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FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 2002
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 AUGUST 3, 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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
435 HUDSON STREET, NEW YORK, NEW YORK 10014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(212) 807-9060
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Number of shares of Class A common stock outstanding as of September 12,
2002: 47,665,624
Number of shares of Class B common stock outstanding as of September 12,
2002: 11,425,000
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STATEMENTS CONTAINED IN THIS DOCUMENT OR INCORPORATED BY REFERENCE,
INCLUDING, WITHOUT LIMITATION, INFORMATION APPEARING UNDER "PART I - ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," MAY BE FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF SECTION
27A OF THE AMENDED SECURITIES ACT OF 1933 AND SECTION 21E OF THE AMENDED
SECURITIES EXCHANGE ACT OF 1934). WHEN USED IN THIS DOCUMENT, THE WORDS
"BELIEVE," "PLAN," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS. THEY APPLY ONLY AS OF THE DATE OF THIS
REPORT. THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THE
FORWARD-LOOKING STATEMENTS. THE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO THE FOLLOWING:
o WE MAY EXPERIENCE REDUCTIONS IN RESPONSE RATES TO CATALOG AND
ELECTRONIC MAILINGS DUE TO INCREASED PROSPECTING, THE TIMING AND
QUANTITY OF OUR MAILINGS AND OTHER FACTORS;
o WE MAY NOT BE ABLE TO OBTAIN ACCEPTABLE STORE SITES AND LEASE
TERMS;
o WE MAY NOT BE ABLE TO OPEN NEW STORES IN A TIMELY FASHION;
o ADVERSE WEATHER CONDITIONS AND OTHER FACTORS AFFECTING RETAIL
STORES GENERALLY MAY CAUSE OUR SALES TO DECREASE;
o WE MAY BE SUBJECT TO INCREASED LEVELS OF COMPETITION;
o WE MAY NOT BE ABLE TO RETAIN KEY PERSONNEL;
o WE ARE SUSCEPTIBLE TO DOWNTURNS IN GENERAL ECONOMIC CONDITIONS;
o OUR STORE LOCATIONS MAY MAKE US SUSCEPTIBLE TO ECONOMIC DOWNTURNS
IN SPECIFIC GEOGRAPHIC REGIONS;
o WE MAY NOT BE ABLE TO ANTICIPATE AND RESPOND TO FASHION TRENDS;
o WE ARE LIKELY TO CONTINUE TO EXPERIENCE INCREASES IN THE COST OF
MATERIALS, PRINTING, PAPER, POSTAGE, SHIPPING AND LABOR;
o WE MAY NOT BE ABLE TO LEVERAGE INVESTMENTS MADE IN INFRASTRUCTURE
TO SUPPORT EXPANSION;
o WE MAY EXPERIENCE DECREASED LEVELS OF SERVICE FROM THIRD PARTY
VENDORS AND SERVICE PROVIDERS;
o OUR SUPPLIERS MAY NOT BE ABLE TO OBTAIN FINANCING TO ENABLE THEM
TO PROVIDE PRODUCTS TO US; AND
o OTHER FACTORS DETAILED ELSEWHERE IN THIS REPORT.
THESE FACTORS, AND OTHER FACTORS THAT APPEAR IN OUR ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, COULD AFFECT OUR ACTUAL
RESULTS AND COULD CAUSE SUCH RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED
IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR ON OUR BEHALF. WE UNDERTAKE NO
OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. YOU ARE ADVISED, HOWEVER,
TO CONSULT ANY ADDITIONAL DISCLOSURES WE MAKE IN OUR REPORTS TO THE SEC ON FORMS
10-K, 10-Q AND 8-K.
THIS REPORT MAY INCLUDE OR INCORPORATE BY REFERENCE MARKET DATA RELATED TO
THE INDUSTRIES IN WHICH WE ARE INVOLVED. THIS DATA HAS BEEN DERIVED FROM STUDIES
PUBLISHED BY MARKET RESEARCH FIRMS, TRADE ASSOCIATIONS AND OTHER ORGANIZATIONS.
