-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UaT4uc+HFeYlKRwMdvvd974Owe8q9MGviUnT7fMIvw+9EaRguPFYz2EnYs890Yr/ pCWeno/g8X+HkdMaMFBIGw== 0000912057-01-543805.txt : 20020413 0000912057-01-543805.hdr.sgml : 20020413 ACCESSION NUMBER: 0000912057-01-543805 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011103 FILED AS OF DATE: 20011218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELIAS CORP CENTRAL INDEX KEY: 0001076914 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 133963754 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25347 FILM NUMBER: 1816602 BUSINESS ADDRESS: STREET 1: 435 HUDSON STREET CITY: NEW YORK STATE: NY ZIP: 10014 BUSINESS PHONE: 2128079060 MAIL ADDRESS: STREET 1: 435 HUDSON STREET CITY: NEW YORK STATE: NY ZIP: 10014 FORMER COMPANY: FORMER CONFORMED NAME: ITURF INC DATE OF NAME CHANGE: 19990115 10-Q 1 a2066178z10-q.txt 10-Q FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 2001 ================================================================================ 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 NOVEMBER 3, 2001 Commission file number 0-25347 dELiA*s CORP. (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) 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 Class A common stock outstanding as of December 14, 2001: 46,312,934 Number of shares of Class B common stock outstanding as of December 14, 2001: 11,425,000
--------------- ================================================================================ STATEMENTS CONTAINED IN THIS DOCUMENT OR INCORPORATED BY REFERENCE, 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. WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. THEY 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. THE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO THE FOLLOWING: o WE MAY EXPERIENCE REDUCTIONS IN RESPONSE RATES TO CATALOG AND ELECTRONIC MAILINGS DUE TO INCREASED PROSPECTING, THE TIMING AND QUANTITY OF OUR MAILINGS AND OTHER FACTORS; o WE MAY NOT BE ABLE TO OBTAIN ACCEPTABLE STORE SITES AND LEASE TERMS; o WE MAY NOT BE ABLE TO OPEN NEW STORES IN A TIMELY FASHION; o ADVERSE WEATHER CONDITIONS AND OTHER FACTORS AFFECTING RETAIL STORES GENERALLY MAY CAUSE OUR SALES TO DECREASE; o WE MAY BE SUBJECT TO INCREASED LEVELS OF COMPETITION; o WE MAY NOT BE ABLE TO RETAIN KEY PERSONNEL; o WE ARE SUSCEPTIBLE TO DOWNTURNS IN GENERAL ECONOMIC CONDITIONS; o OUR STORE LOCATIONS MAY MAKE US SUSCEPTIBLE TO ECONOMIC DOWNTURNS IN SPECIFIC GEOGRAPHIC REGIONS; o WE MAY NOT BE ABLE TO ANTICIPATE AND RESPOND TO FASHION TRENDS; o WE ARE LIKELY TO CONTINUE TO EXPERIENCE INCREASES IN THE COST OF MATERIALS, PRINTING, PAPER, POSTAGE, SHIPPING AND LABOR; o WE MAY NOT BE ABLE TO LEVERAGE INVESTMENTS MADE IN INFRASTRUCTURE TO SUPPORT EXPANSION; o WE MAY EXPERIENCE DECREASED LEVELS OF SERVICE FROM THIRD PARTY VENDORS AND SERVICE PROVIDERS; o OUR SUPPLIERS MAY NOT BE ABLE TO OBTAIN FINANCING TO PROVIDE PRODUCTS TO US; AND o OTHER FACTORS DETAILED ELSEWHERE IN THIS REPORT. THESE FACTORS, AND OTHER FACTORS THAT APPEAR IN OUR ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, COULD AFFECT OUR ACTUAL RESULTS AND COULD CAUSE SUCH RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR ON OUR BEHALF. 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. THIS REPORT MAY INCLUDE OR INCORPORATE BY REFERENCE 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. REFERENCES IN THIS REPORT TO "FISCAL 2001" MEAN THE PERIOD FROM FEBRUARY 4, 2001 TO FEBRUARY 2, 2002. REFERENCES TO "FISCAL 2000" MEAN THE PERIOD FROM JANUARY 30, 2000 TO FEBRUARY 3, 2001. ON NOVEMBER 20, 2000, dELiA*s INC. WAS RECOMBINED WITH ITS MAJORITY-OWNED SUBSIDIARY, ITURF INC., AND WE RENAMED THE PARENT COMPANY OF THE RECOMBINED BUSINESS dELiA*s CORP. THE MERGER 2 TRANSACTION WAS ACCOUNTED FOR AS A PURCHASE BY dELiA*s INC. OF THE MINORITY INTEREST IN ITURF. AS A RESULT, THE HISTORICAL FINANCIAL STATEMENTS OF dELiA*s CORP. CONTAINED HEREIN ARE THE HISTORICAL FINANCIAL STATEMENTS OF dELiA*s INC. WITH EARNINGS PER SHARE RESTATED TO REFLECT THE TRANSACTION. PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 3 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 3, 2001 NOVEMBER 3, 2001 ---------------- ---------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents ........................................ $ 10,121 $ 28,462 Short-term investments ........................................... 11,024 -- Merchandise inventories .......................................... 19,974 21,172 Assets held for sale ............................................. 3,334 -- Prepaid expenses and other current assets ........................ 9,850 8,325 --------- --------- Total current assets ......................................... 54,303 57,959 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $13,022 at February 3, 2001 and $17,424 at November 3, 2001 ...... 30,145 30,483 OTHER ASSETS .......................................................... 595 319 --------- --------- TOTAL ASSETS .......................................................... $ 85,043 $ 88,761 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses ............................ $ 27,080 $ 13,467 Liabilities due to customers ..................................... 4,570 3,819 Accrued restructuring ............................................ 4,059 2,262 Bank loan payable ................................................ 2,361 10,160 Other current liabilities ........................................ 2,151 487 --------- --------- Total current liabilities .................................... 40,221 30,195 LONG-TERM DEBT AND CAPITAL LEASES ..................................... 4,770 3,946 EXCESS OF FAIR VALUE OVER PURCHASE PRICE .............................. 19,383 16,303 OTHER LONG-TERM LIABILITIES ........................................... 513 1,279 STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share; Authorized shares - 1,000,000; Issued shares - none .......... -- -- Class A common stock, par value $.01 per share; Authorized shares - 100,000,000; Issued shares - 38,267,035 and 46,252,330 shares, respectively (including 1,685,580 in treasury) ............................ 383 463 Class B common stock, par value $.01 per share; Authorized shares - 12,500,000; Issued shares - 11,425,000 (all in treasury) ................. 114 114 Additional paid-in capital ....................................... 91,293 130,521 Less common stock in treasury, at cost ........................... (11,041) (11,041) Deferred compensation ............................................ (1,168) (1,168) Retained deficit ................................................. (59,425) (81,851) --------- --------- Total stockholders' equity ................................... 20,156 37,038 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $ 85,043 $ 88,761 ========= =========
