SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number 0-15898
January 31, 1998 (Fiscal 1997)
DESIGNS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2623104
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of principal executive offices)
66 B Street, Needham, MA 02194
(Address of principal executive offices) (Zip Code)
(781) 444-7222
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
(Title of each Class)
-----------------------
Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant, based on the last sales price of such stock on
April 17, 1998 was approximately $29.4 million.
The registrant had 15,738,983 shares of Common Stock, $0.01 par value,
outstanding as of April 17, 1998.
5
DOCUMENTS INCORPORATED BY REFERENCE
Form 10-K Requirement Incorporated Document
PART III
Item 10 Directors and Executive All information under the caption
Officers "Nominees for Director and Executive
Officers" in the Company's definitive
Proxy Statement which is expected to
be filed within 120 days of the end of
the fiscal year ended January 31,
1998.
Item 11 Executive Compensation All information under the caption
"Executive Compensation" in the
Company's definitive Proxy Statement
which is expected to be filed within
120 days of the end of the fiscal year
ended January 31, 1998.
Item 12 Security Ownership of All information under the caption
Certain Beneficial Owners "Security Ownership of Certain
Beneficial Owners and Management" in
the Company's definitive Proxy
Statement which is expected to be
filed within 120 days of the end of
the fiscal year ended January 31,
1998.
Item 13 Certain Relationships and All information under the caption
Related Transactions "Certain Relationships and Related
Transactions" in the Company's
definitive Proxy Statement which is
expected to be filed within 120 days
of the end of the fiscal year ended
January 31, 1998.
6
Designs, Inc.
Index to Annual Report on Form 10-K
PART I PAGE
Item 1. Business 8
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Equity
and Related Shareholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain
Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
The information called for by Items 10, 11, 12 and 13, to the
extent not included in this document, is incorporated herein
by reference to the Company's definitive proxy statement which
is expected to be filed on or about May 6, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 25
PART I.
Item 1. Business
Summary
Designs, Inc. (the "Company") is a specialty retailer based in the United States
selling quality branded apparel and accessories. The Company markets a broad
selection of Levi Strauss & Co. brand and other brand name products
predominantly through outlet stores under the names "Levi's(R) Outlet by
Designs" and "Boston Traders(R)," and mall-based first quality stores under the
names "Designs" and "Boston Trading Co.(R)." A subsidiary of the Company also
owns a 70% interest in a partnership that operates, as part of a joint venture
with a subsidiary of Levi's Only Stores, Inc. ("LOS"), a subsidiary of Levi
Strauss & Co., stores under the name "Original Levi's Store(TM)" and outlet
stores under the name "Levi's(R) Outlet," each of which features men's and
women's Levi Strauss & Co. brand products.
The Company makes extensive use of various brand names, trademarks, trade names
and logos in its advertising, signs and store displays, and relies on the broad
recognition of the Levi Strauss & Co. brand names to generate sales. Management
believes that the Levi's(R) and Dockers(R) names are two of the most widely
recognized apparel brand names in the United States and that the Levi's(R) brand
name is among the most widely recognized brand names in the world.
During the second quarter of fiscal 1997, the Company announced a shift in
strategy away from the vertically integrated Boston Traders(R) private label
concept, which it began following the May 1995 acquisition of the Boston
Traders(R) brand and 33 outlet stores from Boston Trading Ltd., Inc., to a
strategy emphasizing name brands. This strategic shift involved the liquidation
of Boston Traders(R) brand products, the closure of the Company's New York City
product development office, and the closure of 17 Designs stores and 16 Boston
Traders(R) Outlet stores.
During the second half of fiscal 1997, the Company began to test a selection of
new name brands in its six Boston Trading Co.(R) stores and five Designs stores
which were converted to the Boston Trading Co.(R) store format in the fourth
quarter of fiscal 1997 (collectively referred to as the "eleven Boston Trading
Co.(R) stores"). This test is part of the Company's strategic shift back to
selling name brand products and away from its private label Boston Traders(R)
brand product strategy. As part of this test, the product selection and
quantities of certain Levi's(R) brand and the Company's private label Boston
Traders(R) brand products in these stores were significantly reduced from prior
levels.
Store Formats
Levi's(R) Outlet by Designs stores, the Company's largest group of stores, are
located in manufacturers outlet parks and shopping centers. These outlet stores
sell manufacturing overruns, discontinued lines and irregulars purchased by the
Company directly from Levi Strauss & Co. and its licensees, as well as
end-of-season Levi's(R) and Dockers(R) brand merchandise transferred from the
Designs and Boston Trading Co.(R) stores. For several years, the Levi's(R)
Outlet by Designs stores benefited from positive trends in outlet shopping by
catering to "value" oriented customers. Today, many of the manufacturers' outlet
parks and shopping centers in which these stores are located have matured and
are not producing significant year to year increases in customer traffic. The
performance of these stores is also affected by increased competition from
retailers that offer private label brand products, merchandise produced by new
entrants in the fashion jeans market, and national sales trends of Levi's(R)
brand products. To date, each Levi's(R) Outlet by Designs store is the only
authorized outlet in its shopping area selling exclusively Levi Strauss & Co.
brand products.
Designs stores are located in enclosed regional shopping malls and offer a broad
selection of first quality Levi Strauss & Co. brand merchandise. The Company has
recently introduced additional name brands, such as Pacific Trail(R),
Champion(R), Union Bay(R), Mudd(R), Adidas(R) and LEI(R) into these stores in
order to increase the percentage of other branded merchandise. The Company
intends to reduce the proportion of Levi Strauss & Co. brand products in these
stores to 50% to 60% of the product assortment by the end of fiscal 1998.
During fiscal 1997, the Company began to test a selection of name brand products
in the eleven Boston Trading Co.(R) stores. This test is part of the Company's
strategic shift back to name brands and away from its former private label
product development strategy. These stores feature a relatively balanced
proportion of nationally-recognized name brand products including Levi's(R),
silverTab(TM), Polo Jeans(R), Tommy Jeans(R) (by Tommy Hilfiger), DKNY(R), and
CK Calvin Klein(R), and smaller quantities of several emerging fashion brands
including Buffalo(R) Jeans, FUBU(R), Enyce(R), Lucky Brand(R), Dollhouse(R),
Mecca(R), Mossimo(R), Phat Farm(R), Tag Rag(R), Wu Wear(R), Interstate Jeans(R),
S Silver(TM) Jeans, and other brands targeted to the young customer. The Company
intends to continue to test the Boston Trading Co.(R) store format and the
performance of several name brand products through fiscal 1998. During the
course of this test the Company may convert other Designs stores to the Boston
Trading Co.(R) format or may
8
incorporate certain branded products into the merchandise mix in other Designs
stores. Six of the eleven Boston Trading Co.(R) stores are located in upscale
regional shopping centers and urban locales, and five, which were converted from
the Designs store format, are located in local and smaller regional centers. The
Company may utilize limited amounts of independently sourced products to fill
voids in key product categories in these stores.
Boston Traders(R) Outlet stores are presently liquidating Boston Traders(R)
brand products and will primarily sell end-of-season branded product lines from
the Designs and Boston Trading Co.(R) stores.
The Company is also a partner in a joint venture (see discussion below) between
subsidiaries of Levi Strauss & Co. and the Company, which operates eleven
Original Levi's Stores(TM). This format focuses on men's and women's
first-quality Levi's(R) brand products consisting of core traditional styles
such as five pocket 501(R) jeans, denim jackets, contemporary silverTab(TM)
brand tops and bottoms, merchandise from the Levi's(R) World's Finest lines and
Levi's(R) Personal Pair(TM) individually fitted jeans for women. Original Levi's
Stores(TM) are located in upscale malls and urban locations that feature
hardwood floors and "video walls" displaying Levi Strauss & Co. advertisements
and popular music videos. The joint venture also operates eleven Levi's(R)
Outlet stores that sell exclusively Levi's(R) brand products, including
end-of-season and close-out products from Original Levi's Stores(TM) in the
joint venture.
Management believes that the Company competes with other apparel retailers by
offering superior quality merchandise, selection, knowledgeable in-store service
and competitive price points. The Company stresses product training with its
sales staff and, with the assistance of Levi Strauss & Co. and other brands'
merchandise materials, provides its sales personnel with substantial product
knowledge training across all branded product lines.
The following table provides a summary of the number of stores in operation at
year end for the past three fiscal years. With the exception of the Boston
Traders(R) Outlet stores, Levi Strauss & Co. must approve all new store
locations which carry Levi Strauss & Co. brands.
January 31, February 1, February 3,
1998 1997 1996
- -----------------------------------------------------------------------------
Designs (1) ............................ 22 44 49
Levi's(R) Outlet by Designs ............ 58 58 58
Boston Trading Co.(R) .................. 11
Boston Traders(R) Outlet (1) ........... 12 27 35(2)
Joint Venture:
Original Levi's Stores(TM) ........... 11 11 11
Levi's(R) Outlet ..................... 11 10 4
-----------------------------------
Total 125 150 157
-----------------------------------
(1) In fiscal year 1997, the Company closed 16 Designs stores and 15
Boston Traders(R) Outlet stores in connection with the Company's announced
shift in strategy.
(2) In May 1995, the Company acquired certain assets of Boston Trading
Ltd., Inc. including 33 Boston Traders(R) Outlet stores and thereafter
opened two additional Boston Traders(R) Outlets.
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the Company,
and a subsidiary of Levi's Only Stores Inc. ("LOS"), 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 OLS Partnership
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
beginning January 2000. The Company does not presently anticipate that the OLS
Partnership will open any additional Original Levi Stores(TM) or Levi's(R)
Outlet stores in fiscal 1998.
In 1994, Levi Strauss & Co. advised the Company that it did not see any
additional growth in the Levi's(R) Outlet by Designs format, other than
additional Levi's(R) Outlet stores that may be opened under the OLS Partnership
because, in part, Levi Strauss & Co. was opening Levi's(R) Outlets and
Dockers(R) Outlets through its LOS subsidiary. Levi Strauss & Co. recently
informed the Company that it intends to close up to sixteen of its own Levi's(R)
Outlet stores in 1998. Wholly-owned Levi's(R) Outlet by Designs and
jointly-owned Levi's(R) Outlet locations continue to be the only authorized
retail outlet locations in their respective outlet centers to sell Levi's(R)
brand products. The Company does not expect to open additional Levi's(R) Outlet
by Designs stores in the future, except for Levi's(R) Outlet stores that may be
opened by the OLS Partnership.
9
The Company has no present plans for expansion of new stores in fiscal 1998.
Capital expenditures in fiscal 1998 are expected, barring unforeseen
circumstances, to be $2.7 million, including $1.0 million for the remodeling of
existing stores. The Company continually evaluates the performance of all of its
stores and may, from time to time, decide to close, relocate or reduce the size
of certain store locations.
Customer Base
The Levi's(R) Outlet and Levi's(R) Outlet by Designs stores primarily attract
shoppers who are seeking to purchase Levi's(R) and Dockers(R) brand products and
who prefer to purchase end-of-season, close-out, overrun and irregular
merchandise at a "value" price point. The Original Levi's Stores(TM) primarily
attract shoppers who are seeking to purchase first-quality Levi's(R) brand basic
and fashion apparel. Several of the Levi's(R) Outlets and the Original Levi's
Stores(TM) attract foreign travelers shopping for Levi Strauss & Co. brand
products. The Company's product selection offered by these store formats is
designed to satisfy the casual apparel needs of customers in all age groups and
a broad range of income brackets.
As part of the Company's shift in strategy, the target customer base in the
Company's new multi-brand Boston Trading Co.(R) store format changed to one
focused on the growing "echo boomer" generation. This brand-conscious group
predominantly shops in malls and consists of the approximately 36 million ten to
24 year olds born since 1974. The Company's Designs stores primarily attract
shoppers who seek to purchase first-quality Levi's(R) brand basic apparel. The
Company is currently testing the performance of certain new branded products in
its Designs stores. As the Company changes the merchandise assortment in certain
of these stores, the Company anticipates that the customer base in these stores
will shift to those seeking to satisfy their casual apparel needs with a broader
selection of quality branded apparel than is currently being carried in those
stores.
Merchandising and Distribution
In its Levi's(R) Outlet by Designs stores, the Company offers a selection of
Levi Strauss & Co. brands of merchandise including manufacturing overruns,
discontinued lines and irregulars purchased by the Company directly from Levi
Strauss & Co. and end-of-season merchandise transferred from Designs and Boston
Trading Co.(R) stores.
The Levi's(R) Outlets operated by the OLS Partnership sell only Levi's(R) brand
products and service the close-out products of Original Levi's Stores(TM). Due
to the limited availability of merchandise sold through the Levi's(R) Outlet
stores, the Company continues to evaluate and act upon opportunities to purchase
substantial quantities of merchandise. The Boston Traders(R) Outlet stores
currently carry the Company's remaining Boston Traders(R) brand products and
will carry end-of-season branded apparel from Boston Trading Co.(R) and Designs
stores.
Merchandising in the Original Levi's Store(TM) focuses on men's and women's tops
and bottoms under the Levi's(R) brand name, including traditional 501(R), 505(R)
and 550(TM) five pocket jeans; contemporary silverTab(TM) bottoms and tops;
560(TM) Loose fitting jeans and Personal Pair(TM) individually fitted jeans for
women; jeans jackets; a full line of women's jeans; T-shirts; denim shirts;
sweat shirts; Levi's(R) brand shorts; and coordinating accessories. Many styles
are unique to the Original Levi's Store(TM), and are, except for retail stores
operated by Levi's Only Stores, Inc., not available at any other retail store in
the United States.
The Company believes that the Levi's(R) Outlet by Designs, Levi's(R) Outlet,
Designs and Original Levi's Stores(TM) will be positively affected by any
significant advertising and marketing efforts by Levi Strauss & Co. (see the
discussion below under "Advertising").
During the second quarter of fiscal 1997 the Company announced a shift in
strategy away from its private label Boston Traders(R) brand product back to
name brands. During the third and fourth quarters of fiscal 1997, the Company
began to test a selection of name brand products in the eleven Boston Trading
Co.(R) stores. The Company's merchandising strategy in these stores is to offer
a broad selection of nationally recognized brand names combined with select
emerging fashion brands chosen for the customer base in each store. The Company
expects to continue the test of this store concept through fiscal 1998. (See
above discussion under "Store Formats".)
The Company's Designs stores presently carry a majority of Levi Strauss & Co.
brand products. The remaining balance consists of other branded apparel. The
Company expects that the proportion of Levi Strauss & Co. products will decrease
during fiscal 1998 as the Company introduces into these stores other national
brands that will appeal to the Designs store customer and/or which have sold
well in the Boston Trading Co.(R) store format.
All merchandising decisions, including pricing, markdowns, advertising and
promotional programs, inventory purchases and merchandise allocations are made
centrally at the Company's headquarters with input from field operations
personnel.
10
During fiscal 1997, sales by format, by product category, were as follows:
Joint Venture
--------------------
Levi's(R) Boston Boston Original Total Total
Outlet Trading Traders(R) Levi's(R) Levi's Company Company
Category Designs by Designs Co.(R) Outlet Outlet Stores(TM) 1997 1996
- --------------------------------------------------------------------------------------
Men's 65% 64% 41% 59% 64% 62% 63% 68%
Women's 32% 21% 53% 34% 26% 33% 26% 24%
Youth -- 8% -- -- 7% 2% 5% 3%
Accessories 3% 7% 6% 7% 3% 3% 6% 5%
Trademarks
The Company is the owner of the "Boston Trading Co.", "Boston Traders" and
"Traders Collection" trademarks, and certain other trademarks acquired as part
of the acquisition of certain assets of Boston Trading Ltd., Inc. "501," "505,"
"Dockers" and "Levi's" are registered trademarks, and "550," "560," "silverTab"
and "Personal Pair" are trademarks of Levi Strauss & Co.
Store Operations
The Company currently employs three Regional Vice Presidents each of whom are
responsible for the operations and profitability of a group of the Company's
Levi's(R) Outlet by Designs, Designs, and Boston Traders(R) Outlet stores which
are divided among three geographic regions. The Company also employs one
Divisional Vice President who is responsible for the operations and
profitability of its Boston Trading Co.(R) stores. The stores in the OLS
Partnership are managed by a General Manager. All five of these managers have
over 15 years of service with the Company.
In order to provide management development and guidance to individual store
managers, the Company employs approximately 13 district managers, having an
average of seven years of service with the Company, as well as a number of
district manager candidates. Each district manager is responsible for hiring and
developing store managers at the stores assigned to that manager's area and for
the overall operations and profitability of those stores. District managers
report directly to a Regional or Divisional Vice President or to the General
Manager of the OLS Partnership, all of whom report directly to the Company's
President and Chief Executive Officer.
Designs stores average approximately 6,200 square feet in size and are located
in enclosed regional shopping malls usually anchored by department stores.
Boston Trading Co.(R) stores are located in mall-based and urban locations and
average approximately 5,100 square feet in size. Levi's(R) Outlet by Designs
stores are located in manufacturers' outlet parks and shopping centers and
average approximately 11,900 square feet in size. Similarly located, the Boston
Traders(R) Outlet stores have an average size of 4,800 square feet. Original
Levi's Stores(TM) average approximately 6,500 square feet in size and are
located in both mall-based and urban locations. Levi's(R) Outlet stores,
operated by the OLS Partnership, are also located in outlet parks and average
approximately 6,400 square feet in size.