THESE ORGANIZATIONS SOMETIMES ASSUME EVENTS, TRENDS AND ACTIVITIES WILL OCCUR
AND PROJECT INFORMATION BASED ON THOSE ASSUMPTIONS. IF ANY OF THEIR ASSUMPTIONS
ARE WRONG, THEIR PROJECTIONS MAY ALSO BE WRONG.
OUR FISCAL YEAR IS THE 52 OR 53 WEEKS ENDED ON THE SATURDAY CLOSEST TO
JANUARY 31 FOLLOWING THE CORRESPONDING CALENDAR YEAR. FOR EXAMPLE, "FISCAL 2002"
MEANS THE PERIOD FROM FEBRUARY 3, 2002 TO FEBRUARY 1, 2003.
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 2, 2002 AUGUST 3, 2002
---------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................ $ 27,915 $ 14,388
Restricted cash .................................................. 3,277 3,277
Merchandise inventories .......................................... 14,640 22,907
Prepaid expenses and other current assets ........................ 5,847 7,543
--------- ---------
Total current assets ......................................... 51,679 48,115
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$16,423 and $19,947, respectively ................................ 30,208 32,080
OTHER ASSETS .......................................................... 347 442
--------- ---------
TOTAL ASSETS .......................................................... $ 82,234 $ 80,637
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ............................ $ 12,297 $ 10,101
Liabilities due to customers ..................................... 4,824 4,755
Accrued restructuring ............................................ 2,210 1,477
Bank loan payable ................................................ 4,373 13,371
Other current liabilities ........................................ 597 625
--------- ---------
Total current liabilities .................................... 24,301 30,329
LONG-TERM DEBT AND CAPITAL LEASES ..................................... 3,695 3,376
EXCESS OF FAIR VALUE OVER PURCHASE PRICE .............................. 15,383 --
OTHER LONG-TERM LIABILITIES ........................................... 1,398 2,646
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 - 46,169,912 and 47,631,399 shares, respectively
(including 1,685,580 in treasury) ............................ 462 476
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 ....................................... 136,668 138,995
Less common stock in treasury, at cost ........................... (11,041) (11,041)
Deferred compensation ............................................ (870) (480)
Retained deficit ................................................. (87,876) (83,778)
--------- ---------
Total stockholders' equity ................................... 37,457 44,286
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $ 82,234 $ 80,637
========= =========
See Notes to Unaudited Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
AUGUST 4, 2001 AUGUST 3, 2002
-------------- --------------
NET SALES ................................................... $ 25,955 $ 26,154
COST OF SALES ............................................... 14,713 15,645
-------- --------
GROSS PROFIT ................................................ 11,242 10,509
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................ 17,673 17,429
RESTRUCTURING AND FINANCE CHARGES ........................... 4,591 --
INTEREST AND OTHER (INCOME) EXPENSE, NET .................... (46) 96
-------- --------
NET LOSS .................................................... $(10,976) $ (7,016)
======== ========
BASIC AND DILUTED NET LOSS PER SHARE ........................ $ (0.28) $ (0.15)
======== ========
SHARES USED IN THE CALCULATION OF BASIC AND DILUTED
NET LOSS PER SHARE ..................................... 39,784 45,494
TWENTY-SIX WEEKS ENDED
AUGUST 4, 2001 AUGUST 3, 2002
-------------- --------------
NET SALES ................................................... $ 62,186 $ 54,924
COST OF SALES ............................................... 34,395 31,108
-------- --------
GROSS PROFIT ................................................ 27,791 23,816
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................ 42,135 34,993
RESTRUCTURING AND FINANCE CHARGES ........................... 4,975 --
INTEREST AND OTHER (INCOME) EXPENSE, NET .................... (44) 108
-------- --------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ................................... (19,275) (11,285)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ......... -- 15,383
-------- --------
NET (LOSS) INCOME ........................................... $(19,275) $ 4,098
======== ========
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE:
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ................................... $ (0.51) $ (0.25)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ......... -- 0.34
-------- --------
NET (LOSS) INCOME ........................................... $ (0.51) $ 0.09
======== ========
SHARES USED IN THE PER SHARE CALCULATION OF BASIC AND DILUTED
NET (LOSS) INCOME PER SHARE ............................ 37,558 45,265
See Notes to Unaudited Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
AUGUST 4, 2001 AUGUST 3, 2002
-------------- --------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss before cumulative effect of change in accounting principle .... $(19,275) $(11,285)
Adjustments to reconcile net loss before cumulative effect of change in
accounting principle to net cash used in operating activities:
Depreciation and amortization ................................. 668 2,946
Restructuring and finance charges ............................. 4,369 --
