- --------------------------------------------------------------------------------
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 MARCH 27, 1999
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 April 29, 1999: 9,910,647
- --------------------------------------------------------------------------------
DM MANAGEMENT COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 27, 1999
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..........................................................................3-8
Consolidated Balance Sheets at March 27, 1999, March 28, 1998 and December 26, 1998..........................3
Consolidated Statements of Operations for the three months ended March 27, 1999 and March 28, 1998 ..........4
Consolidated Statements of Cash Flows for the three months ended March 27, 1999 and March 28, 1998 ..........5
Notes to Consolidated Financial Statements ................................................................6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................9-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................................12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................................13
Signatures....................................................................................................................14
2
DM MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 27, March 28, December 26,
ASSETS 1999 1998 1998
--------- --------- ------------
Current assets:
Cash and cash equivalents ................................................ $ 773 $ 19,023 $ 19,996
Marketable securities, net of unrealized loss ............................ -- 3,886 --
Inventory ................................................................ 31,503 24,104 26,847
Prepaid catalog expenses ................................................. 7,739 3,477 5,254
Deferred income taxes .................................................... 6,934 5,295 6,934
Other current assets ..................................................... 5,478 1,641 3,156
--------- --------- ---------
Total current assets .................................................. 52,427 57,426 62,187
Property and equipment, net .................................................... 48,927 19,917 47,485
Deferred income taxes .......................................................... 4,520 4,479 4,520
Other non-current assets ....................................................... 1,733 -- 1,300
--------- --------- ---------
Total assets .......................................................... $ 107,607 $ 81,822 $ 115,492
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 11,822 $ 11,356 $ 12,057
Accrued expenses ......................................................... 7,624 3,569 8,571
Accrued customer returns ................................................. 7,454 3,838 8,333
Short-term borrowings .................................................... -- 9,571 21,300
Current portion of long-term debt ........................................ 1,939 1,017 1,735
--------- --------- ---------
Total current liabilities ............................................. 28,839 29,351 51,996
Long-term debt, less current portion ............................................ 23,139 7,296 9,900
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,
9,776,164, 6,298,007, and 9,631,401 shares issued and outstanding as of
March 27, 1999, March 28, 1998 and December 26, 1998, respectively ... 98 63 96
Additional paid-in capital ............................................... 60,674 58,900 59,953
Unrealized loss on marketable securities ................................. -- (108) --
Accumulated deficit ...................................................... (5,143) (13,680) (6,453)
--------- --------- ---------
Total stockholders' equity ............................................ 55,629 45,175 53,596
--------- --------- ---------
Total liabilities and stockholders' equity ............................ $ 107,607 $ 81,822 $ 115,492
--------- --------- ---------
--------- --------- ---------
3
The accompanying notes are an integral part of the consolidated
financial statements.
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
--------------------
MARCH 27, MARCH 28,
1999 1998
--------- ---------
Net sales .................................................................. $ 64,719 $ 44,792
Costs and expenses:
Product ............................................................... 28,598 20,441
Operations ............................................................ 15,386 8,707
Selling ............................................................... 13,804 10,364
General and administrative ............................................ 4,335 3,537
Interest, net ......................................................... 412 (184)
-------- --------
Income before income taxes ................................................. 2,184 1,927
Provision for income taxes ................................................. 874 752
-------- --------
Net income ................................................................. $ 1,310 $ 1,175
-------- --------
-------- --------
EARNINGS PER SHARE:
Basic ................................................................. $ 0.14 $ 0.13
Diluted ............................................................... $ 0.13 $ 0.11
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................................................ 9,688 9,287
Diluted .............................................................. 10,471 10,303
The accompanying notes are an integral part
of the consolidated financial statements.