See Notes to Unaudited Consolidated Financial Statements 4 CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THIRTEEN WEEKS ENDED OCTOBER 28, 2000 NOVEMBER 3, 2001 ---------------- ---------------- (UNAUDITED) NET SALES ........................................ $ 52,332 $ 32,503 COST OF SALES .................................... 29,089 16,488 --------- --------- GROSS PROFIT ..................................... 23,243 16,015 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 38,183 18,434 RESTRUCTURING CHARGE ............................. 18,847 -- NON-RECURRING CHARGES ............................ 1,794 -- INTEREST AND OTHER EXPENSE (INCOME), NET ......... 184 (71) MINORITY INTEREST ................................ (11,823) -- --------- --------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM .. (23,942) (2,348) PROVISION FOR INCOME TAXES ....................... 18,729 -- --------- --------- NET LOSS BEFORE EXTRAORDINARY ITEM ............... (42,671) (2,348) EXTRAORDINARY ITEM ............................... -- 803 --------- --------- NET LOSS ......................................... $ (42,671) $ (3,151) ========= ========= BASIC AND DILUTED NET LOSS PER SHARE: BEFORE EXTRAORDINARY ITEM ................... $ (1.71) $ (0.05) EXTRAORDINARY ITEM .......................... -- (0.02) --------- --------- NET LOSS .................................... $ (1.71) $ (0.07) ========= ========= SHARES USED IN THE NET LOSS PER SHARE CALCULATIONS 24,928 43,466 ========= ========= THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 NOVEMBER 3, 2001 ---------------- ---------------- (UNAUDITED) NET SALES ........................................ $ 138,684 $ 94,689 COST OF SALES .................................... 76,003 50,883 --------- --------- GROSS PROFIT ..................................... 62,681 43,806 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 112,329 60,569 RESTRUCTURING AND FINANCE CHARGES ................ 18,847 4,975 NON-RECURRING CHARGES ............................ 1,794 -- INTEREST AND OTHER INCOME, NET ................... (897) (115) MINORITY INTEREST ................................ (20,411) -- --------- --------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM .. (48,981) (21,623) PROVISION FOR INCOME TAXES ....................... 12,929 -- --------- --------- NET LOSS BEFORE EXTRAORDINARY ITEM ............... (61,910) (21,623) EXTRAORDINARY ITEM ............................... -- 803 --------- --------- NET LOSS ......................................... $ (61,910) $ (22,426) ========= ========= BASIC AND DILUTED NET LOSS PER SHARE: BEFORE EXTRAORDINARY ITEM ................... $ (2.49) $ (0.55) EXTRAORDINARY ITEM .......................... -- (0.02) --------- --------- NET LOSS .................................... $ (2.49) $ (0.57) ========= ========= SHARES USED IN THE NET LOSS PER SHARE CALCULATIONS 24,909 39,529 ========= =========
See Notes to Unaudited Consolidated Financial Statements 5 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 NOVEMBER 3, 2001 ---------------- ---------------- (UNAUDITED) OPERATING ACTIVITIES: Net loss before extraordinary item ........................................ $(61,910) $(21,623) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .................................... 9,557 1,069 Restructuring and finance charges ................................ 20,247 4,975 Valuation allowance for deferred tax assets ...................... 20,350 -- Non-cash compensation expense related to restricted stock ........ 3,618 980 Non-cash fixed asset write-off ................................... 1,037 -- Minority interest ................................................ (20,411) -- Deferred taxes ................................................... (7,481) -- Amortization of investments ...................................... (466) (12) Changes in operating assets and liabilities: Merchandise inventories ...................................... (8,042) (3,012) Prepaid expenses and other current assets .................... (1,781) 2,050 Other assets ................................................. 341 176 Current liabilities .......................................... 1,257 (9,973) Long-term liabilities ........................................ 96 766 -------- -------- Net cash used in operating activities .......................................... (43,588) (24,604) INVESTING ACTIVITIES: Purchase of investment securities ......................................... (23,298) -- Proceeds from the maturity of investment securities ....................... 48,323 11,036 Capital expenditures ...................................................... (7,212) (4,920) Proceeds from sale of businesses .......................................... -- 3,783 Acquisition of business ................................................... 174 (2,500) -------- -------- Net cash provided by investing activities ...................................... 17,987 7,399 FINANCING ACTIVITIES: Net proceeds from common stock offering ................................... -- 29,517 Charges related to changes in financing arrangements ...................... -- (606) Borrowings under line of credit agreement ................................. 10,001 7,799 Principal payments on long-term debt and capital lease obligations ........ (460) (2,488) Exercise of options to purchase shares (714,483 shares in fiscal 2001) .... 74 2,127 -------- -------- Net cash provided by financing activities before extraordinary item ............ 9,615 36,349 Net cash used by extraordinary item ............................................ -- (803) -------- -------- Net cash provided by financing activities ...................................... 9,615 35,546 -------- -------- INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ................................. (15,986) 18,341 CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD ................................... 24,985 10,121 -------- -------- CASH & CASH EQUIVALENTS--END OF PERIOD ......................................... $ 8,999 $ 28,462 ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: o May 2000 and May 2001 issuances of restricted stock. o February 2000 issuance of a subsidiary's common stock for the acquisition of TheSpark.com, Inc. See Notes to Unaudited Consolidated Financial Statements 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS We are a multichannel retailer that markets apparel, accessories and home furnishings to teenage girls and young women. We reach our customers through the dELiA*s catalog, www.dELiAs.cOm and the dELiA*s retail stores. On November 20, 2000, dELiA*s Inc. was recombined with its majority-owned subsidiary, iTurf Inc., and we renamed the parent company of the recombined business dELiA*s Corp. The merger transaction was accounted for as a purchase by dELiA*s Inc. of the minority interest in iTurf. As a result, the historical financial statements of dELiA*s Corp. contained herein are the historical financial statements of dELiA*s Inc. with earnings per share restated to reflect the transaction. References herein to "we," "our" and similar phrases and to "dELiA*s" refer to dELiA*s Inc. prior to November 20, 2000 and to dELiA*s Corp. on or after that date. We are subject to seasonal fluctuations in