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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 26, 1998
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 October 29, 1998: 9,617,652
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DM MANAGEMENT COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 26, 1998
Page
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..........................................................................3-8
Consolidated Balance Sheets at September 26, 1998, September 27, 1997 and December 27, 1997..................3
Consolidated Statements of Operations for the three months and the nine months ended
September 26, 1998 and September 27, 1997...........................................................4
Consolidated Statements of Cash Flows for the nine months ended September 26, 1998 and
September 27, 1997..................................................................................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 2. Changes in Securities and Use of Proceeds...................................................................14
Item 6. Exhibits and Reports on Form 8-K............................................................................14
Signatures....................................................................................................................15
2
DM MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 26, September 27, December 27,
1998 1997 1997
------------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 18,806 $ 582 $ 19,260
Accounts receivable, net .............................................. 3,594 1,492 373
Marketable securities, net of unrealized loss ......................... -- 3,888 3,890
Inventory ............................................................. 29,083 18,498 20,579
Prepaid catalog expenses .............................................. 6,097 5,949 6,475
Deferred income taxes ................................................. 5,295 2,748 5,295
Other current assets .................................................. 1,386 726 856
--------- --------- ---------
Total current assets ............................................. 64,261 33,883 56,728
Property and equipment, net ........................................... 40,899 7,930 14,174
Deferred income taxes ................................................. 4,479 7,026 4,479
--------- --------- ---------
Total assets ..................................................... $ 109,639 $ 48,839 $ 75,381
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 13,580 $ 10,685 $ 14,116
Accrued expenses ...................................................... 7,464 3,258 4,161
Accrued customer returns .............................................. 5,211 3,752 4,779
Short-term borrowings ................................................. 20,701 -- --
Current portion of long-term debt .................................... 9,287 836 837
--------- --------- ---------
Total current liabilities ........................................ 56,243 18,531 23,893
Long-term debt, less current portion ....................................... 3,418 6,150 8,346
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,
9,599,652, 4,675,786 and 6,098,480 shares issued and outstanding as of
September 26, 1998, September 27, 1997 and December 27, 1997,
respectively ......................................................... 96 47 61
Additional paid-in capital ............................................ 59,182 40,535 58,041
Unrealized loss on marketable securities .............................. -- (107) (105)
Accumulated deficit ................................................... (9,300) (16,317) (14,855)
--------- --------- ---------
Total stockholders' equity ....................................... 49,978 24,158 43,142
--------- --------- ---------
Total liabilities and stockholders' equity ....................... $ 109,639 $ 48,839 $ 75,381
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
3
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net sales .......................... $ 46,580 $ 31,649 $ 150,731 $ 89,077
Costs and expenses:
Product ....................... 20,283 13,984 67,733 39,399
Operations .................... 10,349 6,335 30,177 16,548
Selling ....................... 10,076 7,459 32,801 21,595
General and administrative .... 3,623 2,720 11,375 7,454
Interest, net ................. (58) 18 (462) 86
--------- --------- --------- ---------
Income before income taxes ......... 2,307 1,133 9,107 3,995
Provision for income taxes ......... 900 442 3,552 1,558
--------- --------- --------- ---------
Net income ......................... $ 1,407 $ 691 $ 5,555 $ 2,437
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Basic ......................... $ 0.15 $ 0.10 $ 0.59 $ 0.36
Diluted ....................... $ 0.14 $ 0.09 $ 0.53 $ 0.32
Weighted average shares outstanding:
Basic ......................... 9,559 7,001 9,437 6,863
Diluted ....................... 10,419 7,902 10,392 7,691
The accompanying notes are an integral part of the consolidated financial
statements.