4
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------
MARCH 27, MARCH 28,
1999 1998
--------- ---------
Cash flows from operating activities:
Net income ............................................................. $ 1,310 $ 1,175
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation ........................................................... 1,130 618
Changes in assets and liabilities:
Increase in inventory .................................................. (4,656) (3,525)
(Increase) decrease in prepaid catalog expenses ........................ (2,485) 2,998
Increase in other current assets ....................................... (2,322) (412)
Decrease in accounts payable and accrued expenses ...................... (489) (3,352)
Decrease in accrued customer returns ................................... (879) (941)
-------- --------
Net cash used in operating activities ....................................... (8,391) (3,439)
Cash flows used in investing activities:
Investment in cash surrender value ..................................... (433) --
Additions to property and equipment .................................... (3,265) (6,361)
-------- --------
Net cash used in investing activities ....................................... (3,698) (6,361)
Cash flows provided by (used in) financing activities:
Borrowings under debt agreements ....................................... 14,200 18,731
Payments of debt borrowings ............................................ (22,057) (10,029)
Proceeds from stock transactions ....................................... 723 861
-------- --------
Net cash provided by (used in) financing activities ......................... (7,134) 9,563
Net decrease in cash and cash equivalents ................................... (19,223) (237)
Cash and cash equivalents at:
Beginning of period ..................................................... 19,996 19,260
-------- --------
End of period ........................................................... $ 773 $ 19,023
-------- --------
-------- --------
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 26, 1998.
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Intercompany balances and transactions have
been eliminated.
B. DEBT:
The Company's credit facilities at March 27, 1999 consisted of (i) a
$12,000,000 real estate loan (the "Tilton Facility Loan"); (ii) a $9,500,000
equipment loan (the "Equipment Loan"); (iii) a $3,600,000 term loan (the "Term
Loan"); (iv) a $1,650,000 real estate loan (the "Meredith Facility Loan"); and
(v) a $15,910,000 revolving line of credit (the "Revolver").
The Tilton Facility Loan is collateralized by a mortgage lien on the new
operations and fulfillment center in Tilton, New Hampshire (the "Tilton
facility"). The Tilton facility is owned by DM Management Company's wholly owned
subsidiary, Birch Pond Realty Corporation ("Birch Pond") and leased to DM
Management Company. During the first quarter of 1999, Birch Pond entered into
the Tilton Facility Loan with a third party financial institution. The Equipment
Loan is collateralized by substantially all of the Company's materials handling
equipment. The remaining credit facilities are collateralized by substantially
all of the Company's remaining assets. All of these credit facilities contain
various lending conditions and covenants including restrictions on permitted
liens and certain credit facilities also require compliance with certain debt
coverage ratios.
Payments on the Tilton Facility Loan are due monthly through its maturity
on March 1, 2009 with the interest rate fixed at 7.3% per annum. The Equipment
Loan requires monthly payments through its maturity on December 1, 2005 with the
interest rate fixed at 7.5% per annum. The Term Loan requires quarterly payments
through its maturity on June 1, 2002 and provides for several interest rate
options (6.44% per annum at March 27, 1999). Payments on the Meredith Facility
Loan are due monthly, based on a 15-year amortization, with the remaining
balance payable on July 30, 2002. Interest on the Meredith Facility Loan is
fixed at 6.81% per annum until August 31, 1999, at which time the Company may
select from several interest rate options. The Revolver is available for
borrowings and for letters of credit and matures on June 1, 1999. At March 27,
1999 there were $1,950,000 in borrowings and $4,375,000 in letters of credit
outstanding under the Revolver. At March 27, 1999 the Revolver bore interest at
7.75% per annum. The outstanding letters of credit do not bear interest.
6
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
A summary of the Company's outstanding long-term debt follows (in
thousands):
MARCH 27, MARCH 28, DECEMBER 26,
1999 1998 1998
------- ------- ------------
Real estate loans ....................... $13,476 $ 1,586 $ 1,503
Term loans .............................. 2,340 3,240 2,520
Equipment loans ......................... 7,293 -- 7,590
Revolving credit facilities ............. 1,950 3,460 --
Capitalized lease obligations ........... 19 27 22
------- ------- -------
Total long-term debt ............... 25,078 8,313 11,635
Less current maturities ................. 1,939 1,017 1,735
------- ------- -------
Long-term debt, less current portion $23,139 $ 7,296 $ 9,900
------- ------- -------
------- ------- -------
Subsequent to March 27, 1999, the Company obtained $1,841,000 of additional
financing and provided additional collateral under its Equipment Loan. The
interest rate on this additional financing is fixed at 8.08% per annum. The
Company also entered into a $980,000 furniture loan (the "Furniture Loan"). The
Furniture Loan is collateralized by certain workstations and office furniture
and is payable in monthly installments of principle and interest through its
maturity on March 30, 2002. The interest rate on the Furniture Loan is fixed at
6.25% per annum. Additionally, the Company amended the terms of the Revolver to
extend its maturity date to June 1, 2001 and provide for a $14,090,000 increase
in availability. In connection with this amendment, the Company paid off
the Term Loan.
