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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-Q
( MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
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 |_|
Shares outstanding of the Registrant's common stock (par value $0.01) at
August 4, 1997: 4,667,854
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2
DM MANAGEMENT COMPANY & SUBSIDIARY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 1997
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..............................................................................3-8
Consolidated Balance Sheets at June 28, 1997, June 29, 1996 and December 28, 1996................................3
Consolidated Statements of Operations for the three months and the six months ended June 28, 1997 and
June 29, 1996 .............................................................................................4
Consolidated Statements of Cash Flows for the six months
ended June 28, 1997 and June 29, 1996......................................................................5
Notes to Consolidated Financial Statements.....................................................................6-8
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations............9-12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................................................13
Item 6. Exhibits and Reports on Form 8-K................................................................................14
Signature.........................................................................................................................15
2
3
DM MANAGEMENT COMPANY & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
JUNE 28, JUNE 29, DECEMBER 28,
ASSETS 1997 1996 1996
------------- ----------- ------------
Current assets:
Cash and cash equivalents ................................................. $ 6,388 $ 221 $ 384
Marketable securities, net of unrealized loss ............................. 3,872 3,858 3,879
Inventory ................................................................. 11,279 10,866 12,637
Prepaid catalog expenses .................................................. 3,870 4,154 2,714
Deferred income taxes ..................................................... 2,748 -- 2,670
Other current assets ...................................................... 779 1,098 724
-------- -------- --------
Total current assets ................................................. 28,936 20,197 23,008
Property and equipment, net .................................................... 7,033 6,872 7,173
Deferred income taxes .......................................................... 7,026 -- 7,928
-------- -------- --------
Total assets ......................................................... $ 42,995 $ 27,069 $ 38,109
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 8,164 $ 9,651 $ 8,143
Accrued expenses .......................................................... 2,709 1,438 1,877
Accrued customer returns .................................................. 3,423 1,231 1,309
Current portion of long-term debt ........................................ 836 889 1,017
-------- -------- --------
Total current liabilities ............................................ 15,132 13,209 12,346
Long-term debt ................................................................. 4,446 4,380 4,540
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,
4,661,254, 4,305,293 and 4,456,908 shares issued and outstanding as of
June 28, 1997, June 29, 1996 and December 28, 1996,
respectively ......................................................... 46 43 44
Additional paid-in capital ................................................ 40,501 39,890 40,048
Unrealized loss on marketable securities .................................. (122) (136) (115)
Accumulated deficit ....................................................... (17,008) (30,317) (18,754)
-------- -------- --------
Total stockholders' equity ........................................... 23,417 9,480 21,223
-------- -------- --------
Total liabilities and stockholders' equity ........................... $ 42,995 $ 27,069 $ 38,109
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
3
4
DM MANAGEMENT COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
---- ---- ---- ----
Net sales ........................................... $ 32,885 $ 21,582 $ 57,428 $ 41,318
Costs and expenses:
Product ........................................ 14,563 9,507 25,415 17,769
Operations ..................................... 5,912 3,701 10,213 7,092
Selling ........................................ 7,822 6,201 14,136 11,997
General and administrative ..................... 2,606 1,512 4,734 3,397
Interest, net .................................. 7 55 68 179
-------- -------- -------- --------
Income from continuing operations before income taxes 1,975 606 2,862 884
Provision for income taxes .......................... 770 61 1,116 89
-------- -------- -------- --------
Income from continuing operations ................... 1,205 545 1,746 795
Discontinued operations:
Loss from operations ........................... -- (490) -- (476)
Loss on disposal ............................... -- (8,511) -- (8,511)
-------- -------- -------- --------
Loss from discontinued operations .............. -- (9,001) -- (8,987)
-------- -------- -------- --------
Net income (loss) ................................... $ 1,205 $ (8,456) $ 1,746 $ (8,192)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE:
Primary:
Continuing operations .......................... $ 0.23 $ 0.11 $ 0.35 $ 0.17
Discontinued operations ........................ -- (1.90) -- (1.94)
-------- -------- -------- --------
Net income (loss) per share .................... $ 0.23 $ (1.79) $ 0.35 $ (1.77)
======== ======== ======== ========
Weighted-average common and common equivalent shares
outstanding .................................... 5,151 4,737 5,057 4,620
Fully diluted:
Continuing operations .......................... $ 0.23 $ 0.11 $ 0.34 $ 0.17
Discontinued operations ........................ -- (1.87) -- (1.92)
-------- -------- -------- --------
Net income (loss) per share .................... $ 0.23 $ (1.76) $ 0.34 $ (1.75)
======== ======== ======== ========
Weighted-average common and common equivalent shares
outstanding .................................... 5,238 4,795 5,210 4,674
The accompanying notes are an integral part of the consolidated
financial statements.
