<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14, 1999
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT
-------------------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999
Commission file number 0-21869
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 1, 1999: 14,906,472
----------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING, WITHOUT LIMITATION,
INFORMATION APPEARING UNDER "PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY BE
FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF SECTION 27A OF THE AMENDED
SECURITIES ACT OF 1933 AND SECTION 21E OF THE AMENDED SECURITIES EXCHANGE ACT OF
1934). WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVE," "PLAN," "INTEND,"
"EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS REPORT.
THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THE FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
GENERAL ECONOMIC CONDITIONS; CHANGES IN CONSUMER SPENDING PATTERNS; INCREASES IN
THE COST OF MATERIALS, PRINTING, PAPER, POSTAGE, SHIPPING AND LABOR; TIMING OF
CATALOG MAILINGS; CUSTOMER RESPONSE RATES; OPPORTUNITIES TO EXPAND AND THE
ABILITY TO INCREASE COMPARABLE STORE SALES; LEVELS OF COMPETITION; DIFFICULTIES
IN INTEGRATING ACQUISITIONS; THE ABILITY TO LOCATE AND OBTAIN ACCEPTABLE STORE
SITES AND LEASE TERMS OR RENEW EXISTING LEASES; THE ABILITY TO OBTAIN ADDITIONAL
CAPITAL TO FUND THE BUILD-OUT OF NEW STORES; ACCEPTANCE OF NEW RETAIL CONCEPTS;
ADVERSE WEATHER CONDITIONS, CHANGES IN WEATHER PATTERNS AND OTHER FACTORS
AFFECTING RETAIL STORES; AND OTHER FACTORS OUTSIDE OUR CONTROL. THESE FACTORS,
AND OTHER FACTORS THAT APPEAR IN THIS REPORT OR IN OUR OTHER SECURITIES AND
EXCHANGE COMMISSION FILINGS, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED JANUARY 31, 1999, COULD AFFECT OUR ACTUAL RESULTS AND COULD CAUSE OUR
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY US OR ON OUR BEHALF.
ALL REFERENCES IN THIS REPORT TO A FISCAL YEAR PRIOR TO FISCAL 1999 REFER
TO THE YEAR ENDED JANUARY 31 FOLLOWING THE PARTICULAR CALENDAR YEAR (E.G.,
"FISCAL 1998" REFERS TO THE YEAR ENDING JANUARY 31, 1999). EFFECTIVE FEBRUARY 1,
1999, WE CHANGED OUR FISCAL YEAR TO END ON THE SATURDAY CLOSEST TO JANUARY 31
(E.G., "FISCAL 1999" REFERS TO THE FIFTY-TWO WEEKS ENDING JANUARY 29, 2000).
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31, 1999 OCTOBER 30, 1999
---------------- ----------------
* (UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ....................................................... $ 10,981 $ 22,018
Short-term investments .......................................................... -- 48,482
Merchandise inventories ......................................................... 21,232 39,310
Prepaid expenses and other current assets ....................................... 11,352 26,195
--------- ---------
Total current assets ........................................................ 43,565 136,005
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$3,191 at January 31, 1999 and $5,219 at October 30, 1999 ....................... 12,542 32,627
DEFERRED TAX ASSETS .................................................................. -- 9,682
INTANGIBLE ASSETS .................................................................... 25,308 24,516
OTHER ASSETS ......................................................................... 729 241
--------- ---------
TOTAL ASSETS ....................................................................... $ 82,144 $ 203,071
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................................ $ 10,185 $ 27,433
Accrued expenses and other current liabilities .................................. 7,706 6,088
Current portion of long-term debt and capital lease obligations ................. 194 9,550
Accrued restructuring ........................................................... -- 2,662
--------- ---------
Total current liabilities ................................................... 18,085 45,733
DEFERRED TAX LIABILITY ............................................................... -- 28,991
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES .................................. -- 6,970
OTHER LONG-TERM LIABILITIES .......................................................... 452 635
MINORITY INTEREST .................................................................... -- 36,932
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; Authorized - 1,000,000 shares;
Issued and outstanding - none ............................................... -- --
Common stock, par value $.01 per share; Authorized - 50,000,000 shares;
Issued and outstanding - 14,185,425 and 14,895,972 shares at
January 31, 1999 and October 30, 1999, respectively ......................... 142 149
Additional paid-in capital ...................................................... 54,133 79,292
