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FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
/X/ QUARTERLY REPORT
-------------------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 2, 2002
Commission file number 0-25347
DELIA*S CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3963754
(STATE OR OTHER JURISDICTION 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 common stock outstanding (excluding shares in treasury)
as of December 12, 2002:
Class A: 45,904,154
Class B: none
-----------------
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 NOT BE ABLE TO SECURE FINANCING TO FUND OPERATIONS ON
ACCEPTABLE TERMS;
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.
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 NOVEMBER 2, 2002
---------------- ----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 27,915 $ 8,853
Restricted cash............................................................ 3,277 3,277
Merchandise inventories ................................................... 14,640 27,617
Prepaid expenses and other current assets ................................. 5,847 8,169
---------- ----------
Total current assets .................................................. 51,679 47,916
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$16,423 and $22,397, respectively.......................................... 30,208 33,839
OTHER ASSETS .................................................................. 347 384
---------- ----------
TOTAL ASSETS ................................................................. $ 82,234 $ 82,139
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses...................................... $ 12,297 $ 16,457
Liabilities due to customers............................................... 4,824 4,853
Accrued restructuring...................................................... 2,210 1,247
Bank loan payable.......................................................... 4,373 19,286
Current portion of long-term debt and capital leases....................... 597 3,577
---------- ----------
Total current liabilities.............................................. 24,301 45,420
LONG-TERM DEBT AND CAPITAL LEASES .............................................. 3,695 277
EXCESS OF FAIR VALUE OVER PURCHASE PRICE ....................................... 15,383 --
OTHER LONG-TERM LIABILITIES .................................................... 1,398 2,714
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 47,589,734 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................................................. 136,668 139,019
Less common stock in treasury, at cost..................................... (11,041) (11,041)
Deferred compensation...................................................... (870) (375)
Retained deficit........................................................... (87,876) (94,465)
---------- ----------
Total stockholders' equity............................................. 37,457 33,728
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 82,234 $ 82,139
========== ==========
See Notes to Unaudited Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
NOVEMBER 3, 2001 NOVEMBER 2, 2002
---------------- ----------------
NET SALES ...................................................................... $ 32,503 $ 32,904
COST OF SALES .................................................................. 16,488 21,344
---------- ---------
GROSS PROFIT ................................................................... 16,015 11,560
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................................... 18,434 20,445
FACILITY RELOCATION AND CORPORATE SEVERANCE .................................... -- 1,601
INTEREST AND OTHER (INCOME) EXPENSE, NET ....................................... (71) 201
---------- ---------
NET LOSS BEFORE EXTRAORDINARY ITEM ............................................. (2,348) (10,687)
EXTRAORDINARY ITEM ............................................................. 803 --
---------- ---------
NET LOSS ....................................................................... $ (3,151) $ (10,687)
========== =========
BASIC AND DILUTED NET LOSS PER SHARE:
BEFORE EXTRAORDINARY ITEM ................................................. $ (0.05) $ (0.23)
EXTRAORDINARY ITEM ........................................................ (0.02) --
---------- ---------
NET LOSS .................................................................. $ (0.07) $ (0.23)
========== =========
SHARES USED IN THE NET LOSS PER SHARE CALCULATIONS ............................. 43,456 45,568
========== =========
THIRTY-NINE WEEKS ENDED
NOVEMBER 3, 2001 NOVEMBER 2, 2002
---------------- ----------------
NET SALES ...................................................................... $ 94,689 $ 87,828
COST OF SALES .................................................................. 50,883 52,452
---------- ---------
GROSS PROFIT ................................................................... 43,806 35,376
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................................... 60,569 55,438
RESTRUCTURING AND FINANCE CHARGES .............................................. 4,975 --
FACILITY RELOCATION AND CORPORATE SEVERANCE .................................... -- 1,601
INTEREST AND OTHER (INCOME) EXPENSE, NET ....................................... (115) 309
---------- ---------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE AND EXTRAORDINARY ITEM ............................... (21,623) (21,972)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ............................ -- 15,383
EXTRAORDINARY ITEM ............................................................. 803 --
---------- ---------
NET LOSS ....................................................................... $ (22,426) $ (6,589)
========== =========
BASIC AND DILUTED NET LOSS PER SHARE:
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
AND EXTRAORDINARY ITEM ................................................ $ (0.55) $ (0.48)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ....................... -- 0.34
