<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 2000
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 29, 2000
Commission file number 0-21869
dELiA*s INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3914035
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
435 HUDSON STREET, NEW YORK, NEW YORK 10014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(212) 807-9060
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES /X/ NO/ /
Number of shares of Common Stock outstanding as of September 1, 2000:
16,786,786
<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, THE CONDITION OF THE FINANCIAL MARKETS GENERALLY; THE RISK THAT
DELIA*S AND ITURF'S BUSINESSES WILL NOT BE INTEGRATED SUCCESSFULLY; COSTS
RELATED TO THE MERGER; THE RISK THAT DELIA*S OR ITURF STOCKHOLDERS WILL FAIL
TO APPROVE THE MERGER OR THAT LITIGATION WILL DELAY OR PREVENT THE
TRANSACTION'S CONSUMMATION; THE ABILITY OF DELIA*S TO DIVEST NON-CORE ASSETS
ON SATISFACTORY TERMS OR AT ALL; ACCESS TO FINANCING TO FUND OPERATIONS AND
THE EXPANSION STRATEGIES OF EACH BUSINESS; INCREASES IN THE COST OF
MATERIALS, PRINTING, PAPER, POSTAGE, SHIPPING AND LABOR; TIMING AND QUANTITY
OF CATALOG AND ELECTRONIC MAILINGS; DECREASES IN THE RATE OF RESPONSE TO
CATALOG AND ELECTRONIC MAILINGS; EACH COMPANY'S ABILITY TO LEVERAGE
INVESTMENTS MADE IN INFRASTRUCTURE TO SUPPORT EXPANSION; ACCEPTANCE OF NEW
RETAIL CONCEPTS; AVAILABILITY OF ACCEPTABLE STORE SITES AND LEASE TERMS;
ABILITY TO OPEN NEW STORES; POSSIBILITY OF INCREASING COMPARABLE STORE SALES;
ADVERSE WEATHER CONDITIONS AND OTHER FACTORS AFFECTING RETAIL SALES; LEVELS
OF COMPETITION; ITURF'S ABILITY TO SELL ADVERTISING; CHANGES IN THE GROWTH
RATE OF INTERNET USAGE AND ONLINE USER TRAFFIC LEVELS; LEVELS OF DEMAND FOR
INTERNET ADVERTISING; THE ABILITY TO RETAIN KEY PERSONNEL; THE ABILITY OF
COMPUTER SYSTEMS TO SCALE WITH GROWTH IN ONLINE TRAFFIC; DIFFICULTIES IN
INTEGRATING ACQUISITIONS OF NEW BUSINESSES AND TECHNOLOGY; GENERAL ECONOMIC
CONDITIONS; DELIA*S ABILITY TO ANTICIPATE AND RESPOND TO FASHION TRENDS; EACH
COMPANY'S DEPENDENCE ON THIRD PARTIES; AND OTHER FACTORS OUTSIDE OUR CONTROL.
THESE FACTORS, AND OTHER FACTORS THAT APPEAR IN THIS REPORT OR IN OTHER
SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED JANUARY 29, 2000 AND ITURF INC.'S MOST RECENT
PROXY/REGISTRATION STATEMENT ON FORM S-4 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.
THIS REPORT MAY INCLUDE MARKET DATA RELATED TO THE INDUSTRIES IN WHICH WE ARE
INVOLVED. THIS DATA HAS BEEN DERIVED FROM STUDIES PUBLISHED BY MARKET RESEARCH
FIRMS, TRADE ASSOCIATIONS AND OTHER ORGANIZATIONS. THESE ORGANIZATIONS SOMETIMES
ASSUME EVENTS, TRENDS AND ACTIVITIES WILL OCCUR AND PROJECT INFORMATION BASED ON
THOSE ASSUMPTIONS. IF ANY OF THEIR ASSUMPTIONS ARE WRONG, THEIR PROJECTIONS MAY
ALSO BE WRONG.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. YOU ARE
ADVISED, HOWEVER, TO CONSULT ANY ADDITIONAL DISCLOSURES WE MAKE IN OUR REPORTS
TO THE SEC ON FORMS 10-K, 10-Q, 8-K AND ITURF INC.'S MOST RECENT
PROXY/REGISTRATION STATEMENT ON FORM S-4.
ANY REFERENCE IN THIS REPORT TO A PARTICULAR FISCAL YEAR IS TO THE YEAR ENDED
ON THE SATURDAY CLOSEST TO JANUARY 31 FOLLOWING THE CORRESPONDING CALENDAR YEAR.
FOR EXAMPLE, "FISCAL 1999" MEANS THE PERIOD FROM FEBRUARY 1, 1999 TO JANUARY 29,
2000.
