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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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
HINGHAM, MA 02043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (781) 740-2718
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
Common Stock, $0.01 par value
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 /_/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 12, 1999, the aggregate market value of common stock held by
non-affiliates of the Registrant was $154,354,600 based on the closing price
($ 16 5/8 per share) for the common stock as reported on The Nasdaq Stock
Market on March 12, 1999.
Shares outstanding of the Registrant's common stock at March 12, 1999:
9,707,740
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement for the Annual Meeting of
Stockholders of DM Management Company to be held on May 25, 1999, which will be
filed with the Securities and Exchange Commission within 120 days after December
26, 1998, are incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
DM MANAGEMENT COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998
Page
----
Part I
Item 1. Business................................................ 3
Item 2. Properties.............................................. 9
Item 3. Legal Proceedings....................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..... 9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 10
Item 6. Selected Consolidated Financial Data.................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk............................................... 17
Item 8. Consolidated Financial Statements and Supplementary
Data............................................... 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Consolidated Financial Disclosure... 39
Part III
Item 10. Directors and Executive Officers of the Registrant...... 39
Item 11. Executive Compensation.................................. 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 39
Item 13. Certain Relationships and Related Transactions.......... 39
Part IV
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K............................ 40
Signatures.................................................................. 44
PART I
ITEM 1. BUSINESS
THE COMPANY
DM Management Company ("DM Management" or the "Company") is a specialty
direct marketer of high quality women's apparel, accessories, shoes and gifts.
In 1998 the Company also began featuring bed and bath items. The Company
currently markets its products through two discrete catalog concepts, J. JILL
and NICOLE SUMMERS. These concepts are designed to appeal to active, affluent
women age 35 and older, with each concept aimed at a distinct lifestyle segment
within this demographic group. The Company seeks to distinguish its catalogs and
reinforce the brand identity of the J. JILL and NICOLE SUMMERS names through
exclusive private label merchandise offerings, a broad assortment of extended
sizes, "total look" wardrobing and editorial lifestyle photography.
THE CATALOGS
J. JILL is characterized by the simple, comfortable style of its apparel
offerings, which range from relaxed career wear to weekend wear. These apparel
offerings are predominantly private label, with emphasis on natural fibers and
creative details. J. JILL'S target customers are active, affluent women age 35
to 55. During the twelve months ended December 26, 1998 ("fiscal 1998"), J. JILL
net sales accounted for approximately 75% of the Company's total net sales, up
from approximately 54% for the twelve months ended December 27, 1997 ("fiscal
1997"). The Company believes that this growth is being driven by J. JILL'S
distinctive merchandising, marketing and creative strategies, as well as the
emerging market for more casual apparel, particularly for the workplace, and the
need active, working women have for comfortable, versatile clothing. The Company
also believes that this market has not been well served by other direct
marketers or retailers.
NICOLE SUMMERS is characterized by its edited assortment of updated classic
apparel. Its target customers are affluent women age 45 and older who have an
active but formal lifestyle and, most importantly, are younger in their outlook
than their peers in previous generations. NICOLE SUMMERS operates in a mature
marketplace and is currently experiencing negative growth. In an effort to
respond to this mature marketplace and focus on potential opportunities in this
market the Company hired a new Vice President of Merchandising for NICOLE
SUMMERS with experience in product development, planning and women's apparel
merchandising.
BUSINESS STRATEGY
DM Management's objective is to be a fashion authority for its target
market. The Company seeks to combine the personal experience of shopping at an
upscale specialty retailer with the ease and convenience of shopping at home by
offering an edited assortment of high quality products in vibrant, easy-to-read
catalogs. The key elements of the Company's business strategy are set forth
below:
BRAND BUILDING. The Company believes that it has a significant opportunity
to build the brand identity of each of its catalog concepts within its target
market. The Company seeks to enhance brand identity by developing strong
relationships with its customers that foster loyalty and increase repeat
purchases. The consistent application of unique creative and merchandising
techniques tailored to create a signature style for each catalog concept is a
central element of this effort, as is an emphasis on superior customer service.
WELL DIFFERENTIATED MERCHANDISE OFFERINGS. The Company believes that its
distinctive approach to merchandising enhances its position as a fashion
authority to its target customers. Key components of the Company's merchandising
strategy include:
- PRIVATE LABEL PROGRAM. A substantial portion of the merchandise
offered through the Company's catalogs is private label merchandise (i.e.,
merchandise sold under the DM Management catalog's brand name). All of the
Company's private label offerings, particularly under the J. JILL concept,
are designed by the Company and are not available in other catalogs or
retail stores. In fiscal 1998 private label merchandise represented
approximately 91% and 34% of the apparel styles offered in the J. JILL and
NICOLE SUMMERS catalogs, respectively. All private label merchandise is
exclusive to DM Management. The Company believes that its exclusive private
label merchandise offerings reinforce its role as a fashion authority to
its target customers and enhance the brand identity of the J. JILL and
NICOLE SUMMERS names.
3
- EXTENDED SIZES. In addition to offering regular sizes from 4 to 20,
the Company offers a broad assortment of apparel in petite and large sizes
in the same styles as its regular size offerings. Management believes that
the Company has particular expertise in scaling fashionable regular size
merchandise to be attractively worn by extended size customers, and that
these hard to fit customers currently have few attractive catalog or retail
shopping alternatives. In fiscal 1998 extended size apparel offerings
accounted for 44% of total merchandise offerings.
- "TOTAL LOOK" WARDROBING. The Company's "total look" wardrobing
approach seeks to satisfy the lifestyle needs of the Company's target
customers by offering a coordinated selection of apparel, accessories and
shoes to outfit them from head to toe. Management believes that this
approach builds brand identity while increasing the Company's potential
share of household spending dollars.
DISTINCTIVE CREATIVE PRESENTATION. The Company's catalogs are its primary
vehicles for communicating with its customers. The creative presentation of each
catalog is a crucial factor in attracting customer attention, stimulating
purchases, projecting differentiation in the marketplace and building brand
identity. The signature style of each catalog is enhanced by the use of
editorial lifestyle photography that presents merchandise in settings in which
the Company's target customers might find or imagine themselves and by other
distinctive catalog design elements such as thematic merchandise spreads
highlighting particular colors or fabrics.
INVESTMENT IN MANAGEMENT AND INFRASTRUCTURE. The Company is committed to
investments in management and operational infrastructure in order to support its
anticipated future growth, serve its customers, improve operating efficiencies
and respond to strategic opportunities. In fiscal 1998 DM Management completed
the construction of a new operations and fulfillment center and the
implementation of two major operating systems - a new order taking system and a
new warehouse management system.
NEW OPPORTUNITIES. In 1999 the Company intends to mail four separate 48
page J. JILL catalogs featuring an assortment of bed, bath and accessory
items entitled "peopleplacesthings." Additionally, 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. The Company also plans to have a fully-transactional website
in operation in time for the 1999 holiday season. The Company may 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.
CREATIVE PRESENTATION AND CATALOG PRODUCTION
The objective of the Company's creative approach for each of its catalogs
is to present merchandise in a vibrant, easy-to-read format with a visual style
appropriate for the sophistication of the merchandise and the expectations of
the target customers. Management believes that the use of distinctive catalog
design techniques such as editorial lifestyle photography and thematic
merchandise spreads highlighting particular colors or fabrics helps to create
the signature style of its catalog concepts and establish their position as
fashion authorities for their target customers. The Company's catalogs showcase
merchandise in settings in which their customers might find or imagine
themselves, in order to heighten the customers' identification with the concept
and affinity for its merchandise offerings. The Company's catalogs are also
designed to enhance customer convenience through easy-to-read layouts,
coordinated merchandise placement and the Company's "total look" wardrobing
approach. Management believes that the Company's strategy of presenting
merchandise in real life settings also helps to differentiate it from
store-front retailers.
The Company devotes substantial resources to the design and production of
each edition of its catalogs. After an initial conceptualization meeting, the
creative and merchandising teams work closely together on catalog design,
merchandise selection and presentation and catalog print production. The
materials and direction necessary to produce each catalog are then delivered to
the Company's production team approximately eight weeks before the initial
mailing date of the catalog. The production team creates the electronic files
used to print the catalog and plans and manages the printing and catalog
distribution processes. The production team ensures that photographs appearing
in the Company's catalogs accurately depict merchandise characteristics such as
color and texture. Catalog production takes place in-house using desktop
publishing systems. As a result, the Company can adjust catalog layout until
approximately two weeks before the planned initial mailing date, allowing the
Company to react to current market and sales trends by adjusting content and
presentation of catalogs while they are in production. All of the Company's
catalogs are printed commercially under the Company's supervision.
4
MARKETING AND CUSTOMER DATABASE MANAGEMENT
At December 26, 1998, the Company's customer database contained
approximately 3.3 million individual customer names, including approximately
1,022,000 individuals who had made a purchase within the previous 12 months.
The Company estimates that approximately two-thirds of these active customers
have made multiple purchases from the Company. DM Management stores detailed
information on each of its customers, including demographic data and purchase
history. The database is updated on a weekly basis. To determine which of its
customers will receive a particular catalog mailing, the Company analyzes
this information using sophisticated statistical modeling techniques. The
Company's customer database is maintained off-site by a service bureau which
sorts and processes the information in accordance with instructions from the
Company. The Company's agreement with the service bureau requires the service
bureau to safeguard the confidentiality of the Company's database.
Additionally, the Company uses customer research techniques such as focus
groups and quantitative surveys to assess customer perceptions of its catalog
concepts and their competitors, in order to help set distinctive marketing,
merchandising and creative strategies appropriate for each catalog concept.
The Company acquires lists of prospective customers by rental or
exchange and from a database cooperative and other sources. The Company also
purchases lists of prospective customers. The most productive prospects tend
to come from the customer lists of other women's apparel catalogs, including
direct competitors. The Company rents its list of customers to and exchanges
it with others, including direct competitors. To determine which prospective
customers will receive a particular catalog mailing, the Company analyzes
available information concerning such prospects using the same types of
sophisticated statistical modeling techniques used to target mailings to the
Company's own customers.
As part of its customer retention program and brand building strategy, DM
Management offers its own private label credit card. The Company believes that
this credit card reinforces the Company's relationship with existing customers
and promotes additional purchases by these customers. In fiscal 1998
approximately 7% of net sales were attributable to purchases made using the
Company's private label credit card. At December 26, 1998 there were
approximately 91,000 holders of the Company's private label credit card. The
credit card program is currently administered by a fee-based outside vendor who
bears the credit risk associated with the credit card without recourse to the
Company.
MERCHANDISING
The Company provides an edited assortment of high quality merchandise
designed to meet the tastes and serve the lifestyle needs of its target
customers. Each of the Company's catalog concepts has its own merchandise
selection staff. In addition to apparel, shoes and accessories, the Company's
catalogs also offer a selection of seasonal items, gifts and other products
selected with the specific lifestyle profiles of J. JILL and NICOLE SUMMERS
target customers in mind.
The Company's catalogs offer both brand name and private label merchandise.
In fiscal 1998 approximately 91% of the apparel styles offered through J. JILL
catalogs were private label. During the same period, approximately 34% of the
apparel styles offered through NICOLE SUMMERS catalogs were private label.
Private label merchandise is manufactured to the Company's detailed
specifications by foreign and domestic vendors. The foreign vendors are
primarily located in Hong Kong, Singapore and Israel. Brand name products are
selected from the regular offerings of the Company's vendors.
Both the J. JILL and NICOLE SUMMERS catalogs offer a wide assortment of
merchandise in petite and large sizes, in the same styles as their regular sized
offerings. In fiscal 1998 extended size apparel offerings accounted for 44% of
total merchandise offerings.
DM Management's catalogs feature a "total look" wardrobing approach which
presents a coordinated selection of apparel and related items including
sportswear, dresses, suits, coats, swimwear, shoes and accessories intended to
outfit the customer from head to toe. Management believes that this approach
builds brand identity while increasing the Company's potential share of
household spending dollars.
INVENTORY MANAGEMENT AND PURCHASING
The Company's inventory management systems are designed to maintain
inventory levels that provide optimum in-stock positions and maximum inventory
turnover rates while minimizing the amount of unsold merchandise at the end of
each selling season. To achieve this goal, the Company seeks to schedule
merchandise deliveries and inventory amounts to conform to expected sales
levels.
5
The Company follows an interdepartmental approach to the inventory planning
process. Conceptual planning for each principal catalog edition begins
approximately nine months in advance of its initial mailing. Early in the
process the Company's inventory control, marketing, creative and merchandising
teams meet to present key strategies and opportunities for specific catalog
editions and merchandise items. The inventory control group then applies
inventory coverage models to plan opening inventory levels for each stock
keeping unit ("sku"), taking into account projected sales, the cost of being out
of stock and ease of reordering. Preliminary commitments with the Company's
private label merchandise vendors typically are made five to seven months in
advance of each principal catalog edition's initial mailing date. To the extent
feasible, the Company seeks to retain flexibility in these commitments in order
to be able to react to market and sales trends. Initial merchandise commitments
for branded merchandise typically are made three to five months before the
edition's initial mailing date. Initial deliveries generally are scheduled to be
received one to three weeks before the edition's initial mailing date.
