<PAGE>
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 MAY 1, 1999
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 June 1, 1999: 14,891,806
<PAGE>
STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING, WITHOUT LIMITATION,
INFORMATION APPEARING UNDER "PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY BE
FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF SECTION 27A OF THE AMENDED
SECURITIES ACT OF 1933 AND SECTION 21E OF THE AMENDED SECURITIES EXCHANGE ACT OF
1934). WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVE," "PLAN," "INTEND,"
"EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS REPORT.
THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THE FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
GENERAL ECONOMIC CONDITIONS; CHANGES IN CONSUMER SPENDING PATTERNS; INCREASES IN
THE COST OF MATERIALS, PRINTING, PAPER, POSTAGE, SHIPPING AND LABOR; TIMING OF
CATALOG MAILINGS; CUSTOMER RESPONSE RATES; OPPORTUNITIES TO EXPAND AND THE
ABILITY TO INCREASE COMPARABLE STORE SALES; LEVELS OF COMPETITION; DIFFICULTIES
IN INTEGRATING ACQUISITIONS; THE ABILITY TO LOCATE AND OBTAIN ACCEPTABLE STORE
SITES AND LEASE TERMS OR RENEW EXISTING LEASES; ACCEPTANCE OF NEW RETAIL
CONCEPTS; ADVERSE WEATHER CONDITIONS, CHANGES IN WEATHER PATTERNS AND OTHER
FACTORS AFFECTING RETAIL STORES; AND OTHER FACTORS OUTSIDE OUR CONTROL. THESE
FACTORS, AND OTHER FACTORS THAT APPEAR IN THIS REPORT OR IN OUR OTHER SECURITIES
AND EXCHANGE COMMISSION FILINGS, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED JANUARY 31, 1999, COULD AFFECT OUR ACTUAL RESULTS AND COULD CAUSE
OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY US OR ON OUR BEHALF.
ALL REFERENCES IN THIS REPORT TO A PARTICULAR FISCAL YEAR PRIOR TO FISCAL
1999 REFER TO THE YEAR ENDED JANUARY 31 FOLLOWING THE PARTICULAR CALENDAR YEAR
(E.G., "FISCAL 1998" REFERS TO THE FISCAL YEAR ENDING JANUARY 31, 1999).
EFFECTIVE FEBRUARY 1, 1999, WE CHANGED OUR FISCAL YEAR TO END ON THE SATURDAY
CLOSEST TO JANUARY 31 (E.G., "FISCAL 1999" REFERS TO THE FISCAL YEAR ENDING
JANUARY 29, 2000).
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, 1999 MAY 1, 1999
---------------- -----------
* (UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,981 $ 97,031
Merchandise inventories 21,232 24,336
Prepaid expenses and other current assets 11,352 12,115
-------- --------
Total current assets 43,565 133,482
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$3,191 at January 31, 1999 and $3,995 at May 1, 1999 12,542 12,816
DEFERRED TAX ASSETS -- 9,682
INTANGIBLE ASSETS 25,308 7,000
OTHER ASSETS 729 1,138
-------- --------
TOTAL ASSETS $ 82,144 $164,118
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities $ 18,085 $ 15,305
Accrued restructuring -- 2,662
-------- --------
Total current liabilities 18,085 17,967
DEFERRED TAX LIABILITY -- 28,991
OTHER LONG-TERM LIABILITIES 452 504
MINORITY INTEREST -- 27,324
STOCKHOLDERS' EQUITY 63,607 89,332
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,144 $164,118
======== ========
</TABLE>
* Condensed from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial Statements
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THIRTEEN WEEKS
ENDED ENDED
APRIL 30, 1998 MAY 1, 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
NET SALES $ 31,194 $ 41,812
COST OF SALES 14,223 23,023
GROSS PROFIT 16,971 18,789
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 14,092 23,750
RESTRUCTURING CHARGE -- 22,907
GAIN ON SUBSIDIARY INITIAL PUBLIC OFFERING -- (70,091)
INTEREST AND OTHER INCOME, NET (341) (140)
MINORITY INTEREST -- 8
-------- --------
INCOME BEFORE INCOME TAXES 3,220 42,355
PROVISION FOR INCOME TAXES 1,220 17,519
-------- --------
NET INCOME $ 2,000 $ 24,836
======== ========
BASIC NET INCOME PER SHARE $ 0.15 $ 1.75
======== ========
DILUTED NET INCOME PER SHARE $ 0.15 $ 1.56
======== ========
SHARES USED IN THE CALCULATION OF BASIC NET
INCOME PER SHARE 13,321 14,231
======== ========
SHARES USED IN THE CALCULATION OF DILUTED NET
INCOME PER SHARE 13,569 15,966
======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS
ENDED ENDED
APRIL 30, 1998 MAY 1, 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income $ 2,000 $ 24,836
Adjustments to reconcile net income to net cash used in operating
activities
Depreciation and amortization 331 1,009
Gain on subsidiary initial public offering -- (70,091)
Restructuring charge -- 23,407
Deferred taxes -- 19,309
Minority interest -- 8
Amortization of investments 78 --
Compensation expense related to issuance of restricted stock and
stock appreciation rights 22 --
Changes in operating assets and liabilities:
Merchandise inventories (323) (3,604)
Prepaid expenses and other current assets (1,639) (763)
Other assets (27) (273)
Current liabilities (6,785) (2,737)
Deferred credits 60 52
-------- --------
Net cash used in operating activities (6,283) (8,847)
======== ========
