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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JUNE 30, 1996 TO DECEMBER 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 02043
HINGHAM, MA (Zip Code)
(Address of Principal Executive Offices)
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 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 March 7, 1997, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $16,319,472 based on the closing price
($6.00 per share) for the common stock as reported on the Nasdaq National Market
on March 7, 1997.
Shares outstanding of the Registrant's common stock at March 7, 1997:
4,534,157
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement for the Annual Meeting of
Stockholders of DM Management Company to be held on May 8, 1997, which will be
filed with the Securities and Exchange Commission within 120 days after December
28, 1996, are incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
INDEX TO TRANSITION REPORT ON FORM 10-K
FOR THE SIX MONTHS ENDED DECEMBER 28, 1996
PAGE
----
Part I
Item 1. Business.............................................................. 3
Item 2. Properties............................................................ 5
Item 3. Legal Proceedings..................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders................... 6
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 6
Item 6. Selected Consolidated Financial Data.................................. 7
Item 7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations................................. 8
Item 8. Consolidated Financial Statements and Supplementary Data.............. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and
Consolidated Financial Disclosure................................... 32
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 Statement Schedules, and Reports on
Form 8-K............................................................ 32
Signatures................................................................................ 35
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PART I
ITEM 1. BUSINESS
GENERAL
DM Management Company ("DM Management" or the "Company") has changed its
fiscal year to end on the last Saturday in December. This resulted in a six
month reporting period ended December 28, 1996 (the "Six Month Period") included
in this Transition Report on Form 10-K.
DM Management is a specialty direct marketer of high quality women's
apparel, accessories, shoes, gifts and cosmetics. The Company currently markets
its products through two discreet catalog concepts, J. Jill and Nicole Summers.
Each of these catalogs targets mature, affluent women and is designed to appeal
to a distinct lifestyle within this demographic group. The J. Jill assortment of
products is unique, fashionable, relaxed and natural in fiber content. Nicole
Summers offers a traditional, sophisticated, tailored and versatile assortment
of products.
During the Six Month Period the Company combined its The Very Thing!
concept into its Nicole Summers title. During this period, the Company also
recorded a deferred tax benefit of $10,598,000 (see Note H to the accompanying
consolidated financial statements).
CHANGE IN BUSINESS STRATEGY
Over the past year DM Management's business strategy has evolved from one
based almost entirely on circulation management to one in which creative
presentation and differentiation in merchandising execution are also critical
elements of growth and profitability.
CUSTOMER DATABASE AND MARKETING
The Company's proprietary mailing list contains 2.3 million customers.
Approximately 657,000 of these customers have made a purchase within the
previous 24 months ("Active Customers"). DM Management uses a proprietary
database to store detailed information on each customer, including personal
information, demographic data and purchase history.
The Company's marketing programs and circulation strategies are designed to
attract new customers and generate additional sales from existing customers.
Attracting new customers is principally accomplished through prospecting using
targeted mailings to individuals identified through rented or exchanged mailing
lists and outside marketing information services. Generating additional sales
from existing customers involves using selective mailings based on past purchase
histories, household demographics and other relevant criteria.
DM Management introduced its own private label credit card in September of
1995. The Company believes that its credit card reinforces the purchase
relationship with existing customers and promotes additional purchases from
these customers. During the Six Month Period, approximately 9% of net sales were
attributable to purchases made using the Company's private label credit card. At
December 28, 1996, the Company had approximately 43,000 private label credit
card holders.
MERCHANDISING
DM Management's merchandising strategy is to provide a carefully edited and
well focused assortment of unique high quality merchandise presented via a
"total-look" wardrobing concept designed to outfit its customer from head-to-toe
by offering her not only apparel, but also accessories, shoes, gifts and
cosmetics. Few of the Company's competitors currently use this presentational
technique, which the Company believes enhances the overall appeal of its
catalogs. The Company offers a wide variety of sizes appealing not only to the
regular size customer but also to the larger size and petite customer. These
hard to fit customers currently have few attractive catalog or retail shopping
alternatives. Becoming the premier provider of wardrobing for this market niche
is one of the Company's merchandising objectives.
The Company sells both domestically produced and imported merchandise,
which it purchases in the open market from approximately 200 vendors. The
Company offers both brand name and private label
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merchandise. Private label merchandise is an important element in
differentiating the Company's product offerings from those of other retailers.
During the Six Month Period, private label products accounted for approximately
65% and 40% of the J. Jill and Nicole Summers merchandise offerings.
CREATIVE PRESENTATION
The development of each of the Company's catalogs is a joint effort between
the Company's merchandising and creative personnel. After an initial
conceptualization meeting, the merchandising and creative teams work closely
together on catalog design, merchandise selection, presentation and layout. The
distinctive look and feel of the Company's catalogs is the product of this
collaborative effort.
INVENTORY MANAGEMENT
The Company's inventory management strategy is designed to maintain
inventory levels that provide optimum in-stock positions and maximum inventory
turnover rates while minimizing the amount of unsold merchandise at the end of
each selling season. The Company manages inventory levels by monitoring sales
and fashion trends and making purchasing adjustments as necessary and through
inbound telemarketing sales. Additionally, the Company sells excess inventory in
its sale catalogs, through its outlet stores and to jobbers.
CUSTOMER SERVICE AND OPERATIONS
DM Management believes that an emphasis on superior customer service is
critical to its ability to expand its customer base and build customer loyalty.
Customer orders are taken 24 hours a day, 365 days a year by the Company's
telemarketing representatives. The Company also accepts orders by mail or
facsimile. All orders are input directly into the Company's on-line data
processing system, which provides, among other things, customer historical
information, merchandise availability, product specifications, available
substitutes and accessories and expected ship date. The Company trains its
telemarketing representatives to be knowledgeable in merchandise specifications
and features. These representatives have ready access to samples of the entire
merchandise assortment, which enables them to answer detailed merchandise
inquiries from customers on-line.
DM Management believes that the prompt delivery of attractively packaged
merchandise promotes customer loyalty and repeat buying. All merchandise is
boxed and wrapped in tissue and shipped from the Company's distribution center
in Meredith, N.H. The Company's customers normally receive their orders within 3
to 5 business days after shipping, although customers may request overnight
delivery for a nominal extra charge. Overnight delivery is provided free of
additional charge for orders placed through the Company's private label credit
card.
DM Management offers an unconditional 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. Returns experience is
closely monitored at the item level to identify any product quality or fit
issues. Returned merchandise is inspected carefully and, unless damaged, is
cleaned, pressed and returned to inventory. Approximately 95% of returned
merchandise is recycled into inventory.
COMPETITION
The direct marketing industry is both highly fragmented and competitive.
The Company's principal competitors include large retail operations (some with
catalog operations) and other catalog and direct marketing companies. Many of
these competitors are larger and have greater financial, marketing and other
resources than the Company. DM Management competes principally on the basis of
its "total-look" wardrobing concept, expanded size offerings, creatively
distinctive catalogs and superior customer service.
EMPLOYEES
As of March 7, 1997, the Company employed 329 individuals, of whom 281 were
full-time (those employees scheduled to work 30 hours or more per week). None of
the Company's employees is represented by a union. The Company considers its
employee relations to be good.
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TRADEMARKS AND SERVICE MARKS
The Company has registered the names of its principal catalogs, J. Jill
Ltd. and Nicole Summers, as trademarks and service marks with the United States
Patent and Trademark Office.
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.
DM Management currently collects sales tax only 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.
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, NH 93,120 Operations Center Owned Not applicable
(approx. 25 acres)
Hingham, MA 23,719 Corporate Offices Leased 03/31/00
Meredith, NH 3,600 Outlet Store Leased 07/01/99
North Conway, NH 2,567 Outlet Store Leased 02/28/02
Bedford, MA 5,255 Outlet Store Leased 04/30/00
Laconia, NH 37,800 Warehouse Leased 04/01/99
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 quarter ended December 28,
1996.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Stockholders on November 8, 1996. At
the Annual Meeting, the stockholders of the Company voted to approve the
following actions by the following votes:
1. To fix the number of directors that shall constitute the whole Board of
Directors of the Company at four.