The inventory control group utilizes a forecasting system which analyzes
sales and returns by sku throughout the selling season to permit purchasing
adjustments based on forecasted sales and returns. The Company attempts to
minimize overstocks through a variety of promotional efforts, including
telemarketing to customers at the time they place orders for other merchandise
and circulation of seasonal clearance catalogs. The Company also sells excess
inventory through its four outlet stores and to "jobbers." The Company plans to
open three new outlet stores in 1999. The Company's outlet stores are run solely
for the purpose of liquidating overstocks.
The Company sells both domestically produced and imported merchandise,
which it purchases in the open market. In fiscal 1998 the Company purchased
merchandise from approximately 750 vendors. In fiscal 1998 the Company purchased
approximately 21% of its merchandise directly from foreign vendors, and the
Company expects that it will continue to purchase merchandise from foreign
suppliers in the future. In addition, goods purchased by the Company from
domestic vendors may be sourced abroad by such vendors. The Company seeks to
establish long-term relationships with its merchandise vendors and works closely
with them to ensure high standards of merchandise quality.
CONTACT CENTER
DM Management believes that an emphasis on superior customer service is
important to its ability to expand its customer base and build customer
loyalty. At December 26, 1998, the Company employed approximately 340 contact
center representatives. Customer orders are taken 24 hours a day, 365 days a
year, primarily by the Company's contact center representatives at its
operations center. The operations center in Meredith, New Hampshire was
replaced by a new operations center in Tilton, New Hampshire in February
1999. The Company also accepts orders by mail or facsimile. All orders are
input directly into the Company's on-line data processing system, which
provides, among other things, customer historical information, merchandise
availability, product specifications, available substitutes and accessories
and expected shipment date. The Company trains its contact center
representatives to be knowledgeable in merchandise specifications and
features. These representatives have ready access to samples of the current
season's merchandise assortment, which enables them to answer detailed
merchandise inquiries from customers on-line.
DM Management offers an unconditional merchandise guarantee. If a customer
is not completely satisfied with any item for any reason, the customer may
return it for an exchange or a full refund. To simplify the return process, the
Company includes a self-addressed return label with every shipment, which
customers can use to return any item to the Company through the United States
Postal Service without paying postage fees in advance. Management believes that
the Company's return rates are consistent with industry standards for comparable
merchandise. Returns experience is closely monitored to identify any product
quality or fit issues. Returned merchandise is inspected carefully and, unless
damaged, is cleaned, pressed and returned to inventory. Approximately 96% of
returned merchandise is recycled into inventory.
FULFILLMENT
DM Management believes that the prompt delivery of merchandise promotes
customer loyalty and repeat buying. To achieve this goal, the Company uses an
integrated picking, packing and shipping system. The system monitors the
in-stock status of each item ordered, processes the order and generates all
related packing and shipping materials, taking into account the location of
items within the fulfillment center. The Company's customers normally receive
their orders within three to five business days after shipping, although
customers may request overnight delivery for an extra charge.
The Company's significant growth over the past two fiscal years and the
corresponding operating infrastructure investment required to support this
growth has resulted in the construction of a new 400,000 square foot,
state-of-the-art operations and fulfillment center in Tilton, New Hampshire (the
"Tilton facility"). Approximately 370,000 square feet of
6
the new Tilton facility is fulfillment operations. Currently all merchandise is
shipped from the Company's new facility in Tilton, New Hampshire.
In fiscal 1998 the Company operated out of three distribution facilities
while awaiting the completion of the Tilton facility. In connection with the
Company's transition to the Tilton facility, the Company has vacated its
Meredith, New Hampshire operations and fulfillment center, its Laconia, New
Hampshire interim fulfillment center and its Laconia, New Hampshire interim
returns processing and storage facility. The Company is actively marketing its
operations and fulfillment center in Meredith, New Hampshire for sale or lease
and is actively seeking a sub-lessor for its interim fulfillment center in
Laconia, New Hampshire. The Company has terminated the lease on its interim
returns processing and storage facility effective December 31, 1998. The Company
incurred no penalties as a result of this early termination.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company is committed to making ongoing investments in its information
systems to increase operating efficiency, provide superior customer service and
support its anticipated growth. The Company believes that the ability to capture
and analyze operational and financial data and relevant information about its
customers and their purchasing history is critical to its success.
The Company has made, and continues to make, significant investments in
systems to support order taking and customer service, fulfillment, marketing,
merchandising, inventory control, financial control and reporting and
forecasting. During fiscal 1998 DM Management implemented a new automated
warehouse management system which will more efficiently support its warehouse
processes and provide additional flexibility to support the Company's growth
plans. The Company also implemented a new order management system in fiscal 1998
which provides significant processing enhancements and flexibility as compared
to the Company's old system.
In addition to its in-house data processing and information systems
resources, the Company also uses several outside vendors for key services such
as list processing and credit card administration and approval.
COMPETITION
The market for the Company's merchandise is highly competitive. The Company
competes with other direct marketers, specialty apparel and accessory retailers
and traditional department store retailers. There are few barriers to entry in
the women's specialty apparel and accessory market. Moreover, the Company
believes that its recent success, as well as the sales growth in the direct
marketing industry, has or will encourage many new competitors. In particular,
the Company believes that J. JILL serves an emerging market niche in which
competition is limited currently but is likely to increase in the future. Many
of the Company's competitors are larger and have substantially greater
financial, marketing and other resources than the Company. DM Management
believes that it competes principally on the basis of its "total look"
wardrobing approach, extended size offerings, private label product offerings,
creatively distinctive catalogs and superior customer service.
EMPLOYEES
As of March 6, 1999, the Company employed 935 individuals, of whom 849 were
full-time (those employees scheduled to work 30 hours or more per week). None of
the Company's employees is represented by a union. The Company considers its
employee relations to be good.
TRADEMARKS AND SERVICE MARKS
The Company has registered various trademarks and service marks with the
United States Patent and Trademark Office, including J. JILL and NICOLE SUMMERS.
GOVERNMENT REGULATION
The catalog sales business conducted by the Company is subject to the Mail
or Telephone Order Merchandise Rule and related regulations promulgated by the
Federal Trade Commission, which prohibit unfair methods of competition and
unfair or deceptive acts or practices in connection with mail and telephone
order sales and require sellers of mail and telephone order merchandise to
conform to certain rules of conduct with respect to shipping dates and shipping
delays. The Company believes it is in compliance with the Rule and such
regulations.
7
The Company currently collects sales taxes only on sales to its
Massachusetts and Pennsylvania customers. Many states have attempted to
require that out-of-state direct marketers collect use taxes on sales of
products shipped to their residents. In 1992, the United States Supreme Court
held unconstitutional a state's imposition of use tax collection obligations
on an out-of-state mail order company whose only significant contacts with
the state were the distribution of catalogs and other advertising materials
through the mail and subsequent delivery of purchased goods by mail or common
carriers, but stated that Congress could enact legislation authorizing the
states to impose such obligations. In 1995, however, the United States
Supreme Court let stand a decision of New York's highest state court
requiring an out-of-state catalog company to collect use tax (including a
retroactive assessment and penalties) on its mail order sales in the state,
where the catalog company's reported contact with New York included a limited
number of visits by sales force employees. If Congress enacts legislation
permitting states to impose use tax collection obligations on out-of-state
mail order businesses, or if the Company otherwise is required to collect
additional sales or use taxes, such tax collection obligations would make it
more expensive to purchase the Company's products and increase the Company's
administrative costs, and therefore could have a material adverse effect on
the Company's financial condition and results of operations.
8
ITEM 2. PROPERTIES
The following table sets forth certain information relating to the
Company's facilities as of December 26, 1998:
Square Type of Lease
Location Footage Function Interest Termination
- ---------------------------------- ------- --------------------------------- -------- -----------
Tilton, NH (approx. 360 acres).... 400,000 Operations and Fulfillment Center Owned(1) --
Laconia, NH....................... 112,900 Interim Fulfillment Center Leased 09/14/99
Meredith, NH (approx. 25 acres)... 93,120 Operations and Fulfillment Center Owned --
Laconia, NH....................... 37,800 Interim Returns Processing and Leased 12/31/98
Storage Facility
Hingham, MA....................... 19,642 Corporate Offices Leased 03/31/00
Hingham, MA....................... 1,935 Corporate Offices Leased 12/31/03
Bedford, MA....................... 5,255 Outlet Store Leased 04/30/00
Meredith, NH...................... 3,600 Outlet Store Leased 07/01/99
Reading, PA....................... 3,059 Outlet Store Leased 08/31/03
North Conway, NH.................. 2,567 Outlet Store Leased 02/28/02
(1) Subsequent to December 26, 1998, the Company contributed its new operations
and fulfillment center in Tilton, New Hampshire to Birch Pond Realty
Corporation, a wholly owned subsidiary of the Company, in exchange for all
of the outstanding shares of Birch Pond Realty Corporation. (See Note D to
the accompanying consolidated financial statements.)
In connection with the Company's transition to the new Tilton, New
Hampshire operations and fulfillment center, the Company has vacated its
Meredith, New Hampshire operations and fulfillment center, its Laconia, New
Hampshire interim fulfillment center and its Laconia, New Hampshire interim
returns processing and storage facility. The Company is actively marketing its
operations and fulfillment center in Meredith, New Hampshire for sale or lease
and is actively seeking a sub-lessor for its interim fulfillment center in
Laconia, New Hampshire. The Company has terminated the lease on its interim
returns processing and storage facility effective December 31, 1998. The Company
incurred no penalties as a result of this early termination.
During fiscal 1998, the Company entered into lease agreements for two
additional J. JILL catalog outlet stores. The leases on these two stores are due
to commence in 1999. The term of the first lease is five years, commencing on
the earlier of opening the store or April 1999, and includes 2,780 square feet
of retail space located in Lancaster, Pennsylvania. The term of the second lease
is three years, commencing on the earlier of opening the store or December 1999
and includes 3,500 square feet of retail space located in Wrentham,
Massachusetts.
Also during fiscal 1998, the Company entered into a lease agreement for
60,500 square feet of office space intended to house its new corporate
headquarters in Quincy, Massachusetts. The original term of the lease is ten
years commencing on the date on which the premises are ready for occupancy. The
current estimated completion date is in September 1999.
The operations and fulfillment centers in Tilton, New Hampshire and
Meredith, New Hampshire are subject to certain encumbrances. (See Note D to the
accompanying consolidated financial statements.)
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and did not
settle any material legal proceedings during the quarter ended December 26,
1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "DMMC." As of March 12, 1999, the approximate number of holders of record
of common stock of the Company was 350. The Company believes that the
approximate number of beneficial holders of common stock of the Company is
approximately 2,600.
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.
The following table sets forth, for the periods indicated, the high and low
sales prices for the Company's common stock as reported on The Nasdaq Stock
Market. All sales price information below has been restated to reflect the
effects of the three-for-two stock split.
High Low
---- ---
FISCAL 1998
Quarter ended December 26, 1998 ...... $ 17 3/4 $ 5 7/8
Quarter ended September 26, 1998 ..... 27 5/8 7 1/8
Quarter ended June 27, 1998 .......... 23 1/2 12 5/64
Quarter ended March 28, 1998 ......... 15 3/4 10 21/64
FISCAL 1997
Quarter ended December 27, 1997 ...... 12 11/64 7 43/64
Quarter ended September 27, 1997 ..... 9 1/2 6 1/2
Quarter ended June 28, 1997 .......... 7 1/2 4 1/2
Quarter ended March 29, 1997 ......... $5 27/64 $ 2 27/64
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain any earnings for use in the
operation and expansion of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of DM Management Company (the
"Company") set forth below has been derived from the Company's consolidated
financial statements for the periods indicated and should be read in conjunction
with the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and footnotes.
The Company's fiscal year ends on the last Saturday in December. Prior to
December 28, 1996, the Company's fiscal year had ended on the last Saturday in
June. The Company's change in fiscal year end resulted in a six-month transition
period ended December 28, 1996 (the "transition period"). Financial information
for the twelve months ended December 28, 1996 has been presented for comparative
purposes and is unaudited. 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 share and per
share information below has been restated to reflect the effects of the
three-for-two stock split.
Transition
Period
Twelve Months Ended Ended Twelve Months Ended
-------------------------------- ------- --------------------------------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29, June 24, June 25,
1998 1997 1996(2)(1) 1996 (2) 1996 (1) 1995 (1) 1994
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net sales ...................................... $218,730 $135,533 $ 84,642 $ 43,324 $ 80,585 $ 72,691 $ 63,337
Income from continuing operations
before income taxes ........................ 13,774 6,392 1,956 1,072 261 851 3,604
Income from continuing operations .............. 8,402 3,899 12,358 11,563 235 765 3,269
Net income (loss) .............................. 8,402 3,899 3,371 11,563 (9,350) 773 3,269
Income from continuing operations
per share (diluted) ........................ 0.81 0.48 1.76 1.63 0.04 0.11 0.53
Net income (loss) per share (diluted) .......... $ 0.81 $ 0.48 $ 0.48 $ 1.63 $ (1.40) $ 0.11 $ 0.53
Weighted average shares outstanding (diluted) .. 10,378 8,073 7,019 7,105 6,661 6,914 6,115
Consolidated Balance Sheet Data:
Total assets ................................... $115,492 $ 75,381 $ 38,109 $ 38,109 $ 27,069 $ 31,612 $ 26,923
Working capital ................................ 10,191 32,835 10,662 10,662 6,988 6,315 9,305
Long-term debt, less current portion ........... 9,900 8,346 4,540 4,540 4,380 3,634 248
Stockholders' equity ........................... $ 53,596 $ 43,142 $ 21,223 $ 21,223 $ 9,480 $ 18,851 $ 17,861
Selected Operating Data:
Catalog circulation (3) ........................ 73,800 50,500 37,900 18,400 41,600 40,300 32,400
Total twelve-month buyers (4) .................. 1,022 681 455 455 498 479 415
(1) In December 1994 the Company purchased certain assets and assumed certain
liabilities of Carroll Reed, Inc. and Carroll Reed International Limited.
