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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
February 2, 2002 (Fiscal 2002)
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 02494
(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
(Title of each Class)
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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 8, 2002, was approximately $44.4 million.
The registrant had 14,567,886 shares of Common Stock, $0.01 par value,
outstanding as of April 8, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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DESIGNS, INC.
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Index to Annual Report on Form 10-K
Year Ended February 2, 2002
PART I Page
Item 1. Business ................................................. 3
Item 2. Properties ............................................... 11
Item 3. Legal Proceedings ........................................ 12
Item 4. Submission of Matters to a Vote of Security Holders ...... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ...................................... 13
Item 6. Selected Financial Data .................................. 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data .............. 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant ....... 47
Item 11. Executive Compensation ................................... 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management ........................................... 60
Item 13. Certain Relationships and Related Transactions ........... 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ...................................... 64
2
PART I.
Item 1. Business
Summary
Designs, Inc. (together with its subsidiaries, the "Company") is a retailer
specializing in selling quality branded apparel and accessories in outlet malls
throughout the eastern part of the United States and Puerto Rico. For over 25
years, through a license agreement with Levi Strauss & Co., the Company has
owned and operated retail outlet stores selling exclusively Levi's(R) branded
merchandise. The Company is expanding upon its core competency of operating
branded retail stores in factory outlet malls for branded manufacturers.
In January 2002, the Company entered into a license agreement with Candie's,
Inc. ("Candie's"), a publicly owned company and a leading designer and marketer
of young women's footwear, apparel and accessories. Under this license
agreement, the Company plans, over the next five years, to open and operate 75
Candies(R) branded retail stores in outlet malls and value centers throughout
the United States. The Company plans to open 11 Candies(R) branded stores in
outlet malls during the fiscal year ending February 1, 2003 ("fiscal 2003").
Subsequent to the fiscal year ended February 2, 2002 ("fiscal 2002"), the
Company announced that it had entered into a joint venture with EcKo Complex,
LLC ("EcKo"), a privately held company and leading design-driven lifestyle brand
targeting young men and women. EcKo has worldwide annual sales exceeding $200
million. Under this joint venture agreement, the Company will exclusively open
and operate 75 EcKo(R) branded outlet stores throughout the United States over a
six-year period. The basic terms of the joint venture agreement, which is the
Company's preferred business structure with branded manufacturers, provides for
sharing the operating profits where the Company will hold a 50.5% interest in
the venture with the remaining 49.5% interest being held by EcKo. The agreement
requires EcKo to contribute the inventory requirements for the retail stores and
provide the branded trademarks and branded knowledge, and requires the Company
to contribute its retail operational expertise and operating expenses for the
retail stores. The Company plans to open 5 EcKo(R) branded outlet stores during
fiscal 2003.
The Company is continuing discussions with several other manufacturers as it
strives to become a premier operator of branded retail outlet stores. The
Company believes that manufacturers will find the Company as their logical
solution for an outlet channel of distribution for their branded merchandise.
Store Expansion
The Company's plan for fiscal 2003 is to open a total of 15 to 20 new outlet
stores, 16 of which are scheduled to open in time for the important
back-to-school selling season. The Company expects to open eleven new
Candie's(R) junior footwear and apparel outlet stores by mid-year. Four of these
stores will be built utilizing space from the Company's existing
Levi's(R)/Dockers(R) stores which are located in outlet centers in New York, New
England and Puerto Rico. Several of the Company's existing higher volume
Levi's(R)/Dockers(R) outlet stores currently average 13,000 to 15,000 square
feet which is more than the Company's ideal prototype store size of 9,000 square
feet. By utilizing this excess space for the new Candie's(R) outlet stores, the
Company can leverage expenses while increasing profitability. The remaining
seven Candie's(R) outlet stores to be open will include five in California, one
in Las Vegas, Nevada and one in Miami, Florida.
The Company plans to open its first EcKo(R) outlet stores by the back-to-school
season, of which two stores will be built utilizing space in existing
Levi's(R)/Dockers(R) stores. Other new store locations may be planned for other
branded manufacturers with which the Company is having discussions regarding
potential joint venture arrangements, similar to the arrangement with EcKo.
3
Capital expenditures for fiscal 2003 are expected to be approximately $4.0
million, of which $2.5 million relates to the expansion plan discussed above.
This amount is net of committed landlord allowances that the Company expects to
receive.
The Company continually evaluates the performance of its stores and may, from
time to time, decide to close or reduce the size of or remodel certain store
locations.
History
The Company, which started in 1977 and subsequently went public in 1987,
operated exclusively Levi Strauss & Co. branded outlet and full retail priced
mall-based stores until fiscal 1996. In fiscal 1996, the Company embarked on a
private label diversification strategy, acquiring the Boston Traders(R) brand
and 33 existing Boston Traders(R) outlet stores. By fiscal 1997 the Company had
abandoned its private label strategy and had begun to liquidate its private
label merchandise and the Boston Traders(R) stores. The Company incurred
approximately $85 million in operating losses during the fiscal years 1998, 1999
and 2000 as a result of this failed private label diversification strategy.
In October 1999, the stockholders of the Company elected a new board of
directors and then in April 2000 appointed a new Chairman of the Board in
addition to a new Chief Executive Officer and President of the Company. The
following September 2000 a new Chief Financial Officer was also hired. Under new
management, the Company significantly reduced its selling, general and
administrative expenses, reduced its inventory shrink rates from almost 4% to
just over 2%, invested substantial amounts of capital in its inventory
management systems, remodeled the Company's most profitable stores and renewed
the Company's strategy of marketing and selling branded merchandise in the
outlet mall arena, thereby expanding its retail presence. The Company has had
significant improvement in EBITDA (earnings before interest, taxes, depreciation
and amortization) since this management change.
Store Formats
In fiscal 2002, the Company owned stores operating under the names, "Levi's(R)
Outlet by Designs," "Dockers(R) Outlet by Designs," "Levi's(R)/Dockers(R) Outlet
by Designs." In January 2002, in conjunction with the Company entering into a
license agreement with Candie's, the Company also acquired an existing
Candie's(R) Outlet store located in Wrentham, Massachusetts.
During fiscal 2002, the Company continued to update its existing chain of stores
to its updated store proto-type, the Levi's(R)/Dockers(R) Outlet by Designs
store. The Company's preferred proto-type, which is generally 9,000 square feet,
is a combined Dockers(R) Outlet store and Levi's(R) Outlet store that separately
displays each brand in its own unique environment. This differs from the
Company's older Levi's(R) Outlet store format, which averages 10,000 to 12,000
square feet and has no prominent marketing of the individual Levi's(R),
Dockers(R) and Slates(R) brands. By updating the store fixtures and enhancing
visual merchandising, the strong identity of each brand is maximized for the
customer. The total average square footage of the chain has decreased to
approximately 9,800 as the Company continues to open new stores and remodel its
existing stores to the smaller, more profitable proto-type.
At February 2, 2002, the Company operated 102 stores of which 48 are in the
combined Levi's(R)/Dockers(R) Outlet by Designs format. The Company also
operated 11 Dockers(R) Outlet stores, which sell exclusively Dockers(R) and
Slates(R) brand products, and 13 Levi's(R) Outlet stores, which sell exclusively
Levi's(R) brand products. At year end, the Company also owned one Candie's(R)
Outlet store. The remaining 29 stores are the older Levi's(R) Outlet stores that
carry a combination of Levi's(R), Dockers(R) and Slates(R) apparel. The Company
plans to continue to update its store base, where feasible, by remodeling its
remaining older stores to the combined format, relocating or closing stores and
combining the individual Dockers(R) and Levi's(R) outlet stores. Several of the
Company's smaller Dockers(R) and Levi's(R) only stores are located in the same
outlet center and are adjacent to each other. Through fiscal 2002, the Company
had combined six pairs of its standalone Dockers(R) and Levi's(R) outlet stores
that were located in the same mall into combined Levi's(R)/Dockers(R) Outlet
stores.
4
Customer Base
The Company's Levi's(R) and Dockers(R) Outlet stores continue to attract the
loyal Levi's(R), Dockers(R) and Slates(R) brand customers as well as foreign
travelers looking for these well-known brands. The product selection offered in
these stores is designed to satisfy the casual apparel needs of customers in all
groups and income brackets.
The Candie's(R) brand, consisting of fashion and casual footwear, is designed
primarily to attract women and girls aged 6 to 35. The brand is synonymous with
young, fun and fashionable footwear marketed by innovative advertising and
celebrity spokespersons. The Company believes that Candie's has developed its
merchandise into a strong footwear brand appealing to women and girls in this
generation "Y" demographic.
The Company believes that its EcKo(R) Unltd. outlet stores will represent an
opportunity in the outlet marketplace for the underdeveloped young men's and
junior market. EcKo(R) is considered one of the few truly cross-over youth
brands appealing to both the urban and suburban youth with a core customer
between the ages of 14 to 24 years of age.