C. STOCK SPLIT:
On May 29, 1998, the Company announced a three-for-two stock split 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
sheet as of March 28, 1998 has not been restated to include the effects of the
stock split.
7
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
D. EARNINGS PER SHARE:
The Company calculates earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards Statement No. 128 ("SFAS
128"), "EARNINGS PER SHARE." EPS data for the quarter ended March 28, 1998 has
been restated to reflect the effects of the three-for-two stock split. A
reconciliation of the numerators and denominators of the basic and diluted EPS
computation follows (in thousands, except per share data):
THREE MONTHS ENDED
--------------------
MARCH 27, MARCH 28,
1999 1998
--------- ---------
Numerator:
Net income ................................ $ 1,310 $ 1,175
------- -------
------- -------
Denominator (shares):
Basic weighted average shares outstanding . 9,688 9,287
Assumed exercise of stock options ......... 783 1,016
------- -------
Diluted weighted average shares outstanding 10,471 10,303
------- -------
------- -------
Earnings per share:
Basic ..................................... $ 0.14 $ 0.13
Diluted ................................... $ 0.13 $ 0.11
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: THE
SUCCESS OR FAILURE OF THE J. JILL RETAIL STORE INITIATIVE; SIGNIFICANT CHANGES
IN CUSTOMER RESPONSE RATES; CHANGE IN COMPETITION IN THE APPAREL INDUSTRY;
GENERAL ECONOMIC AND BUSINESS CONDITIONS; SUCCESS OR FAILURE OF OPERATING
INITIATIVES; THE ABILITY OF THE COMPANY TO EFFECTIVELY LIQUIDATE ITS OVERSTOCKED
MERCHANDISE; CHANGES IN CONSUMER SPENDING AND CONSUMER PREFERENCES; FAILURE OF
THE COMPANY OR ITS SIGNIFICANT VENDORS OR SUPPLIERS TO BECOME YEAR 2000
COMPLIANT; CHANGES IN BUSINESS STRATEGY; POSSIBLE FUTURE INCREASES IN EXPENSES;
THE EXISTENCE OR ABSENCE OF BRAND AWARENESS; THE EXISTENCE OR ABSENCE OF
PUBLICITY, ADVERTISING AND PROMOTIONAL EFFORTS; AVAILABILITY, TERMS AND
DEPLOYMENT OF CAPITAL; QUALITY OF MANAGEMENT; BUSINESS ABILITIES AND JUDGMENT OF
PERSONNEL; AVAILABILITY OF QUALIFIED PERSONNEL; LABOR AND EMPLOYEE BENEFIT
COSTS; CHANGES IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS, AND
OTHER FACTORS.
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
----------------------
MARCH 27, MARCH 28,
1999 1998
--------- ---------
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales ............................. 100.0% 100.0%
Costs and expenses:
Product .......................... 44.2 45.6
Operations ....................... 23.8 19.5
Selling .......................... 21.3 23.1
General and administrative ....... 6.7 7.9
Interest, net .................... 0.6 (0.4)
-------- --------
Income before income taxes ............ 3.4 4.3
Provision for income taxes ............ 1.4 1.7
-------- --------
Net income ............................ 2.0% 2.6%
-------- --------
-------- --------
SELECTED OPERATING DATA (IN THOUSANDS):
Catalog circulation (1) 21,400 14,800
Total twelve-month buyers (2) 1,156 749
(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 "twelve-month buyers" means
customers who have made a purchase from the Company within the previous
12 months.
