SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT
-------------------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 1998
Commission file number 0-21869
dELiA*s Inc.
(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
(Address of principal executive offices)
(Zip Code)
(212) 807-9060
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
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 [ ]
Number of shares of Common Stock outstanding as of September 10, 1998:
14,138,790
<PAGE>
Certain statements contained herein, including, without limitation,
information appearing under Item 2, "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, increases in materials, printing, paper, postage, shipping and labor
costs, timing of catalog mailings, customer response rates, levels of
competition and other factors outside the control of the Company. These factors,
and other factors that appear with the forward-looking statements, or in the
Company's other Securities and Exchange Commission filings, including its Annual
Report on Form 10-K for the year ended January 31, 1998, 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 1998" refers to the
fiscal year ending January 31, 1999.)
PART I
FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Financial Statements
2
<PAGE>
dELiA*s Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
July 31, 1998 January 31, 1998
------------------------------
(Unaudited) *
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................... $4,603 $4,485
Short-term investments............................ 12,987 37,075
Merchandise inventories .......................... 20,247 11,233
Prepaid expenses and other current assets ........ 8,681 4,020
Deferred taxes ................................... 1,100 1,100
-------- ---------
Total current assets............................ 47,618 57,913
PROPERTY AND EQUIPMENT--Net .......................... 10,017 6,222
GOODWILL AND OTHER ASSETS ............................ 19,712 437
-------- ---------
TOTAL ASSETS ......................................... $77,347 $64,572
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other
current liabilities ............................. $17,565 $19,849
Current portion of long-term debt and capital
leases .......................................... 89 105
-------- ---------
Total current liabilities ...................... 17,654 19,954
DEFERRED CREDITS ..................................... 365 310
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 111 164
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY.................................. 59,217 44,144
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $77,347 $64,572
======== =========
</TABLE>
* Condensed from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial Statements
3
<PAGE>
dELiA*s Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended July 31,
----------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
NET SALES ............................................ $26,451 $21,086
COST OF SALES......................................... 13,712 10,678
------- -------
GROSS PROFIT.......................................... 12,739 10,408
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 13,499 10,148
INTEREST INCOME, NET.................................. 300 268
------- -------
INCOME (LOSS) BEFORE INCOME TAXES..................... (460) 528
PROVISION (BENEFIT) FOR INCOME TAXES.................. (317) 141
------- -------
NET INCOME (LOSS)..................................... $ (143) $ 387
======= =======
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE......... $ (0.01) $ 0.03
======= =======
SHARES USED IN THE CALCULATION OF BASIC NET
INCOME (LOSS) PER SHARE........................... 13,498 12,866
======= =======
SHARES USED IN THE CALCULATION OF DILUTED NET
INCOME (LOSS) PER SHARE........................... 13,498 13,003
======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended July 31,
----------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
NET SALES ............................................ $57,645 $38,783
COST OF SALES......................................... 27,935 19,956
------- -------
GROSS PROFIT.......................................... 29,710 18,827
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 27,591 18,196
INTEREST INCOME, NET.................................. 641 481
------- -------
INCOME BEFORE INCOME TAXES............................ 2,760 1,112
PROVISION FOR INCOME TAXES............................ 903 403
------- -------
NET INCOME............................................ $ 1,857 $ 709
======= =======
BASIC AND DILUTED NET INCOME PER SHARE................ $ 0.14 $ 0.06
======= =======
SHARES USED IN THE CALCULATION OF BASIC NET
INCOME PER SHARE.................................. 13,410 12,577
======= =======
SHARES USED IN THE CALCULATION OF DILUTED NET
INCOME PER SHARE.................................. 13,618 12,695
======= =======
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
dELiA*s Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended July 31,
----------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income ............................................................ $ 1,857 $ 709
Adjustments to reconcile net income to net cash used in operating
activities
Depreciation and amortization ........................................ 762 283
Amortization of investments .......................................... 136 --
Compensation expense related to issuance of restricted stock and
stock appreciation rights. .......................................... 44 54
Changes in operating assets and liabilities:
Merchandise inventories ......................................... (6,753) (3,675)
Prepaid expenses and other current assets ....................... (4,650) (2,168)
Deferred taxes .................................................. -- (283)
Other assets .................................................... (24) (54)
Current liabilities ............................................. (2,714) 2,649
Deferred credits ................................................ 55 94
------- -------
Net cash used in operating activities ................................. (11,287) (2,391)
======= =======
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of Screeem! Business, net of cash acquired (10,303) --
Capital expenditures .................................................. (2,257) (2,240)
Purchases of investment securities
Held-to-maturity ................................................... -- (22,808)
Available for sale ................................................. (43,281) --
Proceeds from the maturity of held-to-maturity investment securities 30,024 --
Proceeds from the sale of available-for-sale investment securities 37,209 --
------- -------
Net cash provided by (used in) investing activities ....................... 11,392 (25,048)
======= =======
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ............................ -- 19,945
Exercise of stock options ............................................. 82 --
Net proceeds under line of credit agreement ........................... -- 796
Proceeds from issuance of long-term debt .............................. -- 168
Principal payments of long-term debt and capital lease obligations (69) --
------- -------
Net cash provided by financing activities ................................. 13 20,909
======= =======
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ............................ 118 (6,530)
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD .............................. 4,485 21,717
------- -------
CASH & CASH EQUIVALENTS--END OF PERIOD .................................... $ 4,603 $15,187
======= =======
SUPPLEMENTARY CASH FLOW INFORMATION:
Income taxes paid ..................................................... $ 3,629 $ 1,076
======= =======
Interest paid ......................................................... $ 13 $ 82
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
Issuance of equity securities in connection with the Screeem! Business
acquisition (Note 1)
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE>
dELiA*s Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
dELiA*s Inc. (together with its consolidated subsidiaries, the "Company") is
a teen-focused marketer of casual apparel, accessories, cosmetics, home
furnishings and soccer merchandise. Through dELiA*s catalog and web site which
target girls and young women between the ages of 10 and 24 (an age group known
as "Generation Y"), the Company believes it is the leading direct marketer of
casual apparel, related accessories and cosmetics distributing a print and
on-line catalog to Generation Y. Through its TSI Soccer catalog, retail stores
and web site, the Company is a leading direct marketer and retailer of specialty
soccer merchandise to Generation Y boys and girls. The Company maintains a
corporate headquarters, telemarketing and customer service group in New York,
New York, additional telemarketing and corporate facilities in Durham, North
Carolina and a fulfillment facility for processing merchandise in Hanover,
Pennsylvania. It also operates two dELiA*s retail outlet stores.
In July 1998, the Company, through two wholly-owned subsidiaries, acquired
assets located in 26 retail stores operated under the Screeem! and Jean Country
names, as well as the leases for such stores, from American Retail Enterprises,
L.P. ("ARE") and certain affiliates of ARE. The Company, through its
subsidiaries, also acquired the Screeem!, Jean Country and American Rocket
trademarks (together with the acquired retail assets and leases, the "Screeem!
Business"). Through these retail stores, the Company offers progressive,
fashion-forward unisex branded apparel to Generation Y boys and girls in a
dynamic shopping experience, featuring live DJs, fashion models and promotional
appearances and events. The purchase price for the acquisition consisted of
$10,025,000 in cash and 812,501 shares of dELiA*s Inc. common stock ("Common
Stock"). The acquisition, which was completed pursuant to an Asset Purchase
Agreement dated June 1, 1998, as amended (the "Screeem! Asset Purchase
Agreement"), has been accounted for as a purchase. Accordingly, the operating
results of the Screem! Business have been included in the Company's condensed
consolidated financial statements since the date of acquisition. The excess of
the aggregate purchase price over the fair market value of net assets acquired
was allocated to goodwill based upon preliminary estimates of fair value and is
being amortized over thirty years. The Company does not expect the final
purchase allocation to differ significantly from the preliminary purchase price
recorded. On a pro forma basis assuming the acquisition had occurred on February
1, 1997, net sales, net income and earnings per share adjusted for interest and
goodwill amortization expenses would have been $45.0 million, $182,000 and
$0.01, respectively, for the six months ended July 31, 1997 and $64.3 million,
$1.5 million and $0.10, respectively, for the six months ended July 31, 1998.