In connection with the purchase, the Company paid $5,031,000 and
established accruals totaling $1,180,000. On May 20, 1996, the Company
announced its plan to divest its CARROLL REED segment and recorded a charge
of $8,511,000 for the loss on disposal of discontinued operations. The
results of the CARROLL REED operations through May 20, 1996 have been
classified as income (loss) from discontinued operations. See Note B to the
accompanying consolidated financial statements.
(2) During the six-month and twelve-month periods ended December 28, 1996, the
Company recognized a deferred tax benefit of $10,598,000. See Note H to the
accompanying consolidated financial statements.
(3) 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-K, the term "catalog
circulation" refers to circulation of the Company's catalogs calculated in
such fashion.
(4) As used throughout this Form 10-K, the term "twelve-month buyers" means
customers who have made a purchase from the Company within the previous 12
months.
11
ITEM 7. 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; DIFFICULTIES IN MANAGING THE TRANSITION OF OPERATIONS TO THE NEW
TILTON, NEW HAMPSHIRE OPERATIONS AND FULFILLMENT CENTER; 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
In January 1997 the Company changed its fiscal year end from the last
Saturday in June to the last Saturday in December. References to fiscal 1998 and
fiscal 1997 mean the Company's fiscal years ended December 26, 1998 and December
27, 1997, respectively. References to the transition period mean the six-month
transition period ended December 28, 1996. The following table sets forth, for
the fiscal periods indicated, certain items from the Company's consolidated
statements of operations expressed as a percentage of net sales:
Transition Twelve
Period Months
Twelve Months Ended Ended Ended
---------------------------- ---------- --------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29,
1998 1997 1996 1996 1996
-------- -------- -------- -------- --------
Net sales ............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Product ............................ 44.8 44.1 44.0 44.9 43.5
Operations ......................... 20.0 18.9 16.5 15.9 17.3
Selling ............................ 22.3 24.7 28.0 27.1 30.3
General and administrative ......... 6.8 7.6 8.8 9.3 8.2
Interest, net ...................... (0.2) -- 0.4 0.3 0.4
----- ----- ----- ----- -----
Income from continuing operations
before income taxes ................ 6.3 4.7 2.3 2.5 0.3
Provision (benefit) for income taxes .... 2.5 1.8 (12.3) (24.2) --
----- ----- ----- ----- -----
Income from continuing operations ....... 3.8 2.9 14.6 26.7 0.3
Loss from discontinued operations ....... -- -- (10.6) -- (11.9)
----- ----- ----- ----- -----
Net income (loss) ....................... 3.8% 2.9% 4.0% 26.7% (11.6)%
===== ===== ===== ===== =====
12
COMPARISON OF FISCAL 1998 TO FISCAL 1997
NET SALES
In fiscal 1998 net sales increased by 61.4%, or $83.2 million, to $218.7
million from $135.5 million in fiscal 1997. The increase in net sales was
attributable to significant sales volume increases from J. JILL. In fiscal 1998
J. JILL net sales and circulation increased by 123.7% and 101.5%, respectively,
as compared to fiscal 1997. J. JILL net sales growth was attributable to the
aforementioned circulation growth, as well as improved response rates and
increased units per order. Although the Company plans to continue its aggressive
customer acquisition strategy at J. JILL, it does not expect the same year over
year percentage increase in circulation that it experienced in fiscal 1998 to
continue. In fiscal 1998 net sales and circulation for NICOLE SUMMERS decreased
by 12.9% and 17.8%, respectively, as compared to fiscal 1997. The Company
expects slight decreases in net sales and circulation at NICOLE SUMMERS in 1999
as compared to fiscal 1998. Total Company catalog circulation increased by 46.1%
to 73.8 million in fiscal 1998 from 50.5 million in fiscal 1997. The number of
twelve-month buyers grew to 1,022,000 at December 26, 1998 from 681,000 at
December 27, 1997, an increase of 50.1%.
PRODUCT
Product costs consist primarily of merchandise acquisition costs (net of
term discounts and advertising allowances), including freight-in costs, and
provisions for markdowns. In fiscal 1998 product costs increased by $38.1
million, or 63.7%, to $97.9 million from $59.8 million in fiscal 1997. As a
percentage of net sales, product costs increased to 44.8% in fiscal 1998 from
44.1% in fiscal 1997. Increased use of strategically designed promotional
pricing in fiscal 1998 combined with increased markdown charges associated with
NICOLE SUMMERS resulted in increased product costs as a percentage of net sales
over the prior year. This increase in costs as a percentage of net sales was
almost entirely 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. 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. In fiscal 1998 operating
expenses increased by $18.2 million, or 71.2%, to $43.8 million from $25.6
million in fiscal 1997. As a percentage of net sales, operating expenses
increased to 20.0% in fiscal 1998 from 18.9% in fiscal 1997. The Company's
significant growth over the past two fiscal years and the corresponding
operating infrastructure investment required to support this growth has resulted
in operational inefficiencies. In fiscal 1998 the Company operated out of three
distribution facilities while awaiting the completion of the new
state-of-the-art, 400,000 square foot operations and fulfillment facility in
Tilton, New Hampshire (the "Tilton facility"). Reduced productivity from
operating out of these multiple facilities, inefficiencies attributable to
implementing new order taking and warehouse management systems, increased costs
associated with third party call center usage and growth in the product
development division of merchandising all contributed to the increase in
operating expenses as a percentage of net sales in fiscal 1998. The Company
currently expects the ratio of operating expenses to net sales to improve in the
second half of 1999 with further improvement in 2000.
SELLING
Selling expenses consist primarily of the cost to produce, print and
distribute catalogs. In fiscal 1998 selling expenses increased by $15.4 million,
or 45.8%, to $48.9 million from $33.5 million in fiscal 1997. As a percentage of
net sales, selling expenses decreased to 22.3% in fiscal 1998 from 24.7% in
fiscal 1997. This decrease was primarily a result of improved catalog
productivity, offset by an increase in paper costs, in fiscal 1998 as compared
to fiscal 1997. The Company expects the ratio of selling expenses to net sales
to increase slightly in 1999 as a result of increased postage rates.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of executive,
marketing, information systems and finance expenses. In fiscal 1998 general and
administrative expenses increased by $4.7 million, or 45.5%, to $14.9 million
from $10.2 million in fiscal 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 6.8%
in fiscal 1998 from 7.6% in fiscal 1997.
INTEREST, NET
Interest income increased to $1.1 million in fiscal 1998 from $0.5 million
in fiscal 1997, primarily due to higher cash and cash equivalent balances in
fiscal 1998 due to proceeds from the Company's fiscal 1997 public offering.
Interest expense increased to $0.6 million in fiscal 1998 as compared to $0.5
million in fiscal 1997 primarily as a result of increased use of the Company's
credit facilities. Interest expense does not include capitalized interest of
$1.0 million and $0.1 million in
13
fiscal 1998 and fiscal 1997, respectively. The Company expects a decrease in
interest income and an increase in interest expense in 1999 as a result of using
cash and cash equivalents and new borrowings to finance the Tilton facility.
COMPARISON OF FISCAL 1997 TO THE TWELVE MONTHS ENDED DECEMBER 28, 1996
NET SALES
In fiscal 1997 net sales increased by 60.1%, or $50.9 million, to $135.5
million from $84.6 million during the twelve months ended December 28, 1996. The
increase in net sales was attributable to significant sales volume increases
from J. JILL. In fiscal 1997 J. JILL net sales and circulation increased by
225.5% and 147.3%, respectively, as compared to the twelve months ended December
28, 1996. J. JILL net sales growth was attributable to the aforementioned
circulation growth, as well as improved response rates and increased units per
order. In fiscal 1997 net sales and circulation for NICOLE SUMMERS decreased by
0.3% and 12.9%, respectively, as compared to the twelve months ended December
28, 1996. Total Company catalog circulation increased by 33.2% to 50.5 million
in fiscal 1997 from 37.9 million during the twelve months ended December 28,
1996. The number of twelve-month buyers grew to 681,000 at December 27, 1997
from 455,000 at December 28, 1996, an increase of 49.7%.
PRODUCT
In fiscal 1997 product costs increased by $22.6 million, or 60.7%, to $59.8
million from $37.2 million during the twelve months ended December 28, 1996. As
a percentage of net sales, product costs increased to 44.1% in fiscal 1997 from
44.0% during the twelve months ended December 28, 1996. The slight increase in
product costs as a percentage of net sales in fiscal 1997 was primarily
attributable to increased promotional activity and was offset in part by lower
markdown charges in fiscal 1997 as compared to the prior year.
OPERATIONS
In fiscal 1997 operating expenses increased by $11.6 million, or 82.9%, to
$25.6 million from $14.0 million during the twelve months ended December 28,
1996. As a percentage of net sales, operating expenses increased to 18.9% in
fiscal 1997 from 16.5% during the twelve months ended December 28, 1996. The
Company's dramatic growth in fiscal 1997 resulted in operational inefficiencies
and capacity issues. Higher than anticipated call volume resulted in increased
costs from greater use of the Company's third party call center. The need for
more fulfillment capacity required the Company to lease two interim satellite
facilities. This arrangement generated operational inefficiencies, as well as
increased costs. Also during the second half of fiscal 1997, the Company
experienced higher shipping costs due to the expiration of its contract with
Airborne Express, which had favorable pricing terms, and its subsequent shift to
the U.S. Postal Service for customer package delivery.
SELLING
In fiscal 1997 selling expenses increased by $9.8 million, or 41.2%, to
$33.5 million from $23.7 million during the twelve months ended December 28,
1996. As a percentage of net sales, selling expenses decreased to 24.7% in
fiscal 1997 from 28.0% during the twelve months ended December 28, 1996.
Increased catalog productivity as well as lower paper prices resulted in this
decline in selling expenses as a percentage of net sales.
GENERAL AND ADMINISTRATIVE
In fiscal 1997 general and administrative expenses increased by $2.8
million, or 37.5%, to $10.2 million from $7.4 million during the twelve months
ended December 28, 1996. This increase was primarily attributable to increased
management infrastructure, increased outside consulting fees related to various
systems and facilities projects and increased depreciation and occupancy costs.
As a percentage of net sales, general and administrative expenses decreased to
7.6% in fiscal 1997 from 8.8% during the twelve months ended December 28, 1996.
INTEREST, NET
Interest income increased to $0.5 million in fiscal 1997 from $0.2
million during the twelve months ended December 28, 1996 primarily due to
earnings on the proceeds from the Company's public offering in October 1997.
Interest expense was $0.5 million in fiscal 1997 unchanged from the twelve
months ended December 28, 1996. Interest expense does not include capitalized
interest of $0.1 million in fiscal 1997.
INCOME TAXES
The Company provides for income taxes at an effective tax rate that
includes the full federal and state statutory tax rates. Prior to December 1996,
the Company reduced the income tax provision recorded in its financial
statements by recording a tax benefit associated with its net deferred tax
assets, primarily net operating loss ("NOL") carryforwards. Because of the
14
uncertainty surrounding the realizability of these assets, the Company placed a
valuation allowance against the entire balance of its net deferred tax assets.
As a result, the associated tax benefit was recognized as income was earned,
resulting in a significantly lower effective tax rate for all periods reported
prior to December 1996.
In December 1996, the Company performed a detailed analysis of the future
taxable income levels required for the Company to fully realize the benefit of
its net deferred tax assets. Based on this analysis, the Company determined that
it was more likely than not that the Company would earn sufficient book and
taxable income to fully realize the benefit of its net deferred tax assets. This
determination required the Company to remove the valuation allowance and
recognize the deferred tax benefit of $10.6 million at December 28, 1996 in its
entirety. No assurance can be given, however, that the Company will achieve
taxable income sufficient to realize the full benefit of its net deferred tax
assets.
Because, for financial statement purposes, the benefit associated with the
Company's deferred tax assets has been fully realized, the Company's effective
tax rate can no longer be reduced by the recognition of this tax benefit over
future periods of income generation. As a result, the Company's effective tax
rate is substantially larger in fiscal 1998 and fiscal 1997 than in prior
periods. Cash payments for income taxes continue to be reduced by available NOL
carryforwards. See Note H to the accompanying consolidated financial statements.
DISCONTINUED OPERATIONS
On May 20, 1996, the Company announced its plan to divest its CARROLL REED
segment due to the incompatibility of the customer base and product line of this
segment with those of its other segment. Accordingly, the CARROLL REED segment
has been accounted for as a discontinued operation, and all assets, liabilities,
results of operations and cash flows associated with the CARROLL REED segment
have been segregated from those associated with continuing operations. In
connection with this divestiture, the Company recorded a charge of $8.5 million
in fiscal 1996 for the loss on disposal of discontinued operations, consisting
of $5.3 million related to the write-off of the remaining unamortized intangible
assets and $3.2 million for expected losses during the phase-out period. The
results of the CARROLL REED operations through May 20, 1996 have been classified
as loss from discontinued operations. Since May 20, 1996, the results
of this discontinued operation have been charged to the liability for expected
losses established in connection with the divestiture and have had no impact on
the Company's operating results. As of December 26, 1998, the Company had
completed the phase-out of its CARROLL REED segment and had utilized its reserve
for expected losses, including the recognition of certain tax benefits.
