FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended January 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________ to ___________
Commission File No. 0-21869
dELiA*s Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3914035
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
435 Hudson Street
New York, New York 10014
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(Address of principal executive offices) (Zip code)
(212) 807-9060
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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|
Aggregate market value of voting stock held by non-affiliates of registrant as
of April 1, 1997: $86,361,007
Number of shares of Common Stock outstanding as of April 1, 1997: 12,052,500
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement pursuant to Regulation
14A, which statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report, are incorporated by reference in Part III
hereof.
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Certain statements contained herein, including, without limitation,
information appearing under Item 1, "Business," and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")).
Forward-looking statements involve a number of risks and uncertainties
including, but not limited to, general economic conditions, changes in fashion
trends, increases in materials, printing, paper, postage, shipping and labor
costs, timing of catalog mailings, customer response rates, international
business risks, levels of competition and other factors outside the control of
the Company. These factors, the factors set forth under Item 1, "Business," and
other factors that appear with the forward-looking statements, or in the
Company's other Securities and Exchange Commission filings, including its
Prospectus dated December 19, 1996, could affect the Company's actual results
and could cause the Company's actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company herein.
All references in this Report to a particular fiscal year refer to the
year ended January 31 following the particular year (e.g., "fiscal 1996" refers
to the fiscal year ended January 31, 1997).
PART I
Item 1. Business.
Overview
dELiA*s Inc. (with its predecessors, "dELiA*s" or the "Company") is a
direct marketer of casual apparel and related accessories to girls and young
women, primarily between the ages of 10 and 24 (an age group known as
"Generation Y"). The Company believes that it is one of a limited number of
direct marketers distributing an apparel-based catalog exclusively for this
market and that its selection and presentation of merchandise have contributed
to a growing recognition of dELiA*s as a Generation Y fashion resource. The
Company's broad assortment of merchandise includes recognized and emerging
brands complemented by dELiA*s own branded products. Merchandise ranges from
basics, such as jeans, shorts and t-shirts to more fashion-oriented apparel and
accessories, such as woven and knit junior dresses, swimwear, sunglasses,
watches, costume jewelry and cosmetics. The Company's distinctive catalogs, with
their eye-catching layouts accented by creative "catch phrases," are designed to
express a culture and attitude unique to dELiA*s. Each catalog carries a broad
array of merchandise typically presented in coordinated outfits that can be
purchased for under $100.
dELiA*s distributed its first catalog in March 1994, distributed
approximately 1.7 million catalogs in fiscal 1995 and 8 million catalogs in
fiscal 1996. The Company plans to increase catalog distribution to in excess of
20 million catalogs in fiscal 1997. As of January 31, 1997, the Company's
proprietary database had grown to over 1.3 million house names, including
approximately 370,000 customers who had made at least one purchase from the
Company within the preceding 36 months. The Company's customers are located in
all 50 states, as well as Canada and Japan, with sales to customers in any
single state comprising not more than 10.5% of total sales in fiscal 1996.
On December 24, 1996, the Company sold 2,052,500 shares of its common
stock, par value $.01 per share ("Common Stock"), in an initial public offering
(the "Offering"). Immediately prior to the Offering, dELiA*s Inc. and dELiA*s
LLC, a predecessor, engaged in a reorganization transaction (the
"Reorganization"), pursuant to which dELiA*s LLC contributed its assets to
dELiA*s Inc. and dELiA*s Inc. assumed, and agreed to pay, perform and discharge,
all liabilities of dELiA*s LLC (except for income tax liabilities).
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The Generation Y Market
With the large "baby boom" generation maturing and having children, the
younger segments of the U.S. population have been increasing in recent years.
According to the U.S. Census Bureau, Generation Y (ages 10 to 24 years)
currently numbers more than 55 million people and is expected to grow by 12% to
approximately 62 million by 2005. These children of the "baby boom" generation
are larger in number and growing more rapidly as a group than the generation
ahead of them.
[Graph titled HISTORICAL AND PROJECTED U.S. POPULATION OF 10 TO 24 YEAR-OLDS
with the following data points:
Years Population (in
millions)
1985 56,653
1986 55,586
1987 54,726
1988 54,249
1989 53,683
1990 54,286
1991 54,070
1992 54,253
1993 54,517
1994 54,656
1995 54,865
1996 55,037
1997 55,505
1998 56,248
1999 57,158
2000 58,134
2001 59,170
2002 60,027
2003 60,770
2004 61,358
2005 61,766
2006 62,133
2007 62,403
2008 62,658
2009 62,964
2010 63,147]
The teen population (ages 12 to 19) represents the core of Generation Y.
The increase in the U.S. teen population has been accompanied by an increase in
the amount of money teens spend. According to one independent consumer research
firm, total teen spending in 1995 was $109 billion, an increase of 10% from
1994.
The Company believes that the members of Generation Y are influenced by
new media and information sources. Although a variety of retailers and
catalogers offer teen merchandise, the Company believes that a limited number of
national retailers or catalogers cater exclusively to the Generation Y market.
The Company believes that creating a cultural environment that caters to teen
purchasers is essential to effectively marketing to this group. Accessibility is
also important, as many of these purchasers are too young to drive, have working
parents with limited time to take them shopping or do not have convenient access
to teen-focused retailers. As a result, the Company believes that Generation Y
is a large and underserved market that represents a significant direct marketing
opportunity.
Growth Strategy
The Company's goal is to be the leading marketer of casual fashion
apparel, related accessories and other products to Generation Y girls and young
women and to build on its recognition as a fashion resource. Key elements of the
Company's strategy to accomplish its goal include the following:
Grow Core Catalog Business. dELiA*s believes that significant
opportunities exist to penetrate further its target market through the increased
use of catalogs. The Company's proprietary database consisted of approximately
1.3 million house names as of January 31, 1997, compared to a total estimated
Generation Y female population of over 25 million. The Company intends to
increase the number of catalogs distributed from 8 million in fiscal 1996 to in
excess of 20 million in fiscal 1997, and to expand the number of editions of its
catalogs. The Company believes it can use its proprietary database to develop
targeted mailings to specific customer segments. It also may broaden the range
of products offered in its catalogs (including additional dELiA*s-branded
products). In addition, the Company recently began to distribute catalogs in
Japan and Canada and plans to increase its distribution of catalogs in these
markets in fiscal 1997. The Company is also exploring distribution opportunities
in other international markets.
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Focus on Brand Name Merchandise. The Company believes teens are very
brand-conscious, and wear branded apparel to project an image to their peers.
The Company monitors leading young women's magazines (including Teen, Seventeen
and YM), television channels (such as MTV) and other trend-setting media to
identify brands and styles that it believes are attracting the attention of the
teen market. A typical dELiA*s catalog features merchandise from a diverse group
of more than 75 vendors. Brands currently offered through dELiA*s catalogs
include nationally recognized names, such as Carter's and Vans, as well as
brands recognized within the teen market, including Free People (Urban
Outfitters) and Roxy (Quiksilver). dELiA*s also strives to obtain merchandise
from emerging designers, a strategy the Company believes differentiates dELiA*s
from other retailers and helps to establish dELiA*s as a fashion resource for
girls and young women. Emerging brands currently featured in dELiA*s catalogs
include Dollhouse, Dawls, Greed Girl, Yak Pak and 26 Red Sugar.
Develop and Leverage the dELiA*s Brand Identity. The Company believes the
dELiA*s brand stands for fresh, progressive teen style and that the Company has
become a fashion resource for Generation Y girls and young women. The dELiA*s
brand identity is comprised of several components, including up-to-date
merchandise offerings, dELiA*s- branded products, the promotion of emerging
brands and dELiA*s distinctive catalog design. dELiA*s reaches out to its target
audience through its colorful, high-impact catalogs, which are designed to
resemble a youthful fashion digest and to enhance the dELiA*s brand identity.
The Company believes that successfully establishing strong relationships with
its target customers through its catalogs will enable dELiA*s to leverage its
name and database to develop additional distribution channels and complementary
product offerings in the future. These opportunities may include developing a
non-traditional, youth-oriented magazine (or 'zine), developing other
traditional or electronic publishing ventures and opening retail stores.
Build Proprietary Customer Database. The Company believes the dELiA*s
proprietary customer database, which includes demographic data as well as
purchasing patterns and preferences, would be difficult for competitors to
replicate, primarily because it consists mostly of names of persons who
specifically requested the dELiA*s catalog and which may not be available
through purchased or rented lists. The Company also believes this proprietary
database offers opportunities for cross-marketing, sales of new products and the
development of additional distribution channels. The database of over 1.3
million house names includes approximately 370,000 customers who have made at
least one purchase in the preceding 36 months. During fiscal 1996, over 1
million new names were added to the Company's database. The database has been
developed primarily through referrals, word-of-mouth, returns of catalog request
cards and targeted classified advertising in selected magazines, including
Seventeen and YM. Over 90% of the names in the database have been derived from
these sources. The Company believes that its database yields response rates that
exceed average response rates for the consumer catalog industry.
Invest in Customer Service Infrastructure. During fiscal 1996, the
Company made significant investments in integrated, state-of-the-art telephone
and management information systems. These systems allow teleservice
representatives to provide real-time product availability and order status
information to customers and to monitor sales patterns and inventory levels
closely. In addition, the Company has expanded its customer service operations,
including an increase in the number of its teleservice representatives from
approximately 50 on February 1, 1996 to approximately 250 on January 31, 1997.
The Company focuses on hiring and training energetic, service-oriented
teleservice representatives who can understand and relate to dELiA*s customers,
with the goals of providing a convenient shopping experience, offering useful
product information and promoting customer loyalty.
Merchandising and Marketing
dELiA*s offers a carefully edited assortment of recognized and emerging
brands of teen apparel and accessories, complemented by dELiA*s-branded
merchandise. The Company believes teens are very brand-conscious, particularly
in their apparel choices, and rely on their favorite brands to help them project
an image to their peers. The Company monitors leading young women's magazines
(including Teen, Seventeen and YM), television channels (such as MTV) and other
trend-setting media to identify brands and styles that it believes are
attracting the attention of the teen
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market. The Company's buyers regularly attend apparel shows and meet with
vendors and, in some cases, the editorial staffs of young women's magazines, to
stay abreast of popular brands, fashions and styles.
The Company's catalogs feature a broad assortment of merchandise, ranging
from basics, such as jeans, shorts and t-shirts to more fashion-oriented apparel
and accessories, such as woven and knit junior dresses, swimwear, sunglasses,
watches, costume jewelry and cosmetics to enable its customers to fulfill many
of their fashion needs. The Company presents coordinated outfits in its catalogs
that reflect dELiA*s style. Merchandise is presented in a manner designed to
encourage customers to create their own outfits. The Company believes the
presentation of coordinated outfits increases average order size and enhances
sales.
The following table sets forth the principal product categories offered
by dELiA*s and the percentage of the Company's net sales in fiscal 1996 from its
1996 catalogs represented by each category.
Percentage of Sale
from 1996 Catalogs
(fiscal 1996)
Product Category -----------------
Apparel.................................. 74%
Footwear................................. 14%
Accessories.............................. 8%
Cosmetics................................ 4%
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100%
In the fall of 1995, the Company began to market products under the
dELiA*s brand name. Currently dELiA*s- branded products consist primarily of
cosmetics, t-shirts and footwear. Approximately 17% of the Company's net sales
from its 1996 catalogs was attributable to dELiA*s-branded products.
The Company seeks to develop strong relationships with numerous vendors
and designers in order to maintain ongoing access to recognized and emerging
brands. A typical dELiA*s catalog features merchandise from a diverse group of
more than 75 vendors. The Company believes the strong customer acceptance of its
catalog helps make the Company a preferred outlet for certain of its vendors,
some of which occasionally provide the Company with merchandise on an exclusive
basis. Brands currently offered through dELiA*s catalogs include nationally
recognized names, such as Carter's and Vans, as well as brands recognized within
the teen market, including Free People (Urban Outfitters) and Roxy (Quiksilver),
dELiA*s also strives to obtain merchandise from emerging designers, a strategy
the Company believes differentiates dELiA*s from other retailers and helps to
establish dELiA*s as a fashion resource for girls and young women. Emerging
brands in the Company's catalog currently include Dollhouse, Dawls, Greed Girl,
Yak Pak and 26 Red Sugar. Apparel produced by Urban Outfitters accounted for
approximately 24% of net sales in fiscal 1996 catalogs (and less than 20% and
10% of net sales from the Winter 1996 and Spring 1997 catalogs, respectively).
No other supplier's products accounted for more than 9% of net sales from fiscal
1996 catalogs. Seven vendors accounted for approximately 51% of the net sales
generated by the Company's fiscal 1996 catalogs. The Company believes that a
limitation on its ability to obtain products from significant suppliers could
have a material adverse effect on the Company. Approximately 30% of the
Company's gross sales derived from its fiscal 1996 catalogs were of products the
Company believes were manufactured outside the United States.
