UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22480
THE J. JILL GROUP, INC.
(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 August 2, 1999: 9,964,222
THE J. JILL GROUP, INC.
(FORMERLY DM MANAGEMENT COMPANY)
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 26, 1999
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements...........................................................................3-7
Consolidated Balance Sheets at June 26, 1999, June 27, 1998 and December 26, 1998.............................3
Consolidated Statements of Operations for the three months and the six months
ended June 26, 1999 and June 27, 1998.....................................................................4
Consolidated Statements of Cash Flows for the six months ended June 26, 1999
and June 27, 1998.........................................................................................5
Notes to Consolidated Financial Statements..................................................................6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..........................................................13
Item 6. Exhibits and Reports on Form 8-K.............................................................................14
Signatures..................................................................................................................15
2
THE J. JILL GROUP, INC.
(FORMERLY DM MANAGEMENT COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
June 26, June 27, December 26,
1999 1998 1998
--------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 12,276 $ 19,300 $ 19,996
Marketable securities, net of unrealized loss............................... - 3,898 -
Inventory................................................................... 22,058 20,036 26,847
Prepaid catalog expenses.................................................... 4,311 5,257 5,254
Deferred income taxes....................................................... 6,934 5,295 6,934
Other current assets........................................................ 4,443 3,758 3,156
------------- -------------- ----------------
Total current assets.................................................... 50,022 57,544 62,187
Property and equipment, net...................................................... 49,369 32,579 47,485
Deferred income taxes............................................................ 4,520 4,479 4,520
Other non-current assets......................................................... 1,723 - 1,300
------------- -------------- ----------------
Total assets............................................................ $105,634 $ 94,602 $115,492
------------- -------------- ----------------
------------- -------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 8,565 $ 17,279 $ 12,057
Accrued expenses............................................................ 5,387 6,166 8,571
Accrued customer returns.................................................... 8,565 5,134 8,333
Short-term borrowings....................................................... - 13,316 21,300
Current portion of long-term debt........................................... 1,911 837 1,735
------------- -------------- ----------------
Total current liabilities............................................... 24,428 42,732 51,996
Long-term debt, less current portion............................................. 21,344 3,627 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,
9,919,221, 9,505,802, and 9,631,401 shares issued and outstanding as of
June 26, 1999, June 27, 1998 and
December 26, 1998, respectively.......................................... 99 95 96
Additional paid-in capital.................................................. 61,128 58,983 59,953
Unrealized loss on marketable securities.................................... - (96) -
Accumulated deficit......................................................... (1,365) (10,739) (6,453)
------------- -------------- ----------------
Total stockholders' equity.............................................. 59,862 48,243 53,596
------------- -------------- ----------------
Total liabilities and stockholders' equity.............................. $105,634 $ 94,602 $115,492
------------- -------------- ----------------
------------- -------------- ----------------
The accompanying notes are an integral part of the consolidated
financial statements.
3
THE J. JILL GROUP, INC.
(FORMERLY DM MANAGEMENT COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ----------------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
--------------- ------------ ------------- -----------
Net sales......................................................... $78,041 $59,359 $142,760 $104,151
Costs and expenses:
Product..................................................... 33,944 27,009 62,542 47,450
Operations.................................................. 15,831 11,121 31,217 19,828
Selling..................................................... 17,310 12,361 31,114 22,725
General and administrative.................................. 4,306 4,215 8,641 7,752
Interest, net............................................... 354 (220) 766 (404)
------------ ------------- ------------- ------------
Income before income taxes........................................ 6,296 4,873 8,480 6,800
Provision for income taxes........................................ 2,518 1,900 3,392 2,652
------------ ------------- ------------- ------------
Net income........................................................ $ 3,778 $ 2,973 $ 5,088 $ 4,148
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
EARNINGS PER SHARE:
Basic....................................................... $ 0.38 $ 0.31 $ 0.52 $ 0.44
Diluted..................................................... $ 0.36 $ 0.28 $ 0.48 $ 0.40
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic....................................................... 9,881 9,465 9,785 9,376
Diluted..................................................... 10,628 10,455 10,550 10,379
The accompanying notes are an integral part of the consolidated
financial statements.
4
THE J. JILL GROUP, INC.