Merchandising
The merchandising department is composed of buyers, merchandise buyers and
merchandise allocators, all playing a key role in deciding the appropriate
merchandise assortments to purchase in the stores, the appropriate timing and
quantities for the stores, with adequate replenishment quantities for the stores
in the warehouse, and in determining the appropriate quantities for each store
after considering regional, demographic data, and historical patterns of each
and every store. The Company has separate merchants for each of the brands that
the Company sells. The Company believes that this is important as each brand has
different merchandise characteristics and requires separate merchandise plans,
distribution and allocation methodologies to maximize the respective brand's
performance in the stores.
Levi's(R)/Dockers(R)/Slates(R) brands
The Company offers an exclusive selection of Levi Strauss & Co. brands of
merchandise which include Levi's(R), Dockers(R) and Slates(R) brands. The Levi
Strauss & Co. brands target customers in all age groups and income levels. The
Levi's(R) brand includes various men's, women's and kids' jeanswear products as
well as an assortment of woven and knit tops and accessories. The Dockers(R)
brand includes a broad range of casual pants and are complemented by a variety
of tops and seasonal pant products in a range of fits, fabrics, colors and
styles. The Dockers(R) brand is primarily targeted towards the casual workplace
attire customer. The Slates(R) brand collection of pants, shirts, sweaters and
outerwear combines contemporary styles with modern fabrics and colors. The
Slates(R) brand for both men and women targets the 25- to 34-year old consumers'
desire for a younger and more sophisticated casual look.
The Company's merchandise sales performance of its Levi's(R)/Dockers(R)stores is
dependent upon the acceptance and growth of the Levi Strauss & Co. brands of
merchandise. Since 1996, Levi Strauss & Co. sales have declined 35% from
approximately $7.1 billion to $4.3 billion for that company's fiscal year ended
November 25, 2001. The Levi Strauss & Co. brands have significant competition
across all brands. Private labels which include VF Corporation, marketer of the
Lee, Wrangler, and Rustler brands; fashion labels including names such as Polo
Ralph Lauren Corporation, Calvin Klein, Nautica Enterprises, Guess?, Inc. and
Tommy Hilfiger Corp.; vertically integrated specialty stores such as Gap, Inc.,
Abercrombie & Fitch, American Eagle Outfitters, Inc., J. Crew and Eddie Bauer,
Inc.; lower-volume but high visibility fashion-forward jeanswear brands that
appeal to the teenage market, including FUBU, JNCO, Lucky, MUDD and Diesel
brands; casual wear manufacturers, including Haggar Corp., Liz Claiborne, Inc.,
and Savane International Corp.; retailer private labels including J.C. Penney's
Arizona brand and Sears' Canyon River Blues and Canyon River Khakis brands; and
mass merchandisers, including Wal-Mart Stores, Inc., Target and Kmart. Levi
Strauss & Co. has placed great emphasis on its business turnaround strategy
through supply chain improvements, product improvements, product innovation, new
marketing campaigns and improved retail presentation.
5
Through the Company's license agreement with Levi Strauss & Co., merchandise
product is made available to the Company throughout the year. The Company has
worked closely with Levi Strauss & Co. to make wider assortments of its brand
offerings regularly available to the Company. The Company has historically
purchased manufacturing overruns, discontinued lines and irregulars from Levi
Strauss & Co. at wholesale cost which has historically been much less than the
wholesale cost of other merchandise purchases from Levi Strauss & Co. The
Company's gross margins have been influenced in part by the varying availability
of this lower wholesale cost merchandise from Levi Strauss & Co.
Candies(R) brand
Candie's(R) footwear features a variety of styles. The retail price of
Candie's(R) footwear generally ranges from $30 - $80 for women's styles and $35
- - $50 for girls' styles. Four major and two interim times per year, as part of
its Spring and Fall collections, 30 to 50 different styles are designed and
marketed. Approximately one-third of Candie's(R) women's styles are "updates" of
the their most popular styles from prior periods, which they consider their
"core" products. Approximately three-quarters of the girls' styles are versions
of the best selling women's styles and the remaining one-quarter are designed
specifically for the girls' line.
Designers from Candie's analyze and interpret fashion trends and translate such
trends into shoe styles consistent with the Candie's(R) image and price points.
Fashion trend information is compiled by the Candie's design team through
various methods, including travel to Europe and throughout the world to identify
and confirm seasonal trends and shop relevant markets, utilization of outside
fashion forecasting services and attendance at trade shows. Each season,
subsequent to the final determination of that season's line by the design team
and management (including colors, trim, fabrics, constructions and decorations),
members of the Candie's design team will travel to their various manufacturers
to oversee the production of the initial sample lines.
EcKo(R) brand
The Company's EcKo(R) Unltd. outlet stores will be geared towards the youth
market offering men and women a broad selection of merchandise that identifies
with everything from hip-hop to extreme sports, and street-wear to fraternity
wear. EcKo's core menswear line consists of fleece, twill and denim bottoms,
wovens, printed tee shirts, shirts, knits and sweaters.
Distribution
The Company operates two distribution centers, both located in Orlando, Florida,
which it uses to regulate the flow of merchandise to its stores. The Company's
distribution strategy is (1) to maintain warehouse facilities that regulate the
flow of merchandise to the stores in order to facilitate improved store-level
inventory management, and (2) to flow through (cross-dock) the higher volume
product in order to maintain optimum inventory levels in the stores and maximize
sales.
Prior to the Company opening its own distribution centers in fiscal 2001, much
of the Company's merchandise was shipped directly to the stores, which resulted
in an unbalance of merchandise throughout the chain.
In fiscal 2002, the Company partnered with United Parcel Services ("UPS") to
improve upon its distribution methods and reduce shipping costs as a result of
not having to use third party trucking companies. By utilizing UPS, the Company
is able to track all deliveries from the warehouse to its individual stores and
gives the Company the added visibility to the status of in-transit shipments.
6
Levi Strauss & Co. Trademark License Agreement
The Company operates under a trademark license agreement with Levi Strauss &
Co., which was most recently amended in October 1998 (as amended, the "Levi
Outlet License Agreement"). This Levi Outlet License Agreement authorizes the
Company to use certain Levi Strauss & Co. trademarks in connection with the
operation of the Company's Levi's(R) Outlet by Designs and Dockers(R) Outlet by
Designs stores in 25 states in the eastern portion of the United States and in
Puerto Rico. Subject to certain default provisions, the term of the Levi Outlet
License Agreement was extended to September 30, 2004, and the license for any
particular store is the period co-terminous with the lease term for such store
(including extension options). The Levi Outlet License Agreement provides that
the Company has the opportunity to extend the term of the license associated
with one or more of the Company's older Levi's(R) Outlet by Designs stores by
either renovating the store or replacing the store with a new store that has
updated format and fixturing. In order to extend the license associated with
each of the Company's then 59 older outlet stores, the Company must, subject to
certain grace periods, complete these renovations or the construction of
replacement stores by December 31, 2004. Through the end of fiscal 2002, the
Company had completed remodels and or relocations on 30 of the 59 older outlet
stores. 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 and
Dockers(R) Outlet by Designs stores. At February 2, 2002, the average remaining
lease term (including extension options) of the Company's Levi's(R) Outlet by
Designs and Dockers(R) Outlet by Designs stores was approximately 8.3 years.
Candie's Trademark License Agreement
In January 2002, the Company entered into a similar trademark license agreement
with Candie's, Inc., which authorizes the Company to use certain Candie's(R)
trademarks in connection with the operation of the Company's Candie's(R) Outlet
stores. The Candie's license agreement provides the Company with the exclusive
right to open and operate Candie's(R) branded stores in outlet malls and value
centers throughout the United States and Puerto Rico as long as the Company
opens the requisite number of outlet stores per year, and reaches 75 outlet
stores in five years. Generally, to maintain the exclusivity in the value
centers, the Company must open approximately five stores per year. If the
Company does not maintain the store opening schedule required in the license
agreement, the Company may lose the right to operate the existing stores within
an exclusive radius until the expiration of the term. The license agreement also
establishes that product purchased from Candie's will be priced according to a
cost-plus formula. Among other terms of the license agreement, the Company could
source its own Candie's(R) merchandise product for the retail stores if Candie's
or its licensees cannot supply the appropriate merchandise assortments or
quantities, as deemed by the Company.
Joint Venture Agreement with EcKo Complex, LLC
Subsequent to fiscal 2002, the Company entered into a joint venture agreement in
principle with EcKo Complex, LLC under which the Company, a 50.5% partner, would
own and manage retail outlet stores bearing the name EcKo Unltd. and featuring
EcKo(R) branded merchandise. EcKo, a 49.5% partner, will contribute to the joint
venture the use of its trademark and the merchandise requirements, at cost, by
the retail outlet stores. The Company will contribute all real estate and
operating requirements of the retail outlet stores, including but not limited
to, the real estate leases, payroll needs and advertising. Each partner will
share in the operating profits of the joint venture, after each partner has
received reimbursement for its cost contributions. Under the terms of the
agreement, the Company must maintain a prescribed store opening schedule and
open 75 stores over a six-year period in order to maintain the joint venture's
exclusivity. At certain times during the term of the agreement, the Company may
exercise a put option to sell its share of the retail joint venture, and EcKo
has an option to acquire the Company's share of the retail joint venture at a
price based on the performance of the retail outlet stores.
