-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UA8W/CB+Pj0Ch59NYd+N3yZoiiN13knOeGOUlMahgxDK75JDEZ0cdPjLCwHvNx8y XmHL5ScDjQbLLT/fxLJV4A== 0000940180-96-000674.txt : 19961223 0000940180-96-000674.hdr.sgml : 19961223 ACCESSION NUMBER: 0000940180-96-000674 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19961220 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELIA S INC CENTRAL INDEX KEY: 0001026114 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 133914035 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-15153 FILM NUMBER: 96683537 BUSINESS ADDRESS: STREET 1: 435 HUDSON ST CITY: NEW YORK STATE: NY ZIP: 10014 BUSINESS PHONE: 2128079060 MAIL ADDRESS: STREET 1: 435 HUDSON ST CITY: NEW YORK STATE: NY ZIP: 10014 424B1 1 PROSPECTUS DATED DECEMBER 19, 1996 RULE NUMBER 424(b)(1) REGISTRATION NUMBER 333-15153 PROSPECTUS - ---------- 2,350,000 SHARES [LOGO OF DELIA*S INC. APPEARS HERE] COMMON STOCK Of the 2,350,000 shares of Common Stock offered hereby, 2,000,000 shares are being sold by the Company and 350,000 shares are being sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." Prior to this offering, there has been no public market for the Common Stock of the Company. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol DLIA. ------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS - ---------------------------------------------------------------------------------------------------- Per Share.................. $11.00 $0.77 $10.23 $10.23 - ---------------------------------------------------------------------------------------------------- Total (3).................. $25,850,000 $1,809,500 $20,460,000 $3,580,500 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $600,000. (3) The Company and certain Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 352,500 additional shares of Common Stock, solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Stockholders will be $29,727,500, $2,080,925, $20,997,075 and $6,649,500, respectively.See "Underwriting." ------------ The shares of Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about December 24, 1996 at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST OPPENHEIMER & CO., INC. December 19, 1996 [PHOTOGRAPHS AND ART FROM DELIA*S CATALOGS.] The Company intends to distribute to its stockholders annual reports containing financial statements audited by its independent public accountants and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. "dELiA*s" is a registered trademark of the Company in the United States. Trade names and trademarks of other companies appearing in this Prospectus are the property of their respective holders. 2 [PHOTOGRAPHS AND ART FROM DELIA*S CATALOGS.] [PHOTOGRAPHS AND ART FROM DELIA*S CATALOGS.] PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY dELiA*s is a direct marketer of casual apparel and related accessories to girls and young women primarily between the ages of 10 and 24 (an age group known as "Generation Y"). The Company believes that it is one of a limited number of direct marketers distributing an apparel-based catalog exclusively for this market. The Company offers a carefully edited assortment of recognized and emerging brands of teen apparel and accessories, 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 believes that its selection and presentation of merchandise have contributed to a growing recognition of dELiA*s as a teen fashion resource. With the large "baby boom" generation maturing and having children, the younger segments of the U.S. population are increasing in size. According to the U.S. Census Bureau, the population of 10 to 24 year-olds is currently 55 million and is expected to grow by 12% to approximately 62 million by 2005. According to data from one independent research firm, teens spent approximately $109 billion in 1995. Another independent research firm estimated that apparel accounted for over one-third of teen spending on certain major categories of goods and services. As a result of the growing population and spending patterns of Generation Y and the limited number of national apparel retailers and catalogers exclusively targeting this age group, the Company believes that this large and underserved market represents a significant direct marketing opportunity. dELiA*s catalogs are designed to create a distinctive and entertaining shopping experience by combining the feel and editorial flair of a teen-focused fashion magazine with the convenience of direct mail shopping. The catalogs include colorful layouts with creative "catch phrases" and feature teen models who convey a culture and attitude unique to dELiA*s. Merchandise items are styled and arranged to encourage customers to create their own outfits, which typically can be purchased for under $100. The Company believes that its proprietary customer database is one of its key competitive advantages. This database has been developed primarily through referrals, word-of-mouth, returns of catalog request cards and targeted advertising. The Company believes that this database yields response rates that exceed average response rates for the consumer catalog industry and that this database would be difficult to replicate primarily because it consists mostly of names of persons who specifically requested the dELiA*s catalog and which may not be available through purchased or rented lists. As of October 31, 1996, the Company's database included over one million names, including approximately 200,000 customers who had made purchases from the Company within the preceding 24 months. The Company has customers in all 50 states and Japan. dELiA*s plans to increase catalog mailings from an anticipated 7 million in fiscal 1996 to approximately 18 million in fiscal 1997, and to increase the number of catalog editions from five in fiscal 1996 to seven in fiscal 1997. The Company's operations are supported by its integrated, state-of-the-art telephone and management information systems, which allow teleservice representatives to provide real-time product availability and order status information. As of October 31, 1996, the Company employed approximately 240 teleservice representatives to provide 24-hour, seven-day-a-week customer service. dELiA*s goal is to be the leading direct marketer of casual apparel, accessories and other related products to Generation Y girls and young women. The Company plans to build on its core catalog business and to leverage the dELiA*s brand identity to develop new channels of distribution and products aimed at the Generation Y market. Notwithstanding the significant direct marketing opportunities the Company believes exist for apparel, accessories and other related products targeted at the Generation Y market, the Company faces intense competition and has a limited operating history that makes it difficult to predict the Company's results of operations. In view of these risks and those more fully described under "Risk Factors," there can be no assurance the Company will achieve its goal of becoming the leading direct marketer of casual apparel, accessories and other related products to Generation Y girls and young women. The Company was incorporated in Delaware in October 1996 and is a successor to a business founded in September 1993. The Company's executive offices are located at 435 Hudson Street, New York, New York 10014, and its telephone number is (212) 807-9060. 3 THE OFFERING Common Stock offered by the Company................. 2,000,000 shares Common Stock offered by the Selling Stockholders.... 350,000 shares Common Stock to be outstanding after the offering... 12,000,000 shares (1) Use of proceeds..................................... For working capital and general corporate purposes Nasdaq National Market symbol....................... DLIA
SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 9, 1993 NINE MONTHS (INCEPTION) TO FISCAL YEAR 1994 FISCAL YEAR 1995 ENDED OCTOBER 31, JANUARY 31, ENDED ENDED ----------------- 1994 JANUARY 31, 1995 JANUARY 31, 1996 1995 1996 -------------- ---------------- ---------------- -------- --------- STATEMENTS OF OPERATIONS DATA: Net sales............. $ -- $ 139 $5,652 $ 2,844 $ 15,482 Gross profit.......... -- 50 2,574 1,391 8,061 Net income (loss)..... $ (33) $ (332) $ 27 $ (73) $ 1,739 Pro forma net income (loss) (2)........... $ (19) $ (202) $ 18 $ (44) $ 1,035 Pro forma net income (loss) per share (3).................. $(0.00) $(0.02) $ 0.00 $ (0.00) $ 0.10 Shares used in the calculation of pro forma net income (loss) per share (3).................. 10,000 10,000 10,000 10,000 10,000 SELECTED OPERATING DATA: Number of catalogs mailed............... -- 26 1,700 1,050 4,950(4) House names (5)....... -- 17 290 196 1,080
OCTOBER 31, 1996 ------------------------------------ ACTUAL PRO FORMA (6) AS ADJUSTED (7) ------ ------------- --------------- BALANCE SHEET DATA: Cash and cash equivalents................ $1,140 $19,599 Working capital.......................... 1,946 20,405 Total assets............................. 6,901 25,360 Total stockholders' equity............... 2,749 1,348 21,208
- -------------------- (1) Excludes 1,250,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan (under which options to purchase an aggregate of 261,000 shares of Common Stock will be outstanding immediately after the completion of this offering) and 250,000 shares of Common Stock reserved for issuance pursuant to an outstanding non-plan stock option the Company has granted to an executive. See "Management--1996 Stock Incentive Plan" and "Management--Stock Option Agreement." (2) Computed on the basis described in Note 6 of Notes to Financial Statements and assuming the pro forma tax provisions described therein. Prior to this offering, the Company effected the Reorganization described under "The Reorganization," in which the Company converted from a limited liability company to a C corporation. (3) See Note 2 of Notes to Financial Statements for an explanation of the determination of shares used in computing pro forma net income per share. (4) Does not include 750,000 copies of the Company's winter 1996 catalog mailed in October 1996. The Company did not mail any copies of its winter 1995 catalog in the nine months ended October 31, 1995. (5) 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 24 months, determined at the end of the applicable fiscal period. (6) Pro forma stockholders' equity gives effect to the portion of the LLC Distribution described in "Dividend Policy" that depended on the Company's results of operations from inception through October 31, 1996. (7) As adjusted gives effect to: (i) the portion of the LLC Distribution that depended on the Company's results of operations from inception through October 31, 1996 and (ii) the sale of 2,000,000 shares of Common Stock offered by the Company hereby and the application of the estimated proceeds therefrom. See "Capitalization" and "Dividend Policy." -------------------- Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock," "Underwriting" and Notes to Financial Statements. In addition, unless otherwise indicated, all information in this Prospectus gives effect to the Reorganization (as defined under "The Reorganization") that was effected prior to the completion of this offering. As used in this Prospectus, references to "dELiA*s" or the "Company" prior to the Reorganization mean dELiA*s LLC and its predecessor, and, thereafter, dELiA*s Inc. All references in this Prospectus to a particular fiscal year refer to the year ended January 31 following the particular year (e.g., "fiscal 1996" refers to the fiscal year ending January 31, 1997). 4 RISK FACTORS The following principal risk factors should be considered carefully in addition to the other information contained in this Prospectus before purchasing the Common Stock offered hereby. This Prospectus contains forward- looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this Prospectus. Limited Operating History. The Company has a limited operating history, and therefore it is difficult to predict the Company's future catalog response rates (the rates at which catalog recipients respond to catalog mailings by ordering products), merchandise return rates, success in identifying fashion trends and other elements that affect the Company's results of operations. Although the Company had net income in fiscal 1995 and the first nine months of fiscal 1996, the Company incurred losses of $33,000 from September 9, 1993 (inception) to January 31, 1994 and $332,000 in fiscal 1994. There can be no assurance the Company will achieve or sustain growth in revenues or maintain profitability in future periods. 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 first and second quarters than in the third and fourth quarters of each fiscal year (which include the back-to-school and holiday seasons). The Company's quarterly results may fluctuate as a result of numerous factors, including the timing, quantity and cost of catalog mailings (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 "Management's Discussion and Analysis of Financial Condition and Results of Operations." Changes in Fashion 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 apparel selection could adversely affect the Company's image with its customers, which 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 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 40% of the names of persons to whom the Company mailed its most recent catalog were derived from purchased or 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- 5 mouth requests. Accordingly, the Company anticipates that overall response rates would decline if it increased its use of purchased and rented lists relative to its use of names in its database. 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. The Company is not a list broker but it 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 sell lists containing information about teens. Consequently,the proposed legislation, or other similar laws or regulations that may 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. 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 the Company mails and the number of products included in its catalogs, as well as increases in response rates. This growth has placed significant demands on the Company's management, administrative, operational and financial resources. The Company intends to continue to pursue an aggressive growth 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 information systems and to continue to expand, motivate and effectively manage its workforce. 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 could 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 may 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 exploring a number of new business opportunities, including opening a retail store, 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 pursue or 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 "Business--Growth Strategy." The Company expects from time to time to consider acquisitions or investments within and outside the direct mail, retail and apparel industries. The Company has never made an acquisition, and if it does make an acquisition, there can be no assurance it will do so on favorable terms or that it will be able successfully to integrate any acquired business with its existing operations. Dependence on Key Vendors. The Company's business depends, in part, on the Company's ability to purchase current-season brand-name apparel at competitive prices, in sufficient quantities and of acceptable quality. Six vendors accounted for approximately 50% of the net sales generated by the Company's spring 1996 catalog, and five vendors accounted for approximately 53% of the net sales generated by the Company's summer 1996 catalog. Apparel produced by Urban Outfitters accounted for approximately 24% of net sales for each of the spring 1996 and summer 1996 catalogs. The Company does not have a long-term contract 6 with Urban Outfitters 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, 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. The loss of one or more of its key employees could have a material adverse effect on the Company. The direct marketing and apparel experience of a significant number of the Company's senior management personnel is limited to their experience with the Company. The Company's future success will depend on the ability of the Company's management to retain key managers and employ additional qualified senior operating management. There can be no assurance that the Company will be successful in attracting or retaining additional qualified personnel. Competition. The apparel and accessories 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 and accessory retailers for teen and young-adult customers. The Company also competes with other direct marketers. 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 Company expects other catalogers, as well as additional store-based retailers and apparel manufacturers, to enter this market. The Company also could face competition from manufacturers of apparel and accessories (including the Company's current vendors), who could market their products directly to retail customers or make their products more readily available in retail stores or through 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, 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. Fluctuations in Postage and Paper Expenses. Postage and paper expenses, in the aggregate, equalled approximately 12% of the Company's net sales in fiscal 1995 and 11% of the Company's net sales in the first nine months of fiscal 1996. 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. 7 Reliance on Third-Party Fulfillment and Parcel Services. All the Company's orders for merchandise are currently being handled by a single third-party fulfillment company at a single facility near Lancaster, Pennsylvania. Any disruption in fulfillment operations could have a material adverse effect on the Company and its reputation with customers. In addition, strikes or other service interruptions by the Company's shippers or parcel services could have a material adverse effect on the Company's ability to deliver merchandise on a timely basis. See "Business--Operations." 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 postal delays or disruptions in the mailing of catalogs, could affect the demand for the Company's products and could have a material adverse effect on the Company. See "Business--Operations--Distribution and Fulfillment." International Business Risks. The Company recently began to distribute its catalog in Japan and intends to increase distribution there and to explore distribution opportunities in other international markets. Approximately 1% of the Company's net sales for the first nine months of fiscal 1996 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 30% of the Company's gross sales derived from its early fall 1996 catalog were of products the Company believes were manufactured outside the United States), and the Company may in the future 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 "Business--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 (" LOGO ") 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 "Business--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. Unspecified Use of Proceeds. The principal purposes of this offering are to obtain additional capital to support anticipated growth, create a public market for the Common Stock, facilitate future access for the Company to public equity markets and enhance the Company's ability to use its Common Stock as consideration for potential acquisitions and as a means of attracting and retaining key employees. The Company expects to use the net proceeds from this offering primarily for working capital and general corporate purposes. The Company has no current specific plan for a significant portion of the proceeds of this offering, and, as a consequence, management will have discretion over the use of a significant portion of the proceeds. 8 Control by Principal Stockholder. At the completion of this offering, Stephen I. Kahn, the Chairman, Chief Executive Officer and President of the Company, will beneficially own approximately 71.9% (approximately 69.2%, if the Underwriters' over-allotment option is exercised in full) of the outstanding shares of Common Stock, including 3,903,738 shares he will own directly and an additional 4,723,051 shares in the aggregate subject to a stockholders agreement among certain of the Company's existing stockholders (the "Family 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. See "Principal and Selling Stockholders" and "Description of Capital Stock." Possibility of Adverse Effect on the Market Price of the Common Stock by Virtue of Certain Anti-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 66 2/3% 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 66 2/3% 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 66 2/3% 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 66 2/3% 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. See "Description of Capital Stock." Absence of Dividends. Following the completion of this offering, 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 "Dividend Policy." Absence of Prior Public Market; Possible Volatility of Stock Price. There has been no public market for the Common Stock prior to this offering, and there can be no assurance an active public market for the Common Stock will develop or continue after this offering. The initial public offering price for the Common Stock was determined by negotiations among the Company, the Selling Stockholders and the representatives of the Underwriters (the "Representatives"). See "Underwriting." There can be no assurance the market price of the Common Stock will not decline below the initial public offering price. 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 operating performance. In addition, future sales of Common Stock by the Company's existing stockholders following the completion of this offering and the expiration of the 180-day lock-up period referred to in "Possibility of Adverse Effect on the Market Price of the Common Stock by Virtue of Public Sales of Common Stock Following This Offering" below could have an adverse effect on the market price of 9 the Common Stock. See "--Possibility of Adverse Effect on the Market Price of the Common Stock by Virtue of Public Sales of Common Stock Following This Offering" below, "Shares Eligible for Future Sale" and "Underwriting." Possibility of Adverse Effect on the Market Price of the Common Stock by Virtue of Public Sales of Common Stock Following This Offering. Sales of substantial amounts of Common Stock in the public market following this offering (including shares issued upon the exercise of stock options) by current holders of the Company's Common Stock and stock options, or the perception that such sales might occur, could adversely affect the market price of the Common Stock and the Company's ability to raise additional equity capital. Upon the completion of this offering, 12,000,000 shares of Common Stock will be outstanding. The shares of Common Stock sold in this offering will be freely tradeable by persons other than "affiliates" of the Company without restriction under the Securities Act of 1933, as amended (the "Securities Act"). All other outstanding shares are subject to lock-up commitments, pursuant to which such shares may not be sold or otherwise disposed of for a period of 180 days after the date of this Prospectus (the "Lock-Up Period") without the prior written consent of Hambrecht & Quist LLC. Such shares consist of an aggregate of 7,400,396 shares that are subject to lock-up agreements (the "Lock-Up Agreements") with Hambrecht & Quist LLC and an aggregate of 4,723,051 shares that are subject to restrictions on transfer contained in the Family Stockholders Agreement or the Restricted Stock Plan, which restrictions the Company has agreed with Hambrecht & Quist LLC not to waive during the Lock-Up Period (without the prior written consent of Hambrecht & Quist LLC). Hambrecht & Quist LLC may release all or any portion of the shares subject to the Lock-Up Agreements. After termination of the Lock-Up Period, all such shares will become eligible for sale in the public market only in compliance with the registration requirements of the Securities Act or pursuant to a valid exemption from registration. See "Management-- Restricted Stock Plan," "Principal and Selling Stockholders" and "Shares Eligible for Future Sale." Dilution. Investors in this offering will incur an immediate dilution in net tangible book value per share of Common Stock of $9.26. See "Dilution." 10 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered by the Company are estimated to be $19,860,000 ($20,397,075 if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds primarily for working capital and general corporate purposes. The Company also is evaluating a future investment in its fulfillment operations. Pending such uses, the net proceeds will be invested in investment-grade, interest-bearing securities. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. See "Risk Factors--Unspecified Use of Proceeds" and "Principal and Selling Stockholders." DIVIDEND POLICY To date, the Company has neither declared nor paid any cash dividends (other than the LLC Distribution). The Company currently intends to retain its earnings for future growth and, therefore, does not anticipate paying any cash dividends in the foreseeable future. In connection with the Reorganization described below under "The Reorganization," prior to the completion of this offering, dELiA*s LLC made a distribution of $4.0 million to certain of its members, a portion of which is intended to be used for the payment by such members of taxes attributable to them by virtue of their respective ownership interests in dELiA*s LLC. The distribution (the "LLC Distribution") was paid in cash. See "Use of Proceeds." THE REORGANIZATION 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." As a limited liability company, dELiA*s LLC was treated for income tax purposes as a partnership with taxes on the income generated by dELiA*s paid by its members. In October 1996, dELiA*s Inc. was incorporated in Delaware. Prior to the completion of this offering, dELiA*s LLC and dELiA*s Inc. engaged in a reorganization transaction (the "Reorganization"), pursuant to which dELiA*s LLC contributed its assets to dELiA*s Inc. and dELiA*s Inc. assumed, and agreed to pay, perform and discharge, all liabilities of dELiA*s LLC (except for income tax liabilities). In connection with the Reorganization, dELiA*s Inc. issued 10,000,000 shares of Common Stock to dELiA*s LLC, of which 704,794 shares are restricted under the Company's Restricted Stock Plan. See "Management--Restricted Stock Plan." The LLC Distribution and the distribution of the 10,000,000 shares of Common Stock of dELiA*s Inc. were effected in accordance with the dELiA*s LLC operating agreement. As a result of the distribution of Common Stock, the members of dELiA*s LLC became stockholders of the Company and, as soon as practicable after the completion of this offering, the separate existence of dELiA*s LLC will cease. 11 CAPITALIZATION The following table sets forth the capitalization of the Company as of October 31, 1996 (i) on an actual basis, reflecting the completion of the Reorganization without giving effect to the LLC Distribution; (ii) on a pro forma basis to give effect to the portion of the LLC Distribution that depended on the Company's results of operations from inception through October 31, 1996; and (iii) on an adjusted basis, to give effect to the portion of the LLC Distribution that depended on the Company's results of operations from inception through October 31, 1996, the sale of 2,000,000 shares of Common Stock offered by the Company and the application of the estimated net proceeds therefrom. See "Dividend Policy," "Reorganization" and "Use of Proceeds." This table should be read in conjunction with the Financial Statements and Notes thereto included in this Prospectus.
