-----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, KGxYJStlGZWfnnVb30a+3nWOTucwGmX8DFc2MDGZDAf0P7jf6eiLWTlLCLPXputS mlJx9+7g/mqZh7gK02dlXA== 0000912057-02-018272.txt : 20020503 0000912057-02-018272.hdr.sgml : 20020503 ACCESSION NUMBER: 0000912057-02-018272 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020202 FILED AS OF DATE: 20020503 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25347 FILM NUMBER: 02632571 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-K 1 a2078716z10-k.txt 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT --------------------- Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002 Commission file number 0-25347 DELIA(*)S CORP. (Exact name of registrant as specified in its charter) DELAWARE 13-3963754 (State or other jurisdiction (I.R.S. Employer Identification No.) of 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value per share Preferred Stock Purchase Rights (TITLE OF CLASS) 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. /X/ YES / / NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of common stock held by non-affiliates of the registrant as of April 16, 2002 was $209,540,100. The number of shares outstanding of the registrant's Class A common stock as of April 16, 2002 was 46,798,619. The number of shares outstanding of the registrant's Class B common stock as of April 16, 2002 was 11,425,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement pursuant to Regulation 14A, which statement will be filed not later than 120 days after the end of the fiscal year covered by this Report, are incorporated by reference in Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STATEMENTS CONTAINED IN THIS DOCUMENT OR INCORPORATED BY REFERENCE, INCLUDING, WITHOUT LIMITATION, INFORMATION APPEARING UNDER "PART I--ITEM 1--BUSINESS" AND "PART I--ITEM 7--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). THE WORDS "BELIEVE," "PLAN," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS REPORT. THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO: THE CONDITION OF THE FINANCIAL MARKETS GENERALLY; ACCESS TO FINANCING TO FUND THE OPERATIONS AND THE EXPANSION STRATEGIES OF OUR BUSINESS; FUTURE CONDITIONS OF THE MARKET FOR OUR COMMON STOCK; THE RISK THAT OUR MERGER AND RESTRUCTURING EFFORTS WILL NOT PRODUCE SAVINGS FROM ADDITIONAL OPERATING EFFICIENCIES IN A TIMELY FASHION OR AT ALL; COSTS RELATED TO THE MERGER AND RESTRUCTURING INITIATIVES; OUR ABILITY TO REDUCE EXPENSES SUCCESSFULLY; THE RISK THAT COST REDUCTION INITIATIVES MAY LEAD TO REDUCED SERVICE LEVELS OR PRODUCT QUALITY, WHICH COULD HAVE AN ADVERSE IMPACT ON REVENUES; INCREASES IN THE COST OF MATERIALS, PRINTING, PAPER, POSTAGE, SHIPPING AND LABOR; TIMING AND QUANTITY OF CATALOG AND ELECTRONIC MAILINGS; RESPONSE RATES; OUR ABILITY TO LEVERAGE INVESTMENTS MADE IN INFRASTRUCTURE TO SUPPORT EXPANSION; AVAILABILITY OF ACCEPTABLE STORE SITES AND LEASE TERMS; ABILITY TO OPEN NEW STORES IN A TIMELY FASHION; POSSIBILITY OF INCREASING COMPARABLE STORE SALES; ADVERSE WEATHER CONDITIONS AND OTHER FACTORS AFFECTING RETAIL STORES GENERALLY; THE ABILITY OF OUR COMPUTER SYSTEMS TO SCALE WITH GROWTH IN ONLINE TRAFFIC; DIFFICULTY IN INTEGRATING NEW TECHNOLOGIES; OUR ABILITY TO RETAIN KEY PERSONNEL; LEVELS OF COMPETITION; GENERAL ECONOMIC CONDITIONS; CHANGES IN CONSUMER SPENDING PATTERNS; OUR ABILITY TO ANTICIPATE AND RESPOND TO FASHION TRENDS; OUR DEPENDENCE ON THIRD PARTIES; AND OTHER FACTORS DETAILED ELSEWHERE IN THIS REPORT. THESE FACTORS, AND OTHER FACTORS THAT APPEAR IN THIS DOCUMENT INCLUDING, WITHOUT LIMITATION, UNDER "RISK FACTORS," 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. 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. IN MAY 1999, WE ANNOUNCED A CHANGE IN OUR FISCAL YEAR TO THE 52 OR 53 WEEKS ENDED ON THE SATURDAY CLOSEST TO JANUARY 31 FOLLOWING THE CORRESPONDING CALENDAR YEAR. REFERENCES IN THIS REPORT TO "FISCAL 2001" MEAN THE PERIOD FROM FEBRUARY 4, 2001 TO FEBRUARY 2, 2002. REFERENCES IN THIS REPORT TO "FISCAL 2000" MEAN THE PERIOD FROM JANUARY 30, 2000 TO FEBRUARY 3, 2001. REFERENCES TO "FISCAL 1999" MEAN 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. 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. SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 PART I ITEM 1. BUSINESS OVERVIEW 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 growing chain of dELiA*s retail stores. In fiscal 2001, dELiA*s Direct (which includes the operations of our dELiA*s catalog and our dELiAs.cOm e-commerce site) provided 58% of our consolidated net sales, dELiA*s Retail provided 38% and our non-core businesses represented the remaining 4%. FISCAL 2000 MERGER AND RESTRUCTURING. 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. These initiatives, which were completed during fiscal 2001, resulted in significant merger and restructuring-related charges. CONSOLIDATED SALES. Apparel sales through our core dELiA*s channels represented 78% of our fiscal 2001 consolidated net sales. No other product category represented more than 10%. MERCHANDISING. Our dELiA*s catalogs, retail stores and e-commerce pages feature a broad assortment of merchandise, ranging from basics, such as jeans, shorts and t-shirts, to more fashion oriented apparel and accessories, such as woven and knit junior dresses, swimwear, sunglasses, watches, costume jewelry and cosmetics, to enable our customers to fulfill many of their fashion needs. dELiA*s also offers home furnishings, light furniture and household articles to teen girls and young women. While we continue to offer recognized and emerging brands purchased from third-party vendors, we also continue to increase our focus on dELiA*s-branded merchandise that we source directly from manufacturers or purchase from third-party vendors for sale under the "dELiA*s" label. We present merchandise in coordinated groupings to encourage customers to create outfits, which we believe increases average purchase size and enhances sales. CATALOG AND INTERNET OFFERINGS. In fiscal 2001, DELIA*S catalog circulation was nearly 42 million. Our distinctive catalogs and dELiAs.cOm Web site include detailed product descriptions and specifications, full color photographs and pricing information. They are designed to create a unique and entertaining shopping experience and to offer customers more than the typical apparel catalog or Web site by combining the feel and editorial flair of a magazine or web/zine with the convenience of at-home shopping. We mail our catalogs to persons listed in our proprietary database, as well as to persons from rented lists. We believe we can leverage our proprietary database to develop additional targeted mailings to specific customer segments, and may expand our strategy of more frequent mailings of supplemental catalogs to repeat customers. RETAIL STORES. As of February 2, 2002, we operated 45 dELiA*s stores, including four outlet stores. Our stores range in size from 2,500 to 5,100 square feet with an average size of approximately 3,700 square feet. They are located on the East Coast (Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia) and in the Midwest (Indiana, Illinois, Missouri, Ohio, Wisconsin). Our retail stores have point-of-sale terminals that transmit information daily on sales by item, color and size. We evaluate this information, together with merchandise statistics reports, when making merchandising decisions regarding reorders of fast-selling items and merchandise allocations. PROPRIETARY DATABASE DEVELOPMENT. Except for our September 1998 purchase of approximately 6 million names from the estate of Fulcrum Direct, Inc., we have historically developed our proprietary 3 customer database primarily through referrals, word-of-mouth, catalog requests, on-line membership programs and targeted classified advertising in selected magazines, including SEVENTEEN and YM. During fiscal 2001, approximately 1.5 million new names were added to our database. As of February 2, 2002, our proprietary database included approximately 13 million names, approximately 8.5 million of which have made a purchase or requested a catalog. Our database contains a person's name, gender, residence, age, family status and historical transaction data (including, among other things, referral source, history of orders, payment method, average order size and product purchase information). Whenever possible, we also gather additional demographic data and e-mail addresses. We are committed to protecting the privacy of our customers. Our privacy policy is available on our dELiAs.cOm website. CALL CENTER OPERATIONS. We provide our dELiA*s Direct customers with toll-free telephone access as well as around-the-clock fax and web service. Teleservice representatives process orders directly into our management information system. Our New York call center is flexibly configured to handle up to 300 phone stations. Our approximately 200 (as of February 2, 2002) full- and part-time teleservice representatives have the capacity to handle nearly 2,500 calls per hour. We also use an outside teleservices provider for overflow calls. We process telephone orders in an average of 4 to 5 minutes, depending upon the nature of the order and whether the customer is a first-time or repeat customer. Inquiries received by our customer service representatives are principally concerned with order and refund status. DISTRIBUTION AND FULFILLMENT. Our customer orders and retail stock shipments are processed through our warehouse and fulfillment center in Hanover, Pennsylvania. From this center, we processed an average in fiscal 2001 of over 15,000 retail shipments and 6,500 customer shipments per day. Our busiest shipping days for dELiA*s Retail and Direct involved 37,000 retail shipments and 22,000 customer packages, respectively. We use an integrated picking, packing and shipping system with a live connection to our direct order entry and retail systems. The system monitors the in-stock status of each item ordered, processes orders and retail stock requests and generates warehouse selection tickets and packing slips for order and retail stock fulfillment operations. A majority of our catalog and Internet orders are shipped within 48 hours of credit approval. In cases in which the order is placed using another person's credit card and it exceeds a specified threshold, the order is shipped only after we have received confirmation from the cardholder. Customers generally receive orders within three to ten business days after shipping. Our shipments are generally carried to customers by United Parcel Service and the United States Postal Service. For fiscal 2001, merchandise returns were approximately 17% of shipped sales in our dELiA*s Direct segment and 9% of sales in our dELiA*s Retail segment. Return experience is closely monitored to identify trends in product offerings, product defects and quality issues. As of April 17, 2002, the dELiA*s Direct channel had approximately $500,000 in backorders as compared to approximately $400,000 on that date in 2001. INVENTORY LIQUIDATION. We have excess inventory in varying degrees over the course of the year. We mail sale catalogs, run promotional sales of excess items and sell excess inventory through our outlet stores and our online discount service, Discount Domain. We have also used third-party liquidators, event sales and charitable donations to dispose of excess inventory and may consider other liquidation options in the future. 4 INTELLECTUAL PROPERTY We have registered the dELiA*s name, stylized logo and daisy symbol, among other trademarks, with the U.S. Patent and Trademark Office. We use the trademarks, tradenames, logos and endorsements of our suppliers with their permission. While we do from time to time receive notices of alleged infringement of other people's intellectual property rights, we are not aware of any pending material conflicts concerning our marks or our use of others' intellectual property. COMPETITION Our industry is highly competitive and we expect competition to increase. We compete with traditional department stores, as well as specialty retailers, for teen and young adult customers. We also compete with other direct marketers and other e-commerce companies, some of which may specifically target our customers. Many of our competitors are larger than us and have substantially greater financial, distribution and marketing resources. Increased competition could result in pricing pressures, increased marketing expenditures and loss of market share. We believe our success will depend, in part, on our ability to adapt to new technologies and to respond to competitors' actions in these areas. EMPLOYEES As of February 2, 2002, we had approximately 1,550 full-time and part-time employees. None of our employees are represented by a collective bargaining unit. We consider our relations with our employees to be good. RISK FACTORS THE FOLLOWING PRINCIPAL RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT BY PROSPECTIVE INVESTORS OR CURRENT STOCKHOLDERS EVALUATING AN INVESTMENT IN OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY AND OUR STOCKHOLDERS. ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO ADVERSELY IMPAIR OUR BUSINESS OPERATIONS. IN ADDITION, ACTUAL RESULTS OF OUR BUSINESS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED AS A RESULT OF THE FOLLOWING RISK FACTORS AND THOSE DESCRIBED IN THE SECTION ENTITLED "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, AND ADDITIONAL CAPITAL COULD DILUTE STOCKHOLDERS Historically, we have financed our business operations primarily through the sale of equity and bank loans. We believe that available cash on hand and available borrowings will enable us to maintain our currently planned operations. However, in the event of lower than expected sales or higher than expected expenses or in the event of material changes to our vendor payment terms, it is likely that we would need to raise additional funds to finance our operations. We are currently in compliance with the covenants of our credit agreement with Wells Fargo Retail Finance LLC and receive a waiver from Allfirst Bank of the financial covenant in our mortgage loan agreement. However, if our business was to deteriorate and we were to fail to comply with the financial covenants under our credit agreement, we may not continue to have access to these sources of funding. In addition, in the event that we elect to accelerate the expansion of our retail operations, we would likely require additional financing. As an alternative to bank financing, we may seek an equity-based investment from a strategic or financial partner. Debt or equity financing may not be available in sufficient amounts or on terms acceptable to us, or at all, and any equity-based financing would be dilutive to our current stockholders. HISTORICAL RESULTS MAY NOT BE INDICATIVE OF FUTURE RESULTS DUE TO SEASONAL, CYCLICAL AND QUARTERLY FLUCTUATIONS 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. In 5 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 not be comparable. Our quarterly results may also fluctuate as a result of a number of other factors, including: - general economic conditions; - changes in consumer spending patterns; - levels of competition; - market acceptance of our merchandise, including new merchandise categories or products introduced; - opportunities to expand, including the ability to locate and obtain acceptable store sites and lease terms or renew existing leases, and the ability to increase comparable store sales; - the timing of merchandise deliveries; - increases in the cost of materials, printing, paper, postage, shipping and labor; - the timing, quantity and cost of catalog and electronic mailings and response rates to those mailings; - adverse weather conditions, changes in weather patterns and other factors affecting retail stores; - changes in the growth rate of Internet usage and online user traffic levels; and - other factors outside our control. As a result of seasonal and cyclical patterns and the other factors described above, you should not rely on quarter-to-quarter comparisons of our results of operations as indicative of our future performance. In addition, it is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors, which could adversely affect our stock price. WE HAVE A LIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATE OUR BUSINESS RETAIL STORES. We opened the first full-priced dELiA*s retail store in February 1999, and many of the dELiA*s retail stores were opened after fiscal 1999. As a result, we do not have substantial data regarding comparable store sales, which is an important measure of performance for a retail company. Because of our limited history as an operator of retail stores and the limited data available to assess the trends in individual store performance, there can be no assurances of our ability to run these stores profitably. In addition, failure to expand the numbers of dELiA*s retail stores will limit our ability to leverage our infrastructure and would have a material adverse effect on our financial condition and results of operations. As a result of these factors, our future revenues are difficult to forecast. Any shortfall in revenues may have a material adverse effect on our business and would likely affect the market price of our common stock in a manner unrelated to our long-term operating performance. E-COMMERCE. We did not begin selling merchandise from the dELiA*s catalog on the Internet until May 1998. As a result, our Internet business has generated substantially all of its revenues since that time. You must consider the risks and difficulties that we will encounter as an early-stage company in the new and rapidly evolving e-commerce market. These risks include our ability to: - maintain and enhance our systems to support growth of operations and increasing user traffic; - retain existing customers, attract new customers and maintain customer satisfaction; 6 - introduce new and enhanced Web pages, services, products and alliances; - minimize technical difficulties, system downtime and the effect of Internet brown-outs; - respond to technological changes in the industry; and - respond to changes in government regulation. If we do not successfully manage these risks, our business will be materially adversely affected. We cannot assure you that we will successfully address these risks or that our business strategy will be successful. WE ARE PARTY TO CLASS ACTION LITIGATION We are currently party to two purported class action litigations. The first was originally filed in two separate complaints in Federal District Court for the Southern District of New York in 1999 against dELiA*s Inc. and certain of its officers and directors. These complaints were consolidated. The consolidated complaint alleges, among other things, that the defendants violated Rule 10b-5 under the Securities Exchange Act of 1934 by making material misstatements and by failing to disclose certain allegedly material information regarding trends in the business during part of 1998. We believe that the allegations are without substantial merit and that the claim is covered under our insurance policy and we intend to vigorously contest this action. However, we cannot predict at this time the outcome of any litigation or whether the resolution of the litigation could have a material adverse effect on our business. The second was originally filed as three separate complaints in Delaware Chancery Court against iTurf Inc., dELiA*s Inc. and each of iTurf's directors in connection with the recombination of the iTurf Inc. and dELiA*s Inc. businesses. The actions were consolidated and an amended complaint was filed on January 19, 2001. The complaint alleges that dELiA*s and the members of the iTurf board of directors breached their fiduciary duties to iTurf's public stockholders and that the exchange ratio was unfair to iTurf's public stockholders. On January 15, 2002, all parties entered into a stipulation and agreement of compromise, settlement and release, which was approved without objection by the court on April 8, 2002 and, provided no appeal is taken, will become a final order in May 2002. OUR GROWTH STRATEGY MAY PRESENT OPERATIONAL, MANAGEMENT AND INVENTORY CHALLENGES Our historical growth has placed significant demands on our management and other administrative, operational and financial resources. We intend to continue to pursue a growth-oriented strategy in our core dELiA*s business for the foreseeable future and our future operating results will largely depend on our ability to open and operate new retail stores, appropriately expand our Internet e-commerce business and manage a larger core dELiA*s business. Managing this growth will require us to continue to implement and improve our operations and financial and management information systems and to continue to expand, motivate and effectively manage our workforce. If we cannot manage this process effectively or grow our businesses as planned, we may not achieve our desired future operating results. Operation of a greater number of retail stores, expansion into new geographic or demographic markets and online expansion may present competitive and merchandising challenges that are different from those we currently encounter in our existing businesses. Such expansion will also require further investment in infrastructure and marketing for our direct and retail businesses. This investment will increase our operating expenses, which could have a material adverse effect on the results of our business if anticipated sales do not materialize, and may require us to seek additional capital. There can be no assurance that we will be able to obtain this financing on acceptable terms or at all. In addition, expansion of our retail and e-commerce businesses within our existing markets may adversely affect the individual financial performance of existing stores or catalog sales. Historically, 7 efforts to increase Internet sales have reduced catalog sales. There can be no assurance that increased sales through our retail stores will not reduce catalog or Internet sales. Also, new stores may not achieve sales and profitability levels consistent