Filed with the Securities and Exchange Commission on May 1, 1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[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, 1998.
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.
(Exact name of registrant as specified in its charter)
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Delaware 13-3914035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value per share
(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]
The aggregate market value of common stock held by non-affiliates of the
registrant as of April 1, 1998 was $149,129,412.
The number of shares outstanding of the registrant's common stock as of
April 1, 1998 was 13,321,164.
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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<PAGE>
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, 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
in this report, including, without limitation, under the "Item 1--Business--Risk
Factors," 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.
Except as described in Note 3 to the Financial Statements, all references
in this Report to a particular fiscal year refer to the year ended January 31
following the particular year (e.g., "fiscal 1997" refers to the fiscal year
ended January 31, 1998). Unless the context requires otherwise, financial and
other data presented herein assume the TSI Merger (as defined in"Item
1--Business--Overview") was consummated as of the beginning of the earliest
period presented. See Note 3 to Notes to Financial Statements.
PART I
ITEM 1. BUSINESS.
Overview
dELiA*s Inc. (with its predecessors, "dELiA*s" or the "Company") is a
leading 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"), and, through its TSI Soccer catalog, of soccer merchandise to
Generation Y boys and girls. The Company believes that it is one of a limited
number of direct marketers distributing an apparel-based catalog (the dELiA*s
catalog) exclusively for Generation Y girls and young women and that its
selection and presentation of merchandise have contributed to a growing
recognition of dELiA*s as a Generation Y fashion resource. The dELiA*s catalog
features a 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 dELiA*s
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.
On December 10, 1997, the Company acquired TSI Soccer Corporation ("TSI")
in a transaction accounted for as a pooling-of-interests (the "TSI Merger"). TSI
is a leading direct marketer of specialty soccer merchandise and operates 13
retail stores located in Georgia, Maryland, North Carolina and Virgina. TSI
offers a wide range of soccer shoes, apparel and equipment through its TSI
Soccer catalog, retail stores and team sales force. Approximately two-thirds of
TSI's sales are made through its catalog and team sales force, and the remainder
are made through TSI's retail stores.
The Company distributed approximately 13 million catalogs in fiscal 1996
and 40 million catalogs in fiscal 1997 (including TSI Soccer catalogs but
excluding dELiA*s sales circulars). The Company plans to increase catalog
distribution to in excess of 55 million catalogs in fiscal 1998. As of January
31, 1998, the Company's proprietary database had grown to approximately 4.0
million house names, including approximately 1.3 million 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.
The Company opened its first dELiA*s outlet store in November 1997, in
Reading, Pennsylvania, and recently entered into leases for two additional
retail outlet stores in New York State which it plans to open in the second
quarter of fiscal 1998. The Company plans to open several more dELiA*s stores in
the third and fourth quarters of fiscal 1998. The Company has also tested a home
furnishings and home accessories catalog titled Contents, which targets the core
dELiA*s market of Generation Y girls and young women.
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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 56 million people and is expected to grow by 10% 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.
[Tabular representation of line chart]
HISTORICAL AND PROJECTED U.S. POPULATION OF 10 TO 24 YEAR-OLDS
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 -- 55,620
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 1997 was $120 billion. Another independent research
firm estimated that apparel and sporting goods accounted for over 40% of teen
spending on certain major categories of goods and services.
Although a variety of retailers and catalogers offer teen fashion apparel
merchandise, the Company believes that a limited number of national retailers or
catalogers caters 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.
The soccer market in the U.S. is primarily composed of Generation Y boys
and girls. Approximately 18.1 million Americans played soccer in 1996, of whom
13.4 million were under the age of 18, according to an industry trade
association study. According to the study, the number of participants increased
by 8% from 1995 to 1996, coinciding with the growing popular recognition of
suburban "soccer moms and dads" sponsoring their children's participation in
amateur and scholastic team competition. Soccer is considered to have the second
most participants of all team sports among the 6 to 11 age group, and the third
most among the 12 to 17 age group. Sixty percent of soccer participants are male
and 40% are female (although TSI customers are slightly more likely to be male
than overall participation rates).
Most soccer merchandise is sold through full-line sporting goods stores.
Lower-end, lower-margin soccer merchandise accounts for the bulk of the soccer
merchandise sold at these stores. The Company believes that annual sales of
soccer specialty merchandise, which tends to be somewhat more expensive and
higher-margin products
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than the soccer merchandise sold through full-line sporting goods stores,
presently exceed $200 million. The Company believes that between two-thirds and
three-quarters of sales of soccer specialty merchandise are made at retail
stores, and the remainder are made by direct marketers.
Growth Strategy
The Company's goal is to be the leading marketer of casual fashion apparel,
accessories and other products to Generation Y girls and young women, as well as
a leading direct marketer of apparel, sporting goods and other products to
Generation Y boys and young men, 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. The Company believes that opportunities exist
to penetrate further its target market through the increased use of catalogs.
The Company's proprietary database consisted of approximately 4.0 million house
names as of January 31, 1998, compared to a total estimated Generation Y
population of over 55 million. The Company intends to increase the number of
catalogs distributed from 40 million in fiscal 1997 to in excess of 55 million
in fiscal 1998. The Company believes it can use its proprietary database to
develop targeted mailings to specific customer segments. It also may continue to
broaden the range of products offered in its catalogs (including additional
dELiA*s-branded and/or TSI-branded products). In addition, the Company began
distributing catalogs in Japan and Canada in 1996 and will consider strategic
opportunities to increase its distribution of catalogs in these and other
international markets.
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 80 vendors. Brands currently offered through dELiA*s catalogs
include nationally recognized names, such as Vans and Paris Blues as well as
brands recognized within the teen market, including Dollhouse, Free People
(Urban Outfitters), Roxy (Quiksilver) and Tag Rag. 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 Dawls, Greed Girl (Kikwear), Penelope, Starlette,
Sugartooth, Yak Pak and 26 Red Sugar. Similarly, the TSI Soccer catalog
emphasizes the leading brands of soccer merchandise, including adidas, Nike,
Puma and Reebok, as well as soccer specialty brands such as Kappa/Lanzera,
Diadora and Uhlsport.
Build Proprietary Customer Database. The Company believes its 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 Company's catalogs 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 approximately
4.0 million house names includes approximately 1.3 million customers (as of
January 31, 1998) who have made at least one purchase in the preceding 36
months. During fiscal 1997, over 2.3 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.
Develop Complementary Product Offerings. The Company believes that the
combination of the dELiA*s brand identity, the magnitude of its proprietary
database and the strong relationships the Company has established with its
target customers through its catalogs has provided a solid platform from which
to develop complementary product offerings. In fiscal 1997, the Company tested
two new catalog titles as supplements to the dELiA*s catalog. Contents, a home
furnishings and home accessories catalog, was bound into several editions of the
dELiA*s catalog, and was tested as a standalone book. Test Kitchen, a collection
of heavily-discounted closeout goods which the Company acquired from its
vendors, was bound into the Company's holiday sales catalog. The Company
currently expects to expand distribution of both the Contents and Test Kitchen
titles in fiscal 1998, as well as to explore other new product offerings to
enable dELiA*s to further leverage its name and database to develop additional
distribution channels and complementary product offerings, including additional
catalogs (which may include a boys' apparel catalog) and other publishing
opportunities.
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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.
Develop Alternative Distribution Channels. The same combination of factors
which has allowed the Company to develop new product offerings has also enabled
the Company to develop alternative distribution channels under the dELiA*s
brand. These include the opening of additional dELiA*s stores, and the continued
development of the www.delias.com web site. The Company currently plans to open
several new dELiA*s retail outlet stores in fiscal 1998 and increase marketing
efforts of the Company's web site through the dELiA*s catalog. The Company may
also consider acquiring businesses which target Generation Y consumers through
retail stores, the internet or other distribution channels.
Invest in Customer Service and Fulfillment Infrastructure. During fiscal
1996 and 1997, the Company made significant investments in its 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 employees in these
operations from approximately 315 on February 1, 1997 to approximately 480 on
January 31, 1998. 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. In addition,
in June 1997, the Company opened a new warehouse and fullfillment center in
Hanover, Pennsylvania. The Company made substantial investments in property and
equipment in fiscal 1997 and is likely to increase the space in which it
operates and make significant additional capital expenditures on both equipment
and systems software in fiscal 1998 to accommodate the Company's growth.
The dELiA*s Catalog
Merchandising and Marketing. The dELiA*s catalog 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
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 dELiA*s catalog features 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 sales in fiscal 1997 represented by
each category.
<TABLE>
<CAPTION>
Percentage of Sales
Product Category (through January 31, 1998)
- ----------------------------------------------- ---------------------------
<S> <C>
Apparel .............................. 75.2%
Footwear ............................. 13.9%
Accessories .......................... 7.5%
Cosmetics ............................ 1.7%
Home Furnishings and Home Accessories 1.7%
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100.0%
</TABLE>
In the fall of 1995, the Company began to market products under the
dELiA*s brand name. In 1997, the Company introduced products under the Spill,
10 Speed, Twink, Bellyflop and Tiny Planet labels. Currently,
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dELiA*s-branded products (together with Spill, 10 Speed, Twink, Bellyflop and
Tiny Planet products) consist primarily of cosmetics, t-shirts and footwear.
Approximately 30% of the Company's sales in fiscal 1997 from its 1997 dELiA*s
catalogs was attributable to these 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
80 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 Vans and Paris Blues as well as brands recognized within the teen
market, including Dollhouse, Free People (Urban Outfitters), Roxy (Quiksilver)
and Tag Rag. 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 Dawls, Greed Girl
(Kikwear), Penelope, Starlette, Sugartooth, Yak Pak and 26 Red Sugar. No vendor
accounted for more than 9% of sales generated by fiscal 1997 dELiA*s catalogs.
However, 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 37% of the sales generated by fiscal 1997 dELiA*s
catalogs were of products the Company believes were manufactured outside the
United States.
Catalog Design. 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
feature teen models whose expressions and poses convey the dELiA*s attitude. The
catalogs are filled with colorful, eye-catching layouts and creative "catch
phrases."
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.
Publishing. In fiscal 1997, the Company published eight editions of the
dELiA*s catalog. The Company anticipates publishing nine catalog editions in
fiscal 1998. A typical dELiA*s catalog, which follows a magazine-type format,
contains 48 to 72 pages and approximately 950 stock-keeping units ("SKUs"). The
Company's four principal seasonal catalogs, as well as supplemental editions,
are mailed to persons listed in the Company's proprietary database, as well as
to persons from rented lists. In addition, the Company arranges for bulk
distribution of its catalogs on college campuses. In fiscal 1997, the Company
mailed three sale circulars. These circulars featured over 200 SKUs. The Company
may from time to time in the future mail additional sale circulars.
The Company distributed in excess of 30 million dELiA*s catalogs in fiscal
1997 and intends to distribute in excess of 45 million in fiscal 1998. The
Company believes it can leverage its proprietary database to develop additional
targeted mailings to specific customer segments, and may expand its strategy of
more frequent mailings of supplemental catalogs to repeat customers.
The Company began to distribute dELiA*s catalogs in Japan in fiscal 1996
and increased its distribution of catalogs in Japan in fiscal 1997. The Company
began to distribute dELiA*s catalogs in Canada in fiscal 1997 and is exploring
other international markets.
TSI Soccer
Merchandising and Marketing. The TSI Soccer catalog and retail stores offer
a full range of soccer merchandise, including footwear, apparel and equipment,
almost all of which consists of products from the leading suppliers of athletic
footwear and apparel, as well as manufacturers of well-known specialty brands.
These leading suppliers, including adidas, Nike, Reebok and Puma, spend heavily
to market their products through targeted advertising and sponsorships of
professional and amateur soccer events. The Company's established relationships
with these and other leading suppliers enable it to offer an exceptionally broad
and deep product selection, including premier branded products, the distribution
of which is typically limited.
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The Company offers over 7,000 SKUs, including difficult-to-find sizes,
men's, women's and children's styles, and special team colors and product color
combinations. The Company occasionally offers exclusive products, designs or
color combinations from leading suppliers. As the Company has grown, it has been
able to provide a greater breadth and depth of new products. The Company
believes that few other direct marketers currently offer as complete a line of
soccer footwear, apparel and equipment covering the depth of products offered by
the Company.
The following table sets forth the principal product categories offered by
TSI Soccer catalogs and retail stores and the percentage of sales from these
sources in fiscal 1997 represented by each category.
<TABLE>
<CAPTION>
Percentage of Sales
Product Category (through January 31, 1998)
- ------------------------------ ---------------------------
<S> <C>
Footwear ............ 39.7%
Apparel ............. 37.1%
Accessories ......... 8.6%
Equipment ........... 14.7%
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100.0%
</TABLE>
The Company believes that its suppliers value the authentic,
soccer-specific channel of distribution the Company's TSI Soccer catalogs and
retail stores offer. The Company believes that the breadth and depth of soccer-
specific products included in its TSI Soccer catalogs and displayed in its TSI
Soccer retail stores create a shopping environment that is highly regarded for
its purity and integrity by both soccer enthusiasts and the suppliers who seek
to influence their purchasing decisions. The Company believes the strong
customer acceptance of its TSI Soccer 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. The Company also strives to
obtain merchandise from specialized suppliers with premier brands in the soccer
niche, the distribution of which is typically quite limited. The Company
believes this strategy helps to differentiate TSI Soccer from general athletic
gear direct marketers and retailers and to establish TSI Soccer as an authentic
soccer resource for young enthusiasts. Specialized suppliers whose brands are
currently included in TSI Soccer catalogs and/or stores include Kappa/Lanzera,
Diadora and Uhlsport.
adidas and Nike accounted for approximately 36% and 20%, respectively, of
the sales generated by TSI Soccer catalogs and stores in fiscal 1997. No other
supplier's products accounted for more than 10% of sales in that period.