Trademarks
"Dockers(R)," "Levi's(R)" and "Slates(R)" are registered trademarks of Levi
Strauss & Co. "Candie's(R)" is a registered trademark of Candie's, Inc.
"EcKo(R)" is a registered trademark of EcKo Complex, LLC.
7
Store Operations
The Company currently employs one Senior Vice President of Operations and one
Director of Stores. In order to provide management development and guidance to
individual store managers, the Company employs 13 district managers. Each
district manager is responsible for hiring and developing store managers at the
stores assigned to that district manager's area and for the sales and overall
profitability of those stores. District managers report directly to the Director
of Stores.
The Company's stores utilize interior design and merchandise layout plans
designed by the Company's visual merchandising team which are specifically
designed to promote customer identification as a specialty outlet 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. The stores prominently display
Levi's(R), Dockers(R), Slates(R) and Candie's(R) brand logos and utilize
distinctive promotional displays. The Company uses Levi Strauss & Co. logos and
trademarks on store signs with the permission of Levi Strauss & Co. and
similarly uses Candie's Inc. logos and trademarks on store signs in its
Candie's(R) Outlet stores.
In fiscal 2001, in conjunction with the Company's initiatives to improve shrink
and inventory management, the Company out-sourced its loss prevention department
to LP Innovations, Inc., a leader in loss prevention management. By utilizing
exception-based reporting software in addition to implementing stronger and more
effective loss prevention controls, the Company has been able to reduce shrink
from 4% to 2% over an approximate two year period.
Customer Service & Training
"Designs University" was established in fiscal 1996 to offer associate training
and development programs throughout the organization. Sales associate
expectations are established at all levels of training, beginning with the Sales
Associate Development Program. This program introduces the associate to the
Company's operational policies, product information and customer service
objectives. Through this program, associates are taught that servicing the
customer is the highest priority. Management believes that sales associates are
trained towards accomplishing the 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. Associates learn how to perform critical management functions required
to successfully operate a store. The Store Management Development Program
focuses on fundamental operational procedures, expense control and personnel
management.
Each Levi's(R) Outlet by Designs and Dockers(R) Outlet by Designs store employs
approximately 17 associates. The Company expects that each of the new
Candie's(R) Outlet stores and EcKo(R) Unltd. Outlet stores will employ
approximately 10 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 on the team in specific stores. The store
management team is responsible for all operational matters in the store,
including the hiring and training of sales associates.
During fiscal 2003, the Company is standardizing its store managerial functions
and staffing requirements among stores, depending upon store size and sales
volumes. The Company has established sales productivity goals among stores as
well as scheduling sales staff based on the hourly sales volume at each store.
As a result, the Company expects to see improvements in fiscal 2003 in its store
labor productivity.
8
Management Information Systems
The Company's management information systems, located at both its corporate
headquarters in Needham, Massachusetts and all of its retail stores, consist of
a full range of retail merchandising and financial systems which include
merchandise planning and reporting, distribution center processing, inventory
allocation, in-store systems, sales reporting, and financial processing and
reporting. The Company's primary business applications, JDA Merchandising
Management Systems and Lawson Financial Systems, operate on an IBM AS/400
platform.
All of the Company's stores have point-of-sale terminals supplied by IBM and
supported by point-of-sale business application provided by CRS, that captures
daily transaction information by item, color and size (SKU). The Company
utilizes barcode technology in tracking sales, inventory and pricing
information. Communication between the corporate office and all stores is
facilitated on a daily basis through the use of an electronic mail system. The
JDA Merchandising Management System is updated daily with all store transactions
and provide daily sales, inventory, pricing and merchandise information and
management reports in assisting the Company operate its retail business. Its
merchandising system applications also facilitate the placement of purchase
orders and their tracking, primarily through electronic data interchange (EDI).
The Company evaluates this information, together with weekly reports on
merchandise statistics, prior to making merchandising decisions regarding
reorders of fast-selling items and the allocation of merchandise.
In fiscal 2001, the Company purchased JDA Arthur, a planning and allocation
system that should further enhance the Company's inventory management and
visibility. The added inventory management applications were installed and
implemented during fiscal 2002. In addition, the Company will be enhancing its
warehouse management systems either through the further development of its
existing system with JDA, or through the purchase of a warehouse management
application from a third-party provider. These added applications should greatly
enhance the Company's inventory management capabilities.
The Company utilizes a client-server based network with mixed NT and Novell
environment running on a local area network to communicate and work-share within
its corporate headquarters. The Company also utilizes the services of ADP, an
outside payroll processing provider, to prepare, distribute and report its
weekly payroll.
Advertising
The Company relies on the visibility and recognition of the Levi's(R),
Dockers(R) and Slates(R) and most recently the Candie's(R) brand names, as well
as the natural flow of traffic that results from locating stores in areas of
high retail activity including destination outlet centers and regional malls.
The Levi Outlet License Agreement with Levi Strauss & Co. limits the Company's
advertising ability to billboards and specific outlet center promotions.
The Company has a complete visual merchandising program that, through the use of
in-store signage, focuses on product knowledge and marketing of the individual
Levi's(R), Dockers(R), Slates(R) and Candie's(R) brands and communicates its
value to the customers. During fiscal 2002, the Company updated its visual
marketing programs by redesigning its communication and education in-store
signage for better guidance of the customers through the shopping experience.
Also during fiscal 2002, the Company introduced a gift card program to its
customers in which gift certificates issued in the form of credit cards are sold
to customers for redemption at a later date. Balances and transaction
information are stored electronically and communicated to the customers on their
purchase receipts.
In fiscal 2003, the Company intends to introduce a customer loyalty program
under a similar concept, whereby frequent customers will be rewarded for their
loyalty to Designs operated stores.
9
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 considers any casual apparel manufacturer operating in outlet parks
throughout the United States to be a competitor in the casual apparel market.
The Company's business involves the sale of branded apparel and accessories sold
by or manufactured under license from Levi Strauss & Co. Levi Strauss & Co. is
involved in the highly competitive fashion apparel industry. Levi's(R) brand
jeans have been impacted by the increased competition from private labels as
well as fashion jeans market entrants and by a decrease in national sales trends
of Levi's(R) brand products.
Management believes that the Company competes with other apparel retailers by
offering superior selection, quality merchandise, knowledgeable in-store service
and competitive price points. The Company stresses product training with its
sales staff and, with the assistance of merchandise materials from its
manufacturers, it can provide its sales personnel with substantial product
knowledge training across all product lines.
As it relates to the Company's future Candie's(R) Outlet stores, the footwear
industry is extremely competitive in the United States and has substantial
competition in each of its product lines from, among other brands, Skechers,
Steve Madden and Esprit. In general, competitive factors include quality, price,
style, name recognition and service. The presence in the marketplace of various
fashion trends and the limited availability of shelf space also can affect
competition.
Employees
As of February 2, 2002, the Company employed approximately 1,500 associates, of
whom 950 were full-time personnel. The Company hires additional temporary
employees during the peak Fall 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, and corporate office
employees are eligible to receive incentive compensation subject to the
achievement of specific performance objectives related to sales, profitability
and expense control. District managers and certain corporate office employees
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 individual store sales contests. District
managers, store managers and certain corporate office employees have been
granted stock options to purchase shares of the Company's common stock, par
value $0.01 per share ("Common Stock"). None of the Company's employees are
represented by any collective bargaining agreement.
10
Item 2. Properties
As of February 2, 2002, the Company operated 102 stores operating under the
names Levi's(R)/Dockers(R) Outlet by Designs, Levi's(R) Outlet by Designs,
Dockers(R) Outlets by Designs and its first Candie's(R) Outlet store. All of
these stores are leased by the Company directly from outlet center owners. In
the past two years, the Company has decreased the average square footage of the
chain to approximately 9,800 as a result of opening new smaller size stores and
remodeling some of its existing stores to a smaller, more profitable prototype.
The store leases are generally five years in length and 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.
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 center and the attractiveness of the store layout. The
Company also utilizes financial models to project the profitability of each
location using assumptions such as the center's 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 stores to attract
customers from the general shopping traffic and to generate its own customers
from surrounding areas.
The lease for the Company's headquarters office, at 66 B Street, Needham
Massachusetts, which began in November 1995, is for a period of ten years. The
lease provides for the Company to pay all occupancy costs associated with the
land and the 80,000 square foot building. Beginning in fiscal 1998, the Company
began subleasing excess office space as a result of its downsizing. As of
February 2, 2002, the Company had two subtenants that collectively lease
approximately 29,800 of the 80,000 square feet. These leases are for five-year
terms, expiring in March and July 2003.