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Capital expenditures (1,298) (3,356)
Purchases of available-for-sale investment securities (40,761) --
Proceeds from the maturity of held-to-maturity investment securities 30,024 --
Proceeds from the sale of available-for-sale investment securities 14,578 --
-------- --------
Net cash provided by (used in) investing activities 2,543 (3,356)
======== ========
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from issuance of subsidiary common stock -- 97,407
Exercise of 6,250 and 152,760 stock options, respectively 68 889
Principal payments of long-term debt and capital lease obligations (27) (43)
-------- --------
Net cash provided by financing activities 41 98,253
======== ========
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (3,699) 86,050
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD 4,485 10,981
-------- --------
CASH & CASH EQUIVALENTS--END OF PERIOD $ 786 $ 97,031
======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
dELiA*s Inc., through its catalogs, retail stores and Web sites, is a
leading marketer of casual apparel, accessories, soccer merchandise and home
furnishings to young men and young women between the ages of 10 and 24, an age
group known as "Generation Y."
We are subject to seasonal fluctuations in our merchandise sales and
results of operations. We expect our net sales and operating results generally
to be lower in the first and second quarters than in the third and fourth
quarters (which include the majority of the back-to-school season and the
holiday season) of each fiscal year.
On April 14, 1999, we completed an initial public offering of
approximately 4.8 million shares of class A common stock of iTurf Inc., our
publicly-traded Internet-focused subsidiary. We now control approximately 72% of
the value and 94% of the vote of iTurf. Accordingly, the 28% of iTurf that is
owned by the public is reflected as minority interest in the accompanying
financial statements. iTurf used $17.7 million of the total $97.8 million in net
offering proceeds to purchase 551,046 shares of dELiA*s common stock from
dELiA*s, which we have treated as treasury stock in consolidation. As a result
of the transaction, we recognized a gain of approximately $70 million.
Effective February 1, 1999, we changed our fiscal year from the year ending
January 31 to the 52 weeks ending on the Saturday closest to January 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION--The condensed consolidated financial
statements include the accounts of dELiA*s Inc. and subsidiaries, all of which,
except iTurf, are wholly owned. The accounts of iTurf are included in the
consolidated financial statements while the 28% public ownership is reflected as
minority interest on the balance sheet and income statement. All significant
intercompany balances and transactions have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with the requirements for Form 10-Q and in accordance with generally accepted
accounting principles for interim financial reporting. In the opinion of
management, the accompanying condensed consolidated financial statements are
presented on a basis consistent with the audited consolidated financial
statements and reflect all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim periods presented.
The financial statements and footnote disclosures should be read in conjunction
with our January 31, 1999 audited consolidated financial statements and the
notes thereto, which are included in our annual report on Form 10-K for the year
ended January 31, 1999, which was filed under the Securities Exchange Act of
1934. Results for the interim periods are not necessarily indicative of the
results to be expected for the year.
3. SEGMENT INFORMATION
dELiA*s determines operating segments in accordance with Statement of
Financial Accounting Standards No. 131. Our reportable segments are business
units that provide similar products to similar customers through different
distribution methods. The segments are managed separately due to their
<PAGE>
distribution methods. Commencing in fiscal 1999, dELiA*s has three reportable
segments: catalog, retail and iTurf. Each of these segments earn revenues
primarily from the sale of apparel, accessories and soccer equipment to
consumers. The catalog segment takes phone and mail orders from our customers
and mails merchandise directly to those customers. Our retail stores display
merchandise in mall and strip mall stores and sell directly to customers who
visit those locations. iTurf sells merchandise through our various Web sites and
also recognizes advertising, subscription and licensing revenues. Sales outside
of the United States were insignificant.
The Company evaluates performance and allocates resources primarily based
on profit and loss after expense allocations for shared resources but before
unusual items, income taxes, interest and other income and minority interest.
