-----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, M2aE965UleFNWEO2zZEWL3mD9XHhe4y9TK8mF6zOpMUbdCj4PYIBXWkdSd0lImLb hhejcagHtAwC0/9r0tgrAg== 0000912057-99-009309.txt : 19991215 0000912057-99-009309.hdr.sgml : 19991215 ACCESSION NUMBER: 0000912057-99-009309 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITURF INC CENTRAL INDEX KEY: 0001076914 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 133963754 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25347 FILM NUMBER: 99774084 BUSINESS ADDRESS: STREET 1: 435 HUDSON ST CITY: NEW YORK STATE: NY ZIP: 10014 BUSINESS PHONE: 2127417785 MAIL ADDRESS: STREET 1: 435 HUDSON ST CITY: NEW YORK STATE: NY ZIP: 10014 10-Q 1 FORM 10-Q FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14, 1999 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT ------------------------- Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999 Commission file number 0-25347 ITURF INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3963754 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 435 HUDSON STREET, NEW YORK, NEW YORK 10014 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (212) 742-1640 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Number of shares of Class A Common Stock outstanding as of December 14, 1999: 7,493,132 Number of shares of Class B Common Stock outstanding as of December 14, 1999: 11,425,000 ----------- STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING, WITHOUT LIMITATION, INFORMATION APPEARING UNDER "PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY BE FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF SECTION 27A OF THE AMENDED SECURITIES ACT OF 1933 AND SECTION 21E OF THE AMENDED SECURITIES EXCHANGE ACT OF 1934). WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVE," "PLAN," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS REPORT. THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO: FLUCTUATIONS IN CONSUMER PURCHASING PATTERNS AND ADVERTISING SPENDING; TIMING OF, RESPONSE TO AND QUANTITY OF OUR PARENT'S CATALOG MAILINGS AND OUR OWN ELECTRONIC MAILINGS; CHANGES IN THE GROWTH RATE OF INTERNET USAGE AND ONLINE USER TRAFFIC LEVELS; ACTIONS OF OUR COMPETITORS; THE TIMING AND AMOUNT OF COSTS RELATING TO THE EXPANSION OF OUR OPERATIONS AND ACQUISITIONS OF TECHNOLOGY OR BUSINESSES AND THEIR INTEGRATION; GENERAL ECONOMIC AND MARKET CONDITIONS; AND OTHER FACTORS OUTSIDE OUR CONTROL. THESE FACTORS, AND OTHER FACTORS THAT APPEAR IN THIS REPORT OR IN OUR OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING OUR REGISTRATION STATEMENT (NO. 333-90435) ON FORM S-1, COULD AFFECT OUR ACTUAL RESULTS AND COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR ON OUR BEHALF. ALL REFERENCES IN THIS REPORT TO A FISCAL YEAR PRIOR TO FISCAL 1999 REFER TO THE YEAR ENDED JANUARY 31 FOLLOWING THE PARTICULAR CALENDAR YEAR (E.G., "FISCAL 1998" REFERS TO THE YEAR ENDING JANUARY 31, 1999). EFFECTIVE FEBRUARY 1, 1999, WE CHANGED OUR FISCAL YEAR TO END ON THE SATURDAY CLOSEST TO JANUARY 31 FOLLOWING THE CALENDAR YEAR (E.G., "FISCAL 1999" REFERS TO THE FIFTY-TWO WEEKS ENDING JANUARY 29, 2000). PART I FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2 ITURF INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 31, 1999 OCTOBER 30, 1999 ---------------- ---------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents ......................................... $ 375 $ 19,700 Short-term investments ............................................ -- 48,482 Prepaid expenses - related party .................................. -- 1,152 Other current assets .............................................. -- 3,565 --------- --------- Total current assets .......................................... 375 72,899 DEFERRED OFFERING COSTS ............................................ 110 -- PROPERTY AND EQUIPMENT, NET ........................................ 414 3,067 INTANGIBLE ASSETS, NET ............................................. 317 18,672 --------- --------- TOTAL ASSETS ....................................................... $ 1,216 $ 94,638 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities .................... $ 263 $ 3,728 Due to dELiA*s .................................................... 573 -- --------- --------- Total current liabilities ..................................... 836 3,728 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued or outstanding .............................. -- -- Class A common stock, $.01 par value, 67,500,000 shares authorized; no shares issued or outstanding at January 31, 1999; 6,418,132 shares issued and outstanding at October 30, 1999 .. -- 64 Class B common stock, $.01 par value, 12,500,000 shares authorized, issued and outstanding ....................................... 125 125 Additional paid-in capital ........................................ -- 116,388 Investment in common stock of dELiA*s Inc. ........................ -- (17,734) Retained earnings (deficit) ....................................... 255 (7,933) --------- --------- Total stockholders' equity .................................... 380 90,910 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $ 1,216 $ 94,638 --------- --------- --------- ---------