9
COMPARISON OF THE THREE MONTHS ENDED MARCH 27, 1999 WITH THE THREE MONTHS ENDED
MARCH 28, 1998
NET SALES
During the three months ended March 27, 1999 ("first quarter 1999") net
sales increased by 44.5% to $64.7 million from $44.8 million during the three
months ended March 28, 1998 ("first quarter 1998"). This net sales increase was
primarily attributable to significant sales volume increases from J. JILL.
During first quarter 1999 J. JILL net sales and circulation increased by 75.6%
and 71.5%, respectively, as compared to first quarter 1998. J. JILL net sales
growth was primarily attributable to the aforementioned circulation growth.
During first quarter 1999 net sales for NICOLE SUMMERS decreased by 18.2% and
circulation remained relatively flat as compared to first quarter 1998. Total
Company catalog circulation increased by 44.6% to 21.4 million during first
quarter 1999 from 14.8 million during first quarter 1998. The number of
twelve-month buyers grew to 1,156,000 at March 27, 1999 from 749,000 at
March 28, 1998, an increase of 54.3%.
PRODUCT
Product costs consist primarily of merchandise acquisition costs (net of
term discounts and advertising allowances), including freight-in costs, and
provisions for markdowns. During first quarter 1999 product costs increased
by 39.9% to $28.6 million from $20.4 million during first quarter 1998. As a
percentage of net sales, product costs decreased to 44.2% during first
quarter 1999 from 45.6% during first quarter 1998. This decrease in product
costs as a percentage of net sales was primarily 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 change significantly during the
remainder of 1999.
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 first quarter 1999
operating expenses increased by 76.7% to $15.4 million from $8.7 million during
first quarter 1998. As a percentage of net sales, operating expenses increased
to 23.8% during first quarter 1999 from 19.5% during first quarter 1998. This
increase was primarily attributable to inefficiencies and reduced employee
productivity associated with the transition and consolidation of the Company's
operations from three distribution facilities into one new operations and
fulfillment facility in Tilton, New Hampshire (the "Tilton facility"). In
addition, better-than-expected sales demand early in first quarter 1999 resulted
in further employee productivity loss and increased labor costs. The Company
expects operating costs as a percentage of net sales to improve during the
remainder of 1999, with further improvement expected in 2000.
SELLING
Selling expenses consist primarily of the cost to produce, print and
distribute catalogs. During first quarter 1999 selling expenses increased by
33.2% to $13.8 million from $10.4 million during first quarter 1998. As a
percentage of net sales, selling expenses decreased to 21.3% during first
quarter 1999 from 23.1% during first quarter 1998. This decrease was primarily
the result of improved catalog productivity during first quarter 1999 as
compared to first quarter 1998. The Company expects selling expenses as a
percentage of net sales to increase slightly during the remainder of 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of executive,
marketing, information systems and finance expenses. During first quarter 1999
general and administrative expenses increased by 22.6% to $4.3 million from
$3.5 million during first quarter 1998. This increase was primarily
attributable to increased salaries and performance bonuses. As a percentage
of net sales, general and administrative expenses decreased to 6.7% during
first quarter 1999 from 7.9% during first quarter 1998.
INTEREST, NET
Interest expense increased to $0.6 million during first quarter 1999 as
compared to $0.1 million during first quarter 1998 primarily as a result of
increased use of the Company's credit facilities. Interest income decreased to
$0.2 million during first quarter 1999 from $0.3 million during first quarter
1998 primarily due to lower cash and cash equivalent balances. The Company
expects an increase in net interest expense in 1999 as a result of lower
invested balances and higher debt levels associated with the financing of the
Tilton facility.
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 for first quarter 1999 and first quarter 1998 was 40.0% and 39.0%,
respectively. The increased effective tax rate in first quarter 1999 reflects
the effect of an increased federal statutory tax rate due to expected annual
taxable income levels.
10
LIQUIDITY AND CAPITAL RESOURCES
DM Management's principal working capital needs arise from the need 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 January. The Spring season begins in January and ends in July. Capital needs
arise from capital expenditures related to expansions and improvements to the
Company's operating infrastructure. During first quarter 1999 these capital
expenditures included costs related to the construction of the Tilton facility.