Catalogs
dELiA*s catalogs are designed to create a distinctive and entertaining
shopping experience and to offer customers more than the typical apparel catalog
by combining the feel and editorial flair of a teen-focused fashion magazine
with the convenience of direct mail shopping. The catalogs are filled with
colorful, eye-catching layouts and creative
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"catch phrases." The catalogs feature teen models whose expressions and poses
convey the dELiA*s attitude. For example, on a typical page, coordinated outfits
featuring plaids and stripes appear beside the editorial soundbite,"oPPositeS
AtTract & AbsTrAcT & DeTrAcT & SuBtRaCt & inTeRaCt. oK." Similarly, the headline
on a page featuring dELiA*s neon and metallic-colored makeup reads, "MakIn' uP
Is nOt hARd tO Do."
dELiA*s catalogs are created and produced in-house by the Company's
designers, with the assistance of free-lance photographers and production
artists. These in-house capabilities allow the Company to control its catalog
production schedule, decreasing the lead times necessary to produce catalogs and
reducing the costs of preparing for printing. These capabilities also provide
the Company with greater flexibility and creativity in catalog production and
merchandise selection.
In fiscal 1996, the Company published six catalog editions. The Company
anticipates distributing eight catalog editions in fiscal 1997. A typical
catalog, which follows a magazine-type format, contains approximately 50 pages
and 650 SKUs. The Company's four principal seasonal catalogs are mailed to
persons listed in the Company's proprietary database, as well as to persons from
rented lists, and the Company also mails supplemental catalog editions to a more
select group. In addition, the Company arranges for bulk distribution of its
catalogs on college campuses. In fiscal 1996, the Company mailed two sale
circulars. These four-page circulars featured over 200 SKUs. The Company may
from time to time in the future mail additional sale circulars.
In fiscal 1996, the Company distributed approximately 8 million catalogs
in all 50 states. The Company intends to increase the number of catalogs
distributed to in excess of 20 million in fiscal 1997. The Company believes it
can leverage its proprietary database to develop additional targeted mailings to
specific customer segments, and intends to begin more frequent mailings of
supplemental catalogs to repeat customers.
The Company began to distribute catalogs in Japan in fiscal 1996 and
intends to increase its distribution of catalogs in Japan in fiscal 1997. These
catalogs are mailed directly to Japanese customers and are also being
distributed through an arrangement with a direct marketing division of Sony
Corporation.
Operations
The primary components of the Company's operations, as described below,
include its proprietary database, teleservices and order entry, customer service
and returns and distribution and fulfillment.
Proprietary Database Development. The Company has developed its
proprietary customer database primarily through referrals, word-of-mouth,
returns of catalog request cards and targeted classified advertising in selected
magazines, including Seventeen and YM. The Company believes over 90% of the
names in the database have been derived from these sources, which the Company
believes generate higher response rates than purchased or rented lists. During
fiscal 1996, more than one million new names were added to the Company's
database. As of January 31, 1997, the Company's proprietary database had grown
to over 1.3 million names, including approximately 370,000 customers who had
made at least one purchase from the Company within the preceding 36 months. The
Company's database contains a person's name, gender, residence, age, family
status and historical transaction data (including, among other things, referral
source, history of orders, payment method, average order size and product
purchase information).
Teleservices and Order Entry. The Company provides its customers with
24-hour, seven-day-a-week, toll-free telephone access. Approximately 75% of the
Company's orders are received by phone and 25% by mail, facsimile and electronic
mail. Teleservice representatives process orders directly into the Company's
management information system, which provides customer order history and
information, product specifications, available substitutes and accessories,
expected ship date and order number. The teleservice representatives are
provided with a sales script, are versed in product sizes, colors and features
and are trained to cross-sell accessories and related products and
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provide information about promotional items. Teleservice representatives are
trained to transfer calls to customer service personnel as appropriate.
The Company believes its customers are particularly sensitive to the way
merchants and salespeople communicate with them. The Company strives to hire
energetic, service-oriented teleservice representatives who can understand and
relate to customers. Teleservice representatives, many of whom are college
students, participate in a training program, which includes a mentor system for
working with more experienced personnel. After training, teleservice
representatives are monitored to review performance and are re-trained
periodically. As teleservice representatives gain experience, they may be
trained and promoted in other areas, such as customer service.
The Company currently has approximately 150 in-house phone stations and
recently installed a new state-of-the-art telephone system. The Company's
approximately 250 (as of January 31, 1997) full- and part-time teleservice
representatives have the capacity to handle approximately 2,000 calls per hour.
The Company also uses an outside teleservices provider for overflow orders and
orders placed between 3 a.m. and 7 a.m., Eastern Standard Time. The Company
processes telephone orders in an average of two to four minutes, depending upon
the nature of the order and whether the customer is a first-time or repeat
customer.
Customer Service and Returns. dELiA*s maintains a separate customer
service department. Customer service inquiries are principally concerned with
order and refund status. Customer service representatives are carefully
screened, specially trained and often promoted from within based on level of
product knowledge, service ability and order accuracy. The Company has a 45-day
unconditional return policy for its products. For each of fiscal 1995 and fiscal
1996, customer returns were approximately 17% of gross sales (before exchanges).
Return experience is closely monitored to identify trends in product offerings,
product defects and quality issues.
Distribution and Fulfillment. A majority of the Company's orders are
shipped within 48 hours of credit approval. In cases in which the order is
placed using another person's credit card and it exceeds a specified threshold,
the order is shipped only after the Company has received oral confirmation from
the cardholder. Customers generally receive orders within three to five business
days after shipping. During fiscal 1996, approximately 95% of all shipments were
made through United Parcel Service or the United States Postal Service. A
shipping and handling fee is charged on each customer order, based on the total
price of the order. The Company's fulfillment systems automatically determine
the most cost effective method of shipping each order.
dELiA*s currently uses an unaffiliated, third-party fulfillment
contractor to process and fulfill orders. The Company manages this process
through two on-site employees. The third-party contractor uses an integrated
picking, packing and shipping system via an on-line connection to the Company's
in-house server. The system monitors the in-stock status of each item ordered,
processes the order and generates warehouse selection tickets and packing slips
for order fulfillment operations. dELiA*s, through this contractor, is currently
making an average of 3,800 shipments a day. The Company's agreement with the
third-party contractor has a fixed term that expires on April 30, 1997 and
thereafter is terminable by either party at the end of the calendar month
following the giving of 60 days' notice.
The Company intends to begin performing its own order processing and
fulfillment operations during fiscal 1997. For that purpose, the Company has
entered into a lease agreement for a warehouse and distribution facility in
Hanover, Pennsylvania. See "Item 2--Properties."
The Company has excess inventory in varying degrees over the course of
the year. Excess inventory is typically greater at the end of the sales life of
the Company's summer catalogs (which typically carry over a substantial number
of SKUs from the spring catalogs) and its winter catalogs (which carry over a
substantial number of SKUs from the fall catalogs). When the Company believes it
has excessive inventory, the Company often runs promotional sales of the excess
items through programs targeted at phone-in customers and through sale
circulars. Products sold through promotional sales to phone-in customers and
through the Company's sales circular are typically discounted by 30%
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to 50% from their standard retail prices. The Company also has used third-party
liquidators, tent sales and charitable donations to dispose of excess inventory
and may consider other liquidation options in the future. The Company's net
sales from excess inventory sold at a discount to retail price in fiscal 1996
were approximately $1.6 million, or less than 6% of the Company's net sales for
that period; the cost of those goods sold at a discount to retail price was
approximately $1.1 million. In addition, the Company maintains a reserve against
anticipated losses due to liquidation of additional unsold inventory.
Intellectual Property
The dELiA*s name and logo have been registered by the Company with the
U.S. Patent and Trademark Office. Other applications for registration of the
Company's trademarks, including the daisy ("*") symbol, are currently pending.
The Company also uses the trademarks, trade names, logos and endorsements of its
suppliers with their permission. The Company is not aware of any pending
conflicts concerning its marks or its use of others' intellectual property
rights.
Competition
The teen apparel and accessories industries are highly competitive, and
the Company expects competition in these markets to increase. The Company
competes for teen and young adult customers with traditional department store
retailers, alternative and vintage clothing stores located primarily in
metropolitan areas and mall-based teen-focused retailers, such as Gadzooks,
Urban Outfitters and The Wet Seal. To a lesser degree, the Company competes with
other direct marketers, such as Tweeds and J. Crew. Many of the Company's
competitors are larger and have substantially greater financial, distribution
and marketing resources than the Company. The Company believes the principal
competitive factors in its business are merchandise selection, customer service,
brand image and price.
There are few barriers to entry in the teen apparel and accessories
market and the Company expects other catalogers, as well as additional
store-based retailers and apparel manufacturers, to enter this market. The
Company also could face competition from manufacturers of apparel and
accessories (including the Company's current vendors), who could market their
products directly to retail customers or make their products more readily
available in retail stores or through catalogs. In addition, competitors could
enter into exclusive distribution arrangements with the Company's vendors for
particular products, denying the Company access to such products.
The Company expects that the direct marketing industry will be affected
by technological changes in distribution and marketing methods, such as on-line
catalogs, retail kiosks and Internet shopping. The Company believes its success
will depend, in part, on its ability to adapt to new technologies and to respond
to competitors' actions in these areas. Adapting to new technologies could
require significant capital expenditures by the Company. There can be no
assurance that the Company will remain competitive in response to technological
changes.
Employees
As of January 31, 1997, the Company had approximately 277 employees, of
which eight held executive and administrative positions, six were employed in
finance and development, 23 were employed in supervisory sales and customer
service, 12 were employed in product acquisition and planning, approximately 225
were employed in teleservice operations and three were employed in catalog
production. None of the Company's employees is represented by a collective
bargaining unit. The Company considers its relations with its employees to be
good.
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Item 2. Properties.
The Company leases its New York offices at 435 Hudson Street, New York,
New York, which occupy approximately 30,000 square feet. The lease expires in
2007.
The Company has entered into a lease agreement for 117,200 square feet of
warehouse and distribution space in Hanover, Pennsylvania. The term of the lease
commences on June 1, 1997 and expires on June 30, 2000. The Company has two
three-year renewal options. See "Item 1--Business-- Operations--Distribution and
Fulfillment."
The Company's current third-party fulfillment contractor provides
warehouse space near Lancaster, Pennsylvania to the Company for inventory
storage. The Company neither owns nor leases such warehouse space; the cost of
the warehouse space is included in the total fee paid by the Company to the
third-party fulfillment company.
The Company believes its facilities are well-maintained and in good
operating condition and are adequate for its present level of operations.
Item 3. Legal Proceedings.
The Company is not involved in any legal proceedings that management
believes would have a material adverse effect on the Company's financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
On December 18, 1996, prior to the effectiveness of the registration of
the Common Stock under the Exchange Act, stockholders entitled to vote a
majority of the Company's outstanding voting securities approved the following
matters by written consent: (i) the Company's 1996 Stock Incentive Plan; (ii)
the Company's 1996 Restricted Stock Plan; and (iii) a stock option agreement
between the Company and an executive officer. There were no other matters
submitted to a vote of security holders during the fourth quarter of fiscal
1996.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock is traded on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") National Market System under the
symbol DLIA. On April 22, 1997 there were 50 holders of record of the Common
Stock and approximately 1,625 beneficial owners of the Common Stock.
The following table sets forth the high and low closing bid prices for
the Company's Common Stock as reported by NASDAQ. Such quotations reflect
interdealer prices without adjustments for retail markups, markdowns, or
commissions and may not necessarily represent actual transactions.
Calendar Period High Low
- --------------- ---- ---
Fiscal 1996:
Fourth Quarter (from
December 19, 1996).................. $20 $12-1/2
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings for future growth
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future.
On December 18, 1996, as part of the Reorganization dELiA*s LLC
subscribed for 10,000,000 shares of Common Stock. The issuance of such shares
was exempt from registration pursuant to Section 4(2) of the Securities Act.
During fiscal 1996, dELiA*s LLC, a predecessor of dELiA*s Inc., issued
the following unregistered securities:
1. On February 1, 1996, dELiA*s LLC issued membership interests
equivalent to an aggregate of 605,428 shares of Common Stock to a group of six
employees pursuant to the dELiA*s LLC Restricted Interest Plan and individual
Restricted Interest Agreements dated February 1, 1996. The employees did not
make any payment for their interests.
2. On February 1, 1996, dELiA*s LLC issued a membership interest
equivalent to 103,591 shares of Common Stock to an investor in consideration for
a non-interest-bearing loan in the amount of $50,000.
3. On June 1, 1996, dELiA*s LLC issued membership interests equivalent to
an aggregate of 66,856 shares of Common Stock to a group of four employees
pursuant to the dELiA*s LLC Restricted Interest Plan and individual Restricted
Interest Agreements dated June 1, 1996. The employees did not make any payment
for their interests.
4. On August 1, 1996, dELiA*s LLC issued membership interests equivalent
to an aggregate of 32,190 shares of Common Stock to a group of three employees
pursuant to the dELiA*s LLC Restricted Interest Plan and individual Restricted
Interest Agreements dated August 1, 1996. The employees did not make any payment
for their interests.
Each of the issuances of securities in the transactions described in
paragraphs 1 through 4 above were either exempt from registration pursuant to
Section 4(2) of the Securities Act or did not constitute a "sale" within the
meaning of the Securities Act.
10
<PAGE>
Item 6. Selected Financial Data.
The selected financial data set forth below have been derived from the
financial statements of the Company set forth elsewhere in this report, which
have been prepared in accordance with generally accepted accounting principles.
This following selected data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto appearing elsewhere in this report.
All financial data has been restated to give effect to the Reorganization.
