1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED JUNE 29, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NUMBER 0-22480
DM MANAGEMENT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2973769
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 RECREATION PARK DRIVE
HINGHAM, MA 02043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 740-2718
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class: Common Stock, $0.01 par value
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 day 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 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. [ ]
As of September 9, 1996, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $8,700,348 based on the closing price
($3,875 per share) for the common stock as reported on the Nasdaq National
Market on September 9, 1996.
Shares outstanding of the Registrant's Common Stock at September 9,
1996: 4,326,157
Certain portions of the Proxy Statement for the Annual Meeting of Stockholders
of DM Management Company to be held on November 8, 1996, which will be filed
with the Securities and Exchange Commission within 120 days after June 29, 1996,
are incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Total number of pages 62
The Exhibit Index is located on Pages 38-39
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DM MANAGEMENT COMPANY AND SUBSIDIARY
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 29, 1996
-----------------------------------
Part I Page
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Item 1. Business................................................................................3-6
Item 2. Properties............................................................................... 7
Item 3. Legal Proceedings.........................................................................7
Item 4. Submission of Matters to a Vote of Security Holders.......................................7
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.....................8
Item 6. Selected Consolidated Financial Data......................................................9
Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations........................................................10-12
Item 8. Consolidated Financial Statements and Supplementary Data..............................13-30
Item 9. Changes in and Disagreements on Accounting and Consolidated Financial Disclosure.........31
Part III
Item 10. Directors and Executive Officers of the Registrant.......................................32
Item 11. Executive Compensation...................................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................32
Item 13. Certain Relationships and Related Transactions...........................................32
Part IV
Item 14. Exhibits, Consolidated Financial Statements and Schedules, and Reports on Form 8-K....33-36
Signatures............................................................................................37
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PART I
ITEM 1. BUSINESS
GENERAL
DM Management Company ("DM Management" or the "Company") is a national
direct marketer of a broad assortment of classic women's apparel and
accessories. The Company markets its products primarily through three catalog
concepts, J. Jill, Ltd., Nicole Summers and The Very Thing!. The Company strives
to provide superior quality products and excellent customer service. Its
catalogs are designed to appeal to the mature, upscale woman.
Beginning in December 1994, the Company also marketed merchandise through
its Carroll Reed catalog. On May 20, 1996, the Company announced its plan to
discontinue the operations of its Carroll Reed segment. Accordingly, the Carroll
Reed segment has been accounted for as a discontinued operation, and all assets,
liabilities, results of operations and cash flows associated with the Carroll
Reed segment have been segregated from those associated with continuing
operations. The information set forth in this item relates to the Company's
continuing operations unless otherwise noted. The divestiture of the Carroll
Reed segment enables the Company to invest its resources in its profitable and
growing core business - J. Jill, Ltd., Nicole Summers and The Very Thing!. The
Company expects to conclude its divestment of the Carroll Reed segment during
fiscal 1997.
THE COMPANY'S CATALOGS
During the year ended June 29, 1996 ("fiscal 1996"), the Company mailed
approximately 42 million catalogs. These mailings include regular seasonal
mailings of its principal catalogs, and periodic mailings of its specialty and
sale catalogs. Each of the Company's principal catalogs embodies a distinctive
concept. These principal catalogs are distributed in three editions per season.
Each edition may be mailed several times with variations in format and content.
The principal catalogs are as follows:
J. JILL, LTD. - "Uncomplicated Style." J. Jill, Ltd. features comfortable
and easy-to-wear clothing, ranging from casual apparel to special-occasion
dressing. Never trendy, J. Jill, Ltd. has a relaxed, confident styling and
season-spanning wearability. Approximately sixty percent of the items offered in
fiscal 1996 were private-label. Brand-name merchandise, from vendors such as
Sigrid Olson, Northern Isles and Rockport, enhanced the collection.
NICOLE SUMMERS - "A spirited style all your own." Nicole Summers targets
women whose style is distinct but eclectic. Brand-name merchandise such as
Marisa Christina, Maggy Boutique, Sandy Starkman and Caron constituted
approximately forty percent of Nicole Summers' merchandise in fiscal 1996.
These recognized names were complemented by private-label merchandise, bringing
customers an original and diverse selection.
THE VERY THING! - "A wardrobe for elegant living." The Very Thing! offers
refined apparel for women with discerning tastes. The merchandise features
quality brands such as Gay Boyer Collections, Bleyle, Castleberry, Ruth Norman,
Laura Knits, Maggy London, Adrianna Papell and Herbert Grossman. These brands
accounted for approximately two-thirds of the merchandise available in fiscal
1996. Other featured apparel consists of private-label goods, primarily
coordinated separates, cotton knits and sweaters.
The following table provides a summary of circulation and net sales by
concept for fiscal 1996 (circulation and dollars in millions):
Circulation as a Net Sales as a
Percent of Total Percent of Total
Circulation Circulation Net Sales Net Sales
----------- ---------------- --------- ----------------
The Very Thing! 11.3 27% $21.3 27%
Nicole Summers 12.4 30% 26.6 33%
J. Jill, Ltd. 8.6 21% 16.1 20%
Combined mailings (1) 9.3 22% 14.8 18%
Outlet stores N/A N/A 1.8 2%
---- ---- ----- ---
Total 41.6 100% $80.6 100%
==== ==== ===== ===
<FN>
(1) Includes sale catalogs and Our Favorites, which features the most popular
items from each of the Company's principal catalogs.
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MERCHANDISING
The Company's principal catalogs offer an extensive wardrobe assortment in
a wide range of sizes, and beginning in fiscal 1997, specialty gift items.
Merchandise styles are classic with a focus on quality and are not subject to
radical change. Changes in merchandise assortments and styles are made carefully
based on changing customer preferences and tastes.
The Company offers both brand-name and private-label merchandise.
Brand-name products are selected from the regular offerings of the Company's
vendors. Private-label products are primarily basic items such as cotton knits
and sweaters and are used to round out and complement the overall merchandise
assortment. In order to ensure that private-label merchandise is manufactured to
the Company's quality standards, product managers, quality assurance specialists
and an in-house fit specialist develop the Company's own quality guidelines and
sizing standards.
The Company sells domestically produced and imported merchandise which it
purchases in the open market from approximately 340 different vendors. During
fiscal 1996, approximately 8% of the Company's merchandise was purchased
directly from one foreign vendor. As a result of its overseas sourcing, the
Company is subject to the risks generally associated with doing business abroad,
including fluctuations in the value of currencies, export duties, quotas, work
stoppages and, in certain parts of the world, political instability. To date,
these factors have not had a material adverse impact on the Company's
operations.
INVENTORY MANAGEMENT
The Company's inventory management goal is to maintain a high initial
fulfillment rate while maximizing inventory turnover rates and minimizing the
amount of unsold merchandise at the end of each selling season. To achieve this
goal, the Company seeks to schedule merchandise deliveries to immediately
precede expected increases in customer demand; and, where practicable, orders
inventory in several lots with the size of reorders dependent on customer
demand.
Initial purchase quantities are based on a variety of factors, including
past experience with the same or similar products, future availability, shipping
time, and the Company's ability to negotiate a reorder commitment from the
vendor. The Company uses software specifically developed for use in the direct
marketing industry ("the Forecasting System") for sales analysis, forecasting
and inventory control. The Forecasting System allows sales and other data for
each catalog to be sorted by various criteria specified by the user, such as
performance by segment (e.g., rented names), performance by cell (e.g., 12-month
customers), performance by merchandise category (e.g., sportswear) and
performance by item. Using this information, the Company projects gross demand
and returns for each item and, based on these projections and inventory on hand
and on order, makes decisions regarding additional purchases.
The Company sells overstocks and prior season's merchandise through inbound
telemarketing, sales pages bound into its full-price catalogs, periodic sale
catalogs and its three outlet stores. A fourth outlet store is being used by the
Company on a temporary basis in order to liquidate Carroll Reed inventory in
connection with the Company's divestiture of the Carroll Reed segment.
MARKETING AND CIRCULATION MANAGEMENT
The Company maintains customer lists for its three titles and several other
catalogs which it no longer distributes. These lists contain approximately 2.2
million names, as well as certain historical information and purchase behavior
data associated with those names. Approximately 498,000 of these names represent
customers who had purchased from any of the Company's catalogs at least once
during fiscal 1996 (12-month customers). The Company's database of names and
purchasing histories is maintained off-site by a service bureau which sorts and
processes this information in accordance with instructions from the Company. The
Company provides transaction updates via tape to the service bureau on a weekly
basis. The service bureau is required by its agreement with the Company to
maintain the confidentiality of the Company's customer lists.
The Company applies statistical modeling and segmentation techniques to its
customer list on a catalog by catalog basis in order to devise its catalog
marketing and circulation strategies. The resulting analysis is used to
determine which of the Company's catalogs will be mailed to which customers, and
the frequency of such mailings.
In addition to mailing to customers currently in its database, the Company
has on ongoing customer acquisition program designed to attract new customers on
a cost effective basis. The primary source of new customers is lists rented from
or exchanged with other mailers and compilers. Before these lists are used, they
are edited in order to identify and delete names already on the Company's house
file and to enhance their probable performance.
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TELESERVICES AND CUSTOMER SERVICE
The Company designs its teleservice and customer service standards to
exceed customers' expectations. In order to support these standards, the
Company's teleservice representatives ("personal shoppers") and customer service
representatives are trained in telephone selling techniques including the
selling of alternates, coordinates and other full-price and sale items. Training
also emphasizes a courteous, helpful approach which informs the customer about
the Company's products and policies. Prior to release of each catalog, the
Company's merchants review that catalog's merchandise with the personal shoppers
to highlight each style's specific selling points. In addition, samples from
every current catalog are available for physical inspection by the personal
shoppers should the customer want to know more about an item. A substantial
portion of each personal shopper's performance evaluation is based on how well
the personal shopper meets customer service standards.
During fiscal 1996, approximately 1.1 million calls were received by the
Company's personal shoppers of which roughly 16% related to the Carroll Reed
segment. Orders are taken 24 hours a day, 365 days a year. Orders not placed by
telephone are received by mail or telecopier. Telephone orders are processed
on-line, through direct real-time access to the Company's data processing
system. This system provides information concerning product availability,
product specifications, available substitutes, coordinates and accessories. The
system also provides information concerning the customer's purchasing history,
which permits the personal shopper to establish a personalized dialog with each
customer.