These results are presented for informational purposes only and do not
necessarily represent results which would have occurred nor are they indicative
of future results of the combined operations.
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 majority of the back-to-school season and the
holiday season) of each fiscal year.
2. Summary of Significant Accounting Policies and Basis of Presentation
a. Principles of Consolidation--The condensed consolidated financial
statements include the accounts of dELiA*s Inc. and subsidiaries, all of which
are wholly owned. All significant intercompany balances and transactions have
been eliminated in consolidation.
b. Unaudited Interim Financial Statements--The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with the requirements for Form 10-Q and in accordance with generally accepted
accounting principles for interim financial reporting. In the opinion of
management, the accompanying condensed consolidated financial statements are
presented on a basis consistent with the audited consolidated financial
statements and reflect all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim periods presented.
The financial statements and footnote disclosures should be read in conjunction
with the Company's January 31, 1998 audited consolidated financial statements
and the notes thereto, which are included in the Company's Annual Report on Form
10-K for the year ended January 31, 1998, which was filed under the Securities
Exchange Act of 1934. Results for the interim periods are not necessarily
indicative of the results to be expected for the year.
6
<PAGE>
dELiA*s Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
c. Reclassifications--Certain amounts have been reclassified to conform to
the July 31, 1998 presentation.
d. Recent Accounting Pronouncements--In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
130 establishes standards for reporting and display of comprehensive income. The
adoption of SFAS No. 130 as of February 1, 1998 did not have an effect on the
Company's financial statements or disclosure as the Company has no reconciling
items. Therefore net income and comprehensive income are the same.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that public companies
report certain information about operating segments in their annual financial
statements and in condensed financial statements of interim periods issued to
shareholders. This statement also requires that public companies report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The Company is currently reviewing the
impact of this statement on its current level of disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. This statement standardizes the
disclosure requirements for pension and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. The Company has determined that
the adoption of this new standard will not have a material effect on the
Company's disclosure for all periods presented.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, which is effective for fiscal
years beginning after June 15, 1999, requires the Company to recognize all
derivatives on the balance sheet at fair value. The Company has determined that
the adoption of this new standard will not have a material effect on the
Company's financial statements or disclosure for all periods presented.
7
<PAGE>
dELiA*s Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Property and Equipment
Major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
Estimated July 31, January 31,
Useful Lives 1998 1998
------------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Furniture, fixtures and equipment 5-10 years $ 9,330,000 $ 5,444,000
Leasehold improvements........... Term of lease 2,436,000 1,842,000
----------- -----------
Total--at cost................... 11,766,000 7,286,000
Less accumulated depreciation and
amortization................... 1,749,000 1,064,000
----------- -----------
Total property and equipment--net $10,017,000 $ 6,222,000
=========== ===========
</TABLE>
4. Credit and Financing Agreements
At July 31, 1998, the Company had a line of credit agreement with a bank
providing for short-term loans of up to $5.0 million subject to bank approval.
Borrowings under the agreement are secured by all assets of the Company except
for merchandise inventories and bear interest at the prime rate (8.5 percent at
July 31, 1998 and January 31, 1998). There were no funds borrowed under the
agreement during the six month period ended July 31, 1998 and the fiscal year
ended January 31, 1998. The Company is currently renegotiating this
agreement.
Outstanding letters of credit established to facilitate international
merchandise purchases at July 31, 1998 were $3,502,000.
5. Stock Options
In the six month period ended July 31, 1998, options to purchase an aggregate
of 1,476,750 shares of Common Stock were granted to 117 employees of the
Company and its subsidiaries. These options will become exercisable over a
period of ten months to five years from the date of grant. The exercise price
per share of each such option is generally equal to the fair market value of the
Common Stock on the date of grant.
8
<PAGE>
dELiA*s Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Stock Options (cont'd.)
A summary of the status of all plan and non-plan options to purchase shares
of Common Stock outstanding as of January 31, 1998 and July 31, 1998 follows:
<TABLE>
<CAPTION>
Fiscal Year Six Months
Ended January 31, 1998 Ended July 31, 1998
---------------------- -------------------
Weighted Weighted
Options Exercise Price Options Exercise Price
------- -------------- ------- -------- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of 383,750 $11.00 744,437 $14.96
period
Granted 362,937 19.13 1,476,750 16.60
Exercised (2,250) 11.00 (7,375) 11.11
Cancelled -- -- (25,500) 21.58
------- ---------
Outstanding at end of period 744,437 14.96 2,188,312 16.58
======= =========
Options exercisable
At end of period 107,500 11.24 296,987 14.29
======= =========
</TABLE>
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 options granted to employees in the six month period
ended July 31, 1998 and the year ended January 31, 1998.
During 1998, the Company reduced the exercise price of approximately 24% of
the outstanding common stock options held by the Company's employees to the fair
market value per share as of the date of the reduction in price. The Company
repriced these employee stock options in an effort to retain employees at a time
when a significant percentage of employee stock options had exercise prices that
were above fair market value. The Company believes that stock options are a
valuable tool in compensating and retaining employees. The repriced options
maintain the same vesting and expiration terms. Executive officers and directors
were excluded from this repricing.
6. Commitments and Contingencies
Pursuant to the Screeem! Asset Purchase Agreement, in the event that the mean
of the intraday high and low bid prices for the Common Stock for the 20
consecutive trading days immediately preceding January 10, 2000 (the "18-Month
Price") is less than $18.00, the Company has agreed to issue that number of
additional shares of Common Stock that is equal to (i) the excess of (x) the
product of 208,334 shares (subject to adjustment) multiplied by $18.00 over (y)
the product of 208,334 shares multiplied by the greater of the 18-Month Price or
$10.00 divided by (ii) the 18-Month Price.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and Notes thereto
included elsewhere in this Report.
Overview
The Company is a teen-focused marketer of casual apparel, accessories,
cosmetics, home furnishings and soccer merchandise. Through dELiA*s catalog and
web site which target girls and young women between the ages of 10 and 24 (an
age group known as "Generation Y"), the Company believes it is the leading
direct marketer of casual apparel, related accessories and cosmetics
distributing a print and on-line catalog to Generation Y. Through its TSI Soccer
catalog, retail stores and web site, the Company is a leading direct marketer
and retailer of specialty soccer merchandise to Generation Y boys and girls. The
Company maintains a corporate headquarters, telemarketing and customer service
group in New York, New York, additional telemarketing and corporate facilities
in Durham, North Carolina and a fulfillment facility for processing merchandise
in Hanover, Pennsylvania. It also operates two dELiA*s retail outlet stores.
On July 10, 1998, the Company, through two wholly-owned subsidiaries,
acquired assets located in 20 retail stores operated under the Screeem! and Jean
Country names, as well as the leases for such stores, from American Retail
Enterprises, L.P. ("ARE") and certain affiliates of ARE. The Company, through
its subsidiaries, acquired assets located in six additional Screeem! and Jean
Country stores, as well as the lease for those stores, in subsequent closings
held on July 17 and July 24, 1998. The Company, through its subsidiaries, also
acquired the Screeem!, Jean Country and American Rocket trademarks. The
acquisition was completed pursuant to an Asset Purchase Agreement dated June 1,
1998, as amended (the "Asset Purchase Agreement"). The purchase price for the
acquisition consisted of $10,025,000 in cash and 812,501 shares (the "Stock
Consideration") of dELiA*s Inc. common stock ("Common Stock").