See Notes to Unaudited Condensed Consolidated Financial Statements 3 ITURF INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS THIRTEEN WEEKS ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ---------------- (UNAUDITED) NET REVENUES: NET PRODUCT SALES....................................................... $ 715 $ 4,602 ADVERTISING AND OTHER................................................... 349 699 -------- --------- TOTAL NET REVENUES.......................................................... 1,064 5,301 COST OF PRODUCT SALES....................................................... 359 2,639 -------- --------- GROSS PROFIT................................................................ 705 2,662 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................ 497 9,329 GOODWILL AMORTIZATION EXPENSE............................................... 17 652 INTEREST EXPENSE (INCOME), NET.............................................. 9 (965) -------- --------- INCOME (LOSS) BEFORE INCOME TAXES........................................... 182 (6,354) PROVISION FOR INCOME TAXES.................................................. 83 -- -------- --------- NET INCOME (LOSS)........................................................... $ 99 $ (6,354) ======== ========= BASIC AND DILUTED NET INCOME (LOSS) PER SHARE............................... $ 0.01 $ (0.35) ======== ========= SHARES USED IN THE CALCULATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE............................................. 12,500 18,360 ======== =========
NINE MONTHS THIRTY-NINE WEEKS ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ---------------- (UNAUDITED) NET REVENUES: NET PRODUCT SALES ......................................................... $ 1,437 $ 9,627 ADVERTISING AND OTHER ..................................................... 456 1,241 -------- -------- TOTAL NET REVENUES ............................................................ 1,893 10,868 COST OF PRODUCT SALES ......................................................... 733 5,622 -------- -------- GROSS PROFIT .................................................................. 1,160 5,246 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................................. 1,017 15,096 GOODWILL AMORTIZATION EXPENSE ................................................. 51 690 INTEREST EXPENSE (INCOME), NET ................................................ 31 (2,066) -------- -------- INCOME (LOSS) BEFORE INCOME TAXES ............................................. 61 (8,474) PROVISION (BENEFIT) FOR INCOME TAXES .......................................... 39 (161) -------- -------- NET INCOME (LOSS) ............................................................. $ 22 $ (8,313) -------- -------- -------- -------- BASIC AND DILUTED NET INCOME (LOSS) PER SHARE ................................. $ 0.00 $ (0.51) -------- -------- -------- -------- SHARES USED IN THE CALCULATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE ............................................... 12,500 16,368 -------- -------- -------- --------
See Notes to Unaudited Condensed Consolidated Financial Statements 4 ITURF INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS THIRTY-NINE WEEKS ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ---------------- (UNAUDITED) CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss) .......................................................... $ 22 $ (8,313) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ............................................ 80 929 Amortization of premiums and discounts on investments, net ............... -- (318) Changes in operating assets and liabilities: Prepaid expenses - related party .................................. -- (1,152) Other current assets .............................................. -- (3,565) Other assets ...................................................... (18) -- Other current liabilities ......................................... 228 3,178 -------- -------- Net cash provided by (used in) operating activities ......................... 312 (9,241) -------- -------- -------- -------- CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of dELiA*s stock .................................................. -- (17,734) Capital expenditures ....................................................... (201) (2,158) Acquisitions ............................................................... -- (444) Purchase of held-to-maturity investment securities ......................... -- (65,158) Proceeds from the maturity of held-to-maturity investment securities ....... -- 16,994 -------- -------- Net cash used in investing activities ....................................... (201) (68,500) -------- -------- -------- -------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Net proceeds from issuance of common stock ................................. -- 97,639 Loan from dELiA*s .......................................................... 1,570 1,001 Repayment to dELiA*s ....................................................... (1,670) (1,574) -------- -------- Net cash provided by (used in) financing activities ......................... (100) 97,066 -------- -------- -------- -------- INCREASE IN CASH & CASH EQUIVALENTS ......................................... 11 19,325 CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD ................................ 31 375 -------- -------- CASH & CASH EQUIVALENTS--END OF PERIOD ...................................... $ 42 $ 19,700 -------- -------- -------- --------
Supplemental disclosure of noncash financing and investing activity: April 1999 issuance of common stock for the acquisition of TSISoccer.com domain name. See Note 1. September 1999 issuance of common stock for the acquisition of T@PONLINE.COM, Inc. See Note 3. See Notes to Unaudited Condensed Consolidated Financial Statements 5 ITURF INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS iTurf Inc. is an Internet community and marketer of apparel, related accessories, home furnishings and soccer merchandise that is focused primarily on young men and women between the ages of 10 and 24, an age group known as "Generation Y." We are a subsidiary of dELiA*s Inc. The accompanying financial statements of iTurf, which was incorporated in August 1997, include all of dELiA*s Internet operations from that date of incorporation, as well as the Internet operations of TSI Soccer Corporation prior to that date. We utilize dELiA*s business relationships, infrastructure and brand names and relied on dELiA*s to provide financing for our operations until April 14, 1999, when