<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
( MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 27, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22480
DM MANAGEMENT COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2973769
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
25 RECREATION PARK DRIVE 02043
HINGHAM, MA (ZIP Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 740-2718
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Shares outstanding of the Registrant's common stock (par value $0.01) at
July 31, 1998: 9,568,302
================================================================================
<PAGE>
DM MANAGEMENT COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements....................................................... 3-8
Consolidated Balance Sheets at June 27, 1998, June 28, 1997 and December 27, 1997........... 3
Consolidated Statements of Operations for the three months and the six
months ended June 27, 1998 and June 28, 1997.......................................... 4
Consolidated Statements of Cash Flows for the six months ended June 27, 1998
and June 28, 1997...................................................................... 5
Notes to Consolidated Financial Statements.................................................. 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 9-12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................................... 13
Item 6. Exhibits and Reports on Form 8-K........................................................ 14
Signatures............................................................................................ 15
</TABLE>
2
<PAGE>
DM MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
JUNE 27, JUNE 28, DECEMBER 27,
1998 1997 1997
------------- ------------- --------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 19,300 $ 6,388 $ 19,260
Marketable securities, net of unrealized loss................. 3,898 3,872 3,890
Inventory..................................................... 20,036 11,279 20,579
Prepaid catalog expenses...................................... 5,257 3,870 6,475
Deferred income taxes......................................... 5,295 2,748 5,295
Other current assets.......................................... 3,758 779 1,229
-------- ----------- -------------
Total current assets........................................ 57,544 28,936 56,728
Property and equipment, net.................................... 32,579 7,033 14,174
Deferred income taxes.......................................... 4,479 7,026 4,479
-------- ----------- -------------
Total assets................................................ $ 94,602 $ 42,995 $ 75,381
======== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 17,279 $ 8,164 $ 14,116
Accrued expenses.............................................. 6,166 2,709 4,161
Accrued customer returns...................................... 5,134 3,423 4,779
Short-term borrowings......................................... 13,316 -- --
Current portion of long-term debt............................ 837 836 837
-------- ----------- -------------
Total current liabilities................................... 42,732 15,132 23,893
Long-term debt, less current portion........................... 3,627 4,446 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,
9,505,802, 6,991,881 and 9,147,720 shares issued and
outstanding as of June 27, 1998, June 28, 1997 and
December 27, 1997, respectively............................. 95 70 91
Additional paid-in capital.................................... 58,983 40,501 58,041
Unrealized loss on marketable securities...................... (96) (122) (105)
Accumulated deficit........................................... (10,739) (17,032) (14,885)
-------- ----------- -------------
Total stockholders' equity.................................. 48,243 23,417 43,142
-------- ----------- -------------
Total liabilities and stockholders' equity.................. $ 94,602 $ 42,995 $ 75,381
======== =========== =============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales........................................ $59,359 $32,885 $104,151 $57,428
Costs and expenses:
Product..................................... 27,009 14,563 47,450 25,415
Operations.................................. 11,121 5,912 19,828 10,213
Selling..................................... 12,361 7,822 22,725 14,136
General and administrative.................. 4,215 2,606 7,752 4,734
Interest, net............................... (220) 7 (404) 68
------- ------- ------- -------
Income before income taxes....................... 4,873 1,975 6,800 2,862
Provision for income taxes....................... 1,900 770 2,652 1,116
------- ------- ------- -------
Net Income....................................... $ 2,973 $ 1,205 $ 4,148 $ 1,746
======= ======= ======= =======
EARNINGS PER SHARE:
Basic:
Earnings per share.......................... $ 0.31 $ 0.18 $ 0.44 $ 0.26
======= ======= ======= =======
Weighted average shares outstanding......... 9,465 6,823 9,376 6,794
Diluted:
Earnings per share.......................... $ 0.28 $ 0.16 $ 0.40 $ 0.23
======= ======= ======== =======
Weighted average shares outstanding......... 10,455 7,727 10,379 7,585
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
DM MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 27, JUNE 28,
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 4,148 $ 1,746
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................... 1,270 754
Deferred income taxes.................................................. -- 824
Liability for expected losses.......................................... -- (152)
Changes in assets and liabilities:
Decrease in inventory.................................................. 543 1,358
(Increase) decrease in prepaid catalog expenses........................ 1,218 (1,156)
(Increase) decrease in other current assets............................ (2,529) 97
Increase in accounts payable and accrued expenses...................... 5,168 853
Increase in accrued customer returns................................... 355 2,114
--------- -----------
Net cash provided by operating activities.................................. 10,173 6,438
Cash flows used in investing activities:
Additions to property and equipment.................................... (19,675) (614)
--------- -----------
Net cash used in investing activities...................................... (19,675) (614)
Cash flows provided by financing activities:
Borrowings under debt agreements....................................... 28,616 5,764
Payments of debt borrowings............................................ (20,019) (6,039)
Proceeds from stock transactions....................................... 945 455
--------- -----------
Net cash provided by financing activities.................................. 9,542 180
Net increase in cash and cash equivalents.................................. 40 6,004
Cash and cash equivalents at:
Beginning of period.................................................... 19,260 384
--------- -----------
End of period.......................................................... $ 19,300 $ 6,388
========= ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
DM MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements included herein have been prepared by DM
Management Company (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and in the opinion of
management contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. Accordingly, although the Company believes that the
disclosures are adequate to make the information presented not misleading, these
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Stockholders for the fiscal year ended December 27, 1997.
A. DEBT:
The Company's credit facilities at June 27, 1998 consisted of (i) a
$1,650,000 real estate loan (the "Real Estate Loan"); (ii) a $3,600,000 term
loan (the "Term Loan"); (iii) an $8,500,000 revolving line of credit (the
"Revolver"); (iv) a $17,000,000 line of credit (the "Line of Credit"); and (v)
a $4,300,000 short-term note (the "Short-Term Note"). All of the Company's
credit facilities are collateralized by a security interest in substantially
all assets of the Company. These credit facilities contain various lending
conditions and covenants, including restrictions on permitted liens and required
compliance with certain financial coverage ratios. Subsequent to June 27, 1998
the Company's credit facilities were amended to modify the calculation of
certain financial coverage ratio requirements.
Payments on the Real Estate Loan are due monthly, based on a 15-year
amortization, with the remaining balance payable on July 30, 2002. Interest on
the Real Estate Loan is fixed at 6.81% per annum until August 31, 1999, at which
time the Company may select from several interest rate options. Payments on the
Term Loan are due quarterly through its maturity on June 1, 2002. The Term Loan
provides for several interest rate options. At June 27, 1998, the Term Loan
bore interest at 7.19% per annum. The Revolver provides for several interest
rate options and expires on June 1, 1999. There were no amounts outstanding
under the revolver at June 27, 1998. The Company is required to pay a
commitment fee of 1/8th of 1% per annum on the unused portion of the Revolver
commitment. Borrowings under the Line of Credit bear interest at LIBOR plus 125
base points repriced monthly and are payable in full on December 31, 1998. The
Company is not required to pay a commitment fee on the unused portion of the
Line of Credit commitment. There was $9,016,000 outstanding under the Line of
Credit at June 27, 1998. The Short-Term Note matures on December 31, 1998 and
bears interest at 7.06% per annum.
A summary of the Company's outstanding long-term debt follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, DECEMBER 27,
1998 1997 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Real estate loans................................. $1,558 $1,650 $1,613
Term loans........................................ 2,880 3,600 7,540
Capitalized lease obligations..................... 26 32 30
------ ------ ------
Total long-term debt......................... 4,464 5,282 9,183
Less current maturities........................... 837 836 837
------ ------ ------
Long-term debt, less current portion......... $3,627 $4,446 $8,346
====== ====== ======
</TABLE>
B. STOCK SPLIT:
On May 29, 1998, the Company announced a three-for-two stock split to be
effected in the form of a stock dividend payable on June 30, 1998 to
shareholders of record on June 12, 1998. The balance sheets and all earnings
per share information have been retroactively restated for all periods presented
to include the effects of the stock split.