Retained earnings ............................................................... 9,332 22,103
Common stock in treasury - 551,046 shares at October 30, 1999 ................... -- (17,734)
--------- ---------
Total stockholders' equity .................................................. 63,607 83,810
--------- ---------
3
<PAGE>
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................... $ 82,144 $ 203,071
--------- ---------
--------- ---------
</TABLE>
* Condensed from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
NET SALES ................................... $ 40,821 $ 48,085
COST OF SALES ............................... 19,979 25,776
-------- --------
GROSS PROFIT ................................ 20,842 22,309
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 19,691 32,395
INTEREST AND OTHER INCOME, NET .............. (126) (703)
MINORITY INTEREST ........................... -- (2,125)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES ........... 1,277 (7,258)
PROVISION (BENEFIT) FOR INCOME TAXES ........ 530 (1,257)
-------- --------
NET INCOME (LOSS) ........................... $ 747 $ (6,001)
-------- --------
-------- --------
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ 0.05 $ (0.42)
-------- --------
-------- --------
SHARES USED IN THE CALCULATION OF BASIC
NET INCOME (LOSS) PER SHARE ............ 14,139 14,342
-------- --------
-------- --------
SHARES USED IN THE CALCULATION OF DILUTED
NET INCOME (LOSS) PER SHARE ............ 14,735 14,342
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS THIRTY-NINE WEEKS
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999
-----------------------------------
(UNAUDITED)
<S> <C> <C>
NET SALES .................................. $ 98,466 $123,272
COST OF SALES .............................. 47,914 69,249
-------- --------
GROSS PROFIT ............................... 50,552 54,023
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 47,282 80,053
RESTRUCTURING CHARGE (NOTE 4) .............. -- 22,907
GAIN ON SUBSIDIARY INITIAL PUBLIC OFFERING . -- (70,091)
INTEREST AND OTHER INCOME, NET ............. (767) (1,870)
MINORITY INTEREST .......................... -- (2,610)
-------- --------
INCOME BEFORE INCOME TAXES ................. 4,037 25,634
PROVISION FOR INCOME TAXES ................. 1,433 12,863
-------- --------
NET INCOME ................................. $ 2,604 $ 12,771
-------- --------
-------- --------
BASIC NET INCOME PER SHARE ................. $ 0.19 $ 0.89
-------- --------
-------- --------
DILUTED NET INCOME PER SHARE ............... $ 0.19 $ 0.82
-------- --------
-------- --------
SHARES USED IN THE CALCULATION OF BASIC
NET INCOME PER SHARE .................. 13,653 14,301
-------- --------
-------- --------
5
<PAGE>
SHARES USED IN THE CALCULATION OF DILUTED
NET INCOME PER SHARE .................. 13,990 15,494
-------- --------
-------- --------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
6
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THIRTY-NINE WEEKS
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income .................................................................. $ 2,604 $ 12,771
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization ............................................. 1,631 2,950
Gain on subsidiary initial public offering ................................ -- (70,091)
Restructuring charge (see Note 4) ......................................... -- 23,407
Deferred taxes ............................................................ -- 19,309
Minority interest ......................................................... -- (2,610)
Amortization of premiums and discounts on investments, net ................ 160 (318)
Compensation expense related to issuance of restricted stock and
stock appreciation rights .............................................. 44 --
Changes in operating assets and liabilities:
Merchandise inventories ............................................ (18,262) (18,578)
Prepaid expenses and other current assets .......................... (6,677) (14,954)
Other assets ....................................................... 165 1,718
Current liabilities ................................................ 2,139 15,343
Deferred credits ................................................... (310) 183
--------- ---------
Net cash used in operating activities ....................................... (18,506) (30,870)
--------- ---------
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ............................. (15,187) (444)
Capital expenditures ........................................................ (4,180) (24,571)
Purchases of held-to-maturity investment securities ......................... -- (65,158)
Proceeds from the maturity of held-to-maturity investment securities ........ 30,024 16,994
Purchases of available-for-sale investment securities ....................... (46,513) --