4
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
------------------------------
September 26, September 27,
1998 1997
------------- -------------
Cash flows from operating activities:
Net income ............................................................................ $ 5,555 $ 2,437
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation .......................................................................... 2,004 1,226
Loss on sale of marketable securities ................................................. 159 --
Deferred income taxes ................................................................. -- 824
Liability for expected losses ......................................................... -- (162)
Changes in assets and liabilities:
Increase in accounts receivable, net .................................................. (3,221) (1,138)
Increase in inventory ................................................................. (8,504) (5,861)
(Increase) decrease in prepaid catalog expenses ....................................... 378 (3,235)
Increase in other current assets ...................................................... (530) (195)
Increase in accounts payable and accrued expenses ..................................... 1,968 3,923
Increase in accrued customer returns .................................................. 432 2,443
-------- --------
Net cash (used in) provided by operating activities ....................................... (1,759) 262
Cash flows from investing activities:
Additions to property and equipment ................................................... (27,930) (1,983)
Proceeds from sale of marketable securities ........................................... 3,836 --
-------- --------
Net cash used in investing activities ..................................................... (24,094) (1,983)
Cash flows from financing activities:
Borrowings under debt agreements ...................................................... 48,002 10,679
Payments of debt borrowings ........................................................... (23,779) (9,250)
Proceeds from stock transactions ...................................................... 1,176 490
------- --------
Net cash provided by financing activities ................................................. 25,399 1,919
Net increase (decrease) in cash and cash equivalents ...................................... (454) 198
Cash and cash equivalents at:
Beginning of period ................................................................... 19,260 384
-------- --------
End of period ......................................................................... $ 18,806 $ 582
-------- --------
-------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
5
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The financial statements included herein have been prepared by DM
Management Company (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and in the opinion of
management contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. Accordingly, although the Company believes that the
disclosures are adequate to make the information presented not misleading, these
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Stockholders for the fiscal year ended December 27, 1997.
A. Debt:
The Company's credit facilities at September 26, 1998 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) an $23,500,000 revolving line of credit
(the "Revolver"); (iv) a $17,000,000 line of credit (the "Line of Credit");
and (v) a $4,300,000 short-term note (the "Short-Term Note"). All of the
Company's credit facilities are collateralized by a security interest in
substantially all assets of the Company. These credit facilities contain
various lending conditions and covenants, including restrictions on permitted
liens and required compliance with certain financial coverage ratios. During
the quarter ended September 26, 1998, the Company's credit facilities were
amended. The amendments include releasing the lender's security interest in
certain collateral that has since been sold, increasing the amount available
under the Revolver from $8,500,000 to $23,500,000 and extending certain
maturity dates subject to the Company obtaining a satisfactory commitment
letter to provide financing for the Company's new Tilton, New Hampshire
operations and fulfillment center.
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 through its maturity on June 1, 2002. The Term Loan
provides for several interest rate options. At September 26, 1998, the Term Loan
bore interest at 7.00% per annum. The Revolver provides for several interest
rate options. At September 26, 1998, borrowings under the Revolver bore interest
at 8.5%. $15,000,000 of the Revolver expires on December 31, 1998. The remaining
$8,500,00 of the Revolver 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
Revolver commitment. Borrowings under the Line of Credit bear interest at LIBOR
plus 125 base points repriced monthly and are payable in full on December 31,
1998. The Company is not required to pay a commitment fee on the unused portion
of the Line of Credit commitment. There was $16,401,000 outstanding under the
Line of Credit at September 26, 1998. The Short-Term Note bears interest at
7.06% per annum and matures on December 31, 1998. The maturity dates for
$15,000,000 of the Revolver, the Line of Credit, and the Short-Term Note may be
extended to March 31, 1999 in accordance with the amendments discussed above.
A summary of the Company's outstanding long-term debt follows (in
thousands):
September 26, September 27, December 27,
1998 1997 1997
------------- ------------- ------------
Real estate loans ....................... $ 1,531 $ 1,641 $ 1,613
Term loans .............................. 2,700 3,420 7,540
Revolver borrowings ..................... 8,450 1,895 --
Capitalized lease obligations ........... 24 30 30
------- ------- -------
Total long-term debt ............... 12,705 6,986 9,183
Less current maturities ................. 9,287 836 837
------- ------- -------
Long-term debt, less current portion $ 3,418 $ 6,150 $ 8,346
------- ------- -------
------- ------- -------
6
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
B. Stock split:
On May 29, 1998, the Company announced a three-for-two stock split to
be effected in the form of a stock dividend payable on June 30, 1998 to
shareholders of record on June 12, 1998. All historical earnings per share
information has been restated to include the effects of the stock split. The
consolidated balance sheets as of December 27, 1997 and September 27, 1997
have not been restated to include the effects of the stock split. All common
stock amounts and activity after the date of the stock split reflect the
three-for-two stock split.