However, the Company believes that a limitation on its ability to obtain
products from its significant suppliers could have a material adverse effect on
the Company. Approximately 84% of the Company's sales in fiscal 1997 generated
by TSI Soccer catalogs and stores were of products the Company believes were
manufactured outside the United States.
The Company's TSI Soccer merchandisers and inventory control specialists
work closely to evaluate new product offerings based upon quality, emerging
merchandise trends, consumer demand, performance histories, current inventory
positions and expected profitability. The Company is committed to finding
state-of-the-art products for its customers and selectively tests merchandise
for fit and quality before offering products for sale. To assist in product
acquisition and inventory control, the Company analyzes past product sales and
frequently talks to soccer coaches and other customers to forecast future
customer purchases.
The Company's merchandisers are responsible for building relationships with
suppliers. The Company's senior management also regularly contacts many of the
Company's suppliers to enhance and develop these relationships. The Company's
merchandisers regularly discuss with these suppliers attractive purchasing
opportunities and general market conditions. Management believes the
relationships that the Company has developed with its suppliers, and the
Company's ability to bring products to market quickly, enhance its ability to
acquire desirable products at favorable prices.
Catalog Design and Publishing. The Company publishes distinctive catalogs
that include detailed product descriptions and specifications, full color
photographs and pricing information. In fiscal 1997, the Company published five
editions of the TSI Soccer catalog. The Company anticipates publishing six
editions of the TSI Soccer catalog in fiscal 1998. A typical catalog, which
follows a magazine-type format, contains approximately 70 pages and more than
7,000 SKUs. The Company distributed approximately 6 million TSI Soccer catalogs
in fiscal 1997
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and intends to distribute in excess of 6 million in fiscal 1998. While most TSI
Soccer catalogs are mailed to customers in the United States, the Company also
distributes the catalog to a small number of customers in Canada and Japan.
Retail Stores. The Company operates 13 TSI Soccer retail stores. These
stores are located in outdoor shopping centers in Georgia, Maryland, North
Carolina and Virginia. The stores range in size from 2,500 square feet to 4,600
square feet, and are occupied under five-year leases, with, in some cases,
options for the Company to renew. The stores, like the TSI Soccer catalog, carry
a full breadth of soccer merchandise, including footwear, apparel and equipment,
almost all of which consists of products from the leading suppliers of branded
soccer merchandise.
TSI opened its first two retail stores in 1995, opened eight stores in 1996
and three in 1997. The Company may seek to grow its soccer specialty retail
business through new store openings or through acquisition.
Team Sales. The Company sells customized soccer apparel in team-sized lots
to amateur and scholastic soccer teams and leagues. The Company screen prints
customized lettering and logos on branded apparel produced by its leading
suppliers. These products are typically sold at a discount to equivalent
non-customized products found in the Company's TSI Soccer catalogs and retail
stores. Team sales represented less than 5% of the Company's sales in fiscal
1997.
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. These operations support both the
dELiA*s and TSI Soccer catalogs.
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, for the dELiA*s catalog, Seventeen and YM. During fiscal 1997,
approximately 1.5 million new names were added to the Company's database. As of
January 31, 1998, the Company's proprietary database currently included
approximately 4.0 million names, including approximately 1.3 million 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, fax and e-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 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 350 in-house phone stations in its
New York and Durham, North Carolina facilities, which operate on
state-of-the-art telephone systems. The Company's approximately 415 (as of
January 31, 1998) full- and part-time teleservice representatives have the
capacity to handle over 3,000 calls per hour. The Company also uses an outside
teleservices provider for overflow orders. 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. The Company maintains a separate customer
service department. Customer service inquiries are principally concerned with
order and refund status. Customer service representatives are
8
<PAGE>
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 most of dELiA*s catalog products and an
unlimited return policy for most of its TSI Soccer catalog products. For fiscal
1997, customer returns were approximately 13% 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. Currently, approximately 99% of all shipments are 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.
The Company processes and fulfills customer orders, and distributes
inventory to its retail stores, through its warehouse and fulfillment center in
Hanover, Pennsylvania. The Company 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. The Company is currently making an average of over 8,000
shipments a day (excluding weekends). The Company believes it has the physical
capacity to ship 25,000 packages per day.
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). The Company regularly runs
promotional sales of the excess items through sale circulars and through
programs targeted at phone-in customers. Products sold through promotional sales
to phone-in customers, the Company's sales circulars and the Company's retail
outlet store are typically discounted by 30% to 50% from their standard retail
prices. The Company also has used third-party liquidators, event 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 1997 were approximately $10.7
million, or approximately 9% of the Company's net sales for that period; the
cost of those goods sold at a discount to retail price was approximately $6.7
million. In addition, the Company maintains a reserve against anticipated losses
due to liquidation of additional unsold inventory. As the Company's sales
increase, the Company anticipates maintaining higher inventory levels in an
effort to continue to maintain satisfactory fulfillment rates for its catalog
customers.
Intellectual Property
The dELiA*s name, stylized logo and daisy ("*") have been registered by the
Company with the U.S. Patent and Trademark Office. The Company uses the TSI name
under a royalty-free license from a third party. Applications for registration
of the Company's other trademarks are currently pending in the United States,
Japan and other international territories. The Company also uses the trademarks,
tradenames, logos and endorsements of its suppliers with their permission. The
Company is not aware of any pending material conflicts concerning its marks or
its use of others' intellectual property rights.
Competition
The apparel, accessories and soccer specialty merchandise industries are
highly competitive, and the Company expects competition in these markets to
increase. The Company competes with traditional department-store retailers, as
well as specialty apparel, accessory and soccer retailers, for teen and
young-adult customers. The Company also competes with other direct marketers,
some of which may specifically target the Company's customers. Many of the
Company's competitors are larger and have substantially greater financial,
distribution and marketing resources than the Company.
There are few barriers to entry in the teen apparel and accessories market
and the soccer merchandise market. The Company believes that its rapid growth
has attracted the attention of other catalogers, as well as store-based
retailers and apparel manufacturers, particularly in the teen apparel category,
some of whom have recently entered or are planning to enter this market. The
Company also could face competition from manufacturers of apparel and
9
<PAGE>
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 other catalogs. In addition, competitors
could enter into exclusive distribution arrangements with the Company's vendors
and deny the Company access to their products. Increased competition could
result in pricing pressures, increased marketing expenditures and loss of market
share, and could have a material adverse effect on the Company.
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, 1998, the Company had approximately 953 employees. None
of the Company's employees is represented by a collective bargaining unit. The
Company considers its relations with its employees to be good.
Risk Factors
The following principal risk factors should be considered carefully in
addition to the other information contained in this report by prospective
investors or current stockholders evaluating an investment in the Company's
Common Stock. Actual results could differ materially from those described
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed below and in the section entitled "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Seasonal and Quarterly Fluctuations. The Company is subject to seasonal
fluctuations in its merchandise sales and results of operations. The Company
expects its sales and operating results 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
(including sale circulars), the response rates to such mailings, the timing of
merchandise deliveries, market acceptance of the Company's merchandise
(including new merchandise categories or products introduced), the mix, pricing
and presentation of products offered and 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. 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. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Decline in Catalog Response Rates Associated with Growth Strategy. The
Company's aggregate response rates from catalogs mailed in fiscal 1997 declined
relative to catalogs distributed in fiscal 1996 as the Company mailed multiple
editions during each quarter of fiscal 1997 to a large number of persons who had
received a prior edition of those catalogs earlier in such quarter. The Company
believes response rates will usually decline when it mails additional catalog
editions within the same fiscal period. In addition, as the Company continues to
increase the number of catalogs it mails and mails these catalogs to a broader
group of new customers, it has observed that new customers respond at lower
rates than the Company's existing customers have historically responded. This
trend in response rates has begun and there can be no assurance that response
rates will not continue to decline, both for new customers and for the Company's
existing customers. Decreases in response rates to the Company's catalogs will
have a material adverse effect on the Company.
Operational, Management and Inventory Risks of Growth Strategy. The recent
growth in the Company's operating income has resulted largely from increases in
the number of catalogs mailed by the Company and the number of products included
in its catalogs. The Company distributed approximately 13 million catalogs in
fiscal 1996, 40 million catalogs in fiscal 1997 and anticipates mailing in
excess of 55 million catalogs in fiscal 1998. This growth has placed significant
demands on the Company's management, administrative, operational and financial
resources. The Company intends to continue to pursue a growth-oriented strategy
for the foreseeable future and its future operating results will largely depend
on its ability to manage a larger business. Managing its growth will require the
Company to continue to implement and improve its operations and financial and
management
10
<PAGE>
information systems and to continue to expand, motivate and effectively manage
its workforce. Investments in infrastructure will increase the Company's
operating expenses, which could have a material adverse effect on the Company if
anticipated sales do not materialize. The Company plans to continue to increase
the number of catalogs it mails and the frequency of such mailings and intends
to broaden the range of products offered in its catalogs (including additional
dELiA*s-branded products). These actions will result in lower response rates and
operating margins. Furthermore, as the Company's sales increase, the Company
anticipates maintaining higher inventory levels in an effort to continue to
maintain satisfactory fulfillment rates for its catalog customers. This
anticipated increase in inventory levels will expose the Company to greater risk
of excess inventories and inventory obsolescence, which could have a material
adverse effect on the Company.
The Company is developing a number of new business opportunities, including
opening additional retail stores, publishing additional catalogs targeted at
other markets, developing traditional or electronic publishing ventures
ancillary to its existing business and expanding its use of electronic
interactive media for promotional and customer development purposes. There can
be no assurance the Company will successfully implement any or all of these
plans. Failure to implement successfully any of these plans, if pursued, could
have a material adverse effect on the Company. See "--Growth Strategy."
Changes in Merchandise Trends and Industry Risks. The Company's success
depends, in part, on management's ability to anticipate the fashion tastes of
its customers and to offer merchandise that appeals to their preferences on a
timely and affordable basis. The fashion tastes of the Company's customers are
expected to change frequently and the failure of the Company successfully to
anticipate, identify or react to changes in styles, trends or brand preferences
of its customers could lead to, among other things, excess inventories and price
markdowns, which could have a material adverse effect on the Company. In
addition, misjudgments in merchandise selection could adversely affect the
Company's image with its customers, which could have a material adverse effect
on the Company.
The Company plans to continue to increase the amount of merchandise
manufactured under its own labels. If customers react poorly to such dELiA*s
products, or if the Company is not able to source effectively these products, it
could have a material adverse effect on the Company.
The apparel and accessories industries are cyclical. Purchases of apparel
and accessories tend to decline during recessionary periods and may decline at
other times. There can be no assurance that the Company will be able to maintain
its historical rate of growth, particularly if the retail environment declines.
A recession in the national or regional economies or uncertainties regarding
future economic prospects, among other things, could affect consumer spending
habits and have a material adverse effect on the Company. The Company's business
is sensitive to consumer spending patterns and preferences. Shifts in consumer
discretionary spending away from casual apparel and accessories to other
consumer goods also could have a material adverse effect on the Company.
Ability to Develop and Maintain Proprietary Customer Lists. The Company
mails catalogs to names in its proprietary database (which are primarily derived
from word-of-mouth inquiries and responses to the Company's advertising) and to
potential customers whose names are obtained from purchased and rented lists.
Approximately 36% of the names of persons to whom the Company mailed its fiscal
1998 catalogs were derived from purchased and rented lists, and the Company
anticipates continuing its use of such lists. Names derived from purchased or
rented lists may generate lower response rates than names derived from
word-of-mouth requests. As the Company increases its use of rented lists
relative to its use of names in its database, its overall response rates have
declined and are likely to continue to decline. In addition, the Company's
database primarily contains names of teen girls and young women. As these
individuals age beyond their teens, they may no longer purchase products aimed
at younger individuals. Accordingly, the Company must constantly update its
mailing lists to identify new, prospective teen customers. Failure to do so
could have a material adverse effect on the Company.
Recently, there has been increasing public concern regarding the
compilation, use and distribution of information about teens and children.
Federal legislation has been 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 teens (under
the age of 16) and children. List brokerage is not a material part of the
Company's business but the Company does mail catalogs to persons whose names
were derived from purchased or rented lists. The Company may increase its use of
purchased and rented lists or, in the future, decide to increase its list
brokerage business. Consequently, the proposed legislation, or other similar
laws or regulations that may
11
<PAGE>
be enacted, could impair the Company's ability to collect customer names or
profit from future plans to sell demographic information relating to the teen
population. Furthermore, additional legislation or regulations could limit the
Company's ability to continue to compile personal information on teens or to use
that information in the course of its business, which could have a material
adverse effect on the Company.