6
<PAGE>
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
C. EARNINGS PER SHARE:
The Company calculates earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." Basic EPS excludes potentially dilutive securities and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common shares were exercised or converted into common shares that then
shared in the earnings of the entity. EPS data for the period ended June 28,
1997 has been restated to conform to the provisions of SFAS 128. A
reconciliation of the numerators and denominators of the basic and diluted
EPS calculation before and after the stock split follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ---------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
POST-STOCK SPLIT 1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income................................ $ 2,973 $1,205 $ 4,148 $1,746
======= ====== ======= ======
Denominator (shares):
Basic weighted average shares outstanding. 9,465 6,823 9,376 6,794
Assumed exercise of stock options......... 990 904 1,003 791
------- ------ ------- ------
Diluted weighted average shares
outstanding.............................. 10,455 7,727 10,379 7,585
======= ====== ======= ======
Earnings per share:
Basic................................... $ 0.31 $ 0.18 $ 0.44 $ 0.26
Diluted................................. $ 0.28 $ 0.16 $ 0.40 $ 0.23
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ---------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
PRE-STOCK SPLIT 1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income................................ $2,973 $1,205 $4,148 $1,746
====== ====== ====== ======
Denominator (shares):
Basic weighted average shares outstanding. 6,310 4,548 6,251 4,529
Assumed exercise of stock options......... 660 603 668 528
------ ------ ------ ------
Diluted weighted average shares
outstanding.............................. 6,970 5,151 6,919 5,057
====== ====== ====== ======
Earnings per share:
Basic................................... $ 0.47 $ 0.26 $ 0.66 $ 0.39
Diluted................................. $ 0.43 $ 0.23 $ 0.60 $ 0.35
</TABLE>
D. RECENT ACCOUNTING STANDARDS:
In June 1997 the Financial Accounting Standards Board (the "FASB") issued
Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income." The Company
has determined that the impact of this statement is immaterial to these
consolidated financial statements.
In June 1997 the FASB issued Statement No. 131, ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information" which establishes new
standards for the way public companies report information about operating
segments and requires companies to report selected segment information quarterly
to stockholders. This statement is effective for financial statements for
periods beginning after December 15, 1997 and requires comparative information
for earlier years to be restated. This statement need not be applied to interim
financial statements in the initial year of its application. Management is
currently evaluating the effect of this statement on its reporting of segment
information.
7
<PAGE>
DM MANAGEMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
E. COMMITMENTS:
In fiscal 1997 the Company began constructing a new operations and
fulfillment center in Tilton, New Hampshire. This new facility is expected to
be operational by early 1999. The estimated cost of this new facility,
including land, construction and equipment, ranges from $39.0 to $41.0 million.
Subsequent to June 27, 1998 the Company entered into a lease agreement for
a new J. Jill catalog outlet store. The original term of the lease is five
years, to begin in August 1998. Minimum annual lease payments due under the
lease are approximately $40,000. The Company has an option to terminate the
lease within one year of its inception.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
involves 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: delays
in completing construction of the Company's new Tilton, New Hampshire operations
and fulfillment center; difficulties in managing the transition of operations to
the new Tilton facility; delays or problems in implementing the Company's new
order management and warehouse management systems; failure of the Company or its
significant vendors to become Year 2000 compliant; the ability of the Company
to effectively liquidate its overstocked merchandise; significant changes in
customer response rates; changes in consumer spending and consumer preferences;
increasing competition in the apparel industry; success of operating
initiatives; changes in business strategy; advertising and promotional efforts;
quality of management; possible future increases in operating costs;
availability, terms and deployment of capital; brand awareness; availability of
qualified personnel; business abilities and judgment of personnel; labor and
employee benefit costs; general economic and business conditions; change in, or
the failure to comply with, government regulations, and other factors.
RESULTS OF OPERATIONS
The following table sets forth the Company's consolidated statements of
operations expressed as a percentage of net sales and certain selected operating
data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
CONSOLIDATED STATEMENT OF OPERATIONS: 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Product...................................... 45.5 44.3 45.6 44.3
Operations................................... 18.8 18.0 19.1 17.8
Selling...................................... 20.8 23.8 21.8 24.6
General and administrative................... 7.1 7.9 7.4 8.2
Interest, net................................ (0.4) - (0.4) 0.1
----- ------ ------ ------
Income before income taxes........................ 8.2 6.0 6.5 5.0
Provision for income taxes........................ 3.2 2.3 2.5 2.0
----- ------ ------ ------
Net income........................................ 5.0% 3.7% 4.0% 3.0%
===== ====== ====== ======
SELECTED OPERATING DATA (IN THOUSANDS):
Catalog circulation (1) 18,600 12,400 33,400 21,500
Active customers (2) 1,103 724 1,103 724
</TABLE>
(1) In order to more closely match net sales to catalog circulation, the
Company calculates catalog circulation on a percentage of completion
basis. This calculation takes into account the total number of
catalogs mailed during all periods and the Company's estimate of the
expected sales life of each catalog edition. As used throughout this
Form 10-Q, the term "catalog circulation" refers to circulation of the
Company's catalogs calculated in such fashion.
(2) As used throughout this Form 10-Q, the term "active customer" means
customers who have made a purchase from the Company within the 24
months preceding the stated period end.
COMPARISON OF THE THREE MONTHS ENDED JUNE 27, 1998 WITH THE THREE MONTHS ENDED
JUNE 28, 1997
Net Sales
During the three months ended June 27, 1998 ("second quarter 1998") net
sales increased by 80.5% to $59.4 million from $32.9 million during the three
months ended June 28, 1997 ("second quarter 1997"). This net sales growth was
primarily attributable to significant sales volume increases from the Company's
J. Jill concept. During second quarter 1998 J. Jill net sales and circulation
increased by 186.1% and 135.5%, respectively, as compared to second quarter
1997. J. Jill's net sales growth was primarily attributable to circulation
growth, an increased average order size and improved response rates. During
second quarter 1998 net sales and circulation for the Nicole Summers concept
decreased by 8.3% and 22.9%, respectively, as compared to second quarter 1997 as
the
9
<PAGE>
Company focused on improving the concept's profitability. Total Company catalog
circulation increased by 50.0% to 18.6 million during second quarter 1998 from
12.4 million during second quarter 1997. The number of active customers grew to
1.1 million at June 27, 1998 from 0.7 million at June 28, 1997, an increase of
52.3%. Although the Company plans to continue its aggressive customer
acquisition strategy, it does not expect the same year over year circulation
growth it has experienced since implementing the strategy in the third quarter
of 1997.
Product
Product costs consist primarily of merchandise acquisition costs (net of
term discounts and advertising allowances), including freight costs, and
provisions for markdowns. During second quarter 1998 product costs increased by
85.5% to $27.0 million from $14.6 million during second quarter 1997. As a
percentage of net sales, product costs increased to 45.5% during second
quarter 1998 from 44.3% during second quarter 1997. The increase in product
costs as a percentage of net sales is primarily attributable to an increase in
markdown charges associated with the Company's Nicole Summers concept as lower
than anticipated sales volume from the Nicole Summers clearance catalogs
resulted in more overstocks than expected. The Company expects product costs as
a percentage of net sales to remain at or near the current level for the
remainder of fiscal 1998.
Operations
Operating expenses consist primarily of order processing costs, such as
telemarketing, customer service, fulfillment, shipping, warehousing and credit
card processing costs. During second quarter 1998 operating expenses increased
by 88.1% to $11.1 million from $5.9 million during second quarter 1997. As a
percentage of net sales, operating expenses increased to 18.8% during second
quarter 1998 from 18.0% during second quarter 1997. The Company's recent growth
has accelerated its need to increase its fulfillment capacity. The Company
currently fulfills orders out of its Meredith, New Hampshire facility and two
leased interim satellite facilities. This arrangement has generated operational
inefficiencies, as well as increased costs, both of which are expected to
continue through the first year of operation in the Company's new Tilton, New
Hampshire facility, which is currently under construction. The Company
currently expects the ratio of operating expenses to net sales to improve by
fiscal 2000.