On November 13, 2000, the Company announced that it had entered into an option
agreement with the landlord of its corporate headquarters. The agreement
provided the landlord with the option, if exercised within 15 months from
November 2000, which was the date of the agreement, to terminate the Company's
lease for its corporate headquarters, which currently will expire on January 31,
2006. If such option, which terminated on February 1, 2002, had been exercised
by the landlord, then the Company would have been entitled to receive $8.9
million for vacating the leased property.
In fiscal 2001, the Company opened its own 60,000 square foot distribution
center located in Orlando, Florida. The Company has leased the property for five
years through August 14, 2005 at which time the Company has the option to extend
its lease for an additional five years. The lease also contains certain exit
rights, which would allow the Company to terminate the lease on August 14, 2002
with six months prior notice. In fiscal 2002, the Company entered into another
lease agreement to lease an additional 16,000 square feet of warehouse space in
Orlando, Florida. The lease for the additional space expires March 31, 2005 and
also contains certain exit rights, which would allow the Company to terminate
the lease on March 31, 2003 with three months prior notice. In fiscal 2002, the
Company also ended its usage of a 30,000 square foot third-party distribution
center in Mansfield, Massachusetts, which it had used to distribute merchandise
until September 2001.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Capital Expenditures."
11
Item 3. Legal Proceedings
The Company is a party to litigation and claims arising in the course of its
business. Management does not expect the results of these actions to have a
material adverse effect on the Company's business or financial condition.
In May 1995, the Company purchased from Boston Trading Ltd., Inc. certain assets
including various trademarks and license agreements. The terms of the Asset
Purchase Agreement, which was dated April 25, 1995 (the "Purchase Agreement"),
included the Company delivering a $1 million promissory note ("Purchase Note")
for the balance of the purchase price. The principal amount of the Purchase Note
was stated to be payable in two equal annual installments through May 1997. In
the first quarter of fiscal 1997, the Company asserted certain indemnification
rights under the Purchase Agreement. In accordance with the terms of the
Purchase Agreement, the Company, when exercising its indemnification rights, had
the right, among other courses of action, to offset against the payment of
principal and interest due and payable under the Purchase Note. Accordingly, the
Company did not make the two $500,000 principal payments on the Purchase Note
that were due on May 2, 1996 and May 2, 1997. The Company paid all interest on
the original principal amount through May 2, 1996 and continued to pay interest
thereafter through January 31, 1998 on $500,000 of principal. In January 1998,
Atlantic Harbor, Inc. filed a lawsuit against the Company for failing to pay the
outstanding principal amount of the Purchase Note, which was issued to Boston
Trading Ltd., Inc. (d/b/a Atlantic Harbor, Inc.). In March 1998, the Company
filed a counterclaim against Atlantic Harbor, Inc. alleging that the Company
suffered damages in excess of $1 million because of the breach of certain
representations and warranties made by Atlantic Harbor, Inc. and its
stockholders concerning the existence and condition of certain foreign trademark
registrations and license agreements.
In the first quarter of fiscal 2002, the Company entered into a settlement
agreement with Atlantic Harbor, Inc. whereby the Company agreed to pay $450,000
to Atlantic Harbor, Inc. as settlement for all obligations outstanding under the
Purchase Note. In exchange, the Company agreed to transfer and assign all
trademarks and license agreements acquired as part of the Purchase Agreement to
a new entity in which the Company would have a 15% equity interest, with
Atlantic Harbor, Inc. and its affiliates retaining the remaining interest. The
Company would also be entitled to receive up to an additional $150,000 from
existing license royalties over the next four years. In the fourth quarter of
fiscal 2001, the Company recorded a gain related to the settlement of this
matter in the amount of $550,000, which was included in "Provision for
impairment of assets, store closings and severance" on the Consolidated
Statements of Operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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 closing sales prices for the Common Stock, as reported on the Nasdaq
consolidated reporting system.
Fiscal Year Ended
February 2, 2002 High Low
- -------------------------------------------------------------------
First Quarter $ 3.0000 $ 1.8750
Second Quarter 5.6000 2.7500
Third Quarter 4.6300 2.0200
Fourth Quarter 4.1900 2.3000
Fiscal Year Ended
February 3, 2001 High Low
- -------------------------------------------------------------------
First Quarter $ 1.5000 $ 1.0938
Second Quarter 2.1250 1.1875
Third Quarter 2.5625 1.9375
Fourth Quarter 2.4688 2.0000
As of April 8, 2002, based upon data provided by independent shareholder
communication services and the transfer agent for the Common Stock, there were
approximately 285 holders of record of Common Stock.
The Company has not paid and does not anticipate paying 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 C of Notes to
Consolidated Financial Statements.
13
Item 6. Selected Financial Data
Fiscal Years Ended (1)
February 2, February 3, January 29, January 30, January 31,
2002 2001 2000 1999 1998
(Fiscal 2002) (Fiscal 2001) (Fiscal 2000) (Fiscal 1999) (Fiscal 1998)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
INCOME STATEMENT DATA:
Sales $ 195,119 $194,530 $ 192,192 $ 201,634 $ 265,726
Gross profit, net of occupancy costs 47,221 54,985 47,440(4) 42,249(5) 38,358(6)
Provision for impairment of assets, store
closing and severance -- 107 14,535(4) 15,729(5) 21,600(6)
EBITDA(2) 7,478 12,671 (2,569) (20,659) (34,945)
Pre-tax income(loss) 175 5,488 (10,278)(4) (29,269)(5) (46,562)(6)
Net income(loss) (7,881)(3) 3,216 (12,493) (18,541) (29,063)
Earnings(loss) per share- basic $ (0.54) $ 0.20 $ (0.78) $ (1.17) $ (1.86)
Earnings(loss) per share- diluted $ (0.54) $ 0.20 $ (0.78) $ (1.17) $ (1.86)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding
For earnings per share- basic 14,486 16,015 16,088 15,810 15,649
Weighted average shares outstanding
For earnings per share -diluted 14,486 16,292 16,088 15,810 15,649
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 13,277 $ 16,306 $ 19,624 $ 24,078 $ 42,104
Inventories 57,734 57,675 57,022 57,925 54,972
Property and equipment, net 20,912 18,577 16,737 17,788 35,307
Total assets 90,901 95,070 95,077 99,317 116,399
Shareholders' equity 42,414 49,825 52,269 63,956 82,380
OPERATING DATA:
Net sales per square foot $ 195 $ 192 $ 190 $ 187 $ 220
Number of stores open at fiscal year end 102 102 103 113 125
(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, 2001 included 53
weeks.
(2) The Company defines EBITDA as Net Income before Taxes, Interest expense
net and Depreciation and amortization.
(3) In the fourth quarter of fiscal 2002, the Company recorded a special
non-cash charge of $8.0 million to reduce the carrying value of certain
deferred tax assets. Due to the general weakness of the economy during
fiscal 2002, which resulted in reduced earnings from fiscal 2001, the full
realizability of certain tax assets can not be assured, accordingly the
Company established additional reserves against those assets. As the
Company's profitability improves, either from improved performance in its
Levi's(R)/Dockers(R) stores, or from its roll-out of the Candies(R),
EcKo(R), and other brands, the Company may have the ability to reinstate
the full value of its deferred tax assets. Conversely, the amount of the
deferred tax assets considered realizable could be reduced in the near
term if projections of future taxable income during the carryforward
period are reduced or if actual results are less than projections..
(4) Pre-tax loss for fiscal 2000 includes the $15.2 million charge taken in
the fourth quarter related to inventory markdowns, the abandonment of the
Company's Boston Traders(R) trademark, severance, and the closure of the
Company's five remaining Designs/BTC(TM) stores and its five Buffalo(R)
Jeans Factory stores. Of the $15.2 million charge, $7.8 million, or 4.1%
of sales, is reflected in gross margin. The pre-tax loss for fiscal 2000
also includes $717,000 of non-recurring income related to excess reserves
from the fiscal 1999 restructuring program.
(5) Pre-tax loss for fiscal 1999 includes the $13.4 million charge taken in
the third quarter related to closing 30 unprofitable stores. Also included
in the pre-tax loss for fiscal 1999 is the $5.2 million charge related to
the closing of one Designs store, three BTC(TM) stores and four Boston
Traders(R) outlet stores, all eight of which were closed in fiscal 2000.
Of the $5.2 million charge, $800,000, or 0.4% of sales, is reflected in
gross margin. In addition, the Company recognized $2.9 million in
restructuring income in the fourth quarter which was the result of
favorable lease negotiations associated with the original estimated $13.4
million charge.
(6) Pre-tax loss for fiscal 1998 includes the $20 million charge taken 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.
14
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.
