SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT
-------------------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 31, 1998
Commission file number 0-21869
dELiA*s Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3914035
(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 as of December 10, 1998:
14,138,790
<PAGE>
Certain statements contained herein, including, without limitation,
information appearing under "Part I - Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations," are forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")). Forward-looking statements involve a
number of risks and uncertainties including, but not limited to, general
economic conditions, increases in materials, printing, paper, postage, shipping
and labor costs, timing of catalog mailings, customer response rates, levels of
competition and other factors outside the control of the Company. These factors,
and other factors that appear with the forward-looking statements, or in the
Company's other Securities and Exchange Commission filings, including its Annual
Report on Form 10-K for the year ended January 31, 1998, could affect the
Company's actual results and could cause the Company's actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company herein.
All references in this Report to a particular fiscal year refer to the year
ended January 31 following the particular year (e.g., "fiscal 1998" refers to
the fiscal year ending January 31, 1999).
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
2
<PAGE>
dELiA*s Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
January 31, 1998 October 31, 1998
---------------- ----------------
* (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................... $ 4,485 $ 3,454
Short-term investments....................................... 37,075 --
Merchandise inventories ..................................... 11,233 32,606
Prepaid expenses and other current assets ................... 4,020 10,738
Deferred taxes .............................................. 1,100 1,100
------- -------
Total current assets .................................... 57,913 47,898
PROPERTY AND EQUIPMENT--Net ..................................... 6,222 11,060
GOODWILL AND OTHER ASSETS ....................................... 437 25,205
------- -------
TOTAL ASSETS .................................................... $64,572 $84,163
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other current
liabilities ............................................... $19,849 $24,019
Current portion of long-term debt and capital leases......... 105 113
------- -------
Total current liabilities ............................... 19,954 24,132
DEFERRED CREDITS ................................................ 310 --
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES.............. 164 67
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY............................................. 44,144 59,964
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $64,572 $84,163
======= =======
</TABLE>
* Condensed from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial Statements
3
<PAGE>
dELiA*s Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended October 31,
-----------------------
1997 1998
---- ----
(Unaudited)
<S> <C> <C>
NET SALES........................................................ $31,357 $ 40,821
COST OF SALES.................................................... 16,514 19,979
------- --------
GROSS PROFIT..................................................... 14,843 20,842
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..................... 12,684 19,691
INTEREST INCOME, NET............................................. 338 126
------- --------
INCOME BEFORE INCOME TAXES....................................... 2,497 1,277
PROVISION FOR INCOME TAXES....................................... 870 530
------- --------
NET INCOME....................................................... $ 1,627 $ 747
======= ========
BASIC AND DILUTED NET INCOME PER SHARE........................... $ 0.12 $ 0.05
======= ========
SHARES USED IN THE CALCULATION OF BASIC NET
INCOME PER SHARE............................................. 13,301 14,139
======= ========
SHARES USED IN THE CALCULATION OF DILUTED NET
INCOME PER SHARE............................................. 13,445 14,735
======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended October 31,
-----------------------
1997 1998
---- ----
(Unaudited)
<S> <C> <C>
NET SALES........................................................ $70,140 $ 98,466
COST OF SALES.................................................... 36,470 47,914
------- --------
GROSS PROFIT..................................................... 33,670 50,552
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..................... 30,880 47,282
INTEREST INCOME, NET............................................. 819 767
------- --------
INCOME BEFORE INCOME TAXES....................................... 3,609 4,037
PROVISION FOR INCOME TAXES....................................... 1,273 1,433
------- --------
NET INCOME....................................................... $ 2,336 $ 2,604
======= ========
BASIC AND DILUTED NET INCOME PER SHARE........................... $ 0.18 $ 0.19
======= ========
SHARES USED IN THE CALCULATION OF BASIC NET
INCOME PER SHARE............................................. 12,818 13,653
======= ========
SHARES USED IN THE CALCULATION OF DILUTED NET
INCOME PER SHARE............................................. 12,945 13,990
======= ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
dELiA*s Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended October 31,
-----------------------
1997 1998
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income................................................... $ 2,336 $ 2,604
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation and amortization.............................. 517 1,631
Amortization of investments................................ -- 160
Compensation expense related to issuance of restricted
stock and stock appreciation rights..................... 75 44
Changes in operating assets and liabilities:
Merchandise inventories.............................. (6,990) (18,262)
Prepaid expenses and other current assets............ (5,960) (6,677)
Deferred taxes....................................... 629 --
Other assets......................................... (99) 165
Current liabilities ................................. 7,731 2,139
Deferred credits..................................... 120 (310)
-------- --------
Net cash used in operating activities........................ (1,641) (18,506)
======== ========
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (Note 1).................. -- (15,187)
Capital expenditures......................................... (4,213) (4,180)
Purchases of investment securities
Held-to-maturity.......................................... (27,769) --
Available for sale........................................ -- (46,513)
Proceeds from the maturity of held-to-maturity investment
securities................................................ -- 30,024
Proceeds from the sale of available-for-sale investment
securities................................................ -- 53,404
-------- --------
Net cash provided by (used in) investing activities.............. (31,982) 17,548
======== ========
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................... 19,945 --
Exercise of stock options.................................... -- 82
Net proceeds under line of credit agreement.................. 796 --
Proceeds from issuance of long-term debt..................... 168 --
Principal payments of long-term debt and capital lease
obligations............................................... (243) (155)
-------- --------
Net cash provided by (used in) financing activities.............. 20,666 (73)
======== ========
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS .................. (12,957) (1,031)
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD..................... 21,717 4,485
-------- --------
CASH & CASH EQUIVALENTS--END OF PERIOD .......................... $ 8,760 $ 3,454
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
Issuance of equity securities in connection with the Screeem!
Business acquisition (Note 1)
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE>
dELiA*s Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
dELiA*s Inc. (together with its consolidated subsidiaries, the "Company")
is a teen-focused marketer of casual apparel, accessories, cosmetics, home
furnishings and soccer merchandise.
In July 1998, the Company acquired assets located in 26 retail stores as
well as the leases for such stores and related trademarks (together, the
"Screeem! Business".) The acquisition has been accounted for as a purchase with
the excess of the aggregate purchase price over the fair market value of net
assets acquired allocated to goodwill based upon preliminary estimates of fair
values. The Company does not expect the final purchase allocation to differ
significantly from the preliminary purchase price recorded. On a pro forma
basis, assuming the acquisition had occurred on the first day of each fiscal
year, net sales, net income and earnings per share would have been $92,100,000,
$1,924,000 and $0.14, respectively, for the nine months ended October 31, 1997
and $112,991,000, $1,489,000 and $0.10, respectively, for the nine months ended
October 31, 1998. These results are presented for informational purposes only
and do not necessarily represent results which would have occurred nor are they
indicative of future results of combined operations.
In September 1998, the Company acquired certain assets from the estate of
Fulcrum Direct, Inc. for approximately $4.75 million in cash. The primary assets
included the trademarks and customer lists for the Zoe, Storybook Heirlooms,
Playclothes, After the Stork and Just for Kids catalogs. The Company also
purchased selected Zoe and Storybook Heirlooms inventory and assumed certain
Storybook Heirlooms customer refund liabilities. The acquisition has been
accounted for as a purchase with the excess of the aggregate purchase price over
the fair market value of net assets acquired allocated to goodwill based upon
preliminary estimates of fair values. The Company does not expect the final
purchase allocation to differ significantly from the preliminary purchase price
recorded.
The Company is subject to seasonal fluctuations in its merchandise sales and
results of operations. The Company expects its net sales and operating results
generally to be lower in the first and second quarters than in the third and
fourth quarters (which include the majority of the back-to-school season and the
holiday season) of each fiscal year.
2. Summary of Significant Accounting Policies and Basis of Presentation
a. Principles of Consolidation--The condensed consolidated financial
statements include the accounts of dELiA*s Inc. and subsidiaries, all of which
are wholly owned. All significant intercompany balances and transactions have
been eliminated in consolidation.
6
<PAGE>
dELiA*s Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
b. Unaudited Interim Financial Statements--The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with the requirements for Form 10-Q and in accordance with generally accepted
accounting principles for interim financial reporting. In the opinion of
management, the accompanying condensed consolidated financial statements are
presented on a basis consistent with the audited 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 the Company's January 31, 1998 audited consolidated financial statements
and the notes thereto, which are included in the Company's Annual Report on Form
10-K for the year ended January 31, 1998, 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.
c. Reclassifications--Certain amounts have been reclassified to conform to
the October 31, 1998 presentation.
d. Recent Accounting Pronouncements--In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income," which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income. The adoption of
SFAS No. 130 as of February 1, 1998 did not have an effect on the Company's
financial statements or disclosure as the Company has no reconciling items.
Therefore net income and comprehensive income are the same.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that public companies
report certain information about operating segments in their annual financial
statements and in subsequent condensed financial statements of interim periods
issued to shareholders. This statement also requires that public companies
report certain information about their products and services, the geographic
areas in which they operate and their major customers. The Company is currently
reviewing the impact of this statement on its current level of disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which is effective for fiscal
years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. This statement
standardizes the disclosure requirements for pension and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures. The Company has
determined that the adoption of this new standard will not have a material
effect on the Company's disclosure for all periods presented.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, which is effective for fiscal
years beginning after June 15, 1999, requires the Company to recognize all
derivatives on the balance sheet at fair value. The Company has determined that
the adoption of this new standard will not have a material effect on the
Company's financial statements or disclosure for all periods presented.
7
<PAGE>
dELiA*s Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. Property and Equipment
Major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
Estimated October 31, January 31,
Useful Lives 1998 1998
------------ ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Furniture, fixtures and equipment....... 5-10 years $10,414,000 $5,444,000
Leasehold improvements.................. Term of lease 2,833,000 1,842,000
----------- ----------
Total--at cost.......................... 13,247,000 7,286,000
Less accumulated depreciation and
amortization.......................... 2,187,000 1,064,000
----------- ----------
Total property and equipment--net....... $11,060,000 $6,222,000
============ ==========
</TABLE>
4. Credit and Financing Agreements
At October 31, 1998, the Company had a line of credit agreement with a bank
providing for short-term loans of up to $5.0 million subject to bank approval.
Borrowings under the agreement are secured by all assets of the Company except
for merchandise inventories and bear interest at the prime rate (8 percent at
October 31, 1998 and 8.5 percent at January 31, 1998). There were no funds
borrowed under the agreement during the nine month period ended October 31, 1998
and the fiscal year ended January 31, 1998. Outstanding letters of credit
established to facilitate international merchandise purchases at October 31,
1998 were $2,286,000.
On December 7, 1998 the Company entered into a Credit Agreement with First
Union National Bank (the "Credit Agreement"). The Credit Agreement established a
new credit facility which replaced the Company's previous line of credit
agreement. The new credit facility, which terminates on December 7, 2001,
consists of a revolving line of credit permitting the Company to borrow up to
$25 million. Under this facility, the Company has the ability to cause the
lender(s) to issue documentary and standby letters of credit up to $10 million.
The Company's obligations under the Credit Agreement are secured by a lien on
substantially all of the Company's assets, except certain real property. The
ability of the Company to borrow under the Credit Agreement is subject to a
number of conditions including compliance with tangible net worth, fixed charge
cover ratio and debt to cash flow covenants. The availability of the unused
revolving line of credit is limited to specified percentages of the value of the
Company's eligible inventory determined under the Credit Agreement. At the
option of the Company, borrowings under this facility bear interest at First
Union National Bank's prime rate or at LIBOR plus 200 basis points. The Credit
Agreement contains certain covenants and default provisions customary for credit
facilities of this nature, including limitations on payment of dividends by the
Company. A fee of 0.375% per year is assessed monthly on the unused portion of
the line of credit.
8
<PAGE>
dELiA*s Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Stock Options
In the nine month period ended October 31, 1998, options to purchase shares
of Common Stock were granted to 194 employees of the Company and its
subsidiaries. These options will become exercisable over a period of six months
to five years from the date of grant. The exercise price per share of each such
option is generally equal to the fair market value of the Common Stock on the
date of grant.
On September 15, 1998, the Company reduced the exercise price of
outstanding common stock options held by the Company's employees and
non-employee directors to the fair market value per share as of that date. The
Company repriced these stock options in an effort to retain employees at a time
when a significant percentage of stock options had exercise prices that were
above fair market value. The Company believes that stock options are a valuable
tool in compensating and retaining employees. After repricing, these options
maintained the same vesting and expiration terms. Not all grants to officers
were repriced. Executive officers forfeited a portion of prior grants in
connection with the repricing.
A summary of all plan and non-plan stock option activity follows:
<TABLE>
<CAPTION>
Fiscal Year Nine months
Ended January 31, 1998 Ended October 31, 1998
------------------------ ------------------------
Weighted Weighted
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 383,750 $11.00 744,437 $14.96
Granted (excludes repricing) 362,937 19.13 2,013,483 17.54
Exercised (2,250) 11.00 (7,375) 11.11
Cancelled (excludes repricing) -- -- (132,100) 18.03
------- ---------
Outstanding at end of period 744,437 14.96 2,618,445 6.49
======= =========
Exercisable at end of period 107,500 $11.24 317,987 $5.75
======= =========
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting for
stock options. Accordingly, no compensation expense has been recognized for
those options granted to employees in the nine month period ended October 31,
1998 and the year ended January 31, 1998.
On September 16, 1998, two employees and a financial advisor were granted
options to purchase stock in Storybook Inc., a wholly-owned subsidiary of the
Company. The options become exercisable two years after the date of grant and
expire ten years after the date of grant. The defined exercise price is equal to
the fair market value at the date of grant.
6. Commitments and Contingencies
In connection with the Screeem! Business acquisition, the Company has
agreed that if the mean of the intraday high and low bid prices for the Common
Stock for the 20 consecutive trading days immediately preceding January 10, 2000
(the "18-Month Price") is less than $18.00, it will issue to the sellers that
number of additional shares of Common Stock that is equal to (i) the excess of
(x) the product of 208,334 shares (subject to adjustment) multiplied by $18.00
over (y) the product of 208,334 shares multiplied by the greater of the 18-Month
Price or $10.00 divided by (ii) the 18-Month Price.
9
<PAGE>
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 the
Company's Condensed Consolidated Financial Statements and Notes thereto included
elsewhere in this Report.
Overview
The Company is a teen-focused marketer of casual apparel, accessories,
cosmetics, home furnishings and soccer merchandise. Through dELiA*s catalog and
web site which target girls and young women between the ages of 10 and 24 (an
age group known as "Generation Y"), the Company believes it is the leading
direct marketer of casual apparel, related accessories and cosmetics to
Generation Y. Through its TSI Soccer catalog, retail stores and web site, the
Company is a leading direct marketer and retailer of specialty soccer
merchandise to Generation Y boys and girls. In addition to www.dELiAs.com and
www.TSIsoccer.com, the Company's rapidly growing internet presence includes
www.discountdomain.com, www.Droog.com and www.ContentsOnline.com as well as the
www.gURL.com community websites. Through its recently acquired Screeem! and Jean
Country retail stores, the Company offers its customers progressive,
fashion-forward, unisex branded apparel through a dynamic mall-based shopping
experience featuring live DJs, fashion models and promotional appearances and
events.
In September 1998, the Company acquired certain assets from the estate of
Fulcrum Direct, Inc. for approximately $4.75 million in cash. The primary assets
included the trademarks and customer lists for the Zoe, Storybook Heirlooms,
Playclothes, After the Stork and Just for Kids catalogs. The Company also
purchased selected Zoe and Storybook Heirlooms inventory and assumed certain
Storybook Heirlooms customer refund liabilities. The Company plans to begin
distributing the Storybook Heirlooms catalog in January 1999. This catalog
primarily targets girls ages 6 to 12 with fashionable, upscale special occasion
outfits and accessories.
The Company maintains a corporate headquarters, telemarketing and customer
service group in New York, New York, additional telemarketing and corporate
facilities in Durham, North Carolina and a fulfillment facility for processing
merchandise in Hanover, Pennsylvania. The Storybook Heirlooms business is based
in the San Francisco, California area.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statement of operations to net
sales. Any trends reflected by the following table may not be indicative of
future results.
<TABLE>
<CAPTION>
Three Months Nine months
Ended October 31, Ended October 31,
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 49.0 52.7 48.7 52.0
----- ----- ----- -----
Gross profit 51.0 47.3 51.3 48.0
Selling, general and administrative expenses 48.2 40.4 48.0 44.0
Interest income, net 0.3 1.1 0.8 1.1
----- ----- ----- -----
Income before income taxes 3.1 8.0 4.1 5.1
Provision for income taxes 1.3 2.8 1.5 1.8
----- ----- ----- -----
Net income 1.8% 5.2% 2.6% 3.3%
===== ===== ===== =====
</TABLE>
10
<PAGE>
Comparison of Three Months Ended October 31, 1998 and 1997
Net Sales. Net sales increased approximately $9.4 million to $40.8 million
in the third quarter of fiscal 1998 from $31.4 million in the third quarter of
fiscal 1997. Sales increases were primarily driven by the July Screeem! Business
acquisition. The Company distributed approximately 20% more catalogs in the
third quarter of fiscal 1998 as in the third quarter of fiscal 1997, although
variances in the timing of mailings render comparisons unmeaningful. Aggregate
response rates from catalogs distributed in the third quarter of fiscal 1998
declined relative to catalogs distributed in the third quarter of fiscal 1997 as
the Company (i) broadened the distribution of its catalogs and increased its
prospecting efforts and (ii) mailed additional catalog editions to a large
number of persons who had received a prior edition of those catalogs earlier in
the period. The Company believes aggregate response rates will usually decline
as it broadens the distribution of its catalog and when it mails additional
catalog editions within the same fiscal period.
Gross Margin. Gross margin increased to 51.0% in the third quarter of fiscal
1998 from 47.3% in the third quarter of fiscal 1997. The increase in gross
profit as a percentage of sales reflects higher average price points in the TSI
Soccer business and continued growth in sales of higher margin dELiA*s branded
product.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $7.0 million to $19.7 million in
the third quarter of fiscal 1998 from $12.7 million in the third quarter of
fiscal 1997. Selling, general and administrative expenses increased as a
percentage of net sales from 40.4% in the third quarter fiscal 1997 to 48.2% in
the third quarter of fiscal 1998. The increase was due to greater spending on
catalog circulation, advertising and database management as well as increased
expenses associated with the company's development of its internet and retail
infrastructure.
Comparison of Nine Months Ended October 31, 1998 and 1997
Net Sales. Net sales increased approximately $28.4 million to $98.5 million
in the first nine months of fiscal 1998 from $70.1 million in the first nine
months of fiscal 1997. Sales increases were driven by the July Screeem! Business
acquisition as well as increased catalog circulation and strong outlet store
sales. The Company distributed approximately 48% more catalogs (excluding sales
circulars) in the first nine months of fiscal 1998 as in the first nine months
of fiscal 1997. Aggregate response rates from catalogs distributed in the first
nine months of fiscal 1998 declined relative to catalogs distributed in the
first nine months of fiscal 1997 as the Company (i) broadened the distribution
of its catalogs and increased its prospecting efforts and (ii) mailed additional
catalog editions to a large number of persons who had received a prior edition
of those catalogs earlier in the period. The Company believes aggregate response
rates will usually decline when it broadens the distribution of its catalog and
when it mails additional catalog editions within the same fiscal period.