Pursuant to the Asset Purchase Agreement, the Company agreed to register the
Stock Consideration for resale under the Securities Act of 1933. The Company has
registered 604,167 shares of the Stock Consideration and is required to register
the remaining 208,334 shares by January 10, 2000.
In addition, pursuant to the Asset Purchase Agreement, in the event that the
mean of the intraday high and low bid prices for the Common Stock for the 20
consecutive trading days immediately preceding January 10, 2000 (the "18-Month
Price") is less than $18.00, the Company has agreed to issue that number of
additional shares of Common Stock that is equal to (i) the excess of (x) the
product of 208,334 shares (subject to adjustment) multiplied by $18.00 over (y)
the product of 208,334 shares multiplied by the greater of the 18-Month Price or
$10.00 divided by (ii) the 18-Month Price.
The acquired stores include 11 stores operating under the Screeem! name and
concept, as well as 15 stores currently operating under the Jean Country name
(together, the "Screeem! Business"), the majority of which the Company intends
to convert to Screeem! stores over the next 12 months. The Screeem! stores
provide a dynamic shopping experience, featuring live DJs, fashion models and
promotional appearances and events. Screeem! offers its customers progressive,
fashion-forward, unisex branded apparel focusing principally on denim and
fashion bottoms, t-shirts and tops, accessories, novelties and shoes. All of the
stores are located in major regional shopping malls in New York, New Jersey,
Connecticut, Pennsylvania and Massachusetts.
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.
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended July 31, Ended July 31,
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ............................................... 100.0 % 100.0% 100.0% 100.0%
Cost of sales............................................ 51.8 50.7 48.4 51.4
------- -------- ------- --------
Gross profit............................................. 48.2 49.3 51.6 48.6
Selling, general and administrative expenses............. 51.0 48.1 47.9 46.9
Interest income, net..................................... 1.1 1.3 1.1 1.2
------- -------- ------- --------
Income before provision for income taxes................. (1.7) 2.5 4.8 2.9
Provision for income taxes............................... (1.2) 0.7 1.6 1.0
------- -------- ------- --------
Net income .............................................. (0.5)% 1.8% 3.2% 1.9%
======= ======== ======= ========
</TABLE>
Comparison of Three Months Ended July 31, 1998 and 1997
Net Sales. Net sales increased approximately $5.4 million to $26.5 million in
the second quarter of fiscal 1998 from $21.1 million in the second quarter of
fiscal 1997. Sales results were driven by increased catalog circulation, strong
outlet store sales and the July Screeem! Business acquisition. The Company
distributed approximately the same number of catalogs in the second quarter of
fiscal 1998 as in the second quarter of fiscal 1997, although variances in the
timing of mailings render comparisons unmeaningful. Aggregate response rates
from catalogs distributed in the second quarter of fiscal 1998 declined relative
to catalogs distributed in the second quarter of fiscal 1997 as the Company (i)
broadened the distribution of its catalogs and increased its prospecting efforts
and (ii) mailed additional catalog editions to a large number of persons who had
received a prior edition of those catalogs earlier in the period. The Company
believes aggregate response rates will usually decline as it broadens the
distribution of its catalog and when it mails additional catalog editions within
the same fiscal period.
Gross Margin. Gross margin decreased to 48.2% in the second quarter of fiscal
1998 from 49.3% in the second quarter of fiscal 1997. The decrease in gross
margin as a percentage of sales was due to a higher proportion merchandise sales
through the Company's sales circulars and outlet stores.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $3.4 million, to $13.5 million
in the second quarter of fiscal 1998 from $10.1 million in the second quarter of
fiscal 1997. Selling, general and administrative expenses increased as a
percentage of net sales from 48.1% in the second quarter fiscal 1997 to 51.0% in
the second quarter of fiscal 1998. The increase was due to greater spending on
dELiA*s catalog circulation coupled with lower response rates on catalogs
mailed, as well as increased expenses associated with the Company's retail
infrastructure development and the acquisition of the Screeem! and Jean Country
stores, offset by reversal or use of a $350,000 reserve previously established
in connection with the Company's acquisition of the TSI Soccer business.
Comparison of Six Months Ended July 31, 1998 and 1997
Net Sales. Net sales increased approximately $18.8 million to $57.6 million
in the first six months of fiscal 1998 from $38.8 million in the first six
months of fiscal 1997. Sales results were driven by increased catalog
circulation, strong outlet store sales and the July Screeem! Business
acquisition. The Company distributed approximately 80% more catalogs (excluding
sales circulars) in the first six months of fiscal 1998 as in the first six
months of fiscal 1997. Aggregate response rates from catalogs distributed in the
first six months of fiscal 1998 declined relative to catalogs
11
<PAGE>
distributed in the first six months of fiscal 1997 as the Company (i) broadened
the distribution of its catalogs and increased its prospecting efforts and (ii)
mailed additional catalog editions to a large number of persons who had received
a prior edition of those catalogs earlier in the period. The Company believes
aggregate response rates will usually decline when it broadens the distribution
of its catalog mails additional catalog editions within the same fiscal period.
Gross Margin. Gross margin increased to 51.6% in the first six months of
fiscal 1998 from 48.6% in the first six months of fiscal 1997. The increase in
gross margin was due to a greater proportion in the earlier part of the period
of higher-margin apparel sales from the dELiA*s catalog in relation to
lower-margin soccer-related merchandise through the TSI soccer catalog as well
as lower markdowns and better recovery on discounted sales through the Company's
liquidation outlets. This increase was offset by a higher proposition of
merchandise sales through these liquidation channels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $9.4 million, to $27.6 million
in the first six months of fiscal 1998 from $18.2 million in the first six
months of fiscal 1997. Selling, general and administrative expenses increased as
a percentage of net sales from 46.9% in the first six months of fiscal 1997 to
47.9% in the first six months of fiscal 1998. The increase was due to greater
spending on dELiA*s catalog circulation coupled with lower response rates on
catalogs mailed, as well as increased expenses associated with the Company's
retail infrastructure development and the acquisition of the Screeem! and Jean
Country stores.
Interest Income, Net. Interest income, net, increased approximately $160,000
to $641,000 in the first six months of fiscal 1998 from $481,000 in the first
six months of fiscal 1997. The increase in interest income, net, was primarily
due to the Company's investment of the net proceeds from its 1997 follow-on
public offering of Common Stock, which proceeds were received in the second
quarter of fiscal 1997.
Selected Quarterly Results of Operations
The following table sets forth certain unaudited statements of operations
data for the six quarters ended July 31, 1998, as well as such data expressed as
a percentage of the Company's total net sales for the periods indicated. This
data has been derived from unaudited financial statements that, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of such information when read in
conjunction with the Company's annual audited financial statements and notes
thereto.