Proceeds from the sale of available-for-sale investment securities .......... 53,404 --
--------- ---------
Net cash provided by (used in) investing activities .............................. 17,548 (73,179)
--------- ---------
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of subsidiary common stock ....................... -- 97,639
Proceeds from long-term debt and capital leases ............................. -- 16,585
Exercise of 7,375 and 193,285 stock options, respectively ................... 82 1,121
Principal payments of long-term debt and capital lease obligations .......... (155) (259)
--------- ---------
Net cash provided by (used in) financing activities .............................. (73) 115,086
--------- ---------
--------- ---------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ................................... (1,031) 11,037
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD ..................................... 4,485 10,981
--------- ---------
CASH & CASH EQUIVALENTS--END OF PERIOD ........................................... $ 3,454 $ 22,018
--------- ---------
--------- ---------
7
</TABLE>
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
- - Issuance of 812,501 shares of common stock in connection with the July
1998 Screeem! acquisition.
- - Cancellation in June 1999 of 33,784 shares of common stock originally
issued in the Screeem! acquisition.
- - Issuance in September 1999 of 1,586,996 shares of iTurf common stock in
connection with the Taponline acquisition. (Note 5)
See Notes to Unaudited Condensed Consolidated Financial Statements
8
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
dELiA*s Inc., through our catalogs, retail stores and Web sites, is a
leading marketer of casual apparel, accessories, soccer merchandise and home
furnishings to young men and young women between the ages of 10 and 24, an age
group known as "Generation Y."
We are subject to seasonal fluctuations in our merchandise sales and
results of operations. We expect our net sales generally to be higher in the
second half of each fiscal year than in the first half of the same fiscal year.
On April 14, 1999, we completed an initial public offering of
approximately 4.8 million shares of class A common stock of iTurf Inc., our
Internet-focused subsidiary. iTurf used $17.7 million of the total $97.4 million
in net offering proceeds to purchase 551,046 shares of our common stock from us,
which shares have been treated as treasury stock in consolidation. As a result
of the offering, we recognized a pre-tax gain of approximately $70 million. On
September 1, 1999, iTurf issued 1,586,996 new shares of its Class A common stock
in connection with its acquisition of [email protected], Inc. See Note 5,
"Acquisition", for a description of the Taponline transaction. As of October 30,
1999, we owned 92% of the vote and 66% of the value of iTurf. Subsequent to the
end of the quarter, our interest in iTurf was reduced as a result of
transactions described in Note 7.
Effective February 1, 1999, we changed our fiscal year from the year ending
January 31 to the 52 weeks ending on the Saturday closest to January 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION--The condensed consolidated financial
statements include the accounts of dELiA*s Inc. and subsidiaries, all of which,
except iTurf, are wholly owned. The accounts of iTurf are included in the
consolidated financial statements while the outside ownership of iTurf is
reflected as minority interest on the balance sheet and income statement. All
significant intercompany balances and transactions have been eliminated in
consolidation.
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 our January 31, 1999 audited consolidated financial statements and the
notes thereto, which are included in our annual report on Form 10-K for the year
ended January 31, 1999, 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.
9
<PAGE>
3. SEGMENT INFORMATION
dELiA*s determines operating segments in accordance with Statement of
Financial Accounting Standards No. 131. Our reportable segments are generally
defined by their method of distribution; different segments may offer similar
products to similar customers, but are managed separately because of their
distribution methods. Commencing in fiscal 1999, dELiA*s has three reportable
segments: catalog, retail and iTurf. Each of these segments earns revenues
primarily from the sale of apparel, accessories and soccer equipment to
consumers. The catalog segment takes phone and mail orders from our customers
and mails merchandise directly to those customers. Our retail stores display
merchandise in mall and strip mall stores and sell directly to customers who
visit those locations. iTurf sells merchandise through our various Web sites and
also recognizes advertising, subscription and licensing revenues. Sales outside
of the United States are insignificant.