In an effort to build brand loyalty and to provide additional convenience
for its customers, the Company introduced its own private-label credit card, The
Catalog Account, in the Fall 1995 selling season. The Company launched its
credit card program by offering credit to existing customers who were
prescreened for creditworthiness using automated screening and credit scoring
techniques. Response to these offers has been favorable, with approximately
35,000 customers becoming cardholders, and approximately $7.7 million in net
sales attributable to those cardholders in the first twelve months of the
program. The Company has retained a service bureau to provide all the necessary
services required to manage its credit card program. Services include credit
screening and approval, credit processing, card issuance, billing/payment
processing, collections and reporting. Credit risks associated with the credit
card program are assumed by the service bureau.
FULFILLMENT
The Company uses an integrated computerized picking, packing and shipping
system in order to facilitate quick delivery. The system monitors the in-stock
status of each item ordered, processes the order and generates all related
packing and shipping materials, taking into account the location of items within
the distribution center. During fiscal 1996, the Company shipped approximately
1.2 million packages from its distribution facility, including approximately
200,000 Carroll Reed packages. In fiscal 1996, the Company shipped approximately
76% of all ordered items on the day of order acceptance and the Company was able
ultimately to ship approximately 95% of all items for which orders were
accepted.
In June 1996, the Company began offering its customers a choice of shipping
options with varying costs depending on desired delivery speed. The Company now
offers quick delivery of its customer orders via the U.S. Postal Service, as
well as its traditional next day delivery service. Under its agreement with an
air cargo courier, the Company has received specific rates by agreeing to use
the courier for substantially all of its air express deliveries.
CUSTOMER GUARANTEE AND RETURNS
The Company offers an unqualified merchandise guarantee. If a customer is
not completely satisfied with any item, for any reason, the customer may return
it for an exchange or a prompt, full refund of the purchase price. For fiscal
1996, the Company experienced customer returns, net of exchanges, of
approximately 29% of items shipped.
Returns are received and processed as a separate activity to maintain
control over the returned product, initiate the refund process and, if
necessary, obtain appropriate credit from suppliers. Return experience is
closely monitored at the item level to identify any product quality and fit
issues. Information generated by this monitoring process is used to assess
future purchases, enhance customer satisfaction and reduce overall returns.
Returned merchandise is inspected carefully and, unless damaged, is cleaned,
pressed and returned to the Company's inventory. Approximately 95% of returned
merchandise is recycled into the Company's inventory.
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CATALOG PRODUCTION AND MAILING
Significant portions of the Company's catalogs are produced in-house using
desktop publishing, thereby providing cost savings and flexibility to make
changes relatively late in the production cycle. The Company engages an outside
creative agency for catalog design. All of the Company's catalogs are printed
commercially under the Company's supervision. The Company significantly reduces
mailing costs by sorting mailings by Zip Code to the carrier route level and
also prints the "zip plus four" bar code to obtain optimum postal discounts.
COMPETITION
The direct marketing industry is both highly fragmented and highly
competitive. The Company's principal competitors are other catalog companies,
retail stores, including discount stores and department stores, and television
home shopping networks. In recent years, many new competitors have entered the
mail order catalog industry, and competition from established companies has
increased. Many of the Company's competitors have greater financial,
distribution and marketing resources than the Company. The Company competes
principally on the basis of its broad selection of quality women's apparel and
accessories selected for its target market, optional overnight delivery of
in-stock items, its personalized customer service and its unconditional
guarantee.
EMPLOYEES
As of August 24, 1996, the Company employed 377 individuals, including
individuals working in the Carroll Reed segment, of whom 288 were full-time
(those employees scheduled to work 30 hours or more per week) and 89 were
part-time. The divestiture of the Carroll Reed segment is not expected to
significantly reduce the number of people employed by the Company. None of the
Company's employees is represented by a union. The Company considers its
employee relations to be good.
TRADEMARKS AND SERVICE MARKS
The Company has registered the names and logos of its three principal
catalogs, The Very Thing!, Nicole Summers and J. Jill, Ltd., as service marks
with the United States Patent and Trademark Office. During fiscal 1995, the
Company acquired the Carroll Reed trademark and service mark. In conjunction
with its decision to discontinue the Carroll Reed segment, the Company is
currently pursuing a buyer for the related trademark and service mark. The
Company also has a service mark registration for The Catalog Outlet Store under
which it operates its outlet stores.
GOVERNMENT REGULATION
The catalog sales business conducted by the Company is subject to the
Merchandise Mail Order Rule and related regulations promulgated by the Federal
Trade Commission, which prohibit unfair methods of competition and unfair or
deceptive acts or practices in connection with mail order sales and require
sellers of mail order merchandise to conform to certain rules of conduct with
respect to shipping dates and shipping delays. The Company believes it is in
compliance with such regulations.
The Company currently collects sales tax on sales to Massachusetts
customers. Many states have attempted to require that out-of-state direct
marketers collect use taxes on sales of products shipped to their residents. The
United States Supreme Court has held unconstitutional a state's imposition of
use tax collection obligations on an out-of-state mail order company whose only
contacts with the state were the distribution of catalogs and other advertising
materials through the mail and subsequent delivery of purchased goods by parcel
post and interstate common carriers but has stated that Congress could enact
legislation authorizing the states to impose such obligations. Management is
unable to predict the likelihood of Congress passing this or similar
legislation, and whether the Company will, in the future, be required to collect
sales and use taxes in the various states. If such legislation is passed or the
Supreme Court alters its position to permit imposition of such obligations, the
Company would incur additional administrative expense. The Company is unable, at
this time, to predict the impact of the collection of sales or use taxes on its
financial position, results of operations and cash flows.
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ITEM 2. PROPERTIES
The following table sets forth certain information relating to the
Company's principal facilities:
SQUARE TYPE OF LEASE
LOCATION FOOTAGE FUNCTION INTEREST TERMINATION
- -------- ------- -------- -------- -----------
Meredith, New Hampshire 93,120 Distribution Center and Offices Owned Not Applicable
(approximately 25 acres)
Hingham, Massachusetts 23,719 Catalog Production Facilities and Offices Leased 03/31/00
Meredith, New Hampshire 3,600 Outlet Store Leased 07/01/99
North Conway, New Hampshire 2,567 Outlet Store Leased 02/28/02
North Conway, New Hampshire 3,538 Outlet Store Leased 10/15/96
Bedford, Massachusetts 5,255 Outlet Store Leased 04/15/00
Laconia, New Hampshire 15,868 Warehouse Leased 04/15/97
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and did not
settle any material legal proceedings during the fourth quarter of fiscal 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on April 25, 1996. At
the Special Meeting, the stockholders of the Company voted to approve the
following actions by the following votes:
1. To increase the number of shares of common stock that may be issued
pursuant to the options granted under the 1993 Incentive and
Nonqualified Stock Option Plan from 300,000 to 700,000.
Number of Shares
----------------
For 2,333,392
Against 254,634
Abstain 3,500
Broker non-votes 501,693
2. To provide for additional formula stock option grants under the 1993
Incentive and Nonqualified Stock Option Plan to members of the
Company's Board of Directors who are not employees of the Company or
any parent or subsidiary of the Company.
Number of Shares
----------------
For 2,945,994
Against 144,046
Abstain 3,449
Broker non-votes 0
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of the Company is listed on the Nasdaq National Market
under the symbol "DMMC." As of September 9, 1996, the approximate number of
shareholders of record of common stock of the Company was 300. The Company
believes that the approximate number of beneficial holders of common stock of
the Company is approximately 1,000.
The following table sets forth, for the periods shown, the high and low per
share sales prices of the Company's Common Stock as reported on the Nasdaq
consolidated reporting system.
HIGH LOW
---- ---
Fiscal 1995: First Quarter............................ 10 8 1/4
Second Quarter .......................... 9 4 1/8
Third Quarter............................ 5 1/4 2 1/2
Fourth Quarter........................... 3 3/4 2 1/4
Fiscal 1996: First Quarter............................ 4 1/8 1 7/8
Second Quarter........................... 2 5/8 1 7/8
Third Quarter............................ 2 7/8 2
Fourth Quarter........................... 5 3/8 2 5/8
The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain its earnings for use in the operation
and expansion of its business. The payment of any future dividends will be
determined in light of the then current conditions, including the Company's
earnings, financial condition and requirements, restrictions in financing
agreements and other factors. Under the terms of the Company's existing debt
agreements with a commercial bank, the Company is not permitted to pay dividends
in excess of twenty-five percent of net income without the commercial bank's
consent.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below
have been derived from the consolidated financial statements of the Company for
the periods indicated. This selected consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and footnotes.
On May 20, 1996, the Company announced its plan to discontinue the
operations of its Carroll Reed segment. Accordingly, the Carroll Reed segment
has been accounted for as a discontinued operation, and all assets, liabilities,
results of operations and cash flows associated with the Carroll Reed segment
have been segregated from those associated with continuing operations.
During the second quarter of the year ended June 25, 1994, the Company
completed its initial public offering ("IPO") of 2,070,000 shares of common
stock at $9.00 per share. In conjunction with the IPO, all shares of the
Company's preferred stock were converted into 2,372,895 shares of common stock.
In addition, all outstanding common stock warrants were exercised for 286,881
shares of common stock.
