-----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, IOjOgOP/4AR5SucLP7vowriocMuzoOc8KYo0p9z+GiZow5TLmPRa6bgTzTEQTv7V 0jsYwCgLaoX7ZHLW8xDRqQ== 0000950146-97-001430.txt : 19970918 0000950146-97-001430.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950146-97-001430 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19970912 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELIAS 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-21869 FILM NUMBER: 97679244 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 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT ------------------------- Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended July 31, 1997 OR [ ] TRANSITION REPORT ------------------ Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from __________________ to ___________________ Commission file number 0-21869 dELiA*s Inc. (Exact name of registrant as specified in its charter) Delaware 13-3914035 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 435 Hudson Street, New York, New York 10014 (Address of principal executive offices) (Zip Code) (212) 807-9060 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of Common Stock outstanding as of August 23, 1997: 13,002,977 Certain statements contained herein, including, without limitation, information appearing under Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Forward-looking statements involve a number of risks and uncertainties including, but not limited to, general economic conditions, increases in materials, printing, paper, postage, shipping and labor costs, timing of catalog mailings, customer response rates, levels of competition and other factors outside the control of the Company. These factors, and other factors that appear with the forward-looking statements, or in the Company's other Securities and Exchange Commission filings, including its Registration Statement on Form S-1 filed on May 20, 1997, could affect the Company's actual results and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company herein. All references in this Report to a particular fiscal year refer to the year ended January 31 following the particular year (e.g., "fiscal 1996" refers to the fiscal year ending January 31, 1997). As used in this Report, references to "dELiA*s" or the "Company" prior to the 1996 Reorganization (described in "Item 1--Consolidated Financial Statements") mean dELiA*s LLC and its predecessor and, thereafter, dELiA*s Inc. and its subsidiaries. PART I FINANCIAL INFORMATION (Unaudited) Item 1. Consolidated Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and therefore do not include all information and footnotes required by generally accepted accounting principles. However, in the opinion of management, all adjustments (which consist only of normal recurring accruals) necessary for a fair presentation of the results of operations for the relevant periods have been made. Results for the interim periods are not necessarily indicative of the results to be expected for the year. 2 dELiA*s Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
January 31, 1997 July 31, 1997 ---------------- ------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents.................................................. $21,316 $15,138 Short-term investments..................................................... -- 8,696 Receivables from related parties .......................................... 61 -- Merchandise inventories ................................................... 4,072 7,262 Prepaid expenses and other current assets ................................. 310 2,456 Deferred taxes ............................................................ 536 183 ------- ------- Total current assets .................................................. 26,295 33,735 ------- ------- PROPERTY AND EQUIPMENT--Net .................................................... 1,021 2,855 LONG-TERM INVESTMENTS .......................................................... -- 14,112 OTHER ASSETS .................................................................. 98 152 ------- ------- TOTAL ASSETS .................................................................. $27,414 $50,854 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable .......................................................... $ 3,148 $ 4,760 Accrued expenses and other current liabilities ............................ 1,937 2,243 Sales return allowance .................................................... 372 364 Liabilities due to customers .............................................. 618 895 Income taxes payable ...................................................... 193 -- ------- ------- Total current liabilities ............................................. 6,268 8,262 ------- ------- DEFERRED CREDITS ............................................................... 14 108 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, par value $.01 per share; Authorized--1,000,000 shares; Shares issued and outstanding--none .............................. -- -- Common Stock, par value $.01 per share; Authorized--50,000,000 shares; Issued and outstanding--12,052,500 and 13,002,977 shares, at January 31, 1997 and July 31, 1997, respectively ................................................... 121 130 Note receivable from stockholder .......................................... (50) -- Deferred compensation ..................................................... (147) (93) Additional paid-in capital ................................................ 20,874 40,285 Retained earnings ......................................................... 334 2,162 ------- ------- Total stockholders' equity ............................................ 21,132 42,484 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $27,414 $50,854 ======= =======