PART I
<PAGE>
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 29, 2000 JULY 29, 2000
---------------- -------------
* (UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 24,985 $ 13,867
Short-term investments 32,893 25,274
Merchandise inventories 28,322 30,696
Deferred tax assets 12,063 14,488
Prepaid expenses and other current assets 15,014 15,796
--------- ---------
Total current assets 113,277 100,121
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$6,635 at January 29, 2000 and $9,722 at July 29, 2000 35,483 37,539
LONG-TERM INVESTMENTS 11,024 2,002
INTANGIBLE ASSETS 23,456 34,121
OTHER ASSETS 800 457
--------- ---------
TOTAL ASSETS $ 184,040 $ 174,240
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 21,643 $ 20,808
Bank loan payable 3,000 9,628
Current portion of long term debt 719 5,946
Accrued restructuring 1,685 1,363
Other current liabilities 2,278 2,915
--------- ---------
Total current liabilities 29,325 40,660
DEFERRED TAX LIABILITIES 23,901 21,586
LONG-TERM DEBT AND CAPITAL LEASES 6,756 1,254
OTHER LONG-TERM LIABILITIES 403 426
MINORITY INTEREST 40,734 43,710
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; Authorized -- 1,000,000 shares;
Issued -- none -- --
Common stock, par value $.01 per share; Authorized -- 50,000,000 shares;
Issued -- 14,914,472 and 16,786,786 shares, respectively 149 168
Additional paid-in capital 80,216 86,284
Deferred compensation -- (3,165)
Less common stock in treasury (551,046 shares) (17,734) (17,734)
Retained earnings 20,290 1,051
--------- ---------
Total stockholders' equity 82,921 66,604
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 184,040 $ 174,240
========= =========
</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>
THIRTEEN WEEKS ENDED
JULY 31, 1999 JULY 29, 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
NET SALES $ 33,375 $ 37,295
COST OF SALES 20,450 21,122
-------- --------
GROSS PROFIT 12,925 16,173
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23,908 35,143
INTEREST AND OTHER INCOME, NET (1,027) (414)
MINORITY INTEREST (493) (4,687)
-------- --------
LOSS BEFORE INCOME TAXES (9,463) (13,869)
BENEFIT FOR INCOME TAXES (3,399) (3,376)
-------- --------
NET LOSS $ (6,064) $(10,493)
======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.42) $ (0.72)
======== ========
SHARES USED IN THE CALCULATION OF BASIC AND
DILUTED NET LOSS PER SHARE 14,330 14,535
======== ========
TWENTY-SIX WEEKS ENDED
JULY 31, 1999 JULY 29, 2000
------------- -------------
(UNAUDITED)
NET SALES $ 75,187 $ 86,352
COST OF SALES 43,473 46,914
-------- --------
GROSS PROFIT 31,714 39,438
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 47,658 74,146
RESTRUCTURING CHARGE 22,907 --
GAIN ON SUBSIDIARY INITIAL PUBLIC OFFERING (70,091) --
INTEREST AND OTHER INCOME, NET (1,167) (1,081)
MINORITY INTEREST (485) (8,588)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 32,892 (25,039)
PROVISION (BENEFIT) FOR INCOME TAXES 14,120 (5,800)
-------- --------
NET INCOME (LOSS) $ 18,772 $(19,239)
======== ========
BASIC NET INCOME (LOSS) PER SHARE $ 1.31 $ (1.33)
======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ 1.19 $ (1.33)
======== ========
SHARES USED IN THE CALCULATION OF BASIC NET
INCOME (LOSS) PER SHARE 14,280 14,519
======== ========
SHARES USED IN THE CALCULATION OF DILUTED NET
INCOME (LOSS)PER SHARE 15,790 14,519
======== ========
</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>
TWENTY-SIX WEEKS ENDED
JULY 31, 1999 JULY 29, 2000
-------------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 18,772 $(19,239)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,911 6,401
Gain on subsidiary IPO (70,091) --
Restructuring charge 23,407 --
Deferred taxes 19,309 (6,146)
Noncash compensation -- 1,601
Minority interest (485) (8,588)
Amortization of investments (139) (321)
Changes in operating assets and liabilities:
Merchandise inventories (9,118) (2,374)
Prepaid expenses and other current assets (5,642) (486)
Other assets (241) 345
Current liabilities 5,272 (817)
Other long-term liabilities 120 9
-------- --------
Net cash used in operating activities (16,925) (29,615)
======== ========
INVESTING ACTIVITIES:
Capital expenditures (9,186) (5,025)
Purchase of held-to-maturity investment securities (55,378) (17,876)
Proceeds from the maturity of investment securities -- 34,838
Acquisition of business -- 174
-------- --------
Net cash (used in) provided by investing activities (64,564) 12,111
======== ========
FINANCING ACTIVITIES:
Net proceeds from issuance of subsidiary common stock 97,749 --
Borrowings under line of credit agreement -- 6,628
Proceeds from long-term debt and capital leases 1,169 --
Principal payments on long-term debt and capital leases (75) (316)
Exercise of 187,335 and 3,500 stock options, respectively 1,088 20
Other -- 54
-------- --------
Net cash provided by financing activities 99,931 6,386
======== ========
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 18,442 (11,118)
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD 10,981 24,985
-------- --------
CASH & CASH EQUIVALENTS--END OF PERIOD $ 29,423 $ 13,867
======== ========
</TABLE>
Supplemental disclosure of noncash financing and investing activities:
May 2000 issuance of restricted stock. See Note 8.
February 2000 issuance of iTurf common stock to acquire theSpark.com,
Inc. See Note 5.
June 1999 cancellation of 33,784 shares of common stock in connection
with the screeem! acquisition.
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
Internet content and community services to young men and women primarily
between the ages of 13 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 generally to be lower in the first half
of each fiscal year than in the second half of the same fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION -- Our condensed consolidated financial
statements include the accounts of dELiA*s and subsidiaries, all of which,
except iTurf Inc., our majority-owned Internet-focused subsidiary, were wholly
owned for all periods presented. The accounts of iTurf are included in the
consolidated financial statements while the outside ownership of iTurf is
reflected as minority interest on the financial statements. 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 29, 2000 audited consolidated financial statements and the notes
thereto, which are included in our annual report on Form 10-K for the year ended
January 29, 2000, 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.
RECLASSIFICATIONS -- Certain amounts have been reclassified to conform to the
current presentation.
3. SEGMENT INFORMATION
dELiA*s determines operating segments in accordance with Statement of
Financial Accounting Standards No. 131. Our reportable segments are generally
defined by their method of distribution; different segments may offer similar
products to similar customers, but are managed separately because of their
distribution methods. dELiA*s currently has three reportable segments: catalog,
retail and iTurf. Certain amounts in our fiscal 1999 segment disclosure have
been reclassified to conform to the fiscal 2000 presentation.
<PAGE>
<TABLE>
<CAPTION>
SECOND QUARTER FISCAL 1999 Catalog Retail Iturf Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 19,915,000 $ 10,508,000 $ 2,952,000 $ 33,375,000
Operating loss (4,513,000) (3,147,000) (2,751,000) (10,411,000)
SECOND QUARTER FISCAL 2000 Catalog Retail Iturf Total
------------ ------------ ------------ ------------
Revenues from external customers $ 16,244,000 $ 13,388,000 $ 7,663,000 $ 37,295,000
Operating loss (2,308,000) (3,254,000) (11,056,000) (16,618,000)
FIRST HALF FISCAL 1999 Catalog Retail Iturf Total
------------ ------------ ------------ ------------
Revenues from external customers $ 49,764,000 $ 19,856,000 $ 5,567,000 $ 75,187,000
Operating loss (5,472,000) (5,733,000) (3,221,000) (14,426,000)
FIRST HALF FISCAL 2000 Catalog Retail Iturf Total
------------ ------------ ------------ ------------
Revenues from external customers $ 42,288,000 $ 25,406,000 $ 18,658,000 $ 86,352,000
Operating loss (3,289,000) (6,700,000) (21,043,000) (31,032,000)
Property and equipment, net, at 6,475,000 18,104,000 3,782,000 28,361,000
period end
</TABLE>
<TABLE>
<CAPTION>
Second Quarter Second Quarter
Fiscal 1999 Fiscal 2000
-------------- --------------
<S> <C> <C>
Operating loss for reportable segments $(10,411,000) $(16,618,000)
Unallocated corporate expenses 572,000 2,352,000
Interest and other income, net 1,027,000 414,000
Minority interest 493,000 4,687,000
------------ ------------
Income (loss) before income taxes $ (9,463,000) $(13,869,000)
============ ============
</TABLE>
<TABLE>
<CAPTION>
First Half First Half
Fiscal 1999 Fiscal 2000
------------ -----------
<S> <C> <C>
Operating loss for reportable segments $(14,426,000) $(31,032,000)
Unallocated corporate expenses 1,018,000 3,676,000
Restructuring charge (23,407,000) --
Gain on subsidiary initial public offering 70,091,000 --
Interest and other income, net 1,167,000 1,081,000
Minority interest 485,000 8,588,000
------------ ------------
Income (loss) before income taxes $ 32,892,000 $(25,039,000)
============ ============
</TABLE>
JULY 29, 2000
-------------
Property and equipment for reportable segments $ 28,361,000
Other assets 145,879,000
------------
Total consolidated assets $174,240,000
============
4. RESTRUCTURING
During fiscal 1999, we recorded a charge of approximately $24.2 million in
connection with our restructuring plan to exit our screeem! and Jean Country
retail operations. The charge was comprised of the following:
<PAGE>
o $19.4 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 retail operations;
o $3.6 million for the shut-down of certain retail stores of which $2.3
million represented the write-off of assets that would no longer be used
and $1.3 million primarily related to future lease costs;
o $700,000 for the elimination of approximately 125 full-time and part-time
jobs at the screeem! corporate office and the store locations to be
closed, resulting in employee severance costs; and
o $500,000 for the liquidation of inventory carried at stores to be
converted or closed (reflected in cost of sales).