Asset impairment .............................................. -- 692
Non-cash compensation expense related to restricted stock ..... 630 390
Amortization of investments ................................... (12) --
Changes in operating assets and liabilities:
Merchandise inventories ................................... 1,607 (8,267)
Prepaid expenses and other current assets ................. 4,048 (1,696)
Other assets .............................................. 52 (118)
Current liabilities ....................................... (10,349) (1,498)
Long-term liabilities ..................................... 442 1,248
-------- --------
Net cash used in operating activities ....................................... (17,820) (17,588)
INVESTING ACTIVITIES:
Capital expenditures ................................................... (3,756) (5,487)
Proceeds from the maturity of investment securities .................... 11,036 --
Proceeds from sales of businesses ...................................... 3,783 --
Acquisition of business ................................................ (2,500) --
-------- --------
Net cash provided by (used in) investing activities ......................... 8,563 (5,487)
FINANCING ACTIVITIES:
Net proceeds from common stock offering ................................ 29,632 --
Borrowings under line of credit agreement .............................. 519 8,998
Principal payments on long-term debt and capital lease obligations ..... (2,349) (291)
Exercise of options to purchase 571,859 and 263,652 shares, respectively 1,771 841
-------- --------
Net cash provided by financing activities ................................... 29,573 9,548
-------- --------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS .............................. 20,316 (13,527)
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD ................................ 10,121 27,915
-------- --------
CASH & CASH EQUIVALENTS--END OF PERIOD ...................................... $ 30,437 $ 14,388
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
o Fiscal 2001 issuance of restricted stock
o Fiscal 2002 issuance of common stock as final consideration for a fiscal
2000 acquisition
See Notes to Unaudited Consolidated Financial Statements
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
We are a multichannel retailer that markets apparel, accessories and home
furnishings to teenage girls and young women. We reach our customers through the
dELiA*s catalog, www.dELiAs.cOm and the dELiA*s retail stores.
We are subject to seasonal fluctuations in our merchandise sales and
results of operations. We expect our net sales generally to be higher in the
second half of each fiscal year than in the first half of the same fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION-- Our consolidated financial statements include
the accounts of dELiA*s and subsidiaries, all of which were wholly-owned for all
periods presented. All significant intercompany balances and transactions have
been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The accompanying unaudited
consolidated financial statements have been prepared in accordance with the
requirements for Form 10-Q and in accordance with generally accepted accounting
principles in the United States for interim financial reporting. In the opinion
of management, the accompanying consolidated financial statements are presented
on a basis consistent with the audited consolidated financial statements and
reflect all adjustments (consisting of normal recurring items) necessary for a
fair presentation of results for the interim periods presented. The financial
statements and footnote disclosures should be read in conjunction with our
fiscal 2001 audited consolidated financial statements and the notes thereto,
which are included in our annual report on Form 10-K for the year ended February
2, 2002, which was filed under the Securities Exchange Act of 1934. Results for
the interim periods are not necessarily indicative of the results to be expected
for the year.
RECENT ACCOUNTING PRONOUNCEMENTS-- As of February 3, 2002, we adopted
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangible Assets." For acquired goodwill, SFAS 142 discontinues amortization
and instead requires annual impairment testing. For intangible assets, SFAS 142
requires testing for impairment and amortization once the useful economic life
is determined to be finite. In connection with our adoption of SFAS 142, we
recorded a $15.4 million cumulative effect of change in accounting principle
which 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. The following table shows the effect that earlier
adoption of SFAS 142 would have had on net loss before cumulative effect of
change in accounting principle (in thousands) and the related per share amounts
for all periods presented in the accompanying statement of operations:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002
--------------- -------------- -------------- --------------
Net loss before cumulative effect
of change in accounting principle $(10,976) $(0.28) $ (7,016) $ (0.15) $(19,275) $ (0.51) $(11,285) $ (0.25)
Negative goodwill amortization (1,000) (0.02) -- -- (2,000) (0.06) -- --
-------- ----- -------- -------- -------- -------- -------- --------
Adjusted net loss before cumulative
effect of change in accounting
principle $(11,976) $(0.30) $ (7,016) $ (0.15) $(21,275) $ (0.57) $(11,285) $ (0.25)
======== ====== ======== ======== ======== ======== ======== ========
As of February 3, 2002, we also adopted SFAS 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."