<TABLE>
<CAPTION>
Fiscal Year 1994 Fiscal Year 1995 Fiscal Year 1996
Ended Ended Ended
January 31, 1995 January 31, 1996 January 31, 1997
---------------- ---------------- ----------------
(in thousands, except per share data)
<S> <C> <C> <C>
Statements of Operations Data:
Net sales.......................................... $ 139 $ 5,652 $ 30,225
Cost of sales...................................... 89 3,078 14,624
------ ------- --------
Gross profit....................................... 50 2,574 15,601
Selling, general and administrative
expenses.................................... 384 2,569 11,850
Interest income, net............................... 2 25 176
------ -------- --------
Income (loss) before provision (benefit) for
income taxes................................ (332) 30 3,927
Provision (benefit) for income taxes............... -- 3 (328)
------- ------- --------
Net Income (loss)................................. $ (332) $ 27 $ 4,255
======= ======= ========
Pro forma net income (loss) (1)................... $ (202) $ 18 $ 2,307
======= ======= ========
Pro forma net income (loss) per
share (2)................................... $ (0.02) $ 0.00 $ 0.23
======= ======= ========
Shares used in the calculation of pro forma
net income (loss) per share (2)........... 10,000 10,000 10,214
======= ======= ========
Selected Operating Data:
Number of catalogs distributed............................ 115 1,700 8,000
House names (3)........................................... 17 290 1,335
Buyers (4)................................................ 1 82 373
</TABLE>
<TABLE>
<CAPTION>
January 31, 1996 January 31, 1997
---------------- ----------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......................... $ 675 $ 21,316
Working capital.................................... 720 20,185
Total assets....................................... 1,266 27,414
Total stockholders' equity......................... 962 21,132
</TABLE>
- ---------------------------
(1) Computed on the basis described in Note 6 of Notes to Financial Statements
and assuming the pro forma tax provisions described therein. Prior to the
Offering, the Company effected the Reorganization, in which the Company
converted from a limited liability company to a C corporation. See "Item 1
-- Business -- Overview" and Note 6 of Notes to Financial Statements.
(2) See Note 2 of Notes to Financial Statements for an explanation of the
determination of shares used in computing pro forma net income per share.
(3) House names represents the number of customers who have made at least one
purchase or have requested a catalog from the Company in the preceding 36
months, determined at the end of the applicable fiscal period.
(4) Buyers represents the number of customers who have made at least one
purchase from the Company in the preceding 36 months, determined at the end
of the applicable fiscal period.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company was founded in 1993 and distributed its first catalog in 1994
through a network of on-campus college representatives. In early 1995, in an
effort to broaden the reach of its catalogs, the Company changed its primary
channel of distribution from college representatives to direct mail. This change
has resulted in a substantial increase in the Company's sales. In order to
support its direct marketing operations, the Company has made significant
capital expenditures for telephone and management information systems and has
hired and maintained an in-house workforce of teleservice representatives.
The Company initially mailed catalogs to persons responding to
advertisements and to names on rented lists. The Company has built a proprietary
list of "house names" (customers who have made at least one purchase or have
requested a catalog from the Company in the preceding 36 months), which
contained over 1.3 million names as of January 31, 1997, primarily through
referrals, word-of-mouth, returns of catalog request cards and targeted
classified advertising in selected magazines. A significant portion of the
Company's catalogs are mailed to house names, supplemented by purchased and
rented lists. The Company believes that the response rates generated from its
house list are typically higher than can be realized from purchased or rented
lists.
The Company plans to increase the number of catalogs it distributes from
8 million in fiscal 1996 to in excess of 20 million in fiscal 1997. The Company
distributed four editions of its catalog in fiscal 1995, six editions in fiscal
1996 and anticipates distributing eight editions in fiscal 1997. While the
Company has achieved response rate increases on a year-to-year basis, the
Company has from time to time (including fiscal 1996) experienced decreases in
response rates from catalog to catalog within a fiscal year. Response rates are
influenced by a number of factors including the timing of catalog mailings,
market acceptance of the Company's merchandise and the mix and presentation of
products and actions of competitors. There can be no assurance that the Company
will achieve response rate increases in the future. Average order size has also
fluctuated seasonally. Generally, the average size of orders from the Company's
fall and winter catalogs is larger than the average size of orders from its
spring and summer catalogs.
The Company is currently attempting to increase the flexibility of its
catalog publishing schedule and reduce the lead time for inventory purchases to
take better advantage of early indicators of customer purchasing patterns and
reduce its exposure to the risk of inventory obsolescence. In the third quarter
of fiscal 1996, the Company began mailing catalogs to selected portions of its
house list that typically respond at higher rates, including its first sale
circular and its first targeted supplemental catalog. In part to facilitate its
targeted publishing strategy, the Company has developed its in-house art
department to allow for shorter and more flexible publishing schedules. In
addition, recently, at the Company's request, certain of the Company's vendors
have agreed to purchase raw materials in advance and in excess of the Company's
initial purchase orders. This allows the Company to place orders later in a
season in response to early indicators of customer demand while reducing the
Company's inventory risk. Although the Company sometimes shares the risk of
these raw material orders with such vendors, these advance purchases limit its
exposure to the greater risk of unsold finished goods. The Company believes
these actions helped to improve its overall profitability in fiscal 1996.
The Company believes that as its revenue base grows and it further
penetrates its target market, the Company may not be able to sustain the levels
of percentage annual growth in net sales and growth in operating income
experienced in fiscal 1995 and fiscal 1996. Additionally, legislation introduced
in the U.S. Congress that proposes restrictions on persons, principally list
brokers, that sell, purchase or otherwise use for commercial purposes personal
information about teen (under the age of 16) and children could adversely affect
the Company's use of purchased and rented lists, as well as the Company's
ability to generate new names for its proprietary database. Although the Company
is not a list broker, it does mail catalogs to persons whose names are derived
from purchased and rented
12
<PAGE>
lists. Approximately 36% of the names of persons to whom the Company mailed its
Spring 1997 catalog were derived from purchased and rented lists. However, the
Company's use of purchased and rented lists has been declining relative to the
use of its house list. The Company is exploring new methods for developing its
house list and believes it will be able to continue to develop this list through
advertising and new channels for the distribution of its catalogs, including
bulk drops on college campuses. There can be no assurance, however, that the
Company will be able to develop its house list.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statement of operations to net
sales. Any trends reflected by the following table may not be indicative of
future results.
<TABLE>
<CAPTION>
Percentage of Net Sales
------------------------------------------------------------
Fiscal Year 1994 Fiscal Year 1995 Fiscal Year 1996
Ended Ended Ended
January 31, 1995 January 31, 1996 January 31, 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0%
Cost of sales.................................... 64.0% 54.5% 48.4%
------ ----- -----
Gross profit..................................... 36.0% 45.5% 51.6%
Selling, general and administrative
expenses....................................... 276.3% 45.4% 39.2%
Interest income, net............................. 1.4% 0.4% 0.6%
Income (loss) before provision for
income taxes................................... (238.9%) 0.5% 13.0%
Provision (benefit) for income taxes............. -- -- (1.1%)
------ ----- -----
Net income (loss)................................ (238.9%) 0.5% 14.0%
====== ===== =====
Net income (loss)(1)............................. (145.3%) 0.3% 7.6%
- ---------- ====== ===== =====
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 6 of Notes to Financial Statements
and assuming the pro forma tax provisions described therein. Prior to the
Offering, the Company effected the Reorganization, in which the Company
converted from a limited liability company to a C corporation. See "Item
1--Business--Overview" and Note 1 of Notes to Financial Statements.
Comparison of Fiscal Years 1995 and 1996
Net sales. Net sales increased approximately $24.6 million, from $5.7
million in fiscal 1995 to $30.2 million in fiscal 1996. The increase in net
sales was primarily due to an increase in the number of catalogs mailed, as well
as an increase in response rates and average order size. The Company increased
the number of catalogs it distributed from 1.7 million in fiscal 1995 to 8
million in fiscal 1996. The increase in average order size resulted from a
combination of factors, including increased prices on certain existing items,
and the addition of certain more expensive items in the Company's catalog.
Gross margin. Gross margin increased from 45.5% in fiscal 1995 to 51.6%
in fiscal 1996. The increase in gross margin was due to improved sourcing of
merchandise, including larger volume discounts from suppliers, as well as
changes in product mix and higher selling prices. To a lesser degree, gross
margin increased as certain related
13
<PAGE>
fixed costs of merchandising were spread over increased sales. These
improvements were partially offset by an increased reserve for returns
consistent with the Company's recent growth and an increased inventory reserve
for obsolescence based upon management's evaluation of merchandise inventories
as of January 31, 1997 and anticipated inventory dispositions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $9.3 million, from $2.6 million
in fiscal 1995 to $11.9 million in fiscal 1996. Selling, general and
administrative expenses decreased as a percentage of net sales from 45.4% in
fiscal 1995 to 39.2% in fiscal 1996. The reduction in selling, general and
administrative expenses as a percentage of net sales was due to economies
implemented in catalog production as well as the leveraging of certain fixed
costs over a larger revenue base. The reduction was partially offset by a charge
of approximately $280,000 in fiscal 1996 related to the processing of names of
catalog requesters through a third party service. The Company currently
processes the majority of the names of its catalog requesters in-house and
anticipates doing so in the future. In addition, the reduction was partially
offset by the Company's higher expenditures on corporate salaries and additional
information systems in anticipation of future sales growth.
Comparison of Fiscal Years 1994 and 1995
Net Sales. Net sales increased approximately $5.6 million, from $139,000
in fiscal 1994 to $5.7 million in fiscal 1995. The increase in net sales was due
primarily to the change in the Company's primary channel of distribution from
on-campus college representatives to direct mail and the corresponding increase
in the number of catalogs distributed. The Company increased catalog
distribution from approximately 115,000 catalogs in fiscal 1994 to approximately
1.7 million catalogs in fiscal 1995.
Gross Margin. Gross margin increased from 36.0% in fiscal 1994 to 45.5%
in fiscal 1995. The increase in gross margin was due to the leveraging of
certain fixed costs over a larger revenue base, improved sourcing of
merchandise, including sourcing in larger quantities from a broader range of
vendors, as well as a change in merchandise mix to higher margin apparel and
accessories. The increase in gross margin in fiscal 1995 was partially offset by
the Company's decision to liquidate excess inventory through charitable
donations in the fourth quarter of fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $2.2 million, from $384,000 in
fiscal 1994 to $2.6 million in fiscal 1995. Selling, general and administrative
expenses decreased as a percentage of net sales from 276.3% in fiscal 1994 to
45.4% in fiscal 1995. This reduction in selling, general and administrative
expenses as a percentage of net sales was due primarily to the fact that
revenues increased faster than expenses. The reduction in expenses as a
percentage of net sales was partially offset by a higher corporate payroll and
higher expenditures for management information systems and telephone systems
related to the Company's infrastructure growth.
Seasonality
The Company is subject to seasonal fluctuations in its merchandise sales
and results of operations. The Company expects its net sales and results of
operations generally to be lower in the first and second quarters than in the
third and fourth quarters of each fiscal year (which include the back-to-school
and holiday seasons). The Company's quarterly results may fluctuate as a result
of numerous factors, including the timing, quantity and cost of catalog
mailings, the timing of sale circulars and liquidations, the timing of
merchandise deliveries, market acceptance of the Company's merchandise
(including new merchandise categories or products introduced), the mix of
products sold, the hiring and training of additional personnel, the timing of
inventory writedowns, the incurrence of other operating costs and factors beyond
the Company's control, such as general economic conditions and actions of
competitors.
14
<PAGE>
Accordingly, the results of operations in any quarter will not necessarily
be indicative of the results that may be achieved for a full fiscal year or any
future quarter.
Liquidity and Capital Resources
Since its inception, the Company has met its operating and cash
requirements through funds generated from operations, the private sales of
equity securities and, most recently, the Offering. All of the Company's working
capital needs have been satisfied by cash provided by operations since the third
quarter of fiscal 1995. Cash provided by operations in fiscal 1996 was $5.6
million and $40,000 in fiscal 1995, while cash used in operations was $422,000
in fiscal 1994. This trend was primarily due to lower selling, general and
administrative expenses as a percentage of net sales and higher gross margins.
Cash used in investing in fiscal 1996 was $940,000 (not including $21.0
million invested in short-term securities), $169,000 in fiscal 1995 and $7,000
in fiscal 1994. The Company expects to make capital expenditures of
approximately $1.5 million to upgrade its management information systems in
fiscal 1997. The Company also anticipates capital expenditures of at least $1.5
million in property, plant and equipment, including leasehold improvements,
office equipment and expenditures relating to the Company's warehouse and
distribution operations.
Cash and cash equivalents increased by approximately $20.6 million from
January 31, 1996 to January 31, 1997, primarily due to the receipt of the net
proceeds to the Company from the Offering and, to a lesser extent, due to
increased cash generated by operations, but offset by a distribution of $4.0
million to members of dELiA*s LLC prior to the Reorganization.
During the fiscal year prior to the Offering, the Company operated as a
limited liability company with taxes paid by its members. Following the
Reorganization in which the Company's business was transferred to a Delaware
corporation, the Company ceased to be a flow-through entity and is now liable
for applicable income taxes. See "Item 1--Business--Overview" and Note 6 of
Notes to Financial Statements.
The Company has a revolving line of credit for seasonal working capital,
collateralized by all of the Company's assets other than inventory. The maximum
amount available under the line of credit is $3.0 million. The interest rate on
the line of credit is the lending bank's prime rate (8.25% at January 31, 1997)
plus 2%. The line expires on July 31, 1997. The Company has not drawn on this
line.