The accounting policies used by the reportable segments in preparation of this
information are the same as those described in the summary of significant
accounting policies in this report and in our annual report on Form 10-K for the
year ended January 31, 1999.
In connection with the iTurf IPO in April 1999, dELiA*s and iTurf entered
into intercompany agreements that govern the transactions between iTurf and the
other segments. Intercompany profit or loss generated by such agreements is
eliminated in consolidation. For the other segments, and for iTurf prior to its
IPO, intersegment product sales are recorded at cost and shared costs are
allocated on a basis believed by management to be reasonable.
The segment disclosure for fiscal 1998 has been restated to reflect the
operating segments as defined for fiscal 1999.
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL 1998 CATALOG RETAIL ITURF TOTAL
------- ------ ----- -----
<S> <C> <C> <C> <C>
Revenues from external customers $ 28,480,000 $ 2,645,000 $ 69,000 $ 31,194,000
Operating profit (loss) 3,004,000 (50,000) (75,000) 2,879,000
Property & equipment, net 6,204,000 876,000 113,000 7,193,000
<CAPTION>
FIRST QUARTER FISCAL 1999 CATALOG RETAIL ITURF TOTAL
------- ------ ----- -----
<S> <C> <C> <C> <C>
Revenues from external customers $ 29,799,000 $ 9,348,000 $ 2,665,000 $ 41,812,000
Operating loss (1,171,000) (3,320,000) (470,000) (4,961,000)
Property & equipment, net 6,981,000 4,940,000 895,000 12,816,000
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL 1998 FIRST QUARTER FISCAL 1999
------------------------- -------------------------
<S> <C> <C>
Operating profit (loss) for reportable segments $ 2,879,000 $ (4,961,000)
Restructuring charges -- (22,907,000)
Gain on subsidiary IPO -- 70,091,000
Interest and other income, net 341,000 140,000
Minority interest -- (8,000)
--------------- ----------------
Total income before income taxes $ 3,220,000 $ 42,355,000
=============== ===============
Property and equipment for reportable segments $ 7,193,000 $ 12,816,000
Other assets 52,712,000 151,302,000
--------------- ---------------
Total consolidated assets $ 59,905,000 $ 164,118,000
=============== ===============
</TABLE>
4. RESTRUCTURING CHARGE
During the first quarter of fiscal 1999, we recorded a charge (primarily
non-cash) of approximately $23.4 million in connection with our restructuring
plan to exit our Screeem! and Jean Country retail operations. The charge is
comprised of the following:
<PAGE>
o $18.0 million for the write-off of the remaining unamortized balance
of goodwill and other intangibles relating to our acquisition of
the Screeem! and Jean Country operations;
o $4.2 for the shut-down or conversion of certain retail stores to more
profitable concepts with the related write-down of assets that will no
longer be used;
o $0.7 for the elimination of jobs at the Screeem! corporate office and
the store locations to be closed, resulting in costs incurred to sever
employees; and
o $0.5 for the liquidation of inventory carried at stores to be
converted or closed (reflected in cost of sales).
We expect the restructuring plans associated with these costs to be
substantially completed by the end of the first quarter of fiscal 2000.
The total charge of $23.4 million includes $22.9 million that is included
in operating expenses as a restructuring charge and $500,000 included as cost of
sales. As our plans progress, we anticipate that we may need to record
additional losses on inventory liquidation and other restructuring-related costs
as well as store operating losses during the transition period.
5. SUBSEQUENT EVENTS
In May 1999, iTurf entered into a strategic marketing alliance with America
Online, Inc. Over the two-year term of the agreement, iTurf has agreed to pay
America Online a total of approximately $8,100,000.
In June 1999, two separate purported class action complaints were filed
against dELiA*s, certain of our officers and directors, and a former officer
of one of our subsidiaries, alleging violations of the federal securities laws.
The class periods run from May 21, 1998 through June 17, 1998 and January 20,
1998 through September 10, 1998, respectively. We intend to vigorously defend
against the allegations. Based upon information presently known to management,
we do not believe that the ultimate resolution of these lawsuits will have a
material adverse effect on our financial condition or results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT REFLECT DELIA*S PLANS, ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT.