EXTRAORDINARY ITEM ......................................................... (0.02) --
---------- ---------
NET LOSS .................................................................. $ (0.57) $ (0.14)
========== =========
SHARES USED IN THE NET LOSS PER SHARE CALCULATIONS ............................. 39,524 45,365
========== =========
See Notes to Unaudited Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THIRTY-NINE WEEKS ENDED
NOVEMBER 3, 2001 NOVEMBER 2, 2002
---------------- ----------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss before cumulative effect of change in accounting principle
and extraordinary item................................................... $ (21,623) $ (21,972)
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization..................................... 1,069 4,539
Restructuring and finance charges................................. 4,975 --
Asset impairment.................................................. -- 1,561
Non-cash compensation expense related to restricted stock......... 980 495
Amortization of investments....................................... (12) --
Changes in operating assets and liabilities:
Merchandise inventories....................................... (3,012) (12,977)
Prepaid expenses and other current assets..................... 2,050 (2,322)
Other assets.................................................. 176 (72)
Current liabilities .......................................... (9,973) 4,726
Long-term liabilities......................................... 766 1,316
---------- ---------
Net cash used in operating activities........................................... (24,604) (24,706)
INVESTING ACTIVITIES:
Capital expenditures....................................................... (4,920) (9,696)
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............................. 7,399 (9,696)
FINANCING ACTIVITIES:
Net proceeds from common stock offering.................................... 29,517 --
Borrowings under line of credit agreement.................................. 7,799 14,913
Principal payments on long-term debt and capital lease obligations......... (2,488) (438)
Charges related to changes in financing arrangements....................... (606) --
Exercise of options to purchase 714,483 and 297,877 shares, respectively... 2,127 865
---------- ---------
Net cash provided by financing activities before extraordinary item............. 36,349 15,340
Net cash used by extraordinary item............................................. (803) --
---------- ---------
Net cash provided by financing activities....................................... 35,546 15,340
---------- ---------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS.................................. 18,341 (19,062)
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD..................................... 10,121 27,915
---------- ---------
CASH & CASH EQUIVALENTS--END OF PERIOD.......................................... $ 28,462 $ 8,853
========== =========
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.
In October 2002, we engaged Peter J. Solomon Company to assist in the
evaluation of strategic alternatives. This process continues and will likely
result in either a sale of the company or the infusion of additional capital in
the form of equity or debt. We are currently evaluating a variety of
alternatives and anticipate being able to announce a decision in this regard by
the end of the fiscal year.
In November 2002, a cash concentration trigger event occurred under the terms
of our Wells Fargo credit facility (see Note 8). As a result of that event, we
are currently in discussions with Wells Fargo to amend the loan agreement. We
anticipate that we will finalize the amendment on satisfactory terms by the end
of December 2002.
If our discussions with Wells Fargo are concluded on satisfactory terms and a
capital infusion is received, we believe that our cash on hand and cash expected
to be generated from operations, together with the funds available under our
credit agreement, will be sufficient to meet our capital and operating
requirements at least through the next twelve months. There can be no assurance
that we will conclude our discussion with Wells Fargo on favorable terms or that
we will be able to obtain a capital infusion. If we are not successful we may
not be able to meet our operating and capital requirements for the next twelve
months. The accompanying financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
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.
RESTRICTED CASH -- Restricted cash represents collateral for standby letters
of credit issued in connection with our merchandise sourcing activities.
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.
6
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 and extraordinary item (in thousands) and the
related per share amounts for all periods presented in the accompanying
statement of operations:
7
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
NOVEMBER 3, 2001 NOVEMBER 2, 2002 NOVEMBER 3, 2001 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
Net loss before cumulative effect of
change in accounting principle and
extraordinary item $ (2,348) $ (0.05) $(10,687) $ (0.23) $(21,623) $ (0.55 $(21,972) $ (0.48)
Negative goodwill amortization (1,000) $ (0.02) -- -- (3,000) (0.08) -- --
-------- ------- -------- -------- -------- ------- ------- -------
Adjusted net loss before cumulative
effect of change in accounting
principle and extraordinary item $ (3,348) $ (0.07) $ (10,687) $ (0.23) $(24,623) $ (0.63) $(21,972) $ (0.48)
======== ======== ========= ======= ======== ======= ======== =======
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." 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. During the third quarter of fiscal 2002, in connection with our facility
relocation, we recorded a charge of approximately $900,000 relating to the
write-off of leasehold improvements at the closed facility.