OCTOBER 31, 1996 ----------------------------- ACTUAL PRO FORMA AS ADJUSTED ------ --------- ----------- (IN THOUSANDS) 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--10,000,000 and 12,000,000 shares, respectively (1)......... 100 100 120 Note receivable from stockholder (2)......... (50) (50) (50) Deferred compensation (3).................... (169) (169) (169) Additional paid-in capital................... 1,467 1,467 21,307 Retained earnings (4)........................ 1,401 0 -- ------ ------ ------- Total stockholders' equity.................. 2,749 1,348 21,208 ------ ------ ======= Total capitalization....................... $2,749 $1,348 $21,208 ====== ====== =======
- --------------------- (1) Excludes 1,250,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan (under which options to purchase an aggregate of 261,000 shares of Common Stock will be outstanding immediately after the completion of this offering) and 250,000 shares of Common Stock reserved for issuance pursuant to an outstanding non-plan stock option the Company has granted to an executive. See "Management-- 1996 Stock Incentive Plan" and "Management--Stock Option Agreement." (2) See Note 8 of Notes to Financial Statements. (3) See Note 7 of Notes to Financial Statements. (4) No adjustment has been made to give effect to the portion of the LLC Distribution that depended on the Company's results of operations from November 1, 1996 through the date of the distribution. The LLC Distribution was 4.0 million. To the extent that the Company's retained earnings are less than $4.0 million at the date of distribution, the balance will be charged to additional paid-in capital. 12 DILUTION As of October 31, 1996, the Company's pro forma net tangible book value, after giving effect to the Reorganization and the portion of the LLC Distribution that depended on the Company's results of operations from inception through October 31, 1996, was $1,036,000, or approximately $0.10 per share of Common Stock based on 10,000,000 shares of Common Stock outstanding. Pro forma net tangible book value per share represents the amount of total stockholders' equity less intangible assets divided by the number of outstanding shares of Common Stock. The net proceeds to the Company from the sale of 2,000,000 shares in this offering will increase the pro forma net tangible book value of the Company at October 31, 1996 to $20,896,000, or approximately $1.74 per share of Common Stock. This would result in an increase in the Company's pro forma net tangible book value of $19,860,000, or $1.64 per share of Common Stock, to existing stockholders and an immediate dilution in pro forma net tangible book value of $9.26 per share to investors purchasing shares in this offering. The following table illustrates this per share dilution: Initial public offering price per share (1).................... $11.00 Pro forma net tangible book value per share before offering.. $0.10 Increase per share attributable to new investors............. 1.64 ----- Pro forma net tangible book value per share after offering..... 1.74 ------ Dilution per share to new investors............................ $ 9.26 ======
The following table sets forth, on a pro forma basis as of October 31, 1996 after giving effect to the Reorganization, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid to the Company by existing stockholders and to be paid by the investors in this offering (before deducting estimated offering expenses and underwriting discounts and commissions):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE --------------------- ---------------------- PER NUMBER (1) PERCENTAGE AMOUNT PERCENTAGE SHARE ---------- ---------- ----------- ---------- ------------- Existing stockholders (1)....... 10,000,000 83.3% $ 1,567,000 6.6% $ 0.16 New investors (1)....... 2,000,000 16.7 22,000,000 93.4 11.00 ---------- ----- ----------- ----- Total................. 12,000,000 100.0% $23,567,000 100.0% ========== ===== =========== =====
- --------------------- (1) Sales by Selling Stockholders in this offering will reduce the number of shares held by existing stockholders to 9,650,000, or approximately 80.4% (9,350,000 shares, or approximately 77.5%, if the Underwriters' over- allotment option is exercised in full), of the number of shares of Common Stock outstanding after this offering. See "Principal and Selling Stockholders." 13 SELECTED FINANCIAL DATA The selected financial data set forth below have been derived from the financial statements of the Company set forth elsewhere in this Prospectus, which have been prepared in accordance with generally accepted accounting principles. This following selected data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes appearing elsewhere in this Prospectus, including the Company's financial statements as of July 31, 1996 and for the six-month period ended July 31, 1996 which have been audited by Deloitte & Touche LLP, independent auditors. The data at January 31, 1996 and January 31, 1995 and for each of the two fiscal years ended January 31, 1996 and January 31, 1995 and for the period from September 9, 1993 (inception) to January 31, 1994 are derived from the Company's financial statements which have been audited by Richard A. Eisner & Company, LLP, independent auditors, which financial statements are included elsewhere herein. The data at October 31, 1996 and for the nine-month periods ended October 31, 1995 and 1996 are derived from the Company's unaudited financial statements for such period, and, in the opinion of the Company's management, contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the results of operations for such interim periods. All financial data has been restated to give effect to the Reorganization. Results for the nine months ended October 31, 1996 are not necessarily indicative of the Company's results that may be achieved for the fiscal year ending January 31, 1997 or any future period.
SEPTEMBER 9, 1993 NINE MONTHS (INCEPTION) TO FISCAL YEAR 1994 FISCAL YEAR 1995 ENDED OCTOBER 31, JANUARY 31, ENDED ENDED --------------------- 1994 JANUARY 31, 1995 JANUARY 31, 1996 1995 1996 -------------- ---------------- ---------------- ------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net sales............. $ -- $ 139 $ 5,652 $ 2,844 $15,482 Cost of sales......... -- 89 3,078 1,453 7,421 ------ ------ ------- ------- ------- Gross profit.......... -- 50 2,574 1,391 8,061 Selling, general and administrative expenses............. 34 384 2,569 1,482 6,331 Interest income, net.. 1 2 25 18 24 ------ ------ ------- ------- ------- Income (loss) before provision for income taxes................ (33) (332) 30 (73) 1,754 Provision for income taxes................ -- -- 3 -- 15 ------ ====== ------- ------- ------- Net income (loss)..... $ (33) $ (332) $ 27 $ (73) $ 1,739 ====== ====== ======= ======= ======= Pro forma net income (loss) (1)........... $ (19) $ (202) $ 18 $ (44) $ 1,035 ====== ====== ======= ======= ======= Pro forma net income (loss) per share (2)............ $(0.00) $(0.02) $ 0.00 $ (0.00) $ 0.10 ====== ====== ======= ======= ======= Shares used in the calculation of pro forma net income (loss) per share (2)............ 10,000 10,000 10,000 10,000 10,000 ====== ====== ======= ======= ======= SELECTED OPERATING DATA: Number of catalogs mailed............... -- 26 1,700 1,050 4,950(4) House names (3)....... -- 17 290 196 1,080 OCTOBER 31, 1996 --------------------- JANUARY 31, 1995 JANUARY 31, 1996 ACTUAL PRO FORMA(5) ---------------- ---------------- ------ ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.......... $ 704 $ 675 $1,140 Working capital....... 826 720 1,946 Total assets.......... 870 1,266 6,901 Total stockholders' equity............... 835 962 2,749 1,348
- --------------------- (1) Computed on the basis described in Note 6 of Notes to Financial Statements and assuming the pro forma tax provisions described therein. Prior to this offering, the Company effected the Reorganization, in which the Company converted from a limited liability company to a C corporation. See "The Reorganization." (2) See Note 2 of Notes to Financial Statements for an explanation of the determination of shares used in computing pro forma net income per share. (3) House names represents the number of customers who have made at least one purchase or have requested a catalog from the Company in the preceding 24 months, determined at the end of the applicable fiscal period. (4) Does not include 750,000 copies of the Company's winter 1996 catalog mailed in October 1996. The Company did not mail any copies of its winter 1995 catalog in the nine months ended October 31, 1995. (5) Pro forma stockholders' equity gives effect to the portion of the LLC Distribution that depended on the Company's results of operations from inception through October 31, 1996. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data" and the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus 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 Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. 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 in the section entitled "Risk Factors" as well as those discussed elsewhere in this Prospectus. OVERVIEW The Company was founded in 1993 and distributed its first catalog in 1994 through a network of on-campus college representatives. In early 1995, in an effort to broaden the reach of its catalogs, the Company changed its primary channel of distribution from college representatives to direct mail. This change has resulted in a substantial increase in the Company's sales. In order to support its direct marketing operations, the Company has made significant capital expenditures for telephone and management information systems and has hired and maintained an in-house workforce of teleservice representatives. The Company initially mailed catalogs to persons responding to advertisements and to names on rented lists. The Company has built a proprietary list of "house names" (customers who have made at least one purchase or have requested a catalog from the Company in the preceding 24 months), which contained over one million names as of October 31, 1996. A significant portion of the Company's catalogs are mailed to house names, supplemented by purchased and rented lists. The Company believes that the response rates generated from its house list are typically higher than can be realized from purchased or rented lists. The Company plans to increase catalog mailings from an anticipated 7 million in fiscal 1996 to approximately 18 million in fiscal 1997. The Company mailed four editions of its catalog in fiscal 1995, and anticipates mailing at least five editions in fiscal 1996 and seven editions in fiscal 1997. Response rates in fiscal 1996 have increased for each season's catalog compared to the corresponding seasonal catalog in fiscal 1995. The Company believes such increases are due, in part, to an increase in the proportion of house names used in the Company's catalog mailings and, in part, to more effective merchandising and catalog design. While the Company has achieved response rate increases on a year-to-year basis, the Company has from time to time (including fiscal 1996) experienced decreases in response rates from catalog to catalog within a fiscal year. Response rates are influenced by a number of factors including the timing of catalog mailings, market acceptance of the Company's merchandise, the mix and presentation of products and actions of competitors, and there can be no assurance that the Company will achieve response rate increases in the future. Average order size has also fluctuated seasonally. Generally, the average size of orders from the Company's fall and winter catalogs is larger than the average size of orders from its spring and summer catalogs. The Company is currently attempting to increase the flexibility of its catalog publishing schedule and reduce the lead time for inventory purchases to take better advantage of early indicators of customer purchasing patterns and reduce its exposure to the risk of inventory obsolescence. In the third quarter of fiscal 1996, the Company began mailing catalogs to selected portions of its house list that typically respond at higher rates. The Company mailed its first sale circular in August 1996 and its first targeted supplemental catalog in October 1996. In part to facilitate its targeted publishing strategy, the Company has developed an in-house art department to allow for shorter and more flexible publishing schedules. In addition, recently, at the Company's request, certain of the Company's vendors have agreed to purchase raw materials in advance and in excess of the Company's initial purchase orders. This allows the Company to place orders later in a season in response to early indicators of customer demand while reducing the Company's inventory risk. Although 15 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 have helped to improve its overall profitability in fiscal 1996. The Company believes that as its revenue base grows and it further penetrates its target market, the Company may not be able to sustain the levels of growth in net sales and growth in operating income experienced in fiscal 1995 and the first nine months of fiscal 1996. Additionally, the 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 40% of the names of persons to whom the Company mailed its most recent catalog were derived from purchased and rented lists. However, the Company's use of purchased and rented lists has been declining relative to the use of its house list. The Company is exploring new methods for developing its house list and believes it will be able to continue to develop this list through advertising and new channels for the distribution of its catalogs, including bulk drops on college campuses. There can be no assurance, however, that the Company will be able to develop its house list. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship of certain items from the Company's statement of operations to net sales. Any trends reflected by the following table may not be indicative of future results.