Selling
Selling expenses consist primarily of the cost to produce, print and
distribute catalogs. During second quarter 1998 selling expenses increased by
58.0% to $12.4 million from $7.8 million during second quarter 1997. As a
percentage of net sales, selling expenses decreased to 20.8% during second
quarter 1998 from 23.8% during second quarter 1997. This decrease was
primarily the result of improved catalog productivity in second quarter 1998 as
compared to second quarter 1997. The Company does not expect to maintain the
catalog productivity levels achieved during second quarter 1998. The anticipated
decreases in catalog productivity combined with expected paper and printing cost
increases may result in selling expenses as a percentage of net sales exceeding
second quarter levels during the remainder of fiscal 1998.
General and Administrative
General and administrative expenses consist primarily of executive,
marketing, information systems and finance expenses. During second quarter 1998
general and administrative expenses increased by 61.7% to $4.2 million from
$2.6 million during second quarter 1997. This increase is primarily
attributable to increased salaries and performance bonuses and increased
depreciation and insurance costs. As a percentage of net sales, general and
administrative expenses decreased to 7.1% during first quarter 1998 from 7.9%
during first quarter 1997.
COMPARISON OF THE SIX MONTHS ENDED JUNE 27, 1998 WITH THE SIX MONTHS ENDED
JUNE 28, 1997
Net Sales
During the six months ended June 27, 1998 net sales increased by 81.4% to
$104.2 million from $57.4 million during the six months ended June 28, 1997.
This net sales increase was primarily attributable to significant sales volume
increases from the Company's J. Jill concept. During the six months ended June
27, 1998 J. Jill net sales and circulation increased by 199.0% and 140.7%,
respectively, as compared to the six months ended June 28, 1997. J. Jill's net
sales growth was primarily attributable to circulation growth, an increased
average order size and improved response rates. During the six months ended June
27, 1998 net sales and circulation for the Nicole Summers concept decreased by
5.4% and 9.9%, respectively, as compared to the six months ended June 28, 1997
as the Company focused on improving the concept's profitability. Total Company
catalog circulation increased by 55.3% to 33.4 million during the six months
ended June 27, 1998 from 21.5 million during the six months ended June 28, 1997.
10
<PAGE>
Product
During the six months ended June 27, 1998 product costs increased by 86.7%
to $47.5 million from $25.4 million during the six months ended June 28, 1997.
As a percentage of net sales, product costs increased to 45.6% during the six
months ended June 27, 1998 from 44.3% during the six months ended June 28, 1997.
During the first quarter of 1998 the Company implemented a new strategic
merchandising initiative designed to maximize the recovery rate of "wear-now"
carry-over items and minimize future potential markdowns by offering moderately
discounted fall season merchandise in the Company's early Spring season
catalogs. This strategy, combined with increased markdown charges associated
with the Company's Nicole Summers concept during second quarter 1998, resulted
in the increase in product costs as a percentage of net sales during the six
months ended June 27, 1998 as compared to the six months ended June 28, 1997.
Operations
During the six months ended June 27, 1998 operating expenses increased by
94.1% to $19.8 million from $10.2 million during the six months ended June 28,
1997. As a percentage of net sales, operating expenses increased to 19.1%
during the six months ended June 27, 1998 from 17.8% during the six months ended
June 28, 1997. Inefficiencies associated with the Company's operation of
multiple fulfillment centers, discussed above, are primarily responsible for the
increase in operating costs as a percentage of net sales.
Selling
During the six months ended June 27, 1998 selling expenses increased by
60.8% to $22.7 million from $14.1 million during the six months ended June 28,
1997. As a percentage of net sales, selling expenses decreased to 21.8% during
the six months ended June 27, 1998 from 24.6% during the six months ended June
28, 1997. This decrease was primarily the result of improved catalog
productivity in the six months ended June 27, 1998 as compared to the six months
ended June 28, 1997.
General and Administrative
During the six months ended June 27, 1998 general and administrative
expenses increased by 63.8% to $7.8 million from $4.7 million during the six
months ended June 28, 1997. This increase is primarily attributable to
increased salaries and performance bonuses, increased outside consulting fees,
and increased depreciation and insurance costs. As a percentage of net sales,
general and administrative expenses decreased to 7.4% during the six months
ended June 27, 1998 from 8.2% during the six months ended June 28, 1997.
INCOME TAXES
The Company provides for income taxes at an effective tax rate that
includes the full federal and state statutory tax rates. The Company's
effective tax rate for the six months ended June 27, 1998 and six months ended
June 28, 1997 was 39.0%.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 27, 1998, the Company funded its working
capital needs through cash generated from operations. The Company used working
capital to support costs incurred in advance of revenue generation, primarily
inventory acquisition and catalog development, production and mailing costs
incurred prior to the beginning of each selling season. The Company has two
selling seasons which correspond to the fashion seasons. The Fall season begins
in July and ends in December. The Spring season begins in January and ends in
early July.
The Company's credit facilities at June 27, 1998 consisted of (i) a $1.7
million real estate loan (the "Real Estate Loan"); (ii) a $3.6 million term loan
(the "Term Loan"); (iii) an $8.5 million revolving line of credit (the
"Revolver"); (iv) a $17.0 million line of credit (the "Line of Credit"); and (v)
a $4.3 million short-term note (the "Short-Term Note"). All of the Company's
credit facilities are collateralized by a security interest in substantially
all assets of the Company. These credit facilities contain various lending
conditions and covenants, including restrictions on permitted liens and required
compliance with certain financial coverage ratios. Subsequent to June 27, 1998
the Company's credit facilities were amended to modify the calculation of
certain financial coverage ratio requirements.
Payments on the Real Estate Loan are due monthly, based on a 15-year
amortization, with the remaining balance payable on July 30, 2002. Interest on
the Real Estate Loan is fixed at 6.81% per annum until August 31, 1999, at which
time the Company may select from several interest rate options. Payments on the
Term Loan are due quarterly through its maturity on June 1, 2002. The Term Loan
provides for several interest rate options. At June 27, 1998, the Term Loan
bore interest at 7.19% per annum. The Revolver provides for several interest
rate options and expires on June 1, 1999. The Company is required to pay a
commitment fee of 1/8th of 1% per annum on the unused portion of the Revolver
commitment. There were no amounts outstanding under the Revolver at June 27,
11
<PAGE>
1998. Borrowings under the Line of Credit bear interest at LIBOR plus 125
basis points repriced monthly and are payable in full on December 31, 1998. The
Company is not required to pay a commitment fee on the unused portion of the
Line of Credit commitment. There was $9.0 million outstanding under the Line of
Credit at June 27, 1998. The Short-Term Note matures on December 31, 1998 and
bears interest at 7.06% per annum.
Cash used in investing activities totaled $19.7 million during the six
months ended June 27, 1998 and $0.6 million during the six months ended June 28,
1998. During the six months ended June 27, 1998 investing activities include
approximately $17.3 million in construction costs related to the Company's new
operations and fulfillment center in Tilton, New Hampshire. At June 27, 1998
approximately $13.3 million of the $17.3 million had been financed through the
use of short-term borrowings.
Inventory levels at June 27, 1998 were 77.6% higher than at June 28, 1997,
primarily due to the past and future projected growth in the business. Prepaid
catalog expenses at June 27, 1998 were 35.8% higher than at June 28, 1997
primarily due to higher paper inventory balances at June 27, 1998. The increase
in paper inventory is primarily a result of the increased circulation levels for
the Company's catalogs and increased paper costs.
In fiscal 1997 the Company began constructing a new operations and
fulfillment center in Tilton, New Hampshire. This new facility is expected to
be operational by early 1999. The estimated cost of this new facility, including
land, construction and equipment, ranges from $39.0 million to $41.0 million, of
which approximately $23.3 million had been spent as of June 27, 1998. The
Company intends to finance the cost of this new facility with a portion of the
net proceeds from its recently completed public offering, bank financing and by
other financing arrangements, which may include, without limitation, additional
bank financing, a sale-leaseback transaction, government sponsored financing or
a public or private placement of debt. The Company is currently upgrading its
order management and warehouse management systems. Total expenditures to be
capitalized for the systems project are estimated at approximately $4.0 million,
of which approximately $2.0 million had been spent as of June 27, 1998.
Subsequent to June 27, 1998, the Company sold its marketable securities and
recognized an after tax loss of $0.1 million. The proceeds from this sale will
be used to fund construction of the new operations and fulfillment center and
working capital needs.