Gross Margin. Gross margin increased to 51.3% in the first nine months of
fiscal 1998 from 48.0% in the first nine months of fiscal 1997. The increase in
gross profit as a percentage of sales reflects higher average price points in
the TSI Soccer businesses and continued growth in sales of higher margin dELiA*s
branded product as well as lower markdowns and better recovery on discounted
sales through the Company's liquidation outlets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $16.4 million to $47.3 million
in the first nine months of fiscal 1998 from $30.9 million in the first nine
months of fiscal 1997. Selling, general and administrative expenses increased as
a percentage of net sales from 44.0% in the first nine months of fiscal 1997 to
48.0% in the first nine months of fiscal 1998. The increase was due to greater
spending on catalog circulation, advertising and
11
<PAGE>
database management as well as increased expenses associated with the company's
development of its internet and retail infrastructure. Expenses related to the
recently acquired retail stores, including depreciation and amortization
expenses, also contributed to this increase.
Selected Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for the seven quarters ended October 31, 1998, as well as such data
expressed as a percentage of the Company's total net sales for the periods
indicated. This data has been derived from unaudited financial statements that,
in the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for fair presentation of such information when
read in conjunction with the Company's annual audited financial statements and
notes thereto.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Quarter Ended
----------------------------------------------------------------------
Fiscal 1998 Fiscal 1997
--------------------------- -------------------------------------
Oct. 31, July 31, Apr. 30, Jan. 31, Oct. 31, July 31, Apr. 30,
1998 1998 1998 1998 1997 1997 1997
---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $40,821 $26,451 $31,194 $42,909 $31,357 $21,086 $17,697
Cost of sales.............. 19,979 13,712 14,223 21,397 16,514 10,678 9,278
------- ------- ------- ------- ------- ------- -------
Gross profit............... 20,842 12,739 16,971 21,512 14,843 10,408 8,419
Selling, general and
administrative expenses. 19,691 13,499 14,092 17,007 12,684 10,148 8,048
Merger-related costs....... -- -- -- 1,614 -- -- --
Interest income, net....... 126 300 341 382 338 268 213
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes................... 1,277 (460) 3,220 3,273 2,497 528 584
Provision (benefit) for
income taxes............ 530 (317) 1,220 1,183 870 141 262
------- ------- ------- ------- ------- ------- -------
Net income (loss) ......... $ 747 $ (143) $ 2,000 $ 2,090 $ 1,627 $ 387 $ 322
======= ======= ======= ======= ======= ======= =======
Percentage of Net Sales
----------------------------------------------------------------------
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales.............. 49.0 51.8 45.6 49.9 52.7 50.7 52.4
------- ------- ------- ------- ------- ------- -------
Gross profit............... 51.0 48.2 54.4 50.1 47.3 49.3 47.6
Selling, general and
administrative expenses 48.2 51.0 45.2 39.6 40.4 48.1 45.5
Merger-related costs....... -- -- -- 3.8 -- -- --
Interest income, net....... 0.3 1.1 1.1 0.9 1.1 1.3 1.2
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes.................. 3.1 (1.7) 10.3 7.6 8.0 2.5 3.3
Provision (benefit) for
income taxes........... 1.3 (1.2) 3.9 2.7 2.8 0.7 1.5
------- ------- ------- ------- ------- ------- -------
Net income (loss).......... 1.8% (0.5)% 6.4% 4.9% 5.2% 1.8% 1.8%
======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company is subject to seasonal fluctuations in its merchandise sales and
results of operations. The Company expects its net sales and results of
operations generally to be lower in the second quarter and higher in the fourth
quarter (which includes the holiday season) of each fiscal year. The Company's
quarterly results may fluctuate as a result of numerous factors, including the
timing, quantity and cost of catalog mailings, responses to those mailings, the
timing of sale circulars and liquidations, the timing of merchandise deliveries,
market acceptance of the Company's merchandise (including new merchandise
categories or products introduced), the mix of products sold, the hiring and
training of additional personnel, the timing of inventory writedowns, the
integration of acquisitions, the incurrence of other operating costs and factors
beyond the Company's control, such as general economic conditions and actions of
competitors. Accordingly, the results of operations in any quarter will not
necessarily be indicative of the results that may be achieved for a full fiscal
year or any future quarter.
12
<PAGE>
Liquidity and Capital Resources
Cash used in operations in the first nine months of fiscal 1998 and 1997 was
$18.5 million and $1.6 million, respectively. The increase in cash used in
operations primarily relates to an increase in inventory levels in an effort to
improve fill rates and in anticipation of greater sales. The increase also
reflects earlier payment of certain liabilities, including accounts payable due
to inventory vendors and other vendors, which allowed the Company to take
advantage of better terms.
Cash provided by investing activities in the first nine months of fiscal
1998 and cash used in investing in the first nine months of fiscal 1997 was
$17.5 million and $32.0 million, respectively, including the sale of short-term,
investment-grade investments in fiscal 1998 and the purchase of short-term,
investment-grade investments in fiscal 1997. The Company expects to make
additional capital expenditures of approximately $2.0 million to upgrade its
management information systems in fiscal 1998. The Company also anticipates
additional capital expenditures of approximately $2.0 million in fiscal 1998 for
property, plant and equipment, including leasehold improvements, office
equipment and expenditures relating to the conversion of Jean Country stores to
Screeem! stores and the Company's warehouse and distribution operations.
The Company did not engage in any significant cash financing activities in
the first nine months of fiscal 1998. Cash flows from financing activities in
the first nine months of fiscal 1997 were $20.7 million as a result of a public
offering of common stock.
Cash and cash equivalents decreased by approximately $1 million to $3.5
million at October 31, 1998 from $4.5 million at January 31, 1998.
At October 31, 1998, the Company had a revolving line of credit for
seasonal working capital, collateralized by all of the Company's assets other
than inventory. The maximum amount available under the line of credit was $5.0
million. The interest rate on the line of credit was the lending bank's prime
rate (8% at October 31, 1998). The Company had not drawn on this line.
Outstanding letters of credit established to facilitate international
merchandise purchases at October 31, 1998 were $2.3 million.
On December 7, 1998 the Company entered into a Credit Agreement with First
Union National Bank (the "Credit Agreement"). The Credit Agreement established a
new credit facility which replaced the Company's previous line of credit
agreement. The new credit facility, which terminates on December 7, 2001,
consists of a revolving line of credit permitting the Company to borrow up to
$25 million. Under this facility, the Company has the ability to cause the
lender(s) to issue documentary and standby letters of credit up to $10 million.
The Company's obligations under the Credit Agreement are secured by a lien on
substantially all of the Company's assets, except certain real property. The
ability of the Company to borrow under the Credit Agreement is subject to a
number of conditions including compliance with tangible net worth, fixed charge
cover ratio and debt to cash flow covenants. The availability of the unused
revolving line of credit is limited to specified percentages of the value of the
Company's eligible inventory determined under the Credit Agreement. At the
option of the Company, borrowings under this facility bear interest at First
Union National Bank's prime rate or at LIBOR plus 200 basis points. The Credit
Agreement contains certain covenants and default provisions customary for credit
facilities of this nature, including limitations on payment of dividends by the
Company. A fee of 0.375% per year is assessed monthly on the unused portion of
the line of credit.
Inflation
The Company does not believe that inflation has had a material adverse
effect on net sales or results of operations. The Company has generally been
able to pass on increased costs related to inflation through increases in its
prices to customers.
13
<PAGE>
Year 2000
The Company recognizes that its operations may be negatively affected by
Year 2000 software issues. The Company is heavily dependent upon complex
computer software and systems for all phases of its operations. Many existing
computer programs and systems use only two digits to identify a year in the date
field. These programs and systems were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. Accordingly, the Company has prepared a Year 2000 compliance program
which involves (i) identifying the material operating software and systems on
which the Company depends (whether used by the Company or by the Company's
service providers), (ii) obtaining written warranties or assurances from third
party software and systems vendors and service providers, (iii) monitoring the
compliance efforts of such vendors and service providers and (iv) testing its
material operating software and systems.
All of the Company's material operating software and systems, including
telecommunications and warehouse systems, in addition to information technology
systems, were developed by and are supported by third party vendors. Each of the
third party vendors of the Company's mission-critical operating software have
provided written warranties or assurances to the Company that such software will
not be affected by the change in the century, with the exception of vendors of
operating software used in the Company's Storybook Heirlooms business which was
acquired on September 16, 1998. The Company is presently in the process of
attempting to obtain written warranties or assurances from the vendors of this
software. The majority of the third party vendors of the Company's other
material operating software and systems have also provided such warranties or
assurances that such software and systems will be compliant by December 31,
1998. The Company expects to begin performing tests of all its material
operating software and systems to verify the assurances given by these third
party vendors and ensure Year 2000 compliance later in fiscal 1998. However,
there can be no assurance that all of the Company's material operating software
and systems will be in Year 2000 compliance.
In addition to the operating systems and software the Company uses directly,
the Company's operations are also dependent upon the performance of operating
software and systems used by its significant service providers, including
providers of financial, telecommunications and parcel delivery services. The
Company has contacted each of its significant service providers and has obtained
written assurances from the majority of such providers that the providers'
relevant operating software and systems are in Year 2000 compliance or will be
by December 31, 1998. The Company is monitoring the status of all its
significant service providers' Year 2000 compliance efforts to minimize the risk
of any material adverse effect on the Company's operations resulting from
compliance failures. However, there can be no assurance that the Company's
service providers have, or will have, operating software and systems that are in
Year 2000 compliance.
A software or systems Year 2000 compliance failure with respect to the
Company's internal systems and software, or that of third party service
providers, could prevent the Company from being able to process or fulfill
orders from its customers, or could disrupt the Company's financial and
management controls and reporting systems. Any such failure, if not quickly
remedied, would have a material adverse effect on the Company. Therefore, the
Company is developing contingency plans with respect to such systems and
software.
In addition, a significant portion of purchases of merchandise from the
Company are made with credit cards, and the Company's operations may be
materially adversely affected to the extent its customers are unable to use
their credit cards due to Year 2000 issues that are not rectified by the
customers' credit card vendors. The Company has not identified significant
exposure to Year 2000 problems outside of those information technology issues
identified above.
Except with respect to systems used by the Storybook Heirlooms business,
which the Company is presently evaluating, the Company does not expect its costs
of addressing Year 2000 issues to be significant. However, given the Company's
dependence on third party software and
14
<PAGE>
system vendors and service providers and on its customers' vendors, there can be
no assurance to that effect.
15
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any legal proceedings that management
believes would have a material adverse effect on the Company's financial
position or results of operations.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
See "Exhibit Index" following the signature page.
(b) The Company filed a Current Report on Form 8-K, dated September 11,
1998, reporting Item 7. This report contained historical and pro forma
financial information about the Screeem! Business.
16
<PAGE>
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 Inc.
(Registrant)
Date: December 15, 1998
By: /s/ Stephen I. Kahn
-------------------
Stephen I. Kahn
Chairman of the Board, President and
Chief Executive Officer
By: /s/ Evan Guillemin
-------------------
Evan Guillemin
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
17
<PAGE>
Exhibit Index
2.1 Bill of Sale and Contribution and Assumption Agreement between dELiA*s
LLC and the Company (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-15153))
3.1 Certificate of incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-15153))
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-15153))
10.1 Form of Employment Agreement between the Company and Stephen I. Kahn
(incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-15153))
10.2 Employment Agreement between the Company and Christopher C. Edgar
(incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-15153))
10.3 Employment Agreement between the Company and Evan Guillemin (incorporated
by reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (Registration No. 333-15153))
10.4 Form of Family Stockholders Agreement among the Company, Stephen I. Kahn
and the persons listed on exhibit A thereto (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 333-15153))
10.5 Amended and Restated 1996 Stock Incentive Plan (incorporated by reference
to the Company's Schedule 14A filed on June 12, 1998)
10.6 Restricted Stock Plan (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (Registration No.
333-15153))
10.7 Stock Option Agreement between the Company and Evan Guillemin
(incorporated by reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (Registration No. 333-15153))
10.8 Transitional Services Agreement, dated as of July 10, 1998, among
American Retail Enterprises, L.P., Screeem Inc., and the Company
(incorporated by reference to Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 31, 1998)
10.9 Lease Agreement dated May 3, 1995 between the Company and The Rector,
Church-Wardens and Vestrymen of Trinity Church in the City of New-York
(the "Lease Agreement"); Modification and Extension of Lease Agreement
dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1 (Registration No.
333-15153))
10.10 Form of Restricted Stock Agreements between the Company and holders of
Common Stock subject to the Restricted Stock Plan (incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (Registration No. 333-15153))
10.11 [omitted]
10.12 Lease Agreement dated April 25, 1997 between the Company and Keystone
Distribution Center, Inc. (incorporated by reference to Exhibit 10.12 to
the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1997)
18
<PAGE>
10.13 Agreement dated April 4, 1997 between the Company and The Rector, Church
Wardens and Vestrymen of Trinity Church in the City of New York amending
the Lease Agreement (incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended January
31, 1997)
10.14 Agreement dated October 7, 1997 between the Company and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York
amending the Lease Agreement (incorporated by reference to Exhibit 10.14
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended October 31, 1997)
10.15 Amendment No. 1 to Employment Agreement between Christopher C. Edgar,
dated September 15, 1998
10.16 Amendment No. 1 to Employment Agreement between Evan Guillemin, dated
September 15, 1998
10.17 Credit Agreement dated December 7, 1998 between First Union National
Bank, the Company and its subsidiaries listed on Schedule 1 thereto
27 Financial Data Schedule
19
dELiA*s
435 Hudson Street
New York, NY 10014
September 15, 1998
Mr. Christopher C. Edgar
dELiA*s
435 Hudson Street
New York, NY 10014
Re: First Amendment to Employment Agreement
Dear Mr. Edgar:
This letter, when countersigned by you, shall constitute the First
Amendment to the Employment Agreement between you and dELiA*s Inc., dated as of
November 22, 1996. Section 3(a) of the Employment Agreement is hereby amended by
deleting the amount "$100,000" and replacing it with "$150,000." In all other
respects, the Employment Agreement shall continue in full force and effect
without modification.
If you are in agreement with the foregoing, please countersign below in the
space indicated.
Sincerely,
dELiA*s Inc.
By:/s/ Stephen I. Kahn
Stephen I. Kahn
President
ACKNOWLEDGED AND AGREED:
/s/ Christopher C. Edgar
CHRISTOPHER C. EDGAR
dELiA*s Operating Company
435 Hudson Street
New York, NY 10014
September 15, 1998
Mr. Evan Guillemin
dELiA*s
435 Hudson Street
New York, NY 10014
Re: First Amendment to Employment Agreement
Dear Mr. Edgar:
This letter, when countersigned by you, shall constitute the First
Amendment to the Employment Agreement between you and dELiA*s Inc. (subsequently
assigned to dELiA*s Operating Company), dated as of November 25, 1996. Section
3(a) of the Employment Agreement is hereby amended by deleting the amount
"$100,000" and replacing it with "$150,000." In all other respects, the
Employment Agreement shall continue in full force and effect without
modification.
If you are in agreement with the foregoing, please countersign below in the
space indicated.
Sincerely,
dELiA*s Operating Company
By:____________________
Stephen I. Kahn
President
ACKNOWLEDGED AND AGREED:
____________________________
EVAN GUILLEMIN
EXHIBIT 10.17
CREDIT AGREEMENT
AMONG
dELiA*s INC.
and its Subsidiaries set forth
on Schedule 1 hereto
("Borrowers")
AND
FIRST UNION NATIONAL BANK
("Bank")
December 7, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 - DEFINITIONS 1
1.1. Definitions 1
1.2. Accounting Principles 12
SECTION 2 - CREDIT FACILITY 13
2.1. The Facility 13
2.2. Promissory Note 13
2.3. Use of Proceeds 13
2.4. Repayment 13
2.5. Interest 14
2.6. Advances 17
2.7. Reduction and Termination of Commitment 18
2.8. Prepayment 18
2.9. Payments 19
2.10. Commitment Fee 19
2.11. Closing Fee 19
2.12. Regulatory Changes in Capital Requirements 19
SECTION 2A - LETTERS OF CREDIT 20
2A.1. Availability of Credits 20
2A.2. Chase Letters of Credit 21
2A.3. Commitment Availability 21
2A.4. Approval and Issuance 21
2A.5. Obligations of the Borrower 22
2A.6. Collateral Security 23
2A.7. General Terms of Credits 24
SECTION 3 - REPRESENTATIONS AND WARRANTIES 25
3.1. Organization and Good Standing 25
3.2. Power and Authority; Validity of Agreement 26
3.3. No Violation of Laws or Agreements 26
3.4. Material Contracts 26
3.5. Compliance 26
3.6. Litigation 27
3.7. Title to Assets 27
3.8. Accuracy of Information; Full Disclosure 27
3.9. Taxes and Assessments 28
3.10. Indebtedness 28
3.11. Management Agreements 28
3.12. Investments; Capital Structure 28
3.13. ERISA 29
3.14. Fees and Commissions 29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.15. No Extension of Credit for Securities 30
3.16. Perfection of Security Interest 30
3.17. Perfection of Pledge 30
3.18. Hazardous Wastes, Substances and Petroleum Products 30
3.19. Solvency 31
3.20. Employee Controversies 31
3.21. Year 2000 Compliance 31
3.22. Intellectual Property 32
3.23. Foreign Assets Control Regulations 32
3.24. Investment Company Act 32
3.25. Public Utility Holding Company Act 32
SECTION 4 - CONDITIONS 32
4.1. Effectiveness 32
4.2. Advances 34
SECTION 5 - AFFIRMATIVE COVENANTS 34
5.1. Existence and Good Standing 34
5.2. Interim Financial Statements 35
5.3. Annual Financial Statements 35
5.4. Compliance Certificate 35
5.5. Borrowing Base Certificate. 35
5.6. Additional Information. 35
5.7. Books and Records 36
5.8. Insurance 36
5.9. Litigation; Event of Default 36
5.10. Taxes 36
5.11. Costs and Expenses 36
5.12. Compliance; Notification 37
5.13. ERISA 37
5.14. Fixed Charge Coverage Ratio 38
5.15. Debt to Cash Flow Ratio 38
5.16. Minimum Tangible Net Worth 38
5.17. Borrowing Base 38
5.18. Management Changes 38
5.19. Transactions Among Affiliates 38
5.20. Joinders. 38
5.21. New Locations; Landlord or Mortgagee Waivers 38
5.22. Further Assurances. 39
5.23. Year 2000 Compliance 39
5.24. Conduct of Business 39
5.25. North Carolina Opinion Letter 39
5.26. Amendment of Articles or Certificates of
Incorporation 39
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.27. Other Information 40
SECTION 6 - NEGATIVE COVENANTS 40
6.1. Indebtedness 40
6.2. Guaranties 40
6.3. Loans 40
6.4. Liens and Encumbrances 40
6.5. Additional Negative Pledge 41
6.6. Restricted Payments 41
6.7. Transfer of Assets; Liquidation 42
6.8. Acquisitions and Investments 42
6.9. Payments to Affiliates 42
6.10. Use of Proceeds 43
6.11. Maximum Capital Expenditures 43
6.12. Use of Creditors'Rights Provision is Articles or
Certificates of Incorporation. 43
SECTION 7 - ADDITIONAL COLLATERAL AND RIGHT OF SET-OFF 43
7.1. Additional Collateral 43
7.2. Right of Set-off 43
SECTION 8 - DEFAULT 44
8.1. Events of Default 44
8.2. Remedies 45
SECTION 9 - MISCELLANEOUS 46
9.1. Indemnification and Release Provisions 46
9.2. Participations and Assignments 46
9.3. Binding and Governing Law 47
9.4. Survival 47
9.5. No Waiver; Delay 47
9.6. Modification 47
9.7. Headings 47
9.8. Notices 47
9.9. Payment on Non-Business Days 48
9.10. Time of Day 49
9.11. Severability 49
9.12. Counterparts 49
9.13. Consent to Jurisdiction and Service of Process 49
9.14. WAIVER OF JURY TRIAL 49
9.15. ACKNOWLEDGMENTS 49
</TABLE>
iii
<PAGE>
LIST OF EXHIBITS
Exhibit A: Advance/Credit Request Form
Exhibit B: Form of Note
Exhibit C: Disclosure Pursuant to Representations and Warranties
Exhibit D: Funding Costs and Loss of Earnings Calculation
Exhibit E: Form of Compliance Certificate
Exhibit F: Form of Borrowing Base Certificate
Exhibit G-1: Form of Master L/C Agreement
Exhibit G-2: Form of Electronic L/C Agreement
iv
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "Agreement") is made the 7th day of December,
1998, by and among DELIA*S INC., a Delaware corporation ("dELiA*s"), and the
Subsidiaries of dELiA*s set forth on Schedule 1 attached hereto (each
individually a "Borrower" and individually and collectively, "Borrowers"); and
FIRST UNION NATIONAL BANK, a national banking association ("Bank").