See Notes to Unaudited Consolidated Financial Statements 3 dELiA*s Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data)
Three Months Ended July 31, -------------- 1996 1997 ---- ---- (Unaudited) NET SALES .................................................................. $ 4,663 $16,091 COST OF SALES .................................................................. 2,233 7,826 -------- ------- GROSS PROFIT .................................................................. 2,430 8,265 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................... 2,149 7,237 INTEREST INCOME, NET............................................................ 11 320 -------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES........................................ 252 1,348 PROVISION FOR INCOME TAXES...................................................... 4 448 -------- ------- NET INCOME .................................................................. $ 288 $ 900 ======== ======= NET INCOME PER SHARE............................................................ $ 0.07 ======= SHARES USED IN THE CALCULATION OF NET INCOME PER SHARE........................................................... 12,774 ======= Pro Forma Income Data (Unaudited) Income before provision for income taxes as reported ...................... $ 292 Pro forma provision for income taxes....................................... 121 -------- Pro forma net income....................................................... $ 171 ======== Pro forma net income per share............................................. $ 0.02 ======== Shares used in the calculation of pro forma net income per share........................................................ 10,000 ======== Six Months Ended July 31, -------------- 1996 1997 ---- ---- (Unaudited) NET SALES .................................................................. $ 8,372 $29,019 COST OF SALES .................................................................. 3,958 14,218 -------- ------- GROSS PROFIT .................................................................. 4,414 14,801 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................... 3,638 12,459 INTEREST INCOME, NET............................................................ 20 557 -------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES........................................ 796 2,899 PROVISION FOR INCOME TAXES...................................................... 11 1,071 -------- ------- NET INCOME .................................................................. $ 785 $ 1,828 ======== ======= NET INCOME PER SHARE............................................................ $ 0.15 ======= SHARES USED IN THE CALCULATION OF NET INCOME PER SHARE........................................................... 12,472 ======= Pro Forma Income Data (Unaudited) Income before provision for income taxes as reported ...................... $ 796 Pro forma provision for income taxes....................................... 328 -------- Pro forma net income....................................................... $ 468 ======== Pro forma net income per share............................................. $ 0.05 ======== Shares used in the calculation of pro forma net income per share........................................................ 10,000 ========
See Notes to Unaudited Consolidated Financial Statements 4 dELiA*s Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Six Months Ended July 31, -------------- 1996 1997 ---- ---- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................. $ 785 $ 1,828 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization ........................................... 29 167 Compensation expense related to issuance of Restricted Stock ............ 26 54 Decrease in note receivable from stockholder............................. -- 50 Changes in operating assets and liabilities: Receivables from related parties ................................. (50) 61 Merchandise inventories........................................... (1,294) (3,190) Prepaid expenses and other current assets......................... (138) (2,146) Deferred taxes ................................................... -- 353 Other assets...................................................... 1 (54) Accounts payable ................................................. 946 1,612 Accrued expenses and other current liabilities ................... 419 306 Sales return allowance ........................................... 81 (8) Liabilities due to customers ..................................... 85 277 Income taxes payable ............................................. (3) (193) Deferred credits ................................................. 21 94 ------- ------- Net cash provided by (used in) operating activities............................. 908 (789) ======= ======= FLOWS FROM INVESTING ACTIVITIES: Capital expenditures....................................................... (240) (2,001) Purchases of held-to-maturity securities................................... -- (22,808) ------- ------- Net cash used in investing activities........................................... (240) (24,809) ======= ======= CASH FLOWS FROM FINANCING ACTIVITIES: Net Proceeds from Issuance of Common Stock................................. -- 19,420 ======= ======= INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ................................. 668 (6,178) CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD..................................... 675 21,316 ======= ======= CASH & CASH EQUIVALENTS--END OF PERIOD .......................................... $ 1,343 $15,138 ======= ======= SUPPLEMENTARY CASH FLOW INFORMATION: Income taxes paid ......................................................... $ 11 $ 1,076 ======= ======= Interest paid ............................................................. $ 6 $ 6 ======= =======