6
For the second quarter of fiscal 2002, selling, general and administrative
expenses included a charge of approximately $700,000 relating to the write-down
to fair value of leasehold improvements at three dELiA*s retail stores. See Note
8.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" to
amend or clarify accounting guidance related to gains and losses from
extinguishment of debt and other topics. Upon adoption of SFAS 145 as of the
beginning of fiscal 2003, we will be required to reclassify a pre-tax
extraordinary loss of approximately $800,000 recognized in fiscal 2001 to
selling, general and administrative expenses. The adoption of the Standard is
not expected to have any other material effect on our consolidated position or
results of operations.
RECLASSIFICATIONS -- Certain balance sheet amounts have been reclassified to
conform to the August 3, 2002 presentation.
3. SEGMENTS
We currently have two reportable segments: dELiA*s Direct and dELiA*s
Retail. All of our other businesses, which were sold or shut down in fiscal
2001, are included as "Non-core" below. Our two segments offer similar products
to similar customers, but are managed separately because of their distribution
methods. Certain amounts have been reclassified to conform to the current
presentation.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002
-------------- -------------- -------------- --------------
NET REVENUES
dELiA*s Direct $ 14,659,000 $ 11,448,000 $ 34,850,000 $ 27,476,000
dELiA*s Retail 11,059,000 14,631,000 21,613,000 27,373,000
Non-core 237,000 75,000 5,723,000 75,000
-------------- -------------- -------------- --------------
Total $ 25,955,000 $ 26,154,000 $ 62,186,000 $ 54,924,000
============== ============== ============== ==============
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE
dELiA*s Direct operating income (loss) $ (971,000) $ (889,000) $ (3,000,000) $ 481,000
dELiA*s Retail operating loss (1,991,000) (3,165,000) (3,114,000) (5,318,000)
Non-core operating income (loss) (615,000) 81,000 (3,175,000) 81,000
-------------- ------------- -------------- -------------
Total operating loss (3,577,000) (3,973,000) (9,289,000) (4,756,000)
Unallocated shared expenses 2,147,000 1,279,000 3,756,000 3,085,000
Depreciation, amortization and non-cash compensation 707,000 1,668,000 1,299,000 3,336,000
Restructuring and finance charges 4,591,000 -- 4,975,000 --
Interest and other expense (income), net (46,000) 96,000 (44,000) 108,000
--------------- -------------- --------------- --------------
Total $ (10,976,000) $ (7,016,000) $ (19,275,000) $ (11,285,000)
============== ============== ============== ==============
4. RESTRUCTURING AND FINANCE CHARGES
During fiscal 2000, we announced our intention to focus on our core dELiA*s
brand and to sell or shut down our non-core businesses. The restructuring of our
businesses included a number of initiatives and resulted in significant related
charges in fiscal 2000 and 2001.
In addition, a $600,000 finance charge recorded in the second quarter of
fiscal 2001 relates to the early termination of an interest rate swap tied to
our distribution facility mortgage.
During the first half of fiscal 2002, we paid approximately $700,000 for
accrued lease and other obligations related to our restructuring initiatives. We
expect to pay the remaining $1.5 million accrued for lease and other obligations
by the end of fiscal 2003.
7
5. STOCK ISSUANCE FOR FISCAL 2000 ACQUISITION
On March 1, 2002, we issued the former stockholders of theSpark.com, Inc.