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 provide the capital resources necessary to support the
Company's capital and operating needs for the foreseeable future.
FUTURE CONSIDERATIONS
The Company is currently planning to introduce an assortment of bed, bath
and gift items in one of its Fall 1998 J. Jill catalogs. The Company does not
expect this offering to significantly affect its financial condition, results of
operations or cash flows during fiscal 1998. In addition, the Company plans to
circulate its first bed, bath and gift edition of the J. Jill catalog in the
Spring of 1999.
Subsequent to June 27, 1998, the Company entered into a lease agreement for
a new J. Jill catalog outlet store.
RECENT ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board (the "FASB") issued
Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income". The Company
has determined that the impact of this statement is immaterial to its
consolidated financial statements.
In June 1997 the FASB issued Statement No. 131, ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information" which establishes new
standards for the way public companies report information about operating
segments and requires companies to report selected segment information quarterly
to stockholders. This statement is effective for financial statements for
periods beginning after December 15, 1997 and requires comparative information
for earlier years to be restated. This statement need not be applied to interim
financial statements in the initial year of its application. Management is
currently evaluating the effect of this statement on its reporting of segment
information.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Stockholders on May 28, 1998. At the
Annual Meeting, the stockholders of the Company voted to approve the following
actions by the following votes:
1. To fix the number of directors that shall constitute the whole Board of
Directors of the Company at six.
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------
<S> <C>
For.................................................................. 5,522,381
Against.............................................................. 15,250
Abstain.............................................................. 1,007
</TABLE>
2. To elect the following individuals as Directors of the Company:
<TABLE>
<CAPTION>
WITHHOLDING
Class B FOR AUTHORITY
- ------- ------------------ ------------------
<S> <C> <C>
Walter J. Levison......................................... 5,350,398 188,240
Ruth M. Owades............................................ 5,349,298 189,340
</TABLE>
3. To amend the 1993 Incentive and Nonqualified Stock Option Plan to
increase the number of shares of common stock that may be issued pursuant
to the options granted thereunder from 1,200,000 to 1,600,000.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
For............................................................. 2,505,079
Against......................................................... 1,690,746
Abstain......................................................... 2,577
Broker non-votes................................................ 1,340,236
</TABLE>
4. To approve the 1998 Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
For............................................................. 3,874,965
Against......................................................... 320,650
Abstain......................................................... 2,787
Broker non-votes................................................ 1,340,236
</TABLE>
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) EXHIBITS
CERTIFICATE OF INCORPORATION AND BY-LAWS
3.1 Restated Certificate of Incorporation of the Company (included as
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 25, 1993, File No. 0-22480, and incorporated
herein by reference)
3.2 By-Laws of the Company, as amended (included as Exhibit 3.2 to the
Company's Current Report on Form 8-K dated January 14, 1997, File No.
0-22480, and incorporated herein by reference)
MATERIAL CONTRACTS
10.1 First Amendment to Second Amended and Restated Loan Agreement dated
June 30, 1998 between the Company and Citizens Bank of Massachusetts
10.2 Lease Agreement dated June 11, 1998 between the Company and Reading
Outlet Center Associates D/B/A Mass Realty Company
10.3 Amended and Restated 1993 Incentive and Nonqualified Stock Option
Plan (included as Appendix A 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)
10.4 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)
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
(2) REPORTS ON FORM 8-K
The Company has not filed any reports on Form 8-K during the quarter ended
June 27, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DM Management Company
Dated: August 10, 1998 By: /s/ Olga L. Conley
-----------------------------------
Olga L. Conley
Authorized Officer
Senior Vice President - Finance,
Chief Financial Officer and
Treasurer (Principal Financial
Officer)
Dated: August 10, 1998 By: /s/ Peter J. Tulp
-----------------------------------
Peter J. Tulp
Authorized Officer
Vice President - Finance,
Corporate Controller (Principal
Accounting Officer)
15
<PAGE>
DM MANAGEMENT COMPANY & SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 27, 1998
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
CERTIFICATE OF INCORPORATION AND BY-LAWS
3.1 Restated Certificate of Incorporation of the Company (included as
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 25, 1993, File No. 0-22480, and incorporated
herein by reference)
3.2 By-Laws of the Company, as amended (included as Exhibit 3.2 to the
Company's Current Report on Form 8-K dated January 14, 1997, File No.
0-22480, and incorporated herein by reference)
MATERIAL CONTRACTS
10.1 First Amendment to Second Amended and Restated Loan Agreement dated
June 30, 1998 between the Company and Citizens Bank of Massachusetts
10.2 Lease Agreement dated June 11, 1998 between the Company and Reading
Outlet Center Associates D/B/A Mass Realty Company
10.3 Amended and Restated 1993 Incentive and Nonqualified Stock Option
Plan (included as Appendix A 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)
10.4 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)
FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
<PAGE>
Exhibit 10.1
FIRST AMENDMENT TO SECOND AMENDED
---------------------------------
AND RESTATED LOAN AGREEMENT
---------------------------
This First Amendment to Second Amended and Restated Loan Agreement as of
June 30, 1998, by and between Citizens Bank of Massachusetts (herein "BANK"),
and DM Management Company, a Delaware corporation (herein "BORROWER:).
Reference is made to a certain Loan Agreement made as of June 5, 1997 by
and between BANK and BORROWER, as the same has been amended and restated in a
certain Amended and Restated Loan Agreement dated October 31, 1997, and in a
certain Second Amended and Restated Loan Agreement dated March 5, 1998 (as so
restated, the "Loan Agreement").
WITNESSETH:
-----------
WHEREAS, the BORROWER wishes to amend certain of the provisions of the Loan
Agreement; and
WHEREAS, THE BANK is willing to do so on the terms, provisions and
conditions contained herein;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties hereby agree that the Loan Agreement is hereby amended as
follows:
Paragraph 11.11 of the Loan Agreement is hereby deleted and the following
inserted in lieu thereof:
11.11 The BORROWER will not, for any four (4) consecutive fiscal
quarters, permit DEBT SERVICE COVERAGE to be less than 1.25 to 1. Such
covenant shall be calculated quarterly based upon the preceding 12 months
of operations commencing with the twelve month period year ending June 30,
1997. Notwithstanding the foregoing, the calculation for the quarters
ending June 30, 1998 and September 30, 1998 shall be made without any
reference to UNFINANCED CAPITAL EXPENDITURES.
This Amendment shall take effect as of the date first above written.
<PAGE>
Except as hereby amended, the Loan Agreement is hereby ratified, confirmed
and republished.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of
the date first above written.
Witness: DM MANAGEMENT COMPANY
By: /s/ Peter J. Tulp
___________________________________
Peter J. Tulp, Corporate Controller
CITIZENS BANK OF MASSACHUSETTS
By: /s/ Lori B. Leeth
____________________________________
Lori B. Leeth, Senior Vice President
<PAGE>
Exhibit 10.2
LEASE AGREEMENT
I. IDENTIFICATION OF PARTIES
THIS LEASE AGREEMENT, made on the eleventh day of June, 1998, by READING
OUTLET CENTER ASSOCIATES, a Pennsylvania Limited Partnership, D/B/A MOSS REALTY
COMPANY, having its principal place of business located at 801 North Ninth
Street, Reading, Pennsylvania, 19604 (hereinafter called "LANDLORD") and DM
Management Company, a Delaware Corporation, having its principal place located
at 25 Recreation Park Drive, Hingham MA 02043 (hereinafter called "TENANT").
II. LEASED PREMISES
LANDLORD hereby leases to TENANT and TENANT hereby rents from LANDLORD the
store premises (hereinafter referred to as the "Store","Premises," "Leased
Premises" or "Demised Premises") designated on the plan attached as "Exhibit A"
hereto located in Building# 5 at 831 Oley Street, Reading PA erected as part
of a shopping center presently known as READING OUTLET CENTER (hereinafter
referred to as the "Center," "Shopping Center" or "Entire Premises" and
presently comprising the area shown in Exhibit "A"), said Demised Premises being
measured and described by the following dimensions which are measured from the
outside building lines of each wall of the Demised Premises or, in the case of
those walls separating the Demised Premises from other stores in the shopping
center, from the center lines of such walls, without deduction or exclusion for
any space occupied or used by columns, stairs, or other interior construction or
equipment:
Total Approx.