PERCENTAGE OF NET SALES ----------------------------------------------------- NINE MONTHS FISCAL YEAR 1994 FISCAL YEAR 1995 ENDED OCTOBER 31, ENDED ENDED ------------------- JANUARY 31, 1995 JANUARY 31, 1996 1995 1996 ---------------- ---------------- -------- -------- Net sales............... 100.0% 100.0% 100.0% 100.0% Cost of sales........... 64.0% 54.5% 51.1% 47.9% ------ ----- -------- -------- Gross profit............ 36.0% 45.5% 48.9% 52.1% Selling, general and administrative expenses............... 276.3% 45.4% 52.1% 41.0% Interest income, net.... 1.4% 0.4% 0.6% 0.2% ------ ----- -------- -------- Income (loss) before provision for income taxes.................. (238.9%) 0.5% (2.6%) 11.3% Provision for income taxes.................. -- -- -- 0.1% ------ ----- -------- -------- Net income (loss)....... (238.9%) 0.5% (2.6%) 11.2% ====== ===== ======== ======== Pro forma net income (loss) (1)............. (145.3%) 0.3% 1.5% 6.7% ====== ===== ======== ========
- --------------------- (1) Computed on the basis described in Note 6 of Notes to Financial Statements and assuming the pro forma tax provisions described therein. Prior to this offering, the Company effected the Reorganization, in which the Company converted from a limited liability company to a C corporation. See "The Reorganization." COMPARISON OF NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 Net sales. Net sales increased approximately $12.7 million, from $2.8 million in the first nine months of fiscal 1995 to $15.5 million in the first nine months of fiscal 1996. The increase in net sales was primarily due to an increase in the number of catalogs mailed, as well as an increase in response rates and average order size. The Company increased the number of catalogs it mailed from over one million in the first nine months of fiscal 1995 to over 4.9 million in the first nine months of fiscal 1996. Sales per catalog from catalogs mailed 16 in the first nine months of fiscal 1996 (excluding the late fall 1996 catalog) increased by 16% over sales per catalog from catalogs mailed in the first nine months of fiscal 1995. The increase in sales per catalog was primarily caused by the increase in response rates over the same period, and to a lesser extent by a slight increase in average order size. The slight 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 48.9% in the first nine months of fiscal 1995 to 52.1% in the first nine months of fiscal 1996. The increase in gross margin was due to improved sourcing of merchandise, including larger volume discounts from suppliers, as well as changes in product mix and higher selling prices. To a lesser degree, gross margin increased as certain related fixed costs of merchandising were spread over increased sales. These improvements were partially offset by an increased reserve for returns consistent with the Company's recent growth and an increased inventory reserve for obsolescence based upon management's evaluation of merchandise inventories as of October 31, 1996 and anticipated inventory dispositions. Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $4.8 million, from $1.5 million in the first nine months of fiscal 1995 to $6.3 million in the first nine months of fiscal 1996. Selling, general and administrative expenses decreased as a percentage of net sales from 52.1% in the first nine months of fiscal 1995 to 41.0% in the first nine months of fiscal 1996. The reduction in selling, general and administrative expenses as a percentage of net sales was due primarily to the leveraging of certain fixed costs over a larger revenue base. The reduction was partially offset by a charge of approximately $270,000 in the first nine months of fiscal 1996 related to the processing of names of catalog requesters through a third party service. The Company currently processes the majority of the names of its catalog requesters in-house and anticipates doing so in the future. In addition, the reduction was partially offset by the Company's higher expenditures on corporate salaries and additional information systems in anticipation of future sales growth. COMPARISON OF FISCAL YEARS 1994 AND 1995 Net sales. Net sales increased approximately $5.6 million, from $139,000 in fiscal 1994 to $5.7 million in fiscal 1995. The increase in net sales was due primarily to the change in the Company's primary channel of distribution from on-campus college representatives to direct mail and the corresponding increase in the number of catalogs distributed. The Company increased catalog mailings from approximately 25,500 catalogs in fiscal 1994 to approximately 1.7 million catalogs in fiscal 1995. Gross margin. Gross margin increased from 36.0% in fiscal 1994 to 45.5% in fiscal 1995. The increase in gross margin was due to the leveraging of certain fixed costs over a larger revenue base, improved sourcing of merchandise, including sourcing in larger quantities from a broader range of vendors, as well as a change in merchandise mix to higher margin apparel and accessories. The increase in gross margin in fiscal 1995 was partially offset by the Company's decision to liquidate excess inventory through charitable donations in the fourth quarter of fiscal 1995. Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $2.2 million, from $384,000 in fiscal 1994 to $2.6 million in fiscal 1995. Selling, general and administrative expenses decreased as a percentage of net sales from 276.3% in fiscal 1994 to 45.4% in fiscal 1995. This reduction in selling, general and administrative expenses as a percentage of net sales was due primarily to the fact that revenues increased faster than expenses. The reduction in expenses as a percentage of net sales was partially offset by a higher corporate payroll and higher expenditures for management information systems and telephone systems related to the Company's infrastructure growth. INCEPTION THROUGH JANUARY 31, 1994 The Company was founded in September 1993 and distributed its first catalog in March 1994. Accordingly, the Company had no net sales and an operating loss of $33,000 in the interim period ended January 31, 1994. 17 SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited statements of operations data for the seven quarters ended October 31, 1996, 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.
QUARTER ENDED ------------------------------------------------------------------- FISCAL 1995 FISCAL 1996 ------------------------------------- ----------------------------- APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCTOBER 31, 1995 1995 1995 1996 1996 1996 1996 -------- -------- -------- -------- -------- -------- ----------- (IN THOUSANDS) Net sales............... $ 557 $ 744 $1,543 $2,808 $3,709 $4,663 $7,110 Cost of sales........... 278 398 777 1,625 1,725 2,233 3,463 ----- ----- ------ ------ ------ ------ ------ Gross profit............ 279 346 766 1,183 1,984 2,430 3,647 Selling, general and administrative expenses............... 337 471 674 1,087 1,489 2,149 2,693 Interest income, net.... 7 6 5 7 9 11 4 ----- ----- ------ ------ ------ ------ ------ Income (loss) before provision for income taxes.................. (51) (119) 97 103 504 292 958 Provision for income taxes.................. -- -- -- 3 7 4 4 ----- ----- ------ ------ ------ ------ ------ Net income (loss)....... $ (51) $(119) $ 97 $ 100 $ 497 $ 288 $ 954 ===== ===== ====== ====== ====== ====== ====== Pro forma net income (loss) (1)............. $ (30) $ (70) $ 58 $ 60 $ 297 $ 171 $ 567 ===== ===== ====== ====== ====== ====== ====== PERCENTAGE OF TOTAL NET SALES ------------------------------------------------------------------- Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........... 49.9% 53.5% 50.4% 57.9% 46.5% 47.9% 48.7% ----- ----- ------ ------ ------ ------ ------ Gross profit............ 50.1% 46.5% 49.6% 42.1% 53.5% 52.1% 51.3% Selling, general and administrative expenses............... 60.5% 63.3% 43.7% 38.7% 40.1% 46.0% 37.9% Interest income, net.... 1.3% 0.8% 0.3% 0.2% 0.2% 0.2% 0.1% ----- ----- ------ ------ ------ ------ ------ Income (loss) before provision for income taxes.................. (9.1%) (16.0%) 6.2% 3.6% 13.6% 6.3% 13.5% Provision for income taxes.................. -- -- -- 0.1% 0.2% 0.1% 0.1% ----- ----- ------ ------ ------ ------ ------ Net income (loss)....... (9.1%) (16.0%) 6.2% 3.5% 13.4% 6.2% 13.4% ===== ===== ====== ====== ====== ====== ====== Pro forma net income (loss) (1)............. (5.4%) (9.4%) 3.8% 2.1% 8.0% 3.7% 8.0% ===== ===== ====== ====== ====== ====== ======
- -------- (1) Computed on the basis described in Note 6 of Notes to Financial Statements and assuming the pro forma tax provisions described therein. Prior to this offering, the Company effected the Reorganization, in which the Company converted from a limited liability company to a C corporation. See "The Reorganization." The Company is subject to seasonal fluctuations in its merchandise sales and results of operations. The Company expects its net sales and results of operations generally to be lower in the first and second quarters than in the third and fourth quarters of each fiscal year (which include the back-to- school and holiday seasons). The Company's quarterly results may fluctuate as a result of numerous factors, including the timing, quantity and cost of catalog mailings, the timing of sale circulars and liquidations, the timing of merchandise deliveries, market acceptance of the Company's merchandise (including new merchandise categories or products introduced), the mix of products sold, the hiring and training of additional personnel, the timing of inventory 18 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 "Risk Factors--Seasonal and Quarterly Fluctuations." LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has met its operating and cash requirements through funds generated from operations and the private sales of equity securities. All of the Company's working capital needs have been satisfied by cash provided by operations since the third quarter of fiscal 1995. Cash provided by operations in the first nine months of fiscal 1996 was $831,000 while cash used in operations was $367,000 during the first nine months of fiscal 1995. This was primarily due to lower selling, general and administrative expenses as a percentage of net sales and higher gross margins. Cash provided by operations was $40,000 in fiscal 1995, as compared to cash used in operations of $422,000 in fiscal 1994. Cash used in investing in the first nine months of fiscal 1996 was $366,000 and $67,000 in the first nine months of fiscal 1995. Cash used in investing in fiscal 1995 was $169,000 and $7,000 in fiscal 1994. The Company expects to make capital expenditures of approximately $1.0 million to upgrade its management information systems in the fourth quarter of fiscal 1996 and the first quarter of fiscal 1997. The Company expects to make additional capital expenditures of $750,000 for additional technology upgrades in the last three quarters of fiscal 1997. The Company also anticipates capital expenditures of at least $250,000 in property, plant and equipment, including leasehold improvements and office equipment. Cash and cash equivalents increased by approximately $465,000 from January 31, 1996 to October 31, 1996 primarily due to increased cash provided by operations relative to cash used by operations and decreased by $29,000 from January 31, 1995 to January 31, 1996. During the fiscal year prior to this offering, the Company has operated as a limited liability company with taxes paid by its members. In anticipation of its conversion to a Delaware corporation, the Company, as part of the Reorganization, intends to make a cash distribution to certain members of the limited liability company. Following the Reorganization, the Company will not be a flow-through entity and will be liable for applicable income taxes. See "Dividend Policy" and "The Reorganization." 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 $1.5 million. The interest rate on the line of credit is the lending bank's prime rate (8.25% at October 31, 1996) plus 2%. The Company has not drawn on this line. The Company believes that its cash on hand, together with cash generated by operations and the proceeds of this offering, will be sufficient to meet its capital and operating requirements through fiscal 1997. The Company's future capital requirements, however, depend on numerous factors, including, without limitation, the success of its marketing, sales and distribution efforts. There can be no assurance that additional funds, if required, will be available to the Company on favorable terms or at all. INFLATION The Company does not believe that inflation has had a material adverse effect on net sales or results of operations. The Company has generally been able to pass on increased costs related to inflation through increases in its prices to customers. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS 19 No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and is effective for fiscal years beginning after December 15, 1995. The adoption of SFAS No. 121 did not have an effect on the Company's financial position or results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for the Company beginning February 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation expense to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board Opinion No. 25 ("APB No. 25"), which recognizes compensation costs based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB No. 25 to its stock-based compensation awards to employees. The required disclosures of pro forma effects on net income and earnings per share did not apply during the nine-month period ended October 31, 1996 or prior years. 20 BUSINESS dELiA*s is a direct marketer of casual apparel and related accessories to girls and young women, primarily between the ages of 10 and 24 (an age group known as "Generation Y"). The Company believes that it is one of a limited number of direct marketers distributing an apparel-based catalog exclusively for this market and that its selection and presentation of merchandise have contributed to a growing recognition of dELiA*s as a Generation Y fashion resource. The Company's broad assortment of merchandise includes recognized and emerging brands complemented by dELiA*s own branded products. Merchandise ranges from basics, such as jeans, shorts and t-shirts to more fashion- oriented apparel and accessories, such as woven and knit junior dresses, swimwear, sunglasses, watches, costume jewelry and cosmetics. The Company's distinctive catalogs, with their eye-catching layouts accented by creative "catch phrases," are designed to express a culture and attitude unique to dELiA*s. Each catalog carries a broad array of merchandise typically presented in coordinated outfits that can be purchased for under $100. dELiA*s mailed its first catalog in March 1994 and mailed approximately 1.7 million in fiscal 1995. The Company plans to increase catalog mailings from an anticipated 7 million in fiscal 1996 to approximately 18 million in fiscal 1997. As of October 31, 1996, the Company's proprietary database had grown to over one million house names, including approximately 200,000 customers who had made at least one purchase from the Company within the preceding 24 months. The Company's customers are located in all 50 states, as well as Japan, with sales to customers in any single state comprising not more than 12% of total sales in the first nine months of fiscal 1996. 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. This increase follows a period of decline in the teen population, which the Company believes contributed to a less favorable market for teen-focused retailers. According to the U.S. Census Bureau, Generation Y (ages 10 to 24 years) currently numbers more than 55 million people and is expected to grow by 12% to approximately 62 million by 2005. These children of the "baby boom" generation are larger in number and growing more rapidly as a group than the generation ahead of them. HISTORICAL AND PROJECTED U.S. POPULATION OF 10 TO 24 YEAR-OLDS [GRAPH APPEARS HERE] 21 The teen population (ages 12 to 19) represents the core of Generation Y. The increase in the U.S. teen population has been accompanied by an increase in the amount of money teens spend. According to one independent consumer research firm, total teen spending in 1995 was $109 billion, an increase of 10% from 1994. Another independent research firm estimated that, in 1995, apparel accounted for 34% of teen spending (ages 13 to 17) on the following categories of goods and services: apparel, food, video/electronics, stationery/school items, entertainment, toys/games, sporting goods, personal care products and reading material; apparel was the largest single category of such spending. The Company believes that the members of Generation Y are influenced by new media and information sources and that new consumer brands have emerged that have become the choice of Generation Y. Although a variety of retailers and catalogers offer teen merchandise, the Company believes that a limited number of national retailers or catalogers cater exclusively to the Generation Y market. The Company believes that in addition to creating a cultural environment that caters to teen purchasers, retailers and catalogers must be accessible to this population, many of whom 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. Based on these factors, the Company believes that Generation Y is a large and underserved market that represents a significant direct marketing opportunity. GROWTH STRATEGY The Company's goal is to be the leading direct marketer of casual fashion apparel, related accessories and other products to Generation Y girls and young women and to build on its recognition as a fashion resource. Key elements of the Company's strategy to accomplish its goal include the following: Grow Core Catalog Business. dELiA*s believes that significant opportunities exist to penetrate further its target market through the increased use of catalogs. The Company's proprietary database consists of approximately one million house names, compared to a total estimated Generation Y female population of over 25 million. The Company intends to increase the number of catalogs mailed from an anticipated 7 million in fiscal 1996 to approximately 18 million in fiscal 1997, and to expand the number of editions of its catalogs. The Company believes it can use its proprietary database to develop targeted mailings to specific customer segments. It also may broaden the range of products offered in its catalogs (including additional dELiA*s-branded products). In addition, the Company recently began to distribute catalogs in Japan and plans to increase its distribution of catalogs in Japan in fiscal 1997. The Company is also exploring distribution opportunities in 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 Sassy, 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 50 vendors. Brands currently offered through dELiA*s catalogs include nationally recognized names, such as Dickie's, Kenneth Cole and Vans, as well as brands recognized within the teen market, including Free People (Urban Outfitters) and Roxy (Quiksilver). dELiA*s also strives to obtain merchandise from emerging designers, a strategy the Company believes differentiates dELiA*s from other retailers and helps to establish dELiA*s as a fashion resource for girls and young women. Emerging brands currently featured in dELiA*s catalogs include Dollhouse, Lip Service, Little Earth Products, Madhouse, Yak Pak and 26 Red Sugar. Develop and Leverage the dELiA*s Brand Identity. The Company believes the dELiA*s brand stands for fresh, progressive teen style and that the Company has become a fashion resource for Generation Y girls and young women. The dELiA*s brand identity is comprised of several components, including up-to- date merchandise offerings, dELiA*s-branded products, the promotion of emerging brands and dELiA*s distinctive catalog design. dELiA*s reaches out to its target audience through its colorful, high-impact 22 catalogs, which are designed to resemble a youthful fashion digest and to enhance the dELiA*s brand identity. The Company believes that successfully establishing strong relationships with its target customers through its catalogs will enable dELiA*s to leverage its name and database to develop additional distribution channels and complementary product offerings in the future. These opportunities may include developing a non-traditional, youth- oriented magazine (or 'zine), developing other traditional or electronic publishing ventures and opening a retail store. Build Proprietary Customer Database. The Company believes the dELiA*s proprietary customer database, which includes demographic data as well as purchasing patterns and preferences, would be difficult for competitors to replicate primarily because it consists mostly of names of persons who specifically requested the dELiA*s catalog and which may not be available through purchased or rented lists. The Company also believes this proprietary database offers opportunities for cross-marketing, sales of new products and the development of additional distribution channels. The database of over one million house names includes approximately 200,000 customers who have made at least one purchase in the preceding 24 months. During the first nine months of fiscal 1996, approximately 800,000 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 Sassy, Seventeen and YM. The Company believes over 90% of the names in the database have been derived from these sources. The Company believes that its database yields response rates that exceed average response rates for the consumer catalog industry. Invest in Customer Service Infrastructure. During fiscal 1996, the Company has made significant investments in integrated, state-of-the-art telephone and management information systems. These systems allow teleservice representatives to provide real-time product availability and order status information to customers and to monitor sales patterns and inventory levels more closely. In addition, the Company has expanded its customer service operations, including an increase in the number of its teleservice representatives from approximately 50 on February 1, 1996 to approximately 240 on October 31, 1996. The Company focuses on hiring and training energetic, service-oriented teleservice representatives who can understand and relate to dELiA*s customers, with the goals of providing a convenient shopping experience, offering useful product information and promoting customer loyalty. MERCHANDISING AND MARKETING dELiA*s offers a carefully edited assortment of recognized and emerging brands of teen apparel and accessories, complemented by dELiA*s-branded merchandise. The Company believes teens are very brand-conscious, particularly in their apparel choices, and rely on their favorite brands to help them project an image to their peers. The Company monitors leading young women's magazines (including Sassy, 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 Company's catalogs feature a broad assortment of merchandise, ranging from basics, such as jeans, shorts and t-shirts to more fashion-oriented apparel and accessories, such as woven and knit junior dresses, swimwear, sunglasses, watches, costume jewelry and cosmetics to enable its customers to fulfill many of their fashion needs. The Company presents coordinated outfits in its catalogs that reflect dELiA*s style. Merchandise is presented in a manner designed to encourage customers to create their own outfits. The Company believes the presentation of coordinated outfits increases average order size and enhances sales. The following table sets forth the principal product categories offered by dELiA*s and the percentage of the Company's net sales (through October 31, 1996) from its 1996 catalogs represented by each category. 23