NUMBER OF
SHARES
---------
For............................................................. 3,456,881
Against......................................................... 63,999
Abstain......................................................... 361
2. To elect the following individual as a Class C Director of the Company:
WITHHOLDING
FOR AUTHORITY
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Gordon R. Cooke...................................... 3,521,221 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company trades on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol "DMMC." As of March 7, 1997, 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
---- ---
Six Month Period
Quarter ended December 28, 1996................................... 4 1/4 3
Quarter ended September 28, 1996.................................. 4 7/8 2 7/8
Fiscal 1996
Quarter ended June 29, 1996....................................... 5 3/8 2 5/8
Quarter ended March 30, 1996...................................... 2 7/8 2
Quarter ended December 30, 1995................................... 2 5/8 1 7/8
Quarter ended September 30, 1995.................................. 4 1/8 1 7/8
Fiscal 1995
Quarter ended June 24, 1995....................................... 3 3/4 2 1/4
Quarter ended March 25, 1995...................................... 5 1/4 2 1/2
Quarter ended December 24, 1994................................... 9 4 1/8
Quarter ended September 24, 1994.................................. 10 8 1/4
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 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 has
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.
TWELVE MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
-------------------------- ------------------------ ----------------------------------------------------------
DEC. 28, DEC. 30, DEC. 28, DEC. 30, JUNE 29, JUNE 24, JUNE 25, JUNE 26, JUNE 27,
1996 1995 1996 1995 1996 1995 1994 1993 1992
(52 WEEKS) (53 WEEKS) (26 WEEKS) (27 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
------------ ------------ ---------- ------------ ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF
OPERATIONS:
Net sales....... $ 84,642 $ 78,532 $ 43,324 $ 39,267 $ 80,585 $ 72,691 $ 63,337 $ 47,510 $ 41,532
Income (loss)
from continuing
operations
before income
taxes.......... 1,956 (323) 1,072 (623) 261 851 3,604 1,608 (2,411)
Income (loss)
from continuing
operations..... 12,358 (291) 11,563 (560) 235 765 3,269 1,547 (2,411)
Net income
(loss)......... 3,371 (881) 11,563 (1,158) (9,350) 773 3,269 1,547 (2,411)
Income (loss)
from continuing
operations per
share.......... 2.64 (0.07) 2.44 (0.13) 0.05 0.17 0.80 0.60 (2.07)
Net income
(loss) per
share.......... 0.72 (0.20) 2.44 (0.27) (2.11) 0.17 0.80 0.60 (2.07)
FINANCIAL POSITION
(END OF PERIOD):
Total assets.... $ 38,109 $ 34,694 $ 38,109 $ 34,694 $ 27,069 $ 31,612 $ 26,923 $ 8,849 $ 6,935
Working
capital........ 10,662 11,019 10,662 11,019 6,988 6,315 9,305 1,075 737
Total debt...... 5,557 8,164 5,557 8,164 5,269 3,913 415 594 7,270
Stockholders'
equity
(deficit)...... 21,223 17,729 21,223 17,729 9,480 18,851 17,861 1,645 (5,962)
STATISTICS ON
CONTINUING
OPERATIONS:
Weighted average
common and
common
equivalent
shares
outstanding
Primary...... 4,679 4,416 4,736 4,262 4,441 4,610 4,077 2,586 1,167
Fully
diluted.... 4,706 4,426 4,736 4,262 4,518 4,619 4,081 2,586 1,167
Catalog
circulation.... 37,900 42,300 18,400 22,100 41,600 40,300 32,400 24,000 24,100
Active
Customers...... 657 611 657 611 638 579 473 448 N/A
The Company has changed its fiscal year to end on the last Saturday in
December. This resulted in a six month reporting period ended December 28, 1996
included in this Transition Report on Form 10-K. Prior to this change, the
Company's fiscal year ended on the last Saturday in June.
During the Six Month Period, the Company recorded a deferred tax benefit of
$10,598,000 (see Note H to the accompanying consolidated financial statements).
On May 20, 1996, the Company announced its plan to discontinue the
operations of its Carroll Reed segment and recorded a charge of $8,511,000 for
the loss on disposal of discontinued operations (see Note B to the accompanying
consolidated financial statements).
During the fiscal year ended June 25, 1994, the Company completed its
initial public offering (see Note E to the accompanying consolidated financial
statements).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company has changed its fiscal year to end on the last Saturday in
December. This resulted in a six month reporting period ended December 28, 1996
(the "Six Month Period") included in this Transition Report on Form 10-K. Prior
to this change the Company's fiscal year ended on the last Saturday in June.
Financial information for the twelve months ended December 28, 1996 ("Calendar
1996"), the twelve months ended December 30, 1995 ("Calendar 1995") and the six
months ended December 30, 1995 has been presented for comparative purposes and
is unaudited. The twelve months ended June 29, 1996 ("Fiscal 1996") was a
53-week period. The twelve months ended June 24, 1995 ("Fiscal 1995") and June
25, 1994 ("Fiscal 1994") were 52-week periods.
The following table represents the Company's consolidated statements of
operations as a percentage of net sales:
TWELVE MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
------------------------ ------------------------ ----------------------------------------
DEC. 28, DEC. 30, DEC. 28, DEC. 30, JUNE 29, JUNE 24, JUNE 25,
1996 1995 1996 1995 1996 1995 1994
(52 WEEKS) (53 WEEKS) (26 WEEKS) (27 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- ----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Product..................... 44.0 44.2 44.9 44.0 43.5 42.9 42.7
Operations.................. 14.9 15.9 14.4 16.1 15.8 15.9 15.4
Selling..................... 27.7 30.2 26.8 31.2 29.9 29.9 26.7
General and
administrative............ 10.7 9.8 11.1 10.0 10.1 10.1 9.7
Interest, net............... 0.4 0.3 0.3 0.3 0.4 -- (0.2)
----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before income
taxes......................... 2.3 (0.4) 2.5 (1.6) 0.3 1.2 5.7
Provision (benefit) for income
taxes......................... (12.3) -- (24.2) (0.2) -- 0.1 0.5
----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations.................... 14.6 (0.4) 26.7 (1.4) 0.3 1.1 5.2
Income (loss) from discontinued
operations.................... (10.6) (0.7) -- (1.5) (11.9) -- --
----- ----- ----- ----- ----- ----- -----
Net income (loss)............... 4.0% (1.1)% 26.7% (2.9)% (11.6)% 1.1% 5.2%
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Significant Recent Events and Developments
Over the past year, the Company's business strategy has evolved from one
based almost entirely on circulation management to one in which creative
presentation and differentiation in merchandising execution are also critical
elements of growth and profitability. This change in focus led to the decision
to divest the Carroll Reed segment and to merge the Company's The Very Thing!
concept into its Nicole Summers title. Based on the resulting recent
improvements in profitability and its evaluation of anticipated future
profitability, the Company determined that it was more likely than not that it
would fully realize the benefit of its net deferred tax assets, and accordingly
recognized a deferred tax benefit of $10,598,000 in the Six Month Period.
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Sales and Circulation
The relationship between the Company's sales and circulation has changed
dramatically over the last several reporting periods. In January 1995, in
response to a variety of factors, the Company embarked on a more targeted
circulation strategy, which has resulted in a decline in the circulation growth
rate over the last several reporting periods and a decrease in the total
circulation level during the Six Month Period. During these same periods, net
sales, page counts, average order size and response rates increased. A table
comparing period-to-period sales and circulation growth rates follows:
SIX MONTH PERIODS TWELVE MONTH PERIODS
----------------- ---------------------------------------
DEC. 28, 1996 JUNE 29, 1996 JUNE 24, 1995
VS. DEC. 30, 1995 VS. JUNE 24, 1995 VS. JUNE 25, 1994
----------------- ----------------- -----------------
Sales growth............ 10.3% 10.9% 14.8%
Circulation growth...... (16.7)% 3.2% 24.4%
Product Costs
Product costs as a percentage of net sales have trended upward in recent
periods. This has resulted primarily from the sustained highly competitive
pricing environment in the women's apparel industry. Other factors affecting
product costs as a percentage of net sales during the periods presented include
variations both in sales trends for particular products with different markups
and in the mix of off and full price sales.