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. In fiscal 1998 these capital expenditures
included costs related to the construction of the Tilton facility and the
implementation of two major operating systems - a new order taking system and a
new warehouse management system (the "new operating systems"). In fiscal 1998
the Company funded its operating and capital needs through its bank credit
facilities, cash generated from operations, proceeds from its fiscal 1997 public
offering and proceeds from the sale of its marketable securities.
The Company's operating activities provided net cash of $7.7 million and
$5.7 million in fiscal 1998 and fiscal 1997, respectively. Net cash provided by
operations in fiscal 1998 and fiscal 1997 was primarily the result of the
significant net sales growth during these periods. This sales growth resulted
in corresponding increases in net income and accrued customer returns. In
order to support this sales growth and the projected future growth in the
business, the Company used cash from operations to increase inventory levels.
Inventory levels at December 26, 1998 were 30.5% higher than at December 27,
1997. Fiscal 1997 operating cash flows were also affected by an increase in
prepaid catalog expenses which resulted from increased catalog circulation
and page counts and higher paper inventory balances.
The Company's investing activities used net cash of $31.4 million and $8.5
million in fiscal 1998 and fiscal 1997, respectively. In fiscal 1998 and fiscal
1997 the use of cash in investing activities was primarily attributable to costs
related to the construction of the new Tilton facility. Construction of the
Tilton facility began in fiscal 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
$37.2 million had been spent as of December 26, 1998. In fiscal 1998 the Company
sold its marketable securities and generated cash from investing activities of
approximately $3.8 million. This cash was used to fund construction of the
Tilton facility.
15
DM Management's financing activities provided net cash of $24.4 million and
$21.6 million in fiscal 1998 and fiscal 1997, respectively. Cash provided by
financing activities in fiscal 1998 was primarily the result of borrowings used
to finance the Tilton facility construction. In fiscal 1998 cash provided from
financing activities also included $1.9 million in cash provided from stock
transactions, primarily the exercise of stock options. Cash provided by
financing activities in fiscal 1997 was primarily due to proceeds received from
the Company's $17.5 million fiscal 1997 public offering.
During the twelve months ended December 28, 1996 net cash provided by
operating activities was affected by two significant events - the recognition of
a $10.6 million reduction in the Company's valuation allowance on its deferred
tax assets and the write off of its discontinued CARROLL REED segment. Net cash
used in investing and financing activities included additions to property and
equipment and payments made related to the CARROLL REED purchase and certain
debt borrowings.
The Company's credit facilities at December 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) a $9.5 million equipment loan (the "Equipment
Loan"); (iv) a $15.9 million revolving line of credit (the "Revolver"); (v) a
$17.0 million line of credit (the "Line of Credit"); and (vi) a $4.3 million
short-term note (the "Short-Term Note"). The Equipment Loan was collateralized
by substantially all of the Company's materials handling equipment. The
remaining credit facilities were 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
required compliance with certain debt coverage ratios.
The Real Estate Loan requires monthly payments, based on a 15-year
amortization, with the 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. The Term Loan requires
quarterly payments through its maturity on June 1, 2002 and provides for several
interest rate options (6.78% per annum at December 26, 1998). The Equipment Loan
requires monthly payments through its maturity on December 1, 2005 with the
interest rate fixed at 7.5% per annum. The Revolver is available for borrowings
and for letters of credit. At December 26, 1998 there were no borrowings
outstanding and $11.6 million of outstanding letters of credit under the
Revolver. At December 26, 1998 the Revolver bore interest at 7.75% per annum.
The outstanding letters of credit do not bear interest. The Revolver matures
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. The Line of Credit bears interest
at LIBOR plus 125 basis points repriced monthly (6.81% per annum at December 26,
1998), expires on March 31, 1999 and does not require a commitment fee. The
Short-Term Note bears interest at 7.06% per annum and matures on March 31, 1999.
Subsequent to December 26, 1998, the Company obtained long-term financing
for the Tilton facility. In connection with the long-term financing, the Company
contributed the new Tilton facility to Birch Pond Realty Corporation ("Birch
Pond"), a wholly owned subsidiary of the Company, in exchange for all the
outstanding shares of Birch Pond. On March 1, 1999, Birch Pond entered into a
$12.0 million loan (the "Loan") with a financial institution and granted a
mortgage lien on the Tilton facility to the financial institution. Cash received
from the Loan, cash from the Company's fiscal 1997 public offering and cash from
operations were used to pay off the Short-Term Note and the Line of Credit and
to release the existing mortgage on the Tilton facility.
Also during fiscal 1998, the Company entered into a lease agreement for
office space intended to house its new corporate headquarters. The original term
of the lease is ten years commencing on 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 cash flows from operations
will be sufficient to support the Company's capital and operating needs for the
foreseeable future.
FUTURE CONSIDERATIONS
In 1999 the Company intends to mail four separate 48-page J. JILL
catalogs featuring an assortment of bed, bath and accessory items entitled
"peopleplacesthings." Additionally, 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.
The Company also plans to have a fully-transactional website in operation in
time for the 1999 holiday season. The Company may 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.
16
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. 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 noncomplying 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 beginning in the first half 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
The Company reports segment information in accordance with Financial
Accounting Standards Board issued Statement No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION." This statement, which is based on the
management approach to segment reporting establishes new standards for the way
public companies report information about operating segments and requires
companies to report selected segment information quarterly to stockholders. The
Company holds assets and reports sales in one operating segment.
In April 1998 the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES,"
which provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. The Company adopted this statement in fiscal
1998. The adoption of this statement was immaterial to the accompanying
consolidated financial statements.
ITEM 7A. 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.
17
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DM MANAGEMENT COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants ......................................... 19
Consolidated Balance Sheets at December 26, 1998 and December 27, 1997 .... 20
Consolidated Statements of Operations for the twelve months ended
December 26, 1998, December 27, 1997 and December 28, 1996 (unaudited),
the six months ended December 28, 1996 and the twelve months ended
June 29, 1996 ........................................................... 21
Consolidated Statements of Changes in Stockholders' Equity for the twelve
months ended December 26, 1998 and December 27, 1997, the six months ended
December 28, 1996 and the twelve months ended June 29, 1996 ....... 22
Consolidated Statements of Cash Flows for the twelve months ended
December 26, 1998, December 27, 1997 and December 28, 1996 (unaudited),
the six months ended December 28, 1996 and the twelve months ended
June 29, 1996 ........................................................... 23
Notes to Consolidated Financial Statements ................................ 24
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DM Management Company:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, stockholders' equity and
cash flows present fairly, in all material respects, the financial position
of DM Management Company and its subsidiary at December 26, 1998 and December
27, 1997, and the results of their operations and their cash flows for each
of the two years in the period ended December 26, 1998 and for the six month
period ended December 28, 1996 and the twelve month period ended June 29,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 5, 1999, except for Note D,
as to which the date is
March 1, 1999
19
DM MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 26, 1998 December 27, 1997
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 19,996 $ 19,260
Marketable securities, net of unrealized loss ..................... -- 3,890
Inventory ......................................................... 26,847 20,579
Prepaid catalog expenses .......................................... 5,254 6,475
Deferred income taxes ............................................. 6,934 5,295
Other current assets .............................................. 3,156 1,229
--------- ---------
Total current assets ............................................ 62,187 56,728
Property and equipment, net ......................................... 47,485 14,174
Deferred income taxes ............................................... 4,520 4,479
Other non-current assets ............................................ 1,300 --
--------- ---------
Total assets .................................................... $ 115,492 $ 75,381
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 12,057 $ 14,116
Accrued expenses .................................................. 8,571 4,161
Accrued customer returns .......................................... 8,333 4,779
Short-term borrowings ............................................. 21,300 --
Current portion of long-term debt ................................. 1,735 837
--------- ---------
Total current liabilities ....................................... 51,996 23,893
Long-term debt, less current portion ................................ 9,900 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,
9,631,401 and 6,098,480 shares issued and outstanding as of
December 26, 1998 and December 27, 1997, respectively ........ 96 61
Additional paid-in capital ........................................ 59,953 58,041
Unrealized loss on marketable securities .......................... -- (105)
Accumulated deficit ............................................... (6,453) (14,855)
--------- ---------
Total stockholders' equity ...................................... 53,596 43,142
--------- ---------
Total liabilities and stockholders' equity ...................... $ 115,492 $ 75,381
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
20
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Transition Twelve
Period Months
Twelve Months Ended Ended Ended
-------------------------------------------- ---------- ----------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29,
1998 1997 1996 1996 1996
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (53 weeks)
---------- ---------- ---------- ----------- ----------
(unaudited)
Net sales ............................... $ 218,730 $ 135,533 $ 84,642 $ 43,324 $ 80,585
Costs and expenses:
Product ............................ 97,870 59,788 37,205 19,436 35,046
Operations ......................... 43,843 25,615 14,007 6,915 13,954
Selling ............................ 48,864 33,505 23,727 11,730 24,416
General and administrative ......... 14,898 10,236 7,442 4,045 6,602
Interest, net ...................... (519) (3) 305 126 306
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes ................ 13,774 6,392 1,956 1,072 261
Provision (benefit) for income taxes .... 5,372 2,493 (10,402) (10,491) 26
--------- --------- --------- --------- ---------
Income from continuing operations ....... 8,402 3,899 12,358 11,563 235
Discontinued operations:
Loss from operations ............... -- -- (476) -- (1,074)
Loss on disposal ................... -- -- (8,511) -- (8,511)
--------- --------- --------- --------- ---------
Loss from discontinued operations ....... -- -- (8,987) -- (9,585)
--------- --------- --------- --------- ---------
Net income (loss) ....................... $ 8,402 $ 3,899 $ 3,371 $ 11,563 $ (9,350)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic:
Continuing operations ............... $ 0.89 $ 0.54 $ 1.90 $ 1.77 $ 0.04
Discontinued operations ............. -- -- (1.38) -- (1.50)
--------- --------- --------- --------- ---------
Net income (loss) per share ......... $ 0.89 $ 0.54 $ 0.52 $ 1.77 $ (1.46)
========= ========= ========= ========= =========
Weighted average shares outstanding ..... 9,483 7,202 6,494 6,547 6,415
Diluted:
Continuing operations .............. $ 0.81 $ 0.48 $ 1.76 $ 1.63 $ 0.04
Discontinued operations ............ -- -- (1.28) -- (1.44)
--------- --------- --------- --------- ---------
Net income (loss) per share ........ $ 0.81 $ 0.48 $ 0.48 $ 1.63 $ (1.40)
========= ========= ========= ========= =========
Weighted average shares outstanding ..... 10,378 8,073 7,019 7,105 6,661
The accompanying notes are an integral part of the consolidated financial
statements.