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5
DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------------
JUNE 28, JUNE 29,
1997 1996
------------- --------------
Cash flows from operating activities:
Net income (loss) ........................................ $ 1,746 $ (8,192)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation ............................................. 754 478
Deferred income taxes .................................... 824 --
Liability for expected losses ............................ (152) 2,658
Write-off of intangible assets ........................... -- 5,336
Amortization related to discontinued operations .......... -- 189
Changes in assets and liabilities:
(Increase) decrease in inventory ......................... 1,358 (1,012)
(Increase) decrease in prepaid catalog expenses .......... (1,156) 1,512
(Increase) decrease in other current assets ............. 97 (161)
Increase in accounts payable and accrued expenses ........ 853 3,153
Increase in accrued customer returns ..................... 2,114 366
-------- --------
Net cash provided by operating activities ..................... 6,438 4,327
Cash flows used in investing activities:
Additions to property and equipment ...................... (614) (678)
Proceeds from sale of marketable securities .............. -- 6
Payment for purchase of Carroll Reed ..................... -- (907)
-------- --------
Net cash used in investing activities ......................... (614) (1,579)
Cash flows provided by (used in) financing activities:
Borrowings under debt agreements ......................... 5,764 13,109
Payments of debt borrowings .............................. (5,935) (15,918)
Principal payments on capital lease obligations .......... (104) (86)
Proceeds from stock transactions ......................... 455 27
-------- --------
Net cash provided by (used in) financing activities ........... 180 (2,868)
Net increase (decrease) in cash and cash equivalents .......... 6,004 (120)
Cash and cash equivalents at:
Beginning of period ...................................... 384 341
-------- --------
End of period ............................................ $ 6,388 $ 221
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for interest ........................................ $ 231 $ 292
Cash paid for taxes, including discontinued operations ........ $ 131 $ --
The accompanying notes are an integral part of the consolidated
financial statements.
5
6
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements included herein have been prepared by DM
Management Company (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and in the opinion of
management contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. Accordingly, although the Company believes that the
disclosures are adequate to make the information presented not misleading, these
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Stockholders for the transition period ended December 28, 1996.
A. 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 $8,511,000 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. As of June 28, 1997, the Company
had completed the phase-out of its Carroll Reed segment and had substantially
utilized its reserve for expected losses. The results of the Carroll Reed
operations through May 20, 1996 have been classified as a loss from discontinued
operations in the accompanying consolidated statements of operations for the
periods ending June 29,1996.