our merchandise sales and results of operations. We expect our net sales generally to be higher in the second half of each fiscal year than in the first half of the same fiscal year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION PRINCIPLES OF CONSOLIDATION-- Our consolidated financial statements include the accounts of dELiA*s and subsidiaries, all of which, except iTurf, were wholly-owned for all periods presented. For the period that iTurf was not wholly-owned, the accounts of iTurf were included in the consolidated financial statements with the outside ownership of iTurf reflected as minority interest. All significant intercompany balances and transactions have been eliminated in consolidation. RECENT ACCOUNTING PRONOUNCEMENTS--In June 2001, the Financial Accounting Standards Board issued Statement No. 142, "Goodwill and Other Intangible Assets." SFAS 142 addresses the accounting and reporting of acquired goodwill and other intangible assets. SFAS 142 discontinues amortization of acquired goodwill and instead requires annual impairment testing of acquired goodwill. Intangible assets will be amortized over their useful economic life and tested for impairment in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Intangible assets with an indefinite useful economic life should not be amortized until the life of the asset is determined to be finite. In connection with our adoption of SFAS 142, we expect to record a favorable cumulative effect of change in accounting principle of approximately $15.3 million in the first quarter of fiscal 2002. This extraordinary gain represents the reversal of the unamortized balance of the negative goodwill carried on our books since the merger of dELiA*s Inc. and iTurf Inc. UNAUDITED INTERIM FINANCIAL STATEMENTS--The accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements for Form 10-Q and in accordance with accounting principles generally accepted in the United States for interim financial reporting. In the opinion of management, the accompanying 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 February 3, 2001 audited consolidated financial statements and the notes thereto, which are included in our annual report on Form 10-K for the year ended February 3, 2001, 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. 7 3. SEGMENTS We currently have two reportable segments: dELiA*s Direct and dELiA*s Retail. All of our other businesses, which were sold or were in the process of being shut down during fiscal 2001 and therefore no longer qualify as operating segments under SFAS No. 131, are included as "Non-core" below. Our two segments offer similar products to similar customers, but are managed separately because of their distribution methods. Certain amounts in our fiscal 2000 segment disclosure have been reclassified to conform to the current presentation.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED OCTOBER 28, NOVEMBER 3, OCTOBER 28, NOVEMBER 3, 2000 2001 2000 2001 ------------- ------------- ------------- ------------- NET REVENUES dELiA*s Direct $ 14,090,000 $ 16,651,000 $ 52,111,000 $ 51,501,000 dELiA*s Retail 13,301,000 15,816,000 28,569,000 37,429,000 ------------- ------------- ------------- ------------- Total core dELiA*s 27,391,000 32,467,000 80,680,000 88,930,000 Non-core 24,941,000 36,000 58,004,000 5,759,000 ------------- ------------- ------------- ------------- Total $ 52,332,000 $ 32,503,000 $ 138,684,000 $ 94,689,000 ============= ============= ============= ============= LOSS BEFORE TAXES AND EXTRAORDINARY ITEM dELiA*s Direct operating loss $ (1,266,000) $ (193,000) $ (4,437,000) $ (3,193,000) dELiA*s Retail operating income (loss) 1,052,000 702,000 (1,261,000) (2,412,000) Non-core operating loss (6,451,000) (306,000) (24,949,000) (3,481,000) ------------- ------------- ------------- ------------- Total operating income (loss) (6,665,000) 203,000 (30,647,000) (9,086,000) Unallocated shared expenses 590,000 1,872,000 3,314,000 5,628,000 Depreciation, amortization and non-cash compensation 5,173,000 750,000 13,175,000 2,049,000 Restructuring, finance and non-recurring charges 23,153,000 -- 23,153,000 4,975,000 Minority interest (11,823,000) -- (20,411,000) -- Interest and other expense (income), net 184,000 (71,000) (897,000) (115,000) ------------- ------------- ------------- ------------- Total $ (23,942,000) $ (2,348,000) $ (48,981,000) $ (21,623,000) ============= ============= ============= =============
4. RESTRUCTURING AND FINANCE CHARGES During fiscal 2000, we announced our intention to focus on our core dELiA*s brand and to sell or shut down our non-core businesses and we recorded significant merger and restructuring-related charges. In connection with our amended merger agreement with the former stockholders of TheSpark.com, Inc., we paid the former stockholders $2.5 million in February 2001 and $1.7 million in connection with our March 2001 sale of TheSpark.com businesses and issued 1,315,271 shares of our Class A common stock to them on June 1, 2001. Our remaining obligation to them is for $1.5 million in cash or stock (at our election) to be paid by March 1, 2002. This amount was reserved for as part of our fiscal 2000 restructuring initiatives. During fiscal 2001, we have recorded restructuring and finance charges of approximately $5.0 million. A $400,000 restructuring charge was recorded in the first fiscal quarter. This charge primarily reflects a net loss on our sale on April 26, 2001 of substantially all of the assets of the Storybook Heirlooms business as well as additional severance charges, offset by a gain on the sale of the TheSpark.com businesses and a reversal of approximately $300,000 of excess reserves as certain actual costs were lower than our original estimates. Restructuring and finance charges of $4.6 million were recorded in the second quarter. $4.0 million of these charges relate primarily to our June 1, 2001 stock issuance to the former shareholders of TheSpark.com Inc., the value of which exceeded our reserve due to the appreciation of our share price, the May 24, 2001 sale of substantially all of the assets of the gURL.com Web site and the closure of our iTurf offices. A $600,000 second quarter finance charge relates to the early termination of an interest rate swap tied to our distribution facility mortgage. As of November 3, 2001, our balance sheet included accruals of $2.3 million for future lease and other obligations, which we expect to be paid by the middle of fiscal 2002. 8 5. COMMITMENTS AND CONTINGENCIES LITIGATION In 1999, two separate purported securities class action lawsuits were filed against dELiA*s Inc. and certain of its 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 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. The motion to dismiss was denied on March 26, 2001. On December 3, 2001, a motion to certify the class was heard by the court. The court has not yet rendered its decision. We intend to vigorously defend against this action. While an estimate of the possible range of loss can not be made, 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 business. Between August 17 and August 25, 2000, three purported class action complaints on behalf of stockholders of iTurf Inc., a partly-owned subsidiary of dELiA*s Inc. at the time, were filed in Delaware Chancery Court against iTurf Inc., dELiA*s Inc. 