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 SFAS 145 is not expected to have any
other material effect on our consolidated position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". Among other things, this Standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. This Standard nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". This Standard is
effective for exit or disposal activities initiated after December 31, 2002.
RECLASSIFICATIONS -- Certain balance sheet amounts have been reclassified to
conform to the current presentation.
8
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 THIRTY-NINE WEEKS ENDED
NOVEMBER 3, 2001 NOVEMBER 2, 2002 NOVEMBER 3, 2001 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
NET REVENUES
dELiA*s Direct $ 16,651,000 $ 13,434,000 $ 51,501,000 $ 40,910,000
dELiA*s Retail 15,816,000 19,470,000 37,429,000 46,843,000
Non-core 36,000 -- 5,759,000 75,000
------------ ------------ ------------ ------------
Total $ 32,503,000 $ 32,904,000 $ 94,689,000 $ 87,828,000
============ ============ ============ ============
NET LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE AND
EXTRAORDINARY ITEM
dELiA*s Direct operating loss $ (193,000) $ (2,859,000) $ (3,193,000) $ (2,378,000)
dELiA*s Retail operating income (loss) 702,000 (2,652,000) (2,412,000) (7,970,000)
Non-core operating (loss) income (306,000) -- (3,481,000) 81,000
------------ ------------ ------------ ------------
Total operating income (loss) 203,000 (5,511,000) (9,086,000) (10,267,000)
Unallocated shared expenses 1,872,000 1,676,000 5,628,000 4,761,000
Depreciation, amortization
and non-cash compensation 750,000 1,698,000 2,049,000 5,034,000
Restructuring, finance, facility relocation
and corporate severance charges -- 1,601,000 4,975,000 1,601,000
Interest and other (income) expense, net (71,000) 201,000 (115,000) 309,000
------------ ------------ ------------ ------------
Net loss before cumulative effect of
change in accounting principle and
extraordinary item $ (2,348,000) $ 10,687,000) $(21,623,000) $(21,972,000)
============ ============ ============ ============
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 related to the early termination of an interest rate swap tied to
our distribution facility mortgage.
During the first three quarters of fiscal 2002, we paid approximately $1.0
million for accrued lease obligations related to our restructuring initiatives.
We expect to pay the remaining $1.2 million accrued for lease obligations by the
end of fiscal 2003.
5. FACILITY RELOCATION AND CORPORATE SEVERANCE
During the third quarter of fiscal 2002, we recorded charges of
approximately $1.0 million related to our decision to relocate our contact
center from Long Island City, New York to Columbus, Ohio and $600,000 for
severance related to a corporate cost-cutting initiative.
9
6. SALE AND ISSUANCES OF STOCK
On May 14, 2001, we issued 300,000 shares of restricted Class A common stock
to Andrea Weiss in connection with her employment as our President. The shares
vest over a four-year period in accordance with the following schedule: 40% in
year one; 30% in year two; 20% in year three and 10% in year four. The fair
value of the restricted stock at the time of grant is being amortized against
earnings over the related vesting periods.
On June 19, 2001, we sold 5.74 million shares of our Class A common stock for
approximately $29.5 million in net proceeds.
On 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.
7. 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 and all other discovery was completed in
September 2002. The parties have reached an agreement in principle on a
settlement of this action and on December 5, 2002, an Order discontinuing the
action was filed with the U.S. District Court. The Order provides that the case
is discontinued without prejudice. In the event the settlement is not
consummated by January 17, 2003, either party may apply to the Court to have the
case re-instated. A settlement will not become effective until a stipulation of
settlement is executed by all parties and finally approved by the Court. The
settlement will be covered under our insurance policy. In the event the
settlement is not consummated and the case is re-instated, we intend to continue
to vigorously defend against this action, which we also believe is covered under
our insurance policy. In either event, we 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.
10
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 charge in the fourth quarter of
fiscal 2001.
INTERNET ALLIANCES
In May 1999, we entered into a strategic marketing alliance with America
Online, Inc. Over the original two-year term of the agreement, we agreed to pay
America Online a total of approximately $8.1 million. On March 30, 2001, the
original agreement was superseded by a new agreement under which we agreed to
pay our remaining obligation of approximately $1.1 million to America Online
over a 27-month period. In connection with the sale of our gURL.com business on
May 24, 2001, we assigned approximately $350,000 of obligations under our
agreement with America Online to PrimediaNet. We remain liable to America Online
for payment of all obligations under the agreement, including the assigned
obligations. In the event PrimediaNet defaults on the obligations it has
assumed, we would have a contractual claim against PrimediaNet and Primedia. As
of November 2, 2002, our remaining payment obligation including the assigned
amount was approximately $100,000.