we completed an initial public offering of our Class A common stock. On April 1, 1999, our certificate of incorporation was amended and restated such that the authorized capital stock of iTurf consists of 67,500,000 shares of Class A common stock, par value $.01 per share, 12,500,000 shares of Class B common stock, par value $.01 per share and 1,000,000 shares of Preferred Stock, par value $.01 per share. In addition, exchange of the 100 shares of common stock previously outstanding and held by dELiA*s into 12,500,000 shares of Class B common stock was approved. All share information in these financial statements and notes has been adjusted to reflect these changes. In our initial public offering, we issued 4,830,000 shares of our Class A common stock to the public at a price of $22 per share to receive net cash proceeds of approximately $97,409,000 after expenses. Holders of Class A common stock have voting rights identical to holders of Class B common stock, except that holders of Class A common stock are entitled to one vote per share and holders of Class B are entitled to six votes per share. In connection with the initial public offering, iTurf acquired the TSISoccer.com domain name from TSI Soccer Corporation, a wholly-owned subsidiary of dELiA*s, for 1,136 shares of Class A common stock (valued at $25,000 at the initial public offering price). dELiA*s continues to own all outstanding shares of iTurf's Class B common stock, each share of which is convertible into one share of Class A common stock under certain circumstances. At October 30, 1999, dELiA*s owned approximately 92% of the voting power and 66% of the value of iTurf common stock. iTurf used approximately $17,700,000 of the initial public offering proceeds to purchase 551,046 shares of dELiA*s common stock from dELiA*s. This purchase has been recorded as a reduction to iTurf's stockholders' equity. In June 1999, we used $1,574,000 of the initial public offering proceeds to repay our May 1, 1999 indebtedness to dELiA*s. iTurf is subject to seasonal fluctuations in our merchandise sales and results of operations. We expect our revenues and operating results generally to be lower in the first half of each fiscal year than in the second half of such year. Effective February 1, 1999, we changed our fiscal year from the year ending January 31 to the 52 weeks ending on the Saturday closest to January 31. 6 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION PRINCIPLES OF CONSOLIDATION--The condensed consolidated financial statements include the accounts of iTurf Inc. and subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. BASIS OF PRESENTATION--For periods prior to our initial public offering, the financial statements include expenses which have been allocated to iTurf by dELiA*s on a specific identification basis plus the allocated share of the costs associated with resources we shared with dELiA*s. Allocations from dELiA*s for such shared resources were made primarily on a proportional cost method based on related revenues. While management believes these allocations are reasonable, the financial statements of iTurf for periods prior to our initial public offering do not necessarily reflect the results of operations or financial position that would have existed had iTurf been an independent company. Since our initial public offering, similar expenses are recorded in accordance with intercompany agreements. At October 30,1999, a portion of our fourth quarter intercompany expenses were prepaid, which is reflected as a related party asset on our balance sheet. UNAUDITED INTERIM FINANCIAL STATEMENTS--The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements for Form 10-Q and in accordance with generally accepted accounting principles for interim financial reporting. In the opinion of management, the accompanying condensed consolidated financial statements are presented on a basis consistent with the audited financial statements and reflect all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The financial statements and footnote disclosures should be read in conjunction with iTurf's January 31, 1999 audited financial statements and the notes thereto, which are included in iTurf's Form S-1, as amended and filed with the Securities and Exchange Commission. Results for the interim period are not necessarily indicative of the results to be expected for the year. INCOME TAXES--For periods prior to our initial public offering, our results were included in dELiA*s consolidated federal and state income tax returns and our income tax provision was calculated as if we had operated as an independent company. As a result of our initial public offering, we are required to file a separate return. We do not expect to have net income for fiscal 1999 and expect to fully reserve deferred tax assets. Therefore, we estimate our effective rate for the period since our initial public offering to be zero. CASH EQUIVALENTS-- We consider all highly liquid investments with maturities of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. RECLASSIFICATIONS-- Certain amounts have been reclassified to conform to the current period presentation. 3. ACQUISITION On September 1, 1999, iTurf Inc. acquired T@PONLINE.COM, Inc. The merger consideration consisted of 1,586,996 shares of our Class A common stock. In accordance with the purchase method of accounting, the results of Taponline have been included in our consolidated financial statements since the date of merger. The excess of the aggregate purchase price over the fair market value of net assets acquired of $19.0 million was allocated to goodwill based upon preliminary estimates of fair values and is being amortized over five years. On a pro forma basis, assuming the merger had been completed on the first day of each fiscal year, net sales, net loss and loss per share would have been approximately $2.1 million, $3.0 million and $0.21, respectively, for the nine months ended October 7 31, 1998 and $11.0 million, $14.1 million and $0.78, respectively, for the thirty-nine weeks ended October 30, 1999. These results are presented for informational purposes only and do not necessarily represent results which would have occurred, and they may not be indicative of future results of combined operations. 