12
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------
Fiscal 1998 Fiscal 1997
----------------- -------------------------------------------
July 31, Apr. 30, Jan. 31, Oct. 31, July 31, Apr. 30,
1998 1998 1998 1997 1997 1997
---- ---- ---- ---- ---- ----
(in thous ands)
<S> <C> <C> <C> <C> <C> <C>
Net sales............. $26,451 $31,194 $42,909 $31,357 $21,086 $17,697
Cost of sales......... 13,712 14,223 21,397 16,514 10,678 9,278
------- ------- ------- ------ -------- -------
Gross profit.......... 12,739 16,971 21,512 14,843 10,408 8,419
Selling, general and
administrative
expenses........... 13,499 14,092 17,007 12,684 10,148 8,048
Merger-related costs -- -- 1,614 -- -- --
Interest income, net.. 300 341 382 338 268 213
------- ------- ------- ------- ------- -------
Income (loss) before
provision (benefit) for
income taxes......... (460) 3,220 3,273 2,497 528 584
Provision (benefit) for
income taxes......... (317) 1,220 1,183 870 141 262
------- ------- ------- ------- ------- -------
Net income (loss) .... $ (143) $ 2,000 $ 2,090 $ 1,627 $ 38 $ 322
======= ======= ======= ======= ======= =======
<CAPTION>
Percentage of Net Sales
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales......... 51.8 45.6 49.9 52.7 50.7 52.4
------- ------- ------- ------- ------- -------
Gross profit.......... 48.2 54.4 50.1 47.3 49.3 47.6
Selling, general and
administrative
expenses.......... 51.0 45.2 39.6 40.5 48.1 45.5
Merger-related costs.. -- -- 3.8 -- -- --
Interest income, net.. 1.1 1.1 0.9 1.1 1.3 1.2
------- ------- ------- ------- ------- -------
Income (loss) before
provision (benefit) for
income taxes......... (1.7) 10.3 7.6 8.0 2.5 3.3
Provision (benefit) for
income taxes......... (1.2) 3.9 2.7 2.8 0.7 1.5
------- ------- ------- ------- ------- -------
Net income (loss)..... (0.5)% 6.4% 4.9% 5.2% 1.8% 1.8%
======= ======= ======= ======= ======= =======
</TABLE>
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 second quarter and higher in the fourth
quarter (which includes the holiday season) of each fiscal year. The Company's
quarterly results may fluctuate as a result of numerous factors, including the
timing, quantity and cost of catalog mailings, responses to those 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
integration of acquisitions, the incurrence of other operating costs and factors
beyond the Company's control, such as general economic conditions and actions of
competitors. 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
Cash used in operations in the first six months of fiscal 1998 and 1997 was
$11.3 million and $2.4 million, respectively. The increase in cash used in
operations was due in part to earlier payment of certain liabilities, including
accounts payable due to inventory vendors and other vendors. The Company also
increased inventory levels at its TSI Soccer division in an efort to improve
fill rates as well as increasing inventory at dELiA*s in anticipation of greater
sales. In addition, the Company paid certain liabilities of its TSI Soccer
business earlier in fiscal 1998 than it did in fiscal 1997 in order to take
advantage of discounts.
Cash provided by investing activities in the first six months of fiscal 1998
and cash used in investing in the first six months of fiscal 1997 was $11.4
million and $25.0 million, respectively, including the sale of short-term,
investment-grade investments in fiscal 1998 and the purchase of short-term,
investment-grade investments in fiscal 1997. The Company expects to make
additional capital expenditures of approximately $3.0 million to upgrade its
management information systems in fiscal 1998. The Company also anticipates
additional capital expenditures of at least $1.0 million in fiscal 1998 for
property, plant and equipment, including leasehold improvements, office
equipment and expenditures relating to the conversion of Jean Country
13
<PAGE>
stores to Screeem! stores and the Company's warehouse and distribution
operations. See "--Results of Operations."
The Company did not engage in any significant cash financing activities in
the first six months of fiscal 1998. Cash flows from financing activities in the
first six months of fiscal 1997 were $20.9 million as a result of a public
offering of common stock.
Cash and cash equivalents increased by approximately $118,000 to $4.6 million
at July 31, 1998 from $4.5 million at January 31, 1998.
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 $5.0 million. The interest rate on
the line of credit is the lending bank's prime rate (8.5% at July 31, 1998). The
Company has not drawn on this line. The Company is currently renegotiating this
line of credit. Outstanding letters of credit established to facilitate
international merchandise purchases at July 31, 1998 were $3,502,000.
The Company believes that its cash on hand, together with cash generated by
operations, will be sufficient to meet its capital and operating requirements
through at least fiscal 1998. The Company's future capital requirements,
however, depend on numerous factors, including, without limitation, the success
of its marketing, sales and distribution efforts. The Company may choose to
borrow funds in fiscal 1999 in order to finance the opening of new stores. There
can be no assurance that such funds 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.
Year 2000
The Company recognizes that its operations may be negatively affected by Year
2000 software issues. The Company is heavily dependent upon complex computer
software and systems for all phases of its operations. Many existing computer
programs and systems use only two digits to identify a year in the date field.
These programs and systems were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000.
Accordingly, the Company has prepared a Year 2000 compliance program which
involves (i) identifying the material operating software and systems on which
the Company depends (whether used by the Company or by the Company's service
providers), (ii) obtaining written warranties or assurances from third party
software and systems vendors and service providers, (iii) monitoring the
compliance efforts of such vendors and service providers and (iv) testing its
material operating software and systems.
All of the Company's material operating software and systems, including
telecommunications and warehouse systems, in addition to information technology
systems, were developed by and are supported by third party vendors. Each of the
third party vendors of the Company's mission-critical operating software have
provided written warranties or assurances to the Company that such software will
not be affected by the change in the century. The majority of the third party
vendors of the Company's other material operating software and systems have also
provided such warranties or assurances that such software and systems will be
compliant by December 31, 1998. The Company expects to begin performing tests of
all its material operating software and systems to verify the assurances given
by these third party vendors and ensure Year 2000 compliance later in fiscal
1998. However, there can be no assurance that all of the Company's material
operating software and systems will be in Year 2000 compliance.
In addition to the operating systems and software the Company uses directly,
the Company's operations are also dependent upon the performance of operating
software and systems used by its
14
<PAGE>
significant service providers, including providers of financial,
telecommunications and parcel delivery services. The Company has contacted each
of its significant service providers and has obtained written assurances from
the majority of such providers that the providers' relevant operating software
and systems are in Year 2000 compliance or will be by December 31, 1998. The
Company is monitoring the status of all its significant service providers' Year
2000 compliance efforts to minimize the risk of any material adverse effect on
the Company's operations resulting from compliance failures. However, there can
be no assurance that the Company's service providers have, or will have,
operating software and systems that are in Year 2000 compliance.
A software or systems Year 2000 compliance failure with respect to the
Company's internal systems and software, or that of third party service
providers, could prevent the Company from being able to process or fulfill
orders from its customers, or could disrupt the Company's financial and
management controls and reporting systems. Any such failure, if not quickly
remedied, would have a material adverse effect on the Company. Therefore, the
Company is developing contingency plans with respect to such systems and
software.
In addition, most purchases of merchandise from the Company are made with
credit cards, and the Company's operations may be materially adversely affected
to the extent its customers are unable to use their credit cards due to Year
2000 issues that are not rectified by the customers' credit card vendors.
The Company presently believes that the cost of its Year 2000 program will
not have a material adverse effect on the Company, however, given the Company's
dependence on third party software and system vendors and service providers and
on its customers' vendors, there can be no assurance to that effect.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
130 establishes standards for reporting and display of comprehensive income. The
adoption of SFAS No. 130 as of February 1, 1998 did not have an effect on the
Company's financial statements or disclosure as the Company has no reconciling
items. Therefore net income and comprehensive income are the same.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that public companies
report certain information about operating segments in their annual financial
statements and in condensed financial statements of interim periods issued to
shareholders. This statement also requires that public companies report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The Company is currently reviewing the
impact of this statement on its current level of disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. This statement standardizes the
disclosure requirements for pension and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. The Company has determined that
the adoption of this new standard will not have a material effect on the
Company's disclosure for all periods presented.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, which is effective for fiscal
years beginning after June 15, 1999, requires the Company to recognize all
derivatives on the balance sheet at fair value.