The Company believes that its cash on hand, together with cash generated
by operations and the net proceeds of the Offering, will be sufficient to meet
its capital and operating requirements through fiscal 1997. The Company's future
capital requirements, however, depend on numerous factors, including, without
limitation, the success of its marketing, sales and distribution efforts. There
can be no assurance that additional funds, if required, will be available to the
Company on favorable terms or at all.
Inflation
The Company does not believe that inflation has had a material adverse
effect on net sales or results of operations. The Company has generally been
able to pass on increased costs related to inflation through increases in its
prices to customers.
15
<PAGE>
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, and is effective
for fiscal years beginning after December 15, 1995. The adoption of SFAS No. 121
did not have an effect on the Company's financial position or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which is effective for the Company beginning February
1, 1996. SFAS No. 123 requires disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
expense to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply Accounting Principles
Board Opinion ("APB") No. 25, which recognizes compensation costs based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB No. 25 to its stock-based compensation awards to employees. The
required disclosures of pro forma effects on net income and earnings per share
are described in Note 12 of Notes to Financial Statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("EPS")," which is effective for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 supersedes APB No. 15 and specifies the
computation, presentation and disclosure requirement for basic and diluted EPS.
The Company expects that the adoption of this new standard would not have had a
material effect on EPS for the fiscal year ended January 31, 1997.
Item 8. Financial Statements and Supplementary Data.
See Item 14 of Part IV of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On August 30, 1996, the Company engaged Deloitte & Touche LLP as its
independent public accountant to audit the Company's financial statements. The
decision to change accountants was approved by the managers of dELiA*s LLC.
Richard A. Eisner & Company, LLP's report on the financial statements for the
Company's two most recent fiscal years did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. During the Company's two most recent
fiscal years preceding the engagement of Deloitte & Touche LLP, there were no
disagreements with Richard A. Eisner & Company, LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of Richard A. Eisner &
Company, LLP, would have caused it to make a reference to the subject matter of
the disagreement in connection with its report. During the Company's two most
recent fiscal years prior to engaging Deloitte & Touche LLP, the Company did not
consult with Deloitte & Touche LLP regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements.
PART III
The information required by Part III (Items 10 through 13) is
incorporated by reference to the captions "Beneficial Ownership of Voting
Securities," "Election of Directors," "Management" and "Certain Transactions" in
16
<PAGE>
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year covered by this report.
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.
(a) See Index to Financial Statements on page F-1.
(b) The Company did not file any reports on Form 8-K during the fourth
quarter of fiscal 1996.
(c) See Exhibit Index immediately following the Notes to Financial
Statements.
17
<PAGE>
dELiA*s Inc.
Index to Financial Statements
Independent Auditors' Reports............................................ F-2
FINANCIAL STATEMENTS:
Balance Sheets as of January 31, 1996 and 1997........................... F-4
Statements of Operations for the fiscal years ended
January 31, 1995, 1996 and 1997 .................................... F-5
Statements of Stockholders' Equity for the fiscal
years ended January 31, 1995, 1996 and 1997 ......................... F-6
Statements of Cash Flows for the fiscal years ended
January 31, 1995, 1996 and 1997 ................................... F-7
Notes to Financial Statements............................................ F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
dELiA*s Inc.
New York, New York
We have audited the accompanying balance sheet of dELiA*s Inc. (the
"Company") as of January 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the fiscal year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at January 31, 1997, and the
results of its operations and its cash flows for the fiscal year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 12, 1997
New York, New York
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
dELiA*s Inc.
New York, New York
We have audited the accompanying balance sheet of dELiA*s Inc. as at
January 31, 1996 and the related statements of operations, stockholders' equity
and cash flows for each of the years in the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of dELiA*s Inc. at January 31,
1996, and results of its operations and its cash flows for each of the years in
the two years then ended in conformity with generally accepted accounting
principles.
Richard A. Eisner & Company, LLP
New York, New York
August 14, 1996
With respect to the
share issuance in Note 1
December 18, 1996
F-3
<PAGE>
dELiA*s Inc.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
January 31, 1996 January 31, 1997
----------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 675 $ 21,316
Receivables from related parties................................. -- 61
Merchandise inventories.......................................... 221 4,072
Prepaid expenses and other current assets........................ 128 310
Deferred taxes................................................... -- 536
----------- -----------
Total current assets....................................... 1,024 26,295
----------- -----------
PROPERTY AND EQUIPMENT--Net............................................. 166 1,021
OTHER ASSETS........................................................... 76 98
----------- -----------
TOTAL ASSETS........................................................... $ 1,266 $ 27,414
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................. $ 63 $ 3,148
Accrued expenses and other current liabilities................... 137 1,937
Sales return allowance........................................... 25 372
Liabilities due to customers..................................... 76 618
Income taxes payable............................................. 3 193
----------- -----------
Total current liabilities.................................. 304 6,268
----------- -----------
DEFERRED CREDITS....................................................... -- 14
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share;
Authorized--1,000,000 shares;
Shares issued and outstanding--none......................... -- --
Common Stock, par value $.01 per share;
Authorized--50,000,000 shares
Issued and outstanding--9,191,935 and 12,052,500 shares, at
January 31, 1996 and 1997, respectively.................... 92 121
Note receivable from stockholder................................. -- (50)
Deferred compensation............................................ -- (147)
Additional paid-in capital 1,208 20,874
Retained earnings/(deficit)...................................... (338) 334
----------- -----------
Total stockholders' equity.............................. 962 21,132
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 1,266 $ 27,414
=========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
dELiA*s Inc.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES.............................................................. $ 139 $ 5,652 $ 30,225
COST OF SALES.......................................................... 89 3,078 14,624
------------ ------------ ------------
GROSS PROFIT........................................................... 50 2,574 15,601
------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................... 384 2,569 11,850
INTEREST INCOME, NET................................................... 2 25 176
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES........................ (332) 30 3,927
PROVISION (BENEFIT) FOR INCOME TAXES................................... -- 3 (328)
------------ ------------ ------------
NET INCOME (LOSS)...................................................... $ (332) $ 27 $ 4,255
Pro Forma Income Data (Unaudited)
Income (Loss) before provision for income
taxes as reported...................... ......................... $ (332) $ 30 $ 3,927
Pro forma provision (benefit) for income taxes....................... (130) 12 1,620
------------ ------------ ------------
Pro forma net income (loss).......................................... $ (202) $ 18 $ 2,307
============ ============ ============
Pro forma net income (loss) per share................................ $ (0.02) $ 0.00 $ 0.23
============ ============ ============
Shares used in the calculation of pro forma net
income (loss) per share. ........................................ 10,000 10,000 10,214
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
dELiA*s Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Note
------------------ Receivable Additional Retained Total
Number of from Deferred Paid-In Earnings/ Stockholders'
Shares Amount Stockholder Compensation Capital (Deficit) Equity
---------- ------ ----------- ------------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1994.................... 2,821,197 $ 28 $ -- $ -- $ 172 $ (33) $ 167
Issuance of common stock..................... 5,372,072 54 -- -- 946 -- 1,000
Net loss..................................... -- -- -- -- -- (332) (332)
---------- ----- ----- ------- -------- -------- --------
BALANCE, JANUARY 31, 1995 8,193,269 82 -- -- 1,118 (365) 835
Issuance of common stock .................... 998,666 10 -- -- 90 -- 100
Net income .................................. -- -- -- -- -- 27 27
---------- ----- ----- ------- -------- ------- --------
BALANCE, JANUARY 31, 1996.................... 9,191,935 92 -- -- 1,208 (338) 962
Issuance of common stock..................... 808,065 8 (50) (217) 259 -- --
LLC Distribution (Note 1).................... -- -- -- -- (417) (3,583) (4,000)
Net proceeds from issuance of common stock
in initial public offering.............. 2,052,500 21 -- -- 19,824 -- 19,845
Deferred compensation expense................ -- -- -- 70 -- -- 70
Net income................................... -- -- -- -- -- 4,255 4,255
---------- ----- ------ ------- -------- ------- --------
BALANCE, JANUARY 31, 1997.................... 12,052,500 $ 21 $ (50) $ (147) $ 20,874 $ 334 $ 21,132
========== ===== ====== ======= ======== ======= ========
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
dELiA*s Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended January 31
----------------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)..................................................... $ (332) $ 27 $ 4,255
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization.................................. 1 14 95
Inventory reserves for obsolescence............................... 6 25 562
Sales return allowance............................................ -- 25 347
Compensation expense related to issuance of Restricted Stock...... -- -- 70
Changes in operating assets and liabilities:
Receivables from related parties............................... -- -- (61)
Merchandise inventories........................................ (80) (156) (4,413)
Prepaid expenses and other current assets...................... (50) (61) (182)
Deferred taxes................................................. -- -- (536)
Other assets................................................... (2) (78) (32)
Accounts payable............................................... 35 63 3,085
Accrued expenses and other current liabilities................. -- 102 1,800
Liabilities due to customers................................... -- 76 542
Income taxes payable........................................... -- 3 190
Deferred credits............................................... -- -- 14
------------- ------------- ------------
Net cash (used in) provided by operating activities........................... (422) 40 5,736
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (7) (169) (940)
------------- ------------- ------------
Net cash used in investing activities......................................... -- -- (940)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................................ 1,000 100 19,845
Payments for dividends.................................................... -- -- (4,000)
------------- ------------- ------------
Net cash provided by financing activities..................................... 1,000 100 15,845
------------- ------------- ------------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS................................ 571 (29) 20,641
CASH & CASH EQUIVALENTS-- BEGINNING OF PERIOD................................. 133 704 675
------------- ------------- ------------
CASH & CASH EQUIVALENTS-- END OF PERIOD....................................... $ 704 $ 675 $ 21,316
============= ============= ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Income taxes paid......................................................... $ -- $ -- $ 15
============= ============= ============
Interest paid............................................................. $ -- $ -- $ 27
============= ============= ============
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND -- -- 50
FINANCING ACTIVITIES:
Increase in note receivable from stockholder.............................. $ $ $
Increase in deferred compensation......................................... -- -- 217
Increase in common stock.................................................. -- -- (8)
Increase in additional paid-in capital.................................... -- -- (259)
------------- ------------- ------------
$ -- $ -- $ --
============= ============= ============
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
1. Business and Basis of Presentation
dELiA*s Inc. (the "Company" or "dInc") is a direct marketer of casual
apparel and related accessories to teen girls and young women primarily between
the ages of 10 and 24. The Company offers a broad selection of merchandise,
presented in distinctively styled catalogs; the first catalog was mailed in
March 1994. The Company maintains a corporate headquarters, telemarketing and
customer service group in New York, New York and utilizes a third-party
fulfillment facility for processing merchandise in Lancaster, Pennsylvania.
The Company is subject to seasonal fluctuations in its merchandise sales
and results of operations. The Company expects its sales operating results
generally to be lower in the first and second quarters than in the third and
fourth quarters (which include the back-to-school and holiday seasons) of each
fiscal year.
The Company is a successor to a business originally founded in September
1993. In 1995, the successor business began to operate as a New York limited
liability company under the name dELiA*s LLC ("dLLC"). As a limited liability
company, dLLC was treated for income tax purposes as a partnership with taxes on
the income generated by dLLC paid by its members. In October 1996, dInc was
incorporated in Delaware. Prior to the completion of the Company's initial
public offering of Common Stock of dInc (the "Offering"), dLLC and dInc engaged
in a reorganization transaction (the "Reorganization") pursuant to which dLLC
contributed its assets to dInc and dInc assumed, and agreed to pay, perform and
discharge, all liabilities of dLLC (except for income tax liabilities). In
connection with the Reorganization, dInc issued 10,000,000 shares of Common
Stock to dLLC, of which 704,794 shares are restricted under the Company's
Restricted Stock Plan. See Note 11--1996 Restricted Stock Plan. The
Reorganization also resulted in the distribution to existing members of dLLC of
$4,000,000 and the shares of Common Stock of dInc in accordance with the dLLC
operating agreement (the "LLC Distribution"). The accompanying financial
statements and footnotes are presented to reflect the Reorganization as
described above, which was accounted for on a basis similar to a pooling of
interests.
2. Summary of Significant Accounting Policies
a. Fiscal Year--The Company's fiscal year ends on January 31.
b. Cash Equivalents--The Company considers all highly liquid investments,
with maturities of 90 days or less when purchased, to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
c. Merchandise Inventories--Merchandise inventories, which are all
finished goods, are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
d. Catalog Costs--Catalogs costs, which primarily consist of catalog
production and mailing costs, are capitalized and amortized over the expected
future revenue stream, which is principally from three to five months from the
date catalogs are mailed. The Company accounts for catalog costs in accordance
with the AICPA Statement of Position ("SOP") 93-7, "Reporting on Advertising
Costs." SOP 93-7 requires that the amortization of capitalized advertising costs
should be the amount computed using the ratio that current period revenues for
the catalog cost pool
F-8
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
bear to the total of current and estimated future period revenues for that
catalog cost pool. Deferred catalog costs as of January 31, 1996 and January 31,
1997 were $93,000 and $272,000, respectively. Catalog costs, which are reflected
in selling, general and administrative expenses, for the fiscal years ended
January 31, 1995, 1996 and 1997 were $162,000, $1,104,000 and $4,549,000,
respectively.
e. Property and Equipment--Property and equipment are stated at cost.