11
8. 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. This credit facility replaced our existing facility with
Congress Financial Corporation. In connection with this change in lenders, we
recorded a charge of approximately $800,000 in the third quarter of fiscal 2001.
As of November 2, 2002, the outstanding balance was $19.3 million, outstanding
letters of credit were $2.7 million and unused available credit was $20,000.
In November 2002, a cash concentration trigger event occurred under the terms
of our Wells Fargo credit facility that permits Wells Fargo, among other things,
to establish additional reserves which impact our availability under the line.
As a result of that event, we are currently in discussions with Wells Fargo to
amend the loan agreement , which will likely result in an adjustment downward of
the effective advance rate under the line as well as introduce a number of
financial covenants relating to sales performance, inventory levels and cash
flow metrics. We anticipate that we will finalize the amendment on satisfactory
terms by the end of December 2002.
9. 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
second quarter, 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. 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.
During the third quarter of fiscal 2002, in connection with our facility
relocation, we recorded a charge of approximately $900,000 relating to the
write-off of leasehold improvements at the closed facility.
12
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.
In October 2002, we engaged Peter J. Solomon Company to assist in the
evaluation of strategic alternatives. This process continues and will likely
result in either a sale of the company or the infusion of additional capital in
the form of equity or debt. We are currently evaluating a variety of
alternatives and anticipate being able to announce a decision in this regard by
the end of the fiscal year.
In November 2002, a cash concentration trigger event occurred under the terms
of our Wells Fargo credit facility. As a result of that event, we are currently
in discussions with Wells Fargo to amend the loan agreement. We anticipate that
we will finalize the amendment on satisfactory terms by late December 2002.
If our discussions with Wells Fargo are concluded on satisfactory terms and a
capital infusion is received, we believe that our cash on hand and cash expected
to be generated from operations, together with the funds available under our
credit agreement, will be sufficient to meet our capital and operating
requirements at least through the next twelve months. There can be no assurance
that we will conclude our discussion with Wells Fargo on favorable terms or that
we will be able to obtain a capital infusion. If we are not successful we may
not be able to meet our operating and capital requirements for the next twelve
months. The accompanying financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
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.
13
ASSET IMPAIRMENT, FACILITY RELOCATION AND CORPORATE SEVERANCE. 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 second
quarter, 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. 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.
During the third quarter of fiscal 2002, we recorded charges of approximately
$1.0 million related to our decision to relocate our contact center from Long
Island City, New York to Columbus, Ohio and $600,000 for severance related to a
corporate cost-cutting initiative. Approximately $900,000 of the facility
relocation charge related to the write-off of leasehold improvements at the
closed facility.
14
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 operations;
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.
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our consolidated statements of operations to
net sales. Any trends reflected by the following table may not be indicative of
future results.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
NOVEMBER 3, 2001 NOVEMBER 2, 2002 NOVEMBER 3, 2001 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 50.7 64.9 53.7 59.7
----- ----- ----- -----
Gross profit 49.3 35.1 46.3 40.3
Selling, general and administrative expenses 56.7 62.1 64.0 63.1
Restructuring and finance charges -- -- 5.2 --
Facility relocation and corporate severance -- 4.9 -- 1.8
Interest and other (income) expense, net (0.2) 0.6 (0.1) 0.4
----- ----- ----- -----
Net loss before cumulative effect of
accounting change and extraordinary item (7.2) (32.5) (22.8) (25.0)
Cumulative effect of accounting change -- -- -- (17.5)
Extraordinary item 2.5 -- 0.9 --
----- ----- ----- -----
Net loss (9.7)% (32.5)% (23.7)% (7.5)%
===== ===== ===== =====
COMPARISON OF THIRTEEN WEEKS ENDED NOVEMBER 3, 2001 AND NOVEMBER 2, 2002
NET SALES. Net sales increased $400,000 from $32.5 million in the third
quarter of fiscal 2001 to $32.9 million in the third quarter of fiscal 2002.
Despite disappointing reception of our Back to School assortment, Retail segment
sales increased 23.1% due to new store openings offset by comparable store sales
declines of 12.8%. Direct segment sales decreased 19.3% due, in part, to a
decrease in catalog circulation as well as disappointing response to our Back to
School and Fall catalog mailings and online offerings.