15
<PAGE>
The Company has determined that the adoption of this new standard will not have
a material effect on the Company's financial statements or disclosure for all
periods presented.
16
<PAGE>
PART II
OTHER INFORMATION
Item 1. 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 2. Changes in Securities
Recent Sales of Unregistered Securities
On July 10, July 17 and July 24, 1998, the Company issued an aggregate of
812,501 shares of Common Stock to ARE as partial consideration for the Screeem!
Business. See "Part I--Item 1--Management's Discussion and Analysis of Financial
Condition and Results of Operation--Overview." The issuance was exempt from the
provisions of Section 5 of the Securities Act of 1933 pursuant to Section 4(2)
thereof and/or Regulation D promulgated thereunder.
Use of Proceeds from Registered Securities
On December 18, 1996, the Securities and Exchange Commission declared
effective the Company's Registration Statement (No. 333-15153) on Form S-1, as
then amended, relating to the Company's initial public offering of 2,702,500
shares of Common Stock (of which 2,052,500 were offered by the Company.)
The net offering proceeds to the Company after deducting the expenses were
approximately $19,845,000.
From December 24, 1996 until January 31, 1998, the net offering proceeds were
invested in interest-bearing, investment-grade securities. During the first six
months of fiscal 1998, the Company applied all of the net offering proceeds as
follows: (1) $10,025,000 as partial consideration for the Screeem! Business and
(2) $9,820,000 for working capital.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on
July 14, 1998, for the purpose of: (i) electing two directors, (ii) approving
the Company's Amended and Restated 1996 Stock Incentive Plan and (iii) ratifying
the selection of auditors for the current fiscal year. Proxies were solicited by
management pursuant to Regulation 14 under the Securities Exchange Act of 1934.
There was no solicitation in opposition to management's proposals and nominees,
and all such proposals were adopted and nominees elected.
17
<PAGE>
With respect to the re-election of Mr. Sidney S. Kahn and Ms. Geraldine
Karetsky as directors of the Company, the number of shares of Common Stock
voted was as follows:
Director For Withheld Abstain
-------- --- -------- -------
Sidney S. Kahn 12,263,690 41,935 100
Geraldine Karetsky 12,263,790 42,035 100
The terms of office of directors Christopher C. Edgar, S. Roger Horchow,
Stephen I. Kahn, and Joseph J. Pinto continued after the meeting.
With respect to the approval of the Amended and Restated 1996 Stock
Incentive Plan, the number of shares of Common Stock voted was as follows:
For Withheld Abstain
--- -------- -------
9,682,454 1,071,263 9,625
With respect to the ratification of Deloitte & Touche LLP as independent
auditors for the current fiscal year, the number of shares of Common Stock voted
was as follows:
For Withheld Abstain
--- -------- -------
12,319,390 860 5,475
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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))
18
<PAGE>
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 Amended and Restated 1996 Stock Incentive Plan (incorporated by
reference to the Company's Schedule 14A filed on June 12, 1998)
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 Transitional Services Agreement, dated as of July 10, 1998, among
American Retail Enterprises, L.P., Screeem Inc., and the Company
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))
10.11 [omitted]
10.12 Lease Agreement dated April 25, 1997 between the Company and
Keystone Distribution Center, Inc. (incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997)
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 (incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997)
10.14 Agreement, dated October 7, 1997, between the Company and The
Rector, Church Wardens and Vestrymen of Trinity Church in the City
of New York amending the Lease Agreement (incorporated by reference
to 10.14 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 1997)
27 Financial Data Schedule
(b) The Company filed a Current Report on Form 8-K, dated July 27, 1998,
reporting Item 5. This report contained information about the acquisition
of the Screeem! Business.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
dELiA*s Inc.
(Registrant)
Date: September 14, 1998
By: /s/ Stephen I. Kahn
----------------------
Stephen I. Kahn
Chairman of the Board, President and
Chief Executive Officer
By: /s/ Evan Guillemin
----------------------
Evan Guillemin
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
20
<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 Amended and Restated 1996 Stock Incentive Plan (incorporated by reference
to the Company's Schedule 14A filed on June 12, 1998)
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 Transitional Services Agreement, dated as of July 10, 1998, among American
Retail Enterprises, L.P., Screeem Inc., and the Company
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))
10.11 [omitted]
10.12 Lease Agreement dated April 25, 1997 between the Company and Keystone
Distribution Center, Inc. (incorporated by reference to Exhibit 10.12 to
the Company's Annual Report on Form 10-K for the fiscal year ended January
31, 1997)
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 (incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended January 31,
1997)
21
<PAGE>
10.14 Agreement dated October 7, 1997 between the Company and The Rector, Church
Wardens and Vestrymen of Trinity Church in the City of New York amending
the Lease Agreement (incorporated by reference to 10.14 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31,
1997)
27 Financial Data Schedule
22
EXHIBIT 10.8
TRANSITIONAL SERVICES AGREEMENT
TRANSITIONAL SERVICES AGREEMENT, dated as of July 10, 1998, among
AMERICAN RETAIL ENTERPRISES, L.P. (the "Seller"), SCREEEM! INC. (the
"Purchaser") and DELIA'S INC. (the "Parent").
RECITALS
A. Seller, Purchaser, Parent and certain affiliates of the Seller are
parties to that certain Asset Purchase Agreement, dated as of June 1, 1998 (the
"Purchase Agreement"), pursuant to which the Seller and certain of its
affiliates are selling certain retail stores to the Purchaser. Capitalized terms
used but not defined herein have the meanings assigned to them in the Purchase
Agreement.
B. Pursuant to Section 9.7 and Section 10.9 of the Purchase Agreement,
it is a condition to the obligations of the parties under the Purchase Agreement
that the Seller, Purchaser and Parent enter into this Transitional Services
Agreement.
C. The parties hereto wish to set forth certain matters concerning the
provision of certain transitional services by the Seller and certain of its
Affiliates to the Purchaser after Closing.
AGREEMENT
Now therefore, in consideration of the premises and the mutual
agreements contained herein, the Seller, the Purchaser and the Parent agree as
follows:
Section 1. Transitional Services to be Provided. During the Term (as
defined in Section 4 below), Seller hereby agrees to provide to the Purchaser,
through personnel of Seller, or at Seller's discretion, the personnel of
Affiliates of Seller, the distribution, warehouse and other administrative
services substantially similar to those services that the Seller provided to the
Purchased Stores in the ordinary course of business immediately prior to the
Closing (other than the services provided by the Persons set forth on Schedule
2.4-A and Schedule 2.4-D to the Purchase Agreement), including the services set
forth on Schedule I to this Agreement (the "Transitional Services"); provided,
however, that the Seller may change the exact manner in which it provides such
services so long as the Seller makes such change with respect to all of the
retail stores that its owns, provided, further, however, that in no event shall
the Seller be required to provide such Transitional Services to any stores other
than (a) the Purchased Stores, and (b) up to ten other retail stores operated by
the Purchaser under the SCREEEM! or JEAN COUNTRY names, which stores are located
within New York, New
<PAGE>
Jersey, Connecticut, Pennsylvania and/or Massachusetts; and provided, further,
that the Seller shall not be required to provide any greater level of service
under this Agreement than the Seller provided to the Purchased Stores
immediately prior to the Closing (except with respect to control and accounting
procedures reasonably necessary for the operation of separately- operated and
controlled entities). Under no circumstances shall the Seller (or any of its
Affiliates) be required or obligated to provide the Purchaser the services of
outside professionals or consultants in fulfilling the obligations of the Seller
set forth herein except to the extent that such outside professionals or
consultants provided services to the Seller with respect to the Purchased
Business prior to the Closing.
