<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14, 1999
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 OCTOBER 30, 1999
Commission file number 0-25347
ITURF INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3963754
(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) 742-1640
(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 Class A Common Stock outstanding as of December 14,
1999: 7,493,132
Number of shares of Class B Common Stock outstanding as of December 14,
1999: 11,425,000
-----------
<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:
FLUCTUATIONS IN CONSUMER PURCHASING PATTERNS AND ADVERTISING SPENDING; TIMING
OF, RESPONSE TO AND QUANTITY OF OUR PARENT'S CATALOG MAILINGS AND OUR OWN
ELECTRONIC MAILINGS; CHANGES IN THE GROWTH RATE OF INTERNET USAGE AND ONLINE
USER TRAFFIC LEVELS; ACTIONS OF OUR COMPETITORS; THE TIMING AND AMOUNT OF COSTS
RELATING TO THE EXPANSION OF OUR OPERATIONS AND ACQUISITIONS OF TECHNOLOGY OR
BUSINESSES AND THEIR INTEGRATION; GENERAL ECONOMIC AND MARKET CONDITIONS; 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 REGISTRATION STATEMENT (NO. 333-90435) ON FORM S-1, 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 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 YEAR ENDING JANUARY 31, 1999). EFFECTIVE FEBRUARY 1,
1999, WE CHANGED OUR FISCAL YEAR TO END ON THE SATURDAY CLOSEST TO JANUARY 31
FOLLOWING THE CALENDAR YEAR (E.G., "FISCAL 1999" REFERS TO THE FIFTY-TWO WEEKS
ENDING JANUARY 29, 2000).
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
ITURF INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31, 1999 OCTOBER 30, 1999
---------------- ----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 375 $ 19,700
Short-term investments ............................................ -- 48,482
Prepaid expenses - related party .................................. -- 1,152
Other current assets .............................................. -- 3,565
--------- ---------
Total current assets .......................................... 375 72,899
DEFERRED OFFERING COSTS ............................................ 110 --
PROPERTY AND EQUIPMENT, NET ........................................ 414 3,067
INTANGIBLE ASSETS, NET ............................................. 317 18,672
--------- ---------
TOTAL ASSETS ....................................................... $ 1,216 $ 94,638
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities .................... $ 263 $ 3,728
Due to dELiA*s .................................................... 573 --
--------- ---------
Total current liabilities ..................................... 836 3,728
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued or outstanding .............................. -- --
Class A common stock, $.01 par value, 67,500,000 shares authorized;
no shares issued or outstanding at January 31, 1999;
6,418,132 shares issued and outstanding at October 30, 1999 .. -- 64
Class B common stock, $.01 par value, 12,500,000 shares authorized,
issued and outstanding ....................................... 125 125
Additional paid-in capital ........................................ -- 116,388
Investment in common stock of dELiA*s Inc. ........................ -- (17,734)
Retained earnings (deficit) ....................................... 255 (7,933)
--------- ---------
Total stockholders' equity .................................... 380 90,910
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $ 1,216 $ 94,638
--------- ---------
--------- ---------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
3
<PAGE>
ITURF INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
NET REVENUES:
NET PRODUCT SALES....................................................... $ 715 $ 4,602
ADVERTISING AND OTHER................................................... 349 699
-------- ---------
TOTAL NET REVENUES.......................................................... 1,064 5,301
COST OF PRODUCT SALES....................................................... 359 2,639
-------- ---------
GROSS PROFIT................................................................ 705 2,662
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................ 497 9,329
GOODWILL AMORTIZATION EXPENSE............................................... 17 652
INTEREST EXPENSE (INCOME), NET.............................................. 9 (965)
-------- ---------
INCOME (LOSS) BEFORE INCOME TAXES........................................... 182 (6,354)
PROVISION FOR INCOME TAXES.................................................. 83 --
-------- ---------
NET INCOME (LOSS)........................................................... $ 99 $ (6,354)
======== =========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE............................... $ 0.01 $ (0.35)
======== =========
SHARES USED IN THE CALCULATION OF BASIC AND DILUTED
NET INCOME (LOSS) PER SHARE............................................. 12,500 18,360
======== =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS THIRTY-NINE WEEKS
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
NET REVENUES:
NET PRODUCT SALES ......................................................... $ 1,437 $ 9,627
ADVERTISING AND OTHER ..................................................... 456 1,241
-------- --------
TOTAL NET REVENUES ............................................................ 1,893 10,868
COST OF PRODUCT SALES ......................................................... 733 5,622
-------- --------
GROSS PROFIT .................................................................. 1,160 5,246
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................................. 1,017 15,096
GOODWILL AMORTIZATION EXPENSE ................................................. 51 690