FISCAL YEARS ENDED (1)
---------------------------------------------------------------------------------
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
2002 2001 2000 1999 1998
(Fiscal 2002) (Fiscal 2001) (Fiscal 2000) (Fiscal 1999) (Fiscal 1998)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Sales (In Thousands) $ 195,119 $ 194,530 $192,192 $ 201,634 $ 265,726
Number of stores in operation at end of the
fiscal year:
Store Type
Levi's(R) Outlet and Dockers(R)Outlet by
Designs 101 102 103 95 59
Candies(R) Outlet 1
Store Concepts closed:
Designs and BTC(TM)(2) -- -- -- 9 22
Buffalo Jeans(R) Factory Outlets(2) -- -- -- 5 --
Boston Trading Co.(R)(2) -- -- -- -- 11
Boston Traders(R) outlets(2) -- -- -- 4 12
Joint Venture:
Original Levi's Stores(TM)(2) -- -- -- -- 11
Levi's(R) Outlet stores (2) -- -- -- -- 11
- ---------------------------------------------------------------------------------------------------------------------------------
Total stores 102 102 103 113 126
Comparable stores 96 92 87 80 112
Changes in total sales 0% 1% (5%) (24%) (8%)
Changes in comparable store sales (4%) (4%) (1%) (18%) (10%)
(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, 2001 covered 53
weeks. Comparable store sales for fiscal 2001 were based upon 52-week
comparisons.
(2) As part of store closing programs in fiscal 1998, 1999 and 2000, the
Company closed all of its non-profitable store concepts.
RESULTS OF OPERATIONS
SALES
Sales for fiscal 2002 were $195.1 million for the 52-week period compared with
sales of $194.5 million for the 53-week period of fiscal 2001. On a comparable
basis, total sales of $195.1 million for fiscal 2002 increased 1.5% when
compared to $192.2 million for the corresponding 52-week period in fiscal 2001.
There were 53 weeks in fiscal 2001 and 52 weeks in fiscal 2002 and 2000.
Comparable store sales for fiscal 2002 decreased 3.9 %.
Fiscal 2002 was a difficult year for the retail industry due to the general
economic conditions and the tragic events of September 11, 2001. In an effort to
manage inventory levels and improve its sales trends, the Company significantly
increased its levels of promotional activities during the second half of fiscal
2002. The impact of this aggressive promotional posture, although negative to
the Company's gross margin, significantly benefited its sales trends in the
second half of fiscal 2002.
Sales for fiscal 2001 were $194.5 million, an increase of 1.2% when compared
with fiscal 2000 sales of $192.2 million. The increase in sales in fiscal 2001,
as compared to fiscal 2000, was due to an additional week of sales of
approximately $2 million and sales from new and remodeled stores offset slightly
by a comparable store sale decrease of 3.8% from the prior year. The comparable
store sales decrease in fiscal 2001 of 4% was due primarily to lower sales in
men's Levi's(R) brand jeans and tops resulting from limited availability and
reduced demand for Levi's(R) brand products. This sales decrease was partially
offset by increased sales of women's Levi's(R) brand jeans and men's and women's
Dockers(R) brand apparel.
15
GROSS MARGIN
Gross margin, which includes occupancy costs, was 24.2% for fiscal 2002 as
compared with 28.3% in fiscal 2001. The 4.1 percentage point decrease in margin
was primarily the result of the Company's aggressive promotional activity, which
resulted in a significantly higher markdown rate as compared to the prior year.
The gross margin rate for fiscal 2002 was also negatively impacted by a decrease
in initial margins related to increased costs of certain product lines. The
Company was able to partially offset these decreases through its improvements in
inventory shrink.
The gross margin rate for fiscal 2001 of 28.3% was an improvement of 3.6
percentage points when compared with 24.7% in fiscal 2000. The improved gross
margin was primarily due to a substantial markdown reserve recorded in fiscal
2000 of $7.8 million, which was not recurring in fiscal 2001. In addition,
through favorable lease negotiations with several existing landlords, the
Company has reduced its occupancy costs as a percentage of sales by 0.3
percentage points. These favorable improvements in gross margin were partially
offset by a slight deterioration in initial margins due to increasing costs on
merchandise purchases. During fiscal 2001, in an effort by the Company to
provide full merchandise assortments, the Company's average cost of merchandise
purchased increased while retail selling prices remained constant. Merchandise
margins in fiscal 2000 included a LIFO benefit of approximately $558,000.
In fiscal 2003, the Company anticipates that its gross margin rate will continue
to be negatively impacted by more aggressive promotional programs. The Company
expects, by increasing opportunistic purchases of close-out merchandise and
special buy merchandise, it will be able to improve its initial margins, which
the Company expects will offset this higher markdown rate.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses as a percentage of sales were 20.4%
or $39.7 million in fiscal 2002, 21.7% or $42.2 million in fiscal 2001 and 22.6%
or $43.4 million in fiscal 2000. The steady decrease in selling, general and
administrative expenses as a percentage of sales over the past three years is a
result of a series of expense reduction actions undertaken since fiscal 1999
that are still ongoing. Through continued improvements in store labor and other
such related costs, the Company anticipated that these expenses will continue to
show favorable decreases over the prior years.
IMPAIRMENT OF 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
indicate the carrying amount of the assets may not be recoverable. The Company
assesses the recoverability of the assets by determining whether the carrying
value 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. No such impairment charge was recorded in
fiscal 2002.
In fiscal 2001, the Company recorded an impairment charge of $837,000 related to
stores whose expected cash flows from operations are not expected to exceed
their net book value prior to the expiration of their expected lease term. In
fiscal 2000, the Company recorded an impairment charge of $611,000 for the
write-down of fixed assets, included as part of the $15.2 million non-recurring
charge recorded in the fourth quarter of fiscal 2000. See "Restructuring -
Fiscal 2000" below. These charges are reflected in "Provision for impairment of
assets, store closings and severance" on the Consolidated Statements of
Operations for fiscal 2001 and 2000.
16
RESTRUCTURING-Fiscal 2000
During the fourth quarter of fiscal 2000, the Company recorded a pre-tax charge
of $15.2 million, or $0.59 per share after tax, related to inventory markdowns,
the abandonment of the Company's Boston Traders(R) and related trademarks,
severance, and the closure of the Company's five Buffalo Jeans(R) Factory stores
and its five remaining Designs stores. Of the $15.2 million charge, $7.8 million
relating to inventory markdowns was reflected in gross margin in fiscal 2000.
This pre-tax charge of $15.2 million included cash costs of approximately $3.6
million related to lease terminations and corporate and store severance, and
approximately $11.6 million of non-cash costs related to inventory markdowns and
the impairment of trademarks and store assets. There was no remaining reserve
balance related to this $15.2 million charge at February 2, 2002.
As a result of the above charges recorded, the Company recorded a net operating
loss for fiscal 2000. Because of an additional year of net operating losses, the
Company recorded a write-down of tax assets of $6.0 million or $0.37 per share
after tax attributable to the potential that certain deferred federal and state
tax assets may not be realizable.
After the recording of these restructuring charges, all assets related to
businesses other than the remaining Levi's(R)/Dockers(R) Outlet stores had been
written off leaving only the operations and related assets of its retail outlet
and factory stores which sell exclusively product made by or for Levi Strauss &
Co.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for fiscal 2002 was $5.4 million as
compared with $5.4 million in fiscal 2001 and $6.5 million in fiscal 2000. The
reduced depreciation related to the aging of the Company's older stores is
offset by increased depreciation of its new and remodeled stores. "See Liquidity
and Capital Resources - Capital Expenditures."
INTEREST EXPENSE, NET
Net interest expense for fiscal 2002 was $1.9 million compared to $1.8 million
in fiscal 2001 and $1.2 million in fiscal 2000. This increase is primarily a
result of higher average borrowing levels offset partially by reduced interest
rates under the Company's credit facility as compared to the prior year.
Similarly, the increase in interest expense in fiscal 2001 as compared with
fiscal 2000 was due to higher average borrowings and increased interest rates.
See "Liquidity and Capital Resources."
INCOME TAX PROVISION/(BENEFIT)
The income tax provision for fiscal 2002 includes a special, non-cash charge of
$8.0 million attributable to an increase in the valuation allowance for the
Company's deferred tax assets, related to the potential that certain federal and
state tax assets may not be realized. The provision for fiscal 2000 also
included a $6.0 million charge against the Company's realizability of certain
tax assets.
Realization of the Company's deferred tax assets, which relate principally to
federal net operating loss carryforwards which expire from 2017 through 2022, is
dependent on generating sufficient taxable income in the following first three
years of the carryforward period. Accordingly, the valuation allowance at
February 2, 2002 is primarily attributable to the potential that certain
deferred federal and state tax assets will not be realizable within this period.
Although realization is not assured, management believes it is more likely than
not that the balance of the deferred tax assets in excess of the valuation
allowance will be realized. In reaching this determination, management
considered the Company's historical performance, noting that the losses in
fiscal 1998, 1999 and 2000 which generated the net operating loss carryforwards
described above were principally the result of charges incurred to exit
unprofitable businesses and that the Company's core business of selling Levi
Strauss & Co. branded apparel in outlet stores has been consistently profitable.
