<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 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 APRIL 29, 2000
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)
ONE BATTERY PARK PLAZA, NEW YORK, NEW YORK 10004
(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
June 1, 2000: 9,697,090
Number of shares of Class B Common Stock outstanding as of
June 1, 2000: 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 ANNUAL REPORT ON FORM 10-K, 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 INCLUDES 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 AND 8-K.
ANY REFERENCE IN THIS REPORT TO A PARTICULAR FISCAL YEAR AFTER 1998 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. ANY REFERENCE IN THIS REPORT TO A PARTICULAR FISCAL YEAR
BEFORE 1999 IS TO THE YEAR ENDED JANUARY 31 FOLLOWING THE CORRESPONDING CALENDAR
YEAR. FOR EXAMPLE, "FISCAL 1998" MEANS THE PERIOD FROM FEBRUARY 1, 1998 TO
JANUARY 31, 1999.
2
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PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITURF INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 29, 2000 APRIL 29, 2000
---------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................. $ 19,009 $ 19,407
Short-term investments..................................................... 32,893 26,599
Prepaid expenses - dELiA*s ................................................ 1,118 1,590
Other current assets....................................................... 3,569 5,103
--------- ---------
Total current assets................................................... 56,589 52,699
INVESTMENTS................................................................. 11,024 7,998
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $518 and $757 at January 29, 2000 and April 29, 2000, respectively...... 3,286 3,778
INTANGIBLE ASSETS, NET...................................................... 17,703 30,230
OTHER ASSETS................................................................ 206 277
--------- ---------
TOTAL ASSETS................................................................ $ 88,808 $ 94,982
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and other current liabilities............................. $ 3,856 $ 4,967
--------- ---------
Total liabilities...................................................... 3,856 4,967
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;
7,493,132 and 8,598,870 shares issued and outstanding at
January 29, 2000 and April 29, 2000, respectively..................... 75 86
Class B common stock, $.01 par value, 12,500,000 shares authorized;
11,425,000 issued and outstanding..................................... 114 114
Additional paid-in capital................................................. 116,388 130,662
Investment in common stock of dELiA*s Inc.................................. (17,734) (17,734)
Accumulated deficit........................................................ (13,891) (23,113)
--------- ---------
Total stockholders' equity............................................. 84,952 90,015
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 88,808 $ 94,982
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
3
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ITURF INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
MAY 1, 1999 APRIL 29, 2000
----------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
NET PRODUCT SALES....................................................... $ 2,425 $ 9,988
ADVERTISING AND OTHER................................................... 190 1,007
-------- ---------
TOTAL NET REVENUES.......................................................... 2,615 10,995
COST OF PRODUCT SALES....................................................... 1,332 5,464
-------- ---------
GROSS PROFIT................................................................ 1,283 5,531
OPERATING EXPENSES:
SELLING AND MARKETING................................................... 997 9,127
TECHNOLOGY AND CONTENT DEVELOPMENT...................................... 449 3,186
GENERAL AND ADMINISTRATIVE.............................................. 288 1,650
GOODWILL AMORTIZATION................................................... 19 1,555
-------- ---------
TOTAL OPERATING EXPENSES.................................................... 1,753 15,518
INTEREST INCOME, NET........................................................ (112) (765)
-------- ---------
LOSS BEFORE INCOME TAXES.................................................... (358) (9,222)
BENEFIT FOR INCOME TAXES.................................................... (161) -
-------- ---------
NET LOSS ................................................................. $ (197) $ (9,222)
======== =========
BASIC AND DILUTED NET LOSS PER SHARE........................................ $ (0.01) $ (0.47)
======== =========
SHARES USED IN THE CALCULATION OF BASIC AND DILUTED
NET LOSS PER SHARE......................................................... 13,413 19,818
======== =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
4
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ITURF INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
MAY 1, 1999 APRIL 29, 2000
----------- --------------
<S> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss .................................................................. $ (197) $ (9,222)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................... 57 1,794
Amortization of premiums and discounts on investments, net............. - (153)
Changes in operating assets and liabilities:
Prepaid expenses - dELiA*s........................................ - (472)
Other current assets.............................................. - (1,238)
Other assets...................................................... - (69)
Current liabilities .............................................. 131 773
--------- ---------
Net cash used in operating activities...................................... (9) (8,587)
========= =========
INVESTING ACTIVITIES:
Purchase of dELiA*s stock ................................................. (17,734) -
Acquisitions .............................................................. - 174
Purchase of investment securities ......................................... - (10,683)
Proceeds from the maturity of investment securities ....................... - 20,156
Capital expenditures....................................................... (522) (716)
--------- ---------
Net cash provided by (used in) investing activities......................... (18,256) 8,931
========= =========
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................................. 98,219 -
Exercise of common stock options........................................... - 54
Loan from dELiA*s.......................................................... 1,001 -
--------- ---------
Net cash provided by financing activities................................... 99,220 54
========= =========
INCREASE IN CASH & CASH EQUIVALENTS......................................... 80,955 398
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD................................. 375 19,009
--------- ---------
CASH & CASH EQUIVALENTS--END OF PERIOD....................................... $ 81,330 $ 19,407
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: April
1999 issuance of common stock valued at $25,000 for the acquisition of
TSISoccer.com domain name. February 2000 issuance of common stock for the
acquisition of theSpark.com, Inc. See Note 3.