W I T N E S S E T H :
WHEREAS, Borrowers wish to borrow, on a joint and several basis, up to
Twenty-Five Million Dollars ($25,000,000) from Bank on a revolving credit basis
for the general corporate purposes of Borrowers, including working capital, and
to provide for the issuance of letters of credit; and
WHEREAS, Bank wishes to lend to Borrowers, on a joint and several basis, up
to Twenty-Five Million Dollars ($25,000,000) on a revolving credit basis, for
such purposes, subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements hereinafter set forth, and intending to be legally bound, the parties
hereto hereby agree as follows:
I. SECTION
DEFINITIONS
A. Definitions. When used in this Agreement, the following terms shall have
the respective meanings set forth below.
"Adjusted Libor Rate" means, for any Interest Period, as applied to a
Portion, the rate per annum (rounded upwards, if necessary to the next 1/100 of
1%) determined pursuant to the following formula:
Adjusted Libor Rate = Libor Rate
----------
[1 - Reserve Percentage]
For purposes hereof, "Libor Rate" means, as applied to a Portion, the rate which
appears on the Telerate Page 3750 at approximately 9:00 a.m. Philadelphia time
two London
-1-
<PAGE>
Business Days prior to the commencement of such Interest Period for
the offering to leading banks in the London Interbank Market of deposits in
United States dollars ("Eurodollars") or, if such rate does not appear on the
Telerate page 3750, the rate which appears (or, if two or more such rates
appear, the average rounded up to the nearest 1/100 of 1% of the rates which
appear) on the Reuters Screen LIBO Page as of 9:00 a.m. Philadelphia time two
London Business Days prior to the commencement of the Interest Period, in either
case for an amount substantially equal to such Portion as to which Borrowers may
elect the Adjusted Libor Rate to be applicable with a maturity of comparable
duration to the Interest Period selected by Borrowers for such Portion, as may
be adjusted from time to time in accordance with Paragraph 2.5(e) hereof.
"Advance" means a borrowing under the Commitment pursuant to Paragraph 2.6
hereof.
"Advance/Credit Request Form" means the certificate in the form attached
hereto as Exhibit A to be delivered by Borrowers to Bank as a condition of each
Advance or standby Letter of Credit.
"Affiliate" means as to any party: (i) any person who or entity which
directly or indirectly owns, controls or holds ten percent (10%) or more of the
outstanding beneficial interests in such party; (ii) any entity of which ten
percent (10%) or more of the outstanding beneficial interest is directly or
indirectly owned, controlled, or held by such party; (iii) any entity which
directly or indirectly is under common control with such party; (iv) any
director or general partner of such party or any Affiliate; or (v) any immediate
family member of any person who is an Affiliate. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of an entity,
whether through the ownership of voting securities, by contract, or otherwise.
"Agreement" means this Credit Agreement and all exhibits hereto, as each
may be amended, modified, extended, consolidated or restated from time to time.
"Bank" means First Union National Bank, a national banking association.
"Base Rate" means the higher of (a) the Federal Funds Rate plus one half of
one percent (1/2%) per annum or (b) the Prime Rate.
"Base Rate Portion" means a Portion as to which Borrowers have elected the
rate of interest based on the Base Rate to be applicable.
"Borrower" means individually, and "Borrowers" means individually and
collectively, dELiA*s and the Subsidiaries of dELiA*s listed on Schedule 1
attached hereto, and any additional Material Subsidiaries of dELiA*s which may
join in this Agreement pursuant to Paragraph 5.20 hereof from time to time.
-2-
<PAGE>
"Borrowing Base" means as of any date of determination without duplication
the sum of (i) fifty percent (50%) of Eligible Inventory, (ii) fifty percent
(50%) of the undrawn face amount of all outstanding documentary Letters of
Credit, and (iii) at any time during any twelve week period between April 30 and
October 31, an additional sum not to exceed Three Million Dollars ($3,000,000);
provided however that such amount shall not exceed sixty-five percent (65%) of
the value of the inventory of Borrowers as of such date of determination as
determined in accordance with GAAP.
"Borrowing Base Certificate" means a certificate in the form of Exhibit F
attached hereto delivered by Borrowers to Bank pursuant to Paragraph 4.1 or 5.5
hereof.
"Business Day" means any day not a Saturday, Sunday or a day on which banks
are required or permitted to be closed under the laws of the Commonwealth of
Pennsylvania.
"Capital Expenditures" means expenditures for any fixed assets or
improvements, replacements, substitutions or additions thereto, which have a
useful life of more than one (1) year, including direct or indirect acquisition
of such assets, provided that there shall be excluded from the calculation of
Capital Expenditures: (i) expenditures pursuant to acquisition transactions
permitted by Section 6.8 hereof and (ii) the real estate [distribution facility]
to be purchased in Hanover, Pennsylvania.
"Capital Leases" means capital leases and subleases, as defined in
Statement 13 of the Financial Accounting Standards Board dated November 1976, as
amended and updated from time to time.
"CERCLA" means the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, as amended from time to time, and all rules and
regulations promulgated in connection therewith.
"Change of Control" means (i) if any person or group within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and the rules and regulations promulgated thereunder, (other than Stephen
I. Kahn and Christopher C. Edgar) shall have beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of
dELiA*s (or other securities convertible into such securities) representing
twenty-five percent (25%) of the combined voting power of all securities of
dELiA*s entitled to vote in the election of directors (hereinafter called a
"Controlling Person"); or (ii) a majority of the Board of Directors of dELiA*s
shall cease for any reason to consist of: (A) individuals who on the date of
this Agreement were serving as directors of dELiA*s or (B) individuals who
subsequently become members of the Board if such individuals' nomination for
election or election to the board is recommended or approved by a majority of
the Board of Directors of dELiA*s. For purposes of clause (i) above, a person or
group shall not be a Controlling
-3-
<PAGE>
Person if such person or group holds voting power in good faith and not for the
purpose of circumventing this definition as an agent, bank, broker, nominee,
trustee, or holder of revocable proxies given in response to a solicitation
pursuant to the 1934 Act, for one or more beneficial owners who do not
individually, or, if they are a group acting in concert, as a group, have the
voting power specified in clause (i) above.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and regulations with respect thereto in effect from time to time.
"Collateral" means the collateral security for the Loan, including under
the Security Agreement, the Intellectual Property Security Agreement, the Pledge
Agreement, the Master L/C Agreement, this Agreement or any other Collateral
Security Document or Loan Document.
"Collateral Security Documents" means collectively, Security Agreement, the
Pledge Agreement(s), the Intellectual Property Security Agreement, the Master
L/C Agreement, any landlord, warehousemen or mortgagee consents or waivers, any
UCC financing statements, and any additional documents granting collateral to
Bank to secure the Loan.
"Commitment" means at any time the maximum aggregate principal amount up to
which Bank has agreed to make Advances under Paragraph 2.1 hereof and/or issue
Letters of Credit under Section 2A hereof, being Twenty-Five Million Dollars
($25,000,000) on the date of this Agreement.
"Compliance Certificate" means a certificate in the form of Exhibit E
attached hereto delivered by Borrowers to Bank pursuant to Paragraph 4.1 or 5.5
hereof.
"Debt to Cash Flow Ratio" means, as of any date of determination, with
respect to dELiA*s and its consolidated Subsidiaries, the ratio of Total Funded
Debt as of such date of determination to EBITDA for the most recent Rolling
Period.
"Default" means an event, condition or circumstance the occurrence of which
would, with the giving of notice or the passage of time or both, constitute an
Event of Default.
"dELiA*s" means dELiA*s Inc., a Delaware corporation.
"EBITDA" means, for any period, net income for such period as defined in
accordance with GAAP, plus interest expense, provisions for federal, state,
local and foreign income taxes, depreciation and amortization expense, non-cash
expense with respect to options or rights to acquire common stock of dELiA*s or
any of its consolidated Subsidiaries as reflected on the financial statements of
dELiA*s and its consolidated Subsidiaries, and non-cash, non-recurring
extraordinary items, in each case
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as defined in accordance with GAAP and to the extent each has been deducted in
determining net income.
"Electronic L/C Agreement" means the Import Express Electronic Letter of
Credit Service Agreement in the form of Exhibit G-2 attached hereto, to be
executed and delivered pursuant to Paragraph 4.1 hereof.
"Eligible Inventory" means all finished goods inventory of dELiA*s and its
consolidated Subsidiaries, at book value determined in accordance with GAAP, net
of any reserves and allowances required by GAAP, excluding, without duplication:
(a) any inventory located at any location other than the stores and
warehouses identified on Exhibit A attached to the Security Agreement or
additional stores or warehouses from time to time as to which (i) Borrowers have
given to Bank thirty (30) days prior written notice thereof, which notice shall
include the address of such location and the identity, address and phone number
of the owner thereof, and (ii) Borrowers have executed and delivered any
documents required by Bank pursuant to Paragraph 5.22 hereof, including without
limitation any landlord, warehousemen or mortgagee waivers and consents;
(b) any inventory located outside of the United States;
(c) any inventory of a Subsidiary that is not a Borrower;
(d) any inventory in the possession of a contract manufacturer, or in the
possession of a third party on consignment or pursuant to a sale on approval or
sale or return, or otherwise located at the place of business of a third party
at which such party deals in goods of that kind or under other circumstances in
which such third party or creditors of such third party may be able to assert
rights in the inventory;
(e) any inventory represented by warehouse receipts or other documents of
title;
(f) any inventory sold on lay-away or any similar arrangement valued in the
aggregate in excess of $25,000; and
(g) any inventory that is damaged, obsolete, defective or otherwise not
salable in the ordinary course of business;
provided, however, that notwithstanding the foregoing, there shall be included
in Eligible Inventory, without duplication, inventory in transit to a location
identified on Exhibit A attached to the Security Agreement or a location
otherwise meeting the requirements of clauses (i) and (ii) of paragraph (a)
above, which inventory is not otherwise included in the calculation of Eligible
Inventory.
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"Environmental Control Statutes" means any federal, state, county, regional
or local laws governing the control, storage, removal, spill, release or
discharge of Hazardous Substances, including without limitation CERCLA, the
Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery
Act of 1976 and the Hazardous and Solid Waste Amendments of 1984, the Federal
Water Pollution Control Act, as amended by the Clean Water Act of 1976, the
Hazardous Materials Transportation Act, the Emergency Planning and Community
Right to Know Act of 1986, the National Environmental Policy Act of 1975, the
Oil Pollution Act of 1990, any similar or implementing state law, and in each
case including all amendments thereto and all rules and regulations promulgated
thereunder and permits issued in connection therewith.
"EPA" means the United States Environmental Protection Agency, or any
successor thereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, all
amendments thereto and all rules and regulations in effect at any time
thereunder.
"ERISA Affiliate" means, when used with respect to any Plan, ERISA, the
PBGC or a provision of the Code pertaining to employee benefit plans, any person
or entity that is a member of any group or organization within the meaning of
Code Sections 414(b), (c), (m) or (o) of which any Borrower is a member.
"Event of Default" means an event described in Paragraph 8.1 hereof.
"Federal Funds Rate" means, for any day, the effective rate of interest for
such day, as announced from time to time by the Board of Governors of the
Federal Reserve System as shown in publication H.15 as the "Federal Funds Rate."
"Fixed Charge Coverage Ratio" means, as of any date of determination, with
respect to dELiA*s and its consolidated Subsidiaries, the ratio of (i) EBITDA
plus rents for real property leases (excluding Capital Leases), for the most
recent Rolling Period, to (ii) the sum of: (A) the current portion of long-term
Indebtedness as of such date of determination plus (B) interest expense and
rents for real property leases (excluding Capital Leases), for the most recent
Rolling Period, in each case as determined in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
Opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants and in statements of the Financial Accounting
Standards Board, which are applicable in the circumstances as of the date in
question, subject to Paragraph 1.2 hereof; and such principles observed in a
current period shall be comparable in all material respects to those applied in
a preceding period, subject to Paragraph 1.2 hereof.
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"Hazardous Substance" means petroleum products and items defined in the
Environmental Control Statutes as "hazardous substances", "hazardous wastes",
"pollutants" or "contaminants" and any other toxic, reactive, corrosive,
carcinogenic, flammable or hazardous substance or other pollutant regulated
under any Environmental Control Statutes.
"Indebtedness" of any person as of any date of determination means and
includes all obligations of such person which, in accordance with GAAP, shall be
classified on a balance sheet of such person as liabilities of such person and
in any event shall include, without duplication, all (i) obligations of such
person for borrowed money or which have been incurred in connection with
acquisition of property or assets, (ii) obligations secured by any lien upon
property or assets owned by such person, notwithstanding that such person has
not assumed or become liable for the payment of such obligations, to the extent
of the fair market value of such property, (iii) obligations created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such person, notwithstanding the fact that the rights and
remedies of the seller, lender or lessor under such agreement in the event of
default are limited to repossession or sale of property, (iv) Capital Leases,
(v) guarantees and (vi) letters of credit and letter of credit reimbursement
obligations.
"Intangible Assets" means for dELiA*s and its consolidated Subsidiaries,
all assets which would be classified in accordance with GAAP as intangible
assets, including without limitation, all franchises, licenses, permits,
patents, patent applications, copyrights, trademarks, tradenames, goodwill,
experimental or organization expenses and other like intangibles, the cash
surrender value and other like intangibles of any life insurance policy,
treasury stock and unamortized debt discount.
"Intellectual Property Security Agreement" means the Intellectual Property
Security Agreement executed by Borrowers and delivered pursuant to Paragraph
4.1(j) hereof (including as joined in by any additional Borrowers pursuant to
Paragraph 5.20 from time to time), as may be amended, modified, or restated from
time to time.
"Interest Period" means, with respect to any Libor Portion, a period of one
(1), two (2), three (3) or six (6) months' duration, as Borrowers may elect,
during which the Adjusted Libor Rate is applicable; provided, however, that (a)
if any Interest Period would otherwise end on a day which shall not be a London
Business Day, such Interest Period shall be extended to the next succeeding
London Business Day, unless such London Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding London
Business Day, subject to clause (c) below; (b) interest shall accrue from and
including the first day of each Interest Period to, but excluding, the day on
which any Interest Period expires; (c) with respect to an Interest Period which
begins on the last London Business Day of a
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calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period), the Interest Period
shall end on the last London Business Day of a calendar month; and (d) Borrowers
may not elect an Interest Period that would extend past the Termination Date.
"Lease" means a lease of real property to which any Borrower is a party.
"Letter of Credit" means individually, and "Letters of Credit" means
individually and collectively, the letter(s) of credit issued from time to time
by Bank pursuant to the terms and conditions of Section 2A hereof.
"Letter of Credit Sublimit" means the portion of the Commitment up to which
Bank has agreed to issue Letters of Credit pursuant to Section 2A hereof, being
Ten Million Dollars ($10,000,000) on the date hereof.
"Libor Portion" means a Portion as to which Borrowers have elected the rate
of interest based on the Adjusted Libor Rate to be applicable.
"Loan" means the aggregate outstanding principal balance of Indebtedness
advanced and the undrawn face amount of all Letters of Credit issued under the
Commitment, and. without duplication, the amount of all unreimbursed draws under
Letters of Credit, together with interest accrued thereon and fees and expenses
incurred in connection with any of the foregoing.
"Loan Documents" means this Agreement, the Note, the Security Agreement,
the Intellectual Property Security Agreement, the Pledge Agreements, the Master
L/C Agreement and the other documents and agreements executed and delivered in
connection with this Agreement.
"Local Authorities" means individually and collectively the state and local
governmental authorities and administrative agencies which govern the business,
commercial activities or facilities owned or operated by any Company.
"London Business Day" means any Business Day on which banks in London,
England are open for business.
"Master L/C Agreement" means the Master Letter of Credit Agreement in the
form of Exhibit G-1 attached hereto, executed and delivered pursuant to
Paragraph 4.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
Collateral, (ii) the business or financial condition of dELiA*s and its
consolidated Subsidiaries taken as a whole, or (iii) the ability of any Borrower
to perform its respective obligations under any Loan Document.
"Net Proceeds" means, as applicable: (a) with respect to any Sale of
Material Assets, the gross cash proceeds received by a Borrower from such sale,
less the sum of (i) all income taxes and other taxes assessed by a governmental
authority as a
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result of such sale and any other reasonable fees and expenses incurred in
connection therewith, (ii) the principal amount of, premium, if any, and
interest on Indebtedness secured by a Lien on the assets (or a portion thereof)
sold, which Indebtedness is required to be repaid in connection with such sale,
and (iii) with respect to any offering of capital stock or issuance of
Indebtedness, the gross cash proceeds received by the Borrower or any of its
Subsidiaries therefrom less all legal, underwriting and other reasonable fees
and expenses incurred in connection therewith and (b) with respect to the
Receipt of Unapplied Insurance Proceeds, the amount of cash proceeds net of all
reasonable expenses of collection less all income taxes and other taxes assessed
by a governmental authority as a result of such payment.