INTEREST EXPENSE (INCOME), NET ................................................ 31 (2,066)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES ............................................. 61 (8,474)
PROVISION (BENEFIT) FOR INCOME TAXES .......................................... 39 (161)
-------- --------
NET INCOME (LOSS) ............................................................. $ 22 $ (8,313)
-------- --------
-------- --------
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE ................................. $ 0.00 $ (0.51)
-------- --------
-------- --------
SHARES USED IN THE CALCULATION OF BASIC AND DILUTED
NET INCOME (LOSS) PER SHARE ............................................... 12,500 16,368
-------- --------
-------- --------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
ITURF INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THIRTY-NINE WEEKS
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) .......................................................... $ 22 $ (8,313)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................ 80 929
Amortization of premiums and discounts on investments, net ............... -- (318)
Changes in operating assets and liabilities:
Prepaid expenses - related party .................................. -- (1,152)
Other current assets .............................................. -- (3,565)
Other assets ...................................................... (18) --
Other current liabilities ......................................... 228 3,178
-------- --------
Net cash provided by (used in) operating activities ......................... 312 (9,241)
-------- --------
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of dELiA*s stock .................................................. -- (17,734)
Capital expenditures ....................................................... (201) (2,158)
Acquisitions ............................................................... -- (444)
Purchase of held-to-maturity investment securities ......................... -- (65,158)
Proceeds from the maturity of held-to-maturity investment securities ....... -- 16,994
-------- --------
Net cash used in investing activities ....................................... (201) (68,500)
-------- --------
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ................................. -- 97,639
Loan from dELiA*s .......................................................... 1,570 1,001
Repayment to dELiA*s ....................................................... (1,670) (1,574)
-------- --------
Net cash provided by (used in) financing activities ......................... (100) 97,066
-------- --------
-------- --------
INCREASE IN CASH & CASH EQUIVALENTS ......................................... 11 19,325
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD ................................ 31 375
-------- --------
CASH & CASH EQUIVALENTS--END OF PERIOD ...................................... $ 42 $ 19,700
-------- --------
-------- --------
</TABLE>
Supplemental disclosure of noncash financing and investing activity: April 1999
issuance of common stock for the acquisition of TSISoccer.com domain name. See
Note 1. September 1999 issuance of common stock for the acquisition of
[email protected], Inc. See Note 3.
See Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE>
ITURF INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
iTurf Inc. is an Internet community and marketer of apparel, related
accessories, home furnishings and soccer merchandise that is focused
primarily on young men and women between the ages of 10 and 24, an age group
known as "Generation Y." We are a subsidiary of dELiA*s Inc. The
accompanying financial statements of iTurf, which was incorporated in August
1997, include all of dELiA*s Internet operations from that date of
incorporation, as well as the Internet operations of TSI Soccer Corporation
prior to that date. We utilize dELiA*s business relationships,
infrastructure and brand names and relied on dELiA*s to provide financing
for our operations until April 14, 1999, when we completed an initial public
offering of our Class A common stock.
On April 1, 1999, our certificate of incorporation was amended and
restated such that the authorized capital stock of iTurf consists of
67,500,000 shares of Class A common stock, par value $.01 per share,
12,500,000 shares of Class B common stock, par value $.01 per share and
1,000,000 shares of Preferred Stock, par value $.01 per share. In addition,
exchange of the 100 shares of common stock previously outstanding and held
by dELiA*s into 12,500,000 shares of Class B common stock was approved. All
share information in these financial statements and notes has been adjusted
to reflect these changes.
In our initial public offering, we issued 4,830,000 shares of our Class
A common stock to the public at a price of $22 per share to receive net cash
proceeds of approximately $97,409,000 after expenses. Holders of Class A
common stock have voting rights identical to holders of Class B common
stock, except that holders of Class A common stock are entitled to one vote
per share and holders of Class B are entitled to six votes per share. In
connection with the initial public offering, iTurf acquired the
TSISoccer.com domain name from TSI Soccer Corporation, a wholly-owned
subsidiary of dELiA*s, for 1,136 shares of Class A common stock (valued at
$25,000 at the initial public offering price). dELiA*s continues to own all
outstanding shares of iTurf's Class B common stock, each share of which is
convertible into one share of Class A common stock under certain
circumstances. At October 30, 1999, dELiA*s owned approximately 92% of the
voting power and 66% of the value of iTurf common stock.
iTurf used approximately $17,700,000 of the initial public offering
proceeds to purchase 551,046 shares of dELiA*s common stock from dELiA*s.