See Notes to Unaudited Condensed Consolidated Financial Statements
5
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ITURF INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
iTurf Inc. operates a network of community and commerce Web sites that
is focused primarily on teens and young adults. 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. At April
29, 2000, dELiA*s owns approximately 57% of our outstanding common stock
and controls approximately 89% of the voting power of our outstanding
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
retroactively to reflect these changes.
Our revenues and results of operations may be subject to seasonal
fluctuations. Sales of apparel, accessories and footwear are generally
lower in the first half of each year. Similarly, advertising sales in
traditional media, such as television and radio, are generally lower in the
first calendar quarter of each year.
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 share with dELiA*s.
Allocations from dELiA*s for such shared resources have been made primarily
on a proportional cost method based on related revenues and management
believes these allocations are reasonable. Since our initial public
offering, similar expenses are recorded in accordance with intercompany
agreements. At April 29, 2000, a portion of our intercompany expenses were
prepaid.
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 audited financial
statements and the notes thereto that are included in iTurf's annual report
on Form 10-K, which was filed
6
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with the Securities and Exchange Commission. Results for the interim period
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. ACQUISITION
On February 15, 2000, we 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 our
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. 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. The excess of the
aggregate purchase price over the fair market value of net assets acquired
of $14.1 million was allocated to goodwill based upon preliminary estimates
of fair values and is being amortized over five years. We do not expect the
final purchase allocation to differ significantly from the preliminary
purchase price recorded. On a pro forma basis, assuming the merger had been
completed on the first day of each fiscal year, net revenues, net loss and
loss per share would not have been materially different from reported
results.
4. COMMITMENTS
On January 30, 2000, we entered into a lease agreement for additional
office space in the office building we currently occupy in downtown
Manhattan. The lease term is 10 years. The lease term does not commence
until the landlord delivers possession of the additional office space. We
expect the landlord to deliver possession of the space in September 2000.
During the term of the lease, we will pay annual rent of approximately
$800,000 subject to certain adjustments.
5. SEGMENTS
iTurf determines operating segments in accordance with Statement of
Financial Accounting Standards No. 131. Prior to our September 1999
acquisition of our OnTap business, iTurf consisted of a single segment.
Since then, we manage acquired businesses as separate reportable segments.
iTurf currently earns the majority of its revenues from e-commerce while
our new businesses earn advertising revenue on its Web sites.
