[XXXX XXXXXXX & CO. LETTERHEAD]
VIA FACSIMILE and FEDERAL EXPRESS
July 29, 1999
Xxxx Xxxxxxxx Xxxxxxx Xxxxxxxx
President and CEO Chairman and CEO
Designs, Inc. Jewelcor Management, Inc.
00 X Xxxxxx 000 Xxxxx Xxxxxx-Xxxxx Xxxx.
Needham, MA 02494 4th Floor
Xxxxxx-Xxxxx, PA 18702
Re: The Designs, Inc./Xxxx Xxxxxxx & Co. License Agreement
Dear Messrs. Xxxxxxxx and Xxxxxxxx:
We note with interest the recent filing of proxy statements by
Designs, Inc. and Jewelcor Management, Inc., respectively, in connection
with the 1999 Annual Meeting of Shareholders of Designs currently scheduled
for September 22, 1999.
Designs is very important to Levi Xxxxxxx & Co., both as a large
customer and as its licensee under a trademark license agreement to operate
Levi's(R) and Dockers(R) outlet stores in more than 25 states. Due to this
relationship, as well as the significance of the License Agreement to
Designs(1), we thought that some comment from LS&CO. regarding certain of the
statements in the proxy filings might help to inform the coming months for
you and Designs' shareholders.
First, LS&CO. does not agree with the Jewelcor proxy's assertion
that the proposed election of JMI Nominees "is not a transfer of control
and will not cause a concern under the License Agreement with Xxxx
Xxxxxxx." To the contrary, and as Jewelcor's proxy materials go on to
contemplate, LS&CO.'s view is that displacement of Designs' current Board
by the JMI Nominees would fall within the License Agreement's provisions
prohibiting transfers. That is, Designs would need LS&CO.'s consent for the
License Agreement to continue in effect if and after the JMI Nominees
displace the current Designs directors.
-----------
(1) Designs' proxy filing states: "The Company also believes that its
relationship with Xxxx Xxxxxxx is the most significant asset of the
Company ..."
Second, the Jewelcor proxy further indicates that in the event
LS&CO. takes this view, Jewelcor will "seek to have Xxxx Xxxxxxx confirm
that no 'transfer' or breach has occurred or waive the occurrence of any
'transfer' or breach." Jewelcor is, of course, free to approach LS&CO., as
it deems appropriate. Based on its direct experience to date with Jewelcor
and its principals (described in more detail below), however, LS&CO. is not
presently inclined to waive any of its rights under the License Agreement
and indeed, intends to exercise them fully.
Third, the Jewelcor proxy indicates that if the JMI Nominees are
elected, Jewelcor would take the immediate step, among other things, of
selling Designs, through the retention of a New York investment banking
firm.(2) Whether or not the JMI Nominees' displacement of the current Board
(should it occur) is ultimately found to constitute a prohibited transfer
under the License Agreement, there is no doubt that Jewelcor's proposed
sale of Designs to a third party without LS&CO.'s consent would fall within
the prohibited transfer provisions.
On the face of Jewelcor's proxy, then, there are at least two events
which implicate the License Agreement's prohibited transfer provisions -
the potential election of the JMI Nominees, and, should the election occur
and a buyer be located, the proposed sale of Designs to a third party.
Should these eventualities ever arise, LS&CO. would of course consider in
good faith the facts then before it in determining whether to consent to
any transfer of Designs, and whether the event in question resulted in a
material breach of the License Agreement.
--------------------
(2) Designs' proxy filing, as well as previous correspondence filed with
the Securities and Exchange Commission, indicates that during early
1999 the Special Committee of the Board of Designs, "acting through
Xxxxxxx & Company, contacted 72 third parties which [they] believed
might be interested in purchasing the Company. Of these 72 third
parties, 17 expressed interest and thereafter received a detailed
memorandum describing the Company and its business." This process of
courting potential buyers led to discussions with Jewelcor regarding
its potential acquisition of Designs, but to LS&CO.'s knowledge no
other potential buyers made a bid. The Jewelcor proxy does not
elaborate on what additional steps it would take to successfully
locate a potential buyer, or why it would succeed when Xxxxxxx &
Company failed.