C. Earnings per share:
The Company calculates earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." 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 during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common shares were exercised or converted into common shares that then shared in
the earnings of the entity. EPS data for the period ended September 26, 1997 has
been restated to conform to the provisions of SFAS 128. A reconciliation of the
numerators and denominators of the basic and diluted EPS calculation follows (in
thousands, except per share data):
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Numerator:
Net income ................................ $ 1,407 $ 691 $ 5,555 $ 2,437
------- ------- ------- -------
------- ------- ------- -------
Denominator (shares):
Basic weighted average shares outstanding . 9,559 7,001 9,437 6,863
Assumed exercise of stock options ......... 860 901 955 828
------- ------- ------- -------
Diluted weighted average shares outstanding 10,419 7,902 10,392 7,691
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic ................................... $ 0.15 $ 0.10 $ 0.59 $ 0.36
Diluted ................................. $ 0.14 $ 0.09 $ 0.53 $ 0.32
D. Commitments:
In fiscal 1997 the Company began constructing a new operations and
fulfillment center in Tilton, New Hampshire. This new facility is expected to be
fully operational by early 1999. The estimated cost of this new facility,
including land, construction and equipment, ranges from $39.0 to $41.0 million.
During the nine months ended September 26, 1998, the Company entered
into a lease agreement for a new J. Jill catalog outlet store. The original
term of the lease is five years, commencing in August 1998, with minimum
annual lease payments due under the lease of $40,000.
During September 1998 the Company entered into a lease agreement for
office space intended to house the Company's new corporate headquarters. The
original term of the lease is ten years commencing on the date following the
date on which the premises are ready for occupancy. The current estimated
completion date is in September 1999. Minimum annual lease payments due under
the lease range from $1,600,000 to $1,785,000. In October 1998 the Company
placed $1,300,000 on deposit to secure this lease.
Subsequent to September 26, 1998, the Company entered into lease
agreements for two additional J. Jill catalog outlet stores. The term of the
first lease is three years, commencing on the earlier of opening the store or
December 1999, with minimum annual lease payments due under the lease of
$74,000. The term of the second lease is five years, commencing on the
earlier of opening the store or April 1999, with minimum annual lease
payments due under the lease of $61,000.
7
E. Recent accounting standards:
In June 1997 the Financial Accounting Standards Board (the "FASB")
issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income." The
Company has determined that the impact of this statement is immaterial to these
consolidated financial statements.
In June 1997 the FASB issued Statement No. 131, ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information" which
establishes new standards for the way public companies report information about
operating segments and requires companies to report selected segment information
quarterly to stockholders. This statement is effective for financial statements
for periods beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. This statement need not be applied
to interim financial statements in the initial year of its application.
Management is currently evaluating the effect of this statement on its reporting
of segment information.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements within
the meaning of 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 "anticipates," "plans,"
"expects" and similar expressions are intended to identify forward-looking
statements. The Company's actual results, performance or achievements may
differ significantly from the results discussed in or implied by the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to the following: difficulties in managing the
transition of operations to the Company's new Tilton, New Hampshire
operations and fulfillment center; delays or problems in implementing the
Company's new order management and warehouse management systems in the new
Tilton facility; failure of the Company or its significant vendors or
suppliers to become Year 2000 compliant; the ability of the Company to
effectively liquidate its overstocked merchandise; significant changes in
customer response rates; changes in consumer spending and consumer
preferences; increasing competition in the apparel industry; success of
operating initiatives; changes in business strategy; advertising and
promotional efforts; quality of management; possible future increases in
operating costs; availability, terms and deployment of capital; brand
awareness; availability of qualified personnel; business abilities and
judgment of personnel; labor and employee benefit costs; general economic and
business conditions; change in, or the failure to comply with, government
regulations, and other factors.