197,835 shares of our Class A common stock as final consideration for our
February 2000 acquisition of that business. Because this consideration was paid
subsequent to our decision to sell the businesses, the value of the stock issued
was reserved as part of our prior year restructuring accruals.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
In 1999, two separate purported securities class action lawsuits were filed
against dELiA*s Inc. and certain of its officers and directors, and one former
officer of a subsidiary. The original complaints were filed in Federal District
Court for the Southern District of New York by Allain Roy on June 1, 1999 and by
Lorraine Padgett on June 3, 1999. The suits were consolidated into a single
class action and an amended and consolidated complaint was filed on March 22,
2000. The complaint in this lawsuit purports to be a class action on behalf of
the purchasers of our securities during the period January 20, 1998 through
September 10, 1998. The complaint generally alleges that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
by making material misstatements and by failing to disclose allegedly material
information regarding trends in our business. The complaint also alleges that
the individual defendants are liable for those violations under Section 20(a) of
the Securities Exchange Act. The complaint seeks unspecified damages, attorneys'
and experts' fees and costs, and such other relief as the court deems proper. On
April 14, 2000, dELiA*s Inc. and the other named defendants filed a motion to
dismiss the lawsuit. The motion to dismiss was denied on March 29, 2001. By
order dated December 10, 2001, the court certified the class. We filed our
answer to the consolidated amended complaint in February 2002 and merit
discovery was completed in May 2002. We intend to continue 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.
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 which became a final order in May 2002.
Pursuant to the settlement, we issued one million shares of dELiA*s Class A
common stock, of which 300,000 have been distributed and the remaining 700,000
shares will be distributed upon the completion of the claims administration
process. The total $6.3 million value of the non-cash settlement was recorded as
a fiscal 2001 charge.
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
8
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 August 3, 2002, our
remaining payment obligation including the assigned amount was approximately
$200,000.
9
7. LONG-TERM DEBT AND CREDIT FACILITIES
We are subject to certain covenants under the mortgage loan agreement
relating to the 1999 purchase of our distribution facility in Hanover,
Pennsylvania, including a covenant to maintain a fixed charge coverage ratio.
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.
Our credit agreement, as amended, with Wells Fargo Retail Finance LLC, a
subsidiary of Wells Fargo & Company, consists of a revolving line of credit that
permits us to borrow up to $25 million, limited to specified percentages of the
value of our eligible inventory as determined under the credit agreement, and
provides for the issuance of documentary and standby letters of credit up to $10
million. Under this Wells Fargo facility, as amended, our obligations are
secured by a lien on substantially all of our assets, except certain real
property and other specified assets. The agreement contains certain covenants
and default provisions customary for credit facilities of this nature, including
limitations on our payment of dividends. The agreement also contains controls on
our cash management and certain limits on our ability to distribute assets. 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. As of August 3, 2002, we were in full compliance with the
covenants under the facility, the outstanding balance was $13.4 million,
outstanding letters of credit were $3.5 million and unused available credit was
$2.2 million.
8. IMPAIRMENT OF LONG-LIVED ASSETS
During the second quarter of fiscal 2002, we reduced our projections due to
a decline in retail market conditions. Accordingly, we evaluated the value of
property and equipment associated with our retail stores. The carrying amount of
a long-lived asset is considered impaired when the anticipated cash flows
expected to be generated by the asset are less than its carrying amount. For the
quarter, selling, general and administrative expenses include a charge of
approximately $700,000 relating to the write-down to fair value of leasehold
improvements at three dELiA*s retail stores. The fair value was based on
expected future discounted cash flows generated by individual stores. Because of
continuing uncertainty in retail market conditions, our future cash flows
projections may change in the near term and we may need to record additional
impairment charges related to other retail stores.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN
THIS REPORT. EXCEPT FOR THE HISTORICAL INFORMATION PRESENTED, THE DISCUSSION IN
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR
IN THIS REPORT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT AND IN
OUR ANNUAL REPORT ON FORM 10-K.
OVERVIEW
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.
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE. In connection with our fiscal
2002 adoption of the Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" we recorded a cumulative effect of change
in accounting principle of approximately $15.4 million. 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.