PERCENTAGE OF SALES FROM 1996 CATALOGS PRODUCT CATEGORY (THROUGH OCTOBER 31, 1996) ---------------- -------------------------- Apparel......................................... 71.3% Footwear........................................ 16.1% Accessories..................................... 7.2% Cosmetics....................................... 5.4% ----- 100.0%
In the fall of 1995, the Company began to market products under the dELiA*s brand name. Currently dELiA*s-branded products consist primarily of cosmetics, t-shirts and footwear. Approximately 14% of the Company's net sales (through October 31, 1996) from its 1996 catalogs was attributable to dELiA*s-branded products. The Company seeks to develop strong relationships with numerous vendors and designers in order to maintain ongoing access to recognized and emerging brands. A typical dELiA*s catalog features merchandise from a diverse group of more than 50 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 whom occasionally provide the Company with merchandise on an exclusive basis. Brands currently offered through dELiA*s catalogs include nationally recognized names, such as Dickie's, Kenneth Cole and Vans, as well as brands recognized within the teen market, including Free People (Urban Outfitters) and Roxy (Quiksilver). dELiA*s also strives to obtain merchandise from emerging designers, a strategy the Company believes differentiates dELiA*s from other retailers and helps to establish dELiA*s as a fashion resource for girls and young women. Emerging brands in the Company's catalog currently include Dollhouse, Lip Service, Little Earth Products, Madhouse, Yak Pak and 26 Red Sugar. Apparel produced by Urban Outfitters accounted for approximately 24% of net sales in each of the spring 1996 and summer 1996 catalogs. The Company believes that a limitation on its ability to obtain products from Urban Outfitters could have a material adverse effect on the Company. No other supplier's products accounted for more than 8% of net sales from the spring 1996 and summer 1996 catalogs. Six vendors accounted for approximately 50% of the net sales generated by the Company's spring 1996 catalog, and five vendors accounted for approximately 53% of the net sales generated by the Company's summer 1996 catalog. Approximately 30% of the Company's gross sales derived from its early fall 1996 catalog were of products the Company believes were manufactured outside the United States. The Company believes its exposure to fashion risk is mitigated in part by relatively short lead times associated with the purchasing of its merchandise and by its ongoing monitoring of sales patterns. On average, approximately three-quarters of stock-keeping units ("SKUs") in the Company's spring and fall catalogs are carried over to the summer and winter catalogs, respectively; approximately one-sixth of SKUs in the summer and winter catalogs is carried over to the fall and spring catalogs, respectively. The Company believes its close working relationships with vendors also enhance its ability to identify fashion trends. CATALOGS dELiA*s catalogs are designed to create a distinctive and entertaining shopping experience and to offer customers more than the typical apparel catalog by combining the feel and editorial flair of a teen-focused fashion magazine with the convenience of direct mail shopping. The catalogs are filled with colorful, eye-catching layouts and creative "catch phrases." The catalogs feature teen models whose expressions and poses convey the dELiA*s attitude. For example, on a typical page, coordinated outfits featuring plaids and stripes appear beside the editorial soundbite, "oPPositeS AtTract & AbsTrAcT & DeTrAcT & SuBtRaCt & inTeRaCt. oK." Similarly, the headline on a page featuring dELiA*s neon and metallic-colored makeup reads, "MakIn' uP Is nOt hARd tO Do." dELiA*s catalogs are created and produced in-house by the Company's designers, with the assistance of free-lance photographers and production artists. These in-house capabilities allow the Company to control its catalog production schedule, decreasing the lead times necessary to produce catalogs and reducing the costs 24 of preparing pages for printing. These capabilities also provide the Company with greater flexibility and creativity in catalog production and merchandise selection. In fiscal 1996, the Company intends to publish at least five seasonal catalogs (spring, summer, fall, late fall and winter). A typical catalog, which follows a magazine-type format, contains approximately 50 pages and 500 SKUs. The Company's four principal seasonal catalogs are mailed to persons listed in the Company's proprietary database, as well as to persons from rented lists. The Company mailed its late fall 1996 catalog and intends to mail future supplemental catalogs to prior purchasers and selected catalog requesters. In addition, the Company arranges for bulk distribution of its catalogs on college campuses. In August 1996, the Company mailed its first sale circular. This four-page circular featured over 200 SKUs. The Company may from time to time in the future mail additional sale circulars. The Company anticipates mailing seven catalog editions in fiscal 1997. In fiscal 1996, the Company anticipates distributing approximately 7 million catalogs in all 50 states. The Company intends to increase the number of catalogs mailed to approximately 18 million in fiscal 1997. The Company believes it can leverage its proprietary database to develop targeted mailings to specific customer segments, and intends to begin more frequent mailings of supplemental catalogs to repeat customers. The Company recently began to distribute catalogs in Japan and intends to increase its distribution of catalogs in Japan in fiscal 1997. These catalogs are mailed directly to Japanese customers and are also being distributed through an arrangement with a direct marketing division of Sony Corporation. OPERATIONS The primary components of the Company's operations, as described below, include its proprietary database, teleservices and order entry, customer service and returns and distribution and fulfillment. Proprietary Database Development. The Company has developed its proprietary customer database primarily through referrals, word-of-mouth, returns of catalog request cards and targeted classified advertising in selected magazines, including Sassy, Seventeen and YM. The Company believes over 90% of the names in the database have been derived from these sources, which the Company believes generate higher response rates than purchased or rented lists. During the first nine months of fiscal 1996, approximately 800,000 new names were added to the Company's database. As of October 31, 1996, the Company's proprietary database had grown to over one million names, including approximately 200,000 customers who had made at least one purchase from the Company within the preceding 24 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 70% of the Company's orders are received by phone and 30% by mail, facsimile and electronic mail. Teleservice representatives process orders directly into the Company's management information system, which provides customer order history and information, product specifications, available substitutes and accessories, expected ship date and order number. The teleservice representatives are provided with a sales script, are versed in product sizes, colors and features and are trained to cross-sell accessories and related products and 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. 25 The Company currently has 120 in-house phone stations and recently installed a new state-of-the-art telephone system. The Company anticipates upgrading its management information systems in the fourth quarter of fiscal 1996 and plans to continue to update the system in the future to support its growth. The Company's approximately 240 (as of October 31, 1996) full- and part-time teleservice representatives have the capacity to handle approximately 2,000 calls per hour. The Company also uses an outside teleservices provider for overflow orders and orders placed between 3 a.m. and 7 a.m., Eastern Standard Time. The Company processes telephone orders in an average of two to four minutes, depending upon the nature of the order and whether the customer is a first-time or repeat customer. Customer Service and Returns. dELiA*s maintains a separate customer service department. Customer service inquiries are principally concerned with order and refund status. Customer service representatives are carefully screened, specially trained and often promoted from within based on level of product knowledge, service ability and order accuracy. The Company has a 45-day unconditional return policy for its products. For each of fiscal 1995 and the nine-month period ended October 31, 1996, customer returns were less than 17% of gross sales. 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 24 hours of credit approval. In cases in which the order is placed using another person's credit card and it exceeds a specified threshold, the order is shipped only after the Company has received oral confirmation from the cardholder. Customers generally receive orders within three to five business days after shipping. During the first nine months of fiscal 1996, approximately 90% of all shipments have been made through United Parcel Service or the United States Postal Service. A shipping and handling fee is charged on each customer order, based on the total price of the order. The Company's fulfillment systems automatically determine the most cost effective method of shipping each order. dELiA*s currently uses an unaffiliated, third-party fulfillment contractor to process and fulfill orders. The Company manages this process through two on-site employees. The third-party contractor uses an integrated picking, packing and shipping system via an on-line connection to the Company's in- house server. The system monitors the in-stock status of each item ordered, processes the order and generates warehouse selection tickets and packing slips for order fulfillment operations. dELiA*s, through this contractor, is currently making an average of 2,000 shipments a day (and the Company believes that the contractor has the capacity to ship up to 10,000 orders a day). During the first nine months of fiscal 1996, the Company shipped over 400,000 packages. The Company's agreement with the third-party contractor has a one- year term and expires on April 30, 1997. The Company may consider performing its own order processing and fulfillment operations in the future. Because the Company generally purchases its merchandise prior to the receipt of customer orders, inventory management is an increasingly important component of the Company's operations. From time to time, the Company purchases large quantities of merchandise to ensure availability or realize volume savings. 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 catalog (which typically carries over a substantial number of SKUs from the spring catalog) and its winter catalog (which carries over a substantial number of SKUs from the fall catalogs). When the Company believes it has excessive inventory, the Company often runs promotional sales of the excess items through programs targeted at phone-in customers. In addition, in August 1996, the Company mailed its first sale circular and may from time to time mail additional sale circulars in the future. Products sold through promotional sales to phone-in customers and through the Company's sales circular are typically discounted by 30% to 50% from their standard retail prices. The Company also has used third-party liquidators, tent sales and charitable donations to dispose of excess inventory and may consider other liquidation options, including outlet stores, in the future. The Company's net sales from excess inventory sold at a discount to retail price in the first nine months of fiscal 1996 were approximately $367,000, or less than 3% of the Company's net sales for that period; the cost of those goods sold at a discount to retail price was approximately $280,000. In addition, the Company had an inventory reserve of $356,000 at October 31, 1996, which included the reserve against anticipated losses due to liquidation of additional unsold inventory. 26 INTELLECTUAL PROPERTY The dELiA*s name and logo have been registered by the Company with the U.S. Patent and Trademark Office. Other applications for registration of the Company's trademarks, including the daisy (" LOGO ") symbol, are currently pending. The Company also uses the trademarks, trade names, logos and endorsements of its suppliers with their permission. The Company is not aware of any pending conflicts concerning its marks or its use of others' intellectual property rights. COMPETITION The teen apparel and accessories industries are highly competitive, and the Company expects competition in these markets to increase. The Company competes for teen and young adult customers with traditional department store retailers, alternative and vintage clothing stores located primarily in metropolitan areas and mall-based teen-focused retailers, such as Gadzooks, Hot Topic, Pacific Sunwear of California, Urban Outfitters and The Wet Seal. To a lesser degree, the Company competes with other direct marketers, such as Tweeds and J. Crew. Many of the Company's competitors are larger and have substantially greater financial, distribution and marketing resources than the Company. The Company believes the principal competitive factors in its business are merchandise selection, customer service, brand image and price. There are few barriers to entry in the teen apparel and accessories market and the Company expects other catalogers, as well as additional store-based retailers and apparel manufacturers, to enter this market. The Company also could face competition from manufacturers of apparel and accessories (including the Company's current vendors), who could market their products directly to retail customers or make their products more readily available in retail stores or through catalogs. In addition, competitors could enter into exclusive distribution arrangements with the Company's vendors and deny the Company access to their products. The Company expects that the direct marketing industry will be affected by technological changes in distribution and marketing methods, such as on-line catalogs, retail kiosks and Internet shopping. The Company believes its success will depend, in part, on its ability to adapt to new technologies and to respond to competitors' actions in these areas. See "Risk Factors-- Competition." EMPLOYEES As of October 31, 1996, the Company had approximately 280 employees, of which six held executive and administrative positions, six were employed in finance and development, 15 were employed in supervisory sales and customer service, 12 were employed in product acquisition and planning, 240 were employed in teleservice operations and two were employed in catalog production. None of the Company's employees is represented by a collective bargaining unit. The Company considers its relations with its employees to be good. PROPERTIES The Company leases its New York offices at 435 Hudson Street, New York, New York, which occupy approximately 14,000 square feet. The lease expires in 2003. The Company believes its facilities are well-maintained and in good operating condition. The Company expects to expand its New York offices to accommodate anticipated growth. The Company's third-party fulfillment contractor provides warehouse space near Lancaster, Pennsylvania to the Company for inventory storage. The Company neither owns nor leases such warehouse space; the cost of the warehouse space is included in the total fee paid by the Company to the third-party fulfillment company. 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. 27 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Executive officers and directors of the Company and their ages as of November 20, 1996 are as follows:
NAME AGE POSITION ---- --- -------- Stephen I. Kahn................ 31 Chairman of the Board, Chief Executive Officer, President and Director Christopher C. Edgar........... 31 Executive Vice President, Chief Operating Officer and Director Evan Guillemin................. 31 Chief Financial Officer, Treasurer and Secretary S. Roger Horchow............... 68 Director Sidney S. Kahn................. 59 Director Geraldine Karetsky............. 55 Director Joseph J. Pinto................ 63 Director