with existing stores. Furthermore, as our sales increase, we anticipate maintaining higher inventory levels. This anticipated increase in inventory levels will expose us to greater risk of excess inventories and inventory obsolescence, as well as increase our dependence on our vendors and exposure to their payment terms, all of which could have a material adverse effect on our business. WE MAY FAIL TO ANTICIPATE AND RESPOND TO FASHION TRENDS AND THE TASTES OF OUR CUSTOMERS Our failure to anticipate, identify or react to changes in styles, trends or brand preferences of our customers may result in lower revenue from reduced sales and promotional pricing. Our success depends, in part, on our ability to anticipate the frequently-changing fashion tastes of our customers and to offer merchandise and services that appeal to their preferences on a timely and affordable basis. If we were to misjudge our offerings, our image with our customers would be materially adversely affected. Poor customer reaction to our products or our failure to source these products effectively would have a material adverse effect on our business. WE RELY ON THIRD-PARTY VENDORS FOR MERCHANDISE Our business depends on the ability of third-party vendors and their subcontractors or suppliers to provide us with current-season, brand-name apparel and merchandise at competitive prices, in sufficient quantities, manufactured in compliance with all applicable laws and of acceptable quality. We do not have long-term contracts with any supplier and are not likely to enter into these contracts in the foreseeable future. In addition, many of the smaller vendors that we use have limited resources, production capacities and operating histories. As a result, we are subject to the following risks, which could have a material adverse effect on our business: - our key vendors may fail or be unable to expand with us; - we may lose or cease doing business with one or more key vendors; - our current vendor terms may be changed to require increased payments in advance of delivery, and we may not be able to fund such payments through our current credit facility; or - our ability to procure products may be limited. It is our current strategy to increase the percentage of our goods designed and manufactured to our specifications and to source this merchandise from independent factories. To the extent we concentrate our sourcing with fewer manufacturers, we may increase our exposure to failed or delayed deliveries, which could have a material adverse effect on our business. Furthermore, as part of our move towards more private-label merchandise, we are likely to source an increasing proportion of our goods from factories in the Far East and Latin America. These goods will be subject to existing or potential duties, tariffs or quotas that may limit the quantity of some types of goods which may be imported into the United States from countries in those regions. We will increasingly compete with other companies for production facilities and import quota capacity. Sourcing more merchandise abroad will also subject our business to a variety of other risks generally associated with doing business abroad, such as political instability, currency and exchange risks and local political issues. Our future performance will be subject to these factors, which are beyond our control. Although a diverse domestic and international market exists for the kinds of merchandise sourced by us, there can be no assurance that these factors would not have a material adverse effect on our results of operations. We believe that alternative sources of supply would be available in the event of a supply disruption in one or more regions of the world. However, we do not believe that, under current 8 circumstances, entering into committed alternative supply arrangements is warranted, and there can be no assurance that alternative sources would in fact be available at any particular time. OUR CHIEF EXECUTIVE OFFICER HOLDS SUBSTANTIAL EQUITY IN THE COMPANY AND MAY USE HIS INFLUENCE IN WAYS THAT ARE NOT CONSISTENT WITH THE INTERESTS OF OTHER STOCKHOLDERS Stephen I. Kahn, our Chief Executive Officer, holds or has the right to vote in the aggregate approximately 22% of our Class A common stock, net of treasury stock and stock held by subsidiaries. Accordingly, Mr. Kahn may have substantial influence over the company and may exercise his influence in ways that might not be consistent with the interests of other stockholders. WE MAY HAVE DIFFICULTY ATTRACTING AND RETAINING KEY PERSONNEL Our success will depend on the continued service of our key senior management personnel. Loss of the services of our senior management personnel, including Stephen I. Kahn, Chairman of our board of directors and Chief Executive Officer, Andrea Weiss, President, Wendy Heath, Executive Vice President of Product Development and Design, and Dennis Goldstein, Chief Financial Officer, or other key employees would have a material adverse effect on our business. Competition for employees in our industries is intense. As a result, we have in the past experienced, and we expect to continue to experience, difficulty hiring and retaining skilled employees with appropriate qualifications. WE MAY NOT BE ABLE TO ATTRACT NEW CUSTOMERS TO REPLENISH OUR CUSTOMER BASE Our customers are primarily teens and young adults. As these individuals age beyond their teens, they may no longer purchase products aimed at younger individuals. Accordingly, we must constantly update our marketing efforts to attract new, prospective teen and young adult customers. Failure to attract new customers would have a material adverse effect on our business. OUR CATALOG RESPONSE RATES MAY DECLINE Catalog response rates usually decline when we mail additional catalog editions within the same fiscal period. Response rates also decline in geographic regions where we open new stores. As we open additional new stores, we expect aggregate catalog response rates to decline further. In addition, as we continue to increase the number of catalogs distributed or mail our catalogs to a broader group of new potential customers, we have observed that these new potential customers respond at lower rates than existing customers have historically responded. These trends in response rates have had and are likely to continue to have a material adverse effect on our rate of sales growth and on our profitability and could have a material adverse effect on our business. OUR INDUSTRIES ARE HIGHLY COMPETITIVE The apparel and accessories industry is highly competitive, and we expect competition to increase. As a result of this competition, we may experience pricing pressures, increased marketing expenditures and loss of market share, which would have a material adverse effect on our business. We compete with traditional department stores, as well as specialty retailers, for teen and young adult customers. We also compete with other direct marketers and e-commerce companies, some of which may specifically target our customers. In addition, because there are few barriers to entry in the teen apparel and accessories market, we could face competition from manufacturers of apparel and accessories, including our current vendors, who could market their products directly to retail customers or make their products more readily available in competitor catalogs, Web sites and retail stores. 9 We cannot assure you that we will be able to compete successfully with these companies or that competitive pressures will not materially and adversely affect our business. We believe that our ability to compete depends upon many factors, including the following: - the consumer acceptance of our product offerings; - the success of our brand building and sales and marketing efforts; - the performance, price and reliability of products developed by us or our competitors; and - the effectiveness of our customer service and support efforts. Many of our competitors are larger and have substantially greater financial, distribution and marketing resources than us. Our competitors may develop products or services that are equal or superior to, or achieve greater market acceptance than, ours. Our competitors could also enter into exclusive distribution arrangements with our vendors and deny us access to these vendors' products. These factors may have a material adverse effect on our business. THE EXPECTED BENEFITS OF OUR MERGER MAY NOT BE REALIZED The success of the recent recombination of our Internet, catalog and retail businesses will depend, in part, on our ability to realize growth opportunities and synergies from combining the businesses of the two companies. Although we expect the merger to affect our stockholders positively, we may not realize the anticipated benefits of the merger. We believe that we will reduce some administrative overhead costs by combining the two companies, but these savings are not expected to have a material effect on our results of operations. Moreover, some of the synergies we hope to exploit are strategic and, by nature, speculative. For example, we hope to improve catalog productivity through targeted e-mails, but there is no definitive evidence that targeted e-mails will improve our sales productivity or allow us to distribute fewer catalogs. WE RELY ON INFORMATION AND TELECOMMUNICATIONS SYSTEMS, WHICH ARE SUBJECT TO DISRUPTION The success of our direct marketing and retail store businesses depends, in part, on our ability to provide prompt, accurate and complete service to our customers on a competitive basis, and to purchase and promote products, manage inventory, ship products, manage sales and marketing and maintain efficient operations through our telephone and management information systems. In addition, the success of our e-commerce business depends, in part, on our ability to provide a consistently prompt and user-friendly experience to our customers, with a minimum of technical delays or disruptions. Our operations therefore depend on our ability to maintain our computer and telecommunications systems and equipment in effective working order. Any sustained or repeated system failure or interruption would have a material adverse effect on sales and customer relations. Unanticipated problems affecting our systems have caused from time to time in the past, and in the future could cause, disruptions in our services. These system interruptions could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require or from events such as fire, power loss, water damage, telecommunications failures, vandalism and other malicious acts, and similar unexpected adverse occurrences. Any damage or failure that interrupts or delays our operations could have a material adverse effect on our business. 10 STRIKES OR OTHER SERVICE INTERRUPTIONS AFFECTING THIRD-PARTY SHIPPERS WOULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE ON A TIMELY BASIS We rely on third-party shippers, including the United States Postal Service and United Parcel Service, to ship merchandise to our customers. Strikes or other service interruptions affecting our shippers would affect our ability to deliver merchandise on a timely basis and could have a material adverse effect on our business. WE DEPEND ON THE STORAGE OF PERSONAL INFORMATION ABOUT OUR CUSTOMERS, AND PROPOSED LEGISLATION MAY LIMIT OUR ABILITY TO CAPTURE AND USE SUCH CUSTOMER INFORMATION Web sites typically place identifying data, or "cookies," on a user's hard drive without the user's knowledge or consent. dELiAs.cOm and other Web sites use cookies for a variety of reasons, including the collection of data derived from the user's Internet activity. Any reduction or limitation in the use of cookies could limit the effectiveness of our sales and marketing efforts. Most currently available Web browsers allow users to remove cookies at any time or to prevent cookies from being stored on their hard drives. In addition, some commentators, privacy advocates and governmental bodies have suggested limiting or eliminating the use of cookies. Furthermore, the European Union recently adopted a directive addressing data privacy that may limit the collection and use of information regarding Internet users. Any of these actions may limit our ability to collect and use information about our customers, which could have a material adverse effect on our business. Recently, there has been increasing public concern regarding the compilation, use and distribution of information about teens and children. Federal legislation has been introduced in the U.S. Congress that proposes restrictions on persons, principally list brokers, that sell, purchase or otherwise use for commercial purposes personal information about teens under the age of 16 and children. List brokerage is not currently a material part of our business but we do market to persons whose names are derived from purchased or rented lists. We may increase our use of purchased and rented lists or, in the future, decide to increase our list brokerage business. Consequently, the proposed legislation, or other similar laws or regulations that may be enacted, could impair our ability to collect customer information, use that information in the course of our business or profit from future plans to sell customer information, which could have a material adverse effect on our business. WE MAY BECOME SUBJECT TO CURRENCY, POLITICAL, TAX AND OTHER UNCERTAINTIES AS WE EXPAND INTERNATIONALLY We distribute our dELiA*s catalogs in Japan and Canada and plan to explore distribution opportunities in other international markets. Our dELiAs.cOm Web site are visited by a global audience. Our international business is subject to a number of risks of doing business abroad, including: - the impact of recessions in economies outside the United States; - regulatory and political changes in foreign markets; - reduced protection for intellectual property rights in some countries; - potential limits on the use of some of our vendors' trademarks outside the United States; - exposure to potentially adverse tax consequences or import/ export quotas; - inconsistent quality of merchandise and disruptions or delays in shipping; and - difficulties in developing customer lists and marketing channels. Furthermore, expansion into new international markets may present competitive and merchandising challenges different from those we currently face. We cannot assure you that we will expand internationally or that any such expansion will result in profitable operations. 11 WE MAY BE REQUIRED TO COLLECT SALES TAX At present, we do not collect sales or other similar taxes in respect of direct shipments of goods to consumers into most states. However, various states have sought to impose state sales tax collection obligations on out-of-state direct mail companies. A successful assertion by one or more states that we should have collected or be collecting sales taxes on the direct sale of our merchandise would have a material adverse effect on our business. WE MAY NOT BE ADEQUATELY PROTECTED AGAINST INFRINGEMENT OF OUR INTELLECTUAL PROPERTY, WHICH IS ESSENTIAL TO OUR BUSINESS We regard our service marks, trademarks, trade secrets and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality, license and other agreements with employees, customers, strategic partners and others to protect our proprietary rights, and have also pursued and applied for the registration of our trademarks and service marks in the United States. The steps we have taken to protect our intellectual property may not be adequate, and third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. In addition, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services are made available. WE MAY BECOME SUBJECT TO LIABILITY FOR INFRINGING THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS From time to time we receive complaints that we have infringed on third-party intellectual property rights. Our reliance on independent vendors makes it difficult to guard against infringement and we have occasionally agreed to refrain from selling some merchandise at the request of third parties alleging infringement. To date, these claims have not had a material adverse effect on our business. However, future infringement claims, if directed at key items of our merchandise or our material intellectual property, could have a material adverse effect on our business. OUR BUSINESS MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN POSTAGE AND PAPER EXPENSES Significant increases in paper or catalog delivery costs would have a material adverse effect on our business. THE PRICE OF OUR COMMON STOCK COULD BE EXTREMELY VOLATILE The market price of our common stock has fluctuated in the past and may continue to be volatile. In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation, which could have material adverse effects on our business. DELAWARE LAW AND OUR ORGANIZATIONAL DOCUMENTS AND STOCKHOLDER RIGHTS PLAN MAY INHIBIT A TAKEOVER Provisions of Delaware law, our Restated Certificate of Incorporation or our bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, our board of directors has adopted a stockholder rights plan, the purpose of which is to protect stockholders against unsolicited attempts to acquire control of us that do not offer a fair price to all of our stockholders. The rights plan may have the effect of dissuading a potential acquirer from making an offer for our common stock at a price that represents a premium to the then current trading price. 12 WE MAY BE EXPOSED TO POTENTIAL LIABILITY OVER PRIVACY CONCERNS Despite the display of our privacy policy on our dELiAs.cOm Web site, any penetration of our network security or misappropriation of our customers' personal or credit card information could subject us to liability. We may be liable for claims based on unauthorized purchases with credit card information, impersonation or other similar fraud claims. Claims could also be based on other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in litigation, which could divert management's attention from the operation of our business and result in the imposition of significant damages. In addition, the Federal Trade Commission and several states have investigated the use by Internet companies of personal information. In 1998, the U.S. Congress enacted the Children's Online Privacy Protection Act of 1998. The Federal Trade Commission recently promulgated final regulations interpreting this act. We depend upon collecting personal information from our customers and we believe that the regulations under this act will make it more difficult for us to collect personal information from some of our customers. Any failure to comply with this act may make us liable for substantial fines and other penalties. We could also incur expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD CREATE ADDITIONAL BURDENS TO DOING BUSINESS ON THE INTERNET Laws and regulations applicable to Internet communications, commerce and advertising are becoming more prevalent. The adoption or modification of laws or regulations applicable to the Internet could adversely affect our business. The law governing the Internet, however, remains largely unsettled. Although our online transmissions generally originate in New York, the governments of other states or foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities. It may take years to determine whether and how existing laws governing intellectual property, privacy, libel and taxation apply to the Internet. In addition, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. We also may be subject to regulation not specifically related to the Internet, including laws affecting direct marketers and advertisers. The interpretation or enactment of any of these types of laws or regulations may impose burdens on our business. THIRD-PARTY INTERNET PROVIDERS MAY EXPERIENCE SYSTEM FAILURES THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS Our customers depend on Internet service providers and Web site operators for access to our Web site. Some of these groups have experienced significant outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to our systems. These types of occurrences could have a material adverse effect on our business. A DECREASE IN THE GROWTH OF WEB USAGE OR INADEQUATE INTERNET INFRASTRUCTURE WOULD ADVERSELY AFFECT OUR BUSINESS The Internet industry is new and rapidly evolving. A decrease in the growth of Web usage would have a material and adverse effect on our business. Some of the factors that may inhibit growth in Web usage are: - inadequate Internet infrastructure; - security and privacy concerns; - inconsistent quality of service; and - unavailability of cost-effective, high-speed service. 13 The success of our dELiAs.cOm Web site depends upon the ability of the Internet infrastructure to support increased use. The performance and reliability of the Web may decline as the number of users increases or the bandwidth requirements of users increase. The Web has experienced a variety of outages due to damage to portions of its infrastructure. If outages or delays frequently occur in the future, Web usage, including usage of our dELiAs.cOm Web site, could grow slowly or decline. Even if the necessary infrastructure or technologies are developed, we may have to spend considerable amounts to adapt our solutions accordingly. WEB SECURITY CONCERNS COULD HINDER ONLINE COMMERCE The need to transmit confidential information such as credit card and other personal information securely over the Internet has been a significant barrier to online commerce. Any publicized compromise of security could deter people from accessing the Web or from using it to transmit confidential information. These security concerns could reduce our market for online commerce. We may also incur significant costs to protect ourselves against the threat of problems caused by security breaches. ITEM 2. PROPERTIES The following table sets forth information regarding our principal facilities, excluding retail stores. Except for the property in Hanover, PA, which we purchased during fiscal 1999, all such facilities are leased. We believe our facilities are well maintained and in good operating condition.