THESPARK.COM, INC. On March 1, 2002, we issued the former stockholders of
theSpark.com, Inc. 197,835 shares of our Class A common stock as final
consideration for our February 2000 acquisition of that business. Because this
consideration was paid subsequent to our decision to sell the businesses, the
value of the stock issued was reserved as part of our prior year restructuring
accruals.
CAPITAL INVESTMENTS. We have made and continue to make significant capital
expenditures for construction of our dELiA*s retail stores including twelve new
stores in the first half of fiscal 2002. We expect the majority of our total
fiscal 2002 capital expenditures, which is estimated at approximately $10
million, to be spent on this continued retail expansion as our current plan is
to increase the number of dELiA*s retail stores by twelve during the second half
of fiscal 2002.
ASSET IMPAIRMENT. During the second quarter of fiscal 2002, we reduced our
projections due to a decline in retail market conditions. Accordingly, we
evaluated the value of property and equipment associated with our retail stores.
The carrying amount of a long-lived asset is considered impaired when the
anticipated cash flows expected to be generated by the asset are less than its
carrying amount. For the quarter, selling, general and administrative expenses
include a charge of approximately $700,000 relating to the write-down to fair
value of leasehold improvements at three dELiA*s retail stores. The fair value
was based on expected future discounted cash flows generated by individual
stores. Because of continuing uncertainty in retail market conditions, our
future cash flows projections may change in the near term and we may need to
record additional impairment charges related to other retail stores.
11
GENERAL MATTERS AFFECTING OUR CORE dELiA*S BUSINESS. The operating results
of our ongoing dELiA*s business are subject to the following uncertainties, each
of which is described in more detail in our annual report on Form 10-K under
"Risk Factors":
o access to financing to fund the operations and the expansion
strategies of our business;
o our ability to anticipate and respond to fashion trends;
o timing and quantity of catalog and electronic mailings and customer
response rates;
o availability of acceptable store sites and lease terms and the
possibility of increasing comparable store sales; and
o other factors described in our annual report on Form 10-K,
particularly under "Risk Factors."
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:
o 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.
o 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.
o 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.
o LONG-LIVED ASSETS -- In accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 144, " Accounting for the Impairment
or Disposal of Long-Lived Assets," we review long-lived assets and
certain identifiable intangibles for impairment periodically and
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable based on anticipated cash
flows to be generated by the asset.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our consolidated statements of operations to
net sales. Any trends reflected by the following table may not be indicative of
future results.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002
-------------- -------------- -------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.7 59.8 55.3 56.6
------ ----- ------ ------
Gross profit 43.3 40.2 44.7 43.4
Selling, general and administrative expenses 68.1 66.6 67.8 63.7
Restructuring and finance charges 17.7 -- 8.0 --
Interest and other expense (income), net (0.2) 0.4 (0.1) 0.2
------ ----- ------ ------
Loss before cumulative effect of accounting change (42.3) (26.8) (31.0) (20.5)
Cumulative effect of accounting change -- -- -- 28.0
------ ----- ------ ------
Net income (loss) (42.3)% (26.8)% (31.0)% 7.5%
====== ===== ====== ======
12
COMPARISON OF THIRTEEN WEEKS ENDED AUGUST 4, 2001 AND AUGUST 3, 2002
NET SALES. Net sales increased $200,000 from $26.0 million in the second
quarter of fiscal 2001 to $26.2 million in the second quarter of fiscal 2002.
The increase reflects a 32.3% increase in our Retail segment due to new store
openings offset by comparable store sales declines of 3.0% and a 21.9% decrease
in our Direct segment due, in part, to a decrease in catalog circulation.
GROSS PROFIT. Gross profit margin for the second quarter of fiscal 2002 was
40.2% compared to 43.3% for fiscal 2001. The decline was primarily driven by
more promotional clearance activity at Retail and sharper pricing in summer sale
catalogs as compared to the prior year. In addition, we recorded additional
reserves during the second quarter of fiscal 2002 to cover inventory risk on
back-to-school product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased from $17.7 million in the second quarter of
fiscal 2001 to $17.4 million in the second quarter of fiscal 2002. Selling,
general and administrative expenses also decreased as a percentage of net sales,
from 68.1% in the second quarter of fiscal 2001 to 66.6% in the second quarter
of fiscal 2002. Direct and corporate expenses were lower due to catalog
circulation reductions, the receipt of approximately $500,000 in insurance
proceeds and an ongoing focus on expense management. The fiscal 2001 divestiture
of non-core businesses also contributed to the decrease in expenses. These
decreases were offset by increases in Retail expenses due to new store openings
and an increase in net depreciation and amortization expenses in connection with
our adoption of SFAS 142.