FISCAL YEAR ENDED
(amounts in thousands, except per share data) ---------------------------------------------------------------------
JUNE 27, JUNE 26, JUNE 25, JUNE 24, JUNE 29,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
RESULTS OF OPERATIONS:
Net sales ............................... $41,532 $47,510 $63,337 $72,691 $80,585
Income (loss) from continuing operations (2,411) 1,547 3,269 765 235
Net income (loss) ....................... (2,411) 1,547 3,269 773 (9,350)
Income (loss) from continuing operations
per common and common equivalent share (2.07) 0.60 0.80 0.17 0.05
Net income (loss) per common and common
equivalent share ..................... (2.07) 0.60 0.80 0.17 (2.11)
FINANCIAL POSITION (END OF PERIOD):
Total assets ............................ $ 6,935 $ 8,849 $26,923 $31,612 $27,069
Working capital ......................... 737 1,075 9,305 6,315 6,988
Total debt .............................. 7,270 594 415 3,913 5,269
Stockholders' equity (deficit) .......... (5,962) 1,645 17,861 18,851 9,480
STATISTICS ON CONTINUING OPERATIONS:
Weighted average common and common
equivalent shares outstanding:
Primary .............................. 1,167 2,586 4,077 4,610 4,441
Fully diluted ........................ 1,167 2,586 4,081 4,619 4,518
Catalog circulation ..................... 24,100 24,000 32,400 40,300 41,600
12-month customer list .................. 282 312 415 479 498
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR IN REVIEW
The year ended June 29, 1996 ("fiscal 1996") was a year of significant
change at DM Management. Under new leadership, it was decided to discontinue the
operations of the Carroll Reed segment. The result of this decision was a
one-time charge to income of $8.5 million in fiscal 1996. While this decision
was a difficult one, it enables the Company to focus on and invest its resources
in its profitable and growing core businesses - J. Jill, Ltd., Nicole Summers
and The Very Thing!.
Fiscal 1996 net sales from continuing operations increased 10.9% to $80.6
million, from $72.7 million reported for the year ended June 24, 1995 ("fiscal
1995"). Net income from continuing operations for fiscal 1996 was $235,000 or
$0.05 per share. This compares to net income from continuing operations of
$765,000 or $0.17 per share for the prior year.
The following table represents the Company's consolidated statements of
operations as a percentage of net sales:
FISCAL YEAR ENDED
------------------------------------
JUNE 25, JUNE 24, JUNE 29,
1994 1995 1996
(52 WEEKS) (52 WEEKS) (53 WEEKS)
-------- -------- --------
Net sales ................................................ 100.0% 100.0% 100.0 %
Cost of goods sold ....................................... 58.1 58.8 59.3
----- ----- -----
Gross profit ........................................ 41.9 41.2 40.7
Selling, general and administrative expenses ............. 36.4 40.0 40.0
----- ----- -----
Income from continuing operations before interest and
income taxes ................................... 5.5 1.2 0.7
Interest (income) expense, net ........................... (0.2) - 0.4
----- ----- -----
Income from continuing operations before income taxes 5.7 1.2 0.3
Provision for income taxes ............................... 0.5 0.1 -
----- ----- -----
Income from continuing operations ................... 5.2 1.1 0.3
Income (loss) from discontinued operations .......... - - (11.9)
----- ----- -----
Net income (loss) ................................... 5.2% 1.1% (11.6)%
===== ===== =====
COMPARISON OF YEAR ENDED JUNE 29, 1996 WITH YEAR ENDED JUNE 24, 1995
CONTINUING OPERATIONS
SALES AND CIRCULATION. Net sales for fiscal 1996 increased 10.9% to $80.6
million from $72.7 million for fiscal 1995. This increase is attributable to a
more targeted mailing strategy which enabled the Company to raise circulation
levels by a modest 3.2% and at the same time increase the overall performance
per catalog. In fact, customer response rates rose by 6.6% and average revenue
per order increased 3.5%. In addition, despite the small circulation increase,
the Company's 12-month customer list grew 4.0% over the prior year.
GROSS PROFIT. Gross profit as a percentage of net sales was 40.7% for
fiscal 1996, as compared to 41.2% for fiscal 1995. The highly competitive
pricing environment in the apparel market and the corresponding loss of
operational leverage during fiscal 1996 were primarily responsible for this
decline.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales were 40.0% for both fiscal
1995 and 1996. This percentage was maintained even though paper and postal cost
increases were in effect for all of fiscal 1996 versus only half of fiscal 1995,
as the Company's more targeted circulation strategy increased the productivity
of its mailings.
INTEREST (INCOME) EXPENSE. Interest income decreased to $214,000 in fiscal
1996 from $286,000 in fiscal 1995, primarily due to lower invested balances.
Interest expense increased to $520,000 for fiscal 1996, as compared to $302,000
for fiscal 1995, primarily as a result of increased use of the Company's
revolving credit facilities.
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INCOME TAXES. The Company's provision for income taxes for fiscal 1996 was
significantly affected by the utilization of federal net operating loss
carryforwards. The effective tax rate was 10.0% in fiscal 1996 and 10.1% in
fiscal 1995. The effective rates reflect the full tax rate at the state level
where operating loss carryforwards have been fully utilized and are no longer
available, as well as the impact of the federal alternative minimum tax.
DISCONTINUED OPERATIONS
The fiscal 1996 results of operations for the Carroll Reed segment through
May 20, 1996 have been classified as loss from discontinued operations in the
Company's consolidated statement of operations. The net loss for fiscal 1996
also includes a loss on disposal of the Carroll Reed segment of $8.5 million.
This loss includes a write-off of the remaining unamortized intangible assets
related to the Carroll Reed segment of $5.3 million and a charge for the
expected losses from the Carroll Reed operations during the disposal period of
$3.2 million. This transaction creates a gross deferred tax asset (see Note G to
the accompanying consolidated financial statements), which has been offset by a
full valuation allowance. Therefore, no tax benefit has been recorded as a
result of this transaction.
COMPARISON OF YEAR ENDED JUNE 24, 1995 WITH YEAR ENDED JUNE 25, 1994
CONTINUING OPERATIONS
SALES AND CIRCULATION. Net sales increased 14.8% to $72.7 million in fiscal
1995 from $63.3 million for the year ended June 25, 1994 ("fiscal 1994").
Catalog circulation increased 24.4% over the prior year. The increase in
circulation was attributable to active prospecting through the Fall 1994 selling
season and the introduction of the Company's Getaway catalog, featuring resort
wear from its The Very Thing! concept. Average revenue per order and response
rates declined slightly in fiscal 1995 as compared to fiscal 1994. The Company's
12-month customer list grew 15.4% over fiscal 1994.
GROSS PROFIT. In fiscal 1995, gross profit as a percentage of net sales was
41.2% as compared to 41.9% in fiscal 1994. This decline was primarily
attributable to higher occupancy costs associated with the Company's expanded
distribution center and an increase in the Company's off-price business as a
result of the difficult Fall 1994 selling season. The effect of these factors on
gross profit was partially offset by lower merchandise costs associated with
private-label offerings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales were 40.0% in fiscal 1995
as compared to 36.4% in fiscal 1994. This increase was attributable to higher
catalog production costs, as U.S. Postal Service rates and paper prices
increased and net sales growth fell short of circulation growth.
INTEREST (INCOME) EXPENSE. Interest income increased to $286,000 in fiscal
1995 as compared to $235,000 in fiscal 1994 primarily as a result of higher
effective interest rates. Increased use of the Company's credit facilities
resulted in an increase in interest expense to $302,000 for fiscal 1995 from
$116,000 in fiscal 1994.
INCOME TAXES. The Company's provision for income taxes for fiscal 1995 was
significantly affected by a reduction in the Company's deferred tax asset
valuation allowance. The effective tax rate was 10.1% in fiscal 1995 and 9.3% in
fiscal 1994. The effective rates reflect the full tax rate at the state level
where operating loss carryforwards have been fully utilized and are no longer
available, as well as the impact of the federal alternative minimum tax.
DISCONTINUED OPERATIONS
The results of operations for the Carroll Reed segment for fiscal 1995 have
been classified as income from discontinued operations in the Company's
consolidated statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, the Company funded its working capital needs through
cash generated from operations and through use of its credit facilities. The
Company's primary working capital need in fiscal 1996 was to fund operating
losses generated by its Carroll Reed segment. In addition, the Company used
working capital to support costs incurred in advance of revenue generation,
primarily inventory acquisition and catalog development, production and mailing
costs incurred prior to the beginning of each selling season. The Company has
two selling seasons which correspond to the fashion seasons. The Fall season
begins in July and ends in December. The Spring season begins in January and
ends in early July.
11
12
As a result of operating losses related to the Carroll Reed segment, the
Company's working capital needs increased during fiscal 1996, resulting in
increased use of the Company's credit facilities. Although these operating
losses created two violations of the financial covenants contained in the
Company's debt agreements, the Company obtained waivers for each of these
covenant violations. The Company's credit facilities at June 29, 1996 consisted
of a $1,650,000 mortgage note, payments on which are due monthly based on a
15-year amortization, with the remaining balance payable in full on August 31,
1999, and a revolving line of credit totaling $7,000,000 which includes (i) a
$4,000,000 line which expires on October 31, 1996; and, (ii) a $3,000,000 line
which expires on November 30, 1996.
The Company has received a commitment from its bank to replace its existing
revolving lines of credit with a new credit facility. This new facility expands
the bank's total commitment to $12,000,000 and includes (i) an $8,000,000
revolving line of credit, which reduces to $5,000,000 during the months of May
through November and expires on June 1, 1997; and, (ii) a $4,000,000 term loan,
with payments of $200,000 due quarterly from September 30, 1996 through June 30,
2001. In consideration for this new facility, the Company has agreed to give its
bank a first security interest on substantially all assets.
Net cash used in investing activities decreased to $1.7 million in fiscal
1996 from $2.7 million in fiscal 1995. Fiscal 1996 capital investments include
additions to property and equipment in the normal course of business and a final
payment related to the Carroll Reed purchase. Net cash used in investing
activities for fiscal 1995 consists of cash outlays for property and equipment
in connection with the completion of the Company's office and distribution
facility expansion and the purchase of certain assets of Carroll Reed, reduced
by cash proceeds from the sale of marketable securities. Planned fiscal 1997
capital expenditures total approximately $1.0 million.
Fiscal year-end inventory levels were 6.1% higher in fiscal 1996 than in
fiscal 1995. This increase is attributable to the growth of the business.
Prepaid catalog expenses at June 29, 1996 were 6.1% lower than at June 24, 1995.
Cost reduction measures implemented for the Fall 1996 selling season are
primarily responsible for the decrease.
The Company's existing credit facilities and those expected to be available
in the future, and its cash flows from operations, are expected to provide the
capital resources necessary to support the Company's operating needs for the
foreseeable future.