GROSS PROFIT. Gross profit margin for the third quarter of fiscal 2002 was
35.1% compared to 49.3% for fiscal 2001. The decline was primarily driven by
more promotional clearance activity at Retail and sharper pricing in our
catalogs and online as compared to the prior year. In addition, to address
overstock issues arising from Back to School, we executed inventory liquidations
at a net loss of $2.3 million, which reduced our gross margin by over 700 basis
points.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $18.4 million in the third quarter of
fiscal 2001 to $20.4 million in the third quarter of fiscal 2002. Selling,
general and administrative expenses also increased as a percentage of net sales,
from 56.7% in the third quarter of fiscal 2001 to 62.1% in the third quarter of
fiscal 2002. The increase primarily relates to new store openings in our Retail
segment and an increase in net depreciation and amortization expenses in
connection with our adoption of SFAS 142. Direct and corporate expenses were
lower due to catalog circulation reductions, the receipt of approximately
$300,000 in insurance proceeds and an ongoing focus on expense management offset
by a write-off of approximately $300,000 of a barter asset.
FACILITY RELOCATION AND CORPORATE SEVERANCE. During the third quarter of
fiscal 2002, we recorded charges of approximately $1.0 million related to our
decision to relocate our contact center from Long Island City, New York to
Columbus, Ohio and $600,000 for severance related to a corporate cost-cutting
initiative.
EXTRAORDINARY ITEM. During the third quarter of fiscal 2001, we entered into
an agreement with Wells Fargo Retail Finance, LLC that provided us with a $25
million line of credit. This facility replaced the credit facility we had with
Congress Financial Corporation. In connection with this change in lenders, we
16
recorded a charge of approximately $800,000. Upon adoption of SFAS 145 as of the
beginning of fiscal 2003, we expect to reclassify this charge to operations.
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 THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001 AND NOVEMBER 2, 2002
NET SALES. Net sales decreased approximately $6.9 million from $94.7
million in the first three quarters of fiscal 2001 to $87.8 million in the first
three quarters of fiscal 2002. The decrease was due to the impact of
divestitures of non-core businesses and a 1.3% decrease in our core dELiA*s
business. A 20.6% decrease in our Direct segment was due, in part, to decreased
catalog circulation and was offset by a 25.2% increase in our Retail segment due
to new store openings while comparable store sales declined 9.6%.
GROSS PROFIT. Gross profit margin decreased from 46.3% in the first three
quarters of fiscal 2001 to 40.3% in the first three quarters of fiscal 2002. The
decline was primarily driven by more promotional clearance activity at Retail
and sharper pricing in our catalogs at Direct as well as increases in inventory
liquidations stemming from our disappointing Back to School results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased from $60.6 million in the first three quarters
of fiscal 2001 to $55.4 million in the first three quarters of fiscal 2002.
Selling, general and administrative expenses decreased as a percentage of net
sales, from 64.0% in the first three quarters of fiscal 2001 to 63.1% in the
first three quarters of fiscal 2002. The decrease relates primarily to lower
Direct expenses and the fiscal 2001 divestiture of non-core businesses. 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 first three quarters of fiscal
2001, we recorded a charge of approximately $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.
FACILITY RELOCATION AND CORPORATE SEVERANCE. During the third quarter of
fiscal 2002, we recorded charges of approximately $1.0 million related to our
decision to relocate our contact center from Long Island City, New York to
Columbus, Ohio and $600,000 for severance related to a corporate cost-cutting
initiative.
EXTRAORDINARY ITEM. During the third quarter of fiscal 2001, we entered into
an agreement with Wells Fargo Retail Finance, LLC that provided us with a $25
million line of credit. This facility replaced the credit facility we had with
Congress Financial Corporation. In connection with this change in lenders, we
recorded a charge of approximately $800,000. Upon adoption of SFAS 145 as of the
beginning of fiscal 2003, we expect to reclassify this charge to selling,
general and administrative expenses.
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.
17
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations in the first three quarters of fiscal 2001 and 2002
was $24.6 million and $24.7 million, respectively. The increase in cash used in
operations primarily relates to higher operating losses offset by changes in
working capital levels.
Investing activities provided $7.4 million in the first three quarters 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 three quarters of fiscal 2002, investing activities
used $9.7 million relating to capital expenditures. During the fourth quarter of
fiscal 2002, we expect to make additional capital expenditures of $300,000 to
$500,000 resulting in total capital expenditures for fiscal 2002 of
approximately $10.0 million.