Square Footage of the Demised Premises: 3059
III. USE OF PREMISES
Subject to the provisions of this Lease, other terms not withstanding, TENANT
shall use the Demised Premises solely for the purpose of conducting the business
of: retail sale of clothing, accessories and home merchandise, which may
include, without limitation, ladies ready to wear, accessories, shoes, bed and
bath goods and accessories.
(a) Except as otherwise specifically provided commencing on the Commencement
Date and thereafter for the balance of the term of this Lease, TENANT shall
continuously occupy and use Demised premises solely for conducting the
business specified in the Lease Agreement as the permitted use, and will
not use or permit or
<PAGE>
suffer the use of the demised premises for any other
business or purpose. In addition, TENANT agrees that TENANT shall not
operate or cause or permit to be operated any catalogue, mail, or telephone
order sales in or from the Demised Premises except (i) outbound
telemarketing and (ii) the incidental sale of merchandise which TENANT is
permitted to sell over the counter to customers in the Demised Premises
pursuant to the permitted use set forth in the Lease Agreement, provided
that no such sales pursuant to subclause (i) or (ii) above shall be
included in the Gross Sales for purposes of this Lease, nor shall TENANT
divert elsewhere any business which would ordinarily be transacted by
TENANT at, in, on or from the Demised Premises. The authorization of the
use of the Premises for the business purposes set forth in the Lease
Agreement does not constitute a representation or warranty by LANDLORD that
any particular use of the Premises is now or will continue to be permitted
under applicable laws or regulations.
(b) TENANT shall not permit, allow or cause any of the following to be
conducted in the Demised Premises: any public or private auction, or any
sale which would indicate to the public that TENANT is bankrupt or is going
out of business, except during such period as LANDLORD shall have the right
to show the Premises under section XXXI of the General Conditions. TENANT
shall not use or permit any use of the Demised Premises, except in a manner
consistent with the general standards of merchandising in the Shopping
Center, nor shall TENANT's advertising indicate or imply that TENANT is
operating its business in a manner which is not consistent with the general
high standards of merchandising in the Shopping Center. Nothing contained
in this paragraph shall affect or is intended to affect TENANT's pricing
policies.
(c) Because the adequacy of the rental is dependent upon TENANT's Gross Sales
whether or not Percentage Rent is payable TENANT agrees that commencing
with the Commencement Date and thereafter throughout the term of this
Lease, TENANT will continuously, actively and diligently operate or cause
the permitted business to be operated in good faith and in an efficient,
businesslike and respectable manner, maintaining in the Demised Premises a
full staff of employees, and a full stock of seasonal merchandise of the
quality, kind, type and breadth which TENANT usually sells, and employing
TENANT's best continual efforts and abilities to the end that the maximum
Gross Sales which can reasonably be produced from the Demised Premises
shall be produced.
(d) Throughout the term of this Lease, TENANT shall cause its store to remain
open each day of the week during the hours set forth in Paragraph III of
the General Conditions captioned "Shopping Center Hours Of Operation",
provided that at least 85% in number (the "Required Number of Co-Tenants")
of the other tenancies in the Shopping Center on the date hereof remain
open during such hours, and that at least all of the tenantable spaces in
the buildings shown as Building #4 and #5 on the plan attached hereto as
Exhibit "A" remain open during such hours. In the event that fewer than the
2
<PAGE>
Required Number of Co-Tenants are open for business on a regular basis
during any thirty (30) consecutive day period, or in the event that more
than 85% of the stores (other than TENANT) in the Building shown as
Building #4 and #5 on the plan attached hereto as Exhibit B are not open
for business on a regular basis during any thirty (30) consecutive day
period, TENANT shall have the right to terminate this Lease upon thirty
(30) days prior written notice to LANDLORD. TENANT agrees that the hours
during which TENANT is obligated to operate may be changed by LANDLORD from
time to time provided that LANDLORD will not act in a discriminatory
manner.
(e) TENANT shall have the right to operate and/or advertise any business
operated at or from the Demised Premises under any name which TENANT or any
successor to TENANT permitted hereunder carries on its business.
IV. ADDITIONAL USE OF THE PREMISES
TENANT covenants and agrees that TENANT at its own cost and expense:
(a) Will keep all exterior and interior store front surfaces clean and will
maintain the rest of the Demised Premises and all corridors and loading
areas immediately adjoining the Demised Premises in a clean and orderly
condition and free of insects, rodents, vermin and other pests;
(b) Will not permit accumulations of any refuse, but will remove the same and
keep such refuse in odor-proof, rat-proof containers within the interior of
the Demised Premises shielded from the view of the general public until
removed and will not burn any refuse whatsoever but will cause all such
refuse to be removed by such person or companies, including LANDLORD, as
may be approved;
(c) Will replace promptly with glass of a like kind and quality any plate glass
or window glass of the Demised Premises which may become cracked or broken.
(d) Will not, without the LANDLORD's prior written consent, place or maintain
any merchandise or other articles in any vestibule or entry of the Demised
Premises or within two (2) feet of any entrance from the Demised Premises
to the enclosed mall, on the footwalks adjacent or elsewhere on the
exterior thereof;
(e) Will not use or permit the use of any apparatus, or sound reproduction or
transmission, or any musical instrument, in such manner that the sound so
reproduced, transmitted or produced shall be audible beyond the confines of
the Demised Premises at a volume not greater than 45 decibels measured from
the main doorway of TENANTs space, and will not use any other advertising
medium, including without limitation flashing
3
<PAGE>
lights, or search lights which may be heard or experienced outside the
Demised Premises;
(f) Will keep all mechanical apparatus free of vibration and noise which may be
transmitted beyond the confines of the Demised Premises;
(g) Will not cause or permit objectionable odors to emanate or to be dispelled
from the Demised Premises;
(h) Will be responsible for the payment of trash removal expenses at the
currant rate of $ 75.00 per month and shall likewise be responsible for any
escalation of said expense upon 30 day notice from the LANDLORD;
(i) Will be required, at their own expense, to have on premises fire
extinguishers of the type and quality required by the local Fire Marshall
and or fire prevention/control ordinances;
(j) Will comply with all laws, rules, regulations, guidelines, orders and
ordinances of applicable federal, state and local governmental authorities,
commissions, boards and agencies with respect to this Lease and the use of
the Demised Premises, for TENANT's specific purpose, other than the general
sale of merchandise at retail, or any work to be performed in the Demised
Premises by TENANT and TENANT shall secure and keep in force all permits,
licenses and approvals required for TENANT's use of the Demised Premises.
In addition, TENANT shall also comply with all recommendations of the
Association of Fire Underwriters, Factory Mutual Insurance Companies, the
Insurance Services Organization, or other similar body establishing
standards for fire insurance ratings with respect to the use or occupancy
of the premises by TENANT, and will participate in periodic fire brigade
instruction and drills at the request of LANDLORD and will supply,
maintain, repair and replace for the Demised Premises any fire
extinguishers or other fire prevention equipment and safety equipment
(including installation of approved hoods and ducts if cooking activity is
conducted on the premises) required by these rules, regulations and the
Association or other body in order to obtain insurance at the lowest
available premium rate throughout the term of this Lease.
Landlord represents and warrants to TENANT that, as of the date hereof, the
Premises comply with all applicable federal, state and local laws,
regulations or codes or insurance requirements which are applicable to the
uses permitted hereunder (collectively the "Codes"), including without
limitation, the Americans With Disabilities Act, that LANDLORD does not
know of any change in any Law which has been proposed which would require
any modification to the Premises, and that LANDLORD shall at its own cost
and expense make any changes now or hereafter required to bring the
Premises into compliance with Codes applicable to the use of the Premises
for general merchandising purposes. In the event such representation and
warranty proves untrue, and LANDLORD
4
<PAGE>
fails to make such changes, TENANT shall be entitled to perform any work
necessary to bring the Premises up to Code, and to deduct amounts expended
to do so from Rent due hereunder.
