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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 SEPTEMBER 27, 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: (781) 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 November 5, 1997: 5,675,786
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DM MANAGEMENT COMPANY & SUBSIDIARY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 1997
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.........................................................................3-8
Consolidated Balance Sheets at September 27, 1997, September 28, 1996 and December 28, 1996.................3
Consolidated Statements of Operations for the three months and the nine months ended
September 27, 1997 and September 28, 1996 ................................................4
Consolidated Statements of Cash Flows for the nine months ended September 27, 1997 and
September 28, 1996........................................................................5
Notes to Consolidated Financial Statements................................................................6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................9-13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................................................................14
Signature....................................................................................................................15
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3
DM MANAGEMENT COMPANY & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 27, SEPTEMBER 28, DECEMBER 28,
ASSETS 1997 1996 1996
------------- ------------- ------------
Current assets:
Cash and cash equivalents ................................................. $ 582 $ 296 $ 384
Marketable securities, net of unrealized loss ............................. 3,888 3,862 3,879
Inventory ................................................................. 18,498 10,200 12,637
Prepaid catalog expenses .................................................. 5,949 3,875 2,714
Deferred income taxes ..................................................... 2,748 -- 2,670
Other current assets ...................................................... 2,218 1,915 724
-------- -------- --------
Total current assets ................................................. 33,883 20,148 23,008
Property and equipment, net .................................................... 7,930 6,994 7,173
Deferred income taxes .......................................................... 7,026 -- 7,928
-------- -------- --------
Total assets ......................................................... $ 48,839 $ 27,142 $ 38,109
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 10,685 $ 6,943 $ 8,143
Accrued expenses .......................................................... 3,258 1,658 1,877
Accrued customer returns .................................................. 3,752 1,441 1,309
Short-term borrowings ..................................................... -- 1,721 --
Current portion of long-term debt ......................................... 836 864 1,017
-------- -------- --------
Total current liabilities ............................................ 18,531 12,627 12,346
Long-term debt, less current portion ........................................... 6,150 4,769 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,
4,675,786, 4,326,157 and 4,456,908 shares issued and outstanding as of
September 27, 1997, September 28, 1996 and December 28,
1996, respectively ....................................................... 47 43 44
Additional paid-in capital ................................................ 40,535 39,902 40,048
Unrealized loss on marketable securities .................................. (107) (132) (115)
Accumulated deficit ....................................................... (16,317) (30,067) (18,754)
-------- -------- --------
Total stockholders' equity ........................................... 24,158 9,746 21,223
-------- -------- --------
Total liabilities and stockholders' equity ........................... $ 48,839 $ 27,142 $ 38,109
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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DM MANAGEMENT COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net sales .................................................. $ 31,649 $ 20,541 $ 89,077 $ 61,859
Costs and expenses:
Product ............................................... 13,984 9,088 39,399 26,857
Operations ............................................ 6,335 3,299 16,548 10,391
Selling ............................................... 7,459 5,680 21,595 17,677
General and administrative ............................ 2,720 2,114 7,454 5,511
Interest, net ......................................... 18 82 86 261
-------- -------- -------- --------
Income from continuing operations before income taxes ...... 1,133 278 3,995 1,162
Provision for income taxes ................................. 442 28 1,558 117
-------- -------- -------- --------
Income from continuing operations .......................... 691 250 2,437 1,045
Discontinued operations:
Loss from operations .................................. -- -- -- (476)
Loss on disposal ...................................... -- -- -- (8,511)
-------- -------- -------- --------
Loss from discontinued operations .......................... -- -- -- (8,987)
-------- -------- -------- --------
Net income (loss) .......................................... $ 691 $ 250 $ 2,437 $ (7,942)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE:
Primary:
Continuing operations ................................. $ 0.13 $ 0.05 $ 0.48 $ 0.22
Discontinued operations ............................... -- -- -- (1.93)
-------- -------- -------- --------
Net income (loss) per share ........................... $ 0.13 $ 0.05 $ 0.48 $ (1.71)
======== ======== ======== ========
Weighted-average common and common equivalent
shares outstanding .................................... 5,268 4,730 5,127 4,657
Fully diluted:
Continuing operations ................................. $ 0.13 $ 0.05 $ 0.46 $ 0.22