Section 2. Fees for Transitional Services; Payment. In consideration
for the Transitional Services provided by the Seller to the Purchaser, the
Purchaser shall pay to the Seller the fees set forth on Schedule II, which
payments shall be made by the Purchaser to the Seller within 30 days of delivery
of invoices therefor by Seller to Purchaser.
Section 3. Purchase and Sale of Merchandise.
(a) Purchase and Sale of Merchandise. In addition to the Transitional
Services to be provided by the Seller to the Purchaser, the Purchaser agrees to
purchase from the Seller, and the Seller agrees to sell to the Purchaser, at
Seller's cost, current merchandise that (i) is the subject of purchase orders
with respect to the Purchased Stores which have been placed in the ordinary
course of the Seller's business but as to which delivery has not been made as of
the Closing Date, and (ii) has been purchased for the Purchased Stores in the
ordinary course of business that is in the Seller's warehouse as of the Closing
Date and has not yet been shipped to the Purchased Stores (such merchandise
referred to in (i) and (ii) being the "Merchandise").
(b) Payment for Merchandise. The Seller shall invoice the Purchaser for
such Merchandise. Purchaser shall pay the Seller for such Merchandise within 15
days of receipt of the invoice therefor from Seller; provided, however, that if
the Purchaser is not satisfied with the quality of the Merchandise, the Seller
and the Purchaser will use their respective commercially reasonable efforts to
obtain a return authorization with respect to such Merchandise from the vendor.
(c) Assignment of Rights. In connection with any sale of Merchandise
pursuant to this Section 3, Seller shall, to the extent permitted, assign to
Purchaser its rights under the contracts, warranties, representations and
guarantees made by suppliers, manufacturers and contractors pursuant to which
the Seller purchased such Merchandise. In the event any such contract is not
assignable, Seller shall cooperate with the Purchaser, to the extent reasonably
practicable, to ensure that the Purchaser enjoys the benefits of the
representations, warranties and covenants made by the vendor under such
contract.
-2-
<PAGE>
Section 4. Term; Termination.
(a) Term. The term of this Agreement shall commence on the Closing
Date, and shall continue until March 31, 1999; provided, however, that the
Purchaser may extend this Agreement until the first anniversary of the Closing
Date by providing the Seller with written notice at least 60 days prior to March
31, 1999 of the Purchaser's intention to extend the term; and provided, further,
that the parties may extend the term of this Agreement beyond the first
anniversary of the Closing Date if the parties mutually agree to do so at least
60 days prior to the first anniversary of the Closing Date (such term, as so
extended, being the "Term"). Notwithstanding anything to the contrary contained
herein, the Seller shall not be obligated to perform any of the services set
forth under the heading "Administrative Services" on Schedule I after December
31, 1998; provided, however, that the Purchaser and Seller may mutually agree to
extend such period until March 31, 1999 if the Purchaser and the Seller mutually
agree (after negotiating reasonably in good faith) on the fee to be paid by the
Purchaser to the Seller for such Administrative Services during such 3 month
period; and provided, further, however, that the Seller shall not be required to
agree to such an extension to the extent the Seller is unable (in accordance
with the terms of the lease agreement or other agreement governing the use of
the Seller's Long Island Facility, or such successor headquarters facility of
the Seller) to reasonably accommodate the Purchaser's employees as required
pursuant to Section 10(a) hereof.
(b) Termination. Notwithstanding any provision of this Agreement to the
contrary, either the Seller or the Purchaser may immediately terminate this
Agreement upon the material breach of this Agreement by the other party hereto,
which breach is not cured after 10 days notice thereof. The Purchaser may
terminate this Agreement at any time and for any reason upon 30 days prior
notice to the Seller.
(c) Effect of Termination. Any termination of this Agreement under this
Section 3 shall not affect the obligations of (i) the Purchaser to pay fees and
expenses accrued prior to the effective date of such termination to the full
extent provided herein, (ii) the Purchaser to purchase Merchandise under Section
3 or (iii) the parties to indemnify each other pursuant to Section 6 of this
Agreement.
Section 5. Standard of Care. The parties acknowledge and agree that (a)
the Seller is not in the business of providing any Transitional Services to
third parties and shall not be held to the standard of care of an entity which
is engaged in such business and (b) the Seller will provide the Transitional
Services to the Purchaser in the same manner and using the same standard of care
as the Seller currently provides such services to retail stores owned by the
Seller on the Closing Date. The parties further acknowledge and agree that the
Seller shall have no liability with respect to the provision of the Transitional
Services unless such liability is the direct result of the Seller's gross
negligence or willful misconduct in the performance of such Transitional
Services.
-3-
<PAGE>
Section 6. Indemnification.
(a) Indemnification by Parent and Purchaser. Parent and the Purchaser,
jointly and severally, shall indemnify, defend and hold harmless the Seller
Indemnified Parties promptly upon demand at any time and from time to time,
against any and all Losses arising in connection with (i) any breach or
nonfulfillment of any covenant or agreement made by the Parent or the Purchaser
in this Agreement or (ii) the provision by the Seller of the Transitional
Services to the Purchaser; provided, however, that for purposes of this Section
6(a), in the event that the Purchaser shall fail to make a payment hereunder
when due, the term "Losses" shall include interest on such unpaid amount at a
rate of 1% per month accruing from the date which is ten days after the date
such payment was due through the date on which such payment is actually made;
and provided, further, however, that the Parent and the Purchaser shall not be
responsible for any Losses of any Seller Indemnified Person that are the direct
result of such Seller Indemnified Person's gross negligence or willful
misconduct or any action outside the scope of the provisions of the Transitional
Services.
(b) Indemnification by Seller. Seller shall indemnify, defend and hold
harmless the Purchaser Indemnified Parties promptly upon demand at any time and
from time to time, against any and all Losses arising out of or in connection
with (i) any breach or nonfulfillment of any covenant or agreement made by the
Seller in this Agreement or (ii) the gross negligence or willful misconduct of
the Seller in connection with the provision by the Seller of the Transitional
Services to the Purchaser.
(c) Reduction for Insurance. The amount which the Seller, the Purchaser
or the Parent is required to pay to, or for the benefit, of an Indemnified Party
under this Section 6 will be reduced (including, without limitation,
retroactively) by any insurance proceeds which may reasonably be recovered by or
on behalf of the Indemnified Party in reduction of the related Loss. Amounts
required to be paid, as so reduced, are hereinafter referred to as "Transitional
Indemnity Payment". If an Indemnified Party has received, or if an Indemnifying
Party has paid on its behalf, Transitional Indemnity Payment in respect of a
Loss and subsequently receives, directly or indirectly, insurance proceeds in
respect of such Loss, then such Indemnified Party will promptly pay to the
Indemnifying Party the amount of such insurance proceeds, or, if less, the
amount of the Transitional Indemnity Payment.
Section 7. Liquidated Damages.
The parties hereto agree that in the event the quality of Seller's
performance hereunder falls below the performance standards set forth in
Schedule III hereto (the "Performance Standards"), Purchaser would be damaged
and the amount of such damages would not be
-4-
<PAGE>
susceptible to calculation. Accordingly, the parties hereto agree that the
liquidated damage amounts set forth in Schedule III, subject to the procedures
and limitations set forth therein, are fair and equitable under the
circumstances, and the parties agree to their terms as Purchaser's and Parent's
sole remedy for Seller's failure to comply with the Performance Standards;
provided, however, that the provisions of this Section 7 solely as they relate
to the Receiving Standard (as defined in Schedule III) shall not apply to
shipments which the Purchaser or Seller deem to be "problem" shipments.