Furniture, fixtures and equipment are depreciated by the straight-line method
over the estimated useful lives of the respective assets, ranging from 5 to 10
years. Leasehold improvements are amortized ratably over the lesser of the
remaining lease term or useful life of the improvement. See Note 3--Property and
Equipment.
f. Income Taxes--Prior to the Offering, the Company was a limited
liability company ("LLC") and each member's respective portion of dLLC's taxable
income or loss was reportable on such members' own federal and state tax
returns. As an LLC, the Company was subject to income tax in New York State, New
York City and Pennsylvania. As discussed in Note 1, the Company has effected a
Reorganization that changed the income tax status of the Company to a taxable C
corporation. Subsequent to the Reorganization, deferred income tax assets and
liabilities were recorded in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." See Note 6--Income
Taxes.
g. Deferred Credits--Deferred credits represent deferred rent that
results from the accounting for rent expense on a straight-line basis over the
lease term for leases with scheduled rent increases.
h. Revenue Recognition--Revenue is recognized when merchandise is shipped
to customers. The Company accrues a sales return allowance in accordance with
its return policy for estimated returns of merchandise subsequent to the balance
sheet date that relate to sales prior to the balance sheet date. At January 31,
1996 and January 31, 1997, sales return allowances were $25,000 and $372,000,
respectively.
i. Pro Forma Net Income Per Share--Pro forma net income per share is
based on the weighted average number of common shares and common share
equivalents outstanding. The common shares give effect to the issuance of
10,000,000 shares of Common Stock to dLLC as described in Note 1, and 2,052,500
shares in the Offering. The number of common shares and common share equivalents
used in the calculation of pro forma net income per share was 10,000,000 for the
years ended January 31, 1995, and 1996 and 10,214,000 for the year ended January
31, 1997. Common stock issued at prices below the initial public offering price
during the twelve month period preceding the Offering has been included as
outstanding as if the stock were outstanding for all periods presented. The
effect of stock options was not material for the year ended January 31, 1997.
j. Fair Value of Financial Instruments--The following disclosure about
the fair value of financial instruments is made in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." The carrying amounts reported in the balance sheets for cash and
cash equivalents, receivables and accounts payable approximate fair value
because of the short-term maturity of those financial instruments.
k. Use of Estimates in the Preparation of Financial Statements--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 and disclosure of
contingent assets and liabilities at the date of
F-9
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
the financial statements and the reported amounts of revenues ane expenses
during the reporting period. Actual results could differ from those estimates.
l. Recent Accounting Pronouncements--In March 1995, the Financial
Accounting Standards Board (the "FASB") issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, and is effective for fiscal years beginning after
December 15, 1995. The adoption of SFAS No. 121 did not have an effect on the
Company's financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which is effective for the Company beginning February
1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
expense to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply Accounting Principles
Board Opinion ("APB") No. 25, which recognizes compensation costs based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB No. 25 to its stock-based compensation awards to employees. See Note
12--Stock Options for the required disclosure of pro forma effects on net income
and earnings per share.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("EPS")," which is effective for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 supersedes APB No. 15 and specifies the
computation, presentation and disclosure requirement for basic and diluted EPS.
The Company expects that the adoption of this new standard would not have had a
material effect on EPS for the fiscal year ended January 31, 1997.
3. Property and Equipment
Major classes of property and equipment are as follows:
Estimated January 31, January 31,
Useful Lives 1996 1997
------------ ------------ ------------
Furniture, fixtures and equipment..... 5-10 years $ 139,000 $ 936,000
Leasehold improvements................ Term of lease 37,000 180,000
--------- -----------
Total--at cost......................... 176,000 1,116,000
Less accumulated depreciation and
amortization....................... 10,000 95,000
--------- ----------
Total property and equipment--
net................................ $ 166,000 $1,021,000
========= ==========
4. Credit and Financing Agreements
At January 31, 1997, the Company had a line of credit agreement with a
bank providing for short-term loans of up to $3.0 million subject to bank
approval. Borrowings under the agreement are secured by all assets of the
F-10
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
Company except for merchandise inventories and bear interest at the prime rate
plus two percent (10.25 percent at January 31, 1997). There were no funds
borrowed under the agreement during the fiscal years ended January 31, 1995,
1996 and 1997.
I. Interest Income--Net
Interest income--net consists of the following:
Fiscal Year 1994 Fiscal Year 1995 Fiscal Year 1996
Ended Ended Ended
January 31, 1995 January 31, 1996 January 31, 1997
------------------ ----------------- ----------------
Interest income......... $ 2,000 $ 25,000 $ 203,000
Interest expense........ -- -- 27,000
-------- --------- ---------
Interest income--net.... $ 2,000 $ 25,000 $ 176,000
======== ========= =========
II. Income Taxes
The provision for income taxes is comprised of the following:
Fiscal Year 1994 Fiscal Year 1995 Fiscal Year 1996
Ended Ended Ended
January 31, 1995 January 31, 1996 January 31, 1997
----------------- ------------------ -----------------
Federal:
Current................ $ -- $ -- $ --
Deferred............... -- -- (445,000)
----------- ------------- ------------
Total federal....... -- -- (445,000)
----------- ------------- ------------
State and local:
Current................ -- 3,000 208,000
Deferred............... -- -- (91,000)
----------- ------------- -----------
Total state
and local........ -- 3,000 117,000
----------- ------------- -----------
Total provision
(benefit)... $ -- $ 3,000 $ (328,000)
=========== ============= ===========
Effective September 9, 1993 (date of inception), the Company's
predecessor, dELiA*s Ltd., elected S corporation status under applicable
provisions of the Internal Revenue Code. In 1995, dELiA*s Ltd. was succeeded by
dLLC and was treated as a partnership for income tax purposes. As such, dELiA*s
Ltd. and dLLC paid no federal income taxes
F-11
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
as all taxable income was taxed directly at the shareholder and membership
level. The income tax provision reflects corporate level taxes due to applicable
jurisdictions.
The effective income tax rates differed from the federal statutory income
tax rates as follows:
<TABLE>
<CAPTION>
Fiscal Year 1994 Fiscal Year 1995 Fiscal Year 1996
Ended Ended Ended
January 31, 1995 January 31, 1996 January 31, 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Federal taxes at statutory rates...... $(113,000) $10,000 $1,323,000
State and local taxes
net of federal benefit............ (20,000) 5,000 272,000
Effect of S Corporation
and LLC........................... 133,000 (12,000) (1,923,000)
--------- ------- ----------
$ -- $ 3,000 $ (328,000)
========= ======= ==========
</TABLE>
The tax effect of temporary differences and carryforwards which give rise
to deferred tax assets and liabilities are:
January 31, 1996 January 31, 1997
---------------- ----------------
Deferred tax assets:
Inventory reserves.................. $ -- $ 184,000
Sales return allowance.............. -- 153,000
Deferred compensation expense....... -- 33,000
Uniform capitalization
- inventories................... -- 65,000
Net operating loss.................. -- 227,000
-------- ----------
Total deferred tax assets............... -- 662,000
-------- ----------
Deferred tax liabilities:
Catalog costs....................... -- (111,000)
Depreciation........................ -- (15,000)
-------- ----------
Total deferred tax liabilities.......... -- (126,000)
-------- ----------
Net deferred tax asset.................. $ -- $ 536,000
======== ==========
Pro Forma Provision for Income Taxes (Unaudited)
The unaudited pro forma provision for income taxes represents estimated
income taxes that would have been reported had the Company filed its tax returns
as a taxable C corporation which reflects the Reorganization described in Note 1
for all periods presented.
F-12
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
The pro forma provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Fiscal Year 1994 Fiscal Year 1995 Fiscal Year 1996
Ended Ended Ended
January 31, 1995 January 31, 1996 January 31, 1997
---------------- ------------------ -------------------
<S> <C> <C> <C>
Federal
Current................. $ -- $ -- $ 1,304,000
Deferred................ 109,000 10,000 (143,000)
----------- -------- -------------
Total federal......... (109,000) 10,000 1,161,000
----------- --------
State and local:
Current................. -- -- 489,000
Deferred................ (21,000) 2,000 (30,000)
----------- --------- --------------
Total state and local. (130,000) 12,000 459,000
----------- --------- --------------
Total provision......... $ (130,000) $ 12,000 $ 1,620,000
=========== ========= ==============
</TABLE>
7. Stockholders' Equity
Effective upon the Reorganization, as described in Note 1, the Company has
authorized 1,000,000 shares of preferred stock, $.01 par value per share, no
shares issued or outstanding; 50,000,000 shares of common stock, $.01 par value
per share, 9,191,935 and 12,052,500 shares issued and outstanding at January 31,
1996, and January 31, 1997, respectively.
Prior to January 31, 1996, dLLC issued Class A Membership Interests for
capital contributions of $1,300,000, which upon the Reorganization converted
into 9,191,935 shares of Common Stock. During the fiscal year ended January 31,
1997, the Company issued Class C Membership Interests for capital contributions
of $50,000, which upon the Reorganization converted into 103,591 shares of
Common Stock.
During the fiscal year ended January 31, 1997, Class B restricted
membership interests were granted to certain employees at no cost to these
employees. The cost of restricted membership interests, based upon the
interests' fair market value at the award date in the amount of $217,000, was
credited to stockholders' equity and is being subsequently amortized against
earnings over the vesting period of 30 months. Deferred compensation expense
recognized during the fiscal year ended January 31, 1997 was $70,000. Upon the
Reorganization, the Class B restricted membership interests converted into
704,474 shares of restricted common stock. See Note 11--1996 Restricted Stock
Plan and Note 13-- Family Stockholders' Agreement.
8. Related Party Transactions
Receivables from related parties as of January 31, 1997 included (i)
non-interest-bearing loans receivable from two stockholder/executives for an
aggregate of $61,000, related to such certain stockholders' personal income
taxes attributable to income of the Company as a limited liability company and
(ii) a non-interest-bearing loan receivable from a third stockholder/executive
of the Company in the amount of $50,000 related to the executive's capital
contribution.
F-13
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
9. Commitments
As of January 31, 1997 the Company was obligated under various long-term
operating leases for office space and equipment requiring minimum annual
rentals. These operating leases expire on varying dates to 2003. At January 31,
1997 aggregate minimum rentals in future periods are as follows:
Fiscal Year
Ending
January 31,
1998 ........................................$477,000
1999 .........................................385,000
2000 .........................................286,000
2001 .........................................221,000
2002 .........................................150,000
Thereafter .......................................37,000
In addition, the Company is obligated to pay a proportionate share of
increases in real estate taxes and other occupancy costs.
Rent expense for the fiscal years ended January 31, 1995, 1996 and 1997 was
$44,000, $88,000 and $128,477, respectively.
In April 1997, the Company entered into: (i) a three-year lease agreement
for warehouse and distribution space in Hanover, Pennsylvania, providing for
monthly payments amounting to an aggregate of $351,600 per year (the term of the
lease commences in June 1997 and expires in June 2000); and (ii) a lease
agreement for additional space adjacent to its principal offices in New York
City, which lease agreement increases the Company's aggregate annual rental
payments for its principal offices to $269,000, $310,000 and $323,000 for the
periods ending March 31, 1998, April 30, 2003 and March 31, 2007, respectively.
The lease agreement for the Company's principal offices expires in 2007.
The Company has an agreement (the "Fulfillment Agreement") with a
third-party fulfillment contractor to provide warehouse space near Lancaster,
Pennsylvania for inventory storage and processing, including the fulfillment of
customer orders for merchandise. The Company neither owns nor leases such
warehouse space; the cost of the warehouse space is included in the fees paid by
the Company to the third-party fulfillment contractor under the terms of the
Fulfillment Agreement. The Fulfillment Agreement has a fixed term that expires
on April 30, 1997 and thereafter is terminable by either party at the end of the
calendar month following the giving of 60 days' notice. At January 31, 1997,
aggregate minimum payments in future periods under the Fulfillment Agreement are
as follows: $86,000 for fiscal year ending January 31, 1998.
10. Employment Agreements
Prior to the Offering, two executives of the Company entered into
three-year agreements with the Company providing for the continuation of their
employment at minimum salaries of $100,000 a year for each executive, subject to
annual
F-14
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
upward adjustment in proportion to the increase in the consumer price index plus
such increases in salary and bonuses as approved by the Board of Directors.
In July 1996, an executive of the Company entered into an agreement with
the Company providing for the continuation of his employment at a minimum salary
each year of $100,000 plus such increases in salary and bonuses as approved by
the Board of Directors. The agreement terminates in July 2001.
11. 1996 Restricted Stock Plan
Concurrent with the Reorganization, the Company approved and adopted the
1996 Restricted Stock Plan (the "Restricted Stock Plan") pursuant to which
704,794 shares of Common Stock were exchanged for restricted membership
interests in dLLC held by certain employees of the Company ("Restricted Interest
Holders"). Upon the issuance of such shares, no more shares were available for
issuance pursuant to the Restricted Stock Plan.
Under the provisions of the restricted stock agreements between each
Restricted Interest Holder and the Company, the restrictions on the shares
generally lapse 30 months from the grant date of the original restricted
membership interest in dLLC. If a Restricted Interest Holder's employment is
terminated prior to the 30th month for any reason, the Restricted Interest
Holder will forfeit all rights to the restricted stock. Within the limits of the
Restricted Stock Plan, the compensation committee may provide for the lapse of
such restrictions in installments in whole or in part or may accelerate or waive
such restrictions at any time.