(k) Will not receive or ship articles of any kind except through the facilities
provided for that purpose by LANDLORD and will not permit any delivery of
goods, supplies, merchandise, or fixtures to or from the leased Premises to
be made through any of the enclosed malls unless the Leased Premises have
no entrance other than on such a mall, in which latter case TENANT shall
use its best efforts to schedule such deliveries outside shopping center
business hours, except with LANDLORD's approval in emergency situations;
(l) Will when applicable light the show windows of the Demised Premises each
day of the year to the extent which shall be required by LANDLORD of all
tenants of the Shopping Center, but in no event later than one hour after
the close of the Center;
(m) Will at its own expense repair and maintain all air conditioning units and
the replacement of all air conditioning filters. (the replacement of said
filters shall be done monthly.)
(n) Will refer to the name of the Shopping Center in all advertising done to
promote sales at its store or stores in the geographical area in which the
Center is located;
(o) Will not use the plumbing facilities identified to its leasehold for any
other purpose than that for which they are constructed and will not permit
any foreign substance of any kind to be thrown in them and the expense of
repairing any breakage, stoppage, seepage or damage, whether occurring on
or off the premises, resulting from a violation of this provision by TENANT
or TENANT's employees, agents or invitees shall be borne by TENANT. All
grease traps and other plumbing traps shall be kept clean and operable by
TENANT at TENANT's own cost and expense;
(p) Will not permit any shopping carts in the common areas even if taken there
by customers;
(q) Will not place or cause or permit to be placed within the Demised Premises,
pay telephones, vending machines (except those for the exclusive use of
TENANT's employees) or amusement devices of any kind without the prior
written consent of LANDLORD;
(r) Will be responsible for all lighting equipment in the Demised Premises;
(s) Will be responsible for janitorial services within the Demised Premises;
(t) Will be responsible for additional keys for employees.
5
<PAGE>
V. LENGTH OF TERM
The original term of this Lease and TENANT's obligation to pay rent and occupy
the Demised Premises in accordance with the terms of the Lease shall commence on
the earlier of the following dates (such earlier date being hereinafter called
the "Commencement Date"): the date that is thirty (30) days after the date of
possession and with a fully executed Lease Agreement or; (2) the date on which
TENANT shall first open the Demised Premises for business with the public,
however no later than September 1, 1998. LANDLORD hereby agrees that possession
of the Demised Premises shall be delivered to TENANT no later than July 15,
1998. The term of this Lease shall be for a period of five years, plus the
period, if any, between the Commencement Date if it falls on a day other than
the first day of the month and the first day of the first calendar month in the
term.
VI. CONFIRMATION OF THE TERM
At any time after the Commencement Date of the term of the Lease the parties
shall execute and deliver to each other, at the option of LANDLORD, either an
instrument in recordable form or a letter agreement prepared by LANDLORD,
wherein TENANT shall: (1) certify that the Lease is in full force and effect
and (2) certify the commencement and termination dates of the original term of
this Lease.
This Lease and the tenancy hereby created shall cease and terminate at the end
of the term of this Lease without the necessity of any notice from either
LANDLORD or TENANT to terminate the same, and TENANT hereby waives notice to
vacate the Premises and agrees that LANDLORD shall be entitled to the benefit of
all provisions of law respecting the summary recovery of possession of premises
from a TENANT holding over to the same extent as if statutory notice had been
given.
From the date of the signing of the Lease by the TENANT, the TENANT shall be
bound to all of the terms and conditions of the lease, subject only to exception
set forth in paragraph identified as Length Of Term.
VII. INABILITY TO GIVE POSSESSION
DELETED
6
<PAGE>
VIII. FIXED MINIMUM RENT
TENANT shall pay to LANDLORD a guaranteed annual minimum rent ("Fixed Minimum
Rent") for each of the following periods during the term of this Lease, as
follows:
<TABLE>
<CAPTION>
TIME PERIOD ANNUAL AMOUNT MONTHLY AMOUNT
- -------------- ------------- ----------------------------
<S> <C> <C>
Years 1 - 5 $39,767.00 $ 3,313.92 ( $13.00 sq. ft.)
Years 6 - 10 $45,885.00 $ 3,823.75 ( $15.00 sq. ft.)
</TABLE>
Each such installment shall be due and payable on or before the first day of
each calendar month in the original term of this Lease, in advance, at the
office of Agent or at such other place as may be designated by LANDLORD from
time to time, without any prior demand therefor and without any deduction or
setoff whatsoever, the first installment to be paid on the Commencement Date
whether or not the Commencement Date is the first day of the calendar month.
In the event that the Commencement Date of the term of this Lease shall be a day
other than the first day of a calendar month, TENANT's first payment of Fixed
Minimum Rent shall be prorated for the fractional month between the Commencement
Date and the first day of the first full calendar month in the term of this
Lease on a per diem basis (calculated on a thirty-day month).
IX. TAXES
TENANT agrees to pay as rent in addition to the minimum rental herein reserved
its pro-rata share (agreed to be 9.48%) of all taxes assessed or imposed upon
the demised premises and/or the building of which the demised premises is a part
during the term of this lease. Should any increase in taxes be exclusively
attributable to the use and occupancy of the demised premises by the TENANT, the
TENANT agrees to pay the entire increase. The word "Taxes" shall include all
taxes attributable to improvements now or hereafter made to the Shopping Center
or any part of it or attributable to the present or future installation in the
Shopping Center or any part of the Shopping Center of fixtures, machinery or
equipment, all real estate Taxes, (provided that Taxes shall not include any
taxes attributable to improvements made by any tenant which LANDLORD shall have
given the right under any lease to charge back to such tenant), water and sewer
and other governmental impositions and charges of every kind and nature,
nonrecurring as well as recurring, special or extraordinary as well as ordinary,
foreseen and unforeseen, and each and every installment thereof, which shall or
may during the term of this Lease be levied, assessed or imposed, or become due
and payable or become liens upon, or arise in connection with the use, occupancy
or possession of, or any interest in, the Shopping Center or any part of it or
any land, buildings or other improvements.
7
<PAGE>
Notwithstanding anything to the contrary provided herein, LANDLORD shall pay all
Taxes over the longest period permitted by law.
For each "Tax Year" during the original term of this Lease, TENANT shall pay
to LANDLORD as additional rent (hereinafter called "Tax Rent"), on account of
Tax Rents, TENANT shall pay monthly, in advance, as additional rent, together
with each monthly installment of Fixed Minimum Rent, without demand or setoff,
an amount equal to one-twelfth (1/12) of the annual amount payable on account of
Tax Rent
Such amount may be adjusted by LANDLORD at any time during the term of this
Lease to an amount equal to one-twelfth (1/12) of the Tax Rent payable by TENANT
for the preceding Tax Year. If TENANT's payment on account of Tax Rent for the
last Tax Year exceeds the actual amount payable by TENANT as Tax rent for such
Tax Year LANDLORD shall refund such excess to TENANT within thirty (30) days. In
the event TENANT is indebted to LANDLORD for any reason whatsoever, LANDLORD may
deduct the amount owed from such overpayment.
LANDLORD shall have the right to bill TENANT for Tax Rent at any time after
each receipt by LANDLORD of a bill, assessment, levy, notice of imposition or
other evidence of taxes due or payable all of which are hereinafter
collectively referred to as a "Tax Bill" (whether such bill is a final bill, an
estimate of actual taxes or represents a Tax Bill based upon a final or partial
assessment or determination). TENANT shall pay the balance of its Tax Rent
within thirty (30) days of receipt from LANDLORD of a written statement setting
forth the taxes for which LANDLORD has received a Tax Bill, TENANT's share of
taxes, and TENANT's payments made on account of such Tax Rent. All payments on
account of Tax Rent made by TENANT during such Tax Year after receipt of such
bill and statement shall be applied by LANDLORD toward payment on account of
TENANT's obligation for Tax Rent for the next ensuing Tax Year and shall not
reduce TENANT's obligation to pay the balance due LANDLORD pursuant to such
statement. In making the above computations a tax bill or photocopy of the tax
bill submitted by LANDLORD to TENANT shall be conclusive evidence of the amount
of the taxes included in the computation of the Tax Rent in question; provided,
however, LANDLORD shall have the right to bill TENANT for TENANT's share of the
Tax Rent for the last Tax Year in the term of this Lease whether or not LANDLORD
shall have received a Tax Bill covering the period from the date of the Tax Bill
which formed the basis of the most recent installment on account of Tax Rent
billed to TENANT to the expiration of the term of this Lease. If LANDLORD has
not received a Tax Bill for such period, LANDLORD shall estimate the amount of
such last installments of Tax rent on the basis of information contained in the
Tax Bill most recently received by LANDLORD, subject to adjustment when LANDLORD
receives a Tax Bill which includes the period from the date of such Tax Bill to
the expiration of the term of this Lease. TENANT shall pay such adjusted amount
upon billing by LANDLORD.