Stephen I. Kahn has served as President and Chief Executive Officer of dELiA*s and as a member of the board of managers of dELiA*s LLC since co- founding the Company in 1993 and has served as Chairman of the board of directors since October 1996. Prior to that, he worked at PaineWebber Group, Inc., first as a management associate (from 1988 to 1989) and then as an associate in the merchant banking group (from 1989 to 1993). In the merchant banking group, he was involved in the acquisition, marketing and restructuring of the firm's portfolio investments, including apparel and retailing properties. He also served as a director of Hawthorne Broadcasting Corp., a PaineWebber portfolio company engaged in the ownership and operation of radio stations. Mr. Kahn holds a B.A. from Yale College, an M.A. from Oxford University and an M.B.A. from Columbia Business School. Christopher C. Edgar has served as Executive Vice President of dELiA*s and as a member of the board of managers of dELiA*s LLC since co-founding the Company in 1993, presently serves as dELiA*s Chief Operating Officer and joined the board of directors of the Company in October 1996. Mr. Edgar oversees catalog publishing, marketing, merchandising and inventory management. From 1992 to 1993, Mr. Edgar was a Nicholson Fellow and student in the doctoral program in comparative literature at Columbia University. From 1989 to 1992, he worked as an analyst for SNL Securities, a financial industry information service, and as a journalist for the Charlottesville Observer. Mr. Edgar received a B.A. from Yale College and an M.A. from Columbia University. Evan Guillemin has served as Chief Financial Officer of dELiA*s since July 1996. Prior to joining the Company, he served briefly as an associate with, and later a director of acquisitions for, K-III Communications Corporation, a media investment company. From 1992 to 1994, he was executive vice president of The New York Observer Co., with responsibility for the sales, marketing and finance for that company's regional newspaper group. Prior to that, he helped start SDC Publishing Co., a financial publishing unit of Thomson Corporation, where he served as an editor and managed new product development and acquisitions from 1989 to 1992. Mr. Guillemin received a B.A. from Yale College and an M.B.A. from Harvard Business School. S. Roger Horchow joined the board of directors of the Company in October 1996. He was the founder and chairman of the Horchow Collection, a direct marketer of specialty home and fashion products, from 1971 until 1990. Mr. Horchow was vice president of mail order for Neiman Marcus Group, Inc. from 1969 to 1971. Mr. Horchow has been a director of Fieldcrest Cannon, Inc., a manufacturer of home-furnishing textile products, since 1994. He is also a director of Public Radio International, White House Endowment Fund, Smithsonian Institution and serves on the Board of Governors of the Yale University Art Gallery. He has been chairman of R. Horchow Productions, Inc., a theatrical production company, since 1990. Mr. Horchow received a B.A. from Yale College. Sidney S. Kahn has served as a member of the board of managers of dELiA*s LLC since its founding and joined the Company's board of directors in October 1996. He has been a private investor specializing in venture capital investments since 1987. From 1977 to 1987 he was a senior officer of E.F. Hutton & Co., Inc., a wholly-owned subsidiary of the E.F. Hutton Group, Inc., and from 1966 to 1977 he was a managing 28 director and partner of Lehman Brothers. He has been a director of Orion Network Systems, Inc., an operator of satellite-based communications systems services, since 1990 and a number of privately held corporations, including Telogy Networks, Inc., a communications software developer. He received a B.A. from Yale College and is a member of the Board of Governors of the Yale University Art Gallery. Geraldine Karetsky has served as a member of the board of managers of dELiA*s LLC since 1994 and joined the Company's board of directors in October 1996. She is a private investor and venture capitalist. She received a B.A. from Smith College. Joseph J. Pinto joined the board of directors of the Company in November 1996. He is a private investor. Since 1981, Mr. Pinto has been a director and officer of Sefinco Ltd. (and a predecessor), the U.S.-based private investment affiliate of Entrecanales Y Tavora SA, a Spanish conglomerate with interests in construction and merchant banking. Sefinco's investments have included Loehmann's, Inc., a specialty retailer of women's fashion apparel, on whose board Mr. Pinto served from 1988 to 1992. From 1973 to 1981, Mr. Pinto was chairman of the finance committee of Sea Containers Ltd., a container lessor of which Mr. Pinto was a founder and a director from 1967 to 1986. From 1961 to 1973, he was engaged in merchant banking in France and Spain with Pinto & Co., a family-owned investment firm. Mr. Pinto received a B.A. from Yale College. Sidney S. Kahn is Stephen I. Kahn's father. Ms. Karetsky is Stephen I. Kahn's aunt and Sidney S. Kahn's sister. There are no other family relationships among the directors and executive officers of the Company. KEY EMPLOYEES Charlene Benson has been Creative Director of dELiA*s since the fall of 1994. Prior to joining the Company, she was art director of Mademoiselle from 1991 to 1994. She has received awards from the Society of Publications for her work in US magazine, GQ and The Sunday New York Times. Karen Christensen has been a Senior Vice President and Controller of the Company since January 1995. Prior to joining the Company, Ms. Christensen practiced law with the firm of Certilman Balin Adler & Hyman in 1994. From 1993 to 1994, she was a director of international sales at Masten-Wright Incorporated, an international marketing firm. From 1990 to 1993, she attended law school. Ilka Eberly has been Buying Manager of dELiA*s since July 1996. Prior to joining the Company, Ms. Eberly was a divisional merchandise manager of Urban Outfitters, where she worked from 1990 to 1996. Lisa Higgins joined dELiA*s in 1994 as one of the original buyers and is currently Senior Vice President of Merchandising of the Company. Prior to joining the Company, Ms. Higgins worked in the retailing division of Esprit from 1990 until 1992. From 1992 to 1994, Ms. Higgins was an officer and director of a non-profit institution in Colorado. Robert Karetsky has been a Senior Vice President of dELIA*s since October 1994. Prior to joining the Company, he worked in a variety of capacities in education. Mr. Karetsky is the son of Geraldine Karetsky, a nephew of Sidney S. Kahn and a cousin of Stephen I. Kahn. Mary Obert has been Merchandise Production Manager of dELiA*s since August 1996. Prior to joining the Company, she was a production designer at Planet Claire from 1995 to 1996 and a production manager and assistant designer at Living Doll from 1992 to 1995. Prior to 1992, Ms. Obert was an assistant designer at Urban Outfitters and Betsey Johnson. Julie Scott has been Vice President of International Marketing of dELiA*s since September 1996. Between 1990 and 1996, she worked in client acquisitions at Abacus Direct Corp., a database marketing company, as well as in licensing and sales in Japan at a variety of companies including Marvel Comics, Calvin Klein, Hermes and Dentsu. Kent Trowbridge has been Senior Vice President and Director of Operations of dELiA*s since February 1995. From 1994 to 1995, Mr. Trowbridge was a market strategist at Josephthal, Lyon and Ross. From 1993 29 to 1994, he was a research analyst and money manager at Sherwood Securities. From 1992 to 1993, he was an independent financial consultant. From 1991 to 1992, he worked for Warreck, Inc., a marketer of mass-transit vehicle advertising space. Seth Walter has served as Vice President of Inventory Management of dELiA*s since November 1995. Prior to joining the Company, Mr. Walter was an inventory manager at Williams-Sonoma, where he worked from 1990 to 1995. BOARD COMMITTEES Audit Committee. Prior to the completion of this offering, the board of directors established an audit committee, a majority of whose members are directors who are neither members of the Company's management nor members of the Kahn family. The audit committee will make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Company's internal accounting controls. Compensation Committee. Prior to the completion of this offering, the board of directors established a compensation committee. The compensation committee will approve the salaries and other benefits of the executive officers of the Company and administer certain compensation plans of the Company. In addition, the compensation committee will consult with the Company's management regarding pension and other benefit plans and compensation policies and practices of the Company. BOARD ELECTIONS The Company's board of directors is divided into three classes. Directors of each class are elected at the annual meeting of stockholders held in the year in which the term for the class expires and will serve thereafter for three years. See "Description of Capital Stock--Anti-Takeover Effect of Provisions of the Certificate of Incorporation and Bylaws." The terms of each of the current directors of the Company are as follows: term expiring in 1997--S. Roger Horchow and Joseph J. Pinto; term expiring in 1998--Sidney S. Kahn and Geraldine Karetsky; and term expiring in 1999--Christopher C. Edgar and Stephen I. Kahn. DIRECTOR COMPENSATION The Company intends to pay its directors who are not employees of the Company $1,500 for each directors' meeting and each committee meeting attended (plus reimbursement for out-of-pocket expenses). Under the Company's 1996 Stock Incentive Plan (the "Incentive Plan"), each non-employee director who is not a member of the Kahn family will be granted, effective at the completion of this offering, an option to purchase 40,000 shares of Common Stock at an exercise price per share equal to the initial public offering price. All options granted to non-employee directors will become exercisable at the rate of 20% on each of the first five anniversaries of the date of grant, assuming the non-employee director is a director on those dates, and all such options generally will cease to be exercisable ten years from the date of grant. Upon a Change of Control (as defined in the Incentive Plan) and, in the case of directors elected prior to November 15, 1996 who are neither members of the Company's management nor members of the Kahn family, upon a termination of directorship other than for cause or as a result of a refusal to stand for re- election, all options (which have not yet expired) will automatically become exercisable. Directors who are employees of the Company will not be compensated for services as directors. See "Management--1996 Stock Incentive Plan." EXECUTIVE COMPENSATION Stephen I. Kahn, the Company's Chairman of the Board, President and Chief Executive Officer received $20,000 in salary in fiscal 1995. He did not receive any other compensation from the Company in fiscal 1995, and did not receive any compensation in fiscal 1994 or the period from September 9, 1993 (inception) to January 31, 1994. The aggregate dollar value of all perquisites and other personal benefits, securities or 30 property awarded to, earned by or paid to Mr. Kahn did not exceed the lesser of $50,000 or 10% of his total annual salary during any fiscal year. No officer of the Company received $100,000 or more in salary and bonus in fiscal 1995. In fiscal 1996, the annual salary rate of the Company's executive officers has been as follows: Mr. Kahn $35,000, Mr. Edgar $50,000 and Mr. Guillemin $50,000. No bonuses have been paid in fiscal 1996. EMPLOYMENT AGREEMENTS Messrs. Kahn and Edgar (the "Executives") have entered into three-year agreements with the Company providing for the continuation of their employment as Chairman of the Board and President and as Chief Operating Officer and Executive Vice President, respectively, at minimum salaries of $100,000 a year for each Executive, subject to annual upward adjustment in proportion to the increase in the consumer price index plus such increases in salary and such bonuses as the board of directors may from time to time approve. If an Executive dies, or, as a result of disability, is unable to perform substantially all his duties for a period of nine consecutive months, the Company may terminate his employment (not earlier than 30 days and not later than 90 days after the expiration of the nine-month period), in which event the Executive (or his heirs or estate) will be entitled to his salary for the remainder of the term of the agreement. Evan Guillemin has entered into an employment agreement with the Company providing for the continuation of his employment as Chief Financial Officer, at a salary of $100,000 a year, on substantially the same terms and conditions as Messrs. Kahn and Edgar, except that the term of Mr. Guillemin's agreement will expire on July 31, 2001. RESTRICTED STOCK PLAN Under the Company's Restricted Stock Plan, the Company has outstanding restricted stock awards to 12 employees covering an aggregate of 704,794 shares of Common Stock. Each such employee will be entitled to retain his shares, without consideration, if he continues to be employed after the 30th month following the date of grant; if such employment terminates earlier for any reason, the employee will forfeit all his rights to the restricted stock. Until the employee is entitled to retain his shares, Stephen I. Kahn is entitled to vote all such shares and the employee has no rights as a stockholder in respect of those shares. The Company will not make any additional awards under the Restricted Stock Plan. STOCK OPTION AGREEMENT Mr. Guillemin and the Company have entered into a stock option agreement, pursuant to which the Company has granted Mr. Guillemin an option to purchase up to an aggregate of 250,000 shares of Common Stock at the price per share to the public in this offering (the "Exercise Price"). The option becomes exercisable as to 50,000 shares on each of July 21, 1997, 1998, 1999, 2000 and 2001. If Mr. Guillemin's employment terminates before July 21, 2001 as a result of his death or disability, or if the Company terminates his employment other than for cause or if the Company effects a Constructive Discharge (as defined in Mr. Guillemin's employment agreement) of Mr. Guillemin, the option will become exercisable as to all 250,000 shares; if Mr. Guillemin's employment terminates other than as set forth above, the portion of the option that is not exercisable at the date of termination will not thereafter become exercisable. During the 30-day period beginning on the fourth anniversary of the termination of Mr. Guillemin's employment for any reason, the Company may purchase all the shares previously purchased by Mr. Guillemin pursuant to the option and terminate all further rights under the option in exchange for an amount equal to (i) the product of (A) the Average Price of a Share (as defined in the stock option agreement) and (B) the sum of (1) the number of shares being purchased plus (2) the number of shares subject to the option being terminated, reduced by (ii) the product of the Exercise Price and the number of shares subject to the option being terminated. Upon a merger, consolidation or sale of substantially all the assets of the Company, the option will become immediately exercisable as to 50% of the shares as to which the option has not yet become exercisable, with the balance of the option not then exercisable becoming exercisable in equal amounts on each July 21 thereafter through July 21, 2001. Finally, if Mr. Guillemin's employment terminates before July 22, 1997, Stephen I. Kahn will have the option to purchase from Mr. Guillemin 100,000 shares of Common Stock for $50,000. 31 1996 STOCK INCENTIVE PLAN A maximum of 1,250,000 shares of Common Stock may be issued or used for reference purposes pursuant to the Incentive Plan. No awards will have been made under the Incentive Plan prior to this offering. At the time of this offering, an option to purchase 40,000 shares of Common Stock at an exercise price equal to the initial public offering price will be granted to each non- employee director of the Company who is not a member of the Kahn family. See "--Director Compensation." In addition, options to purchase an aggregate of 181,000 shares of Common Stock will be granted to 15 employees of the Company at the time of this offering. The maximum number of shares of Common Stock subject to each of stock options or stock appreciation rights that may be granted to any individual under the Incentive Plan is 100,000 for each fiscal year of the Company during the term of the Incentive Plan. If a stock appreciation right is granted in tandem with a stock option, it shall apply against the individual limits for both stock options and stock appreciation rights, but only once against the maximum number of shares available under the Incentive Plan. The Incentive Plan provides for the following types of awards to 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. In addition, the Incentive Plan provides for the non-discretionary award of stock options to non-employee directors of the Company. Awards may be granted singly, in combination or in tandem, as determined by a committee of the board of directors. Under the Incentive Plan, the committee may grant awards in the form of incentive stock options or non-qualified stock options. The committee will determine the number of shares subject to the option, the term of the option (which may not exceed ten years, or, in the case of an incentive stock option granted to a ten percent stockholder of the Company, five years), the exercise price per share of stock subject to the option, the vesting schedule (if any) and the other material terms of the option. Generally, no option may have an exercise price less than the fair market value of the Common Stock at the time of grant (or, in the case of an incentive stock option granted to a ten percent stockholder of the Company, 110% of fair market value). The option price upon exercise may, to the extent determined by the committee at or after the time of grant, be paid in cash, in shares of Common Stock, in shares of restricted stock valued at fair market value on the payment date as determined by the committee (without regard to any forfeiture restrictions applicable to restricted stock), by a reduction in the number of shares of Common Stock issuable upon exercise of the option or by such other method as is approved by the committee. If an option is exercised by delivery of shares of restricted stock, the shares of Common Stock acquired pursuant to the exercise of the option will generally be subject to the same restrictions as were applicable to such restricted stock. All options may be made exercisable in installments, and the exercisability of options may be accelerated by the committee. The committee may at any time offer to buy an option previously granted on such terms and conditions as the committee shall establish. The committee may in its discretion reprice options or substitute options with lower exercise prices in exchange for outstanding options that are not incentive stock options, provided that the exercise price of substitute options or repriced options may not be less than the fair market value at the time of such repricing or substitution. Options may also, at the discretion of the committee, provide for "reloads," whereby a new option is granted for the same number of shares as the number of shares of Common Stock or restricted stock used to pay the option price upon exercise. The Incentive Plan also authorizes the committee to award shares of restricted stock. Upon the award of restricted stock, the recipient has all rights of a stockholder with respect to the shares, including the right to receive dividends currently, unless otherwise specified by the committee at the time of grant. Unless otherwise determined by the committee at grant, payment of dividends, if any, will be deferred until the date the relevant share of restricted stock vests. Recipients of restricted stock are required to enter into a restricted stock award agreement with the Company which states the restrictions to which the shares are subject and the date or dates or criteria on which such restrictions will lapse. Within the limits of the Incentive Plan, the 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. 32 The Incentive Plan also authorizes the committee to grant stock appreciation rights ("SARs") either with a stock option ("Tandem SARS") or independent of a stock option ("Non-Tandem SARs"). A SAR is a right to receive a payment either in cash or Common Stock as the committee may determine, equal in value to the excess of the fair market value of a share of Common Stock on the date of exercise over the reference price per share of Common Stock established in connection with the grant of the SAR. The reference price per share covered by an SAR will be the per share exercise price of the related option in the case of a Tandem SAR and will be not less than the per share fair market value of the Common Stock on the date of grant (or any other date chosen by the committee) in the case of a Non-Tandem SAR subject to any exception that applies to stock options. A Tandem SAR may be granted at the time of the grant of the related stock option or, if the related stock option is a non-qualified stock option, at any time thereafter during the term of the stock option. A Tandem SAR generally may be exercised only at the times and to the extent the related stock option is exercisable. A Tandem SAR is exercised by surrendering the same portion of the related option. A Tandem SAR expires upon the termination of the related stock option. A Non-Tandem SAR will be exercisable as provided by the committee and will have such other terms and conditions as the committee may determine. A Non- Tandem SAR may have a term no longer than ten years from its date of grant. A Non-Tandem SAR is subject to acceleration of vesting or immediate termination upon termination of employment in certain circumstances. The committee also is authorized to grant "limited SARS," either as Tandem SARs or Non-Tandem SARS. Limited SARs would become exercisable only upon the occurrence of a Change of Control (as defined in the Incentive Plan) or such other event as the committee may designate at the time of grant or thereafter. Unless determined otherwise by the committee at the time of grant, upon a Change of Control, all vesting and forfeiture conditions, restrictions and limitations in effect with respect to any outstanding award will immediately lapse and any unvested awards will automatically become 100% vested. However, unless otherwise determined by the committee at the time of grant, no acceleration of exercisability will occur with regard to certain options the committee reasonably determines in good faith prior to a Change of Control will be honored or assumed or new rights substituted therefor by a successor immediately following the Change of Control. The Incentive Plan provides for nondiscretionary awards of options to purchase Common Stock to each non-employee director. See "--Director Compensation." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Compensation policies and decisions, including those relating to salary, bonuses and benefits of executive officers, have been set or made by the board of directors since the formation of the Company. Upon completion of this offering, the board of directors will create a compensation committee, which will recommend to the board the compensation to be paid to the Company's executive officers. See "--Board Committees" above. 33 CERTAIN TRANSACTIONS From March 8, 1995 until immediately prior to the Reorganization, the Company had been a limited liability company, the members of which, rather than the Company itself, have been responsible for payment of taxes on the Company's income. Upon the Reorganization, the Company became a C corporation, which will be responsible for the payment of taxes. The Company has made non- interest-bearing loans to Stephen I. Kahn and Christopher C. Edgar, each of whom is a director and officer of the Company, in amounts estimated to equal the taxes on the portion of the income of the Company that was attributed to them by virtue of their respective ownership interests in the Company during its existence as a limited liability company. Those loans, each of which was for less than $60,000, will be repaid by Mr. Kahn and Mr. Edgar upon the completion of this offering. In addition, the Company has made a non-interest- bearing loan of $50,000 to Evan Guillemin to finance Mr. Guillemin's acquisition of an equity interest in the Company. In connection with the Reorganization, certain existing members of dELiA*s LLC received a portion of the LLC Distribution. See "Dividend Policy" and "The Reorganization." 34 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information, with respect to the Company's Common Stock beneficially owned by (i) each person known by the Company to be the beneficial owner of more than 5% of the shares of Common Stock, (ii) each director individually, (iii) each executive officer individually and (iv) all executive officers and directors as a group.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR OWNED AFTER TO THE OFFERING THE OFFERING ----------------------- SHARES ----------------------- NAME AND ADDRESS NUMBER PERCENT OFFERED (1) NUMBER PERCENT - ---------------- ------------ ---------- ----------- ------------ ---------- 5% STOCKHOLDERS - --------------- Stephen I. Kahn (2)..... 8,901,789 89.0% 200,000 8,626,789 71.9% 435 Hudson Street New York, New York 10014 Geraldine Karetsky (3).. 1,423,460 14.2 15,000 1,408,460 11.7 1660 Silverking Drive Aspen, Colorado 81611 Sidney S. Kahn (3)...... 1,191,704 11.9 40,000 1,151,704 9.6 14 East 60th Street New York, New York 10022 Christopher C. Edgar 769,204 7.7 75,000 694,204 5.8 (4).................... 435 Hudson Street New York, New York 10014 Robert Karetsky......... 662,927 6.6 20,000 642,927 5.4 435 Hudson Street New York, New York 10014 OTHER EXECUTIVE OFFICERS AND DIRECTORS - ------------------------ Evan Guillemin (5)...... 99,091 1.0 -- 99,091 0.9 435 Hudson Street New York, New York 10014 S. Roger Horchow (6).... * * -- * * 5722 Chatham Hill Road Dallas, Texas 75225 Joseph J. Pinto (6)..... * * -- * * 767 Fifth Avenue New York, New York 10153 Directors and executive officers as a group (7 individuals)........ 9,770,084 97.7 350,000 9,420,084 78.5