The net current assets and liabilities of the Carroll Reed segment, which
have been included in other current assets in the accompanying consolidated
balance sheets, are summarized below (in thousands):
JUNE 29, DECEMBER 28,
1996 1996
---------------------------
Current assets:
Inventory ............................ $2,477 $ --
Prepaid catalog expenses ............. 492 --
Other current assets ................. 149 49
------ ------
Total current assets .............. 3,118 49
------ ------
Current liabilities:
Accounts payable and accrued expenses 286 --
Accrued customer returns ............. 173 9
Liability for expected losses ........ 2,658 231
------ ------
Total current liabilities ......... 3,117 240
------ ------
Net current assets (liabilities)
of discontinued operations ... $ 1 $ (191)
====== ======
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7
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
B. DEBT:
During second quarter 1997, the Company refinanced its existing debt by
entering into a loan agreement with a new bank. The aggregate principal
availability under the new loan agreement totals $13,750,000. At June 28, 1997,
the credit facilities provided for in the new loan agreement consisted of (i) a
$1,650,000 interim loan (the "Interim Loan"); (ii) a $3,600,000 term loan (the
"Term Loan"); (iii) a $6,000,000 revolving line of credit (the "Revolver"); and,
(iv) a $2,500,000 line for the issuance of commercial letters of credit (the
"Letter of Credit Line").
The Interim Loan was replaced by a $1,650,000 real estate loan (the "Real
Estate Loan") on July 30, 1997. Payments on the Real Estate Loan are due
monthly, based on a 15-year amortization, with the remaining balance payable on
July 30, 2002. Interest on the Real Estate Loan is fixed at 6.81% per annum
until August 31, 1999 at which time the Company may select from several interest
rate options. Payments on the Term Loan are due quarterly commencing on
September 2, 1997 through its maturity on June 1, 2002. The Term Loan provides
for several interest rate options. At June 28, 1997 the Term Loan bore interest
at 7.28% per annum. Both the Revolver and the Letter of Credit Line expire on
June 1, 1999. The Revolver also provides for several interest rate options.
There were no outstanding Revolver borrowings at June 28, 1997. Outstanding
letters of credit at June 28, 1997 totaled approximately $1,669,000.
The Company is required to pay a commitment fee of 1/8th of 1% per annum on
the unused portion of the Revolver commitment. All of the credit facilities
under the new loan agreement are collateralized by a first lien mortgage on the
Company's distribution center in Meredith, New Hampshire. The Term Loan is also
collateralized by the Company's marketable securities and substantially all
assets of the Company. The Revolver and the Letter of Credit Line are also
collateralized by substantially all assets of the Company, except the Company's
marketable securities. The terms of the new loan agreement contain various
lending conditions and covenants, including restrictions on permitted liens and
required compliance with certain financial coverage ratios.
A summary of the Company's outstanding credit facilities follows (in
thousands):
JUNE 28, JUNE 29, DECEMBER 28,
1997 1996 1996
------------------------------------------------
Interim Loan/Real Estate Loan ............ $1,650 $1,476 $1,421
Term Loan ................................ 3,600 -- 4,000
Revolver ................................. -- 3,602 --
Capitalized lease obligations ............ 32 191 136
------ ------ ------
Total debt .......................... 5,282 5,269 5,557
Less current maturities ............. 836 889 1,017
------ ------ ------
Long-term debt ...................... $4,446 $4,380 $4,540
====== ====== ======
C. 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. Common stock equivalents consist of
common stock issuable on the exercise of outstanding stock options and are
calculated using the treasury method.
D. RECLASSIFICATIONS:
Certain financial statement amounts have been reclassified to be consistent
with current period presentation.
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8
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
E. 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 for
financial statements issued for periods ending after December 15, 1997. The
restatement of all prior period EPS data presented is also required upon
adoption. Basic EPS excludes potentially dilutive securities and is computed by
dividing net income 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 that then shared in the earnings of the entity. Early
application of SFAS 128 is not permitted.
The following table summarizes the Company's EPS and weighted-average
common and common equivalent shares outstanding on a pro-forma basis as
calculated under SFAS 128.