RESTRUCTURING AND FINANCE CHARGES. During the second quarter of fiscal
2001, we recorded a charge of $4.6 million in connection with the sale or
shut-down of our non-core businesses and the early termination of an interest
rate swap tied to our distribution facility mortgage.
INCOME TAXES. No tax benefit has been recorded and our deferred tax assets
are fully reserved due to the uncertainty of our ability to utilize the benefit.
COMPARISON OF TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 AND AUGUST 3, 2002
NET SALES. Net sales decreased approximately $7.3 million from $62.2
million in the first half of fiscal 2001 to $54.9 million in the first half of
fiscal 2002. The decrease was due to the impact of divestitures of non-core
businesses and a 2.9% decrease in our core dELiA*s business. A 21.2% decrease in
our Direct segment was due, in part, to decreased catalog circulation and was
offset by a 26.7% increase in our Retail segment due to new store openings while
comparable store sales declined 7.4%.
GROSS PROFIT. Gross profit margin decreased from 44.7% in the first half of
fiscal 2001 to 43.4% in the first half of fiscal 2002. The decline was primarily
driven by more promotional clearance activity at Retail and sharper pricing in
clearance catatogs at Direct as well as increases in inventory reserves in
response to the challenging retail environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $7.1 million from $42.1 million
in the first half of fiscal 2001 to $35.0 million in the first half of fiscal
2001. Selling, general and administrative expenses also decreased as a
percentage of net sales, from 67.8% in the first half of fiscal 2001 to 63.7% in
the first half of fiscal 2002. Direct and corporate expenses were lower due to
catalog circulation reductions, the receipt of approximately $500,000 in
insurance proceeds and an ongoing focus on expense management. The fiscal 2001
divestiture of non-core businesses also contributed to the decrease in expenses.
These decreases were offset by increases in Retail expenses
13
due to new store openings and an increase in net depreciation and amortization
expenses in connection with our adoption of SFAS 142.
RESTRUCTURING AND FINANCE CHARGES. During the first half of fiscal 2001, we
recorded a charge of $5.0 million in connection with the sale or shut-down of
our non-core businesses and the early termination of an interest rate swap tied
to our distribution facility mortgage.
INCOME TAXES. No tax benefit has been recorded and our deferred tax assets
are fully reserved due to the uncertainty of our ability to utilize the benefit.
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 retail store openings
and catalog mailings and promotions and may also fluctuate as a result of a
number of other factors described in our annual report on Form 10-K,
particularly under "Risk Factors." As a result of seasonal and cyclical patterns
and these other factors, you should not rely on quarter-to-quarter comparisons
of our results of operations as indicative of our future performance.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations in the first half of fiscal 2001 and 2002 was $17.8
million and $17.6 million, respectively. The decrease in cash used in operations
primarily relates to lower operating losses offset by changes in working capital
levels.
Investing activities provided $8.6 million in the first half of fiscal 2001
primarily relating to net investment proceeds offset by capital expenditures and
to the cash proceeds and payments relating to our non-core businesses. In the
first half of fiscal 2002, investing activities used $5.5 million relating to
capital expenditures. During fiscal 2002, we expect to make capital expenditures
of approximately $10.0 million, approximately $9.5 million of which relates to
the construction of new retail stores.
Financing activities provided $29.6 million in the first half of fiscal
2001, primarily as a result of the June 2001 sale of 5.74 million shares of our
Class A common stock, and $9.5 million in the first half of fiscal 2002,
primarily relating to net activity under our credit facility.
We are subject to certain covenants under the mortgage loan agreement
relating to the 1999 purchase of our distribution facility in Hanover,
Pennsylvania, including a covenant to maintain a fixed charge coverage ratio.