Operations
Although operations expense as a percentage of net sales was relatively
unchanged during the Company's three most recent fiscal years, during the Six
Month Period the operating expense percentage has trended downward as a result
of efficiencies achieved through the reengineering of order fulfillment
processes and delivery mechanisms.
Selling
The effect of the change in the relationship between sales and circulation
described above is most evident in selling expenses as a percentage of net
sales. In Fiscal 1994, before the rapid increase in postage and paper costs, the
Company was successfully growing through circulation expansion and selling
expenses were 26.7% of net sales. Selling expenses rose to 29.9% of net sales in
Fiscal 1995 and Fiscal 1996, as postage and paper costs escalated. In response,
the Company embarked on a more targeted circulation strategy, which has resulted
in better catalog productivity and has consequently lowered selling expenses to
26.8% of net sales for the Six Month Period.
General and Administrative
Variations in general and administrative expense as a percentage of net
sales were relatively insignificant during the last three full fiscal years.
During the Six Month Period, general and administrative expense as a percentage
of net sales increased as a result of the Company's increasing its investment in
management infrastructure.
Income Taxes
The Company's provision for income taxes for all periods presented was
significantly affected by the utilization of federal net operating loss
carryforwards. This resulted in an effective tax rate significantly lower than
the federal statutory rate. During the Six Month Period, the Company recorded a
deferred tax benefit of $10,598,000 (see Note H to the accompanying consolidated
financial statements). As a result, for future periods, the Company will be
providing for income taxes at an effective tax rate that includes the full
federal statutory rate as well as the full tax rate at the state level.
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Discontinued Operations
On May 20, 1996, the Company announced its plan to divest 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. In connection with this
divestiture, the Company recorded a charge of $8.5 million in Fiscal 1996 for
the loss on disposal of discontinued operations, consisting of $5.3 million
related to the write-off of the remaining unamortized intangible assets and $3.2
million for expected losses during the phase-out period. The results of the
Carroll Reed operations through May 20, 1996 have been classified as income
(loss) from discontinued operations. The Carroll Reed loss of $517,000 incurred
from May 20, 1996 through June 29, 1996 was recorded against the liability for
expected losses. During the Six Month Period, the Company substantially phased
out the operations of the Carroll Reed segment and recorded $2.4 million of
operating losses against the liability for expected losses. The Company expects
to utilize the remaining liability for expected losses for severance and other
costs associated with the Carroll Reed segment divestment. The Company continues
to pursue the divestment of the Carroll Reed customer list and trademark and
expects to conclude this divestiture during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the Six Month Period, the Company funded its working capital needs
through cash generated from operations and through use of its credit facilities.
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.
The Company's credit facilities at December 28, 1996 consisted of (i) a
$1.7 million 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;
(ii) a $4.0 million secured term loan, with payments of $200,000 due quarterly
through December 31, 2001; and (iii) an $8.0 million secured revolving line of
credit, which reduces to $5.0 million during the months of May through November
and expires on June 1, 1997. Net cash provided by financing activities declined
to $409,000 for the Six Month Period as compared to $4.3 million for the six
months ended December 30, 1995, primarily because the Company generated more
cash from operations during the Six Month Period and used this cash to support
its working capital needs.
Cash used in investing activities was $834,000 for the Six Month Period and
$118,000 for the six months ended December 30, 1995. Capital investments for
both periods consisted of additions to property and equipment. During the Six
Month Period, property additions included system upgrades and costs incurred to
renovate office space.
Inventory levels at December 28, 1996 were 16.3% higher than at June 29,
1996. This increase is attributable to the growth of the business. Prepaid
catalog expenses at December 28, 1996 were 34.7% lower than at June 29, 1996.
This decline is primarily attributable to lower paper inventory balances on hand
at December 28, 1996 than at June 29, 1996.
Management intends to use its capital resources to fund improvements in its
information systems during fiscal 1997 and beyond. Anticipated expenditures to
upgrade its existing systems are estimated at approximately $2.0 million. 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.
RECENT ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings per Share," which modifies the way in which
earnings per share ("EPS") is calculated and disclosed. Currently, the Company
discloses primary and fully diluted EPS. SFAS 128 requires the disclosure of
basic and diluted EPS and the restatement of all prior period EPS data
presented. Basic EPS excludes
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dilution and is computed by dividing net income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS, similar to fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Early application
of SFAS 128 is not permitted. The Company plans to adopt SFAS 128 in fiscal 1997
and has not yet determined the impact.
FORWARD-LOOKING STATEMENTS
The above discussion includes forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: changes in consumer spending and
consumer preferences; general economic and business conditions; increasing
competition in the apparel industry; success of operating initiatives; possible
future increases in operating costs; advertising and promotional efforts; brand
awareness; the existence or absence of adverse publicity; changes in business
strategy; quality of management; availability, terms and deployment of capital;
business abilities and judgment of personnel; availability of qualified
personnel; labor and employee benefit costs; changes in, or the failure to
comply with, government regulations; and other factors.
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 Six Month Period, Fiscal 1996, Fiscal 1995 and Fiscal 1994.
11
12
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DM MANAGEMENT COMPANY AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants..................................................... 13
Consolidated Balance Sheets at December 28, 1996, December 30, 1995 (unaudited), June
29, 1996 and June 24, 1995.......................................................... 14
Consolidated Statements of Operations for the twelve months ended December 28, 1996
(unaudited) and December 30, 1995 (unaudited), the six months ended December 28,
1996 and December 30, 1995 (unaudited) and the three fiscal years ended June 29,
1996, June 24, 1995 and June 25, 1994............................................... 15
Consolidated Statements of Changes in Stockholders' Equity for the six months ended
December 28, 1996 and the three fiscal years ended June 29, 1996, June 24, 1995 and
June 25, 1994....................................................................... 16
Consolidated Statements of Cash Flows for the twelve months ended December 28, 1996
(unaudited) and December 30, 1995 (unaudited), the six months ended December 28,
1996 and December 30, 1995 (unaudited) and the three fiscal years ended June 29,
1996, June 24, 1995 and June 25, 1994............................................... 17
Notes to Consolidated Financial Statements............................................ 18
12
13
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 December 28, 1996, June 29, 1996 and
June 24, 1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the six months ended December 28, 1996
and 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 December 28, 1996, June 29, 1996 and
June 24, 1995 and the consolidated results of its operations and its cash flows
for the six months ended December 28, 1996 and 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
February 4, 1997
13
14
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DEC. 28, 1996 DEC. 30, 1995 JUNE 29, 1996 JUNE 24, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................... $ 384 $ 341 $ 221 $ 231
Marketable securities, net of unrealized
loss....................................... 3,879 3,948 3,858 --
Inventory.................................... 12,637 9,854 10,866 10,244
Prepaid catalog expenses..................... 2,714 5,666 4,154 4,424
Deferred income taxes........................ 2,670 -- -- --
Other current assets......................... 724 2,653 1,098 543
--------- --------- --------- ---------
Total current assets.................... 23,008 22,462 20,197 15,442
Marketable securities, net of unrealized loss..... -- -- -- 3,949
Property and equipment, net....................... 7,173 6,672 6,872 6,986
Non-current assets of discontinued operations..... -- 5,560 -- 5,235
Deferred income taxes............................. 7,928 -- -- --
--------- --------- --------- ---------
Total assets............................ $ 38,109 $ 34,694 $ 27,069 $ 31,612
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 8,143 $ 6,222 $ 9,651 $ 5,927
Accrued expenses............................. 1,877 1,714 1,438 1,730