The Company evaluates performance and allocates resources primarily based
on profit and loss after expense allocations for shared resources but before
unusual items, income taxes, interest and other income and minority interest.
There are no material differences between accounting policies used by the
reportable segments in preparation of this information and those described in
the summary of significant accounting policies in this report and in our annual
report on Form 10-K for the year ended January 31, 1999.
In connection with the iTurf initial public offering in April 1999, dELiA*s
and iTurf entered into intercompany agreements that govern the transactions
between iTurf and the other segments. Intercompany profit or loss generated by
such agreements is eliminated in consolidation. For transactions between the
other segments, and for transactions involving iTurf prior to its initial public
offering, inter-segment product sales are recorded at cost and shared costs are
allocated on a basis believed by management to be reasonable.
The segment disclosure for fiscal 1998 has been restated to reflect the
operating segments as defined for fiscal 1999.
<TABLE>
<CAPTION>
(in thousands)
THREE MONTHS ENDED OCTOBER 31, 1998 Catalog Retail iTurf Total
------- ------ ----- -----
<S> <C> <C> <C> <C>
Revenues from external customers $ 24,419 $ 15,338 $ 1,064 $ 40,821
Operating profit (loss) (179) 1,139 191 1,151
THIRTEEN WEEKS ENDED OCTOBER 30, 1999 Catalog Retail iTurf Total
------- ------ ----- -----
Revenues from external customers $ 25,147 $ 17,637 $ 5,301 $ 48,085
Operating loss (1,631) (1,136) (7,319) (10,086)
NINE MONTHS ENDED OCTOBER 31, 1998 Catalog Retail iTurf Total
------- ------ ----- -----
Revenues from external customers $ 73,388 $ 23,185 $ 1,893 $ 98,466
Operating profit 1,949 1,229 92 3,270
Property & equipment, net 6,701 4,090 269 11,060
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 Catalog Retail iTurf Total
------- ------ ----- -----
Revenues from external customers $ 74,911 $ 37,493 $ 10,868 $ 123,272
Operating loss (7,785) (7,205) (10,540) (25,530)
Property & equipment, net 16,237 13,323 3,067 32,627
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS NINE MONTHS THIRTY-NINE WEEKS
ENDED ENDED ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- ---------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C> <C>
Operating profit (loss) for reportable segments $ 1,151 $(10,086) $ 3,270 $(25,530)
Restructuring charges (Note 4) ................ -- -- -- (23,407)
Gain on subsidiary initial public offering .... -- -- -- 70,091
Interest and other income, net ................ 126 703 767 1,870
Minority interest ............................. -- 2,125 -- 2,610
-------- -------- -------- --------
Total income (loss) before taxes .............. $ 1,277 $ (7,258) $ 4,037 $ 25,634
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- ----------------
(in thousands)
<S> <C> <C>
Property and equipment for reportable segments $ 11,060 $ 32,627
Other assets 73,103 170,444
----------- -----------
Total consolidated assets $ 84,163 $ 203,071
----------- -----------
----------- -----------
</TABLE>
4. RESTRUCTURING CHARGE
During the first quarter of fiscal 1999, we recorded a charge of
approximately $23.4 million in connection with our restructuring plan to exit
our Screeem! and Jean Country retail operations. The charge is comprised of the
following:
- - $18.0 million for the write-off of the remaining unamortized balance of
goodwill and other intangibles relating to our acquisition of the
Screeem! and Jean Country retail operations;
- - $4.2 million for the shut-down or conversion of certain retail stores
to the dELiA*s retail concept with the related adjustment for assets
that will no longer be used;
- - $700,000 for the elimination of jobs at the Screeem! corporate office
and the store locations to be closed, resulting in employee severance
costs; and
- - $500,000 million for the liquidation of inventory carried at stores to
be converted or closed (reflected in cost of sales).