Results of Operations
The following table sets forth the Company's consolidated statements of
operations expressed as a percentage of net sales and certain selected operating
data:
Three Months Ended Nine Months Ended
-------------------------------------- -----------------------------------
September 26, September 27, September 26, September 27,
Consolidated Statement of Operations: 1998 1997 1998 1997
------------------ ------------------ ------------------ ---------------
Net sales.......................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Product....................................... 43.5 44.2 44.9 44.2
Operations.................................... 22.2 20.0 20.0 18.6
Selling....................................... 21.6 23.6 21.8 24.2
General and administrative.................... 7.8 8.6 7.6 8.4
Interest, net................................. (0.1) -- (0.3) 0.1
-------- ------- ------- -------
Income before income taxes......................... 5.0 3.6 6.0 4.5
Provision for income taxes......................... 2.0 1.4 2.3 1.8
-------- ------- ------- -------
Net income......................................... 3.0% 2.2% 3.7% 2.7%
-------- ------- ------- -------
-------- ------- ------- -------
Selected Operating Data (in thousands):
Catalog circulation (1) 15,100 10,900 48,500 32,300
Active customers (2) 1,203 794 1,203 794
(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 customer"
means customers who have made a purchase from the Company
within the 24 months preceding the stated period end.
Comparison of the Three Months Ended September 26, 1998 with the Three Months
Ended September 27, 1997
Net Sales
During the three months ended September 26, 1998 ("third quarter
1998") net sales increased by 47.2% to $46.6 million from $31.6 million
during the three months ended September 27, 1997 ("third quarter 1997"). This
net sales growth was primarily attributable to significant sales volume
increases from the Company's J. Jill concept. During third quarter 1998 J.
Jill net sales and circulation increased by 89.1% and 74.3%, respectively, as
compared to third quarter 1997. J. Jill net sales growth was primarily
attributable to circulation growth. During third quarter 1998 net sales and
circulation for the Nicole Summers concept decreased by 17.5% and 20.0%,
respectively, as compared to third quarter 1997 as the Company focused on
improving the concept's profitability. Total Company catalog circulation
increased by 38.5% to 15.1 million during third quarter 1998 from 10.9
million during third quarter 1997. The number of active customers grew to 1.2
million at September 26, 1998 from 0.8 million at September 27, 1997, an
increase of 51.5%. Although the Company plans to continue its aggressive
customer
9
acquisition strategy, it does not expect the same year over year percentage
increase in circulation that it has experienced since implementing the strategy
in third quarter 1997.
Product
Product costs consist primarily of merchandise acquisition costs (net
of term discounts and advertising allowances), including freight costs, and
provisions for markdowns. During third quarter 1998 product costs increased by
45.0% to $20.3 million from $14.0 million during third quarter 1997. As a
percentage of net sales, product costs decreased to 43.5% during third quarter
1998 from 44.2% during third quarter 1997. The decrease in product costs as a
percentage of net sales is attributable to the shift in the mix of the business
toward J. Jill, which experiences lower product costs as a percentage of net
sales than Nicole Summers due to its higher concentration of private label
merchandise. The Company does not expect product costs as a percentage of net
sales to improve significantly in the near future.
Operations
Operating expenses consist primarily of order processing costs, such
as telemarketing, customer service, fulfillment, shipping, warehousing and
credit card processing costs, and merchandising costs. During third quarter
1998 operating expenses increased by 63.4% to $10.3 million from $6.3 million
during third quarter 1997. As a percentage of net sales, operating expenses
increased to 22.2% during third quarter 1998 from 20.0% during third quarter
1997. The Company's recent growth has accelerated its need to increase its
fulfillment capacity. The Company currently fulfills orders out of its
Meredith, New Hampshire facility and two leased interim satellite facilities.
This arrangement has generated operational inefficiencies, as well as
increased costs, both of which are expected to continue through the first
year of operation in the Company's new Tilton, New Hampshire facility, which
is currently in its testing phase and is expected to be fully operational by
early 1999. Also during third quarter 1998 the Company implemented its new
order taking and order fulfillment operating systems in its current operating
facilities. The implementation process resulted in approximately six weeks of
operating inefficiencies before the Company was able to achieve previously
maintained order taking and order fulfillment performance levels. In addition
the Company's investment in the product development division of merchandising
during third quarter 1998 increased substantially as compared to third
quarter 1997. The Company currently expects the ratio of operating expenses
to net sales to improve by fiscal 2000.