However, considering the general economic weakness and reduced profit margin
experienced in fiscal 2002, management increased the valuation allowance further
in fiscal 2002. Assuming improved operating results from its core
Levi's(R)/Dockers(R) Outlet business, management believes that the balance of
deferred tax assets in excess of the valuation allowance may be utilized in the
next three years. Although not considered in assessing the realization of the
Company's deferred tax assets, management expects that the Company's expansion
strategy of opening and operating other branded stores for other brand
manufacturers will generate income in the coming years which could result in the
realization of deferred tax assets currently reserved for. In the event the
Company's performance of its Levi's(R)/Dockers(R) store improves, and/or its
expansion into operating branded retail stores for other brand manufacturers
improves the Company's overall profitability,
17
the Company's valuation allowance for its deferred tax assets may be reduced.
Conversely, the amount of the valuation allowance deemed necessary could be
increased in the near term if projections of future taxable income during the
carryforward period are reduced or if actual results are less than projections.
As of February 2, 2002, the Company has net operating loss carryforwards of
$33,622,000 for federal income tax purposes and $49,745,000 for state income tax
purposes, which are available to offset future taxable income through fiscal
year 2022. Additionally, the Company has alternative minimum tax credit
carryforwards of $1,166,000, which are available to reduce further income taxes
over an indefinite period.
During the first quarter of fiscal 1999, the Internal Revenue Service ("IRS")
completed an examination of the Company's federal income tax returns for fiscal
years 1992 through 1996. Taxes on the adjustments proposed by the IRS, excluding
interest, amounted to approximately $4.9 million. The IRS challenged the fiscal
tax years in which various income and expense deductions were recognized,
resulting in potential timing differences of previously paid federal income
taxes. The Company appealed these proposed adjustments through the IRS appeals
process.
In the third quarter of fiscal 2002, the Company and the IRS reached a final
settlement on the audit of the Company's federal income tax returns for fiscal
years 1992 through 1996. In accordance with this settlement, the Company paid to
the IRS a total of $1.5 million, which included interest. The settlement of $1.5
million had no material impact on the Company's results of operations for fiscal
2002 due to adequate provisions previously established by the Company.
NET INCOME (LOSS)
The Company reported pre-tax income of $0.2 million for fiscal 2002 as compared
to pre-tax income of $5.5 million in fiscal 2001 and a pre-tax loss of $10.3
million in fiscal 2000. After a non-cash charge of $8.0 million against the
Company's deferred tax assets, the Company reported a net loss of $(7.9) million
or $(0.54) per diluted share in fiscal 2002 compared with net income of $3.2
million or $0.20 per diluted share for fiscal 2001 and a net loss of $(12.5)
million or $(0.78) per diluted share for fiscal 2000. Fiscal 2000 included
non-recurring restructuring charges of $15.2 million, of which $6.0 million
related to the write-down of certain tax assets. See "Restructuring - Fiscal
2000" for further discussion.
SEASONALITY
--------------------------------------------------------------------------------
FISCAL 2002 FISCAL 2001 FISCAL 2000
- -------------------------------------------------------------------------------------------------------------
(SALES DOLLARS IN THOUSANDS)
First quarter $ 39,395 20.2% $ 39,379 20.2% $ 39,835 20.7%
Second quarter 47,698 24.5% 45,693 23.5% 42,907 22.3%
Third quarter 54,301 27.8% 56,587 29.1% 56,703 29.5%
Fourth quarter 53,725 27.5% 52,871 27.2% 52,747 27.5%
--------------------------------------------------------------------------------
$ 195,119 100.0% $ 194,530 100.0% $ 192,192 100.0%
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. A comparison of
quarterly sales, gross profit, net income (loss) per share for the past two
fiscal years is presented in Note K of Notes to Consolidated Financial
Statements.
18
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 and trade credit will enable it to finance its current
working capital, 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
----------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Cash provided by (used for)
operations $ 563 $ 6,299 $ (1,227)
Working capital 13,277 16,306 19,624
Current ratio 1.3:1 1.4:1 1.5:1
The Company has financed its working capital requirements, store remodel and
expansion program, stock repurchase programs and acquisitions with cash flow
from operations, borrowings under the Company's credit facility, and proceeds
from common stock offerings. Cash provided by (used for) operating activities
was $0.6 million, $6.3 million and $(1.2) million in fiscal 2002, 2001 and 2000,
respectively. The decrease in cash flow in fiscal 2002 was primarily the result
of lower earnings as compared to fiscal 2001. The Company used the cash proceeds
from operations of $0.6 million and borrowings under its credit facility to
finance its store openings and remodeling program and other capital requirements
of approximately $4.0 million, net of landlord allowances received.
Correspondingly, the Company's net borrowing position increased by approximately
$3.4 million to $27.8 million at February 2, 2002 as compared to the prior year.
In addition to cash flow from operations, the Company's other primary source of
working capital is its Credit Agreement with Fleet Retail Finance, Inc. This
agreement, which was amended on December 7, 2000, provides a revolving line of
credit of up to $45 million and the ability to issue documentary and standby
letters of credit up to $10 million. The Credit Agreement, which expires on
November 30, 2003, was amended to reduce the borrowing costs and tie future
interest costs to excess borrowing availability, eliminate all existing
financial performance covenants and adopt a minimum availability covenant,
increase the amount that can potentially be borrowed by increasing the advance
rate formula to 68% of the Company's eligible inventory, provide the Company the
ability to enter into stock buyback programs and reduce the total commitment
from $50 million to $45 million. The Company's obligation under the Credit
Agreement continues to be secured by a lien on all of its assets. The Company is
subject to a prepayment penalty through December 7, 2002.
At February 2, 2002, the Company had borrowings of approximately $27.8 million
outstanding under this credit facility and had two outstanding standby letters
of credit totaling approximately $2.3 million. Average borrowings outstanding
under this credit facility for fiscal 2002 were approximately $29.4 million. In
fiscal 2002, the average unused availability under this credit facility was
approximately $8.0 million.
Inventory
At February 2, 2002, total inventories of $57.7 million were unchanged when
compared to the prior year total inventories of $57.7 million at February 3,
2001. On a per square foot basis, inventory levels decreased 6% in fiscal 2002
to $57.99 per square foot from $61.94 per square foot in fiscal 2001. The
Company's increased promotional activities in fiscal 2002 and the Company's
continued efforts to control inventory levels were the primary reasons for the
decrease on a per square foot basis.
19
In the first quarter of fiscal 2002, the Company changed its method of
determining the cost of inventories from the last-in, first-out (LIFO) method to
the first-in, first-out (FIFO) method. Management believes that the FIFO method
better measures the current value of such inventories and provides a more
appropriate matching of revenues and expenses. In the current low-inflationary
environment, management believes that the use of the FIFO method more accurately
reflects the Company's financial position. The effect of this change was
immaterial to the financial results of the prior reporting periods of the
Company and therefore did not require retroactive restatement of results for
those prior periods.
The Company continues to evaluate and, within the discretion of management, act
upon opportunities to purchase substantial quantities of Levi's(R) and
Dockers(R) brand products for its Levi's(R) Outlet and Dockers(R) Outlet stores.
Stock Repurchase Programs
During the second and third quarters of fiscal 2001, the Company repurchased
863,000 shares of its Common Stock at an aggregate cost of $1,861,000 under a
Stock Repurchase Program that was approved by the Company's Board of Directors
in June 2000. In December 2000, the Company repurchased 1.8 million shares at
$2.50 per share through a "Dutch Auction" tender offer. Under the terms of the
offer, the Company invited its stockholders to tender their shares to the
Company at prices specified by the tendering stockholders not in excess of $3.00
nor less than $2.20 per share, in ten-cent ($0.10) increments. The Company
selected the lowest single per-share purchase price that would allow it to buy
1.5 million shares, or up to an additional 1.0 million shares at the Company's
option.
At February 2, 2002, the Company has a total of 3,040,000 shares of repurchased
Common Stock at an aggregate cost of $8.5 million which is reported by the
Company as treasury stock and is reflected as a reduction in stockholders'
equity.
Litigation
In fiscal 2001, the Company had a $1 million promissory note which was payable
to Atlantic Harbor, Inc. in conjunction with the Company's acquisition of
certain assets from Boston Trading Ltd., Inc. ("Boston Trading") in May 1995. In
the first quarter of fiscal 1997, the Company had asserted certain
indemnification rights and accordingly did not pay any principal payments on the
note. In January 1998, Atlantic Harbor, Inc. filed a lawsuit against the Company
for failing to pay the outstanding principal amount of the promissory note, and
in March 1998, the Company filed a counterclaim against Atlantic Harbor, Inc.
alleging that the Company suffered 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.
In the first quarter of fiscal 2002, the Company entered into a settlement
agreement with Atlantic Harbor, Inc. whereby the Company agreed to pay $450,000
to Atlantic Harbor, Inc. as settlement for all obligations under the outstanding
promissory note. In exchange, the Company agreed to transfer and assign all
trademarks and license agreements acquired as part of the original purchase
agreement to a new entity in which the Company would have a 15% equity interest,
with Atlantic Harbor, Inc and its affiliates retaining the remaining interest.