"Note" means the promissory note in the form of Exhibit B attached hereto
delivered by Borrowers to Bank, as may be amended, modified, extended,
consolidated or restated from time to time.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Permitted Investments" means:
(a) investments in commercial paper;
(b) investments in direct obligations of the United States of America
or obligations of any agency thereof which are guaranteed by the United
States of America;
(c) obligations issued or guaranteed by any State or political
subdivision thereof:
(d) investments in certificates of deposit maturing within one (1)
year from the date of acquisition thereof issued by a bank or trust company
organized under the laws of the United States or any state thereof, having
capital, surplus and undivided profits aggregating at least $500,000,000
and the long-term deposits of which are rated A1 or better by Moody's
Investor Service, Inc. or equivalent by Standard & Poor's Corporation;
(e) investments in money market funds which invest solely in any of
the foregoing (a) through (d) above; and
(f) repurchase agreements with a bank or trust company (including
Bank) or recognized securities dealer having capital and surplus in excess
of $500,000,000 for direct obligations issued or fully guaranteed by the
United States of America in which Borrower has a perfected first priority
security interest (subject to no other liens or encumbrances) and having,
on the date of purchase thereof, a fair market value of at least 100% of
the amount of the repurchase obligations;
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provided that the investments described in (a) - (c) above which are:
(i) rated "AA" (or the equivalent thereof) or better by Standard & Poor's
Corporation shall mature within three (3) years of the acquisition thereof;
and (ii) rated "A-1" (or the equivalent thereof ) or better by Standard &
Poor's Corporation shall mature within one (1) year of the acquisition
thereof.
"Plan" means any employee pension benefit or employee welfare benefit plan
as defined in Sections 3(1) or (2) of ERISA maintained or sponsored by,
contributed to, or covering employees of any Borrower or any ERISA Affiliate.
"Pledge Agreement" means the Pledge Agreement executed and delivered
pursuant to Paragraph 4.1 hereof, and any supplement to or additional Pledge
Agreement executed and delivered from time to time pursuant to Paragraph 5.20
hereof, each as may be amended, modified or restated from time to time.
"Portion" means a portion of the Loan as to which a specific interest rate
and, in the case of a Libor Portion, an Interest Period, has been elected by
Borrower.
"Prime Rate" means the rate of interest announced by Bank from time to time
as its prime rate.
"Receipt of Unapplied Insurance Proceeds" means the receipt of any
insurance proceeds by any Borrower, which proceeds are not used to repurchase,
rebuild or reconstruct any lost or damaged property in accordance with Paragraph
5.8 hereof.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System, comprising Part 204 of Title 12 Code of Federal Regulations, as
amended, and any successor thereto.
"Release" means any spill, leak, emission, discharge or the pumping,
pouring, emptying, disposing, injecting, escaping, leaching or dumping of a
Hazardous Substance.
"Reserve" means, for any day, that reserve (expressed as a decimal) which
is in effect (whether or not actually incurred) with respect to Bank on such
day, as prescribed by the Board of Governors of the Federal Reserve System (or
any successor or any other banking authority to which Bank is subject including
any board or governmental or administrative agency of the United States or any
other jurisdiction to which Bank is subject for determining the maximum reserve
requirement (including without limitation any basic, supplemental, marginal or
emergency reserves) for Eurocurrency liabilities as defined in Regulation D.
"Reserve Percentage" means, for Bank on any day, that percentage (expressed
as a decimal) prescribed by the Board of Governors of the Federal Reserve
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System (or any successor or any other banking authority to which Bank is
subject, including any board or governmental or administrative agency of the
United States or any other jurisdiction to which Bank is subject), for
determining the reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for (i) deposits of United States
dollars or (ii) Eurocurrency liabilities as defined in Regulation D, in each
case used to fund a Libor Portion. The Adjusted Libor Rate shall be adjusted on
and as of the effective day of any change in the Reserve Percentage. Bank hereby
acknowledges that on the date of this Agreement the Reserve Percentage is zero
(0).
"Restricted Payments" means redemptions, repurchases, and distributions of
any kind in respect of dELiA*s capital stock.
"Rolling Period" means a period of four consecutive fiscal quarters for
which income statements have been (or are required to have been) delivered
hereunder.
"Sale of Material Assets" means any transfer, sale or other disposition of
assets of dELiA*s or its consolidated Subsidiaries (including the stock of any
Subsidiary) in one or more related transactions, which represented, or with
respect to which the proceeds from such transaction(s) comprised, either (i)
constituted 5% or more of the assets of dELiA*s and its consolidated
Subsidiaries as of the most recent date for which a balance sheet has been
delivered hereunder, or (ii) contributed 5% or more of the EBITDA of dELiA*s and
its consolidated Subsidiaries for the most recent Rolling Period; provided,
however, that no such transaction shall constitute a Sale of Material Assets to
the extent that within ninety (90) days after receipt of the proceeds thereof by
dELiA*s or its Subsidiary such proceeds have been used to acquire assets of a
similar character for use in the business of dELiA*s and its consolidated
Subsidiaries.
"Security Agreement" means the Security Agreement executed by Borrowers and
delivered pursuant to Paragraph 4.1 hereof (including as joined in by any
additional Borrowers pursuant to Paragraph 5.20 hereof from time to time), as
may be amended, modified, or restated from time to time.
"Subsidiary" means any corporation, partnership or other legal entity of
which any Borrower, directly or indirectly (including as beneficiary of a
business trust), owns more than fifty percent (50%) of any class or classes of
securities or partnership interests, and any partnership in which a Borrower is
a general partner. Unless otherwise specified, references to "Subsidiaries"
herein shall mean direct and indirect Subsidiaries of dELiA*s.
"Tangible Net Worth" means, as of the date of determination, stockholders'
equity of dELiA*s and its consolidated Subsidiaries, in accordance with GAAP,
minus Intangible Assets.
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"Termination Date" means the earlier of (i) December 7, 2001, or (ii) the
date on which the Commitment is terminated pursuant to Paragraph 2.7 hereof.
"Total Funded Debt" means, as of the date of determination, the aggregate
principal amount of all Indebtedness of dELiA*s and its consolidated
Subsidiaries for:
(i) borrowed money other than trade indebtedness incurred in the
normal and ordinary course of business for value received, having a final
maturity of one year or more from the date of determination;
(ii) installment purchases of real or personal property;
(iii) Capital Leases; and
(iv) guaranties of Total Funded Debt or any portion of Total Funded
Debt of others, without duplication.
"Year 2000 Compliant" means, as to any computer system or application or
micro-processor dependent good or equipment, that it is designed and intended to
be used prior to, during and after the calendar year 2000 AD and that it will
operate as designed and intended during each such time period without error
relating to date data or date information, specifically including any error
relating to, or the product of, date data or date information that represents or
references different centuries or more than one century.
1.2. Accounting Principles. Except as otherwise provided herein, financial
and accounting terms used in the foregoing definitions or elsewhere in this
Agreement, shall be defined in accordance with GAAP. If Borrowers or Bank
determine that a change in GAAP from that in effect on the date hereof has
altered the treatment of certain financial data to its detriment under this
Agreement, such party may, by written notice to the other within thirty (30)
days after the effective date of such change in GAAP, require renegotiation of
the financial covenants affected by such change to
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modify such covenants as necessary to equitably reflect such change in GAAP. If
Borrowers and Bank have not agreed on revised covenants within thirty (30) days
after the delivery of such notice, then, for purposes of this Agreement, GAAP
will mean generally accepted accounting principles on the date just prior to the
date on which the change occurred that gave rise to the notice.
SECTION 2
CREDIT FACILITY
2.1. The Facility.
(a) Commitment. From time to time prior to the Termination Date,
subject to the provisions below, Bank agrees to make Advances to Borrowers,
jointly and severally, which Borrowers may repay and reborrow prior to the
Termination Date, for purposes specified in Paragraph 2.3 hereof; provided,
however, that the aggregate outstanding principal amount of such Advances
shall not exceed at any time the lesser of the Commitment or the Borrowing
Base as from time to time in effect.
(b) Joint and Several Obligation. The obligations of Borrowers
hereunder are and shall be joint and several.
(c) Authority of dELiA*s. Each of the Borrowers hereby irrevocably
authorizes and requests that dELiA*s execute all Advance/Credit Request
Forms, make all elections as to interest rates and take any other actions
required or permitted of Borrowers under this Agreement, on its respective
behalf, in each case with the same force and effect as if such Borrower had
executed such Advance/Credit Request Form, made such election or taken such
other action itself. Any request, application or other communication by
dELiA*s may be relied on by Bank, and any communication by Bank shall be
made to dELiA*s, and shall be binding on each Borrower, jointly and
severally, as fully as if such request, application or other communication
were made directly by or to each such Borrower.
2.2. Promissory Note. The Indebtedness of the Borrowers to Bank under the
Loan will be evidenced by a Note executed by Borrowers in favor of Bank. The
original principal amount of the Note will be in the amount of the Commitment;
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provided, however, that notwithstanding the face amount of such Note, Borrowers'
liability thereunder shall be limited at all times to the actual Indebtedness,
principal, interest, fees and expenses then outstanding to Bank under the Loan.
2.3. Use of Proceeds. Funds advanced under the Loan shall be used solely:
(i) for Borrowers' working capital needs and general corporate purposes of
Borrowers and (ii) for reimbursement of draws under Letters of Credit in
accordance with Paragraph 2A.4 hereof.
2.4. Repayment. The aggregate outstanding principal balance under the Loan,
together with all interest, fees and costs due hereunder, shall be due and
payable in full on the Termination Date. Notwithstanding the immediately
preceding sentence, the aggregate outstanding balance of the Loan shall be due
and payable immediately upon acceleration of the Loan in accordance with
Paragraph 8.2 hereof.
2.5. Interest. Portions of the Loan shall bear interest on the outstanding
principal amount thereof in accordance with the following provisions:
(a) Interest on Loan.
(i) At the Borrowers' election in accordance with the provisions of
Paragraph 2.5(b) below, in the absence of an Event of Default
hereunder and prior to maturity or judgment, and subject to
clause (ii) below, any Portion of the Loan shall bear interest at
either of the following rates:
(a) Base Rate. The Base Rate.
(b) Adjusted Libor Rate. The Adjusted Libor Rate plus two percent
(2%) per annum.
(ii) Notwithstanding the foregoing, upon the occurrence and during the
continuance of an Event of Default hereunder, including after
maturity and upon judgment, Borrowers hereby agree to pay to Bank
interest on the outstanding principal balance of the Loan at the
rate of three percent (3%) per annum in excess of the rate then
available to and elected by the Borrowers for each Portion then
outstanding, and with respect to Portions bearing interest based
on the Adjusted Libor Rate, at the end of the applicable Interest
Period and thereafter, such Portions shall bear interest at the
rate of three percent (3%) per annum in excess of the Base Rate,
such rate to change when and as the Base Rate changes.
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(b) Procedure for Determining Interest Periods and Rates of Interest.
(i) If Borrowers elect the rate based on the Base Rate to be
applicable to a Portion, Borrowers must notify Bank of such
election in writing prior to eleven o'clock (11:00) a.m.
Philadelphia time one (1) Business Day prior to the proposed
application of such rate. If Borrowers elect the rate based
on the Adjusted Libor Rate to be applicable to a Portion,
Borrowers must notify Bank of such election and the Interest
Period selected prior to eleven o'clock (11:00) a.m.
Philadelphia time at least two (2) London Business Days
prior to the commencement of the proposed Interest Period.
If Borrowers do not provide notice for the rate based on the
Adjusted Libor Rate, then Borrowers shall be deemed to have
requested that the rate based on the Base Rate shall apply
to any Portion as to which the Interest Period is expiring
and to any new Advance of the Loan until Borrowers shall
have given proper notice of a change in or determination of
the rate of interest in accordance with this Paragraph
2.5(b).
(ii) Borrowers shall not elect more than eight (8) different
Libor Portions to be applicable to the Loan at one time, and
any Portion shall be in an even multiple of One Hundred
Thousand Dollars ($100,000).
(c) Payment and Calculation of Interest. With respect to Libor
Portions, interest shall be due and payable on the last day of each
Interest Period for each such Portion, and, in the case of a Libor Portion
with an Interest Period of six (6) months, on the ninetieth (90th) day
after the commencement of such Interest Period and on the last day of the
Interest Period. With respect to Base Rate Portions, interest shall be due
and payable on the last Business Day of each March, June, September and
December commencing on the first such date after the first Advance which
bears interest at the Base Rate. Interest shall be calculated in accordance
with the provisions of Paragraph 2.5(a) hereof; all interest based on the
Adjusted Libor Rate shall be calculated on the basis of the actual number
of days elapsed over a year of three hundred sixty (360) days, and interest
based on the Base Rate shall be calculated on the basis of the actual
number of days elapsed over a year of three hundred sixty-five (365) or
three hundred sixty-six (366) days, as applicable.
(d) Reserves. If at any time when a Libor Portion is outstanding, Bank
(or a bank Affiliate of Bank) is subject to and incurs a Reserve, Borrowers
hereby agree to pay within five (5) Business Days of demand thereof from
time to time, as billed by Bank, such additional amount as is necessary to
reimburse Bank for its costs in maintaining such Reserve to the extent that
such costs are not reflected in the Reserve Percentage used to determine
the Adjusted Libor Rate. Such amount shall be computed by taking into
account the cost incurred by Bank in maintaining such Reserve in an amount
equal to the Portion on which such Reserve is incurred, which computation
shall be set forth in any such demand by Bank. The determination by Bank of
such costs incurred and the allocation of such costs among Borrowers and
other customers which
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have similar arrangements with Bank shall be prima facie evidence of the
correctness of the fact and the amount of such additional costs, if
calculated in a manner consistent with similar charges made by Bank to its
other customers having similar arrangements with Bank. Upon notification to
Borrowers of any payment required pursuant to this Paragraph 2.5(d),
Borrowers (A) shall make such payment in accordance with the provisions
hereof and (B) may repay the Portion of the Loan with respect to which such
payment is required, subject to the requirements of Paragraph 2.8 and
2.5(f) hereof.
(e) Special Provisions Applicable to Adjusted Libor Rate. The
following special provisions shall apply to the Adjusted Libor Rate:
(i) Change of Adjusted Libor Rate. The Adjusted Libor Rate may
be automatically adjusted by Bank on a prospective basis to
take into account the additional or increased cost of
maintaining any necessary reserves for Eurodollar deposits
or increased costs due to changes in applicable law or
regulation or the interpretation thereof occurring
subsequent to the commencement of the then applicable
Interest Period, including but not limited to changes in tax
laws (except changes of general applicability in corporate
income tax laws) and changes in the reserve requirements
imposed by the Board of Governors of the Federal Reserve
System (or any successor), excluding the Reserve Percentage
and any Reserve which has resulted in a payment pursuant to
subparagraph (e) above, that increase the cost to Bank of
funding the Loan or a portion thereof bearing interest based
on the Adjusted Libor Rate. Bank shall give Borrowers notice
of such a determination and adjustment, which determination
shall be prima facie evidence of the correctness of the fact
and the amount of such adjustment. Borrowers may, by notice
to Bank, (A) request Bank to furnish to Borrowers a
statement setting forth the basis for adjusting such
Adjusted Libor Rate and the method for determining the
amount of such adjustment; and/or (B) repay the Portion of
the Loan with respect to which such adjustment is made,
subject to the requirements of Paragraph 2.8 and 2.5(f)
hereof.
(ii) Unavailability of Eurodollar Funds. In the event that
Borrowers shall have requested the rate based on the
Adjusted Libor Rate in accordance with Paragraph 2.5(b) and
Bank shall have reasonably determined that Eurodollar
deposits equal to the amount of the principal of the Portion
and for the Interest Period specified are unavailable, or
that the rate based on the Adjusted Libor Rate will not
adequately and fairly reflect the cost of making or
maintaining the principal amount of the Portion specified by
Borrowers during the Interest Period specified, or that by
reason of circumstances affecting Eurodollar markets,
adequate and reasonable means do not exist for ascertaining
the rate based on the Adjusted Libor Rate applicable to the
specified Interest Period, Bank shall give notice of such
determination to Borrowers that the rate based on the
Adjusted Libor Rate is not available. A determination by
Bank hereunder shall be prima facie evidence of the
correctness of the fact and amount of such additional costs
or unavailability. Upon such a determination, (i) the
obligation to advance or maintain Libor Portions shall be
suspended until Bank shall have notified
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Borrowers that such conditions shall have ceased to exist,
and (ii) the rate based on the Base Rate shall be applicable
to all Portions.
(iii) Illegality. In the event that it becomes unlawful for Bank
(or Bank's bank Affiliate) to maintain Eurodollar
liabilities sufficient to fund any Portion of the Loan
subject to the rate based on the Adjusted Libor Rate, then
Bank shall immediately notify Borrowers thereof and Bank's
obligations hereunder to advance or maintain Advances at the
rate based on the Adjusted Libor Rate shall be suspended
until such time as Bank (or Bank's bank Affiliate) may again
cause the rate based on the Adjusted Libor Rate to be
applicable to any Portion of the outstanding principal
balance of the Loan, and any Portion shall then be subject
to the rate based on the Base Rate.
(f) Funding Costs and Loss of Earnings. In the event that Borrowers
shall have requested the Adjusted Libor Rate to be applicable to a Portion
to be advanced and Borrowers shall revoke the request for such Advance or
shall fail to meet the conditions to such Advance as set forth in Section
Four hereof, and in connection with any prepayment or repayment of a Libor
Portion made on other than the last day of the applicable Interest Period,
whether such prepayment or repayment is voluntary, mandatory, by demand,
acceleration or otherwise, Borrowers shall pay to Bank all reasonable
funding costs and loss of earnings which may arise in connection with such
revocation of request for or failure to meet the conditions to such Advance
or such prepayment or repayment, as calculated by Bank in accordance with
Exhibit D hereto.
2.6. Advances.
(a) Advance Request. Borrowers shall give Bank written notice of each
requested Advance under the Commitment, not later than eleven o'clock
(11:00) a.m. Philadelphia time, one (1) Business Day prior to the proposed
Advance in the case of an Advance of a Base Rate Portion, and two (2)
Business Days prior to an Advance of a Libor Portion, specifying the date,
amount and purpose thereof. Such notice shall be in the form of the
Advance/Credit Request Form attached hereto as Exhibit A, shall be
certified by the chief financial officer or controller of dELiA*s, and
shall contain the following information and representations, which shall be
deemed affirmed and true and correct as of and upon receipt of the date of
and upon receipt of the requested Advance:
(i) the aggregate amount of the requested Advance, which shall
be an even multiple of $100,000;
(ii) confirmation of compliance with Paragraphs 5.14 through 5.17
hereof as of the most recent date for which a Compliance
Certificate or Borrowing Base Certificate, as applicable,
has been (or is required to have been) delivered, and taking
into account any Advances, including the requested Advance,
and payments since such date; and
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(iii) statements that the representations and warranties set
forth herein and in the other Loan Documents are true and
correct in all material respects as of the date thereof (or
if such representation or warranty is expressly stated to
have been made as of a specific date, such date), provided
that the representations and warranties insofar as they
refer to the accuracy of matters set forth in Exhibit C may
be amended (i) by the Borrowers to reflect any transaction
expressly permitted under Article 5 or 6 hereof or (ii) with
the written consent of Bank; no Event of Default or Default
hereunder has occurred and is then continuing or will be
caused by the requested Advance; and there has been no
Material Adverse Effect since the date of the most-recently
delivered audited financial statements pursuant to Paragraph
5.3 hereof; and no event or circumstance (or combination of
events or circumstances) has occurred which is reasonably
likely to have a Material Adverse Effect.
(b) Procedures. Upon receiving a request for an Advance in accordance
with subparagraph (a) above, subject to the satisfaction of the terms and
conditions hereof, Bank shall make the requested Advance available to
Borrowers by crediting such amount to Borrowers' deposit account with Bank
as designated by dELiA*s from time to time not later than one o'clock
(1:00) p.m. on the day of the requested Advance.