Section 8. Escrow. In order to secure the obligations of the Seller to
indemnify the Purchaser Indemnified Parties under Section 6(b) of this
Agreement, Parent will deposit the Additional Shares with the Escrow Agent, to
be held by the Escrow Agent in accordance with the terms of the Escrow
Agreement. Such Additional Shares will be deposited into an account to be
managed and paid out by the Escrow Agent in accordance with the terms of the
Escrow Agreement. To the extent that an indemnification claim is made against
such account, the number of shares of Parent Common Stock to be disbursed shall
be determined by dividing the dollar amount of such claim (as finally determined
in accordance with the provisions of the Escrow Agreement) by the Current Price.
Section 9. Parent Guaranty. Parent hereby unconditionally and
irrevocably guarantees the due and prompt payment, performance and discharge of
all of the covenants, obligations and liabilities of the Purchaser under this
Agreement. This is a guarantee of payment and not merely collectibility. Parent
waives any defense to payment and performance of any kind (whether due to
Purchaser's insolvency, the modification of the obligations guaranteed or any
other event, act, omission or occurrence or legal theory which would otherwise
operate to release a guarantor or surety) and shall remain fully obligated until
the Seller has indefeasibly received payment and performance in full.
Section 10. License to Use Seller's Facilities.
(a) Management Space. Until January 1, 1999, or such earlier date as
the parties may mutually agree, to the extent permitted under the lease
agreement with respect to such property, the Seller shall permit the Purchaser
to use a portion of its Long Island, New York business headquarters (the "Long
Island Facility") as office space for Post-Closing Employees. That portion shall
be the same portion, to the extent reasonably practicable, which such
Post-Closing Employees used prior to becoming employees of the Purchaser.
(b) Distribution Space. To the extent permitted under the lease
agreement with respect to such property, the Seller shall permit the Purchaser
to use that portion of the Seller's New Jersey warehouse and distribution
facility (the "New Jersey Facility") necessary for the distribution and
warehouse services described hereunder with respect to the Purchaser's
inventory.
-5-
<PAGE>
(c) Compliance with Leases. Neither the Purchaser nor the Parent shall
take any action or fail to take any action in connection with its use of the
portions of the Long Island Facility and the New Jersey Facility which might
result in the Seller's violating any of the terms or conditions of Seller's (or
its affiliates) lease agreement with respect to such facilities. Unless required
by applicable law, or the applicable lease agreement, the Seller shall not take
any action or fail to take any action in connection with its leasehold interest
in the Long Island Facility and the New Jersey Facility which might result in
any interference with the Purchaser's right to use portions of such facilities
as provided herein.
Section 10. Books and Records. Each party shall maintain correct and
complete books and records relating to its performance hereunder and shall
provide the other party full access to such books and records at reasonable
times and upon reasonable notice.
Section 11. Miscellaneous. The provisions of Sections 15.3, 15.5, 15.6,
15.7, 15.8, 15.10 and 15.12 of the Purchase Agreement are hereby incorporated
into and made a part of this Agreement as if herein set forth.
Section 12. Force majeure. No delay or failure by a party in the
performance of any of its obligations under this Agreement shall be a deemed a
breach of this Agreement or create any penalty or liability, to the extent that
delay or failure was caused by an event or events beyond the reasonable control
of that party, including but not limited to the following events, each of which
shall be considered beyond the control of each party: (a) fire, explosion,
breakdown or failure of machinery, strike, lock-out, labor dispute, casualty or
accident, epidemic, cyclone, flood, drought or failure in whole or in part of
transportation, communication or power; (b) war, revolution, civil commotion,
blockade or embargo; or (c) any law, order, proclamation, injunction,
regulation, ordinance, demand or requirement of any Governmental Authority that
does not arise from any act or omission of the failing party. If any event
beyond the reasonable control of a party occurs, the party whose performance is
affected by that event shall promptly give notice of the event to the other
party and shall be temporarily excused from performing those obligations that
the event makes it impracticable to perform.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
AMERICAN RETAIL ENTERPRISES, L.P.
By: Landmark Pants Corp., one of its general
partners,
By: ________________________________
Name:
Title:
SCREEEM! INC.
By: ________________________________
Alex S. Navarro
Senior Vice President
DELIA'S INC.
By: ________________________________
Alex S. Navarro
Senior Vice President
-7-
<PAGE>
SCHEDULE I
to
TRANSITIONAL SERVICES AGREEMENT
Transitional Services
A. Administrative Services
Seller shall provide the following services:
1. Services to be Provided
1. Data Processing -- This service contemplates the receipt, processing
and storage of data. It also includes the preparation and
dissemination of reports.
1. Sales
1. Poll stores daily and post sales by store to sales journals and
LRMS merchandise system.
2. Follow up with stores that do not poll and post sales to sales
journal and LRMS merchandise system.
3. Prepare selling reports on a daily and weekly basis (see
Exhibits).
2. Merchandise Systems
1. Process the entry and maintenance of purchase order files daily.
2. Download SKU files and prices daily to store systems to maintain
price look-up files.
3. Download retail price changes daily to maintain price look-up
files on store registers.
4. Post daily sales to merchandise system.
5. Process Levilink transactions as they occur.
6. Process automatic replenishment system daily to replenish store
inventories from warehouse inventory.
7. Maintain SKU files.
8. Provide files to Planning and Distribution Department to maintain
Arthur files.
9. Prepare merchandise selling reports weekly (see Exhibits).
10. Maintain off-premises back-up computer tape daily.
11. Post relevant information to the General Ledger.
3. Help Desk
1. Provide direct phone and beeper service to handle problems from
store personnel relating to POS equipment and software.
2. Place service calls to IBM or dispatch our own personnel where
appropriate.
-8-
<PAGE>
2. Accounts Payable
1. Maintain vendor file.
2. Receive invoices for merchandise and purchased.
3. Verify goods have been received.
4. Verify terms and amount to be paid.
5. Draw checks on Delia's check stock.
6. Audit checks prior to mailing.
7. Deliver checks and invoices to Delia's for approval.
8. Answer inquiries from vendors about status of account, invoices
and disputes.
9. Answer inquiries from factors concerning status of account,
invoices and disputes.
10. Maintain file of paid invoices and copies of checks issued.
3. Accounting
1. Maintain General Ledger.
2. Maintain Sales Journal.
3. Maintain Payable Journal.
4. Close books monthly without physical inventory.
5. Close books quarterly with physical inventory.
6. Review daily sales exception reports and make correcting entries.
7. Transmit General Ledger information to Delia's monthly.
8. Reconcile credit card remittances.
9. Prepare sales tax remittance reports.
10. Verify rent invoices -- Rent, CAM, R/E Taxes, etc.
11. Process monthly rent payments.
12. Draw checks on Delia's check stock.
4. Human Resources
1. Maintain permanent Personnel Files on all employees.
2. Obtain necessary information on new hires such as:
1. Signed application
2. Form I-9
3. Form W-4
4. Insurance Application
5. 401(K)/Profit Sharing Plan information
3. Process payroll weekly through ADP (checks to be drawn on Delia's
account).
4. Collect time sheets and test check.
5. Handle employee inquiries.
6. Handle employee disputes.
7. Maintain files on terminated employees.
8. Provide reports to Delia's to assist them in making filings with
government agencies.
-9-
<PAGE>
5. Loss Prevention
1. Audit stores operations in accordance with Audit report shown in
Exhibits.
2. Conduct interviews of employees in connection with high shrink or
suspected theft.
3. After consultation with Delia's, prosecute suspected thieves.
4. Conduct loss prevention training for store employees.
5. Maintain electronic Loss Prevention equipment.
6. Arrange for installation of new equipment in new stores.
6. Planning & Distribution
1. Prepare seasonal merchandise plans by merchandise classification
and by store.