APPR. SQ. LEASE LOCATION USE FOOTAGE EXPIRATION DATE - -------- ----------------------------------------------------- --------- --------------- New York, NY............. Corporate offices 45,000 2007 Long Island City, NY..... Call center 25,000 2009 Hanover, PA.............. Warehouse, fulfillment and distribution center 400,000 -- Hayward, CA*............. Storybook Heirlooms distribution center 33,000 2003 New York, NY**........... iTurf offices 25,000 2011
- -------------------------- * We have negotiated a definitive settlement to terminate this lease. ** We are currently negotiating to terminate this lease or to sublet the space. ITEM 3. 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 29, 2001. By order dated December 10, 2001, the court certified the class. We filed our answer to the consolidated amended complaint on February 13, 2002. We intend to vigorously defend against this action. While an estimate of the possible range of loss cannot be made, 14 based upon information presently known to management, we believe that the claim is covered under our insurance policy and 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. On March 5, 2001, we answered that complaint, asserted affirmative defenses and separately moved to strike certain allegations. Also on March 5, 2001, we moved to dismiss the complaint. On January 15, 2002, all parties entered into a stipulation and agreement of compromise, settlement and release. Pursuant to the settlement, the defendants will receive full release in exchange for one million shares of dELiA*s common stock, which shares were issued and delivered on April 26, 2002. The total $6.3 million value of the non-cash settlement is recorded as a fiscal 2001 merger charge with an offset to additional paid-in capital. The settlement was approved without objection by the court on April 8, 2002 and, provided no appeal is taken, will become a final order in May 2002. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Since our November 20, 2000 merger, our Class A common stock has traded on the NASDAQ National Market under the symbol DLIA. Prior to that date, iTurf Inc. Class A common stock was traded on the NASDAQ National Market under the symbol TURF while dELiA*s Inc. common stock was traded on the NASDAQ National Market under the symbol DLIA. The following table sets forth the high and low sales prices as reported by NASDAQ for the periods indicated for dELiA*s Corp. Class A common stock since the merger and iTurf Inc. Class A common stock prior to November 20, 2000. These quotations reflect interdealer prices without adjustments for retail markups, markdowns or commissions and may not necessarily represent actual transactions.
HIGH LOW -------- -------- FISCAL YEAR ENDED FEBRUARY 3, 2001 1st Quarter.............................................. $13.750 $4.313 2nd Quarter.............................................. 5.375 2.500 3rd Quarter.............................................. 3.625 0.625 4th Quarter.............................................. 3.719 0.500 FISCAL YEAR ENDED FEBRUARY 2, 2002 1st Quarter.............................................. $ 5.250 $2.281 2nd Quarter.............................................. 8.000 2.950 3rd Quarter.............................................. 7.100 3.600 4th Quarter.............................................. 8.050 4.900
15 On April 16, 2002, there were approximately 200 holders of record of our common stock and approximately 7,800 beneficial owners of our common stock. DIVIDEND INFORMATION Since inception, we have neither declared nor paid any cash dividends on our common stock. We currently intend to retain our earnings for future growth and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Our credit agreement prohibits us from paying dividends. SALES OF UNREGISTERED SECURITIES IN THE FOURTH QUARTER OF FISCAL 2001 None. ITEM 6. SELECTED FINANCIAL DATA The selected financial information set forth below has been derived from our consolidated financial statements. The following selected data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto appearing elsewhere in this report. All applicable information has been restated to give effect to our December 1997 acquisition of TSI Soccer Corporation, which was accounted for as a pooling of interests. In addition, all net income (loss) per share amounts for periods prior to the November 2000 merger of dELiA*s Inc. and iTurf Inc. have been retroactively adjusted to reflect the merger exchange ratio by multiplying the number of dELiA*s Inc. shares by 1.715.
FISCAL 1997 FISCAL 1998 FISCAL 1999 FISCAL 2000 FISCAL 2001 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales................................... $113,049 $158,364 $190,772 $215,065 $143,728 Cost of sales............................... 57,811 78,368 108,148 119,258 75,918 -------- -------- -------- -------- -------- Gross profit................................ 55,238 79,996 82,624 95,807 67,810 Selling, general and administrative expenses.................................. 47,943 71,711 124,339 155,503 84,630 Merger, restructuring and finance charges... 1,614 -- 23,668 29,205 4,975 Merger settlement charge.................... -- -- -- -- 6,335 Gain on subsidiary IPO and sale of subsidiary stock.......................... -- -- (78,117) -- -- Minority interest........................... -- -- (4,865) (20,812) -- Other expense (income), net................. (1,201) (962) (2,429) (316) (482) -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item........................ 6,882 9,247 20,028 (67,773) (27,648) Provision for income taxes.................. 2,456 3,405 9,070 11,942 -- -------- -------- -------- -------- -------- Net income (loss) before extraordinary item...................................... 4,426 5,842 10,958 (79,715) (27,648) Extraordinary item.......................... -- -- -- -- 803 -------- -------- -------- -------- -------- Net income (loss)........................... $ 4,426 $ 5,842 $ 10,958 $(79,715) $(28,451) ======== ======== ======== ======== ======== Net income (loss) per share before extraordinary item: Basic..................................... $ 0.20 $ 0.25 $ 0.45 $ (2.98) $ (0.68) ======== ======== ======== ======== ======== Diluted................................... $ 0.20 $ 0.24 $ 0.42 $ (2.98) $ (0.68) ======== ======== ======== ======== ========
16
FISCAL 1997 FISCAL 1998 FISCAL 1999 FISCAL 2000 FISCAL 2001 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss) per share: Basic..................................... $ 0.20 $ 0.25 $ 0.45 $ (2.98) $ (0.70) ======== ======== ======== ======== ======== Diluted................................... $ 0.20 $ 0.24 $ 0.42 $ (2.98) $ (0.70) ======== ======== ======== ======== ======== Shares used in the per share calculations: Basic..................................... 22,194 23,631 24,550 26,744 40,604 ======== ======== ======== ======== ======== Diluted................................... 22,437 24,555 26,377 26,744 40,604 ======== ======== ======== ======== ======== BALANCE SHEET DATA AT END OF FISCAL YEAR: Cash and cash equivalents................... $ 4,485 $ 10,981 $ 24,985 $ 10,121 $ 27,915 Working capital............................. 37,959 25,480 83,952 14,082 27,421 Total assets................................ 64,572 82,144 184,040 85,043 82,234 Long-term debt and capital leases........... -- -- 6,756 4,770 3,695 Total stockholders' equity.................. 44,144 63,607 82,921 20,156 37,457
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "ITEM 6--SELECTED FINANCIAL DATA" AND 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 UNDER "ITEM 1--BUSINESS--RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS REPORT. OVERVIEW 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. MERGER AND RESTRUCTURING. On November 20, 2000, iTurf Inc. and dELiA*s Inc. were recombined and the parent company was renamed dELiA*s Corp. As a result of the "reverse acquisition" accounting treatment, dELiA*s Corp. reports the historical results of dELiA*s Inc. for periods prior to the merger with all share and per share information, except for amounts on our Consolidated Balance Sheets and Consolidated Statements of Stockholders' Equity, retroactively adjusted to reflect the merger exchange ratio by multiplying the number of dELiA*s Inc. shares by 1.715. In presenting our shares outstanding and calculating loss per share for periods after the merger, we have assumed conversion on the merger date of all eligible shares of dELiA*s Inc. common stock. During fiscal 2000, we also announced our intention to focus on our core dELiA*s brand and to sell or shut down our non-core businesses. In connection with our fiscal 2000 merger and restructuring initiatives, we recorded significant charges in fiscal 2000 and additional charges of $10.7 million during fiscal 2001, including $6.3 million for the non-cash settlement of a merger-related class action suit. As a result of our merger and restructuring initiatives, we currently have two reportable segments: dELiA*s Direct (which includes the operations of our dELiA*s catalog and our dELiAs.cOm e-commerce site) and dELiA*s Retail. See Note 5 to our consolidated financial statements for disclosure of results by reportable segment. 17 FISCAL 2001 FINANCE INITIATIVES AND EXTRAORDINARY ITEM. Our fiscal 2001 merger, restructuring and finance charges include a $600,000 finance charge relating to the early termination of an interest rate swap that was tied to our distribution facility mortgage. Also during fiscal 2001, we recorded an extraordinary charge of approximately $800,000 when we replaced our Congress Financial Corporation credit facility with one from Wells Fargo Retail Finance LLC. THESPARK.COM, INC. On February 15, 2000, we acquired TheSpark.com, Inc. In accordance with the acquisition agreement, as amended, we paid the sellers $4.2 million (including $1.7 million in connection with our March 2001 sale of the businesses) in fiscal 2001 and issued them 1,315,271 and 197,835 shares of our Class A common stock on June 1, 2001 and March 1, 2002, respectively. The value of all consideration paid subsequent to our decision to sell the businesses was included in our restructuring charges. 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. Our current plan is to grow the total number of dELiA*s retail stores by 20 during fiscal 2002. We expect capital expenditures of approximately $10 million, the majority of which will be spent on the expansion of our retail store base. CRITICAL ACCOUNTING POLICIES INVOLVING ESTIMATES. Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies currently affect our financial condition and results of operations: - REVENUE RECOGNITION--Revenue is recognized when merchandise is shipped to customers or at the point of retail sale. We accrue a sales return allowance in accordance with our return policy for estimated returns of merchandise subsequent to the balance sheet date that relate to sales prior to that date. - CATALOG COSTS--Catalog costs, which primarily consist of catalog production and mailing costs, are capitalized and amortized over the expected life of the related future revenue stream, which generally covers three to five months from mailing date. We account for catalog costs in accordance with AICPA Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs." SOP 93-7 requires that expenses relating to capitalized advertising costs be computed using the ratio of current period revenues for the catalog cost pool to the total of current and estimated future period revenues for that catalog cost pool. - MERCHANDISE INVENTORIES--Merchandise inventories, which are primarily finished goods, are stated at the lower of cost (determined on a first-in, first-out basis) or market value, which is determined based on estimated recovery. - LONG-LIVED ASSETS--In accordance with the Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," we periodically review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (on an undiscounted basis) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. 18 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 $15.4 million in the first quarter of fiscal 2002. This amount represents the reversal of the unamortized balance of the negative goodwill recorded on our books in connection with the November 2000 merger of dELiA*s Inc. and iTurf Inc. In August 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 is not expected to have a material effect on our consolidated financial position or results of operations. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship of items from our Consolidated Statements of Operations to net sales. Any trends reflected by the following table may not be indicative of future results.
PERCENTAGE OF NET SALES --------------------------------------- FISCAL 1999 FISCAL 2000 FISCAL 2001 ----------- ----------- ----------- Net sales................................................... 100.0% 100.0 % 100.0 % Cost of sales............................................... 56.7 55.4 52.8 ----- ----- ----- Gross profit................................................ 43.3 44.6 47.2 Selling, general and administrative expenses................ 65.2 72.3 58.9 Merger, restructuring and finance charges................... 12.4 13.6 3.4 Merger settlement charge.................................... -- -- 4.4 Gain on subsidiary IPO and sale of subsidiary stock......... (40.9) -- -- Minority interest........................................... (2.6) (9.7) -- Interest and other income, net.............................. (1.3) (0.1) (0.3) ----- ----- ----- Income (loss) before income taxes and extraordinary item.... 10.5 (31.5) (19.2) Provision for income taxes.................................. 4.8 5.6 -- ----- ----- ----- Net income (loss) before extraordinary item................. 5.7 (37.1) (19.2) Extraordinary item.......................................... -- -- 0.6 ----- ----- ----- Net income (loss)........................................... 5.7% (37.1)% (19.8)% ===== ===== =====
19 COMPARISON OF FISCAL YEARS 2000 AND 2001 NET SALES. Net sales decreased approximately $71.4 million from $215.1 million in fiscal 2000 to $143.7 million in fiscal 2001. The decrease was primarily due to the impact of divestitures of non-core businesses. Net sales in our core dELiA*s business decreased 2% with a 13% decrease in dELiA*s Direct and a 20% increase at dELiA*s Retail. The decrease at Direct can be attributed to the current economic environment as well as sporadic mail delays and mail disruptions that delayed the in-home date of our key holiday mailing in many of our major markets. The increase at Retail is a function of our continued store expansion, a trend that we plan to continue. However, comp store sales declined as a result of decreased mall traffic, particularly in the Northeast where the majority of our stores are located. GROSS MARGIN. Gross margin increased from 44.6% in fiscal 2000 to 47.2% in fiscal 2001 primarily as a result of the elimination of lower margin non-core businesses. Gross margin for our core dELiA*s business remained essentially flat. We expect gross margins to improve as we continue to increase our dELiA*s branded merchandise offerings and continue our sourcing initiatives. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased approximately $70.9 million from $155.5 million in fiscal 2000 to $84.6 million in fiscal 2001. Selling, general and administrative expenses also decreased as a percentage of net sales, from 72.3% in fiscal 2000 to 58.9% in fiscal 2001. Approximately $58.2 million of the decrease relates to operating expenses of our discontinued non-core businesses. Depreciation, amortization and non-cash compensation expenses decreased approximately $13.2 million. Operating expenses at our core dELiA*s business also decreased; increases of $4.9 million at dELiA*s Retail primarily related to the continued expansion of our store base while decreases of $5.5 million at dELiA*s Direct related primarily to online advertising and mailing costs. These decreases were offset by $1.1 million net increases in other expenses. MERGER, RESTRUCTURING AND FINANCE CHARGES. During fiscal 2000, we recorded primarily non-cash charges of $29.2 million relating to our decision to focus exclusively on our core dELiA*s business and the related merger. Additional related charges are included in fiscal 2000 cost of sales and income taxes. During fiscal 2001, we recorded additional charges of $4.4 million as we substantially completed the sale or shut down of our non-core businesses. In addition, a $600,000 finance charge in fiscal 2001 related to the early termination of an interest rate swap that was tied to our distribution facility mortgage. MERGER SETTLEMENT CHARGE. During fiscal 2001, we recorded a $6.3 million charge for the non-cash settlement of a merger-related class action suit and $4.4 million for other costs related to substantially completing our initiatives to dispose of our non-core businesses. In addition, a $600,000 finance charge in fiscal 2001 related to the early termination of an interest rate swap that was tied to our distribution facility mortgage. INTEREST AND OTHER INCOME, NET. Interest and other income, net was $300,000 in fiscal 2000 and $500,000 in fiscal 2001. The fiscal 2000 income was offset, in party, by a one-time loss on an investment in an Internet business. 20 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. In accounting for the November 2000 merger of dELiA*s Inc. and iTurf Inc., deferred tax liabilities relating to earlier issuances of iTurf common stock were eliminated and the remaining net deferred tax asset was reserved with a non-cash tax charge of $19.8 million. 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 FISCAL YEARS 1999 AND 2000 NET SALES. Net sales increased 12.7% to $215.1 million in fiscal 2000 from $190.8 million in fiscal 1999. The increase is primarily due to increases in our core dELiA*s businesses, with increases of $28.2 million and $11.0 million in dELiA*s Retail and dELiA*s Direct, respectively. The increase in net sales in our dELiA*s Retail segment is primarily due to 14 new store openings and the increase in net sales in our dELiA*s Direct segment is primarily due to higher sales per catalog mailed. These increases were offset by decreases in our non-core businesses of $14.9 million, with a significant portion of that decrease relating to the closure of our Screeem! retail chain. GROSS MARGIN. Gross margin increased to 44.6% in fiscal 2000 from 43.3% in fiscal 1999. The change represents significant improvements in our core dELiA*s business partially offset by declines in our non-core businesses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased approximately $31.2 million, to $155.5 million or 72.3% of net sales in fiscal 2000 from $124.3 million or 65.2% of net sales in fiscal 1999. The increase primarily relates to our Internet and other non-core businesses, in particular to the increase in goodwill amortization associated with our acquisitions of Internet businesses. In our core dELiA*s businesses, increases at dELiA*s Retail of $13.0 million, relating to the addition of 14 new stores, were partially offset by decreases at dELiA*s Direct in excess of $3.0 million. MERGER AND RESTRUCTURING CHARGES. During fiscal 2000, we recorded primarily non-cash charges of $29.2 million relating to our decision to focus exclusively on our core dELiA*s business and the related merger. During fiscal 1999, we recorded a charge of $23.7 million in connection with our plans to close our Screeem! and Jean Country retail operations. These charges are in addition to the related charges included in cost of sales and income taxes. GAIN ON SUBSIDIARY IPO AND SALE OF SUBSIDIARY STOCK. In connection with the April 1999 iTurf initial public offering, we recognized a one-time pre-tax gain of approximately $70.1 million. During the fourth quarter of fiscal 1999, we recorded an additional $8.0 million pre-tax gain on our sale of 1,075,000 shares of iTurf stock for cash. 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. INTEREST AND OTHER INCOME, NET. Interest and other income, net decreased to $300,000 in fiscal 2000 from $2.4 million in fiscal 1999 due to the sale of marketable securities, increased interest expense due to additional borrowings and a one-time loss in fiscal 2000 on an investment in an Internet business. 21 INCOME TAXES. In accounting for the November 2000 merger of dELiA*s Inc. and iTurf Inc., deferred tax liabilities relating to earlier issuances of iTurf common stock were eliminated and the remaining net deferred tax asset was reserved with a non-cash tax charge of $19.8 million. SELECTED QUARTERLY RESULTS OF OPERATIONS AND 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 "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.