See Notes to Unaudited Consolidated Financial Statements 5 dELiA*s Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Business The Company 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 distributed in March 1994. The Company maintains a corporate headquarters, telemarketing and customer service group in New York, New York and utilizes a third-party fulfillment facility for processing merchandise in Lancaster, Pennsylvania. The Company is subject to seasonal fluctuations in its merchandise sales and results of operations. The Company expects its sales operating results generally to be lower in the first and second quarters than in the third and fourth quarters (which include the back-to-school and holiday seasons) of each fiscal year. dELiA*s Inc. (the "Company" or "dInc") is a successor to a business originally founded in September 1993. In 1995, the successor business began to operate as a New York limited liability company under the name dELiA*s LLC ("dLLC"). As a limited liability company, dLLC was treated for income tax purposes as a partnership with taxes on the income generated by dLLC paid by its members. In October 1996, dInc was incorporated in Delaware. Prior to the completion of the Company's initial public offering of Common Stock of dInc (the "IPO"), dLLC and dInc engaged in a reorganization transaction (the 1996 "Reorganization") pursuant to which dLLC contributed its assets to dInc and dInc assumed, and agreed to pay, perform and discharge, all liabilities of dLLC (except for income tax liabilities). In connection with the 1996 Reorganization, dInc issued 10,000,000 shares of Common Stock to dLLC, of which 704,474 shares are restricted under the Company's Restricted Stock Plan. The 1996 Reorganization also resulted in the distribution to existing members of dLLC of $4,000,000 and the shares of Common Stock of dInc in accordance with the dLLC operating agreement (the "LLC Distribution"). The accompanying financial statements and footnotes are presented to reflect the 1996 Reorganization as described above, which was accounted for on a basis similar to a pooling of interests. In June 1997, the Company completed a public offering of 1,000,000 shares of Common Stock at a public offering price of $21.00 per share (the "1997 Offering"). The Company received net proceeds of $19.4 million In July 1997, the dELiA*s business was reorganized into several subsidiaries along functional business and geographic lines. 2. Summary of Significant Accounting Policies and Basis of Presentation a. Principles of Consolidation--The consolidated financial statements include the accounts of dInc and subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. b. Unaudited Interim Financial Statements--In the opinion of management, the unaudited financial statements for the six month periods ended July 31, 1996 and 1997 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. 6 dELiA*s Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) c. Recent Accounting Pronouncements--Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information About Capital Structure," was issued in February 1997 and is effective for periods ending after December 15, 1997. This statement establishes standards for disclosing information about an entity's capital structure by superseding and consolidating previously issued accounting standards. The financial statements of the Company are prepared in accordance with the requirements of SFAS No. 129. 3. Property and Equipment Major classes of property and equipment are as follows:
Estimated January 31, July 31, Useful Lives 1997 1997 ------------ ----------- -------- (Unaudited) Furniture, fixtures and equipment................ 5-10 years $ 936,000 $2,424,000 Leasehold improvements........................... Term of lease 180,000 693,000 --------- ---------- Total--at cost................................... 1,116,000 3,117,000 Less accumulated depreciation and amortization................................... 95,000 262,000 --------- ---------- Total property and equipment--net................ $1,021,000 $2,855,000 ========= ==========
4. Credit and Financing Agreements At July 31, 1997, the Company had a line of credit agreement with a bank providing for short-term loans of up to $5.0 million subject to bank approval. Borrowings under the agreement are secured by all assets of the Company except for merchandise inventories and bear interest at the prime rate plus two percent (10.25 percent and 10.5 percent at January 31, 1997 and July 31, 1997, respectively). There were no funds borrowed under the agreement during the fiscal year ended January 31, 1997 and the six month period ended July 31, 1997. Outstanding letters of credit established to facilitate international merchandise purchases at July 31, 1997 were $864,000. 5. Stock Options In the six month period ended July 31, 1997, options to purchase an aggregate of 222,362 shares of Common Stock were granted to 21 employees of the Company. These options will become exercisable over a period of eleven months to five years from the date of grant. The exercise price per share of each such option is equal to the fair market value of the Common Stock on the date of grant. A summary of the status of all plan and non-plan options to purchase shares of Common Stock outstanding as of January 31, 1997 and July 31, 1997 (unaudited) follows: 7 dELiA*s Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal Year 1996 Six Months Ended January 31, 1997 Ended July 31, 1997 ---------------------- ------------------- Weighted Weighted Options Exercise Price Options Exercise Price ------- -------------- ------- -------------- Outstanding at beginning of period -- $ -- 383,750 $11.00 Granted 383,750 11.00 222,362 18.20 Exercised -- -- -- -- Cancelled -- -- -- -- ------- ------ ------- ------ Outstanding at end of period 383,750 $11.00 606,112 $13.64 ======= ====== ======= ====== Options exercisable at end of period -- -- 50,000 $11.00 ======= ====== ======= ======