In addition, the restricted stock agreements give an executive
officer/stockholder of the Company the right to vote all the shares of common
stock issued to the Restricted Interest Holders pursuant to such agreements on
all matters during the period in which such shares are subject to restrictions
on transfer.
12. Stock Options
An executive is party to a stock option agreement with the Company pursuant
to which the Company granted such executive an option to purchase up to an
aggregate of 250,000 shares of Common Stock at the price per share to the public
in the Offering (the "Exercise Price"). The option becomes exercisable as to
50,000 shares on each of July 21, 1997, 1998, 1999, 2000 and 2001. If the
executive's employment terminates before July 21, 2001 as a result of his death
or disability, or if the Company terminates his employment other than for cause
or if the Company effects a Constructive Discharge (as defined in the
executive's employment agreement) of the executive, the option will become
exercisable as to all 250,000 shares; if the executive's employment terminates
other than as set forth above, the portion of the option that is not then
exercisable terminates. During the 30-day period beginning on the fourth
anniversary of the termination of the executive's employment for any reason, the
Company may purchase all the shares previously purchased by the executive
pursuant to the option and terminate all further rights under the option in
exchange for an amount determined pursuant to the stock option agreement. Upon a
merger, consolidation or sale of substantially all the assets of the Company,
the option will become immediately exercisable as to 50% of the shares as to
which the option has not yet become exercisable, with the balance of the option
not then exercisable becoming exercisable in equal amounts on each July 21
thereafter through July 21, 2001. If the executive's employment terminates
before July 22, 1997, a
F-15
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
stockholder/executive of the Company will have the option to purchase from the
executive 100,000 shares of Common Stock for $50,000.
Concurrent with the Reorganization, the Company approved and adopted the
1996 Stock Incentive Plan (the "Incentive Plan"), which provides for the
following types of awards of eligible employees: (i) stock options, including
incentive stock options and non-qualified stock options; (ii) stock appreciation
rights, in tandem with stock options or freestanding; and (iii) restricted
stock. Awards may be granted singly, in combination or in tandem, as determined
by a committee of the Company's board of directors.
The maximum number of shares of Common Stock that may be issued pursuant to
the Incentive Plan is 1,250,000. The maximum number of shares of Common Stock
subject to each of stock options or stock appreciation rights that may be
granted to any individual under the Incentive Plan is 100,000 for each fiscal
year of the Company during the term of the Incentive Plan. If a stock
appreciation right is granted in tandem with a stock option, it shall apply
against the individual limits for both stock options and stock appreciation
rights, but only once against the maximum number of shares available under the
Incentive Plan.
Under the Incentive Plan, two independent non-employee directors were
granted, at the time of the Offering, an option to purchase 40,000 shares each
of Common Stock at an exercise price per share equal to the Offering price. All
options granted to non-employee directors will become exercisable at the rate of
20% on each of the first five anniversaries of the date of grant, assuming the
non-employee director is a director on those dates, and all such options
generally will cease to be exercisable ten years from the date of grant. Upon a
Change of Control (as defined in the Incentive Plan), all options (which have
not yet expired) will automatically become exercisable.
In addition, options to purchase an aggregate of 53,750 shares of Common
Stock were granted to sixteen employees of the Company at the time of the
Offering. These options granted to employees will become exercisable over a
period of one to three years after the date of the Offering and expire after 10
years. The exercise price per share of the options that were granted at the time
of the Offering is equal to the initial public offering price.
A summary of the status of the options to purchase shares of Common Stock
outstanding as of January 31, 1997 follows:
Weighted
Options Exercise Price
------- --------------
Outstanding at beginning of year ................ -- $ --
Granted 383,750 11.00
Exercised -- --
Canceled -- --
------- ------
Outstanding at end of year ...................... 383,750 $11.00
======= ======
Options exercisable at end of year .............. -- $11.00
======= ======
The Company applies APB No. 25 and related interpretations in accounting
for its stock option and purchase plans. Accordingly, no compensation expense
has been recognized for those plans in the year ended January 31, 1997. Had
compensation expense been determined based on the fair value of stock option
grants on the date of grant consistent with
F-16
<PAGE>
dELiA*s Inc.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended January 31, 1995, 1996 and 1997
SFAS No. 123, the effect on the Company's net income and earnings per share for
the year ended January 31, 1997 would not have been material.
The estimated fair market value of options granted during the year ended
January 31, 1997 was $4.08 per share. The fair value of options granted by the
Company during the year ended January 31, 1997 was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions used: no dividend yield; expected volatility (based on comparable
stocks) of 45 percent; risk-free interest rate of 6.4 percent; expected lives of
three to five years.
13. Family Stockholders' Agreement
Concurrent with the Reorganization, certain stockholders (the "Family
Holders") and a stockholder/executive of the Company (the "Executive") entered
into a stockholders agreement with the Company (the "Family Stockholders
Agreement") which, subject to certain exceptions, prohibits the Family Holders
from transferring the shares of Common Stock they owned upon completion of the
Reorganization for a period of two years from the date of the Reorganization.
Thereafter, the Family Holders will be able to transfer such shares in
accordance with the requirements of Rule 144 under the Securities Act. The
Family Stockholders Agreement also permits each of the Family Holders to cause
the Company to register shares of Common Stock concurrently with offerings of
Common Stock by the Executive. The Company will generally be required to bear
the expenses of all such registrations, except underwriting discounts and
commissions. In addition, the Family Stockholders Agreement gives the Executive
the right to vote all of the shares of Common Stock owned by the Family Holders
on all matters that come before the stockholders of the Company. The Family
Holders collectively, owned 32.5 percent of the outstanding Common Stock upon
completion of the Offering. The Family Stockholders Agreement will expire on the
tenth anniversary of the completion of the Reorganization.
F-17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 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.
dELiA*s Inc.
By: /s/ Stephen I. Kahn
-------------------
Stephen I. Kahn
Chairman of the Board, President and
Chief Executive Officer
Date: April 25, 1997
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.
/s/ Stephen I. Kahn Chairman of the Board, President, April 25, 1997
------------------------- Chief Executive Officer
Stephen I. Kahn and Director (principal
executive officer)
/s/ Evan Guillemin Chief Financial Officer and April 25, 1997
------------------------- Treasurer (principal financial
Evan Guillemin and accounting officer)
/s/ Christopher C. Edgar Executive Vice President, Chief April 25, 1997
-------------------------
Christopher C. Edgar Operating Officer and Director
/s/ S. Roger Horchow Director April 25, 1997
-------------------------
S. Roger Horchow
/s/ Sidney S. Kahn Director April 25, 1997
-------------------------
Sidney S. Kahn
/s/ Geraldine Karetsky Director April 25, 1997
-------------------------
Geraldine Karetsky
/s/ Joseph J. Pinto Director April 25, 1997
-------------------------
Joseph J. Pinto
<PAGE>
EXHIBIT INDEX
2.1 Bill of Sale and Contribution and Assumption Agreement between dELiA*s
LLC and the Company (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-15153))
3.1 Certificate of incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-15153))
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration No.
333-15153))
10.1 Form of Employment Agreement between the Company and Stephen I. Kahn
(incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-15153))
10.2 Employment Agreement between the Company and Christopher C. Edgar
(incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333- 15153))
10.3 Employment Agreement between the Company and Evan Guillemin (incorporated
by reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (Registration No. 333-15153))
10.4 Form of Family Stockholders Agreement among the Company, Stephen I. Kahn
and the persons listed on exhibit A thereto (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 333-15153))
10.5 1996 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (Registration No.
333-15153))
10.6 Restricted Stock Plan (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (Registration No.
333-15153))
10.7 Stock Option Agreement between the Company and Evan Guillemin
(incorporated by reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (Registration No. 333-15153))
10.8 Agreement dated April 11, 1996 between the Company and The Jay Group,
Inc. (the "Jay Group Agreement") (incorporated by reference to Exhibit
10.8 to the Company's Registration Statement on Form S-1 (Registration
No. 333-15153))
10.9 Lease Agreement dated May 3, 1995 between the Company and The Rector,
Church-Wardens and Vestrymen of Trinity Church in the City of New-York
(the "Lease Agreement"); Modification and Extension of Lease Agreement
dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1 (Registration No.
333-15153))
10.10 Form of Restricted Stock Agreements between the Company and holders of
Common Stock subject to the Restricted Stock Plan (incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (Registration No. 333-15153))
<PAGE>
10.11* Amendment dated March 31, 1996 to the Jay Group Agreement
10.12* Lease Agreement dated April 11, 1997 between the Company and Keystone
Distribution Center, Inc.
10.13* Agreement, dated April 4, 1997 between the Company and The Rector, Church
Wardens and Vestrymen of Trinity Church in the City of New York amending
the Lease Agreement
16 Letter from Richard A. Eisner & Company, LLP respecting change in
certifying accountant (incorporated by reference to Exhibit 16 to the
Company's Registration Statement on Form S-1 (Registration No.
333-15153))
23.1* Consent of Deloitte & Touche LLP*
23.2* Consent of Richard A. Eisner & Company LLP
27* Financial Data Schedule*
*Filed herewith
EXHIBIT 10.11
The following agreement ("The Amendment") between dELiA*s Inc. (dELiA*s) and The
Jay Group, Inc. ("Jay") will be considered a binding agreement to the Catalog
Fulfillment Agreement ("The Agreement") between dELiA*s and The Jay Group,
entered into April 11, 1996.
1. Both dELiA*s and Jay agree to Amend The Agreement (dated April 11, 1996).
dELiA*s and Jay reserve the right to terminate the Agreement with 60 days
advance notice of termination. However, both parties will be required to
fulfill their respective obligations under the Agreement until the end of
the calendar month following the 60-day notice period. Upon execution of
the Amendment, neither party shall have the right to give notice of
termination prior to May 1, 1997. After April 30, 1997, the package volume
referenced under BACKEND PACKAGE VOLUME on page 3 under item 6 of the
original Agreement will be calculated on an annualized basis.
2. The price to be paid by dELiA*s to The Jay Group for each return processed,
as referenced in The Agreement, will be increased to $2.25 per return,
effective with the signing of the Amendment. The dollar breakdown between
data processing and physically separating returns is $0.31 and $1.94
respectively. This price amendment is not subject to the performance
criteria contained in #4 below.
3. Subject to dELiA*s approval of sample packages, Jay will install an
automatic sealing machine rather than hand taping packages.
4. The adjustment related to line items per package referenced on page 4 item
7A of the original Agreement will be waived as in section 4C below,
provided The Jay Group meets the following performance criteria for 1997
activity as outlined below.
a. All orders will be shipped within 48 hours of receipt unless package
volume is greater than 125% of predicted daily package volume or
greater than the maximum productivity outlined below (predicted volume
is defined as the projected volume supplied by dELiA*s to Jay at least
two weeks prior to processing (not including backorders that are
equivalent to 40% of the project order volume). The source document
for determining the start of the 48 hour period will be the production
Planning Worksheet. All orders processed for printing after 1 p.m.
will be assigned to the next business day. The maximum capacity of the
Jay Group is to ship 6,000 packages per day or 30,000 packages per 5
day week (not including backorders that are equivalent to 40% of the
projected order volume). A 5 day period is required to staff at volume
levels above 30,000 packages with a maximum capacity of 42,000
packages per 7 day week. These quantities represent the ceiling for
the 48 hour performance standard. Jay will agree to assign additional
shift hours to production if unexpected volume exceeds 42,000 packages
per 7 day week. dELiA*s agrees to pay at 1.4 times the $1.40 per
package rate ($1.40 x 1.4 = $1.96) outlined in the original Agreement
for all packages shipped over 42,000 during this 7 day time frame.
<PAGE>
b. All merchandise will be received within 48 hours of dELiA*s approval
subject to all carriers scheduling appointments. The consolidated
shipment schedule for Tuesday's arrival will be received within the 72
hour requirement. Changes in the priority of receipts by dELiA*s
personnel which cause delay in receiving merchandise within 48 hours
will be subject to a 72 hour receiving performance evaluation. Goods
which need to be collated into kits will be received within 48 hours,
but the kit assembly and work orders are not part of the 48 hour
criteria.
c. The Error Rate will be less than .01 for items shipped during the
month of April and will decline an average of .001 per month to a goal
of .005. The Error Rate is defined as that number of which the
numerator is equal to the number of items returned due to omissions,
wrong items packed, and items damaged during the fulfillment process
(a subset of items damaged), and the denominator of which is the
number of items shipped three weeks prior. The number of items
returned due to omissions and wrong items picked will be determined by
a comparison to the printed collate returned by the consumer. Jay
agrees to this method of calculation assuming an average three week
return cycle. If actual activity deviates from the three week return
cycle assumption, the error rate will be calculated over the life of a
catalog.
Subject to the signing of the Amendment, and on the attainment of the
goals outlined in item 4 (to the extent The Jay Group can control the
outcome), dELiA*s will agree to forgive the Net Amount owed to dELiA*s
by Jay at 20% of the net total per month April thru August 1997. Net
Amount is defined as the line item penalty amount determined as of the
signing of this amendment, less one half of the storage charges for
March and April 1997 less $60.000 in past due receivables, as
referenced in the February 28, 1997 memo from Jay to dELiA*s. Any
invoice credit amount related to the $60,000 in past due receivables
that remains outstanding as of April 30, 1997 represent additions to
the net amount.