Risks Associated With Acquisitions. The Company expects from time to time
to consider making additional acquisitions within and outside the direct mail,
retail and apparel industries, but there can be no assurance that the Company
will be able to make such acquisitions, either on favorable terms or at all. The
Company has made only two acquisitions, the acquisitions of TSI and gURL,
Interactive Inc. described under "Item 7--Management's Discussion and Analysis
of Financial Condition and Results of Operations," and there can be no assurance
such acquisitions will prove successful.
Acquisitions involve a number of special risks, including the diversion of
management's attention to the assimilation of operations and the assimilation
and retention of the personnel of acquired companies and potential adverse
short-term effects on the Company's operating results. In addition, the Company
may require additional debt or equity financing for future acquisitions, which
may not be available on terms favorable to the Company, if at all. The inability
of the Company successfully to finance, complete and integrate acquisitions in a
timely manner could have a material adverse effect on the Company.
Reliance on Third Party Shippers. The Company relies on third party
shippers (including the United States Postal Service, United Parcel Service and
FedEx) to ship merchandise to the Company's customers. Strikes or other service
interruptions affecting the Company's shippers could have a material adverse
effect on the Company's ability to deliver merchandise on a timely basis. See
"--Operations--Distribution and Fulfillment."
Dependence on Key Vendors. The Company's business depends, in part, on the
Company's ability to purchase current-season brand-name apparel and soccer
merchandise at competitive prices, in sufficient quantities and of acceptable
quality. While no vendor accounted for more than 9% of sales generated by fiscal
1997 dELiA*s catalogs, two vendors accounted for approximately 56% of TSI's
sales in fiscal 1997. One of those vendors, adidas, accounted for approximately
13% of the Company's sales in fiscal 1997. The Company does not have a long-term
contract with adidas or any other supplier. In addition, many of the Company's
smaller vendors have limited resources, production capacities and operating
histories. The failure of key vendors to expand with the Company, the loss of
one or more key vendors, including adidas, a material change in the Company's
current purchase terms or a limitation on the Company's ability to procure
products could have a material adverse effect on the Company.
Dependence on Key Personnel. The success of the Company has largely
depended upon the efforts and abilities of its senior management, including the
Company's co-founders, Stephen I. Kahn, Chairman of the Board, President and
Chief Executive Officer, and Christopher C. Edgar, Executive Vice President and
Chief Operating Officer. TSI's business has been dependent upon the efforts of
one of its co-founders, Evan L. Jones. The loss of one or more of its key
employees could have a material adverse effect on the Company.
Competition. The apparel and accessories industries and the soccer
specialty market are highly competitive, and the Company expects competition in
these markets to increase. The Company's dELiA*s catalog competes with
traditional department store retailers, as well as specialty apparel and
accessory retailers, for teen and young-adult customers. The dELiA*s catalog
also competes with other direct marketers, some of which may specifically target
the Company's customers. The TSI Soccer catalog and retail stores compete with
several other soccer specialty direct marketers, soccer specialty retailers, as
well as general athletic merchandise retailers. Many of the Company's
competitors are larger and have substantially greater financial, distribution
and marketing resources than the Company.
There are few barriers to entry in the teen apparel and accessories market
and in the soccer speciality market. The Company believes that its recent
success in teen apparel market has attracted the attention of other catalogers,
as well as store-based retailers and apparel manufacturers, some of which are
likely 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 other
catalogs. In addition, competitors could enter into exclusive distribution
arrangements with the Company's vendors and deny the Company access to their
products. Increased competition could result in pricing pressures, increased
marketing expenditures and loss of market share, and could have a material
adverse effect on the Company.
12
<PAGE>
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.
Fluctuations in Postage and Paper Expenses. Postage and paper expenses, in
the aggregate, equaled approximately 13% of the Company's net sales in fiscal
1997. The Company has not passed on, and has no future plans to pass on, the
costs of catalog mailings and paper to its customers. Material increases in
paper or catalog delivery costs could have a material adverse effect on the
Company.
Reliance on Information Systems. The Company's success depends, in part, on
its ability to provide prompt, accurate and complete service to its customers on
a competitive basis, and to purchase and promote products, manage inventory,
ship products, manage sales and marketing and maintain efficient operations
through its telephone and management information systems. A significant
disruption in its telephone and management information systems could adversely
affect the Company's relations with its customers and vendors and its ability to
manage its operations. Furthermore, there can be no assurance that extended or
repeated reliance on the Company's back-up computer and telephone systems would
not have a material adverse effect on the Company.
Catalog Delivery Risks. The Company attempts to deliver its catalogs to
its customers at timely seasonal intervals. The failure of the Company to
deliver catalogs at appropriate times, or the occurrence of postal delays or
disruptions in the mailing of catalogs, could affect the demand for the
Company's products or the timing of the Company's sales and could have a
material adverse effect on the Company. See "--Operations--Distribution and
Fulfillment."
International Business Risks. The Company recently began to distribute its
dELiA*s catalog in Japan and Canada and to explore distribution opportunities in
other international markets. Approximately 2% of the Company's net sales for
fiscal 1997 were from sales to customers outside the United States,
substantially all of whom were located in Japan. In addition, certain of the
Company's vendors procure products from outside the United States (approximately
48% of the Company's sales in fiscal 1997 were of products the Company believes
were manufactured outside the United States), and the Company has begun to
purchase merchandise for its dELiA*s-branded apparel directly from non-U.S.
manufacturers. The Company's international business is subject to a number of
risks generally associated with doing business abroad, including the opening and
management of foreign offices and distribution centers, maintenance of uniform
quality of merchandise, development of customer lists and marketing channels,
disruptions or delays in shipping, fluctuations in the value of foreign
currencies, exposure to potentially adverse tax consequences, imposition of
import/export duties and quotas and unexpected regulatory, economic and
political changes in foreign markets. There can be no assurance these factors
will not have a material adverse effect on the Company. Furthermore, expansion
into new international markets may present competitive and merchandising
challenges different from those the Company currently faces. There can be no
assurance the Company will expand internationally or that any such expansion
will result in profitable operations. See "--Growth Strategy."
Dependence on Intellectual Property. There can be no assurance that the
actions taken by the Company to establish and protect its trademarks and other
proprietary rights (including the dELiA*s name, the dELiA*s logo and the daisy
("*") symbol) will prevent imitation of its products and services or
infringement of its intellectual property rights by others. In addition, there
can be no assurance others will not resist or seek to block sales of the
Company's products as violative of their trademark and proprietary rights.
See"--Intellectual Property."
Risk that the Company May Be Required to Collect Sales Tax. At present, the
Company does not collect sales or other similar taxes in respect of shipments of
goods into most states. However, various states have sought to impose state
sales tax collection obligations on out-of-state mail-order companies, such as
the Company. A successful assertion by one or more states that the Company
should have collected or be collecting sales taxes on the sale of products could
have a material adverse effect on the Company.
Control by Principal Stockholder. As of March 31, 1998, Stephen I. Kahn,
the Chairman, Chief Executive Officer and President of the Company, beneficially
owned approximately 50.9% of the outstanding shares of Common Stock, including
2,999,825 shares he owns directly and an additional 3,780,535 shares in the
aggregate subject to a stockholders agreement among certain of the Company's
existing stockholders (the "Family
13
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Stockholders Agreement") and agreements with holders of restricted stock. Under
the Family Stockholders Agreement, Mr. Kahn is entitled, among other things, to
vote and restrict the transfer of all the shares subject to the Family
Stockholders Agreement, and, under the agreements with holders of restricted
stock, Mr. Kahn is entitled to vote such holders' shares. Therefore, Mr. Kahn
can control the election of directors of the Company and the outcome of all
issues submitted to a vote of stockholders of the Company. The foregoing,
together with certain provisions in the Company's certificate of incorporation,
may make it more difficult for a third party to acquire, and may discourage
acquisition bids for, the Company and could limit the price that certain
investors might be willing to pay for shares of Common Stock. In addition,
stockholders may take any action by written consent in accordance with the
General Corporation Law of the State of Delaware and the Company's bylaws, which
may allow Mr. Kahn to direct corporate action without advance notice to other
stockholders.
Possibility of Adverse Effect on the Market Price of the Common Stock by
Virtue of Certain Takeover Provisions. Certain provisions of the Company's
certificate of incorporation and bylaws may make it more difficult for a third
party to acquire, or may discourage acquisition bids for, the Company and could
limit the price that certain investors might be willing to pay in the future for
shares of Common Stock. These provisions, among other things, (a) divide the
board of directors into three classes, (b) require the affirmative vote of the
holders of at least 662/3% of the shares to approve a sale, lease, transfer or
exchange of all or substantially all the assets of the Company, (c) require the
affirmative vote of the holders of at least 662/3% of the shares to remove a
director or to fill a vacancy on the board of directors, (d) require the
affirmative vote of the holders of at least 662/3% of the shares to amend or
repeal certain provisions of the certificate of incorporation and (e) require
the affirmative vote of the holders of at least 662/3% of the shares or
two-thirds of the members of the board of directors to amend or repeal the
bylaws of the Company. In addition, the rights of holders of Common Stock will
be subject to, and may be adversely affected by, the rights of any holders of
Preferred Stock that may be issued in the future and that may be senior to the
rights of the holders of Common Stock. Under certain conditions, Section 203 of
the General Corporation Law of the State of Delaware would prohibit the Company
from engaging in a "business combination" with an "interested stockholder" (in
general, a stockholder owning 15% or more of the Company's outstanding voting
stock) for a period of three years from the date that such stockholder becomes
an "interested stockholder."
Absence of Dividends. The Company intends to retain any future earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future. See "Item 5--Market
for Registrant's Common Equity and Related Stockholder Matters."
Limited Trading History; Possible Volatility of Stock Price. The Company's
stock price has fluctuated substantially since its initial public offering in
December 1996 (the "IPO"). The Company believes factors such as actions of
competitors and quarterly variations in operating results, as well as changes in
market conditions, analysts' estimates and the stock market may cause the market
price of the Common Stock to fluctuate significantly. Further, the stock market
has historically experienced volatility that sometimes has been unrelated to a
company's operating performance.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Company's
principal facilities, all of which are leased.
<TABLE>
<CAPTION>
Location Use Appr. Sq. Footage Lease Expiration Date
- -------------- ----------------------------------------- ------------------- ----------------------
<S> <C> <C> <C>
New York, NY Corporate offices and call center 43,000 2007
Hanover, PA Warehouse, fulfillment and
distribution center 175,000 2000 (1)
Durham, NC Corporate offices and call center (TSI) 65,000 2007
</TABLE>
- ------------
(1) The Company has two three-year options to extend the term of this lease.
Following the TSI Merger, the Company moved warehousing, fulfillment and
distribution operations for the TSI Soccer business from the Durham, North
Carolina facility to the Hanover, Pennsylvania facility and is currently
negotiating to move out or sublet a portion of the TSI Soccer facility in
Durham, North Carolina.
The Company operates 13 TSI Soccer retail stores, which are located in
outdoor shopping centers in Georgia, Maryland, North Carolina and Virginia. The
stores range in size from 2,500 to 4,600 square feet, and are occupied under
five-year leases, with, in some cases, options for the Company to renew.
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The Company also operates a dELiA*s outlet store in Reading, Pennsylvania
and recently entered into leases for two additional retail outlet stores in New
York State. These stores range in size from 3,000 to 3,800 square feet, and are
occupied under five to seven year leases, with, in some cases, options for the
Company to renew.
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.
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
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. The following table sets forth the high and low sales prices for
the Company's Common Stock as reported by NASDAQ for the period indicated. Such
quotations reflect interdealer prices without adjustments for retail markups,
markdowns, or commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
------------ ------------
<S> <C> <C>
Fiscal year ended
4th Quarter (from December 19, 1996) ......... $20.250 $12.500
Fiscal year ended January 31, 1998
1st Quarter .................................. 19.750 13.750
2nd Quarter .................................. 25.875 14.250
3rd Quarter .................................. 25.000 16.125
4th Quarter .................................. 30.750 19.750
</TABLE>
On April 15, 1998, there were 97 holders of record of the Common Stock and
approximately 2,000 beneficial owners of the Common Stock.
Dividend Information
The Company has never declared or paid any cash dividends on its Common
Stock (other than a distribution prior to the IPO to members of the Company's
predecessor limited liability company). The Company currently intends to retain
its earnings for future growth and, therefore, does not anticipate paying any
cash dividends in the foreseeable future.
Sales of Unregistered Securities
On December 10, 1997, as part of the TSI Merger, the Company issued 297,927
shares of Common Stock to the stockholders of TSI in exchange for the capital
stock of that entity owned by such stockholders. The issuance of such securities
was exempt from registration pursuant to Regulation D under the Securities Act.
On December 10, 1997, the Company also issued 10,760 shares of Common Stock
to TSI employees pursuant to a "change of control" provision to in that entity's
stock appreciation rights plan. The issuance of such securities was 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.
On December 17, 1997, the Company issued 5,000 shares of Common Stock to
the three New York State residents who were stockholders of gURL, Interactive
Inc. as partial payment for all of the outstanding capital stock of that entity.
The issuance of such securities was exempt from registration pursuant to Section
4(2) of the Securities Act.
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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, 352,500 shares of which were issued upon exercise of an
overallotment option granted by the Company to the underwriters. The managing
underwriters for the offering were Hambrecht & Quist LLC and Oppenheimer & Co.,
Inc. (the "Underwriters"). In connection with the IPO, the Company registered
the Common Stock under the Securities Exchange Act of 1934, as amended.