The Company applies APB No. 25 and related interpretations in accounting for its stock option and purchase plans. Accordingly, no compensation expense has been recognized for those plans in the year ended January 31, 1997 and the three month period ended July 31, 1997. Had compensation expense been determined based on the fair value of stock option grants on the date of grant consistent with SFAS No. 123, the effect on the Company's net income and earnings per share for the year ended January 31, 1997 would not have been material. The estimated fair market value of options granted during the year ended January 31, 1997 was $4.08 per share. The fair value of options granted by the Company during the year ended January 31, 1997 was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield; expected volatility (based on comparable stocks) of 45 percent; risk-free interest rate of 6.4 percent; expected lives of three to five years. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Report. Overview The Company was founded in 1993 and distributed its first catalog in 1994 through a network of on-campus college representatives. In late 1994 and early 1995, in an effort to broaden the reach of its catalogs, the Company changed its primary channel of distribution from college representatives to direct mail. This change has resulted in a substantial increase in the Company's sales. In order to support its direct marketing operations, the Company has made significant capital expenditures for telephone and management information systems and has hired and maintained an in-house workforce of teleservice representatives. The Company initially mailed catalogs to persons responding to advertisements and to names on rented lists. The Company has built a proprietary list of "house names" (customers who have made at least one purchase or have requested a catalog from the Company in the preceding 36 months), which currently contains approximately 2.3 million names, primarily through referrals, word-of-mouth, returns of catalog request cards and targeted classified advertising in selected magazines. A significant portion of the Company's catalogs is mailed to house names, supplemented by purchased and rented lists. The response rates generated from its house list are typically higher than those the Company realizes from purchased or rented lists. The Company plans to increase the number of catalogs it distributes from 8 million in fiscal 1996 to at least 28 million in fiscal 1997 and in excess of 45 million in fiscal 1998. The Company distributed six editions of its catalog in fiscal 1996 and anticipates distributing eight editions in fiscal 1997. As the Company continues to increase its prospecting efforts and the number of catalogs it distributes, the Company intends to increase its aggregate marketing expenditures, which may result in a decrease in operating margin. With increased catalog distribution, there can be no assurance that response rates will not decline in the future. Response rates have typically fluctuated on a year-to-year and catalog-to-catalog basis. Response rates are influenced by a number of factors including the timing of catalog mailings, market acceptance of the Company's merchandise and the mix and presentation of products and actions of competitors. Average order size has also fluctuated seasonally. Generally, the average size of orders from the Company's fall and winter catalogs is larger than the average size of orders from its spring and summer catalogs. 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. To facilitate its publishing strategy, the Company has developed its in-house art department to allow for shorter and more flexible publishing schedules. In addition, at the Company's request, certain of the Company's vendors have agreed to purchase raw materials in advance and in excess of the Company's initial purchase orders. This allows the Company to place orders later in a season in response to early indicators of customer demand while reducing the Company's inventory risk. Although the Company sometimes shares the risk of these raw material orders with such vendors, these advance purchases limit its exposure to the greater risk of unsold finished goods. The Company believes these actions helped to improve its overall profitability in fiscal 1996 and the first six months of fiscal 1997. The Company believes that as its revenue base grows and it further penetrates its target market, the Company may not be able to sustain the levels of percentage annual growth in net sales and growth in operating income experienced in fiscal 1995 and fiscal 1996. Additionally, legislation introduced in the 9 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 summer 1997 catalogs 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 regularly explores 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. There can be no assurance, however, that the Company will be able to develop its house list. The Company began operating its own warehouse and fulfillment operations on June 30, 1997 in a leased facility located in Hanover, Pennsylvania. Prior to that date, the Company used an unaffiliated third-party fulfillment contractor to process and fulfill orders. Starting