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
Pro-forma Basic EPS: --------- --------- ---------- -----------
Continuing operations ......................... $ 0.26 $ 0.13 $ 0.39 $ 0.19
Discontinued operations ....................... -- (2.10) -- (2.10)
-------- -------- -------- --------
Net income (loss) per share ................... $ 0.26 $ (1.97) $ 0.39 $ (1.91)
======== ======== ======== ========
Weighted-average common and common equivalent shares
outstanding.................................... 4,548 4,297 4,529 4,292
Pro-forma Diluted EPS:
Continuing operations ......................... $ 0.23 $ 0.11 $ 0.35 $ 0.17
Discontinued operations ....................... -- (1.90) -- (1.94)
-------- -------- -------- --------
Net income (loss) per share ................... $ 0.23 $ (1.79) $ 0.35 $ (1.77)
======== ======== ======== ========
Weighted-average common and common equivalent shares
outstanding ................................... 5,151 4,737 5,057 4,620
F. COMMITMENTS:
Subsequent to June 28, 1997 the Company signed a letter of intent to
purchase approximately 360 acres of land in Tilton, New Hampshire for
$3,650,000. The site is intended to house an approximately 300,000 square foot
distribution center to be completed by the end of 1998. Construction is expected
to begin promptly. The estimated cost of this new state-of-the-art facility,
including land, construction and equipment, ranges from $20.0 to $25.0 million.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Income from continuing operations before income taxes increased over
225% to $2.0 million for the three months ended June 28, 1997 ("second
quarter 1997") as compared to $0.6 million for the three months ended June
29, 1996 ("second quarter 1996"). Income from continuing operations
increased 121% to $1.2 million for second quarter 1997 from $0.5 million
for second quarter 1996. Income from continuing operations per share was
$0.23 for second quarter 1997, more than twice the $0.11 reported for
second quarter 1996. The Company attributes its profit improvement to
strong customer response to its new business strategies which focus on
creative presentation, merchandise differentiation and brand building. The
Company's J. Jill title performed particularly well during the three months
and six months ended June 28, 1997. In addition, the combination of the
Company's The Very Thing! concept into its Nicole Summers title permitted
the Company to realize certain operational and selling efficiencies during
the three months and six months ended June 28, 1997.
The following table represents the Company's consolidated statements
of operations as a percentage of net sales:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -----------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
Net sales ........................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Product ........................................ 44.3 44.1 44.3 43.0
Operations ..................................... 18.0 17.1 17.8 17.2
Selling ........................................ 23.8 28.7 24.6 29.1
General and administrative ..................... 7.9 7.0 8.2 8.2
Interest, net .................................. -- 0.3 0.1 0.4
----- ----- ----- -----
Income from continuing operations before income taxes 6.0 2.8 5.0 2.1
Provision for income taxes .......................... 2.3 0.3 2.0 0.2
----- ----- ----- -----
Income from continuing operations ................... 3.7 2.5 3.0 1.9
Loss from discontinued operations ................... -- (41.7) -- (21.7)
----- ----- ----- -----
Net income (loss) ................................... 3.7% (39.2)% 3.0% (19.8)%
===== ===== ===== =====
COMPARISON OF THE THREE MONTHS ENDED JUNE 28, 1997 WITH THE THREE MONTHS
ENDED JUNE 29, 1996
Sales and Circulation
Second quarter 1997 net sales increased 52.4% over second quarter 1996
net sales, as catalog circulation, page counts, response rates and average
order size all increased. The Company attributes its increased response
rates and average order size to the creative and merchandising changes it
has implemented, including its use of a "total look" wardrobing concept,
and to its adoption of a more targeted circulation strategy that has cut
back on duplicate mailings while expanding prospecting. Prospecting
circulation as a percent of total circulation increased significantly
compared to last year, as the Company continued its plan to aggressively
grow sales and increase active customer counts.
Product Costs
Product costs as a percentage of net sales were slightly higher for
second quarter 1997 as compared to second quarter 1996 due to increased
promotional activity. In May 1997, the Company circulated a new
promotionally priced edition of its Nicole Summers catalog, designed to
compete with late-in-the-season retail store offerings. This catalog
provided the Company with an opportunity to grow sales by offering new
merchandise at value prices while at the same time serving as an excellent
vehicle to liquidate overstocked in-season merchandise without taking the
deep discounts typically found in a sale book. The resulting impact on the
Company's product cost percentage was partially offset by lower markdown
charges in second quarter 1997 as compared to second quarter 1996.