- -------- * Less than 1%. (1) In the event that the Underwriters exercise the over-allotment option, up to an additional 352,500 shares of Common Stock may be sold as follows: the Company, 52,500 shares; Stephen I. Kahn, 175,000 shares; Sidney S. Kahn, 50,000 shares; Geraldine Karetsky, 25,000 shares; Christopher C. Edgar, 25,000 shares; and Robert Karetsky, 25,000 shares. (2) Includes 4,103,738 shares of Common Stock (3,903,738 shares after this offering) directly owned by Mr. Kahn and 4,798,051 shares (4,723,051 after this offering) that Mr. Kahn has the sole power to vote pursuant to the Family Stockholders Agreement and agreements with certain employee holders of restricted stock, of which Mr. Kahn also has the shared power to restrict the disposition of 1,625,515 of those shares (1,605,515 after this offering). See "-- Family Stockholders Agreement" and "Management-- Restricted Stock Plan." (3) Includes 147,422 shares of stock owned as trustees for The Ruth Kahn Trust f/b/o Sidney S. Kahn, which Sidney S. Kahn and Geraldine Karetsky have the shared power to dispose of. (4) Does not include 60,705 shares of Common Stock owned by Mr. Edgar subject to the Restricted Stock Plan, which Mr. Edgar does not have the power to vote or to dispose of. 35 (5) Does not include 250,000 shares of Common Stock issuable pursuant to a stock option agreement between Mr. Guillemin and the Company. Pursuant to that agreement, Mr. Guillemin's option does not begin to become exercisable until July 21, 1997. See "Management--Stock Option Agreement." (6) Does not include 40,000 shares of Common Stock issuable pursuant to an option that will be granted upon the completion of this offering. See "Management--Director Compensation." FAMILY STOCKHOLDERS AGREEMENT Certain members of Stephen I. Kahn's family and trusts for the benefit of such persons (the "Family Holders") and Stephen I. Kahn have entered into a stockholders agreement with the Company (the "Family Stockholders Agreement") which, subject to certain exceptions, prohibits the Family Holders from transferring the shares of Common Stock they will own upon the completion of the Reorganization for a period of two years from the date of the Reorganization. Thereafter, the Family Holders will be able to transfer such shares in accordance with the limitations imposed on "affiliates" under Rule 144 under the Securities Act. The Family Stockholders Agreement will permit each of the Family Holders to cause the Company to register shares of Common Stock concurrently with offerings of Common Stock by Stephen I. Kahn. 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 Stephen I. Kahn the right to vote all the shares of Common Stock owned by the Family Holders on all matters that come before the stockholders of the Company. The Family Holders (not including Stephen I. Kahn), collectively, will own 33.5% of the outstanding Common Stock upon the completion of this offering. The Family Stockholders Agreement will expire on the tenth anniversary of the Reorganization. 36 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock having a par value of $.01 per share and 1,000,000 shares of Preferred Stock having a par value of $.01 per share. The following description of the Company's capital stock and certain provisions of the Company's certificate of incorporation and bylaws is qualified in its entirety by the provisions of the certificate of incorporation and bylaws (which are included as exhibits to the Registration Statement of which this Prospectus is a part) and the General Corporation Law of the State of Delaware. COMMON STOCK There will be 12,000,000 shares of Common Stock outstanding after the completion of this offering. In addition, an aggregate of 1,500,000 shares of Common Stock are reserved for issuance under the Incentive Plan and a non-plan stock option agreement between the Company and an executive. All outstanding shares of Common Stock are, and the shares offered hereby will be, fully paid and nonassessable. The holders of Common Stock are entitled to one vote for each share held of record on all matters voted upon by stockholders and may not cumulate votes. Thus, the owners of a majority of the Common Stock outstanding may elect all of the directors if they choose to do so, and the owners of the balance of such shares would not be able to elect any directors. Subject to the rights of holders of any future series of undesignated Preferred Stock that may be designated, each share of outstanding Common Stock is entitled to participate equally in any distribution of net assets made to the stockholders in liquidation, dissolution or winding up of the Company and is entitled to participate equally in dividends as and when declared by the board of directors. There are no redemption, sinking fund, conversion or preemptive rights with respect to the shares of Common Stock. All shares of Common Stock have equal rights and preferences. PREFERRED STOCK The board of directors is authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate of 1,000,000 shares of Preferred Stock in one or more series with such designations and such powers, preferences and rights, and such qualifications, limitations or restrictions (which may differ with respect to each series) as the board may fix by resolution. The board of directors is empowered to set the terms of such shares (including terms with respect to redemption, sinking fund, dividend, liquidation, preemptive, conversion and voting rights and preferences). Accordingly, the board of directors, without stockholder approval, may issue shares of Preferred Stock with terms (including terms with respect to redemption, sinking fund, dividend, liquidation, preemptive, conversion and voting rights and preferences) that could adversely affect the voting power and other rights of holders of the Common Stock. At present, no shares of Preferred Stock are outstanding and the Company has no present plans to issue any shares of Preferred Stock. The undesignated Preferred Stock may have the effect of discouraging an attempt, through the acquisition of a substantial number of shares of Common Stock, to acquire control of the Company with a view to effecting a merger, sale or exchange of assets or a similar transaction. For example, the board of directors could issue such shares as a dividend to holders of Common Stock or place such shares privately with purchasers who may side with the board of directors in opposing a takeover bid. The anti-takeover effects of the undesignated Preferred Stock may deny stockholders the receipt of a premium on their Common Stock and may also have a depressive effect on the market price of the Common Stock. 37 CERTAIN PROVISIONS OF DELAWARE LAW The Company is subject to the provisions of section 203 of the General Corporation Law of the State of Delaware. Subject to certain exceptions, section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. ANTI-TAKEOVER EFFECT OF PROVISIONS OF THE CERTIFICATION OF INCORPORATION AND BYLAWS Certain provisions of the certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Company, such as an unsolicited acquisition proposal. Because these provisions could have the effect of discouraging a third party from acquiring control of the Company, they may inhibit fluctuations in the market price of shares of Common Stock that could otherwise result from actual or rumored takeover attempts and, therefore could deprive stockholders of an opportunity to realize a takeover premium. These provisions also may have the effect of limiting the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock and of preventing changes in the management of the Company. Restrictions on Certain Business Combinations. The Company's certificate of incorporation provides that if stockholder approval is required for the adoption of any agreement for the merger or consolidation of the Company with another corporation or for the sale, lease, transfer or exchange of all or substantially all the assets of the Company, then the affirmative vote of the holders of at least 66 2/3% of the shares entitled to vote on the matter will required to approve such action. Election and Removal of Directors. The Company's board of directors is divided into three classes of directors serving staggered terms. One class of directors will be elected at each annual meeting of stockholders for a three- year term. See "Management--Board Elections." At least two annual meetings of stockholders, instead of one, generally will be required to change the majority of the Company's board of directors. Any director may be removed with or without cause at any time by the affirmative vote of the holders of at least 66 2/3% of the shares entitled to vote at a special meeting of stockholders called for that purpose and the vacancies thus created may be filled at that same meeting by the affirmative vote of the holders of at least 66 2/3% of the shares entitled to vote at such meeting. Ordinary vacancies in the board of directors may also be filled by the affirmative vote of the holders of at least 66 2/3% of the shares entitled to vote in the election of directors. Vote Required to Amend or Repeal Certain Provisions of the Certificate of Incorporation and Bylaws. The General Corporation Law of the State of Delaware provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. The Company's certificate of incorporation requires the affirmative vote of the holders of at least 66 2/3% of the shares entitled to vote in the election of directors to amend or repeal certain of its provisions. A vote of not fewer than 66 2/3% of the holders of shares entitled to vote in the election of directors is required to amend or repeal the Company's bylaws. The bylaws may also be amended or repealed by a vote of not fewer than 66 2/3% of the board of directors, provided that the board of directors may not amend or repeal any bylaw adopted by the stockholders of the Company. Any such vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any Preferred Stock that might be outstanding at the time any such amendments are submitted to stockholders. 38 Stockholder Meetings. Only a majority of the Company's board of directors (excluding those directors affiliated with or elected by an interested stockholder), the chairman of the board, the vice chairman of the board or the president of the Company will be able to call an annual or special meeting of stockholders. In addition, stockholders may take any action by written consent. Requirements for Advance Notification of Stockholder Nomination and Proposals. The Company's certificate of incorporation establishes advance notice procedures with regard to stockholder proposals and the nomination, other than by or at the direction of the board of directors or a committee thereof, of candidates for election as directors. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is The Bank of New York. 39 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, 12,000,000 shares of Common Stock will be outstanding and 1,500,000 shares of Common Stock will be reserved for issuance upon the exercise of outstanding stock options pursuant to the Incentive Plan and a non-plan stock option agreement between the Company and an executive. The 2,350,000 shares of Common Stock sold in this offering will be freely tradeable without restriction under the Securities Act, except for any shares purchased by an "affiliate" of the Company (as that term is defined under the rules and regulations of the Securities Act), which will be subject to the resale limitations of Rule 144 under the Securities Act. The remaining 9,650,000 outstanding shares of Common Stock are "restricted securities" for purposes of Rule 144 (the "Restricted Securities") and may not be resold in a public distribution, except in compliance with the registration requirements of the Securities Act or pursuant to a valid exemption from registration (including pursuant to Rule 144). There has been no public market for the Common Stock prior to this offering. The Company cannot predict the effect, if any, sales of shares of Common Stock or the availability of shares for sale will have on the market price from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market following completion of this offering could adversely affect the market price of the Common Stock and the Company's ability to raise additional equity capital. SALES OF RESTRICTED SHARES None of the outstanding shares held by the Company's existing stockholders will be eligible for resale in the public market pursuant to Rule 144 immediately after this offering. Moreover, all of the Restricted Securities are subject to lock-up commitments, pursuant to which these shares may not be sold publicly during the Lock-Up Period without the prior written consent of Hambrecht & Quist LLC. These shares consist of an aggregate of 7,400,396 shares that are subject to Lock-Up Agreements with Hambrecht & Quist LLC and an aggregate of 4,723,051 shares that are subject to restrictions on transfer contained in the Restricted Stock Plan or the Family Stockholders Agreement, which the Company has agreed with Hambrecht & Quist LLC not to waive during the Lock-Up Period (without the prior written consent of Hambrecht & Quist LLC). Thus, none of the outstanding shares held by the Company's existing stockholders will be eligible for sale prior to the expiration or waiver of the Lock-Up Period. Thereafter, all the Restricted Securities may be resold in the public market only in compliance with the registration requirements of the Securities Act or pursuant to a valid exemption from registration, including pursuant to Rule 144. The Restricted Securities will begin to be eligible for sale under Rule 144 after the second anniversary of the Reorganization. In general, under Rule 144(e), as currently in effect, a stockholder (or stockholders whose shares are aggregated), including an affiliate, who has beneficially owned for at least two years shares of Common Stock that are treated as "restricted securities" would be entitled to sell publicly, within any three-month period, up to the greater of 1% of the then outstanding shares of Common Stock (120,000 shares, immediately after the completion of this offering) or the average weekly reported trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of sale is given, provided certain requirements are satisfied. In addition, affiliates of the Company must comply with additional requirements of Rule 144 in order to sell shares of Common Stock (including shares acquired by affiliates in this offering). Under Rule 144, a stockholder deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale by him, and who has beneficially owned for at least three years shares of Common Stock that are treated as "restricted securities," would be entitled to sell those shares, without regard to the foregoing requirements. See "Principal and Selling Stockholders." REGISTRATION RIGHTS Pursuant to the Family Stockholders Agreement, stockholders holding 4,018,257 shares of Common Stock after this offering have certain rights to have such shares registered for resale under the Securities Act. See "Principal and Selling Stockholders--Family Stockholders Agreement." 40 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, through their representatives, Hambrecht & Quist LLC and Oppenheimer & Co., Inc. (collectively, the "Representatives"), have severally agreed to purchase from the Company and the Selling Stockholders the following respective numbers of shares of Common Stock:
NUMBER NAME OF SHARES ---- --------- Hambrecht & Quist LLC............................................ 715,000 Oppenheimer & Co., Inc. ......................................... 715,000 Alex. Brown & Sons Incorporated.................................. 80,000 Donaldson, Lufkin & Jenrette Securities Corporation.............. 80,000 Montgomery Securities............................................ 80,000 Robertson, Stephens & Company LLC................................ 80,000 Schroder Wertheim & Co. Incorporated............................. 80,000 Smith Barney Inc. ............................................... 80,000 Allen & Company Incorporated..................................... 40,000 Arnhold and S. Bleichroeder, Inc. ............................... 40,000 William Blair & Company, L.L.C. ................................. 40,000 Blaylock & Partners, L.P. ....................................... 40,000 The Buckingham Research Group Incorporated....................... 40,000 Burnham Securities Inc. ......................................... 40,000 Ladenburg, Thalmann & Co. Inc. .................................. 40,000 Needham & Company, Inc. ......................................... 40,000 The Robinson-Humphrey Company, Inc. ............................. 40,000 Southcoast Capital Corp. ........................................ 40,000 Sutro & Co. Incorporated......................................... 40,000 --------- Total........................................................ 2,350,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company, its counsel and independent auditors. The nature of the Underwriters' obligations is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $0.42 per share. The Underwriters may allow and such dealers may re- allow a concession not in excess of $0.10 per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the Representatives. The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 352,500 additional shares of Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company and the Selling Stockholders will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. 41 The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The Selling Stockholders and other stockholders of the Company, including the executive officers and directors, who will own in the aggregate 9,650,000 shares of Common Stock after this offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exercisable for or convertible into shares of Common Stock owned by them during the 180-day period following the effective date of this Prospectus. The Company has agreed that it will not, without prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180-day period following the effective date of this Prospectus, except that the Company may grant options under its stock plans and issue securities under, or pursuant to the exercise of options granted under, its stock plans. Hambrecht & Quist LLC in its sole discretion may release any of the shares subject to the lock-up at any time without notice. See "Shares Eligible for Future Sale." The Representatives have informed the Company that the Underwriters do not intend to confirm sales of Common Stock offered hereby to any accounts over which they have discretionary authority. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock was determined by negotiation among the Company, the representatives of the Selling Stockholders and the Representatives. Among the factors considered in determining the initial public offering price were prevailing market and economic conditions, revenues and earnings of the Company, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. LEGAL MATTERS Certain matters with respect to the legality of the shares of the Common Stock offered hereby have been passed upon for the Company by Proskauer Rose Goetz & Mendelsohn LLP, New York, New York. Certain legal matters relating to this offering will be passed upon for the Underwriters by Sidley & Austin, Chicago, Illinois. EXPERTS The financial statements as of July 31, 1996 and for the six months in the period ended July 31, 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements as of January 31, 1996 and 1995 and for each of the two fiscal years in the period ended January 31, 1996 and for the period September 9, 1993 (inception) to January 31, 1994 included in this Prospectus have been audited by Richard A. Eisner & Company, LLP, independent auditors, as stated in their reports appearing herein, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 42 On August 30, 1996, the Company engaged Deloitte & Touche LLP as its independent public accountant to audit the Company's financial statements. The decision to change accountants was approved by the managers of dELiA*s LLC. Richard A. Eisner & Company, LLP's report on the financial statements for the Company's two most recent fiscal years did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years and all subsequent interim periods 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 and all subsequent interim periods 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. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules filed therewith. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, DC 20549, the New York Regional Office located at 7 World Trade Center, Suite 1300, New York, New York 10048, and the Chicago Regional Office located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may be obtained at prescribed rates from the Commission's Public Reference Section at its principal office. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's World Wide Web site is http://www.sec.gov. 43 DELIA*S INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Reports............................................ F-2 FINANCIAL STATEMENTS: Balance Sheets as of January 31, 1995 and 1996, July 31, 1996, and October 31, 1996 (Unaudited)............................................ F-4 Statements of Operations for the period September 9, 1993 (inception) to January 31, 1994, fiscal years ended January 31, 1995 and 1996, six months ended July 31, 1995 (Unaudited) and 1996, and nine months ended October 31, 1995 and 1996 (Unaudited)........................................................ F-5 Statements of Stockholders' Equity for the period September 9, 1993 (inception) to January 31, 1994, fiscal years ended January 31, 1995 and 1996, six months ended July 31, 1996, and three months ended October 31, 1996 (Unaudited)........................................................ F-6 Statements of Cash Flows for the period September 9, 1993 (inception) to January 31, 1994, fiscal years ended January 31, 1995 and 1996, six months ended July 31, 1995 (Unaudited) and 1996, and nine months ended October 31, 1995 and 1996 (Unaudited)........................................................ F-7 Notes to Financial Statements............................................ F-8