This purchase has been recorded as a reduction to iTurf's stockholders'
equity. In June 1999, we used $1,574,000 of the initial public offering
proceeds to repay our May 1, 1999 indebtedness to dELiA*s.
iTurf is subject to seasonal fluctuations in our merchandise sales and
results of operations. We expect our revenues and operating results
generally to be lower in the first half of each fiscal year than in the
second half of such year.
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.
6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION--The condensed consolidated financial
statements include the accounts of iTurf Inc. and subsidiaries, all of which
are wholly owned. All significant intercompany balances and transactions
have been eliminated in consolidation.
BASIS OF PRESENTATION--For periods prior to our initial public offering,
the financial statements include expenses which have been allocated to iTurf
by dELiA*s on a specific identification basis plus the allocated share of
the costs associated with resources we shared with dELiA*s. Allocations from
dELiA*s for such shared resources were made primarily on a proportional cost
method based on related revenues. While management believes these
allocations are reasonable, the financial statements of iTurf for periods
prior to our initial public offering do not necessarily reflect the results
of operations or financial position that would have existed had iTurf been
an independent company. Since our initial public offering, similar expenses
are recorded in accordance with intercompany agreements. At October 30,1999,
a portion of our fourth quarter intercompany expenses were prepaid, which is
reflected as a related party asset on our balance sheet.
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 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 iTurf's January 31, 1999 audited financial statements
and the notes thereto, which are included in iTurf's Form S-1, as amended
and filed with the Securities and Exchange Commission. Results for the
interim period are not necessarily indicative of the results to be expected
for the year.
INCOME TAXES--For periods prior to our initial public offering, our
results were included in dELiA*s consolidated federal and state income tax
returns and our income tax provision was calculated as if we had operated as
an independent company. As a result of our initial public offering, we are
required to file a separate return. We do not expect to have net income for
fiscal 1999 and expect to fully reserve deferred tax assets. Therefore, we
estimate our effective rate for the period since our initial public offering
to be zero.
CASH EQUIVALENTS-- We consider all highly liquid investments with
maturities of 90 days or less when purchased to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
RECLASSIFICATIONS-- Certain amounts have been reclassified to conform to
the current period presentation.
3. ACQUISITION
On September 1, 1999, iTurf Inc. acquired [email protected], Inc. The merger
consideration consisted of 1,586,996 shares of our Class A common stock. In
accordance with the purchase method of accounting, the results of Taponline
have been included in our consolidated financial statements since the date
of merger. The excess of the aggregate purchase price over the fair market
value of net assets acquired of $19.0 million was allocated to goodwill
based upon preliminary estimates of fair values and is being amortized over
five years. On a pro forma basis, assuming the merger had been completed on
the first day of each fiscal year, net sales, net loss and loss per share
would have been approximately $2.1 million, $3.0 million and $0.21,
respectively, for the nine months ended October
7
<PAGE>
31, 1998 and $11.0 million, $14.1 million and $0.78, respectively, for the
thirty-nine weeks ended October 30, 1999. These results are presented for
informational purposes only and do not necessarily represent results which
would have occurred, and they may not be indicative of future results of
combined operations.
4. COMMITMENTS AND CONTINGENCIES
In May 1999, we entered into a strategic marketing alliance with America
Online, Inc. Over the two-year term of the agreement, we have agreed to pay
America Online a total of approximately $8.1 million, of which approximately
$4.0 million was paid as of October 30, 1999. The total expected payment is
being recognized as advertising expense on a straight-line basis over the
life of the marketing program.
In August 1999, we entered into a strategic marketing alliance with
Microsoft Corporation. Over the one-year term of the agreement, we have
agreed to pay Microsoft a total of at least $4.6 million, of which
approximately $775,000 was paid as of October 30, 1999. The total expected
payment is being recognized as advertising expense on a straight-line basis
over the life of the marketing program.
