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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 28, 1996 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
incorporation or organization) Identification No.)
25 RECREATION PARK DRIVE
HINGHAM, MA 02043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 740-2718
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class
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Common stock, $0.01 par value 4,456,908 shares outstanding
at November 5, 1996
Total number of pages 86
The Exhibit Index is located on Page 12
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DM MANAGEMENT COMPANY & SUBSIDIARY
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Consolidated Financial Statements........................................................................................3-7
Consolidated Balance Sheets at September 28, 1996, September 30, 1995 and June 29, 1996....................................3
Consolidated Statements of Operations for the three months ended September 28, 1996 and September 30, 1995.................4
Consolidated Statements of Cash Flows for the three months ended September 28, 1996 and September 30, 1995.................5
Notes to Consolidated Financial Statements ..............................................................................6-7
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations ......................8-9
PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K..........................................................................................10
Signature.........................................................................................................................11
Exhibit Index.....................................................................................................................12
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DM MANAGEMENT COMPANY & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 28, SEPTEMBER 30, JUNE 29,
1996 1995 1996
------------- ------------- --------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 296 $ 370 $ 221
Marketable securities, net of unrealized loss ................. 3,862 -- 3,858
Inventory ..................................................... 10,200 8,675 10,866
Prepaid catalog expenses ...................................... 3,875 4,103 4,154
Other current assets .......................................... 1,915 2,355 1,098
-------- -------- --------
Total current assets ................................. 20,148 15,503 20,197
Marketable securities, net of unrealized loss ........................... -- 3,943 --
Property and equipment, net ............................................. 6,994 6,812 6,872
Non-current assets of discontinued operations ........................... -- 5,366 --
-------- -------- --------
Total assets ......................................... $ 27,142 $ 31,624 $ 27,069
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 6,943 $ 5,217 $ 9,651
Accrued expenses .............................................. 1,658 2,276 1,438
Accrued customer returns ...................................... 1,441 2,247 1,231
Short-term revolver ........................................... 1,721 -- --
Current portion of mortgage note and other long-term debt ..... 864 283 889
-------- -------- --------
Total current liabilities ........................... 12,627 10,023 13,209
Mortgage note ........................................................... 1,338 1,448 1,366
Other long-term debt .................................................... 3,431 1,975 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,
4,326,157, 4,261,558 and 4,305,293 shares issued and
outstanding at September 28, 1996, September 30, 1995
and June 29, 1996, respectively .................... 43 42 43
Additional paid-in capital .................................... 39,902 39,827 39,890
Unrealized loss on marketable securities ...................... (132) (57) (136)
Accumulated deficit ........................................... (30,067) (21,634) (30,317)
-------- -------- --------
Total stockholders' equity .......................... 9,746 18,178 9,480
-------- -------- --------
Total liabilities and stockholders' equity .......... $ 27,142 $ 31,624 $ 27,069
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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DM MANAGEMENT COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
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SEPTEMBER 28, SEPTEMBER 30,
1996 1995
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Net sales .......................................................................................... $20,541 $22,312
Cost of goods sold ................................................................................. 12,114 13,297
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Gross profit .................................................................................. 8,427 9,015
Selling, general and administrative expenses ....................................................... 8,067 9,262
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Income (loss) from continuing operations before interest and income taxes ..................... 360 (247)
Interest expense, net .............................................................................. 82 58
------- -------
Income (loss) from continuing operations before income taxes .................................. 278 (305)
Provision (benefit) for income taxes ............................................................... 28 (31)
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Income (loss) from continuing operations ...................................................... 250 (274)
Loss from discontinued operations ............................................................. -- (393)
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Net income (loss) ............................................................................. $ 250 $ (667)
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Income (loss) per common and common equivalent share
Primary:
Continuing operations ......................................................................... $ 0.05 $ (0.06)
Discontinued operations ....................................................................... -- (0.09)
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Net income (loss) per common and common equivalent share ...................................... $ 0.05 $ (0.15)
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Weighted average common and common equivalent shares outstanding ................................... 4,730 4,566
The accompanying notes are an integral part of the consolidated financial
statements.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
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SEPTEMBER 28, SEPTEMBER 30,
1996 1995
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Cash flows from operating activities:
Net income (loss) ............................................................ $ 250 $ (667)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Amortization related to discontinued operations .......................... -- 113
Use of liability for expected losses of discontinued operations .......... (897) --
Depreciation and amortization ............................................ 266 217
Changes in assets and liabilities:
Decrease in inventory ...................................................... 666 1,569
Decrease in prepaid catalog expenses ....................................... 279 321
Increase in other current assets ........................................... (328) (782)
Decrease in accounts payable and accrued expenses .......................... (2,488) (164)
Increase in accrued customer returns ....................................... 210 1,056
Decrease (increase) in net current assets of discontinued operations ....... 408 (1,274)
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Net cash (used in) provided by operating activities ............................ (1,634) 389
Cash flows from investing activities:
Additions to property and equipment .......................................... (350) (43)
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Net cash used in investing activities .......................................... (350) (43)
Cash flows from financing activities:
Borrowings under debt agreements ............................................. 8,460 6,696
Payments of debt borrowings .................................................. (6,369) (6,868)
Principal payments on capital lease obligations .............................. (44) (35)
Proceeds from stock transactions ............................................. 12 --
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Net cash provided by (used in) financing activities ............................ 2,059 (207)
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Net increase in cash and cash equivalents ...................................... 75 139
Cash and cash equivalents at:
Beginning of period .......................................................... 221 231
------- -------
End of period ................................................................ $ 296 $ 370
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Supplemental information:
Non-cash financing activities:
Increase in capital lease obligations ...................................... $ 38 $ --
The accompanying notes are an integral part of the consolidated financial
statements.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements included herein have been prepared by DM
Management Company (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and in the opinion of
management contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. Accordingly, although the Company believes that the
disclosures are adequate to make the information presented not misleading, these
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Stockholders for the fiscal year ended June 29, 1996.
A. DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 1996, the Company announced its plans
to divest its Carroll Reed segment. In connection with this divestiture, the
Company recorded a $3,175,000 liability for expected losses from the Carroll
Reed operations during the phase-out period. The Carroll Reed loss for the three
months ended September 28, 1996 of $897,000 was recorded against the liability
for expected losses. The results of operations for the three months ended
September 30, 1995 have been classified as loss from discontinued operations in
the accompanying consolidated statement of operations. The Company is pursuing
the divestment of the Carroll Reed assets and expects to conclude this
divestiture during 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):
September 28, September 30, June 29,
1996 1995 1996
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Current assets
Inventory $1,968 $1,432 $2,477
Prepaid catalog expenses 328 854 492
Other current assets 30 119 149
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Total current assets 2,326 2,405 3,118
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Current liabilities
Accounts payable 7 1,196 286
Accrued expenses 9 29 --
Accrued customer returns 59 147 173
Liability for expected losses 1,761 -- 2,658
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Total current liabilities 1,836 1,372 3,117
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Net current assets of discontinued operations $ 490 $1,033 $ 1
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Non-current assets of discontinued operations on the accompanying
consolidated balance sheet at September 30, 1995 are comprised solely of the net
intangible assets related to the Carroll Reed segment.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
B. DEBT
The Company's credit facilities at September 28, 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 (the "$4,000,000 Revolver") which expired on October 31, 1996; and, (ii) a
$3,000,000 line which would have expired on November 30, 1996.
A summary of the Company's outstanding long-term credit facilities follows
(in thousands):
September 28,1996 September 30,1995
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Mortgage note $1,448 $1,558
$4,000,000 Revolver 4,000 1,830
Capitalized lease obligations 185 318
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Total long-term debt 5,633 3,706
Less current maturities 864 283
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Long-term debt $4,769 $3,423
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The Company's credit facilities at September 28, 1996 were 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.
On November 4, 1996, the Company replaced its $7,000,000 revolving line of
credit with a $12,000,000 facility consisting of (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, which
expires on December 31, 2001 and requires quarterly principal payments of
$200,000 commencing on December 31, 1996. In consideration for the new facility,
the Company has given its bank a first security interest on substantially all
assets.
C. 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.
D. NET INCOME (LOSS) PER SHARE
Net income (loss) per common and common equivalent share is 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 consist of common stock issuable on the exercise of outstanding
stock options and are calculated using the treasury method. Fully diluted net
income (loss) per share has not been presented because the amount would not
differ significantly from that presented.
E. RECLASSIFICATIONS
Certain financial statement amounts have been reclassified to be consistent
with current period presentation.
F. FISCAL YEAR
The Company's fiscal year is comprised of 52-53 weeks. Fiscal 1996 ended on
June 29, 1996 and included 53 weeks. Fiscal 1997 will be a 52-week year ending
on June 28, 1997. The additional week in fiscal 1996 was added in the first
quarter.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 28, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTERLY OVERVIEW
Net income for the three months ended September 28, 1996 ("first quarter
fiscal 1997") was $250,000 or $0.05 per share. This compares to a net loss from
continuing operations of $274,000 or $0.06 per share and a net loss, including
loss from discontinued operations, of $667,000 or $0.15 per share for the three
months ended September 30, 1995 ("first quarter fiscal 1996"). This is the
Company's fourth consecutive quarter of profit improvement from continuing
operations over the prior year's comparable quarter. Management believes this
profit improvement is evidence that the various creative, marketing, operational
and financial strategies that the Company has adopted are working.
The Company's fiscal year is comprised of 52-53 weeks. Fiscal 1996 was a
53-week year ending June 29, 1996. The additional week was added in first
quarter fiscal 1996. Accordingly, all comparisons of first quarter fiscal 1997
to first quarter fiscal 1996 are comparisons of a 13-week period to a 14-week
period.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 28, 1996 WITH THREE MONTHS ENDED
SEPTEMBER 30, 1995
CONTINUING OPERATIONS
Sales and circulation. Net sales for first quarter fiscal 1997 decreased
7.9% to $20.5 million from $22.3 million for first quarter fiscal 1996. The $1.8
million decline was primarily attributable to the impact of one less week of
sales in first quarter fiscal 1997 as compared to the previous year's 14-week
period. During first quarter fiscal 1997, the Company circulated 15.7% fewer
full-price catalogs and 76.4% fewer sale catalogs, resulting in an overall
circulation decrease of 26.9% versus first quarter fiscal 1996. Customer
response rates rose by approximately 10% and average revenue per order increased
approximately 5%. In addition, despite the decrease in circulation, the
Company's 12-month customer list was 1.6% larger at September 28, 1996 than at
September 30, 1995.
