fail to renew this Agreement at any time within two
years following the effective date of a Change in Control of the Company, the
Company shall upon such termination, immediately pay (i) Executive, in a lump
sum, an amount equal to the greater of (1) one-twelfth of the Executive's then
annual salary multiplied by the number of months in the remaining term of this
Agreement or (2) a sum equal to her then annual salary multiplied by two years
(such period being hereinafter referred to as the "Severance Period"), which
amount shall be in lieu of any and all other payments due and owing to the
Executive under the terms of this Agreement (other than any payments
constituting reimbursement of expenses pursuant to Section 4 hereof), and (ii)
continue to allow Executive to participate, at the Company's expense, in the
Company's health insurance and disability insurance programs, to the extent
permitted under such programs, during the Severance Period (collectively, the
"Severance Payments"). For purposes of this Agreement, a "Change in Control of
the Company" shall be deemed to occur if (i) there shall be consummated (x) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the
Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (y) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company, or (ii) the stockholders of
the Company shall approve any plan or proposal for liquidation or dissolution
of the Company, or (iii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) shall become the beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act) of 40% or more of the Company's outstanding Common
Stock other than pursuant to a plan or arrangement entered into by such person
and the Company, or (iv) during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire Board of
Directors of the Company shall cease for any reason to constitute a majority
thereof unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
(h) Notwithstanding any provision to the contrary contained herein,
in the event the Company elects not to renew this Agreement (other than within
two years following a change in Control of the Company, which is covered in
Section 7(g) above) the Company will
5
pay Executive a severance payment equal to the greater of (i) two months'
salary plus 1/6 of Executive's bonus, if any, relating to the most recently
completed fiscal year, for each year Executive has been employed by the Company
or (ii) one year's annual salary.
(i) Executive may terminate her employment at any time upon 30 days'
prior written notice to the Company. Upon Executive's termination of her
employment hereunder or her election not to renew this Agreement, this
Agreement (other than Sections 4, 7, 9, 10, 11 and 12, which shall survive, if
at all, in accordance with their terms) shall terminate, provided however, that
Section 9 shall not survive such termination unless the Company pays to
Executive during the Severance Period the Severance Payments. In such event,
Executive shall be entitled to receive such portion of Executive's annual
salary and bonus, if any, as has been accrued to date. Executive shall be
entitled to reimbursement of expenses pursuant to Section 4 hereof and to
participate in the Company's benefit plans to the extent participation by
former employees is required by law or permitted by such plans, with the
expense of such participation to be as specified in such plans for former
employees.
(j) If, in connection with a change of ownership or control of the
Company or a change in ownership of a substantial portion of the assets of the
Company (all within the meaning of Section 28OG(b)(2) of the Internal Revenue
Code of 1986, as amended (the "Code")), an excise tax is payable by Executive
under Section 4999 of the Code, then the Company will pay to the Executive
additional compensation which will be sufficient to enable Executive to pay
such excise tax as well as the income tax and excise tax on such additional
compensation, such that, after the payment of income and excise taxes,
Executive is in the same economic position in which he would have been if the
provisions of Section 4999 of the Code had not been applicable. The additional
compensation required by this Section 7(j) will be paid to Executive promptly
after the date or dates on which the amount of such additional compensation is
determinable, in whole or in part.
(k) Upon the resignation of this Executive Officer in any capacity
that resignation will be deemed to be a resignation from all offices and
positions that that person holds with respect to the Company and any of its
subsidiaries and affiliates.
8. 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 her 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.
6
9. NON-COMPETITION
---------------
(a) Executive agrees that during her employment by the Company and
during the one year 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 of its subsidiaries and affiliates, in any geographic
area in the United States of America where, at the time of the termination of
her employment hereunder, the business of the Company or any of its
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 notify directly or indirectly, during the Non-Competitive
Period, 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 of solicit, 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 9
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.
(c) Executive acknowledges that the Company conducts business
throughout the United States, that its sales and marketing prospects are for
continued expansion throughout the United States and that, therefore, the
territorial and time limitations set forth in this Section 9 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 claim or cause of action 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.