The Company's stores utilize centrally developed interior design and merchandise
layout plans specifically designed to promote customer identification of the
store as a specialty store selling quality branded apparel and accessories. The
merchandise layout is further customized by store management and the Company's
visual merchandising department to suit each particular store location. Designs
and Levi's(R) Outlet stores prominently display Levi's(R) and Dockers(R) logos
and utilize distinctive promotional displays. Original Levi's Stores(TM) also
feature a "video wall" presentation developed to promote an upscale image of the
men's and women's Levi's(R) brand products sold in those stores. The Company
uses Levi Strauss & Co. logos and trademarks on store signs with the permission
of Levi Strauss & Co. Boston Trading Co.(R) stores are merchandised to feature
an echo boomer lifestyle theme, projecting an alternative, edgy personality,
through the use of vendor-supplied brand focused graphics and visually
stimulating store window displays.
Customer Service and Training
"Designs University" was established in fiscal 1996 to provide associate
training and development programs throughout the organization. The Company's
Operational Support and Development team is responsible for developing and
presenting all customer service training programs. These programs are designed
to provide store associates with the skills needed to provide outstanding
service levels. Associates are taught that servicing the customer is the highest
priority.
Customer service expectations are established at all levels of associate
training, beginning with the Sales Associate Development Program. During this
orientation and training program, associates learn that customer service and
sales is the primary job accountability. This program stresses the value of
product knowledge and includes "Try-On" sessions,
11
which provide an effective experience with the product. Management believes that
sales associates accomplish the important goal of reinforcing the customer's
perception of the Company's stores as branded specialty stores and of
differentiating its stores from those of the Company's competitors.
All members of store management participate in the Store Management Development
Program, in which participants learn how to perform all critical management
functions required to successfully operate a store and focus on fundamental
operations procedures, merchandising, visual merchandising, and personnel
management, respectively. The Designs University training center at the
Company's home office hosts a quarterly program, which is focused on leadership,
education, motivation, and team building.
Designs, Boston Trading Co.(R) and Boston Traders(R) Outlet stores each employ
approximately 10 associates. Each Levi's(R) Outlet by Designs, Levi's(R) Outlet
and Original Levi's Store(TM) location employs approximately 30 associates.
Store staffing typically includes a store manager, one or more assistant
managers and shift supervisors, and a team of full-time and part-time sales
associates. Store manager candidates or assistant manager candidates may also be
included in specific stores. The store management team is responsible for all
store operations, including the hiring and training of sales associates.
Information Systems
The Company believes that management information systems are an important factor
in the continued growth of the Company. The Company continues to devote
significant resources to the development of information systems which are
intended to enable the Company to centrally maintain inventory, pricing and
other financial controls. During fiscal 1996, the Company converted its
merchandise management software to a new system. This software is designed to
enhance the analytical capabilities of the Company's merchandise and financial
functions and to provide an integrated business approach to the financial and
merchandising systems. During that same year, a new point of sale system, which
includes in-store computer terminals, was installed in the Company's stores.
Point of sale data, in conjunction with a full compliment of EDI transactions
handling invoicing, advanced shipment notices and purchase orders, became the
primary sources of data input for the new merchandise management package.
The Company makes use of software systems supporting vendor managed
replenishment for core merchandise. These processes utilize available sales and
inventory data to react to the individual needs of each store on a timely basis.
Presently, only Levi Strauss & Co. is providing for vendor managed
replenishment.
The Company is currently involved in the process of converting its systems that
are critical to its business to become Year 2000 compliant. The Company expects
to spend approximately $500,000 in conversion costs, primarily in fiscal 1998,
to accomplish this. As part of this conversion, the Company intends to review
the performance of its information systems in order to determine the components
and functions of its information systems which are in need of improvement and
implement these improvements concurrently. Barring unforeseen circumstances, the
Company anticipates that the conversion process to make its systems Year 2000
compliant will be completed by the end of calendar year 1999. Of course, the
Company's business may be negatively affected by vendors, government agencies
and any other entity with which it has dealings whose systems may not be Year
2000 compliant.
Advertising
The Company relies on the visibility and recognition of its nationally featured
recognized brand names, as well as the natural flow of traffic that results from
locating its stores in areas of high retail activity, including large regional
malls, destination outlet centers and urban shopping districts. Historically,
the Company has received co-operative advertising allowances from Levi Strauss &
Co. that fund a substantial portion of the Company's advertising expenditures.
In fiscal 1997 the Company received allowances totaling approximately 20% of its
advertising expenditures. The cooperative advertising allowances associated with
the Company's and the OLS Partnership's advertising will fluctuate in proportion
to amounts of Levi Strauss & Co. brand products purchased and Levi Strauss &
Co.'s cooperative advertising policies.
Levi Strauss & Co. recently informed the Company of certain advertising and
marketing plans which the Company anticipates will commence during the second
half of fiscal 1998 and continue into fiscal 1999. If the advertising and
marketing initiatives by Levi Strauss & Co. are successful, the Company
anticipates that these efforts will increase consumer awareness of the Levi's(R)
brand. The Company understands that these initiatives by Levi Strauss & Co.
include a new advertising campaign formulated by a recently retained advertising
agency as well as enhanced brand positioning.
12
Competition
The United States casual apparel market is highly competitive with many national
and regional department stores, specialty apparel retailers and discount stores
offering a broad range of apparel products similar to those sold by the Company.
The Company's competitors in the casual apparel market consist of national and
regional department stores in the Company's market areas, such as J.C. Penney
Company, Sears, Roebuck & Company, Dillard Department Stores Inc., May Company,
Kohls and Filene's. In addition, the Company's Boston Trading Co.(R) stores
compete with several specialty apparel retailers, including The Buckle,
Gadzooks, The GAP, Urban Outfitters, Pacific Sunwear and Hot Topics. The
Company's Levi's(R) Outlet stores also compete with any retailer that offers
Levi Strauss & Co. brand products in an off-price retail environment.
A substantial portion of the Company's revenue is generated from the sale of
Levi Strauss & Co. brand products. Levi Strauss & Co. is involved in a highly
competitive fashion apparel industry in the United States. The Company believes
that its sales of Levi's(R) brand products have been negatively impacted by
increased competition from retailers selling private label brand merchandise as
well as new manufacturers of fashion jeans.
Employees
As of January 31, 1998, the Company employed approximately 3,200 associates, of
whom 3,000 were full-time and part-time sales personnel. The Company hires
additional temporary employees during the peak late summer and holiday seasons.
All qualified full-time employees are entitled, when eligible, to life, medical,
disability and dental insurance and to participate in the Company's 401(k)
retirement savings plan. Store managers, district managers, vice presidents and
other key personnel are eligible to receive incentive compensation subject to
the achievement of specific performance objectives related to sales,
profitability and expense control. In addition, store and district managers are
eligible to receive incentive compensation based on quarterly sales and payroll
objectives. Vice Presidents and District Managers are also entitled to use an
automobile provided by the Company or to receive an automobile allowance. Sales
personnel are compensated on an hourly basis and, generally, receive no
commissions but, from time to time, are eligible to earn sales incentive
payments from a particular store's sales contests. Vice Presidents, certain
district and store managers and certain other employees, have been granted stock
options. None of the Company's employees are represented by a union. In the
fourth quarter of fiscal 1997, the Company reduced its workforce by
approximately 25% of the Company's headquarters and field management staff. The
Company incurred a $1.6 million charge for severance, benefits and other costs
related to this reduction.
Risks and Uncertainties
The Company is filing a report with the United States Securities and Exchange
Commission, as an exhibit to this Annual Report on Form 10-K, which identifies
in a readily available document certain risks and uncertainties that may have an
impact on the future sales, earnings and direction of the Company.
13
Item 2. Properties
As of January 31, 1998, the Company operated 58 Levi's(R) Outlet by Designs
stores, 22 Designs stores, 11 Boston Trading Co.(R) stores, 12 Boston Traders(R)
Outlet stores and in the joint venture, 11 Original Levi's Stores(TM) and 11
Levi's(R) Outlets. All such stores, with the exception of joint venture stores,
are leased by the Company directly from shopping mall, outlet park and urban
property owners. The 11 Original Levi's Stores(TM) and 11 Levi's(R) Outlets are
leased directly by the OLS Partnership. Designs store and Original Levi's
Store(TM) leases are generally ten years in length with no renewal options. The
leases for Boston Trading Co.(R) stores have terms between 7 and 10 years.
Outlet store leases are usually for a series of shorter periods and certain
leases contain renewal options extending their terms to between 10 and 15 years.
Most of the Company's outlet store leases provide for annual rent based on a
percentage of store sales, subject to guaranteed minimum amounts.
The lease for the headquarters office, which began in November 1995, is for ten
years. The lease provides for the Company to pay all occupancy costs associated
with the land and the headquarters building. The Company has entered into a
lease agreement effective April 1, 1998 to sublease approximately 14,500 square
feet to a sublessee for an initial term of five years with an option for an
additional three years.
The Company utilizes a third-party warehouse facility to receive and distribute
branded apparel for its Boston Trading Co.(R) and Designs stores. The Company
has no plans to operate its own warehousing facility in fiscal 1998.
Sites for store expansion are selected on the basis of several factors intended
to maximize the exposure of each store to the Company's target customers. These
factors include the demographic profile of the area in which the site is
located, the types of stores and other retailers in the area, the location of
the store within the mall and the attractiveness of the store layout. The
Company also utilizes financial models to project the profitability of each
location using assumptions such as malls' sales per square foot averages,
estimated occupancy costs and return on investment requirements. The Company
believes that its selection of locations enables the Company's mall, urban and
outlet stores to attract customers from the general shopping traffic and to
generate its own customers from surrounding areas.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Capital Expenditures."
Item 3. Legal Proceedings
In January 1998, Atlantic Harbor, Inc. (formerly known as "Boston Trading Ltd.,
Inc.") filed a lawsuit against the Company for refusing to pay the outstanding
principal amount of a non-negotiable promissory note in the principal amount of
$1 million issued by the Company in connection with the acquisition of certain
assets from Atlantic Harbor, Inc. In March 1998, the Company filed a
counterclaim against Atlantic Harbor, Inc. alleging that the Company was damaged
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. Barring unforeseen circumstances, management of the Company does not
believe that the result of this litigation will have a material adverse effect
on the Company's business or financial condition.
The Company is a party to other litigation and claims arising in the course of
its business. Management does not expect the results of these actions to have a
material adverse effect on the Company's business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of fiscal 1997 to a vote of
security holders, through the solicitation of proxies or otherwise.
14
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "DESI."
The following table sets forth, for the periods indicated, the high and low per
share sales prices for the common stock, as reported on the Nasdaq consolidated
reporting system.
Fiscal Year Ending
January 31, 1998 High Low
- --------------------------------------------------------------------------------
First Quarter 6 5/8 4 1/4
Second Quarter 5 1/4 4
Third Quarter 5 1/8 3 3/4
Fourth Quarter 4 1/2 2 1/16
Fiscal Year Ending
February 3, 1997 High Low
- --------------------------------------------------------------------------------
First Quarter 7 1/8 5 3/4
Second Quarter 7 3/4 5 1/4
Third Quarter 7 1/8 5 1/2
Fourth Quarter 7 1/8 5 1/2
As of April 17, 1998, based upon data provided by the Company's proxy solicitor
and the transfer agent for the common stock, there were approximately 373
holders of record of common stock and approximately 5,700 beneficial holders of
common stock.
The Company currently pays no cash dividends on its common stock. For a
description of financial covenants in the Company's loan agreement that may
restrict dividend payments, see Note D of Notes to Consolidated Financial
Statements.
15
Item 6. Selected Financial Data
Fiscal Years Ended (1)
---------------------------------------------------------------------
(In Thousands, Except January 31, February 1, February 3, January 28, January 29,
Per Share and Operating Data) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Sales $ 265,726 $ 289,593 $ 301,074 $ 265,910 $ 240,925
Gross profit, net of occupancy costs 38,358(2) 86,229 89,085 84,126 75,221
Pre-tax income (loss) (46,885)(2) 10,859 16,940(3) 28,399(3) 9,507(4)
Net Income (loss) (29,063) 6,264 9,773 16,903 5,748
Earnings per share - basic $ (1.86) $ 0.40 $ 0.62 $ 1.06 $ 0.36
Earnings per share - diluted $ (1.86) $ 0.40 $ 0.61 $ 1.05 $ 0.35
---------------------------------------------------------------------
Weighted average shares outstanding
for earnings per share - basic 15,649 15,755 15,770 15,914 15,916
Weighted average shares outstanding
for earnings per share - diluted 15,649 15,833 15,898 16,121 16,324
---------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 42,104 $ 72,320 $ 64,557 $ 55,725 $ 35,671(4)
Inventories 54,972 79,958 58,008 52,649 46,664
Property and equipment, net 35,307 39,216 36,083 26,503 22,922
Total assets 116,399 141,760 132,649 127,295 119,556
Long-term debt (5) 1,000 1,000 1,000 -- 10,000
Shareholders' equity 82,380 111,045 106,085 95,702 81,183
OPERATING DATA:
Net sales per square foot $ 220 $ 234 $ 265 $ 256 $ 265
Number of stores open
at fiscal year end 125 150 157(6) 120(7) 120
(1) The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 31. The fiscal year ended February 3, 1996 covered 53
weeks.
(2) Pre-tax loss for fiscal 1997 includes the $20 million charge recorded in
the second quarter related to the Company's strategy shift and the fourth
quarter charge of $1.6 million for the Company's reduction in work force.
Of the $20 million charge, $13.9 million or 5.2% of sales is reflected in
gross margin.
(3) Includes $2.2 million and $3.2 million of non-recurring income related to
the fiscal 1993 restructuring program recognized in the fiscal years ended
February 3, 1996 and January 28, 1995, respectively.
(4) Includes $15.0 million 1993 restructuring charge.
(5) Includes current portion of long-term debt. Fiscal 1997, 1996 and fiscal
1995 include a $1 million promissory note issued in conjunction with the
acquisition of certain assets of Boston Trading Ltd., Inc. on May 2, 1995.
(6) Includes the 33 Boston Traders(R) Outlet stores, which were acquired as
part of the Boston Trading Ltd., Inc. acquisition.
(7) Excludes the two Dockers(R) Shops and one Original Levi's Store(TM) in
Cambridge, Massachusetts and Minneapolis, Minnesota, which were sold on
January 28, 1995 and the fifteen stores which were closed in connection
with the restructuring program.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table provides a five-year history of the total sales results of
the Company, together with a summary of the number of stores in operation and
the change in the Company's comparable store sales. "Changes in comparable store
sales" measures the percentage change in sales in comparable stores, which are
those stores open for at least one full fiscal year. Changes in comparable store
sales in fiscal 1997 exclude five Designs stores, which were converted to the
Boston Trading Co.(R) store format in fiscal 1997.
Fiscal Years Ended(1)
--------------------------------------------------------------------
Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 30,
1998 1997 1996 1995 1994
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995) (Fiscal 1994) (Fiscal 1993)
- -------------------------------------------------------------------------------------------------------
Total Sales (In Thousands) $ 265,726 $ 289,593 $ 301,074 $ 265,910 $ 240,925
Number of stores in operation
at end of the fiscal year:
Designs (2) 22 44 49 51 64
Levi's(R) Outlet by Designs 58 58 58 61 48
Boston Trading Co.(R)(2) 11 -- -- -- --
Boston Traders(R) Outlets 12 27 35 -- --
Joint Venture: (3)
Original Levi's Stores(TM) 11 11 11 8 8
Levi's(R) Outlet stores 11 10 4 -- --
--------------------------------------------------------------------
Total stores 125 150 157 120 120
Comparable stores 112 142 97 91 102
Changes in total sales (8)% (4)% 13% 10% 18%
Changes in comparable store sales (10)% (5)% 0.5% (5)% 6%
(1) The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 31. The fiscal year ended February 3, 1996 covered 53
weeks. Comparable store sales for fiscal 1996 were based upon 52-week
comparisons.
(2) Boston Trading Co.(R) includes five Designs stores which were converted to
the multi-brand Boston Trading Co.(R) format.
(3) Until January 28, 1995, all eight Original Levi's Stores(TM) were
wholly-owned by the Company. See discussion of joint venture below.
RESULTS OF OPERATIONS
SALES
Sales for fiscal 1997 were $265.7 million, a decrease of 8%, compared with
fiscal 1996 sales of $289.6 million. Sales for fiscal 1996 decreased by 4% to
$289.6 million as compared to fiscal 1995 sales of $301.1 million. There were 52
weeks in fiscal 1997 and 1996 and 53 weeks in fiscal 1995. The decrease in sales
in fiscal 1997 was due to a 10% decrease in comparable store sales and 31 store
closings, partially offset by sales from new stores that were opened during the
fiscal year. Comparable store sales decreases were due primarily to lower sales
in men's Levi's(R) brand jeans and tops associated with limited assortment and
reduced demand for Levi's(R) brand product, and were partially offset by
increased sales of women's Levi's(R) brand jeans and men's and women's
Dockers(R) brand apparel. In fiscal 1997, the Company generated $3.4 million in
sales of other name brand products compared to fiscal 1996 sales of $0.9 million
as the Company began to implement its refocused brand strategy beginning in the
third quarter of fiscal 1997. The Company anticipates decreases in comparable
store sales through the first and second quarters of fiscal 1998.