FISCAL QUARTER ENDED -------------------------------------------------------------------------------------- APRIL 29, JULY 29, OCT. 28, FEB. 3, MAY 5, AUG. 4, NOV. 3, FEB. 2, 2000 2000 2000 2001 2001 2001 2001 2002 --------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................ $49,057 $ 37,295 $ 52,332 $ 76,381 $36,231 $ 25,955 $32,503 $49,039 Cost of sales............ 25,792 21,122 29,089 43,255 19,682 14,713 16,488 25,035 ------- -------- -------- -------- ------- -------- ------- ------- Gross profit............. 23,265 16,173 22,243 33,126 16,549 11,242 16,015 24,004 Selling, general and administrative expenses............... 39,003 35,142 38,183 43,174 24,462 17,673 18,434 24,061 Merger, restructuring and finance charges........ -- -- 20,641 8,564 384 4,591 -- -- Merger settlement charge................. -- -- -- -- -- -- -- 6,335 Interest and other expense (income), net.................... (667) (414) 184 581 2 (46) (71) (367) Minority interest........ (3,901) (4,687) (11,823) (401) -- -- -- -- ------- -------- -------- -------- ------- -------- ------- ------- Loss before income taxes and extraordinary item................... (11,170) (13,869) (23,942) (18,792) (8,299) (10,976) (2,348) (6,025) Provision (benefit) for income taxes........... (2,424) (3,376) 18,729 (987) -- -- -- -- ------- -------- -------- -------- ------- -------- ------- ------- Net loss before extraordinary item..... (8,746) (10,493) (42,671) (17,805) (8,299) (10,976) (2,348) (6,025) Extraordinary item....... -- -- -- -- -- -- 803 -- ------- -------- -------- -------- ------- -------- ------- ------- Net loss................. $(8,746) $(10,493) $(42,671) $(17,805) $(8,299) $(10,976) $(3,151) $(6,025) ======= ======== ======== ======== ======= ======== ======= ======= Basic and diluted net loss per share: Before extraordinary item................. $ (0.35) $ (0.42) $ (1.71) $ (0.55) $ (0.23) $ (0.28) $ (0.05) $ (0.14) Extraordinary item..... -- -- -- -- -- -- 0.02 -- ------- -------- -------- -------- ------- -------- ------- ------- Net loss............... $ (0.35) $ (0.42) $ (1.71) $ (0.55) $ (0.23) $ (0.28) $ (0.07) $ (0.14) ======= ======== ======== ======== ======= ======== ======= =======
22
PERCENTAGE OF NET SALES -------------------------------------------------------------------------------------- APRIL 29, JULY 29, OCT. 28, FEB. 3, MAY 5, AUG. 4, NOV. 3, FEB. 2, 2000 2000 2000 2001 2001 2001 2001 2002 --------- -------- -------- -------- -------- -------- -------- -------- Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales...................... 52.6 56.6 55.6 56.6 54.3 56.7 50.7 51.1 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit....................... 47.4 43.4 44.4 43.4 45.7 43.3 49.3 48.9 Selling, general and administrative expenses......................... 79.5 94.2 73.0 56.5 67.5 68.1 56.7 49.1 Merger, restructuring and finance charges.......................... -- -- 39.4 11.2 1.1 17.7 -- -- Merger settlement charge........... -- -- -- -- -- -- -- 12.9 Interest and other expense (income), net.................... (1.4) (1.1) 0.3 0.8 0.0 (0.2) (0.2) (0.8) Minority interest.................. (8.0) (12.5) (22.6) (0.5) -- -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- Loss before income taxes and extraordinary item............... (22.7) (37.2) (45.7) (24.6) (22.9) (42.3) (7.2) (12.3) Provision (benefit) for income taxes............................ (4.9) (9.1) 35.8 (1.3) -- -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- Loss before extraordinary item..... (17.8) (28.1) (81.5) (23.3) (22.9) (42.3) (7.2) (12.3) Extraordinary item................. -- -- -- -- -- -- 2.5 -- ----- ----- ----- ----- ----- ----- ----- ----- Net loss........................... (17.8)% (28.1)% (81.5)% (23.3)% (22.9)% (42.3)% (9.7)% (12.3)% ===== ===== ===== ===== ===== ===== ===== =====
LIQUIDITY AND CAPITAL RESOURCES Cash used by operations was $15.6 million in fiscal 2001 compared to $37.0 million in fiscal 2000. This decrease primarily relates to lower operating losses as a result of the sale or shut down of our non-core businesses in connection with our restructuring initiatives. Investing activities provided $6.5 million and $24.1 million in fiscal 2001 and 2000, respectively, primarily relating to net proceeds from our investments offset by capital expenditures and, in fiscal 2001, to the cash proceeds and payments relating to our non-core businesses. During fiscal 2002, we expect to make capital expenditures of approximately $10 million, primarily for the expansion of our retail store base. Financing activities were not significant in fiscal 2000. In fiscal 2001, financing activities provided cash of $26.9 million, which primarily relates to the June 2001 sale of 5.74 million shares of our Class A common stock and stock option exercises. 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. The principal balance on the mortgage was $5.2 million and $3.1 million as of February 3, 2001 and February 2, 2002, respectively. Future mortgage principal payments are as follows: fiscal 2002--$100,000; and 2003--$3.0 million. 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 23 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 fiscal 2001. As of February 2, 2002, the outstanding balance, which was classified as current, was $4.4 million, outstanding letters of credit were $800,000 and unused available credit was $2.8 million. We believe that our cash on hand and cash generated by operations, together with the funds available under our credit agreement, will be sufficient to meet our capital and operating requirements through fiscal 2002. Our future capital requirements depend on numerous factors, including, without limitation, the success of our marketing, sales and distribution efforts. Additional funds, if required, may not be available to us on favorable terms or at all. The following is a summary of our contractual obligations and commitments as of February 2, 2002 and the timing of related future payments:
FISCAL 2003 FISCAL 2005 FISCAL 2007 FISCAL 2002 AND 2004 AND 2006 AND THEREAFTER TOTAL ----------- ------------ ------------ -------------- ----------- Mortgage.................... $ 100,000 $ 3,000,000 -- -- $ 3,100,000 Capital leases.............. 600,000 700,000 -- -- 1,300,000 Operating leases............ 7,800,000 15,200,000 $14,300,000 $21,200,000 58,500,000 ---------- ----------- ----------- ----------- ----------- Total....................... $8,500,000 $18,900,000 $14,300,000 $21,600,000 $63,300,000
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our variable-rate mortgage arrangements and our credit facility expose us to changes in interest rates. Based on our outstanding balances of $3.1 million and $4.4 million, respectively, at February 2, 2002, a hypothetical 100 basis point increase in interest rates would cause an increase in our annual interest expense of approximately $75,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 of Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 PART III The information required by Part III (Items 10 through 13) is incorporated by reference to the captions "Beneficial Ownership of Voting Securities," "Election of Directors," "Management" and "Certain Transactions" in our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of our fiscal year covered by this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K (a) See Index to Financial Statements on page F-1. All schedules are omitted either because they are not applicable or the required information is disclosed in the consolidated financial statements or notes thereto. (b) We did not file any reports on Form 8-K during the fourth quarter of fiscal 2001. (c) See Exhibit Index immediately following Signature Page. 25 DELIA*S CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENT
PAGE -------- REPORT OF INDEPENDENT AUDITORS.............................. F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets as of February 3, 2001 and February 2, 2002........................................ F-3 Consolidated Statements of Operations for the fiscal years ended January 29, 2000, February 3, 2001 and February 2, 2002.................................................... F-4 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 29, 2000, February 3, 2001 and February 2, 2002.................................................... F-5 Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2000, February 3, 2001 and February 2, 2002.................................................... F-6 Notes to Consolidated Financial Statements................ F-7
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of dELiA*s Corp. We have audited the accompanying consolidated balance sheets of dELiA*s Corp. (the "Company") as of February 3, 2001 and February 2, 2002 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ending February 2, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of dELiA*s Corp. as of February 3, 2001 and February 2, 2002 and the consolidated results of the Company's operations and cash flows for each of the three fiscal years in the period ending February 2, 2002 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP New York, New York March 11, 2002, except for the last paragraph of Note 10, as to which the date is April 26, 2002 F-2 DELIA*S CORP. CONSOLIDATED BALANCE SHEETS FEBRUARY 3, 2001 AND FEBRUARY 2, 2002 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FEBRUARY 3, 2001 FEBRUARY 2, 2002 ---------------- ---------------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 10,121 $ 27,915 Restricted cash........................................... -- 3,277 Short-term investments.................................... 11,024 -- Merchandise inventories................................... 19,974 14,640 Assets held for sale...................................... 3,334 -- Prepaid expenses and other current assets................. 9,850 5,890 -------- -------- Total current assets.................................... 54,303 51,722 PROPERTY AND EQUIPMENT, NET................................. 30,145 30,074 OTHER ASSETS................................................ 595 438 -------- -------- TOTAL ASSETS................................................ $ 85,043 $ 82,234 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses..................... $ 27,080 $ 12,297 Liabilities due to customers.............................. 4,570 4,824 Accrued restructuring..................................... 4,059 2,210 Bank loan payable......................................... 2,361 4,373 Other current liabilities................................. 2,151 597 -------- -------- Total current liabilities............................... 40,221 24,301 LONG-TERM DEBT AND CAPITAL LEASES........................... 4,770 3,695 EXCESS OF FAIR VALUE OVER PURCHASE PRICE.................... 19,383 15,383 OTHER LONG-TERM LIABILITIES................................. 513 1,398 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 46,169,912, respectively (including 1,685,580 in treasury)............................................... 383 462 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................................ 91,293 136,668 Less common stock in treasury, at cost.................... (11,041) (11,041) Deferred compensation..................................... (1,168) (870) Retained deficit.......................................... (59,425) (87,876) -------- -------- Total stockholders' equity.............................. 20,156 37,457 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 85,043 $ 82,234 ======== ========
See notes to consolidated financial statements. F-3 DELIA*S CORP. CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS ENDED JANUARY 29, 2000, FEBRUARY 3, 2001 AND FEBRUARY 2, 2002 (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL ------------------------------ 1999 2000 2001 -------- -------- -------- NET SALES................................................... $190,772 $215,065 $143,728 COST OF SALES............................................... 108,148 119,258 75,918 -------- -------- -------- GROSS PROFIT................................................ 82,624 95,807 67,810 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 124,339 155,503 84,630 MERGER, RESTRUCTURING AND FINANCE CHARGES................... 23,668 29,205 4,975 MERGER SETTLEMENT CHARGE.................................... -- -- 6,335 GAIN ON SUBSIDIARY IPO AND SALE OF SUBSIDIARY STOCK......... (78,117) -- -- INTEREST AND OTHER INCOME, NET.............................. (2,429) (316) (482) MINORITY INTEREST........................................... (4,865) (20,812) -- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.... 20,028 (67,773) (27,648) PROVISION FOR INCOME TAXES.................................. 9,070 11,942 -- -------- -------- -------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM................. 10,958 (79,715) (27,648) EXTRAORDINARY ITEM.......................................... -- -- 803 -------- -------- -------- NET INCOME (LOSS)........................................... $ 10,958 $(79,715) $(28,451) ======== ======== ======== BASIC NET INCOME (LOSS) PER SHARE: BEFORE EXTRAORDINARY ITEM................................. $ 0.45 $ (2.98) $ (0.68) EXTRAORDINARY ITEM........................................ -- -- 0.02 -------- -------- -------- NET INCOME (LOSS)......................................... $ 0.45 $ (2.98) $ (0.70) ======== ======== ======== DILUTED NET INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM................................. $ 0.42 $ (2.98) $ (0.68) EXTRAORDINARY ITEM........................................ -- -- 0.02 -------- -------- -------- NET INCOME (LOSS)......................................... $ 0.42 $ (2.98) $ (0.70) ======== ======== ========
See notes to consolidated financial statements. F-4 DELIA*S CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FISCAL YEARS ENDED JANUARY 29, 2000, FEBRUARY 3, 2001 AND FEBRUARY 2, 2002 (IN THOUSANDS, EXCEPT SHARE DATA)
dELiA*s Inc. dELiA*s Corp. dELiA*s Corp. Common Stock Class A Common Class B Common Additional ---------------------- --------------------- --------------------- Paid-In Treasury SHARES Amount SHARES Amount SHARES Amount Capital Stock ----------- -------- ---------- -------- ---------- -------- ---------- -------- BALANCE, JANUARY 31, 1999......... 14,185,425 $ 142 -- -- -- -- $ 54,133 -- Common stock issuance for acquisition..................... 5,000 -- -- -- -- -- 1,396 -- Subsidiary stock issuance for acquisition..................... -- -- -- -- -- -- 6,919 -- Cancellation of common stock...... (33,784) -- -- -- -- -- (608) -- Subsidiary purchase of dELiA*s Inc. common stock.................... 551,046 5 -- -- -- -- 17,729 $(17,734) Stock option activity............. 206,785 2 -- -- -- -- 1,199 -- Tax effect of equity transactions.................... -- -- -- -- -- -- (552) -- Net income........................ -- -- -- -- -- -- -- -- ----------- ----- ---------- ---- ---------- ---- -------- -------- BALANCE, JANUARY 29, 2000......... 14,914,472 149 -- -- -- -- 80,216 (17,734) Common stock issuance for acquisitions.................... 168,039 2 -- -- -- -- (2) -- Subsidiary stock issuance for acquisition..................... -- -- -- -- -- -- 2,802 -- Restricted stock issuance, net.... 1,628,775 16 (87,978) $ (1) -- -- 2,760 -- Merger adjustments................ (16,714,786) $(167) 38,353,738 384 11,425,000 $114 5,477 7,516 Deferred compensation............. -- -- -- -- -- -- -- -- Stock option activity............. 3,500 -- 1,275 -- -- -- 40 -- Stock repurchases................. -- -- -- -- -- -- -- (823) Net loss.......................... -- -- -- -- -- -- -- -- ----------- ----- ---------- ---- ---------- ---- -------- -------- BALANCE, FEBRUARY 3, 2001......... -- -- 38,267,035 383 11,425,000 114 91,293 (11,041) Common stock issuance for offering........................ -- -- 5,740,000 58 -- -- 29,459 -- Common stock issuance for acquisition..................... -- -- 1,315,271 13 -- -- 6,591 -- Common stock issuance for settlement...................... -- -- -- -- -- -- 6,335 -- Restricted stock issuance, net.... -- -- (70,308) (1) -- -- 249 -- Deferred compensation............. -- -- -- -- -- -- -- -- Stock option activity............. -- -- 917,914 9 -- -- 2,741 -- Net loss.......................... -- -- -- -- -- -- -- -- ----------- ----- ---------- ---- ---------- ---- -------- -------- BALANCE, FEBRUARY 2, 2002......... -- -- 46,169,912 $462 11,425,000 $114 $136,668 $(11,041) =========== ===== ========== ==== ========== ==== ======== ======== Retained Total Deferred Earnings Stockholders' Comp. (Deficit) Equity -------- --------- ------------- BALANCE, JANUARY 31, 1999......... $ -- $ 9,332 $63,607 Common stock issuance for acquisition..................... -- -- 1,396 Subsidiary stock issuance for acquisition..................... -- -- 6,919 Cancellation of common stock...... -- -- (608) Subsidiary purchase of dELiA*s Inc. common stock.................... -- -- -- Stock option activity............. -- -- 1,201 Tax effect of equity transactions.................... -- -- (552) Net income........................ -- 10,958 10,958 ------- -------- ------- BALANCE, JANUARY 29, 2000......... -- 20,290 82,921 Common stock issuance for acquisitions.................... -- -- -- Subsidiary stock issuance for acquisition..................... -- -- 2,802 Restricted stock issuance, net.... (3,784) -- (1,009) Merger adjustments................ (499) -- 12,825 Deferred compensation............. 3,115 -- 3,115 Stock option activity............. -- -- 40 Stock repurchases................. -- -- (823) Net loss.......................... -- (79,715) (79,715) ------- -------- ------- BALANCE, FEBRUARY 3, 2001......... (1,168) (59,425) 20,156 Common stock issuance for offering........................ -- -- 29,517 Common stock issuance for acquisition..................... -- -- 6,604 Common stock issuance for settlement...................... -- -- 6,335 Restricted stock issuance, net.... (979) -- (731) Deferred compensation............. 1,277 -- 1,277 Stock option activity............. -- -- 2,750 Net loss.......................... -- (28,451) (28,451) ------- -------- ------- BALANCE, FEBRUARY 2, 2002......... $ (870) $(87,876) $37,457 ======= ======== =======
See notes to consolidated financial statements. F-5 DELIA*S CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED JANUARY 29, 2000, FEBRUARY 3, 2001 AND FEBRUARY 2, 2002 (IN THOUSANDS)