FUTURE CONSIDERATIONS
During fiscal 1996, the Company developed and began implementing certain
operational, merchandising, marketing and creative strategies aimed at improving
operating results and strengthening its competitive position. The divestiture of
Carroll Reed enables the Company to dedicate its resources to the profitable and
growing segments of its core business. The Company is committed to building upon
its heritage of providing fashions, including extended sizes, for the active
woman. The Company will continue to market to the upscale consumer with a focus
on being a leading fashion provider to mature women.
The Company faces various risks and uncertainties in the normal course of
its business. These risks include, but are not limited to, the potential for
changes in consumer spending, consumer preferences and overall economic
conditions, increasing competition in the apparel industry and possible future
increases in operating costs. These factors could cause actual results to differ
materially from those set forth in forward-looking statements made by
management.
IMPACT OF INFLATION
Except for the increases in U.S. Postal Service rates and paper prices, the
Company's operations have not been materially affected by inflation during the
last three fiscal years.
12
13
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------
FISCAL YEAR ENDED
-------------------------------------
(amounts in thousands, except per share data) JUNE 25, JUNE 24, JUNE 29,
1994 1995 1996
-------- -------- --------
Net sales ............................... $63,337 $72,691 $80,585
Income from continuing operations 3,269 765 235
Net income (loss) ....................... 3,269 773 (9,350)
Income from continuing operations
per common and common equivalent share 0.80 0.17 0.05
Net income (loss) per common and common
equivalent share ..................... 0.80 0.17 (2.11)
Working capital ......................... $ 9,305 $ 6,315 $ 6,988
Total assets ............................ 26,923 31,612 27,069
Stockholders' equity (deficit) .......... 17,861 18,851 9,480
On May 20, 1996, the Company announced its plan to discontinue the
operations of its Carroll Reed segment. Accordingly, the Carroll Reed segment
has been accounted for as a discontinued operation, and all assets, liabilities,
results of operations and cash flows associated with the Carroll Reed segment
have been segregated from those associated with continuing operations.
During the second quarter of fiscal 1994, the Company completed its initial
public offering ("IPO") of 2,070,000 shares of common stock at $9.00 per share.
In conjunction with the IPO, all shares of the Company's preferred stock were
converted into 2,372,895 shares of common stock. In addition, all outstanding
common stock warrants were exercised for 286,881 shares of common stock.
13
14
DM MANAGEMENT COMPANY AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.......................................................................................... 15
Consolidated Balance Sheets at June 24, 1995 and June 29, 1996............................................................. 16
Consolidated Statements of Operations for the fiscal years ended June 25, 1994, June 24, 1995 and June 29, 1996............ 17
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended June 25, 1994, June 24, 1995 and
June 29, 1996..................................................................................................... 18
Consolidated Statements of Cash Flows for the fiscal years ended June 25, 1994, June 24, 1995 and June 29, 1996............ 19
Notes to Consolidated Financial Statements................................................................................. 20-28
14
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DM Management Company:
We have audited the accompanying consolidated balance sheets of DM
Management Company and subsidiary as of June 24, 1995 and June 29, 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three fiscal years in the period ended June 29,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DM
Management Company and subsidiary as of June 24, 1995 and June 29, 1996 and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended June 29, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
August 9, 1996, except with respect to Note D as to which the date is
September 10, 1996.
15
16
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS JUNE 24, 1995 JUNE 29, 1996
------------- -------------
Current assets:
Cash and cash equivalents ................................................ $ 231 $ 221
Marketable securities, net of unrealized loss ............................ - 3,858
Inventory ................................................................ 10,244 10,866
Prepaid catalog expenses ................................................. 4,424 4,154
Other current assets ..................................................... 543 1,098
-------- --------
Total current assets ................................................. 15,442 20,197
Marketable securities, net of unrealized loss ............................... 3,949 -
Property and equipment, net ................................................. 6,986 6,872
Non-current assets of discontinued operations ............................... 5,235 -
-------- --------
Total assets ......................................................... $ 31,612 $ 27,069
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 5,927 $ 9,651
Accrued expenses ......................................................... 1,730 1,438
Accrued customer returns ................................................. 1,191 1,231
Current portion of mortgage note and other long-term debt ................ 279 889
-------- --------
Total current liabilities ............................................ 9,127 13,209
Mortgage note ............................................................... 1,476 1,366
Other long-term debt ........................................................ 2,158 3,014
Commitments
Stockholders' equity:
Special preferred stock (par value $0.01) 1,000,000 shares authorized .... - -
Common stock (par value $0.01) 15,000,000 shares authorized, 4,261,058 and
4,305,293 shares issued and outstanding as of June 24, 1995 and
June 29, 1996, respectively .......................................... 42 43
Additional paid-in capital ............................................... 39,827 39,890
Unrealized loss on marketable securities ................................. (51) (136)
Accumulated deficit ...................................................... (20,967) (30,317)
-------- --------
Total stockholders' equity ........................................... 18,851 9,480
-------- --------
Total liabilities and stockholders' equity ........................... $ 31,612 $ 27,069
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
16
17
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED
-----------------
JUNE 25, 1994 JUNE 24, 1995 JUNE 29, 1996
------------- ------------- -------------
Net sales ................................................... $63,337 $72,691 $80,585
Cost of goods sold .......................................... 36,770 42,723 47,781
------- ------- -------
Gross profit ........................................... 26,567 29,968 32,804
Selling, general and administrative expenses ................ 23,082 29,101 32,237
------- ------- -------
Income from continuing operations before interest and
income taxes ...................................... 3,485 867 567
Interest (income) expense, net .............................. (119) 16 306
------- ------- -------
Income from continuing operations before income taxes .. 3,604 851 261
Provision for income taxes .................................. 335 86 26
------- ------- -------
Income from continuing operations ...................... 3,269 765 235
Discontinued operations:
Income (loss) from operations ..................... - 8 (1,074)
Loss on disposal .................................. - - (8,511)
------- ------- -------
Income (loss) from discontinued operations ... - 8 (9,585)
------- ------- -------
Net income (loss) ...................................... $ 3,269 $ 773 $(9,350)
======= ======= =======
Income (loss) per common and common equivalent share
Primary:
Continuing operations .................................. $ 0.80 $ 0.17 $ 0.05
Discontinued operations ................................ - - (2.16)
------- ------- -------
Net income (loss) per common and common equivalent share $ 0.80 $ 0.17 $ (2.11)
======= ======= =======
Weighted average common and common equivalent shares
outstanding ............................................ 4,077 4,610 4,441
Fully diluted:
Continuing operations .................................. $ 0.80 $ 0.17 $ 0.05
Discontinued operations ................................ - - (2.12)
------- ------- -------
Net income (loss) per common and common equivalent share $ 0.80 $ 0.17 $ (2.07)
======= ======= =======
Weighted average common and common equivalent shares
outstanding ............................................ 4,081 4,619 4,518
The accompanying notes are an integral part of the
consolidated financial statements.
17
18
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 25, 1994, JUNE 24, 1995, AND JUNE 29, 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
UNREALIZED
ADDITIONAL LOSS ON TOTAL
PREFERRED COMMON PAID-IN MARKETABLE ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL SECURITIES DEFICIT EQUITY
--------- ------ ------- ---------- ----------- -------------
Balance at June 26, 1993 ................. $ 791 $ 1 $25,862 $ - $(25,009) $ 1,645
Issuance of 1,470,000 shares of common
stock ................................. - 15 11,239 - - 11,254
Preferred stock conversion ............... (791) 24 767 - - -
Exercise of warrants ..................... - 2 1,748 - - 1,750
Exercise of stock options ................ - - 11 - - 11
Tax benefit from exercise of stock options - - 23 - - 23
Stock granted under the 1993 Employee
Stock Bonus Plan ...................... - - 24 - - 24
Change in unrealized losses, net of tax .. - - - (115) - (115)
Net income ............................... - - - - 3,269 3,269
----- --- ------- ----- -------- -------
Balance at June 25, 1994 ................. - 42 39,674 (115) (21,740) 17,861
Exercise of stock options ................ - - 55 - - 55
Tax benefit from exercise of stock options - - 61 - - 61
Stock granted under the Employee Stock
Purchase Plan ......................... - - 37 - - 37
Change in unrealized losses, net of tax .. - - - 64 - 64
Net income ............................... - - - - 773 773
----- --- ------- ----- -------- -------
Balance at June 24, 1995 ................. - 42 39,827 (51) (20,967) 18,851
Exercise of stock options ................ - 1 29 - - 30
Stock granted under the Employee Stock
Purchase Plan ......................... - - 34 - - 34
Change in unrealized losses, net of tax .. - - - (85) - (85)
Net loss ................................. - - - - (9,350) (9,350)
----- --- ------- ----- -------- -------
Balance at June 29, 1996 ................. $ - $43 $39,890 $(136) $(30,317) $ 9,480
===== === ======= ===== ======== =======
The accompanying notes are an integral part of the
consolidated financial statements.