(FORMERLY DM MANAGEMENT COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
--------------------------------
JUNE 26, JUNE 27,
1999 1998
---------------- ------------
Cash flows provided by operating activities:
Net income.................................................................................... $ 5,088 $ 4,148
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.................................................................................. 2,244 1,270
Changes in assets and liabilities:
Decrease in inventory......................................................................... 4,789 543
Decrease in prepaid catalog expenses.......................................................... 943 1,218
Increase in other current assets.............................................................. (1,287) (2,529)
Increase (decrease) in accounts payable and accrued expenses.................................. (5,983) 5,168
Increase in accrued customer returns.......................................................... 232 355
------------ --------------
Net cash provided by operating activities.......................................................... 6,026 10,173
Cash flows used in investing activities:
Investment in cash surrender value............................................................ (423) -
Additions to property and equipment........................................................... (4,821) (19,675)
----------- ------------
Net cash used in investing activities.............................................................. (5,244) (19,675)
Cash flows provided by (used in) financing activities:
Borrowings under debt agreements.............................................................. 17,021 28,616
Payments of debt borrowings................................................................... (26,701) (20,019)
Proceeds from stock transactions.............................................................. 1,178 945
----------- --------------
Net cash provided by (used in) financing activities................................................ (8,502) 9,542
Net increase (decrease) in cash and cash equivalents............................................... (7,720) 40
Cash and cash equivalents at:
Beginning of period........................................................................... 19,996 19,260
----------- ------------
End of period................................................................................. $ 12,276 $ 19,300
----------- ------------
----------- ------------
The accompanying notes are an integral part of the consolidated
financial statements.
5
THE J. JILL GROUP, INC.
(FORMERLY DM MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The consolidated financial statements included herein have been
prepared by The J. Jill Group, Inc. (the "Company" or the "J. Jill Group"),
formerly known as DM Management 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
consolidated 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 June 26, 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 $980,000 furniture loan (the
"Furniture Loan"); (iv) a $1,650,000 real estate loan (the "Meredith Facility
Loan"); and (v) a $30,000,000 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 the J. Jill Group's wholly owned
subsidiary, Birch Pond Realty Corporation ("Birch Pond") and leased to the J.
Jill Group. 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 Furniture Loan is collateralized by certain workstations and
office furniture. 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 of principal and interest on the Tilton Facility Loan are due
monthly through its maturity on March 1, 2009 with the interest rate fixed at
7.30% per annum. The Equipment Loan requires monthly payments of principal and
interest through its maturity on December 1, 2005 and has two components with
different fixed interest rates, with a weighted average interest rate of 7.62%
per annum. Interest on the Furniture Loan is fixed at 6.25% per annum and
requires monthly payments of principal and interest through its maturity on
March 30, 2002. Payments of principal and interest 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 including a prime rate option. The Revolver is
available for borrowings and for letters of credit and matures on June 1, 2001.
At June 26, 1999 there were no borrowings and $10,880,000 in letters of credit
outstanding under the Revolver. At June 26, 1999 the Revolver bore interest at
7.75% per annum. The outstanding letters of credit do not bear interest.
6
THE J. JILL GROUP, INC.
(FORMERLY DM MANAGEMENT COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the Company's outstanding long-term debt follows (in thousands):
JUNE 26, JUNE 27, DECEMBER 26,
1999 1998 1998
----------------- --------------- ----------------
Real estate loans...................................................... $13,403 $1,558 $ 1,503
Term loans............................................................. - 2,880 2,520
Equipment loans........................................................ 8,905 - 7,590
Furniture loans........................................................ 930 - -
Capitalized lease obligations.......................................... 17 26 22
-------------- ----------------- ---------------
Total long-term debt............................................ 23,255 4,464 11,635
Less current maturities................................................ 1,911 837 1,735
-------------- ----------------- ---------------
Long-term debt, less current portion............................ $21,344 $3,627 $ 9,900
-------------- ----------------- ---------------
-------------- ----------------- ---------------
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 includes the effects of the stock split. The consolidated balance
sheets at June 26, 1999, June 27, 1998 and December 26, 1998 include the effects
of the stock split.