GROSS MARGIN
Gross margin rate, after occupancy costs, equaled 14.4% of sales for fiscal
1997, 29.8% in fiscal 1996 and 29.6% in fiscal 1995. The decrease in fiscal 1997
was primarily attributable to a $13.9 million charge for markdowns of Boston
Traders(R) brand merchandise which was included in the second quarter charge for
the termination of the Company's private label product development program,
(discussed below under "Restructuring"); approximately $5.6 million related to
fourth quarter adjustments for inventory shrinkage against physical inventory
results and reserves against pending resolution of vendor discussions regarding
proof of delivery of certain goods; increases in promotional markdowns
associated with Levi's(R) brand products in fiscal 1997; decreases in initial
margin on certain Levi's(R) brand merchandise; and an increase in occupancy
costs as a percentage of sales due to the effect of a lower sales base than
during the prior year.
17
The increase in gross margin in fiscal 1996 as compared to fiscal 1995 was
primarily attributable to a 1.2 percentage point increase in merchandise margins
as a result of increased initial margins and improved shrink results, partially
offset by markdowns associated with Boston Traders(R) brand products and a
$391,000 provision for LIFO. Gross margin in fiscal 1996 was also adversely
affected by a one percent increase in occupancy costs due to the effect of a
lower sales base compared to the prior year. The Company reviews its inventory
levels in order to identify slow-moving merchandise and records markdowns to
clear such merchandise.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses as a percentage of sales increased
to 24.7% or $65.7 million in fiscal 1997, from 22.8% of sales or $65.9 million
in fiscal 1996, and 22.2% or $67.0 million in fiscal 1995. The increase in
selling, general and administrative expenses as a percentage of sales in fiscal
1997 was due to decreased sales as compared to prior year. On a dollar basis,
expenses decreased slightly by $0.3 million as a result of the Company's cost
reduction efforts in fiscal 1997. The Company recorded an impairment charge of
$378,000 in fiscal 1997 in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This charge reflects the estimated
unrecoverable carrying value of the assets of one store as compared to the fair
value of those assets based on projected discounted future cash flows. The
Company intends to continually monitor and, where appropriate, lower operating
expenses throughout fiscal 1998.
Selling, general and administrative expenses for fiscal 1997, 1996 and 1995
included costs incurred to design, source and distribute Boston Traders(R) brand
products totaling $1.9 million, $5.1 million and $2.5 million, respectively.
RESTRUCTURING
In the second quarter of fiscal 1997, the Company recorded a pre-tax charge of
$20 million related to its shift in strategy away from the vertically integrated
Boston Traders(R) private label concept to a strategy with greater emphasis on
name brands. This decision involved the liquidation of Boston Traders(R) brand
products, the closure of the Company's New York City product development office
and the closure of 17 Designs stores and 16 Boston Traders(R) Outlet stores.
This pre-tax charge included cash costs of approximately $6.1 million related to
lease terminations, the cost of canceling private label fabric commitments,
severance associated with the closing of the New York office, and other
miscellaneous expenses. The remainder of the $20 million charge consisted of
non-cash costs of approximately $13.9 million, which included approximately
$12.4 million of markdowns at cost related to the liquidation of Boston
Traders(R) brand product and $1.5 million for asset impairment charges
associated with store closings. Merchandise markdowns and costs associated with
the cancellation of fabric commitments, which total approximately $13.9 million,
are accounted for in cost of goods sold. The remaining amounts related to lease
termination costs, asset impairment charges, severance and other costs, which
total approximately $6.1 million, are accounted for in the restructuring charge
on the Company's Consolidated Statements of Income. At the end of fiscal 1997,
the store closing program was essentially complete with 31 of the 33 stores
planned for closure having been closed. The remaining two stores were closed by
the end of March 1998. In addition, the Company completed fabric commitment
cancellations with most private label fabric and garment suppliers by the end of
fiscal 1997.
The estimated earnings and cash flow benefits expected, barring unforeseen
circumstances, to be derived from these actions for fiscal year 1998 are $8.8
million and $15.8 million, and for fiscal 1999 are $8.8 million and $8.8
million, respectively. These estimates include a federal income tax refund
totaling $12.9 million received in March and April 1998 related to net operating
losses carried back against the Company's taxable income in prior years, offset
by cash payments for lease termination costs, severance costs and other
miscellaneous costs relating to the change in strategy.
In the fourth quarter of fiscal year 1997, the Company incurred an additional
pre-tax charge of $1.6 million relating primarily to severance, benefits and
other costs associated with a reduction in its home office and field staff. This
reduction in force resulted in the elimination of 47 positions, or approximately
25%, of the Company's headquarters and field management staff. This charge is
accounted for in the restructuring charge in the Company's Consolidated
Statements of Income for the year ended January 31, 1998. The estimated earnings
and cash flow benefits expected, barring unforeseen circumstances, to be derived
from this charge for fiscal year 1998 are $3.3 million and $1.7 million,
respectively. Both the estimated earnings and cash flow benefits expected in
fiscal year 1999 are $3.3 million.
At January 31, 1998, the Company had a balance of $1.8 million accrued in the
reserve for lease terminations for the two remaining stores scheduled for
closure, outstanding fabric commitments, and severance costs for the fourth
quarter reduction in force. Inventory includes markdown reserves of $830,000
against the remaining Boston Traders(R) brand product. At year end, this product
had been allocated for sales in the eleven Boston Traders(R) Outlet stores.
18
Management believes that, barring unforeseen circumstances, these reserves are
adequate to cover the Company's remaining obligations with regards to lease
terminations, fabric commitments, severance payments and Boston Traders(R)
product liquidation.
In fiscal 1993, the Company recorded a non-recurring pre-tax charge of $15.0
million to cover the costs associated with the closing of 15 of its poorest
performing Designs stores. Total costs to close these 15 stores totaled $9.6
million as compared to the original pre-tax estimate of $15.0 million, primarily
due to favorable negotiations with landlords. The remaining reserve was
recognized as non-recurring pre-tax income in fiscal 1995 and fiscal 1994 in the
amounts of $2.2 million and $3.2 million respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for fiscal year 1997 increased to $11.2
million from $10.4 million in fiscal 1996, primarily due to capital expenditures
associated with the Company's six new Boston Trading Co.(R) stores. Depreciation
and amortization expense for fiscal year 1996 increased to $10.4 million from
$8.8 million in fiscal 1995, primarily due to capital expenditures associated
with new and remodeled stores, the Company's new corporate offices and the
upgrade of information and technology systems. "See Liquidity and Capital
Resources--Capital Expenditures."
INTEREST EXPENSE
Interest expense for fiscal 1997 was $851,000 compared to $197,000 in fiscal
1996 and $196,000 in 1995. This increase is primarily a result of borrowings
under the Company's credit facility. The Company had no borrowings under its
credit facilities in fiscal years 1996 and 1995. See "Liquidity and Capital
Resources." The Company anticipates, barring unforeseen circumstances, that
interest expense will decrease in fiscal 1998 as a result of reduced borrowing
levels as compared to fiscal 1997.
INTEREST INCOME
Interest income for fiscal 1997 decreased to $145,000 from $1.2 million in
fiscal 1996 and $1.6 million in fiscal 1995. This decrease was attributable to
limited investment activity during fiscal 1997 as compared to the two prior
years. The Company anticipates that interest income will be minimal through
fiscal 1998. See "Liquidity and Capital Resources."
NET INCOME
Net income for fiscal 1997 was a loss of $29.1 million or $1.86 per share as
compared with net income of $6.3 million or $0.40 per share in fiscal 1996, and
net income of $9.8 million or $0.62 per share in fiscal 1995. The impact of the
non-recurring charges in fiscal 1997 was $20 million pre-tax or $0.75 per share
after tax for the second quarter charge related to the Company's shift in
strategy and $1.6 million pre-tax or $0.06 per share related to the Company's
fourth quarter reduction in force. Fiscal 1995 results include income related to
the 1993 restructuring, as discussed above, of $2.2 million or $0.08 per share.
SEASONALITY
(Sales Dollars
in Thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995
- --------------------------------------------------------------------------------
First quarter $55,470 20.9% $59,336 20.5% $57,337 19.0%
Second quarter 64,543 24.3% 66,524 23.0% 66,993 22.3%
Third quarter 77,459 29.1% 84,958 29.3% 89,217 29.6%
Fourth quarter 68,254 25.7% 78,775 27.2% 87,527 29.1%
---------------------------------------------------------
$265,726 100.0% $289,593 100.0% $301,074 100.0%
A comparison of sales in each quarter of the past three fiscal years is
presented above. The amounts shown are not necessarily indicative of actual
trends, since such amounts also reflect the addition of new stores and the
remodeling and closing of others during these periods. 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. As the Company's
percentage of outlet store business increases in relation to total sales, the
Company expects that the third and fourth quarters will become less significant
as a percentage to total sales. This is due to a difference in seasonality of
the Company's outlet business as compared with the mall-based speciality stores.
A comparison of quarterly sales, gross profit, net income and net income per
share for the past two fiscal years is presented in Note N of Notes to
Consolidated Financial Statements.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for operating expenses, including cash
outlays associated with inventory purchases and capital expenditures for new and
remodeled stores. The Company expects that cash flow from operations, short-term
revolving borrowings, its $12.9 million federal income tax refund and trade
credit will enable it to finance its current working capital, store remodeling
and expansion requirements.
The following table sets forth financial data regarding the Company's liquidity
position at the end of the past three fiscal years:
Fiscal Years
-----------------------------------
(Dollars in Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Cash (used for) provided by operations $ (7,029) $ (2,145) $ 10,770
Working capital 42,104 72,320 64,557
Current ratio 2.4:1 4.0:1 4.3:1
To date, the Company has financed its working capital requirements and expansion
program with cash flow from operations, borrowings under the Company's credit
facility, and proceeds from Common Stock offerings. Cash (used for) provided by
operating activities was ($7.0) million, ($2.1) million, and $10.8 million in
fiscal 1997, 1996 and 1995, respectively. The Company's reduced cash flow from
operations in fiscal 1997 is due to reduced sales volumes and cash outlays
incurred related to landlord terminations, cancellation of fabric commitments
and severance payments.
At January 31, 1998, the Company was in a net borrowing position of $8.4 million
compared to a net cash position of $8.3 million at February 1, 1997. In March
1998, subsequent to fiscal year end, the Company used a portion of the cash
received from the $12.9 million federal income tax refund to reduce the
outstanding balance of its credit facility. The following table provides a
comparative analysis of the Company's cash, investments and borrowings at the
end of fiscal 1997 and fiscal 1996.
January 31, February 1,
1998 1997
(In Thousands) (Fiscal 1997) (Fiscal 1996)
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 1,473 $3,390
Short-term investments - 5,887
--------------------------
Total cash and investments $ 1,473 $9,277
Total short-term borrowings $ 9,828 $1,000
Short-term investments of $5.9 million at February 1, 1997 consisted of
government securities with a weighted average maturity of approximately 1.7
years and a weighted average interest rate of 5.33%. These investments were sold
in the first quarter of fiscal 1997 for a realized loss of $102,300.
At January 31, 1998, total inventories decreased 31% to $55 million from $80
million at February 1, 1997. This decrease was primarily due to the liquidation
of Boston Traders(R) brand merchandise as well as reduced purchases of Levi
Strauss & Co. brand product in the third and fourth quarters of fiscal 1997 as
compared to the prior year. Boston Traders(R) brand products represented $1.6
million, net of markdown reserves, or 3% of total inventory at January 31, 1998.
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 its 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. During fiscal 1997, Levi
Strauss & Co. extended the Company's normal trade terms during peak purchasing
periods. At the end of fiscal 1997, the Company was current with all outstanding
merchandise payables to all vendors. The Boston Traders(R) brand product
required the Company to source its own product predominantly from various
offshore vendors. Payment to these vendors were through the use of commercial
and trade letters of credit. Given the Company's shift in strategy away from its
own product development, the use of commercial and trade letters of credits as a
payment method will be minimal and the Company expects that purchases of branded
merchandise will be under customary industry credit terms.
On December 10, 1997, the Company and BankBoston, N.A. entered into a credit
agreement, which was amended on January 31, 1998 (as amended, the "Credit
Agreement"). The credit facility established by the Credit Agreement,
20
which terminates on June 30, 1999, consists of a revolving line of credit
permitting the Company to borrow up to $25 million. Under the facility, the
Company may cause BankBoston to issue documentary and standby letters of credit
up to $2 million. Availability of the unused revolving line of credit is subject
to borrowing base requirements and compliance with certain earnings, net worth
and inventory turnover covenants and a cash flow ratio covenant which becomes
effective beginning in the fourth quarter of fiscal 1998. The Company's
borrowings under the credit facility are secured by a security interest in all
of the Company's Levi Strauss & Co. brand inventory, accounts receivable and
certain intangible assets of the Company, excluding all assets of the joint
venture and the Company's Boston Traders(R) trademark and its other related
trademarks. The security interest may be released if the Company achieves
certain minimum cash flow ratio requirements. At the option of the Company,
borrowings under this facility bear interest at BankBoston N.A.'s prime rate or
LIBOR-based fixed rates (depending upon the Company's quarterly ratio of cash
flow to fixed charges). 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. At January 31, 1998, the Company had borrowings of
$8.8 million outstanding. There were no outstanding borrowings at February 1,
1997. Effective January 31, 1998, the Company and BankBoston, N.A. agreed to
amend the Credit Agreement to exclude certain non-recurring charges from the
earnings calculation for the fourth quarter. As a result, the Company was in
compliance with all debt covenants at the end of fiscal 1997.
In connection with the Company's acquisition of certain assets of Boston Trading
Ltd., Inc. in May 1995, the Company delivered a non-negotiable promissory note
in the principal amount of $1,000,000 (the "Purchase Note"), which was payable
in two equal installments through May 1997. The note bears interest at the
published prime rate and is payable semi-annually from the date of acquisition.
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 the $500,000 payments of principal on the
Purchase Note that were due on May 2, 1996 and May 2, 1997. The Company paid
interest on the original principal amount of the Purchase Note through May 2,
1996 and has 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 refusing 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 was damaged 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. Barring
unforeseen circumstances, management of the Company does not believe that the
result of this litigation will have a material adverse effect on the Company's
business or financial condition.
In March and April 1998, the Company received a federal income tax refund
totaling $12.9 million because of losses incurred by the Company during fiscal
1997, which were carried back against federal income tax payments in prior
years. The Company used a portion of the cash received to reduce the outstanding
borrowings under the credit facility.
During the first quarter of fiscal 1998, the Internal Revenue Service ("IRS")
completed an examination of the Company's federal income tax returns for fiscal
years 1991 through 1995. Taxes on the adjustments proposed by the IRS, excluding
interest, amount to approximately $4.9 million. The IRS has challenged, among
other things, the timing of certain income and expense deductions, resulting in
differences in the amounts of federal income taxes previously paid by the
Company. The Company intends to protest the proposed adjustments through the IRS
appeals process. The Company believes that these adjustments will be reduced
through the appeals process and, in the opinion of management, adequate
provisions have been made for all additional income taxes and interest the
Company may be required to pay. The Company believes that any adjustments to
prior periods that may arise as a result of this process will not have a
material impact on the results of operations and financial condition of the
Company.
During the third quarter of fiscal 1994, the Company's Board of Directors
authorized the repurchase of up to two million shares of the Company's Common
Stock. During fiscal 1996, the Company repurchased and held in treasury 280,900
shares at a cost of $1.8 million. No shares of the Company's Common Stock were
repurchased during fiscal 1997.
Year 2000
Most of the Company's computer and process control systems were designed to use
only two digits to represent years. As a result they may not recognize "00" as
representing the Year 2000, but rather the year 1900, which could result in
errors or system failures. The Company is in the process of converting its
technology and information systems to be
21
Year 2000 compliant. The Company expects to spend approximately $500,000 in
conversion and upgrade costs, primarily in fiscal 1998, to accomplish this.
Barring unforeseen circumstances, the Company anticipates that the conversion
will be complete by the end of calendar year 1999.
CAPITAL EXPENDITURES
The following table sets forth the stores opened, remodeled and closed and the
capital expenditures incurred for the fiscal years presented:
1997 1996 1995 (1)
- --------------------------------------------------------------------------------
Designs -- -- 1
Boston Trading Co.(R) 6 -- --
Boston Traders(R) Outlets 1 1 2
Joint Venture:
Original Levi's Stores(TM) -- -- 3
Levi's(R) Outlet stores 1 6 4
------------------------------------------
Total new stores 8 7 10
Remodeled Levi's(R) Outlet by Designs 5 5 7
Remodeled Designs -- -- 11
Remodeled Boston Traders(R) Outlets 6 1 --
------------------------------------------
Total remodeled stores 11 6 18
------------------------------------------
Total closed stores 32 15 19
------------------------------------------
Capital expenditures (000's) $ 6,554 $ 2,775 $10,971
- --------------------------------------------------------------------------------
(1) Excludes Boston Traders(R) Outlet stores acquired in fiscal 1995.
In addition to the capital expenditures incurred related to new and remodeled
stores, the Company incurred capital expenditures of $1.2 million in fiscal 1997
related to management information systems and other corporate expenditures.