18
19
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FISCAL YEAR ENDED
-----------------------------------------------
JUNE 25, 1994 JUNE 24, 1995 JUNE 29, 1996
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) ................................................ $ 3,269 $ 773 $ (9,350)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Discontinued operations:
Amortization ............................................ - 203 415
Write-off of intangible assets .......................... - - 5,336
Liability for expected losses ........................... - - 2,658
Changes in assets and liabilities: ............................... 406 704 910
Increase in inventory ......................................... (4,072) (739) (622)
(Increase) decrease in prepaid catalog expenses ............... (992) (1,436) 270
(Increase) decrease in other current assets ................... (233) 118 (557)
Increase (decrease) in accounts payable and accrued expenses .. 1,979 (292) 3,432
Increase in accrued customer returns .......................... 105 163 40
Increase in net current assets of discontinued operations ..... - (926) (2,265)
-------- -------- --------
Net cash provided by (used in) operating activities .............. 462 (1,432) 267
Cash flows from investing activities:
Investments in marketable securities .......................... (8,130) - -
Proceeds from sale of marketable securities ................... - 4,130 6
Additions to property and equipment ........................... (4,304) (2,656) (796)
Payments for purchase of Carroll Reed ......................... - (4,124) (907)
-------- -------- --------
Net cash used in investing activities ............................ (12,434) (2,650) (1,697)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrant exercise ... 13,004 - -
Borrowings under debt agreements .............................. 7,774 14,805 30,103
Payments of debt borrowings ................................... (7,774) (11,244) (28,586)
Principal payments on capital lease obligations ............... (213) (178) (161)
Proceeds from stock transactions .............................. 11 92 64
-------- -------- --------
Net cash provided by financing activities ........................ 12,802 3,475 1,420
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............. 830 (607) (10)
Cash and cash equivalents at:
Beginning of year ............................................. 8 838 231
-------- -------- --------
End of year ................................................... $ 838 $ 231 $ 221
======== ======== ========
Supplemental information:
Purchase of Carroll Reed (Note B):
Purchase price ............................................. $ - $ 5,304 $ 907
Accruals recorded, including liabilities assumed ........... - (1,180) -
-------- -------- --------
Cash paid for assets and ancillary costs ................... $ - $ 4,124 $ 907
Non-cash financing activities:
Increase in capital lease obligations ...................... $ 34 $ 115 $ -
Stock grant, net of tax .................................... 24 - -
Tax benefit from exercise of stock options ................. 23 61 -
Cash paid for interest ........................................ $ 116 $ 298 $ 506
Cash paid for income taxes, including discontinued operations . $ 127 $ 175 $ 2
The accompanying notes are an integral part of the
consolidated financial statements.
19
20
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
DM Management Company and subsidiary (the "Company") is a national direct
marketer of a broad assortment of classic women's apparel and accessories. The
Company markets its products primarily through three catalog concepts, J. Jill,
Ltd., Nicole Summers and The Very Thing!. During fiscal 1996 and part of fiscal
1995, the Company also marketed its products through the Carroll Reed concept.
See Note B.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. Intercompany balances and transactions have
been eliminated.
Fiscal Year
The Company's fiscal year is comprised of 52-53 weeks. Fiscal 1996 was a
53-week year that ended on June 29, 1996. The additional week was added in the
first quarter of fiscal 1996. The fiscal years ended June 25, 1994 and June 24,
1995 were 52-week years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes sales and the related cost of sales at the time the
products are shipped to customers. The Company allows for merchandise returns at
the customer's discretion, and provides an allowance for returns based on
projected merchandise returns.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash on deposit in banks and
may also include cash invested in money market mutual funds and overnight
repurchase agreements. The Company considers all highly liquid instruments with
maturity at time of purchase of three months or less to be cash equivalents.
Marketable Securities
The Company's marketable securities consist of investments in mutual funds
which are primarily invested in U.S. Treasury, U.S. government and corporate
bonds. The marketable securities are classified as available-for-sale and are
carried at fair market value in the accompanying consolidated balance sheets,
based on quoted market prices as of June 24, 1995 and June 29, 1996. Unrealized
holding losses of $51,000 and $136,000 have been reported as a separate
component of stockholders' equity for fiscal 1995 and 1996, respectively. These
losses are net of deferred tax benefits of $32,000 and $85,000 for fiscal 1995
and 1996, respectively. There were no realized gains or losses recorded in
fiscal 1994, 1995 or 1996. During fiscal 1996, the Company determined that it
may choose to hold its marketable securities for a period of less than one year.
As a result, the Company reclassified its marketable securities as current
during fiscal 1996. These marketable securities are exposed to concentrations of
credit risk and are managed by a nationally recognized financial institution.
Inventory
Inventory, consisting of merchandise for sale, is stated at the lower of
cost or market, with cost determined using the first-in, first-out method.
Prepaid Catalog Expenses
Prepaid catalog expenses consist of the cost to produce, print and
distribute catalogs. These costs are considered direct-response advertising and
as such are capitalized as incurred and amortized over the expected sales life
of each catalog, which is generally a period not exceeding four months. Total
catalog expense related to continuing operations in fiscal 1994, 1995 and 1996
was $16,694,000, $21,493,000 and $23,888,000, respectively.
20
21
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization
expense is computed using the straight-line method over the estimated useful
lives of the assets, which are 30 years for buildings and 3-7 years for
equipment, furniture and fixtures. Improvements to leased premises are amortized
on a straight-line basis over the shorter of the estimated useful life or the
lease term. Maintenance and repairs are charged to expense as incurred. Upon
retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is credited or charged to income. Assets under capital leases are recorded
at the present value of future lease payments. The assets under capital leases
are depreciated over the term of the lease.
Long-lived assets
In fiscal 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." In accordance with SFAS
121, management periodically considers whether there has been a permanent
impairment in the value of its long-lived assets, primarily property and
equipment and intangible assets, by evaluating various factors, including
current and projected future operating results and undiscounted cash flows.
Based on this assessment, management concluded that as of June 24, 1995 and June
29, 1996, its long-lived assets were fully realizable except as discussed in
Note B.
Net income (loss) per share
Primary and fully diluted net income (loss) per common and common
equivalent share are computed by dividing net income (loss) by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents ("CSEs") consist of
common stock issuable on the exercise of outstanding stock options and are
calculated using the treasury method. For purposes of computing net income per
share for fiscal 1994, CSEs also include the effect of outstanding warrants and
outstanding preferred stock convertible into common stock prior to the actual
conversion of the preferred stock and the exercise of the warrants in connection
with the Company's initial public offering in the second quarter of fiscal 1994.
Fair value of financial instruments
The carrying amount of the Company's long-term debt, including current
maturities, approximates fair value because the interest rates on these
instruments change with market interest rates. The carrying amounts for accounts
receivable and accounts payable approximate their fair values due to the short
maturity of these instruments. The Company's marketable securities are stated at
fair value based on quoted market prices.
Recent accounting standards
The Financial Accounting Standards Board issued Statement No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," the accounting and disclosure
provisions of which must be adopted by the Company in fiscal 1997. The standard
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The new standard
encourages, but does not require, adoption of the fair value method of
accounting for employee stock-based transactions. SFAS 123 permits companies to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," but
requires pro forma net income and earnings per share amounts be disclosed as if
the Company had applied the new method of accounting. The Company intends to
elect to continue to account for stock-based compensation under APB 25 and will
adopt the disclosure requirements of SFAS 123 in fiscal 1997.
Reclassifications
Certain financial statement amounts have been reclassified to be consistent
with the fiscal 1996 presentation.
B. DISCONTINUED OPERATIONS:
During second quarter fiscal 1995, the Company purchased certain assets and
assumed certain liabilities of Carroll Reed, Inc. and Carroll Reed International
Limited. In connection with the purchase, the Company paid $5,031,000, including
the deferred payment amount of $907,000 paid during fiscal 1996, and established
accruals totaling $1,180,000. The acquisition was accounted for under the
purchase method of accounting. Accordingly, the cost of the acquisition was
allocated to net tangible assets acquired on the
21
22
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
basis of the estimated fair market value of the net tangible assets acquired, of
approximately $257,000. The excess of such costs over the fair value of the net
tangible assets acquired, approximately $5,954,000, was allocated to the Carroll
Reed trademark, service mark and customer list.
On May 20, 1996, the Company announced its plans to divest its Carroll Reed
segment. In connection with this divestiture, the Company recorded a charge of
$8,511,000 for the loss on disposal of discontinued operations, consisting of
$5,336,000 related to the write-off of the remaining unamortized intangible
assets related to Carroll Reed and $3,175,000 for expected losses from the
Carroll Reed operations during the phase-out period. The results of the Carroll
Reed operations for fiscal 1995 and 1996, through May 20, 1996, have been
classified as income (loss) from discontinued operations. Fiscal 1996 net sales
for the Carroll Reed segment through May 20, 1996 were $12,415,000. The Carroll
Reed loss of $517,000, incurred from May 20, 1996 through June 29, 1996 was
recorded against the liability for expected losses. This transaction creates a
gross deferred tax asset (see Note G), which has been offset by a full valuation
allowance. Therefore, no tax benefit has been recorded as a result of this
transaction. The Company is pursuing the divestment of the Carroll Reed assets
and expects to conclude this transaction in fiscal 1997.
The current assets and liabilities of the Carroll Reed segment have been
classified as net current assets of discontinued operations and are included in
other current assets in the accompanying consolidated balance sheets as
summarized below (in thousands):
June 24, 1995 June 29, 1996
------------- -------------
Current assets
Inventory $360 $2,477
Prepaid catalog expenses 408 492
Other current assets 40 149
---- ------
Total current assets 808 3,118
---- ------
Current liabilities
Accounts payable 715 286
Accrued expenses 6 -
Accrued customer returns 84 173
Liability for expected losses - 2,658
---- ------
Total current liabilities 805 3,117
---- ------
Net current assets of
discontinued operations $ 3 $ 1
==== ======
Non-current assets of discontinued operations on the accompanying
consolidated balance sheet at June 24, 1995 are comprised solely of the net
intangible assets related to the Carroll Reed segment.
C. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
June 24, 1995 June 29, 1996
------------- -------------
Land and building $ 5,163 $ 5,163
Equipment 2,702 2,983
Furniture, fixtures and leasehold improvements 677 467
Construction in progress 39 212
------- -------
Total 8,581 8,825
Less accumulated depreciation and amortization (1,595) (1,953)
------- -------
Property and equipment, net $ 6,986 $ 6,872
======= =======
Depreciation and amortization for fiscal 1994, 1995 and 1996 was $406,000,
$704,000 and $910,000, respectively.
22
23
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
D. FINANCING ARRANGEMENTS:
The Company's credit facilities at June 29, 1996 consisted of a $1,650,000
mortgage note, payments on which are due monthly based on a 15-year
amortization, with the remaining balance payable in full on August 31, 1999, and
a revolving line of credit totaling $7,000,000 which includes (i) a $4,000,000
line which expires on October 31, 1996; and, (ii) a $3,000,000 line which
expires on November 30, 1996.