4. COMMITMENTS AND CONTINGENCIES In May 1999, we entered into a strategic marketing alliance with America Online, Inc. Over the two-year term of the agreement, we have agreed to pay America Online a total of approximately $8.1 million, of which approximately $4.0 million was paid as of October 30, 1999. The total expected payment is being recognized as advertising expense on a straight-line basis over the life of the marketing program. In August 1999, we entered into a strategic marketing alliance with Microsoft Corporation. Over the one-year term of the agreement, we have agreed to pay Microsoft a total of at least $4.6 million, of which approximately $775,000 was paid as of October 30, 1999. The total expected payment is being recognized as advertising expense on a straight-line basis over the life of the marketing program. In connection with the Taponline transaction, MarketSource Corporation, which is owned by certain of the shareholders of Taponline, including Martin Levine, who was recently elected as a member of our board of directors, entered into an arrangement to purchase advertising and other inventory on our network of sites for resale to MarketSource's clients. Separately, we have agreed to enter into a marketing alliance with MarketSource to promote our network of sites through MarketSource's offline marketing channels. We committed to purchasing approximately $6.5 million in promotional opportunities through these channels over the next three years. 5. SUBSEQUENT EVENTS On November 17, 1999, 325,000 shares of our Class B common stock were converted to Class A common stock and sold by dELiA*s to Kistler Joint Venture. On November 29, 1999, 1,675,000 shares of our Class A common stock, to be issued upon conversion, were registered for future sale. On December 6, 1999, 750,000 shares of our Class B common stock held by dELiA*s were converted to Class A common stock and sold by dELiA*s pursuant to the registration statement. As a result of these transactions, our parent's interest in iTurf was reduced to 90% of vote and 60% of value. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT ITURF'S PLANS, ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT. AS USED IN THIS REPORT, THE TERM "PARENT" MEANS DELIA*S INC., A REPORTING COMPANY UNDER THE SECURITIES EXCHANGE ACT OF 1934. OUR PARENT OWNS ALL OF THE SHARES OF OUR CLASS B COMMON STOCK WHICH ENTITLES OUR PARENT TO SIX VOTES PER SHARE, AS COMPARED TO ONE VOTE PER SHARE OF OUR CLASS A COMMON STOCK. AS OF OCTOBER 30, OUR PARENT HELD APPROXIMATELY 92% OF THE VOTING POWER OF OUR OUTSTANDING CAPITAL STOCK. OVERVIEW We are a leading online teen network providing Internet community, content and e-commerce services focused primarily on young men and women between the ages of 10 and 24, an age group known as "Generation Y." We provide Generation Y with a network of Web sites that addresses this demographic group's concerns, interests, tastes and needs. Our sites offer interactive web/zines with proprietary content, chat rooms, posting boards, personal homepages and e-mail, as well as online shopping opportunities. Our historical financial statements for periods prior to our April 1999 initial public offering include allocations for administrative, distribution and other expenses incurred by our parent for services rendered to iTurf. While we believe such allocations to be reasonable, they are not necessarily indicative of, and it is not practical for us to estimate, the levels of expenses that would have resulted had iTurf been operating as an independent company. Following our initial public offering, the provision of such services and other matters between the two companies, including use of our parent's trademarks, has been governed by intercompany agreements. Prior to our initial public offering, we relied on our parent to provide financing for our operations. Therefore, our cash flows were not necessarily indicative of the cash flows that would have resulted had we been operating as an independent company. We believe that our continued growth will depend in large part on our ability to increase our brand awareness, provide our customers with superior Internet community and e-commerce experiences and continue to enhance our systems and technology to support increased traffic to our Web sites. We intend to invest heavily in marketing and promotion, including advertising in our parent's print catalogs, and to further develop our Web sites, technology and operating infrastructure. As a result, we expect to record substantial net losses for the foreseeable future. In view of the rapidly changing nature of iTurf's business and our limited operating history, as well as the changes in our relationship with our parent and our expected seasonality, iTurf believes that period-to-period comparisons of our operating results, including our gross profit margin and operating expenses as a percentage of sales, are not necessarily meaningful. You should not rely on this information as an indication of future performance. On September 1, 1999, iTurf Inc. acquired T@PONLINE.COM, Inc. The merger consideration consisted of 1,586,996 shares of our Class A common stock. In accordance with the purchase method of accounting, the results of Taponline have been included in our consolidated financial statements since the date of merger. 9 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship of certain items from our statement of operations to total net revenues. Any trends reflected by the following table may not be indicative of future results.