Accrued customer returns..................... 1,309 865 1,231 1,191
Short-term borrowings........................ -- 2,356 -- --
Current portion of mortgage note and
long-term debt............................. 1,017 286 889 279
--------- --------- --------- ---------
Total current liabilities............... 12,346 11,443 13,209 9,127
Mortgage note..................................... 1,311 1,421 1,366 1,476
Long-term debt.................................... 3,229 4,101 3,014 2,158
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, 4,456,908, 4,282,943,
4,305,293 and 4,261,058 shares issued and
outstanding as of December 28, 1996,
December 30, 1995, June 29, 1996 and June
24, 1995, respectively..................... 44 42 43 42
Additional paid-in capital................... 40,048 39,864 39,890 39,827
Unrealized loss on marketable securities..... (115) (52) (136) (51)
Accumulated deficit.......................... (18,754) (22,125) (30,317) (20,967)
--------- --------- --------- ---------
Total stockholders' equity.............. 21,223 17,729 9,480 18,851
--------- --------- --------- ---------
Total liabilities and stockholders'
equity................................ $ 38,109 $ 34,694 $ 27,069 $ 31,612
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
14
15
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
-------------------------- -------------------------- --------------------------------------
DEC. 28, DEC. 30, DEC. 28, DEC. 30, JUNE 29, JUNE 24, JUNE 25,
1996 1995 1996 1995 1996 1995 1994
(52 WEEKS) (53 WEEKS) (26 WEEKS) (27 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS)
------------ ------------ ------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales......................... $ 84,642 $ 78,532 $ 43,324 $ 39,267 $ 80,585 $72,691 $63,337
Costs and expenses:
Product....................... 37,205 34,692 19,436 17,277 35,046 31,211 27,035
Operations.................... 12,675 12,482 6,268 6,328 12,735 11,512 9,735
Selling....................... 23,461 23,699 11,598 12,232 24,095 21,730 16,925
General and administrative.... 9,040 7,736 4,824 3,926 8,142 7,371 6,157
Interest, net................. 305 246 126 127 306 16 (119)
-------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations before income
taxes........................... 1,956 (323) 1,072 (623) 261 851 3,604
Provision (benefit) for income
taxes........................... (10,402) (32) (10,491) (63) 26 86 335
-------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations...................... 12,358 (291) 11,563 (560) 235 765 3,269
Discontinued operations:
Income (loss) from
operations.................. (476) (590) -- (598) (1,074) 8 --
Loss on disposal.............. (8,511) -- -- -- (8,511) -- --
-------- -------- -------- -------- -------- ------- -------
Income (loss) from discontinued
operations...................... (8,987) (590) -- (598) (9,585) 8 --
-------- -------- -------- -------- -------- ------- -------
Net income (loss)................. $ 3,371 $ (881) $ 11,563 $ (1,158) $ (9,350) $ 773 $ 3,269
======== ======== ======== ======== ======== ======= =======
NET INCOME (LOSS) PER SHARE:
Primary:
Continuing operations......... $ 2.64 $ (0.07) $ 2.44 $ (0.13) $ 0.05 $ 0.17 $ 0.80
Discontinued operations....... (1.92) (0.13) -- (0.14) (2.16) -- --
-------- -------- -------- -------- -------- ------- -------
Net income (loss) per share... $ 0.72 $ (0.20) $ 2.44 $ (0.27) $ (2.11) $ 0.17 $ 0.80
======== ======== ======== ======== ======== ======= =======
Weighted average common and common
equivalent shares outstanding... 4,679 4,416 4,736 4,262 4,441 4,610 4,077
Fully diluted:
Continuing operations......... $ 2.63 $ (0.07) $ 2.44 $ (0.13) $ 0.05 $ 0.17 $ 0.80
Discontinued operations....... (1.91) (0.13) -- (0.14) (2.12) -- --
-------- -------- -------- -------- -------- ------- -------
Net income (loss) per share... $ 0.72 $ (0.20) $ 2.44 $ (0.27) $ (2.07) $ 0.17 $ 0.80
======== ======== ======== ======== ======== ======= =======
Weighted average common and common
equivalent shares outstanding... 4,706 4,426 4,736 4,262 4,518 4,619 4,081
The accompanying notes are an integral part of the consolidated financial
statements.
15
16
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(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................. -- -- 3 -- -- 3
Stock granted under the Employee Stock
Purchase Plan........................... -- -- 34 -- -- 34
Change in unrealized losses, net of tax... -- -- -- (1) -- (1)
Net loss.................................. -- -- -- -- (1,158) (1,158)
----- ---- -------- ------ --------- -------
Balance at December 30, 1995
(unaudited)............................. -- 42 39,864 (52) (22,125) 17,729
Exercise of stock options................. -- 1 26 -- -- 27
Change in unrealized losses, net of tax... -- -- -- (84) -- (84)
Net loss.................................. -- -- -- -- (8,192) (8,192)
----- ---- -------- ------ --------- -------
Balance at June 29, 1996.................. -- 43 39,890 (136) (30,317) 9,480
Exercise of stock options................. -- 1 145 -- -- 146
Tax benefit from exercise of stock
options................................. -- -- 13 -- -- 13
Change in unrealized losses, net of tax... -- -- -- 21 -- 21
Net income................................ -- -- -- -- 11,563 11,563
----- ---- -------- ------ --------- -------
Balance at December 28, 1996.............. $ -- $ 44 $ 40,048 $ (115) $ (18,754) $21,223
===== ==== ======== ====== ========= =======
The accompanying notes are an integral part of the consolidated financial
statements.
16
17
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
TWELVE MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
------------------------ ------------------------ ----------------------------------------
DEC. 28, DEC. 30, DEC. 28, DEC. 30, JUNE 29, JUNE 24, JUNE 25,
1996 1995 1996 1995 1996 1995 1994
(52 WEEKS) (53 WEEKS) (26 WEEKS) (27 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- ----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net income (loss)............... $ 3,371 $ (881) $ 11,563 $ (1,158) $ (9,350) $ 773 $ 3,269
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation.................... 1,049 834 571 432 910 704 406
Deferred income taxes........... (10,598) -- (10,598) -- -- -- --
Liability for expected losses... 231 -- (2,427) -- 2,658 -- --
Write-off of intangible
assets........................ 5,336 -- -- -- 5,336 -- --
Amortization related to
discontinued operations....... 189 429 -- 226 415 203 --
Changes in assets and liabilities:
(Increase) decrease in
inventory..................... (2,783) 1,478 (1,771) 390 (622) (739) (4,072)
(Increase) decrease in prepaid
catalog expenses.............. 2,952 (2,355) 1,440 (1,242) 270 (1,436) (992)
(Increase) decrease in other
current assets................ 795 (767) 182 (1,170) (557) 118 (233)
Increase (decrease) in accounts
payable and accrued
expenses...................... 2,084 619 (1,069) 279 3,432 (292) 1,979
Increase (decrease) in accrued
customer returns.............. 444 37 78 (326) 40 163 105
(Increase) decrease in net
current assets (liabilities)
of discontinued operations.... 1,845 (2,808) 2,619 (1,491) (2,265) (926) --
-------- -------- -------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities.............. 4,915 (3,414) 588 (4,060) 267 (1,432) 462
Cash flows used in investing
activities:
Additions to property and
equipment..................... (1,512) (506) (834) (118) (796) (2,656) (4,304)
Proceeds from sale of marketable
securities.................... 6 -- -- -- 6 4,130 --
Payments for purchase of Carroll
Reed.......................... (907) -- -- -- (907) (4,124) --
Investments in marketable
securities.................... -- -- -- -- -- -- (8,130)
-------- -------- -------- -------- -------- -------- --------
Net cash used in investing
activities........................ (2,413) (506) (834) (118) (1,697) (2,650) (12,434)
Cash flows provided by (used in)
financing activities:
Borrowings under debt
agreements.................... 21,972 26,149 8,863 16,994 30,103 14,805 7,774
Payments of debt borrowings..... (24,438) (23,903) (8,520) (12,668) (28,586) (11,244) (7,774)
Principal payments on capital
lease obligations............. (179) (173) (93) (75) (161) (178) (213)
Proceeds from stock
transactions.................. 186 169 159 37 64 92 11
Issuance of common stock and
warrant exercise.............. -- -- -- -- -- -- 13,004
-------- -------- -------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities.............. (2,459) 2,242 409 4,288 1,420 3,475 12,802
-------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents.................. 43 (1,678) 163 110 (10) (607) 830
Cash and cash equivalents at:
Beginning of period............. 341 2,019 221 231 231 838 8
-------- -------- -------- -------- -------- -------- --------
End of period................... $ 384 $ 341 $ 384 $ 341 $ 221 $ 231 $ 838
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL INFORMATION:
Purchase of Carroll Reed (Note B):
Purchase price.................. $ 907 $ -- $ -- $ -- $ 907 $ 5,304 $ --
Accruals recorded, including
liabilities assumed........... -- -- -- -- -- (1,180) --
-------- -------- -------- -------- -------- -------- --------
Cash paid for assets and
ancillary costs............... $ 907 $ -- $ -- $ -- $ 907 $ 4,124 $ --
======== ======== ======== ======== ======== ======== ========
Non-cash financing activities:
Increase in capital lease
obligations................... $ 38 $ 100 $ 38 -- -- $ 115 $ 34
Stock grant, net of tax......... -- -- -- -- -- -- $ 24
Tax benefit from exercise of
stock options................. $ 13 $ 61 $ 13 -- -- $ 61 $ 23
Cash paid for interest.............. $ 545 $ 464 $ 252 $ 214 $ 506 $ 298 $ 116
Cash paid for income taxes,
including discontinued
operations........................ -- $ 2 -- $ 2 $ 2 $ 175 $ 127
The accompanying notes are an integral part of the consolidated financial
statements.