A summary of the Company's outstanding long-term credit facilities follows
(in thousands):
June 24, 1995 June 29, 1996
------------- -------------
Mortgage note $1,586 $1,476
$4,000,000 Revolver 1,975 3,602
Capitalized lease obligations 352 191
------ ------
Total long-term debt 3,913 5,269
Less current maturities 279 889
------ ------
Long-term debt $3,634 $4,380
====== ======
The Company's credit agreements provide several interest rate options that
the Company may select from in determining the rate on which its borrowings are
based. During fiscal 1996, interest on the Company's mortgage note averaged
7.08%. The $4,000,000 Revolver's weighted average interest rate during fiscal
1996 was 8.49%. The Company is required to pay a commitment fee on the unused
portion of the $4,000,000 Revolver of 1/4 of 1% per annum. Currently, the
Company's credit facilities are collateralized by the Company's marketable
securities. The mortgage note is also collateralized by a first mortgage on the
Company's office and distribution facility. The terms of the Company's financing
arrangements contain various lending conditions and covenants, including
restrictions on permitted liens, limitations on capital expenditures and
dividends, and compliance with certain financial coverage ratios. The Company
was in compliance with or has received waivers for the financial covenants
contained in its credit agreements as of June 29, 1996.
The Company has received a commitment from its bank to replace its existing
revolving lines of credit with a new credit facility. This new facility expands
the bank's total commitment to $12,000,000 and includes (i) an $8,000,000
revolving line of credit, which reduces to $5,000,000 during the months of May
through November and expires on June 1, 1997; and, (ii) a $4,000,000 term loan,
with payments of $200,000 due quarterly from September 30, 1996 through June 30,
2001. In consideration for this new facility, the Company has agreed to give its
bank a first security interest on substantially all assets.
Aggregate maturities of long-term debt for the next five fiscal years,
based on the terms of the new credit facility described above, are as follows:
1997 - $889,000; 1998 - $922,000; 1999 - $910,000; 2000 - $1,946,000; and, 2001
- - $602,000.
Import letters of credit are for commitments issued through the Company's
bank to guarantee payment for foreign-sourced merchandise within agreed upon
time periods according to the terms of the agreements. Outstanding import
letters of credit totaled approximately $1,198,000 and $424,000 at June 24, 1995
and June 29, 1996, respectively.
E. STOCKHOLDERS' EQUITY:
Common stock
In the second quarter of fiscal 1994, the Company completed its initial
public offering of 2,070,000 shares of common stock. In conjunction with the
Company's initial public offering, all shares of the Company's preferred stock
were converted into 2,372,895 shares of common stock. In addition, all
outstanding common stock warrants were exercised for 286,881 shares of common
stock.
Special preferred stock
The Company has 1,000,000 shares of special preferred stock, $0.01 par
value per share, authorized. No special preferred stock was outstanding at June
24, 1995 or June 29, 1996.
23
24
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Treasury stock
During fiscal 1995, the Company's Board of Directors voted to retire the
then outstanding 6,666 shares of the Company's common stock held in treasury.
These shares were authorized and unissued at June 24, 1995 and June 29, 1996.
Stock purchase plan
The Company has an employee stock purchase plan which authorizes the
issuance of up to 100,000 shares of the Company's common stock to eligible
employees. Pursuant to the plan, eligible employees may be granted the
opportunity to purchase common stock of the Company at 85% of market value on
the first or last day of the calendar year, whichever is lower. A total of
90,865 and 71,480 shares of common stock remained available for issuance under
the plan at June 24, 1995 and June 29, 1996, respectively. Purchases of common
stock under the plan have been made as follows: on December 29, 1994, 9,135
shares at an aggregate purchase price of approximately $37,000; on December 30,
1995, 19,385 shares at an aggregate purchase price of approximately $34,000. No
compensation expense has been recorded related to the employee stock purchase
plan.
Stock bonus plan
During fiscal 1994, the Board of Directors adopted the Company's 1993
Employee Stock Bonus Plan (the "Stock Bonus Plan"), which authorized the Company
to make a one-time grant of 10 shares of common stock to every eligible
employee. During fiscal 1994, the Company issued 2,190 shares and recorded
compensation expense of approximately $21,000 related to the Stock Bonus Plan.
Stock warrants
In connection with a loan and security agreement between the Company and
one of its stockholders, the Company issued such stockholder warrants to
purchase 286,881 shares of common stock at an exercise price of $6.10 per share.
These warrants were exercised in conjunction with the Company's initial public
offering in November 1993.
Stock option plans
The Company's 1988 Incentive Stock Option Plan (the "1988 Stock Option
Plan") provides for the grant of options to purchase shares of common stock to
key employees at exercise prices that are not less than the fair market value of
the common stock at the date of grant. During fiscal 1994, the Board of
Directors voted not to issue any additional options under the 1988 Stock Option
Plan. Generally, options have a vesting schedule which approximates 25% on each
yearly anniversary date.
The Company's 1993 Incentive and Nonqualified Stock Option Plan (the "1993
Stock Option Plan") authorizes (i) the grant of options to purchase common stock
intended to qualify as incentive stock options ("Incentive Options"), as defined
in Section 422 of the Internal Revenue Code of 1986, as amended, and (ii) the
grant of options that do not so qualify ("Nonqualified Options"). The exercise
price of Incentive Options granted under the 1993 Stock Option Plan must be at
least equal to the fair market value of the common stock on the date of grant.
The exercise price of Incentive Options granted to an optionee who owns stock
possessing more than 10% of the voting power of the Company's outstanding
capital stock must equal at least 110% of the fair market value of the common
stock on the date of grant. The exercise price of Nonqualified Options granted
under the 1993 Stock Option Plan must not be less than 85% of the fair market
value of the common stock on the grant date. Under the 1993 Stock Option Plan,
Outside Directors are automatically granted Nonqualified Options to purchase a
specific number of shares of common stock at an exercise price equal to the fair
market value of the common stock on the date of grant. Such options vest over
time, contingent on continued service as a director, and expire five years from
the date of grant. At June 29, 1996, the 1993 Stock Option Plan authorized the
issuance of options to purchase up to 700,000 shares of common stock.
24
25
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table reflects the activity under the 1988 Stock Option Plan
and the 1993 Stock Option Plan during fiscal 1994, 1995 and 1996:
1988 Stock Option Plan 1993 Stock Option Plan
--------------------------------- --------------------------------
Number of Exercise Number of Exercise
Shares Price Per Share Shares Price Per Share
--------- --------------- --------- ---------------
Balance at June 26, 1993 584,877 $0.17-6.10 - -
Granted - - 45,000 $9.00-10.88
Exercised (6,675) 1.67 - -
Canceled (10,875) 1.67 - -
------- --------- ------- ----------
Balance at June 25, 1994 567,327 0.17-6.10 45,000 9.00-10.88
Granted - - 77,000 2.75-15.00
Exercised (55,673) 0.17-1.67 - -
Canceled (22,310) 0.17-1.67 - -
------- --------- ------- ----------
Balance at June 24, 1995 489,344 0.17-6.10 122,000 2.75-15.00
Granted - - 421,000 2.06-5.00
Exercised (24,850) 0.17-1.67 - -
Canceled (1,500) 1.67 (23,000) 4.00-10.88
------- --------- ------- ----------
Balance at June 29, 1996 462,994 $0.17-6.10 520,000 $2.06-15.00
======= ========== ======= ===========
Options exercisable under the 1988 Stock Option Plan at June 25, 1994, June
24, 1995, and June 29, 1996 were 411,417, 447,684, and 442,914, respectively.
Options exercisable under the 1993 Stock Option Plan at June 25, 1994, June 24,
1995 and June 29, 1996 were 0, 14,250 and 68,750, respectively.
F. BENEFIT PLANS:
The Company implemented a savings plan (the "Plan") during fiscal 1994,
which permits participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. At the discretion of the Board of
Directors, the Company may also make contributions dependent on profits each
year for the benefit of all eligible employees under the Plan. Employee
eligibility is based on minimum age and employment requirements. The Company
contributed $65,000 and $12,000 to the Plan for fiscal 1994 and 1995,
respectively. The Company did not make a contribution to the Plan for fiscal
1996.
G. INCOME TAXES:
In fiscal 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109,
deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using current statutory tax rates. SFAS 109 also requires a
valuation reserve against net deferred tax assets if, based upon available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. Such adoption did not have a material impact on the
Company's financial condition or results of operations.
The components of the Company's provision for income taxes for continuing
operations for the years ended June 25, 1994, June 24, 1995, and June 29, 1996
are as follows (in thousands):
1994 1995 1996
---- ---- ----
Current
Federal $210 $40 $ 8
State 125 46 18
Deferred
Federal - - -
State - - -
---- --- ---
Total 335 86 26
==== === ===
25
26
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's effective income tax rate for continuing operations for the
years ended June 25, 1994, June 24, 1995, and June 29, 1996 differed from the
U.S. federal statutory rate as follows:
1994 1995 1996
---- ---- ----
U.S. federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 3.5 5.5 4.5
Utilization of net operating losses (28.2) - (28.5)
Reduction of deferred tax asset valuation allowance - (29.4) -
---- ---- ----
Effective income tax rate 9.3% 10.1% 10.0%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities at June 24, 1995 and June 29,
1996, are as follows (in thousands):
1995 1996
---- ----
Deferred tax assets:
Net operating losses $7,094 $ 6,951
Inventory 1,462 1,381
Reserve for customer returns 501 552
Discontinued segment - 3,343
Other 320 304
------ -------
Total deferred tax assets 9,377 12,531
Deferred tax liabilities:
Prepaid catalogs 1,898 1,343
Other 79 54
------ -------
Total deferred tax liabilities 1,977 1,397
------ -------
Net deferred tax assets 7,400 11,134
Less valuation allowance 7,400 11,134
------ -------
Net deferred tax assets per consolidated balance sheets $ - $ -
====== =======
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against the entire balance of the net deferred tax assets at June 24, 1995 and
June 29, 1996.
At June 29, 1996, the Company had available net operating loss ("NOL")
carryforwards of approximately $18,787,000, of which $5,470,000 expires in
fiscal 2004, $7,912,000 expires in fiscal 2005, $2,530,000 expires in fiscal
2006, $2,383,000 expires in fiscal 2007 and $492,000 expires in fiscal 2010.