The total charge of $23.4 million includes $22.9 million that is included
in operating expenses as a restructuring charge and $500,000 included as cost of
sales. In addition, as part of our acquisition of the Screeem! and Jean Country
retail operations, we agreed that if the mean of the intraday high and low bid
prices for the Company's common stock for the 20 consecutive trading days
immediately preceding January 10, 2000 (the "18-Month Price") is less than
$18.00, we will issue to the sellers that number of additional shares of dELiA*s
common stock that is equal to (i) the excess of (x) the product of 174,550
shares multiplied by $18.00 over (y) the product of 174,550 shares multiplied by
the greater of the 18-Month Price or $10.00 divided by (ii) the 18-Month Price.
If we are required to issue additional shares, the value of those shares will
result in a charge to earnings in the fourth quarter of fiscal 1999.
During the second and third quarters, we did not make any significant
changes in our estimate of the above restructuring charge, nor did we incur any
of the estimated store shut-down/ conversion or job elimination expenses. We
expect such costs to be incurred primarily in the fourth quarter of fiscal 1999
and first quarter of fiscal 2000. As our plans progress, we anticipate that we
may need to record additional losses on inventory liquidation and other
restructuring-related costs, as well as store operating losses during the
transition period.
11
<PAGE>
5. ACQUISITION
On September 1, 1999, iTurf acquired [email protected], Inc. pursuant to an
Agreement and Plan of Merger dated August 10, 1999. As a result of the
transaction, Taponline became a wholly owned subsidiary of iTurf. The aggregate
consideration paid consisted of 1,586,996 newly issued shares of iTurf Class A
common stock. The transaction, which was structured as a tax-free
reorganization, was accounted for under the purchase method of accounting. On
November 17, 1999, we announced our intention to spin off our iTurf interest to
our shareholders. Accordingly, no gain was recognized in connection with
issuance of iTurf common stock for the Taponline transaction and no gain will be
recognized on the future issuance of shares of iTurf common stock by iTurf.
6. COMMITMENTS AND CONTINGENCIES
In May 1999, iTurf entered into a strategic marketing alliance with America
Online, Inc. Over the two-year term of the agreement, iTurf has agreed to pay
America Online a total of approximately $8,100,000.
In June 1999, two separate purported class action complaints were filed
against dELiA*s, certain of our officers and directors, and a former officer of
one of our subsidiaries, alleging violations of the federal securities laws. The
class periods run from May 21, 1998 through June 17, 1998 and January 20, 1998
through September 10, 1998, respectively. On August 3, 1999, the plaintiffs in
both suits filed a motion to consolidate the suits. We intend to vigorously
defend against the allegations. Based upon information presently known to
management, we do not believe that the ultimate resolution of these lawsuits
will have a material adverse effect on our financial condition, results of
operations or cash flows.
In August 1999, iTurf entered into a strategic marketing alliance with
Microsoft Corporation under which we have agreed to pay Microsoft a total of at
least $4.6 million over the one-year term of the agreement.
On August 6, 1999, we purchased for $6.2 million an approximately 415,000
square foot distribution facility in Hanover, Pennsylvania, of which we
previously leased approximately 360,000 square feet. We borrowed $5.3 million
from Allfirst Bank in the form of a mortgage loan on the property to pay for
$4.9 million of the purchase price and $400,000 of planned capital improvements.
We are subject to certain covenants under the loan agreement, including a
covenant to maintain a fixed charge coverage ratio. On August 10, 1999 we
entered into an interest-rate swap agreement with Allfirst Bank under which we
effectively converted the LIBOR-based variable interest rate mortgage to a fixed
rate loan with an interest rate of approximately 8.78%.
In connection with the acquisition of the distribution facility, we hired
an environmental consultant to perform an assessment of the facility. As a
result of that assessment, the seller of the property performed certain soil
remediation and created a groundwater remediation plan, each relating to the
presence of underground fuel oil, waste oil and gasoline tanks located on the
property and subsequently removed by the seller. The Pennsylvania Department of
Environmental Protection has released the seller from liability with respect to
soil contamination and has approved the ground water remediation plan. The
seller has set funds aside in escrow to cover up to $250,000 in ground water
remediation costs. We do not believe that the environmental conditions at the
facility will have a material adverse effect on our consolidated financial
condition, results of operations or cash flows.