in the second quarter of fiscal 1997, the Company has begun to incur additional expenses as a result of moving to and operating the new facility, and will make substantial investments in plant and equipment to improve the new facility. See "--Liquidity and Capital Resources." On December 24, 1996, the Company sold 2,052,500 shares of Common Stock in the IPO. The Company has invested the net proceeds it received from the IPO, consisting of $19.8 million, in interest-bearing, investment-grade securities. On June 9, 1997, the Company completed the 1997 Offering in which it received net proceeds of $19.4 million. The Company has invested the net proceeds it received from the 1997 Offering in interest-bearing, investment-grade securities. Stockholders of the Company sold an additional 1,300,000 shares in the 1997 Offering. On July 1, 1997, the dELiA*s business was reorganized into several subsidiaries along functional business and geographic lines. In connection with this reorganization, the Corporation expects to realize certain state tax savings in the second half of fiscal 1997 and thereafter. 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. Six Months Ended July 31, -------------- 1996 1997 ---- ---- (Unaudited) Net sales 100.0% 100.0% Cost of sales 47.3 49.0 ----- ----- Gross profit 52.7 51.0 Selling, general and administrative expenses 43.4 42.9 Interest income, net 0.2 1.9 ----- ----- Income before provision for income taxes 9.5 10.0 Provision for income taxes 0.1 3.7 ----- ----- Net income 9.4% 6.3% ----- ----- Pro forma net income (1) 5.6% 6.3% ===== ===== - ------------------------ (1) Pro forma net income for the six months ended July 31, 1996 is adjusted to reflect the Company's financial statements as if it had been a C corporation for the entire period. During the fourth quarter 10 of fiscal 1996, the Company converted from a limited liability company to a C corporation. Pro forma net income for the six months ended July 31, 1997 represents actual reported net income. Comparison of Three Months Ended July 31, 1996 and 1997 Net Sales. Net sales increased approximately $11.4 million, from $4.7 million in the second quarter of fiscal 1996 to $16.1 million in the second quarter of fiscal 1997. The increase in net sales was primarily due to an increase in the number of catalogs mailed. The Company increased the number of catalogs it distributed to 5.6 million in the second quarter of fiscal 1997 from 1.4 million in the second quarter of fiscal 1996. Aggregate response rates from catalogs distributed in the second quarter of fiscal 1997 declined relative to catalogs distributed in the second quarter of fiscal 1996 as the Company mailed additional catalog editions during the second quarter of fiscal 1997 to a large number of persons who had received a prior edition of those catalogs earlier in the period. The Company believes aggregate response rates will usually decline when it mails additional catalog editions within the same fiscal period. Gross Margin. Gross margin decreased from 52.1% in the second quarter of fiscal 1996 to 51.4% in the second quarter of fiscal 1997. The decrease in gross margin was due primarily to increased reserves for returns and inventory obsolescence consistent with the Company's recent growth based upon management's evaluation of merchandise inventories as of July 31, 1997 and the sale of merchandise at a discount though sales circulars. In contrast, in the second quarter of fiscal 1996, the Company had negligible carryover inventory, and thus no discounted sales, as a result of a one-time liquidation of over-stocked merchandise in the fourth quarter of fiscal 1995. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased approximately $5.1 million, from $2.1 million in the second quarter of fiscal 1996 to $7.2 million in the second quarter of fiscal 1997. Selling, general and administrative expenses decreased as a percentage of net sales from 46.1% in the second quarter of fiscal 1996 to 45.0% in the second quarter of fiscal 1997. The decrease was primarily due to lower processing costs in adding new names to its proprietary database, as well as the Company's ability to leverage certain fixed expenses over a greater revenue base. The decrease was partly offset by expenses associated with the transition to the Company's new warehouse facility and higher expenditures on corporate salaries, telemarketing staff and additional information systems in anticipation of future sales growth, as well as additional marketing expenditures as the Company increased the number of catalogs it mailed. Interest Income, Net. Interest income, net, increased approximately $309,000, from $11,000 in the second quarter of fiscal 1996 to $320,000 in the second quarter of fiscal 1997. The increase in interest income, net, was primarily due to the Company's investment of the net proceeds from the IPO and the 1997 Offering, which proceeds were received in the fourth quarter of fiscal 1996 and the second quarter of fiscal 1997, respectively. Provision for Income Taxes. Provision for income taxes increased approximately $444,000 from $4,000 in the second quarter of fiscal 1996 to $448,000 in the second quarter of fiscal 1997. This increase was almost entirely due to the 1996 Reorganization, which was effected in the fourth quarter of fiscal 1996, in which the Company converted from a limited liability company to a C corporation. See Note 1 of "Item 1--Consolidated Financial Statements." Comparison of Six Months Ended July 31, 1996 and 1997 Net Sales. Net sales increased approximately $20.6 million, from $8.4 million in the first six months of fiscal 1996 to $29.0 million in the first six months of fiscal 1997. The increase in net sales was primarily