Discontinued operations ............................... -- -- -- (1.91)
-------- -------- -------- --------
Net income (loss) per share ........................... $ 0.13 $ 0.05 $ 0.46 $ (1.69)
======== ======== ======== ========
Weighted-average common and common equivalent
shares outstanding .................................... 5,308 4,730 5,270 4,693
The accompanying notes are an integral part of the consolidated financial
statements.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
Cash flows from operating activities:
Net income (loss) .................................................................... $ 2,437 $ (7,942)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation ......................................................................... 1,226 744
Deferred income taxes ................................................................ 824 --
Liability for expected losses ........................................................ (162) 1,761
Write-off of intangible assets ....................................................... -- 5,336
Amortization related to discontinued operations ...................................... -- 189
Changes in assets and liabilities:
Increase in inventory ................................................................ (5,861) (346)
(Increase) decrease in prepaid catalog expenses ...................................... (3,235) 1,791
Increase in other current assets ..................................................... (1,333) (81)
Increase in accounts payable and accrued expenses .................................... 3,923 665
Increase in accrued customer returns ................................................. 2,443 576
------- --------
Net cash provided by operating activities ................................................. 262 2,693
Cash flows used in investing activities:
Additions to property and equipment .................................................. (1,983) (1,028)
Proceeds from sale of marketable securities .......................................... -- 6
Payment for purchase of Carroll Reed ................................................. -- (907)
------- --------
Net cash used in investing activities ..................................................... (1,983) (1,929)
Cash flows provided by (used in) financing activities:
Borrowings under debt agreements ..................................................... 10,679 21,569
Payments of debt borrowings .......................................................... (9,144) (22,287)
Principal payments on capital lease obligations ...................................... (106) (130)
Proceeds from stock transactions ..................................................... 490 39
------- --------
Net cash provided by (used in) financing activities ....................................... 1,919 (809)
Net increase (decrease) in cash and cash equivalents ...................................... 198 (45)
Cash and cash equivalents at:
Beginning of period .................................................................. 384 341
------- --------
End of period ........................................................................ $ 582 $ 296
======= ========
SUPPLEMENTAL INFORMATION:
Cash paid for interest .................................................................... $ 333 $ 416
Cash paid for taxes ....................................................................... $ 401 $ --
The accompanying notes are an integral part of the consolidated financial
statements.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements included herein have been prepared by DM
Management Company (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and in the opinion of
management contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. Accordingly, although the Company believes that the
disclosures are adequate to make the information presented not misleading, these
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Stockholders for the transition period ended December 28, 1996.
A. DEBT:
Pursuant to the Company's loan agreement with a commercial bank, the
Company's credit facilities at September 27, 1997 consisted of (i) a $1,650,000
real estate loan (the "Real Estate 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"). All of the credit facilities under the loan agreement
are collateralized by a first lien mortgage on the Company's operations and
fulfillment center in Meredith, New Hampshire and a security interest in
substantially all assets of the Company other than its marketable securities.
The Term Loan is also collateralized by the Company's marketable securities. The
terms of the Company's credit facilities contain various lending conditions and
covenants, including restrictions on permitted liens and required compliance
with certain financial coverage ratios.
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 5, 1997 through its maturity
on June 1, 2002. The Term Loan provides for several interest rate options. At
September 27, 1997 the Term Loan bore interest at 7.22% per annum. Outstanding
letters of credit at September 27, 1997 totaled approximately $1,155,000.
A summary of the Company's outstanding long-term credit facilities follows
(in thousands):
SEPTEMBER 27, SEPTEMBER 28, DECEMBER 28,
1997 1996 1996
------------- ------------- ------------
Real estate loans ........................................ $1,641 $1,448 $1,421
Term loans ............................................... 3,420 - 4,000
Revolver borrowings ...................................... 1,895 4,000 -
Capitalized lease obligations ............................ 30 185 136
------ ------ ------
Total long-term debt ................................ 6,986 5,633 5,557
Less current maturities ............................. 836 864 1,017
------ ------ ------
Long-term debt, less current portion ................ $6,150 $4,769 $4,540
====== ====== ======
At September 28, 1996, the Company also had short-term borrowings
outstanding of $1,721,000. The Company had no short-term borrowings outstanding
at September 27, 1997.