(c) Requests Irrevocable. Each request for an Advance pursuant to this
Paragraph 2.6 shall be irrevocable and binding on Borrowers. In the case of
any Advance bearing interest at the rate based upon the Adjusted Libor
Rate, Borrowers shall indemnify Bank against any loss, cost or expense
incurred by Bank as a result of not borrowing such funds on the requested
Advance date, including as a result of any failure to fulfill on or before
the date specified in such request for an Advance the applicable conditions
set forth in Section Four hereof, including, without limitation, any loss,
cost or expense incurred by reason of the liquidation or redeployment of
deposits or other funds acquired by Bank to fund the Advance to be made by
Bank when such Advance, as a result of such failure, is not made on such
date, as calculated by Bank in accordance with Exhibit D attached hereto.
2.7. Reduction and Termination of Commitment.
(a) Borrowers. Borrowers shall have the right at any time and from
time to time, upon three (3) Business Days' prior written notice to Bank,
to reduce the Commitment in increments of $1,000,000 or multiples thereof
without penalty or premium, provided that on the effective date of such
reduction Borrowers shall make a prepayment of the Loan in an amount, if
any, by which the aggregate outstanding principal balance of the Loan
exceeds the amount of the Commitment as then so reduced, together with
accrued interest on the amount so prepaid and any amounts due pursuant to
Paragraph 2.5(f) hereof.
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(b) Bank. Bank shall have the right to terminate the Commitment at any
time, in its discretion and upon notice to Borrowers, upon the occurrence
of any Event of Default hereunder (except if an Event of Default described
in Paragraph 8.1(i) shall occur with respect to any Borrower, in which case
termination of the Commitment shall occur automatically without notice).
(c) Restoration Only With Consent. Any termination or reduction of the
Commitment pursuant to subparagraphs 2.7(a) and (b) hereof shall be
permanent, and such Commitment cannot thereafter be restored or increased
without the written consent of Bank.
2.8. Prepayment.
(a) Upon one (1) Business Day's prior written notice by Borrowers to
Bank, Borrowers may repay all or any portion of the outstanding principal
balance under the Loan without premium or penalty, provided that any such
payment shall include all accrued interest on the amount prepaid plus any
amounts which may be due pursuant to Paragraph 2.5(f) hereof.
(b) If at any time the aggregate outstanding principal balance of the
Loan plus the undrawn amount of all outstanding Letters of Credit is in
excess of the Borrowing Base, Borrowers shall promptly make a prepayment of
the Loan in accordance with subparagraph (a) above in an amount sufficient
to reduce the balance of the Loan to an amount less than or equal to the
Borrowing Base, together with interest on the amount prepaid through the
date or prepayment and any amounts owed pursuant to Paragraph 2.5(f)
hereof.
(c) Upon any: (i) Sale of Material Assets or (ii) Receipt of Unapplied
Insurance Proceeds, Borrowers shall pay to Bank the Net Proceeds, for
application to the outstanding principal balance of the Loan, together with
interest on the amount repaid through the date of repayment and any amounts
owed pursuant to Paragraph 2.5(f) hereof.
(d) Mandatory prepayments made pursuant to Paragraph 2.8(c) hereof
shall not reduce the Commitment and may be reborrowed.
2.9. Payments. All payments of principal, interest, fees and other amounts
due hereunder, including any prepayments thereof, shall be made by Borrowers to
Bank in immediately available funds before twelve o'clock (12:00) noon,
Philadelphia time, on any Business Day at the office of Bank at 1339 Chestnut
Street, Philadelphia, PA 19107. Borrowers hereby authorize Bank to charge
Borrowers' accounts with Bank for all payments of principal, interest and fees,
if not paid when due.
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2.10. Commitment Fee. Borrowers shall pay to Bank a non-refundable
commitment fee at the rate of three-eighths of one percent (3/8%) per annum on
the unborrowed portion of the Commitment from the date hereof through the
Termination Date, which fees shall be payable at the offices of Bank quarterly
in arrears on the last day of each March, June, September and December and on
the applicable Termination Date. The commitment fee shall be calculated on the
basis of the actual number of days elapsed over a year of three hundred sixty
five (365) days.
Borrowers and Bank hereby agree that for purposes of calculating the
commitment fee to be paid from time to time under this Paragraph 2.10, the
unborrowed portion of the Commitment (on which such fee is calculated) shall be
reduced by the amount available to be drawn under outstanding Letters of Credit.
2.11. Closing Fee. On the date of execution of this Agreement, Borrowers
shall pay to Bank the unpaid balance of a total closing fee of One Hundred
Thousand Dollars ($100,000).
2.12. Regulatory Changes in Capital Requirements. If Bank shall have
determined that the adoption or the effectiveness after the date hereof of any
law, rule, regulation or guideline regarding capital adequacy, or any change in
any of the foregoing or in the interpretation or administration of any of the
foregoing by any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by Bank
(or any lending office of Bank) or Bank's holding company with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency which is generally
applicable to banks comparable to Bank, has or would have the effect of reducing
the rate of return on Bank's capital or on the capital of Bank's holding
company, as a consequence of this Agreement, the Commitment, Advances, Letters
of Credit or the Loan made by Bank pursuant hereto, to a level below that which
Bank or its holding company could have achieved but for such adoption, change or
compliance (taking into consideration Bank's policies and the policies of Bank's
holding company with respect to capital adequacy) by an amount deemed by Bank to
be material, then from time to time Borrowers shall pay to Bank such additional
amount or amounts as will compensate Bank or its holding company for any such
reduction suffered together with interest on each such amount from the date due
until payment in full thereof at the rate provided in Paragraph 2.5(a)(ii)
hereof with respect to amounts not paid when due. Bank will notify Borrowers of
any event occurring after the date of this Agreement that will entitle Bank to
compensation pursuant to this Paragraph 2.12 as promptly as practicable after it
obtains knowledge thereof and determines to request such compensation, and such
compensation shall not be charged for any period more than ninety (90) days
prior to the date of such notice.
A certificate of Bank setting forth such amount or amounts as shall be
necessary to compensate Bank or its holding company as specified above and
describing
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the calculation of such amount shall be delivered to Borrowers and shall be
conclusive absent manifest error, if calculated and charged in a manner
consistent with similar charges made by Bank to its other customers having
similar arrangements with Bank. Borrowers shall pay Bank the amount shown as due
on any such certificate delivered by Bank within ten (10) days after its receipt
of the same.
Failure on the part of Bank to demand compensation for increased costs or
reduction in amounts received or receivable or reductions in return on capital
with respect to any period shall not constitute a waiver of Bank's right to
demand compensation with respect to any other period except as otherwise limited
by the terms of this Paragraph 2.12.
SECTION 2A
LETTERS OF CREDIT
2A.1. Availability of Credits.
(a) Terms of Letters of Credit. Subject to the terms and conditions set
forth herein, Bank shall from time to time prior to the Termination Date issue
Letters of Credit for the account of one or more Borrowers on the following
terms and conditions:
(i) at the time of issuance of the Letter of Credit, the sum of
the amount available to be drawn under such Letter of Credit
and all other Letters of Credit then outstanding hereunder
plus any unreimbursed draws under Letters of Credit, plus
the outstanding principal balance of the Loan, shall not
exceed the lesser of the Commitment or the Borrowing Base;
(ii) at the time of issuance of the Letter of Credit, the amount
available to be drawn under such Letter of Credit and all
other Letters of Credit then outstanding hereunder plus any
unreimbursed draws under Letters of Credit shall not exceed,
in the aggregate, the Letter of Credit Sublimit;
(iii) the final expiration date of each Letter of Credit shall be
on or before the earlier of (i) one year, in the case of
standby Letters of Credit, and one hundred eighty (180)
days, in the case of documentary Letters of Credit, from the
date of issuance thereof or (ii) the Termination Date;
(iv) there shall not exist at the time of issuance of the Letter
of Credit, or as a result thereof, any Default or Event of
Default hereunder; and
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(v) each Letter of Credit issued under this Section 2A shall be
utilized by a Borrower for legitimate purposes in the
ordinary course of its business.
(b) Extension of Letters of Credit. Notwithstanding the provisions of
this Paragraph 2A.1 requiring that the final expiry of each Letter of Credit be
on or before the Termination Date, Bank hereby agrees that it may issue, upon
Borrowers' request if required by a proposed beneficiary, a Letter of Credit
which by its terms may be extended beyond the Termination Date. With respect to
any such Letter of Credit issued hereunder, Borrowers hereby agree that they
will deliver on or before the Termination Date cash collateral in an amount
equal to one hundred ten percent (110%) of the outstanding undrawn amount of
each such Letter of Credit pursuant to Paragraph 2A.5 hereof.
2A.2. Chase Letters of Credit. On the date of this Agreement, Bank shall
issue a standby Letter of Credit in the amount of Five Million Dollars
($5,000,000) (the "Initial Standby L/C") in an aggregate face amount equal to
all letters of credit issued by The Chase Manhattan Bank for the account of
Borrowers outstanding on the date of this Agreement or issued within thirty (30)
days after such date (the "Chase L/Cs"). The number, beneficiary and amount of
each Chase L/C shall be set forth on Exhibit C attached hereto.
2A.3. Commitment Availability. The amount available under the Commitment as
from time to time in effect shall be reduced by the amount available to be drawn
under all outstanding Letters of Credit and unreimbursed amounts of any draws
under Letters of Credit. The amount by which the Commitment is so reduced shall
not be available for Advances under Paragraph 2.6 hereof, except Advances
thereunder which are made to reimburse Bank for draws under the Letters of
Credit as permitted pursuant to Paragraph 2A.4 hereof.
2A.4. Approval and Issuance.
(a) Whenever a Borrower desires that a Letter of Credit be issued for
its account, or that an outstanding Letter of Credit issued for its account be
amended, such Borrower shall give Bank: (i) in the case of a standby Letter of
Credit, at least eight (8) Business Days' prior written request therefor in the
form of Exhibit A attached hereto and (ii) in the case of a documentary Letter
of Credit, written request therefor (or by electronic request pursuant to
procedures established between Borrowers and Bank) one (1) Business Day prior to
issuance.
(b) Letters of Credit and amendments thereto shall be requested,
processed and issued, and draws thereon shall be negotiated, processed and paid,
in accordance with and subject to the terms and procedures of the Master L/C
Agreement and the Electronic L/C Agreement entered into between Borrowers and
Bank.
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(c) It shall be a condition to the issuance of any Letter of Credit
that the conditions set forth in Paragraphs 2A.1(a) and 4.2 hereof shall be
satisfied.
2A.5. Obligations of the Borrower. Borrowers agree to pay to Bank in
connection with each Letter of Credit issued hereunder:
(a) immediately upon the demand of Bank, the amount paid by Bank with
respect to such Letter of Credit;
(b) immediately upon demand of Bank, the amount of any draft presented
purporting to be drawn under such Letter of Credit provided that the draft and
accompanying documents conform to the terms of the Letter of Credit but subject
to the terms of Paragraph 2A.7 and any other amounts paid thereunder (it being
understood that Bank is not required to make demand upon or proceed against any
other party or to resort to any Collateral before obtaining payment from
Borrowers);
(c) quarterly in arrears on the last Business Day of each March, June,
September and December, a fee calculated on the average outstanding amount of
all documentary and standby Letters of Credit for such period at a rate per
annum equal to one and one-eighth of one percent (1 1/8%) together with any
Letter of Credit fees customarily charged by Bank;
(d) interest on any Indebtedness outstanding with respect to such
Letter of Credit, whether for funds paid on drafts on such Letter of Credit or
otherwise (but such indebtedness shall not include undrawn balances of such
Letter of Credit issued hereunder) at the rate set forth in Paragraph
2.5(a)(i)(A) hereof from the date of payment by Bank (if not reimbursed by
Borrowers on the same day) to the date one (1) Business Day after notice to
Borrowers of such payment, and thereafter at the rate applicable to Portions
bearing interest based on the Base Rate under Paragraph 2.5(a)(ii) hereof;
interest under this subparagraph (d) shall be paid at the times and in the
manner set forth in Paragraph 2.5 hereof, and shall accrue on amounts paid on a
Letter of Credit (if not reimbursed by Borrowers on the same day) from the date
of payment by Bank, whether or not demand is made, until such amounts are
reimbursed by Borrowers whether before, at or after demand.
(e) On or before the Termination Date, in the absence of a Default or
Event of Default at such time, and subject to the provisions of Paragraph 2.6
hereof, Bank hereby agrees to advance funds to Borrowers under the Loan to make
the payments required under Paragraphs 2A.4(a) and (b) hereof. If any payment by
Bank of a draft drawn under a Letter of Credit is for any reason (including
without limitation the occurrence or continuation of a Default or Event of
Default hereunder) not reimbursed prior to or on the date of such payment, the
amount of such payment shall thereupon be deemed for purposes hereof an Advance
under Paragraph 2.6 hereof. Such reimbursement obligation shall be repayable,
prepayable, and otherwise subject to all the
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terms and conditions thereof as if advanced by Bank pursuant to Paragraph 2.6
hereof (but without duplication).
2A.6. Collateral Security.
(a) The indebtedness, liabilities and obligations of Borrowers under
this Section 2A, however created or incurred, whether now existing or hereafter
arising, due or to become due, absolute or contingent, direct or indirect,
secured or unsecured, are among the obligations secured by the security
interests, liens and encumbrances created by the Collateral, and Bank is
entitled to the benefit of the Collateral granted thereunder with respect to
such indebtedness.
(b) Notwithstanding the payment in full of the Loan, the termination
of the Commitment or the occurrence of the Termination Date, the Collateral
shall continue to secure the Indebtedness, liabilities and obligations of
Borrowers under this Section 2A until all Letters of Credit shall have expired
and all Indebtedness, liabilities and obligations under this Section 2A shall
have been paid in full or until the cash collateral required by subparagraph (c)
below has been provided.
(c) On the termination of the Commitment or the occurrence of an
Event of Default, Bank may require (and in the case of an Event of Default
occurring under Paragraph 8.1(i) it shall be required automatically) that
Borrowers deliver to Bank cash or U.S. Treasury Bills with maturities of not
more than 90 days from the date of delivery (discounted in accordance with
customary banking practice to present value to determine amount) in an amount
equal at all times to one hundred ten percent (110%) of the outstanding undrawn
amount of all Letters of Credit, such cash or U.S. Treasury Bills and all
interest earned thereon to constitute cash collateral for all such Letters of
Credit. At such time as such Collateral is required to be and has not been
deposited, Bank shall be entitled to liquidate such of the other Collateral for
the Loan (if any) as is necessary or appropriate in its sole judgment so as to
create such cash collateral.
(d) Any cash collateral deposited under subparagraph (c) above, and
all interest earned thereon, shall be held by Bank and invested and reinvested
at the expense and the written direction of Borrowers, in U.S. Treasury Bills
with maturities of no more than ninety (90) days from the date of investment.
2A.7. General Terms of Credits. The following terms and conditions apply
with respect to each Letter of Credit notwithstanding anything to the contrary
contained herein:
(a) Borrowers assume all risks of the acts or omissions of the
beneficiary of each Letter of Credit with respect to the use of the Letter of
Credit or with respect to the beneficiary's obligations to Borrowers. Neither
Bank nor any of its officers or directors shall be liable or responsible for,
and Borrowers hereby agree to indemnify and hold Bank harmless (except for the
issuer's gross negligence or willful misconduct) with respect to: (i) the use
which may be made of the Letter of Credit or for any acts or
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omissions of the beneficiary in connection therewith; (ii) the accuracy, truth,
validity, sufficiency or genuineness of documents, or of any endorsement
thereon, even if such documents should in fact prove to be in any or all
respects false, misleading, inaccurate, invalid, insufficient, fraudulent, or
forged; (iii) the payment by Bank against presentation of facially conforming
documents; (iv) any other circumstances whatsoever in making or failing to make
payment under a Letter of Credit; or (v) any inaccuracy, interruption, error or
delay in transmission or delivery of correspondence or documents by post,
telegraph or otherwise. In furtherance and not in limitation of the foregoing,
Bank may accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary.
(b) To the extent any failure to comply with the provisions of this
Paragraph 2A.6(b) would, either individually or in the aggregate, result in a
Material Adverse Effect, Borrowers agree to procure or to cause the
beneficiaries of each documentary Letter of Credit to procure promptly any
necessary import and export or other licenses for the import or export or
shipping of any goods referred to in or pursuant to a Letter of Credit and to
comply and to cause the beneficiaries to comply with all foreign and domestic
governmental regulations with respect to the shipment and warehousing of such
goods or otherwise relating to or affecting such Letter of Credit, including
governmental regulations pertaining to transactions involving designated foreign
countries or their nationals, and to furnish such certificates in that respect
as Bank may at any time reasonably require, and to keep such goods adequately
covered by insurance in amounts, with carriers and for such risks as shall be
customary in the industry and to cause Bank's interest to be endorsed on such
insurance and to furnish bank at its request with reasonable evidence thereof.
Should such insurance (or lack thereof) upon said goods for any reason not be
reasonably satisfactory to Bank, Bank may (but is not obligated to) obtain,
after notice, at Borrowers' expense, insurance satisfactory to Bank.
(c) In connection with each Letter of Credit, neither Bank nor any
correspondent shall be responsible for: (i) the existence, character, quality,
quantity, condition, packing, value or delivery of the property purporting to be
represented by documents; (ii) any difference in character, quality, condition
or value of the property from that expressed in documents; (iii) the time,
place, manner or order in which shipment of the property is made; (iv) partial
or incomplete shipment referred to in such Letter of Credit; (v) the character,
adequacy or responsibility of any insurer, or any other risk connected with
insurance other than insurance procured by the Bank; (vi) any deviation from
instructions, delay, default or fraud by the beneficiary or anyone else in
connection with the property or the shipping thereof; (vii) the solvency,
responsibility or relationship to the property of any party issuing any
documents in connection with the property; (viii) delay in arrival or failure to
arrive of either the property or any of the documents relating thereto; (ix)
delay in giving or failure to give notice of arrival or any other notice; (x)
any breach of contract between the Letter of Credit beneficiaries and Borrowers;
(xi) any laws, customs, and regulations which may be effective in any
jurisdiction where any negotiation and/or payment of such Letter of Credit
occurs; (xii)
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failure of documents (other than documents required by the terms of the Letter
of Credit) to accompany any draft at negotiation; or (xiii) failure of any
entity to note the amount of any document or draft on the reverse of such Letter
of Credit or to surrender or to take up such Letter of Credit or to forward
documents other than documents required by the terms of the Letter of Credit. In
connection with each Letter of Credit, Bank shall not be responsible for any
error, neglect or default of any of their correspondents. None of the above
shall affect, impair or prevent the vesting of any of the Bank's rights or
powers hereunder. If a Letter of Credit provides that payment is to be made by
Bank's correspondent, neither Bank nor such correspondent shall be responsible
for the failure of any of the documents specified in such Letter of Credit to
come into the Bank's hands, or for any delay in connection therewith, and
Borrowers' obligation to make reimbursements shall not be affected by such
failure or delay in the receipt of any such documents.
(d) Notwithstanding but without limiting the foregoing, with respect
to any Letter of Credit, Borrowers shall have a claim against Bank, and Bank
shall be liable to Borrowers, to the extent, but only to the extent, of any
direct, as opposed to indirect or consequential, damages suffered by Borrowers
caused by the Bank's willful misconduct or gross negligence.