The total charge of $24.2 million includes $23.7 million that was included in
fiscal 1999 operating expenses as a restructuring charge ($22.9 million recorded
in the first quarter and $800,000 in the second half of the year) and $500,000
included in cost of sales of the first quarter. The total charge also includes
$1.4 million of goodwill write-off relating to the value of 168,039 shares of
common stock issued in February 2000. This additional goodwill charge was
recorded in fiscal 1999, when the related contingencies were satisfied, as an
increase to additional paid-in capital.
Through the second quarter of fiscal 2000, we have incurred approximately
$400,000 for costs relating to store shut-down, $500,000 for inventory
liquidation and $200,000 for the elimination of 125 jobs. All stores have been
closed as of the second quarter of 2000. We expect the $1.4 million that remains
accrued at July 29, 2000 for contractual obligations and employee severance
costs to be paid out in fiscal 2000.
5. ACQUISITION
On February 15, 2000, iTurf acquired theSpark.com, Inc. The aggregate
consideration paid consisted of 1,099,988 newly issued shares of iTurf Class A
common stock and the right to receive up to $13.5 million in additional stock
(up to 2,683,634 additional shares) and cash (for any remaining amount earned)
if certain performance goals related to the theSpark.com web site are met. The
transaction was accounted for under the purchase method of accounting.
Consistent with our fiscal 1999 treatment of the issuance of iTurf stock for an
acquisition, we recorded $2.8 million (net of related taxes) as additional
paid-in capital instead of recognizing a gain in connection with this
transaction.
6. COMMITMENTS AND CONTINGENCIES
In the first quarter of fiscal 2000, iTurf entered into a lease agreement
for additional office space in the office building currently occupied in
downtown Manhattan. The lease term does not commence until the landlord
delivers possession of the additional office space which we expect to occur
in the third quarter of fiscal 2000. During the ten year term of the lease,
annual rent should approximate $800,000 subject to certain adjustments.
In 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 original complaints were filed in Federal District Court for the
Southern District of New York by Allain Roy on June 1, 1999 and by Lorraine
Padgett on June 3, 1999. The suits were consolidated into a single class action
and an amended and consolidated complaint was filed on March 22, 2000. The
complaint in this lawsuit purports to be a class action on behalf of the
purchasers of our securities during the period January 20, 1998 through
September 10, 1998. The complaint generally alleges that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
by making material misstatements and by
<PAGE>
failing to disclose certain allegedly material information regarding trends in
our business. The complaint also alleges that the individual defendants are
liable for those violations under Section 20(a) of the Securities Exchange Act.
The complaint seeks unspecified damages, attorneys' and experts' fees and costs,
and such other relief as the court deems proper. On April 14, 2000, dELiA*s Inc.
and the other named defendants filed a motion to dismiss the lawsuit. On May 12,
2000, counsel for the plaintiffs filed a memo in response to our motion and on
May 26, 2000, we filed a reply to that response. We intend to vigorously defend
against this action. Based upon information presently known to management, we do
not believe that the ultimate resolution of this lawsuit will have a material
adverse effect on our financial condition, results of operations or cash flow.
7. LONG-TERM DEBT AND CREDIT FACILITIES
In August 1999, in connection with the purchase of our distribution facility
in Hanover, Pennsylvania, we borrowed $5.3 million from Allfirst Bank in the
form of a mortgage loan on the property. We are subject to certain covenants
under the loan agreement, including a covenant to maintain a fixed charge
coverage ratio. On August 10, 1999 we entered into an interest-rate swap
agreement with Allfirst Bank under which we effectively converted the
LIBOR-based variable interest rate mortgage to a fixed rate loan with an
interest rate of approximately 8.78%. On April 26, 2000, we received a waiver
through the first quarter of fiscal 2001 of the fixed charge coverage ratio
covenant. As we have not received a waiver through the second quarter of fiscal
2001, we have classified the mortgage as current at July 29, 2000. It is our
intention to either renegotiate the terms of the loan agreement or to seek
alternative financing.
On April 28, 2000, we entered into an amended and restated credit agreement
with Congress Financial Corporation. The agreement amends and restates the terms
of our credit facility with First Union National Bank, the parent company of
Congress. The Congress credit facility consists of a revolving line of credit
permitting us to borrow up to $25 million and provides for the issuance of
documentary and standby letters of credit up to $10 million. Our obligations
under the Congress credit agreement are secured by a lien on substantially all
of our assets, except specified real property, the Class B common stock of iTurf
that we own and the assets of iTurf and its subsidiaries. (See below for
restrictions on distribution of iTurf shares.) As with the First Union facility,
the availability of the revolving line of credit is limited to specified
percentages of the value of our eligible inventory determined under the credit
agreement, which percentages are subject to certain restrictions and reserves in
certain circumstances. However, the Congress credit facility provides us with a
higher initial borrowing base than that provided by the First Union facility. At
our option, borrowings under this facility bear interest at First Union National
Bank's prime rate plus 25 basis points or at LIBOR plus 225 basis points. The
credit agreement contains covenants and default provisions customary for credit
facilities of this nature, including limitations on our payment of dividends and
sales of assets. A fee of 0.375% per year is assessed monthly on the unused
portion of the line of credit. The Congress credit agreement contains controls
on our cash management and certain limits on our ability to distribute assets.