Subsequent to September 27, 1997, the Company and its bank negotiated an
amendment to the Company's credit facilities that, among other things, increased
the aggregate principal availability thereunder from $13,750,000 to $18,050,000,
included the Company's recently purchased land in Tilton, New Hampshire as
collateral for all borrowings thereunder and combined the Revolver and Letter of
Credit Line into a single $8,500,000 facility (the "New Revolver"). The New
Revolver provides for several interest rate options and expires on June 1, 1999.
The Company is required to pay a commitment fee of 1/8th of 1% per annum on the
unused portion of the New Revolver commitment. The increase in aggregate
principal availability was used to fund a $4,300,000 bridge loan (the "Bridge
Loan") that bears interest at 7.25% per annum and expires on February 28, 1998.
The Company expects to negotiate a construction loan to finance some of the cost
of constructing the Company's new Tilton, New Hampshire facility. That
construction loan would replace the Bridge Loan.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
B. DISCONTINUED OPERATIONS:
On May 20, 1996, the Company announced its plan to divest its Carroll Reed
segment due to the incompatibility of the customer base and product line of this
segment with those of its other 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 have been classified as loss from
discontinued operations in the accompanying consolidated statement of operations
for the nine months ended September 28, 1996. Since May 20, 1996, the results of
this discontinued operation have been charged to the liability from expected
losses established in connection with the divestiture and have had no impact on
the Company's operating results. The Company has completed the phase-out of its
Carroll Reed segment and has utilized its reserve for expected losses.
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):
SEPTEMBER 28, DECEMBER 28,
1996 1996
------------ ------------
Current assets:
Inventory .............................................................. $1,968 $ -
Prepaid catalog expenses ............................................... 328 -
Other current assets ................................................... 30 49
------ -----
Total current assets ................................................ 2,326 49
------ -----
Current liabilities:
Accounts payable and accrued expenses .................................. 16 -
Accrued customer returns ............................................... 59 9
Liability for expected losses .......................................... 1,761 231
------ -----
Total current liabilities ........................................... 1,836 240
------ -----
Net current assets (liabilities) of discontinued operations ...... $ 490 $(191)
====== =====
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.
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DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
D. 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 NINE MONTHS ENDED
----------------------------- ------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Pro forma basic EPS:
Continuing operations ........................................ $ 0.15 $ 0.06 $ 0.53 $ 0.24
Discontinued operations ...................................... -- -- -- (2.09)
------ ------ ------ ------
Net income (loss) per share .................................. $ 0.15 $ 0.06 $ 0.53 $(1.85)
====== ====== ====== ======
Weighted average common and common equivalent shares
outstanding (in thousands) ................................... 4,667 4,312 4,575 4,299
Pro forma diluted EPS:
Continuing operations ........................................ $ 0.13 $ 0.05 $ 0.48 $ 0.22
Discontinued operations ...................................... -- -- -- (1.93)
------ ------ ------ ------
Net income (loss) per share .................................. $ 0.13 $ 0.05 $ 0.48 $(1.71)
====== ====== ====== ======
Weighted average common and common equivalent shares
outstanding (in thousands) ................................... 5,268 4,730 5,127 4,657
E. COMMITMENTS:
On September 30, 1997 the Company purchased approximately 360 acres of
land in Tilton, New Hampshire for $4,152,000. The site is intended to house a
new fulfillment center expected to be operational by early 1999. The estimated
cost of this new facility, including land, construction and equipment, ranges
from $33.0 to $37.0 million.