The public offering commenced on December 19, 1997 and terminated upon the
sale of all the 2,702,500 shares of Common Stock which were registered for sale.
The aggregate offering price of the securities sold was $29,727,500. Of the
2,702,500 shares which were registered, 2,052,500 were sold for the account of
the Company. The aggregate offering price of the securities sold for the account
of the Company was $22,577,500.
From the effective date of the Registration Statement through January 31,
1998, the Company incurred the following expenses in connection with the
issuance and distribution of the Common Stock registered:
<TABLE>
<S> <C>
Underwriting discounts and commissions ............. $1,580,425
Other expenses (legal and accounting fees and
expenses, printing and engraving expenses,
filing and listing fees, transfer agent and
registrar fees and miscellaneous) ................ 1,180,718
</TABLE>
The net offering proceeds to the Company after deducting the foregoing
expenses were $19,816,357. Other than the amounts set forth for underwriting
discounts and commissions, the foregoing represent reasonable estimates of
expenses.
The Company did not make, in connection with the offering and sale of the
Common Stock registered, any direct or indirect payments to directors or
officers of the Company or, to the Company's knowledge, their associates;
persons owning 10% or more of any class of equity securities of the Company; or
affiliates of the Company.
From December 24, 1996 until January 31, 1998, the net offering proceeds
were invested in interest-bearing, investment-grade securities.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial, operating,
and balance sheet data of the Company. The selected financial data as of January
31, 1998 and 1997 and for each of the fiscal years in the three year period
ended January 31, 1998 have been derived from the Company's consolidated
financial statements set forth elsewhere in this report. The selected financial
data as of January 31, 1996 and 1995 and for the fiscal year ended January 31,
1995 have been derived from the Company's consolidated financial statements
which are not included herein. The following selected data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto appearing elsewhere in this report. All financial and operating data has
been restated to give effect to the 1996 Reorganization (as defined in Note 1 to
the Financial Statements) and the TSI Merger.
<TABLE>
<CAPTION>
Fiscal Year 1994 Fiscal Year 1995 Fiscal Year 1996 Fiscal Year 1997
Ended Ended Ended Ended
January 31, 1995 January 31, 1996 January 31, 1997 January 31, 1998
------------------ ------------------ ------------------ -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ....................................... $12,053 $23,391 $54,224 $ 113,049
Cost of sales ................................... 7,212 13,652 28,891 57,811
------- ------- ------- ---------
Gross profit .................................... 4,841 9,739 25,933 55,238
Selling, general and administrative expenses 4,949 9,720 22,194 47,943
Merger related costs ............................ -- -- -- 1,614
Interest income (expense), net .................. (45) (56) 103 1,201
------- ------- ------- ---------
Income (loss) before provision for
income taxes .................................. (153) (37) 3,842 6,882
Provision (benefit) for income taxes ............ -- (5) (351) 2,456
------- ------- ------- ---------
Net income (loss) ............................... 153 (32) $ 4,193 $ 4,426
======= ======= ======= =========
Basic and diluted net income (loss) per
share (1) ..................................... (0.01) $(0.00) $ 0.40 $ 0.34
======= ======= ======= =========
Pro forma net income (loss) (2) ................. $ (95) $ (22) $ 2,257 $ 4,426
======= ======= ======= =========
Pro forma basic and diluted net income
(loss) per share (1) (2) ...................... $ (0.01) $(0.00) $ 0.22 $ 0.34
======= ======= ======= =========
Shares used in the calculation of basic net
income (loss) per share ....................... 10,263 10,263 10,477 12,941
======= ======= ======= =========
Shares used in the calculation of diluted
net income (loss) per share ................... 10,263 10,263 10,499 13,083
======= ======= ======= =========
January 31
---------------------------------------------------------------------------
1995 1996 1997 1998
------- ------- ------- ---------
(in thousands, except retail stores)
Balance Sheet Data:
Cash and cash equivalents ....................... 635 726 21,717 4,485
Working capital ................................. 950 349 19,099 37,959
Total assets .................................... 2,807 4,381 32,660 64,572
Total stockholders' equity ...................... 848 916 21,024 44,144
Selected Operating Data:
Number of catalogs distributed (3) .............. 5,400 13,050 39,850
House names (4) ................................. 685 1,873 4,192
Buyers (5) ...................................... 269 644 1,308
Retail stores (6) ............................... 2 10 14
</TABLE>
- ------------
(1) In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," and all per share data has been restated.
(2) Computed for all periods prior to the year ended January 31, 1997 on the
basis described in Note 10 of Notes to Financial Statements and assuming the
pro forma tax provisions described therein. Prior to the IPO, the Company
effected the 1996 Reorganization, in which the Company converted from a
limited liability company to a C corporation. Pro forma net income for the
year ended January 31, 1998 represents actual reported net income.
See Note 1 of Notes to Financial Statements.
17
<PAGE>
(3) Number of catalogs distributed includes the number of dELiA*s and TSI Soccer
catalogs distributed during the applicable fiscal period (excluding sales
circulars).
(4) 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. The numbers
presented are net of duplicate names (appearing on both dELiA*s and TSI
Soccer lists) based on management estimates.
(5) 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. The numbers presented are net of duplicate
names (appearing on both dELiA*s and TSI Soccer lists) based on management
estimates.
(6) Retail stores represents the number of retail stores operated by the
Company, determined at the end of the applicable fiscal period.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
"Item 6--Selected Financial Data" and the Company's Financial Statements and
Notes thereto included elsewhere in this report. Except for the historical
information contained herein, the discussion in this report contains
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this report should be read as being applicable to
all related forward-looking statements wherever they appear in this report. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and under "Item 1--Business--Risk Factors" as
well as those discussed elsewhere in this report.
Overview
The Company is a leading direct marketer of casual apparel and related
accessories to girls and young women. Through its recently acquired TSI
subsidiary, the Company also sells a broad range of soccer-related merchandise
and apparel to young men and women through catalogs and 13 retail stores.
The Company acquired TSI on December 10, 1997. TSI carries on a business
conducted by predecessor entities since 1989. Pursuant to an Agreement and Plan
of Merger dated December 10, 1997, a wholly-owned subsidiary of the Company was
merged with and into TSI. As a result of the TSI Merger, TSI became a
wholly-owned subsidiary of the Company. In connection with the TSI Merger, the
Company issued an aggregate of 308,687 shares of Common Stock to certain
stockholders of TSI, including 10,760 shares of Common Stock to employees of TSI
pursuant to a "change of control" provision in TSI's stock appreciation rights
plan. The Company also made cash payments of approximately $730,000 to former
stockholders of TSI who exercised statutory dissenters' rights. The TSI Merger
was structured as a tax-free exchange and the Company has accounted for the TSI
Merger as a pooling-of-interests.
On December 17, 1997, the Company acquired gURL, Interactive Inc., the
owner of the www.gURL.Com web site. The acquisition was accounted for by the
purchase method. The consideration paid by the Company was not material.
In the fourth quarter of fiscal 1997, the Company recorded merger-related
costs of $1.6 million in connection with expenses related to the TSI Merger
including professional fees, costs related to consolidation of distribution
facilities, including a provision for lease termination and the write-off of
property and equipment, and cancellation of contracts.
Direct Marketing Businesses. The Company initially mailed dELiA*s catalogs
to persons responding to advertisements and to names on rented lists. TSI Soccer
distributes catalogs to persons who have requested catalogs and to participants
at soccer tournaments, soccer league members and names it acquires from
purchased or 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
approximately 4.0 million names as of January 31, 1998, 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 (including prior purchases),
supplemented by purchased and rented lists. The response rates generated from
the Company's list of buyers are typically higher than those the Company
realizes from purchased or rented lists.
The Company plans to increase the number of catalogs it distributes from 40
million in fiscal 1997 to in excess of 55 million in fiscal 1998. The Company
distributed six editions of its dELiA*s catalog in fiscal 1996, eight editions
in fiscal 1997 and anticipates distributing nine editions in fiscal 1998. The
Company distributed five editions of its TSI Soccer catalog in fiscal 1996 and
fiscal 1997 and anticipates distributing six editions in fiscal 1998. As the
Company continues to increase its prospecting efforts and the number of catalogs
it distributes, the Company intends to continue to increase its aggregate
marketing expenditures, which the Company expects will result in a decrease in
operating margin. With increased catalog distribution, the Company has observed
a decline in response rates and expects that response rates will decline further
in the future. Response rates have typically fluctuated on a year-to-year and
catalog-to-catalog basis. 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.
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.
19
<PAGE>
In the third quarter of fiscal 1996, the Company began mailing catalogs to
selected portions of its house list, 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, 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 1997.
Retail Businesses. TSI opened its first two retail stores in 1995, opened
eight stores in 1996 and three in 1997. The Company may seek to grow its soccer
specialty retail business through new store openings or through acquisition.
The Company opened its first dELiA*s retail outlet store in Reading,
Pennsylvania in November 1997. The opening of this store did not have a material
effect on the Company's financial condition or results of operations in fiscal
1997. The Company recently entered into leases for two additional retail outlet
stores in New York State and plans to open additional retail outlet stores in
1998. The Company believes that these outlet stores will modestly increase net
sales and allow the Company to liquidate unsold inventory at a greater margin
than is usually available through other liquidation means. The Company will also
consider opening full-priced dELiA*s stores or premium outlets on a test basis.
Capital Investments. In order to support its direct marketing operations,
the Company has made and continues to make significant capital expenditures for
telephone and management information systems and has hired and maintained an
in-house workforce of teleservice representatives.
The Company also made significant capital expenditures in connection with
the relocation of its warehouse and fulfillment operations from a third-party
contractor's facility to its own leased facility in Hanover, Pennsylvania in the
second quarter of fiscal 1997. The Company expects to make additional
significant capital expenditures to build infrastructure (including
high-performance sophisticated retail management systems) to support the
additional sales volume the facility is expected to handle as a result of the
relocation of TSI's fulfillment operations, the expected growth in the dELiA*s
catalog and the expansion of dELiA*s retail businesses.
Certain Risks. As the Company's revenue base grows and it further
penetrates its target market, the Company will not be able to sustain the levels
of percentage annual growth in net sales and growth in operating income
experienced in fiscal 1995, fiscal 1996 and fiscal 1997. In addition, as the
Company continues to increase the number of catalogs it mails, it has observed
that new customers respond at lower rates than the Company's existing customers
have historically responded. This trend in response rates has begun to have and
is likely to continue to have a material adverse effect on the Company's rate of
sales growth and on the Company's profitability. In addition, the Company has
observed that when customers receive multiple editions of catalogs within the
same fiscal quarter to customers who had received a prior edition of those
catalogs earlier in such quarter, the Company's aggregate response rates have
declined. As the Company increases its mailing of multiple editions of catalogs
to a broader market, it expects that response rates will decline further. This
trend in response rates has begun to have and is likely to continue to have a
material adverse effect on the Company's profitability.
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 teens (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 lists. Approximately 36% of the names of persons to whom the Company
mailed its fiscal 1998 catalogs were derived from purchased and rented lists,
and the Company anticipates continuing its use of such lists. The Company's use
of purchased and rented lists fluctuates from season-to-season and from
year-to-year. 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 the
Company's www.delias.com web site. There can be no assurance, however, that the
Company will be able to develop its house list.
20
<PAGE>
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 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, to the extent
practicable, its material operating software and systems.
All of the Company's material operating software and systems were developed
by and are supported by third party vendors. Each of the third party vendors of
the Company's mission-critical computer software have provided written
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 assurances 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.
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 significant service providers,
including providers of financial, telecommunications and parcel delivery
services. The Company has contacted or is contacting each of its significant
service providers to obtain written assurances from such providers that the
providers' relevant operating software and systems are in Year 2000 compliance
or will be by December 31, 1998. The Company will monitor 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. Therefore, the Company is developing contingency plans
with respect to its significant service providers.
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.
Equity Financing Transactions. On December 24, 1996, the Company sold
2,052,500 shares of Common Stock in the IPO. The Company received net proceeds
of $19.8 million. On June 9, 1997, the Company sold 1,000,000 shares of Common
Stock in a second underwritten public offering (the "1997 Offering"). The
Company received net proceeds of $19.4 million. The Company has invested
substantially all of the proceeds of both offerings in interest-bearing,
investment-grade securities. A portion of the proceeds of the 1997 Offering has
been used for working capital and the TSI Merger.
21
<PAGE>
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 1995 Fiscal Year 1996 Fiscal Year 1997
Ended Ended Ended
January 31, 1996 January 31, 1997 January 31, 1998
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net Sales ............................................... 100.0% 100.0% 100.0%
Cost of sales ........................................... 58.4 53.3 51.1
----- ----- -----
Gross profit ............................................ 41.6 47.8 48.9
Selling, general and administrative expenses ............ 41.6 40.9 42.4
Interest income (expense), net .......................... ( 0.2) 0.2 1.1
----- ----- -----
Income (loss) before provision for income taxes ......... ( 0.2) 7.1 6.1
----- ----- -----
Net income (loss) ....................................... ( 0.1)% 7.7% 3.9%
----- ----- -----
Pro forma net income (loss) (1) ......................... ( 0.1)% 4.2% 3.9%
----- ----- -----
</TABLE>
- ------------
(1) Computed for all periods prior to the year ended January 31, 1998 on the
basis described in Note 10 of Notes to Financial Statements and assuming the
pro forma tax provisions described therein. Prior to the Company's IPO, the
Company effected the 1996 Reorganization, in which the Company converted
from a limited liability company to a C corporation. Pro forma net income
for the year ended January 31, 1998 represents actual reported net income.