In addition, the Company would also be entitled to receive up to an additional
$150,000 from existing license royalties over the next four years. The Company
recorded a gain on the settlement of this matter in the amount of $550,000 in
the fourth quarter of fiscal 2001, which was included in "Provision for
impairment of assets, store closing and severance" on the Consolidated
Statements of Operations. See "Item 3. Legal Proceedings" for more discussion.
20
CAPITAL EXPENDITURES
The following table sets forth the stores opened, remodeled and closed and the
capital expenditures incurred for the fiscal years presented:
2002 2001 2000
- --------------------------------------------------------------------------------
New Stores:
Levi's(R)/Dockers(R) Outlets 5 6 10
Dockers(R) Outlets 1 -- 2
Candie's(R) Outlet 1 --
Remodeled Stores:
Remodeled Levi's(R) Outlets
By Designs 6 9 6
------------------------------
Total new and remodeled 13 15 18
------------------------------
Total closed stores 4 4 23
------------------------------
Capital expenditures (000's) $4,666 $5,823 $6,006
------------------------------
During fiscal 2002, the Company received approximately $3.7 million in landlord
allowances against the total new and remodeled store capital expenditures of
$4.7 million. The Company incurred capital expenditures of $3.0 million in
fiscal 2002 related to miscellaneous leasehold improvements at the Company's
corporate headquarters, technology expenditures and other store capital.
The Company's plan for fiscal 2003 is to open a total of 15 to 20 new outlet
stores, 16 of which are scheduled to open in time for the important
back-to-school selling season. The Company expects to open eleven new
Candie's(R) junior footwear and apparel outlet stores by mid-year. Four of these
stores will be built utilizing space from the Company's existing
Levi's(R)/Dockers(R) stores which are located in outlet centers in New York, New
England and Puerto Rico. Several of the Company's existing higher volume
Levi's(R)/Dockers(R) outlet stores currently average 13,000 to 15,000 square
feet which is more than the Company's ideal prototype store size of 9,000 square
feet. By utilizing this excess space for the new Candie's(R) outlet stores, the
Company can leverage expenses while increasing profitability. The remaining
seven Candie's(R) outlet stores to be open will include five in California, one
in Las Vegas, Nevada and one in Miami, Florida.
The Company plans to open its first EcKo(R) outlet stores by the back-to-school
season. As the Company continues to discuss its growth strategy with other
manufacturers, new store locations may be added to the Company's current
expansion plans.
Capital expenditures for fiscal 2003 are expected to be approximately $4.0
million, of which $2.5 million relates to the expansion plan discussed above.
This amount is net of committed landlord allowances of approximately $910,000
that the Company will receive. The expected cost to build a Candie's(R) Outlet
store is approximately $25-30 square foot, net of tenant allowances. These store
locations, which will average approximately 2,800 square feet, will require
limited initial cash requirements which is why the Company will be able to fund
the above expansion plan through the use of its cash from operations and its
existing credit facility.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are based on the application of significant
accounting policies, many of which require management to make significant
estimates and assumptions (see Note A to the consolidated financial statements).
The Company believes that the following are some of the more critical judgment
areas in the application of its accounting policies that currently affect our
financial condition and results of operations.
Inventory. The Company records inventory at the lower of cost or market on a
first-in first-out basis ("FIFO"). The Company reserves for obsolescence based
on the difference between the weighted average cost of the inventory and the
estimated market value based on assumptions of future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional reserves may be required.
21
Impairment of Long-Lived Assets. The Company reviews its long-lived assets for
impairment when indicators of impairment are present and the undiscounted cash
flow estimated to be generated by those assets are less than the assets'
carrying amount. The Company evaluates its long-lived assets for impairment at a
store level for all its retail locations. If actual market conditions are less
favorable than management's projections, future write-offs may be necessary.
Deferred Taxes. The Company records a valuation allowance to reduce its deferred
tax assets to the amount that is more likely than not to be realized. The
Company has considered estimated future taxable income and ongoing tax planning
strategies in assessing the amount needed for the valuation allowance. If actual
results differ unfavorably from those estimates used, the Company may not be
able to realize all or part of its net deferred tax assets and additional
valuation allowances may be required.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets" (the "Statements"), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. The Company will apply the new accounting rules under the
Statements beginning in the first quarter of fiscal 2003. Management does not
believe that the adoption of the impairment provisions of the Statements will
have a material impact on the Company's overall financial position or results of
operations.
In July 2001, the FASB also issued Statement No. 143 "Accounting for Asset
Retirement Obligations". This Statement requires recording the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and capitalizing the associated asset retirement costs as part of the
carrying amount of the long-lived asset. Adoption of this Statement is required
for fiscal years beginning after June 15, 2002. Management does not believe that
the adoption of this Statement will have a material impact on the Company's
overall financial position or results of operations.
In October 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement supercedes
Statement No. 121. Although this Statement retains many of the fundamental
provisions of Statement No. 121, it expands the scope of discontinued operations
to include more disposal transactions and significantly changes the criteria for
classifying an asset as held-for-sale. The provisions of this Statement are
effective for fiscal years beginning after December 15, 2001. Management does
not believe that the adoption of this Statement will have a material impact on
the Company's overall financial position or results of operations.
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.
RISKS AND UNCERTAINTIES
This Annual Report on Form 10-K, including the foregoing discussion of results
of operations, liquidity, capital resources and capital expenditures, contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements are statements other than historical
information or statements of current conditions. Some forward-looking statements
may be identified by use of terms such as "believe," "anticipate," "intends," or
"expects." These forward-looking statements in this Annual Report on Form 10-K
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. Numerous factors
could cause the Company's actual results to differ materially from such
forward-looking statements. The Company encourages readers to refer to the
Company's Current Report on Form 8-K, previously filed with the Securities and
Exchange Commission on April 28, 2000, which identifies certain risks and
uncertainties that may have an impact on future earnings and the direction of
the Company. The Company undertakes no obligation to release publicly the
results of any future revisions it may make to forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial position and results of
operations of the Company are routinely subject to a variety of risks, including
market risk associated with interest rate movements on borrowings. The Company
regularly assesses these risks and has established policies and business
practices to protect against the adverse effects of these and other potential
exposures. The Company utilizes cash from operations and a revolving credit
facility to fund its working capital needs. The Company's revolving credit
facility is not used for trading or speculative purposes. In addition, the
Company has available letters of credit as sources of financing for its working
capital requirements. Borrowings under this credit agreement, which expires in
November 2003, bear interest at variable rates based on FleetBoston, N.A.'s
prime rate or the London Interbank Offering Rate ("LIBOR"). These interest rates
at February 2, 2002 were 4.75% for prime based borrowings and included various
LIBOR contracts with interest rates ranging from 4.016% to 4.374%. Based upon
sensitivity analysis as of February 2, 2002, a 10% increase in interest rates
would result in a potential increase in interest expense of approximately
$140,000.
23
Item 8. Financial Statements and Supplementary Data
DESIGNS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Management's Responsibility for Financial Reporting 25
Report of Ernst & Young, Independent Auditors 26
Independent Auditors' Report 27
Consolidated Financial Statements:
Consolidated Balance Sheets at February 2, 2002
and February 3, 2001 28
Consolidated Statements of Operations for the Fiscal Years Ended
February 2, 2002 February 3, 2001 and January 29, 2000 29
Consolidated Statements of Changes in Stockholders'
Equity for the Fiscal Years Ended February 2, 2002, February
3, 2001 and January 29, 2000 30
Consolidated Statements of Cash Flows for the Fiscal Years
Ended February 2, 2002, February 3, 2001 and January 29, 2000 31
Notes to Consolidated Financial Statements 32
24
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
auditors 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 auditors have free access to the Audit Committee.
Ernst & Young LLP, independent auditors, have been engaged to examine the
financial statements of the Company for the fiscal year ended February 2, 2002.
The Report of Ernst & Young Independent Auditors 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 auditing standards generally accepted in the United States.