F. SUBSEQUENT EVENT:
Subsequent to September 27, 1997, the Company sold 1,000,000 shares of
common stock in an underwritten public offering in which the price to the
public of the common stock was $13.50 per share. In addition, the Company has
been notified that the underwriters are exercising their over-allotment option
with respect to an additional 412,861 shares of common stock to be sold by the
Company. Also in connection with the public offering, 1,752,404 shares of the
Company's common stock were sold by selling stockholders. The Company will not
receive any of the net proceeds from the sale of shares by the selling
stockholders.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Net income increased 176.4% to $0.7 million for the three months
ended September 27, 1997 ("third quarter 1997") as compared to $0.3
million for the three months ended September 28, 1996 ("third quarter
1996"). Net income per share increased 160.0% to $0.13 per share for third
quarter 1997 as compared to $0.05 per share for third quarter 1996. Third
quarter 1997 marked the fifth consecutive quarter of profit improvement as
compared to the comparable quarter of the prior year. The Company
attributes its profit improvement to strong customer response to its
continuing focus on creative presentation, merchandise differentiation and
brand building. The Company's J. Jill concept performed particularly well
during the three months and nine months ended September 27, 1997.
The following table sets forth the Company's consolidated statements
of operations as a percentage of net sales and certain selected operating
data:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
1997 1996 1997 1996
--------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS:
Net sales.................................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Product.................................................. 44.2 44.2 44.2 43.4
Operations............................................... 20.0 16.1 18.6 16.8
Selling.................................................. 23.6 27.7 24.2 28.6
General and administrative............................... 8.6 10.3 8.4 8.9
Interest, net............................................ -- 0.4 0.1 0.4
------ ----- ------ ------
Income from continuing operations before income taxes......... 3.6 1.3 4.5 1.9
Provision for income taxes.................................... 1.4 0.1 1.8 0.2
------ ----- ------ ------
Income from continuing operations............................. 2.2 1.2 2.7 1.7
Loss from discontinued operations............................. -- -- -- (14.5)
------ ----- ------ ------
Net income (loss)............................................. 2.2% 1.2% 2.7% (12.8)%
====== ===== ====== ======
SELECTED OPERATING DATA (IN THOUSANDS):
Catalog circulation (1) 10,900 8,700 32,300 28,100
Active customers (2) 794 639 794 639
(1) In order to more closely match net sales to catalog circulation, the
Company calculates catalog circulation on a percentage of completion
basis. This calculation takes into account the total number of
catalogs mailed during all periods and the Company's estimate of the
expected sales life of each catalog edition. As used throughout this
Form 10-Q, the term "catalog circulation" refers to circulation of
the Company's catalogs calculated in such fashion.
(2) As used throughout this Form 10-Q, the term "active customers" means
customers who have made a purchase from the Company within the
previous 24 months.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 27, 1997 WITH THE THREE
MONTHS ENDED SEPTEMBER 28, 1996
Net Sales
During third quarter 1997 net sales increased by $11.1 million, or
54.1%, to $31.6 million from $20.5 million during third quarter 1996.
Catalog circulation increased by 25.3% to 10.9 million during third
quarter 1997 from 8.7 million during third quarter 1996. The net sales and
catalog circulation increases were primarily the result of significant net
sales and circulation growth in the Company's J. Jill concept. During 1996
the Company merged its The Very Thing! concept into its Nicole Summers
concept. Circulation, and to a lesser degree, net sales for the Nicole
Summers concept decreased during third quarter 1997 compared to combined
circulation and net sales for the Nicole Summers and The Very Thing!
concepts during third quarter 1996. The number of active customers grew to
794,000 at September 27, 1997 from 639,000 at September 28, 1996, an
increase of 24.3%.
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Product
During third quarter 1997 product costs increased by $4.9 million, or
53.9%, to $14.0 million from $9.1 million during third quarter 1996. As a
percentage of net sales, product costs remained unchanged at 44.2% during
both three month periods.
Operations
During third quarter 1997 operating expenses increased by $3.0
million, or 92.0%, to $6.3 million from $3.3 million during third quarter
1996. As a percentage of net sales, operating expenses increased to 20.0%
during third quarter 1997 from 16.1% during third quarter 1996. This
increase in operating expenses as a percentage of net sales was caused in
part by increased use of the Company's third party call center and
increased order processing and order fulfillment costs associated with the
operation of multiple fulfillment centers during third quarter 1997 as
compared to third quarter 1996. In addition, the operation of the
Company's Meredith, New Hampshire fulfillment center at or near capacity
during third quarter 1997 also contributed to the increase in operating
expenses as a percentage of net sales. The Company anticipates that these
trends will continue at least until early 1999, when the Company's planned
new fulfillment center in Tilton, New Hampshire is scheduled to be fully
operational.