Financing activities provided $35.5 million in the first three quarters of
fiscal 2001, primarily as a result of the June 2001 sale of 5.74 million shares
of our Class A common stock as well as borrowings under our new credit agreement
and stock option exercises, and $15.3 million in the first three quarters of
fiscal 2002, primarily relating to net activity under our credit facility.
18
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 an adjustment in our payment
schedule.
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 November 2, 2002, the outstanding balance was $19.3
million, outstanding letters of credit were $2.7 million and unused available
credit was $20,000.
In November 2002, a cash concentration trigger event occurred under the terms
of our Wells Fargo credit facility that permits Wells Fargo, among other things,
to establish additional reserves which impact our availability under the line.
As a result of that event, we are currently in discussions with Wells Fargo to
amend the loan agreement , which will likely result in an adjustment downward of
the effective advance rate under the line as well as introduce a number of
financial covenants relating to sales performance, inventory levels and cash
flow metrics. We anticipate that we will finalize the amendment on satisfactory
terms by the end of December 2002.
Separately, in October 2002, we engaged Peter J. Solomon Company to assist in
the evaluation of strategic alternatives. This process continues and will likely
result in either a sale of the company or the infusion of additional capital in
the form of equity or debt. We are currently evaluating a variety of
alternatives and anticipate being able to announce a decision in this regard by
the end of the fiscal year.
19
If our discussions with Wells Fargo are concluded on satisfactory terms and a
capital infusion is received, we believe that our cash on hand and cash expected
to be generated from operations, together with the funds available under our
credit agreement, will be sufficient to meet our capital and operating
requirements at least through the next twelve months. There can be no assurance
that we will conclude our discussion with Wells Fargo on favorable terms or that
we will be able to obtain a capital infusion. If we are not successful we may
not be able to meet our operating and capital requirements for the next twelve
months. The accompanying financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
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. Based on our outstanding balances of $3.0 million
and $19.3 million, respectively, at November 2, 2002, a hypothetical 100 basis
point increase in interest rates would cause an increase in our annual interest
expense of approximately $223,000.
ITEM 4. CONTROLS AND PROCEDURES
As of November 2,2002, an evaluation was performed under the supervision
and with the participation of our management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Exchange Act). Based on that evaluation, our
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective as of
November 2, 2002. Further, there have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to November 2, 2002.
20
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, merit discovery
was completed in May 2002 and all other discovery was completed in September
2002. The parties have reached an agreement in principle on a settlement of this
action and on December 5, 2002, an Order discontinuing the action was filed with
the U.S. District Court. The Order provides that the case is discontinued
without prejudice. In the event the settlement is not consummated by January 17,
2003, either party may apply to the Court to have the case re-instated. A
settlement will not become effective until a stipulation of settlement is
executed by all parties and finally approved by the Court. The settlement will
be covered under our insurance policy. In the event the settlement is not
consummated and the case is re-instated, we intend to continue to vigorously
defend against this action, which we also believe is covered under our insurance
policy. In either event, we 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.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
See "Exhibit" Index Following Signature Page and Certifications
The company filed a Form 8-K on October 30, 2002, in connection with (i)
Amendment No. 1 to the Employment Agreement Between Registrant and Andrea Weiss
dated October 17, 2002 and (ii) the second Amendment to Loan and Security
Agreement with Wells Fargo Retail Finance, LLC, dated October 21, 2002. No
financial statements were filed with this Form 8-K.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
dELiA*s Corp.
(Registrant)
Date: December 13, 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)
23
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Stephen I. Kahn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of dELiA*s Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: December 13, 2002
By: /s/ Stephen I. Kahn
-------------------
Stephen I. Kahn
Chairman of the Board and Chief Executive Officer
24
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Dennis Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of dELiA*s Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: December 13, 2002
By: /s/ Dennis Goldstein
--------------------
Dennis Goldstein
Chief Financial Officer
25
EXHIBIT INDEX
10.1 Amendment No.1 to Employment Agreement between dELiA*s Corp. and Andrea
Weiss, dated October 12, 2002 (incorporated by reference to Exhibit
10.1 of Current Report on Form 8-K dated October 30, 2002)
10.2 Second Amendment to Loan and Security Agreement by and among Wells fargo
Retail Finance LLC, dELiA*s Corp., dELiA*s Operating Company, dELiA*s
Distribution Company, and dELiA*s Retail Company, dated October 21, 2002
(incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K
dated October 30, 2002)
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
26