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 made virtually identical claims, alleging that dELiA*s Inc. and the members of iTurf's board of directors breached their fiduciary duties to iTurf's public stockholders and that the merger exchange ratio was unfair to iTurf's public stockholders. The actions were consolidated and an amended complaint was filed on January 19, 2001. This complaint seeks class certification and other equitable and monetary relief, including enjoining the merger or awarding damages, which may take the form of the issuance of additional common stock to members of the plaintiff class. If we were to issue a significant number of shares of our common stock in connection with this action, it would materially dilute our current stockholders. On April 3, 2001, we filed a motion to dismiss the lawsuit. Although we believe that the allegations of the complaint are without substantial merit and intend to vigorously contest this action, we can not predict at this time the outcome of any litigation or the possible range of loss or whether the resolution of the litigation could have a material adverse effect on our business or the value of our common stock. In the first quarter of fiscal 2001, we were served with a purported class action complaint alleging that we improperly collected sales tax from residents of New York State. On October 31, 2001, the plaintiffs agreed to discontinue the action. INTERNET ALLIANCES In May 1999, we entered into a strategic marketing alliance with America Online, Inc. Over the original two-year term of the agreement, we agreed to pay America Online a total of approximately $8.1 million. On March 30, 2001, the original agreement was superseded by a new agreement under which we agreed to pay our remaining obligation of approximately $1.1 million to America Online over a 27-month period. In connection with the sale of our gURL.com business on May 24, 2001, we assigned approximately $350,000 of obligations under our agreement with America Online to PrimediaNet. We remain liable to America Online for payment of all obligations under the agreement, including the assigned obligations. In the event PrimediaNet defaults on the obligations it has assumed, we would have a contractual claim against 9 PrimediaNet and Primedia. As of November 3, 2001, our remaining payment obligation including the assigned amount was approximately $460,000. 6. 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 seven-year 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. In August 1999, we also 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%. Effective May 1, 2001, we received a waiver of the fixed charge coverage ratio covenant through August 6, 2003 in exchange for a principal payment of $2.0 million on May 7, 2001 and our agreement to pay on August 6, 2003 the outstanding principal balance as of that date. On May 4, 2001, we terminated the related interest-rate swap agreement and recorded a $600,000 charge. As of September 24, 2001, we entered into a three-year agreement with Wells Fargo Retail Finance, LLC, a subsidiary of Wells Fargo & Company, consisting of a revolving line of credit that permits us to borrow up to $25 million, limited to specified percentages of the value of our eligible inventory as determined under the credit agreement, and provides for the issuance of documentary and standby letters of credit up to $10 million. Under this Wells Fargo facility, as amended, our obligations are secured by a lien on substantially all of our assets, except certain real property and other specified assets. The agreement contains certain covenants and default provisions customary for credit facilities of this nature, including limitations on our payment of dividends. The agreement also contains controls on our cash management and certain limits on our ability to distribute assets. This credit facility replaced our existing facility with Congress Financial Corporation. At our option, borrowings under this facility bear interest at Wells Fargo Bank's prime rate plus 50 basis points or at the Eurodollar Rate plus 275 basis points. A fee of 0.375% per year is assessed monthly on the unused portion of the line of credit as defined in the agreement. The facility matures September 30, 2004 and can extend for successive twelve-month periods at our option under certain terms and conditions. In connection with our change in lenders, we have recorded a charge of approximately $800,000 in the third quarter of fiscal 2001. As of November 3, 2001, our outstanding credit facility balance was $10.2 million and outstanding letters of credit were $1.3 million. 7. RESTRICTED STOCK On May 14, 2001, we issued 300,000 shares of restricted Class A common stock to Andrea Weiss in connection with her employment as our President. The shares vest over a four-year period in accordance with the following schedule: 40% in year one; 30% in year two; 20% in year three and 10% in year four. The fair value of the restricted stock at the time of grant is being amortized against earnings over the related vesting periods. 8. SALE OF COMMON STOCK On June 19, 2001, we sold 5.74 million shares of our Class A common stock for approximately $29.5 million in net proceeds. 10 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 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 AND IN OUR ANNUAL REPORT ON FORM 10-K. OVERVIEW Through our catalogs, retail stores and Web sites, we market apparel, accessories and home furnishings primarily to teenage girls and young women. RESTRUCTURING AND FINANCE CHARGES. During fiscal 2000, we announced our intention to focus on our core dELiA*s brand and to sell or shut down our non-core businesses and we recorded significant merger and restructuring-related charges. In connection with our amended merger agreement with the former stockholders of TheSpark.com, Inc., we paid the former stockholders $2.5 million in February 2001 and $1.7 million in connection with our March 2001 sale of TheSpark.com businesses and issued 1,315,271 shares of our Class A common stock to them on June 1, 2001. Our remaining obligation to them is for $1.5 million in cash or stock (at our election) to be paid by March 1, 2002. This amount has been reserved for as part of our fiscal 2000 restructuring initiatives. During the first half of fiscal 2001, we recorded restructuring and finance charges of approximately $5.0 million. A $400,000 restructuring charge was recorded in the first fiscal quarter. This charge primarily reflects a net loss on our sale on April 26, 2001 of substantially all of the assets of the Storybook Heirlooms business as well as additional severance charges, offset by a gain on the March 19, 2001 sale of the TheSpark.com businesses and a reversal