D. 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." A reconciliation of the numerators and denominators of the basic and
diluted EPS calculation follows (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- -------------------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
Numerator:
Net income.............................................. $ 3,778 $ 2,973 $ 5,088 $ 4,148
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Denominator (shares):
Basic weighted average shares outstanding............... 9,881 9,465 9,785 9,376
Assumed exercise of stock options....................... 747 990 765 1,003
-------------- ------------- ------------- -------------
Diluted weighted average shares outstanding............. 10,628 10,455 10,550 10,379
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Earnings per share:
Basic................................................... $ 0.38 $ 0.31 $ 0.52 $ 0.44
Diluted................................................. $ 0.36 $ 0.28 $ 0.48 $ 0.40
7
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 AND E-COMMERCE INITIATIVES; THE
SUCCESS OR FAILURE OF THE REPOSITIONING OF THE NICOLE SUMMERS CONCEPT; THE
SUCCESS OR FAILURE OF NEW CUSTOMER ACQUISITION EFFORTS; FAILURE OF THE COMPANY
OR ITS SIGNIFICANT VENDORS OR SUPPLIERS TO BECOME YEAR 2000 COMPLIANT;
SIGNIFICANT CHANGES IN CUSTOMER RESPONSE RATES; CHANGES 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; 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 consolidated statements of
operations for The J. Jill Group, Inc. (the "Company" or the "J. Jill Group"),
formerly known as DM Management Company, expressed as a percentage of net sales
and certain selected operating data:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- -------------------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
--------------- ------------- ------------- -------------
CONSOLIDATED STATEMENT OF OPERATIONS:
Net sales...................................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Product................................................... 43.5 45.5 43.8 45.6
Operations................................................ 20.3 18.8 21.9 19.1
Selling................................................... 22.2 20.8 21.7 21.8
General and administrative................................ 5.5 7.1 6.1 7.4
Interest, net............................................. 0.5 (0.4) 0.5 (0.4)
------- -------- -------- --------
Income before income taxes..................................... 8.0 8.2 6.0 6.5
Provision for income taxes..................................... 3.2 3.2 2.4 2.5
------- -------- -------- --------
Net income..................................................... 4.8% 5.0% 3.6% 4.0%
------- -------- -------- --------
------- -------- -------- --------
SELECTED OPERATING DATA (IN THOUSANDS):
Catalog circulation (1)........................................ 30,400 18,600 51,800 33,400
Twelve-month buyers (2)........................................ 1,233 834 1,233 834
(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.
8
COMPARISON OF THE THREE MONTHS ENDED JUNE 26, 1999 WITH THE THREE MONTHS ENDED
JUNE 27, 1998
NET SALES
During the three months ended June 26, 1999 ("second quarter 1999") net
sales increased by 31.5% to $78.0 million from $59.4 million during the three
months ended June 27, 1998 ("second quarter 1998"). This net sales increase
was primarily attributable to significant sales volume increases from J.
JILL. J. JILL net sales comprised 83.7% of the Company's total net sales
during second quarter 1999 as compared to 72.4% during second quarter 1998.
During second quarter 1999 J. JILL net sales and circulation increased by
52.0% and 94.6%, respectively, as compared to second quarter 1998. J. JILL
net sales growth was primarily attributable to the aforementioned circulation
growth as well as an increase in fulfillment rates and a decrease in return
rates. During second quarter 1999 net sales and circulation for NICOLE
SUMMERS decreased by 22.3% and 15.8%, respectively, as compared to second
quarter 1998. The Company is in the process of refocusing its NICOLE SUMMERS
concept. The first new NICOLE catalog will debut in mid-August, 1999, and
will target younger, more career conscious women (see Future Considerations).
Total Company catalog circulation increased by 63.4% to 30.4 million during
second quarter 1999 from 18.6 million during second quarter 1998. The number
of total Company twelve-month buyers grew to 1,233,000 at June 26, 1999 from
834,000 at June 27, 1998, an increase of 47.8%.
PRODUCT
Product costs consist primarily of merchandise acquisition costs,
including freight-in costs, and provisions for markdowns. During second
quarter 1999 product costs increased by 25.7% to $33.9 million from $27.0
million during second quarter 1998. As a percentage of net sales, product
costs decreased to 43.5% during second quarter 1999 from 45.5% during second
quarter 1998. This decrease in product costs as a percentage of net sales is
primarily attributable to higher markdown charges incurred during the second
quarter of 1998 as compared to second quarter 1999 associated with the
Company's NICOLE SUMMERS concept and lower markdown charges during second
quarter 1999 as compared to second quarter 1998 as the Company's off-price
liquidation vehicles began generating better than anticipated margins. In
addition, product margins improved during second quarter 1999 as compared to
second quarter 1998 as a result of the continued shift in the mix of the
business towards J. JILL. This improvement was offset by increased
promotional activity. The Company expects product costs as a percentage of
net sales to improve slightly during the remainder of 1999.