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of dELiA*s Inc. New York, New York We have audited the accompanying balance sheet of dELiA*s Inc. (the "Company") as of July 31, 1996, and the related statements of operations, stockholders' equity, and cash flows for the six months then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at July 31, 1996, and the results of its operations and its cash flows for the six months then ended in conformity with generally accepted accounting principles. Deloitte & Touche LLP October 4, 1996 December 18, 1996 as to Note 10 New York, New York F-2 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders dELiA*s Inc. New York, New York We have audited the accompanying balance sheets of dELiA*s Inc. as at January 31, 1995 and January 31, 1996 and the related statements of operations, stockholders' equity and cash flows for the years then ended and for the period from September 9, 1993 (inception) to January 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of dELiA*s Inc. at January 31, 1995 and January 31, 1996, and results of its operations and its cash flows for the years then ended and for the period from September 9, 1993 (inception) to January 31, 1994 in conformity with generally accepted accounting principles. Richard A. Eisner & Company, LLP New York, New York August 14, 1996 With respect to the first paragraph of Note 10a December 18, 1996 F-3 DELIA*S INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, PRO FORMA -------------- JULY 31, OCTOBER 31, OCTOBER 31, 1995 1996 1996 1996 1996 ------ ------ -------- ----------- ----------- (UNAUDITED) (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents... $ 704 $ 675 $1,343 $1,140 Receivables................. -- 27 108 82 Receivables from related parties.................... -- -- 50 61 Merchandise inventories..... 90 221 1,515 3,712 Prepaid expenses and other current assets............. 67 101 158 1,085 ------ ------ ------ ------ Total current assets...... 861 1,024 3,174 6,080 ------ ------ ------ ------ PROPERTY AND EQUIPMENT--Net... 6 166 381 484 OTHER ASSETS.................. 3 76 71 337 ------ ------ ------ ------ TOTAL ASSETS.................. $ 870 $1,266 $3,626 $6,901 ====== ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............ $ -- $ 63 $1,009 $2,391 Accrued expenses and other current liabilities........ 35 137 556 1,364 Sales return allowance...... -- 25 106 153 Liabilities due to customers.................. -- 76 161 226 Income taxes payable........ -- 3 -- -- ------ ------ ------ ------ Total current liabilities.............. 35 304 1,832 4,134 ------ ------ ------ ------ DEFERRED CREDITS.............. -- -- 21 18 COMMITMENTS AND CONTINGENCIES (Note 12) 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-- 8,196,995, 9,196,115 and 10,000,000 shares, respectively.............. 82 92 100 100 100 Note receivable from stockholder............... -- -- (50) (50) (50) Deferred compensation...... -- -- (191) (169) (169) Additional paid-in capital.. 1,118 1,208 1,467 1,467 1,467 Retained earnings/(deficit)......... (365) (338) 447 1,401 0 ------ ------ ------ ------ ----- Total stockholders' equity................... 835 962 1,773 2,749 1,348 ------ ------ ------ ------ ----- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $ 870 $1,266 $3,626 $6,901 ====== ====== ====== ======
See Notes to Financial Statements F-4 DELIA*S INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 9, FISCAL YEAR SIX MONTHS 1993 ENDED ENDED NINE MONTHS (INCEPTION) TO JANUARY 31, JULY 31, ENDED OCTOBER 31, JANUARY 31, -------------- ------------------ ----------------------- 1994 1995 1996 1995 1996 1995 1996 -------------- ------ ------ ----------- ------ ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) NET SALES........................ $ -- $ 139 $5,652 $1,301 $8,372 $2,844 $15,482 COST OF SALES.................... -- 89 3,078 676 3,958 1,453 7,421 ------ ------ ------ ------ ------ ------ ------- GROSS PROFIT..................... -- 50 2,574 625 4,414 1,391 8,061 ------ ------ ------ ------ ------ ------ ------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 34 384 2,569 808 3,638 1,482 6,331 INTEREST INCOME, NET............. 1 2 25 13 20 18 24 ------ ------ ------ ------ ------ ------ ------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES................ (33) (332) 30 (170) 796 (73) 1,754 PROVISION FOR INCOME TAXES....... -- -- 3 -- 11 -- 15 ------ ------ ------ ------ ------ ------ ------- NET INCOME (LOSS)................ $ (33) $ (332) $ 27 $ (170) $ 785 $ (73) $ 1,739 ====== ====== ====== ====== ====== ====== ======= Pro Forma Income Data (Unaudited) Income (Loss) before provision for income taxes as reported... $ (33) $ (332) $ 30 $ (170) $ 796 $ (73) $ 1,754 Pro forma provision (benefit) for income taxes............... (14) (130) 12 (68) 328 (29) 719 ------ ------ ------ ------ ------ ------ ------- Pro forma net income (loss)..... $ (19) $ (202) $ 18 $ (102) $ 468 $ (44) $ 1,035 ====== ====== ====== ====== ====== ====== ======= Pro forma net income (loss) per share.......................... $(0.00) $(0.02) $ 0.00 $(0.01) $ 0.05 $(0.00) $ 0.10 ====== ====== ====== ====== ====== ====== ======= Shares used in the calculation of pro forma net income (loss) per share...................... 10,000 10,000 10,000 10,000 10,000 10,000 10,000 ====== ====== ====== ====== ====== ====== =======
See Notes to Financial Statements F-5 DELIA*S INC. STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK NOTE ----------------- RECEIVABLE ADDITIONAL RETAINED TOTAL NUMBER OF FROM DEFERRED PAID-IN EARNINGS/ STOCKHOLDERS' SHARES AMOUNT STOCKHOLDER COMPENSATION CAPITAL (DEFICIT) EQUITY ---------- ------ ----------- ------------ ---------- --------- ------------- BALANCE, SEPTEMBER 9, 1993 (INCEPTION)....... -- $ -- $ -- $ -- $ -- $ -- $ -- Issuance of common stock.................. 2,822,480 28 -- -- 172 -- 200 Net loss................ -- -- -- -- -- (33) (33) ---------- ----- ----- ----- ------ ------ ------ BALANCE, JANUARY 31, 1994................... 2,822,480 28 -- -- 172 (33) 167 Issuance of common stock.................. 5,374,515 54 -- -- 946 -- 1,000 Net loss................ -- -- -- -- -- (332) (332) ---------- ----- ----- ----- ------ ------ ------ BALANCE, JANUARY 31, 1995................... 8,196,995 82 -- -- 1,118 (365) 835 Issuance of common stock.................. 999,120 10 -- -- 90 -- 100 Net income.............. -- -- -- -- -- 27 27 ---------- ----- ----- ----- ------ ------ ------ BALANCE, JANUARY 31, 1996................... 9,196,115 92 -- -- 1,208 (338) 962 Issuance of common stock.................. 803,885 8 (50) (217) 259 -- -- Net income.............. -- -- -- -- -- 785 785 Deferred compensation expense................ -- -- -- 26 -- -- 26 ---------- ----- ----- ----- ------ ------ ------ BALANCE, JULY 31, 1996.. 10,000,000 100 (50) (191) 1,467 447 1,773 Net income.............. -- -- -- -- -- 954 954 Deferred compensation expense................ -- -- -- 22 -- -- 22 ---------- ----- ----- ----- ------ ------ ------ BALANCE, OCTOBER 31, 1996 (UNAUDITED)....... 10,000,000 $ 100 $ (50) $(169) $1,467 $1,401 $2,749 ========== ===== ===== ===== ====== ====== ======
See Notes to Financial Statements F-6 DELIA*S INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SEPTEMBER 9, 1993 FISCAL YEAR ENDED SIX MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO JANUARY 31, JULY 31, OCTOBER 31, JANUARY 31, ------------------- ------------------- ----------------------- 1994 1995 1996 1995 1996 1995 1996 -------------- --------- -------- ----------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)...... $(33) $ (332) $ 27 $(170) $ 785 $(73) $1,739 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities Depreciation and amortization........ -- 1 14 4 29 10 49 Inventory reserves for obsolescence.... -- 6 25 -- 207 -- 325 Compensation expense related to issuance of Restricted Stock.... -- -- -- -- 26 -- 48 Changes in operating assets and liabilities: Receivables......... -- -- (27) -- (81) (7) (55) Receivables from related parties.... -- -- -- -- (50) -- (61) Merchandise inventories........ (16) (80) (156) (223) (1,501) (669) (3,816) Prepaid expenses and other current assets............. (17) (50) (34) (9) (57) (26) (984) Other assets........ (1) (2) (78) (28) 1 (47) (262) Accounts payable.... -- 35 63 134 946 453 2,328 Accrued expenses and other current liabilities........ -- -- 102 95 419 (23) 1,227 Sales return allowance.......... -- -- 25 10 81 15 128 Liabilities due to customers.......... -- -- 76 -- 85 -- 150 Income taxes payable............ -- -- 3 -- (3) -- (3) Deferred credits.... -- -- -- -- 21 -- 18 ------ --------- -------- ----- ------- ---- ------ Net cash (used in) provided by operating activities... (67) (422) 40 (187) 908 (367) 831 ------ --------- -------- ----- ------- ---- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures... -- (7) (169) (50) (240) (67) (366) ------ --------- -------- ----- ------- ---- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock................. 200 1,000 100 100 -- 100 -- ------ --------- -------- ----- ------- ---- ------ INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS..... 133 571 (29) (137) 668 (334) 465 CASH & CASH EQUIVALENTS-- BEGINNING OF PERIOD.... -- 133 704 704 675 704 675 ------ --------- -------- ----- ------- ---- ------ CASH & CASH EQUIVALENTS-- END OF PERIOD.......... $ 133 $ 704 $ 675 $ 567 $ 1,343 $370 $1,140 ====== ========= ======== ===== ======= ==== ====== SUPPLEMENTARY CASH FLOW INFORMATION: Income taxes paid...... $ -- $ -- $ -- $ -- $ 11 $ -- $ 15 ====== ========= ======== ===== ======= ==== ====== Interest paid.......... $ -- $ -- $ -- $ -- $ 6 $ -- $ 20 ====== ========= ======== ===== ======= ==== ======
See Notes to Financial Statements F-7 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) 1. BUSINESS AND BASIS OF PRESENTATION dELiA*s Inc. (the "Company" or "dInc") is a direct marketer of casual apparel and related accessories to teen girls and young women primarily between the ages of 10 and 24. The Company offers a broad selection of merchandise, presented in distinctively styled catalogs; the first catalog was mailed in March 1994. The Company maintains a corporate headquarters, telemarketing and customer service group in New York, New York and utilizes a third-party fulfillment facility for processing merchandise in Lancaster, Pennsylvania. The Company is subject to seasonal fluctuations in its merchandise sales and results of operations. The Company expects its sales and 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 initial public offering described in this Prospectus (the "Offering"), dLLC and dInc engaged in a reorganization transaction (the "Reorganization") pursuant to which dLLC contributed its assets to dInc and dInc assumed, and agreed to pay, perform and discharge, all liabilities of dLLC (except for income tax liabilities). In connection with the Reorganization, dInc issued 10,000,000 shares of Common Stock to dLLC, of which 704,794 shares are restricted under the Company's Restricted Stock Plan. See Note 10c--1996 Restricted Stock Plan. A distribution of cash and the shares of Common Stock of dInc was effected in accordance with the dLLC operating agreement. The accompanying financial statements and footnotes are presented to reflect the Reorganization as described in Note 10a, which was accounted for on a basis similar to a pooling of interests. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Fiscal Year--The Company's fiscal year ends on January 31. b. Cash Equivalents--The Company considers all highly liquid investments, with maturities of 90 days or less when purchased, to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. c. Merchandise Inventories--Merchandise inventories, which are all finished goods, are stated at the lower of cost (determined on a first-in, first-out basis) or market value. At January 31, 1995, January 31, 1996, July 31, 1996 and October 31, 1996 (unaudited) inventory reserves for obsolescence were $6,000, $31,000, $238,000 and $356,000, respectively. d. Catalog Costs--Catalogs costs, which primarily consist of catalog production and mailing costs, are capitalized and amortized over the expected future revenue stream, which is principally from three to five months from the date catalogs are mailed. The Company accounts for catalog costs in accordance with the AICPA Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs." SOP 93-7 requires that the amortization of capitalized advertising costs should be the amount computed using the ratio that current F-8 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) period revenues for the catalog cost pool bear to the total of current and estimated future period revenues for that catalog cost pool. Deferred catalog costs as of January 31, 1995, January 31, 1996, July 31, 1996 and October 31, 1996 (unaudited) were $56,000, $93,000, $109,000 and $1,049,000, respectively. Catalog costs, which are reflected in selling, general and administrative expenses, for the fiscal years ended January 31, 1995 and 1996, for the six month periods ended July 31, 1995 (unaudited) and 1996 and for the nine month periods ended October 31, 1995 and 1996 (unaudited) were $162,000, $1,104,000, $381,000, $1,409,000, $675,000 and $2,398,000, respectively. e. Property and Equipment--Property and equipment are stated at cost. Furniture, fixtures and equipment are depreciated by the straight-line method over the estimated useful lives of the respective assets, ranging from 3 to 5 years. Leasehold improvements are amortized ratably over the lesser of the remaining lease term or useful life of the improvement. See Note 3--Property and Equipment. f. Income Taxes--Prior to the Offering, the Company was a limited liability company ("LLC") and each member's respective portion of dLLC's taxable income or loss was reportable on such members own federal and state tax returns. As an LLC, the Company was subject to the New York City income tax on unincorporated businesses. As discussed in Note 10a--Reorganization, the Company has effected a Reorganization that changed the income tax status of the Company to a taxable C corporation. Subsequent to the Reorganization, deferred income tax assets and liabilities will be recorded in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." g. Deferred Credits--Deferred credits represent deferred rent that results from the accounting for rent expense on a straight-line basis over the lease term for leases with scheduled rent increases. h. Revenue Recognition--Revenue is recognized when merchandise is shipped to customers. The Company accrues a sales return allowance in accordance with its return policy for estimated returns of merchandise subsequent to the balance sheet date that relate to sales prior to the balance sheet date. At January 31, 1995, January 31, 1996, July 31, 1996 and October 31, 1996 (unaudited), sales return allowances were $0, $25,000, $106,000 and $153,000, respectively. i. Pro Forma Net Income Per Share--Pro forma net income per share is based on the weighted average number of common shares and common share equivalents outstanding. The common shares give effect to the issuance of 10,000,000 shares of Common Stock to dLLC as described in Note 10a--Reorganization. For all periods presented, the number of common shares and common share equivalents used in the calculation of pro forma net income per share was 10,000,000, which reflects the Reorganization as described in Note 10a. Common stock issued at prices below the initial public offering price during the twelve month period preceding the date of this Prospectus has been included as outstanding as if the stock were outstanding for all periods presented. F-9 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) j. Fair Value of Financial Instruments--The following disclosure about the fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The carrying amounts reported in the balance sheets for cash and cash equivalents, receivables and accounts payable approximate fair value because of the short-term maturity of those financial instruments. k. Use of Estimates in the Preparation of Financial Statements--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. l. Recent Accounting Pronouncements--In March 1995, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and is effective for fiscal years beginning after December 15, 1995. The adoption of SFAS No. 121 did not have an effect on the Company's financial position or results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", which is effective for the Company beginning February 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation expense to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board Opinion No. 25 ("APB No. 25"), which recognizes compensation costs based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB No. 25 to its stock-based compensation awards to employees. The required disclosures of pro forma effects on net income and earnings per share did not apply during the nine month period ended October 31, 1996 or during prior fiscal years. m. Unaudited Interim Financial Statements--In the opinion of management, the unaudited financial statements for the six months ended July 31, 1995 and the nine months ended October 31, 1995 and 1996 are presented on a basis consistent with the audited financial statements and reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results thereof. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. n. Pro forma Stockholders' Equity--Pro forma Stockholders' Equity as of October 31, 1996 (unaudited) represents stockholders' equity, after giving effect to the portion of the LLC Distribution that depended on the Company's results of operations from inception through October 31, 1996. F-10 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) 3. PROPERTY AND EQUIPMENT Major classes of property and equipment are as follows:
ESTIMATED JANUARY 31, JANUARY 31, JULY 31, OCTOBER 31, USEFUL LIVES 1995 1996 1996 1996 ------------- ----------- ----------- -------- ----------- (UNAUDITED) Furniture, fixtures and equipment.............. 3-5 years $7,000 $139,000 $295,000 $367,000 Leasehold improvements.. Term of lease -- 37,000 121,000 175,000 ------ -------- -------- -------- Total--at cost.......... 7,000 176,000 416,000 542,000 Less accumulated depreciation and amortization........... 1,000 10,000 35,000 58,000 ------ -------- -------- -------- Total property and equipment--net......... $6,000 $166,000 $381,000 $484,000 ====== ======== ======== ========