of approximately $300,000 of excess reserves as certain actual costs were lower than our original estimates. Restructuring and finance charges of $4.6 million were recorded in the second quarter. $4.0 million of these charges relate primarily to our June 1, 2001 stock issuance to the former shareholders of TheSpark.com Inc., the value of which exceeded our reserve due to the appreciation of our share price, the May 24, 2001 sale of substantially all of the assets of the gURL.com Web site and the closure of our iTurf offices. A $600,000 finance charge relates to the early termination of an interest rate swap tied to our distribution facility mortgage. EXTRAORDINARY ITEM. During the third quarter of fiscal 2001, we entered into an agreement with Wells Fargo Retail Finance, LLC that provides us with a credit line of up to $25 million. This facility replaces the credit facility we had with Congress Financial Corporation. In connection with this change in lenders, we have recorded a charge of approximately $800,000. SALE OF COMMON STOCK. On June 19, 2001, we sold 5.74 million shares of our Class A common stock for approximately $29.5 million in net proceeds. CAPITAL INVESTMENTS. We have made and continue to make significant capital expenditures for construction of our dELiA*s retail stores. The 11 new dELiA*s retail store that we've opened during fiscal 2001 have resulted in related capital expenditures of approximately $4.0 million. 11 GENERAL MATTERS AFFECTING OUR CORE dELiA*S BUSINESS. The operating results of our ongoing dELiA*s business are subject to the following uncertainties, each of which is described in more detail in our annual report on Form 10-K under "Risk Factors": o our ability to anticipate and respond to fashion trends; o timing and quantity of catalog and electronic mailings and customer response rates; o availability of acceptable store sites and lease terms and the possibility of increasing comparable store sales; and o other factors described in our annual report on Form 10-K, particularly under "Risk Factors." In addition, it is difficult to anticipate the full impact to our business of the tragic events of September 11, 2001, which resulted in delayed mailings of our critical holiday catalogs and reduced traffic at our stores. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship of certain items from our consolidated statements of operations to net sales. Any trends reflected by the following table may not be indicative of future results.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED OCTOBER 28, NOVEMBER 3, OCTOBER 28, NOVEMBER 3, 2000 2001 2000 2001 ---------- ---------- ---------- ---------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 55.6 50.7 54.8 53.7 ---------- ---------- ---------- ---------- Gross profit 44.4 49.3 45.2 46.3 Selling, general and administrative expenses 73.0 56.7 81.0 64.0 Restructuring and finance charges 36.0 -- 13.6 5.2 Non-recurring charges 3.4 -- 1.3 -- Interest and other expense (income), net 0.4 (0.2) (0.7) (0.1) Minority interest (22.6) -- (14.7) -- ---------- ---------- ---------- ---------- Loss before taxes and extraordinary item (45.8) (7.2) (35.3) (22.8) Provision for income taxes 35.8 -- 9.3 -- ---------- ---------- ---------- ---------- Net loss before extraordinary item (81.6) (7.2) (44.6) (22.8) Extraordinary item -- 2.5 -- 0.9 ---------- ---------- ---------- ---------- Net loss (81.6)% (9.7)% (44.6)% (23.7)% ========== ========== ========== ==========
COMPARISON OF THIRTEEN WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000 NET SALES. Net sales decreased $19.8 million from $52.3 million in the third quarter of fiscal 2000 to $32.5 million in the third quarter of fiscal 2001. The decrease was due to the impact of divestitures of non-core businesses partially offset by an 18.5% increase in our core dELiA*s business, which reflects increases of 18.9% and 18.2%, respectively, at dELiA*s Retail and dELiA*s Direct. GROSS MARGIN. Gross margin for the third quarter of fiscal 2001 was 49.3% compared to 44.4% last year. The improvement primarily represents the elimination of lower margin non-core businesses as well as improvement in our core business gross margin of approximately 50 basis points from 48.7% to 49.2%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased from $38.2 million in the third quarter of fiscal 2000 to $18.4 million in the third quarter of fiscal 2001. Selling, general and administrative expenses also decreased significantly as a percentage of net sales, from 73.0% in the third quarter of fiscal 2000 to 56.7% in the third quarter of fiscal 2001. The decrease in selling, general and administrative expenses primarily relates to lower operating expenses from our discontinued and disposed non-core businesses and related decreases in depreciation, amortization, and non-cash compensation. The decrease in selling, general and administrative is also related to the amortization of the 12 excess of fair value of purchase price resulting from the November 2000 merger of dELiA*s Inc. and iTurf Inc. RESTRUCTURING AND FINANCE CHARGES. The restructuring charges recorded in the third quarter of fiscal 2000 include $4.4 million relating to the closure of our TSI Soccer retail stores, $15.2 million relating to iTurf's shut-down of OnTap and a restructuring charge reversal of $750,000 relating to excess Screeem! reserves. In addition, $1.4 million of inventory charges relating to the TSI Soccer retail restructuring are included in cost of sales. NON-RECURRING CHARGES. During the third quarter of fiscal 2000, we recorded $1.8 million of non-recurring charges representing iTurf's expenses related to the November 2000 merger of dELiA*s Inc. and iTurf Inc. MINORITY INTEREST. For the period that iTurf Inc. was not wholly-owned by dELiA*s, we reflected the outside ownership of iTurf as minority interest. INCOME TAXES. During the third quarter of fiscal 2000, we recorded a tax provision of $20.4 million to fully reserve for our deferred tax asset as a result of the November 2000 Merger of dELiA*s Inc. and iTurf Inc. Since the November 2000 merger of dELiA*s Inc. and iTurf Inc., our deferred tax assets have been fully reserved due to the uncertainty of our ability to utilize the benefit. EXTRAORDINARY ITEM. During the third quarter of fiscal 2001, we entered into an agreement with Wells Fargo Retail Finance, LLC that provides us with a $25 million line of credit. This facility replaces the credit facility we had with Congress Financial Corporation. In connection with this change in lenders, we have recorded a charge of approximately $800,000. COMPARISON OF THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000 NET SALES. Net sales decreased approximately $44.0 million from $138.7 million in the first three quarters of fiscal 2000 to $94.7 million in the first three quarters of fiscal 2001. The decrease was due to the impact of divestitures of non-core businesses partially offset by a 10.2% increase in our core dELiA*s business. A 31.0% increase at dELiA*s Retail, which reflects the continued expansion of our store base, was offset, in part, by a 1.2% decrease in dELiA*s Direct. GROSS MARGIN. Gross margin increased from 45.2% in the first three quarters of fiscal 2000 to 46.3% in the first three quarters of fiscal 2001 primarily as a result of the elimination of lower margin non-core businesses and improvements at dELiA*s Direct. These improvements were offset, in part, by a decline in retail margins as a result of the competitive retail environment. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased approximately $51.7 million from $112.3 million in the first three quarters of fiscal 2000 to $60.6 million in the first three quarters of fiscal 2001. Selling, general and administrative expenses also decreased as a percentage of net sales, from 81.0% in the first three quarters of fiscal 2000 to 64.0% in the first three quarters of fiscal 2001. The decrease primarily relates to lower depreciation, amortization, non-cash compensation and operating expenses of our discontinued non-core business. Operating expenses at our core dELiA*s business also decreased as a result of improvements at dELiA*s Direct offset, in part, by increased expenses at dELiA*s Retail in connection with the continued expansion of our store base. RESTRUCTURING AND FINANCE CHARGES. During the first three quarters of fiscal 2001, we recorded restructuring and finance charges of approximately $5.0 million. A $400,000 restructuring charge was recorded in the first fiscal quarter. This charge primarily reflects a net loss on our sale on April 26, 2001 of substantially all of the assets of the Storybook Heirlooms business as well as additional severance charges, 13 offset by a gain on the March 19, 2001 sale of the TheSpark.com businesses and a reversal of approximately $300,000 of excess reserves as certain actual costs were lower than our original estimates. Restructuring and finance charges of $4.6 million were recorded in the second quarter. $4.0 million of these charges relate primarily to our June 1, 2001 stock issuance to the former shareholders of TheSpark.com Inc., the value of which exceeded our reserve due to the appreciation of our share price, the May 24, 2001 sale of substantially all of the assets of the gURL.com Web site and the closure of our iTurf offices. A $600,000 finance charge relates to the early termination of an interest rate swap tied to our distribution facility mortgage. The restructuring charges recorded in the third quarter of fiscal 2000 include $4.4 million relating to the closure of our TSI Soccer retail stores, $15.2 million relating to iTurf's shut-down of OnTap and a restructuring charge reversal of $750,000 relating to excess reserve estimated at the time of the April 1999 Screeem! shut-down. In addition, cost of sales includes a $1.4 million charge relating to the liquidation of the TSI Soccer retail business. NON-RECURRING CHARGES. During the third quarter of fiscal 2000, we recorded $1.8 million of non-recurring charges representing iTurf's expenses related to the November 2000 merger of dELiA*s Inc. and iTurf Inc. MINORITY INTEREST. For the period that iTurf Inc. was not wholly-owned by dELiA*s, we reflected the outside ownership of iTurf as minority interest. INCOME TAXES. During the third quarter of fiscal 2000, we recorded a tax provision of $20.4 million to fully reserve for our deferred tax asset as a result of the November 2000 Merger of dELiA*s Inc. and iTurf Inc. Since the November 2000 merger of dELiA*s Inc. and iTurf Inc., our deferred tax assets have been fully reserved due to the uncertainty of our ability to utilize the benefit. EXTRAORDINARY ITEM. During the third quarter of fiscal 2001, we entered into an agreement with Wells Fargo Retail Finance, LLC that provides us with a $25 million line of credit. This facility replaces the credit facility we had with Congress Financial Corporation. In connection with this change in lenders, we have recorded a charge of approximately $800,000. SEASONALITY We experience seasonal and cyclical fluctuations in our revenues and results of operations. For example, sales of apparel, accessories and footwear are generally lower in the first half of each year than in the second half. In addition, due to the cyclical nature of our businesses and our sensitivity to consumer spending patterns, purchases of apparel and accessories tend to decline during recessionary periods and may decline at other times. Consequently, our results of operations from quarter to quarter may become less comparable. Our quarterly results will also be affected by the timing of catalog mailings and promotions and may also fluctuate as a result of a number of other factors described in our annual report on Form 10-K, particularly under "Risk Factors." As a result of seasonal and cyclical patterns and these other factors, you should not rely on quarter-to-quarter comparisons of our results of operations as indicative of our future performance. LIQUIDITY AND CAPITAL RESOURCES Cash used in operations in the first three quarters of fiscal 2000 and 2001 was $43.6 million and $24.6 million, respectively. This decrease primarily relates to lower operating losses as a result of our restructuring initiatives. 14 Investing activities provided $18.0 million and $7.4 million in the first three quarters of fiscal 2000 and 2001, respectively, primarily relating to net investment proceeds offset by capital expenditures and, in fiscal 2001, to the cash proceeds and payments relating to our non-core businesses. During fiscal 2001, we've made capital expenditures of approximately $4.9 million and expect to incur approximately $100,000 more during the fourth quarter. Approximately $4.0 million of our fiscal 2000 capital expenditures relates to the construction of 11 new retail stores. Financing activities provided $9.6 million in the first three quarters of fiscal 2000, primarily relating to net borrowings under our credit agreement and $35.5 million in the first three quarters of fiscal 2001 primarily as a result of the June 2001 sale of 5.74 million shares of our Class A common stock. Borrowings under our new credit agreement and stock option exercises also provided cash in the first three quarters of fiscal 2001. 