(e) In the event Executive's employment with the Company terminates
for any reason other than (i) the Company's failure to renew this Agreement or
(ii) termination by the Company within two years following a Change in Control
of the Company, the Company and Executive agree that in consideration of the
severance payment made to Executive, Executive shall be available during the
Non-Competitive Period to advise and consult with the Board
7
of Directors, the President and other officers of the Company and its
subsidiaries and affiliates with respect to the affairs of the Company and its
subsidiaries and affiliates on a part-time basis, in response to requests for
such advisory and consulting services by the Board of Directors, or other
officers of the Company or its subsidiaries and affiliates, subject to the
conditions that (i) such services shall be performed within the United States
of America, (ii) Executive shall not be required to devote a major portion of
her time to such services, (iii) such services shall not unreasonably interfere
with the performance of other employment or consulting duties Executive may
have, (iv) Executive shall not be required to perform such services during
usual vacation periods and reasonable periods of illness or other
incapacitation, (v) such services shall be performed at times and places as
shall be chosen by Executive, and which will result in the least inconvenience
to Executive, and (vi) all other provisions of this Section 9 shall apply.
The Company shall reimburse Executive for actual out-of-pocket expenses
incurred in rendering the services performed by Executive upon the request of
the Board of Directors, or other officers of the Company or its subsidiaries or
affiliates, payable at the end of each month during such period.
Notwithstanding the foregoing, in the event that Executive seeks full-time
employment with a third party and such third party will not accept Executive's
services for as long as he is committed under this subsection (e) to provide
consulting services to the Company, then if the Board of Directors of the
Company determines in its reasonable discretion that Executive's employment
with the third party will not cause him to breach the provisions of Section 9
of this Agreement (other than this subsection (e)) and Executive provides the
Board of Directors with a letter signed by the third party stating that such
third party will not accept Executive's services as described above, the
provisions of this subsection (e) shall immediately terminate and be of no
further force or effect.
(f) Notwithstanding anything herein to the contrary, this Section 9
shall automatically terminate if the Company elects not to renew this
Agreement, if the Company terminates Executive's employment within two years
following the effective date of a Change in Control of the Company, or if the
Company fails to make any payments due to Executive under Sections 7(g), 7(h),
7(i) or 9(e).
10. 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 her 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 her employment or the rendering of advisory and consulting
services hereunder (collectively the "Subject Matter").
8
(b) Executive hereby assigns and transfers, and agrees to assign and
transfer, to the Company) all her 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 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 $1,500 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 Severance Period.
11. 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 her duties (including without limitation disclosures to the Company's
advisors and consultants) or is 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 or corporation, any confidential information acquired by him during the
course of, or as an incident to, her employment or the rendering of her
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 client of the Company or any of its
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, 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, customer lists and any other documents
embodying such confidential information. This confidentiality obligation shall
not apply to any confidential information which thereafter becomes publicly
available other than pursuant to a breach of this Section 11(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.
9
12. SPECIFIC PERFORMANCE
--------------------
Executive agrees that if he breaches, or threatens to commit a
breach of, any of the provisions of Sections 9, 10 or 11 (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 an 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 her right to contest whether a breach or threatened
breach of any Restrictive Covenant has occurred.
13. 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.
14. 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.
15. 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.
16. 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.
17. WAIVER OR BREACH
----------------
It is agreed that a waiver by either party of 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.
10
18. 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.
19. 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 4, 7, 9, 10, 11 and 12 hereof.
20. 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.
21. 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, demand or affect its provisions.
22. 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/ SCOTT N. SEMEL
_____________________
Scott N. Semel
Executive Vice President
/s/ CAROLYN FAULKNER
_____________________
Carolyn Faulkner
Exhibit 11. Statement Re: Computation of Per Share Earnings
Three Months Ended Twelve Months
Ended
5/3/97 5/4/96 5/3/97 5/4/96
(In thousands, except for per share data)
Net (loss)
income $(3,184) $(1,145) $4,225 $7,054
Weighted
average
shares
outstanding
during the
period 15,606 15,812 15,720 15,778
Net (loss)
income per
common share
$(0.20) $(0.07) $0.27 $0.45
5
1000
3-MOS
JAN-31-1998
FEB-02-1997
MAY-03-1997
119
0
467
0
104,112
113,236
76,132
35,281
160,143
46,362
0
0
0
159
107,815
160,143
55,470
55,470
41,984
41,984
18,841
0
151
(5,435)
2,251
(3,184)
0
0
0
(3,184)
(0.20)
(0.20)
[DESIGNS, INC. LOGO]
FOR IMMEDIATE RELEASE
For Information, Contact:
Shareholder Information Line
1-888-DESI-333
Carolyn Faulkner, Chief Financial Officer
Designs, Inc.