See Note 10 of Notes to Financial Statements.
Comparison of Fiscal Years 1996 and 1997
Net sales. Net sales increased approximately $58.8 million, from $54.2
million in fiscal 1996 to $113.0 million in fiscal 1997. The increase in net
sales was primarily due to an increase in the number of dELiA*s catalogs mailed,
as well as an increase in average order size and, to a lesser degree, the
opening of three new TSI Soccer retail stores. Aggregate response rates from
catalogs mailed in fiscal 1997 declined relative to catalogs distributed in
fiscal 1996 as the Company mailed multiple editions during each quarter of
fiscal 1997 to a large number of persons who had received a prior edition of
those catalogs earlier in such quarter. The Company believes response rates will
usually decline when it mails additional catalog editions within the same fiscal
period and as it mails to a broader ranger of customers. 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 catalogs.
Gross margin. Gross margin increased from 47.8% in fiscal 1996 to 48.9% in
fiscal 1997. The increase in gross margin was primarily due to a larger
proportion of higher-margin apparel sales from the dELiA*s catalog compared to
relatively lower-margin soccer merchandise sales from the TSI Soccer catalog and
retail stores. To a lesser degree, gross margin increased because of: (i)
improved sourcing of merchandise, including larger volume discounts from
suppliers and a greater proportion of private label products sourced directly
from overseas contract manufacturers, (ii) changes in product mix and (iii)
higher selling prices. 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, 1998 and anticipated inventory
dispositions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $25.7 million, from $22.2
million in fiscal 1996 to $47.9 million in fiscal 1997. Selling, general and
administrative expenses increased as a percentage of net sales from 40.9% in
fiscal 1996 to 42.4% in fiscal 1997. The increase in selling, general and
administrative expenses was primarily due to greater marketing expenditures on
catalog circulation and greater spending on infrastructure, which were partly
offset by the leveraging of certain fixed costs over a larger revenue base. In
addition, the TSI business recorded certain expenses in fiscal 1997 associated
with the relocation of its corporate and fulfillment facilities in the first six
months of fiscal 1997 prior to the TSI Merger.
22
<PAGE>
Merger related costs. Merger related costs of $1.6 million were incurred in
fiscal 1997 connection with the TSI Merger and included professional fees, costs
related to consolidation of distribution facilities, including a provision for
lease termination and the write-off of property and equipment, and cancellation
of contracts.
Interest income, net. Interest income, net, increased approximately $1.1
million, from $103,000 in fiscal 1996 to $1.2 million in fiscal 1997. The
increase in interest income, net, was primarily due to the Company's investment
of the net proceeds from the IPO and the 1997 Offering. Following the
consummation of the TSI Merger, the Company repaid substantially all of TSI's
outstanding long-term debt and bank line of credit.
Provision (benefit) for income taxes. Provision (benefit) for income taxes
increased approximately $2.8 million from a benefit of $351,000 in fiscal 1996
to a provision of $2.5 million in fiscal 1997. This increase was due to the
effect of the 1996 Reorganization, which was effected in the fourth quarter of
fiscal 1996, in which the Company converted from a limited liability company to
a C corporation. See Note 10 of Notes to Financial Statements.
Comparison of Fiscal Years 1995 and 1996
Net sales. Net sales increased approximately $29.8 million, from $23.4
million in fiscal 1995 to $54.2 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 and the opening of eight
TSI soccer retail stores. The Company increased the number of catalogs it
distributed from 6.9 million in fiscal 1995 to 13 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 dELiA*s catalog.
Gross margin. Gross margin increased from 41.6% in fiscal 1995 to 47.8% in
fiscal 1996. The increase in gross margin was primarily due to a larger
proportion of higher-margin apparel sales from the dELiA*s catalog compared to
relatively lower-margin soccer merchandise sales from the TSI Soccer catalog and
retail stores. To a lesser degree, gross margin increased because of certain
related fixed costs of merchandising were spread over increased sales and
improved sourcing of merchandise, including larger volume discounts from
suppliers, as well as changes in product mix and higher selling prices. These
improvements were partially offset by an increased inventory reserve for
obsolescence based upon management's evaluation of merchandise inventories as of
January 31, 1997 and anticipated inventory dispositions as well as an increased
reserve for returns consistent with the Company's recent growth.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $12.5 million, from $9.7 million
in fiscal 1995 to $22.2 million in fiscal 1996. Selling, general and
administrative expenses decreased as a percentage of net sales from 41.6% in
fiscal 1995 to 40.9% in fiscal 1996. The reduction in selling, general and
administrative expenses as a percentage of net sales was primarily 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, as well as the
Company's higher expenditures of corporate salaries and additional information
systems in anticipation of sales growth.
Interest income (expense), net. Interest income (expense), net, increased
approximately $159,000, from $56,000 in expense in fiscal 1995 to $103,000 in
income in fiscal 1996. The increase in interest income, net, was primarily due
to the Company's investment of the net proceeds from the IPO, which proceeds
were received in the fourth quarter of fiscal 1996.
Provision (benefit) for income taxes. (Benefit) for income taxes increased
approximately $346,000, from a benefit of $5,000 in fiscal 1995 to a benefit of
$351,000 in fiscal 1996. This decrease was almost entirely due to the 1996
Reorganization, which was effected in the fourth quarter of fiscal 1996, in
which the Company converted from a limited liability company to a C corporation.
See Note 10 of Notes to Financial Statements.
23
<PAGE>
Selected Quarterly Results of Operations and Seasonality
The following table sets forth certain unaudited statements of operations
data for the eight quarters ended January 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.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------
Fiscal 1996
---------------------------------------------------
Apr. 30, July 31, Oct. 31, Jan. 31,
1996 1996 1996 1997
---------- ------------- ------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales ................................... $ 7,870 $9,875 $15,310 $ 21,170
Cost of sales ............................... 4,209 5,106 8,251 10,702
------- ------- ------- --------
Gross profit ................................ 3,661 4,769 7,059 10,468
Selling, general and administrative
expenses ................................... 3,575 4,638 5,611 8,394
Merger-related costs ........................ -- -- -- --
Interest income (expense), net .............. (20) (5) (9) 137
------- --------- --------- --------
Income before provision for income taxes .... $ 66 $ 126 $1,439 $ 2,211
======= ======== ======== ========
Pro forma net income(1) ..................... $ 38 $ 74 $ 847 $ 1,298
======= ======== ======== ========
Per share data:
Pro forma basic net income per share (2) .... $ 0.00 $ 0.01 $ 0.08 $ 0.12
======= ======== ======== ========
Pro forma diluted net income per share (2)... $ 0.00 $ 0.01 $ 0.08 $ 0.12
======= ======== ======== ========
Shares used in calculation of basic net
income per share ........................... 10,262 10,262 10,262 11,122
Shares used in calculation of diluted net
income per share ........................... 10,262 10,262 10,262 11,122
Percentage of Total Net Sales
----------------------------------------------------
Net sales ................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 53.5 51.7 53.9 50.6
------- ------- ------- --------
Gross profit ................................ 46.5 48.3 46.1 49.4
Selling, general and administrative
expenses ................................... 45.4 47.0 36.6 39.7
Interest income (expense), net .............. 0.3 0.1 0.1 (0.6)
------- ------- ------- --------
Income before provision for income taxes .... 0.8% 1.3% 9.4% 10.4%
======= ======== ======== ========
Pro forma net income (1) .................... 0.5% 0.7% 5.5% 6.1%
======= ======== ======== ========
<CAPTION>
Quarter Ended
---------------------------------------------------
Fiscal 1997
---------------------------------------------------
Apr. 30, July 31, Oct. 31, Jan. 31,
1997 1997 1997 1998
------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales ................................... $ 17,697 $ 21,086 $ 31,357 $ 42,909
Cost of sales ............................... 9,332 10,768 16,568 21,397
-------- -------- -------- --------
Gross profit ................................ 8,365 10,408 14,789 21,512
Selling, general and administrative
expenses ................................... 7,994 10,148 12,630 17,007
Merger-related costs ........................ -- -- -- 1,614
Interest income (expense), net .............. 213 268 338 382
-------- -------- -------- --------
Income before provision for income taxes .... $ 584 $ 528 $ 2,497 $ 3,273
======== ======== ======== ========
Pro forma net income(1) ..................... $ 322 $ 387 $ 1,627 $ 2,090
======== ======== ======== ========
Per share data:
Pro forma basic net income per share (2) .... $ 0.03 $ 0.03 $ 0.12 $ 0.16
======== ======== ======== ========
Pro forma diluted net income per share (2)... $ 0.03 $ 0.03 $ 0.12 $ 0.15
======== ======== ======== ========
Shares used in calculation of basic net
income per share ........................... 12,288 12,866 13,301 13,310
Shares used in calculation of diluted net
income per share ........................... 12,387 13,003 13,445 13,498
Net sales ................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 52.7 50.6 52.8 49.9
-------- -------- -------- --------
Gross profit ................................ 47.3 49.4 47.2 50.1
Selling, general and administrative
expenses ................................... 45.2 48.1 40.3 39.6
Interest income (expense), net .............. 1.2 1.3 1.1 0.9
-------- -------- -------- --------
Income before provision for income taxes .... 3.3% 2.5% 8.0% 11.4%
======== ======== ======== ========
Pro forma net income (1) .................... 1.8% 1.8% 5.2% 4.9%
======== ======== ======== ========
</TABLE>
- ------------
(1) Pro forma net income for each quarter of fiscal 1996 is adjusted to reflect
the Company's financial statements as if it had been a C corporation for the
entire period. During the fourth quarter of fiscal 1996, the Company
converted from a limited liability company to a C corporation. Pro forma net
income for each quarter of fiscal 1997 represents actual reported net
income.
(2) In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per share," and all per share data has been
restated.
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, 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. 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. See "Item
1--Business--Risk Factors--Seasonal and Quarterly Fluctuations."
In fiscal 1998, the Company has adjusted its mailing schedule to more
closely mirror what the Company believes to be the emerging catalog purchasing
trends of its dELiA*s catalog customers. Accordingly, the Company has increased
the number of catalogs it plans to mail in the first and fourth quarters
relative to the number of catalogs
24
<PAGE>
it plans to mail in the second and third quarters. In addition, the Company also
intends to mail additional TSI Soccer catalogs in the second quarter of fiscal
1998 in connection with the quadrennial World Cup soccer competition.
Liquidity and Capital Resources
Without giving effect to the TSI Merger, since its inception, the Company
has met its operating and cash requirements through funds generated from
operations, the private sales of equity securities and the 1997 Offering. TSI's
operating and cash requirements were provided primarily by bank loans, loans
from stockholders and private equity financing. Following the consummation of
the TSI Merger, the Company repaid substantially all of TSI's outstanding
long-term debt and bank line of credit. The Company expects that this will have
a slight positive effect on interest income, net, in fiscal 1998.
Giving effect to the TSI Merger in the manner described in Note 3 to the
Financial Statements, cash provided by operations in fiscal 1997 was $6.6
million, $6.3 million in fiscal 1996 and $778,000 in fiscal 1995. This trend was
primarily due to the growth of the Company's business and the increase in net
income over these periods.
Cash used in investing in fiscal 1997 was $43.0 million, $1.6 million in
fiscal 1996 and $467,000 in fiscal 1995, as the Company used the net proceeds of
the IPO and the 1997 Offering to invest in interest-bearing, investment-grade
securities. The Company made capital expenditures of $467,000 in fiscal 1995,
$1.6 million in fiscal 1996 and $4.8 million in fiscal 1997. The Company
currently expects to make capital expenditures in excess of $3.0 million to
upgrade its management information systems in fiscal 1998. The Company also
currently anticipates capital expenditures of at least $5.0 million in fiscal
1998 for other property, plant and equipment, including leasehold improvements,
office equipment and expenditures relating to the Company's new warehouse and
distribution operations.
Cash flows from financing activities in fiscal 1997 were $19.2 million as a
result of the 1997 Offering and private equity financing for TSI (prior to the
TSI Merger), and $16.3 million in fiscal 1996 as a result of the IPO.
Cash and cash equivalents decreased by approximately $17.2 million to $4.5
million at January 31, 1998 from $21.7 million at January 31, 1997, as the
Company received $19.4 in net proceeds from the 1997 Offering, offset by the
Company's shift of a portion of its investments to securities with maturities of
greater than 90 days and increased its inventory position during the fiscal
year. These securities consist primarily of AA and AAA-rated municipal
obligations with a maximum maturity of three years.
During the fiscal year prior to the IPO, 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 10 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 $5.0 million. The interest rate on
the line of credit is the lending bank's prime rate plus two percent (10.5% at
January 31, 1998). The line expires on July 31, 1998. 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 IPO and the 1997 Offerings, will be
sufficient to meet its capital and operating requirements through fiscal 1998,
subject to the use of cash to make acquisitions and other investments. 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.
25
<PAGE>
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 Company has determined that the adoption of this new standard would
not have had a material effect on the Company's disclosure for all periods
presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which is effective for periods 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 value 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.