due to an increase in the number of catalogs mailed. The Company increased the number of catalogs it distributed to 10.4 million in the first six 11 months of fiscal 1997 from 2.5 million in the first six months of fiscal 1996. Aggregate response rates from catalogs distributed in the first six months of fiscal 1997 declined relative to catalogs distributed in the first six months of fiscal 1996, as the Company mailed additional catalog editions during the first quarter and second quarters of 1997 to a large number of persons who had received a prior edition of those catalogs earlier in the period. The Company believes aggregate response rates will usually decline when it mails additional catalog editions within the same fiscal period. Gross Margin. Gross margin decreased from 52.7% in the first six months of fiscal 1996 to 51.0% in the first six months of fiscal 1997. The decrease in gross margin was due primarily to increased reserves for returns and inventory obsolescence consistent with the Company's recent growth based upon management's evaluation of merchandise inventories as of July 31, 1997 and the sale of merchandise at a discount though sales circulars. In contrast, in the first six months of fiscal 1996, the Company had negligible carryover inventory, and thus no discounted sales, as a result of a one-time liquidation of over-stocked merchandise in the fourth quarter of fiscal 1995. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased approximately $8.9 million, from $3.6 million in the first six months of fiscal 1996 to $12.5 million in the first six months of fiscal 1997. Selling, general and administrative expenses decreased as a percentage of net sales from 43.4% in the first six months of fiscal 1996 to 42.9% in the first six months of fiscal 1997. The decrease was primarily due to lower processing costs in adding new names to its proprietary database, as well as the Company's ability to leverage certain fixed expenses over a greater revenue base. The decrease was partly offset by expenses associated with the transition to the Company's new warehouse facility and higher expenditures on corporate salaries, telemarketing staff and additional information systems in anticipation of future sales growth, as well as additional marketing expenditures as the Company increased the number of catalogs it mailed. Interest Income, Net. Interest income, net, increased approximately $537,000, from $20,000 in the first six months of fiscal 1996 to $557,000 in the first six months of fiscal 1997. The increase in interest income, net, was primarily due to the Company's investment of the net proceeds from the IPO and the 1997 Offering, which proceeds were received in the fourth quarter of fiscal 1996 and the second quarter of fiscal 1997, respectively. Provision for Income Taxes. Provision for income taxes increased approximately $1.1 million, from $11,000 in the first six months of fiscal 1996 to $1.1 million in the first six months of fiscal 1997. This increase was almost entirely due to the 1996 Reorganization, which was effected in the fourth quarter of fiscal 1996, in which the Company converted from a limited liability company to a C corporation. See Note 1 of "Item 1--Consolidated Financial Statements." Selected Quarterly Results of Operations The following table sets forth certain unaudited statements of operations data for the six quarters ended July 31, 1997, as well as such data expressed as a percentage of the Company's total net sales for the periods indicated. This data has been derived from unaudited financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation of such information when read in conjunction with the Company's annual audited financial statements and notes thereto. 12
---------------------------------------------------------------------------------- Quarter Ended --------------------------------------------------- -- --------------------------- Fiscal 1996 Fiscal 1997 --------------------------------------------------- --------------------------- Apr. 30, July 31, Oct. 31, Jan. 31, Apr. 30, July 31, 1996 1996 1996 1997 1997 1997 --------- -------- -------- -------- --------- -------- (in thousands) Net sales....................... $ 3,709 $ 4,663 $ 7,110 $ 14,743 $ 12,928 $16.091 Cost of sales................... 1,725 2,233 3,463 7,203 6,392 7,826 --------- -------- -------- -------- --------- -------- Gross profit.................... 1,984 2,430 3,647 7,540 6,536 8,265 Selling, general and Administrative expenses...... 1,489 2,149 2,693 5,519 5,222 7,237 Interest income, net............ 9 11 4 152 237 320 --------- -------- -------- -------- --------- -------- Income before provision for income taxes................ 504 292 958 2,173 1,551 1,348 Provision (benefit) for income Taxes....................... 7 4 4 (343) 623 448 --------- -------- -------- -------- --------- -------- Net income...................... $ 497 $ 288 $ 954 $ 2,516 $ 928 $ 900 --------- -------- -------- -------- --------- -------- Pro forma net income(1)......... $ 297 $ 171 $ 567 $ 1,272 $ 928 $ 900 ========= ======== ======== ======== ========= ======== Percentage of Total Net Sales ---------------------------------------------------------------------------------- Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Sales................... 46.5 47.9 48.7 48.9 49.4 48.6 --------- -------- -------- -------- --------- -------- Gross profit.................... 53.5 52.1 51.3 51.1 50.6 51.4 Selling, general and administrative expenses..... 40.1 46.0 37.9 37.4 40.4 45.0 Interest income, net............ 0.2 0.2 0.1 1.0 1.8 2.0 --------- -------- -------- -------- --------- -------- Income before provision for income taxes................ 13.6 6.3 13.5 14.7 12.0 8.4 Provision (benefit) for income taxes....................... 0.2 0.1 0.1 (2.3) 4.8 2.8 --------- -------- -------- -------- --------- -------- Net income...................... 13.4% 6.2% 13.4% 17.1% 7.2% 5.6% --------- -------- -------- -------- --------- -------- Pro forma net income............ 8.0% 3.7% 8.0% 8.6% 7.2% 5.6% ========= ======== ======== ======== ========= ========