8
<PAGE>
For the purpose of this Lease the words "Tax Year" shall mean the twelve (12)
full calendar months of the term commencing with the commencement date of Lease
and each succeeding twelve (12) month period thereafter in the term of this
Lease.
If, after TENANT shall have made the required annual payment of Tax Rent,
LANDLORD shall receive a refund of any portion of the taxes included in the
computation of such Tax Rent within forty-five (45) days after receipt of the
refund LANDLORD shall pay to TENANT that percentage of the net refund after
deducting all costs and expenses (including, but not limited to, attorneys' and
appraisers' fees) expended or incurred in obtaining such refund, which portion
of the taxes in question paid by TENANT bears to the entire amount of such taxes
immediately prior to the refund. TENANT shall not institute any proceedings
with respect to the assessed space valuation of the Shopping Center or any part
of it for the purpose of securing a tax reduction. In the event the LANDLORD
shall retain any consultant to negotiate the amount of taxes, tax rate, assessed
value and/or other factors influencing the amount of taxes and/or institute any
administrative and/or legal proceedings challenging the tax rate, assessed value
of other factors influencing the amount of taxes, whether or not such action
results in a reduction in the amount of taxes. TENANT's Tax Rent shall include
the portion of the aggregate of all such reasonable fees, reasonable attorneys'
and appraisers' fees and all disbursements, court costs and other similar items
paid or incurred by LANDLORD during the applicable Tax Year with respect to such
proceedings which is obtained by multiplying the aggregate of such sums by the
fraction set forth in the term of this Lease identified as TAXES.
In the event of any dispute regarding the floor area or any portion of it
(other than the Leased Premises which shall be determined by the provisions of
the Lease Agreement), the following determination of LANDLORD shall be binding
upon the parties. (3059 sq. ft. - 32,269 sq. ft. Bldg #5 = 9.48%)
X. ADDITIONAL RENT
All sums of money or charges required to be paid by TENANT under this Lease,
whether or not the same are designated "Additional rent," shall for all purposes
of this Lease be deemed and shall be paid by TENANT as rent. If such amounts or
charges are not paid at the time provided in this Lease, they shall
nevertheless, if not paid when due,be collectible as rent with the next
installment of Fixed Minimum Rent thereafter falling due together with a late
fee of eighteen percent (18%) per annum from the due date, or no later than the
tenth (10th) day of the month, of the installment to the date of payment, but
not in excess of the highest rate allowed by law.
9
<PAGE>
XI. PERCENTAGE RENT
In addition to the Fixed Minimum Rent and all other sums specified herein and
as part of the total rent to be paid, TENANT covenants and agrees that it will,
without demand, pay to LANDLORD Percentage Rental as set forth below from the
demised premises in each lease year. For the purposes of calculating such
Percentage Rental, "Gross Sales" shall mean the selling price of all merchandise
or services sold in or from the Store by TENANT, its subTENANTs, licensees and
concessionaires, whether for cash or for credit, excluding, however, the
following:
(1) The sale price of all merchandise returned and accepted for full
credit or the amount of the cash refund or allowance made thereon;
(2) The sums and credits received in settlement of claims for loss or
damage to merchandise;
(3) Sales tax, so-called luxury taxes, excise taxes, gross receipt taxes,
and other taxes imposed upon the sale of merchandise or services,
whether added separately to the selling price of the merchandise or
services and collected from customers or included in the retail
selling price;
(4) Receipts from public telephones, vending machines, sales of money
orders, and the collection of public utility bills;
(5) Interest, carrying charges, or finance charges in respect of sales
made on credit;
(6) Sales of TENANT's fixtures;
(7) Transfers of merchandise between TENANT-owned stores;
(8) Sales to other merchant's jobbers, or employees;
(9) Sales to employees at a discount.
The Percentage Rental, shall be computed based on the following time periods,
which shall be called "Lease Year" or "Lease Years". The first Percentage Rental
period shall be extended from the commencement date of the Lease to the last day
of the month proceeding the first anniversary of the commencement date of this
Lease. Subsequent Percentage Rental periods shall commence on each anniversary
of the commencement
10
<PAGE>
date of this Lease Year. Percentage Rental for any partial Lease Year, whether
the first or last year shall be computed on a pro-rata basis.
Each Lease Year shall be considered as an independent accounting period for
the purposes of computing the amount of Percentage Rental. The Percentage
Rental payable by TENANT to the LANDLORD as described in this article shall
begin upon the Gross Sales of the TENANT, from the leased premises as defined
above reaching One Million Three Hundred Twenty Five Thousand Five Hundred Sixty
Seven Dollars. ($433.33 sq. ft. break point). At which time TENANT shall pay
three percent (3%) of Gross Sales above this amount to LANDLORD. Should
TENANT's sales reach this amount the Percentage Rental payment due hereunder
shall be paid within thirty (30) days following the end of the Lease Year. At
the expiration of this Lease or any renewal option hereunder TENANT's Percentage
Rental payment, if any, due hereunder shall be made within thirty (30) days of
such expiration date. Gross sales must be reported monthly.
XII. MONTHLY ACCOUNTING
TENANT shall submit to LANDLORD before the twentieth (20) day following the
end of each month during the term hereof (including the 20th day of the month
following the end of the term), a written statement, signed by TENANT and
certified by it to be correct, showing the amount of Gross Sales during the
preceding month.
XIII. YEARLY ACCOUNTING
TENANT shall submit to LANDLORD before the sixtieth (60) day following the end
of each lease Year a written statement, signed by TENANT and certified by an
officer of TENANT to be correct, setting forth the amount of Gross Sales during
the preceding Lease Year. The statements referred to herein shall be made in
such form and contain such details as LANDLORD may reasonably request.
The acceptance by LANDLORD of payments of Percentage Rental or reports thereon
shall be without prejudice and shall in no case constitute a waiver of
LANDLORD's right to audit TENANT's books and records of its Gross Sales and
inventories of merchandise. TENANT shall maintain at its Home Office adequate
records for a period of twenty-four (24) months after the close of each Lease
Year for the allowing of LANDLORD to verify the reported Gross Sales for such
year. Once with respect to each Lease Year and any time within said twenty-four
(24) months, LANDLORD or its agents may inspect such records during normal
business hours.
11
<PAGE>
LANDLORD shall have the right to cause, upon five (5) days notice to TENANT, a
complete audit to be made of TENANT's entire business affairs relating to the
Store and of all records including those specified in the preceding paragraph,
and TENANT shall make all such records available for examination at the TENANT's
home office. If the results of such audit shall show that TENANT's statement of
Gross Sales for any period has been understated by three percent (3%) or more,
then TENANT shall pay LANDLORD the cost of such audit in addition to any
deficiency payment required. The furnishing by TENANT of any grossly inaccurate
statement shall constitute a breach of the Lease. Any information obtained by
LANDLORD as a result of such audit shall be held in strict confidence by
LANDLORD, except in any proceeding or action to collect the cost of such audit
or deficiency or with respect to a prospective sale, mortgage, lease or lease-
back of the Center.
XIV. TENANT'S RECORDS
TENANT covenants and agrees that TENANT's records and those of any subTENANT,
licensee or concessionaire upon the Demised Premises shall be kept in
accordance with generally accepted accounting principles and that the records
required in this Lease will be provided and maintained. TENANT shall record
each sale at the time the sale is made, using cash registers equipped with
sealed continuous totals or such other devices for controlling sales.