OVERVIEW
We are a teen-focused marketer of casual apparel, accessories, cosmetics,
home furnishings and soccer merchandise. Through the dELiA*s catalog and Web
site which target girls and young women between the ages of 10 and 24 (an age
group known as "Generation Y"), we believe we are the leading direct marketer of
casual apparel, related accessories and cosmetics to Generation Y. In February
1999, we opened our first full-priced dELiA*s store in The Westchester mall in
New York. Based on our success at that location and the strength of the core
dELiA*s brand, we plan to rapidly expand this concept through new store openings
and the conversion of certain of our Screeem! and Jean Country stores to the
same format. Through our TSI Soccer catalog, retail stores and Web site, we are
a leading direct marketer and retailer of specialty soccer and other athletic
merchandise to Generation Y boys and girls. Our other catalog titles include
Contents, which offers home furnishings to Generation Y, and Droog, which offers
apparel and accessories exclusively to Generation Y boys and young men. We also
target pre-teen girls with our Storybook Heirlooms and dot dot dash catalogs.
On April 14, 1999, we completed an initial public offering of approximately
4.8 million shares of class A common stock of iTurf Inc., our publicly-traded
Internet-focused subsidiary. We now control approximately 72% of the value and
94% of the vote of iTurf. Accordingly, the 28% of iTurf that is owned by the
public is reflected as minority interest in the accompanying financial
statements. iTurf used $17.7 million of the total $97.8 million in net offering
proceeds to purchase 551,046 shares of dELiA*s common stock from dELiA*s, which
we have treated as treasury stock in consolidation. As a result of the
transaction, we recognized a gain of approximately $70 million before taxes ($41
million, or $2.57 per share on a diluted basis, after taxes.)
dELiA*s maintains its corporate and Internet headquarters and a
telemarketing and customer service group in New York, New York, additional
telemarketing and corporate facilities in Durham, North Carolina and a
fulfillment facility for processing merchandise in Hanover, Pennsylvania. The
Storybook Heirlooms business is based in the San Francisco, California area.
RISKS. As our revenue base grows and we further penetrate our target
market, we will probably not be able to sustain the levels of percentage annual
growth in net sales and operating income experienced historically. In addition,
as we continue to increase the number of catalogs we mail, we have observed that
new customers respond at lower rates than our existing customers have
historically responded. We have also observed that when customers receive
multiple editions of catalogs within the same fiscal quarter, aggregate response
rates have declined.
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 our use of purchased and rented lists, as well
as our ability to generate new names for our proprietary database.
A variety of factors affect our comparable store sales, including, among
others, fashion trends, the general retail sales environment, our ability to
efficiently source and distribute products, changes in our merchandise mix and
our ability to execute our business strategy efficiently. Comparable store sales
may
<PAGE>
fluctuate significantly as we roll out new retail concepts and enter new
markets.
<PAGE>
RESTRUCTURING CHARGE
During the first quarter of fiscal 1999, we recorded a charge (primarily
non-cash) of approximately $23.4 million in connection with our restructuring
plan to exit our Screeem! and Jean Country retail operations. The charge is
comprised of the following:
o $18.0 million for the write-off of the remaining unamortized balance
of goodwill and other intangibles relating to our acquisition of
the Screeem! and Jean Country operations;
o $4.2 for the shut-down or conversion of certain retail stores to more
profitable concepts with the related write-down of assets that will no
longer be used;
o $0.7 for the elimination of jobs at the Screeem! corporate office and
the store locations to be closed, resulting in costs incurred to sever
employees; and
o $0.5 for the liquidation of inventory carried at stores to be
converted or closed (reflected in cost of sales).
We expect the restructuring plans associated with these costs to be
substantially completed by the end of the first quarter of fiscal 2000.
The total charge of $23.4 million includes $22.9 million that is included
in operating expenses as a restructuring charge and $500,000 included as cost of
sales. As our plans progress, we anticipate that we may need to record
additional losses on inventory liquidation and other restructuring-related costs
as well as store operating losses during the transition period.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from statement of operations to net sales. Any
trends reflected by the following table may not be indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS
ENDED ENDED
APRIL 30, 1998 MAY 1, 1999
-------------- -----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 45.6 55.0
----- ------
Gross profit 54.4 45.0
Selling, general and administrative expenses 45.2 56.8
Restructuring charge -- 54.8
Gain on subsidiary initial public offering -- (167.6)
Interest and other income, net (1.1) (0.3)
Minority interest -- 0.0
----- ------
Income before income taxes 10.3 101.3
Provision for income taxes 3.9 41.9
----- ------
Net income 6.4% 59.4%
===== ======
</TABLE>
COMPARISON OF THIRTEEN WEEKS ENDED MAY 1, 1999 AND THREE MONTHS ENDED APRIL 30,
1998
NET SALES. Net sales increased approximately $10.6 million to $41.8 million
in the first quarter of fiscal 1999 from $31.2 million in the first quarter of
fiscal 1998. The increase in sales is primarily due to our acquisition and
introduction, in July 1998 and February 1999, respectively, of new retail
concepts and the launch in January 1999 of our Storybook Heirlooms catalog, as
well as the growth of our Internet operations The increase was partially offset
by lower sales from the dELiA*s catalog due to lower fill rates and reduced
circulation as well as lower sales through our outlet stores. We expect low fill
rates and
<PAGE>
outlet sales to continue through a portion of the second fiscal quarter before
the beginning of the back-to-school season.