On January 28, 1995, Designs JV Corp., a wholly-owned subsidiary of the Company,
and a wholly-owned subsidiary of Levi's Only Stores, Inc., a wholly-owned
subsidiary of Levi Strauss and 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 their interest in the
joint venture after five years. The Company does not anticipate that the OLS
Partnership will open any additional Original Levi's Stores(TM) or Levi's(R)
Outlet stores in fiscal 1998. At the end of fiscal 1997, the OLS Partnership
operated eleven Original Levi's Stores(TM) and eleven Levi's(R) Outlets. In
connection with the formation of the OLSPartnership, Designs JV Corp.
contributed, for a 70% interest in the joint venture, eight of the Company's
then existing Original Levi's Stores(TM) and three leases for then unopened
stores. At the same time, LDJV Inc., the joint venture subsidiary of Levi's Only
Stores, Inc., contributed approximately $4.7 million in cash to the joint
venture in exchange for a 30% interest. During fiscal 1997, the OLS Partnership
opened one Levi's(R) Outlet store which was funded by cash flow from operations.
In fiscal 1997, the OLS Partnership distributed $5.7 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 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 one year
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. During the third quarter of fiscal 1997,
the term of the OLS Credit Agreement was extended through September 30, 1998,
unless earlier terminated pursuant to other provisions of the OLS Credit
Agreement. This credit facility bears interest at BankBoston, N.A.'s prime rate.
The OLS Credit Agreement also provides that there may not be credit advances
outstanding on the last day of the fiscal year. There were no credit advances
under this facility in fiscal 1997.
In 1994, Levi Strauss & Co. advised the Company that it did not see any
additional growth in the Levi's(R) Outlet by Designs store format, other than
additional outlet stores that might be opened by the OLS Partnership. As such,
the
22
Company did not open any Levi's(R) Outlet by Designs stores during fiscal 1997.
In addition, the OLS Partnership has opened its own outlets, which may have an
impact on the availability of goods to the Levi's(R) Outlet by Designs stores.
In November 1996, the Company and Levi Strauss & Co. entered into a new
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
particular store is the period co-terminous with the lease term for such store
(including extension options in effect in November 1996). The leases (including
extension options in effect in November 1996) relating to approximately
two-thirds of the Levi's(R) Outlet by Designs stores open at the end of fiscal
1997 expire in or prior to fiscal 2009 and all, except for five such leases,
expire in or prior to fiscal 2011.
The Company continually evaluates discretionary investments in new projects that
may complement its existing business. Further, as leases expire, the Company may
lose the right to use the Levi's(R) trademark in connection with certain
Levi's(R) Outlet by Designs stores. The Company continues to evaluate the
performance of its existing stores and to consider ways to enhance its outlet
business. As a result of this process, certain store locations could be closed
or relocated within a shopping center in the future.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires that changes in comprehensive income be shown on a separate
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 becomes effective for fiscal years beginning
after December 15, 1997. The Company expects to adopt this Standard beginning in
the first quarter of the fiscal year ending January 30, 1999. The Company does
not expect the adoption of this statement to have a material impact on the
Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. SFAS 131 becomes effective for fiscal years
beginning after December 15, 1997. The Company will adopt this standard for the
fiscal year ending January 30, 1999. The Company has not yet determined the
impact of this standard.
Effects of Inflation
Although the Company's operations are influenced by general economic trends, the
Company does not believe that inflation has had a material effect on the results
of its operations in the last three fiscal years.
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 report filed with the United States Securities and Exchange
Commission, as an exhibit to this Annual Report on Form 10-K, which identifies
certain risks and uncertainties that may have an impact on future sales,
earnings and the direction of the Company.
Item 8. Financial Statements and Supplementary Data
The financial statements and other information required by this item are set
forth in the "Index to Financial Statements" on page 27 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
23
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors and executive officers of the Company
is incorporated herein by reference to the Company's definitive proxy statement
expected to be filed within 120 days of the end of the fiscal year ended January
31, 1998.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated herein by
reference to the Company's definitive proxy statement expected to be filed
within 120 days of the end of the fiscal year ended January 31, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Company's definitive
proxy statement expected to be filed within 120 days of the end of the fiscal
year ended January 31, 1998.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions
is incorporated by reference to the Company's definitive proxy statement to be
filed within 120 days of the fiscal year ended January 31, 1998.
24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
14(a)(1) Financial Statements
The list of consolidated financial statements and notes required by this
Item 14(a)(1) is set forth in the "Index to Financial Statements" on page 27 of
this Report.
14(a)(2) Financial Statement Schedules
All schedules have been omitted because the required information is not
applicable or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the financial
statements or notes thereto.
14(a)(3) Exhibits
The list of exhibits required by this Item 14(a)(3) is set forth in the
"Index to Exhibits" on pages 47 to 48 of this Report.
14(b) Reports on Form 8-K
The Company reported under item 5 on Form 8-K, dated January 5, 1998, that
on December 10, 1998 the Company entered into a Credit Agreement and Security
Agreement, each between the Company and BankBoston, N.A.
The Company reported under Item 5 of Form 8-K, dated April 1, 1998, that
effective January 31, 1998, the Company and BankBoston N.A. entered into a First
Amendment to the Credit Agreement. In addition, the Company reported that on
March 31, 1998, the Company received a federal income tax refund in the amount
of approximately $12.7 million related to losses incurred during fiscal 1997
which were carried back against federal income taxes paid by the Company in
prior years.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DESIGNS, INC.
May 1, 1998
By: /s/ JOEL H. REICHMAN
--------------------
Joel H. Reichman
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated, on May 1, 1998.
SIGNATURES
/s/ JOEL H. REICHMAN President and Chief Executive Officer
- ----------------------- and Director (Principal Executive Officer)
Joel H. Reichman
/s/ CAROLYN R. FAULKNER Vice President, Chief Financial Officer
- ----------------------- and Treasurer
Carolyn R. Faulkner
/s/ STANLEY I. BERGER Chairman of the Board and Director
- -----------------------
Stanley I. Berger
/s/ JAMES G. GRONINGER Director
- -----------------------
James G. Groninger
/s/ MELVIN SHAPIRO Director
- -----------------------
Melvin Shapiro
/s/ BERNARD M. MANUEL Director
- -----------------------
Bernard M. Manuel
/s/ PETER L. THIGPEN Director
- -----------------------
Peter L. Thigpen
26
DESIGNS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Management's Responsibility for Financial Reporting 28
Report of Independent Accountants 29
Consolidated Financial Statements
Consolidated Balance Sheets at January 31, 1998 and February 1, 1997 30
Consolidated Statements of Income for the three years ended
January 31, 1998, February 1, 1997 and February 3, 1996 31
Statements of Changes in Stockholders' Equity for the three years
ended January 31, 1998, February 1, 1997 and February 3, 1996 32
Statements of Cash Flows for the three years ended
January 31, 1998, February 1, 1997 and February 3, 1996 33
Notes to Consolidated Financial Statements, except Note N 34-45
Not Covered by Report of Independent Accountants:
Note N - Selected Quarterly Data 46
27
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The integrity and objectivity of the financial statements and the related
financial information in this report are the responsibility of the management of
the Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, where necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization and the
accounting records provide a reliable basis for the preparation of the financial
statements. The system of internal accounting control is regularly reviewed by
management and improved and modified as necessary in response to changing
business conditions.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with management and the Company's independent
accountants to review matters relating to the Company's financial reporting, the
adequacy of internal accounting control and the scope and results of audit work.
The independent accountants have free access to the Committee.
Coopers & Lybrand L.L.P., independent accountants, have been engaged to examine
the financial statements of the Company. The Report of Independent Accountants
expresses an opinion as to the fair presentation of the financial statements in
accordance with generally accepted accounting principles and is based on an
audit conducted in accordance with generally accepted auditing standards.
/s/ JOEL H. REICHMAN /s/ CAROLYN R. FAULKNER
Joel H. Reichman Carolyn R. Faulkner
President and Chief Executive Officer Vice President, Chief Financial
Officer and Treasurer
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Designs, Inc:
We have audited the accompanying consolidated balance sheets of Designs, Inc. as
of January 31, 1998 and February 1, 1997 and the related consolidated statements
of income, changes in stockholders' equity and cash flows for each of the three
years in the period ended January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Designs, Inc. as
of January 31, 1998 and February 1, 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1998 in conformity with generally accepted accounting principles.
Boston, Massachusetts /s/ COOPERS & LYBRAND LLP
March 17, 1998
29
CONSOLIDATED BALANCE SHEETS
January 31, 1998 February 1, 1997
(In Thousands) (Fiscal 1997) (Fiscal 1996)
- ----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,473 $ 3,390
Short-term investments -- 5,887
Accounts receivable 115 558
Inventories 54,972 79,958
Income taxes refundable and deferred 13,857 1,160
Pre-opening costs, net -- 524
Prepaid expenses 1,015 4,834
----------------------------------
Total current assets 71,432 96,311
----------------------------------
Property and equipment, net of
accumulated depreciation and amortization 35,307 39,216
Other assets:
Deferred income taxes 6,362 2,743
Intangible assets, net 2,945 3,078
Other assets 353 412
----------------------------------
Total assets $ 116,399 $ 141,760
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,821 $ 12,194
Accrued expenses and other current liabilities 6,129 7,046
Accrued rent 2,751 2,398
Reserve for severance and store closings 1,799 --
Income taxes payable -- 1,353
Notes payable 9,828 1,000
----------------------------------
Total current liabilities 29,328 23,991
----------------------------------
Commitments and contingencies
Minority interest 4,691 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,16,012,000, and 15,873,000 shares issued
at January 31, 1998 and February 1, 1997,
respectively 160 159
Additional paid-in capital 53,652 53,320
Retained earnings 30,395 59,393
Treasury stock at cost, 281,000 shares at
January 31, 1998 and February 1, 1997 (1,827) (1,827)
----------------------------------
Total stockholders' equity 82,380 111,045
----------------------------------
Total liabilities and stockholders' equity $ 116,399 $ 141,760
----------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF INCOME
For the fiscal years ending
-------------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
(In Thousands, Except Per Share Data) (Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
- ----------------------------------------------------------------------------------------------
Sales $ 265,726 $ 289,593 $ 301,074
Cost of goods sold including occupancy 227,368 203,364 211,989
-------------------------------------------------
Gross profit 38,358 86,229 89,085
-------------------------------------------------
Expenses:
Selling, general and administrative 65,657 65,936 66,988
Restructuring charge (income) 7,646 -- (2,200)
Depreciation and amortization 11,234 10,403 8,752
-------------------------------------------------
Total expenses 84,537 76,339 73,540
-------------------------------------------------
Operating income (loss) (46,179) 9,890 15,545
Interest expense 851 197 196
Interest income 145 1,166 1,591
-------------------------------------------------
Income (loss) before minority interest
and income taxes (46,885) 10,859 16,940
-------------------------------------------------
Less minority interest (323) 495 425
-------------------------------------------------
Income (loss) before income taxes (46,562) 10,364 16,515
Provision (benefit) for income taxes (17,499) 4,100 6,742
-------------------------------------------------
Net income (loss) $ (29,063) $ 6,264 $ 9,773
-------------------------------------------------
Earnings per share - Basic $ (1.86) $ 0.40 $ 0.62
Earnings per share - Diluted $ (1.86) $ 0.40 $ 0.61
Weighted average number of common
shares outstanding 15,649 15,755 15,770
Weighted average number of common and
dilutive common equivalent shares outstanding 15,649 15,833 15,898
The accompanying notes are an integral part of the
consolidated financial statements.
31
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the fiscal years ending January 31, 1998, February 1, 1997
and February 3, 1996
Additional
Common Stock Treasury Stock Paid-in Retained
(In Thousands) Shares Amounts Shares Amounts Capital Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 28, 1995 15,755 $ 157 $ 52,619 $ 42,926 $ 95,702
-----------------------------------------------------------------------------------------
Issuance of Common Stock:
Exercises under option programs 63 1 148(1) 149
Unrealized gain on investments 461 461
Net income 9,773 9,773
-----------------------------------------------------------------------------------------
Balance at February 3, 1996 15,818 $ 158 $ 52,767 $ 53,160 $106,085
-----------------------------------------------------------------------------------------
Issuance of Common Stock:
Exercises under option programs 5 24(1) 24
Repurchase of 281,000 shares under
the stock repurchase program (281) $ (1,827) (1,827)
Issuance of 50,000 shares as part of the
Boston Trading Ltd., Inc.
Acquisition 50 1 529 530
Unrealized loss on investments (31) (31)
Net income 6,264 6,264
-----------------------------------------------------------------------------------------
Balance at February 1, 1997 15,873 $ 159 (281) $ (1,827) $ 53,320 $ 59,393 $111,045
-----------------------------------------------------------------------------------------
Issuance of Common Stock:
Exercises under option programs 144 1 351(1) 352
Retirement of shares (5) (19) (19)
Unrealized gain on investments 65 65
Net income (loss) (29,063) (29,063)
-----------------------------------------------------------------------------------------
Balance at January 31, 1998 16,012 $ 160 (281) $ (1,827) $ 53,652 $ 30,395 $ 82,380
-----------------------------------------------------------------------------------------
(1) Net of related tax benefit
The accompanying notes are an integral part of the
consolidated financial statements.
32
STATEMENTS OF CASH FLOWS
For the fiscal years ending
----------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
(In Thousands, Except Per Share Data) (Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(29,063) $ 6,264 $ 9,773
Adjustments to reconcile to net cash
provided by (used for) operating activities:
Depreciation and amortization 11,234 10,403 8,752
Deferred income taxes (5,015) (262) (560)
Minority interest (323) 495 425
Loss from sale of investments 102 17 71
Loss (gain) from disposal of property and equipment 398 (35) 1,382
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 443 (85) 3,750
Inventories 12,598 (21,950) (2,342)
Prepaid expenses 3,819 (993) (2,656)
Income taxes (12,697) 1,480 (98)
Accounts payable (3,373) 4,009 (5,025)
Restructuring reserve 15,412 -- --
Accrued expenses and other current liabilities (917) (1,300) 2,402
Accrued rent 353 (188) (5,104)
----------------------------------------------
Net cash (used for) provided by operating activities (7,029) (2,145) 10,770
----------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (7,762) (12,290) (18,021)
Incurrence of pre-opening costs (325) (640) (1,582)
Proceeds from disposal of property and equipment 13 151 92
Sale of investments 5,888 6,072 4,483
(Increase) Reduction in other assets (153) 322 (218)
----------------------------------------------
Net cash used for investing activities (2,339) (6,385) (15,246)
----------------------------------------------
Cash flows from financing activities:
Net borrowings under credit facility 8,828 -- --
Payment for acquisition of a business -- -- (5,428)
Repurchase of common stock -- (1,827) --
Proceeds from minority equityholder of joint venture -- -- 1,560
Distributions to minority equityholder of joint venture (1,710) (218) (287)
Issuance of common stock under option program (1) 333 24 148
----------------------------------------------
Net cash provided by (used for) financing activities 7,451 (2,021) (4,007)
----------------------------------------------
Net decrease in cash and cash equivalents (1,917) (10,551) (8,483)
----------------------------------------------
Cash and cash equivalents:
Beginning of the year 3,390 13,941 22,424
----------------------------------------------
End of the year $ 1,473 $ 3,390 $ 13,941
----------------------------------------------
(1) Net of related tax benefit.
The accompanying notes are an integral part of the consolidated financial
statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Line of Business
Designs, Inc. (the "Company") is engaged in the retail sales of clothing and
accessories. Levi Strauss & Co. is the most significant vendor of the Company,
representing a substantial portion of the Company's merchandise purchases.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries and affiliates. All intercompany accounts, transactions and
profits are eliminated.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent liabilities as of the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from estimates.
Fiscal Year
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 31. Fiscal years 1997, 1996 and 1995 ended on January 31,
1998, February 1, 1997 and February 3, 1996, respectively. Fiscal years 1997 and
1996 were 52-week periods, whereas fiscal year 1995 was a 53-week period.
Cash and Cash Equivalents
Short-term investments, which have a maturity of ninety days or less when
acquired, are considered cash equivalents. The carrying value approximates fair
value.
Inventories
Substantially all merchandise inventories are valued at the lower of cost or
market using the retail method on the last-in first-out basis ("LIFO"). At
January 31, 1998, approximately $1.6 million of Boston Traders(R) liquidation
merchandise has been valued on the first-in first-out ("FIFO") basis. If all
inventory had been valued on the FIFO basis, inventory at January 31, 1998 and
February 1, 1997 would have been approximately $56,698,000 and $81,150,000
respectively. The (provision) benefit for LIFO was ($534,000), ($391,000) and
$924,000 in fiscal 1997, 1996 and 1995, respectively.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while repairs and maintenance are charged to expense as incurred.
Upon retirement or other disposition, the cost and related depreciation of the
assets are removed from the accounts and the resulting gain or loss is reflected
in income. Depreciation is computed on the straight-line method over the assets'
estimated useful lives as follows:
Motor vehicles Five years
Store furnishings Five to ten years
Equipment Five to eight years
Leasehold improvements Lesser of useful lives or related lease life
Software development Three to five years
Investments
The Company's investments, consisting primarily of government securities, are
classified as available for sale and are recorded at fair value, in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Fair value is based upon
quoted market prices on the last business day of the fiscal year. Unrealized
changes in value are recorded as a component of stockholders' equity, net of the
related deferred tax asset or liability. The Company had no unrealized losses in
fiscal year 1997 and had unrealized losses of $105,000 in fiscal year 1996.
Intangibles
Trademarks and licensing agreements acquired are amortized on a straight line
basis over 15 years and three years, respectively. Amortization expense for
trademarks and licensing agreements was $312,000 and $361,000 for fiscal 1997
and 1996, respectively. Accumulated amortization for trademark and licensing was
$826,000 and $514,000 for fiscal 1997 and 1996, respectively.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pre-opening costs
Store opening costs, consisting primarily of payroll and rent, are capitalized
when incurred and charged to expense during the first 12 months of store
operations. Amortization expense of pre-opening costs was $849,000, $1,000,000
and $1,180,000 for fiscal 1997, 1996 and 1995, respectively.