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, dELiA*s LLC, a predecessor of 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. Deloitte & Touche LLP's reports on the financial
statements for fiscal 1996 and fiscal 1997 did not contain an adverse opinion or
a disclaimer of opinion, and were 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 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.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Financial Statements on page F-1.
(b) The Company filed a Current Report on Form 8-K dated December 24, 1997
which included items 2 and 7.
(c) See Exhibit Index immediately following Signature Page.
27
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
INDEPENDENT AUDITORS' REPORTS .......................................................... F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of January 31, 1997 and 1998 ........................... F-5
Consolidated Statements of Operations for the fiscal years ended January 31, 1996, 1997
and 1998 ............................................................................. F-6
Consolidated Statements of Stockholders' Equity for the fiscal years ended January 31,
1996, 1997 and 1998 .................................................................. F-7
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1996, 1997
and 1998 ............................................................................. F-8
Notes to Consolidated Financial Statements ............................................ F-9
</TABLE>
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 consolidated balance sheets of dELiA*s Inc. and subsidiaries
(the "Company") as of January 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the fiscal
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits. The consolidated financial statements
give retroactive effect to the merger between a wholly-owned subsidiary of the
Company and TSI Soccer Corporation ("TSI"), which has been accounted for as a
pooling of interests as described in Note 3 to the consolidated financial
statements. We did not audit the balance sheet of TSI as of December 31, 1996,
or the related statements of operations, stockholders' equity and cash flows of
TSI for the year ended December 31, 1996, which statements reflect total assets
of $5.3 million as of December 31, 1996, and total revenues of $24.0 million for
the year ended December 31, 1996. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, in so far as it
relates to the amounts included for TSI for 1996, is based solely on the report
of such other auditors.
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, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company at January 31, 1998 and
1997, and the results of its operations and its cash flows for the fiscal years
then ended in conformity with generally accepted accounting principles.
Other auditors previously audited and reported on the consolidated statements of
operations, stockholders' equity, and cash flows of dELIA*s Inc. for the fiscal
year ended January 31, 1996, prior to their restatement for the December 1997
pooling of interests, and their report dated April 14, 1996 (December 18, 1996
with respect to the share issuance in Note 1) expressed an unqualified opinion
on those statements. The financial statements of TSI for the year ended December
31, 1995 were audited by other auditors, whose report dated March 18, 1998
expressed an unqualified opinion. We audited the combination of the accompanying
consolidated statements of income, changes in stockholders' equity, and cash
flows for the fiscal year ended January 31, 1996, after restatement for the
December 1997 pooling of interests; in our opinion, such consolidated statements
have been properly combined on the basis described in Note 3 to the consolidated
financial statements.
Deloitte & Touche LLP
March 20, 1998
New York, New York
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
dELiA*s Inc.
New York, New York
We previously audited the statements of operations, stockholders' equity and
cash flows (not presented herein) of dELiA*s Inc. for the year ended January 31,
1996, prior to their restatement for the December 1997 pooling-of-interests.
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, the financial statements enumerated above (not presented herein)
present fairly, in all material respects, the results of operations and cash
flows of dELiA*s Inc. for the year ended January 31, 1996, prior to the
restatement for the December 1997 pooling-of-interests, 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>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
TSI Soccer Corporation
Durham, North Carolina
We have audited the balance sheets of TSI Soccer Corporation as of December 31,
1996 and 1995 and the related statements of operations, stockholders' equity and
cash flows for the years then ended (not separately included herein). 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. These 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 referred to above present fairly, in
all material respects, the financial position of TSI Soccer Corporation at
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
High Point, North Carolina
March 18, 1998 BDO Seidman,
LLP
F-4
<PAGE>
dELiA*s INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1997 AND 1998
(In Thousands, Except Shares and per Share Data)
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $21,717 $ 4,485
Short-term investments ................................................... -- 37,075
Merchandise inventories .................................................. 7,005 11,233
Prepaid expenses and other current assets ................................ 1,030 4,020
Deferred income taxes .................................................... 586 1,100
------- -------
Total current assets .................................................... 30,338 57,913
------- -------
PROPERTY AND EQUIPMENT--Net ............................................... 2,211 6,222
OTHER ASSETS .............................................................. 111 437
------- -------
TOTAL ASSETS .............................................................. $32,660 $64,572
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable--bank ....................................................... $ 503 $ --
Bank overdrafts .......................................................... 521 5,002
Accounts payable ......................................................... 6,484 6,695
Accrued expenses and other current liabilities ........................... 2,199 5,157
Sales return allowance ................................................... 517 601
Liabilities due to customers ............................................. 618 1,206
Current maturities of long-term debt ..................................... 160 55
Current maturities of obligations under capital leases ................... 44 50
Income taxes payable ..................................................... 193 1,188
------- -------
Total current liabilities ............................................... 11,239 19,954
------- -------
DEFERRED CREDITS .......................................................... 14 310
LONG-TERM DEBT ............................................................ 293 30
OBLIGATIONS UNDER CAPITAL LEASES .......................................... 90 134
COMMITMENTS AND CONTINGENCIES (Note 16)
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--12,315,127 and 13,318,914 shares, at January 31,
1997 and 1998, respectively ............................................ 124 133
Note receivable from stockholder ......................................... (50) --
Deferred compensation .................................................... (147) (50)
Additional paid-in capital ............................................... 20,886 40,571
Retained earnings ........................................................ 211 3,490
------- -------
Total stockholders' equity .............................................. 21,024 44,144
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $32,660 $64,572
======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
dELiA*s INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
(In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
------------------------------------------
1996 1997 1998
------------- ---------- -------------
<S> <C> <C> <C>
NET SALES ............................................................ $23,391 $54,224 $ 113,049
COST OF SALES ........................................................ 13,652 28,291 57,811
------- ------- ---------
GROSS PROFIT ......................................................... 9,739 25,933 55,238
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......................... 9,720 22,194 47,943
MERGER RELATED COSTS (Note 3) ........................................ -- -- 1,614
INTEREST INCOME/(EXPENSE), NET ....................................... (56) 103 1,201
------- ------- ---------
INCOME /(LOSS) BEFORE PROVISION FOR INCOME TAXES ..................... (37) 3,842 6,882
PROVISION (BENEFIT) FOR INCOME TAXES ................................. (5) (351) 2,456
--------- ------- ---------
NET INCOME/(LOSS) .................................................... $ (32) $ 4,193 $ 4,426
======== ======= =========
BASIC AND DILUTED NET INCOME/(LOSS) PER SHARE ........................ $ 0.00 $ 0.40 $ 0.34
======== ======= =========
PRO FORMA INCOME DATA (UNAUDITED) ....................................
Income/(loss) before provision for income taxes as reported ......... $ (37) $ 3,842
Pro forma provision/(benefit) for income taxes ...................... (15) 1,585
-------- -------
Pro forma net income/(loss) ......................................... $ (22) $ 2,257
======== =======
Pro forma basic and diluted net income/(loss) per share ............. $ 0.00 $ 0.22
======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
dELiA*s INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock
------------------------
Note
Number of Receivable
Shares Amount from Stockholder
------------- ---------- ------------------
<S> <C> <C> <C>
BALANCE, JANUARY 31, 1995 ............. 8,455,896 $85 $ --
Issuance of common stock .............. 998,666 10 --
Net (loss) ............................ -- -- --
--------- --- ------
BALANCE, JANUARY 31, 1996 ............. 9,454,562 95 --
Issuance of common stock .............. 808,065 8 (50)
LLC Distribution (Note 1) ............. -- -- --
Net proceeds from issuance of
common stock in initial public
offering (Note 1) .................... 2,052,500 21 --
Deferred compensation expense
(Note 11) ............................ -- -- --
Net income ............................ -- -- --
--------- --- ------
BALANCE, JANUARY 31, 1997 ............. 12,315,127 124 (50)
Cancellation of common stock .......... (49,523) (1) --
Net proceeds from issuance of
common stock in public offering 1,000,000 10 --
Issuance of common stock
(Note 11) ............................ 35,300 -- --
Payment of note receivable from
stockholder (Note 15) ................ -- -- 50
Issuance of common stock in
connection with acquisition
(Note 4) ............................. 5,000 -- --
Exercise of stock options ............. 2,250 -- --
Issuance of common stock in
satisfaction of Stock Appreciation
Rights (Note 3) ...................... 10,760 -- --
Deferred compensation expense
(Note 11) ............................ -- -- --
Net income ............................ -- -- --
Adjustment to conform fiscal year
of pooled company (Note 3) ........... -- -- --
---------- ----- ------
BALANCE, JANUARY 31, 1998 ............. 13,318,914 $133 $ --
========== ===== ======
<CAPTION>
Additional Retained Total
Deferred Paid-In Earnings/ Stockholders'
Compensation Capital (Deficit) Equity
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1995 ............. $ -- $1,130 $ (367) $ 848
Issuance of common stock .............. -- 90 -- 100
Net (loss) ............................ -- -- (32) (32)
------ -------- --------- --------
BALANCE, JANUARY 31, 1996 ............. -- 1,220 (399) 916
Issuance of common stock .............. (217) 259 -- --
LLC Distribution (Note 1) ............. -- (417) (3,583) (4,000)
Net proceeds from issuance of
common stock in initial public
offering (Note 1) .................... -- 19,824 -- 19,845
Deferred compensation expense
(Note 11) ............................ 70 -- -- 70
Net income ............................ -- -- 4,193 4,193
------ -------- --------- --------
BALANCE, JANUARY 31, 1997 ............. (147) 20,886 211 21,024
Cancellation of common stock .......... 5 (4) -- --
Net proceeds from issuance of
common stock in public offering -- 19,415 -- 19,425
Issuance of common stock
(Note 11) ............................ -- 638 -- 638
Payment of note receivable from
stockholder (Note 15) ................ -- -- -- 50
Issuance of common stock in
connection with acquisition
(Note 4) ............................. -- (108) -- (108)
Exercise of stock options ............. -- (23) -- (23)
Issuance of common stock in
satisfaction of Stock Appreciation
Rights (Note 3) ...................... -- (233) -- (233)
Deferred compensation expense
(Note 11) ............................ 92 -- -- 92
Net income ............................ -- -- 4,426 4,426
Adjustment to conform fiscal year
of pooled company (Note 3) ........... -- -- (1,147) (1,147)
------ -------- --------- --------
BALANCE, JANUARY 31, 1998 ............. $ (50) $40,571 $ 3,490 $ 44,144
====== ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
dELiA*s INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
(In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
----------------------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ (32) $ 4,193 $ 4,426
Adjustment to conform fiscal year of pooled company ..................... -- -- (1,147)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 152 288 857
Loss on disposition of fixed assets .................................... 2 -- 85
Amortization of investments ............................................ -- -- 204
Sales return allowance ................................................. 90 347 84
Compensation expense related to issuance of Restricted Stock ........... -- 70 92
Compensation expense related to Stock Appreciation Rights .............. -- -- 233
Decrease in notes receivable from stockholder .......................... -- -- 50
Changes in operating assets and liabilities:
Merchandise inventories ................................................ (749) (4,827) (4,228)
Prepaid expenses and other current assets .............................. (359) (449) (2,990)
Deferred income taxes .................................................. (9) (577) (514)
Other assets ........................................................... (78) (32) (130)
Accounts payable and bank overdrafts ................................... 1,578 4,763 4,692
Accrued expenses and other current liabilities ......................... 102 1,800 2,958
Liabilities due to customers ........................................... 76 542 588
Income taxes payable ................................................... 5 131 995
Deferred credits ....................................................... -- 14 296
------- -------- ---------
Net cash provided by operating activities ................................ 778 6,263 6,551
------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................... (467) (1,551) (4,839)
Purchase of investment securities:
Held-to-maturity ....................................................... -- -- (62,782)
Available-for-sale ..................................................... -- -- (49,501)
Proceeds from maturity of held-to maturity investment securities ........ -- -- 32,555
Proceeds from sale of available-for-sale investment securities .......... -- -- 42,450
Acquisition of businesses ............................................... -- -- (843)
------- -------- ---------
Net cash used in investing activities .................................... (467) (1,551) (42,960)
------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock .............................. 100 19,845 20,063
Exercise of stock options ............................................... -- -- 23
Payments for dividends .................................................. -- (4,000) --
Net borrowings (repayments) under line of credit agreement .............. (151) 503 (503)
Proceeds from issuance of long-term debt ................................ -- 68 --
Principal payments on long-term debt .................................... (142) (114) (368)
Principal payments on capital lease obligations ......................... (27) (23) (38)
------- -------- ---------
Net cash (used in) provided by financing activities ..................... (220) 16,279 19,177
------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 91 20,991 (17,232)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 635 726 21,717
------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $ 726 $ 21,717 $ 4,485
------- -------- ---------
SUPPLEMENTARY CASH FLOWS INFORMATION:
Income taxes paid ....................................................... $ -- $ 96 $ 1,738
======= ======== =========
Interest paid ........................................................... $ 80 $ 119 $ 255
======= ======== =========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
1. BUSINESS AND BASIS OF PRESENTATION
dELiA*s Inc. (together with its consolidated subsidiaries, the "Company" or
"dlnc") is a leading 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") and, as a result of a recent acquisition (see Note 3)
of soccer merchandise to Generation Y boys and girls. Through its dELiA*s
catalog, the Company offers a broad selection of recognized and emerging brands
of teen apparel and accessories, complemented by the Company's own branded
products. Through its TSI Soccer catalog and its 13 TSI Soccer retail stores,
the Company offers a wide range of soccer shoes, apparel and equipment to young
soccer enthusiasts. The Company maintains a corporate headquarters,
telemarketing and customer service group in New York, New York and operates a
fulfillment facility for processing merchandise in Hanover, Pennsylvania and, in
the fourth quarter of fiscal 1997, opened a dELiA*s retail store in Reading,
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 "IPO"), dLLC and dInc engaged in a
reorganization transaction (the "1996 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 1996 Reorganization, dInc issued 10,000,000 shares of Common
Stock to dLLC, of which 704,474 shares are restricted under the Company's
Restricted Stock Plan. See Note 17. The 1996 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 1996 Reorganization as described above, which was
accounted for on a basis similar to a pooling of interests.