In connection with the Taponline transaction, MarketSource Corporation,
which is owned by certain of the shareholders of Taponline, including Martin
Levine, who was recently elected as a member of our board of directors,
entered into an arrangement to purchase advertising and other inventory on
our network of sites for resale to MarketSource's clients. Separately, we
have agreed to enter into a marketing alliance with MarketSource to promote
our network of sites through MarketSource's offline marketing channels. We
committed to purchasing approximately $6.5 million in promotional
opportunities through these channels over the next three years.
5. SUBSEQUENT EVENTS
On November 17, 1999, 325,000 shares of our Class B common stock were
converted to Class A common stock and sold by dELiA*s to Kistler Joint
Venture. On November 29, 1999, 1,675,000 shares of our Class A common
stock, to be issued upon conversion, were registered for future sale. On
December 6, 1999, 750,000 shares of our Class B common stock held by
dELiA*s were converted to Class A common stock and sold by dELiA*s pursuant
to the registration statement. As a result of these transactions, our
parent's interest in iTurf was reduced to 90% of vote and 60% of value.
8
<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 ITURF'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. AS USED IN THIS REPORT, THE TERM "PARENT" MEANS DELIA*S INC., A
REPORTING COMPANY UNDER THE SECURITIES EXCHANGE ACT OF 1934. OUR PARENT OWNS
ALL OF THE SHARES OF OUR CLASS B COMMON STOCK WHICH ENTITLES OUR PARENT TO
SIX VOTES PER SHARE, AS COMPARED TO ONE VOTE PER SHARE OF OUR CLASS A COMMON
STOCK. AS OF OCTOBER 30, OUR PARENT HELD APPROXIMATELY 92% OF THE VOTING
POWER OF OUR OUTSTANDING CAPITAL STOCK.
OVERVIEW
We are a leading online teen network providing Internet community,
content and e-commerce services focused primarily on young men and women
between the ages of 10 and 24, an age group known as "Generation Y." We
provide Generation Y with a network of Web sites that addresses this
demographic group's concerns, interests, tastes and needs. Our sites offer
interactive web/zines with proprietary content, chat rooms, posting boards,
personal homepages and e-mail, as well as online shopping opportunities.
Our historical financial statements for periods prior to our April 1999
initial public offering include allocations for administrative, distribution
and other expenses incurred by our parent for services rendered to iTurf.
While we believe such allocations to be reasonable, they are not necessarily
indicative of, and it is not practical for us to estimate, the levels of
expenses that would have resulted had iTurf been operating as an independent
company. Following our initial public offering, the provision of such
services and other matters between the two companies, including use of our
parent's trademarks, has been governed by intercompany agreements.
Prior to our initial public offering, we relied on our parent to provide
financing for our operations. Therefore, our cash flows were not necessarily
indicative of the cash flows that would have resulted had we been operating
as an independent company.
We believe that our continued growth will depend in large part on our
ability to increase our brand awareness, provide our customers with superior
Internet community and e-commerce experiences and continue to enhance our
systems and technology to support increased traffic to our Web sites. We
intend to invest heavily in marketing and promotion, including advertising
in our parent's print catalogs, and to further develop our Web sites,
technology and operating infrastructure. As a result, we expect to record
substantial net losses for the foreseeable future.
In view of the rapidly changing nature of iTurf's business and our
limited operating history, as well as the changes in our relationship with
our parent and our expected seasonality, iTurf believes that
period-to-period comparisons of our operating results, including our gross
profit margin and operating expenses as a percentage of sales, are not
necessarily meaningful. You should not rely on this information as an
indication of future performance.
On September 1, 1999, iTurf Inc. acquired [email protected], Inc. The merger
consideration consisted of 1,586,996 shares of our Class A common stock. In
accordance with the purchase method of accounting, the results of Taponline
have been included in our consolidated financial statements since the date
of merger.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship of certain items from our statement of operations to
total net revenues. Any trends reflected by the following table may not be
indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS NINE MONTHS THIRTY-NINE WEEKS
ENDED ENDED ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net product sales 67.2% 86.8% 75.9% 88.6%
Advertising and other revenues 32.8 13.2 24.1 11.4
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
Cost of product sales 33.7 49.8 38.7 51.7
----- ----- ----- -----
Gross profit 66.3 50.2 61.3 48.3
Selling, general and administrative expenses 46.7 176.0 53.7 138.9
Goodwill amortization 1.6 12.3 2.7 6.4
Interest expense (income), net 0.9 (18.2) 1.6 (19.0)
----- ----- ----- -----
Income (loss) before income taxes 17.1 (119.9) 3.3 (78.0)
Provision (benefit) for income taxes 7.8 -- 2.1 (1.5)
----- ----- ----- -----
Net income (loss) 9.3% (119.9)% 1.2% (76.5)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
COMPARISON OF THIRTEEN WEEKS ENDED OCTOBER 30, 1999 AND THREE MONTHS
ENDED OCTOBER 31, 1998
NET REVENUES. Net revenues increased from $1.1 million in the third
fiscal quarter of 1998 to $5.3 million for the same period in fiscal 1999.