Minority Interest
As more fully discussed in Note K, minority interest at January 31, 1998 and
February 1, 1997 represents LDJV Inc.'s 30% interest in The Designs/OLS
Partnership (the "OLS Partnership"), a joint venture between Designs JV Corp., a
wholly-owned subsidiary of the Company, and LDJV Inc., a wholly-owned subsidiary
of Levi's Only Stores, Inc. which is a wholly-owned subsidiary of Levi Strauss &
Co.
Advertising Costs
Advertising costs are expensed as incurred.
Net Income Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") for fiscal 1997 and all historical net
earnings per share data presented has been restated to conform to the provisions
of this statement. SFAS 128 established a different method of computing net
earnings per share than was required under the provisions of Accounting
Principles Board Opinion No. 15. The following table reconciles the numerator
and the denominators of the basic and diluted earnings per share (EPS)
computation as shown on the Consolidated Statements of Income.
Fiscal Years Ending
----------------------------------------
January 31, February 1, February 3,
(In Thousands Except Per Share Data) 1998 1997 1996
- ------------------------------------------------------------------------------------------
Basic EPS Computation
Numerator:
Net income (loss) $(29,063) $ 6,264 $ 9,773
Denominator:
Weighted average common shares outstanding 15,649 15,755 15,770
----------------------------------------
Basic EPS $ (1.86) $ 0.40 $ 0.62
----------------------------------------
Diluted EPS Computation
Numerator:
Net income (loss) $(29,063) $ 6,264 $ 9,773
Denominator:
Weighted average common shares outstanding 15,649 15,755 15,770
Stock options, excluding anti-dilutive options
of 34 shares for January 31, 1998 -- 78 128
----------------------------------------
Total Shares 15,649 15,833 15,898
----------------------------------------
Diluted EPS $ (1.86) $ 0.40 $ 0.61
----------------------------------------
Options to purchase shares of the Company's Common Stock of 2,026,700, 1,670,300
and 1,447,500 for fiscal years 1997, 1996 and 1995, respectively, were
outstanding during the respective periods but were not included in the
computation of diluted EPS because the price of the exercise options was greater
than the average market price per share of Common Stock for the period reported.
These options, which all expire between June 2, 2002 and June 10, 2007, have
exercise prices that range from $4.88 to $21.50 in fiscal 1997, $6.63 to $21.50
in fiscal 1996, and $8.50 to $21.50 in fiscal 1995.
During fiscal 1994, the Company's Board of Directors authorized the repurchase
of up to two million shares of the Company's Common Stock. The Company
repurchased 280,900 shares of the Company's Common Stock during fiscal 1996 at
an aggregate cost of $1,827,000. These shares were recorded by the Company as
treasury stock, and were
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
accounted for as a reduction in stockholders' equity. Shares owned by the
Company are not considered outstanding for the computation of earnings per share
until re-issued by the Company.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." The Company
reviews its long-lived assets for events or changes in circumstances that might
indicate the carrying amount of the assets may not be recoverable. The Company
assesses the recoverability of the assets by determining whether the
depreciation of such assets over the remaining lives can be recovered through
projected undiscounted future cash flows. The amount of impairment, if any, is
measured based on projected discounted future cash flows using a discount rate
reflecting the Company's average cost of funds. As a result of one of the OLS
Partnership's store's inability to achieve the improvements specified in its
strategic plan, the store continued to operate at a loss in fiscal 1997.
Accordingly, the Company recorded an impairment charge of $378,000 for a
write-down of fixed assets which is included in selling, general and
administrative expenses in the accompanying Consolidated Statements of Income.
At February 1, 1997, no such impairment of assets was indicated.
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
January 31, February 1,
(In Thousands) 1998 1997
- --------------------------------------------------------------------------------
Motor vehicles $ 388 $ 379
Store furnishings 22,182 23,100
Equipment 9,662 8,357
Leasehold improvements 31,948 33,901
Purchased software 5,550 5,982
Construction in progress 388 257
------------------------------
70,118 71,976
Less accumulated depreciation (34,811) (32,760)
------------------------------
Total property and equipment $ 35,307 $ 39,216
------------------------------
Depreciation expense for fiscal 1997, 1996 and 1995 was $10,040,000, $9,042,000
and $7,357,000, respectively.
C. INVESTMENTS
At February 1, 1997, the Company's investment securities at cost and fair value
were $5,992,000 and $5,887,000, respectively. The Company subsequently sold
these securities in the first quarter of fiscal 1997 with a realized loss of
$102,000. The Company had realized losses on the sale of certain investments of
$17,200 in fiscal 1996.
D. DEBT OBLIGATIONS
On December 10, 1997, the Company and BankBoston, N.A. entered into a credit
agreement, which was amended on January 31, 1998 (as amended, the "Credit
Agreement"). The credit facility established under the Credit Agreement, which
terminates on June 30, 1999, consists of a revolving line of credit permitting
the Company to borrow up to $25 million. Under the facility, the Company may
cause BankBoston to issue documentary and standby letters of credit up to $2
million. Availability of the unused revolving line of credit is subject to
borrowing base requirements and compliance with certain earnings, net worth and
inventory turnover covenants and a cash flow ratio covenant which becomes
effective beginning the fourth quarter of fiscal 1998. The Company's borrowings
under the credit facility are secured by a security interest in all of the
Company's Levi Strauss & Co. brand inventory, accounts receivable and certain
intangible assets of the Company, excluding all assets of the OLS Partnership
and the Company's Boston Traders(R) trademark and its other related trademarks.
The security interest may be released if the Company achieves certain minimum
cash flow ratio requirements. At the option of the Company, borrowings under
this facility bear interest at BankBoston N.A.'s prime rate or at LIBOR-based
fixed rates (depending upon the Company's quarterly ratio of cash flow to fixed
charges). Under the Credit Agreement, the Company has agreed not to pay cash
dividends
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
At January 31, 1998, the Company had borrowings of $8.8 million outstanding and
two outstanding standby letters of credit totaling $232,000. There were no
outstanding borrowings at February 1, 1997. Effective January 31, 1998, the
Company and BankBoston, N.A. agreed to amend the Credit Agreement to exclude
certain non-recurring charges from the earnings calculation for the fourth
quarter. As a result, the Company was in compliance with all debt covenants at
the end of fiscal 1997.
On May 2, 1995, the Company delivered a non-negotiable promissory note in the
principal amount of $1,000,0000 in connection with the acquisition of certain
assets of Boston Trading Ltd., Inc. ("Boston Trading") in accordance with the
terms of an Asset Purchase Agreement dated April 21, 1995 among Boston Trading,
its stockholders, Designs Acquisition Corp., and the Company (the "Purchase
Agreement"). The principal amount of the Purchase Note is payable in two equal
annual installments through May 1997. The note bears interest at the published
prime rate and is payable semi-annually from the date of acquisition.
In the first quarter of fiscal 1996, the Company asserted certain
indemnification rights under the Purchase Agreement. In accordance with the
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 the $500,000 payments of principal on the Purchase Note
that were due on May 2, 1996 and May 2, 1997. The Company paid interest on the
original principal amount of the Purchase Note 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
refusing 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 was damaged 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. Barring unforeseen circumstances,
management of the Company does not believe that the result of this litigation
will have a material adverse effect on the Company's business or financial
condition.
The Company paid interest and fees on all of the above described debt
obligations totaling $833,000, $253,000 and $172,000 for the fiscal years 1997,
1996 and 1995, respectively.
E. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. SFAS 109 requires current recognition of
net deferred tax assets to the extent that it is more likely than not that such
net assets will be realized. To the extent that the Company believes that its
net deferred tax assets will not be realized, a valuation allowance must be
placed against those assets.
The Company has net operating loss carryforwards of $1,884,000 for federal
income tax purposes and $42,921,000 for state income tax purposes which are
available to offset future taxable income through fiscal year 2012.
Additionally, the Company has alternative minimum tax credit carryforwards of
$1,138,000, which are available to reduce further income taxes over an
indefinite period.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of the net deferred tax assets as of January 31, 1998 and
February 1, 1997 are as follows:
January 31, February 1,
(In Thousands) 1998 1997
- ------------------------------------------------------------------------------
Deferred tax assets - current:
Inventory reserves $ 3,312 $ 716
LIFO reserve -- 444
-------------------------
Subtotal 3,312 1,160
Deferred tax liabilities - current:
LIFO reserve (1,924) --
-------------------------
Net deferred tax assets - current $ 1,388 $ 1,160
-------------------------
Deferred tax asset - noncurrent:
Excess of book over tax depreciation/amortization $ 2,168 $ 2,577
Capital loss carryforward 165 124
Unrealized loss on investment -- 42
Net operating loss carryforward 2,891 --
Alternative minimum tax credit carryforward 1,138 --
-------------------------
Total deferred tax assets - noncurrent $ 6,362 $ 2,743
-------------------------
The provision for income taxes consists of the following:
Fiscal Years Ending
-------------------------------------------
January 31, February 1, February 3,
(In Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $(12,964) $ 3,234 $ 6,241
State (688) 1,149 1,031
-------------------------------------------
(13,652) 4,383 7,272
-------------------------------------------
Deferred:
Federal (1,639) (223) (481)
State (2,208) (60) (49)
-------------------------------------------
(3,847) (283) (530)
-------------------------------------------
Total Provision $(17,499) $ 4,100 $ 6,742
-------------------------------------------
The following is a reconciliation between the statutory and effective income tax
rates:
Fiscal Years Ending
---------------------------------------
January 31, February 1, February 3,
1998 1997 1996
- -------------------------------------------------------------------------------
Statutory federal income tax rate (35.0)% 35.0% 35.0%
State income and other taxes, net of
federal tax benefit (2.6) 5.8 5.8
Permanent items and tax credits -- (1.2) --
---------------------------------------
Effective tax rate (37.6)% 39.6% 40.8%
---------------------------------------
The Company paid income taxes of $195,000, $2,888,000 and $7,452,000 during
fiscal years 1997, 1996 and 1995, respectively. These figures represent the net
of payments and receipts. In March and April 1998, the Company received a
federal income tax refund totaling $12.9 million related to losses incurred by
the Company in fiscal 1997, which were carried back against federal income tax
payments in prior years.
During the first quarter of fiscal 1998, the Internal Revenue Service ("IRS")
completed an examination of the Company's federal income tax returns for fiscal
years 1991 through 1995. Taxes on the adjustments proposed by the IRS, excluding
interest, amount to approximately $4.9 million. The IRS has challenged, among
other things, the timing of certain
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
income and expense deductions, resulting in differences in the amounts of
federal income taxes previously paid by the Company. The Company intends to
protest the proposed adjustments through the IRS appeals process. The Company
believes that these adjustments will be reduced through the appeals process and,
in the opinion of management, adequate provisions have been made for all
additional income taxes and interest the Company may be required to pay. The
Company believes that any adjustments to prior periods that may arise as a
result of this process will not have a material impact on the results of
operations and financial condition of the Company.
F. COMMITMENTS AND CONTINGENCIES
At January 31, 1998, the Company was obligated under operating leases covering
store and office space, automobiles and certain equipment for future minimum
rentals as follows:
Total
Fiscal (In Thousands)
- --------------------------------------------------------------------------------
1998 $ 25,808
1999 22,571
2000 20,795
2001 18,494
2002 17,256
Thereafter 31,716
-------------
$ 136,640
-------------
The Company signed a lease for its corporate headquarters in Needham,
Massachusetts during fiscal 1995. The term of the lease is for ten years ending
in November 2005. The lease provides for the Company to pay all related costs
associated with the land and headquarters building. The Company has employment
agreements with each of its executive officers. The initial three year terms of
two of the agreements expire, unless earlier terminated in accordance with the
respective terms, on October 16, 1998, and the initial three year term of the
third agreement expires on May 9, 2000. Such agreements provide for minimum
salary levels, adjusted for cost of living increases as well as bonuses as
determined by the Compensation Committee of the Company's Board of Directors.
The aggregate commitment for future salaries at January 31, 1998, excluding
bonuses, was $1,016,000.
In addition to future minimum rental payments, many of the store leases include
provisions for common area maintenance, mall charges, escalation clauses and
additional rents based on percentage of store sales above designated levels.
Amounts charged to operations for the above occupancy costs, automobile and
leased equipment expense, excluding a related party lease in the prior years,
were $36,458,000, $35,921,000 and $32,998,000 in fiscal years 1997, 1996 and
1995, respectively. Of these amounts charged to operations, $402,000 $780,000
and $847,000 represent payments based upon a percentage of adjusted gross sales
as provided in the lease agreement for the fiscal years ended 1997, 1996 and
1995, respectively. Amounts charged to operations for the related party lease
were $150,000 and $764,000 in fiscal years 1996 and 1995, respectively. The
Company did not make any payments for occupancy costs to a related party in
fiscal 1997. See Note H for additional information regarding the related party
lease. The Company remains principally liable on two leases which were assigned
to Levi's Only Stores, Inc., a wholly-owned subsidiary of Levi Strauss & Co., in
connection with the sale of the Company's Original Levi's Store(TM) and the
Dockers(R) Shop which are both located in Minneapolis, Minnesota. These store
leases expire in January 2003.
Most of the Company's computer and process control systems were designed to use
only two digits to represent years. As a result they may not recognize "00" as
representing the Year 2000, but rather the year 1900, which could result in
errors or system failures. The Company is in the process of converting all
technology and its information systems to be Year 2000 compliant. The Company
expects to spend approximately $500,000 in conversion costs primarily in fiscal
1998 to accomplish this. Barring unforeseen circumstances, the Company
anticipates that the conversion will be complete by the end of calendar year
1999.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
G. STOCK OPTIONS
The Company's Board of Directors and its stockholders previously approved the
1987 Incentive Stock Option Plan (the "Incentive Plan") pursuant to which, as
amended, stock options to purchase up to 787,500 shares of Common Stock may be
issued to key employees (including executive officers and directors who are
employees). The Incentive Plan is administered by the Compensation Committee of
the Company's Board of Directors, which designates the optionees, number of
shares for each option grant, option prices (which may not be less than fair
value on the date of grant), date of grant, vesting schedule (ranging from three
to five years) and period of option (which may not be more than ten years). All
Incentive Plan options are non-assignable. As of April 16, 1997, the Company was
no longer able to grant incentive stock options under the Incentive Plan. The
Incentive Plan terminates the earlier of the date on which all shares issuable
thereunder have been issued and the date on which all options granted thereunder
expire.
The Company's Board of Directors and its stockholders also previously approved
the 1987 Non-Qualified Stock Option Plan (the "Non-Qualified Plan") pursuant to
which stock options to purchase up to 337,500 shares of Common Stock which are
not "incentive stock options" (as defined in Section 422 of the Internal Revenue
Code, as amended) may be issued to key employees (including executive officers
and directors of the Company) and directors who are not employees of the
Company. The Non-Qualified Plan is administered by the Compensation Committee of
the Company's Board of Directors, which designates the optionees, number of
shares for each option grant, option prices (which may not be less than 85% of
the fair market value on the date of grant), date of grant, vesting schedule
(ranging from three to five years) and period of option (which may not be more
than ten years). All Non-Qualified Plan options are non-assignable. As of April
16, 1997, the Company was no longer able to grant stock options under the
Non-Qualified Plan. The Non-Qualified Plan terminates when all shares issuable
thereunder have been issued. Outstanding options under both the Incentive Plan
and the Non-Qualified Plan expire seven to ten years after the date of grant.
On April 3, 1992, the Board of Directors adopted the 1992 Stock Incentive Plan
(the "1992 Plan"), which became effective on June 9, 1992 when it was approved
by the stockholders of the Company. Under the 1992 Plan, as amended, up to
2,430,000 shares of Common Stock may be issued pursuant to "incentive stock
options" (as defined in Section 422 of the Internal Revenue Code, as amended),
options which are not "incentive stock options," conditioned stock awards,
unrestricted stock awards and performance share awards. The 1992 Plan is
administered by the Compensation Committee, all of the members of which are
non-employee directors. The Compensation Committee makes all determinations with
respect to amounts and conditions covering awards under the 1992 Plan. No
Incentive Stock Options may be granted under the 1992 Plan after April 2, 2002.
Options have never been granted at a price less than fair value on the date of
the grant. Except for certain "premium priced" options granted to executive
officers of the Company which are described below, options granted to employees,
executives and directors typically vest over five, three and three years,
respectively, and expire ten years from the date of grant. The 1992 Plan
terminates when all shares issuable thereunder have been issued.
By written consent dated as of April 28,1997, the Board of Directors authorized
an increase in the number of shares issuable under the 1992 Plan by 580,000
shares to a total of 2,430,000. In addition, the Board authorized an increase in
the number of shares that may be granted during any fiscal year to any
individual participant from 75,000 to 270,000 shares, but only any such stock
options exceeding 75,000 shares that has a per share exercise price not less
than 200% of fair market value of Common Stock on the date of grant.
Furthermore, the Board authorized the elimination of certain provisions of the
1992 Plan which were no longer required by Rule 16b-3 under the Exchange Act.
The stockholders approved the increase in the number of shares issuable under
the 1992 Plan and the other amendments to the 1992 Plan at the Annual Meeting of
Stockholders held on June 10, 1997.