FISCAL ------------------------------ 1999 2000 2001 -------- -------- -------- OPERATING ACTIVITIES: Net income (loss) before extraordinary item............... $ 10,958 $(79,715) $(27,648) Adjustments to reconcile net income (loss) before extraordinary item to net cash used in operating activities: Depreciation and amortization........................... 6,403 11,494 1,493 Merger, restructuring and finance charges............... 24,168 32,523 4,975 Merger settlement charge................................ -- -- 6,335 Valuation allowance for deferred tax assets............. -- 19,768 -- Gain on subsidiary IPO and sale of subsidiary stock..... (78,117) -- -- Non-cash compensation expense related to restricted stock................................................. -- 4,561 1,277 Other non-cash corporate charges........................ -- 1,651 -- Minority interest....................................... (4,865) (20,812) -- Deferred taxes.......................................... 11,953 (7,495) -- Amortization of investments............................. (473) (524) (12) Changes in operating assets and liabilities: Merchandise inventories............................... (7,590) 2,413 3,520 Prepaid expenses and other current assets............. (3,888) 4,720 3,732 Other assets.......................................... (71) 331 57 Current liabilities................................... 5,111 (5,984) (10,190) Long-term liabilities................................. (49) 110 885 -------- -------- -------- Net cash used in operating activities....................... (36,460) (36,959) (15,576) INVESTING ACTIVITIES: Capital expenditures...................................... (21,009) (10,804) (5,855) Purchase of investment securities......................... (73,952) (24,282) -- Other investments......................................... (1,000) -- -- Proceeds from maturity of investment securities........... 31,508 56,699 11,036 Proceeds from sale of businesses.......................... -- 2,289 3,783 Acquisitions, net of cash acquired........................ (547) 174 (2,500) -------- -------- -------- Net cash provided by (used in) investing activities......... (65,000) 24,076 6,464 FINANCING ACTIVITIES: Net proceeds from issuance of subsidiary common stock..... 97,496 -- -- Net proceeds from common stock offering................... -- -- 29,517 Increase in restricted cash............................... -- -- (3,277) Charges related to changes in financing arrangements...... -- -- (606) Disposition of subsidiary stock........................... 14,090 -- -- Exercise of stock options................................. 1,201 75 2,692 Acquisition of treasury stock............................. -- (823) -- Borrowings (repayments) under line of credit agreements... 3,000 (639) 2,012 Principal payments on long-term debt and capital lease obligations............................................. (323) (594) (2,629) -------- -------- -------- Net cash provided by (used in) financing activities before extraordinary item........................................ 115,464 (1,981) 27,709 Net cash used by extraordinary item......................... -- -- (803) -------- -------- -------- Net cash provided by (used in) financing activities......... 115,464 (1,981) 26,906 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 14,004 (14,864) 17,794 CASH AND CASH EQUIVALENTS, BEGINNING........................ 10,981 24,985 10,121 -------- -------- -------- CASH AND CASH EQUIVALENTS, END.............................. $ 24,985 $ 10,121 $ 27,915 ======== ======== ========
See notes to consolidated financial statements. F-6 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 2, 2002 1. BUSINESS AND BASIS OF PRESENTATION 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 April 14, 1999, dELiA*s Inc. completed the initial public offering of 28% of the common stock of iTurf Inc., its Internet-focused subsidiary. iTurf used $17.7 million of the offering proceeds to purchase from dELiA*s Inc. 945,044 shares (551,046 pre-merger shares) of dELiA*s Inc. common stock, which was treated as treasury stock in the consolidation of dELiA*s Inc. In connection with the subsidiary offering, dELiA*s Inc. recognized a pre-tax gain of approximately $70.0 million. Later in fiscal 1999, dELiA*s Inc. sold an additional 1.1 million shares of iTurf stock for cash and recorded a related gain of $8.0 million. As a result of such sales and the issuance of additional shares for acquisitions, dELiA*s Inc.'s ownership of iTurf declined to 54% as of November 20, 2000. On November 20, 2000, iTurf Inc. and dELiA*s Inc. were recombined through the merger of dELiA*s Inc. into a wholly-owned subsidiary of iTurf Inc. We issued 1.715 shares of iTurf Class A common stock to dELiA*s Inc. stockholders for each outstanding share of dELiA*s Inc. common stock surrendered in the merger. All outstanding dELiA*s Inc. options and shares of restricted stock were converted at the same exchange ratio. We renamed the parent company of the recombined business dELiA*s Corp. Because the former stockholders of dELiA*s Inc. owned more than 50% of dELiA*s Corp. after the merger, the transaction was accounted for as a "reverse acquisition" by dELiA*s Inc. of the minority interest in iTurf. In connection with the merger, deferred tax liabilities relating to earlier issuances of iTurf common stock were eliminated and the remaining net deferred tax asset was reserved with a fiscal 2000 tax charge (see Note 13) of $19.8 million. The excess of the net assets acquired over the merger consideration, after the writeoff of the minority interest proportionate percentage of iTurf's noncurrent assets and an adjustment relating to our fiscal 2000 restructuring initiatives (see Note 4), was recorded as $20.1 million of "excess of fair value over purchase price" for amortization over five years. As a result of the "reverse acquisition" treatment, dELiA*s Corp. reports the historical results of dELiA*s Inc. for periods prior to the merger with all share and per share information, except for amounts on our Consolidated Balance Sheets and Consolidated Statements of Stockholders' Equity, retroactively adjusted to reflect the merger exchange ratio by multiplying the number of dELiA*s Inc. shares by 1.715. In presenting our shares outstanding and calculating loss per share for periods after the merger, we have assumed conversion on the merger date of all eligible shares of dELiA*s Inc. common stock. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR--In May 1999, we announced a change in our fiscal year to the 52 or 53 weeks ended on the Saturday closest to January 31 following the corresponding calendar year. References in this report to "fiscal 2001" mean the period from February 4, 2001 to February 2, 2002. References in this report to "fiscal 2000" mean the period from January 30, 2000 to February 3, 2001. References to "fiscal 1999" mean the period from February 1, 1999 to January 29, 2000. 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 F-7 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. USE OF ESTIMATES--The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our financial statements and footnotes thereto. Actual results could differ from those estimates. RECLASSIFICATIONS--Certain amounts have been reclassified to conform to the current period presentation. STATEMENTS OF CASH FLOWS--During fiscal 1999, 2000 and 2001, we paid $600,000, $1.3 million and $600,000, respectively, for interest and did not pay any income taxes. Non-cash investing and financing activities include the issuances of common stock for the merger described in Note 1, the acquisitions described in Note 3 and the merger settlement described in Note 10 and the issuances of restricted stock described in Note 11. CASH AND CASH EQUIVALENTS--We consider all highly liquid investments with maturities of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. RESTRICTED CASH--Restricted cash represents collateral for replacement letters of credit issued in connection with our change in lenders. The restriction will be removed after the letters of credit expire or are cancelled, which is expected to be completed during fiscal 2002. INVESTMENTS--Our investments consisted of debt securities, principally instruments of the U.S. Government and its agencies, of municipalities and of short-term mutual municipal and corporate bond funds. All such investments were classified as held-to-maturity and carried at amortized cost. Realized gains and losses on sales of these securities were reported in earnings and computed using the specific identification cost basis. MERCHANDISE INVENTORIES--Merchandise inventories, which are primarily finished goods, are stated at the lower of cost (determined on a first-in, first-out basis) or market value, which is determined based on estimated recovery. CATALOG COSTS--Catalog costs, which primarily consist of catalog production and mailing costs, are capitalized and amortized over the expected life of the related future revenue stream, which generally covers three to five months from mailing date. We account for catalog costs in accordance with AICPA Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs." SOP 93-7 requires that expenses relating to capitalized advertising costs be computed using the ratio of current period revenues for the catalog cost pool to the total of current and estimated future period revenues for that catalog cost pool. Deferred catalog costs, which are included in prepaid expenses and other current assets, were $3.1 million as of February 3, 2001. As of February 2, 2002, our deferred catalog cost balance was minimal. ADVERTISING COSTS--Advertising expenses that are not direct-response catalog costs are expensed as incurred. For fiscal 1999, 2000 and 2001, such expenses amounted to $10.6 million, $14.6 million and F-8 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) $1.3 million, respectively. Prior to fiscal 2001, these expenses related primarily to our Internet businesses. LONG-LIVED ASSETS--In accordance with the Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," we periodically review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (on an undiscounted basis) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. REVENUE RECOGNITION--Revenue is recognized when merchandise is shipped to customers or at the point of retail sale. We accrue a sales return allowance in accordance with our return policy for estimated returns of merchandise subsequent to the balance sheet date that relate to sales prior to that date. As of February 3, 2001 and February 2, 2002, the sales return allowance, which is included in customer liabilities, was $859,000 and $523,000, respectively. NONMONETARY TRANSACTION--During fiscal 2001, we exchanged some of our excess inventory, which had an original cost of $600,000 and a carrying value of $300,000, for the right to receive future goods and services also valued at $300,000. As of February 2, 2002, the related asset was approximately $300,000. SHIPPING EXPENSES--Expenses incurred in shipping goods to customers are included in cost of sales. RECOGNITION OF GAIN ON ISSUANCE OF SUBSIDIARY STOCK--In accordance with the SEC Staff Accounting Bulletin "Accounting for Sales of Stock by a Subsidiary," dELiA*s recorded a gain on the April 1999 issuance of subsidiary stock for the excess of the offering price per share over the carrying amount because the sale of such shares by a subsidiary was not a part of a broader corporate reorganization contemplated or planned. During the fourth quarter of fiscal 1999, we contemplated reorganization plans with respect to that subsidiary that precluded us from recognizing similar gains in connection with subsequent issuances of that subsidiary's stock. INCOME TAXES--Deferred income tax assets and liabilities are recorded in accordance with SFAS No. 109. Valuation allowances are provided when the expected realization of tax assets does not meet a "more likely than not" criteria. (See Note 13.) COMPUTATION OF HISTORICAL NET INCOME (LOSS) PER SHARE--We calculate net income (loss) per share in accordance with SFAS No. 128, "Computation of Earnings Per Share" and SEC Staff Accounting Bulletin No. 98. (See Note 6.) STOCK-BASED COMPENSATION--In accordance with Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," compensation cost for stock-based awards is measured as the excess, if any, of the quoted market price of our stock as of the time of grant over the amount, if any, that an employee must pay to acquire the stock. Stock options are generally granted with exercise prices equal to the fair value of the shares as of the date of grant; accordingly, we do not generally recognize compensation expense in connection with stock options. (See Note 11.) F-9 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $15.4 million in the first quarter of fiscal 2002. This amount represents the reversal of the unamortized balance of the negative goodwill recorded on our books in connection with the November 2000 merger of dELiA*s Inc. and iTurf Inc. In August 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 is not expected to have a material effect on our consolidated financial position or results of operations. 3. ACQUISITIONS THESPARK.COM, INC. On February 15, 2000, we acquired TheSpark.com, Inc. The aggregate consideration paid consisted of newly issued shares of a subsidiary's common stock and the right to receive additional consideration based on the achievement of certain performance goals. The transaction was accounted for under the purchase method of accounting with the operating results of the acquired business included in our consolidated financial statements from the date of acquisition and the excess of the aggregate purchase price over the fair market value of net assets acquired of $14.1 million allocated to goodwill. The goodwill was assigned a five-year life for amortization. In connection with this issuance of a subsidiary's common stock, we recorded $2.8 million as additional paid-in capital. On January 12, 2001, we entered into an agreement with representatives of the sellers to amend our contingent obligations under the acquisition agreement. In accordance with the amended agreement, we paid them $4.2 million (including $1.7 million in connection with our March 2001 sale of the businesses) in fiscal 2001 and issued them 1,315,271 and 197,835 shares of our Class A common stock on June 1, 2001 and March 1, 2002, respectively. The value of all consideration paid or issued subsequent to our decision to sell the businesses (see Note 4) was included in our restructuring charges. T@PONLINE.COM, INC. On September 1, 1999, we acquired T@ponline.com, Inc., an operator of a Web site directed at college and university students that we renamed Ontap.com, for newly issued shares of a subsidiary's common stock. We accounted for the transaction under the purchase method of accounting with the operating results of the acquired business included in our consolidated financial statements from the date of acquisition and the excess of the aggregate purchase price over the fair market value of net F-10 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 3. ACQUISITIONS (CONTINUED) assets acquired of $19.0 million allocated to goodwill. The goodwill was assigned a five-year life for amortization. In connection with this issuance of a subsidiary's common stock, we recorded $6.9 million as additional paid-in capital. During fiscal 2000, we shut down the acquired Internet site. (See Note 4.) SCREEEM! AND JEAN COUNTRY In July 1998, dELiA*s acquired assets located in 26 retail stores operated under the Screeem! and Jean Country names, as well as the leases for such stores and several related trademarks. The total shares issued for the acquisition includes shares issued in February 2000 net of shares cancelled in fiscal 1999 for a working capital purchase price adjustment. The $1.4 million value of the shares issued in February 2000 was recorded as an increase to goodwill and stockholders' equity in fiscal 1999 as the contingencies relating to such issuance had been satisfied by January 29, 2000. 4. MERGER, RESTRUCTURING AND FINANCE CHARGES FISCAL 2001 During fiscal 2001, we substantially completed our prior year merger and restructuring initiatives (see below) and recorded the following related charges: - $2.3 million for non-cash asset writedowns attributable to the discontinued non-core businesses, which primarily relates to our June 1, 2001 stock issuance to the sellers of TheSpark.com Inc., the value of which exceeded our reserve due to the appreciation of our share price; - a $1.2 million loss, which is net of a $100,000 gain, on the sales of non-core businesses; and - a $900,000 increase in reserves, which is net of the reversal of excess reserves of $85,000, for lease and other obligations as actual costs differed from our original estimates. We also recorded a $600,000 finance charge relating to the early termination of an interest rate swap that was tied to our distribution facility mortgage (see Note 9) and agreed on a non-cash settlement of a class action suit relating to the November 2000 merger of dELiA*s Inc. and iTurf Inc (see Note 10.) As of February 2, 2002, $2.2 million remains accrued for future lease and other obligations relating to our restructuring initiatives. We expect this amount to be paid in fiscal 2002. FISCAL 2000 During fiscal 2000, dELiA*s Inc. and iTurf Inc. merged and we announced our intention to focus on our core dELiA*s brand and to sell or shut down our non-core businesses. The merger and restructuring of our businesses included the following initiatives, which were substantially completed in fiscal 2001: - the recombination of dELiA*s Inc. and iTurf Inc. in order to allow us, among other things, to manage the catalog and e-commerce components of our dELiA*s Direct business segment better; - the liquidation of our Droog direct business; F-11 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 4. MERGER, RESTRUCTURING AND FINANCE CHARGES (CONTINUED) - the sale of substantially all of the assets of our TSI Soccer direct business; - the sale of the primary assets of our Storybook Heirlooms direct business; - the liquidation of the retail operations of TSI Soccer; and - the decision to exit our Internet community businesses. In connection with these initiatives, we recorded the following in fiscal 2000: - $37.6 million for non-cash asset writedowns, offset by a $14.3 million reduction of the excess of fair value over purchase price attributable to the operations being shut down or sold; - $19.8 million for a non-cash tax charge taken in connection with the merger; - $3.3 million relating to the liquidation of inventory of businesses being shut down; - $3.2 million relating to future lease costs and other contractual obligations; - $1.8 million in merger transaction costs; - $1.2 million in severance costs related to the elimination of approximately 200 full-time and part-time positions at the locations being sold or shut down and at our corporate offices; and - a $500,000 loss on the sale of the TSI Soccer direct business. The total fiscal 2000 charge of $53.1 million was recorded as $30.0 million of merger and restructuring charges, a $19.8 million fiscal 2000 income tax charge and $3.3 million in cost of sales. During fiscal 2000, we also reversed $800,000 of our Screeem! restructuring reserves as actual lease exit penalties were less than the amount originally estimated (see below). FISCAL 1999 During fiscal 1999, we recorded a charge of approximately $24.2 million in connection with our restructuring plan to exit our Screeem! and Jean Country retail operations. The charge was comprised of the following: - $19.4 million for the write-off of the remaining unamortized balance of goodwill and other intangibles relating to our acquisition of the Screeem! and Jean Country retail operations; - $3.6 million for the shutdown of certain retail stores, of which $2.3 million represented the write-off of assets that would no longer be used and $1.3 million primarily related to future lease costs; - $700,000 in severance costs relating to the elimination of approximately 125 full-time and part-time jobs at the Screeem! corporate office and the store locations to be closed; and - $500,000 for the liquidation of inventory carried at stores to be converted or closed. The total fiscal 1999 charge of $24.2 million is recorded as a $23.7 million restructuring charge in operating expenses and $500,000 in cost of sales. The total charge includes $1.4 million of goodwill write-off relating to the value of 288,187 shares (168,039 pre-merger shares) of common stock issued in F-12 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 4. MERGER, RESTRUCTURING AND FINANCE CHARGES (CONTINUED) February 2000. This additional goodwill charge was recorded in fiscal 1999, when the related contingencies were satisfied, as an increase to additional paid-in capital. All stores were closed or converted to dELiA*s stores and all planned job eliminations completed by the end of fiscal 2000. 