The increase was principally due to increased traffic as a result of our
marketing efforts and growth in Internet usage, as well as to sales derived
from Web sites launched or acquired subsequent to the third fiscal quarter
of 1998, including droog.com, dotdotdash.com, StorybookHeirlooms.com,
contentsonline.com and OnTap.com. Advertising, subscription and licensing
revenues increased to $699,000 for the third quarter of fiscal 1999 from
$349,000 for the same period of fiscal 1998 primarily as a result of the
Taponline acquistion.
GROSS PROFIT. Gross profit increased from $705,000 for the third quarter
of fiscal 1998 to $2.7 million for the same period in fiscal 1999 as a
result of increased sales. Gross margin decreased from 66.3% in the third
quarter of fiscal 1998 to 50.2% in the third quarter of fiscal 1999. The
decrease was principally due to a decrease in advertising and other revenues
as a percent of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses are comprised of:
- - sales and marketing expenses, which include advertising costs, credit
card fees and distribution costs;
- - product development expenses, which include site development, editorial
content and systems costs; and
- - general and administrative expenses, which include depreciation but
exclude goodwill amortization expenses.
Total selling, general and administrative expenses, including direct
expenses, expenses allocated from our parent for periods prior to our
initial public offering and expenses charged by our parent in connection
with intercompany agreements after our initial public offering, increased
from $497,000, or 46.7% of revenues, in the third quarter of fiscal 1998 to
$9.3 million, or 176.0% of revenues, in the third quarter of fiscal 1999 due
to a substantial increase in advertising, product development and overhead
costs to support the continued expansion of iTurf. During the third quarter
of 1999, we incurred approximately
10
<PAGE>
$2.5 million of expenses in connection with services provided to us by our
parent.
In the third quarter of fiscal 1999, selling, general and administrative
expenses were comprised of approximately $6.7 million of selling and
marketing expenses, $1.8 million of product development costs and $800,000
of general and administrative expenses.
GOODWILL AMORTIZATION. Goodwill amortization increased significantly
from $17,000, or 1.6% of revenues, for the third quarter of fiscal 1998 to
$652,000, or 12.3% of revenues, for the same period in fiscal 1999 as a
result of the Taponline acquisition.
COMPARISON OF THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 AND NINE MONTHS ENDED
OCTOBER 31, 1998
NET REVENUES. Net revenues increased from $1.9 million in the first
three quarters of fiscal 1998 to $10.9 million for the same period in fiscal
1999. The increase was due to the launch of the dELiAs.cOm and
discountdomain.com Web sites in May 1998, the contentsonline.com and
droog.com sites in November 1998, the dotdotdash.com site in March 1999 and
the StorybookHeirlooms.com site in April 1999, the acquisition of OnTap.com
in September 1999 as well as increased traffic as a result of our marketing
efforts and growth in Internet usage. Advertising, subscription and
licensing revenues increased to approximately $1.2 million for the first
three quarters of fiscal 1999 from $456,000 for the same period of fiscal
1998 as a result of both increased advertising on gURL.com and the Taponline
acquisition.
GROSS PROFIT. Gross profit increased from $1.2 million for the first
three quarters of fiscal 1998 to $5.2 million for the same period in fiscal
1999 as a result of increased sales. Gross margin decreased from 61.3% in
the first three quarters of fiscal 1998 to 48.3% in the first three quarters
of fiscal 1999. The decrease was principally due to increased sales of
lower-margin products on our discountdomain.com and TSISoccer.com sites as
well as seasonal promotional offers. The change also reflects a decrease in
advertising and other revenues as a percent of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and
administrative expenses increased from $1.0 million, or 53.7% of revenues,
in the first three quarters of fiscal 1998 to $15.1 million, or 138.9% of
revenues, in the first three quarters of fiscal 1999 due to a substantial
increase in advertising, product development and overhead costs to support
the continued expansion of iTurf. During the first three quarters of 1999,
we incurred approximately $5.1 million of expenses in connection with
services provided to us by our parent.