In order to focus management on business performance that creates stockholder
value and to reward management only for superior results, the Compensation
Committee concluded that an important element of the Company's executive
incentive compensation program should be a significant grant of premium priced
options to the executive officers of the Company. Accordingly, on April 28,
1997, the Compensation Committee granted premium priced options to purchase a
total of 580,000 shares to the Company's four executive officers. Before an
executive officer can exercise these options, the price must appreciate to
$12.00 per share, which is 140% higher than the closing price of shares of
Common Stock on the date of grant. To encourage the executive officers further
to achieve superior performance and to create stockholder value within a defined
time frame, the premium priced options will be forfeited if prior to April 28,
2002, the per share price of the Common Stock does not close at or above $12.00
for at least five trading days during a period of ten consecutive trading days.
In addition, the options are subject to time-based vesting at a rate of 20% per
year
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
over five years. If the option price of $12.00 is reached before April 28, 2002,
the options will continue in effect for a period of ten years from the date of
grant and the five year time-based vesting would continue.
A summary of shares subject to the option plans described above is as follows:
1987 Incentive Stock Option Plan
Fiscal Year
-------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Outstanding at beginning of year 97,306 96,339 160,561
Options granted - 18,500 -
Options canceled 20,900 6,000 1,670
Options exercised 67,406 11,533 62,552
-------------------------------
Outstanding at end of year 9,000 97,306 96,339
-------------------------------
Options exercisable at end of year 9,000 76,406 89,139
Common shares reserved for future grants at
end of year - 9,105 21,605
Weighted average exercise price per option:
Outstanding at beginning of year $ 4.01 $ 3.71 $ 3.18
Granted during the year - $ 6.62 -
Canceled during the year $ 7.15 $ 11.17 $ 2.37
Exercised during the year $ 2.07 $ 2.05 $ 2.37
Outstanding at end of year $ 11.17 $ 4.01 $ 3.71
The following table summarizes information about stock options outstanding under
the Incentive Plan at January 31, 1998:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------
$11.17 to $11.17 9,000 1.4 years $11.17 9,000 $11.17
1987 Non-Qualified Stock Option Plan
Fiscal Year
-------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Outstanding at beginning of year 76,948 76,948 76,948
Options granted -- -- --
Options canceled -- -- --
Options exercised 76,948 -- --
-------------------------------
Outstanding at end of year -- 76,948 76,948
-------------------------------
Options exercisable at end of year -- 76,948 76,948
Weighted average exercise price per option:
Outstanding at beginning of year $ 2.53 $ 2.53 $ 2.53
Exercised during the year $ 2.53 -- --
Outstanding at end of year -- $ 2.53 $ 2.53
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1992 Stock Incentive Plan
Fiscal Year
-----------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Outstanding at beginning of year 1,660,400 1,520,050 1,298,950
Options granted 708,750 301,250 440,500
Options canceled 327,401 160,900 219,400
Options exercised -- -- --
-----------------------------------
Outstanding at end of year 2,041,749 1,660,400 1,520,050
-----------------------------------
Options exercisable at end of year 1,145,397 937,496 698,180
Common shares reserved for future grants at
end of year 372,851 174,200 314,550
Weighted average exercise price per option:
Outstanding at beginning of year $ 12.00 $ 12.85 $ 14.59
Granted during the year $ 10.65 $ 6.72 $ 8.93
Canceled during the year $ 8.99 $ 10.10 $ 10.50
Exercised during the year -- -- --
Outstanding at end of year $ 12.02 $ 12.00 $ 12.85
The following table summarizes information about stock options outstanding under
the 1992 Plan at January 31, 1998:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------
$4.44 to $ 6.63 197,900 8.8 years $ 5.51 23,716 $ 6.48
6.88 to 9.00 357,999 6.2 years 8.12 189,565 8.25
10.50 to 15.25 1,030,650 7.1 years 11.94 494,316 11.96
16.50 to 21.50 455,200 5.0 years 18.09 437,800 18.10
- ---------------------------------------------------------------------------------------------------
$4.44 to $21.50 2,041,749 1,145,397
On July 26, 1993, stock options covering an aggregate of 67,500 shares of Common
Stock were granted outside of the Incentive Plan, the Non-Qualified Plan and the
1992 Plan to the non-employee directors of the Company. Each of these options
has an exercise price of $17.50 per share and each remained outstanding as of
the end of fiscal 1997. These options become exercisable in three equal
installments commencing twelve months following the date of grant and have a 10
year term.
When shares are sold within one year of exercise or within two years from date
of grant, the Company derives a tax deduction measured by the excess of the
market value over the option price at the date the shares are sold, which
approximated $18,256, $27,980 and $239,000 in fiscal years 1997, 1996 and 1995,
respectively.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. FASB Statement No. 123 "Accounting for Stock-Based Compensation"
("FAS 123") was issued by the FASB in 1995 and requires the company to elect
either expense recognition under FAS 123 or its disclosure-only alternative for
stock-based employee compensation. The Company has elected the disclosure-only
alternative and accordingly no compensation cost has been recognized. The
Company has disclosed the pro forma net income or loss and per share amounts
using the fair value based method.
Had compensation costs for the Company's grants for stock-based compensation
been determined consistent with FAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
Fiscal Years Ended
---------------------------------------
January 31, February 1, February 3,
(In Thousands, Except Per Share Amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------
Net income (loss) - as reported $ (29,063) $ 6,264 $ 9,773
Net income (loss) - pro forma $ (29,383) $ 5,933 $ 9,621
Earnings per share - basic and diluted as reported $ (1.86) $ 0.40 $ 0.62
Earnings per share - basic and diluted pro forma $ (1.88) $ 0.38 $ 0.61
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The effects of applying FAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. FAS
123 does not apply to awards prior to 1995 and additional awards are
anticipated.
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1997, 1996 and 1995: expected volatility
of 63.97% in fiscal 1997 and 51.96% in fiscal 1996 and fiscal 1995; risk free
interest rate of 6.2%, 6.3% and 6.1% in fiscal 1997, 1996 and 1995,
respectively; and expected lives of 4.5 years. No dividend rate was used for
fiscal 1997, 1996 or 1995. The weighted-average fair value of options granted in
fiscal 1997, 1996 and 1995, was $1.93, $3.35 and $4.43, respectively.
H. RELATED PARTIES
Until April 30, 1996, the Company leased its headquarters in Chestnut Hill,
Massachusetts, from Durban Trust, a nominee trust of which the sole beneficiary
is a partnership affiliated with Stanley I. Berger, the Chairman of the Board of
the Company, and Calvin Margolis, a former executive officer and director of the
Company. The general partner of the beneficiary is a corporation controlled by
Mr. Berger and the estate of Mr. Margolis, and the only limited partners of the
beneficiary are Mr. Berger and the estate of Mr. Margolis, individually. When
the lease expired April 30, 1996 the Company moved its headquarters to Needham,
Massachusetts. See Note F. There were no rent payments made to Durban Trust in
fiscal 1997. Total rent paid to Durban Trust in fiscal 1996 and 1995 was
approximately $150,000 and $764,000, respectively. The Company believes that the
lease arrangements between the Company and Durban Trust were on terms at least
as favorable to the Company as it would have expected to receive from a landlord
unrelated to the Company, Mr. Berger or the estate of Mr. Margolis for office
facilities of equal quality.
The Company entered into a Consulting Agreement with Stanley I. Berger, the
Chairman of the Board of the Company, dated as of December 21, 1994, in which he
agreed to provide an average of four days per week of consulting services to the
Company until December 20, 1997. As compensation for such services, among other
things, the Company agreed to pay Mr. Berger at the rate of $250,000 per year.
Following December 20, 1997, Mr. Berger has continued to provide consulting
services to the Company on a month to month basis with respect to the Company's
Levi's(R) Outlet by Designs stores. As compensation for such services, the
Company pays Mr. Berger at the rate of $50,000 per year.
Bernard M. Manuel, a Director of the Company, is the Chairman of the Board of
Cygne Designs, Inc. During fiscal year 1995, Cygne Designs, Inc. provided
sourcing for certain of the Company's private label products. In that fiscal
year, the Company paid $311,000 for merchandise purchased from Fenn Wright &
Manson, Inc. a division of Cygne Designs, Inc. No products were purchased from
Cygne Designs, Inc. or its affiliates in fiscal 1996 or 1997.
I. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan that covers all eligible
employees who have completed one year of service. Under this plan, the Company
may provide matching contributions up to a stipulated percentage of employee
contributions. The plan is fully funded by the Company; and the matching
contribution, if any, is established each fiscal year by the Board of Directors.
For fiscal 1997, the matching contribution by the Company was set at 50% of
contributions by eligible employees up to a maximum of 6% of salary. The Company
recognized $279,000, $231,000 and $229,000 of expense under this plan in fiscal
1997, 1996 and 1995, respectively.
J. RESTRUCTURING
In the second quarter of fiscal 1997, the Company recorded a pre-tax charge of
$20 million related to its shift in strategy away from the vertically integrated
Boston Traders(R) private label concept to a strategy with greater emphasis on
name brands. This decision involved the liquidation of Boston Traders(R) brand
products, the closure of the Company's New York City product development office
and the closure of 17 Designs stores and 16 Boston Traders(R) Outlet stores.
This pre-tax charge included cash costs of approximately $6.1 million related to
lease terminations, the cost of canceling private label fabric commitments,
severance associated with the closing of the New York office, and other
miscellaneous expenses. The remainder of the $20 million charge consisted of
non-cash costs of approximately $13.9 million, which included approximately
$12.4 million of markdowns at cost related to the liquidation of Boston
Traders(R) brand product and $1.5 million for asset impairment charges
associated with the store closings. Merchandise markdowns and costs associated
with the cancellation of fabric commitments, which total approximately $13.9
million, are accounted for in
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
cost of goods sold. The remaining amounts related to lease termination costs,
asset impairment charges, severance and other costs, which total approximately
$6.1 million, are accounted for in the restructuring charge on the Company's
Consolidated Statements of Income. At the end of fiscal 1997, the store closing
program was essentially complete with 31 of the 33 stores planned for closure
having been closed. The remaining two stores were closed by the end of March
1998. In addition, the Company had completed fabric commitment cancellations
with most private label fabric and garment suppliers by the end of fiscal 1997.
In the fourth quarter of fiscal 1997, the Company incurred an additional pre-tax
charge of $1.6 million related primarily to severance, benefits and other costs
associated with a reduction in its home office and field staff. This reduction
in force resulted in the elimination of 47 positions, or approximately 25%, of
the Company's headquarters and field management staff. This charge is accounted
for in the restructuring charge in the Company's Consolidated Statements of
Income for the year ended January 31, 1998.
At January 31, 1998, the Company had a balance of $1.8 million accrued in the
reserve for lease terminations for the two remaining stores scheduled for
closure, outstanding fabric commitments, and severance costs for the fourth
quarter reduction in force. Inventory includes markdown reserves of $830,000
against the remaining Boston Traders(R) brand product. At year end, this product
had been allocated for sales in the eleven Boston Traders(R) Outlet stores.
Management believes that, barring unforeseen circumstances, these reserves are
adequate to cover the Company's remaining obligations with regard to lease
terminations, fabric commitments, severance payments and Boston Traders(R)
product liquidation.
In fiscal 1993, the Company recorded a non-recurring pre-tax charge of $15
million to cover the costs associated with the closing of 15 of its poorest
performing Designs stores. Total costs to close these 15 stores totaled $9.6
million, compared to the estimate of $15.0 million estimate, primarily due to
favorable negotiations with landlords. The remaining reserve was recognized in
fiscal 1995 and fiscal 1994 in the amount of $2.2 million and $3.2 million,
respectively.
K. FORMATION OF JOINT VENTURE
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 established under the Partnership Agreement is known as The Designs/OLS
Partnership (the "OLS Partnership"). The Company does not anticipate that the
OLSPartnership will open any additional Original Levi's Stores(TM) or Levi's(R)
Outlet stores in fiscal 1998. At January 31, 1998, the OLS Partnership operated
eleven Original Levi's Stores(TM) and eleven Levi's(R) Outlets. The Levi's(R)
Outlet stores owned by the OLS Partnership sell only Levi's(R) brand products
and end of season and close-out products from the Original Levi's Stores(TM).
In connection with the formation of the joint venture, Designs JV Corp.
contributed, for a 70% interest in the joint venture, eight of the Company's
then existing Original Levi's Stores(TM) and three leases for then unopened
stores in New York City, Nanuet, New York and White Plains, New York. At the
same time, LDJV Inc., the joint venture subsidiary of the Levi's Only Stores,
Inc., contributed approximately $4.7 million in cash to the joint venture in
exchange for a 30% interest.
Below is a summary of additional capital contributions and cash distributions to
each partner for the fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996:
Designs JV Corp. LDJV, Inc. Total
-------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Capital Contributions - - $3,640 - - $1,560 - - $5,200
Capital Distributions $3,990 $505 $670 $1,710 $218 $287 $5,700 $723 $957
The term of the OLS Partnership is ten years; however, the Partnership Agreement
contains certain exit rights that enable either partner to buy or sell their
interest in the OLS Partnership after five years. The Partnership Agreement
provides for certain special capital account allocations and cash distributions,
but otherwise allocates and distributes income in proportion to the partners'
percentage ownership.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the third quarter of fiscal 1996, the Company entered into a one year
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. During the third quarter of fiscal 1997,
the term of the OLS Credit Agreement was extended through September 30, 1998,
unless earlier terminated pursuant to other provisions of the OLS Credit
Agreement. This credit facility bears interest at BankBoston, N.A.'s prime rate.
The OLS Credit Agreement also provides that there may not be credit advances
outstanding on the last day of the fiscal year. There were no credit advances
under this facility in fiscal 1997.
For financial reporting purposes, the OLS Partnership's assets, liabilities and
results of operations are consolidated with those of the Company and LDJV Inc.'s
30% interest in the OLS Partnership is included in the Company's financial
statements as minority interest.
L. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires that changes in comprehensive income be shown on a separate
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 becomes effective for fiscal years beginning
after December 15, 1997. The Company expects to adopt this standard beginning in
the first quarter of its fiscal year ending January 30, 1999. The Company does
not expect the adoption of this standard to have a material impact on the
Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. SFAS 131 becomes effective for fiscal years
beginning after December 15, 1997. The Company will adopt this standard for the
fiscal year ending January 30, 1999. The Company has not yet determined the
impact of this standard.
M. SHAREHOLDERS RIGHTS PLAN
On May 1, 1995, the Board of Directors of the Company adopted a Shareholder
Rights Plan. Pursuant to the Plan, the Company entered into a Shareholder Rights
Agreement ("Rights Agreement") between the Company and its transfer agent,
Boston EquiServe, the successor to The First National Bank of Boston. Pursuant
to the Rights Agreement, the Board of Directors declared a dividend distribution
of one preferred stock purchase right (the "Right(s)") for each outstanding
share of the Company's Common Stock to stockholders of record as of the close of
business on May 15, 1995. Initially, these Rights are not exercisable and will
trade with the shares of the Company's Common Stock. In the event that a person
becomes an "Acquiring Person" or is declared an "Adverse Person" as each such
term is defined in the Rights Agreement, each holder of a Right (other than the
Acquiring Person or the Adverse Person) would be entitled to acquire such number
of shares of preferred stock which are equivalent to the Company's Common Stock
having a value of twice the then-current exercise price of the Right. If the
Company is acquired in a merger or other business combination transaction after
any such event, each holder of a Right would then be entitled to purchase, at
the then-current exercise price, shares of the acquiring company's Common Stock
having a value of twice the exercise price of the Right.
On October 6, 1997, the Board of Directors approved an amendment to the Rights
Agreement, pursuant to which the definition of an "Acquiring Person" was
amended. The definition of Acquiring Person now allows a person who is and
continues to be permitted to file Schedule 13G, in lieu of Schedule of 13D,
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder, to be a beneficial owner of less than 20% of
the shares of the Company's Common Stock then outstanding without becoming an
"Acquiring Person".
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
N. SELECTED QUARTERLY DATA (UNAUDITED)
First Second Third Fourth Full
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------
FISCAL YEAR 1997
Net Sales $ 55,470 $ 64,543 $ 77,459 $ 68,254 $ 265,726
Gross Profit (Loss) 13,486 (2,585) 18,800 8,657 38,358
Net Income (Loss) (1) (3,184) (16,581) (567) (8,732) (29,063)
Earnings per Share - Basic (0.20) (1.06) (0.04) (0.56) (1.86)
Earnings per Share - Diluted (0.20) (1.06) (0.04) (0.56) (1.86)
FISCAL YEAR 1996
Net Sales $ 59,336 $ 66,524 $ 84,958 $ 78,775 $ 289,593
Gross Profit 16,157 20,565 27,646 21,861 86,229
Net Income (Loss) (1,145) 553 4,664 2,192 6,264
Earnings per Share - Basic (0.07) 0.03 0.30 0.14 0.40
Earnings per Share - Diluted (0.07) 0.03 0.29 0.14 0.40
(1) The results for the fourth quarter of fiscal 1997 include a total of
approximately $7.6 million pre-tax adjustments related to inventory
shrinkage reserves related to the resolution of pending vendor discussions
regarding proof of delivery of certain goods, the Company's reduction in
force and a charge for impairment of long-lived assets.