17
18
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 specialty direct
marketer of high quality women's apparel, accessories, shoes, gifts and
cosmetics. The Company currently markets its products through two discreet
catalog concepts, J. Jill and Nicole Summers. During the six months ended
December 28, 1996, the Company combined its The Very Thing! concept into its
Nicole Summers title.
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.
CHANGE IN FISCAL YEAR
The Company has changed its fiscal year to end on the last Saturday in
December. This resulted in a six month reporting period ended December 28, 1996
(the "Six Month Period") included in this Transition Report on Form 10-K. Prior
to this change the Company's fiscal year ended on the last Saturday in June.
Financial information for the twelve months ended December 28, 1996 ("Calendar
1996"), the twelve months ended December 30, 1995 ("Calendar 1995") and the six
months ended December 30, 1995 has been presented for comparative purposes and
is unaudited. The twelve months ended June 29, 1996 ("Fiscal 1996") was a
53-week period. The twelve months ended June 24, 1995 ("Fiscal 1995") and June
25, 1994 ("Fiscal 1994") were 52-week periods.
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 provides an allowance 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.
18
19
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 at each balance sheet date presented. Unrealized
holding losses, net of deferred tax benefits, are included as a separate
component of stockholders equity and are as follows (in thousands):
DEC. 28, 1996 DEC. 30, 1995 JUNE 29, 1996 JUNE 24, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
Unrealized loss.......................... $187 $ 85 $ 221 $ 83
Deferred tax benefit..................... (72) (33) (85) (32)
---- ---- ----- -----
Net unrealized loss on marketable
securities.......................... $115 $ 52 $ 136 $ 51
==== ==== ===== =====
There were no realized gains or losses recorded in any of the reported
periods. After June 24, 1995, the Company determined that it may choose to hold
its marketable securities for a period of less than one year and, accordingly,
marketable securities for all subsequent periods have been classified as
current. 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.
SELLING EXPENSES
Selling 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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation 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 and are depreciated over the term of the lease.
LONG-LIVED ASSETS
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 all balance sheet
dates reported, the Company's long-lived assets were fully realizable except as
discussed in Note B.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share ("EPS") 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.
19
20
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 EPS 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.
RECLASSIFICATIONS
Certain financial statement amounts have been reclassified to be consistent
with the Six Month Period presentation.
RECENT ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings per Share," which modifies the way in which EPS
is calculated and disclosed. Currently, the Company discloses primary and fully
diluted EPS. SFAS 128 requires the disclosure of basic and diluted EPS and the
restatement of all prior period EPS data presented. Basic EPS excludes dilution
and is computed by dividing net income (loss) available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS, similar to fully diluted EPS, reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Early application of SFAS
128 is not permitted. The Company plans to adopt SFAS 128 in fiscal 1997 and has
not yet determined the impact.
B. DISCONTINUED OPERATIONS:
During 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 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 based on their
estimated fair market value of approximately $257,000. The excess of such costs
over the fair value of those assets of approximately $5,954,000 was allocated to
the Carroll Reed trademark, service mark and customer list.
On May 20, 1996, the Company announced its plan to divest 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. 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 and $3,175,000 for
expected losses during the phase-out period. The results of the Carroll Reed
operations through May 20, 1996, including Fiscal 1996 net sales through May 20,
1996 of $12,415,000, have been classified as income (loss) from discontinued
operations. The Carroll Reed loss of $517,000 incurred from May 20, 1996 through
June 29, 1996 was recorded against the liability for expected losses. During the
Six Month Period, the Company substantially phased out the operations of the
Carroll Reed segment and recorded $2,427,000 of operating losses against the
liability for expected losses. The Company expects to utilize the remaining
liability for expected losses for severance and
20
21
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other costs associated with the Carroll Reed segment divestment. The Company
continues to pursue the divestment of the Carroll Reed customer list and
trademark and expects to conclude this divestiture during fiscal 1997.
The net current assets and liabilities of the Carroll Reed segment, which
have been classified as other current assets in the accompanying consolidated
balance sheets, are summarized below (in thousands):
DEC. 28, 1996 DEC. 30, 1995 JUNE 29, 1996 JUNE 24, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
Current assets:
Inventory............................ $ -- $ 1,831 $ 2,477 $ 360
Prepaid catalog expenses -- 1,027 492 408
Other current assets................. 49 36 149 40
------------- ------------- ------------- ------
Total current assets............ 49 2,894 3,118 808
------------- ------------- ------------- ------
Current liabilities:
Accounts payable..................... -- 1,818 286 715
Accrued expenses..................... -- -- -- 6
Accrued customer returns............. 9 133 173 84
Liability for expected losses........ 231 -- 2,658 --
------------- ------------- ------------- ------
Total current liabilities....... 240 1,951 3,117 805
------------- ------------- ------------- ------
Net current assets
(liabilities) of
discontinued
operations............... $(191) $ 943 $ 1 $ 3
============ ============ ============ ============
Non-current assets of discontinued operations on the accompanying
consolidated balance sheet at December 30, 1995 and 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):
DEC. 28, 1996 DEC. 30, 1995 JUNE 29, 1996 JUNE 24, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
Land and building......................... $ 5,163 $ 5,163 $ 5,163 $ 5,163
Equipment................................. 3,718 2,517 3,195 2,741
Furniture, fixtures and leasehold
improvements............................ 816 467 467 677
------------- ------------- ------------- -------------
Total................................ 9,697 8,147 8,825 8,581
Less accumulated depreciation and
amortization............................ (2,524) (1,475) (1,953) (1,595)
------------- ------------- ------------- -------------
Property and equipment, net............... $ 7,173 $ 6,672 $ 6,872 $ 6,986
============ ============ ============ ============
21
22
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. DEBT:
The Company's credit facilities at December 28, 1996 consisted of (i) 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;
(ii) a $4,000,000 secured term loan (the "Term Loan") with payments of $200,000
due quarterly through December 31, 2001; and (iii) an $8,000,000 secured
revolving line of credit (the "$8,000,000 Revolver") which reduces to $5,000,000
during the months of May through November and expires on June 1, 1997.
A summary of the Company's outstanding credit facilities follows (in
thousands):
DEC. 28, 1996 DEC. 30, 1995 JUNE 29, 1996 JUNE 24, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
Mortgage note.............................. $1,421 $1,531 $1,476 $1,586
Term loan.................................. 4,000 -- -- --
Revolving credit facilities................ -- 6,356 3,602 1,975
Capitalized lease obligations.............. 136 277 191 352
------ ------ ------ ------
Total debt............................ 5,557 8,164 5,269 3,913
Less current maturities............... 1,017 2,642 889 279
------ ------ ------ ------
Long-term debt........................ $4,540 $5,522 $4,380 $3,634
====== ====== ====== ======
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 the Six Month Period, interest on the Company's mortgage note
averaged 6.81%, the weighted-average interest rate on the Term Loan was 7.72%
and the weighted-average interest rate on all revolver borrowings was 8.25%. The
Company is required to pay a commitment fee on the $8,000,000 Revolver of
approximately $5,000 per annum. The Company's credit facilities are
collateralized by substantially all corporate assets. The mortgage note is also
collateralized by a first mortgage on the Company's operations center. 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.