Selling
During third quarter 1997 selling expenses increased by $1.8 million,
or 31.3%, to $7.5 million from $5.7 million for third quarter 1996. As a
percentage of net sales, selling expenses decreased to 23.6% during third
quarter 1997 from 27.7% during third quarter 1996. The decrease in selling
expenses as a percentage of net sales during third quarter 1997 was
primarily the result of a more selective circulation strategy, a
curtailing of unproductive cross-mailings to existing customers and the
merger of the Company's The Very Thing! concept into its Nicole Summers
concept in 1996. The Company does not expect further decreases in selling
expenses as a percentage of net sales.
General and Administrative
During third quarter 1997 general and administrative expenses
increased by $0.6 million, or 28.7%, to $2.7 million from $2.1 million
during third quarter 1996. This increase is primarily attributable to
increased management infrastructure, increased outside consulting fees and
increased depreciation and occupancy costs. As a percentage of net sales,
general and administrative expenses decreased to 8.6% during third quarter
1997 from 10.3% during third quarter 1996.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 27, 1997 WITH THE NINE
MONTHS ENDED SEPTEMBER 28, 1996
Net Sales
During the nine months ended September 27, 1997 net sales increased
by $27.2 million, or 44.0%, to $89.1 million from $61.9 million during the
nine months ended September 28, 1996. Catalog circulation increased by
14.9% to 32.3 million during the nine months ended September 27, 1997 from
28.1 million during the nine months ended September 28, 1996. The net
sales and catalog circulation increases were primarily the result of
significant net sales and circulation growth in the Company's J. Jill
concept. During 1996 the Company merged its The Very Thing! concept into
its Nicole Summers concept. Circulation, and to a slight degree, net sales
for the Nicole Summers concept decreased during the nine months ended
September 27, 1997 compared to combined circulation and net sales for the
Nicole Summers and The Very Thing! concepts during the nine months ended
September 28, 1996.
Product
During the nine months ended September 27, 1997 product costs
increased by $12.5 million, or 46.7%, to $39.4 million from $26.9 million
during the nine months ended September 28, 1996. As a percentage of net
sales, product costs increased to 44.2% during the nine months ended
September 27, 1997 from 43.4% during the nine months ended September 28,
1996. This increase in product costs as a percentage of net sales was
primarily attributable to increased promotional activity, as the Company
introduced a new edition of its Nicole Summers catalog in 1997 which was
designed to compete directly with value priced retail store offerings.
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Operations
During the nine months ended September 27, 1997 operating expenses
increased by $6.2 million, or 59.3%, to $16.5 million from $10.4 million
during the nine months ended September 28, 1996. As a percentage of net
sales, operating expenses increased to 18.6% during the nine months ended
September 27, 1997 from 16.8% during the nine months ended September 28,
1996. This increase in operating expenses as a percentage of net sales was
caused in part by higher than anticipated demand levels for the Company's
products, which resulted in increased use of the Company's third party
call center and certain order processing and order fulfillment
inefficiencies. In addition, the operation of the Company's Meredith, New
Hampshire fulfillment center at or near capacity during the nine month
period and the operation of multiple fulfillment centers during third
quarter 1997 also contributed to the increase in operating expenses as a
percentage of net sales.
Selling
During the nine months ended September 27, 1997 selling expenses
increased by $3.9 million, or 22.2%, to $21.6 million from $17.7 million
during the nine months ended September 28, 1996. As a percentage of net
sales, selling expenses decreased to 24.2% during the nine months ended
September 27, 1997 from 28.6% during the nine months ended September 28,
1996. The decrease in selling expenses as a percentage of net sales during
the nine months ended September 27, 1997 was primarily the result of a
more selective circulation strategy, a curtailing of unproductive
cross-mailings to existing customers and the merger of the Company's The
Very Thing! concept into its Nicole Summers concept in 1996.
General and Administrative
During the nine months ended September 27, 1997 general and
administrative expenses increased by $1.9 million, or 35.3%, to $7.5
million from $5.5 million during the nine months ended September 28, 1996.