21
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Unrealized
Additional Loss on Total
Common Paid-In Marketable Accumulated Stockholders'
Stock Capital Securities Deficit Equity
------ -------- ------- -------- --------
Balance at June 24, 1995 ............................. $ 42 $ 39,827 $ (51) $(20,967) $ 18,851
Exercise of stock options ............................ 1 29 -- -- 30
Stock granted under the 1993 Employee
Stock Purchase Plan .............................. -- 34 -- -- 34
Change in unrealized losses, net of tax .............. -- -- (85) -- (85)
Net loss ............................................. -- -- -- (9,350) (9,350)
------ -------- ------- -------- --------
Balance at June 29, 1996 ............................. 43 39,890 (136) (30,317) 9,480
Exercise of stock options ............................ 1 145 -- -- 146
Tax benefit from exercise of stock options ........... -- 13 -- -- 13
Change in unrealized losses, net of tax .............. -- -- 21 -- 21
Net income ........................................... -- -- -- 11,563 11,563
------ -------- ------- -------- --------
Balance at December 28, 1996 ......................... 44 40,048 (115) (18,754) 21,223
Issuance of 1,412,861 shares of common stock, net .... 14 17,440 -- -- 17,454
Exercise of stock options ............................ 3 408 -- -- 411
Tax benefit from exercise of stock options ........... -- 87 -- -- 87
Stock granted under the 1993 Employee
Stock Purchase Plan .............................. -- 58 -- -- 58
Change in unrealized losses, net of tax .............. -- -- 10 -- 10
Net income ........................................... -- -- -- 3,899 3,899
------ -------- ------- -------- --------
Balance at December 27, 1997 ......................... 61 58,041 (105) (14,855) 43,142
Exercise of stock options ............................ 3 1,115 -- -- 1,118
Tax benefit from exercise of stock options ........... -- 734 -- -- 734
Stock granted under 1993 Employee
Stock Purchase Plan .............................. -- 96 -- -- 96
Adjustment for stock split ........................... 32 (33) -- -- (1)
Change in unrealized losses, net of tax .............. -- -- 105 -- 105
Net income ........................................... -- -- -- 8,402 8,402
------ -------- ------- -------- --------
Balance at December 26, 1998 ......................... $ 96 $ 59,953 $ -- $ (6,453) $ 53,596
====== ======== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
22
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Transition Twelve
Period Months
Twelve Months Ended Ended Ended
------------------------------------ -------- --------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29,
1998 1997 1996 1996 1996
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (53 weeks)
-------- -------- -------- -------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) ........................................ $ 8,402 $ 3,899 $ 3,371 $ 11,563 $ (9,350)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ............................ 2,853 1,493 1,049 571 910
Loss on sale of marketable securities .................... 159 -- -- -- --
Deferred income taxes .................................... (1,680) 824 (10,598) (10,598) --
Liability for expected losses ............................ -- (231) 231 (2,427) 2,658
Write-off of intangible assets ........................... -- -- 5,336 -- 5,336
Amortization related to discontinued operations .......... -- -- 189 -- 415
Changes in assets and liabilities:
Increase in inventory .................................... (6,268) (7,942) (2,783) (1,771) (622)
(Increase) decrease in prepaid catalog expenses .......... 1,221 (3,761) 2,952 1,440 270
(Increase) decrease in other current assets .............. (1,927) (314) 795 182 (557)
Increase (decrease) in accounts payable and
accrued expenses ....................................... 1,408 8,257 2,084 (1,069) 3,432
Increase in accrued customer returns ..................... 3,554 3,470 444 78 40
(Increase) decrease in net current assets (liabilities)
of discontinued operations ............................. -- 39 1,845 2,619 (2,265)
-------- -------- -------- -------- --------
Net cash provided by operating activities .................. 7,722 5,734 4,915 588 267
Cash flows used in investing activities:
Additions to property and equipment ...................... (35,221) (8,494) (1,512) (834) (796)
Proceeds from sale of marketable securities .............. 3,836 -- 6 -- 6
Payments for purchase of CARROLL REED (Note B) ........... -- -- (907) -- (907)
-------- -------- -------- -------- --------
Net cash used in investing activities ...................... (31,385) (8,494) (2,413) (834) (1,697)
Cash flows provided by (used in) financing activities:
Deposit on lease ......................................... (1,300) -- -- -- --
Borrowings under debt agreements ......................... 70,702 21,224 21,972 8,863 30,103
Payments of debt borrowings .............................. (46,950) (17,598) (24,617) (8,613) (28,747)
Proceeds from stock transactions ......................... 1,947 556 186 159 64
Issuance of common stock, net ............................ -- 17,454 -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities ........ 24,399 21,636 (2,459) 409 1,420
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 736 18,876 43 163 (10)
Cash and cash equivalents at:
Beginning of period ...................................... 19,260 384 341 221 231
-------- -------- -------- -------- --------
End of period ............................................ $ 19,996 $ 19,260 $ 384 $ 384 $ 221
======== ======== ======== ======== ========
Supplemental information:
Non-cash investing activities:
Construction in progress accrued, not paid ............... $ 943 $ -- $ -- $ -- $ --
Cash paid for interest ..................................... $ 557 $ 493 $ 545 $ 252 $ 506
Cash paid for income taxes.................................. $ 5,994 $ 1,068 $ -- $ -- $ 2
The accompanying notes are an integral part of the consolidated financial
statements.
23
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
DM Management Company and subsidiary (the "Company") is a specialty direct
marketer. The Company's primary products include high quality women's apparel,
accessories, shoes and gifts. In 1998 the Company also began featuring bed and
bath items. The Company currently markets its products through two discrete
catalog concepts, J. JILL and NICOLE SUMMERS.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. Intercompany balances and transactions have
been eliminated.
FISCAL YEAR
The Company's fiscal year ends on the last Saturday in December. The twelve
months ended December 26, 1998 ("fiscal 1998") and the twelve months ended
December 27, 1997 ("fiscal 1997") were 52-week periods. Prior to December 28,
1996, the Company's fiscal year had ended on the last Saturday in June. The
Company's change in fiscal year end resulted in a six-month transition period
ended December 28, 1996 (a 26-week period) (the "transition period"). Financial
information for the twelve months ended December 28, 1996 (a 52-week period) has
been presented for comparative purposes and is unaudited. The twelve months
ended June 29, 1996 ("fiscal 1996") was a 53-week period.
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 sheet as of December 27, 1997 and the consolidated
statements of changes in stockholders' equity for dates prior to the stock split
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 split.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes sales and the related cost of sales at the time the
products are shipped to customers. The Company provides an allowance based on
projected merchandise returns.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash on deposit in banks and
may also include cash invested in money market mutual funds and overnight
repurchase agreements. The Company considers all highly liquid instruments,
including certificates of deposits, with maturity at time of purchase of three
months or less to be cash equivalents.
24
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARKETABLE SECURITIES
The Company sold its marketable securities during fiscal 1998 and
recognized a loss of $97,000 net of a deferred tax benefit of $62,000. There
were no realized gains or losses recorded in fiscal 1997.
At December 27, 1997 the Company's marketable securities consisted of
investments in mutual funds which were primarily invested in U.S. Treasury, U.S.
government and corporate bonds. The marketable securities were classified as
available-for-sale and carried at fair market value based on quoted market
prices at December 27, 1997. Unrealized holding losses at December 27, 1997 of
$105,000, net of a deferred tax benefit of $65,000, were included as a separate
component of stockholders' equity.
INVENTORY
Inventory, consisting of merchandise for sale, is stated at the lower of
cost or market, with cost determined using the first-in, first-out method. The
Company provides for markdown reserves based on expected net realizable market
value.
SELLING EXPENSES
Selling expenses consist primarily of the cost to produce, print and
distribute catalogs. These costs are considered direct-response advertising and
as such are capitalized as incurred and amortized over the expected sales life
of each catalog, which is generally a period not exceeding four months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is computed
using the straight-line method over the estimated useful lives of the assets,
which are 30 years for buildings and 1-7 years for computers, computer software,
equipment, furniture and fixtures. Improvements to leased premises are amortized
on a straight-line basis over the shorter of the estimated useful life or the
lease term. Maintenance and repairs are charged to expense as incurred. Upon
retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is credited or charged to income. Assets under capital leases are recorded
at the present value of future lease payments and are depreciated over the term
of the lease.
The Company accounts for its internal use software in accordance with
American Institute of Certified Public Accountants issued Statement of Position
No. 98-1 ("SOP 98-1"), "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED
OR OBTAINED FOR INTERNAL USE." SOP 98-1 requires that certain costs related to
the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software. SOP 98-1 also requires
that costs related to the preliminary project stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. The Company has determined the
impact of SOP 98-1 to be immaterial to these consolidated financial statements.
LONG-LIVED ASSETS
Management periodically considers whether there has been a permanent
impairment in the value of its long-lived assets, primarily property and
equipment, by evaluating various factors, including current and projected future
operating results and undiscounted cash flows. Based on this assessment,
management concluded that as of December 26, 1998 and December 27, 1997, the
Company's long-lived assets were not permanently impaired.
25
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NET INCOME PER SHARE
The Company calculates net income per share ("EPS") in accordance with
Financial Accounting Standards Board issued Statement No. 128 ("SFAS 128"),
"EARNINGS PER SHARE." A reconciliation of the numerators and denominators of the
basic and diluted per share computation for income from continuing operations
follows (in thousands, except per share data). All share and per share
information below has been restated to reflect the effects of the three-for-two
stock split.
Transition Twelve
Period Months
Twelve Months Ended Ended Ended
-------------------------------- ---------- ----------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29,
1998 1997 1996 1996 1996
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (53 weeks)
-------- -------- -------- -------- --------
(unaudited)
Numerator:
Income from continuing operations ......... $ 8,402 $ 3,899 $12,358 $11,563 $ 235
------- ------- ------- ------- -------
Denominator (shares):
Basic weighted average shares outstanding . 9,483 7,202 6,494 6,547 6,415
Assumed exercise of stock options ......... 895 871 525 558 246
------- ------- ------- ------- -------
Diluted weighted average shares outstanding 10,378 8,073 7,019 7,105 6,661
======= ======= ======= ======= =======
Income from continuing operations per share:
Basic ..................................... $ 0.89 $ 0.54 $ 1.90 $ 1.77 $ 0.04
Diluted ................................... $ 0.81 $ 0.48 $ 1.76 $ 1.63 $ 0.04
Options to purchase 447,500, 129,000, 306,810, and 153,810 shares of common
stock were outstanding at December 26, 1998, December 27, 1997, December 28,
1996 and June 29, 1996, respectively, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the average
market price of the common shares during the respective periods.
Between December 26, 1998 and March 12, 1999 options to purchase 50,000
shares of the Company's common stock were granted pursuant to the Company's
stock option plans and options to purchase 92,597 shares of common stock were
exercised pursuant to the Company's stock option plans.
COMPREHENSIVE INCOME
The Company calculates comprehensive income in accordance with Financial
Accounting Standards Board issued Statement No. 130 ("SFAS 130"), "REPORTING
COMPREHENSIVE INCOME," which establishes standards for reporting and display of
comprehensive income. The Company's comprehensive income (loss) includes net
income (loss) as reported in the accompanying consolidated statements of
operations plus the change in unrealized losses on marketable securities, net of
deferred tax benefit. Comprehensive income (loss) totaled $8,507,000 in fiscal
1998, $3,909,000 in fiscal 1997, $11,584,000 during the transition period and
($9,435,000) in fiscal 1996. The unrealized loss on marketable securities
represents accumulated other comprehensive income. There was no accumulated
other comprehensive income at December 26, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company periodically assesses the fair value of its financial
instruments. Based on a detailed analysis, the Company's long-term debt,
including current maturities, approximates fair value.
26
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash investments. The
Company maintains cash and cash equivalents with various major financial
institutions. The Company performs periodic evaluations of the relative credit
standing of these financial institutions.
RECLASSIFICATIONS
Certain financial statement amounts have been reclassified to be consistent
with the presentation for fiscal 1998.
RECENT ACCOUNTING STANDARDS
The Company reports segment information in accordance with Financial
Accounting Standards Board issued Statement No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION." This statement, which is based on the
management approach to segment reporting establishes new standards for the way
public companies report information about operating segments and requires
companies to report selected segment information quarterly to stockholders. The
Company holds assets and reports sales in one operating segment.
In April 1998 the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES,"
which provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. The Company adopted this statement in fiscal
1998. The adoption of this statement was immaterial to these consolidated
financial statements.
B. DISCONTINUED OPERATIONS:
On May 20, 1996, the Company announced its plan to divest its CARROLL
REED segment due to the incompatibility of the customer base and product line
of this segment with those of its other segment. Accordingly, the CARROLL
REED segment has been accounted for as a discontinued operation, and all
assets, liabilities, results of operations and cash flows associated with the
CARROLL REED segment have been segregated from those associated with
continuing operations. In connection with this divestiture, the Company
recorded a charge of $8,511,000 in fiscal 1996 for the loss on disposal of
discontinued operations, consisting of $5,336,000 related to the write-off of
the remaining unamortized intangible assets and $3,175,000 for expected
losses during the phase-out period. The results of the CARROLL REED
operations through May 20, 1996, including fiscal 1996 net sales through
May 20, 1996 of $12,415,000, have been classified as loss from discontinued
operations in the accompanying consolidated statements of operations. Since
May 20, 1996, the results of this discontinued operation have been charged to
the liability for expected losses established in connection with the
divestiture and have had no impact on the Company's operating results. As of
December 26, 1998, the Company had completed the phase-out of its CARROLL
REED segment and had utilized its reserve for expected losses, including the
recognition of certain tax benefits.
27
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
C. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
December 26, 1998 December 27, 1997
----------------- -----------------
Land and building ................................. $ 9,657 $ 9,657
Equipment ......................................... 8,704 4,176
Furniture, fixtures and leasehold improvements .... 1,870 1,684
Construction in progress .......................... 34,124 2,674
-------- --------
Total property and equipment ................. 54,355 18,191
Less accumulated depreciation and amortization .... (6,870) (4,017)
-------- --------
Property and equipment, net .................. $ 47,485 $ 14,174
======== ========
At December 26, 1998 construction in progress was comprised primarily of
costs of constructing the new operations and fulfillment center in Tilton, New
Hampshire (the "Tilton Facility"). This facility was placed in full operation in
early 1999. Included in construction in progress at December 26, 1998 and
December 27, 1997 was $1,071,000 and $50,000, respectively, of capitalized
interest.
D. DEBT:
The Company's credit facilities at December 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) a $9,500,000 equipment loan (the "Equipment
Loan"); (iv) a $15,910,000 revolving line of credit (the "Revolver"); (v) a
$17,000,000 line of credit (the "Line of Credit"); and (vi) a $4,300,000
short-term note (the "Short-Term Note"). The Equipment Loan was collateralized
by substantially all of the Company's materials handling equipment. The
remaining credit facilities were 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
required compliance with certain debt coverage ratios.
The Real Estate Loan requires monthly payments, based on a 15-year
amortization, with the 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. The Term Loan requires
quarterly payments through its maturity on June 1, 2002 and provides for several
interest rate options (6.78% per annum at December 26, 1998). The Equipment Loan
requires monthly payments through its maturity on December 1, 2005 with the
interest rate fixed at 7.5% per annum. The Revolver is available for borrowings
and for letters of credit. At December 26, 1998 there were no borrowings
outstanding under the Revolver. At December 26, 1998 the Revolver bore interest
at 7.75% per annum. The outstanding letters of credit do not bear interest. The
Revolver matures 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. The Line of
Credit bears interest at LIBOR plus 125 basis points repriced monthly (6.81% per
annum at December 26, 1998), expires on March 31, 1999 and does not require a
commitment fee. There was $17,000,000 outstanding under the Line of Credit at
December 26, 1998. The Short-Term Note bears interest at 7.06% per annum and
matures on March 31, 1999. There was $4,300,000 outstanding under the Short-Term
Note at December 26, 1998.