Selling
Selling expenses consist primarily of the cost to produce, print and
distribute catalogs. During third quarter 1998 selling expenses increased by
35.1% to $10.1 million from $7.5 million during third quarter 1997. As a
percentage of net sales, selling expenses decreased to 21.6% during third
quarter 1998 from 23.6% during third quarter 1997. This decrease was primarily
the result of improved catalog productivity in third quarter 1998 as compared to
third quarter 1997. This improved productivity more than offset an increase in
paper costs during third quarter 1998 as compared to third quarter 1997. The
Company does not expect to maintain the catalog productivity levels achieved
during third quarter 1998.
General and Administrative
General and administrative expenses consist primarily of executive,
marketing, information systems and finance expenses. During third quarter 1998,
general and administrative expenses increased by 33.2% to $3.6 million from $2.7
million during third quarter 1997. This increase is primarily attributable to
increased salaries and performance bonuses and increased depreciation. As a
percentage of net sales, general and administrative expenses decreased to 7.8%
during third quarter 1998 from 8.6% during third quarter 1997.
Comparison of the Nine Months Ended September 26, 1998 with the Nine Months
Ended September 27, 1997
Net Sales
During the nine months ended September 26, 1998 net sales increased by
69.2% to $150.7 million from $89.1 million during the nine months ended
September 27, 1997. This net sales increase was primarily attributable to
significant sales volume increases from the Company's J. Jill concept. During
the nine months ended September 26, 1998 J. Jill net sales and circulation
increased by 150.6% and 112.8%, respectively, as compared to the nine months
ended September 27, 1997. J. Jill's net sales growth was primarily attributable
to circulation growth, an increased average order size and improved response
rates. During the nine months ended September 26, 1998 net sales and circulation
for the Nicole Summers concept decreased by 8.7% and 12.5%, respectively, as
compared to the nine months ended September 27, 1997 as the Company focused on
improving the concept's profitability. Total Company catalog circulation
increased by 50.2% to 48.5 million during the nine months ended September 26,
1998 from 32.3 million during the nine months ended September 27, 1997.
10
Product
During the nine months ended September 26, 1998 product costs increased
by 71.9% to $67.7 million from $39.4 million during the nine months ended
September 27, 1997. As a percentage of net sales, product costs increased to
44.9% during the nine months ended September 26, 1998 from 44.2% during the nine
months ended September 27, 1997. During the first quarter of 1998 the Company
implemented a new strategic merchandising initiative designed to maximize the
recovery rate of "wear-now" carry-over items and minimize future potential
markdowns by offering moderately discounted Fall season merchandise in the
Company's early Spring season catalogs. This strategy, combined with increased
markdown charges associated with the Company's Nicole Summers concept during
second quarter 1998, resulted in the increase in product costs as a percentage
of net sales during the nine months ended September 26, 1998 as compared to the
nine months ended September 27, 1997. This increase in costs as a percentage of
net sales was partially offset by the shift in the mix of the business toward J.
Jill, which experiences lower product costs as a percentage of net sales than
Nicole Summers due to its higher concentration of private label merchandise.
Operations
During the nine months ended September 26, 1998 operating expenses
increased by 82.4% to $30.2 million from $16.5 million during the nine months
ended September 27, 1997. As a percentage of net sales, operating expenses
increased to 20.0% during the nine months ended September 26, 1998 from 18.6%
during the nine months ended September 27, 1997. Inefficiencies associated
with the Company's operation of multiple fulfillment centers and its recent
operating systems implementation combined with the Company's continued
investment in the product development division of merchandising, discussed
above, are primarily responsible for the increase in operating costs as a
percentage of net sales.
Selling
During the nine months ended September 26, 1998 selling expenses
increased by 51.9% to $32.8 million from $21.6 million during the nine months
ended September 27, 1997. As a percentage of net sales, selling expenses
decreased to 21.8% during the nine months ended September 26, 1998 from 24.2%
during the nine months ended September 27, 1997. This decrease was primarily the
result of improved catalog productivity, despite an increase in paper costs, in
the nine months ended September 26, 1998 as compared to the nine months ended
September 27, 1997.