Given the importance of the continuation of the LS&CO. relationship
to Designs' successful operation(3), however, let me identify for you some of
LS&CO.'s substantial concerns which have developed as we have observed the
battle for control of Designs unfold over recent months. These
considerations would factor substantially into LS&CO.'s evaluation of any
transfer.
o Our trademarks, notably the Levi's(R) and Dockers(R) brand names
which are the subject of the License Agreement, are LS&CO.'s crown
jewels. Should our marks ever become associated in consumers' minds
with shoddy or even average business practices, this devalues LS&CO.
We will not enter into, or remain in business with, any business
partner who does not afford our marks appropriate respect and
treatment.
o Designs is one of LS&CO.'s largest accounts as measured by sales volume
and number of store locations. Designs currently operates more than
100 Levi's(R)and Dockers(R)outlet stores in 27 states, representing a
substantial product flow in an increasingly important retail channel.
The potential disruption of Designs' retail presence and approach which
could result from Jewelcor's proposed changes in Designs' Board
membership, management and ownership gives rise to substantial business
risk to LS&CO.
-----------------
(3) Even Jewelcor's proxy indicates that "if . . . Xxxx Xxxxxxx were to
ultimately terminate the License Agreement, the Company's business
could be materially adversely effected [sic]."
o In recent years the LS&CO. and Designs' relationship has variously
included vendor/manufacturer, licensor/licensee and joint venturers'
dynamics. Through these experiences doing business together, the
crucial importance of open, timely communications and a successful,
indeed intimate, day to day working relationship between LS&CO. and
Designs has become increasingly apparent. Indeed, representatives of
our companies communicate virtually daily about a broad range of
operational issues associated with running the outlet stores. LS&CO.
continues to believe that a strong working relationship based on
communication, trust and confidence is critical to its and Designs'
business success.
o LS&CO.'s entire direct experience with Jewelcor and its principals
occurred in Spring 1999, during the course of Jewelcor's discussions
with Designs regarding a prospective acquisition of Designs. In
anticipation of being asked to consent to an assignment of the License
Agreement to Jewelcor, and seeking information relevant to the
anticipated consent request (e.g., information about Jewelcor's and its
principals' retail and apparel experience, business plan for Designs,
financial strength, etc.), LS&CO. provided Jewelcor's principals with a
written information request and confidentiality agreement under which
the requested information could be provided. Jewelcor acknowledged
receipt of LS&CO.'s request; however, no responsive information
whatsoever was ever provided. LS&CO. had no further communications
from Jewelcor until, after LS&CO. sent a letter to Jewelcor withdrawing
its information request in light of public reports that Jewelcor's bid
for Designs had been withdrawn, Jewlecor sent LS&CO. a letter
indicating that it had withdrawn its bid. In our opinion, even if
Jewelcor furnished the information now and LS&CO. concluded that the
information met LS&CO.'s criteria, this bodes poorly for the future of
a successful working relationship between LS&CO. and a
Jewelcor-controlled Designs.
o Jewlecor's lack of communication with LS&CO., which by any measure
is an important participant in Designs' business, persists even as
this proxy fight gets underway.
o Finally, since early 1999 (within several weeks of Jewelcor's
acquisition of an approximately 9.9% share of Designs at record low
share prices), this series of initiatives seeking to gain control of
Designs has created a substantial distraction and cloud of uncertainty
for the Designs' business and incumbent management. In LS&CO.'s view,
Designs' resources would be more productively dispatched to concentrate
on managing and building the Designs business without disruptions such
as this proxy fight, which promises continuing turmoil through at least
September 22, 1999. Recognizing Jewelcor's understandable interest in
maximizing shareholder value, we submit that these continuing control
plays themselves impair Designs' ability to improve all participants'
return on their investments.
Let me summarize LS&CO.'s key positions regarding Designs and the Jewelcor
proxy's proposals. LS&CO. views both the proposed displacement of the
Designs Board in its entirety, and the stated plan to sell Designs to a
third party, as triggering events under its License Agreement's prohibition
against transfers without its consent. LS&CO. will not waive its rights
under the License Agreement and presently intends to exercise them fully.
Finally, LS&CO.'s direct experience with Jewelcor's and its principals'
communication approach and lack of responsiveness leads LS&CO. to believe
that it is unlikely that Jewelcor will successfully establish a productive
working relationship with LS&CO., should Jewelcor gain control of Designs.
Very truly yours,
/s/ Xxxxxx Xxxxxx
Xxxxxx Xxxxxx
Vice President, Finance, Business Development