28
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
A summary of the Company's outstanding long-term debt follows (in
thousands):
December 26, 1998 December 27, 1997
----------------- -----------------
Real estate loans ............................ $ 1,503 $ 1,613
Term loans ................................... 2,520 7,540
Equipment loans .............................. 7,590 --
Capitalized lease obligations ................ 22 30
------- -------
Total long-term debt .................... 11,635 9,183
Less current maturities ...................... 1,735 837
------- -------
Long-term debt, less current portion .... $ 9,900 $ 8,346
======= =======
Subsequent to December 26, 1998, the Company obtained long-term financing
for the Tilton facility. In connection with the long-term financing, the Company
contributed the new Tilton facility to Birch Pond Realty Corporation ("Birch
Pond"), a wholly owned subsidiary of the Company, in exchange for all the
outstanding shares of Birch Pond. On March 1, 1999, Birch Pond entered into a
$12,000,000 loan (the "Loan") with a financial institution and granted a
mortgage lien on the Tilton facility to the financial institution. Cash received
from the Loan, cash from the Company's fiscal 1997 public offering and cash from
operations were used to pay off the Short-Term Note and the Line of Credit and
to release the existing mortgage on the Tilton facility.
At December 26, 1998, aggregate maturities of long-term debt for the next
five fiscal years and thereafter were as follows: 1999--$1,735,000;
2000--$1,756,000; 2001--$1,826,000; 2002--$2,599,000; 2003 --$1,148,000; and
thereafter --$2,571,000.
Import letters of credit are for commitments issued through the Company's
bank to guarantee payment of foreign-sourced merchandise within agreed upon time
periods according to the terms of the agreements. Outstanding import letters of
credit totaled approximately $11,612,000 and $3,993,000 at December 26, 1998 and
December 27, 1997, respectively.
E. STOCKHOLDERS' EQUITY:
COMMON STOCK
In fiscal 1997 the Company completed its second offering of common stock to
the public, issuing 1,412,861 shares of common stock at a price to the public of
$13.50 per share. The Company received approximately $17,454,000 in net proceeds
from the offering, after underwriting discounts and commissions and expenses.
Expenses incurred by the Company in connection with the offering totaled
approximately $567,000. Also in connection with this public offering, 1,752,404
shares of the Company's common stock were sold by selling stockholders. The
Company did not receive any of the proceeds from the sale of shares by selling
stockholders. The information in this paragraph has not been restated to reflect
the effects of the three-for-two stock split.
SPECIAL PREFERRED STOCK
The Company has 1,000,000 shares of special preferred stock, $0.01 par
value per share, authorized. No special preferred stock was outstanding at
either of the reported balance sheet dates.
29
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
F. STOCK-BASED PLANS:
At December 26, 1998, the Company had three stock-based plans--the 1988
Incentive Stock Option Plan (the "1988 Stock Option Plan"), the 1993 Incentive
and Nonqualified Stock Option Plan (the "1993 Stock Option Plan") and the 1998
Employee Stock Purchase Plan (the "1998 Stock Purchase Plan"). The Company
applies Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES," and related interpretations to account for its stock
option plans and employee stock purchase plans. No compensation cost has been
recognized for these plans.
STOCK OPTION PLANS
The 1988 Stock Option Plan provides for the grant of options to purchase
common stock intended to qualify as incentive stock options as defined in
Section 422 of the Internal Revenue Code of 1986, as amended ("ISO's"). During
fiscal 1994, the Board of Directors voted not to issue any additional options
under the 1988 Stock Option Plan. The maximum term of options granted under the
1988 Stock Option Plan is ten years.
The 1993 Stock Option Plan authorizes (i) the grant of options to purchase
common stock intended to qualify as ISO's, and (ii) the grant of options that do
not so qualify. At December 26, 1998, the 1993 Stock Option Plan authorized the
issuance of options to purchase up to 2,400,000 shares of common stock (as
adjusted to reflect the effects of the three-for-two stock split). The
Compensation Committee of the Board of Directors administers the 1993 Stock
Option Plan and within certain limits has discretion to determine the terms and
conditions of options granted under the plan. The 1993 Stock Option Plan also
provides for the automatic grant of options to purchase a specified number of
shares to non-employee directors. The maximum term of options granted under the
1993 Stock Option Plan is ten years.
STOCK PURCHASE PLANS
Under the Company's stock purchase plans, eligible employees may be granted
the opportunity to purchase common stock of the Company at 85% of market value
on the first or last business day of the calendar year, whichever is lower. The
1993 Stock Purchase Plan authorized the issuance of up to 150,000 shares (as
adjusted to reflect the effects of the three-for-two stock split) of the
Company's common stock to eligible employees. Issuances of common stock under
the 1993 Stock Purchase Plan have been made as follows. All share information
below has been restated to reflect the effects of the three-for-two stock split.
Aggregate
Purchase
Shares Price
------ ---------
December 31, 1997 .......... 45,156 $ 96,000
December 31, 1996 .......... 51,267 58,000
December 30, 1995 .......... 29,078 34,000
Prior Periods .............. 13,702 $ 37,000
Immediately following the December 31, 1997 issuance, the 1993 Stock
Purchase Plan was terminated.
The 1998 Stock Purchase Plan authorizes the issuance of up to 150,000
shares (as adjusted to reflect the effects of the three-for-two stock split) of
the Company's common stock to eligible employees. A total of 150,000 shares of
common stock were available for issuance under the 1998 Stock Purchase Plan at
December 26, 1998. On December 31, 1998, 23,891 shares of common stock were
issued under the 1998 Stock Purchase Plan at an aggregate purchase price of
$211,000.
30
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The following table reflects the activity under the 1988 Stock Option Plan
and the 1993 Stock Option Plan. All amounts have been restated to reflect the
effects of the three-for-two stock split:
1988 Stock Option Plan 1993 Stock Option Plan
------------------------------------- ------------------------------------------
Exercise Wtd. Avg. Exercise Wtd. Avg.
Number Price Exercise Number Price Exercise
of Shares Per Share Price of Shares Per Share Price
--------- --------- --------- -------- -------------- ---------
Balance at June 24, 1995 ........ 734,016 $ 0.11-4.07 $ 1.03 183,000 $ 1.83-10.00 $ 6.84
Granted ..................... -- -- -- 631,500 1.38-3.33 1.93
Exercised ................... (37,275) 0.11-1.11 0.77 -- -- --
Canceled .................... (2,250) 1.11 1.11 (34,500) 2.67-7.25 5.57
------- -------
Balance at June 29, 1996 ........ 694,491 0.11-4.07 1.04 780,000 1.38-10.00 2.92
Granted ..................... -- -- -- 93,750 2.09-2.17 2.13
Exercised ................... (224,695) 0.11-1.11 0.63 (2,727) 1.83 1.83
Canceled .................... (4,245) 1.11 1.11 (37,500) 10.00 10.00
------- -------
Balance at December 28, 1996 .... 465,551 0.11-4.07 1.24 833,523 1.38-10.00 2.51
Granted ..................... -- -- -- 648,750 2.42-10.75 6.31
Exercised ................... (255,702) 0.11-4.07 1.35 (36,098) 1.50 - 3.33 1.81
Canceled .................... (2,250) 1.11 1.11 (11,700) 1.83 - 3.33 2.29
------- -------
Balance at December 27, 1997 .... 207,599 1.11 1.11 1,434,475 1.38-10.75 4.25
Granted ..................... -- -- -- 595,000 10.13-20.83 16.02
Exercised ................... (194,099) 1.11 1.11 (244,475) 1.38 - 10.00 3.69
Canceled .................... -- -- -- (38,250) 2.08 - 7.46 5.51
------- -------
Balance at December 26, 1998 .... 13,500 $ 1.11 $ 1.11 1,746,750 $ 1.38-20.83 $ 8.32
======= =======
Options exercisable under the 1988 Stock Option Plan and the 1993 Stock
Option Plan were as follows. Amounts as of December 27, 1997 have been restated
to reflect the effects of the three-for-two stock split.
December 26, 1998 December 27, 1997
----------------- -----------------
1988 Stock Option Plan ....................... 13,500 207,599
1993 Stock Option Plan ....................... 567,099 410,073
------- -------
Total ................................... 580,599 617,672
======= =======
Weighted average exercise price per share .... $ 4.53 $ 2.45
======= =======
31
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The following table summarizes information about options outstanding under
the 1988 Stock Option Plan and the 1993 Stock Option Plan at December 26, 1998:
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Number Wtd. Avg. Wtd. Avg. Number Wtd. Avg.
Range of Exercise Outstanding at Remaining Exercise Exercisable at Exercise
Prices December 26, 1998 Contractual Life Price December 26, 1998 Price
- ------------------------- ----------------- ---------------- --------- ----------------- ---------
$ 1.11-- 1.50 ...... 310,500 3.3 years $ 1.46 205,875 $ 1.45
1.83-- 2.42 ...... 253,400 4.5 years 2.30 122,975 2.31
2.83-- 3.83 ...... 152,000 4.6 years 3.13 60,000 3.08
5.00-- 7.25 ...... 290,350 5.3 years 6.46 118,300 6.07
7.79-- 10.75 ..... 406,500 6.1 years 10.27 35,949 10.09
14.13-- 20.83 .... 347,500 6.5 years 20.08 37,500 20.83
--------- -------
Total ..... 1,760,250 5.2 years $ 8.26 580,599 $ 4.53
========= =======
The Company discloses stock-based compensation information in accordance
with Financial Accounting Standards Board issued Statement No. 123 ("SFAS 123"),
"ACCOUNTING FOR STOCK-BASED COMPENSATION," which requires disclosure of pro
forma net income, EPS and other information as if the fair value method of
accounting for stock options and other equity instruments described in SFAS 123
had been adopted. Pro forma disclosures include the effects of all options
granted after December 25, 1994. The effects of applying SFAS 123 in this pro
forma disclosure are not indicative of future amounts. SFAS 123 does not apply
to awards made prior to December 25, 1994. Additional awards in future years are
anticipated.
Had compensation cost for the Company's stock-based plans been based on the
fair value at the grant dates for awards made under these plans consistent with
SFAS 123, the Company's net income (loss) and EPS would have been as follows (in
thousands, except per share data). Prior period EPS amounts have been restated
to reflect the effects of the three-for-two stock split:
Transition Twelve
Period Months
Twelve Months Ended Ended Ended
------------------------------------- ---------- ---------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29,
1998 1997 1996 1996 1996
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (53 weeks)
--------- --------- ---------- ---------- ----------
(unaudited)
Net income (loss):
As reported ...... $ 8,402 $ 3,899 $ 3,371 $ 11,563 $ (9,350)
Pro forma ........ 7,135 3,478 3,233 11,498 (9,420)
Basic EPS:
As reported ...... 0.89 0.54 0.52 1.77 (1.46)
Pro forma ........ 0.75 0.48 0.50 1.76 (1.47)
Diluted EPS:
As reported ...... 0.81 0.48 0.48 1.63 (1.40)
Pro forma ........ $ 0.69 $ 0.43 $ 0.46 $ 1.62 $ (1.41)
32
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The Black-Scholes option-pricing model is used to estimate the fair
value on the date of grant of each option granted after December 25, 1994. The
Black-Scholes model is also used to estimate the fair value of the employees'
purchase rights. In each case, the following assumptions were used for stock
option grants and employee purchase right grants in fiscal 1998:
1993 Stock 1998 Stock
Option Plan Purchase Plan
----------- -------------
Dividend yield............................................. 0.0% 0.0%
Expected volatility........................................ 75.0% 75.0%
Risk free interest rate.................................... 5.3% 5.7%
Expected lives............................................. 4.5 years 1 year
The weighted average fair value of stock options granted and the
average fair value of the employee purchase rights granted were as follows. All
prior period amounts have been restated to reflect the effects of the
three-for-two stock split.
Transition Twelve
Period Months
Twelve Months Ended Ended Ended
---------------------------------------- ---------- -------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29,
1998 1997 1996 1996 1996
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (53 weeks)
--------- ---------- ---------- ----------- ----------
(unaudited)
Fair value of stock options granted........... $ 10.11 $ 3.53 $ 1.17 $ 1.22 $ 1.08
Fair value of employee purchase rights granted $ 4.73 $ 0.91 $ 0.45 $ -- $ 0.45
G. BENEFIT PLANS:
The Company offers a savings plan (the "Savings Plan") to its employees,
which permits participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. At the discretion of the Board of
Directors, the Company may also make contributions dependent on profits each
year for the benefit of all eligible employees under the Savings Plan. Employee
eligibility is based on minimum age and employment requirements. The Company
contributed approximately $200,000, $100,000, $10,000 and $0 to the Savings Plan
for fiscal 1998, fiscal 1997, the transition period and fiscal 1996,
respectively.
H. INCOME TAXES:
The Company accounts for income taxes in accordance with of Financial
Accounting Standards Board issued Statement No. 109 ("SFAS 109"), "ACCOUNTING
FOR INCOME TAXES." Under SFAS 109, deferred tax assets and liabilities are
recognized based on temporary differences between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. SFAS 109 requires
current recognition of net deferred tax assets to the extent that it is more
likely than not that such net assets will be realized. To the extent that the
Company believes that its net deferred tax assets will not be realized, a
valuation allowance must be placed against those assets.