GROSS MARGIN. Gross margin excluding a $500,000 charge related to the
Screeem! restructuring decreased to 46.1% in the first quarter of fiscal 1999
from 54.4% in the first quarter of fiscal 1998. The decrease is primarily due to
higher freight costs and lower pricing on our catalog merchandise as well as
significant markdowns related to the Screeem! operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses before restructuring increased approximately $9.7
million to $23.8 million in the first quarter of fiscal 1999 from $14.1 million
in the first quarter of fiscal 1998. Selling, general and administrative
expenses increased as a percentage of net sales from 45.2% in the first quarter
fiscal 1998 to 56.8% in the first quarter of fiscal 1999. The increase was
primarily due to greater expenditures on catalog production and marketing,
partly in connection with the introduction of new titles, decreased sales across
a fixed expense base at Screeem! and greater spending on our corporate
infrastructure, including expenditures to support retail and Internet growth and
to improve the efficiency of our distribution processes. We expect such
expenditures to continue and selling, general and administrative expenses to be
high throughout fiscal 1999.
RESTRUCTURING CHARGE. During the first quarter of fiscal 1999, we recorded
a charge (primarily non-cash) of approximately $23.4 million in connection
with our restructuring plan to close our Screeem! and Jean Country retail
operations. This charge includes approximately $500,000 related to inventory
and recorded as cost of sales. As our plans progress, we anticipate that we
may need to record additional losses on inventory liquidation and other
restructuring-related costs as well as store operating losses during the
transition period.
GAIN ON SUBSIDIARY INITIAL PUBLIC OFFERING. On April 14, 1999, we completed
an initial public offering of approximately 4.8 million shares of class A common
stock of iTurf Inc., our publicly-traded Internet-focused subsidiary. As a
result of the transaction, we recognized a one-time gain of approximately $70
million before taxes.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statement of operations
data for the five quarters ended May 1, 1999, as well as such data expressed as
a percentage of total net sales for the periods indicated. This data has been
derived from our 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 our annual audited financial statements and notes thereto.
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
QUARTER ENDED
-------------------------------------------------------------
FISCAL 1998 FISCAL 1999
----------------------------------------------- -----------
APR. 30, JULY 31, OCT. 31, JAN. 31, MAY 1,
1998 1998 1998 1999 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales $ 31,194 $ 26,451 $ 40,821 $ 59,898 $ 41,812
Cost of sales 14,223 13,712 19,979 30,454 23,023
-------- -------- -------- -------- --------
Gross profit 16,971 12,739 20,842 29,444 18,789
Selling, general and administrative
expenses 14,092 13,499 19,691 24,429 23,750
Restructuring charge -- -- -- -- 22,907
Gain on subsidiary initial public -- -- -- -- (70,091)
offering
Interest and other income, net (341) (300) (126) (195) (140)
Minority interest -- -- -- -- 8
-------- -------- -------- -------- --------
Income (loss) before income taxes . 3,220 (460) 1,277 5,210 42,355
Provision (benefit) for income taxes 1,220 (317) 530 1,972 17,519
-------- -------- -------- -------- --------
Net income (loss) $ 2,000 $ (143) $ 747 $ 3,238 $ 24,836
======== ======== ======== ======== ========
Per share data:
Basic net income (loss) per share . $ 0.15 $ (0.01) $ 0.05 $ 0.23 $ 1.75
======== ======== ======== ======== ========
Shares used in the calculation of
basic net income (loss) per share 13,321 13,498 14,139 14,159 14,231
======== ======== ======== ======== ========
Diluted net income (loss) per share $ 0.15 $ (0.01) $ 0.05 $ 0.21 $ 1.56
======== ======== ======== ======== ========
Shares used in calculation of diluted
net income (loss) per share 13,569 13,498 14,735 15,300 15,966
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET SALES
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 45.6 51.8 49.0 50.8 55.0
----- ----- ----- ----- -----
Gross profit 54.4 48.2 51.0 49.2 45.0
Selling, general, and administrative
expenses 45.2 51.0 48.2 40.8 56.8
Restructuring reserve -- -- -- -- 54.8
Gain on subsidiary initial public
offering -- -- -- -- (167.6)
Interest and other income, net 1.1 1.1 0.3 0.3 (0.3)
Minority interest -- -- -- -- 0.0
----- ----- ----- ----- -----
Income before income taxes 10.3 (1.7) 3.1 8.7 101.3
Provision (benefit) for income taxes 3.9 (1.2) 1.3 3.3 41.9
----- ----- ----- ----- -----
Net income (loss) 6.4% (0.5)% 1.8% 5.4% 59.4%
===== ===== ===== ===== =====
</TABLE>
dELiA*s is subject to seasonal fluctuations in our merchandise sales and
results of operations. We expect our net sales and results of operations
generally to be lower in the second quarter and higher in the fourth quarter
(which includes the holiday season) of each fiscal year. Our quarterly results
may fluctuate as a result of numerous factors, including the timing, quantity
and cost of catalog mailings, responses to those mailings, the timing of sale