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 seven-year 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. In August 1999, we also 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%. Effective May 1, 2001, we received a waiver of the fixed charge coverage ratio covenant in the loan agreement through August 6, 2003 in exchange for a principal payment of $2.0 million on May 7, 2001 and our agreement to pay on August 6, 2003 the outstanding principal balance as of that date. On May 4, 2001, we terminated the related interest-rate swap agreement and recorded a $600,000 charge. As of September 24, 2001, we entered into a three-year agreement with Wells Fargo Retail Finance, LLC, a subsidiary of Wells Fargo & Company, consisting of a revolving line of credit that permits us to borrow up to $25 million, limited to specified percentages of the value of our eligible inventory as determined under the credit agreement, and provides for the issuance of documentary and standby letters of credit up to $10 million. Under this Wells Fargo facility, as amended, our obligations are secured by a lien on substantially all of our assets, except certain real property and other specified assets. The agreement contains certain covenants and default provisions customary for credit facilities of this nature, including limitations on our payment of dividends. The agreement also contains controls on our cash management and certain limits on our ability to distribute assets. This credit facility replaced our existing facility with Congress Financial Corporation. At our option, borrowings under this facility bear interest at Wells Fargo Bank's prime rate plus 50 basis points or at the Eurodollar Rate plus 275 basis points. A fee of 0.375% per year is assessed monthly on the unused portion of the line of credit as defined in the agreement. The facility matures September 30, 2004 and can extend for successive twelve-month periods at our option under certain terms and conditions. In connection with our change in lenders, we have recorded a charge of approximately $800,000 in the third quarter of fiscal 2001. As of November 3, 2001, our outstanding credit facility balance was $10.2 million and outstanding letters of credit were $1.3 million. On June 19, 2001, we sold 5.74 million shares of our Class A common stock for approximately $29.5 million in net proceeds. We believe that our cash on hand and cash expected to be generated by operations, together with the funds available under our credit agreement, will be sufficient to meet our capital and operating requirements for the next twelve months. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are currently exposed to changes in interest rates primarily from our credit and our variable-rate mortgage arrangements. Until recently, an interest rate hedge offset our outstanding variable-rate mortgage debt. Therefore, we effectively paid a fixed interest rate on the mortgage and we were not exposed to interest rate risk. In May 2001, the hedge was terminated. As a result, we are subject to interest rate fluctuations on the remaining principal balance of the variable-rate mortgage loan. Based on the current principal balance, a hypothetical 100 basis point movement of in interest rates would not have a material effect on our interest costs. We are also affected by interest rate changes to the extent that fluctuating rate loans are outstanding under our credit facility. Based on the outstanding balance at the end of the quarter, a hypothetical 100 basis point increase in interest rates would not have a material effect on our interest costs. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In 1999, two separate purported securities class action lawsuits were filed against dELiA*s Inc. and certain of its 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 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. The motion to dismiss was denied on March 26, 2001. On December 3, 2001, a motion to certify the class was heard by the court. The court has not yet rendered its decision. We intend to vigorously defend against this action. While an estimate of the possible range of loss can not be made, 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 business. Between August 17 and August 25, 2000, three purported class action complaints on behalf of stockholders of iTurf Inc., at the time a partly-owned subsidiary of dELiA*s, were filed in Delaware Chancery Court against iTurf Inc., dELiA*s Inc. 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 made virtually identical claims, alleging that dELiA*s Inc. and the members of iTurf's board of directors breached their fiduciary duties to iTurf's public stockholders and that the merger exchange ratio was unfair to iTurf's public stockholders. The actions were consolidated and an amended complaint was filed on January 19, 2001. This complaint seeks class certification and other equitable and monetary relief, including enjoining the merger or awarding damages, which may take the form of the issuance of additional common stock to members of the plaintiff class. If we were to issue a significant number of shares of our common stock in connection with this action, 16 it would materially dilute our current stockholders. On April 3, 2001, we filed a motion to dismiss the lawsuit. Although we believe that the allegations of the complaint are without substantial merit and intend to vigorously contest this action, we can not predict at this time the outcome of any litigation or the possible range of loss or whether the resolution of the litigation could have a material adverse effect on our business or the value of our common stock. In the first quarter of fiscal 2001, we were served with a purported class action complaint alleging that we improperly collected sales tax from residents of New York State. On October 31, 2001, the plaintiffs agreed to discontinue the action. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None 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 on October 10, 2001 reporting Item 5. This report related to the Loan and Security Agreement dated as of September 24, 2001 by and among Wells Fargo Retail Finance LLC, dELiA*s Corp., dELiA*s Operating Company, dELiA*s Distribution Company and dELiA*s Retail Company. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. dELiA*s Corp. (Registrant) Date: December 18, 2001 By: /s/ STEPHEN I. KAHN ------------------- Stephen I. Kahn Chairman of the Board and Chief Executive Officer By: /s/ DENNIS GOLDSTEIN -------------------- Dennis Goldstein Chief Financial Officer and Treasurer (principal financial and accounting officer) 18 EXHIBIT INDEX 10.1 Loan and Security Agreement dated as of September 24, 2001 by and among Wells Fargo Retail Finance LLC, dELiA*s Corp., dELiA*s Operating Company, dELiA*s Distribution Company and dELiA*s Retail Company (incorporated by reference to the dELiA*s Inc. Current Report on Form 8-K dated October 5, 2001) 10.2* First Amendment to Loan and Security Agreement by and among Wells Fargo Retail Finance LLC, dELiA*s Corp., dELiA*s Operating Company, dELiA*s Distribution Company and dELiA*s Retail Company, dated October 29, 2001 - ---------- * Filed herewith. 