General and Administrative
During the nine months ended September 26, 1998 general and
administrative expenses increased by 52.6% to $11.4 million from $7.5 million
during the nine months ended September 27, 1997. This increase is primarily
attributable to increased salaries and performance bonuses, increased outside
consulting fees and increased depreciation and insurance costs. As a percentage
of net sales, general and administrative expenses decreased to 7.6% during the
nine months ended September 26, 1998 from 8.4% during the nine months ended
September 27, 1997.
Income Taxes
The Company provides for income taxes at an effective tax rate that
includes the full federal and state statutory tax rates. The Company's effective
tax rate during the nine months ended September 26, 1998 and the nine months
ended September 27, 1997 was 39.0%.
Liquidity and Capital Resources
During the nine months ended September 26, 1998, 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 September 26, 1998 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) an $23.5 million revolving line of
credit (the "Revolver"); (iv) a $17.0 million line of credit (the "Line of
Credit"); and (v) a $4.3 million short-term note (the "Short-Term Note"). All
of the Company's credit facilities are collateralized by a security interest
in substantially all assets of the Company. These credit facilities contain
various lending conditions and covenants, including restrictions on permitted
liens and required compliance with certain financial coverage ratios. During
the quarter ended September 26, 1998 the Company's credit facilities were
amended. The amendments include releasing the lender's security interest in
certain collateral that has since been sold, increasing the amount available
under the Revolver from $8.5 million to $23.5 million and extending certain
maturity dates subject to the Company obtaining a satisfactory commitment
letter to provide financing for the Company's new Tilton, New Hampshire
operations and fulfillment center.
Payments on the Real Estate Loan are due monthly, based on a 15-year
amortization, with the remaining balance payable on
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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 through
its maturity on June 1, 2002. The Term Loan provides for several interest
rate options. At September 26, 1998, the Term Loan bore interest at 7.00% per
annum. The Revolver provides for several interest rate options. At September
26, 1998, borrowings under the Revolver bore interest at 8.5%. $15.0 million
of the Revolver expires on December 31, 1998. The remaining $8.5 million of
the Revolver 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 Revolver
commitment. Borrowings under the Line of Credit bear interest at LIBOR plus
125 basis points repriced monthly and are payable in full on December 31,
1998. The Company is not required to pay a commitment fee on the unused
portion of the Line of Credit commitment. The Short-Term Note bears interest
at 7.06% per annum and matures on December 31, 1998. The maturity dates for
$15.0 million of the Revolver, the Line of Credit, and the Short-Term Note
may be extended to March 31, 1999 in accordance with the amendments discussed
above.
Cash used in investing activities totaled $24.1 million during the nine
months ended September 26, 1998 and $2.0 million during the nine months ended
September 27, 1997. During the nine months ended September 26, 1998 investing
activities included approximately $24.4 million in costs related to the
construction of the Company's new operations and fulfillment center in Tilton,
New Hampshire.
In fiscal 1997 the Company began constructing its new operations and
fulfillment center in Tilton, New Hampshire. This new facility is in the
testing phase and is expected to be fully operational by early 1999. The
estimated cost of this new facility, including land, construction and
equipment, ranges from $39.0 million to $41.0 million, of which approximately
$30.4 million had been spent as of September 26, 1998. At September 26, 1998
approximately $20.7 million of the $30.4 million had been financed through the
use of short-term borrowings. The Company intends to finance the cost of this
new facility with a combination of the following: a mortgage from a financing
institution, a portion of the net proceeds from its second public offering, a
sale-leaseback transaction, proceeds from the Company's recent sale of
marketable securities, government sponsored financing and cash flows from
operations.
During third quarter 1998, the Company implemented its new order
management and warehouse management operating systems in its current
operating facilities. Total expenditures to be capitalized for this systems
project are estimated at approximately $2.8 million, of which approximately
$2.7 million had been spent as of September 26, 1998.
During third quarter 1998, the Company sold its marketable securities
and recognized an after tax loss of $0.1 million. The proceeds from this sale
were used to fund construction of the new operations and fulfillment center.
Inventory levels at September 26, 1998 were 57.2% higher than at
September 27, 1997, primarily due to the past and future projected growth in the
business.
During the nine months ended September 26, 1998, the Company entered
into a lease agreement for a new J. Jill catalog outlet store. The original
term of the lease is five years, commencing in August 1998, with minimum
annual lease payments due under the lease of less than $0.1 million.