GOODWILL AMORTIZATION. Goodwill amortization increased significantly
from $51,000, or 2.7% of revenues, for the first three quarters of fiscal
1998 to $690,000, or 6.4% of revenues, for the same period in fiscal 1999 as
a result of the Taponline acquisition.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
Our revenues and operating results may vary significantly from quarter
to quarter due to a number of factors, many of which are outside of our
control. These factors include:
- - seasonal fluctuations in consumer purchasing patterns and advertising
spending;
- - mix of product and other revenues;
- - timing of, response to and quantity of our parent's catalog mailings and
our own electronic mailings;
11
<PAGE>
- - changes in the growth rate of Internet usage;
- - actions of competitors;
- - the timing and amount of costs relating to the expansion of our
operations and acquisitions of technology or businesses; and
- - general economic and market conditions.
Our limited operating history and rapid growth make it difficult to
ascertain the effects of seasonality on our business although we believe our
revenues and operating results generally to be lower in the first half of
each fiscal year than in the second half of such year. We believe that
period-to-period comparisons of our historical results are not necessarily
meaningful and should not be relied upon as an indication of future results.
INCOME TAXES
Since our initial public offering, we are no longer consolidated with
our parent's taxpayer group. For periods prior to such event, we owed our
parent our proportionate share of the consolidated tax liability computed as
if iTurf were filing a separate return. Any tax loss benefits attributable
to us were used by our parent. To the extent that our parent used our tax
benefits, we reduced our debt due to our parent, which was repaid in the
third quarter of fiscal 1999.
Now that we are no longer consolidated with our parent's taxpayer group,
we may not be able to realize the tax benefit of future losses. Losses
generated subsequent to deconsolidation will be available to us to offset
any future taxable income for twenty years. However, deferred tax assets
recorded to reflect such future benefits are likely to be fully reserved
when recorded based on our limited operating history.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided net cash of $312,000 for the first three
quarters of fiscal 1998 and used $9.2 million during the first three
quarters of fiscal 1999. This significant cash usage during fiscal 1999
reflects higher operating expenses as well as prepayments of marketing and
other costs.
Net cash used in investing activities of $68.5 million for the first
three quarters of fiscal 1999 relate primarily to our investments in
marketable securities and purchase of shares of dELiA*s common stock from
our parent in connection with our initial public offering. During the first
three quarters of fiscal 1999, our investing activities, which used
approximately $201,000, relate to purchases of property and equipment. We
expect to make additional capital expenditures of approximately $250,000 in
the fourth quarter of fiscal 1999, including investments in technology and
physical infrastructure. In addition, a portion of our resources may be used
to fund acquisitions or investments in businesses, products and technologies
that are complementary to our current business.
We also expect to spend significant amounts for marketing and other
alliances. In May 1999, we entered into a strategic alliance agreement with
America Online, Inc. under which we committed to cash payments of
approximately $4.0 million in fiscal 1999 and $4.1 million in fiscal 2000.
In August 1999, we entered into a strategic marketing alliance with
Microsoft Corporation under which we agreed to pay Microsoft a total of at
least $4.6 million over the one-year term of the agreement. In connection
with the September 1999 Taponline transaction, we agreed to purchase
approximately $6.5 million in promotional opportunities through these
MarketSource's offline marketing channels over the next three years.
Financing activities provided net cash of $97.1 million for the first
three quarters of fiscal 1999 and used $100,000 for the same period of
fiscal 1998. The significant amount of cash provided by financing
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activities during the first three quarters of fiscal 1999 relates to the
initial public offering of our common stock. Prior to our initial public
offering, financing activities were related primarily to loans from our
parent.
Our capital requirements depend on numerous factors, including:
- the rate of market acceptance of iTurf's online presence;
- our ability to expand iTurf's customer base;
- the cost of upgrades to our online presence; and
- our level of expenditures for sales and marketing.
The timing and amount of such capital requirements cannot accurately be
predicted. Additionally, we will continue to evaluate possible investments
in businesses, products and system technologies and to develop plans to
expand our sales and marketing programs and conduct more aggressive brand
promotions. We believe that the net proceeds of our initial public offering,
together with our cash from operations, will be sufficient to meet
anticipated cash needs at least through fiscal 2000.