Historically, the Company has experienced seasonal fluctuations in net sales,
gross profit and net income, with increases occurring during the Company's third
and fourth quarters as a result of "Fall" and "Holiday" seasons. As the
Company's percentage of outlet store business increases in relation to total
sales, the Company expects that the third and fourth quarters will decrease as a
percentage to total sales. Quarterly sales comparisons are not necessarily
indicative of actual trends, since such amounts also reflect the addition of new
stores, closing of stores and the remodeling of stores during these periods.
46
Index To 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). *
4.2 First Amendment dated as of October 6, 1997, to the Shareholder Rights
Agreement dated as of May 1, 1995, between the Company its transfer agent
(included as Exhibit 4.1 to the Company's Current Report on Form 8-K dated
October 9, 1997, 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 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 by reference). *
10.6 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). *
10.7 Credit Agreement between the Company and BankBoston, N.A. dated as of
December 10, 1997 (included as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated January 5, 1998, and incorporated herein by
reference). *
10.8 First Amendment to Credit Agreement dated as of January 31, 1998, between
the Company and BankBoston, N.A. (included as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated April 1,1998, and incorporated
herein by reference). *
10.9 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). *
10.10 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). *
10.11 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). *
10.12 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). *
47
10.13 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). *
10.14 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). *
10.15 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). *
10.16 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). *
10.17 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). *
10.18 First Amendment to Credit Agreement among the Company, LOS and the OLS
Partnership dated as of October 29, 1997 (included as Exhibit 10.16 to the
Company's Quarterly Report on Form 10-Q dated December 16, 1997, and
incorporated herein by reference). *
10.19 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). *
10.20 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). *
10.21 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). *
10.22 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). *
10.23 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). *
10.24 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). *
10.25 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). *
10.26 Separation Agreement dated as of February 9, 1998 between the Company and
Mark S. Lisnow.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand, L.L.P. dated May 1, 1998.
27 Financial Data Schedule.
99 Report of the Company dated May 1, 1998 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.
48
CORPORATE AND SHAREHOLDER INFORMATION
Board of Directors Corporate Officers Daniel L. Murphy
Vice President
Stanley I. Berger George F. Cavedon Controller
Chairman of the Regional Vice President
Board of Directors Daniel O. Paulus
Mary Ann Ryan Vice President
James G. Groninger Vice President General Merchandise
President Human Resources Manager
The BaySouth Company
James F. Duval Brian J. Sequin
Bernard M. Manuel Regional Vice President Regional Vice
Chairman of the Board and President
Chief Executive Officer Jan Falcione
Cygne Designs, Inc. Divisional Vice President Michael E. Strubing
Vice President
Joel H. Reichman Martin Goldstein Logistics
President and Vice President
Chief Executive Officer Construction and Design Robert A. Wilbur, Jr.
Vice President
Melvin I. Shapiro Alan B. Gruber Technology and
Partner General Manager Information Systems
Tofias, Fleishman & The Designs/OLS Partnership
Shapiro & Co., P.C.
Anthony E. Hubbard Corporate Offices
Peter L. Thigpen Vice President 66 B Street
Partner Deputy General Counsel and Needham, MA 02194
Executive Reserves Assistant Secretary (781) 444-7222
Executive Officers Ben P. Lentini
Vice President
Joel H. Reichman General Merchandise Manager
President and
Chief Executive Officer
Scott N. Semel
Executive Vice President
General Counsel and Secretary
Carolyn R. Faulkner
Vice President
Chief Financial Officer and
Treasurer
49
CORPORATE AND SHAREHOLDER INFORMATION
Annual Meeting
The 1998 Annual Meeting of Stockholders of Designs, Inc. will be held on
Tuesday, June 9, 1998, at 10:00 a.m. at the Sheraton Needham Hotel, 100 Cabot
Street, Needham, Massachusetts.
Financial Information
Requests for financial information should be directed to the Investor Relations
Department at the Company's headquarters: Designs, Inc., 66B Street, Needham, MA
02194, (781) 444-7222. A copy of the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1998, filed with the Securities and Exchange
Commission, may be obtained without charge upon request to the Investor
Relations Department.
Approximate reporting dates for fiscal year 1998 quarterly earnings are:
Quarter 1: May 18, 1998
Quarter 2: August 17, 1998
Quarter 3: November 16, 1998
Quarter 4 and fiscal year end: March 8, 1999
Transfer Agent and Registrar
Inquiries regarding stock transfer requirements, address changes and lost stock
certificates should be directed to:
Boston EquiServe Limited Partnership
Post Office Box 8040
Boston, Massachusetts 02266-8040
(781) 575-3120
Independent Accountants
Coopers & Lybrand L.L.P.
Boston, Massachusetts
Trademarks
Boston Trading Co.(R), Boston Traders(R) and Traders Collection(R) are
registered trademarks of Designs, Inc.
Levi's(R) and Dockers(R) are registered trademarks, and Original Levi's
Store(TM) is a trademark, of Levi Strauss & Co.
All other trademarks appearing in this report are the property of their
respective owners.
50
SEPARATION AGREEMENT
This Agreement made as of this 9th day of February, 1998 by and between
Designs, Inc., a Delaware corporation having a usual place of business at 66 B
Street, Needham, Massachusetts 02194 ("Designs"), and Mark S. Lisnow ("Lisnow")
of 7 Deerfield Road, Sherborn, Massachusetts 01770.
WITNESSETH THAT:
WHEREAS, Designs has employed Lisnow most recently pursuant to an
Employment Agreement dated as of October 16, 1995 (the "Employment Agreement"),
a copy of which is appended hereto as Exhibit A; and
WHEREAS, Designs and Lisnow desire to set forth the terms of the
termination of Lisnow's employment at Designs;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements set forth herein, Designs and Lisnow agree as follows:
1. Lisnow is hereby terminated as an employee and officer of Designs and
its affiliates, effective February 13, 1998 (the "termination date") pursuant to
the notice given in accordance with Section 7.(a)(i) of the Employment
Agreement. Lisnow has executed and Designs shall file with the SEC a "Form 5" in
the form attached hereto as Exhibit B.
2. In accordance with Section 7.(g) of the Employment Agreement, Designs
agrees to pay Lisnow a sum equal to his annual salary for the fiscal year ending
January 31, 1998, which amount shall be in lieu of any and all other payments
due and owing to Lisnow under said Employment Agreement. Lisnow represents,
agrees and acknowledges that he has received reimbursement for all business and
travel expenses incurred in connection with his employment with Designs and that
all of his accrued vacation time has been paid.
3. Designs agrees to allow Lisnow to participate, at its expense, in
Designs' health insurance plan, to the extent permitted under such plan, at no
cost to Lisnow through February 12, 1999. As additional consideration under this
Separation Agreement, Designs, at no cost to Lisnow, agrees to extend such
health insurance coverage for an additional three months through May 12, 1999
(the lump sum equal to his aforementioned annual salary and health insurance
coverage herein collectively referred to as "Severance Benefits."
4. All options which have heretofore been granted to Lisnow under Designs'
1992 Stock Incentive Plan, as amended shall be exercisable in accordance with
their terms.
5. Lisnow agrees, represents and acknowledges that certain provisions of
his Employment Agreement survive the termination of his employment and he
reaffirms such obligations set forth in the copy of the Employment Agreement
appended hereto as Exhibit A. Designs and Lisnow agree that the "Non-Competition
Period" shall expire at the close of the day on February 12, 1999.
6. Without written permission from the President of Designs, Lisnow shall
not hire and will make every reasonable effort to dissuade any future employer
from hiring any current employee of Designs or its affiliates until February 12,
1999.
7. Lisnow on behalf of himself, his heirs, executors, administrators,
assigns, and successors, hereby releases and forever discharges and holds
Designs and its successors, subsidiaries, related entities, and each of their
respective past, present or future officers, directors, shareholders, agents,
servants, and employees harmless of all claims, causes of action or suits of any
nature whatsoever from the beginning of time to the date of this Agreement,
including those arising from the law, being directly or indirectly related to
his employment or the termination of his employment with Designs, but excluding
all claims based on a breach of this Separation Agreement and Workers'
Compensation and Unemployment Compensation Statutes. Without limitation, Lisnow
specifically waives any claims arising under the federal Age Discrimination in
Employment Act of 1967, as amended by the Older Workers Benefit Protection Act
of 1990 that arose before the date this Agreement is signed. Further, this
Agreement shall not affect any vested rights Lisnow may have in stock options,
the Designs 401(k) plan or to continue health insurance under COBRA, subject to
the terms of such plans. If Lisnow or his heirs, executors and administrators
institute any such aforementioned claim, Lisnow agrees to pay the reasonable
costs of Designs in defending such action, including reasonable attorney fees.
8. Lisnow confirms that no claim, charge, complaint or action against
Designs exists in any forum or form. In the event that any such claim, charge,
complaint or action is filed, Lisnow shall not be entitled to recover any relief
or recovery therefrom, including costs and attorneys' fees.
9. Lisnow agrees to keep the terms of this Agreement confidential and will
not disclose the contents except to his immediate family, personal legal or tax
advisors and such government authorities or agencies as required by law, agrees
not to criticize or comment negatively about, orally or in writing, Designs,
including its successors, subsidiaries, related entities, and each of their
respective past, present or future officers, directors, shareholders, agents,
servants, and employees or its suppliers, products, services, or otherwise
except as required by law, or to endanger, harm or destroy any assets or
property of Designs, otherwise such Severance Benefits shall cease and those
paid shall be returned. Lisnow represents that he has returned all assets or
property belonging to Designs, and if he has not such Severance Benefits shall
cease and those paid
2
shall be returned. Furthermore, such Severance Benefits shall cease and those
paid shall be returned if Lisnow violates the non-competition and
non-solicitation provisions of his agreements with Designs.
10. LISNOW FURTHER STATES THAT HE HAS CAREFULLY READ THE WITHIN AND
FOREGOING AGREEMENT, AND THAT HE KNOWS AND UNDERSTANDS THE CONTENTS THEREOF AND
THAT HE EXECUTES (SIGNS) THE SAME AS HIS OWN FREE ACT AND DEED. HE FURTHER
REPRESENTS, ACKNOWLEDGES AND AGREES THAT HE HAS BEEN ADVISED BY DESIGNS TO
CONSULT WITH AN ATTORNEY OF HIS CHOOSING PRIOR TO EXECUTING THIS AGREEMENT AND
THAT HE FULLY UNDERSTANDS THE TERMS, CONDITIONS, AND FINAL AND BINDING EFFECT OF
THIS AGREEMENT TO BE A FULL AND FINAL RELEASE OF ALL CLAIMS WITH FULL AND
BINDING EFFECT. LISNOW UNDERSTANDS THAT HE DOES NOT WAIVE ANY RIGHTS OR CLAIMS
THAT MAY ARISE AFTER THE DATE THIS AGREEMENT IS EXECUTED. LISNOW ACKNOWLEDGES
THAT HE HAS BEEN GIVEN A PERIOD OF AT LEAST FORTY-FIVE (45) DAYS FROM THE
RECEIPT OF THIS AGREEMENT WITHIN WHICH TO CONSIDER THIS AGREEMENT PRIOR TO HIS
EXECUTION THEREOF. AS REQUIRED BY FEDERAL LAW, EXHIBIT C TO THIS AGREEMENT IS A
LIST OF JOB TITLES AND AGES OF ALL INDIVIDUALS SELECTED FOR TERMINATION AND AN
OFFER OF CONSIDERATION FOR SIGNING A WAIVER, AND THE AGES OF ALL INDIVIDUALS IN
THE SAME JOB CLASSIFICATION OR ORGANIZATIONAL UNIT WHO HAVE NOT BEEN SELECTED
FOR TERMINATION AND THE OFFER OF CONSIDERATION FOR SIGNING A WAIVER. FURTHERMORE
IT IS AGREED THAT LISNOW SHALL HAVE THE RIGHT TO REVOKE THIS AGREEMENT BY
WRITTEN NOTICE TO DESIGNS - ATTENTION VICE PRESIDENT OF HUMAN RESOURCES WITHIN
THE SEVEN (7) DAY PERIOD FOLLOWING ITS EXECUTION, AND THAT THIS AGREEMENT SHALL
NOT BECOME ENFORCEABLE UNTIL SUCH SEVEN (7) DAY PERIOD HAS EXPIRED.
11. This Agreement is the entire agreement between the parties. This
Agreement shall be governed by the laws of the Commonwealth of Massachusetts
without regard to its principles of conflicts of laws. Jurisdiction and venue
shall be in Norfolk County in the Commonwealth of Massachusetts. Should any
provision of the Agreement be declared illegal or unenforceable by a court of
competent jurisdiction and cannot be modified to be enforceable, such provision
shall immediately become null and void, leaving the remainder of this Agreement
in effect.
IN WITNESS WHEREOF, Designs and Lisnow have set their hands and seals on
the date first above written.
DESIGNS, INC.
By: /s/ Mary Ann Ryan /s/ Mark S. Lisnow
----------------- ------------------
Mary Ann Ryan Mark S. Lisnow
3
V.P. of Human Resources
4
EX-11
EARNINGS PER SHARE
Exhibit 11. Statement Re: Computation of Per Share Earnings
Fiscal Years Ending
January 31, 1998 February 1, 1997 February 3, 1996
------------------------------------------------------------
(In thousands except per share data)
Basic EPS Computation
Numerator:
Net income (loss) $ (29,063) $ 6,264 $ 9,773
Denominator:
Weighted average common shares outstanding 15,649 15,755 15,770
----------- --------- ---------
Basic EPS $ (1.86) $ 0.40 $ 0.62
=========== ========= =========
Diluted EPS Computation
Numerator:
Net income (loss) $ (29,063) $ 6,264 $ 9,773
Denominator:
Weighted average common shares outstanding 15,649 15,755 15,770
Stock Options, excluding anti-dilutive options
of 34 shares for January 31, 1998 -- 78 128
----------- --------- ---------
Total Shares 15,649 15,833 15,898
----------- --------- ---------
Diluted EPS $ (1.86) $ 0.40 $ 0.61
=========== ========= =========
Exhibit 21
Subsidiaries of the Registrant
Designs Securities Corporation
(a Massachusetts securities corporation)
Designs JV Corp.
(a Delaware corporation)
Designs Acquisition Corp.
(a Delaware corporation)
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Designs, Inc. on Forms S-8 (Reg. Nos. 33-22957, 33-32690, 33-32687 and 33-52892)
of our report dated March 17, 1998, on our audits of the consolidated financial
statements of Designs, Inc. as of January 31, 1998 and February 1, 1997 and for
each of the three years in the period ended January 31, 1998, which report is
included in this Annual Report on Form 10-K.
Boston, Massachusetts
May 1, 1998 /s/ COOPERS & LYBRAND, LLP
DESIGNS, INC.
Cautionary Statements Concerning Forward-Looking Information
May 1, 1998
Designs, Inc. (the "Company") is filing this Report with the Securities
and Exchange Commission in order to set forth in a readily available document
certain significant risks and uncertainties that are important considerations to
be taken into account in conjunction with consideration and review of the
Company's reports, registration statements, information statements, press
releases, and other publicly-disseminated documents (including oral statements
concerning Company business information made on behalf of the Company) that
include forward-looking information.
The nature of forward-looking information is that such information
involves assumptions, risks and uncertainties. Certain public documents of the
Company and oral statements made by authorized officers, directors, employees,
agents and representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the following and other
assumptions, risks and uncertainties. Forward-looking information requires
management of the Company to make assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and future operational decisions.
Forward-looking statements made by or on behalf of the Company are subject to
the risk that the forecasts, projections, and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may become
inaccurate. Accordingly, the Company's future financial positions, its actual
results of operations and the implementation of its plans and operations may
differ materially from forward-looking statements made on behalf of the Company.
The following discussion identifies certain important factors that could affect
the Company's financial position, its actual results of operations, and its
actions and could cause the Company's financial position, its results of
operations, and actions to differ materially from any forward-looking statements
made by or on behalf of the Company. Other factors, which are not identified
herein, could also have such an effect.
DEPENDENCE ON LEVI STRAUSS & CO. MERCHANDISE, ADVERTISING AND MARKET POSITION
Almost all of the Company's revenue is derived from the operation of its
retail stores. Despite the Company's efforts to become less dependent upon the
sale of Levi Strauss & Co. brand
merchandise, substantially all of the merchandise sold to consumers through the
Company's stores continues to be merchandise manufactured by Levi Strauss & Co.
and its licensees. The Company does not now have, and never has had, any
agreement with Levi Strauss & Co. guaranteeing minimum quantities of
merchandise, nor guaranteeing a particular mix of merchandise by style, size,
fit or color, to be supplied to the Company, establishing a price structure for
the Company's purchases of Levi Strauss & Co. brand merchandise, or compelling
the Company to purchase minimum quantities or specific styles, sizes, fits or
colors of merchandise. The Company has no assurance that it will be able to
continue to purchase merchandise from Levi Strauss & Co. or its licensees in
adequate quantities, in suitable proportions with respect to style, size, fit
and color, or on terms that are comparable to those available to other retailers
that compete with the Company. Moreover, the Company stocks its Levi's(R) Outlet
by Designs stores, and the Levi's(R) Outlet stores owned and operated by the
joint venture between subsidiaries of the Company and Levi Strauss & Co. (the
"OLS Partnership"), exclusively with manufacturing overruns, discontinued lines
and irregulars purchased directly from Levi Strauss & Co. and end-of-season Levi
Strauss & Co. brand merchandise transferred from the Company's Designs and
Boston Trading Co.(R) stores and, at certain times, from the OLS Partnership's
Original Levi's Stores(TM). By its nature, this merchandise, including the most
popular Levi Strauss & Co. styles of merchandise and the breadth of the mix of
this merchandise, is subject to limited availability. This merchandise, when
purchased from Levi Strauss & Co. exclusively for sale in outlet stores, is
allocated by Levi Strauss & Co., in its sole discretion, among outlet stores
operated by an affiliate of Levi Strauss & Co., the Company and the other
authorized operators of Levi's(R) Outlet stores.