- ------------------------ (1) Pro forma net income for the six months ended July 31, 1996 is adjusted to reflect the Company's financial statements as if it had been a C corporation for the entire period. During the fourth quarter of fiscal 1996, the Company converted from a limited liability company to a C corporation. Pro forma net income for the six months ended July 31, 1997 represents actual reported net income. The Company is subject to seasonal fluctuations in its merchandise sales and results of operations. The Company expects its net sales and results of operations generally to be lower in the first and second quarters than in the third and fourth quarters of each fiscal year (which include the back-to-school and holiday seasons). The Company's quarterly results may fluctuate as a result of numerous factors, including the timing, quantity and cost of catalog mailings, the timing of sale circulars and liquidations, the timing of merchandise deliveries, market acceptance of the Company's merchandise (including new merchandise categories or products introduced), the mix of products sold, the hiring and training of additional personnel, the timing of inventory writedowns, the incurrence of other operating costs and factors beyond the Company's control, such as general economic conditions and actions of competitors. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter. Liquidity and Capital Resources 13 Since its inception, the Company has met its operating and cash requirements through funds generated from operations, the private sales of equity securities, the IPO and, most recently, the 1997 Offering. All of the Company's working capital needs have been satisfied by cash provided by operations since the third quarter of fiscal 1995. Cash provided by operations in the first six months of fiscal 1996 was $908,000 and cash used in operations in the first six months of fiscal 1997 was $789,000. Cash used in investing in the first six months of fiscal 1996 and 1997 was $240,000 and $24.8 million, respectively, as the Company invested the net proceeds of the 1997 Offering in interest-bearing, investment-grade securities. The Company expects to make capital expenditures of approximately $1.5 million to upgrade its management information systems in fiscal 1997. The Company also anticipates capital expenditures of at least $1.5 million in property, plant and equipment, including leasehold improvements, office equipment and expenditures relating to the Company's new warehouse and distribution operations. See "--Results of Operations." Cash flows from financing activities in the first six months of fiscal 1997 were $19.4 million as a result of the 1997 Offering; the Company did not engage in any financing activities in the first six months of fiscal 1996. Cash and cash equivalents decreased by approximately $6.2 million to $15.1 million at July 31, 1997 from January 31, 1997, as the Company received $19.4 in net proceeds from the 1997 Offering, offset by the Company's shift of a portion of its investments to securities with maturities of greater than 90 days and increased its inventory position during the six months ended July 31, 1997. During the fiscal year prior to the IPO, the Company operated as a limited liability company with taxes paid by its members. Following the 1996 Reorganization in which the Company's business was transferred to a Delaware corporation, the Company ceased to be a flow-through entity and is now liable for applicable income taxes. The Company has a revolving line of credit for seasonal working capital, collateralized by all of the Company's assets other than inventory. The maximum amount available under the line of credit is $5.0 million. The interest rate on the line of credit is the lending bank's prime rate (10.5% at July 31, 1997). The line expires on July 31, 1998. The Company has not drawn on this line. The Company believes that its cash on hand, together with cash generated by operations, will be sufficient to meet its capital and operating requirements through at least 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 operation. 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 October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for the Company beginning February 1, 1996. SFAS No. 123 requires disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation expense to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply 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 14 effects on net income and earnings per share are described in Note 12 of "Item 1--Consolidated Financial Statements." In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("EPS"), which is effective for both interim and annual periods ending after December 15, 1997. SFAS No. 128 supersedes APB No. 15 and specifies the computation, presentation and disclosure requirement for basic and diluted EPS. The Company has determined that the adoption of this new standard would not have had a material effect on EPS for all periods presented. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information About Capital Structure," which is effective for periods ending after December 15, 1997. This statement establishes standards for disclosing information about an entity's capital structure by superseding and consolidating previously issued accounting standards. The financial statements of the Company are prepared in accordance with the requirements of SFAS No. 129. 