In particular, we are prohibited from distributing any iTurf shares to our
stockholders prior to November 1, 2000, and may be similarly restricted
thereafter if we have not met, among other things, minimum borrowing capacity
availability requirements. As of July 29, 2000, there was $9.6 million in
principal amount outstanding and $2.6 million in outstanding letters of credit
and an additional $3.7 million available under the loan.
8. RESTRICTED STOCK
On May 25, 2000, the compensation committee of iTurf's board of directors
approved the
<PAGE>
exchange of outstanding options held by key employees and non-employee
directors for 1,098,220 shares of restricted iTurf stock. iTurf replaced
options with restricted stock in an effort to retain these key employees at a
time when the stock options had exercise prices that were above the current
market price for iTurf's stock. Certain vesting schedules of the restricted
stock were extended as compared to the option vesting schedule in order to
encourage retention of the selected employees and directors.
On May 26, 2000, our board of directors, at the recommendation of the
compensation committee, approved the exchange of all of the outstanding options
held by certain key employees and non-employee directors for 1,700,775 million
shares of restricted dELiA*s stock. We replaced options with restricted stock in
an effort to retain key employees at a time when the stock options had exercise
prices that were above the current market price for our stock. Certain vesting
schedules of the restricted stock were extended as compared to the option
vesting schedule in order to encourage retention of the selected employees and
directors.
In connection with the issuance of restricted stock, we expect to record the
total noncash compensation charge of approximately $7.2 million, including $3.1
million related to iTurf, over the appropriate vesting periods with 65%, 18%,
11%, 5% and 1% being recognized in fiscal 2000, 2001, 2002, 2003 and 2004,
respectively.
9. SUBSEQUENT EVENTS
On August 16, 2000, iTurf and dELiA*s agreed to combine through a merger
of dELiA*s and a wholly-owned subsidiary of iTurf. As a result of the merger,
dELiA*s will become a wholly-owned subsidiary of iTurf. In the merger,
holders of dELiA*s common stock will receive 1.715 shares of Class A common
stock of iTurf for each share of dELiA*s common stock they own. In order to
complete the merger, iTurf and dELiA*s must obtain the approval of the merger
by their stockholders. iTurf must also obtain the approval by its
stockholders of an amendment to iTurf's certificate of incorporation to
increase the number of authorized shares of iTurf's common stock, to
designate additional shares of Class A common stock, to change iTurf's name
to dELiA*s iTurf Inc. and to eliminate the voting rights of iTurf's Class B
common stock upon transfer unless the transfer is approved by iTurf's board
of directors. dELiA*s must also obtain the approval of Congress Financial
Corporation under its amended and restated credit agreement with dELiA*s.
The merger will be accounted for as a "purchase" for accounting and financial
reporting purposes. The merger will be treated as a reverse acquisition by
dELiA*s of the minority interest of iTurf, that is, the shares of iTurf's common
stock that dELiA*s does not already own, because dELiA*s stockholders will own
more than 50% of the combined company.
On August 16, 2000, iTurf and dELiA*s also announced that they intend to
divest the assets of their non-core properties, including Storybook Heirlooms
and TSI Soccer.
Between August 17 and August 25, 2000, three purported class action
complaints on behalf of iTurf stockholders were filed in Delaware Chancery
Court against iTurf, dELiA*s and each of iTurf's directors. All three
complaints make virtually identical claims, alleging that dELiA*s and the
members of the iTurf board of directors have breached their fiduciary duties
to iTurf and iTurf's public stockholders and that the exchange ratio is
unfair to iTurf's public stockholders. These complaints seek class
certification and other equitable and monetary refief, including enjoining
the merger or awarding damages. We believe that the allegations are without
substantial merit and intend to vigorously contest these actions. Although we
believe that the allegations of the complaints are without substantial merit,
we can not predict at this time the outcome of any litigation or whether the
resolution of the litigation could have a material adverse effect on our
results of operations, cash flows or financial condition.
<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. EXCEPT FOR THE HISTORICAL INFORMATION PRESENTED, THE DISCUSSION
IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR
IN THIS REPORT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT.
OVERVIEW
THROUGH OUR CATALOGS, RETAIL STORES AND WEB SITES, WE SELL CASUAL APPAREL,
ACCESSORIES, SOCCER MERCHANDISE AND INTERNET CONTENT AND COMMUNITY SERVICES
TO YOUNG MEN AND WOMEN PRIMARILY BETWEEN THE AGES OF 13 AND 24, AN AGE GROUP
KNOWN AS "GENERATION Y."
Through our DELIA*S catalog, Web site, full-priced stores and discount outlet
stores, we are a leading marketer of casual apparel, related accessories, home
furnishings and cosmetics to Generation Y girls and young women. Through our TSI
SOCCER catalog, retail stores and Web site, we are a leading marketer of
specialty soccer merchandise to Generation Y boys and girls. Our other catalogs
with related Web sites include DROOG, an apparel and accessories title that
targets Generation Y young men, and STORYBOOK HEIRLOOMS, which primarily targets
girls ages 4 to 11 and their mothers with fashionable, upscale special occasion
outfits, casual apparel and accessories.
iTurf, our publicly traded Internet subsidiary, currently consists of our
www.iTurf.com, www.gURL.com, www.OnTap.com, www.theSpark.com and
www.SparkNotes.com content and community Web sites as well as our
www.dELiAs.cOm, www.tsisoccer.com, www.discountdomain.com, www.Droog.com and
www.StorybookHeirlooms.com e-commerce sites. At July 29, 2000, we owned 54% of
the outstanding stock and control 88% of the vote of iTurf.
ACQUISITION. On February 15, 2000, iTurf acquired theSpark.com, Inc, which
operates a community and content Web site focusing on college students and young
adults. The consideration consisted of 1,099,988 newly-issued shares of iTurf
Class A common stock valued at $14.2 million based on iTurf's closing share
price on the day prior to the announcement of the transaction and the right to
receive up to $13.5 million in additional stock (up to 2,683,634 additional
shares) and cash (for any remaining amount earned) if certain performance goals
related to the acquired Web site are met. In accordance with the purchase method
of accounting, the results of theSpark have been included in our consolidated
financial statements since the date of the transaction.