5. SEGMENTS Our reportable segments changed as a result of our fiscal 2000 merger and restructuring initiatives. All disclosures have been restated to conform to the current presentation. We currently have two reportable segments: dELiA*s Direct and dELiA*s Retail. All of our other businesses have been sold or shut down and therefore no longer qualify as operating segments under SFAS No. 131 and are included as "non-core" below. Our two segments offer similar products to similar customers, but are managed separately because of their distribution methods. Both segments earn revenues primarily from the sale of apparel, accessories and home furnishings to consumers. The Direct segment takes phone, online and mail orders from our customers and ships merchandise directly to those customers. Our dELiA*s retail stores display merchandise primarily in mall stores and sell directly to customers who visit those locations. Inter-segment activity is minimal, is recorded at cost and is eliminated in consolidation and in preparation of the disclosure below. We do not sell a significant amount of product outside of the United States. We evaluate performance and allocate resources primarily based on operating income (loss) before certain expense allocations for shared resources; depreciation, amortization and non-cash compensation; unusual or extraordinary items; minority interest; interest and other income; and income taxes. There are no material differences between accounting policies used by the reportable segments in preparation of this information and those described in the summary of significant accounting policies in this report.
NET REVENUES FISCAL 1999 FISCAL 2000 FISCAL 2001 - ------------ ------------ ------------ ------------ dELiA*s Direct..................................... $ 85,256,000 $ 96,251,000 $ 83,684,000 dELiA*s Retail..................................... 16,934,000 45,097,000 54,285,000 Non-core........................................... 88,582,000 73,717,000 5,759,000 ------------ ------------ ------------ Total.............................................. $190,772,000 $215,065,000 $143,728,000 ============ ============ ============ ASSETS AT THE END OF FISCAL YEAR FISCAL 2000 FISCAL 2001 - -------------------------------- ------------ ------------ dELiA*s Direct inventory. $ 11,112,000 $ 9,109,000 dELiA*s Retail inventory......................................... 5,251,000 5,531,000 Other assets..................................................... 68,680,000 67,594,000 ------------ ------------ Total............................................................ $ 85,043,000 $ 82,234,000 ============ ============
F-13 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 5. SEGMENTS (CONTINUED)
INCOME (LOSS) BEFORE TAXES AND EXTRAORDINARY ITEM FISCAL 1999 FISCAL 2000 FISCAL 2001 - ------------------------------------------------- ------------ ------------ ------------ dELiA*s Direct operating loss....................... $(15,334,000) $ (936,000) $ (1,066,000) dELiA*s Retail operating loss....................... (3,020,000) (369,000) (1,604,000) Non-core operating loss............................. (13,743,000) (32,256,000) (3,481,000) Unallocated shared expenses......................... (2,715,000) (5,650,000) (7,899,000) Depreciation, amortization and non-cash compensation...................................... (6,403,000) (16,055,000) (2,770,000) Merger, restructuring, finance and other non-recurring charges............................. (24,168,000) (33,635,000) (4,975,000) Merger settlement charge............................ -- -- (6,335,000) Gain on subsidiary IPO and sale of subsidiary stock............................................. 78,117,000 -- -- Minority interest................................... 4,865,000 20,812,000 -- Interest and other income, net...................... 2,429,000 316,000 482,000 ------------ ------------ ------------ Total............................................... $ 20,028,000 $(67,773,000) $(27,648,000) ============ ============ ============
6. NET INCOME (LOSS) PER SHARE Net income (loss) per share amounts for all periods prior to the November 2000 merger (see Note 1) have been restated to reflect the merger with all components of the denominator having been multiplied by the 1.715 exchange ratio. Net loss per share for fiscal 2000 is calculated assuming that all shares of dELiA*s Inc. common stock that were eligible for exchange in the merger were exchanged on the merger date. Net loss per share for fiscal 2001 is calculated assuming that the shares issued for settlement of the merger-related class action lawsuit (see Note 10) were issued on the date of the settlement agreement. The following table sets forth the computation of basic and diluted net income (loss) per share:
FISCAL 1999 FISCAL 2000 FISCAL 2001 ----------- ------------ ------------ Net income (loss) before extraordinary item.......... $10,958,000 $(79,715,000) $(27,648,000) =========== ============ ============ Denominator for basic net income (loss) per share.... 24,550,000 26,744,000 40,604,000 Effect of dilutive securities: Stock options...................................... 1,626,000 -- -- Contingent stock--acquisitions..................... 201,000 -- -- ----------- ------------ ------------ Denominator for diluted net income (loss) per share.............................................. 26,377,000 26,744,000 40,604,000 =========== ============ ============ Net income (loss) per share before extraordinary item: Basic.............................................. $ 0.45 $ (2.98) $ (0.68) =========== ============ ============ Diluted............................................ $ 0.42 $ (2.98) $ (0.68) =========== ============ ============
For fiscal 1999, options to purchase 1.5 million shares (883,000 pre-merger shares) were outstanding as of the end of the period but not included in the computation of diluted net income per share because their effect would have been antidilutive. For fiscal 2000 and 2001, all options (see Note 11) and the shares issued after the end of the respective fiscal year for the TheSpark.com acquisition (see Note 3) were excluded from the computations of diluted loss per share. F-14 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value amounts reported in our balance sheets for cash and cash equivalents and long-term debt approximate fair values. Our investments of $11.0 million as of February 3, 2001 represent debt securities that are classified as held-to-maturity and carried at amortized cost. The fair value of those debt security investments as of February 3, 2001 was $11.0 million based on quotes obtained from brokers for those instruments. 8. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated on the straight-line method over the estimated useful lives or, for leasehold improvements, the shorter of the estimated useful lives or the remaining term of the lease. Depreciation expense for fiscal 2000 and 2001 was $7.1 million and $5.5 million, respectively. Major classes of property and equipment at the end of those fiscal years were as follows:
ESTIMATED USEFUL LIVES FEBRUARY 3, 2001 FEBRUARY 2, 2002 ---------------------- ---------------- ---------------- Furniture, fixtures and equipment........ 3-10 years $20,317,000 $20,400,000 Leasehold improvements................... Term of lease 16,529,000 19,938,000 Building................................. 40 years 5,448,000 5,448,000 Land..................................... n/a 873,000 873,000 ----------- ----------- Total--at cost........................... 43,167,000 46,659,000 Less accumulated depreciation............ 13,022,000 16,585,000 ----------- ----------- Total property and equipment, net........ $30,145,000 $30,074,000 =========== ===========
9. 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, the bank agreed to waive 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. The principal balance on the mortgage was $5.2 million and $3.1 million as of February 3, 2001 and February 2, 2002, respectively. Future mortgage principal payments are as follows: fiscal 2002--$100,000 and 2003--$3.0 million. On April 28, 2000, we entered into a three-year agreement with Congress Financial Corporation that amended and restated the terms of our previous credit agreement with First Union, the parent company of Congress. 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 F-15 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 9. LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED) 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 Congress facility. 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 recorded an extraordinary charge of approximately $800,000 in fiscal 2001. As of February 3, 2001 and February 2, 2002, our credit facility balance, which was classified as current, was $2.4 million and $4.4 million, respectively, outstanding letters of credit were $1.4 million and $800,000, respectively, and unused available credit was $5.5 million and $2.8 million, respectively. During fiscal 2000, the weighted average interest rate incurred on our credit agreement was 9.5%. During fiscal 2001, the weighted average interest rate incurred on our credit facility was 7.0%. During fiscal 1999, 2000 and 2001, interest expense was $700,000, $1.3 million and $600,000, respectively. 10. COMMITMENTS AND CONTINGENCIES LEASES As of February 2, 2002, dELiA*s was obligated under various long-term non-cancelable leases for offices, retail stores, warehouse and distribution space and equipment requiring minimum annual rental payments. Those future obligations, including amounts for which we've reserved in connection with our restructuring initiatives (see Note 4), are payable as follows:
FISCAL CAPITAL LEASES OPERATING LEASES - ------ -------------- ---------------- 2002............................................ $ 596,000 $ 7,844,000 2003............................................ 596,000 7,742,000 2004............................................ 149,000 7,440,000 2005............................................ -- 7,150,000 2006............................................ -- 7,107,000 2007 and thereafter............................. -- 21,169,000 ----------- ----------- Minimum lease payments.......................... $ 1,341,000 $58,452,000 =========== ===========
The total minimum payments for capital leases include approximately $100,000 for imputed interest, which reduces the total future payments to $1.2 million present value. Amortization of assets recorded under capital leases is included with depreciation expense on our owned assets. (See Note 8.) Some of our retail store leases include contingent rent clauses that will result in higher payments if the store sales exceed expected levels. Some of our operating leases also include renewal options and F-16 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) escalation clauses with terms that are typical for the industry. In addition, we are obligated to pay a proportionate share of increases in real estate taxes and other occupancy costs for space covered by our operating leases. Rent expense for fiscal 1999, 2000 and 2001 consisted almost entirely of minimum rentals and was $10.3 million, $7.8 million and $9.4 million, respectively. BENEFIT PLAN We have a 401(k) retirement plan covering all eligible employees. Under the plan, employees can defer 1% to 15% of compensation up to federal limits. We may make matching contributions on a discretionary basis. The employee's contribution is 100% vested and the employer's matching contribution vests over a five-year period. Our employer's contributions to the plan were $46,000, $82,000 and $107,000 in fiscal 1999, 2000 and 2001, respectively. 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 PrimediaNet and Primedia. As of February 2, 2002, our remaining payment obligation including the assigned amount was approximately $400,000. 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 29, 2001. By order dated December 10, 2001, the court certified the class. We filed our answer to the consolidated amended complaint on February 13, 2002. We intend to vigorously defend against this action. We believe that the claim is covered under our insurance policy and do not expect the ultimate resolution of this lawsuit to have a material adverse effect on our results of operations, financial position or cash flow. F-17 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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. On March 5, 2001, we answered that complaint, asserted affirmative defenses and separately moved to strike certain allegations. Also on March 5, 2001, we moved to dismiss the complaint. On January 15, 2002, all parties entered into a stipulation and agreement of compromise, settlement and release. Pursuant to the settlement, the defendants will receive full release in exchange for one million shares of dELiA*s common stock, which shares were issued and delivered on April 26, 2002. The total $6.3 million value of the non-cash settlement is recorded as a fiscal 2001 merger charge with an offset to additional paid-in capital. The settlement was approved without objection by the court on April 8, 2002 and, provided no appeal is taken, will become a final order in May 2002. 11. STOCK-BASED COMPENSATION Prior to the iTurf Inc. initial public offering, the board of directors of iTurf Inc. approved and adopted the 1999 Amended and Restated iTurf Stock Incentive Plan. Together with the 1996 dELiA*s Inc. Stock Incentive Plan, as amended, and the 1998 dELiA*s Inc. Stock Incentive Plan, the 1999 iTurf Stock Incentive Plan, as amended, (collectively, the "Incentive Plans") provide for the following types of awards to eligible employees: (i) stock options, including incentive stock options and non-qualified stock options; (ii) stock appreciation rights, in tandem with stock options or freestanding; and (iii) restricted stock. The maximum number of shares of common stock subject to each of the stock options or stock appreciation rights that may be granted to any individual under the 1999 Stock Incentive Plan is 750,000 for each fiscal year. If a stock appreciation right is granted in tandem with a stock option, it shall apply against the individual limits for both stock options and stock appreciation rights, but only once against the maximum number of shares available under the Incentive Plans. STOCK OPTIONS On November 20, 2000, in connection with the merger of dELiA*s Inc. and iTurf Inc., dELiA*s Corp. assumed all of the options outstanding under the 1996 Stock Incentive Plan and the 1998 Stock Incentive Plan. Such options were adjusted to reflect the 1.715 merger exchange ratio with the number of shares underlying each option multiplied by the ratio and the related exercise prices divided by the ratio. All historical stock option information of dELiA*s Inc. that is provided herein has been similarly restated. The 1.2 million iTurf Inc. options outstanding as of the date of merger, which had an average exercise price of $9.77, continued to be outstanding after the merger with their terms and conditions unchanged, and are included in the total fiscal 2000 grants in the table below. From the date of the recombination of dELiA*s Inc. and iTurf Inc., options are only available for grant under the 1999 Stock Incentive Plan. As of February 2, 2002, options to purchase 4.6 million shares were available for grant under the 1999 Stock Incentive Plan. F-18 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 11. STOCK-BASED COMPENSATION (CONTINUED) An executive is party to a stock option agreement with us pursuant to which we granted such executive an option to purchase up to an aggregate of 428,750 shares of our Class A common stock at an exercise price equal to the fair market value on the date of grant. In fiscal 1998, a portion of the grant was repriced to reflect the fair market value as of the date of such repricing. The option became exercisable as to 85,750 shares on each of July 10, 1999, 2000 and 2001 and becomes exercisable as to 85,750 shares on each of July 10, 2002 and 2003. A summary of our stock option activity for the three most recent fiscal years is as follows:
FISCAL 1999 FISCAL 2000 FISCAL 2001 -------------------------- --------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE --------- -------------- ---------- -------------- ---------- -------------- Outstanding, beginning of period..................... 5,212,074 $3.95 5,808,076 $4.83 5,340,005 $4.60 Granted...................... 1,452,662 7.94 4,069,695 4.10 2,082,357 4.58 Exercised.................... (354,636) 3.39 (7,277) 2.89 (917,914) 2.93 Canceled..................... (502,023) 5.68 (4,530,489) 4.44 (1,807,062) 6.24 --------- ----- ---------- ----- ---------- ----- Outstanding, end of period... 5,808,076 $4.83 5,340,005 $4.60 4,697,386 $4.29 ========= ===== ========== ===== ========== ===== Exercisable, end of period... 2,111,045 $3.62 1,897,886 $4.96 1,604,720 $4.20 ========= ===== ========== ===== ========== =====
The following summarizes our stock option information as of February 2, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ------------------------------ WEIGHTED-AVERAGE RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ---------------- ---------------- ----------- ---------------- Less than $2.50................. 1,222,571 8.8 $ 0.81 545,508 $ 0.78 $2.50 to $4.49.................. 1,600,582 8.1 3.26 89,800 3.44 $4.50 to $7.49.................. 1,320,571 9.4 5.69 194,352 5.45 $7.50 to $14.00................. 460,162 7.0 9.54 236,145 10.08 More than $14.00................ 93,500 7.1 21.94 38,915 21.91 --------- --- ------ --------- ------ Total........................... 4,697,386 8.5 $ 4.29 1,604,720 $ 4.20