Section 382 of the Internal Revenue Code of 1986, as amended, restricts a
corporation's ability to use its NOL carryforwards following certain "ownership
changes." The Company has determined that such an ownership change has occurred
as a result of its initial public offering. The amount of the Company's NOL
carryforwards available for use in any future taxable year is limited to
approximately $1.5 million annually. NOL carryforwards expire 15 years after the
tax year in which they arise, and the last of the Company's current NOL
carryforwards will expire in its fiscal 2010 tax year. For financial reporting
purposes, if the Company believes that it is more likely than not that its NOL
carryforwards will be fully utilized (even if deferred), the provision for
income taxes in the Company's consolidated statements of operations, under SFAS
109, would be calculated as if the Company's NOL carryforwards were fully
available without limitation to offset taxable income.
H. COMMITMENTS:
At fiscal year end 1995 and 1996, there was approximately $557,000 of
equipment under capital leases. Accumulated depreciation related to these leased
assets totaled approximately $170,000 and $365,000, respectively. The capital
leases in effect at June 29, 1996 include options to purchase the related
equipment at fair market value at the end of the lease term.
26
27
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of June 29, 1996, future minimum lease payments for capitalized lease
obligations are as follows: fiscal 1997 - $188,000; and, fiscal 1998 - $12,000.
Approximately $9,000 of these amounts represents interest.
The Company leases certain of its facilities under noncancellable operating
leases having initial or remaining terms of more than one year. The majority of
these real estate leases require the Company to pay maintenance, insurance and
real estate taxes. Total rent expense, including these costs, amounted to
approximately $914,000, $581,000 and $666,000 for fiscal years 1994, 1995 and
1996, respectively.
Future minimum lease payments for operating leases having a remaining term
in excess of one year at June 29, 1996 totaled $2,132,000 and are as follows:
fiscal 1997 - $581,000; fiscal 1998 - $581,000; fiscal 1999 - $581,000; and,
fiscal 2000 - $389,000.
I. RELATED PARTY:
The Company provides various operational and marketing services to Shannon
North America, Limited ("Shannon") pursuant to a joint venture agreement between
the Company and its partner, Aer Rianta cpt. During fiscal 1994, 1995 and 1996,
the Company charged $487,000, $555,000 and $690,000, respectively, to Shannon
for these various services. During fiscal 1996, the Company decided to terminate
its relationship with Shannon. The Company expects its involvement with Shannon
to cease during early fiscal 1997. The Company's investment in Shannon is
immaterial.
27
28
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
J. QUARTERLY FINANCIAL DATA (UNAUDITED):
Fiscal 1996 Quarter Ended
------------------------------------------------------
(amounts in thousands, except per share data) September 30 December 30 March 30 June 29
------------ ----------- -------- -------
Net sales $22,312 $16,955 $19,736 $21,582
Gross profit 9,015 6,647 8,422 8,720
Income (loss) from continuing operations (274) (286) 250 545
Income (loss) from discontinued operations (393) (205) 14 (9,001)
Net income (loss) (667) (491) 264 (8,456)
Income (loss) from continuing
operations per common and common
equivalent share (0.06) (0.07) 0.06 0.11
Income (loss) from discontinued
operations per common and common
equivalent share (0.09) (0.05) - (1.90)
Net income (loss) per common and common
equivalent share $ (0.15) $ (0.12) $ 0.06 $ (1.79)
Fiscal 1995 Quarter Ended
------------------------------------------------------
(amounts in thousands, except per share data) September 24 December 24 March 25 June 24
------------ ----------- -------- -------
Net sales $18,536 $14,890 $19,704 $19,561
Gross profit 8,022 6,250 8,248 7,448
Income (loss) from continuing operations 1,078 (582) 180 89
Income (loss) from discontinued operations - - (60) 68
Net income (loss) 1,078 (582) 120 157
Income (loss) from continuing
operations per common and common
equivalent share 0.23 (0.13) 0.04 0.02
Income (loss) from discontinued
operations per common and common
equivalent share - - (0.01) 0.01
Net income per common and common
equivalent share $ 0.23 $ (0.13) $ 0.03 $ 0.03
On May 20, 1996, the Company announced its plan to discontinue the
operations of its Carroll Reed segment. The operating results of the Carroll
Reed segment have been classified as income (loss) from discontinued operations.
The net loss for the quarter ending June 29, 1996 includes a loss on the
disposal of the discontinued operations of the Carroll Reed segment of $8.5
million.
The sum of the quarterly net income per common and common equivalent share
amounts may not equal the full year amount since the computations of the
weighted average number of common and common equivalent shares outstanding for
each quarter and the full year are made independently.
28
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE
Our report on the consolidated financial statements of DM Management
Company and subsidiary is included on Page 15 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on Page 33 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
August 9, 1996
29
30
DM MANAGEMENT COMPANY AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
BALANCE, AMOUNTS WRITE-OFFS BALANCE,
BEGINNING CHARGED TO AGAINST END OF
OF PERIOD NET INCOME RESERVE PERIOD
--------- ---------- ---------- --------
Accrued Customer Returns:
Year Ended June 29, 1996 $1,191 $22,534 $22,494 $1,231
====== ======= ======= ======
Year Ended June 24, 1995 $1,028 $21,062 $20,899 $1,191
====== ======= ======= ======
Year Ended June 25, 1994 $ 923 $17,378 $17,273 $1,028
====== ======= ======= ======
30
31
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND CONSOLIDATED FINANCIAL
DISCLOSURE
Not applicable.
31
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Directors and Officers" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" appearing
in the Company's definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on November 8,
1996, and which will be filed with the Securities and Exchange Commission not
later than 120 days after June 29, 1996, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Remuneration of Executive
Officers and Directors" appearing in the Company's definitive Proxy Statement to
be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on November 8, 1996, and which will be filed with the
Securities and Exchange Commission not later than 120 days after June 29, 1996,
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" appearing in the Company's definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held on November 8, 1996, and which will be filed with the
Securities and Exchange Commission not later than 120 days after June 29, 1996,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
32
33
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES, AND
REPORTS ON FORM 8-K
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Consolidated Statements on Page 14.
(2) FINANCIAL STATEMENT SCHEDULES
Index to Consolidated Financial Statement Schedules Page
----
Report of Independent Public Accountants on Supplementary Schedule 29
For the three years ending June 29, 1996:
Schedule II - Valuation and Qualifying Accounts 30
(3) EXHIBITS
Exhibits 10.5 through 10.12 include the Company's compensatory plan or
arrangements required to be filed as exhibits pursuant to Item 14(c) of
Form 10-K.
Acquisition Contracts
---------------------
2.1 Purchase Agreement dated December 19, 1994 between the Company and
Carroll Reed, Inc. and Carroll Reed International Limited (included as
Exhibit 2.1 to the Company's Report on Form 8-K dated December 19,
1994, File No. 0-22480, and incorporated herein by reference)
Certificate of Incorporation and By-Laws
----------------------------------------
3.1 Restated Certificate of Incorporation of the Company (included as
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 25, 1993, File No. 0-22480, and incorporated
herein by reference)
3.2 Amended By-Laws of the Company (included as Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
26, 1994, File No. 0-22480, and incorporated herein by reference)
Material Contracts
------------------
10.1 Ninth Amended and Restated Registration Rights Agreement dated as of
August 12, 1993 by and among the Company, Allstate Insurance Company,
Aegis II Limited Partnership and Aegis Selected Limited Partnership
(included as Exhibit 10.4 to the Company's Registration Statement on
Form S-1, Registration No. 33-67512, and incorporated herein by
reference)
10.2 Lease Agreement dated September 14, 1989 between the Company and
Richard D. Matthews and Richard J. Valentine, Trustees of Bare Cove
Realty Trust established u/d/t dated January 10, 1984, as amended
(included as Exhibit 10.13 to the Company's Registration Statement on
Form S-1, Registration No. 33-67512, and incorporated herein by
reference)
10.3 Shopping Center Lease between the Company and Meredith Bay Corporation
dated May 24, 1990, Addendum to Lease dated June 23, 1990 and Renewal
Lease dated May 4, 1993 (included as Exhibit 10.14 to the Company's
Registration Statement on Form S-1, Registration No. 33-67512, and
incorporated herein by reference)
10.4 Retail Lease Agreement between the Company and Settlers' Green
Associates Limited Partnership dated February 13, 1992 (included as
Exhibit 10.16 to the Company's Registration Statement on Form S-1,
Registration No. 33-67512, and incorporated herein by reference)
10.5 1988 Incentive Stock Option Plan (included as Exhibit 10.17 to the
Company's Registration Statement on Form S-1, Registration No.
33-67512, and incorporated herein by reference)
33
34
10.6 1993 Incentive and Nonqualified Stock Option Plan, as amended
(included as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 30, 1996, File No. 0-22480, and
incorporated herein)
10.7 1993 Employee Stock Purchase Plan (included as Exhibit 10.19 to the
Company's Registration Statement on Form S-1, Registration No.
33-67512, and incorporated herein by reference)
10.8 Fiscal 1997 Bonus Plan
10.9 Severance Agreement dated September 25, 1995 between the Company and
George R. Burman, Jr. (included as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, File No. 0-22480, and incorporated herein by reference)
10.10 Severance Agreement dated April 4, 1995 between the Company and Margo
M. Wyckoff (included as Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995, File No.
0-22480, and incorporated herein by reference)
10.11 Employment Letter Agreement dated December 21, 1995, between the
Company and Gordon R. Cooke (included as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 30, 1995,
File No. 0-22480, and incorporated herein by reference)
10.12 Employment Letter Agreement dated May 7, 1996, between the Company
and John J. Hayes
+10.13 National Account Agreement between the Company and Airborne Freight
Corporation dated July 1, 1991, as amended (included as Exhibit 10.25
to the Company's Registration Statement on Form S-1, Registration No.
33-67512, and incorporated herein by reference)
+10.14 Amendment No. 5 to the National Account Agreement between the Company
and Airborne Freight Corporation dated July 1, 1991, as previously
amended (included as Exhibit 10.15 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 24, 1994, File No.
0-22480, and incorporated herein by reference)
10.15 License Agreement between the Company and Galvin Associates, Inc.
dated June 23, 1993 (included as Exhibit 10.27 to the Company's
Registration Statement on Form S-1, Registration No. 33-67512, and
incorporated herein by reference)
10.16 Software Maintenance Agreement between the Company and Galvin
Associates, Inc. dated June 23, 1993 (included as Exhibit 10.28 to the
Company's Registration Statement on Form S-1, Registration No.