In December 1996, the Company completed the IPO, and sold 2,052,500 shares
of Common Stock at a public offering price of $11.00 per share. The Company
received net proceeds of $19.8 million. In June 1997, the Company completed a
public offering of 1,000,000 shares of Common Stock at a public offering price
of $21.00 per share (the "1997 Offering"). The Company received net proceeds of
$19.4 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Fiscal Year--The Company's fiscal year ends on January 31. The
consolidated financial statements have been retroactively restated to
include the financial statements of TSI Soccer Corporation ("TSI") for all
periods prior to the consummation of the acquisition discussed in Note 3.
b. Principles of Consolidation--The consolidated financial statements include
the accounts of dInc and subsidiaries, all of which are wholly-owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
c. 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.
d. Investments--The Company's short-term and long-term investments consist of
equity securities, debt securities, principally instruments of the U.S.
Government and its agencies, of municipalities, and of short-term mutual
municipal and corporate bond funds.
F-9
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --Continued
Securities that may be sold as part of the Company's asset management
strategy, in response to or in anticipation of changes in interest rates,
or for other similar factors, are classified as available for sale and
carried at fair value. Unrealized holding gains and losses on such
securities are reported net of related taxes, if any, as a separate
component of stockholders' equity. Securities that the Company has the
ability and positive intent to hold to maturity are classified as held to
maturity and carried at amortized cost. There are no trading account
securities. Realized gains and losses on sales of securities are reported
in earnings and computed using the specific identification cost basis.
e. 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.
f. 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 AICPA Statements 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 bear to the
total current and estimated future period revenues for that catalog cost
pool. Deferred catalog costs as of January 31, 1997 and 1998 were $532,000
and $3,226,000, respectively. Catalog costs, which are reflected in
selling, general and administrative expenses, for the fiscal years ending
January 31, 1996, 1997 and 1998 were $4,368,000, $8,171,000 and
$22,637,000, respectively.
g. 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 7.
h. Other Assets--Other assets include goodwill which is amortized on a
straight-line basis over 10 years and costs related to trademarks and
licenses of the Company, which are being amortized on a straight-line
basis over 20 years.
i. Income Taxes--Prior to the IPO, 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 discussed in Note 1, the Company has effected the 1996
Reorganization that changed the income tax status of the Company to a
taxable C corporation. Subsequent to the 1996 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 10.
j. 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.
k. Revenue Recognition--Mail-order revenue is recognized when merchandise is
shipped to customers. Retail sales are recognized at the point of sale.
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, 1997 and 1998, sales return allowances were $517,000 and
$601,000, respectively.
l. 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 the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-10
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --Continued
m. Recent Accounting Pronouncements--In February 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 129, "Disclosure of
Information About Capital Structure," which is effective for periods
ending after December 15, 1997. SFAS No. 129 establishes standards for
disclosing information about an entity's capital structure by superseding
and consolidating previously issued accounting standards. The financial
statements of the Company are prepared in accordance with the requirements
of SFAS No. 129.
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 Company has determined that the adoption of this
new standard would not have had a material effect on the Company's
disclosure for all periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information," which is effective for periods
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.
3. ACQUISITION OF TSI SOCCER CORPORATION
On December 10, 1997, the Company acquired TSI. Pursuant to an Agreement
and Plan of Merger, a wholly-owned subsidiary of the Company was merged with and
into TSI (the "TSI Merger"). As of result of the TSI Merger, TSI became a
wholly-owned subsidiary of the Company. In connection with the TSI Merger, the
Company issued an aggregate of 308,687 shares of common stock, par value $.01
per share, including 297,927 shares to certain stockholders of TSI, and 10,760
shares of common stock to employees of TSI pursuant to a "change of control"
provision in TSI's stock appreciation rights plan. The Company also made cash
payments of approximately $730,000 to former stockholders of TSI who exercised
statutory dissenters rights. The TSI Merger was structured as a tax-free
exchange and the Company has accounted for the TSI Merger as a
pooling-of-interests. As such, prior financial statements and information have
been restated to include TSI, as if the companies had been combined for all
periods presented.
Prior to the acquisition, TSI prepared its financial statements with a
fiscal year ending December 31. In 1997 the combined companies reported on the
basis of dInc's fiscal year, which ends on January 31. Accordingly, the
Consolidated Statement of Operations for the fiscal year ended January 31, 1998
includes the results of TSI for the year ended December 31, 1997. As a result,
TSI's operations for the one-month period ended January 31, 1998 are not
reflected in the Consolidated Statements of Operations for the fiscal year ended
January 31, 1998. TSI's operating results for the one-month period ended January
31, 1998, comprising total revenues and a net loss of approximately $986,000 and
$1,147,000, respectively, are reflected as an adjustment to retained earnings.
The results for this one-month period reflect no unusual items and the seasonal
nature of the business.
F-11
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
3. ACQUISITION OF TSI SOCCER CORPORATION --Continued
Merger related costs totaling $1.6 million included professional fees,
costs related to the consolidation of distribution facilities including a
provision for lease termination and the writeoff of property and equipment, and
cancellation of contracts.
The table below sets forth the unaudited separate and combined results of
dInc and TSI for the fiscal year ended January 31, 1998.
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31, 1998
------------------
(unaudited)
<S> <C>
Total Revenues
dlnc ............ $ 86,610,000
TSI ............. 26,439,000
------------
Total ........... $113,049,000
============
Net Income (Loss)
dlnc ............ $ 5,861,000
TSI ............. (1,435,000)
------------
Total ........... $ 4,426,000
============
</TABLE>
4. ACQUISITION OF gURL, INTERACTIVE INC.
On December 17, 1997, a wholly-owned subsidiary of the Company acquired the
net assets of gURL, Interactive Inc. ("GURL"), an interactive entertainment Web
site for girls, for 5,000 shares of common stock and cash. The acquisition was
accounted for by the purchase method and the results of the operations of the
acquired business have been included in the consolidated financial statements
since the date of acquisition. The excess of the purchase price over the fair
values of the net assets acquired was approximately $208,000 and has been
recorded as goodwill, and is being amortized on the straight-line basis over 10
years. On the basis of a pro forma consolidation of the results of operations as
if the acquisition had taken place at the beginning of fiscal 1996, consolidated
net revenues, income and earnings per share would not have been materially
different from the reported amounts for fiscal 1996, 1997 and 1998. As part of
the acquisition of gURL, the former shareholders were granted the right to
receive an aggregate of 10,000 additional shares of common stock on December 17,
1998 and 1999, subject to the satisfaction of certain performance targets for
the gURL Web site, which will be recorded as additional goodwill.
5. INVESTMENTS
Available for Sale Securities
The amortized cost and estimated fair values of available for sale
securities at January 31, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealization Unrealization Fair
Cost Gains Losses Value
------------ --------------- --------------- -----------
<S> <C> <C> <C> <C>
Mutual funds investing in municipal $7,051,000 $-- $-- $7,051,000
obligations ......................... ------------ --------------- --------------- -----------
$7,051,000 $-- $-- $7,051,000
Total Equity Securities ............. ------------ --------------- --------------- -----------
</TABLE>
For the year ended January 31, 1998, the Company had no gross realized
gains or losses on the sale of available for sale securities.
F-12
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
5. INVESTMENTS --Continued
Held to Maturity Securities
The amortized cost and estimated fair values of held to maturity securities
at January 31, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealization Unrealization Fair
Cost Gains Losses Value
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
$30,024,000 $57,000 $-- $30,081,000
Municipal Bonds ............... ------------- --------------- --------------- ------------
$30,024,000 $57,000 $-- $30,081,000
Total Debt Securities ......... ------------- --------------- --------------- ------------
</TABLE>
The amortized cost and estimated fair value of debt securities at January
31, 1998, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
-------------- --------------
<S> <C> <C>
Due in one year or less ......... $30,024,000 $30,081,000
=========== ===========
</TABLE>
6. PREPAID EXPENSE AND OTHER CURRENT ASSETS Prepaid expenses and other current
assets consisted of:
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
------------- ------------
<S> <C> <C>
Deferred catalog costs ......... $ 532,000 $3,226,000
Other .......................... 498,000 794,000
---------- ----------
Total .......................... $1,030,000 $4,020,000
========== ==========
</TABLE>
7. PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
Estimated January 31, January 31,
Useful Lives 1997 1998
--------------- ------------- ------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ...................... 5-10 years $2,137,000 $5,444,000
Leasehold improvements ................................. Term of lease 482,000 1,842,000
---------- ----------
Total--at cost ......................................... 2,619,000 7,286,000
Less accumulated depreciation and amortization ......... 408,000 1,064,000
---------- ----------
Total property and equipment--net ...................... $2,211,000 $6,222,000
========== ==========
</TABLE>
8. CREDIT AND FINANCING AGREEMENTS
At January 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 plus two percent
(10.5 percent at January 31, 1998). There were no funds borrowed under the
agreement during the fiscal years ended January 31, 1996, 1997, and 1998. The
line expires on July 31, 1998.
At January 31, 1997, the Company had a line of credit agreement with a bank
providing borrowings up to $1.2 million subject to bank approval. At January 31,
1997, outstanding borrowings under this agreement were $503,000. There were no
funds borrowed under this agreement as of January 31, 1998.
Outstanding letters of credit established to facilitate international
merchandise purchases at January 31, 1998 were $1,633,000.
F-13
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
9. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
------------- ------------
<S> <C> <C>
Installment notes payable, $5,057 per month, including interest at
9.9% through November, 1999, collateralized by vehicles ......... $102,000 $85,000
Note to bank, payable $5,555 per month, plus interest at the prime
rate plus 1.25% through October, 1999, collateralized by
substantially all the assets of the Company ..................... 189,000 --
Subordinated unsecured notes payable to stockholders, $13,500 per
quarter, plus interest at 10% through December, 1999 ............ 162,000 --
-------- -------
453,000 85,000
Less current maturities .......................................... 160,000 55,000
-------- -------
Total long-term debt ............................................. $293,000 $30,000
======== =======
</TABLE>
Scheduled maturities of the Company's long-term debt for the next two years
are as follows:
1998--$55,000; and 1999--$30,000.
10. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1996 Fiscal Year 1997
Ended Ended Ended
January 31, 1996 January 31, 1997 January 31, 1998
------------------ ------------------ -----------------
<S> <C> <C> <C>
Federal:
Current .......................... $ 1,000 $ 14,000 $2,262,000
Deferred ......................... (7,000) (478,000) (498,000)
-------- ---------- ----------
Total federal ................... (6,000) (464,000) 1,764,000
State and local:
Current .......................... 3,000 212,000 694,000
Deferred ......................... (2,000) (99,000) (2,000)
-------- ---------- ----------
Total state and local ........... 1,000 113,000 692,000
-------- ---------- ----------
Total provision (benefit) ......... $ (5,000) $ (351,000) $2,456,000
======== ========== ==========
</TABLE>
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 as all taxable income was taxed directly at the
shareholder and membership level. In 1996, the Company effected the 1996
reorganization that changed the income tax status of the Company to a taxable C
corporation. As discussed in Note 3, in December 1997, the Company acquired TSI,
a C corporation.
F-14
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
10. INCOME TAXES --Continued
The effective income tax rates differed from the federal statutory income
tax rates as follows:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1996 Fiscal Year 1997
Ended Ended Ended
January 31, 1996 January 31, 1997 January 31, 1998
------------------ ------------------ -----------------
<S> <C> <C> <C>
Federal taxes at statutory rates ..................... $ (13,000) $ 1,306,000 $2,340,000
State and local taxes net of federal benefit ......... -- 273,000 451,000
Effect of S Corporation and LLC ...................... (12,000) (1,923,000) --
Tax-exempt interest income ........................... -- -- (346,000)
Other ................................................ 20,000 (7,000) 5,000
--------- ------------ ----------
$ (5,000) $ (351,000) $2,456,000
========= ============ ==========
</TABLE>
The tax effect of temporary differences and carryforwards which give rise
to deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
January 31, 1997 January 31, 1998
------------------ -----------------
<S> <C> <C>
Deferred tax assets:
Inventory reserves .......................... $ 211,000 $ 790,000
Sales return allowance ...................... 189,000 238,000
Deferred compensation expense ............... 33,000 68,000
Uniform capitalization--inventories ......... 65,000 258,000
Net operating loss .......................... 227,000 328,000
Reserves and accruals ....................... -- 425,000
Other ....................................... 22,000 204,000
---------- ------------
Total deferred tax assets .................. 747,000 2,311,000
---------- ------------
Deferred tax liabilities:
Catalog costs ............................... (111,000) (1,211,000)
Property and equipment ...................... (50,000) --
---------- ------------
Total deferred tax liabilities ............. (161,000) (1,211,000)
---------- ------------
Net deferred tax asset ..................... $ 586,000 $ 1,100,000
========== ============
</TABLE>
The Company has a net operating loss carryover ("NOL") of approximately
$800,000 at January 31, 1998 representing the separate company loss of TSI
existing at the date of acquisition. Although this NOL is subject to limitations
under provisions of the Internal Revenue Code, the Company expects to fully
utilize this NOL in future periods. The NOL expires in 2012.