Aggregate maturities of long-term debt for the next five fiscal years are
as follows: fiscal 1997 - $1,017,000; fiscal 1998 - $917,000; fiscal 1999 -
$2,008,000; fiscal 2000 - $808,000; and fiscal 2001 - $807,000.
Import letters of credit are for commitments issued through the Company's
bank to guarantee payment of foreign-sourced merchandise within agreed upon time
periods according to the terms of the agreements. Outstanding import letters of
credit totaled approximately $407,000, $816,000, $424,000 and $1,198,000 at
December 28, 1996, December 30, 1995, June 29, 1996 and June 24, 1995,
respectively.
E. STOCKHOLDERS' EQUITY:
COMMON STOCK
During Fiscal 1994, the Company completed its initial public offering
("IPO") of 2,070,000 shares of common stock. In conjunction with the Company's
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.
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 any
of the reported balance sheet dates.
22
23
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 each of the reported balance sheet
dates.
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 IPO in Fiscal
1994.
F. STOCK-BASED PLANS:
At December 28, 1996, the Company had three stock-based plans -- the 1988
Incentive Stock Option Plan (the "1988 Stock Option Plan"), the 1993 Incentive
and Nonqualified Stock Option Plan (the "1993 Stock Option Plan") and an
employee stock purchase plan. The Company applies Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its stock option plans and its
employee stock purchase plan. No compensation cost has been recognized for these
plans.
STOCK OPTION PLANS
The 1988 Stock Option Plan provides for the grant of options to purchase
common stock intended to qualify as incentive stock options as defined in
Section 422 of the Internal Revenue Code of 1986, as amended. During Fiscal
1994, the Board of Directors voted not to issue any additional options under the
1988 Stock Option Plan. The maximum term of options granted under the 1988 Stock
Option Plan is 10 years.
The 1993 Stock Option Plan authorizes (i) the grant of options to purchase
common stock intended to qualify as incentive stock 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. At December 28, 1996, the 1993 Stock Option
Plan authorized the issuance of options to purchase up to 700,000 shares of
common stock. The Compensation Committee of the Board of Directors administers
the 1993 Stock Option Plan and within certain limits has discretion to determine
the terms and conditions of options granted under the plan. The 1993 Stock
Option Plan also provides for the automatic grant of options to purchase a
specified number of shares to non-employee directors. The maximum term of
options granted under the 1993 Stock Option Plan is 10 years.
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
71,480, shares of common stock remained available for issuance under the plan at
December 28, 1996. Subsequent to December 28, 1996, 34,178 shares were purchased
under the plan at an aggregate purchase price of approximately $58,000. Other
purchases of common stock under the plan have been made as follows: on December
30, 1995, 19,385 shares at an aggregate purchase price of approximately $34,000,
and on December 29, 1994, 9,135 shares at an aggregate purchase price of
approximately $37,000.
23
24
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:
1988 STOCK OPTION PLAN 1993 STOCK OPTION PLAN
--------------------------------- ---------------------------------
EXERCISE WTD.-AVG. NUMBER EXERCISE WTD.-AVG.
NUMBER PRICE EXERCISE OF PRICE EXERCISE
OF SHARES PER SHARE PRICE SHARES PER SHARE PRICE
--------- ---------- -------- -------- ----------- --------
Balance at June 25, 1994...... 567,327 $0.17-6.10 $ 1.49 45,000 $9.00-10.88 $ 9.50
Granted.................. -- -- -- 77,000 2.75-15.00 10.70
Exercised................ (55,673) 0.17-1.67 0.97 -- -- --
Canceled................. (22,310) 0.17-1.67 1.67 -- -- --
------- --------- ---- ------- --------- ----
Balance at June 24, 1995...... 489,344 0.17-6.10 1.54 122,000 2.75-15.00 10.26
Granted.................. -- -- -- 106,000 2.25-4.00 2.35
Exercised................ (2,500) 0.17-1.67 1.37 -- -- --
Canceled................. -- -- -- (8,000) 10.88 10.88
------- --------- ---- ------- --------- ----
Balance at December 30,
1995........................ 486,844 0.17-6.10 1.54 220,000 2.25-10.88 6.43
Granted.................. -- -- -- 315,000 2.06-5.00 3.08
Exercised................ (22,350) 0.17-1.67 1.14 -- -- --
Canceled................. (1,500) 1.67 1.67 (15,000) 4.00-9.00 7.00
------- --------- ---- ------- --------- ----
Balance at June 29, 1996...... 462,994 0.17-6.10 1.56 520,000 2.06-15.00 4.38
Granted.................. -- -- -- 62,500 3.13-3.25 3.20
Exercised................ (149,797) 0.17-1.67 0.94 (1,818) 2.75 2.75
Canceled................. (2,830) 1.67 1.67 (25,000) 15.00 15.00
------- --------- ---- ------- --------- ----
Balance at December 28,
1996........................ 310,367 $0.17-6.10 $ 1.86 555,682 $2.06-15.00 $ 3.76
======= ========= ==== ======= ========= ====
Options exercisable under the 1988 Stock Option Plan and the 1993 Stock
Option Plan were as follows:
DEC. 28, 1996 DEC. 30, 1995 JUNE 29, 1996 JUNE 24, 1995 JUNE 25, 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
1988 Stock Option Plan........ 293,117 445,184 442,914 447,684 411,417
1993 Stock Option Plan........ 138,282 41,550 68,750 14,250 --
------------- ------------- ------------- ------------- -------------
Total.................... 431,399 486,734 511,664 461,934 411,417
============ ============ ============ ============ ============
The following table summarizes information about options outstanding under
the 1988 Stock Option Plan and the 1993 Stock Option Plan at December 28, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ---------------------------------
NUMBER WTD-AVG. NUMBER
RANGE OF EXERCISE OUTSTANDING AT REMAINING WTD.-AVG. EXERCISABLE AT WTD.-AVG.
PRICES DEC. 28, 1996 CONTRACTUAL LIFE EXERCISE PRICE DEC. 28, 1996 EXERCISE PRICE
- ----------------------- -------------- ---------------- -------------- -------------- --------------
$ 0.17 - 1.67 285,827 1 year $ 1.50 268,577 $ 1.49
$ 2.06 - 5.00 502,682 6 years $ 2.91 100,282 $ 2.74
$ 6.10 - 9.00 48,540 1 year $ 7.53 48,540 $ 7.53
$10.88 - 15.00 29,000 7 years $14.43 14,000 $13.82
-------------- --------------
Total 866,049 431,399
============= ============
24
25
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which requires disclosure of pro forma net income, EPS and other
information as if the fair value method of accounting for stock options and
other equity instruments described in SFAS 123 had been adopted. Pro forma
disclosures include the effects of all options granted after December 25, 1994.
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards made prior to December 25,
1994 and additional awards in future years are anticipated.