circulars and liquidations, the timing of merchandise deliveries, market
acceptance of merchandise (including new merchandise categories or products
introduced), the mix of products sold, the hiring and training of additional
personnel, the timing of inventory writedowns, the integration of acquisitions,
the incurrence of other operating costs and factors beyond control, such as
general economic conditions and actions of competitors. Accordingly, the results
of operations in any quarter will not necessarily be indicative of the results
that may be achieved for a full fiscal year or any future quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations in the first quarter of fiscal 1999 and 1998 was
$8.9 million and $6.3 million, respectively. The increase in cash used in
operations primarily relates to operating losses and an increase
<PAGE>
in inventory levels in an effort to improve fill rates and in anticipation of
greater sales.
Investing activities used $3.4 million for capital expenditures in the
first quarter of fiscal 1999. For the first quarter of fiscal 1998, investing
activities provided $2.5 million, which reflects the sale of short-term,
investment-grade investments in fiscal 1998. During fiscal 1999, we expect to
make additional capital expenditures of approximately $24 million for the
purchase of and improvements to our warehouse and distribution facility,
expansion of or conversion between our retail concepts, investment in iTurf and
other information system projects as well as leasehold improvements and other
equipment relating to new corporate office leases.
Cash flows from financing activities in the first quarter of fiscal 1999
were $98.3 million as a result of the initial public offering of iTurf common
stock. We did not engage in significant financing activities in the first
quarter of fiscal 1998.
In April 1999, we amended our credit agreement with First Union National
Bank such that in connection with the iTurf IPO, iTurf is no longer
considered a borrower under such agreement. Accordingly, First Union National
Bank released its security interest in the assets of iTurf as well as its
pledge, assignment and security interest in the capital stock of iTurf for
the remaining term of the agreement.
YEAR 2000
We are heavily dependent upon complex computer software and systems for our
operations. Many existing computer programs and systems use only two digits to
identify a year in the date field. These programs and systems were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000.
STATE OF READINESS. All of our material operating software and our information
technology and other systems, including telecommunications and warehouse
systems, were developed by and are supported by third party vendors. Each of the
third party vendors of our mission-critical operating software, with the
exception of the vendor of the telephone switch used by our Storybook Heirlooms
business, have provided written warranties or assurances that such software will
not be affected by the changes in the century. We expect our Storybook Heirlooms
telephone switch to be compliant after an upgrade scheduled to occur during our
second fiscal quarter. The majority of the third party vendors of our other
material operating software and systems have also provided warranties or
assurances that such software and systems would be compliant. We have prepared a
Year 2000 compliance program which involves:
o identifying the material operating software and systems on which we
depend, whether used by us or by our service providers;
o obtaining written warranties or assurances from third party software
and system vendors and service providers;
o monitoring the compliance efforts of those vendors and service
providers; and
o testing our material operating software and systems.
We expect to begin performing tests in the second quarter of fiscal 1999 of
some of our material operating software and systems to verify the assurances
given by third party vendors and ensure Year 2000 compliance. We have not yet
begun to perform these tests on any of our software and systems and we may not
be able to test all of our material operating systems. As a result of this
timing, we have not identified any material software or systems as requiring
remediation or replacement. However, we can not assure you that all of our
material operating software and systems will be Year 2000 compliant.
<PAGE>
In addition to the operating systems and software we use directly, our
operations are also dependent upon the performance of operating software and
systems used by our significant service providers, including providers of
financial, telecommunications and parcel delivery services. We have contacted
each of our significant service providers and have obtained written assurances
from the majority of such providers that their relevant operating software and
systems are in Year 2000 compliance or would be by December 31, 1998. We are
monitoring the status of all our significant service providers' Year 2000
compliance efforts to minimize the risk of any material adverse effect on our
operations resulting from compliance failures. However, there can be no
assurance that our service providers have, or will have, operating software and
systems that are Year 2000 compliant.