We apply APB No. 25 and related interpretations in accounting for the Incentive Plans. Generally, all grants have a fixed exercise price with vesting based solely on service. Accordingly, no compensation expense has been recognized for options under these plans. Had compensation expense been determined based on the fair value of stock option grants on the date of grant in accordance with SFAS No. 123, our net income (loss) and net income (loss) per share would have been as follows:
FISCAL 1999 FISCAL 2000 FISCAL 2001 ----------- ------------ ------------ Pro forma net income (loss)........................... $5,484,000 $(82,658,000) $(30,158,000) Pro forma basic net income (loss) per share........... $ 0.38 $ (3.09) $ (0.74) Pro forma diluted net income (loss) per share......... $ 0.36 $ (3.09) $ (0.74)
The average estimated fair market value of options granted during fiscal 1999, 2000 and 2001 was $7.34, $1.01 and $2.94 per share, respectively. In preparing such estimates, we used the Black-Scholes F-19 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 11. STOCK-BASED COMPENSATION (CONTINUED) option pricing model with the following assumptions: no dividend yield; expected volatility of 65%, 82% and and 85%, respectively, risk-free interest rates of 5.5%, 6.0% and 4.0%, respectively; expected lives of three to five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable measure of the fair value of our stock options. In the accompanying Consolidated Statement of Stockholders' Equity, stock option activity includes option exercises and restructuring-related adjustments. 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. During fiscal 2000, dELiA*s and iTurf issued restricted common stock primarily in exchange for outstanding options held by certain employees and non-employee directors, resulting in the issuance of approximately 2.9 million shares (1.7 million pre-merger shares) of dELiA*s Inc. restricted common stock, 1.1 million shares of iTurf restricted common stock, and 100,000 shares of dELiA*s Corp. common stock. Certain vesting schedules of the restricted stock were extended as compared to the related option vesting schedules. Restricted stock was issued primarily in an effort to retain these employees at a time the exercise prices of their options were above current market prices for the common stock. The value of dELiA*s restricted stock granted, based upon the market value as of the award date, is recorded as deferred compensation, an offset to stockholders' equity which is amortized against earnings over the related vesting periods. Prior to the November 2000 merger, iTurf's restricted stock grant was recorded as minority interest and was being similarly amortized against the earnings of that subsidiary. As a result of the merger, all unvested shares of iTurf restricted stock were revalued based on the current market price of dELiA*s Inc. stock and such value was added to deferred compensation for amortization over the remaining vesting periods. During fiscal 2000 and 2001, we reduced the deferred compensation balance by a total of $3.5 million and $1.3 million, respectively, as we recognized non-cash compensation expense relating to restricted stock and made certain adjustments in connection with our restructuring initiatives. The deferred compensation balance as of February 3, 2001 and February 2, 2002 was $1.2 million and $900,000, respectively. In the accompanying Consolidated Statement of Stockholders' Equity, issuances of restricted stock include the effect of subsidiary grants and are shown net of forfeitures, shares cancelled for related employee tax payments and restructuring-related adjustments. F-20 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 12. STOCK OFFERING AND REPURCHASES On June 19, 2001, we sold 5.74 million shares of our Class A common stock for approximately $29.5 million in net proceeds. On December 13, 2000, we announced that our Board of Directors authorized us to repurchase up to $2,000,000 worth of shares of our Class A common stock, subject to market conditions. During the fourth quarter of fiscal 2000, we purchased approximately 700,000 shares of our Class A common stock at market value totaling approximately $800,000. Such shares were classified as treasury stock at cost. 13. INCOME TAXES The provision for income taxes is comprised of the following:
FISCAL 1999 FISCAL 2000 FISCAL 2001 ----------- ----------- ----------- Federal: Current........................................ $(2,463,000) $ (224,000) $ -- Deferred....................................... 13,185,000 9,401,000 -- State and local: Current........................................ -- -- -- Deferred....................................... (1,652,000) 2,765,000 -- ----------- ----------- ------- Total provision.................................. $ 9,070,000 $11,942,000 $ -- =========== =========== =======
No income tax provision or benefit was booked for fiscal 2001 due to our current operating loss. In connection with the November 20, 2000 merger of dELiA*s Inc. and iTurf Inc., deferred tax liabilities of approximately $26.1 million were written off in purchase accounting. In the absence of these deferred tax liabilities, an additional valuation allowance was required, which resulted in a fiscal 2000 merger-related tax charge of approximately $19.8 million. During fiscal 1999, additional paid-in capital was increased $1.8 million for the tax effect of stock option exercises and decreased $2.4 million for the tax effect of the issuance of a subsidiary's common stock in connection with the T@ponline.com, Inc. acquisition. dELiA*s had a federal net operating loss carryover ("NOL") of approximately $95.0 million as of February 2, 2002, including a separate company loss of approximately $1.4 million relating to one of the noncore businesses that we sold in fiscal 2000. This separate company NOL is subject to limitation under the provisions of the Internal Revenue Code. Our federal NOL will expire in 2012 through 2022. F-21 DELIA*S CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 2, 2002 13. INCOME TAXES (CONTINUED) The effective income tax rates differed from the federal statutory income tax rates as follows:
FISCAL 1999 FISCAL 2000 FISCAL 2001 ----------- ------------ ------------ Federal taxes at statutory rates............. $ 6,810,000 $(23,721,000) $ (9,400,000) State and local taxes net of federal benefit.................................... (1,090,000) 1,797,000 (1,871,000) Valuation allowance.......................... 4,777,000 26,171,000 10,971,000 Goodwill amortization/ write-off............. -- 7,648,000 (1,861,000) Minority interest............................ (1,646,000) -- -- Merger settlement charge..................... -- -- 2,161,000 Other........................................ 219,000 47,000 -- ----------- ------------ ------------ $ 9,070,000 $ 11,942,000 $ -- =========== ============ ============
The significant components of our net deferred tax assets (liabilities) are as follows:
FEBRUARY 3, 2001 FEBRUARY 2, 2002 ---------------- ---------------- DEFERRED TAX ASSETS: Inventory reserves..................................... $ 920,000 $ 956,000 Net operating loss..................................... 28,198,000 40,656,000 Uniform capitalization--inventories.................... 484,000 558,000 Reserves and accruals.................................. 902,000 601,000 Sales return allowance................................. 418,000 254,000 Accrued restructuring.................................. 2,410,000 901,000 Property and equipment/amortization.................... 149,000 692,000 Catalog Costs.......................................... -0- 2,000 Other.................................................. 425,000 222,000 Valuation allowance*................................... (32,715,000) (44,732,,000) ----------- ------------ Total deferred tax assets.............................. 1,191,000 110,000 DEFERRED TAX LIABILITIES: Catalog costs.......................................... (641,000) -- Amortization........................................... (550,000) (110,000) ----------- ------------ Total deferred tax liabilities......................... (1,191,000) (110,000) ----------- ------------ NET DEFERRED TAX ASSETS (LIABILITIES).................. $ -- $ -- =========== ============
- ------------------------ * The company's existing deferred tax assets at February 3, 2001 and February 2, 2002 have been reduced by a valuation allowance of approximately $32.7 million and $44.7 million, respectively, due to the uncertainty regarding the realization of such deferred tax assets. F-22 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized. /s/ STEPHEN I. KAHN --------------------------------------------- Stephen I. Kahn CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Date: May 3, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ STEPHEN I. KAHN Chairman of the Board and ------------------------------------------- Chief Executive Officer May 3, 2002 Stephen I. Kahn (principal executive officer) /s/ DENNIS GOLDSTEIN Chief Financial Officer ------------------------------------------- (principal financial and May 3, 2002 Dennis Goldstein accounting officer) /s/ ANDREA WEISS ------------------------------------------- President and Director May 3, 2002 Andrea Weiss /s/ EVAN GUILLEMIN ------------------------------------------- Chief Operating Officer May 3, 2002 Evan Guillemin and Director /s/ CLARE COPELAND ------------------------------------------- Director May 3, 2002 Clare Copeland /s/ S. ROGER HORCHOW ------------------------------------------- Director May 3, 2002 S. Roger Horchow
SIGNATURES TITLE DATE ---------- ----- ---- /s/ TIMOTHY U. NYE ------------------------------------------- Director Timothy U. Nye /s/ JOSEPH J. PINTO ------------------------------------------- Director May 3, 2002 Joseph J. Pinto
EXHIBIT INDEX 2.1 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) 2.2 Agreement and Plan of Merger, dated as of August 16, 2000, among iTurf Inc., iTurf Breakfast Corp. and dELiA*s Inc. (incorporated by reference to Annex A to the iTurf Inc. Registration Statement on Form S-4 (Registration No. 333-44916)) 3.1 Second Restated Certificate of Incorporation of iTurf Inc. (incorporated by reference to Annex B to the joint proxy statement/prospectus included with the iTurf Inc. Registration Statement on Form S-4 (Registration No. 333-44916)) 3.2 Amended and Restated By-laws of dELiA*s Corp. (incorporated by reference to Exhibit 3.2 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.1 Employment Agreement between dELiA*s Inc. and Christopher C. Edgar (incorporated by reference to Exhibit 10.2 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.2 Form of Family Stockholders Agreement among dELiA*s Inc., Stephen I. Kahn and the persons listed on Exhibit A thereto (incorporated by reference to Exhibit to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.3 Amended and Restated 1996 Stock Incentive Plan of dELiA*s Inc. (incorporated by reference to the dELiA*s Inc. Schedule 14A filed on June 12, 1998) 10.4 iTurf Inc. 1999 Amended and Restated Stock Incentive Plan (incorporated by reference to Annex E of the joint proxy/prospectus included with the iTurf Inc. registration statement on Form S-4 (Registration No. 333-44916)) 10.5 Lease Agreement dated May 3, 1995 between dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York (the "Lease Agreement"); Modification and Extension of Lease Agreement dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.6 Agreement dated April 4, 1997 between dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York amending the Lease Agreement (incorporated by reference to Exhibit 10.13 to the dELiA*s Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1997) 10.7 Agreement dated October 7, 1997 between dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York amending the Lease Agreement (incorporated by reference to Exhibit 10.14 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997) 10.8 Amendment No. 1 to Employment Agreement between dELiA*s Inc. and Christopher C. Edgar, dated September 15, 1998 (incorporated by reference to Exhibit 10.15 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998) 10.9 Amendment No. 1 to Employment Agreement between dELiA*s Inc. and Evan Guillemin, dated September 15, 1998 (incorporated by reference to Exhibit 10.16 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998) 10.10 1998 Stock Incentive Plan of dELiA*s Inc. (incorporated by reference to Exhibit 10.17 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998)
10.11 Intercompany Services Agreement between dELiA*s Inc. and iTurf Inc., dated April 8, 1999 (incorporated by reference to Exhibit 10.1 to the iTurf Inc. registration statement on Form S-1 (Registration No. 333-71123)) 10.12 Trademark License Agreement between dELiA*s Inc. and iTurf Inc., dated April 8, 1999 (incorporated by reference to Exhibit 10.2 to the iTurf Inc. registration statement on Form S-1 (Registration No. 333-71123)) 10.13 Advertising Agreement between iTurf Inc. 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) + 10.14 Construction Loan Agreement dated August 6, 1999, among dELiA*s Distribution Company, dELiA*s Inc. and Allfirst Bank (incorporated by reference to Exhibit 10.23 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999) 10.15 Mortgage Note dated August 6, 1999 made by dELiA*s Distribution Company in favor of Allfirst Bank (incorporated by reference to Exhibit 10.24 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999) 10.16 Registration Rights Agreement between iTurf Inc. and MarketSource Corporation (incorporated by reference to Exhibit 10.19 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-90435)) 10.17 Amendment No. 2 to Employment Agreement between dELiA*s Inc. and Christopher C. Edgar, dated October 18, 1999 (incorporated by reference to Exhibit 10.28 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1999) 10.18 Amendment No. 2 to Employment Agreement between dELiA*s Inc. and Evan Guillemin, dated October 18, 1999 (incorporated by reference to Exhibit 10.29 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1999) 10.19 Lease Agreement dated January 30, 2000 by and between iTurf Inc. 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) 10.20 Amended and Restated Credit Agreement among dELiA*s Inc. and its subsidiaries set forth on Schedule 1 thereto and Congress Financial Corporation dated April 28, 2000 (incorporated by reference to the dELiA*s Inc. Current Report on Form 8-K dated May 2, 2000) 10.21 Amendment No. 3 to Employment Agreement between dELiA*s Inc. and Christopher C. Edgar, dated June 9, 2000 (incorporated by reference to Exhibit 10.36 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 2000) 10.22 Employment Agreement between iTurf and Dennis Goldstein (incorporated by reference to Exhibit 10.13 to iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.23 Amendment Number 1 to Employment Agreement between dELiA*s Corp. (f/k/a iTurf Inc.) and Dennis Goldstein (incorporated by reference to Exhibit 10.27 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.24 Amendment No. 1 to Amended and Restated Credit Agreement among dELiA*s Inc. and certain of its subsidiaries and Congress Financial Corporation, dated July 31, 2000 (incorporated by reference to Exhibit 10.28 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.25 Amendment No. 2 to Amended and Restated Credit Agreement among dELiA*s Inc. and certain of its subsidiaries and Congress Financial Corporation, dated November 10, 2000 (incorporated by reference to Exhibit 10.29 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001)
10.26 Amendment No. 3 to Amended and Restated Credit Agreement among dELiA*s Corp. and certain of its subsidiaries and Congress Financial Corporation, dated November 20, 2000 (incorporated by reference to Exhibit 10.30 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.27 Amendment No. 4 to Amended and Restated Credit Agreement among dELiA*s Corp. and certain of its subsidiaries and Congress Financial Corporation, dated January 19, 2001 (incorporated by reference to Exhibit 10.31 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.28 Amendment No. 5 to Amended and Restated Credit Agreement among dELiA*s Corp. and certain of its subsidiaries and Congress Financial Corporation, dated February 2, 2001 (incorporated by reference to Exhibit 10.32 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.29 Employment Agreement between Evan Guillemin and dELiA*s Inc. dated as of October 27, 2000 (incorporated by reference to Exhibit 10.33 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.30 Modification Agreement, dated as of May 4, 2001, among Allfirst Bank, dELiA*s Group Inc. and dELiA*s Distribution Company (incorporated by reference to Exhibit 10.34 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.31 Employment Agreement among Andrea Weiss, dELiA*s Corp. and Stephen I. Kahn dated as of May 7, 2001 (incorporated by reference to Exhibit 10.33 to Amendment 1 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.32 Employment Agreement between dELiA*s Corp. and Stephen I. Kahn dated as of April 24, 2001 (incorporated by reference to Exhibit 10.34 to Amendment 1 to the dELiA*s Corp. Annual Report on Form 10-K for the fiscal year ended February 3, 2001) 10.33 Amendment No. 6 to Amended and Restated Credit Agreement among dELiA*s Corp. and certain of its subsidiaries and Congress Financial Corporation, dated May 4, 2001 (incorporated by reference to Exhibit 10.33 to the dELiA*s Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended May 5, 2001) 10.34 Amendment No. 7 to Amended and Restated Credit Agreement among dELiA*s Corp. and certain of its subsidiaries and Congress Financial Corporation, dated June 12, 2001 (incorporated by reference to Exhibit 10.34 to the dELiA*s Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended May 5, 2001) 10.35 Amendment No. 8 to Amended and Restated Credit Agreement among dELiA*s Corp. and certain of its subsidiaries and Congress Financial Corporation, dated August 17, 2001 (incorporated by reference to Exhibit 10.35 to the dELiA*s Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended August 4, 2001) 10.36 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 Exhibit 10.1 to the dELiA*s Inc. Current Report on Form 8-K dated October 5, 2001) 10.37 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 (incorporated by reference to Exhibit 10.2 to the dELiA*s Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended November 3, 2001)
10.38* Employment Agreement between dELiA*s Corp. and Christopher C. Edgar dated as of December 20, 2001 21* Subsidiaries of the Registrant 23* Consent of Ernst & Young LLP