In addition, dELiA*s will consider an incentive payment tied to exceeding the
goals outlined in item 4 above. Jay is in agreement that an incentive payment
plan is appropriate. The incentives will be tied to the date of the amendment.
5. Payment terms for all activity will be net 7 days via wire transfer.
Disputes not settled within 10 days will be considered delinquent and The
Jay Group reserves the right to temporarily discontinue service for
non-payment.
6. If for any reason the relationship is not continued thru August 30, 1997
the line item forgiveness subject to the criteria outlined in item 4 will
be considered complete as of the final day of production at The Jay Group.
7. This amendment has no ties to any future contracts.
<PAGE>
Please sign below to indicate your acceptance of the terms of the Amendment.
Agreed to by:
The Jay Group, Inc. dELiA*s Inc.
/s/ H. Douglas Bushong /s/ Evan Guillemin
H. Douglas Bushong Evan Guillemin
Chief Financial Officer Chief Financial Officer
Date: 3/27/97 Date: 3/31/97
EXHIBIT 10.12
AGREEMENT
---------
THIS AGREEMENT of lease, executed this eleventh of April, 1997 between
dELiA*s Inc., having its offices at 435 Hudson St., 3rd floor, New York, NY
10014, hereinafter referred to as Lessee, and Keystone Distribution Center, Inc.
having its offices at 118 Carlisle Street, Hanover, PA 17331, hereinafter
referred to as Lessor.
WITNESSETH:
1. LESSOR, for and in consideration of the rent, covenants and agreements
hereinafter more fully mentioned and reserved, does by these presents
lease to the Lessee premises defined as Building #7 and #6 in Exhibit
A (the "premises").
a. TERM -
The term of the lease shall commence on June 1, 1997 and expire
on June 30, 2000. Possession shall commence June 1, 1997 and
rental shall commence July 1, 1997.
b. BASE RENTAL -
The total base rental of this lease is $1,054,8000. The rental is
payable in monthly installments as follows in advance on the
first day of each month:
$ / S.F. $ / Month $ / Year
-------- --------- --------
Year 1 $ 3.00 $ 29,300 $ 351,600
Year 2 $ 3.00 $ 29,300 $ 351,600
Year 3 $ 3.00 $ 29,300 $ 351,600
The first month's rent is due at the signing of this lease
document.
c. RENEWAL OPTION -
Lessee shall have (2) 3 year renewal options. Each renewal option
must be exercised by notification in writing no less than 180
days prior to the expiration of the current term. The rent is
payable in monthly installments as follows in advance on the
first day of each month:
OPTION 1
$ / S.F. $ / Month $ / Year
--------- --------- --------
Year 1 $ 3.15 $ 30,765 $ 369,180
Year 2 $ 3.15 $ 30,765 $ 369,180
<PAGE>
Year 3 $ 3.25 $ 31,742 $ 380,900
OPTION 2
$ / S.F. $ / Month $ / Year
--------- --------- --------
Year 1 $ 3.25 $ 31,742 $ 380,900
Year 2 $ 3.45 $ 33,695 $ 404,340
Year 3 $ 3.45 $ 33,695 $ 404,340
2. PAYMENT OF RENT AND DEFAULT - If the monthly said rent or part thereof
or any payment due as defined in this lease shall remain in arrears
and unpaid for a period of ten (10) days following written notice from
Lessor, or if Lessee shall fail to comply with any terms, covenants,
conditions, or agreements of this lease, or / and shall have failed to
cure such defaults within twenty (20) days of Lessor's written notice,
then in any of the said events, Lessor may at its option declare this
lease and the tenancy hereby created, terminated or maintain Lessee's
tenancy under the lease and pursue any remedy at law or equity now or
hereafter available to the Lessor. In the event Lessee is dispossessed
from the premises as a result of actions taken pursuant to this
paragraph, Lessor shall use its best efforts relet the premises and
Lessee's obligations under this paragraph shall be reduced in the
amount of any proceeds of such reletting.
3. USE - It is understood and agreed that Lessee shall use the demised
premises for a pick, pack, and ship operation and storage facility.
Notwithstanding the foregoing, Tenant shall be permitted to use the
demised premises for any legally permitted purpose which does not (i)
cause traffic and parking congestion in the property owned by Lessor
("Lessor's Property") that is adjacent to the demised premises, (ii)
overload the capacity of the demise premises or Lessor's Property, or
(iii) negatively impact the marketability of Lessor's Property,
provided, however, that such use shall not include volatile or
unstable substances creating fire or explosion hazards, unless such
hazardous use is first approved, in writing, by the Lessor, and the
Lessor shall have the unilateral right to reasonable reject such
hazardous use.
It shall be the Lessor's responsibility to see that the building is in
compliance with the local building codes and Pennsylvania Department
of Labor and Industry regulations for use as a warehouse and ancillary
offices only at the inception of this lease. Lessee shall be
responsible, at Lessee's expense, for securing a codes enforcement
inspection and use certificate, if applicable, for Lessee's specific
use. Lessee shall be responsible, at Lessee's expense for bringing the
demised premises into compliance with code requirements for Lessee's
specific use, and for keeping the premises in compliance as its use
may require.
<PAGE>
4. PARKING - Lessee shall have the use of 100 automobile parking spaces
on the premises as indicated in Exhibit A.
In the event that Lessee expands its leasehold in the property,
additional automobile parking spaces will be provided in a ratio of 1
space per 1,000 square feet of additional rented space, or as mutually
agreed.
5. MAINTENANCE - Lessee, at its expense, shall maintain and keep the
leased premises, including without limitation, windows, doors, lights,
truck loading docks, and interior walls in good repair. Lessee shall
be responsible for its own security for the leased premises.
The foregoing shall not be deemed to require Lessee to pay for repairs
required as a result of the events for which Lessor is insured under
the policy of insurance referred to in paragraph 7.
Lessor shall maintain in good condition the building roof and exterior
walls and other major structural components.
Lessee shall vacate and surrender the premises upon termination of
this lease or upon any renewal thereof, in the same condition as said
premises were at the beginning of this lease, reasonable wear and tear
excepted.
6. REAL ESTATE TAXES - Lessee shall pay as additional monthly rent its
pro rata share of the real estate taxes levied against the property of
which the demised premises are a part.
For the purpose of this lease, the net rentable area of the property
of which the demised premises are a part is defined as 406,000 square
feet.
Pro rata share is defined as the proportion that the net rentable area
of leased premises bears to the total net rentable area of the
property. For the purposes of this agreement that proportion is
defined as 28.8%
For the initial one year term of the lease, beginning June 1, 1997 the
additional monthly rent is $3,132. This additional rental will be
adjusted annually to reflect the fluctuation in costs incurred by the
Lessor.
Thirty days prior to the anniversary date of beginning of the lease
agreement, the Lessor will send the Lessee notification of the
additional monthly rent due for the subsequent year, along with
supporting documents therefore.
7. INSURANCE - Lessee shall pay as additional monthly rent its pro rata
share of the cost of insuring the property of which the demised
premises are a part against loss by fire and such other hazards as are
provided for by special all risk endorsement to a standard
Pennsylvania insurance policy.
<PAGE>
Pro rata share is defined as the proportion that the net rentable area
of the premises bears to the total net rentable area of the property.
For the purposes of this agreement that proportion is defined as
28.8%.
For the initial one year term of the lease, beginning June 1, 1997,
the additional monthly rent is $1,090. This additional rental will be
adjusted annually to reflect the fluctuations in costs incurred by the
Lessor.
Thirty days prior to the anniversary date of beginning of the lease
agreement, the lessor will send the Lessee notification of the
additional monthly rent due for the subsequent year, along with
supporting documents therefor. The rental adjustment will not exceed
12% in any one year. Lessee shall not do or store anything on the
premises which will increase the insurance rates for the building or
contents, nor will the Lessee do or allow to be done on the premises
anything that is on violation of National Fire Protection Association
codes. In the event the cost of insurance shall be increased by reason
of Lessee's use or the materials kept or stored thereon, Lessee agrees
to pay the additional cost of such insurance within fifteen (15) days
of receipt of an invoice and supporting documents therefor.
Lessee shall be responsible for insuring its contents stored in the
premises against such hazards as it may decide.
Lessee shall maintain liability insurance with a combined single limit
of $5,000,000.
8. COMMON AREAS - Lessee shall pay as additional monthly rent its pro
rata share of the common area costs such as utilities, grounds and
paved area maintenance, fire protection service, and regular sprinkler
maintenance.
The pro rata share of common charges is defined as the proportion that
the net rentable area of leased premise bears to the total net
rentable area of the property. For the purpose of this agreement that
proportion is defined as 28.8%.
For the initial one year term of the lease, beginning June 1, 1997,
the additional monthly rent is $780. This additional rental will be
adjusted annually to reflect the fluctuations in casts incurred by the
Lessor.
Thirty days prior to the anniversary date of the beginning of the
lease agreement, the Lessor will send the Lessee notification of the
additional monthly rent due for the subsequent year, along with
supporting documents therefor. The rental adjustment will not exceed
12% in any one year.
9. UTILITIES - Lessee shall be responsible for all utility expenses for
the premises. Utilities shall include: fuel for heating or processing;
electricity, water for
<PAGE>
sanitary, processing, or sprinkler operation; sewerage; and refuse
removal. An account for refuse removal will be established by the
Lessee. Other utilities will be accounts obtained and maintained in
the name of Lessor and will be separately metered for usage. The
meters measuring utilities in the demised premises shall not measure
usage of any portion of the property other than the demised premises.
However, in the event that joint metering is necessary, the resulting
utility charge will be determined by prior agreement between Lessor
and Lessee. Lessor will bill Lessee within ten days and failure to pay
utility bills within ten days is an event of default.
10. REFUSE REMOVAL - Lessee shall be responsible, at Lessee's expense, for
the removal of all refuse, waste, and debris form the demised
premises.
11. INDEMNIFICATION - Lessor agrees to indemnify and hold Lessee harmless
from and against any and all liability, claims, damages, costs,
expenses, penalties, and judgments (including, without limitation,
attorneys' fees) arising out of any injury to person, loss of life or
damage to property that shall occur upon the premises or Lessor's
other property, except for those resulting from the wrongful act or
negligence of Lessee or its employees, agents, contractors,
representatives, or visitors.
12. DESTRUCTION - In the event of a partial destruction of the premises
during the term, which requires repairs to the premises, or the
premises being declared unsafe or unfit for occupancy by on authorized
public authority for any reason other than Lessee's act, use, or
occupation, which declaration requires repairs to the premises, Lessor
shall forthwith make such repairs provided such repairs can be made
within thirty (30) days under the laws and regulations of authorized
public authorities, but such partial destruction, including any
destruction necessary in order to make repairs required by any such
declaration, shall in no way annul or void this lease except that
Lessee shall be entitled to proportionate reduction in rent while such
repairs are being made, provided however that if premises shall be
more than 40% unsafe or unfit for occupancy or partially destroyed the
Lessee at its sole option shall be permitted to terminate the lease
and no further rent will be due hereunder.
The total destruction, including any destruction required by any
public authority, of the premises shall terminate this lease
automatically.
13. SUBLEASE - Lessee will not assign this lease nor underlet nor in any
manner dispose of the premises or any part thereof, without the
written consent of the Lessor, which consent will not be unreasonably
withheld. Notwithstanding the foregoing, Lessee shall have the right
to sublet up to fifty percent (50%) of the demised premises without
Lessor's consent provided that no subtenant shall be permitted to use
the subleased space in a manner inconsistent with Article 3 hereof.
<PAGE>
14. BANKRUPTCY - If Lessee shall be declared a bankrupt or shall make an
assignment for the benefit of creditors, the whole of the rent for the
then entire term shall immediately become due and payable.
15. LESSEE ALTERATIONS - Lessee will not, without the prior written
consent of the Lessor, make any alteration, addition, or change in or
to the premises, nor in any way deface or mutilate the walls, floors,
ceiling, or other parts thereof, nor do or keep anything on the
premises which will affect the insurance against fire or other hazards
or the rate thereof, or which shall violate any law or government
regulation.
16. LESSOR INSPECTION - Lessor shall have the right to enter the premises
during the normal business hours of the Lessee upon reasonable notice
for the purpose of inspecting the premises and for the purpose of
making repairs required therein. Lessor shall have the right in the
event of an emergency to enter the premises at any time, by master key
or by force, if necessary, for purposes of preventing damage, making
emergency repairs, and enforcing any provisions of this lease.
17. CONDEMNATION - If, during the term of this lease, the whole or any
part of the demised premises shall be taken under the power of Eminent
Domain by any public, quasi-public, or private authority, then in such
event, the proceeds of said condemnation shall be paid to Lessor.
A. In the event the taking of the demised premises shall result
in a reduction in the size of the building and / or parking areas such
that the remaining areas are not reasonably suited for the conduct of
Lessee's business, then Lessee may terminate this Lease, at Lessee's
election, by giving Lessor forty five (45) days notice of its election
to terminate.
B. In the event the taking of the demised premises shall result
in a reduction in the size of the building and Lessor shall determine
that the cost of restoration of the building is not reasonable and
within the damages awarded by the condemning authority, then in such
event, Lessor may elect to terminate this lease by giving Lessee
forty-five (45) days notice of its election to terminate.
C. In the event the taking of the demised premises shall result
in a reduction in the size of the building, and such reduction does
not unreasonably affect Lessee's business operation, then in such an
event this Lease shall continue in full force and effect except that
the rental shall be reduced proportionately based on the reduction of
the demised area.