During September 1998 the Company entered into a lease agreement for
office space intended to house the Company's new corporate headquarters. The
original term of the lease is ten years commencing on the date following the
date on which the premises are ready for occupancy. The current estimated
completion date is in September 1999. Minimum annual lease payments due under
the lease range from $1.6 million to $1.8 million. In October 1998 the
Company placed $1.3 million on deposit to secure this lease.
The Company expects that its cash and cash equivalents, existing
credit facilities, anticipated new credit facilities and other financing
arrangements, and cash flows from operations will be sufficient to support
the Company's capital and operating needs for the foreseeable future.
Future Considerations
On October 19, 1998 the Company launched "J. Jill Homewear," the
Company's foray into the home market, featuring an assortment of bed, bath
and accessory items. The Company does not expect this initial offering to
significantly affect its financial condition, results of operations or cash
flows during fiscal 1998. Additionally, the Company has plans to mail four
separate 48-page "J. Jill Homewear" catalogs during 1999.
Subsequent to September 26, 1998, the Company entered into lease
agreements for two additional J. Jill catalog outlet stores. The term of the
first lease is three years, commencing on the earlier of opening the store or
December 1999, with minimum annual lease payments due under the lease of
$0.1 million. The term of the second lease is five years, commencing on the
earlier of opening the store or April 1999, with minimum annual lease
payments due under the lease of $0.1 million.
Year 2000
The Year 2000 issue affects most companies that rely on computer
systems and involves the computer software and hardware changes necessary to
handle the transition from the year 1999 to the Year 2000. During 1997, the
Company formulated a plan to address the Year 2000 issue. The Company has
assessed its status regarding its Year 2000 compliance in three components:
internal information technology (IT) systems, internal non-information
technology (non-IT) systems, and external Year 2000 issues related to the
Company's vendors, suppliers and service providers ("third party providers").
As part of the Company's strategic business plan, the Company's
major internal IT and non-IT systems have been replaced or upgraded. The
Company has received assurances from the vendors of the Company's major
internal IT and non-IT systems indicating the new systems and upgrades are
designed to be Year 2000 compliant. Due to the fact that these system
12
improvements were primarily motivated by the Company's growth and technology
needs, they are not considered to be costs directly attributable to the Year
2000 issue. Certain minor internal IT and non-IT systems have also been
upgraded or are planned to be upgraded by January 1999. The Company has
received assurances from the vendors of these upgrades indicating that the
upgrades are designed to be Year 2000 compliant. These upgrades are part of
the Company's continuing maintenance plans and are not considered to be costs
directly attributable to the Year 2000 issue. Beginning in the Spring of
1999, the Company plans to run tests focused on verifying the assurances
given by the vendors of its internal IT and non-IT systems. At this time
there can be no assurance that all of the Company's internal IT and non-IT
systems will be Year 2000 compliant. The total historical and estimated
future costs to address the Year 2000 issue with respect to internal IT and
non-IT systems is currently estimated to be less than $500,000.
As part of the Company's plan to address the Year 2000 issue, the
Company has begun contacting and receiving letters from its significant third
party providers either certifying that their company is currently Year 2000
compliant or indicating a date that a compliance certificate is expected. The
Company has begun to develop contingency plans to deal with possible
non-compliance by the Company's significant third party providers. These plans
include the possible replacement of the non-complying third party providers.
The current estimated impact to the Company for these replacements is
approximately $200,000. At this time there can be no assurance that all of
the Company's third party providers will be Year 2000 compliant. The Company
plans to further develop its contingency plans beginning in the first quarter
of 1999.
The estimates mentioned above may change materially in the future as
further information is obtained. Any failure of the Company or its
significant third party providers to become Year 2000 compliant could have a
material adverse effect on the Company's financial condition, results of
operations, or cash flows.
Recent Accounting Standards
In June 1997 the Financial Accounting Standards Board (the "FASB")
issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income". The
Company has determined that the impact of this statement is immaterial to its
consolidated financial statements.
In June 1997 the FASB issued Statement No. 131, ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information" which
establishes new standards for the way public companies report information about
operating segments and requires companies to report selected segment information
quarterly to stockholders. This statement is effective for financial statements
for periods beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. This statement need not be applied
to interim financial statements in the initial year of its application.