FIRST QUARTER OF FISCAL 2000
<TABLE>
<CAPTION>
iTurf OnTap theSpark Total
----- ----- -------- -----
<S> <C> <C> <C> <C>
Revenues $ 10,415,000 $ 47,000 $ 533,000 $ 10,995,000
Operating loss (7,079,000) (2,408,000) (500,000) (9,987,000)
Total assets at period end 62,576,000 17,897,000 14,509,000 94,982,000
Operating loss for reportable segments $ (9,987,000)
Interest income, net 765,000
---------------
Loss before taxes $ (9,222,000)
===============
</TABLE>
6. SUBSEQUENT EVENT
On May 25, 2000, the compensation committee of our board of directors
approved the exchange of outstanding options held by key employees and
non-employee directors for restricted stock. We replaced options with
restricted stock in an effort to retain these key employees at a time when
the
7
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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. We expect to record the
resulting compensation expense totaling $3.1 million over the applicable
vesting periods with 50%, 20%, 20%, 9% and 1% being recognized in fiscal
2000, 2001, 2002, 2003 and 2004, respectively.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INVESTORS SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO OF ITURF WHICH APPEAR 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 OUR REPORTS, PARTICULARLY IN
"RISK FACTORS" IN OUR ANNUAL REPORT ON FORM 10-K, WHICH IS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
iTurf is a leading provider, based on sales and traffic, of Internet
community, content and e-commerce services focused primarily on teens and young
adults. We provide teens and young adults with an online destination that
encompasses a network of Web sites that address this demographic group's
concerns, interests, tastes and needs. Our sites offer interactive web/zines
with proprietary content, chat rooms, posting boards, personal homepages, music
downloading and e-mail, as well as online shopping opportunities.
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.
On February 15, 2000, we 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 our 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.
Because we sell many of the same products our parent's other businesses do
and advertise our offerings to our parent's non-Internet customers, we compete
directly with our parent's other businesses. Because of our promotional pricing
and our minority public ownership, our success at selling products to our
parent's customers has an adverse effect on our parent's operating results and
cash flows. As we have become more successful in this regard, our parent's
financial condition has become adversely affected. Material adverse changes to
our parent's financial condition jeopardize our ability to continue to obtain
goods and services from our parent under the intercompany agreements. As a
result, we may be required to renegotiate the terms of the intercompany
agreements or provide financing to our parent in order to ensure that we can
continue to obtain goods and services from our parent.
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.
9
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statement of operations to revenues. Any
trends reflected by the following table may not be indicative of future results.
Thirteen Weeks Ended May 1, 1999 April 29, 2000
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
MAY 1, 1999 APRIL 29, 2000
----------- --------------
<S> <C> <C>
Net revenues.......................................... 100.0% 100.0%
Cost of product sales................................. 50.9 49.7
------ ------
Gross profit.......................................... 49.1 50.3
Operating expenses.................................... 67.0 141.1
Interest income, net.................................. (4.3) (6.9)
------- -------
Loss before income taxes.............................. (13.7) (83.9)
Benefit for income taxes.............................. (6.1) --
------- ------
Net loss.............................................. (7.5)% (83.9)%
======= =======
</TABLE>
COMPARISON OF THIRTEEN WEEKS ENDED MAY 1, 1999 AND APRIL 29, 2000
NET REVENUES. Net revenues increased from $2.6 million in the first quarter
of fiscal 1999 to $11.0 for the same period of fiscal 2000. The increase
primarily relates to delias.com sales. Advertising, subscription and licensing
revenues were approximately $1.0 million for the fiscal 2000 quarter compared to
$190,000 for the same period of the prior year as a result of both growth on our
existing sites and acquisition of new sites.
GROSS PROFIT. Gross profit increased from $1.3 million for the first
quarter of fiscal 1999 to $5.5 million for the same period in fiscal 2000 as a
result of increased sales and other revenues. Product gross margin increased
slightly from 45.1% in the first quarter of fiscal 1999 to 45.3% in the first
quarter of fiscal 2000.
OPERATING EXPENSES. Operating expenses are comprised of
o selling and marketing expenses, which include advertising costs,
credit card fees, trademark licensing and distribution costs,
o technology and content development expenses, which include site
development, editorial content and systems costs,
o general and administrative expenses and
o goodwill amortization expense.
Total operating 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 $1.8 million, or 67.0% of revenues, in
the first quarter of fiscal 1999, to $15.5 million or 141.1% of revenues, in the
first quarter of fiscal 2000, due to a substantial increase in advertising,
product development and overhead costs to support the launch of our iTurf.com
hub site and the continued expansion of the other sites of our iTurf network.