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.
Our credit agreement, as amended, with Wells Fargo Retail Finance LLC, a
subsidiary of Wells Fargo & Company, consists of a revolving line of credit that
permits us to borrow up to $25 million, limited to specified percentages of the
value of our eligible inventory as determined under the credit agreement, and
provides for the issuance of documentary and standby letters of credit up to $10
million. Under this Wells Fargo facility, as amended, our obligations are
secured by a lien on substantially all of our assets, except certain real
property and other specified assets. The agreement contains certain covenants
and default provisions customary for credit facilities of this nature, including
limitations on our payment of dividends. The agreement also contains controls on
our cash management and certain limits on our ability to distribute assets. 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. As of August 3, 2002, we were in full compliance with the
covenants under the facility, the outstanding balance was $13.4 million,
outstanding letters of credit were $3.5 million and unused available credit was
$2.2 million.
We believe that our cash on hand and cash expected to be generated by
operations, together with the funds available under our credit agreement, will
be sufficient to meet our capital and operating requirements through at least
the next twelve months. However, we can give no assurances that we will be able
to generate sufficient capital through operations or other means to comply with
the covenants in our credit agreement. Our failure to raise sufficient capital,
to meet our internal earnings projections or to have continued access to
borrowings under our credit facility would have a material adverse effect on our
business. Additional funds that may be necessary to operate the business may not
be available to us on favorable terms or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our variable-rate mortgage arrangements and our credit facility expose us
to changes in interest rates.
15
Based on our outstanding balances of $3.1 million and $13.4 million,
respectively, at August 3, 2002, a hypothetical 100 basis point increase in
interest rates would cause an increase in our annual interest expense of
approximately $165,000.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1999, two separate purported securities class action lawsuits were filed
against dELiA*s Inc. and certain of its officers and directors, and one former
officer of a subsidiary. The original complaints were filed in Federal District
Court for the Southern District of New York by Allain Roy on June 1, 1999 and by
Lorraine Padgett on June 3, 1999. The suits were consolidated into a single
class action and an amended and consolidated complaint was filed on March 22,
2000. The complaint in this lawsuit purports to be a class action on behalf of
the purchasers of our securities during the period January 20, 1998 through
September 10, 1998. The complaint generally alleges that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
by making material misstatements and by failing to disclose allegedly material
information regarding trends in our business. The complaint also alleges that
the individual defendants are liable for those violations under Section 20(a) of
the Securities Exchange Act. The complaint seeks unspecified damages, attorneys'
and experts' fees and costs, and such other relief as the court deems proper. On
April 14, 2000, dELiA*s Inc. and the other named defendants filed a motion to
dismiss the lawsuit. The motion to dismiss was denied on March 29, 2001. By
order dated December 10, 2001, the court certified the class. We filed our
answer to the consolidated amended complaint in February 2002 and merit
discovery was completed in May 2002. We intend to continue 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.
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 which became a final order in May 2002.
Pursuant to the settlement, we issued one million shares of dELiA*s Class A
common stock, of which 300,000 have been distributed and the remaining 700,000
shares will be distributed upon the completion of the claims administration
process. The total $6.3 million value of the non-cash settlement was recorded as
a fiscal 2001 charge.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
17
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
dELiA*s Corp.
(Registrant)
Date: September 17, 2002
By: /s/ Stephen I. Kahn
-------------------
Stephen I. Kahn
Chairman of the Board and Chief
Executive Officer
By: /s/ Dennis Goldstein
--------------------
Dennis Goldstein
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of dELiA*s Corp. on Form 10-Q for the
period ending August 3, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Stephen I. Kahn, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
By: /s/ Stephen I. Kahn
-------------------
Stephen I. Kahn
Chief Executive Officer
September 17, 2002
In connection with the Quarterly Report of dELiA*s Corp. on Form 10-Q for the
period ending August 3, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Dennis Goldstein, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
19
By: /s/ Dennis Goldstein
--------------------
Dennis Goldstein
Chief Financial Officer and Treasurer
September 17, 2002
20