33
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
December 26, 1998 December 27, 1997
----------------- -----------------
Deferred tax assets:
Net operating losses........................................... $ 4,333 $ 4,787
Inventory...................................................... 4,123 2,593
Reserve for customer returns................................... 3,316 1,743
Discontinued segment........................................... -- 1,947
Property and equipment......................................... 708 229
Other.......................................................... 745 539
----------- --------
Total deferred tax assets................................. 13,225 11,838
----------- --------
Deferred tax liabilities:
Prepaid catalogs............................................... 1,771 1,899
Other.......................................................... -- 165
----------- --------
Total deferred tax liabilities............................ 1,771 2,064
----------- --------
Net deferred tax assets.............................. $ 11,454 $ 9,774
=========== ========
Prior to December 28, 1996, management believed that the uncertainty
surrounding the realizability of its net deferred tax assets was sufficient to
require a valuation allowance to be placed against the entire balance of those
assets. However, as of December 28, 1996, management determined, based on the
Company's recent profitability trends and anticipated future profitability, that
it was more likely than not that sufficient book and taxable income would be
generated to fully realize the benefit of its net deferred tax assets. This
determination required the Company to remove the valuation allowance and
recognize the deferred tax benefit of $10,598,000 at December 28, 1996 in its
entirety.
At December 26, 1998, the Company had available net operating loss ("NOL")
carryforwards of approximately $12,379,000, of which $7,466,000 expires in 2004,
$2,530,000 expires in 2005 and $2,383,000 expires in 2006.
Section 382 of the Internal Revenue Code of 1986, as amended, restricts a
corporation's ability to use its NOL carryforwards following certain "ownership
changes." The Company determined that such an ownership change occurred as a
result of its initial public offering ("IPO") and accordingly the amount of the
Company's pre-IPO NOL carryforwards available for use in any particular taxable
year is limited to approximately $1.5 million annually. To the extent that the
Company does not utilize the full amount of the annual NOL limit, the unused
amount may be used to offset taxable income in future years. NOL carryforwards
expire 15 years after the tax year in which they arise, and the last of the
Company's current NOL carryforwards will expire in its 2006 tax year.
34
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The components of the Company's provision (benefit) for income taxes for
continuing operations are as follows (in thousands):
Transition Twelve
Period Months
Twelve Months Ended Ended Ended
---------------------------------------- ---------- --------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29,
1998 1997 1996 1996 1996
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (53 weeks)
---------- ------------ ----------- ----------- ---------
(unaudited)
Current:
Federal................................ $5,717 $1,379 $ 98 $ 53 $ 8
State.................................. 1,335 750 98 54 18
Deferred:
Federal................................ (1,365) 213 (9,164) (9,164) --
State.................................. (315) 151 (1,434) (1,434) --
------ ------ -------- -------- --------
Provision (benefit) for income taxes........ $5,372 $2,493 $(10,402) $(10,491) $ 26
====== ====== ======== ======== ========
The difference in income taxes at the U. S. federal statutory rate and the
income tax provision (benefit) reported in the accompanying consolidated
statements of operations is as follows (in thousands):
Transition Twelve
Period Months
Twelve Months Ended Ended Ended
------------------------------------------- --------- -------
Dec. 26, Dec. 27, Dec. 28, Dec. 28, June 29,
1998 1997 1996 1996 1996
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (53 weeks)
--------- ---------- ---------- --------- -------
(unaudited)
Provision for income taxes at the U.S. federal
statutory rate..........................................$ 4,821 $ 2,173 $ 665 $ 364 $ 89
State taxes, net of federal tax benefits..................... 551 320 88 35 12
Valuation allowance change................................... -- -- (10,598) (10,598) --
Utilization of NOL carryforward.............................. -- -- (557) (275) (75)
Other........................................................ -- -- -- (17) --
-------- -------- --------- --------- --------
Provision (benefit) for income taxes at effective rate.......$ 5,372 $ 2,493 $ (10,402) $ (10,491) $ 26
======== ======== ========= ========= ========
I. COMMITMENTS:
The Company leases certain of its facilities under noncancellable operating
leases having initial or remaining terms of more than one year. The majority of
these real estate leases require the Company to pay maintenance, insurance and
real estate taxes. Total rent expense, including these costs, amounted to
approximately $1,622,000 in fiscal 1998, $1,052,000 in fiscal 1997, $362,000
during the transition period and $666,000 in fiscal 1996.
At December 26, 1998, future minimum lease payments for operating leases
having a remaining term in excess of one year at such date totaled $19,458,000
and for the next five fiscal years and thereafter were as follows:
1999--$1,733,000; 2000-- $2,061,000; 2001-- $1,944,000; 2002--$1,911,000;
2003--$1,834,000; and thereafter--$9,975,000.
J. RELATED PARTY:
In fiscal 1996 the Company terminated its relationship with Shannon North
America, Limited ("Shannon"), a joint venture between the Company and Aer Rianta
cpt. The Company's investment in Shannon was immaterial. In fiscal 1998 and
fiscal 1997 the Company continued to provide various operational services to
Shannon. Amounts charged to Shannon totaled approximately $86,000 in fiscal
1998, $174,000 in fiscal 1997, $180,000 during the transition period and
$690,000 in fiscal 1996.
35
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
K. QUARTERLY FINANCIAL DATA (UNAUDITED): (in thousands, except per share data)
Fiscal 1998 Quarter Ended
----------------------------------------------------------------------------
March 28, 1998 June 27, 1998 Sept. 26, 1998 Dec. 26, 1998
--------------- -------------- -------------- -------------
Net sales..............................................$ 44,792 $ 59,359 $ 46,580 $ 67,999
Net income............................................. 1,175 2,973 1,407 2,847
Income per share (basic)............................... 0.13 0.31 0.15 0.30
Income per share (diluted).............................$ 0.11 $ 0.28 $ 0.14 $ 0.28
Fiscal 1997 Quarter Ended
----------------------------------------------------------------------------
March 29, 1997 June 28, 1997 Sept. 27, 1997 Dec. 27, 1997
-------------- ------------- -------------- -------------
Net sales..............................................$ 24,543 $ 32,885 $ 31,649 $ 46,456
Net income............................................. 541 1,205 691 1,462
Net income per share (basic)........................... 0.08 0.18 0.10 0.18
Net income per share (diluted).........................$ 0.07 $ 0.16 $ 0.09 $ 0.16
Transition Period Quarter Ended
----------------------------------------------------------------------------
Sept. 28, 1996 Dec. 28, 1996
-------------- -------------
Net sales.............................................. $ 20,541 $ 22,783
Net income............................................. 250 11,313
Net income per share (basic)........................... 0.04 1.71
Net income per share (diluted)......................... $ 0.04 $ 1.59
Fiscal 1996 Quarter Ended
-----------------------------------------------------------------------
Sept. 30, 1995 Dec. 30, 1995 March 30, 1996 June 29, 1996
-------------- ------------- -------------- --------------
Net sales................................................... $ 22,312 $ 16,955 $ 19,736 $ 21,582
Income (loss) from continuing operations.................... (274) (286) 250 545
Net income (loss)........................................... (667) (491) 264 (8,456)
Income (loss) from continuing operations per share (basic).. (0.04) (0.04) 0.04 0.08
Income (loss) from continuing operations per share (diluted) (0.04) (0.04) 0.04 0.08
Net income (loss) per share (basic)......................... (0.10) (0.08) 0.04 (1.31)
Net income (loss) per share (diluted)....................... $ (0.10) $ (0.08) $ 0.04 $ (1.19)
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 per share information above has
been restated to reflect the effects of the three-for-two stock split.
During the transition period the Company recorded a deferred tax benefit of
$10,598,000 (see Note H).
On May 20, 1996, the Company announced its plan to discontinue the
operations of its CARROLL REED segment and recorded a charge of $8,511,000 for
the loss on disposal of discontinued operations (see Note B).
The sum of the quarterly EPS amounts may not equal the full year amount
since the computations of the weighted average shares outstanding for each
quarter and the full year are made independently.
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DM Management Company:
Our audits of the consolidated financial statements referred to in our
report dated February 5, 1999, except for Note D, as to which the date is March
1, 1999, appearing on page 19 of the 1998 Annual Report to Shareholders of DM
Management Company (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 5, 1999, except for Note D,
as to which the date is
March 1, 1999
37
DM MANAGEMENT COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance, Amounts Write-Offs Balance,
Beginning Charged to Against End
Accrued Customer Returns: of Period Net Income Reserve of Period
--------- ---------- ---------- ----------
Year ended December 26, 1998............... $ 4,779 $ 63,838 $ 60,284 $ 8,333
============ ============ ========== ===========
Year ended December 27, 1997............... $ 1,309 $ 40,276 $ 36,806 $ 4,779
============ ============ ========== ===========
Six months ended December 28, 1996......... $ 1,231 $ 11,634 $ 11,556 $ 1,309
============ ============ ========== ===========
Year ended June 29, 1996................... $ 1,191 $ 22,534 $ 22,494 $ 1,231
============ ============ ========== ===========
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
CONSOLIDATED FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance"
appearing in the Company's definitive Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held on
May 25, 1999, which will be filed with the Securities and Exchange Commission
not later than 120 days after December 26, 1998, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Remuneration of Executive
Officers and Directors" appearing in the Company's definitive Proxy Statement to
be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 25, 1999, which will be filed with the Securities
and Exchange Commission not later than 120 days after December 26, 1998, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" appearing in the Company's definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held on May 25, 1999, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 26,
1998, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
39
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Consolidated Financial Statements on Page 18.
(2) FINANCIAL STATEMENT SCHEDULE
Index to Consolidated Financial Statement Schedule Page
----
Report of Independent Accountants 37
Schedule II - Valuation and Qualifying Accounts 38
(3) EXHIBITS
Exhibits 10.11 through 10.26 include the Company's compensatory plans or
arrangements required to be filed as exhibits pursuant to Item 14(c) of Form
10-K.
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 14, 1989, between the Company and Richard
D. Matthews and Richard J. Valentine, Trustees of Bare Cove Realty Trust
established u/d/t dated January 10, 1984, as amended (included as Exhibit
10.13 to the Company's Registration Statement on Form S-1, Registration
No. 33-67512, and incorporated herein by reference)
10.2 Third Amendment to Lease Agreement dated September 14, 1989, between the
Company and Richard D. Matthews and Richard J. Valentine, Trustees of Bare
Cove Realty Trust established u/d/t dated January 10, 1984, as previously
amended (included as Exhibit 10.3 to the Company's Transition Report on
Form 10-K for the transition period from June 30, 1996 to December 28,
1996, File No. 0-22480, and incorporated herein by reference)
10.3 Fourth Amendment to Lease Agreement dated September 14, 1989, between the
Company and Richard D. Matthews and Richard J. Valentine, Trustees of Bare
Cove Realty Trust established u/d/t dated January 10, 1984, as previously
amended (included as Exhibit 10.4 to the Company's Transition Report on
Form 10-K for the transition period from June 30, 1996 to December 28,
1996, File No. 0-22480, and incorporated herein by reference)
10.4 Fifth Amendment to Lease Agreement dated August 27, 1998, between the
Company and Richard D. Matthews and Richard J. Valentine, as Trustees of
Bare Cove Realty Trust established u/d/t dated January 10, 1984, as
amended
10.5 Lease dated August 15, 1997 between the Company and Central NH Realty,
Inc.(included as Exhibit 10.27 to the Company's Registration Statement on
Form S-2 dated September 10, 1997, File No. 0-22480, and incorporated
herein by reference)
10.6 Lease Agreement dated June 11, 1998 between the Company and Reading Outlet
Center Associates D/B/A Mass Realty Company (included as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter year ended
June 27, 1998, File No. 0-22480, and incorporated herein by reference)
10.7 Lease Agreement dated September 18, 1998, between the Company and National
Fire Protection Association (included as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 26, 1998,
File No. 0-22480, and incorporated herein by reference)
10.8 Lease Agreement dated October 5, 1998, between the Company and Chelsea GCA
Realty Partnership, L.P. (included as Exhibit 10.11 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 26, 1998,
File No. 0-22480, and incorporated herein by reference)
10.9 Lease Agreement dated October 23, 1998, between the Company and Tanger
Properties Limited Partnership (included as Exhibit 10.13 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 26, 1998,
File No. 0-22480, and incorporated herein by reference)
10.10 Lease dated March 1, 1999 between the Company and Birch Pond Realty
Corporation
40
10.11 1988 Incentive Stock Option Plan (included as Exhibit 10.17 to the
Company's Registration Statement on Form S-1, Registration No. 33-67512,
and incorporated herein by reference)
10.12 Amended and Restated 1993 Incentive and Nonqualified Stock Option Plan
10.13 1998 Employee Stock Purchase Plan (included as Appendix B to the Company's
definitive Proxy Statement for its annual meeting of stockholders held on
May 28, 1998, File No. 0-22480, and incorporated herein by reference)
10.14 1998 Incentive Compensation Plan (included as Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
27, 1997, File No. 0-22480, and incorporated herein by reference)
10.15 1999 Incentive Compensation Plan
10.16 Employment Letter Agreement dated December 21, 1995, between the Company
and Gordon R. Cooke (included as Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 30, 1995, File No.