10
<PAGE>
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:
o seasonal fluctuations in consumer purchasing patterns and advertising
spending;
o mix of product and other revenues;
o timing of, response to and quantity of our parent's catalog and our
own electronic mailings;
o changes in the growth rate of Internet usage;
o actions of competitors;
o the timing and amount of costs relating to the expansion of our
operations and acquisitions of technology or businesses; and
o general economic and market conditions.
Our limited operating history and rapid growth make it difficult to
ascertain the effects of seasonality on our business. 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.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used net cash of $8.6 million during the first quarter
of fiscal 2000 compared to $9,000 for the same period of fiscal 1999. The
significant increase in cash usage relates primarily to higher operating
expenses as well as prepayments of advertising and other costs.
Investing activities in the first quarter of fiscal 2000, primarily the
maturity of investments, provided approximately $8.9 million. Net cash used in
investing activities of $18.3 million for the first quarter of fiscal 1999
relate primarily to our purchase of 551,046 shares of dELiA*s common stock from
our parent for approximately $17.7 million. We expect to make capital
expenditures of approximately $2.4 million in fiscal 2000, 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 continue to spend significant amounts for marketing and other
alliances.
While our cash on hand is not used in our parent's non-Internet businesses,
we periodically prepay dELiA*s for inventory and various services, including
advertising, under the intercompany agreements. At April 29, 2000, our net
prepaid balance was $1.6 million, while shortly thereafter it was approximately
$6.0 million. These prepayments are not secured. A third party creditor has a
perfected security interest in the inventory for which we have prepaid, which is
senior to any interest we may have in this inventory. As a result, if our parent
were to default on its obligations to this third party creditor, we might suffer
a loss of all or part of these prepaid expenses.
Financing activities were not significant in the first quarter of fiscal
2000 compared to the $99.2 million provided primarily by our initial public
offering in the same period of fiscal 1999.
Prior to our April 1999 initial public offering, we relied on our parent
for financing capital expenditures. Our capital requirements depend on numerous
factors, including:
o the rate of market acceptance of iTurf's online presence;
o our ability to expand iTurf's customer base;
11
<PAGE>
o the cost of upgrades to our online presence; and
o 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 our cash on hand, together with our cash from operations, will be
sufficient to meet anticipated cash needs for at least the next 12 months.
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.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any legal proceedings that we believe would have a
material adverse effect on our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 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 our account.
We 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 iTurf 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.
From April 14, 1999 until April 29, 2000, approximately $28.3 million of
the net offering proceeds was used for general corporate purposes and $17.7
million was used to purchase 551,046 shares of common stock of dELiA*s Inc.
CHANGES IN SECURITIES
None.
SALES OF UNREGISTERED SECURITIES
On February 15, 2000, we issued 1,099,988 shares of our Class A common
stock to the shareholders of theSpark.com, Inc. in a transaction which was
exempt from Section 5 of the Securities Act pursuant to Section 4(2) of the
Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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<PAGE>
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 the following reports on Form 8-K during the fiscal quarter:
(i) a current report on Form 8-K dated February 25, 2000 reporting
Item 2. This report contained information on our acquisition of
theSpark.com, Inc.; and
(ii) a current report on Form 8-K/A dated March 14, 2000 reporting
Item 7. This report contained information on our acquisition of
theSpark.com, Inc. including financial statements.
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<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: June 13, 2000
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)
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<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))
4.1 Agreement and Plan of Merger dated February 4, 2000, by and among iTurf,
iTurf Caveman Acquisition Corporation, theSpark.com, Inc. ("Spark"), and
the stockholders of Spark (incorporated by reference to Exhibit 2.1 to
the iTurf Inc. Current Report on Form 8-K dated February 25, 2000)
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 [omitted]
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 [omitted]
10.15 [omitted]
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,
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)
10.18 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 [omitted]
10.20 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)
10.21 Registration Rights Agreement dated February 15, 2000 by and between
iTurf and former stockholders of TheSpark.com Inc. (incorporated by
reference to Exhibit 10.21 to the iTurf Inc. Annual Report on Form 10-K
for the fiscal year ended January 29, 2000)
27.1* Financial Data Schedule
--------------------
* Filed herewith
** Confidential treatment granted as to certain portions, which portions have
been omitted and filed separately with the SEC.
16