THREE MONTHS THIRTEEN WEEKS NINE MONTHS THIRTY-NINE WEEKS ENDED ENDED ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ---------------- ---------------- ---------------- Net product sales 67.2% 86.8% 75.9% 88.6% Advertising and other revenues 32.8 13.2 24.1 11.4 ----- ----- ----- ----- Total net revenues 100.0 100.0 100.0 100.0 Cost of product sales 33.7 49.8 38.7 51.7 ----- ----- ----- ----- Gross profit 66.3 50.2 61.3 48.3 Selling, general and administrative expenses 46.7 176.0 53.7 138.9 Goodwill amortization 1.6 12.3 2.7 6.4 Interest expense (income), net 0.9 (18.2) 1.6 (19.0) ----- ----- ----- ----- Income (loss) before income taxes 17.1 (119.9) 3.3 (78.0) Provision (benefit) for income taxes 7.8 -- 2.1 (1.5) ----- ----- ----- ----- Net income (loss) 9.3% (119.9)% 1.2% (76.5)% ----- ----- ----- ----- ----- ----- ----- -----
COMPARISON OF THIRTEEN WEEKS ENDED OCTOBER 30, 1999 AND THREE MONTHS ENDED OCTOBER 31, 1998 NET REVENUES. Net revenues increased from $1.1 million in the third fiscal quarter of 1998 to $5.3 million for the same period in fiscal 1999. The increase was principally due to increased traffic as a result of our marketing efforts and growth in Internet usage, as well as to sales derived from Web sites launched or acquired subsequent to the third fiscal quarter of 1998, including droog.com, dotdotdash.com, StorybookHeirlooms.com, contentsonline.com and OnTap.com. Advertising, subscription and licensing revenues increased to $699,000 for the third quarter of fiscal 1999 from $349,000 for the same period of fiscal 1998 primarily as a result of the Taponline acquistion. GROSS PROFIT. Gross profit increased from $705,000 for the third quarter of fiscal 1998 to $2.7 million for the same period in fiscal 1999 as a result of increased sales. Gross margin decreased from 66.3% in the third quarter of fiscal 1998 to 50.2% in the third quarter of fiscal 1999. The decrease was principally due to a decrease in advertising and other revenues as a percent of total revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses are comprised of: - - sales and marketing expenses, which include advertising costs, credit card fees and distribution costs; - - product development expenses, which include site development, editorial content and systems costs; and - - general and administrative expenses, which include depreciation but exclude goodwill amortization expenses. Total selling, general and administrative expenses, including direct expenses, expenses allocated from our parent for periods prior to our initial public offering and expenses charged by our parent in connection with intercompany agreements after our initial public offering, increased from $497,000, or 46.7% of revenues, in the third quarter of fiscal 1998 to $9.3 million, or 176.0% of revenues, in the third quarter of fiscal 1999 due to a substantial increase in advertising, product development and overhead costs to support the continued expansion of iTurf. During the third quarter of 1999, we incurred approximately 10 $2.5 million of expenses in connection with services provided to us by our parent. In the third quarter of fiscal 1999, selling, general and administrative expenses were comprised of approximately $6.7 million of selling and marketing expenses, $1.8 million of product development costs and $800,000 of general and administrative expenses. GOODWILL AMORTIZATION. Goodwill amortization increased significantly from $17,000, or 1.6% of revenues, for the third quarter of fiscal 1998 to $652,000, or 12.3% of revenues, for the same period in fiscal 1999 as a result of the Taponline acquisition. COMPARISON OF THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 AND NINE MONTHS ENDED OCTOBER 31, 1998 NET REVENUES. Net revenues increased from $1.9 million in the first three quarters of fiscal 1998 to $10.9 million for the same period in fiscal 1999. The increase was due to the launch of the dELiAs.cOm and discountdomain.com Web sites in May 1998, the contentsonline.com and droog.com sites in November 1998, the dotdotdash.com site in March 1999 and the StorybookHeirlooms.com site in April 1999, the acquisition of OnTap.com in September 1999 as well as increased traffic as a result of our marketing efforts and growth in Internet usage. Advertising, subscription and licensing revenues increased to approximately $1.2 million for the first three quarters of fiscal 1999 from $456,000 for the same period of fiscal 1998 as a result of both increased advertising on gURL.com and the Taponline acquisition. GROSS PROFIT. Gross profit increased from $1.2 million for the first three quarters of fiscal 1998 to $5.2 million for the same period in fiscal 1999 as a result of increased sales. Gross margin decreased from 61.3% in the first three quarters of fiscal 1998 to 48.3% in the first three quarters of fiscal 1999. The decrease was principally due to increased sales of lower-margin products on our discountdomain.com and TSISoccer.com sites as well as seasonal promotional offers. The change also reflects a decrease in advertising and other revenues as a percent of total revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and administrative expenses increased from $1.0 million, or 53.7% of revenues, in the first three quarters of fiscal 1998 to $15.1 million, or 138.9% of revenues, in the first three quarters of fiscal 1999 due to a substantial increase in advertising, product development and overhead costs to support the continued expansion of iTurf. During the first three quarters of 1999, we incurred approximately $5.1 million of expenses in connection with services provided to us by our parent. GOODWILL AMORTIZATION. Goodwill amortization