OPERATIONS
Operating expenses consist primarily of order processing costs, such as
order taking, customer service, fulfillment, shipping, warehousing and credit
card processing costs, and merchandising costs. During second quarter 1999
operating expenses increased by 42.4% to $15.8 million from $11.1 million during
second quarter 1998. As a percentage of net sales, operating expenses increased
to 20.3% during second quarter 1999 from 18.8% during second quarter 1998,
primarily as a result of higher costs associated with order taking and customer
service. Operating costs as a percentage of net sales trended favorably during
the six months ended June 26, 1999 decreasing from 23.8% during the first
quarter of 1999 to 20.3% during second quarter 1999 as the Company continued to
make progress adjusting to the new operations and fulfillment facility in
Tilton, New Hampshire (the "Tilton facility"). The Company expects operating
costs as a percentage of net sales to improve slightly during the fall 1999
season, with further improvement expected in 2000.
SELLING
Selling expenses consist primarily of the cost to produce, print and
distribute catalogs. During second quarter 1999 selling expenses increased by
40.0% to $17.3 million from $12.4 million during second quarter 1998. As a
percentage of net sales, selling expenses increased to 22.2% during second
quarter 1999 from 20.8% during second quarter 1998. Catalog productivity levels
achieved during second quarter 1998 were unusually high, resulting in relatively
low selling expenses as a percentage of net sales during second 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 second quarter 1999
general and administrative expenses increased by 2.2% to $4.3 million from $4.2
million during second quarter 1998. As a percentage of net sales, general and
administrative expenses decreased to 5.5% during second quarter 1999 from 7.1%
during second quarter 1998.
INTEREST, NET
Interest expense increased to $0.5 million during second quarter 1999 as
compared to $0.1 million during second quarter 1998 primarily as a result of
increased use of the Company's credit facilities. Interest income decreased to
$0.1 million during second quarter 1999 from $0.3 million during second 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.
9
COMPARISON OF THE SIX MONTHS ENDED JUNE 26, 1999 WITH THE SIX MONTHS ENDED JUNE
27, 1998
NET SALES
During the six months ended June 26, 1999 net sales increased by 37.1%
to $142.8 million from $104.2 million during the six months ended June 27,
1998. This net sales increase was primarily attributable to significant sales
volume increases from J. JILL. J. JILL net sales comprised 82.6% of the
Company's total net sales during the six months ended June 26, 1999 as
compared to 70.0% during the six months ended June 27, 1998. During the six
months ended June 26, 1999 J. JILL net sales and circulation increased by
61.7% and 85.2%, respectively, as compared to the six months ended June 27,
1998. J. JILL net sales growth was primarily attributable to the
aforementioned circulation growth as well as an increase in fulfillment rates
and a decrease in returns rates. During the six months ended June 26, 1999
net sales and circulation for NICOLE SUMMERS decreased by 20.3% and 6.7%,
respectively, as compared to the six months ended June 27, 1998. As mentioned
above, the Company is in the process of refocusing its NICOLE SUMMERS
concept. The first new NICOLE catalog will debut in mid-August 1999 and will
target younger, more career conscious women (see Future Considerations).
Total Company catalog circulation increased by 55.1% to 51.8 million during
the six months ended June 26, 1999 from 33.4 million during the six months
ended June 27, 1998.
PRODUCT
During the six months ended June 26, 1999 product costs increased by
31.8% to $62.5 million from $47.5 million during the six months ended June
27, 1998. As a percentage of net sales, product costs decreased to 43.8%
during the six months ended June 26, 1999 from 45.6% during the six months
ended June 27, 1998. This decrease in product costs as a percentage of net
sales is primarily attributable to the factors discussed above in the
quarterly comparison of product costs as well as the impact of a strategic
merchandising initiative implemented during the first quarter 1998 aimed at
minimizing future potential markdowns.
OPERATIONS
During the six months ended June 26, 1999 operating expenses increased by
57.4% to $31.2 million from $19.8 million during the six months ended June 27,
1998. As a percentage of net sales, operating expenses increased to 21.9% during
the six months ended June 26, 1999 from 19.1% during the six months ended June
27, 1998. This increase was primarily attributable to the increased order taking
and customer service costs discussed above in the quarterly comparison of
operating expenses and to inefficiencies and reduced employee productivity
associated with the transition and consolidation of the Company's operations
from three distribution facilities into the Tilton facility.