(e) To the extent not inconsistent with this Agreement, the Uniform
Customs and Practices for Documentary Credits (1993 Revision), International
Chamber of Commerce Publication No. 500, are hereby made a part of this
Agreement with respect to obligations in connection with each Letter of Credit.
SECTION 3
REPRESENTATIONS AND WARRANTIES
Borrowers represent and warrant to Bank as follows:
3.1. Organization and Good Standing. Each Borrower is a corporation,
partnership or other legal entity as set forth on Exhibit C attached hereto,
duly formed and validly existing under the laws of its state of formation as set
forth on Exhibit C attached hereto, and each has the power and authority to
carry on its business as now conducted and, except as to such failures to
qualify which are not, either singly or in the aggregate, reasonably likely to
have a Material Adverse Effect, is qualified to do business in all other states
in which the nature of its business or the ownership of its properties requires
such qualification.
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3.2. Power and Authority; Validity of Agreement. Each Borrower has the power
and authority under applicable law and under its articles or certificate of
incorporation and bylaws or other organizational documents to enter into and
perform the Loan Documents to the extent that it is a party thereto; and all
actions necessary or appropriate for the execution and performance by such
Borrower of the Loan Documents have been taken, and, upon their execution, the
same will constitute the valid and binding obligations of each Borrower to the
extent it is a party thereto, enforceable in accordance with their terms.
3.3. No Violation of Laws or Agreements. The making and performance of the
Loan Documents by each Borrower will not violate any provisions of any law or
regulation, federal, state, local, or foreign or any Borrower's respective
articles or certificate of incorporation and bylaws or other organizational
documents, or result in any breach or violation of, or constitute a default
under, any agreement or instrument by which any Borrower or its property may be
bound (except that the Bank's exercise of remedies under the Pledge Agreement
may result in a default under certain of the Leases).
3.4. Material Contracts. There exists no default by any Borrower under any
contracts material to the business(es) of each Borrower which default, or
defaults taken as a whole, is or are reasonably likely to have a Material
Adverse Effect. Set forth on Exhibit C is a complete list of all material
contracts of Borrowers and all Leases.
3.5. Compliance.
(a) Each Borrower is in compliance with all applicable laws and
regulations, federal, state, local or foreign (including without limitation
those administered by the Local Authorities), except for such failure to comply
as are not, either singly or in the aggregate, reasonably likely to have a
Material Adverse Effect;
(b) Each Borrower possesses all the franchises, permits, licenses,
certificates of compliance and approval and grants of authority, necessary or
required in the conduct of its respective business(es) as of the date hereof;
and as of the date hereof all such franchises, permits, licenses, certificates
and grants are valid, binding, enforceable and subsisting without any defaults
thereunder or enforceable adverse limitations thereon and are not subject to any
proceedings or asserted claims opposing the issuance, development or use thereof
or contesting the validity thereof, except to the extent that the failure to
obtain or maintain any of the foregoing is not, either singly or in the
aggregate, reasonably likely to have a Material Adverse Effect; and
(c) No authorization, consent, approval, waiver, license or formal
exemptions from, nor any filing, declaration or registration with, any court,
governmental agency or regulatory authority (federal, state or local) or
non-governmental entity, under the terms of contracts or otherwise, is required
by any Borrower by reason of
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or in connection with such Borrower's execution and performance of the Loan
Documents, except those which have been obtained and UCC financing statements
and Patent and Trademark Office filings as contemplated by Paragraph 4.1 hereof.
(d) Since January 31, 1997, to the best of each Borrower's knowledge,
no employee of any Borrower, or any supplier of any of them, has been employed
in violation of Section 6 or Section 7 of the Fair Labor Standards Act (29
U.S.C. ss.201 et seq.) (the "FLSA"), or in violation of any regulation or order
of the Secretary of Labor of the United States under Section 14 of the FLSA,
except to the extent that any such violation, either singly or in the aggregate,
is not reasonably likely to have a Material Adverse Effect.
3.6. Litigation. Except as set forth on Exhibit C attached hereto, there are
no actions, suits, proceedings or claims which are pending or, to the best
knowledge of any member of Borrowers' senior management, threatened, against any
Borrower which, if adversely resolved, are reasonably likely to have a Material
Adverse Effect.
3.7. Title to Assets. Each Borrower has good and marketable title to, or
valid leasehold interest in or a license to use, all of the properties and
assets material to the conduct of its business, free and clear of any liens and
encumbrances, except the security interests granted under the Security
Agreement, liens and encumbrances permitted pursuant to Paragraph 6.4 hereof and
the liens and security interests identified on Exhibit C attached hereto. All
such assets are materially covered by the insurance required under Paragraph 5.8
hereof.
3.8. Accuracy of Information; Full Disclosure.
(a) All information furnished to Bank concerning the financial
condition of dELiA*s and its consolidated Subsidiaries, including dELiA*s annual
consolidated financial statements for the period ended January 31, 1998, a copy
of which has been furnished to Bank, but excluding any projections or
forward-looking statements, have been prepared in accordance with GAAP and
fairly presents in all material respects the financial condition of dELiA*s and
its consolidated Subsidiaries as of the dates and for the periods covered and
discloses all liabilities of dELiA*s and its consolidated Subsidiaries required
to be disclosed in accordance with GAAP, and there has been no material adverse
change in the financial condition or business of dELiA*s and its consolidated
Subsidiaries taken as a whole from the date of such statements to the date
hereof. Bank has received dELiA*s quarterly reports on Form 10-Q for the periods
ended April 30, 1998 and July 31, 1998 and the internally prepared financial
statements for the nine-month period ended October 31, 1998, and Bank hereby
acknowledges that the financial and business condition and results reflected in
such reports and financial statements do not in and of themselves constitute a
Material Adverse Effect.
(b) All financial statements and other documents furnished by each
Borrower to Bank pursuant to this Agreement and the other Loan
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Documents (excluding any projections or forward-looking statements) do not and
will not contain any untrue statement of material fact or omit to state a
material fact necessary in order to make the statements contained herein and
therein not misleading in light of the circumstances in which they were made.
There is no fact presently actually known to the Borrowers which has not been
disclosed to Bank in writing which materially and adversely affects the
Collateral or the business, operations or conditions (financial or otherwise) of
the Borrowers.
3.9. Taxes and Assessments.
(a) Except as set forth on Exhibit C, each Borrower has duly and
timely filed all information and tax returns and reports with any federal,
state, or local governmental taxing authority, body or agency, and all taxes,
including without limitation income, gross receipts, sales, use, excise,
withholding and any other taxes, and any governmental charges, penalties,
interest or fines with respect thereto, due and payable by any Borrower, have
been paid, withheld or reserved for in accordance with GAAP or, to the extent
they relate to periods on or prior to the date of the financial statements
referenced in Paragraphs 5.2 and 5.3 hereof, are reflected as a liability on the
financial statements in accordance with GAAP.
(b) Each Borrower has properly withheld all amounts required by law to
be withheld for income taxes and unemployment taxes, including without
limitation, all amounts required with respect to social security and
unemployment compensation, relating to its employees, and has remitted such
withheld amounts in a timely manner to the appropriate taxing authority, agency
or body.
3.10. Indebtedness. No Borrower has any presently outstanding Indebtedness
or obligations, including contingent obligations and obligations under leases of
property from others, except the Indebtedness and obligations described in
Exhibit C hereto or in Borrowers' financial statements which have been furnished
to Bank pursuant to Paragraph 3.8, 5.2 or 5.3 hereof, and Indebtedness permitted
pursuant to Paragraph 6.1 hereof.
3.11. Management Agreements. Except as set forth on Exhibit C attached
hereto, no Borrower is a party to any management or consulting agreements for
the provision of senior executive services to such Borrower other than
employment agreements.
3.12. Investments; Capital Structure. Each direct and indirect Subsidiary of
dELiA*s is identified on Exhibit C attached hereto, which indicates the number
of shares and classes of the capital stock or partnership interests, as
applicable, of each such Subsidiary and the ownership thereof. All such shares
are validly issued, fully paid and non-assessable, and the issuance and sale
thereof are in compliance with all applicable federal and state securities and
other applicable laws; and the shareholders' ownership of such shares of each
Subsidiary is free and clear of any liens or
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encumbrances or other contractual restrictions, except the pledge thereof to
Bank hereunder. All such interests are validly existing and the creation and
sale thereof are in compliance with all applicable federal and state securities
and other applicable laws; and the partners' ownership thereof is free and clear
of any liens or encumbrances or other contractual restrictions, except the
assignment thereof to Bank hereunder. No Borrower has any other Subsidiaries or
any investments in or loans to any other individuals or business entities except
for loans and investments permitted pursuant to Paragraph 6.3 or 6.8 hereof and
identified on Exhibit C hereto. There are no agreements or obligations of
Borrowers requiring redemption or repurchase of any of the outstanding shares of
dELiA*s or otherwise requiring the making of any Restricted Payment.
3.13. ERISA. Each Borrower and each ERISA Affiliate is in compliance in all
material respects with all applicable provisions of ERISA and the regulations
promulgated thereunder; and,
(a) No Borrower nor any ERISA Affiliate maintains or contributes to or
has maintained or contributed to any multiemployer plan (as defined in section
4001 of ERISA) under which any Borrower or any ERISA affiliate could have any
withdrawal liability which is reasonably likely to have a Material Adverse
Effect;
(b) No Borrower nor any ERISA Affiliate sponsors or maintains any Plan
under which there is an accumulated funding deficiency within the meaning of
ss.412 of the Code, whether or not waived, which is reasonably likely to have a
Material Adverse Effect;
(c) The aggregate liability for accrued benefits and other ancillary
benefits under each defined benefit pension Plan that is sponsored or maintained
by any Borrower or any ERISA Affiliate (determined on the basis of the actuarial
assumptions prescribed for valuing benefits under terminating single-employer
defined benefit plans under Title IV of ERISA) does not exceed the aggregate
fair market value of the assets under each such defined benefit pension Plan by
an amount which is reasonably likely to have a Material Adverse Effect;
(d) The aggregate liability of each Borrower and each ERISA Affiliate
arising out of or relating to a failure of any Plan to comply with the
provisions of ERISA or the Code, is not an amount which is reasonably likely to
have a Material Adverse Effect; and
(e) There does not exist any unfunded liability (determined on the
basis of actuarial assumptions utilized by the actuary for the Plan in preparing
the most recent Annual Report) of any Borrower or ERISA Affiliate under any Plan
providing post-retirement life or health benefits which is reasonably likely to
have a Material Adverse Effect.
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3.14. Fees and Commissions. No Borrower owes any brokers' or finders' fees
or commissions of any kind, or knows of any claim for any brokers' or finders'
fees or commissions, in connection with any Borrower's obtaining the Commitment
or the Loan or Letters of Credit from Bank, except those provided herein.
3.15. No Extension of Credit for Securities. No Borrower is now, nor at any
time has it been engaged principally, or as one of its respective important
activities, in the business of extending or arranging for the extension of
credit for the purpose of purchasing or carrying any margin stock or margin
securities within the meaning of the regulations of the Board of Governors of
the Federal Reserve System, nor will the proceeds of the Loan be used by any
Borrower, directly or indirectly, for such purposes except those permitted
hereunder.
3.16. Perfection of Security Interest. Upon the filing of UCC financing
statements in the jurisdictions identified by counsel to Borrowers in its
opinion delivered pursuant to this Agreement, and the making of the first
Advance or issuance of a Letter of Credit hereunder, the taking of the actions
described in Paragraph 3.17, and all filings with the United States Copyright
Office or United States Patent and Trademark Office required under the
Intellectual Property Security Agreement, with respect to the Collateral covered
by the Collateral Security Documents, no further action, including any filing or
recording of any document, is necessary in order to establish and perfect Bank's
security interests in the Collateral covered by the Collateral Security
Documents.
3.17. Perfection of Pledge. Upon the delivery into and the maintenance of
the possession of Bank of certificates for all of the outstanding shares of
capital stock of each Borrower (other than dELiA*s) being pledged pursuant to
the Pledge Agreement, and the making of the first Advance or issuance of a
Letter of Credit hereunder, no further action, including any filing or recording
of any document, is necessary under present law in order to establish, perfect
and maintain the first priority security interest in such stock created by the
Pledge Agreement.
3.18. Hazardous Wastes, Substances and Petroleum Products.
(a) Each Borrower (i) has received all material permits and filed all
notifications required by the Environmental Control Statutes to carry on its
respective business(es); and (ii) is in compliance in all material respects with
all Environmental Control Statutes.
(b) Each Borrower has given any written or oral notice to the EPA or
any state or local agency with regard to any actual or imminently threatened
Release of Hazardous Substances of which such Borrower has knowledge on
properties owned, leased or operated by such Borrower or used in connection with
the conduct of its business and operations as are required under any applicable
Environmental Control Statutes.
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(c) No Borrower has received written notice that it is potentially
responsible for clean-up, remediation, costs of clean-up or remediation, fines
or penalties with respect to any actual or imminently threatened Release of
Hazardous Substances pursuant to any Environmental Control Statute.
3.19. Solvency. To the best of each Borrower's knowledge, excluding
intercompany indebtedness, each Borrower is and after receipt and application of
the first Advance under this Agreement will be, solvent such that (i) the fair
value of its assets (including without limitation the fair salable value of the
goodwill and other intangible property of such Borrower) is greater than the
total amount of its liabilities, including without limitation, contingent
liabilities, (ii) the present fair salable value of its assets (including
without limitation the fair salable value of the goodwill and other intangible
property of such Borrower) is not less than the amount that will be required to
pay the probable liability on their debts as they become absolute and matured,
and (iii) they are able to realize upon their assets and pay their debts and
other liabilities, contingent obligations and other commitments as they mature
in the normal course of business. No Borrower intends to, nor believes that it
will, incur debts or liabilities beyond its ability to pay as such debts and
liabilities mature, and no Borrower is engaged in a business or transaction, or
about to engage in a business or transaction, for which its property would
constitute unreasonably small capital after giving due consideration to the
prevailing practice and industry in which it is engaged. For purposes of this
Paragraph 3.19, in computing the amount of contingent liabilities at any time,
it is intended that such liabilities will be computed at the amount which, in
light of all the facts and circumstances existing at such time, represents the
amount that reasonably can be expected to become an actual matured liability of
the applicable Borrower.
Each Borrower hereby agrees that to the extent a Borrower shall have
paid more than its proportionate share of any payment made hereunder, such
Borrower shall be entitled to seek and receive contribution from and against any
other Borrower which has not paid its proportionate share of such payment;
provided however such Borrower shall not seek any such contribution from any
other Borrower until the Loan has been paid in full in cash and the Commitment
of the Bank hereunder has been terminated. The provisions of this paragraph
shall in no respect limit the obligations and liabilities of any Borrower to
Bank, and each Borrower shall remain liable to Bank, jointly and severally, for
the full amount of Borrowers' obligations hereunder and under the other Loan
Documents.
3.20. Employee Controversies. There are no material controversies pending
or, to the knowledge of any Borrower, threatened or anticipated between any
Borrower and any of its respective employees, and there are no labor disputes,
grievances, arbitration proceedings or any strikes, work stoppages or slowdowns
pending, or to any Borrower's knowledge, threatened between any Borrower and its
respective employees and representatives, which in either event or which is
reasonably likely to have a Material Adverse Effect.
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3.21. Year 2000 Compliance. Borrowers have conducted a comprehensive review
and assessment of their computer systems and applications, micro-processor based
goods and equipment owned or used by them in their business (except with respect
to certain assets acquired by the Borrowers on September 16, 1998 from Fulcrum
Direct, Inc. and its affiliates), and all products currently sold by them, and
are making inquiry of their material suppliers, vendors and customers, with
respect to functionality before, during and after the year 2000 (the "Year 2000
Problem"). Borrowers have prepared a plan to ensure that all such systems,
goods, equipment and products owned or used by them and material to the conduct
of their business will be Year 2000 Compliant in a timely manner, and have
provided a copy of such plan to Bank. Borrowers reasonably believe, based on the
foregoing review, assessment and inquiry that the Year 2000 Problem will not
result in a Material Adverse Effect.
3.22. Intellectual Property. Each Borrower owns, or is licensed to use, all
trademarks, trade names, copyrights, patents and other intellectual property
material to its business which are set forth on Exhibits A through D to the
Intellectual Property Security Agreement, and the use thereof by Borrowers does
not infringe upon the rights of any other Person, except for any such
infringements that, individually or in the aggregate, are not reasonably likely
to have a Material Adverse Effect.
3.23. Foreign Assets Control Regulations. Neither the borrowing by Borrowers
nor their use of the proceeds thereof will violate the Foreign Assets Control
Regulations, the Foreign Funds Control Regulations, the Transactions Control
Regulations, the Cuban Assets Control Regulations, the Iranian Transaction
Regulations, or the Iraqi Sanctions Regulations of the United States Treasury
Department (31 C.F.R. Subtitle B, Chapter V, as amended).
3.24. Investment Company Act. No Borrower is directly or indirectly
controlled by or acting on behalf of any person which is an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
3.25. Public Utility Holding Company Act. No Borrower is a "public utility
holding company" within the meaning of the Public Utility Holding Company Act of
1935, as amended (the "1935 Act"), nor does the execution, delivery and
performance of this Agreement or the Note require any filing, authorization or
consent under the 1935 Act.
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SECTION 4
CONDITIONS
4.1. Effectiveness. The effectiveness of this Agreement shall be subject to
Bank's receipt of the following documents and satisfaction of the following
conditions, each in form and substance satisfactory to Bank:
(a) Promissory Note. The Note duly executed by Borrowers.
(b) Authorization Documents. A certificate of the secretary of each
Borrower attaching and certifying as to (i) the certificate or articles of
incorporation and bylaws of such Borrower; (ii) resolutions or other evidence of
authorization by the board of directors of such Borrower authorizing its
execution and full performance of the Agreement, the Loan Documents and all
other documents and actions required hereunder; and (iii) an incumbency
certificate setting forth the name, title and specimen signature of each officer
of such Borrower who is authorized to execute the Loan Documents and any
requests or communications hereunder on behalf of such entity.
(c) Good Standing. Certificates of good standing or the equivalent for
each Borrower in its state of formation.
(d) Opinion(s) of Counsel. Opinion letter(s) from counsel for the
Borrowers as may be reasonably satisfactory to Bank.
(e) Compliance and Borrowing Base Certificates. A completed Compliance
Certificate in the form of Exhibit E attached hereto and a completed Borrowing
Base certificate in the form of Exhibit F attached hereto, calculated as of the
end of the most recent month or most recent fiscal quarter of Borrowers, as
applicable, for which such certificates would be required hereunder.
(f) Inventory Appraisal. An inventory appraisal dated November
25, 1998.
(g) Fees and Expenses. Payment of all fees required by Paragraphs 2.10
and 2.11 hereof.
(h) Security Agreement. The Security Agreement duly executed by each
of the Borrowers in favor of Bank, granting Bank a lien on all tangible and
intangible assets of Borrowers, together with UCC financing statements in such
jurisdictions as Bank shall reasonably require, all in form and substance
satisfactory to Bank.
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(i) Pledge Agreement. The Pledge Agreement duly executed by dELiA*s,
pledging all of the outstanding capital stock of all Borrowers and Subsidiaries,
other than that of dELiA*s, to Bank, together with the certificates representing
the shares pledged thereby and stock powers executed in blank.