increased significantly from $51,000, or 2.7% of revenues, for the first three quarters of fiscal 1998 to $690,000, or 6.4% of revenues, for the same period in fiscal 1999 as a result of the Taponline acquisition. QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. These factors include: - - seasonal fluctuations in consumer purchasing patterns and advertising spending; - - mix of product and other revenues; - - timing of, response to and quantity of our parent's catalog mailings and our own electronic mailings; 11 - - changes in the growth rate of Internet usage; - - actions of competitors; - - the timing and amount of costs relating to the expansion of our operations and acquisitions of technology or businesses; and - - general economic and market conditions. Our limited operating history and rapid growth make it difficult to ascertain the effects of seasonality on our business although we believe our revenues and operating results generally to be lower in the first half of each fiscal year than in the second half of such year. We believe that period-to-period comparisons of our historical results are not necessarily meaningful and should not be relied upon as an indication of future results. INCOME TAXES Since our initial public offering, we are no longer consolidated with our parent's taxpayer group. For periods prior to such event, we owed our parent our proportionate share of the consolidated tax liability computed as if iTurf were filing a separate return. Any tax loss benefits attributable to us were used by our parent. To the extent that our parent used our tax benefits, we reduced our debt due to our parent, which was repaid in the third quarter of fiscal 1999. Now that we are no longer consolidated with our parent's taxpayer group, we may not be able to realize the tax benefit of future losses. Losses generated subsequent to deconsolidation will be available to us to offset any future taxable income for twenty years. However, deferred tax assets recorded to reflect such future benefits are likely to be fully reserved when recorded based on our limited operating history. LIQUIDITY AND CAPITAL RESOURCES Operating activities provided net cash of $312,000 for the first three quarters of fiscal 1998 and used $9.2 million during the first three quarters of fiscal 1999. This significant cash usage during fiscal 1999 reflects higher operating expenses as well as prepayments of marketing and other costs. Net cash used in investing activities of $68.5 million for the first three quarters of fiscal 1999 relate primarily to our investments in marketable securities and purchase of shares of dELiA*s common stock from our parent in connection with our initial public offering. During the first three quarters of fiscal 1999, our investing activities, which used approximately $201,000, relate to purchases of property and equipment. We expect to make additional capital expenditures of approximately $250,000 in the fourth quarter of fiscal 1999, including investments in technology and physical infrastructure. In addition, a portion of our resources may be used to fund acquisitions or investments in businesses, products and technologies that are complementary to our current business. We also expect to spend significant amounts for marketing and other alliances. In May 1999, we entered into a strategic alliance agreement with America Online, Inc. under which we committed to cash payments of approximately $4.0 million in fiscal 1999 and $4.1 million in fiscal 2000. In August 1999, we entered into a strategic marketing alliance with Microsoft Corporation under which we agreed to pay Microsoft a total of at least $4.6 million over the one-year term of the agreement. In connection with the September 1999 Taponline transaction, we agreed to purchase approximately $6.5 million in promotional opportunities through these MarketSource's offline marketing channels over the next three years. Financing activities provided net cash of $97.1 million for the first three quarters of fiscal 1999 and used $100,000 for the same period of fiscal 1998. The significant amount of cash provided by financing 12 activities during the first three quarters of fiscal 1999 relates to the initial public offering of our common stock. Prior to our initial public offering, financing activities were related primarily to loans from our parent. Our capital requirements depend on numerous factors, including: - the rate of market acceptance of iTurf's online presence; - our ability to expand iTurf's customer base; - the cost of upgrades to our online presence; and - our level of expenditures for sales and marketing. The timing and amount of such capital requirements cannot accurately be predicted. Additionally, we will continue to evaluate possible investments in businesses, products and system technologies and to develop plans to expand our sales and marketing programs and conduct more aggressive brand promotions. We believe that the net proceeds of our initial public offering, together with our cash from operations, will be sufficient to meet anticipated cash needs at least through fiscal 2000. YEAR 2000 COMPLIANCE We are heavily dependent upon complex computer software and systems for our operations, including, to a significant extent, our parent's computer systems. Many existing computer programs and systems use only two digits to identify a year in the date field. These programs and systems were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. STATE OF READINESS. All of iTurf's material operating software and our information technology systems and other systems, including telecommunications and warehouse systems, were developed by and are