D. At such time as a notice of intent to condemn is received by
Lessor, Lessor will immediately notify Lessee of said action.
<PAGE>
E. Lessee shall have the right to maintain an independent action
against the condemning authority for condemnation awards, provided
that such action shall not serve to reduce any award available to
Lessor.
18. NON-WAIVER - The failure of Lessor to insist in any one or more
instances upon a strict performance of any covenant of this lease, or
to exercise any right herein contained, shall not be construed as a
waiver for the future of such covenant or right, but the same shall
continue in full force and effect, unless the contrary is expressed in
writing by Lessor to Lessee.
It is the intention of the parties hereto to be legally bound hereby
and this lease shall be binding upon the said parties hereto, their
respective heirs, executors, administrators, successors, and / or
assigns.
19. COVENANT OF QUIET ENJOYMENT - Lessor agrees that so long as Lessee
shall and may peaceably and quietly have, hold and enjoy the premises
for the term hereby granted without disturbance or hindrance by or
from Lessor or anyone claiming under Lessor.
20. NOTICES - Notices given hereunder shall be in writing and shall be
given by certified mail, return receipt requested, or by courier
service providing written proof of delivery , as follows:
If to Lessee:
Delia's Inc.
435 Hudson St. 3rd Fl.
New York, NY 10014
ATTN: Stephen Kahn
If to Lessor:
Keystone Distribution Center, Inc.
118 Carlisle St. Hanover, PA 17331
ATTN: Terrence Hormel
Notice given by certified mail shall be effective upon the date of
receipt, refusal or nondelivery indicated in the return receipt; by
courier, upon the date of delivery as set forth in the courier's
delivery receipt. Any party may from time to time, by notice to the
other parties, specify another address for notice purposes.
21. RIGHT OF REFUSAL - A. If at any time, or from time to time, during the
term of the lease, any portion of the property of which the demised
premises is a part
<PAGE>
("Additional Space") shall become available for leasing, and Lessor
shall be prepared to offer such space in the open market, then Lessor
shall notify Lessee in writing (the "Offer Notice") of such
availability and shall state in such notice the date in which Lessor
expects to be able to deliver the Additional Space. If Lessee desires
to lease the Additional Space, Lessee shall have the right,
exercisable by delivery of notice ("Lessee's Exercise Notice") to
Lessor within sixty (60) days after receipt by Lessee of Lessor's
notice of availability, to lease the Additional Space for the
remaining term of this lease.
B. The date on which possession of the Additional Space is delivered
to Lessee pursuant to this Article 21 is the "Additional Space
Commencement Date." On the Additional Space Commencement Date the
Additional Space shall be added to and deemed a part of the demised
premises for the remaining term of this lease, subject to the terms
and conditions of this lease except that (i) the Base Rental reserved
hereunder shall be increased by an amount equal to the product of (x)
the number of usable square feet in the Additional Space and (y) the
Base Rental per square foot that is then applicable to the demised
premises and (ii) Lessee's pro rata share with respect to real estate
taxes, insurance and common areas shall be increased by the fraction,
expressed as a percentage, the numerator of which is the number of
usable square feet contained in the Additional Space and the
denominator of which is the number of square feet contained in the
property of which the demised premises is a part.
22. ENTIRE AGREEMENT - This Agreement, including the Exhibits hereto,
contains the entire agreement among the parties. There are no other
terms, obligations, covenants, representations, statements or
conditions, oral or otherwise of any kind whatsoever concerning these
transactions. This Agreement shall not be altered, amended, changed or
modified except in a writing executed by Lessor and Lessee.
This agreement shall be governed by the laws of the state of
Pennsylvania.
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals the day and year first above written.
Keystone Distribution
Center, Inc.
/s/ Beverly Millisi BY /s/ Terrence A. Hormel
ATTEST LESSOR
Delia's Inc.
/s/ Evan Guillemin BY /s/ Stephen Kahn
ATTEST LESSOR
EXHIBIT 10.13
THIS AGREEMENT, made this 4th day of April, l997, between THE RECTOR,
CHURCH-WARDENS AND VESTRYMEN OF TRINITY CHURCH IN THE CITY OF NEW YORK, a
religious corporation in the State of New York, having its office and address at
74 Trinity Place in the Borough of Manhattan, City, State and County of New York
(hereinafter referred to as the "Landlord"), and DELIA'S, INC., a Delaware
Corporation, having its place of business at 435 Hudson Street, Borough of
Manhattan, City, County and State of New York (hereinafter referred to as the
"Tenant").
W I T N E S S E T H :
WHEREAS, the Landlord and Delia's LLC entered into an agreement of
lease dated May 3, 1995, modified September 26,1996 herein the Landlord leased
to the Tenant a portion of the 3rd Floor as described in the lease, in the
building of the Landlord known as 435 Hudson Street, New York, New York, for a
term to commence May 1, 1995, and expire (unless sooner terminated in accordance
with the provisions of the lease) on April 30, 2003 at the rent and additional
rents and on the other terms and covenants set forth in such lease (the said
lease is hereinafter referred to as the "Lease" and the premises thereby demised
are hereinafter referred to as the "Original Premises"), and
WHEREAS, Delia's LLC assigned all of its right, title and interest in
the Lease to the Tenant; and
WHEREAS, Tenant wishes to (i) take and hire additional space in said
building consisting of another portion of the 3rd floor as hatched in red on the
diagram attached hereto and made part of the Agreement and marked Exhibit "B"
(such additional space is hereinafter referred to as the "Additional Space"),
and (ii) extend the term of the Lease to March 31, 2007, and the Landlord is
willing to agree to such extension and lease the Additional Space to the Tenant
on the terms herein prescribed and otherwise on those set forth in the Lease;
and
<PAGE>
WHEREAS, the Landlord and the Tenant desire to modify the Lease
accordingly.
NOW, THEREFORE, it is hereby mutually covenanted and agreed between
the parties hereto as follows:
l. The Lease shall be and it hereby is modified in the following
respects effective as of April 1, 1997:
(a) By making the Additional Space a part of the Premises demised
under the Lease which the Landlord lets and leases to the Tenant and the Tenant
takes and hires from the Landlord for the remainder of the term of the Lease and
upon all of the terms, covenants and conditions of the Lease except as they are
herein modified.
(b) The fixed annual rent payable under the Lease shall be increased
to the annual rates of (i) $268,960.00 during the period commencing on April 1,
1997 and ending on April 30, 1998 payable in monthly installments of $22,413.33
payable in advance on the first day of each calendar month and (ii) of
$309,835.00 during the period commencing on May 1, 1998 and ending April 30,
2003, payable in monthly installments of $25,819.58 payable in advance on the
first of each calendar month.
(c) The definition of "Tenant's Proportionate Share" shall be adjusted
to reflect the addition of the Additional Space.
(d) For the purposes of computing the escalations from and after March
31, 1997 in respect to both the Original Premises and the Additional Space, the
following changes are made to Article THIRTY-SEVENTH of the Lease:
(i) The term "Base Index" shall mean the Index as last published
prior to April 1, 1997.
(ii) The term "Base Year" shall mean the calendar year 1997.
(iii) The term "Computation Date" shall mean the first day of April,
1998 and, in Subsequent Years, its anniversary date.
(iv) "Statements for the Tenant" shall be furnished on or before May
1, 1998, and on or before that day in each Subsequent Year.
(e) By increasing the amount deposited pursuant to Article
TWENTY-EIGHTH of the Lease by $26,659.99 (that is, from $24,979.16 to
$51,639.15), which additional amount shall be deposited by the Tenant
simultaneously with the execution of this lease amendment.
(2)
<PAGE>
(f) By extending the term of the Tenant thereunder for a further term
of 3 years and 11 months beginning May 1, 2003, and expiring March 31, 2007
(unless sooner terminated in accord with the provisions of the lease), during
which period the Tenant shall pay fixed rent at the rate of $323,460.00 per
annum. The Tenant shall also pay additional rent as set forth in (i) Article
THIRTY-SEVENTH (or THIRTY-EIGHTH) of the Lease and (ii) Sections 1(c) and 1(d)
of this Lease Amendment.
2. The Tenant is hereby granted the privilege of occupying the
Additional Space subject to all of the terms, covenants and conditions of the
lease, including but not limited to, the payment of any service charges for
electric current, water, sprinkler maintenance and any overtime elevator or heat
service and to the payment of any additional rent payable pursuant to the
provisions of Article THIRTY-SEVENTH of the Lease but otherwise free of the
payment of fixed rent ($13,330.00 per month) during the following periods:
(i) During the period beginning with the tender of possession of the
Additional Space by the Landlord to the Tenant at any time prior to the
commencement of the term of this lease and ending on March 31, 1997, the date
prior to the commencement of the term.
(ii) During the period of the term of this lease commencing on April
1, 1997, or such later date on which the Landlord tenders the Additional Space
with the work referred to in paragraph 5 hereof substantially completed and
ending 120 days thereafter.
(iii) During the one month periods during the term of this lease
commencing on April 1 and ending on April 30, in each of the years 2002, 2003
and 2004.
The right to occupy the premises free of rent during the periods set
forth in clauses (ii) and (iii) above shall be subject to the condition that the
Tenant shall not default in the payment of any other fixed rent, or any
additional rent or any other charge due under this lease or in the performance
of the other terms, covenants and conditions thereof. In the event of any such
default, then fixed annual rent at the monthly rate set forth in this lease
shall be payable during the period in which the Tenant would otherwise be
entitled to the use of the
(3)
<PAGE>
premises free of fixed annual rent. Any such payment shall be paid within l0
days following demand and shall constitute additional rent under this lease.
3. In the event that the Landlord, for any reason, shall be unable to
give possession of the Additional Space hereby demised by the first day of
April, 1997, the Lease shall nevertheless continue in full force and effect and
the Landlord shall tender and the Tenant will take possession of said Additional
Space under the terms herein as soon as the Landlord shall have tendered
possession thereof to the Tenant; the fixed rent applicable to the Additional
Space ($13,330 per month), however, to begin on the date which is the 121st day
following the date upon which such possession is tendered to the Tenant.
4. The Tenant represents that no broker, licensed or otherwise, was
involved in the making of this lease or brought the premises to the attention of
the Tenant and that all of the negotiations respecting this lease were conducted
with and through the offices of the Landlord.
If the foregoing representation is breached, the Tenant agrees to
indemnify and hold Landlord harmless from any and all costs and expenses,
including without limitation, Landlord's legal fees and expenses paid or
incurred by Landlord in connection with any claim by a broker, co-broker and/or
finder in connection with this lease.
5. It is agreed that the following work is to be done in the
Additional Space by the Landlord at the Landlord's expense:
a) Landlord will remove existing ceiling hung A/C unit and all
unused piping and conduit.
b) Demolish all existing sheetrock walls and dropped ceiling.
c) Replace all cracked/broken windows and change any opaque window
panes to clear glass and clean once at commencement of lease.
d) Provide ACP-5 form.
e) Landlord to deliver existing 400 amps 3-phase power with meter
and switch at existing location. All electrical distribution and
relocation of electrical risers/panels to be at tenant's expense.
(4)
<PAGE>
f) Replace existing fire exit door in southwest corner of premises
with new door and building standard hardware.
g) Turn over existing perimeter radiators in good working order.
h) Deliver existing sprinkler system in good working order and all
dropped heads to be raised to original condition.
i) Tenant to be responsible for all floor finishes.
j) Landlord will perform alterations to the perimeter floor
penetrations as recommended by Landlord's engineer (Cerami &
Associates, Inc.)
k) Landlord will reimburse tenant up to $34,500.00 upon receipt of
invoices marked "paid in full" and waiver of lien forms. Landlord
contribution to be utilized for the installation/renovation of
bathrooms and for the demolition of existing demising block
walls.
l) Wrap 39 pipes with insulation as per Cerami & Associates, Inc.
recommendations.
6. Except as modified in accord with the provisions of this Agreement,
the Lease is hereby ratified and affirmed and the Tenant covenants and agrees to
keep and perform the obligations of the Lease as hereby modified.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE RECTOR, CHURCH-WARDENS AND
VESTRYMEN OF TRINITY CHURCH IN
THE CITY OF NEW YORK
[CORPORATE SEAL]
ATTEST:
By: /s/ Joseph Palombi By: /s/ Stephen Heyman
Executive Vice President Director of Leasing
of Real Estate
By: /s/ James Groden
Finance Department
[CORPORATE SEAL]
ATTEST: DELIA'S, INC.
(5)
<PAGE>
By: /s/ Stephen Kahn By: /s/ Evan Guillemin
Name: Stephen Kahn Name: Evan Guillemin
Title: Chief Financial Officer
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-22449 of dELiA*s Inc. on Form S-8 of our report dated March 12, 1997,
appearing in the Annual Report on Form 10-K of dELiA*s Inc. for the year ended
January 31, 1997.
DELOITTE & TOUCHE LLP
New York, New York
April 23, 1997
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statment No.
333-22449 of dELiA*s Inc. on Form S-8 of our report dated August 14, 1996 (with
respect to the share issuance in Note 1, December 18, 1996), appearing in the
Annual Report on Form 10-K of dELiA*s Inc. for the year ended January 31, 1997.
Richard A. Eisner & Company, LLP
New York, New York
April 23, 1997
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<FISCAL-YEAR-END> JAN-31-1997
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