Furthermore, TENANT shall keep at all times during the term of this Lease, at
the Demised Premises or at the general office of TENANT, full, complete and
accurate books of account and records in accordance with the accepted accounting
practices with respect to all operations of the business to be conducted in or
from the demised premises including, without limitation, the recording of Gross
Sales and the receipt of all merchandise into and the delivery of all
merchandise from the Demised Premises during the term of this lease and shall
retain such books and records, copies of all tax reports submitted to the
appropriate taxing authorities, as well as copies of contracts, vouchers,
checks, inventory records, dated cash register tapes and other documents and
papers in any way relating to the operation of such business (all of which are
hereinafter collectively referred to as "Books and Records"), for at least two
(2) years from the end of the Lease Year to which they are applicable, or, if an
audit is commenced or if a controversy should arise between the parties to this
Lease regarding the rent payable under this Lease until such audit or
controversy is terminated even though such retention period may be after the
expiration of the term of, or earlier termination of, this Lease.
DELETED
12
<PAGE>
XV. INSURANCE
TENANT agrees to pay to LANDLORD as additional rent its pro-rata share (agreed
to be .75%) of all insurance premiums upon the demised premises and/or the
building of which the demised premises is a part. If any increase is
exclusively caused by any act or neglect of the TENANT or the nature of the
TENANT's business, TENANT agrees to pay the entire increase. TENANT's annual
payment for insurance hereunder is estimated to be $.26 per square foot. (3059 -
408,692 sq. ft. Center = .75%)
XVI. COMMON COST OF MAINTENANCE AND OPERATION
LANDLORD shall maintain the Common Area, which shall include, without
limitation, the roof, all structural elements of the Building which the Demised
Premises are located, exterior walls, gutters, downspouts and foundations in
good order, condition and repair. TENANT agrees to pay LANDLORD fifty cents
($.50) per square foot per year for the entire term of this lease for the
Center's Common Area Maintenance Costs. "Common area Maintenance Costs" shall
mean the total costs and expenses incurred in operating, maintaining, and
repairing the Common Areas, including without limitations the cost of the
following: landscaping; gardening; planting; cleaning; painting (including line
painting); decorating; paving; lighting; removal of snow; fire protection; water
and sewer charges applicable to the common area; operating of public toilets;
installing and rent of signs; maintenance, repair, and replacement of utility
systems serving the Center and the Premises, including water, sanitary sewer and
storm water lines and other utility lines, pipes and conduits; replacement of
machinery and equipment owned and used in operation, maintenance and repair of
the Common Area, or the rental charges for such machinery and equipment; costs
of personnel (including applicable payroll taxes, workmen's compensation
insurance, and disability insurance) to implement all of the foregoing.
LANDLORD may, however, cause any or all of said services to be provided by
independent contractors.
XVII. SECURITY DEPOSIT
DELETED
XVIII. EXTENSION OPTION
The term of this Lease shall expire on the last day of the month preceding the
Fifth Anniversary of the Commencement date or if the Lease is extended as set
forth below, the Tenth Anniversary of the Commencement Date. In the event
TENANT has performed all of the terms, conditions, and covenants of this Lease
which are required of it, then
13
<PAGE>
TENANT is hereby granted an option for a five (5) year extension from the day of
the Fifth Anniversary of the Commencement Date through the last day of the month
preceding the Tenth Anniversary of the Commencement Date. The option shall be
exercised by TENANT notifying LANDLORD in writing by certified or registered
mail at least ninety (90) days before the Fifth Anniversary of the Commencement
Date of its intention to exercise such option. If the option is not exercised as
herein provided for, then the option right is being waived and the Lease shall
terminate accordingly. If said option is exercised, all of the terms,
conditions, and covenants of this Lease shall prevail and be binding upon the
parties for the extended period. The annual base rental for the extension period
shall be $45,885.00 ($15.00 sq. ft.) payable as set forth in this Lease with
such additional rent as is provided for in this Lease. The breakpoint for
Percentage Rental payable by TENANT during each Lease Year of the extension
period shall begin upon the Gross Sales of the TENANT from the Leased Premises
reaching One Million Five Hundred Twenty Nine Thousand Five Hundred
(1,529,500.00) Dollars ($500.00/sq. ft.) breakpoint. Thereafter TENANT shall pay
three percent (3%) of Gross Sales above this amount to LANDLORD.
XIX. FIXTURES
TENANT shall have the right to use the existing fixtures for the entire term
of this Lease. However, the fixtures must remain when Tenant vacates the
Demised Premises. In addition, TENANT shall have the right to install such
tenant fixtures as TENANT shall elect, and shall have the right to remove such
fixtures at the end of the term.
TENANT may purchase the fixtures, if they wish to do so by contacting William
Semko, General Manager of the Reading Outlet Center.
XX. GET OUT CLAUSE
TENANT may cancel this Lease, by a thirty (30) day written notice to LANDLORD,
given within six (6) months after the expiration of the first such Lease Year,
if the Gross Sales for the first full twelve (12) months of the Lease Term do
not exceed $764,750.00.( $250/sq.ft.) If Tenant does not so notify LANDLORD of
its intention to cancel, then this Lease shall remain in full force and effect
for the entire Lease Term.
14
<PAGE>
XXI. LEASE DOCUMENTS
In addition to the Lease Agreement consisting of 19 pages, the following are
attached to the Lease and are incorporated in and made part of the Lease as
fully as though set forth at length in the Lease: "GENERAL CONDITIONS" attached
as Exhibit "B", Building Layout attached as Exhibit "A", and Signage attached as
Exhibit "C".
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound by the
Lease, have caused this Lease to be duly executed the day and year first above
written.
READING OUTLET CENTER ASSOCIATES
D/B/A MOSS REALTY COMPANY
BY: /s/ Charles T. McMurtrie
_______________________________
ITS: President
______________________________
DATE: July 10, 1998
_____________________________
ATTEST: /s/ Sandra Bartman
___________________________
DM MANAGEMENT COMPANY
BY: /s/ Patricia C. Selander
_______________________________
ITS: V.P. -- Inventory Management
______________________________
DATE: July 8, 1998
_____________________________
ATTEST: /s/ Nancy B. Morse
___________________________
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT JUNE 27, 1998 AND FROM THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE 3 MONTHS AND THE SIX MONTHS ENDED JUNE 27, 1998
CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000910721
<NAME> DM MANAGEMENT COMPANY
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-26-1998 DEC-26-1998
<PERIOD-START> MAR-29-1998 DEC-28-1997
<PERIOD-END> JUN-27-1998 JUN-27-1998
<CASH> 19,300 19,300
<SECURITIES> 3,898 3,898
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 20,036 20,036
<CURRENT-ASSETS> 57,544 57,544
<PP&E> 32,579 32,579
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 94,602 94,602
<CURRENT-LIABILITIES> 42,732 42,732
<BONDS> 3,627 3,627
0 0
0 0
<COMMON> 95 95
<OTHER-SE> 48,148 48,148
<TOTAL-LIABILITY-AND-EQUITY> 94,602 94,602
<SALES> 59,359 104,151
<TOTAL-REVENUES> 59,359 104,151
<CGS> 27,009 47,450
<TOTAL-COSTS> 38,130 67,278
<OTHER-EXPENSES> 16,576 30,477
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (220) (404)
<INCOME-PRETAX> 4,873 6,800
<INCOME-TAX> 1,900 2,652
<INCOME-CONTINUING> 2,973 4,148
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,973 4,148
<EPS-PRIMARY> .31<F1> .44<F1>
<EPS-DILUTED> .28<F1> .40<F1>
<FN>
<F1>THE COMPANY HAD A THREE-FOR-TWO STOCK SPLIT EFFECTIVE JUNE 30, 1998. THE
EFFECTS OF THIS STOCK SPLIT ARE INCLUDED IN THE BALANCE SHEET AT JUNE 27, 1998
AND IN THE CALCULATION OF EARNINGS PER SHARE FOR THE THREE MONTHS ENDED JUNE
27, 1998 AND THE SIX MONTHS ENDED JUNE 27, 1998. PRIOR FINANCIAL DATA SCHEDULES
HAVE NOT BEEN RESTATED FOR THE EFFECTS OF THIS STOCK SPLIT.
</FN>
</TABLE>