The Company would be materially and adversely affected by any material
reductions in the availability of adequate quantities of Levi Strauss & Co.
first-quality merchandise sold through the Company's and the OLS Partnership's
specialty stores, and manufacturing overruns, discontinued lines and irregulars
sold through the Company's and the OLS Partnership's outlet stores. The Company
also would be materially and adversely affected by any material deterioration in
the suitability of the style, size, fit and color assortment of merchandise
offered to the Company by Levi Strauss & Co. or any adverse change in Levi
Strauss & Co. business, marketing strategy or share of the casual apparel market
in the United States. The Company would be materially and adversely affected by
any significant increase in the prices the Company must pay for Levi Strauss &
Co. merchandise, or any other factor that has a negative impact on consumer
demand for Levi Strauss & Co. brand products. The Company also may be materially
and adversely affected in the event of negative publicity concerning the
reputation of Levi Strauss & Co. or the reputation of its merchandise.
RISK OF RESTRICTION ON USE OF LEVI STRAUSS & CO. TRADEMARKS, SERVICE MARKS,
TRADE DRESS AND TRADE NAMES
The Company and the OLS Partnership use certain trademarks, service marks,
logos, trade names and brand names of Levi Strauss & Co. in their store names,
displays and advertising with the permission of Levi Strauss & Co. The Company
has an agreement with Levi Strauss & Co. to use certain Levi Strauss & Co.
trademarks on the Company's store signs. The OLS Partnership entered into a
license agreement that grants it the right to use certain service marks, logos,
trade names and trade dress owned by Levi Strauss & Co. The Company and the OLS
Partnership make no payments to Levi Strauss & Co. or its affiliates with
respect to the use of such trademarks, service marks, logos, trade names, and
trade dress.
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
particular store is the period co-terminous with the lease term for such store
(including extension options) in effect in November 1996. The leases (including
extension options) in effect in November 1996 relating to approximately
two-thirds of the Levi's(R) Outlet by Designs stores open at the end of fiscal
year 1997 expire in or prior to fiscal year 2009 and all, except for five such
leases, expire in or prior to fiscal year 2011.
The Company and the OLS Partnership could be materially and adversely
affected by significant limitations imposed on their use of Levi Strauss & Co.
trademarks, service marks, trade names, logos, trade dress or brand names.
COMPETITION
Competition in markets for the Company's products occurs in a variety of
ways, including, among other factors, price, quality, reputation, brand image
and recognition, ability to anticipate fashion trends and customer preferences,
store design and location, merchandise mix, inventory control, quality control
of the Company's products, store visual presentation, advertising and customer
service. Other factors that will affect the Company's competitive position
include uncertainties associated with product procurement from an increasing
number of merchandise vendors, the effectiveness of the advertising and
promotional efforts by those vendors and the Company, and the Company's ability
to select and offer consumers a broad range of merchandise.
The intensity of the competition faced by the Company and the rapid
changes in consumer preferences that can occur in the casual
apparel markets pose significant risks to the Company. The Company faces
competition from a number of national and regional department, specialty and
discount chain stores that offer Levi Strauss & Co. brand and other brand name
products. Many of the Company's principal competitors have greater market share
and financial resources than the Company and there are no assurances that the
Company will be able to compete successfully with these competitors in the
future.
Levi Strauss & Co., through its wholly-owned subsidiary, Levi's Only
Stores, Inc., has opened retail stores, including Original Levi's Stores(TM) and
Levi's(R) Outlet stores, in the United States and elsewhere. Although Levi's
Only Stores, Inc. recently informed the Company that it intends to close 16 of
its own Levi's(R) Outlet stores, Levi's Only Stores, Inc. may decide to relocate
its existing stores and/or open additional retail stores throughout the United
States. The Company understands that stores owned and operated by Levi's Only
Stores, Inc., including Original Levi's Stores(TM), Levi's(R) Outlet stores,
Dockers(R) Shop stores, Dockers(R) Outlet stores, and Personal Pair(TM) stores,
may feature one or more Levi Strauss & Co. brands of merchandise and, thereby,
compete with the Company's stores. While the OLS Partnership remains in
existence, Original Levi's Stores(TM) and Levi's(R) Outlet stores opened in
eleven northeast states and the District of Columbia (the "Territory") may only
be opened by the OLS Partnership. Levi Strauss & Co. and its affiliates
currently operate stores (including Levi's(R) Outlet stores) that compete with
the Company's stores. Further, Levi Strauss & Co. and its affiliates are
permitted to open retail stores based on other store formats that would compete
with the Company's stores.
RISKS RELATED TO TRANSITION TO A MULTI-VENDOR, MULTI-BRAND RETAILER
For almost 21 years, the Company purchased merchandise exclusively from
Levi Strauss & Co. and its licensees. In November 1994, and more significantly
in May 1995, the Company undertook a transition from being a single vendor
retailer to being a multi-brand vertically integrated retailer offering, in
addition to the Levi's(R) and Dockers(R) brands, its own Boston Traders(R) brand
of merchandise. As part of this transition, the Company made significant
additions to its management and staff in order to establish, among other
capabilities, product development, product sourcing and logistics capabilities.
In June 1997 the Company announced that it would discontinue its
vertically integrated private label brand strategy and focus its efforts on
selling Levi's(R), Dockers(R) and other name brand products. This shift in
strategy will require the Company to successfully merchandise a number of
nationally-recognized brands, a number of emerging fashion brands of apparel,
and a limited group of independently sourced products to fill voids not covered
by other brands. There are no assurances that the Company will be able to
successfully continue to transition its operations from a single vendor retailer
to a multi-vendor and multi-brand retailer. There
are no assurances that the Company will be able to successfully: (i) update,
enhance and distinguish its stores and the merchandise sold by the Company; (ii)
manage the risks inherent in changing strategic direction; (iii) manage the
operational changes required to transition the Company from a single vendor
retailer to a multi-vendor retailer offering customers a broad selection of
brand name products; or (iv) implement the Company's operating and other
business strategies. The Company may also be materially and adversely affected
in the event of negative publicity concerning the reputation of the vendors and
the brands of merchandise offered for sale by the Company.
ADVERTISING AND PROMOTION
For almost 21 years the Company has enjoyed the benefit of being closely
identified with Levi Strauss & Co. The Company is directly affected by the
success or failure of the advertising and promotional efforts of Levi Strauss &
Co. As the Company becomes less dependent on sales of Levi Strauss & Co. brand
merchandise and increasingly features other brands of merchandise, the Company
will increasingly rely upon the success or failure of its own advertising and
promotional efforts, as well as the success or failure of advertising and
promotional efforts of other vendors. There are no assurances that the Company
will become less dependent on sales of Levi Strauss & Co. brand merchandise.
Moreover, there are no assurances that the future advertising efforts of the
Company, Levi Strauss & Co., or other vendors will result in increased sales.
Historically, the Company received co-operative advertising allowances
from Levi Strauss & Co. that funded as much as one third of the Company's annual
advertising expenditures. As the Company decreases the proportion of Levi
Strauss & Co. brand merchandise it offers, the advertising allowances associated
with the Company's advertising will decrease proportionately. Accordingly, the
Company's business will require increased expenditures for marketing and
advertising. There are no assurances that such increased expenditures will be
financially possible or, if undertaken, will result in increased sales.
RISKS ASSOCIATED WITH THE JOINT VENTURE
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
Company previously announced that the OLS Partnership may open up to a total of
thirty-five to fifty Original Levi's Stores(TM) and Levi's(R) Outlet stores in
the Territory through January 2000. The OLS Partnership currently owns and
operates twenty-two stores in the Territory. Any further store expansion by the
OLS Partnership depends, in large part, upon the ability of the OLS Partnership
to identify and secure suitable store locations. The Company does not
presently anticipate that the OLS Partnership will open any additional Original
Levi's Stores(TM) or Levi's(R) Outlet stores in fiscal year 1998.
The OLS Partnership has a ten year term. However, the Partnership
Agreement contains certain exit rights that enable either partner to buy or sell
their interest in the OLS Partnership, including the right to buy or sell
particular stores operated by the OLS Partnership. The Company may be materially
and adversely affected if, following January 2000, Levi Strauss & Co. or its
affiliates were to purchase the OLS Partnership's profitable stores and either
cause some or all of the unprofitable stores to remain in the OLS Partnership or
to seek to require an affiliate of the Company to purchase one or more of the
unprofitable stores. Notwithstanding, in the event such a transaction or series
of transactions is consummated, the Company would receive the benefit of any
consideration paid or otherwise transferred by Levi Strauss & Co. or its
affiliates for stores currently owned and operated by the OLS Partnership.
LIMITATIONS ON STORE EXPANSION
Levi Strauss & Co. informed the Company that it did not see an opportunity
for the Company to increase the number of its Levi's(R) Outlet by Designs
stores, nor the number of its Designs stores in the exclusively Levi Strauss &
Co. brands format. Accordingly, the Company's ability to increase the number of
stores it operates depends, in part, on the Company's ability to successfully
develop, open (including, in certain cases, the conversion of existing stores)
and operate stores that feature merchandise other than Levi Strauss & Co. brand
merchandise and, in part, on the OLS Partnership's ability to successfully
identify, secure, open and operate Original Levi's Stores(TM) and Levi's(R)
Outlet stores within the Territory. The Company anticipates that certain store
locations and existing store relocations will continue to be subject to new
branch opening approval policies and practices of Levi Strauss & Co. The Company
expects to continue to work closely with Levi Strauss & Co. in evaluating
product availability for existing and new store locations and must obtain the
approval of Levi Strauss & Co. before opening new stores. There are no
assurances that the Company's will be able to develop one or more new store
formats, including its Boston Trading Co.(R) store format featuring a broad
selection of nationally-recognized apparel brands and select emerging fashion
brands, or that, if developed, any new stores based upon such store formats will
be successful. Also, there are no assurances that new stores will achieve
profitability or that existing profitable stores will remain so.
RISKS ASSOCIATED WITH THE OPENING OF NEW STORES
To the extent that the Company opens new stores, any such store expansion
efforts will depend upon on a number of general factors including the Company's
ability to identify and secure suitable store locations, the negotiation of
acceptable lease
terms, merchandise availability, and the Company's future financial resources.
There are no assurances that the Company will be successful in either obtaining
suitable store locations for new or relocated stores or in negotiating
acceptable lease terms for such locations. Also, there are no assurances that
new stores will achieve profitability or that existing profitable stores will
remain so.
INCREASED DEPENDENCE ON BORROWINGS AND TRADE CREDIT
In fiscal year 1997, the Company reported a substantial net loss,
experienced negative cash flow from operations, made substantial cash outlays
associated with certain non-recurring charges, and ended the fiscal year in a
net borrowing position. Historically, the Company has financed its working
capital and capital expenditure requirements from cash flow from operations,
Common Stock offerings and short-term borrowings. The Company has become more
dependent upon its revolving credit facility as a source of capital than it has
been in the past. The Company also is more dependent upon the availability of
trade credit from Levi Strauss & Co., its licensees, and other vendors of
merchandise than it has been in the past. Any material unavailability of
revolving credit and/or vendor trade credit would have a material and adverse
effect on the operating results and financial position of the Company.
SEASONALITY AND INVENTORY RISK
Historically, the Company has experienced seasonal fluctuations in
revenues and income, with a larger portion of each generated in the second half
of the Company's fiscal year as a result of the Fall and Holiday seasons. The
seasonal nature of the Company's business requires the Company to increase its
inventory levels prior to the latter half of its fiscal year in preparation for
such selling seasons. The casual apparel industry has a significant lead time
for ordering, production and delivery of merchandise and, therefore, the Company
must commit to orders well in advance of the time when such merchandise would be
available for sale to consumers. Merchandise orders normally must be placed well
in advance of each selling season when customer preferences and fashion trends
are not yet evident from customer purchases. Since the Company must enter into
commitments and contracts for the purchase of merchandise well in advance of
each selling season, the Company is vulnerable to changes in consumer demand and
pricing shifts and to errors in selection of styles, quantities, product mix and
in the timing of such merchandise purchases. If the Company fails to forecast
consumer demand accurately or if there are changes in consumer preferences or
market demand after the Company has committed to such purchase and production
orders, the Company may encounter difficulty in liquidating its inventory. These
variables may have an adverse effect on the Company and the image of the brands
offered for sale by the Company as well as its sales, gross margins, earnings
results, and financial position.
INFORMATION SYSTEMS AND CONTROL PROCEDURES
The Company periodically reviews, improves and, under certain
circumstances, replaces its technology and management information systems to
provide enhanced support to all operating areas of the Company. While the
Company expects to continue to review and upgrade its technology and management
information systems, there are no assurances that the Company can successfully
implement such enhancements or that such enhancements will support the Company's
operating strategies, or, if such upgrades and enhancements are not successfully
implemented, that the Company's current systems will continue to support
adequately its management information requirements.
Moreover, while the Company believes its current management information
systems are generally adequate to support the Company's business operations, any
deficiencies in these systems which could result in less than optimal systems
performance could adversely affect the business operations of the Company. There
are no assurances that the Company's efforts to improve upon and enhance its
present management information systems will resolve or eliminate any existing or
potential difficulties.
The Company is implementing a program designed to cause its technology and
information systems that are critical to the Company's business to be year 2000
compliant. Barring unforeseen circumstances, the Company anticipates that the
conversion process to make its technology and information systems year 2000
compliant will be completed by the end of calendar year 1999. Any failure of any
such technology or information systems to comply with year 2000 requirements or
any unanticipated difficulty with the conversion process itself could have a
material and adverse affect on the business, financial condition, and results of
operations of the Company. The Company's business also may be negatively
affected by vendors, government agencies and other entities with which it has
dealings whose technology or systems are not year 2000 compliant.
RISK OF INFRINGEMENT OF THE COMPANY'S TRADEMARKS
The Company is the owner in the United States of the registered trademarks
"Boston Trading Co." and "Boston Traders" and certain other trademarks, service
marks and trade names. Certain of these marks are also registered, or are the
subject of pending applications, in the trademark registries of foreign
countries. The Company considers its rights in the Boston Trading Co.(R) and
Boston Traders(R) trademarks and its other marks in the United States and in
foreign countries to be valuable assets of the Company. Any infringement upon
the Company's Boston Trading Co.(R) and Boston Traders(R) trademarks or its
other trademarks, service marks and trade names or any piracy of the Company's
other intellectual property or its products would have a negative impact upon
the Company's ability to license, promote, market and enhance these brands.
SOURCES OF SUPPLY
The Company depends upon its unaffiliated vendors to supply high-quality
apparel and accessories in a timely manner. If these vendors were to experience
significant shortages of products purchased by the Company, such shortages could
have a negative effect on the Company's business, including increased costs or
difficulty in procuring merchandise.
CONSUMER PREFERENCES
The casual apparel industry is intensely competitive and subject to rapid
changes in consumer preferences and fashion trends. A significant marketing or
promotional success by one or more of the Company's existing or yet to be
established competitors could adversely affect the Company's competitive
position. In addition, in the United States, where the casual apparel market is
mature, sales levels may depend in part on whether the Company can increase its
market share at the expense of its competitors.
GENERAL ECONOMIC RISK FACTORS
Forward-looking statements of the Company are subject to the risk that
assumptions made by management of the Company concerning future general economic
conditions such as recession, inflation, interest rates, tax rates, consumer
spending and credit and other future conditions having an impact on retail
markets and the Company's business may prove to be incorrect. Adverse changes in
such future economic conditions could have an adverse affect on the Company's
business.
LITIGATION RISKS
The Company is subject to the normal risks of litigation with respect to
its business operations.
FACTORS AFFECTING THE COMPANY'S BUSINESS ARE SUBJECT TO CHANGE
This Report contains cautionary statements concerning certain factors that
may influence the business of the Company and are made as of the date of this
Report. Such factors are subject to change. The cautionary statements set forth
in this Report are not intended to cover all of the factors that may affect the
Company's business in the future. Forward-looking information disseminated
publicly by the Company following the date of this Report may be subject to
additional factors hereafter published by the Company.
5
12-mos
Jan-31-1998
Feb-02-1997
Jan-31-1998
1,473
0
115
0
54,972
71,432
70,118
34,811
116,399
29,328
0
0
0
160
82,220
116,399
265,726
265,726
227,368
227,368
84,537
0
851
(46,562)
(17,499)
(29,063)
0
0
0
(29,063)
(1.86)
(1.86)
5
1,000
12-mos
Feb-01-1997
Feb-04-1996
Feb-01-1997
3,390
5,887
558
0
79,958
96,311
71,976
32,760
141,760
23,991
0
0
0
159
110,886
141,760
289,593
289,593
203,364
203,364
76,339
0
197
10,364
4,100
6,264
0
0
0
6,264
.40
.40
5
1,000
12-mos
Feb-03-1996
Jan-29-1995
Feb-03-1996
13,941
5,978
473
0
58,008
84,174
62,385
26,302
132,649
19,617
0
0
0
158
105,927
132,649
301,074
301,074
211,989
211,989
73,540
0
196
16,515
6,742
9,773
0
0
0
9,773
.62
.61