617-444-7222
DESIGNS, INC. ANNOUNCES RETURN TO BRANDS AND PRIVATE LABEL
OVERHEAD REDUCTIONS
(Needham, MA., June 10, 1997) -- Designs, Inc. (NASDAQ: DESI), operator of
specialty retail apparel stores, today announced a series of strategic and
overhead reduction initiatives associated with a refocused business strategy.
These initiatives are intended to result in overhead savings of approximately
$1.5 million in 1997 (exclusive of severance, benefits, and other related
costs) and at least $3.0 million in 1998.
REFOCUSED BRAND STRATEGY. The Company will refocus the product mix
in its Designs and Boston Trading Co.(SM) stores to one focused on Levi
Strauss & Co. and other brand name apparel and accessories.
Joel H. Reichman, Chief Executive Officer said: "We are going back to basics
by returning to our core competency of operating specialty retail stores
featuring Levi's(R), Dockers(R) and other name brands and will use private
label only to fill voids in key product categories not covered by these
brands".
The Company plans to increase the mix of Levi's(R), Dockers(R) and other
name brands in its Designs stores to approximately 70% beginning with the
Back to School selling season. The Company will also shift the product mix
in the Boston Trading Co.(SM) stores by immediately increasing the quantity
of Levi Strauss & Co. and other brand name products in these stores and
plans to greatly reduce the amount of private label merchandise in these
stores for 1998. The Company has already started to increase the percentage
of Levi Strauss & Co brand products in these stores and is meeting with other
name brands whose apparel and accessories will complete its branded casual
apparel strategy. The Company's reduced private label requirements will
come from open market purchases of selected items that will carry the
Boston Traders(R) label.
CLOSING OF NEW YORK PRODUCT DEVELOPMENT OFFICE AND HEADCOUNT FREEZE. In
connection with this refocused strategy the Company will close its New York
private label product development office and eliminate all headcount
associated with that office. The Company has also instituted a headcount
freeze in its home office and does not intend to replace open home office
positions through the balance of 1997.
(more)
OTHER EXPENSE IMPROVEMENTS. The Company has substantially reduced planned
capital expenditures for the balance of 1997 and is reducing previously
planned expenses in a number of other areas including advertising, travel,
sampling and professional services. In addition, three members of the
Company's senior executive team have refused salary increases for 1997.
In announcing these initiatives, Joel H. Reichman, Chief Executive Officer,
also said "we have conducted a strategic review of all operating areas with
our management team and have identified areas in which we can reduce costs
without affecting our customer service standards. With these actions, we
are returning to our brand name roots and plan to use the cash generated by
these overhead reductions to increase our branded businesses. We will
continue our strong commitment to the Levi's(R) and Dockers(R) brands and
look forward to continuing our long standing excellent relationship with
Levi Strauss & Co."
INVENTORY. The Company is currently reviewing the impact of this refocused
strategy on its current and on order Boston Traders(R) inventory. Private
label purchase commitments from July 1997 through January of 1998 of $12.9
million at cost are approximately 27 percent lower than the $17.6 million
at cost private label inventory commitment during the same period last year.
Based upon the performance to date of its private label merchandise, the
Company anticipates increased markdown activity during the remainder of 1997
in connection with the sale of excess inventory. At the end of the first
quarter of fiscal 1997, the Company had approximately $15 million in private
label inventory.
Reichman added: "this new focus will allow us to leverage our 20 years of
experience in operating branded specialty retail stores with the goal of
increasing our sales and profits, increasing our cash position and enhancing
long term shareholder value."
Designs, Inc. operates 154 stores in five retail formats: 43 "Designs"
stores, 58 "Levi's(R) Outlet by Designs" stores, 26 "Boston Traders(R)
Outlet" stores, and five "Boston Trading Co.(SM)" stores. A joint venture
between subsidiaries of Designs, Inc. and Levi's Only Stores, Inc., a wholly-
owned subsidiary of Levi Strauss & Co., operates 11 "Original Levi's(R)
Stores(TM)" and 11 "Levi's(R) Outlet" stores.
# # #