(j) Intellectual Property Security Agreement. The Intellectual
Property Security Agreement duly executed by each of the Borrowers in favor of
Bank, in form and substance satisfactory to Bank, together with all documents
and filings required thereunder.
(k) L/C Agreements. The Master L/C Agreement in the form of Exhibit
G-1 attached hereto and the Electronic L/C Agreement in the form of Exhibit G-2
attached hereto, each executed by Borrowers and Bank.
(l) Initial Standby L/C. Notice to Bank for the Initial Standby L/C as
required pursuant to Section 2A hereof.
(m) Insurance Certificates. Certificates of insurance and lender loss
payee endorsements with respect to Borrowers' and the Subsidiaries' property,
casualty and liability insurance naming Bank as lender loss payee and
undertaking to furnish Bank with reasonable notice and opportunity to cure any
non-payment of premiums prior to termination of coverage.
(n) Consents. Receipt of all required consents and approvals under
applicable law or contract.
(o) Lien Searches. UCC, tax, lien, and judgment searches against
Borrowers in those offices and jurisdictions identified on Schedule A to the
Security Agreement and as Bank shall reasonably request.
(p) Consents and Waivers. Receipt of all landlord, warehousemen and
mortgagee consents and waivers as may be required by Bank.
(q) Other Documents. Such additional documents as Bank reasonably may
request.
4.2. Advances. The obligation of Bank to make Advances under the Commitment
shall be subject to Borrowers' compliance with Paragraph 2.6 hereof and it shall
be a condition to Bank's obligation hereunder to make any such Advance that (a)
the
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representations and warranties set forth herein and in the other Loan Documents
shall be true and correct in all material respects as if made on the date of
such Advance, (b) no Event of Default or Default shall have occurred and not
have been waived on the date of such Advance or be caused by such Advance, (c)
all fees required pursuant to Paragraphs 2.10 and 2.11 hereof have been paid as
and when due, and (d) there shall have been no Material Adverse Effect since the
date of the audited financial statements of dELiA*s and its consolidated
Subsidiaries most recently delivered pursuant to this Agreement, and no event or
circumstance (or combination of events or circumstances) shall have occurred
which is reasonably likely to have a Material Adverse Effect.
SECTION 5
AFFIRMATIVE COVENANTS
Borrowers covenant and agree that so long as the Commitment of
Bank to Borrowers or any Indebtedness of Borrowers to Bank is outstanding, each
of the Borrowers will (and with respect to Paragraph 5.13, will cause each ERISA
Affiliate to):
5.1. Existence and Good Standing. Preserve and maintain (a) its existence as
a corporation, partnership or other legal entity, as specified in Exhibit C
attached hereto, and its good standing in all states in which the nature of its
business or assets requires such qualification except for such lapses in
qualification which are not, either singly or in the aggregate, reasonably
likely to have a Material Adverse Effect; and (b) the effectiveness and validity
of all its franchises, licenses, permits, certificates of compliance or grants
of authority required in the conduct of its business, except for such instances
of ineffectiveness or invalidity as would not, either singly or in the
aggregate, have a Material Adverse Effect.
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5.2. Interim Financial Statements. Furnish to Bank within forty-five (45)
days of the end of each of the first three quarterly periods in each fiscal year
of Borrowers, unaudited quarterly consolidated financial statements, as
applicable, in form and substance as reasonably required by Bank, including (i)
a consolidated balance sheet, (ii) a consolidated statement of income, and (iii)
a statement of cash flows, prepared in accordance with GAAP consistently applied
(except that such interim statements need not contain footnotes and may be
subject to year-end adjustments).
5.3. Annual Financial Statements. Furnish to Bank within ninety (90) days
after the close of each fiscal year audited consolidated annual financial
statements, including the information required under Paragraph 5.2 hereof, which
financial statements shall be prepared in accordance with GAAP and shall be
certified without qualification (except with respect to changes in GAAP as to
which Borrowers' independent certified public accountants have concurred) by any
one of the "big five" accounting firms or an independent certified public
accounting firm reasonably satisfactory to Bank; and cause Bank to be furnished,
at the time of the completion of the annual audit, with copies of any management
letters prepared by such accountants and with a certificate signed by such
accountants to the effect that to the best of their knowledge there exists no
Event of Default or Default hereunder.
5.4. Compliance Certificate. At the time of delivery of quarterly and annual
financial statements pursuant to Paragraph 5.2 and 5.3 hereof, deliver to Bank a
certificate in the form of Exhibit E attached hereto executed by the chief
financial officer of dELiA*s, showing the calculation of the covenants set forth
in Paragraph 5.14 through 5.16 hereof.
5.5. Borrowing Base Certificate. Within fifteen (15) days after the end of
each month or upon request by Bank at any other time, furnish to Bank a
Borrowing Base Certificate in the form of Exhibit F attached hereto executed by
the chief financial officer or controller of dELiA*s, and upon request by Bank,
furnish to Bank a summary inventory aging report in form and substance
satisfactory to Bank.
5.6. Additional Information. Deliver to Bank promptly upon transmission
thereof copies of all financial statements, proxy statements, notices and
reports sent to shareholders of Borrowers, and copies of any registration
statements (without exhibits), filed with the Securities and Exchange Commission
(or any governmental body or agency succeeding to the functions of the
Securities and Exchange Commission), including without limitation, Forms 10Q and
Forms 10K, and copies of all auditors' annual management letters delivered to
Borrowers.
5.7. Books and Records. Keep and maintain adequate books and records of
account in accordance with GAAP and make or cause the same to be made available
to Bank or its agents or nominees at any reasonable time during normal business
hours upon reasonable notice for inspection and to make extracts thereof and
permit bank
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or its agents or nominees to discuss contents of same with senior officers of
Borrowers and also with outside auditors and accountants of Borrowers.
5.8. Insurance. Keep and maintain all of their property and assets in good
order and repair (and make such property available to Bank or its agents or
nominees at any reasonable time during normal business hours upon reasonable
notice for inspection) and keep such property and assets covered by insurance
with reputable and financially sound insurance companies against such hazards
and in such amounts as is customary in the industry, under policies requiring
the insurer to furnish reasonable notice to Bank and opportunity to cure any
non-payment of premiums prior to termination of coverage and naming Bank as loss
payee under a standard lender loss payee endorsement.
5.9. Litigation; Event of Default. Notify Bank in writing immediately of:
(i) the institution of any litigation, the commencement of any administrative
proceedings, the happening of any event or the assertion or threat of any claim,
to the extent that any of the foregoing could reasonably be expected to have a
Material Adverse Effect and (ii) the occurrence of any Event of Default or
Default hereunder.
5.10. Taxes. Pay and discharge all taxes, assessments or other governmental
charges or levies imposed on it or any of its property or assets prior to the
date on which any material penalty for non-payment or late payment is incurred,
unless the same are currently being contested in good faith by appropriate
proceedings, diligently prosecuted and covered by appropriate reserves
maintained in accordance with GAAP.
5.11. Costs and Expenses. Pay or reimburse Bank for all out-of-pocket costs
and expenses (including but not limited to reasonable attorneys' fees and
disbursements) Bank may pay or incur in connection with the preparation and
review of this Agreement and all other documentation related thereto (not to
exceed with respect to attorneys' fees, $50,000), and pay or reimburse Bank for
all costs, liabilities and expenses (including but not limited to reasonable
attorneys' fees and disbursements) associated with all waivers, consents and
amendments in connection therewith, the administration, collection or
enforcement of the Loan, including without limitation any fees and disbursements
incurred in defense of or to retain amounts of principal, interest or fees paid
or in connection with any audit or examination of the Borrowers. All obligations
provided for in this Paragraph 5.11 shall survive any termination of this
Agreement or the Commitment and the repayment of the Loan.
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5.12. Compliance; Notification.
(a) Comply in all material respects with all local, state and federal
laws and regulations applicable to its business (including the Environmental
Control Statutes), including without limitation all laws and regulations of the
Local Authorities, and with the provisions and requirements of all franchises,
permits, certificates of compliance, approval and need issued by regulatory
authorities and with other like grants of authority held by any Borrower; and
notify Bank immediately in detail of any actual or alleged failure to comply
with or perform, breach, violation or default under any such laws or regulations
or under the terms of any of such franchises, licenses or grants of authority,
or of the occurrence or existence of any facts or circumstances which with the
passage of time, the giving of notice or otherwise could create such a breach,
violation or default or could occasion the termination of any of such
franchises, licenses or grants of authority, to the extent that any of the
foregoing could reasonably be expected to have a Material Adverse Effect.
(b) With respect to the Environmental Control Statutes, promptly
notify Bank when, in connection with the conduct of any Borrower's business or
operations, any person (including, without limitation, EPA or any state or local
agency) provides oral or written notification to any Borrower, or any Borrower
otherwise becomes aware, of a condition with regard to an actual or imminently
threatened Release of Hazardous Substances which could reasonably be expected to
have a Material Adverse Effect; and notify Bank in detail promptly upon the
receipt by a Borrower of an assertion of liability under the Environmental
Control Statutes, of any actual or alleged failure to comply with, failure to
perform, breach, violation or default under any such statutes or regulations
which could reasonably be expected to have a Material Adverse Effect or of the
occurrence or existence of any facts, events or circumstances which with the
passage of time, the giving of notice, or both, could create such a failure to
perform, breach, violation or default.
5.13. ERISA. (a) Comply in all material respects with the provisions of
ERISA to the extent applicable to any Plan maintained for the employees of any
Borrower or any ERISA Affiliate; (b) do or cause to be done all such acts and
things that are required to maintain the qualified status of each Plan and tax
exempt status of each trust forming part of such Plan; (c) not incur any
material accumulated funding deficiency (within the meaning of ERISA and the
regulations promulgated thereunder), or any material liability to the PBGC (as
established by ERISA); (d) not permit any event to occur with respect to any
Plan sponsored by any Borrower or any ERISA Affiliate (i) as described in
Section 4042 of ERISA or (ii) which may result in the imposition of a lien on
its properties or assets; and (e) notify Bank in writing promptly after it has
come to the attention of senior management of any Borrower of the written
assertion or threat of any event described in Section 4042 of ERISA (relating to
the soundness of a Plan) (including any "reportable event" described in Section
4042(a)(3) of ERISA to the extent the notice requirement is not waived by the
PBGC) or the PBGC's ability to assert a material
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liability against it or impose a lien on any Borrower's, or any ERISA
Affiliate's properties or assets; and (f) refrain from engaging in any
prohibited transactions or actions causing possible liability under Section 502
of ERISA.
5.14. Fixed Charge Coverage Ratio. Maintain as of the last day of each
fiscal quarter a Fixed Charge Coverage Ratio for dELiA*s and its consolidated
Subsidiaries of not less than 1.40 to 1.00.
5.15. Debt to Cash Flow Ratio. Maintain as of the last day of each fiscal
quarter a Debt to Cash Flow Ratio for dELiA*s and its consolidated Subsidiaries
of not more than 3.00 to 1.00.
5.16. Minimum Tangible Net Worth. Maintain as of the last day of each
fiscal quarter, a Minimum Tangible Net Worth of dELiA*s and its consolidated
Subsidiaries of not less than Thirty Million Dollars ($30,000,000), and for each
fiscal year of Borrowers' ending after January 31, 1999, maintain as of the last
day of each fiscal quarter a Minimum Tangible Net Worth of no less than the
required Minimum Tangible Net Worth for the prior fiscal year plus fifty percent
(50%) of net income for dELiA*s and its consolidated Subsidiaries for the prior
fiscal year, without deduction for losses.
5.17. Borrowing Base. Maintain at all times the outstanding principal
balance of the Loan plus, without duplication, the amount available to be drawn
under all outstanding Letters of Credit and the amount of any unreimbursed draws
for Letter of Credit, in an amount less than or equal to the Borrowing Base.
5.18. Management Changes. Notify Bank in writing within ten (10) Business
Days after the death, disability, dismissal or voluntary resignation of dELiA*s
senior executive officers.
5.19. Transactions Among Affiliates. Cause all transactions between and
among it and its Affiliates, other than transactions among the Borrowers, to be
on an arms-length basis and on such terms and conditions as are customary in the
applicable industry between and among unrelated entities.
5.20. Joinders. If any new Subsidiary is formed or acquired, cause such
Subsidiary to execute a joinder to this Agreement, the Security Agreement, the
Intellectual Property Security Agreement, and a supplement to the or an
additional Pledge Agreement, as applicable, together with updates to the
applicable disclosure exhibits to reflect such Subsidiary (which disclosure
shall be in form and substance satisfactory to Bank) and deliver such other
documents as Bank may reasonably require in connection therewith, including
without limitation UCC-1 financing statements, secretary's certificates and
opinions of counsel.
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5.21. New Locations; Landlord or Mortgagee Waivers. Use reasonable best
efforts to obtain, upon the opening of any new retail location, any landlord or
mortgagee waiver that may be reasonably required by Bank at the time of the
execution of any Lease for such location.
5.22. Further Assurances.
(a) Use reasonable efforts to obtain landlord, warehousemen and
mortgagee consents and waivers executed by the landlord, warehousemen or
mortgagee with respect to each leased, mortgaged or warehouse location at which
inventory or books and records of any Borrower or Subsidiary are located: within
sixty (60) days after the date of this Agreement, consents and waivers with
respect to not less than fifty percent (50%) of the inventory locations, and
within one hundred twenty (120) days after the date of this Agreement, consents
and waivers with respect to not less than eighty percent (80%) of the inventory
locations.
(b) Execute, deliver, file and record such additional documents,
instruments or agreements as Bank shall reasonably require from time to time in
order to perfect, maintain, protect or realize upon the Collateral, including
without limitation additional UCC financing statements, landlord, warehousemen
or mortgagee waivers and consents and any other documentation as may be required
in connection with the establishment by a Borrower of additional inventory
locations.
5.23. Year 2000 Compliance. Take all action necessary to assure that
Borrowers' computer systems and applications, micro-processor based goods and
equipment owned or used by them in their business, and all products sold by them
will be Year 2000 Compliant in a timely manner; and use reasonable best efforts
to assure the Year 2000 Compliance of their material vendors and suppliers or to
assure that failures to be Year 2000 Compliant by such vendors and suppliers
will not have a Material Adverse Effect. Borrowers shall provide to Bank any
material updates or revisions to its plan for Year 2000 Compliance delivered
pursuant to Paragraph 3.21 and notice of any material increase in the estimated
costs to Borrowers of achieving Year 2000 Compliance in accordance with such
plan; and, at the request of Bank, Borrowers shall provide Bank assurances
acceptable to Bank regarding the Year 2000 Compliance and/or contingency plans
related thereto, of Borrowers and their material vendors and suppliers.
5.24. Conduct of Business. Continue to conduct its business(es) principally
in retailing, direct marketing and online services.
5.25. North Carolina Opinion Letter. Provide Bank, within one month of the
date of this Agreement, with an opinion letter from North Carolina counsel to
Borrowers, in form and substance as may be reasonably satisfactory to Bank.
5.26. Amendment of Articles or Certificates of Incorporation. The next time
that the certificate of incorporation of any Borrower that includes a provision
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concerning creditors' rights is amended, amend, as necessary, such certificate
of incorporation so as to remove such provision concerning creditors' rights.
5.27. Other Information. Provide Bank with any other documents
and information, financial or otherwise, reasonably requested by Bank from time
to time.
SECTION 6
NEGATIVE COVENANTS
So long as any Commitment or any Indebtedness of Borrowers to
Bank remains outstanding hereunder, Borrowers covenant and agree that without
Bank's prior written consent, each Borrower will not:
6.1. Indebtedness. Borrow any monies or create any Indebtedness except: (i)
borrowings from Bank hereunder; (ii) Indebtedness of any Borrower for the
purchase of a distribution facility in an aggregate principal amount not
exceeding Eight Million Dollars ($8,000,000); (iii) trade Indebtedness in the
normal and ordinary course of business for value received; (iv) Indebtedness
incurred to purchase or lease fixed or capital assets, provided, that the
aggregate original principal amount of such Indebtedness incurred in any fiscal
year shall not exceed in the aggregate Three Million Dollars ($3,000,000); (v)
guaranties permitted pursuant to Paragraph 6.2 hereof and (vi) indebtedness set
forth on Exhibit C attached hereto provided that the principal amount thereof is
limited to the amount outstanding on the date of this Agreement.
6.2. Guaranties. Guarantee or assume or agree to become liable in any way,
either directly or indirectly, for any Indebtedness or liability of others,
whether or not contingent, except (i) to endorse checks or drafts in the
ordinary course of business and (ii) any Borrower may guaranty Indebtedness of
another Borrower which is permitted pursuant to Paragraph 6.1 hereof.
6.3. Loans. Make any loans or advances to others, other than (i) investments
and advances permitted by Paragraph 6.8 hereof and (ii) loans or advances to
employees of Borrowers not to exceed in the aggregate $250,000.
6.4. Liens and Encumbrances. Create, permit or suffer the creation of any
liens, security interests, or any other encumbrances on (including any
conditional sales arrangement with respect to) any of its property, real or
personal, except (i) the security interests in favor of Bank as security for the
Loan; (ii) liens arising in favor of sellers or lessors for Indebtedness and
obligations incurred to purchase or lease fixed or capital assets permitted
under Paragraph 6.1(iii) hereof, provided, however, that such liens secure only
the indebtedness and obligations created thereunder and are limited to the
assets purchased or leased pursuant thereto and the proceeds thereof; (iii)
liens arising in connection with the distribution facility Indebtedness
permitted pursuant to Paragraph
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6.1(ii) hereof; (iv) mechanic's and workman's liens, liens for taxes,
assessments or other governmental charges, federal, state or local, which are
then being currently contested in good faith by appropriate proceedings and are
covered by appropriate reserves maintained in accordance with GAAP; (v) pledges
or deposits to secure obligations under workmen's compensation, unemployment
insurance or social security laws or similar legislation; (vi) deposits to
secure performance or payment bonds, bids, tenders, contracts, leases,
franchises, or public and statutory obligations required in the ordinary course
of business; (vii) deposits to secure surety, appeal or custom bonds required in
the ordinary course of business; (viii) deposits to secure Leases; (ix) sales on
lay-away or similar arrangements in the ordinary course of business; (x) liens
existing on the date hereof and set forth on Exhibit C attached hereto; (xi)
notwithstanding anything to the contrary contained in any Loan Document, each
Borrower may enter into Leases which create security interests in or liens on
(A) such Borrower's interest in such Leases and (B) such Borrower's personal
property located within the underlying real property in favor of the landlord
and/or mortgagee of such underlying real property so long as such security
interests in and liens on such Borrower's personal property (other than fixtures
and leasehold improvements) are expressly subordinated to the security interests
created by the Loan Documents; (xii) liens constituting encumbrances in the
nature of zoning restrictions, easements, rights of way and rights of access and
rights or restrictions of record on the use of real property, which in the
aggregate are not substantial in amount and which do not, in any case, detract
from the value of such property or impair these thereof in the ordinary conduct
of business and (xiii) judgment or similar liens arising in connection with
court proceedings, provided that the execution or enforcement of such liens is
effectively stayed, the claims secured thereby are not in excess of $1,000,000
and are being actively contested in good faith and by appropriate proceedings
and such reserve or appropriate provision, if any, as shall be required by GAAP
shall have been made therefor.