During first quarter 1999 the Company funded its operating and capital needs
through its bank credit facilities, a new loan from a financial institution,
cash generated from operations, and proceeds from its 1997 public offering.
The Company's operating activities used net cash of $8.4 million and
$3.4 million during first quarter 1999 and first quarter 1998, respectively,
primarily to support sales growth with increased inventory purchases. Inventory
levels at March 27, 1999 were 30.7% higher than at March 28, 1998.
The Company's investing activities used net cash of $3.7 million and
$6.4 million during first quarter 1999 and first quarter 1998, respectively,
primarily for property and equipment additions related to the construction of
the new Tilton facility. Construction of the Tilton facility began in 1997 and
was completed as of December 26, 1998. The estimated total cost of this
facility, including land, construction, equipment and furniture is approximately
$41.0 million of which approximately $40.1 million had been spent as of
March 27, 1999.
The Company's financing activities used net cash of $7.1 million during
first quarter 1999. This usage was primarily the net result of a $21.3 million
paydown of short-term borrowings and a $12.0 million increase in long-term debt
in connection with the refinancing of the Tilton facility on a long-term basis.
During first quarter 1998, net cash of $9.6 million was provided by financing
activities, primarily as a result of borrowings used to finance the Tilton
facility construction.
The Company's credit facilities at March 27, 1999 consisted of (i) a
$12.0 million real estate loan (the "Tilton Facility Loan"); (ii) a $9.5
million equipment loan (the "Equipment Loan"); (iii) a $3.6 million term loan
(the "Term Loan"); (iv) a $1.7 million real estate loan; and (v) a $15.9
million revolving line of credit (the "Revolver"). The weighted average
interest rate for amounts outstanding under the Company's credit facilities
during first quarter 1999 was 6.86%. The Tilton Facility Loan is
collateralized by a mortgage lien on the Tilton facility. The Tilton facility
is owned by DM Management Company's wholly owned subsidiary, Birch Pond
Realty Corporation ("Birch Pond") and leased to DM Management Company. During
the first quarter of 1999, Birch Pond entered into the Tilton Facility Loan
with a third party financial institution. The Equipment Loan is
collateralized by substantially all of the Company's materials handling
equipment. The remaining credit facilities are collateralized by
substantially all of the Company's remaining assets. All of these credit
facilities contain various lending conditions and covenants including
restrictions on permitted liens and certain credit facilities also require
compliance with certain debt coverage ratios.
Subsequent to March 27, 1999, the Company obtained additional financing of
$1.8 million and provided additional collateral under its Equipment Loan. The
interest rate on this additional financing is fixed at 8.08% per annum. The
Company also entered into a $1.0 million furniture loan (the "Furniture Loan").
The Furniture Loan is collateralized by certain furniture and is payable in
monthly installments of principle and interest through its maturity on March 30,
2002. The interest rate on the Furniture Loan is fixed at 6.25% per annum.
Additionally, the Company amended the terms of the Revolver to extend its
maturity date to June 1, 2001 and provide for a $14.1 million increase in
availability. In connection with this amendment, the Company paid off the Term
Loan.
FUTURE CONSIDERATIONS
In an effort to continue to capitalize on the strength of the J. JILL
brand, the Company is expanding its channels of distribution to include
retail stores and the Internet. Currently, the Company plans to open five to
ten specialty retail stores by the end of 2000 and an additional 50 stores in
2001. The Company also plans to have a fully-transactional website in
operation in time for the 1999 holiday season. The Company expects to incur
costs in excess of revenues generated by these new opportunities during the
initial phases of their development. There can be no assurance that these new
opportunities will be successful.
NICOLE SUMMERS operates in a mature marketplace and is currently
experiencing negative growth. In an effort to respond to this negative
growth and focus on potential opportunities for NICOLE SUMMERS, the Company
hired a new Vice President of Merchandising for NICOLE SUMMERS with
experience in product development, planning and women's apparel
merchandising, and will be updating the NICOLE SUMMERS merchandising
assortment and circulation strategy beginning with the Fall 1999 catalogs.