Management is currently evaluating the effect of this statement on its reporting
of segment information.
13
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company's $4.0 million of remaining proceeds from the initial
public offering of its common stock (SEC File #33-67512, effective date of
registrations statement -November 1, 1993) were used during the quarter ended
September 26, 1998. The proceeds were previously held in short term
investments. The Company sold the investments during the quarter ended
September 26, 1998 and recognized an after tax loss of $0.1 million. These
proceeds were used to fund the construction of the Company's new operations
and fulfillment center in Tilton, New Hampshire.
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 Lease Agreement dated September 18, 1998, between the Company and
National Fire Protection Association
10.2 Second Amendment to Second Amended and Restated Loan Agreement
dated September 4, 1998, between the Company and Citizens Bank of
Massachusetts
10.3 Third Amendment to Second Amended and Restated Loan Agreement
dated September 4, 1998, between the Company and Citizens Bank of
Massachusetts
10.4 First Amendment to Assignment of Certificate of Deposit dated
September 4, 1998, between the Company and Citizens Bank of
Massachusetts
10.5 Second Amendment to Bridge Mortgage dated September 4, 1998,
between the Company and Citizens Bank of Massachusetts
10.6 Third Amendment to Mortgage (Meredith) dated September 4, 1998,
between the Company and Citizens Bank of Massachusetts
10.7 Replacement New Bridge Note dated September 4, 1998, between the
Company and Citizens Bank of Massachusetts
10.8 Replacement Short Term Revolving Note dated September 4, 1998,
between the Company and Citizens Bank of Massachusetts
10.9 Second Replacement Revolving Note dated September 4, 1998, between
the Company and Citizens Bank of Massachusetts
10.10 Third Amendment to Security Agreement dated September 4, 1998,
between the Company and Citizens Bank of Massachusetts
10.11 Lease agreement dated October 5, 1998, between the Company and
Chelsea GCA Realty Partnership, L.P.
10.12 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated October 1, 1998 between the Company and Gordon R.
Cooke
10.13 Lease Agreement dated October 23, 1998, between the Company and
Tanger Properties Limited Partnership
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 26, 1998.
14
SIGNATURES
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 9, 1998 By: /s/ Olga L. Conley
-------------------
Olga L. Conley
Authorized Officer
Senior Vice President - Finance,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Dated: November 9, 1998 By: /s/ Peter J. Tulp
------------------
Peter J. Tulp
Authorized Officer
Vice President - Finance,
Corporate Controller
(Principal Accounting Officer)
15
DM MANAGEMENT COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 26, 1998
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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 Lease Agreement dated September 18, 1998, between the Company and
National Fire Protection Association
10.2 Second Amendment to Second Amended and Restated Loan Agreement
dated September 4, 1998, between the Company and Citizens Bank of
Massachusetts
10.3 Third Amendment to Second Amended and Restated Loan Agreement
dated September 4, 1998, between the Company and Citizens Bank of
Massachusetts
10.4 First Amendment to Assignment of Certificate of Deposit dated
September 4, 1998, between the Company and Citizens Bank of
Massachusetts
10.5 Second Amendment to Bridge Mortgage dated September 4, 1998,
between the Company and Citizens Bank of Massachusetts
10.6 Third Amendment to Mortgage (Meredith) dated September 4, 1998,
between the Company and Citizens Bank of Massachusetts
10.7 Replacement New Bridge Note dated September 4, 1998, between the
Company and Citizens Bank of Massachusetts
10.8 Replacement Short Term Revolving Note dated September 4, 1998,
between the Company and Citizens Bank of Massachusetts
10.9 Second Replacement Revolving Note dated September 4, 1998, between
the Company and Citizens Bank of Massachusetts
10.10 Third Amendment to Security Agreement dated September 4, 1998,
between the Company and Citizens Bank of Massachusetts
10.11 Lease agreement dated October 5, 1998, between the Company and
Chelsea GCA Realty Partnership, L.P.
10.12 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated October 1, 1998 between the Company and Gordon R.
Cooke
10.13 Lease Agreement dated October 23, 1998, between the Company and
Tanger Properties Limited Partnership
Financial Data Schedule
27.1 Financial Data Schedule
16