RISKS. The failure of our software or systems to be Year 2000 compliant could
prevent us from being able to process or fulfill orders from our customers or
could disrupt our financial and management controls and reporting systems. Any
such worst-case scenario, if not quickly remedied, would have a material adverse
effect on our business. Therefore, we are developing contingency plans with
respect to our systems and software. We expect our contingency plans to be
completed by the end of the second quarter of fiscal 1999.
In addition, a significant portion of our merchandise sales are made with
credit cards, and our operations may be materially adversely affected to the
extent our customers are unable to use their credit cards due to Year 2000
issues that are not rectified by the customers' credit card vendors.
We have not identified significant exposure to Year 2000 problems outside
of the information technology issues identified above.
COSTS. To date, we have spent less than $10,000 on Year 2000 compliance. We
expect our incremental costs of addressing Year 2000 issues to be between
$50,000 and $75,000, which includes the cost of upgrading our Storybook
Heirlooms phone switch. We believe that we have sufficiently budgeted for
technology investments, including Year 2000 compliance, and that such
investments will be funded by our cash from operations, the iTurf IPO and our
credit facility, as necessary. However, given our dependence on third-party
software and system vendors and service providers, including our customers'
vendors, there can be no assurance to that effect.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, two separate purported securities class action lawsuits were filed
against us and certain of our officers and directors and one former officer of a
subsidiary. The complaints in these lawsuits purport to be class actions on
behalf of the purchasers of our securities during the period May 21, 1998
through June 17, 1998 and January 20, 1998 through September 10, 1998,
respectively. The complaints generally allege that defendants violated Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by making
material misstatements and by failing to disclose certain allegedly material
information regarding trends in our business. The complaints also allege that
the individual defendants are liable for those violations under Section 20(a) of
the Securities Exchange Act. The complaints seek unspecified damages, attorneys'
and experts' fees and costs, and such other relief as the court deems proper.
The complaints were filed in Federal District Court for the Southern District of
New York. Set forth bellow is some additional information regarding the
complaints:
PLAINTIFF DATE FILED
- --------- ----------
Allain Roy June 1, 1999
Lorraine Padgett June 3, 1999
We intend to vigorously defend against these actions. Based upon information
presently known to management, we do not believe that the ultimate resolution of
these lawsuits will have a material adverse effect on our financial condition or
results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
SALES OF UNREGISTERED SECURITIES
In connection with the initial public offering of iTurf Inc. on April 14, 1999,
iTurf purchased 551,046 shares of dELiA*s Inc. common stock from us. Our
issuance of such securities was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
See "Exhibit Index" following the signature page.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
dELiA*s Inc.
(Registrant)
Date: June 15, 1999
By: /s/ STEPHEN I. KAHN
-------------------
Stephen I. Kahn
Chairman of the Board and Chief Executive Officer
By: /s/ EVAN GUILLEMIN
-------------------
Evan Guillemin
President, Chief Financial Officer and Treasurer
(principal financial and accounting officer)
<PAGE>
EXHIBIT INDEX
2.1 Bill of Sale and Contribution and Assumption Agreement between dELiA*s
LLC and dELiA*s Inc. (incorporated by reference to Exhibit 2.1 to the
dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153))
3.1 Certificate of incorporation of dELiA*s Inc. (incorporated by reference
to Exhibit 3.1 to the dELiA*s Inc. Registration Statement on Form S-1
(Registration No. 333-15153))
3.2 Bylaws of dELiA*s Inc. (incorporated by reference to Exhibit 3.2 to the
dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153))
10.1 Form of Employment Agreement between dELiA*s Inc. and Stephen I. Kahn
(incorporated by reference to Exhibit 10.1 to the dELiA*s Inc.
Registration Statement on Form S-1 (Registration No. 333-15153))
10.2 Employment Agreement between dELiA*s Inc. and Christopher C. Edgar
(incorporated by reference to Exhibit 10.2 to the dELiA*s Inc.
Registration Statement on Form S-1 (Registration No. 333-15153))
10.3 Employment Agreement between dELiA*s Inc. and Evan Guillemin
(incorporated by reference to Exhibit 10.3 to the dELiA*s Inc.
Registration Statement on Form S-1 (Registration No. 333-15153))
10.4 Form of Family Stockholders Agreement among dELiA*s Inc., Stephen I. Kahn
and the persons listed on Exhibit A thereto (incorporated by reference to
Exhibit 10.4 to the dELiA*s Inc. Registration Statement on Form S-1
(Registration No. 333-15153))
10.5 Amended and Restated 1996 Stock Incentive Plan (incorporated by reference
to the dELiA*s Inc. Schedule 14A filed on June 12, 1998)
10.6 Restricted Stock Plan (incorporated by reference to Exhibit 10.6 to the
dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153))
10.7 Stock Option Agreement between dELiA*s Inc. and Evan Guillemin
(incorporated by reference to Exhibit 10.7 to the dELiA*s Inc.