This increase is primarily attributable to increased management
infrastructure, increased outside consulting fees and increased
depreciation and occupancy costs. As a percentage of net sales, general
and administrative expenses decreased to 8.4% during the nine months ended
September 27, 1997 from 8.9% for the nine months ended September 28, 1996.
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 ("NOLs").
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 associated tax benefit was
recognized as income was earned, resulting in a significantly lower
effective tax rate for all periods reported prior to December 1996.
In December 1996, the Company performed a detailed analysis of the
future taxable income levels required for the Company to fully realize the
benefit of its net deferred tax assets. This analysis considered several
factors, including the historical taxable income trend since fiscal 1993,
exclusive of a taxable loss generated in fiscal 1996 by the Company's
discontinued Carroll Reed segment, management's demonstrated ability to
increase the Company's active customer database and the implementation of
the Company's new strategic business initiatives. Based on this analysis,
the Company 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
$10.6 million at December 28, 1996 in its entirety. No assurance can be
given, however, that the Company will achieve taxable income sufficient to
realize the full benefit if its deferred tax assets.
Because, for financial statement purposes, the benefit associated
with the Company's deferred tax assets has been fully realized, the
Company's effective tax 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 in fiscal 1997 than in
the prior year. Cash payments for income taxes continue to be reduced by
available NOLs, which results in cash payments which are significantly
less than the income tax provision recorded for financial statement
purposes during fiscal 1997.
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DISCONTINUED OPERATIONS
On May 20, 1996, the Company announced its plan to divest its Carroll
Reed segment due to the incompatibility of the customer base and product
line of this segment with those of its other 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 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 loss from discontinued operations in the accompanying consolidated
statement of operations for the nine months ended September 28, 1996.
Since May 20, 1996, the results of this discontinued operation have been
charged to the liability from expected losses established in connection
with the divestiture and have had no impact on the Company's operating
results. The Company has completed the phase-out of its Carroll Reed
segment and has utilized its reserve for expected losses.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 27, 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.
Pursuant to the Company's loan agreement with a commercial bank, the
Company's credit facilities at September 27, 1997 consisted of (i) a $1.7
million real estate loan (the "Real Estate Loan"); (ii) a $3.6 million
term loan (the "Term Loan"); (iii) a $6.0 million revolving line of credit
(the "Revolver"); and (iv) a $2.5 million line for the issuance of
commercial letters of credit (the "Letter of Credit Line"). All of the
credit facilities under the loan agreement are collateralized by a first
lien mortgage on the Company's operations and fulfillment center in
Meredith, New Hampshire and a security interest in substantially all
assets of the Company other than its marketable securities. The Term Loan
is also collateralized by the Company's marketable securities. The terms
of the Company's credit facilities contain various lending conditions and
covenants, including restrictions on permitted liens and required
compliance with certain financial coverage ratios.
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 5, 1997 through its maturity on June 1, 2002. The Term Loan
provides for several interest rate options. At September 27, 1997 the Term
Loan bore interest at 7.22% per annum. Outstanding letters of credit at
September 27, 1997 totaled approximately $1.2 million.
Subsequent to September 27, 1997 the Company and its bank negotiated
an amendment to the Company's credit facilities that, among other things,
increased the aggregate principal availability thereunder from $13.8
million to $18.1 million, included the Company's recently purchased land
in Tilton, New Hampshire as collateral for all borrowings thereunder and
combined the Revolver and Letter of Credit Line into a single $8.5 million
facility (the "New Revolver"). The New Revolver provides for several
interest rate options and expires on June 1, 1999. The Company is required
to pay a commitment fee of 1/8th of 1% per annum on the unused portion of
the New Revolver commitment. The increase in aggregate principal
availability was used to fund a $4.3 million bridge loan (the "Bridge
Loan") that bears interest at 7.25% per annum and expires on
February 28, 1998. The Company expects to negotiate a construction loan to
finance some of the cost of constructing the Company's new Tilton, New
Hampshire facility. That construction loan would replace the Bridge Loan.