33-67512, and incorporated herein by reference)
10.17 Service Agreement between the Company and Wiland Services, Inc. dated
February 7, 1991 (included as Exhibit 10.29 to the Company's
Registration Statement on Form S-1, Registration No. 33-67512, and
incorporated herein by reference)
10.18 Directors and Officers Liability and Company Reimbursement Policy and
the related Directors and Officers Renewal Declaration issued by Home
Insurance Company of Illinois and the Excess Directors and Officers
Liability Insurance and Company Reimbursement Policy issued by Admiral
Insurance Company (included as Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 24, 1994, File No.
0-22480, and incorporated herein by reference)
10.19 $3,000,000 Commercial Promissory Grid Note dated October 28, 1994,
between the Company and Shawmut Bank, N.A. (included as Exhibit 10.21
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 24, 1994, File No. 0-22480, and incorporated herein by
reference)
10.20 First Amendment to $3,000,000 Commercial Promissory Grid Note between
the Company and Shawmut Bank, N.A. dated November 10, 1995 (included
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 0-22480, and incorporated
herein by reference)
----------------
+ Confidential treatment previously granted.
34
35
10.21 $4,000,000 Commercial Promissory Grid Note dated October 28, 1994,
between the Company and Shawmut Bank, N.A. (included as Exhibit 10.22
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 24, 1994, File No. 0-22480, and incorporated herein by
reference)
10.22 First Amendment to $4,000,000 Commercial Promissory Grid Note between
the Company and Shawmut Bank, N.A. dated November 10, 1995 (included
as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 0-22480, and incorporated
herein by reference)
10.23 Mortgage and Security Agreement dated October 28, 1994, between the
Company and Shawmut Bank, N.A. (included as Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 24, 1994, File No. 0-22480, and incorporated herein by
reference)
10.24 $1,650,000 Commercial Promissory Note dated October 28, 1994, between
the Company and Shawmut Bank, N.A. (included as Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended December
24, 1994, File No. 0-22480, and incorporated herein by reference)
10.25 Letter from Shawmut Bank, N.A., dated July 12, 1995, amending certain
financial covenants contained in the $3,000,000 Commercial Promissory
Grid Note dated October 28, 1994, and the $4,000,000 Commercial
Promissory Grid Note dated October 28, 1994, both between the Company
and Shawmut Bank, N.A. (included as Exhibit 10.20 to the Company's
Form 10-K for the fiscal year ended June 24, 1995, File No. 0-22840,
and incorporated herein by reference)
10.26 Pledge Agreement dated January 15, 1996, between the Company and
Fleet National Bank, as successor to Shawmut Bank, N.A. (included as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 30, 1995, File No. 0-22480, and incorporated
herein by reference)
10.27 Debt Covenant Waiver Letter dated February 7, 1996, between the
Company and Fleet National Bank, as successor to Shawmut Bank, N.A.
(included as Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 30, 1995, File No. 0-22480, and
incorporated herein by reference)
10.28 Debt Covenant Waiver Letter dated September 10, 1996, between the
Company and Fleet National Bank, as successor to Shawmut Bank, N.A.
10.29 Commitment Letter dated September 10, 1996, from Fleet National Bank.
10.30 Merchant Services Agreement between the Company and Hurley State
Bank, dated July 18, 1995 (included as Exhibit 10.21 to the Company's
Form 10-K for the fiscal year ended June 24, 1995, File No. 0-22840,
and incorporated herein by reference)
Per Share Earnings
------------------
11.1 Statement re: computation of per share earnings
Consent of Experts and Counsel
------------------------------
23.1 Consent of Independent Accountants dated September 26, 1996
Financial Data Schedule
-----------------------
27 Financial Data Schedule
(4) REPORTS ON FORM 8-K
On September 28, 1995, the Company filed a report on Form 8-K with the
Securities and Exchange Commission regarding the resignation of George R.
Burman, Jr. from his positions as the Company's Chairman of the Board and a
director, effective October 1, 1995.
On October 18, 1995, the Company filed a report on Form 8-K with the
Securities and Exchange Commission regarding the resignation of Ronald J.
Jackson from the Company's Board of Directors effective October 18, 1995.
35
36
On January 3, 1996, the Company filed a report on Form 8-K with the
Securities and Exchange Commission in connection with the announcement that
Gordon R. Cooke had been named President, Chief Executive Officer and a
Director, and that Samuel L. Shanaman had become Chief Operating Officer and
would continue as a Director.
On May 20, 1996, the Company filed a report on Form 8-K with the Securities
and Exchange Commission announcing its decision to discontinue the operations of
its Carroll Reed segment.
36
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DM MANAGEMENT COMPANY
Dated: September 26, 1996 By: /s/ Gordon R. Cooke
------------------------------------------
Gordon R. Cooke
President, Chief Executive Officer and
Director (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
By: /s/ Gordon R. Cooke President, Chief Executive Officer and Director September 26, 1996
------------------------------- (Principal Executive Officer)
Gordon R. Cooke
By: /s/ Samuel L. Shanaman Executive Vice President, Chief Operating Officer, September 26, 1996
------------------------------- Chief Financial Officer and Director
Samuel L. Shanaman (Principal Financial Officer)
By: /s/ Olga L. Conley Vice President of Finance and Treasurer September 26, 1996
------------------------------- (Principal Accounting Officer)
Olga L. Conley
By: /s/ Walter J. Levison Director September 26, 1996
-------------------------------
Walter J. Levison
By: /s/ William E. Engbers Director September 26, 1996
-------------------------------
William E. Engbers
37
38
DM MANAGEMENT COMPANY AND SUBSIDIARY
FORM 10-K
FOR THE YEAR ENDED JUNE 29, 1996
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
2.1 Purchase Agreement dated December 19, 1994 between the Company and Carroll Reed, Inc.
and Carroll Reed International Limited
3.1 Restated Certificate of Incorporation of the Company
3.2 Amended By-Laws of the Company
10.1 Ninth Amended and Restated Registration Rights Agreement dated as of August 12, 1993 by and
among the Company, Allstate Insurance Company, Aegis II Limited Partnership and Aegis
Selected Limited Partnership
10.2 Lease Agreement dated September 14, 1989 between the Company and Richard D. Matthews and
Richard J. Valentine, Trustees of Bare Cove Realty Trust established u/d/t dated January 10, 1984,
as amended
10.3 Shopping Center Lease between the Company and Meredith Bay Corporation dated May 24,
1990, Addendum to Lease dated June 23, 1990 and Renewal Lease dated May 4, 1993
10.4 Retail Lease Agreement between the Company and Settlers' Green Associates Limited Partnership
dated February 13, 1992
10.5 1988 Incentive Stock Option Plan
10.6 1993 Incentive and Nonqualified Stock Option Plan, as amended
10.7 1993 Employee Stock Purchase Plan
10.8 Fiscal 1997 Bonus Plan 40
10.9 Severance Agreement dated September 25, 1995 between the Company and George R. Burman, Jr.
10.10 Severance Agreement dated April 4, 1995 between the Company and Margo M. Wyckoff
10.11 Employment Letter Agreement dated December 21, 1995, between the Company and Gordon
R. Cooke
10.12 Employment Letter Agreement dated May 7, 1996, between the Company and John J. Hayes 47
+10.13 National Account Agreement between the Company and Airborne Freight Corporation dated
July 1, 1991, as amended
+10.14 Amendment No. 5 to the National Account Agreement between the Company and Airborne
Freight Corporation dated July 1, 1991, as previously amended
10.15 License Agreement between the Company and Galvin Associates, Inc. dated June 23, 1993
<FN>
- ------------------
+ Confidential treatment previously granted.
38
39
10.16 Software Maintenance Agreement between the Company and Galvin Associates, Inc. dated
June 23, 1993
10.17 Service Agreement between the Company and Wiland Services, Inc. dated February 7, 1991
10.18 Directors and Officers Liability and Company Reimbursement Policy and the related Directors
and Officers Renewal Declaration issued by Home Insurance Company of Illinois and the
Excess Directors and Officers Liability Insurance and Company Reimbursement Policy issued
by Admiral Insurance Company
10.19 $3,000,000 Commercial Promissory Grid Note dated October 28, 1994, between the Company
and Shawmut Bank, N.A.
10.20 First Amendment to $3,000,000 Commercial Promissory Grid Note between the Company
and Shawmut Bank, N.A. dated November 10, 1995
10.21 $4,000,000 Commercial Promissory Grid Note dated October 28, 1994, between the Company
and Shawmut Bank, N.A.
10.22 First Amendment to $4,000,000 Commercial Promissory Grid Note between the Company and
Shawmut Bank, N.A. dated November 10, 1995
10.23 Mortgage and Security Agreement dated October 28, 1994, between the Company and
Shawmut Bank, N.A.
10.24 $1,650,000 Commercial Promissory Note dated October 28, 1994, between the Company
and Shawmut Bank, N.A.
10.25 Letter from Shawmut Bank, N.A., dated July 12, 1995, amending certain financial covenants
contained in the $3,000,000 Commercial Promissory Grid Note dated October 28, 1994, and the
$4,000,000 Commercial Promissory Grid Note dated October 28, 1994, both between the
Company and Shawmut Bank, N.A.
10.26 Pledge Agreement dated January 15, 1996, between the Company and Fleet National Bank,
as successor to Shawmut Bank, N.A.
10.27 Debt Covenant Waiver Letter dated February 7, 1996, between the Company and Fleet National
Bank, as successor to Shawmut Bank, N.A.
10.28 Debt Covenant Waiver Letter dated September 10, 1996, between the Company and Fleet 50
National Bank, as successor to Shawmut Bank, N.A.
10.29 Commitment Letter dated September 10, 1996, from Fleet National Bank. 52
10.30 Merchant Services Agreement between the Company and Hurley State Bank, dated
July 18, 1995
11.1 Statement re: computation of per share earnings 57
23.1 Consent of Independent Accountants dated September 26, 1996 59
27 Financial Data Schedule 61
39