RESTRICTED STOCK. On May 25, 2000, the compensation committee of iTurf's
board of directors approved the exchange of outstanding options held by key
employees and non-employee directors for 1,098,220 shares of restricted iTurf
stock. iTurf replaced options with restricted stock in an effort to retain these
key employees at a time when the stock options had exercise prices that were
above the current market price for iTurf's stock. Certain vesting schedules of
the restricted stock were extended as compared to the option vesting schedule in
order to encourage retention of the selected employees and directors.
On May 26, 2000, our board of directors, at the recommendation of the
compensation committee, approved the exchange of all of the outstanding options
held by certain key employees and non-employee directors for 1,700,775 shares of
restricted dELiA*s stock. We replaced options with
<PAGE>
restricted stock in an effort to retain key employees at a time when the stock
options had exercise prices that were above the current market price for our
stock. Certain vesting schedules of the restricted stock were extended as
compared to the option vesting schedule in order to encourage retention of the
selected employees and directors.
In connection with the issuance of restricted stock, we expect to record the
total noncash compensation charge of approximately $7.2 million, including $3.1
million related to iTurf, over the appropriate vesting periods with 65%, 18%,
11%, 5% and 1% being recognized in fiscal 2000, 2001, 2002, 2003 and 2004,
respectively.
PROPOSED REORGANIZATION. On August 16, 2000, iTurf and dELiA*s agreed to
combine through a merger of dELiA*s and a wholly-owned subsidiary of iTurf. As a
result of the merger, dELiA*s will become a wholly-owned subsidiary of iTurf. In
the merger, holders of dELiA*s common stock will receive 1.715 shares of Class A
common stock of iTurf for each share of dELiA*s common stock they own. In order
to complete the merger, iTurf and dELiA*s must obtain the approval of the merger
by their stockholders. iTurf must also obtain the approval by its stockholders
of an amendment to iTurf's certificate of incorporation to increase the number
of authorized shares of iTurf's common stock and to designate additional shares
of Class A common stock.
The merger will be accounted for as a "purchase" for accounting and financial
reporting purposes. The merger will be treated as a reverse acquisition by
dELiA*s of the minority interest of iTurf, that is, the shares of iTurf's common
stock that dELiA*s does not already own, because dELiA*s stockholders will own
more than 50% of the combined company.
On August 16, 2000, iTurf and dELiA*s also announced that they intend to
divest the assets of their non-core properties, including Storybook Heirlooms
and TSI Soccer. In addition, we may take a material non cash charge to
earnings in the third quarter related to the possible reclassification of
certain of our businesses as discontinued operations or assets held for sale,
as well as a possible write-down of certain tax assets in connection with the
proposed transaction with iTurf.
CAPITAL INVESTMENTS. We have made and continue to make significant capital
expenditures for store build-out in connection with our premier dELiA*s retail
concept.
In addition, in order to support our direct marketing and Internet
operations, we have made and continue to make significant capital expenditures
for telephone and management information systems and have hired and maintained
an in-house workforce of teleservice representatives.
We have made, and expect to continue to make, significant capital
expenditures to build infrastructure, including retail management systems, to
support the additional sales volume expected as a result of expected growth in
our various businesses.
RISKS. Sales made through iTurf instead of through our other channels produce
lower earnings for dELiA*s after accounting for promotional pricing and minority
interest. In addition, cash provided by such sales is not available for use in
our other businesses. While iTurf's cash is not used in our non-Internet
businesses, iTurf periodically prepays for inventory and various services,
including advertising. At July 29, 2000, iTurf had prepaid approximately $8.6
million to our other businesses primarily relating to third quarter expenses and
inventory purchases. The rapid rate of customer migration to the internet has
had a material adverse effect on the financial position and results of
operations of dELiA*s.
Because iTurf, our internet subsidiary, sells many of the same products that
our other businesses do and advertises their offerings to our non-Internet
customers, iTurf competes directly with our other businesses. Because of iTurf's
promotional pricing and minority public ownership, their success at selling
products to our customers has had an adverse effect on our operating results and
cash flows. As
<PAGE>
iTurf has become more successful in this regard, our financial condition has
become adversely affected. Material adverse changes to our financial condition
jeopardize iTurf's ability to continue to obtain goods and services from dELiA*s
under the intercompany agreements. As a result, if the proposed merger is not
consummated, iTurf may be required to renegotiate the terms of the intercompany
agreements or provide financing to dELiA*s in order to ensure that they can
continue to obtain goods and services from us.
SCREEEM! RESTRUCTURING
During fiscal 1999, we recorded a charge of approximately $24.2 million in
connection with our restructuring plan to exit our Screeem! and Jean Country
retail operations. The charge is comprised of the following:
o $19.4 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 retail operations;
o $3.6 million for the shut-down of certain retail stores of which $2.3
million represented the write-off of assets that would no longer be used
and $1.3 million primarily related to future lease costs;
o $700,000 for the elimination of approximately 125 full-time and part-time
jobs at the Screeem! corporate office and the store locations to be
closed, resulting in employee severance costs; and
o $500,000 for the liquidation of inventory carried at stores to be
converted or closed (reflected in cost of sales).
The total charge of $24.2 million includes $23.7 million that was included in
fiscal 1999 operating expenses as a restructuring charge ($22.9 million recorded
in the first quarter and $800,000 in the second half of the year) and $500,000
included in cost of sales of the first quarter. The total charge also includes
$1.4 million of goodwill write-off relating to the value of 168,039 shares of
common stock issued in February 2000. This additional goodwill charge was
recorded in fiscal 1999, when the related contingencies were satisfied, as an
increase to additional paid-in capital.
Through the second quarter of fiscal 2000, we have incurred approximately
$400,000 for costs relating to store shut-down, $500,000 for inventory
liquidation and $200,000 for the elimination of 125 jobs. All stores have been
closed as of the second quarter of 2000. We expect the $1.4 million that remains
accrued at July 29, 2000 for contractual obligations and employee severance
costs to be paid out in fiscal 2000.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statement of operations to net sales. Any
trends reflected by the following table may not be indicative of future results.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 JULY 29, 2000
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 61.3 56.6 57.8 54.3
----- ----- ----- -----
Gross profit 38.7 43.4 42.2 45.7
Selling, general and administrative expenses 71.6 94.2 63.4 85.9
Restructuring charge -- -- 30.5 --
Gain on subsidiary initial public offering -- -- (93.2) --
Interest and other income, net (3.1) (1.1) (1.5) (1.3)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Minority interest (1.5) (12.6) (0.7) (9.9)
----- ----- ----- -----
Income (loss) before income taxes (28.3) (37.1) 43.7 (29.0)
Provision (benefit) for income taxes (10.2) (9.1) 18.8 (6.7)
----- ----- ----- -----
Net income (loss) (18.1)% (28.0)% 24.9% (22.3)%
===== ===== ===== =====
</TABLE>
COMPARISON OF THIRTEEN WEEKS ENDED JULY 29, 2000 AND JULY 31, 1999
NET SALES. Net sales increased approximately $3.9 million or 11.8% to
$37.3 million in the second quarter of fiscal 2000 from $33.4 million in the
second quarter of fiscal 1999. Retail sales increased $2.9 million, or 27% in
the second quarter of fiscal 2000 from fiscal 1999. Increased fiscal 2000
sales in our dELiA*s premier and TSI retail concepts more than offset the
loss of fiscal 1999 revenues relating to the closure of our screeem! stores.