4. CREDIT AND FINANCING AGREEMENTS At October 31, 1996, the Company had a line of credit agreement with a bank providing for short-term loans of up to $1.5 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 (10.25 percent at October 31, 1996). The agreement expires on July 31, 1997. The agreement is personally guaranteed by three stockholders of the Company. There were no funds borrowed under the agreement during the nine month period ended October 31, 1996 or during the fiscal years ended January 31, 1996 and 1995. 5. INTEREST INCOME--NET Interest income--net consists of the following:
SEPTEMBER 9, 1993 SIX MONTHS NINE MONTHS ENDED (INCEPTION) TO FISCAL YEAR 1994 FISCAL YEAR 1995 ENDED JULY 31, OCTOBER 31, JANUARY 31, ENDED ENDED ------------------- ----------------------- 1994 JANUARY 31, 1995 JANUARY 31, 1996 1995 1996 1995 1996 -------------- ---------------- ---------------- ----------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) ----------- ----------- ----------- Interest income......... $1,000 $2,000 $25,000 $13,000 $26,000 $18,000 $ 44,000 Interest expense........ -- -- -- -- (6,000) -- (20,000) ------ ------ ------- ------- ------- ------- -------- Interest income--net.... $1,000 $2,000 $25,000 $13,000 $20,000 $18,000 $ 24,000 ====== ====== ======= ======= ======= ======= ========
F-11 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) 6. INCOME TAXES The provision for income taxes is comprised of the following:
SIX MONTHS NINE MONTHS ENDED SEPTEMBER 9, 1993 FISCAL YEAR 1994 FISCAL YEAR 1995 ENDED JULY 31, OCTOBER 31, (INCEPTION) TO ENDED ENDED ------------------- ----------------------- JANUARY 31, 1994 JANUARY 31, 1995 JANUARY 31, 1996 1995 1996 1995 1996 ----------------- ---------------- ---------------- ----------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) ----------- ----------- ----------- Federal: Current............... $ -- $ -- $ -- $-- $ -- $ -- $ -- Deferred.............. -- -- -- -- -- -- -- ----- ----- ------ ---- ------- ----- ------- Total federal....... -- -- -- -- -- -- -- ----- ----- ------ ---- ------- ----- ------- State and local: Current............... -- -- 3,000 -- 11,000 -- 15,000 Deferred.............. -- -- -- -- -- -- -- ----- ----- ------ ---- ------- ----- ------- Total state and local.............. -- -- 3,000 -- 11,000 -- 15,000 ----- ----- ------ ---- ------- ----- ------- Total provision....... $ -- $ -- $3,000 $-- $11,000 $ -- $15,000 ===== ===== ====== ==== ======= ===== =======
Effective September 9, 1993 (date of inception), the Company's predecessor, dELiA*s Ltd., elected S corporation status under applicable provisions of the Internal Revenue Code. In 1995, dELiA*s Ltd. was succeeded by dLLC and was treated as a partnership for income tax purposes. As such, dELiA*s Ltd. and dLLC paid no federal or state income taxes as all taxable income was taxed directly at the shareholder and membership level. The effective income tax rates differed from the federal statutory income tax rates as follows:
SIX MONTHS NINE MONTHS ENDED SEPTEMBER 9, 1993 FISCAL YEAR 1994 FISCAL YEAR 1995 ENDED JULY 31, OCTOBER 31, (INCEPTION) TO ENDED ENDED --------------------- ----------------------- JANUARY 31, 1994 JANUARY 31, 1995 JANUARY 31, 1996 1995 1996 1995 1996 ----------------- ---------------- ---------------- ----------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) ----------- ----------- ----------- Federal taxes at statutory rates....... $(11,000) $(113,000) $ 10,000 $(58,000) $ 271,000 $(25,000) $596,000 State and local taxes net of federal benefit............... (2,000) (20,000) 5,000 (10,000) 53,000 (5,000) 117,000 Effect of S corporation and LLC company status................ 13,000 133,000 (12,000) 68,000 (313,000) 30,000 (698,000) -------- --------- -------- -------- --------- -------- -------- $ -- $ -- $ 3,000 $ -- $ 11,000 $ -- $ 15,000 ======== ========= ======== ======== ========= ======== ========
F-12 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) PROFORMA PROVISION FOR INCOME TAXES (UNAUDITED) The unaudited pro forma provision for income taxes represents estimated income taxes that would have been reported had the Company filed its tax returns as a taxable C corporation which reflects the reorganization described in Note 13 for all periods presented. The pro forma provision for income taxes is comprised of the following:
SIX MONTHS NINE MONTHS ENDED SEPTEMBER 9, 1993 FISCAL YEAR 1994 FISCAL YEAR 1995 ENDED JULY 31, OCTOBER 31, (INCEPTION) TO ENDED ENDED -------------------- ----------------------- JANUARY 31, 1994 JANUARY 31, 1995 JANUARY 31, 1996 1995 1996 1995 1996 ----------------- ---------------- ---------------- ----------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Federal: Current................ $ -- $ -- $ -- $ -- $248,000 $ -- $333,000 Deferred............... (12,000) (109,000) 10,000 (58,000) 26,000 (25,000) 268,000 -------- --------- ------- -------- -------- -------- -------- Total federal........ (12,000) (109,000) 10,000 (58,000) 274,000 (25,000) 601,000 -------- --------- ------- -------- -------- -------- -------- State and local: Current................ -- -- -- -- 49,000 -- 65,000 Deferred............... (2,000) (21,000) 2,000 (10,000) 5,000 (4,000) 53,000 -------- --------- ------- -------- -------- -------- -------- Total state and local............... (2,000) (130,000) 12,000 (10,000) 54,000 (4,000) 118,000 -------- --------- ------- -------- -------- -------- -------- Total provision......... $(14,000) $(130,000) $12,000 $(68,000) $328,000 $(29,000) $719,000 ======== ========= ======= ======== ======== ======== ========
The tax effects of significant items comprising the Company's pro forma federal and state net deferred tax asset as of January 31, 1996, July 31, 1996 and October 31, 1996 (unaudited) are as follows:
JANUARY 31, JULY 31, OCTOBER 31, 1996 1996 1996 ----------- -------- ----------- (UNAUDITED) ----------- Deferred tax assets: Inventory reserves.................... $ 13,000 $ 97,000 $ 145,000 Sales return allowance................ 10,000 53,000 62,000 Deferred compensation expense......... -- 11,000 20,000 Depreciation.......................... 5,000 7,000 8,000 Net operating loss.................... 146,000 -- -- Other................................. -- 9,000 7,000 -------- -------- --------- Total deferred tax assets............... 174,000 177,000 242,000 -------- -------- --------- Deferred tax liabilities: Catalog costs......................... (38,000) (82,000) (426,000) -------- -------- --------- Net deferred tax asset/(liability)...... $136,000 $ 95,000 $(184,000) ======== ======== =========
F-13 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) 7. STOCKHOLDERS' EQUITY Effective upon the Reorganization, as described in Note 10a, 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, 8,196,995, 9,196,115 and 10,000,000 shares issued and outstanding at January 31, 1995, January 31, 1996, July 31, 1996 and October 31, 1996 (unaudited), respectively. Prior to January 31, 1996, the Company issued Class A Membership Interests for capital contributions of $1,300,000, which upon the Reorganization converted into 9,196,115 shares of Common Stock. During the six month period ended July 31, 1996, the Company issued Class C Membership Interests for capital contributions of $50,000, which upon the Reorganization converted into 99,091 shares of Common Stock. During the six month period ended July 31, 1996, 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 six month period ended July 31, 1996 and nine month period ended October 31, 1996 (unaudited) was $26,000 and $48,000, respectively. Upon the Reorganization, the Class B restricted membership interests converted into 704,794 shares of restricted common stock. See Note 10c--1996 Restricted Stock Plan. Also see Note 10e regarding the Family Stockholders' Agreement. 8. RELATED PARTY TRANSACTIONS Receivables from related parties as of July 31, 1996 and October 31, 1996 included (i) non-interest-bearing loans receivable from stockholders of $50,000 and $61,000, respectively, related to certain stockholders' personal income taxes attributable to income of the Company as a limited liability company and (ii) non-interest-bearing loan receivable from a stockholder/executive of the Company in the amount of $50,000 related to the executive's capital contribution. 9. COMMITMENTS As of October 31, 1996 the Company was obligated under various long-term operating leases for office space and equipment requiring minimum annual rentals. These operating leases expire on varying dates to 2003. At October 31, 1996 aggregate minimum rentals in future periods are as follows:
FISCAL YEAR ENDING JANUARY 31, ----------- 1997 (remainder).............................................. $ 51,000 1998.......................................................... 225,000 1999.......................................................... 185,000 2000.......................................................... 164,000 2001.......................................................... 151,000 Thereafter..................................................... 187,000
In addition, the Company is obligated to pay a proportionate share of increases in real estate taxes and other occupancy costs. F-14 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) Rent expense for the fiscal years ended January 31, 1995 and 1996, for the six month periods ended July 31, 1995 (unaudited) and 1996 and for the nine month periods ended October 31, 1995 and 1996 (unaudited) was $44,000, $88,000, $17,000, $123,000, $36,000 and $232,000, respectively. The Company has an agreement (the "Fulfillment Agreement") with a third- party fulfillment contractor to provide warehouse space near Lancaster, Pennsylvania for inventory storage and processing, including the fulfillment of customer orders for merchandise. The Company neither owns nor leases such warehouse space; the cost of the warehouse space is included in the fees paid by the Company to the third-party fulfillment contractor under the terms of the Fulfillment Agreement. The Fulfillment Agreement expires on April 30, 1997. At October 31, 1996, aggregate minimum payments in future periods under the Fulfillment Agreement are as follows: $86,000 for the remainder of fiscal year ending January 31, 1997 and $86,000 for fiscal year ending January 31, 1998. 10. SUBSEQUENT EVENTS A. REORGANIZATION As described in this Prospectus, on December 18, 1996, dLLC and dInc engaged in a reorganization transaction (the "Reorganization") pursuant to which dLLC contributed its assets to dInc. dInc assumed, and agreed to pay, perform and discharge, all liabilities of dLLC (except for income tax liabilities). In connection with the Reorganization, dInc issued 10,000,000 shares of Common Stock to dLLC, of which 704,794 shares are restricted under the Company's Restricted Stock Plan as described in Note 10c--1996 Restricted Stock Plan. The Reorganization also resulted in the distribution to existing members of dLLC of the LLC Distribution described below and the shares of Common Stock of dInc received pursuant to the operating agreement. Prior to the completion of the Offering, dLLC made a cash distribution (the "LLC Distribution") to certain of its members in the amount of $4.0 million. B. STOCK OPTION AGREEMENT AND EMPLOYMENT AGREEMENTS Prior to the Offering, an executive entered into a stock option agreement pursuant to which the Company has granted such executive an option to purchase up to an aggregate of 250,000 shares of Common Stock at the price per share to the public in this Offering (the "Exercise Price"). The option becomes exercisable as to 50,000 shares on each of July 21, 1997, 1998, 1999, 2000 and 2001. If the executive's employment terminates before July 21, 2001 as a result of his death or disability, or if the Company terminates his employment other than for cause or if the Company effects a Constructive Discharge (as defined in the executive's employment agreement) of the executive, the option will become exercisable as to all 250,000 shares; if the executive's employment terminates other than as set forth above, the portion of the option that is not exercisable at the date of termination will not thereafter become exercisable. During the 30-day period beginning on the fourth anniversary of the termination of the executive's employment for any reason, the Company may purchase all the shares previously purchased by the executive pursuant to the option and terminate all further rights under the option in exchange for an amount equal to (i) the product of (A) the Average Price of a Share (as defined in the stock option agreement) and (B) the sum of (1) the number of shares being purchased plus (2) the number of shares subject to the option being terminated, reduced by (ii) the product of the Exercise Price and the number of shares subject to the option being terminated. Upon a merger, consolidation or sale of F-15 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, SIX MONTHS ENDED JULY 31, 1995 AND 1996, AND NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 AND THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED) substantially all the assets of the Company, the option will become immediately exercisable as to 50% of the shares as to which the option has not yet become exercisable, with the balance of the option not then exercisable becoming exercisable in equal amounts on each July 21 thereafter through July 21, 2001. If the executive's employment terminates before July 22, 1997, a stockholder/executive of the Company will have the option to purchase from the executive 100,000 shares of Common Stock for $50,000. Prior to the completion of the Offering, two executives of the Company entered into three-year agreements with the Company providing for the continuation of their employment at minimum salaries of $100,000 a year for each executive, subject to annual upward adjustment in proportion to the increase in the consumer price index plus such increases in salary and bonuses as approved by the Board of Directors. In July 1996, an executive of the Company entered into an agreement with the Company providing for the continuation of his employment at a minimum salary each year of $50,000 ($100,000 upon completion of the Offering) plus such increases in salary and bonuses as approved by the Board of Directors. The agreement terminates in July 2001. C. 1996 RESTRICTED STOCK PLAN Concurrent with the Reorganization, the Company approved and adopted the 1996 Restricted Stock Plan (the "Restricted Stock Plan") pursuant to which 704,794 shares of Common Stock were exchanged for restricted membership interests in dLLC held by certain employees of the Company ("Restricted Interest Holders"). Upon the issuance of such shares, no more shares were available for issuance pursuant to the Restricted Stock Plan. Under the provisions of the restricted stock agreements between each Restricted Interest Holder and the Company, the restrictions on the shares generally lapse 30 months from the grant date of the original restricted membership interest in dLLC. If a Restricted Interest Holder's employment is terminated prior to the 30th month for any reason, the Restricted Interest Holder will forfeit all rights to the restricted stock. Within the limits of the Restricted Stock Plan, the compensation committee may provide for the lapse of such restrictions in installments in whole or in part or may accelerate or waive such restrictions at any time. In addition, the restricted stock agreements give an executive officer/stockholder of the Company the right to vote all the shares of common stock issued to the Restricted Interest Holders pursuant to such agreements on all matters during the period in which such shares are subject to restrictions on transfer. D. 1996 STOCK INCENTIVE PLAN Concurrent with the Reorganization, the Company approved and adopted the 1996 Stock Incentive Plan (the "Incentive Plan"), which provides for the following types of awards to 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. Under the Incentive Plan, two independent non-employee directors will be granted, at the time of the Offering, an option to purchase 40,000 shares each of Common Stock at an exercise price per share equal to the initial public offering price. All options granted to non-employee directors will become exercisable at the F-16 DELIA*S INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 9, 1993 (INCEPTION) TO JANUARY 31, 1994, FISCAL YEARS ENDED JANUARY 31, 1995 AND 1996, AND SIX MONTHS ENDED JULY 31, 1995 AND 1996 (INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JULY 31, 1995 IS UNAUDITED) rate of 20% on each of the first five anniversaries of the date of grant, assuming the non-employee director is a director on those dates, and all such options generally will cease to be exercisable ten years from the date of grant. Upon a Change of Control (as defined in the Incentive Plan), all options (which have not yet expired) will automatically become exercisable. In addition, options to purchase an aggregate of 181,000 shares of Common Stock will be granted to fifteen employees of the Company at the time of the Offering. These options granted to employees will become exercisable over a period of one to five years after the date of the Offering. The exercise price per share of the options that become exercisable one year after the date of the Offering is equal to the initial public offering price. The exercise price per share of the options that become exercisable between two and five years after the date of the Offering is equal to the fair market value one year prior to the date each option becomes exercisable. The maximum number of shares of common stock that may be issued pursuant to the Incentive Plan will be 1,250,000, of which no shares will have been issued or used for reference purposes prior to the Offering. The maximum number of shares of common stock subject to each of stock options or stock appreciation rights that may be granted to any individual under the Incentive Plan will be 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. E. FAMILY STOCKHOLDERS' AGREEMENT Concurrent with the Reorganization, certain stockholders (the "Family Holders") and a stockholder/executive of the Company (the "Executive") entered into a stockholders agreement with the Company (the "Family Stockholders Agreement") which, subject to certain exceptions, prohibits the Family Holders from transferring the shares of Common Stock they will own upon completion of the Reorganization for a period of two years from the date of the Reorganization. Thereafter, the Family Holders will be able to transfer such shares in accordance with the requirements of Rule 144 under the Securities Act. The Family Stockholders Agreement also permits each of the Family Holders to cause the Company to register shares of Common Stock concurrently with offerings of Common Stock by the Executive. The Company will generally be required to bear the expenses of all such registrations, except underwriting discounts and commissions. In addition, the Family Stockholders Agreement gives the Executive the right to vote all of the shares of Common Stock owned by the Family Holders on all matters that come before the stockholders of the Company. The Family Holders collectively, will own 33.5 percent of the outstanding Common Stock upon completion of the Offering. The Family Stockholders Agreement will expire on the tenth anniversary of the completion of the Reorganization. F-17 [PHOTOGRAPHS AND ART FROM DELIA*S CATALOGS.] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE- LIED UPON AS HAVING BEEN AUTHO- RIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI- TUTE AN OFFER TO SELL OR A SOLICI- TATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMA- TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ----------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................................................... 3 Risk Factors.......................................................... 5 Use of Proceeds....................................................... 11 Dividend Policy....................................................... 11 The Reorganization.................................................... 11 Capitalization........................................................ 12 Dilution.............................................................. 13 Selected Financial Data............................................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 15 Business.............................................................. 21 Management............................................................ 28 Certain Transactions.................................................. 34 Principal and Selling Stockholders.................................... 35 Description of Capital Stock.......................................... 37 Shares Eligible for Future Sale....................................... 40 Underwriting.......................................................... 41 Legal Matters......................................................... 42 Experts............................................................... 42 Additional Information................................................ 43 Index to Financial Statements......................................... F-1
----------- UNTIL JANUARY 13, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPEC- TUS), ALL DEALERS EFFECTING TRANS- ACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHENACTING AS UNDERWRITERS AND WITH RESPECT TO THEIRUNSOLD ALLOT- MENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,350,000 SHARES [LOGO OF DELIA*S INC. APPEARS HERE] COMMON STOCK --------------- PROSPECTUS --------------- HAMBRECHT & QUIST OPPENHEIMER & CO., INC. DECEMBER 19, 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----