19 EX-10.2 3 a2066178zex-10_2.txt EXHIBIT 10.2 Exhibit 10.2 ================================================================================ FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT WELLS FARGO RETAIL FINANCE, LLC ================================================================================ October 29, 2001 THIS FIRST AMENDMENT is made in consideration of the mutual covenants contained herein and benefits to be derived herefrom to the September 24, 2001 Loan and Security Agreement (the "LOAN AGREEMENT") between Wells Fargo Retail Finance LLC (referred to therein as the "LENDER"), a Delaware limited liability company with offices at One Boston Place - 18th Floor, Boston, Massachusetts 02108, and dELiA*s Corp. (referred to therein in such capacity, as the "LEAD BORROWER"), a Delaware corporation with its principal executive offices at 435 Hudson Street, New York, New York 10014, as agent for the following (referred to therein individually, as a "BORROWER" and collectively, the "BORROWERS"): dELiA*s Corp., dELiA*s Operating Company, dELiA*s Distribution Company, dELiA*s Retail Company, each a Delaware corporation with its principal executive offices at 435 Hudson Street, New York, New York 10014, in consideration of the mutual covenants contained herein and benefits to be derived herefrom, WITNESSETH: PART 1. AMENDMENT OF LOAN AGREEMENT: The Loan Agreement is amended as follows: ARTICLE 1 OF THE LOAN AGREEMENT IS AMENDED SO THAT THE FOLLOWING DEFINITION INCLUDED THEREIN READS AS FOLLOWS: "BORROWING BASE": The result of the lesser of (a) or (b), where: (a) Is the aggregate of the following: (i) The lesser of (A) The Standard Line Credit Limit or (B) The product of the Cost of Eligible Inventory (net of Inventory Reserves) multiplied by the Standard Inventory Advance Rate. PLUS (ii) The lesser of (A) The Special Line Credit Limit or (B) The product of the Cost of Eligible Inventory (net of Inventory Reserves) multiplied by the Special Inventory Advance Rate. PLUS (iii) 100% of the fair market value of the Backstop L/C Collateral. (b) Is 95% of the Three Month Rolling Average NRLV. ARTICLE 1 OF THE LOAN AGREEMENT IS AMENDED BY THE ADDITION OF THE FOLLOWING DEFINITIONS IN ALPHABETICAL ORDER THEREIN: "BACKSTOP L/C": Letter of Credit No.NZS41388 dated October 4, 2001 issued by Wells Fargo Bank, N.A. for the account of dELiA*s Corp and benefit of Congress. "BACKSTOP L/C COLLATERAL": The lesser, on any day, of $3,250,000.00 or the then fair market value of the contents of Account No. H42-1001603 maintained by iTurf Finance Company with J.P. Morgan Securities Inc., a security interest in which has been granted to the Lender. "BACKSTOP L/C KEY DATE": That date on which written notice is given by the Lead Borrower to the Lender (with reasonable supporting materials) to the effect that twenty (20) or more days prior to the giving of such written notice either (a) the Backstop L/C expired or was cancelled or (b) the Stated Amount of the Backstop L/C had been reduced to an amount not in excess of $175,500.00. Page 2 "JPMSI RELEASE CONSENT": The Lender's consent to instructions to deliver cash and/or securities, or proceeds from the sale of, or distributions on such securities, from Account No. H42-1001603 maintained by iTurf Finance Company with J.P. Morgan Securities Inc. ARTICLE 2 OF THE LOAN AGREEMENT IS AMENDED BY THE ADDITION OF THE FOLLOWING SECTION THERETO: 2-4A. THE BACKSTOP L/C (a) At the request of the Lead Borrower, the Lender has procured the issuance of the Backstop L/C pursuant to Section 2:2-15. (b) Unless and until the occurrence of the Backstop L/C Key Date, the Borrowers shall not suffer or permit the fair market value of the Backstop L/C Collateral to be less than $3,250,000.00. (c) The Lender, at the Lead Borrower's written request from time to time, shall provide a JPMSI Release Consent, provided that (x) the condition set forth in Section 2:2-4A(c)(i) is satisfied and (y) unless and until the occurrence of the Backstop L/C Key Date, the condition set forth in Section 2:2-4A(c)(ii) is satisfied: (i) No Borrower is InDefault on the date on which such written request by the Lead Borrower is given nor would any Borrower be InDefault after giving effect to the requested release. (ii) Immediately following and after giving effect to the instructions to which consent would be given by the requested JPMSI Release Consent, the fair market value of the Backstop L/C Collateral would not be less than $3,250,000.00. (d) The Lead Borrower's providing of a written request to the Lender to provide a JPMSI Release Consent shall constitute certification by each Borrower that as of the date of such request, each of the following is true and correct: (i) Each representation which is made herein or in any of the Loan Documents is then true and complete in all material respects as of and as if made on the date of such request. (ii) Each condition then applicable to the Lender's furnishing of a JPMSI Release Consent has then been satisfied. Page 3 PART 2. RATIFICATION OF LOAN DOCUMENTS. NO CLAIMS AGAINST THE LENDER: (a) Except as provided herein, all terms and conditions of the Loan Agreement and of the other Loan Documents remain in full force and effect. Each Borrower and each Guarantor hereby ratifies, confirms, and re-affirms all terms and provisions of the Loan Documents. (b) There is no basis nor set of facts on which any amount (or any portion thereof) owed by any Borrower or Guarantor under any Loan Document could be reduced, offset, waived, or forgiven, by rescission or otherwise; nor is there any claim, counterclaim, off set, or defense (or other right, remedy, or basis having a similar effect) available to any Borrower or Guarantor with regard thereto; nor is there any basis on which the terms and conditions of any of the Liabilities could be claimed to be other than as stated on the written instruments which evidence such Liabilities. To the extent that any Borrower or Guarantor has (or ever had) any such claims against the Lender, that Borrower or that Guarantor hereby affirmatively WAIVES and RELEASES the same. PART 3. MISCELLANEOUS: (a) Terms used in the First Amendment which are defined in the Loan Agreement are used as so defined. (b) This First Amendment may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. (c) This First Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof. (d) Any determination that any provision of this First Amendment or any application hereof is invalid, illegal, or unenforceable in any respect and in any instance shall not affect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality, or enforceability of any other provisions of this First Amendment. (e) The Borrowers shall pay on demand all reasonable costs and expenses of the Agents, including, without limitation, reasonable attorneys' fees in connection with the preparation, negotiation, execution, and delivery of this First Amendment. All terms and conditions of the Loan Agreement, as previously amended to date, shall remain in full force and effect. Page 4 DELIA*S CORP. ("LEAD BORROWER") BY Thomas Murphy -------------------------- PRINT NAME: Thomas Murphy -------------------------- TITLE: SR V.P. -------------------------- DELIA*S CORP. DELIA*S OPERATING COMPANY DELIA*S DISTRIBUTION COMPANY DELIA*S RETAIL COMPANY "BORROWERS": BY Thomas Murphy -------------------------- PRINT NAME: Thomas Murphy -------------------------- TITLE: SR V.P. -------------------------- Page 5 WELLS FARGO RETAIL FINANCE LLC ("LENDER") BY Patrick J. Norton -------------------------- PRINT NAME: Patrick J. Norton -------------------------- TITLE: Vice President -------------------------- Page 6 -----END PRIVACY-ENHANCED MESSAGE-----