Had compensation cost for the Company's stock-based plans been based on the
fair value at the grant dates for awards made under these plans consistent with
SFAS 123, the Company's compensation cost, net of income tax benefit, net income
(loss) and EPS pro forma amounts would have been as follows (in thousands,
except per share data):
FISCAL YEAR
ENDED
TWELVE MONTHS ENDED SIX MONTHS ENDED --------------
----------------------------- ----------------------------- JUNE 29,
DEC. 28, 1996 DEC. 30, 1995 DEC. 28, 1996 DEC. 30, 1995 1996
(52 WEEKS) (53 WEEKS) (26 WEEKS) (27 WEEKS) (53 WEEKS)
------------- ------------- ------------- ------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Compensation cost:
1993 Stock Option Plan........ $ 124 $ 7 $ 58 $ 6 $ 63
Employee Stock Purchase
Plan........................ 14 8 7 4 7
Net income (loss):
As reported................... 3,371 (881) 11,563 (1,158) (9,350)
Pro forma..................... 3,233 (896) 11,498 (1,168) (9,420)
Primary EPS:
As reported................... 0.72 (0.20) 2.44 (0.27) (2.11)
Pro forma..................... 0.69 (0.20) 2.43 (0.27) (2.12)
Fully diluted EPS:
As reported................... 0.72 (0.20) 2.44 (0.27) (2.07)
Pro forma..................... 0.69 (0.20) 2.43 (0.27) (2.08)
The Black-Scholes option-pricing model is used to estimate the fair value
on the date of grant of each option granted after December 25, 1994. The
Black-Scholes model is also used to estimate the fair value of the employees'
purchase rights. In each case, the following assumptions were used for stock
option and employee purchase right grants:
1993 STOCK EMPLOYEE STOCK
OPTION PLAN PURCHASE PLAN
----------- --------------
Dividend yield................................... 0% 0%
Expected volatility.............................. 60.0% 50.0%
Risk free interest rate.......................... 6.1% 5.6%
Expected lives................................... 4-5 years 1 year
The weighted-average fair value of options granted and the average fair
value of the employee purchase rights granted were as follows:
FISCAL YEAR
ENDED
TWELVE MONTHS ENDED SIX MONTHS ENDED --------------
----------------------------- ----------------------------- JUNE 29,
DEC. 28, 1996 DEC. 30, 1995 DEC. 28, 1996 DEC. 30, 1995 1996
(52 WEEKS) (53 WEEKS) (26 WEEKS) (27 WEEKS) (53 WEEKS)
------------- ------------- ------------- ------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Fair value of options granted...... $1.76 $1.28 $1.83 $1.20 $ 1.61
Fair value of purchase rights
granted.......................... $0.67 $1.59 -- -- $ 0.67
25
26
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. 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 $12,000 and $65,000 to the Plan for Fiscal 1995 and Fiscal 1994,
respectively, and did not make a contribution to the Plan for Fiscal 1996. The
Company plans to contribute approximately $10,000 to the Plan for the Six Month
Period.
H. INCOME TAXES:
The Company accounts for income taxes in accordance with 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 enacted tax rates in effect in the years in which the
differences are expected to reverse. SFAS 109 requires current recognition of
net deferred tax assets to the extent that it is more likely than not that such
net assets will be realized. To the extent that the Company believes that its
net deferred tax assets will not be realized, a valuation allowance must be
placed against those assets.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
DEC. 28, 1996 DEC. 30, 1995 JUNE 29, 1996 JUNE 24, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
Deferred tax assets:
Net operating losses.................... $ 6,771 $ 7,946 $ 6,951 $ 7,094
Inventory............................... 1,847 1,396 1,381 1,462
Reserve for customer returns............ 513 392 552 501
Discontinued segment.................... 2,166 -- 3,343 --
Other................................... 417 390 304 320
------- ------- ------- ------
Total deferred tax assets.......... 11,714 10,124 12,531 9,377
------- ------- ------- ------
Deferred tax liabilities:
Prepaid catalogs........................ 1,007 1,913 1,343 1,898
Other................................... 109 81 54 79
------- ------- ------- ------
Total deferred tax liabilities..... 1,116 1,994 1,397 1,977
------- ------- ------- ------
Net deferred tax assets....... 10,598 8,130 11,134 7,400
Less valuation allowance...... -- 8,130 11,134 7,400
------- ------- ------- ------
Net deferred tax assets per
consolidated balance
sheets...................... $10,598 $ -- $ -- $ --
======= ======= ======= ======
As of each of the reported balance sheet dates prior to December 28, 1996,
management believed that the uncertainty surrounding the realizability of its
net deferred tax assets was sufficient to require a valuation allowance to be
placed against the entire balance of those assets. However, as of December 28,
1996, management determined, based on the Company's recent profitability trends
and anticipated future profitability, that it was more likely than not that
sufficient book and taxable income would be generated to fully realize the
benefit of its net deferred tax assets. This determination required the Company
to remove the valuation allowance and recognize the deferred tax benefit of
$10,598,000 at December 28, 1996 in its entirety.
At December 28, 1996, the Company had available net operating loss ("NOL")
carryforwards of approximately $18,357,000, of which $4,783,000 expires in
fiscal 2003, $7,912,000 expires in fiscal 2004, $2,530,000 expires in fiscal
2005, $2,383,000 expires in fiscal 2006 and $749,000 expires in fiscal 2010.
26
27
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 determined that such an ownership change occurred as a
result of its initial public offering and accordingly the amount of the
Company's NOL carryforwards available for use in any particular taxable year is
limited to approximately $1.5 million annually. To the extent that the Company
does not utilize the full amount of the annual NOL limit, the unused amount may
be used to offset taxable income in future years. 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.
The components of the Company's provision (benefit) for income taxes for
continuing operations are as follows (in thousands):
TWELVE MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
----------------------- ------------------------ --------------------------------------
DEC. 28, DEC. 30, DEC. 28, DEC. 30, JUNE 29, JUNE 24, JUNE 25,
1996 1995 1996 1995 1996 1995 1994
(52 WEEKS) (53 WEEKS) (26 WEEKS) (27 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Current:
Federal................ $ 98 $(50) $ 53 $(88) $ 8 $ 40 $210
State.................. 98 18 54 25 18 46 125
Deferred:
Federal................ (9,164) -- (9,164) -- -- -- --
State.................. (1,434) -- (1,434) -- -- -- --
-------- ---- -------- ---- ---- ---- ----
Provision (benefit) for
income taxes............. $(10,402) $(32) $(10,491) $(63) $ 26 $ 86 $335
======== ==== ======== ==== ==== ==== ====
The difference in income taxes at the U. S. federal statutory rate and the
income tax provision (benefit) reported in the accompanying consolidated
statements of operations is as follows (in thousands):
TWELVE MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
----------------------- ------------------------ --------------------------------------
DEC. 28, DEC. 30, DEC. 28, DEC. 30, JUNE 29, JUNE 24, JUNE 25,
1996 1995 1996 1995 1996 1995 1994
(52 WEEKS) (53 WEEKS) (26 WEEKS) (27 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Provision (benefit) for
income taxes at the U. S.
federal statutory rate... $ 665 $ (110) $ 364 $ (212) $ 89 $ 289 $ 1,225
State taxes, net of federal
tax benefit.............. 88 18 35 17 12 47 126
Valuation allowance
change................... (10,598) 60 (10,598) 132 -- (250) --
Utilization of NOL
carryforwards............ (557) -- (275) -- (75) -- (1,016)
Other...................... -- -- (17) -- -- -- --
-------- ------ -------- ------ ---- ------ --------
Provision (benefit) for
income taxes at effective
rate..................... $(10,402) $ (32) $(10,491) $ (63) $ 26 $ 86 $ 335
======== ====== ======== ====== ==== ====== ========
27
28
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. COMMITMENTS:
At December 28, 1996, December 30, 1995, June 29, 1996 and June 24, 1995,
there was approximately $594,000, $557,000, $557,000 and $557,000 of equipment
under capital leases, respectively. Accumulated depreciation related to these
leased assets totaled approximately $461,000, $266,000, $365,000 and $170,000,
respectively. The capital leases in effect at December 28, 1996 include options
to purchase the related equipment at fair market value at the end of the lease
term.
As of December 28, 1996, future minimum lease payments for capitalized
lease obligations are as follows: fiscal 1997 - $113,000; fiscal 1998 - $10,000;
fiscal 1999 - $10,000; fiscal 2000 - $10,000; and, fiscal 2001 - $7,000.
Approximately $14,000 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 $362,000, $321,000, $666,000, $581,000 and $914,000 for the Six
Month Period, the six months ended December 30, 1995, Fiscal 1996, Fiscal 1995
and Fiscal 1994, respectively.
Future minimum lease payments for operating leases having a remaining term
in excess of one year at December 28, 1996 totaled $2,187,000 and are as
follows: fiscal 1997 - $649,000; fiscal 1998 - $649,000; fiscal 1999 - $615,000;
fiscal 2000 - $203,000; and fiscal 2001 - $71,000.