The increase also relates to higher direct marketing sales which increase
$1.0 million in the second quarter of fiscal 2000 from the same period in the
prior year. E-commerce product sales continued to grow as a percentage of
overall direct marketing product sales, representing 28.3% of all direct
marketing product sales for the second quarter of fiscal 2000 compared to
11.5% of all direct marketing product sales for the second quarter of fiscal
1999.
GROSS MARGIN. Gross margin increased to 43.4% in the second quarter of fiscal
2000 from 38.7 % in the second quarter of fiscal 1999. The increase is primarily
due to an increase in the proportion of our retail sales relating to our higher
margin dELiA*s premier concept, improved product mix as well as improved freight
margins in our catalog segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expense increased $11.2 million to $35.1 million in the second
quarter of fiscal 2000 from $23.9 million in the second quarter of fiscal 1999.
Selling, general and administrative expenses increased as a percentage of net
sales from 71.6 % in the second quarter of fiscal 1999 to 94.2 % in the second
quarter of fiscal 2000.
Selling, general and administrative expenses of our iTurf subsidiary
totaled $14.8 million for the current quarter, compared to $4.1 million for
the same period in fiscal 1999. Current period iTurf expenses included $2.6
million related to depreciation, amortization of goodwill and noncash
compensation charges related to changes in iTurf's equity compensation plan.
In addition, $8.2 million of the total was sales and marketing related.
dELiA*s selling, general and administrative expenses excluding iTurf
totaled $20.3 million for the current quarter, compared to $19.8 million for
the same period in fiscal 1999. Current period expenses included $2.2 million
related to depreciation, amortization of goodwill and noncash compensation
charges related to changes in our equity compensation plan. Net of these
noncash charges, dELiA*s selling, general and administrative expenses
excluding iTurf were $18.1 million in the current quarter, down $800,000 from
the prior year. Significantly lower selling, general and administrative
expenses in the catalog segment more than offset increases in retail, which
primarily related to the expansion of the dELiA*s premier retail chain and
higher corporate overhead.
MINORITY INTEREST. Since the iTurf initial public offering in April 1999, we
reflect the outside ownership of that subsidiary as minority interest. As of
July 29, 2000, we owned 54% of the value and controlled 88% of the vote of
iTurf.
INCOME TAXES. The decrease in our effective income tax rate relates primarily
to iTurf losses. Since the iTurf initial public offering in April 1999, iTurf
has continued to be consolidated in the dELiA*s Inc. financial statements for
reporting purposes but iTurf is no longer a part of our consolidated group for
tax purposes and the deferred tax assets arising from its net operating loss are
fully reserved.
COMPARISON OF TWENTY-SIX WEEKS ENDED JULY 29, 2000 AND JULY 31, 1999
NET SALES. Net sales increased approximately $11.2 million to $86.4 million
in the first half of fiscal 2000 from $75.2 million in the first half of fiscal
1999. Retail sales increased $5.6 million, or 28% in the
<PAGE>
first half of fiscal 2000 from fiscal 1999. Increased fiscal 2000 sales in
our dELiA*s premier and TSI retail concepts more than offset the loss of
fiscal 1999 revenues relating to the closure of our screeem! stores. Direct
marketing sales also increased $5.6 million in the first half of fiscal 2000
from the same period in the prior year. E-commerce product sales continued to
grow as a percentage of overall direct marketing product sales, representing
27.9% of all direct marketing product sales for the first half of fiscal 2000
compared to 9.2% of all direct marketing product sales for the first half of
fiscal 1999.
GROSS MARGIN. Gross margin increased to 45.7% in the first half of fiscal
2000 from 42.9% (excluding a $500,000 charge related to the screeem!
restructuring) in the first half of fiscal 1999. The increase is primarily
due to an increase in the proportion of our retail sales relating to our
higher margin dELiA*s premier concept, improved product mix as well as
improved freight margins in our catalog segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expense increased $26.4 million to $74.1 million in the first
half of fiscal 2000 from $47.7 million in the first half of fiscal 1999,
excluding non-recurring gains and losses. Selling, general and administrative
expenses increased as a percentage of net sales from 63.4 % in the first half of
fiscal 1999 to 85.9 % in the first half of fiscal 2000.
Selling, general and administrative expenses of our iTurf subsidiary
totaled $30.4 million for the first half of fiscal 2000, compared to $5.8
million for the same period in fiscal 1999. Current period iTurf expenses
included $4.4 million related to depreciation, amortization of goodwill and
noncash charges relating to changes in iTurf's equity compensation plan. In
addition, $17.3 million of the total was sales and marketing related.
dELiA*s selling, general and administrative expenses excluding iTurf
totaled $43.7 million for the first half of fiscal 2000, compared to $41.9
million for the same period in fiscal 1999. Current period expenses included
$3.6 million related to depreciation, amortization of goodwill and noncash
charges relating to changes in the company's equity compensation plan.
RESTRUCTURING CHARGE. During the first half of fiscal 1999, we recorded a
charge (primarily noncash) 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 was
recorded as cost of sales.
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 Internet-focused subsidiary. As a result of the
transaction, we recognized a gain of approximately $70.1 million before taxes.
MINORITY INTEREST. Since the iTurf initial public offering in April 1999, we
reflect the outside ownership of that subsidiary as minority interest. As of
July 29, 2000, we owned 54% of the value and controlled 88% of the vote of
iTurf.
INCOME TAXES. The decrease in our effective income tax rate relates primarily
to iTurf losses. Since the iTurf initial public offering in April 1999, iTurf
has continued to be consolidated in the dELiA*s Inc. financial statements for
reporting purposes but iTurf is no longer a part of our consolidated group for
tax purposes and the deferred tax assets arising from its net operating loss are
fully reserved.