2. Create and maintain open-to-buys.
3. Produce weekly business reports (see Exhibits).
4. Maintain Arthur database.
5. Coordinate the transfer of merchandise between stores.
6. Work with buyers to distribute merchandise on new orders to
stores.
7. Fill in store inventories from warehouse inventory.
7. Buying Department
1. Buyer support personnel to assist buyers with administrative
functions:
1. Creating purchase orders
2. Entering purchase orders into LRMS
3. Answering vendor inquiries
4. Handling follow-up with vendors
5. Processing mark-downs/mark-ups
6. Process information for vendor ticketing
B. Distribution Services
Seller shall provide the following services:
1. Case Pack Distribution -- This service contemplates the receipt, processing
and distribution of full cases. The services include but are not limited to
the following:
8. Tasks:
0. Receive merchandise from truckers and other freight companies.
2. Refuse shipments where there are no valid purchase orders on
file or where shipments are received prior to the purchase order
start date or subsequent to the purchase order in-house cancellation
date on the applicable Purchase Order, unless authorized by Delia's,
in writing, to accept the merchandise.
3. Check in merchandise against Delia's "Receiving Worksheet."
4. Note all discrepancies on Receiving Manifest and inform
Delia's daily.
-10-
<PAGE>
5. Verify that the number of pieces in each carton corresponds to the
applicable Purchase Order and that the merchandise matches the
description on the Purchase Order.
6. Apply Delia's price tickets where applicable to garments pursuant to
specifications contained in "Appendix A."
7. Place merchandise into stock.
8. Store merchandise.
9. Update Delia's automated Inventory Management System to show the
merchandise received.
10. Pick full cases of merchandise in accordance with work order or pick
ticket instructions.
11. Place shipping labels on cartons.
12. Prepare a Shipping Manifest to accompany each shipment.
13. Ship all outbound orders via UPS or other freight carriers agreed to
in writing by the parties.
14. Present all packing slips, invoices and receiving reports to Delia's
daily, showing verification of the actual goods received.
2. Pick and Pack Prepacks -- This service contemplates the receipt, processing
and distribution of prepacks which will be enclosed in master cartons. (If
prepacks are broken open in carton, or broken down to ticket, they will be
reassembled into prepacks.)
1. Tasks:
1. Same as Case Pack Distribution except that Warehouser will open
cases and process individual prepacks.
3. Single SKU Pull -- This service contemplates the receipt, processing and
distribution of individual garments.
1. Tasks:
1. Same as Case Pack Distribution except merchandise will be
received in master cartons and will be picked, a single garment
at a time.
4. Vendor Returns/Damages -- Warehouser shall, upon written instructions from
Delia's, return merchandise to vendors.
1. Tasks:
1. Vendor Returns and Damages.
1. Receive written instructions from Delia's to return
merchandise to vendors.
2. Receive merchandise from stores to return to vendors, if
applicable.
3. Prepare merchandise to be returned.
4. Pack merchandise in cartons.
5. Solicit return authorizations from vendors where applicable.
6. Ship merchandise to vendors.
2. Materials.
1. Packaging Materials will be supplied by Warehouser.
2. Ticketing equipment and materials will be supplied by
Warehouser.
3. Shipping Labels will be supplied by Warehouser.
4. Other materials will be supplied by Warehouser.
-11-
<PAGE>
SCHEDULE II
to
TRANSITIONAL SERVICES AGREEMENT
Fees
I. Fees for Administrative Services:
$200,000 for the six month period following the Closing.
II. Fees for Distribution Services:
1. From Closing until March 31, 1999 -- Monthly retail sales divided
by an assumed retail price of $35.00 per unit and the quotient
multiplied by $0.35.
2. From April 1, 1999 until the first anniversary date of the
Closing -- Monthly retail sales divided by an assumed retail
price of $35.00 per unit and the quotient multiplied by $1.00.
3. After the first anniversary date of the Closing -- A price to be
negotiated by the parties.
-12-
<PAGE>
SCHEDULE III
to
TRANSITIONAL SERVICES AGREEMENT
Performance Standards and Liquidated Damages
1. Performance Standards
1. Seller shall enter the receipt of Purchaser inventory into its MIS
system on average within five (5) business days of delivery thereof to the New
Jersey facility such that the inventory is ready to be picked, packed and
shipped (e.g., inventory delivered on Monday must be entered by Friday) (the
"Receiving Standard").
2. Seller shall not lose (i.e., shrinkage) in excess of 1% (measured by
cost of inventory shipped from the warehouse) of the Purchaser's inventory (the
"Inventory Loss Standard").
3. Seller shall ship Purchaser inventory to the Purchaser's stores
within three business days of written or electronic instructions for such
delivery, that is three business days for pick, pack and ship (the
"Pick/Pack/Ship Standard").
4. With respect to payments to third parties for which Seller is
responsible for handling as part of this Agreement, Seller shall cause timely
payment of all amounts owed by the Purchaser to third parties such that no late
fees or interest charges are imposed by third parties (the "Timely and Accurate
Payment Standard").
2. Liquidated Damages.
The Seller shall be liable for the following amounts as liquidated
damages in the event of a failure to meet the Performance Standards set forth
above, provided, however, that no such damages shall become payable unless and
until the aggregate amount of liquidated damages in any Measurement Period
(defined below) exceeds $100,000:
1. For failures under the Receiving Standard: $25,000 for each day by
which the monthly average time to perform the service in A.1 exceeds five
business days. Performance under this standard shall be determined monthly.
2. For failures under the Inventory Loss Standard: 100% of the cost of
such lost inventory (in excess of 1%), performance under this standard shall be
determined at the end of the term of the Agreement.
3. For each day's failure to meet the Pick/Pack/Ship Standard: 5% of
the cost of such untimely delivered inventory.
-13-
<PAGE>
4. For failures under the Timely and Accurate Payment Standard; 100% of
such late fees and interest payments which are imposed by such third parties.
3. Procedures.
1. Seller's compliance with the Performance Standards shall be reviewed
by the parties at the end of each three month period (except with respect to the
Inventory Loss Standard which shall be reviewed at the end of the term of the
Agreement) (or shorter with respect to the first such period) period ending July
31, October 31, January 31 and April 30 (each, a "Measurement Period").
2. Such review shall be based on reports generated by Seller's
inventory, distribution and accounting systems, which reports shall be
presumptively conclusive (which presumption may be rebutted by either party) of
Seller's compliance or non-compliance with the Performance Standards. Seller and
the Purchaser shall jointly prepare such reports within 30 days after the end of
each Measurement Period.
3. If Seller is liable for liquidated damages with respect to a
Measurement Period, the Purchaser may deduct such amount from its fee payments
hereunder.
4. Seller shall not be liable for any liquidated damages hereunder
except to the extent the amount of liquidated damages calculated with respect to
a Measurement Period exceeds $100,000.
5. Under no circumstances shall Seller ever be liable for any
liquidated damages with respect to a Measurement Period in excess of the
aggregate fees payable with respect to such Services provided during such
Measurement Period.
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,603
<SECURITIES> 12,987
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 20,247
<CURRENT-ASSETS> 47,618
<PP&E> 11,766
<DEPRECIATION> (1,749)
<TOTAL-ASSETS> 77,347
<CURRENT-LIABILITIES> 17,654
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 58,076
<TOTAL-LIABILITY-AND-EQUITY> 77,347
<SALES> 57,645
<TOTAL-REVENUES> 57,645
<CGS> 27,935
<TOTAL-COSTS> 55,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,760
<INCOME-TAX> 903
<INCOME-CONTINUING> 1,857
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,857
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