SELLING
During the six months ended June 26, 1999 selling expenses increased by
36.9% to $31.1 million from $22.7 million during the six months ended June 27,
1998. As a percentage of net sales, selling expenses decreased to 21.7% during
the six months ended June 26, 1999 from 21.8% during the six months ended June
27, 1998.
GENERAL AND ADMINISTRATIVE
During the six months ended June 26, 1999 general and administrative
expenses increased by 11.5% to $8.6 million from $7.8 million during the six
months ended June 27, 1998. This increase was primarily attributable to
increased salaries and increased professional fees. As a percentage of net
sales, general and administrative expenses decreased to 6.1% during the six
months ended June 26, 1999 from 7.4% during the six months ended June 27, 1998.
INTEREST, NET
Interest expense increased to $1.0 million during the six months ended June
26, 1999 as compared to $0.3 million during the six months ended June 27, 1998,
primarily as a result of increased use of the Company's credit facilities.
Interest income decreased to $0.3 million during the six months ended June 26,
1999 from $0.7 million during the six months ended June 27, 1998, primarily due
to lower cash and cash equivalent balances.
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 the six months ended June 26, 1999 and the six months
ended June 27, 1998 was 40.0% and 39.0%, respectively. The increased
effective tax rate during the six months ended June 26, 1999 reflects the
effect of an increased federal statutory tax rate due to expected annual
taxable income levels.
10
LIQUIDITY AND CAPITAL RESOURCES
The J. Jill Group'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
the six months ended June 26, 1999 these capital expenditures included costs
related to the construction of the Tilton facility. During the six months
ended June 26, 1999 the Company funded its operating and capital needs
through its new and existing credit facilities, cash generated from
operations and proceeds from its 1997 public offering.
The Company's operating activities provided net cash of $6.0 million
during the six months ended June 26, 1999 primarily from net income before
depreciation and decreases in inventory, which were partially offset by
decreases in accounts payable and accrued expenses. The decrease in inventory
levels at June 26, 1999 as compared to December 26, 1998 was primarily a result
of decreases in NICOLE SUMMERS inventory consistent with the continued negative
growth of NICOLE SUMMERS and the timing of the new NICOLE debut (see Future
Considerations). The Company's operating activities provided net cash of $10.2
million during the six months ended June 27, 1998 as a result of net income
before depreciation and an increase in accounts payable and accrued expenses.
The Company's investing activities used net cash of $5.2 million and
$19.7 million during the six months ended June 26, 1999 and the six months ended
June 27, 1998, respectively, primarily for property and equipment additions
related to the construction of the Tilton facility. Construction of the
Tilton facility began in 1997 and was completed as of December 26, 1998.
The Company's financing activities used net cash of $8.5 million during
the six months ended June 26, 1999. This usage was primarily the net result of a
$23.6 million paydown of short-term borrowings and long-term debt and a $14.8
million increase in long-term debt in connection with the refinancing of the
Tilton facility, equipment and furniture on a long-term basis. During the six
months ended June 27, 1998, net cash of $9.5 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 June 26, 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 $1.0 million furniture
loan (the "Furniture Loan"); (iv) a $1.7 million real estate loan; and (v) a
$30.0 million revolving line of credit. The weighted average interest rate
for amounts outstanding under the Company's credit facilities during the six
months ended June 26, 1999 was 7.08%. The Tilton Facility Loan is
collateralized by a mortgage lien on the Tilton facility. The Tilton facility
is owned by the J. Jill Group's wholly owned subsidiary, Birch Pond Realty
Corporation ("Birch Pond") and leased to the J. Jill Group. 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
Furniture Loan is collateralized by certain workstations and office
furniture. 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.
The Company expects that its cash and cash equivalents, existing credit
facilities and cash flows from operations will be sufficient to provide the
capital resources necessary to support the Company's capital and operating needs
for the foreseeable future.
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 two new retail
stores in November, 1999. One of these stores will be located in Natick,
Massachusetts and one in Providence, Rhode Island. The Company currently plans
to have a total of 10 to 12 retail stores open by the end of fiscal year 2000
and an additional 50 stores open in 2001. The Company also plans to have a
fully-transactional website in operation by the end of August, 1999. 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 is
currently refocusing the NICOLE SUMMERS concept. The new NICOLE merchandising
assortment is targeted to younger, fashion conscious career women and offers
a very focused trend-relevant assortment of contemporary apparel. The first
new NICOLE catalog will
11
debut in mid-August, 1999. The Company expects this refocusing of its NICOLE
SUMMERS concept to result in additional declines in response rates and net
sales that the Company expects to be temporary and not material to its
consolidated results of operations.