/s/ DAVID A. LEVIN /s/ DENNIS R. HERNREICH
David A. Levin Dennis R. Hernreich
President and Chief Executive Officer Senior Vice President, Chief
Financial Officer & Treasurer
25
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Designs, Inc:
We have audited the accompanying consolidated balance sheets of Designs, Inc. as
of February 2, 2002 and February 3, 2001 and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for each of the
two years in the period ended February 2, 2002. Our audits also included the
financial statement schedule for the years ended February 2, 2002 and February
3, 2001 listed in the Index as Item 14 (a)(2). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 disclosures 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. at
February 2, 2002 and February 3, 2001, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
February 2, 2002 in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Boston, Massachusetts /s/ ERNST & YOUNG LLP
March 11, 2002
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Designs, Inc:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Designs, Inc. (the "Company") for the
year ended January 29, 2000. Our audit also included the financial statement
schedule listed in the Index at Item 14 (a) (2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 disclosures 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and cash flows for the year
ended January 29, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Boston, Massachusetts /s/ DELOITTE & TOUCHE LLP
April 11, 2000
27
DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
February 2, 2002 and February 3, 2001
February 2, 2002 February 3, 2001
(Fiscal 2002) (Fiscal 2001)
----------------------------------
ASSETS (In thousands, except share data)
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable 491 18
Inventories 57,734 57,675
Deferred income taxes 652 765
Prepaid expenses 2,887 3,093
-------------------------
Total current assets 61,764 61,551
Property and equipment, net of
accumulated depreciation and amortization 20,912 18,577
Other assets:
Deferred income taxes 7,326 14,347
Other assets 899 595
-------------------------
Total assets $ 90,901 $ 95,070
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,074 $ 6,280
Accrued expenses and other current liabilities 10,538 10,809
Accrued rent 2,541 2,376
Reserve for severance and store closings -- 852
Payable to affiliate 582 583
Notes payable 27,752 24,345
-------------------------
Total current liabilities 48,487 45,245
-------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $0.01 par value, 50,000,000 shares authorized,
17,608,000 and 17,488,000 shares issued at
February 2, 2002 and February 3, 2001, respectively 176 175
Additional paid-in capital 56,189 55,697
(Accumulated deficit) retained earnings (5,304) 2,577
Treasury stock at cost, 3,040,000 and 3,035,000 shares at
February 2, 2002 and February 3, 2001, respectively (8,450) (8,427)
Note receivable from officer (197) (197)
-------------------------
Total stockholders' equity 42,414 49,825
-------------------------
Total liabilities and stockholders' equity $ 90,901 $ 95,070
=========================
The accompanying notes are an integral part of the consolidated financial
statements.
28
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the fiscal years ended February 2, 2002, February 3, 2001 and
January 29, 2000
Fiscal Fiscal Fiscal
2002 2001 2000
(52 weeks) (53 weeks) (52 weeks)
---------------------------------------
(In thousands, except share data)
Sales $ 195,119 $ 194,530 $ 192,192
Cost of goods sold including occupancy 147,898 139,545 144,752
---------------------------------------
Gross profit 47,221 54,985 47,440
Expenses:
Selling, general and administrative 39,743 42,207 43,401
Provision for impairment of assets, store closings and severance -- 107 6,608
Depreciation and amortization 5,398 5,373 6,502
---------------------------------------
Total expenses 45,141 47,687 56,511
---------------------------------------
Operating income (loss) 2,080 7,298 (9,071)
Interest expense, net 1,905 1,810 1,207
---------------------------------------
Income (loss) before income taxes 175 5,488 (10,278)
Provision for income taxes 8,056 2,272 2,215
---------------------------------------
Net (loss) income $ (7,881) $ 3,216 $ (12,493)
======================================
Net (loss) income per share - basic ($0.54) $ 0.20 ($0.78)
Net (loss) income per share - diluted ($0.54) $ 0.20 ($0.78)
Weighted-average number of common shares outstanding:
Basic 14,486 16,015 16,088
Diluted 14,486 16,292 16,088
The accompanying notes are an integral part of the consolidated financial
statements.
29
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the fiscal years ended February 2, 2002, February 3, 2001 and January 29,
2000
(IN THOUSANDS)
Additional
Common Stock Treasury Stock Paid-in
Shares Amounts Shares Amounts Capital
---------------------- ----------------------- ----------
Balance at January 30, 1999 16,178 $ 162 (286) $ (1,830) $ 53,908
Issuance of Common Stock:
Board of Directors compensation 157 2 256
Vesting of restricted stock award
Issuance of shares to related party
for professional services 355 3 407
Net loss
----------------------------------------------------------------
Balance at January 29, 2000 16,690 $ 167 (286) $ (1,830) $ 54,571
----------------------------------------------------------------
Issuance of Common Stock:
Exercises under option program 38 -- 82
Board of Directors compensation 119 1 186
Issuance of shares to related party for
professional services 386 4 520
Repurchase of common stock (2,621) (6,314) --
Restricted stock cancelled (23) (53) 1
Exercise of options and repurchase of
shares from director 105 1 (105) (230) 132
Sale of stock to officer 150 2 195
Income tax benefit from stock option exercised 10
Net income
----------------------------------------------------------------
Balance at February 3, 2001 17,488 $ 175 (3,035) $ (8,427) $ 55,697
----------------------------------------------------------------
Issuance of Common Stock:
Exercises under option program 19 28
Board of Directors compensation 35 99
Issuance of shares to related party for
professional services 66 1 316
Issuance of options for professional
services rendered 33
Repurchase of common stock (5) (23)
Income tax benefit from stock option exercised 16
Net loss
----------------------------------------------------------------
Balance at February 2, 2002 17,608 $ 176 (3,040) $ (8,450) $ 56,189
================================================================
(Accumulated
Note Deficit)
Deferred Receivable Retained
Compensation from Officer Earnings Total
------------ ------------ ------------ --------
Balance at January 30, 1999 $ (138) $ -- $ 11,854 $ 63,956
Issuance of Common Stock:
Board of Directors compensation 258
Vesting of restricted stock award 138 138
Issuance of shares to related party
for professional services 410
Net loss (12,493) (12,493)
---------------------------------------------------
Balance at January 29, 2000 $ -- $ -- $ (639) $ 52,269
---------------------------------------------------
Issuance of Common Stock:
Exercises under option program 82
Board of Directors compensation 187
Issuance of shares to related party for
professional services 524
Repurchase of common stock (6,314)
Restricted stock cancelled (52)
Exercise of options and repurchase of
shares from director (97)
Sale of stock to officer
Income tax benefit from stock option exercised (197) --
Net income 3,216 3,216
---------------------------------------------------
Balance at February 3, 2001 $ -- $ (197) $ 2,577 $ 49,825
---------------------------------------------------
Issuance of Common Stock:
Exercises under option program 28
Board of Directors compensation 99
Issuance of shares to related party for
professional services 317
Issuance of options for professional
services rendered 33
Repurchase of common stock (23)
Income tax benefit from stock option exercised 16
Net loss (7,881) (7,881)
---------------------------------------------------
Balance at February 2, 2002 $ -- $ (197) $ (5,304) $ 42,414
===================================================
The accompanying notes are an integral part of the consolidated financial
statements.
30
DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the fiscal years ended February 2, 2002, February 3, 2001 and January 29,
2000
Fiscal Fiscal Fiscal
2002 2001 2000
----------------------------------
Cash flows from operating activities:
Net (loss) income $(7,881) $ 3,216 $(12,493)
Adjustments to reconcile net (loss) income to net cash
provided by (used for) operating activities:
Depreciation and amortization 5,398 5,373 6,503
Deferred income taxes 7,134 2,023 (4,323)
Loss (gain) from disposal of property and equipment 42 145 (75)
Vesting of restricted stock, net of cancellations -- -- 138
Issuances of common stock to Board of Directors 99 187 258
Issuance of common stock to related party 317 524 410
Issuance of common stock for professional services 33 -- --
Changes in operating assets and liabilities:
Accounts receivable (473) 65 95
Inventories (59) (653) (6,944)
Prepaid expenses 206 (2,051) (131)
(Increase) reduction in other assets (399) (98) 2,368
Payment to Internal Revenue Service on settlement of audit (1,500) -- --
Accounts payable 794 (521) (1,915)
Reserve for severance, store closings and impairment charges (852) (2,376) 14,844
Accrued expenses, other current liabilities and payable to affiliate (2,461) 342 (200)
Accrued rent 165 123 238
------- ------- --------
Net cash provided by (used for) operating activities 563 6,299 (1,227)
------- ------- --------
Cash flows from investing activities:
Additions to property and equipment, net (4,012) (4,493) (5,046)
Proceeds from disposal of property and equipment 21 57 108
Termination (establishment) of investment trust -- 2,365 (2,365)
------- ------- --------
Net cash used for investing activities (3,991) (2,071) (7,303)
------- ------- --------
Cash flows from financing activities:
Net borrowings under credit facility 3,407 2,143 8,377
Repurchase of common stock (23) (6,597) --
Issuances of common stock under option program (1) 44 226 --
------- ------- --------
Net cash provided by (used for) financing activities 3,428 (4,228) 8,377
------- ------- --------
Net decrease in cash and cash equivalents -- -- (153)
Cash and cash equivalents:
Beginning of the year -- -- 153
------- ------- --------
End of the year $ -- $ -- $ --
======= ======= ========
(1) Includes related tax benefit.
The accompanying notes are an integral part of the consolidated financial
statements.
31
DESIGNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 2002
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Line of Business
Designs, Inc. (the "Company") is engaged in the retail sales of branded apparel
and accessories primarily in the outlet channel of distribution. The Company
operates a chain of outlet stores located in the eastern part of the United
States and Puerto Rico. Levi Strauss & Co. is currently the most significant
vendor of the Company, representing substantially all of the Company's
merchandise purchases. The Company also purchases merchandise, primarily
accessories, from license