Registration Statement on Form S-1 (Registration No. 333-15153))
10.8 Transitional Services Agreement, dated as of July 10, 1998, among
American Retail Enterprises, L.P., Screeem Inc., and dELiA*s Inc.
(incorporated by reference to Exhibit 10.8 to the dELiA*s Inc. Quarterly
Report on Form 10-Q for the fiscal quarter ended July 31, 1998)
10.9 Lease Agreement dated May 3, 1995 between dELiA*s Inc. 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 dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153))
10.10 Form of Restricted Stock Agreements between dELiA*s Inc. and holders of
Common Stock subject to the Restricted Stock Plan (incorporated by
reference to Exhibit 10.10 to the dELiA*s Inc. Registration Statement on
Form S-1 (Registration No. 333-15153))
10.11 Employment Agreement dated April 5, 1999 between iTurf Inc. and Stephen
I. Kahn (incorporated by reference to Exhibit 10.10 to iTurf's
registration statement on Form S-1 (Registration No. 333-71123))
10.12 Lease Agreement dated April 25, 1997 between dELiA*s Inc. and Keystone
Distribution Center, Inc. (incorporated by reference to Exhibit 10.12 to
the dELiA*s Inc. Annual Report on Form 10-
<PAGE>
K for the fiscal year ended January 31, 1997)
10.13 Agreement dated April 4, 1997 between dELiA*s Inc. and The Rector, Church
Wardens and Vestrymen of Trinity Church in the City of New York amending
the Lease Agreement (incorporated by reference to Exhibit 10.13 to the
dELiA*s Inc. Annual Report on Form 10-K for the fiscal year ended January
31, 1997)
10.14 Agreement dated October 7, 1997 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York
amending the Lease Agreement (incorporated by reference to Exhibit 10.14
to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter
ended October 31, 1997)
10.15 Amendment No. 1 to Employment Agreement between dELiA*s Inc. and
Christopher C. Edgar, dated September 15, 1998 (incorporated by reference
to Exhibit 10.15 to the dELiA*s Inc. Quarterly Report on Form 10-Q for
the fiscal quarter ended October 31, 1998)
10.16 Amendment No. 1 to Employment Agreement between dELiA*s Inc. and Evan
Guillemin, dated September 15, 1998 (incorporated by reference to Exhibit
10.16 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1998)
10.17 Credit Agreement dated December 7, 1998 between First Union National
Bank, dELiA*s Inc. and the subsidiaries listed on Schedule 1 thereto
(incorporated by reference to Exhibit 10.17 to the dELiA*s Inc. Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31, 1998)
10.18 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.17 to
the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter
ended October 31, 1998)
10.19 Intercompany Services Agreement between dELiA*s Inc. and iTurf Inc.,
dated April 8, 1999 (incorporated by reference to Exhibit 10.1 to iTurf's
registration statement on Form S-1 (Registration No. 333-71123))
10.20 Trademark License Agreement between dELiA*s Inc. and iTurf Inc., dated
April 8, 1999 (incorporated by reference to Exhibit 10.2 to iTurf's
registration statement on Form S-1 (Registration No. 333-71123))
10.21 Amendment No. 1, dated April 8, 1999, to Credit Agreement between First
Union National Bank, dELiA*s Inc. and our subsidiaries listed on the
signature page thereto (incorporated by reference to Exhibit 10.21 to our
annual report on Form 10-K for the fiscal year ended January 31, 1999)
10.22 Advertising Agreement between iTurf and America Online, Inc., dated May
4, 1999 (incorporated by reference to Exhibit 10.16 to iTurf's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 1, 1999)**
27* Financial Data Schedule
* Filed herewith
** Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> MAY-01-1999
<CASH> 97,031
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 24,336
<CURRENT-ASSETS> 133,482
<PP&E> 16,811
<DEPRECIATION> 3,995
<TOTAL-ASSETS> 164,118
<CURRENT-LIABILITIES> 17,967
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 89,332
<TOTAL-LIABILITY-AND-EQUITY> 164,118
<SALES> 41,812
<TOTAL-REVENUES> 41,812
<CGS> 23,023
<TOTAL-COSTS> 23,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (140)
<INCOME-PRETAX> 42,355
<INCOME-TAX> 17,519
<INCOME-CONTINUING> 24,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,836
<EPS-BASIC> 1.75
<EPS-DILUTED> 1.56
</TABLE>