9
10
Operations
Operations expense as a percentage of net sales increased in second
quarter 1997 as compared to second quarter 1996 as higher than expected
demand levels resulted in order processing inefficiencies. Backorder
processing costs, including increased packages per order, resulted in
increased postage and handling charges. The Company anticipates that these
order processing inefficiencies will continue into the Fall season. During
second quarter 1997 these order processing inefficiencies were partially
offset by efficiencies achieved from the merger of the Company's The Very
Thing! concept into its Nicole Summers title.
Selling
Improved catalog productivity and lower paper prices resulted in a 4.9
percentage point decline in selling costs as a percentage of net sales in
second quarter 1997 as compared to second quarter 1996.
General and Administrative
General and administrative expenses increased 72.4% for second quarter
1997 over second quarter 1996, from $1.5 million to $2.6 million, primarily
as a result of outside consulting fees for various systems and facilities
projects, increased depreciation and occupancy costs and increased
management infrastructure.
COMPARISON OF THE SIX MONTHS ENDED JUNE 28, 1997 WITH THE SIX MONTHS ENDED
JUNE 29, 1996
Sales and Circulation
Net sales for the six months ended June 28, 1997 increased 39.0% over
the same period in the prior year. Catalog circulation, page counts,
customer response rates and average order size all increased as compared
to the same period a year ago. Creatively distinctive catalog design,
differentiation in merchandising execution and a more targeted circulation
strategy were critical elements affecting the Spring season sales growth.
Prospecting circulation as a percent of total circulation increased
significantly compared to last year, as the Company continued its plan to
aggressively grow sales and increase active customer counts.
Product Costs
Product costs as a percentage of net sales were higher for the six
months ended June 28, 1997 as compared to the six months ended June 29,
1996 due in part to increased promotional activity in the current year. In
order to grow sales and be more competitive with its retail store
competition, the Company began a program to offer in-season merchandise at
promotional, rather that sale, prices. This increased promotional activity
resulted in the increased product cost percentage during the first six
months of 1997 as compared to 1996.
Operations
Operations expense as a percentage of net sales increased for the six
months ended June 28, 1997 as compared to the six months ended June 29,
1996, as order processing costs increased due to higher than expected
demand. Efficiencies achieved as a result of the merger of the Company's
The Very Thing! concept into its Nicole Summers title helped to somewhat
offset these additional costs.
Selling
Increased catalog productivity and lower paper prices resulted in the
4.5 percentage point decrease in selling expenses as a percentage of net
sales during the six months ended June 28, 1997 as compared to the same
period in the prior year.
General and Administrative
General and administrative expenses increased 39.4% for the six months
ended June 28, 1997 compared to the six months ended June 29, 1996, but
were unchanged as a percentage of net sales. The increase in general and
administrative expenses was primarily a result of outside consulting fees
on various systems and facilities projects, increased depreciation and
occupancy costs and increased management infrastructure.
10
11
INCOME TAXES
The Company provides for income taxes at an effective tax rate that
includes the full federal and state statutory tax rates. Prior to
December 1996, the Company reduced the income tax provision recorded in
its financial statements by recording a tax benefit associated with its
net deferred tax assets, primarily net operating loss carryforwards
("NOL's"). Because of the uncertainty surrounding the realizability of
these assets, the Company placed a valuation allowance against the entire
balance of its net deferred tax assets. As a result, the Company
recognized the associated tax benefit as income was earned. This resulted
in a significantly lower effective tax rate for all periods reported
prior to December 1996.
In December 1996, management determined that it was more likely than
not that the Company would earn sufficient book and taxable income to fully
realize the benefit of its 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. Because,
for financial statement purposes, the benefit associated with the Company's
deferred tax assets has been fully realized, the Company's effective rate
can no longer be reduced by the recognition of this tax benefit over future
periods of income generation. As a result, the Company's tax provision is
substantially larger this year than in the prior year. Cash payments for
income taxes continue to be reduced by available NOL's resulting in cash
payments which are significantly less than the income tax provision
recorded for financial statement purposes during 1997.