6.5. Additional Negative Pledge. Agree or covenant with or promise any
person or entity other than Bank that it will not pledge its assets or
properties or otherwise grant any liens, security interests or encumbrances on
its property except (i) in connection with the proposed mortgage on the
distribution facility and (ii) agreements not to pledge Leases.
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6.6. Restricted Payments. Make any Restricted Payments except for repurchase
of dELiA*s common stock in an amount not to exceed: (i) in cost, $10,000,000 in
the aggregate from the date of this Agreement; and (ii) in number, the number of
shares of dELiA*s common stock issued pursuant to the exercise of employee stock
options.
6.7. Transfer of Assets; Liquidation.
(a) Sell, lease, transfer or otherwise dispose of all or any portion
of its assets, real or personal, other than to another Borrower or such
transactions in the normal and ordinary course of business for value received
and other than the sale of assets no longer used or usable in the business of
such Borrower or a Sale of Material Assets with respect to which Borrowers have
complied with Paragraph 2.8(c) hereof, it being understood that Borrowers from
time to time in the normal and ordinary course of business may sell or lease or
otherwise dispose of ("Transfer") bulk quantities of inventory and Transfer
their customer lists and license their intellectual property; or
(b) Discontinue, liquidate, or change in any material respect any
substantial part of its operations or business(es).
6.8. Acquisitions and Investments. Purchase or otherwise acquire (including
without limitation by way of share exchange) any part or amount of the capital
stock, partnership interests, or assets of, or make any investments in, any
other firm or corporation, other than Permitted Investments; or enter into any
new business activities or ventures not reasonably related to its present
business; or merge or consolidate with or into any other firm or corporation
which is not a Borrower; or create any Subsidiary; provided, however that in the
absence of a Default or an Event of Default at such time and if such transaction
will not give rise to a Default or an Event of Default, Borrowers may (A) create
additional Subsidiaries provided that (i) all of the outstanding capital stock
of such Subsidiary is owned by a Borrower or wholly-owned Subsidiary, (ii)
Borrowers provide to Bank, with a copy to its counsel, not less than thirty (30)
days prior written notice of the proposed Subsidiary creation, indicating the
purpose thereof and any supplemental disclosure that will be required pursuant
to the representations and warranties set forth herein, (iii) Borrowers comply
with the terms and conditions of Paragraph 5.20 hereof, and (iv) taking into
account any supplement or amendment to Exhibit C hereto which is acceptable to
Bank, all of the representations and warranties set forth herein are true and
correct in all material respects prior to and following the acquisition or
creation of such Subsidiary and (B) upon ten (10) Business Days prior written
notice to Bank, make acquisitions of the stock or assets of any entity the
business of which is engaged in a business directly related to a business of
Borrowers as set forth in Paragraph 5.24 hereof and which acquisitions, either
singly or in the aggregate after the date hereof, involve total consideration
(including contingent payments, and cash and non-cash consideration) of not more
than Ten Million Dollars ($10,000,000).
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6.9. Payments to Affiliates. Pay any salaries, compensation, management
fees, consulting fees, service fees, licensing fees, or other similar payments
to Affiliates of any Borrower (except other Borrowers) other than on terms and
conditions substantially as favorable to the Borrowers as would be obtainable by
it in a comparable arm's length transaction with a person other than an
Affiliate.
6.10. Use of Proceeds. Except as permitted by Paragraph 6.6 hereof, use any
of the proceeds of the Loan, directly or indirectly, to purchase or carry margin
securities within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System; or engage as its principal business in the extension of
credit for purchasing or carrying such securities.
6.11. Maximum Capital Expenditures. Make Capital Expenditures in any fiscal
year in excess of the amount set forth opposite such year in the table below:
<TABLE>
<CAPTION>
Year Maximum Capital Expenditures
<S> <C>
1999 $20,000,000
2000 $20,000,000
2001 $20,000,000
</TABLE>
Amounts not expended in any fiscal year may be expended in the
following fiscal year.
6.12. Use of Creditors' Rights Provision Articles or Certificates of
Incorporation. Employ, in connection with any Borrower's Indebtedness to Bank,
any provision in any Borrower's articles or certificate of incorporation
concerning creditors' rights. The parties hereto agree that money damages would
be an inadequate remedy for any breach of this covenant. Therefore, in the event
of a breach or threatened breach of this covenant, Bank or its successors or
assigns may, in addition to other rights and remedies existing in its favor,
apply to any court of competent jurisdiction for specific performance and/or
injunctive or other equitable relief in order to enforce, or prevent any
violations of, the provisions of this Paragraph 6.12.
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SECTION 7
ADDITIONAL COLLATERAL AND RIGHT OF SET-OFF
7.1. Additional Collateral. As additional collateral for the payment of any
and all of Borrowers' Indebtedness and obligations to Bank, whether matured or
unmatured, now existing or hereafter incurred or created hereunder or otherwise,
Borrowers hereby grant to Bank a security interest in and lien upon all funds,
balances or other property of any kind of the Borrowers, or in which the
Borrowers have an interest, limited to the interest of the Borrowers therein,
whether now or hereafter in the possession, custody or control of Bank.
7.2. Right of Set-off. Bank is hereby authorized at any time and from time
to time, to set-off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other Indebtedness at any
time owing by Bank to or for the credit or the account of a Borrower against any
and all of the obligations of a Borrower now or hereafter existing under this
Agreement, the Note or any other Loan Document, irrespective of whether Bank
shall have made any demand under this Agreement, or the Note or such other Loan
Document and although such obligations may be unmatured and irrespective of
whether Bank is otherwise fully secured. Bank agrees promptly to notify the
applicable Borrower after any such set-off and application made by Bank;
provided, however, that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of Bank under this Section
7 are in addition to
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other rights and remedies (including, without limitation, other rights of
set-off) which Bank may have.
SECTION 8
DEFAULT
8.1. Events of Default. Each of the following events shall be an Event of
Default hereunder:
(a) If Borrowers shall fail to pay when due any installment of
principal or any interest, fees, costs, expenses or any other sum payable to
Bank hereunder; or
(b) If any representation or warranty made herein or in any other Loan
Document or in connection herewith or therewith or in any statement, certificate
or other document furnished hereunder or thereunder is false or misleading in
any material respect when made; or
(c) If any Borrower shall default (after expiration of any applicable
cure or grace periods) in the payment or performance of any Indebtedness for
borrowed money to another either singly or in the aggregate in excess of One
Million Dollars ($1,000,000) whether now or hereafter incurred, or shall default
(after expiration of any applicable cure or grace periods) in the payment or
performance of any other Indebtedness or obligation which is reasonably likely
to result in an obligation in excess of One Million Dollars ($1,000,000); or
(d) If there shall be a default in or failure to observe the covenants
set forth in Paragraphs 5.14 through 5.17 hereof or in Section 6 hereof; or
(e) If any Borrower shall default in the performance of any other
agreement or covenant contained herein or in any other Loan Document (other than
as provided in subparagraphs (a), (b) or (d) above) or in any document executed
or delivered in connection herewith or therewith, including without limitation
any Collateral Security Document, and such default shall continue uncured for
twenty (20) days after notice thereof to Borrowers given by Bank; or
(f) If a Change of Control shall occur; or
(g) If dELiA*s ceases to own, directly or indirectly, 100% of the
outstanding capital stock of each other Borrower or in the case of Storybook
Inc., seventy-nine percent (79%); or
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(h) If custody or control of any substantial part of the property of
any Borrower shall be assumed by any governmental agency or any court of
competent jurisdiction at the instance of any governmental agency; if any
license, franchise or agreement of a Borrower shall be suspended, revoked, not
renewed or otherwise terminated, the loss of which would reasonably be expected
to have a Material Adverse Effect; or if any governmental regulatory authority
or judicial body shall make any other final non-appealable determination the
effect of which would have Material Adverse Effect; or
(i) If any Borrower becomes insolvent, bankrupt or generally fails to
pay its debts as such debts become due; is adjudicated insolvent or bankrupt;
admits in writing its inability to pay its debts; or shall suffer a custodian,
receiver or trustee for it or substantially all of its property to be appointed
and if appointed without its consent, not be discharged within sixty (60) days;
makes a general assignment for the benefit of creditors; or suffers proceedings
under any law related to bankruptcy, insolvency, liquidation or the
reorganization, readjustment or the release of debtors to be instituted against
it and if contested by it not dismissed or stayed within sixty (60) days; if
proceedings under any law related to bankruptcy, insolvency, liquidation, or the
reorganization, readjustment or the release of debtors is instituted or
commenced by any Borrower; if any order for relief is entered relating to any of
the foregoing proceedings; if any Borrower shall call a meeting of its creditors
with a view to arranging a composition or adjustment of its debts; or if any
Borrower shall by any act or failure to act indicate its consent to, approval of
or acquiescence in any of the foregoing; or
(j) any event or condition shall occur or exist with respect to any
activity or substance regulated under the Environmental Control Statutes and as
a result of such event or condition, Borrowers have incurred or in the opinion
of Borrowers are reasonably likely to incur liabilities in the aggregate in
excess of One Million Dollars ($1,000,000); or
(k) if any judgment, writ, warrant or attachment or execution or
similar process which calls for payment or presents liability in excess of One
Million Dollars ($1,000,000) shall be rendered, issued or levied against any
Borrower or its respective property and such process shall not be paid, waived,
stayed, vacated, discharged, settled, satisfied or fully bonded within sixty
(60) days after its issuance or levy unless such judgment is covered by
insurance and the insurer has acknowledged coverage in writing with respect
thereto.
8.2. Remedies. Upon the happening of any Event of Default and at any time
thereafter, and by notice by Bank to Borrowers (except if an Event of Default
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described in Paragraph 8.1(i) shall occur with respect to any Borrower, in which
case acceleration of the Loan and termination of the Commitment shall occur
automatically without notice), Bank may (i) terminate the Commitment, and (ii)
declare the entire unpaid balance, principal, interest, fees, and other amounts
of all indebtedness of Borrowers to Bank, hereunder or otherwise, to be
immediately due and payable. Upon such declaration, Bank shall have the
immediate right to enforce or realize on any Collateral granted therefor in any
manner or order it deems expedient without regard to any equitable principles of
marshaling or otherwise. In addition to any rights granted hereunder or in any
of the Loan Documents delivered in connection herewith, Bank shall have all the
rights and remedies granted by any applicable law, all of which shall be
cumulative in nature.
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SECTION 9
MISCELLANEOUS
9.1. Indemnification and Release Provisions. Borrowers hereby agree to
defend Bank and its directors, officers, agents, employees and counsel from, and
hold each of them harmless against, any and all losses, liabilities (including
without limitation settlement costs and amounts, transfer taxes, documentary
taxes, or assessments or charges made by any governmental authority), claims,
damages, interest judgments, costs, or expenses, including without limitation
reasonable fees and disbursements of counsel, incurred by any of them arising
out of claims by any third party relating to or in connection with or by reason
of this Agreement, the Collateral Security Documents or any other Loan Document,
the Commitment, the issuance or negotiation of any Letters of Credit, the making
of the Loan or any Collateral therefor, other than those resulting primarily
from any such party's own wilful misconduct or gross negligence, including
without limitation, any and all losses, liabilities, claims, damages, interests,
judgments, costs or expenses relating to or arising under any Environmental
Control Statute or the application of any such Statute to any of the Borrowers'
properties or assets. Borrowers hereby release Bank and its directors, officers,
agents, employees and counsel from any and all claims for loss, damages, costs
or expenses caused or alleged to be caused by any act or omission on the part of
any of them other than those resulting primarily from any such party's own
wilful misconduct or gross negligence. All obligations provided for in this
Paragraph 9.1 shall survive any termination of this Agreement or the Commitment
and the repayment of the Loan.
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9.2. Participations and Assignments. Borrowers hereby acknowledge and agree
that Bank may at any time: (a) grant participations in all or any portion the
Commitment or the Loan or the Note or of its right, title and interest therein
or in or to this Agreement (collectively, "Participations") to any other lending
office or to any other bank, lending institution or other entity which has the
requisite sophistication to evaluate the merits and risks of investments in
Participations ("Participants"); provided, however, that: (i) all amounts
payable by Borrowers hereunder shall be determined as if Bank had not granted
such Participation; and (ii) any agreement pursuant to which Bank may grant a
Participation: (x) shall provide that Bank shall retain the sole right and
responsibility to enforce the obligations of Borrowers hereunder including,
without limitation, the right to approve any amendment, modification or waiver
of any provisions of this Agreement; (y) such participation agreement may
provide that Bank will not agree to any modification, amendment or waiver of
this Agreement without the consent of the Participant if such modification,
amendment or waiver would reduce the principal of or rate of interest on the
Loan or postpone the date fixed for any payment of principal of or interest on
the Loan; and (z) shall not relieve Bank from its obligations, which shall
remain absolute, to make Advances hereunder; and (b) assign all or any portion
of its rights under the Loan, including an assignment to a Federal Reserve Bank.
Borrowers may not assign or transfer their rights or obligations hereunder to
any other party, including by operation of law, without the express written
consent of Bank.
9.3. Binding and Governing Law. This Agreement and all documents executed
hereunder shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns and, except as may be
required by mandatory provisions of applicable law, shall be governed as to
their validity, interpretation and effect by the laws of the Commonwealth of
Pennsylvania without reference to conflict of laws principles.
9.4. Survival. All agreements, representations, warranties and covenants of
Borrowers contained herein or in any documentation required hereunder shall
survive the execution of this Agreement and the making of the Loan hereunder,
and except for Paragraphs 5.11 and 9.1 which provide otherwise, will continue in
full force and effect as long as the Commitment or any Letter of Credit remains
in effect or any Indebtedness or other obligation of Borrowers to Bank remains
outstanding.
9.5. No Waiver; Delay. If Bank shall waive any power, right or remedy
arising hereunder or under any applicable law, such waiver shall not be deemed
to be a waiver upon the later occurrence or recurrence of any of said events
with respect to Bank. No delay by Bank in the exercise of any power, right or
remedy shall, under any circumstances, constitute or be deemed to be a waiver,
express or implied, of the same and no course of dealing between the parties
hereto shall constitute a waiver of Bank's powers, rights or remedies. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
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9.6. Modification; Waiver. Except as otherwise provided in this Agreement,
no modification or amendment hereof, or waiver or consent hereunder, shall be
effective unless made in a writing signed by appropriate officers of the parties
hereto.
9.7. Headings. The various headings in this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.
9.8. Notices. Any notice, request or consent required hereunder or in
connection herewith shall be deemed satisfactorily given when received if in
writing and delivered by hand, mailed (registered or certified mail) or sent by
facsimile transmission (with confirmation of transmission) to Bank or to any
Borrower at the respective addresses or telecopier numbers set forth below, or
to any party at such other addresses or telecopier numbers as may be given by
any party to the others in writing:
If to any Borrower:
dELiA*s Inc.
435 Hudson Street
New York, NY 10014
Attention: Evan Guillemin, Chief Financial Officer
Telecopier: (212) 627-8350
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036-8299
Attention: Jeffrey A. Horwitz, Esquire
Telecopier: (212) 969-2900
if to Bank:
First Union National Bank
1339 Chestnut Street
PA 4819
Philadelphia, PA 19107-7618
Attention: Jack Ginter
Telecopier: (215) 973-7671
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with a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
Philadelphia, PA 19103
Attention: Lisa D. Kabnick, Esq.
Telecopier: (215) 981-4750
Failure to provide a copy of any notice or other communication to counsel as
provided above shall not affect the validity or effect of such notice or other
communication.
9.9. Payment on Non-Business Days. Whenever any payment to be made hereunder
shall be stated to be due on a day other than a Business Day, such payment may
be made on the next succeeding Business Day, provided however that such
extension of time shall be included in the computation of interest due in
conjunction with such payment or other fees due hereunder, as the case may be.
9.10. Time of Day. All time of day restrictions imposed herein shall be
calculated using Bank's local time.
9.10. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
9.11. Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document, and each such counterpart shall be deemed to be an
original.
9.12. Consent to Jurisdiction and Service of Process. Each Borrower
irrevocably appoints each officer of dELiA*s as its attorney upon whom may be
served any notice, process or pleading in any action or proceeding against it
arising out of or in connection with this Agreement, the Note, any other Loan
Document, any Letter of Credit or any of the Collateral; each Borrower hereby
consents that any action or proceeding against it be commenced and maintained in
any court within the Commonwealth of Pennsylvania or in the United States
District Court for the Eastern District of Pennsylvania by service of process on
any officer of dELiA*s; and each Borrower agrees that the courts of the
Commonwealth of Pennsylvania and the United States District Court for the
Eastern District of Pennsylvania shall have jurisdiction with respect to the
subject matter hereof and the person of each Borrower and the Collateral.
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Notwithstanding the foregoing, Bank, in its absolute discretion, may also
initiate proceedings in the courts of any other jurisdiction in which any
Borrower may be found or in which any of its properties or Collateral may be
located.
9.14. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY KNOWINGLY,
VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR THE NOTE, OR ANY OTHER LOAN DOCUMENT OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR
ACTIONS OF BANK. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BANK'S ENTERING
INTO THIS AGREEMENT.
9.15. ACKNOWLEDGMENTS. EACH BORROWER ACKNOWLEDGES THAT IT HAS HAD THE
ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS AGREEMENT AND,
SPECIFICALLY, PARAGRAPH 9.14 HEREOF, AND FURTHER ACKNOWLEDGES THAT THE MEANING
AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAVE BEEN FULLY EXPLAINED TO
SUCH BORROWER BY SUCH COUNSEL.
IN WITNESS WHEREOF, the undersigned, by their duly authorized
officers, as applicable, have executed this Agreement the day and year first
above written.
dELiA*s INC.
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
dELiA*s DISTRIBUTION COMPANY
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
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[EXECUTIONS CONTINUED]
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dELiA*s FOREIGN SALES CORPORATION
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
dELiA*s INTERACTIVE COMPANY
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
dELiA*s OPERATING COMPANY
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
dELiA*s PROPERTIES INC.
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
dELiA*s RETAIL COMPANY
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
-56-
<PAGE>
[EXECUTIONS CONTINUED]
-57-
<PAGE>
SCREEEM! INC.
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
STORYBOOK INC.
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
TSI SOCCER CORPORATION
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
TSI RETAIL COMPANY
By: /s/ Alex Navarro
------------------------------------
Name: Alex Navarro
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By: /s/ Irene Marks
------------------------------------
Name: Irene Marks
Title:
-58-
<PAGE>
Schedule 1
Borrowers
dELiA*s Inc.
dELiA*s Distribution Company
dELiA*s Foreign Sales Corporation
dELiA*s Interactive Company
dELiA*s Operating Company
dELiA*s Properties Inc.
dELiA*s Retail Company
Screeem! Inc.
Storybook Inc.
TSI Soccer Corporation
TSI Retail Company
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,454
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 32,606
<CURRENT-ASSETS> 47,898
<PP&E> 13,247
<DEPRECIATION> 2,187
<TOTAL-ASSETS> 84,163
<CURRENT-LIABILITIES> 24,132
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 59,823
<TOTAL-LIABILITY-AND-EQUITY> 84,163
<SALES> 98,466
<TOTAL-REVENUES> 98,466
<CGS> 47,914
<TOTAL-COSTS> 47,914
<OTHER-EXPENSES> 47,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,037
<INCOME-TAX> 1,433
<INCOME-CONTINUING> 2,604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,604
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