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 1996 Reorganization described in
Note 1 for all periods presented and which reflects the provision/benefit for
income taxes assuming the TSI merger was consummated on February 1, 1995, the
beginning of the earliest period presented. A proforma provision for fiscal year
1997 is not presented as both dInc and TSI were taxable C Corporations for the
entire year.
F-15
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
10. INCOME TAXES --Continued
The pro forma provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1996
Ended Ended
January 31, 1996 January 31, 1997
------------------ -----------------
<S> <C> <C>
Federal:
Current ............................ $ (23,000) $1,308,000
Deferred ........................... 10,000 (176,000)
--------- ----------
Total federal ..................... (13,000) 1,132,000
State and local:
Current ............................ (4,000) 491,000
Deferred ........................... 2,000 (38,000)
--------- ----------
Total state and local ............. (2,000) 453,000
--------- ----------
Total provision (benefit) ......... $ (15,000) $1,585,000
========= ==========
</TABLE>
11. STOCKHOLDERS' EQUITY
Effective upon the 1996 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, 12,315,127 and 13,318,914 shares issued and outstanding at January
31, 1997 and 1998, respectively.
Prior to January 31, 1996, dLLC issued Class A Membership Interests for
capital contributions of $1,300,000, which upon the 1996 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 1996 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 years ended January 31, 1997 and 1998 was $70,000
and $92,000, respectively. Upon the 1996 Reorganization, the Class B restricted
membership interests converted into 704,474 shares of restricted common stock.
See Note 17 and Note 19.
During the fiscal year ended January 31, 1998, TSI issued 134,409
additional shares of TSI common stock at $4.75 per share. Of the 134,409 shares
issued, $113,400 of the subordinated unsecured notes payable to TSI stockholders
were repaid through the issuance of 23,834 shares of common stock of TSI. Net
proceeds from the sale of the balance of 110,575 shares at $4.75 per share were
used principally to fund working capital. The 134,409 shares of TSI common stock
were exchanged for 35,300 shares of dInc's common stock in the TSI Merger. (See
Note 3).
F-16
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended January 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
January 31, January 31, January 31,
1996 1997 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Number of shares on which basic earnings per share is
calculated:
Average outstanding during the period ................ 10,263,000 10,477,000 12,941,000
Add: Incremental shares under stock incentive plan
and stock option agreements ......................... -- 22,000 142,000
---------- ---------- ----------
Number of shares on which diluted earnings per share is
calculated ........................................... 10,263,000 10,499,000 13,083,000
========== ========== ==========
Net income (loss) ..................................... $ (32,000) $ 4,193,000 $ 4,426,000
========== ============ ============
Basic and diluted income per share .................... $ 0.00 $ 0.40 $ 0.34
========== ============ ============
</TABLE>
Stock options to purchase 0, 0, and 7,000 shares for the fiscal years ended
January 31, 1996, 1997 and 1998, respectively, were outstanding but not included
in the computation of diluted earnings per share because the option's exercise
price was greater than the average market price of the common stock and
therefore the effect would be antidilutive.
13. INTEREST INCOME--NET
Interest income--net consists of the following:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1996 Fiscal Year 1997
Ended Ended Ended
January 31, 1996 January 31, 1997 January 31, 1998
------------------ ------------------ -----------------
<S> <C> <C> <C>
Interest income ........................ $ 25,000 $ 176,000 $1,392,000
Interest expense ....................... (81,000) (73,000) (191,000)
--------- --------- ----------
Interest income (expense)--net ......... $ (56,000) $ 103,000 $1,201,000
========= ========= ==========
</TABLE>
14. 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 value amounts reported in the
balance sheets for cash and cash equivalents, receivables, accounts payable and
long-term debt approximate fair values. The fair values of current and
noncurrent investments were estimated based on quotes obtained from brokers for
those instruments (see Note 5). The carrying amounts and fair values of the
Company's investments at January 31, 1998 are as follows:
<TABLE>
<CAPTION>
January 31, 1998
-------------------------------
Carrying Fair
Value Value
-------------- --------------
<S> <C> <C>
Debt Securities ........... $30,024,000 $30,081,000
Equity Securities ......... 7,051,000 7,051,000
</TABLE>
F-17
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
15. 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, included in prepaid expenses and other current assets,
which 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. These
receivables were repaid during the fiscal year ended January 31, 1998.
Payables to related parties as of January 31, 1997 included unsecured
subordinated notes payable to stockholders in the amount of $162,000. These
notes were repaid during the fiscal year ended January 31, 1998. See Note 11.
16. COMMITMENTS AND CONTINGENCIES
a. Leases
As of January 31, 1998, the Company was obligated under various long-term
operating leases for office, warehouse and distribution, and retail space,
and equipment requiring minimum annual rentals. These operating leases expire
on varying dates to 2008. At January 31, 1998 aggregate minimum rentals in
future periods are as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ending Capital Operating
January 31 Leases Leases Total
- ----------- ----------- ------------- -------------
<S> <C> <C> <C>
1999 ................................................ $ 68,000 $ 2,366,000 $ 2,434,000
2000 ................................................ 62,000 2,337,000 2,399,000
2001 ................................................ 40,000 1,960,000 2,000,000
2002 ................................................ 40,000 1,463,000 1,503,000
2003 ................................................ 17,000 1,066,000 1,083,000
Thereafter .......................................... -- 4,061,000 4,061,000
-------- ----------- -----------
Minimum lease payments .............................. 227,000 $13,253,000 $13,480,000
======== =========== ===========
Less: imputed interest and executary costs .......... 43,000
--------
Present value of net minimum lease payments ......... $184,000
========
</TABLE>
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, 1996, 1997 and 1998 was
$303,000, $730,000 and $2,069,000, respectively.
b. Benefit Plan
TSI has a 401(k) retirement plan covering all eligible employees. Under the
plan employees can defer 1% to 15% of compensation. The Company may make
matching contributions on a discretionary basis. The employee's contribution
is 100% vested and the Company's matching contribution vests over a five-year
period. The Company's contribution was $5,000 in 1997 and $13,000 in 1998.
17. 1996 RESTRICTED STOCK PLAN
Concurrent with the 1996 Reorganization, the Company approved and adopted
the 1996 Restricted Stock Plan (the "Restricted Stock Plan") pursuant to which
704,474 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.
F-18
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
17. 1996 RESTRICTED STOCK PLAN --Continued
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.
18. 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 an exercise price of $11.00 per
share, the fair market value on the date of grant (the "Exercise Price"). The
option becomes exercisable as to 50,000 shares on each of July 21, 1997, 1998,
1999, 2000 and 2001.
Concurrent with the 1996 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 the 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 IPO, an option to purchase 40,000 shares each of
Common Stock at an exercise price per share equals to the IPO price. All options
granted to non-employee directors will become exercisable at the rate of 20% in
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.
A summary of the status of the options to purchase shares of Common Stock
outstanding as of January 31, 1997 and 1998 follows:
<TABLE>
<CAPTION>
January 31, 1997 January 31, 1998
---------------------------- -----------------------------
Weighted Weighted
Options Exercise Price Options Exercise Price
--------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period .............. -- $ -- 383,750 $11.00
Granted ..................................... 383,750 11.00 362,937 19.13
Exercised ................................... -- -- (2,250) 11.00
Canceled .................................... -- -- -- --
------- ------ ------- ------
Outstanding at end of period ................. 383,750 $ 11.00 744,437 $ 14.96
======= ======= ======= =======
Options exercisable at end of period ......... -- $ -- 107,500 $ 11.24
======= ======= ======= =======
</TABLE>
F-19
<PAGE>
dELiA*s INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
18. STOCK OPTIONS --Continued
The options outstanding as of January 31, 1998 range in price as follows
<TABLE>
<CAPTION>
Number of Options Price Range
- --------------------- -------------------
<S> <C>
744,487 ............................................................ $11.00--$24.25
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting
for the stock option and purchase plans. Accordingly, no compensation expense
has been recognized for those plans in the years ended January 31, 1997 and
1998. Had compensation expense been determined based on the fair value of stock
option grants on the date of grant consistent with SFAS No. 123, the effect on
the Company's net income and earnings per share for the years ended January 31,
1997 and 1998 would have been as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net income ................................................ $ 4,193 $ 4,426
======= =======
Pro forma net income ...................................... $ 4,162 $ 3,345
======= =======
Basic and diluted net income per share .................... $ 0.40 $ 0.34
======= =======
Pro forma basic and diluted net income per share .......... $ 0.40 $ 0.26
======= =======
</TABLE>
The estimated fair market value of options granted during the years ended
January 31, 1997 and 1998 was $4.08 and $7.30 per share. The fair value of
options granted by the Company during the year ended January 31, 1997 and 1998
was estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used: no dividend yield; expected volatility of 45
percent; risk-free interest rate of 6.4 percent and 5.5 percent; expected lives
of three to five years.
19. FAMILY STOCKHOLDERS' AGREEMENT
Concurrent with the 1996 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 Company Stock they owned upon completion of the
1996 Reorganization for a period of two years from the date of the 1996
Reorganization. Thereafter, the Family Holders will be able to transfer such
shares in accordance with the requirements of Rule 144 under the Securities Act
of 1933. 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 26.7 percent of the outstanding Common
Stock as of January 31, 1998. The Family Stockholders' Agreement will expire on
the tenth anniversary of the completion of the 1996 Reorganization.
F-20
<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.
/s/ Stephen I. Kahn
-------------------------------------
Stephen I. Kahn
Chairman of the Board, President and
Chief Executive Officer
Date: April 30, 1998
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.
<TABLE>
<CAPTION>
Signatures Title Date
- --------------------------- ------------------------------- ---------------
<S> <C> <C>
/s/ Stephen I. Kahn Chairman of the Board, April 30, 1998
- ------------------------- President and Chief Executive
Stephen I. Kahn Officer (principal executive
officer)
/s/ Evan Guillemin Chief Financial Officer and April 30, 1998
- ------------------------- Treasurer (principal financial
Evan Guillemin and accounting officer)
/s/ Christopher C. Edgar Executive Vice President, April 30, 1998
- ------------------------- Chief Operating Officer and
Christopher C. Edgar Director
/s/ S. Roger Horchow Director April 30, 1998
- -------------------------
S. Roger Horchow
/s/ Sidney S. Kahn Director April 30, 1998
- -------------------------
Sidney S. Kahn
/s/ Geraldine Karetsky Director April 30, 1998
- -------------------------
Geraldine Karetsky
/s/ Joseph J. Pinto Director April 30, 1998
- -------------------------
Joseph J. Pinto
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
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 [omitted]
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
April 30, 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 April 30, 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
Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 1997)
21* Subsidiaries of the Registrant
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of Richard A. Eisner & Company LLP
23.3* Consent of BDO Seidman, LLP
27* Financial Data Schedule
</TABLE>
- ----------
* Filed herewith
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of dELiA*s Inc.: (i) Form S-3 (Registration No. 333-43665), (ii) Form
S-8 (Registration No. 333-42135) and (iii) Form S-8 (Registration No. 333-22449)
of our report dated March 20, 1998, appearing in the Annual Report on Form 10-K
of dELiA*s Inc. for the year ended January 31, 1998.
DELOITTE & TOUCHE LLP
New York, New York
April 30, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-22449 and 333-42135 of dELiA*s Inc. on Form S-3 and 333-43665 on Form S-3 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, 1998.
Richard A. Eisner & Company, LLP
New York, New York
April 30, 1998
Consent of Independent Certified Public Accountants
TSI Soccer Corporation
Durham, North Carolina
We hereby consent to the incorporation by reference in the following
Registration Statements of dELiA*s Inc.:
(i) Form S-3 (Registration No. 333-43665),
(ii) Form S-8 (Registration No. 333-42135) and
(iii) Form S-8 (Registration No. 333-22449)
of our report dated March 18, 1998, relating to the financial statements of TSI
Soccer Corporation, included in the Annual Report on Form 10-K of dELiA*s Inc.
for the year ended January 31, 1998.
High Point, North Carolina
April 30, 1998 BDO Seidman, LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,485
<SECURITIES> 37,075
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 11,233
<CURRENT-ASSETS> 57,913
<PP&E> 6,222
<DEPRECIATION> (1,064)
<TOTAL-ASSETS> 64,572
<CURRENT-LIABILITIES> 19,954
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 44,011
<TOTAL-LIABILITY-AND-EQUITY> 64,572
<SALES> 113,049
<TOTAL-REVENUES> 113,049
<CGS> 57,811
<TOTAL-COSTS> 105,754
<OTHER-EXPENSES> 1,614
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,882
<INCOME-TAX> 2,456
<INCOME-CONTINUING> 4,426
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,426
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