- ------------------------ * Filed herewith + Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the SEC. EX-10.38 3 a2078716zex-10_38.txt EXHIBIT 10.38 Exhibit 10.38 EMPLOYMENT AGREEMENT BETWEEN dELiA*s CORP. AND CHRISTOPHER C. EDGAR DATED AS OF DECEMBER 20, 2001 dELiA*s Corp. (the "Company"), a Delaware corporation, and Christopher C. Edgar (the "Executive") agree as follows: 1. EMPLOYMENT AND DUTIES (a) The Company shall employ the Executive, and the Executive shall serve the Company, as (i) Vice Chairman of the Board of Directors, reporting to the Chief Executive and Chairman of the Board of Directors in such capacity, and (ii) Director of Real Estate of the Company, reporting to the President of the Company in such capacity. The Executive shall use his best efforts to promote the interests of the Company, and shall perform his duties faithfully and diligently, consistent with sound business practices. The Executive acknowledges that the President of the Company shall report directly to the Chairman of the Board and Chief Executive Officer. (b) The Company shall cause the Executive to be nominated for re-election at any meeting of the stockholders of the Company at which the Executive's directorship is up for re-election, PROVIDED that the Company shall not have delivered a notice of termination of employment as contemplated in Section 6 and the Executive shall not have delivered a notice of resignation of employment for any reason. (c) The Executive shall devote substantially his full business time to the performance of his duties for the Company (it being understood, however, that nothing in this agreement or otherwise shall be deemed to restrict the Executive from being a passive investor in businesses that are not competitive with the Company). In the event that the Executive makes an Executive Transition Election or the Company makes a Company Transition Election, each as defined in section 5 below, the immediately preceding sentence shall not apply and the Executive shall be required to devote only such time as is required to perform his duties as Vice Chairman of the Board of Directors of the Company. (d) If the Company changes its principal place of business during the term of this agreement to a location outside the New York metropolitan area, the Executive shall not be required to perform his duties for the Company outside the New York metropolitan area. 2. TERM OF EMPLOYMENT (a) Subject to section 6 and except as provided in section 2(b) below, the Executive shall continue to be employed by the Company under this agreement until the close of business on the fifth anniversary of this agreement. (b) In the event that, on or before the second anniversary of this agreement, the Executive makes an Executive Transition Election or the Company makes a Company Transition Election, each as defined in section 5 below, the Executive shall continue to be employed by the Company under this agreement until the close of business on the third anniversary of this 1 agreement. In the event that, after the second anniversary and up to and including the fourth anniversary of this agreement, the Executive makes an Executive Transition Election or the Company makes a Company Transition Election, each as defined in section 5 below, the Executive shall continue to be employed by the Company under this agreement for a period of one (1) year from the date of such Executive Transition Election or Company Transition Election. In the event that, after the fourth anniversary of this agreement, the Executive makes an Executive Transition Election or the Company makes a Company Transition Election, each as defined in section 5 below, the Executive shall continue to be employed by the Company under this agreement until the close of business on the fifth anniversary of this agreement. 3. COMPENSATION (a) As compensation for all services to be rendered by the Executive during his employment under this agreement, the Executive shall be entitled to a base salary at the rate of $150,000 a year (payable in equal installments at least twice a month), subject to section 3(b). (b) The base salary referred to in section 3(a) shall be reduced to $100,000 (i) following the Executive's last day of employment as Director of Real Estate in the event that (A) the Executive makes an Executive Transition Election (as defined below) or (B) the Company makes a Company Transition Election (as defined below), (ii) in the event the Executive's employment is terminated for death or disability as provided in Section 6(a) below or (iii) in the event that the Executive terminates employment for Good Reason, as defined in section 6 (c) below. (c) So long as the Executive shall perform the function of Director of Real Estate pursuant to this Agreement, the Executive shall be entitled to participate in the Company's managerial bonus program in effect from time to time. The level of the Executive's participation in the Company's managerial bonus program shall be at the sole discretion of the board of directors of the Company or any authorized committee thereof. The Executive shall not be entitled to participate in the managerial bonus program for the Company's fiscal year 2001. The Company may, in the sole discretion of the board of directors or any authorized committee thereof, award such bonus to the Executive for fiscal year 2001 as it considers appropriate. 4. STOCK OPTION. (a) OPTION GRANT. Effective on the date hereof, the Company shall grant the Executive an option (the "Signing Option"), as approved by the Committee on or prior to the date hereof, to purchase 100,000 shares of the Class A Common Stock of the Company ("Common Stock") at the closing price reported on The Nasdaq Stock Market for such shares on the date hereof (the "Signing Option Exercise Price"). The Signing Option shall be an "incentive stock option," as defined under the Internal Revenue Code of 1986, as amended (the "Code"), to the maximum extent permitted by law. The Signing Option shall be issued under the Company's 1999 Amended and Restated Stock Incentive Plan (the "Plan") and, except as otherwise expressly provided in this agreement, the Company's standard form of stock option agreement. (b) VESTING. Except as otherwise provided for in section 4 (c) below, the Signing Option shall vest in five installments of 20,000 shares each on the first, second, third, fourth and fifth anniversaries of the date hereof. (c) EFFECT OF A TRANSITION ELECTION. In the event that the Executive makes an Executive Transition Election or the Company makes a Company Transition Election, the Signing Option shall automatically, and without further action by or on behalf of the Company, 2 be reduced to an option to purchase (i) 60,000 shares vesting in three installments of 20,000 shares each on the first, second and third anniversaries of the date hereof in the event Executive ceases to be employed by the Company prior to reaching the fourth anniversary of this agreement and (ii) 80,000 shares vesting in four installments of 20,000 shares each on the first, second, third and fourth anniversaries of the date hereof in the event Executive ceases to be employed by the Company prior to reaching the fifth anniversary of this agreement (d) CHANGE OF CONTROL. Section 11.1(c) of the Plan notwithstanding, upon the occurrence of a Change in Control (as defined in the Plan), the Signing Option shall immediately become fully vested and exercisable with respect to all shares of Common Stock subject thereto. 5. TRANSITION FROM DIRECTOR OF REAL ESTATE (a) In the event that the Executive wishes to resign his position as Director of Real Estate, Executive shall give no less than 60-days' prior written notice to the Company (an "Executive Transition Election"). During the period between delivery of notice and the effectiveness of the Executive's resignation, the Executive shall work with the Company to identify a satisfactory replacement on an in-house or outsource basis and to take any other actions reasonably required by the Company to ensure the smooth transition of the Company's real estate matters to a new director or consultant. (b) The Company may terminate the Executive's role as Director of Real Estate for any reason at any time upon no less than 60-days' prior written notice to the Executive (a "Company Transition Election"). During the period between delivery of notice and the effectiveness of the Executive's termination, the Executive shall work with the Company to identify a satisfactory replacement on an in-house or outsource basis and to take any other actions reasonably required by the Company to ensure the smooth transition of the Company's real estate matters to a new director or consultant. 6. TERMINATION (a) The Executive's employment shall terminate upon his death, and may be terminated at the option of the Company as a result of his disability, if, in the good faith determination of the Company's board of directors, such disability has prevented the Executive from substantially performing his duties and obligations under this agreement during any period of nine consecutive calendar months and the Company gives notice to the Executive not earlier than 30 days and not later than 90 days after the expiration of the nine months (in which case the employment under this agreement shall terminate when that notice is given). Upon termination of employment for death or disability pursuant to this section 6, the Company shall continue to pay the Executive (or his estate or any other person designated by the Executive in writing to the Company) the Executive's base salary as determined under section 3(b) until either (i) the third anniversary of this agreement or (ii) for a period of one year from the date of termination, whichever is greater. (b) The Company may terminate the Executive's employment under this Agreement for Cause upon written notice to the Executive. As used in this agreement, "Cause" shall mean (i) the conviction of the Executive for a felony or crime of moral turpitude; or (ii) any material breach by the Executive of any material provision of this agreement, after notice by the Company to the Executive of such breach and failure by the Executive to cure the breach promptly thereafter. Promptly following termination of the Executive's employment for Cause, the Company shall pay to the Executive all accrued but unpaid amounts under this agreement for (i) base salary as determined pursuant to Section 3 and (ii) reimbursement of expenses pursuant to 3 Section 7, and no further compensation of any kind shall be due and owing to the Executive from the Company. (c) The Executive may terminate his employment under this Agreement for Good Reason upon written notice to the Company. "Good Reason" shall mean a material breach by the Company of any material provision of this agreement, after notice by the Executive to the Company of such breach and failure by the Company to cure the breach promptly thereafter. Upon termination of employment by the Executive for Good Reason, the Company shall continue to pay the Executive (or his estate or any other person designated by the Executive in writing to the Company) the Executive's base salary as determined under section 3(b) until either (i) the third anniversary of this agreement or (ii) for a period of one year from the date of termination, whichever is greater. 7. EXPENSES; FRINGE BENEFITS During the employment of the Executive under this agreement: (a) The Company shall reimburse the Executive, on presentation of vouchers or other evidence of such expenses in accordance with the policies of the Company, for all reasonable business expenses incurred by him in the performance of his duties for the Company. (b) The Company shall provide the Executive with medical insurance, disability insurance and life insurance under policies no less favorable to the Executive than the ones currently in effect. In addition, the Company may obtain key-man term life insurance on the life of the Executive, and the Company shall be the beneficiary under such policy. (c) The Executive shall be entitled to six weeks vacation each year. (d) The Company shall provide the Executive with an automobile of at least the same quality as the one he currently uses, and shall pay all expenses reasonably incurred in connection with his use of that automobile. (e) The Company shall provide the Executive with an annual allowance of $20,000 to be applied, in the Executive's discretion, in any combination to one or more of the following: tax return preparation, financial consulting, estate planning and similar professional services, life/disability insurance premiums, educational expenses and/or professional membership fees, subscriptions, club memberships (if determined by the Chief Executive Officer of the Company, in his sole discretion, to be desirable for the furtherance of the Company's business objectives) and similar professional development expenses. 8. NON-COMPETITION; CONFIDENTIALITY (a) The Executive may not at any time during his employment under this agreement for any reason, engage or become interested in (as owner, lender, stockholder, partner, director, officer, employee, consultant or otherwise) any business that is in direct competition with the business conducted by the Company anywhere in any state in the United States in which the Company has engaged in such business. Nothing herein shall prohibit the Executive from owning no more that 1% of any publicly traded company that is listed on a national stock exchange or the Nasdaq National Market. 4 (b) During the Executive's employment under this agreement, the Executive shall not on his own behalf, or on behalf of any other person or enterprise, hire, solicit or encourage to leave the employment of the Company any individual who was an employee of the Company or its affiliates during the Executive's employment by the Company. (c) The Executive shall not, at any time during or after his employment under this agreement, disclose to any third party, except in the performance of his duties under this agreement or as may be required by law, any confidential matter regarding the Company's customers, suppliers, trade secrets or business. (d) The Executive acknowledges that the remedy at law for breach of the provisions of this section 8 would be inadequate and that, in addition to any other remedy the Company may have for breach of this section 8, the Company shall be entitled to an injunction restraining any such breach or threatened breach, without any bond or other security being required. 9. MISCELLANEOUS (a) The failure of a party to this agreement to insist on any occasion upon strict adherence to any term of this agreement shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this agreement. Any waiver must be in writing. (b) All notices and other communications under this agreement shall be in writing and shall be deemed given when delivered personally or mailed by registered mail, return receipt requested, to a party at his or its address as follows (or at such other address as a party may designate in any notice under this agreement): If to the Executive: Christopher C. Edgar 135 Wooster Street, #5 New York, NY 10012 If to the Company: dELiA*s Corp. 435 Hudson Street New York, NY 10014 Attention: Chief Executive Officer With a copy to: dELiA*s Corp. 435 Hudson Street New York, NY 10014 Attention: Legal Department (c) This agreement shall be assigned to and shall inure to the benefit of any successor to substantially all the assets and business of the Company as a going concern, whether by merger, consolidation, liquidation or sale of substantially all the assets of the Company or otherwise, and the Company shall cause any such successor to assume the Company's obligations under this 5 agreement (but no such assignment shall relieve the Company of its obligations under this agreement). (d) This agreement together with all the Company's personnel policies and practices in effect from time to time constitutes the entire understanding of the parties with respect to the subject matter of this agreement, cannot be changed or terminated except by a written agreement executed by the parties and shall be governed by the law of the State of New York applicable to agreements made and to be performed therein. Notwithstanding the foregoing, the Company, in its sole discretion, shall have the right to maintain or establish, and to revise, alter, amend or terminate any personnel policy or practice with or without prior notice to the Executive; provided, however, that any such changes shall be implemented on a company-wide basis and not targeted specifically at the Executive. (e) This agreement amends and restates the Employment Agreement between dELiA*s Group Inc. (formerly known as dELiA*s Inc.) and the Executive dated as of November 11, 1996, as amended September 15, 1998, October 18, 1999 and June 9, 2000. (f) This agreement shall not be renewable, except in writing and signed by both parties. In the event the Executive shall remain in the employ of the Company on and after the expiration date herein, without a written agreement covering a definite extended period, such continuing employment shall be at the compensation rate set forth above and shall be terminable at the will of either party upon ninety (90) days written notice. IN WITNESS WHEREOF, the parties hereto have set forth their signatures as of the date first above written. dELiA*s CORP. By: /s/ Stephen I. Kahn ----------------------------- Stephen I. Kahn Chairman of the Board and Chief Executive Officer CHRISTOPHER C. EDGAR /s/ Christopher C. Edgar ---------------------------- Christopher C. Edgar 6 EX-21 4 a2078716zex-21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Incorporation - ---- ----------------------------- dELiA*s Operating Company Delaware dELiA*s Distribution Company Delaware dELiA*s Retail Company Delaware dELiA*s Group Inc. Delaware dELiA*s Properties Inc. Delaware dELiA*s Foreign Sales Corporation Barbados iTurf Finance Company Delaware OnTap.com Inc. New Jersey Caveman Disposition Corp. Massachusetts Screeem! Inc. Delaware SBH Restructuring Corp. Delaware TSI Soccer Restructuring Corp. North Carolina TSI Retail Restructuring Corp. Delaware EX-23 5 a2078716zex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of dELiA*s Corp.: (a) Form S-1 (Registration No. 333-90435), (b) Form S-8 (Registration No. 333-53670), (c) Form S-3 (Registration No. 333-36300) (d) Form S-8 (Registration No. 333-91837), (e) Form S-3 (Registration No. 333-54430), and (f) Form S-8 (Registration No. 333-83508) of our report dated March 11, 2002 (except for the last paragraph of Note 10, as to which the date is April 26, 2002), with respect to the consolidated financial statements of dELiA*s Corp. included in the Annual Report (Form 10-K) filed with the Securities and Exchange Commission for the fiscal year ended February 2, 2002. ERNST & YOUNG LLP New York, New York May 2, 2002 -----END PRIVACY-ENHANCED MESSAGE-----