supported by third party vendors. Each of the third party vendors of iTurf's mission-critical operating software has provided a written warranty or assurance to iTurf or our parent that such software will not be affected by the change in the century. The majority of the third party vendors of iTurf's other material operating software and systems have also provided warranties or assurances that such software and systems would be compliant. iTurf has prepared a Year 2000 compliance program, which involves: - identifying the material operating software and systems on which iTurf depends, whether used by iTurf or by iTurf's service providers; - obtaining written warranties or assurances from third party software and system vendors and service providers; - monitoring the compliance efforts of such vendors and service providers; and - testing our material operating software and systems. During the third quarter, we began to perform tests of some of our material operating software and systems to verify the assurances given by third party vendors and ensure Year 2000 compliance. The testing, which has since been completed, has not identified any material software or systems as requiring remediation or replacement. However, we cannot assure you that all of our material operating software and systems will be Year 2000 compliant. In addition to the operating systems and software iTurf uses directly, our operations are also dependent upon the performance of operating software and systems used by our significant service providers, including our parent and providers of financial, telecommunications and parcel delivery 13 services. Our parent has provided us with assurance that its Year 2000 compliance program is consistent with ours and the status of its efforts is the same as ours. We have contacted each of iTurf's other significant service providers and have obtained written assurances from the majority of such providers that the providers' relevant operating software and systems are or would be in Year 2000 compliance. We are monitoring the status of all iTurf's significant service providers' Year 2000 compliance efforts to minimize the risk of any material adverse effect on iTurf's operations resulting from compliance failures. However, there can be no assurance that iTurf's service providers have, or will have, operating software and systems that are Year 2000 compliant. RISKS. The failure of our software or systems to be Year 2000 compliant could prevent us from being able to process or fulfill orders from our customers, could cause users of our Web sites to consider alternative Web community and content providers and could disrupt our financial and management controls and reporting systems. Any such worst-case scenario, if not quickly remedied, would have a material adverse effect on iTurf. Therefore, we are developing contingency plans with respect to such systems and software. In addition, a significant portion of our merchandise sales are made with credit cards, and iTurf's operations may be materially adversely affected to the extent our customers are unable to use their credit cards due to Year 2000 issues that are not rectified by the customers' credit card vendors. iTurf has not identified significant exposure to Year 2000 problems outside of the information technology issues identified above. COSTS. To date, we have spent less than $5,000 on Year 2000 compliance. We expect that our incremental costs of addressing Year 2000 issues may be as much as $50,000. We believe that the proceeds of our initial public offering budgeted for investment in technology infrastructure and maintenance will be sufficient to fund our Year 2000 compliance program and contingency plan. However, given iTurf's dependence on third party software and system vendors and service providers and on our customers' vendors, there can be no assurance to that effect. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not involved in any legal proceedings that management believes would have a material adverse effect on our financial position or results of operations. ITEM 2. CHANGES IN SECURITIES USE OF PROCEEDS FROM REGISTERED SECURITIES On April 8, 1999, the Securities and Exchange Commission declared effective our registration statement (No. 333-15153) on Form S-1, as then amended, relating to our initial public offering of 4,830,000 shares of Class A common stock, 630,000 shares of which were issued upon exercise of an overallotment option granted by us to the underwriters. The managing underwriters for the offering were BT Alex. Brown Incorporated and Hambrecht & Quist LLC (the "Underwriters"). In connection with the offering, we registered the Class A common stock under the Securities Exchange Act of 1934, as amended. 14 The public offering commenced on April 9, 1999 and terminated upon the sale of all of the 4,830,000 shares of Class A common stock which were registered for sale. The offering was completed on April 14, 1999. The aggregate offering price of the securities sold was $106,260,000. All of the securities registered were sold for the account of the Company. Prior to October 30, 1999, the Company incurred the following expenses in connection with the issuance and distribution of the Common Stock registered: Underwriting discounts and commissions $7,438,000 Other expenses (legal and accounting fees and expenses, printing and engraving expenses, filing and listing fees, transfer agent and registrar fees and miscellaneous) 1,413,000 The net offering proceeds to the Company after deducting the foregoing expenses were $97,409,000. Other than the amounts set forth for underwriting discounts and commissions, the foregoing represent