Gross profit. Gross profit as a percentage of net sales was 41.0% in first
quarter fiscal 1997, as compared to 40.4% in first quarter fiscal 1996. The
gross profit improvement is primarily attributable to a decrease in off-price
sales volume in first quarter fiscal 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses in first quarter fiscal 1997 were $8.1 million or 39.3%
of net sales, compared to $9.3 million or 41.5% of net sales in first quarter
fiscal 1996. The decrease in selling, general and administrative expenses as a
percentage of net sales was attributable to the increased productivity of the
Company's first quarter fiscal 1997 mailings.
Interest (income) expense. Interest income was $55,000 and $56,000 for
first quarter fiscal 1997 and first quarter fiscal 1996, respectively, as
invested balances remained at substantially the same level for both quarters.
Interest expense increased to $137,000 in first quarter fiscal 1997 from
$114,000 in first quarter fiscal 1996 due to the Company's increased usage of
its credit facilities.
Income taxes. The effective tax rate for first quarter fiscal 1997 and
first quarter fiscal 1996 was 10.1% and 10.2%, respectively. 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.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 28, 1996
DISCONTINUED OPERATIONS
During fourth quarter fiscal 1996, the Company announced its plans to
divest its Carroll Reed segment. Accordingly, the results of the Carroll Reed
operations for first quarter fiscal 1996 have been classified as loss from
discontinued operations in the accompanying consolidated statement of
operations. The net loss incurred for first quarter fiscal 1997 has been
recorded as a reduction to the Company's liability for expected losses
established in connection with the Company's decision to divest the Carroll Reed
segment (see Note A to the consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
During first quarter fiscal 1997, 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 is to fund 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.
The Company's credit facilities at September 28, 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 expired on October 31, 1996; and, (ii) a $3,000,000 line which would
have expired on November 30, 1996.
On November 4, 1996, the Company replaced its $7,000,000 revolving line of
credit with a $12,000,000 facility consisting of (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, which
expires on December 31, 2001 and requires quarterly principal payments of
$200,000 commencing on December 31, 1996. In consideration for the new facility,
the Company has given its bank a first security interest on substantially all
assets.
Inventory levels at September 28, 1996 were 17.8% higher than at September
30, 1995. The increase is attributable to the timing of the Company's mailings.
Quarter-end prepaid catalog expenses for first quarter fiscal 1997 decreased
5.6% as compared to first quarter fiscal 1996. The Company's more conservative
circulation strategy is primarily responsible for the decline.
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.
Various factors could cause actual results to differ materially from those
projected in forward-looking statements made by management. These factors
include, but are not limited to, the potential for changes in consumer spending,
consumer preferences and general economic conditions, increasing competition in
the apparel industry and possible future increases in operating costs.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 28, 1996
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
Material Contracts
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10.1 $8,000,000 Commercial Promissory Grid Note and Loan Agreement
dated November 4, 1996, between the Company and Fleet National
Bank
10.2 $3,600,000 Commercial Promissory Term Note and Loan Agreement
dated November 4, 1996, between the Company and Fleet National
Bank
10.3 $400,000 Time Note dated November 4, 1996, between the Company
and Fleet National Bank
10.4 Security Agreement dated November 4, 1996, between the Company
and Fleet National Bank
10.5 Pledge Agreement dated November 4, 1996, between the Company, DM
Management Security Corporation and Fleet National Bank
Per Share Earnings
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11.1 Statement re: computation of per share earnings.
Financial Data Schedule
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27 Financial Data Schedule
REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended
September 28, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DM MANAGEMENT COMPANY
Dated: November 11, 1996 By: /s/Samuel L. Shanaman
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Samuel L. Shanaman
Authorized Officer
Executive Vice President,
Chief Operating Officer and Chief
Financial Officer (Principal
Financial Officer)
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DM MANAGEMENT COMPANY AND SUBSIDIARY
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 28, 1996
EXHIBIT INDEX
Exhibit No. Description Page
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10.1 $8,000,000 Commercial Promissory Grid Note and Loan
Agreement dated November 4, 1996, between the Company
and Fleet National Bank 13
10.2 $3,600,000 Commercial Promissory Term Note and Loan
Agreement dated November 4, 1996, between the Company
and Fleet National Bank 38
10.3 $400,000 Time Note dated November 4, 1996, between the
Company and Fleet National Bank 62
10.4 Security Agreement dated November 4, 1996, between the
Company and Fleet National Bank 68
10.5 Pledge Agreement dated November 4, 1996, between the
Company, DM Management Security Corporation and Fleet
National Bank 76
11.1 Statement re: computation of per share earnings. 83
27 Financial Data Schedule 85
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