YEAR 2000 COMPLIANCE
We are heavily dependent upon complex computer software and systems for
our operations, including, to a significant extent, our parent's computer
systems. 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 iTurf's material operating software and our
information technology systems 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 iTurf's
mission-critical operating software has provided a written warranty or
assurance to iTurf or our parent that such software will not be affected by
the change in the century. The majority of the third party vendors of
iTurf's other material operating software and systems have also provided
warranties or assurances that such software and systems would be compliant.
iTurf has prepared a Year 2000 compliance program, which involves:
- identifying the material operating software and systems on which iTurf
depends, whether used by iTurf or by iTurf's service providers;
- obtaining written warranties or assurances from third party software
and system vendors and service providers;
- monitoring the compliance efforts of such vendors and service
providers; and
- testing our material operating software and systems.
During the third quarter, we began to perform tests of some of our
material operating software and systems to verify the assurances given by
third party vendors and ensure Year 2000 compliance. The testing, which has
since been completed, has not identified any material software or systems as
requiring remediation or replacement. However, we cannot assure you that all
of our material operating software and systems will be Year 2000 compliant.
In addition to the operating systems and software iTurf uses directly,
our operations are also dependent upon the performance of operating software
and systems used by our significant service providers, including our parent
and providers of financial, telecommunications and parcel delivery
13
<PAGE>
services. Our parent has provided us with assurance that its Year 2000
compliance program is consistent with ours and the status of its efforts is
the same as ours. We have contacted each of iTurf's other significant
service providers and have obtained written assurances from the majority of
such providers that the providers' relevant operating software and systems
are or would be in Year 2000 compliance. We are monitoring the status of all
iTurf's significant service providers' Year 2000 compliance efforts to
minimize the risk of any material adverse effect on iTurf's operations
resulting from compliance failures. However, there can be no assurance that
iTurf's 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, could cause users of our Web sites to consider alternative Web
community and content providers and 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 iTurf.
Therefore, we are developing contingency plans with respect to such systems
and software.
In addition, a significant portion of our merchandise sales are made
with credit cards, and iTurf's 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.
iTurf has not identified significant exposure to Year 2000 problems
outside of the information technology issues identified above.
COSTS. To date, we have spent less than $5,000 on Year 2000 compliance.
We expect that our incremental costs of addressing Year 2000 issues may be
as much as $50,000. We believe that the proceeds of our initial public
offering budgeted for investment in technology infrastructure and
maintenance will be sufficient to fund our Year 2000 compliance program and
contingency plan. However, given iTurf's dependence on third party software
and system vendors and service providers and on our customers' vendors,
there can be no assurance to that effect.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any legal proceedings that management believes
would have a material adverse effect on our financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
USE OF PROCEEDS FROM REGISTERED SECURITIES
On April 8, 1999, the Securities and Exchange Commission declared
effective our registration statement (No. 333-15153) on Form S-1, as then
amended, relating to our initial public offering of 4,830,000 shares of
Class A common stock, 630,000 shares of which were issued upon exercise of
an overallotment option granted by us to the underwriters. The managing
underwriters for the offering were BT Alex. Brown Incorporated and Hambrecht
& Quist LLC (the "Underwriters"). In connection with the offering, we
registered the Class A common stock under the Securities Exchange Act of
1934, as amended.
14
<PAGE>
The public offering commenced on April 9, 1999 and terminated upon the
sale of all of the 4,830,000 shares of Class A common stock which were
registered for sale. The offering was completed on April 14, 1999. The
aggregate offering price of the securities sold was $106,260,000. All of the
securities registered were sold for the account of the Company.
Prior to October 30, 1999, the Company incurred the following expenses
in connection with the issuance and distribution of the Common Stock
registered:
Underwriting discounts and commissions $7,438,000
Other expenses (legal and accounting fees and expenses,
printing and engraving expenses, filing and listing fees,
transfer agent and registrar fees and miscellaneous) 1,413,000
The net offering proceeds to the Company after deducting the foregoing
expenses were $97,409,000. Other than the amounts set forth for underwriting
discounts and commissions, the foregoing represent reasonable estimates of
expenses.
The Company did not make, in connection with the offering and sale of
the Common Stock registered, any direct or indirect payments to directors or
officers of the Company or, to the Company's knowledge, their associates,
persons owning 10% or more of any class of equity securities of the Company,
or affiliates of the Company.
From April 14, 1999 until October 30, 1999, approximately $5.8 million
of the net offering proceeds was used for general corporate purposes and
$17,734,000 was used to purchase 551,046 shares of common stock of dELiA*s
Inc.