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. The net
loss from this discontinued operation for 1997 has been charged to the
liability for expected losses established in connection with the
divestiture. As of June 28, 1997, the Company had completed the phase-out
of its Carroll Reed segment and had fully utilized its reserve for expected
losses. The results of operations for the Caroll Reed segment for 1996 have
been classified as income from discontinued operations in the accompanying
consolidated statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 28, 1997, 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.
During second quarter 1997, the Company refinanced its existing debt
by entering into a loan agreement with a new bank. The aggregate principal
availability under the new loan agreement totals $13,750,000. At June 28,
1997, the credit facilities provided for in the new loan agreement
consisted of (i) a $1,650,000 interim loan (the "Interim Loan"); (ii) a
$3,600,000 term loan (the "Term Loan"); (iii) a $6,000,000 revolving line
of credit (the "Revolver"); and, (iv) a $2,500,000 line for the issuance of
commercial letters of credit (the "Letter of Credit Line").
The Interim Loan was replaced by a $1,650,000 real estate loan (the
"Real Estate Loan") on July 30, 1997. Payments on the Real Estate Loan are
due monthly, based on a 15-year amortization, with the remaining balance
payable on July 30, 2002. Interest on the Real Estate Loan is fixed at
6.81% per annum until August 31, 1999 at which time the Company may select
from several interest rate options. Payments on the Term Loan are due
quarterly commencing on September 2, 1997 through its maturity on June 1,
2002. The Term Loan provides for several interest rate options. At June 28,
1997 the Term Loan bore interest at 7.28% per annum. Both the Revolver and
the Letter of Credit Line expire on June 1, 1999. The Revolver also
provides for several interest rate options. There were no outstanding
Revolver borrowings at June 28, 1997. Outstanding letters of credit at June
28, 1997 totaled approximately $1,669,000.
The Company was considerably more liquid at June 28, 1997 than at June
29, 1996 as cash and cash equivalents totaled $6.4 million versus $0.2
million for the respective periods. Cash used in investing activities was
$614,000 for the six months ended June 28, 1997, and $1.6 million for the
six months ended June 29, 1996. Capital investments for both periods
included additions to property and equipment. In 1996, investing activities
included a final payment for the purchase of Carroll Reed.
11
12
Inventory levels at June 28, 1997 were only 3.8% higher than at June
29, 1996 due to the timing of receipts of Fall season merchandise. Prepaid
catalog expenses at June 28, 1997 were 6.8% lower than at June 29, 1996.
This decline is primarily attributable to lower paper inventory balances on
hand at June 28, 1997 than at June 29, 1996.
Subsequent to June 28, 1997, the Company signed a letter of intent to
purchase approximately 360 acres of land in Tilton, New Hampshire for
$3,650,000. The site is intended to house an approximately 300,000 square
foot distribution center to be completed by the end of 1998. Construction
is expected to begin promptly. The estimated cost of this new
state-of-the-art facility, including land, construction and equipment
ranges from $20.0 to $25.0 million.
Management intends to use the Company's capital resources to fund the
development and construction of its new distribution center as well as to
upgrade its information systems. Anticipated expenditures to upgrade its
existing information 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
capital and 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 for financial statements
issued for periods ending after December 15, 1997. The restatement of all
prior period EPS data presented is also required upon adoption. Basic EPS
excludes potentially dilutive securities and is computed by dividing net
income 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 that then shared in the earnings of the entity. Early
application of SFAS 128 is not permitted. See Note E to the accompanying
consolidated financial statements.
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; change in, or the failure to
comply with, government regulations; and other factors.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Stockholders on May 8, 1997. 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 six.