SEASONALITY
dELiA*s is subject to seasonal fluctuations in our merchandise sales and
results of operations. We
<PAGE>
expect our net sales and results of operations generally to be lower in the
first half and higher in the second half (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 half of fiscal 2000 and 1999 was $29.6
million and $16.9 million, respectively. The increase in cash used in operations
primarily relates to increased operating losses.
Investing activities provided $12.1 million in the first half of fiscal 2000,
primarily relating to net proceeds from iTurf's investments offset by capital
expenditures, and used $64.6 million for the purchase of short-term investments
and capital expenditures in the first half of fiscal 1999.
Cash flows from financing activities in the first half of fiscal 1999 were
$99.9 million, primarily as a result of the initial public offering of iTurf
common stock. Cash flows from activities in the first half of fiscal 2000
were $6.4 million, primarily as a result of borrowings under our line of
credit agreement.
During fiscal 2000, we expect our capital expenditures to total in excess
$9 million for the continued expansion of our dELiA*s retail concept,
investment in information systems at iTurf and other subsidiaries as well as
leasehold improvements and equipment relating to new corporate offices. We
believe that our consolidated cash on hand, together with the funds available
under our credit agreement, new equipment leases and the planned divestitures
of our TSI Soccer and Storybook Heirlooms properties will be sufficient to
meet our consolidated capital and net operating requirements through fiscal
2000.
In August 1999, in connection with the purchase of our distribution
facility in Hanover, Pennsylvania, we borrowed $5.3 million from Allfirst
Bank in the form of a mortgage loan on the property. We are subject to
certain covenants under the loan agreement, including a covenant to maintain
a fixed charge coverage ratio. On August 10, 1999 we entered into an
interest-rate swap agreement with Allfirst Bank under which we effectively
converted the LIBOR-based variable interest rate mortgage to a fixed rate
loan with an interest rate of approximately 8.78%. On April 26, 2000, we
received a waiver through the first quarter of fiscal 2001 of the fixed
charge coverage ratio covenant. As we have not received a waiver through the
second quarter of fiscal 2001, we have classified the mortgage as current at
July 29, 2000. It is our intention to either renegotiate the terms of the
loan agreement or to seek alternative financing.
On April 28, 2000, we entered into an amended and restated credit agreement
with Congress Financial Corporation. The agreement amends and restates the terms
of our credit facility with First Union National Bank, the parent company of
Congress. The Congress credit facility consists of a revolving line of credit
permitting us to borrow up to $25 million and provides for the issuance of
documentary and standby letters of credit up to $10 million. Our obligations
under the Congress credit agreement are secured by a lien on substantially all
of our assets, except specified real property, the Class B common stock of iTurf
that we own and the assets of iTurf and its subsidiaries. (See below for
restrictions on distribution of iTurf shares.) As with the First Union facility,
the availability of the revolving line of credit is limited to specified
percentages of the value of our eligible inventory determined under the credit
agreement, which percentages are subject to certain restrictions and reserves in
certain circumstances. However, the Congress credit facility provides us with a
higher initial
<PAGE>
borrowing base than that provided by the First Union facility. At our option,
borrowings under this facility bear interest at First Union National Bank's
prime rate plus 25 basis points or at LIBOR plus 225 basis points. The credit
agreement contains covenants and default provisions customary for credit
facilities of this nature, including limitations on our payment of dividends and
sales of assets. A fee of 0.375% per year is assessed monthly on the unused
portion of the line of credit. The Congress credit agreement contains controls
on our cash management and certain limits on our ability to distribute assets.
In particular, we are prohibited from distributing any iTurf shares to our
stockholders prior to November 1, 2000, and may be similarly restricted
thereafter if we have not met, among other things, minimum borrowing capacity
availability requirements. As of July 29, 2000, there was $9.6 million in
principal amount outstanding and $2.6 million in outstanding letters of credit
and an additional $3.7 million available under the loan.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We maintain the majority of our excess funds in marketable securities. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. We do not believe that a change of 100 basis
points in interest rates would have a material effect on our financial
condition.
Our outstanding long-term debt as of July 29, 2000 when offset by our
interest rate hedge bears interest at a fixed rate; therefore, our results of
operations would only be affected by interest rate changes to the extent that
fluctuating rate loans are outstanding under our credit facility. As of July 29,
2000, we had $9.6 million outstanding under such facility. We do not believe
that a change of 100 basis points in interest rates would have a material effect
on our financial condition.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 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 original complaints were filed in Federal District Court for the
Southern District of New York by Allain Roy on June 1, 1999 and by Lorraine
Padgett on June 3, 1999. The suits were consolidated into a single class action
and an amended and consolidated complaint was filed on March 22, 2000. The
complaint in this lawsuit purports to be a class action on behalf of the
purchasers of our securities during the period January 20, 1998 through
September 10, 1998. The complaint generally alleges that the 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 complaint also
alleges that the individual defendants are liable for those violations under
Section 20(a) of the Securities Exchange Act. The complaint seeks unspecified
damages, attorneys' and experts' fees and costs, and such other relief as the
court deems proper. On April 14, 2000, dELiA*s Inc. and the other named
defendants filed a motion to dismiss the lawsuit. On May 12, 2000, counsel for
the plaintiffs filed a memo in response to our motion and on May 26, 2000, we
filed a reply to that response.
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,
results of operations or cash flow.
Between August 17 and August 25, 2000, three purported class action
complaints on behalf of iTurf stockholders were filed in Delaware Chancery
Court against iTurf, dELiA*s and each of iTurf's directors. These actions
include: Pack v. Kahn, et al., Del. Ch., C.A. No. 18242NC, Semeraro v. Kahn,
et al., Del. Ch., C.A. No. 18258, and Engel v. Kahn, et al., Del. Ch., C.A.
No. 18260NC. All three complaints make virtually identical claims, alleging
that dELiA*s and the members of the iTurf board of directors have breached
their fiduciary duties to iTurf and iTurf's public stockholders and that the
exchange ratio is unfair to iTurf's public stockholders. These complaints
seek class certification and other equitable and monetary relief, including
enjoining the merger or awarding damages. We believe that the allegations are
without substantial merit and intend to vigorously contest these actions.
Although we believe that the allegations of the complaints are without
substantial merit, we can not predict at this time the outcome of any
litigation or whether the resolution of the litigation could have a material
adverse effect on our results of operations, cash flows or financial
condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RESTRICTED STOCK. On May 25, 2000, the compensation committee of iTurf
issued 1,098,220 shares of restricted iTurf stock to key employees and
non-employee directors in exchange for their outstanding stock options. These
issuances did not constitute "sales" within the meaning of the Securities Act
of 1933.