This may result in a temporary decline in response rates and net sales for
NICOLE SUMMERS, however, the Company does not expect the effects to be
material to its consolidated results of operations.
11
YEAR 2000 READINESS DISCLOSURE
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 all of the Company's major internal IT
and non-IT systems indicating the new systems and upgrades are designed to be
Year 2000 compliant. Because these system 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 June
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. The Company
has begun testing 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 continued to contact and receive 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 intends to further develop its
contingency plans during the remainder 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's objective in managing its exposure to interest rate changes
and foreign currency rate changes is to limit the material impact of the changes
on cash flows and earnings and to lower its overall borrowing costs. To achieve
its objectives, the Company identifies these risks and manages them through its
regular operating and financing activities, including periodic refinancing of
debt obligations to lower financing costs and adjust fixed and variable rate
debt positions. The Company does not currently use derivative financial
instruments or enter into foreign currency denominated contracts. Management has
calculated the effect of a 10% change in interest rates over a month and
determined the effect to be immaterial. Management does not foresee or expect
any significant changes in the management of foreign currency or interest rate
exposures or in the strategies it employs to manage such exposures in the near
future.
12
PART II - OTHER INFORMATION
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 Employment Letter Agreement, dated March 11, 1999, between the Company
and Dennis Adomaitis
10.2 Fifth Amendment to Second Amended and Restated Loan Agreement, dated
March 30, 1999, by and between the Company and Citizens Bank of
Massachusetts
10.3 Secured Promissory Note, dated March 30, 1999, between the Company and
Citizens Leasing Corporation
10.4 Secured Promissory Note, dated March 30, 1999, between the Company and
Citizens Leasing Corporation
10.5 Loan Agreement, dated March 30, 1999, between the Company and Belknap
County Economic Development Council, Inc.
10.6 Security Agreement, dated March 30, 1999, between the Company and
Belknap County Economic Development Council, Inc.
10.7 Note, dated March 30, 1999, between the Company and Belknap County
Economic Development Council, Inc.
10.8 Third Amended and Restated Loan Agreement, dated May 4, 1999, between
the Company and Citizens Bank of Massachusetts
10.9 Third Replacement Revolving Note, dated May 4, 1999, between the
Company and Citizens Bank of Massachusetts
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 March 27, 1999.
13
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: May 10, 1999 By:/s/ Olga L. Conley
------------------------------------------------
Olga L. Conley
Authorized Officer
Senior Vice President - Finance, Chief Financial
Officer and Treasurer (PRINCIPAL FINANCIAL
OFFICER)
Dated: May 10, 1999 By: /s/ Peter J. Tulp
------------------------------------------------
Peter J. Tulp
Authorized Officer
Vice President - Finance and
Corporate Controller
(PRINCIPAL ACCOUNTING OFFICER)
14
DM MANAGEMENT COMPANY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 27, 1999
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
MATERIAL CONTRACTS
10.1 Employment Letter Agreement, dated March 11, 1999, between the
Company and Dennis Adomaitis
10.2 Fifth Amendment to Second Amended and Restated Loan Agreement,
dated March 30, 1999, by and between the Company and Citizens
Bank of Massachusetts
10.3 Secured Promissory Note, dated March 30, 1999, between the
Company and Citizens Leasing Corporation
10.4 Secured Promissory Note, dated March 30, 1999, between the
Company and Citizens Leasing Corporation
10.5 Loan Agreement, dated March 30, 1999, between the Company and
Belknap County Economic Development Council, Inc.
10.6 Security Agreement, dated March 30, 1999, between the Company
and Belknap County Economic Development Council, Inc.
10.7 Note, dated March 30, 1999, between the Company and Belknap
County Economic Development Council, Inc.
10.8 Third Amended and Restated Loan Agreement, dated May 4, 1999,
between the Company and Citizens Bank of Massachusetts
10.9 Third Replacement Revolving Note, dated May 4, 1999, between
the Company and Citizens Bank of Massachusetts
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
15