0-22480, and incorporated herein by reference)
10.17 Employment Letter Agreement dated May 7, 1996, between the Company and
John J. Hayes (included as Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the year ended June 29, 1996, File No. 0-22480, and
incorporated herein by reference)
10.18 Employment Letter Agreement between the Company and Kevin E. Burns
(included as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 27, 1997, File No. 0-22480, and
incorporated herein by reference)
10.19 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated October 1, 1998 between the Company and Gordon R. Cooke
(included as Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 26, 1998, File No. 0-22480, and
incorporated herein by reference)
10.20 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 22, 1999 between the Company and Kevin Burns
10.21 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and Olga Conley
10.22 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and Gordon Cooke
10.23 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and John Hayes
10.24 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and Patricia Lee
10.25 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and Peter Tulp
10.26 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated March 3, 1999 between the Company and Jane Dunning
10.27 Merchant Services Agreement between the Company and Hurley State Bank,
dated July 18, 1995 (included as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 24, 1995, File No.
0-22480, and incorporated herein by reference)
10.28 Construction Agreement dated October 24, 1997 between the Company and
Clayco Construction Company, Inc. (included as Exhibit 10.39 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
27, 1997, File No. 0-22480, and incorporated herein by reference)
10.29 Contract dated April 1, 1998, between the Company and Designed Conveyor
Systems, Inc. (included as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 28, 1998, File No. 0-22480, and
incorporated herein by reference)
10.30 Grant of Security Interest in Trademarks dated June 5, 1997 between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 28,
1997, File No. 0-22480, and incorporated herein by reference)
10.31 Account Control Agreement dated June 5, 1997 between the Company, Citizens
Bank of Massachusetts and Fleet National Bank (included as Exhibit 10.7 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 28,
1997, File No. 0-22480, and incorporated herein by reference)
10.32 Real Estate Note dated July 30, 1997 between the Company and Citizens Bank
of Massachusetts (included as Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997, File No. 0-22480,
and incorporated herein by reference)
10.33 Mortgage dated July 30, 1997 between the Company and Citizens Bank of
Massachusetts (included as Exhibit 10.9 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 28, 1997, File No. 0-22480, and
incorporated herein by reference)
41
10.34 Mortgage (Bridge Mortgage) dated October 31, 1997 between the Company and
Citizens Bank of Massachusetts (included as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 27, 1997,
File No. 0-22480, and incorporated herein by reference)
10.35 First Amendment to Security Agreement dated October 31, 1997 between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 27, 1997, File No. 0-22480, and incorporated herein by
reference)
10.36 First Amendment to Mortgage dated October 31, 1997 between the Company and
Citizens Bank of Massachusetts (included as Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 27, 1997,
File No. 0-22480, and incorporated herein by reference)
10.37 Replacement Revolving Note dated October 31, 1997 between the Company and
Citizens Bank of Massachusetts (included as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 27, 1997,
File No. 0-22480, and incorporated herein by reference)
10.38 Second Amended and Restated Loan Agreement dated March 5, 1998 between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997, File No. 0-22480, and incorporated herein by reference)
10.39 New Bridge Note dated March 5, 1998 between the Company and Citizens Bank
of Massachusetts (included as Exhibit 10.28 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 27, 1997, File No.
0-22480, and incorporated herein by reference)
10.40 Short Term Revolving Note dated March 5, 1998 between the Company and
Citizens Bank of Massachusetts (included as Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 27, 1997,
File No. 0-22480, and incorporated herein by reference)
10.41 Second Amendment to Security Agreement dated March 5, 1998 between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.30 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997, File No. 0-22480, and incorporated herein by reference)
10.42 Assignment of Certificate of Deposit dated March 5, 1998 between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997, File No. 0-22480, and incorporated herein by reference)
10.43 Amended Bridge Mortgage dated March 5, 1998 between the Company and
Citizens Bank of Massachusetts (included as Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 27, 1997,
File No. 0-22480, and incorporated herein by reference)
10.44 Second Amendment to Mortgage (Meredith) dated March 5, 1998 between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997, File No. 0-22480, and incorporated herein by reference)
10.45 First Amendment to Second Amended and Restated Loan Agreement dated June
30, 1998 between the Company and Citizens Bank of Massachusetts (included
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 27, 1998, File No. 0-22480, and incorporated herein by
reference)
10.46 Second Amendment to Second Amended and Restated Loan Agreement dated
September 4, 1998, between the Company and Citizens Bank of Massachusetts
(included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 26, 1998, File No. 0-22480, and
incorporated herein by reference)
10.47 Third Amendment to Second Amended and Restated Loan Agreement dated
September 4, 1998, between the Company and Citizens Bank of Massachusetts
(included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 26, 1998, File No. 0-22480, and
incorporated herein by reference)
10.48 First Amendment to Assignment of Certificate of Deposit dated September 4,
1998, between the Company and Citizens Bank of Massachusetts (included as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 26, 1998, File No. 0-22480, and incorporated
herein by reference)
10.49 Second Amendment to Bridge Mortgage dated September 4, 1998, between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 26, 1998, File No. 0-22480, and incorporated herein by
reference)
10.50 Third Amendment to Mortgage (Meredith) dated September 4, 1998, between
the Company and Citizens Bank of Massachusetts (included as Exhibit 10.6
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 26, 1998, File No. 0-22480, and incorporated herein by
reference)
10.51 Replacement New Bridge Note dated September 4, 1998, between the Company
and Citizens Bank of Massachusetts (included as Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 26, 1998, File No. 0-22480, and incorporated herein by
reference)
42
10.52 Replacement Short Term Revolving Note dated September 4, 1998, between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.8 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 26, 1998, File No. 0-22480, and incorporated herein by
reference)
10.53 Second Replacement Revolving Note dated September 4, 1998, between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.9 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 26, 1998, File No. 0-22480, and incorporated herein by
reference)
10.54 Third Amendment to Security Agreement dated September 4, 1998, between the
Company and Citizens Bank of Massachusetts (included as Exhibit 10.10 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 26, 1998, File No. 0-22480, and incorporated herein by
reference)
10.55 Fourth Amendment to Second Amended and Restated Loan Agreement, dated as
of December 31, 1998, by and between the Company and Citizens Bank of
Massachusetts
10.56 Second Amendment to Assignment of Certificate of Deposit, dated as of
December 31, 1998, by and between the Company and Citizens Bank of
Massachusetts
10.57 Second Replacement New Bridge Note, dated as of December 31, 1998, by and
between the Company and Citizens Bank of Massachusetts
10.58 Second Replacement Short Term Revolving Note, dated as of December 31,
1998, by and between the Company and Citizens Bank of Massachusetts
10.59 Master Security Agreement, dated as of December 23, 1998, by and between
the Company and Citizens Leasing Corporation
10.60 Amendment No. 1 to the Master Security Agreement, dated as of December 23,
1998, by and between the Company and Citizens Leasing Corporation
10.61 Secured Promissory Note, dated as of December 23, 1998, by and between the
Company and Citizens Leasing Corporation
10.62 Secured Promissory Note, dated as of December 23, 1998, by and between the
Company and Citizens Leasing Corporation
10.63 Mortgage Note dated March 1, 1999 between Birch Pond Realty Corporation
and John Hancock Real Estate Finance, Inc.
10.64 Assignment of Leases and Rents dated March 1, 1999 between Birch Pond
Realty Corporation and John Hancock Real Estate Finance, Inc.
10.65 Mortgage, Assignment of Leases and Rents and Security Agreement dated
March 1, 1999 between Birch Pond Realty Corporation and John Hancock Real
Estate Finance, Inc.
10.66 Assignment of Agreements, Permits and Contracts dated March 1, 1999
between Birch Pond Realty Corporation and John Hancock Real Estate
Finance, Inc.
10.67 Indemnification Agreement dated March 1, 1999 between the Company, Birch
Pond Realty Corporation and John Hancock Real Estate Finance, Inc.
10.68 Guaranty Agreement dated March 1, 1999 between the Company and John
Hancock Real Estate Finance, Inc.
10.69 Replacement Reserve Agreement dated March 1, 1999 by and between Birch
Pond Realty Corporation and John Hancock Real Estate Finance, Inc.
10.70 Tenant Improvement and Leasing Commissions Agreement dated March 1, 1999
between Birch Pond Realty Corporation and John Hancock Real Estate
Finance, Inc.
10.71 Consent Agreement dated March 1, 1999 between the Company and Citizens
Bank of Massachusetts
CONSENT OF EXPERTS AND COUNSEL
23.1 Consent of PricewaterhouseCoopers LLP dated March 24, 1999
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule for the year ended December 26, 1998
(4) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended
December 26, 1998.
43
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) 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: March 25, 1999 By: /s/ Gordon R. Cooke
---------------------------
Gordon R. Cooke
President, Chief Executive Officer,
Chairman of the Board of Directors and
Director (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
President, Chief Executive Officer, March 25, 1999
/s/ Gordon R. Cooke Chairman of the Board of Directors and
- -------------------- Director (PRINCIPAL EXECUTIVE OFFICER)
Gordon R. Cooke
/s/ Olga L. Conley Senior Vice President-- Finance, Chief March 25, 1999
-------------------- Financial Officer and Treasurer
Olga L. Conley (PRINCIPAL FINANCIAL OFFICER)
/s/ Peter J. Tulp Vice President Finance, Corporate March 25, 1999
- --------------------- Controller (PRINCIPAL ACCOUNTING OFFICER)
Peter J. Tulp
/s/ William E. Engbers Director March 25, 1999
- ----------------------
William E. Engbers
/s/ Walter J. Levison Director March 25, 1999
- ----------------------
Walter J. Levison
/s/ Thomas J. Litle Director March 25, 1999
- ----------------------
Thomas J. Litle
/s/ Ruth M. Owades Director March 25, 1999
- ----------------------
Ruth M. Owades
/s/ Samuel L. Shanaman Director March 25, 1999
- ----------------------
Samuel L. Shanaman
44
DM MANAGEMENT COMPANY
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
MATERIAL CONTRACTS
10.4 Fifth Amendment to Lease Agreement dated August 27, 1998, between the
Company and Richard D. Matthews and Richard J. Valentine, as Trustees of
Bare Cove Realty Trust established u/d/t dated January 10, 1984, as amended
10.10 Lease dated March 1, 1999 between the Company and Birch Pond Realty
Corporation
10.12 Amended and Restated 1993 Incentive and Nonqualified Stock Option Plan
10.15 1999 Incentive Compensation Plan
10.20 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 22, 1999 between the Company and Kevin Burns
10.21 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and Olga Conley
10.22 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and Gordon Cooke
10.23 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and John Hayes
10.24 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and Patricia Lee
10.25 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated February 24, 1999 between the Company and Peter Tulp
10.26 Split Dollar Agreement and Assignment of Life Insurance Policy as
Collateral dated March 3, 1999 between the Company and Jane Dunning
10.55 Fourth Amendment to Second Amended and Restated Loan Agreement, dated as
of December 31, 1998, by and between the Company and Citizens Bank of
Massachusetts
10.56 Second Amendment to Assignment of Certificate of Deposit, dated as of
December 31, 1998, by and between the Company and Citizens Bank of
Massachusetts
10.57 Second Replacement New Bridge Note, dated as of December 31, 1998, by and
between the Company and Citizens Bank of Massachusetts
10.58 Second Replacement Short Term Revolving Note, dated as of December 31,
1998, by and between the Company and Citizens Bank of Massachusetts
10.59 Master Security Agreement, dated as of December 23, 1998, by and between
the Company and Citizens Leasing Corporation
10.60 Amendment No. 1 to the Master Security Agreement, dated as of December 23,
1998, by and between the Company and Citizens Leasing Corporation
10.61 Secured Promissory Note, dated as of December 23, 1998, by and between the
Company and Citizens Leasing Corporation
10.62 Secured Promissory Note, dated as of December 23, 1998, by and between
the Company and Citizens Leasing Corporation
10.63 Mortgage Note dated March 1, 1999 between Birch Pond Realty Corporation
and John Hancock Real Estate Finance, Inc.
10.64 Assignment of Leases and Rents dated March 1, 1999 between Birch Pond
Realty Corporation and John Hancock Real Estate Finance, Inc.
10.65 Mortgage, Assignment of Leases and Rents and Security Agreement dated
March 1, 1999 between Birch Pond Realty Corporation and John Hancock Real
Estate Finance, Inc.
45
10.66 Assignment of Agreements, Permits and Contracts dated March 1, 1999
between Birch Pond Realty Corporation and John Hancock Real Estate Finance,
Inc.
10.67 Indemnification Agreement dated March 1, 1999 between the Company, Birch
Pond Realty Corporation and John Hancock Real Estate Finance, Inc.
10.68 Guaranty Agreement dated March 1, 1999 between the Company and John
Hancock Real Estate Finance, Inc.
10.69 Replacement Reserve Agreement dated March 1, 1999 by and between Birch
Pond Realty Corporation and John Hancock Real Estate Finance, Inc.
10.70 Tenant Improvement and Leasing Commissions Agreement dated March 1, 1999
between Birch Pond Realty Corporation and John Hancock Real Estate Finance,
Inc.
10.71 Consent Agreement dated March 1, 1999 between the Company and Citizens
Bank of Massachusetts
CONSENT OF EXPERTS AND COUNSEL
23.1 Consent of PricewaterhouseCoopers LLP dated March 24, 1999
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule for the year ended December 26, 1998
46