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, all of the
Company's 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
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 or were part
of the Company's continuing maintenance plans, they are not considered to be
costs directly attributable to the Year 2000 issue. The Company is continuing
its validation process 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 they are currently Year 2000 compliant or
indicating a date that a compliance certificate is expected. The Company is
updating its 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 refine 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Stockholders on May 25, 1999. At
the Annual Meeting, the stockholders of the Company voted to approve the
following actions by the following votes:
1. To fix the number of directors that shall constitute the whole Board of
Directors of the Company at six.
NUMBER OF SHARES
--------------------------
For.................................................................................... 8,728,229
Against................................................................................ 15,437
Abstain................................................................................ 1,105
2. To elect the following nominees as Class C Directors of the Company:
WITHHOLDING
FOR AUTHORITY
------------------- ------------------------
Gordon R. Cooke................................................. 8,744,310 461
Thomas J. Litle................................................. 8,742,479 2,292
3. To amend the Company's Certificate of Incorporation to change the name of the
Company to "The J. Jill Group, Inc."
NUMBER OF SHARES
--------------------------
For.................................................................................... 8,677,367
Against................................................................................ 64,838
Abstain................................................................................ 2,566
13
EXHIBIT INDEX
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 Certificate of Amendment of Restated Certificate of
Incorporation of the Company, dated June 1, 1999
3.3 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 First Amendment to Lease Agreement, dated June 10, 1999,
between the Company and National Fire Protection Association
10.2 Subordination of Mortgage, dated June 28, 1999, between Birch
Pond Realty Corporation and John Hancock Real Estate Finance,
Inc.
10.3 First Modification of Mortgage, Assignment of Leases and Rents
and Security Agreement, dated June 28, 1999, between Birch
Pond Realty Corporation and John Hancock Real Estate Finance,
Inc.
10.4 Partial Release, dated June 28, 1999, between Birch Pond
Realty Corporation and John Hancock Real Estate Finance, Inc.
10.5 Reaffirmation of Guaranty and Indemnity Agreements, dated June
28, 1999, between the Company and Birch Pond Realty
Corporation in favor of John Hancock Real Estate Finance, Inc.
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
(2) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated May 25, 1999 in connection
with the change of the name of the Company from DM Management Company
to The J. Jill Group, Inc. The Company filed no other reports on Form
8-K during the quarter ended June 26, 1999.
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.
THE J. JILL GROUP, INC.
Dated: August 9, 1999 By: /S/ OLGA L. CONLEY
---------------------------------
Olga L. Conley
Authorized Officer
Senior Vice President -
Finance,
Chief Financial Officer and
Treasurer
(PRINCIPAL FINANCIAL OFFICER)
Dated: August 9, 1999 By: /S/ PETER J. TULP
----------------------------------
Peter J. Tulp
Authorized Officer
Vice President - Finance
and Corporate Controller
(PRINCIPAL ACCOUNTING OFFICER)
15
THE J. JILL GROUP, INC.
(FORMERLY DM MANAGEMENT COMPANY)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 26, 1999
EXHIBIT INDEX
DESCRIPTION
EXHIBIT NO.
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 Certificate of Amendment of Restated Certificate of
Incorporation of the Company, dated June 1, 1999
3.3 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 First Amendment to Lease Agreement, dated June 10, 1999,
between the Company and National Fire Protection Association
10.2 Subordination of Mortgage, dated June 28, 1999, between Birch
Pond Realty Corporation and John Hancock Real Estate Finance,
Inc.
10.3 First Modification of Mortgage, Assignment of Leases and Rents
and Security Agreement, dated June 28, 1999, between Birch
Pond Realty Corporation and John Hancock Real Estate Finance,
Inc.
10.4 Partial Release, dated June 28, 1999, between Birch Pond
Realty Corporation and John Hancock Real Estate Finance, Inc.
10.5 Reaffirmation of Guaranty and Indemnity Agreements, dated June
28, 1999, between the Company and Birch Pond Realty
Corporation in favor of John Hancock Real Estate Finance, Inc.
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
16