reasonable estimates of expenses. The Company did not make, in connection with the offering and sale of the Common Stock registered, any direct or indirect payments to directors or officers of the Company or, to the Company's knowledge, their associates, persons owning 10% or more of any class of equity securities of the Company, or affiliates of the Company. From April 14, 1999 until October 30, 1999, approximately $5.8 million of the net offering proceeds was used for general corporate purposes and $17,734,000 was used to purchase 551,046 shares of common stock of dELiA*s Inc. CHANGES IN SECURITIES None. ITEM 3. DEFAULT UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION SALES OF UNREGISTERED SECURITIES On September 1, 1999, we issued 1,586,996 shares of our Class A common stock to the shareholders of T@PONLINE.COM, Inc. in a transaction which was exempt from Section 5 of the Securities Act pursuant to Section 4(2) of the Securities Act. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits See "Exhibit Index" following the signature page. (b) We filed the following reports on Form 8-K during the fiscal quarter: (i) current report on Form 8-K, dated August 11, 1999, reporting Item 5. This report contained information about our agreement to acquire T@PONLINE.COM, Inc. (ii) current report on Form 8-K, dated September 7, 1999, reporting Item 2. This report contained information about our acquisition of T@PONLINE.COM, Inc. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. iTurf Inc. (Registrant) Date: December 14, 1999 By: /s/ STEPHEN I. KAHN ----------------------------------------- Stephen I. Kahn Chairman of the Board, President and Chief Executive Officer By: /s/ DENNIS GOLDSTEIN ----------------------------------------- Dennis Goldstein Chief Financial Officer and Treasurer (principal financial and accounting officer) 17 EXHIBIT INDEX 3.1 Restated Certificate of Incorporation of iTurf (incorporated by reference to Exhibit 3.1 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 3.2 By-laws of iTurf (incorporated by reference to Exhibit 3.2 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.1 Form of Intercompany Services Agreement (incorporated by reference to Exhibit 10.1 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.2 Form of Trademark License and Customer List Agreement (incorporated by reference to Exhibit 10.2 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.3 Form of Intercompany Indemnification Agreement (incorporated by reference to Exhibit 10.3 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.4 Form of Tax Allocation Agreement (incorporated by reference to Exhibit 10.4 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.5 Form of iTurf Common Stock Registration Rights Agreement (incorporated by reference to Exhibit 10.5 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.6 Form of dELiA*s Common Stock Registration Rights Agreement (incorporated by reference to Exhibit 10.6 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.7 Form of Customer Service Agreement (incorporated by reference to Exhibit 10.7 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.8 Form of Letter Agreement between dELiA*s and iTurf (regarding a sale of control by dELiA*s) (incorporated by reference to Exhibit 10.8 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.9 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.10 Employment Agreement between iTurf and Stephen I. Kahn (incorporated by reference to Exhibit 10.10 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.11 Employment Agreement between iTurf and Alex S. Navarro (incorporated by reference to Exhibit 10.11 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.12 Employment Agreement between iTurf and Oliver Sharp (incorporated by reference to Exhibit 10.12 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.13 Employment Agreement between iTurf and Dennis Goldstein (incorporated by reference to Exhibit 10.13 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.14 TSISoccer.com Asset Transfer Agreement, dated April 1, 1999, between iTurf Inc. and TSI Soccer Corporation (incorporated by reference to Exhibit 10.14 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.15 Subscription Agreement, dated April 1, 1999, between iTurf Delaware Investment Company and dELiA*s (incorporated by reference to Exhibit 10.15 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-71123)) 10.16 Advertising Agreement between iTurf and America Online, Inc., dated May 4, 1999 (incorporated by reference to Exhibit 10.16 to the iTurf Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 1999)** 10.17 Online Advertising Authorized Reseller Agreement between iTurf, Taponline and MarketSource Corporation, dated September 1, 1999 (incorporated by reference to Exhibit 99.1 to the iTurf Inc. Current Report on Form 8-K dated September 7, 1999) 10.18 Offline Advertising Purchase Agreement between iTurf and MarketSource Corporation, dated September 1, 1999 (incorporated by reference to Exhibit 99.2 to the iTurf Inc. Current Report on Form 8-K dated September 7, 1999) 10.19 Registration Rights Agreement between iTurf and Marketsource Corporation (incorporated by reference to Exhibit 10.19 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-90435) 18 27.1* Financial Data Schedule * Filed herewith ** Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the SEC. 19 EX-27 2 EXHIBIT 27
5 1,000 9-MOS JAN-29-2000 FEB-01-1999 OCT-30-1999 19,700 48,482 0 0 0 72,899 3,356 289 94,638 3,728 0 0 0 189 90,721 94,638 9,627 10,868 5,622 5,622 15,786 0 (2,066) (8,474) (161) (8,313) 0 0 0 (8,313) (0.51) (0.51)
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