J. RELATED PARTY:
During Fiscal 1996, the Company terminated its relationship with Shannon
North America, Limited ("Shannon"), a joint venture between the Company and Aer
Rianta cpt. The Company's investment in Shannon was immaterial. During the Six
Month Period, the Company continued to provide various operational services to
Shannon. Amounts charged to Shannon during each of the periods indicated is as
follows:
Calendar 1996.................................................. $519,000
Calendar 1995.................................................. 664,000
Six months ended December 28, 1996............................. 180,000
Six months ended December 30, 1995............................. 406,000
Fiscal 1996.................................................... 690,000
Fiscal 1995.................................................... 555,000
Fiscal 1994.................................................... 487,000
28
29
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
K. QUARTERLY FINANCIAL DATA (UNAUDITED):
SIX MONTH PERIOD
QUARTER ENDED
----------------------------
SEPTEMBER 28 DECEMBER 28
------------ -----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net sales..................................... $ 20,541 $22,783
Income from continuing operations............. 250 11,313
Net income.................................... 250 11,313
Income from continuing operations per share... 0.05 2.38
Net income per share.......................... $ 0.05 $ 2.38
FISCAL 1996 QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30 DECEMBER 30 MARCH 30 JUNE 29
------------ ----------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales..................................... $ 22,312 $16,955 $19,736 $21,582
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
share....................................... (0.06) (0.07) 0.06 0.11
Income (loss) from discontinued operations per
share....................................... (0.09) (0.05) -- (1.90)
Net income (loss) per share................... $ (0.15) $ (0.12) $ 0.06 $ (1.79)
FISCAL 1995 QUARTER ENDED
------------------------------------------------------
SEPTEMBER 24 DECEMBER 24 MARCH 25 JUNE 24
------------ ----------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales..................................... $ 18,536 $14,890 $19,704 $19,561
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
share....................................... 0.23 (0.13) 0.04 0.02
Income (loss) from discontinued operations per
share....................................... -- -- (0.01) 0.01
Net income (loss) per share................... $ 0.23 $ (0.13) $ 0.03 $ 0.03
During the Six Month Period, the Company recorded a deferred tax benefit
for $10,598,000 (see Note H).
On May 20, 1996, the Company announced its plan to discontinue the
operations of its Carroll Reed segment and recorded a charge of $8,511,000 for
the loss on disposal of discontinued operations (see Note B).
The sum of the quarterly EPS 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.
29
30
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 13 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 32 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
February 4, 1997
30
31
DM MANAGEMENT COMPANY AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
BALANCE, AMOUNTS WRITE-OFFS BALANCE,
BEGINNING CHARTED TO AGAINST END
OF PERIOD NET INCOME RESERVE OF PERIOD
--------- ---------- ---------- ---------
ACCRUED CUSTOMER RETURNS:
Six months ended December 28, 1996................. $ 1,231 $ 11,634 $ 11,556 $ 1,309
====== ======= ======= ======
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
====== ======= ======= ======
31
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
CONSOLIDATED FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance"
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
May 8, 1997, which will be filed with the Securities and Exchange Commission not
later than 120 days after December 28, 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 May 8, 1997, which will be filed with the Securities
and Exchange Commission not later than 120 days after December 28, 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 May 8, 1997, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 28,
1996, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT 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 Financial Statements on Page 12.
(2) FINANCIAL STATEMENT SCHEDULES
Index to Consolidated Financial Statement Schedules
PAGE
----
Report of Independent Public Accountants on Supplementary Schedule 30
For the Six Month Period and the three years ending June 29, 1996:
Schedule II -- Valuation and Qualifying Accounts 31
32
33
(3) EXHIBITS
Exhibits 10.7 through 10.11 include the Company's compensatory plans or
arrangements required to be filed as exhibits pursuant to Item 14(c) of Form
10-K.
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 By-Laws of the Company, as amended (included as Exhibit 3.2 to the Company's
Current Report on Form 8-K dated January 14, 1997, 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 Select 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 Third Amendment to 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 previously amended
10.4 Fourth Amendment to 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 previously amended
10.5 Lease Agreement dated May 3, 1996, between the Company and MacNeill Worldwide,
Inc.
10.6 Lease Agreement dated February 21, 1997, between the Company and MacNeill
Worldwide, Inc.
10.7 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)
10.8 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 by reference)
10.9 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)
10.10 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)
10.11 Employment Letter Agreement dated May 7, 1996, between the Company and John J.
Hayes (included as Exhibit 10.12 to the Company's Annual Report on Form 10-K for
the year ended June 29, 1996, File No. 0-22480 and incorporated herein by
reference)
10.12 $8,000,000 Commercial Promissory Grid Note and Loan Agreement dated November 4,
1996, between the Company and Fleet National Bank (included as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996,
File No. 0-22480, and incorporated herein by reference)
10.13 $3,600,000 Commercial Promissory Term Note and Loan Agreement dated November 4,
1996, between the Company and Fleet National Bank (included as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996,
File No. 0-22480, and incorporated herein by reference)
10.14 $400,000 Time Note dated November 4, 1996, between the Company and Fleet National
Bank (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 28, 1996, File No. 0-22480, and incorporated herein by
reference)
33
34
10.15 Security Agreement dated November 4, 1996, between the Company and Fleet National
Bank (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 28, 1996, File No. 0-22480, and incorporated herein by
reference)
10.16 Pledge Agreement dated November 4, 1996, between the Company, DM Management
Security Corporation and Fleet National Bank (included as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996,
File No. 0-22480, and incorporated herein by reference)
10.17 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)
10.18 $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)
10.19 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 March 26, 1997
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
(4) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended December
28, 1996.
34
35
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: March 26, 1997 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
--------- ----- ----
/s/ GORDON R. COOKE President, Chief Executive March 26, 1997
- ---------------------------------------- Officer and Director (Principal
Gordon R. Cooke Executive Officer)
/s/ SAMUEL L. SHANAMAN Executive Vice President, Chief March 26, 1997
- ---------------------------------------- Operating Officer, Chief
Samuel L. Shanaman Financial Officer and Director
(Principal Financial Officer)
/s/ OLGA L. CONLEY Vice President of Finance and March 26, 1997
- ---------------------------------------- Treasurer (Principal Accounting
Olga L. Conley Officer)
/s/ WALTER J. LEVISON Director March 26, 1997
- ----------------------------------------
Walter J. Levison
/s/ WILLIAM E. ENGBERS Director March 26, 1997
- ----------------------------------------
William E. Engbers
35
36
DM MANAGEMENT COMPANY AND SUBSIDIARY
FORM 10-K
FOR THE SIX MONTHS ENDED DECEMBER 28, 1996
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
3.1 Restated Certificate of Incorporation of the Company
3.2 By-Laws of the Company, as amended
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 Third Amendment to 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 previously
amended 37
10.4 Fourth Amendment to 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 previously
amended 50
10.5 Lease Agreement dated May 3, 1996 between the Company and MacNeill
Worldwide, Inc. 55
10.6 Lease Agreement dated February 21, 1997 between the Company and MacNeill
Worldwide, Inc. 63
10.7 1988 Incentive Stock Option Plan
10.8 1993 Incentive and Nonqualified Stock Option Plan, as amended
10.9 1993 Employee Stock Purchase Plan
10.10 Employment Letter Agreement dated December 21, 1995, between the Company
and Gordon R. Cooke
10.11 Employment Letter Agreement dated May 7, 1996, between the Company and
John J. Hayes
10.12 $8,000,000 Commercial Promissory Grid Note and Loan Agreement dated
November 4, 1996, between the Company and Fleet National Bank
10.13 $3,600,000 Commercial Promissory Term Note and Loan Agreement dated
November 4, 1996, between the Company and Fleet National Bank
10.14 $400,000 Time Note dated November 4, 1996, between the Company and Fleet
National Bank
10.15 Security Agreement dated November 4, 1996, between the Company and Fleet
National Bank
10.16 Pledge Agreement dated November 4, 1996, between the Company, DM Manage-
ment Security Corporation and Fleet National Bank
10.17 Mortgage and Security Agreement dated October 28, 1994, between the
Company and Shawmut Bank, N.A.
10.18 $1,650,000 Commercial Promissory Note dated October 28, 1994, between the
Company and Shawmut Bank, N.A.
10.19 Merchant Services Agreement between the Company and Hurley State Bank,
dated July 18, 1995
11.1 Statement re: computation of per share earnings 71
23.1 Consent of Independent Accountants dated March 26, 1997 73
27.1 Financial Data Schedule 75
36