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
On September 1, 1999, we issued 1,586,996 shares of our Class A common
stock to the shareholders of [email protected], Inc. in a transaction which was
exempt from Section 5 of the Securities Act pursuant to Section 4(2) of the
Securities Act.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See "Exhibit Index" following the signature page.
(b) We filed the following reports on Form 8-K during the fiscal
quarter:
(i) current report on Form 8-K, dated August 11, 1999, reporting
Item 5. This report contained information about our agreement
to acquire [email protected], Inc.
(ii) current report on Form 8-K, dated September 7, 1999, reporting
Item 2. This report contained information about our
acquisition of [email protected], Inc.
16
<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.
iTurf Inc.
(Registrant)
Date: December 14, 1999
By: /s/ STEPHEN I. KAHN
-----------------------------------------
Stephen I. Kahn
Chairman of the Board, President and
Chief Executive Officer
By: /s/ DENNIS GOLDSTEIN
-----------------------------------------
Dennis Goldstein
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
17
<PAGE>
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of iTurf (incorporated by
reference to Exhibit 3.1 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
3.2 By-laws of iTurf (incorporated by reference to Exhibit 3.2 to the iTurf
Inc. Registration Statement on Form S-1 (Registration No. 333-71123))
10.1 Form of Intercompany Services Agreement (incorporated by reference to
Exhibit 10.1 to the iTurf Inc. Registration Statement on Form S-1
(Registration No. 333-71123))
10.2 Form of Trademark License and Customer List Agreement (incorporated by
reference to Exhibit 10.2 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.3 Form of Intercompany Indemnification Agreement (incorporated by
reference to Exhibit 10.3 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.4 Form of Tax Allocation Agreement (incorporated by reference to Exhibit
10.4 to the iTurf Inc. Registration Statement on Form S-1 (Registration
No. 333-71123))
10.5 Form of iTurf Common Stock Registration Rights Agreement (incorporated
by reference to Exhibit 10.5 to the iTurf Inc. Registration Statement
on Form S-1 (Registration No. 333-71123))
10.6 Form of dELiA*s Common Stock Registration Rights Agreement
(incorporated by reference to Exhibit 10.6 to the iTurf Inc.
Registration Statement on Form S-1 (Registration No. 333-71123))
10.7 Form of Customer Service Agreement (incorporated by reference to
Exhibit 10.7 to the iTurf Inc. Registration Statement on Form S-1
(Registration No. 333-71123))
10.8 Form of Letter Agreement between dELiA*s and iTurf (regarding a sale of
control by dELiA*s) (incorporated by reference to Exhibit 10.8 to the
iTurf Inc. Registration Statement on Form S-1 (Registration No.
333-71123))
10.9 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to
the iTurf Inc. Registration Statement on Form S-1 (Registration No.
333-71123))
10.10 Employment Agreement between iTurf 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))
10.11 Employment Agreement between iTurf and Alex S. Navarro (incorporated by
reference to Exhibit 10.11 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.12 Employment Agreement between iTurf and Oliver Sharp (incorporated by
reference to Exhibit 10.12 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.13 Employment Agreement between iTurf and Dennis Goldstein (incorporated
by reference to Exhibit 10.13 to the iTurf Inc. Registration Statement
on Form S-1 (Registration No. 333-71123))
10.14 TSISoccer.com Asset Transfer Agreement, dated April 1, 1999, between
iTurf Inc. and TSI Soccer Corporation (incorporated by reference to
Exhibit 10.14 to the iTurf Inc. Registration Statement on Form S-1
(Registration No. 333-71123))
10.15 Subscription Agreement, dated April 1, 1999, between iTurf Delaware
Investment Company and dELiA*s (incorporated by reference to Exhibit
10.15 to the iTurf Inc. Registration Statement on Form S-1
(Registration No. 333-71123))
10.16 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)**
10.17 Online Advertising Authorized Reseller Agreement between iTurf,
Taponline 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)
10.18 Offline Advertising Purchase Agreement between iTurf and MarketSource
Corporation, dated September 1, 1999 (incorporated by reference to
Exhibit 99.2 to the iTurf Inc. Current Report on Form 8-K dated
September 7, 1999)
10.19 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)
18
<PAGE>
27.1* Financial Data Schedule
* Filed herewith
** Confidential treatment requested as to certain portions, which portions
have been omitted and filed separately with the SEC.
19
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