On May 26, 2000, we issued 1,700,775 shares of restricted dELiA*s stock to
key employees and non-employee directors in exchange for their outstanding stock
options. These issuances did not constitute "sales" within the meaning of the
Securities Act of 1933.
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See "Exhibit Index" following the signature page.
(b) We filed a current report on Form 8-K dated May 2, 2000 reporting Item 5.
This report contained information on our amended and restated credit
agreement with Congress Financial Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
dELiA*s Inc.
(Registrant)
Date: September 12, 2000
By: /s/ Stephen I. Kahn
----------------------
Stephen I. Kahn
Chairman of the Board and Chief
Executive Officer
By: /s/ R. James Cooper
----------------------
R. James Cooper
Executive Vice President and Chief
Financial Officer
(principal financial and accounting officer)
<PAGE>
EXHIBIT INDEX
1.1 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))
2.1 Agreement and Plan of Merger by and among dELiA*s Inc., iTurf Inc. and
iTurf BREAKFAST Corporation dated August 16, 2000 (incorporated by
reference to an Annex A of the joint proxy/prospectus included within the
iTurf Inc. registration statement on Form S-4 (Registration No.
333-44916)).
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 [omitted]
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 [omitted]
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 [omitted]
10.11 Employment Agreement dated April 5, 1999 between iTurf Inc. and Stephen I.
Kahn (incorporated by reference to Exhibit 10.10 to the iTurf Inc.
registration statement on Form S-1 (Registration No. 333-71123))
10.12 [omitted]
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
<PAGE>
(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)
1.14 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)
1.14 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)
1.14 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)
1.14 [omitted]
1.15 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)
1.16 Intercompany Services Agreement between dELiA*s Inc. and iTurf
Inc., dated April 8, 1999 (incorporated by reference to Exhibit
10.1 to the iTurf Inc. registration statement on Form S-1
(Registration No. 333-71123))
1.14 Trademark License Agreement between dELiA*s Inc. and iTurf Inc.,
dated April 8, 1999 (incorporated by reference to Exhibit 10.2 to
the iTurf Inc. registration statement on Form S-1 (Registration
No. 333-71123))
1.14 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 the dELiA*s Inc. annual report on Form 10-K for
the fiscal year ended January 31, 1999)
1.14 Advertising Agreement between iTurf and America Online, Inc., dated May 4,
1999 (incorporated by reference to Exhibit 10.16 to the iTurf Inc.
Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 1999)**
1.14 Construction Loan Agreement dated August 6, 1999, among dELiA*s
Distribution Company, dELiA*s Inc. and Allfirst Bank (incorporated by
reference to Exhibit 10.23 to the dELiA*s Inc. Quarterly Report on Form
10-Q for the fiscal quarter ended July 31, 1999)
10.24 Mortgage Note dated August 6, 1999 made by dELiA*s Distribution Company in
favor of Allfirst Bank (incorporated by reference to Exhibit 10.24 to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended
July 31, 1999)
10.25 Online Advertising Authorized Reseller Agreement between iTurf, T@ponline
and MarketSource Corporation, dated September 1, 1999 (incorporated by
reference to Exhibit 99.1 to the iTurf Inc. Current Report on Form 8-K
dated September 7, 1999)
10.26 Offline Advertising Purchase Agreement between iTurf and MarketSource
Corporation, dated September 1, 1999 (incorporated by reference to Exhibit
99.2 of iTurf's Current Report on Form 8-K dated September 7, 1999)
10.27 Registration Rights Agreement between iTurf and MarketSource Corporation
(incorporated by reference to Exhibit 10.19 to the iTurf Inc. Registration
Statement on Form S-1 (Registration No.
333-90435))
<PAGE>
10.28 Amendment No. 2 to Employment Agreement between dELiA*s Inc. and
Christopher C. Edgar, dated October 18, 1999 (incorporated by
reference to Exhibit 10.28 to the dELiA*s Inc. Quarterly Report on
Form 10-Q for the fiscal quarter ended October 31, 1999)
10.29 Amendment No. 2 to Employment Agreement between dELiA*s Inc. and Evan
Guillemin, dated October 18, 1999 (incorporated by reference to
Exhibit 10.29 to the dELiA*s Inc. Quarterly Report on Form 10-Q for
the fiscal quarter ended October 31, 1999)
10.30 Employment Agreement dated August 1998 between Storybook Inc. (a
wholly-owned subsidiary of dELiA*s Inc.) and Estelle DeMuesy
(incorporated by reference to Exhibit 10.30 to the dELiA*s Inc.
Quarterly Report on Form 10-Q for the fiscal quarter ended October
31, 1999)
10.31 Employment Agreement dated February 2, 2000 between dELiA*s Inc. and
R. James Cooper (incorporated by reference to Exhibit 10.31 to the
dELiA*s Inc. annual report on Form 10-K for the fiscal year ended
January 29, 2000)
10.32 Lease Agreement dated January 30, 2000 by and between iTurf and the
State-Whitehall Company (incorporated by reference to Exhibit 10.20
to the iTurf Inc. Annual Report on Form 10-K for the fiscal year
ended January 29, 2000)
10.33 Amended and Restated Credit Agreement among dELiA*s Inc. and its
subsidiaries set forth on Schedule 1 thereto and Congress Financial
Corporation dated April 28, 2000 (incorporated by reference to the
Company's Current Report on Form 8-K dated May 2, 2000)
10.34 Letter Agreement among dELiA*s Inc. and certain of its subsidiaries
and Congress Financial Corporation dated April 28, 2000, regarding
the Distribution of iTurf Shares (incorporated by reference to the
Company's Current Report on Form 8-K dated May 2, 2000)
10.35 Amendment No. 2 to Employment Agreement between dELiA*s Inc. and
Stephen I. Kahn, dated June 9, 2000 (incorporated by reference to
Exhibit 10.35 to the dELiA*s Inc. Quarterly Report on Form 10-Q for
the fiscal quarter ended April 29, 2000)
10.36 Amendment No. 3 to Employment Agreement between dELiA*s Inc. and
Christopher C. Edgar, dated June 9, 2000 (incorporated by reference to
Exhibit 10.36 to the dELiA*s Inc. Quarterly Report on Form 10-Q for
the fiscal quarter ended April 29, 2000)
10.37* Amendment No. 1 to amended and restated credit agreement among
dELiA*s Inc. and certain of its subsidiaries and Congress Financial
Corporation, dated July 31, 2000.
27* Financial Data Schedule
* Filed herewith
** Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