15 PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is not involved in any legal proceedings that management believes would have a material adverse effect on the Company's financial position or results of operations. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held on June 30, 1997, for the purpose of: (i) electing two directors, and (ii) ratifying the selection of auditors for the current fiscal year. Proxies were solicited by management pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's proposals and nominees, and all such proposals were adopted and nominees elected. With respect to the re-election of Mr. S. Roger Horchow and Mr. Joseph J. Pinto as directors of the Company, the number of shares of Common Stock voted was as follows: Director For Withheld Abstain -------- --- -------- ------- S. Roger Horchow 11,655,495 4,500 5,000 Joseph J. Pinto 11,655,495 4,500 5,000 The terms of office of directors Christopher C. Edgar, Stephen I. Kahn, Sidney S. Kahn and Geraldine Karetsky continued after the meeting. With respect to the ratification of Deloitte & Touche LLP as independent auditors for the current fiscal year, the number of shares of Common Stock voted was as follows: For Withheld Abstain --- -------- ------- 11,661,195 0 3,800 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 2.1 Bill of Sale and Contribution and Assumption Agreement between dELiA*s LLC and the Company (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 3.1 Certificate of incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 16 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.1 Form of Employment Agreement between the Company and Stephen I. Kahn (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.2 Employment Agreement between the Company and Christopher C. Edgar (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.3 Employment Agreement between the Company and Evan Guillemin (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.4 Form of Family Stockholders Agreement among the Company, Stephen I. Kahn and the persons listed on exhibit A thereto (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.5 1996 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.6 Restricted Stock Plan (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.7 Stock Option Agreement between the Company and Evan Guillemin (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.8 [omitted] 10.9 Lease Agreement dated May 3, 1995 between the Company and The Rector, Church-Wardens and Vestrymen of Trinity Church in the City of New-York (the "Lease Agreement"); Modification and Extension of Lease Agreement dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.10 Form of Restricted Stock Agreements between the Company and holders of Common Stock subject to the Restricted Stock Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.11 [omitted] 10.12 Lease Agreement dated April 25, 1997 between the Company and Keystone Distribution Center, Inc. (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997). 10.13 (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997). 27 Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the second quarter of fiscal 1997. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. dELiA*s Inc. (Registrant) Date: September 11, 1997 By: /s/ Stephen I. Kahn ------------------- Stephen I. Kahn Chairman of the Board, President and Chief Executive Officer By: /s/ Evan Guillemin -------------- Evan Guillemin Chief Financial Officer and Treasurer (principal financial and accounting officer) 18 Exhibit Index 2.1 Bill of Sale and Contribution and Assumption Agreement between dELiA*s LLC and the Company (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 3.1 Certificate of incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.1 Form of Employment Agreement between the Company and Stephen I. Kahn (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.2 Employment Agreement between the Company and Christopher C. Edgar (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.3 Employment Agreement between the Company and Evan Guillemin (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.4 Form of Family Stockholders Agreement among the Company, Stephen I. Kahn and the persons listed on exhibit A thereto (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.5 1996 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.6 Restricted Stock Plan (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.7 Stock Option Agreement between the Company and Evan Guillemin (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.8 [omitted] 10.9 Lease Agreement dated May 3, 1995 between the Company and The Rector, Church-Wardens and Vestrymen of Trinity Church in the City of New-York (the "Lease Agreement"); Modification and Extension of Lease Agreement dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.10 Form of Restricted Stock Agreements between the Company and holders of Common Stock subject to the Restricted Stock Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-15153)) 10.11 [omitted] 10.12 Lease Agreement dated April 25, 1997 between the Company and Keystone Distribution Center, Inc. (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997). 10.13 Agreement dated April 4, 1997 between the Company and The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997). 27 Fiancial Data Schedule 19 EX-27 2 FDS --
5 1000 U.S. DOLLARS 6-MOS JAN-31-1996 FEB-01-1997 JUL-31-1997 1 15,138 8,696 0 0 7,262 33,735 2,456 (262) 50,854 8,262 0 0 0 130 42,354 50,854 29,019 29,019 14,218 26,677 0 0 0 2,899 1,071 1,828 0 0 0 1,828 015 015
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