Subsequent to September 27, 1997, the Company sold 1,000,000 shares
of common stock in an underwritten public offering in which the price to
the public of the common stock was $13.50 per share. In addition, the
Company has been notified that the underwriters are exercising their
over-allotment option with respect to an additional 412,861 shares of
common stock to be sold by the Company. Also in connection with the public
offering, 1,752,404 shares of the Company's common stock were sold by
selling stockholders. The Company will not receive any of the net proceeds
from the sale of shares by the selling stockholders.
Cash used in investing activities was $2.0 million during the nine
months ended September 27, 1997, and $1.9 million during the nine months
ended September 28, 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.
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Inventory levels at September 27, 1997 were 81.4% higher than at
September 28, 1996. Inventory balances have increased compared to last
year due to the growth in the business and anticipated future growth.
Prepaid catalog expenses at September 27, 1997 were 53.5% higher than at
September 28, 1996. This increase is primarily attributable to higher
circulation levels this year versus last year.
On September 30, 1997, the Company purchased approximately 360 acres
of land in Tilton, New Hampshire for approximately $4.2 million. The site
is intended to house a new fulfillment center expected to be operational
by early 1999. The estimated cost of this new facility, including land,
construction and equipment ranges from $33.0 to $37.0 million. The Company
intends to finance the cost of the fulfillment center with a portion of
the net proceeds received from its recently completed public offering,
bank financing and by other financing arrangements, which may include,
without limitation, additional bank financing, a sale-leaseback
transaction or government sponsored financing. The Company is also in the
process of upgrading its information systems, including implementing new
order management and warehouse management systems. Total expenditures for
this purpose are estimated at approximately $3.0 million of which
approximately $0.9 million had been spent as of September 27, 1997.
The net proceeds of the Company's recently completed public offering,
the Company's existing credit facilities and cash flows from operations
are expected to be sufficient to provide the capital resources necessary
to support the Company's capital and operating needs (not including the
new fulfillment center) for at least the next twelve months.
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 D to the accompanying consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The above discussion contains forward-looking statement within the
meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended which
involve risks and uncertainties. For this purpose, any statements
contained herein or incorporated herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the generality of the foregoing, the words "believe,"
"anticipates," "plans," "expects" and similar expressions are intended to
identify forward-looking statements. The Company's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are
not limited to 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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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 Amended and Restated Loan Agreement dated October 31, 1997 between
the Company and Citizens Bank of Massachusetts
10.2 Bridge Note dated October 31, 1997 between the Company and Citizens
Bank of Massachusetts
10.3 Mortgage (Bridge Mortgage) dated October 31, 1997 between the Company
and Citizens Bank of Massachusetts
10.4 First Amendment to Security Agreement dated October 31, 1997 between
the Company and Citizens Bank of Massachusetts
10.5 First Amendment to Mortgage dated October 31, 1997 between the
Company and Citizens Bank of Massachusetts
10.6 Replacement Revolving Note dated October 31, 1997 between the Company
and Citizens Bank of Massachusetts
10.7 Employment Letter Agreement between the Company and Kevin E. Burns
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
September 27, 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: November 10, 1997 By: /s/ Olga L. Conley
--------------------------------------
Olga L. Conley
Authorized Officer
Vice President - Finance, Chief Financial
Officer and Treasurer (Principal Financial
Officer)
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DM MANAGEMENT COMPANY & SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 1997
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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)
10.1 Amended and Restated Loan Agreement dated October 31, 1997
between the Company and Citizens Bank of Massachusetts
10.2 Bridge Note dated October 31, 1997 between the Company and
Citizens Bank of Massachusetts
10.3 Mortgage (Bridge Mortgage) dated October 31, 1997 between the
Company and Citizens Bank of Massachusetts
10.4 First Amendment to Security Agreement dated October 31, 1997
between the Company and Citizens Bank of Massachusetts
10.5 First Amendment to Mortgage dated October 31, 1997 between the
Company and Citizens Bank of Massachusetts
10.6 Replacement Revolving Note dated October 31, 1997 between the
Company and Citizens Bank of Massachusetts
10.7 Employment Letter Agreement between the Company and Kevin E.
Burns
11.1 Statement re: computation of per share earnings
27.1 Financial Data Schedule
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