Number of Shares
----------------
For............................................. 3,664,454
Against......................................... 5,598
Abstain......................................... 250
2. To elect the following individuals as Directors of the Company:
Withholding
For Authority
--- ---------
CLASS A
William E. Engbers................... 3,514,275 156,027
Samuel L. Shanaman................... 3,509,086 161,216
CLASS B
Ruth M. Owades....................... 3,513,693 156,609
CLASS C
Thomas J. Litle...................... 3,514,275 156,027
3. To amend the 1993 Incentive and Nonqualified Stock Option Plan to
increase the number of shares of common stock that may be issued
pursuant to the options granted thereunder from 700,000 to 1,200,000.
Number of Shares
----------------
For.................................................... 2,097,727
Against................................................ 235,487
Abstain................................................ 850
Broker non-votes....................................... 1,336,238
4. To amend the 1993 Incentive and Nonqualified Stock Option Plan further
to alter the formula stock option grants thereunder to non-employee
directors of the Company.
Number of Shares
----------------
For................................................... 3,413,167
Against............................................... 232,488
Abstain............................................... 1,038
Broker non-votes...................................... 23,609
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) EXHIBITS
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 Loan Agreement dated June 5, 1997 between the Company and
Citizens Bank of Massachusetts
10.2 Revolving Note dated June 5, 1997 between the Company and
Citizens Bank of Massachusetts
10.3 Term Note dated June 5, 1997 between the Company and Citizens
Bank of Massachusetts
10.4 Interim Note dated June 5, 1997 between the Company and
Citizens Bank of Massachusetts
10.5 Security Agreement dated June 5, 1997 between the Company
and Citizens Bank of Massachusetts
10.6 Grant of Security Interest in Trademarks dated June 5, 1997
between the Company and Citizens Bank of Massachusetts
10.7 Account Control Agreement dated June 5, 1997 between the
Company and Citizens Bank of Massachusetts
10.8 Real Estate Note dated July 30, 1997 between the Company and
Citizens Bank of Massachusetts
10.9 Mortgage dated July 30, 1997 between the Company and Citizens
Bank of Massachusetts
10.10 Letter of Intent to purchase certain land in Tilton, New
Hampshire, dated July 8, 1997 between the Company and Pike
Industries Inc.
PER SHARE EARNINGS
11.1 Statement re: computation of per share earnings
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
(2) REPORTS ON FORM 8-K
The Company has not filed any reports on Form 8-K during the quarter
ended June 28, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DM MANAGEMENT COMPANY
Dated: August 11, 1997 By: /S/ Samuel L. Shanaman
------------------------------
Samuel L. Shanaman
Authorized Officer
Executive Vice President,
Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
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DM MANAGEMENT COMPANY & SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 1997
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 Loan Agreement dated June 5, 1997 between the Company and
Citizens Bank of Massachusetts 17
10.2 Revolving Note dated June 5, 1997 between the Company and
Citizens Bank of Massachusetts 53
10.3 Term Note dated June 5, 1997 between the Company and
Citizens Bank of Massachusetts 56
10.4 Interim Note dated June 5, 1997 between the Company and
Citizens Bank of Massachusetts 59
10.5 Security Agreement dated June 5, 1997 between the Company
and Citizens Bank of Massachusetts 62
10.6 Grant of Security Interest in Trademarks dated June 5, 1997
between the Company and Citizens Bank of Massachusetts 73
10.7 Account Control Agreement dated June 5, 1997 between the
Company and Citizens Bank of Massachusetts 78
10.8 Real Estate Note dated July 30, 1997 between the Company and
Citizens Bank of Massachusetts 83
10.9 Mortgage dated July 30, 1997 between the Company and
Citizens Bank of Massachusetts 86
10.10 Letter of Intent to purchase certain land in Tilton, New
Hampshire, dated July 8, 1997 between the Company and Pike
Industries Inc. 93
11.1 Statement re: computation of per share earnings 98
27.1 Finciancial Data Schedule 100
16