In connection with its acquisition of [email protected], Inc., iTurf agreed to
enter into a marketing alliance with MarketSource to promote iTurf's network of
sites through MarketSource's offline marketing channels. iTurf committed to
purchasing approximately $6.5 million in promotional opportunities through these
channels over the next three years.
12
<PAGE>
During the third quarter we borrowed a total of $9 million under our credit
facility with First Union National Bank. The facility consists of a revolving
line of credit permitting us to borrow up to $25 million and provides for the
issuance of documentary and standby letters of credit up to $10 million. Our
ability to continue to borrow under the credit agreement is contingent on a
number of conditions including our compliance with tangible net worth, fixed
charge coverage ratio and debt to cash flow covenants. In addition, amounts
outstanding under the facility are limited to specified percentages of the value
of our eligible inventory as determined under the credit agreement. As our
inventory levels decrease due to sales, we will be required to repay a portion
of the amounts outstanding.
7. SUBSEQUENT EVENTS
On November 17, 1999, we converted 325,000 shares of our iTurf Inc. Class B
common stock to Class A common stock and sold such shares to Kistler Joint
Venture at a price of $11.3125 per share. On November 29, 1999 we registered
1,675,000 shares of iTurf Inc. Class A common stock, to be issued upon
conversion, for future sale. On December 6, 1999, we converted 750,000 of Class
B common stock of iTurf Inc. to Class A common stock and sold those shares to
Deutsche Bank Securities pursuant to the registration statement. The sale price
for the Deutsche Bank transaction was $13.875 per share. As a result of these
transactions, our interest in iTurf was reduced to 90% of vote and 60% of value.
13
<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
OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT REFLECT DELIA*S PLANS, ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT AND THOSE
DISCUSSED IN OUR OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING OUR
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 31, 1999.
OVERVIEW
We are a teen-focused marketer of casual apparel, accessories, cosmetics,
home furnishings and soccer merchandise. Through the 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"), we believe we are the leading direct marketer of
casual apparel, related accessories and cosmetics focused on Generation Y. In
February 1999, we opened our first full-priced dELiA*s store in New York. We
opened four additional dELiA*s stores during the second quarter of fiscal 1999
and six more stores during the third quarter, bringing the total number of
full-price dELiA*s brand stores in operation to eleven at October 30, 1999. We
plan to continue the expansion of this concept through new store openings and
the conversion of certain of our Screeem! and Jean Country stores. Through our
TSI Soccer catalog, retail stores and Web site, we are a leading direct marketer
and retailer of specialty soccer and other athletic merchandise to Generation Y
boys and girls. Our other catalog titles include Contents, which offers home
furnishings to Generation Y, and Droog, which offers apparel and accessories to
Generation Y boys and young men. We also target pre-teen girls with our
Storybook Heirlooms catalog.
On April 14, 1999, we completed an initial public offering of approximately
4.8 million shares of Class A common stock of iTurf Inc., our Internet-focused
subsidiary. iTurf used $17.7 million of the total $97.4 million in net offering
proceeds to purchase 551,046 shares of dELiA*s common stock from dELiA*s, which
we have treated as treasury stock in consolidation. As a result of the offering,
we recognized a gain of approximately $70 million before taxes ($41 million
after taxes). On September 1, 1999, iTurf acquired [email protected], Inc. in
exchange for 1,586,996 newly issued shares of iTurf Class A common stock. As of
October 30, 1999, we owned approximately 66% of the value and 92% of the vote of
iTurf. The outside ownership of iTurf is reflected as minority interest in the
accompanying financial statements.
dELiA*s maintains its corporate and Internet headquarters and a
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.
RISKS. Growth in our revenue base and further penetration of our target
market may negatively affect our levels of percentage annual growth in net sales
and operating income. In addition, when we increase the number of catalogs we
mail, we observe that new customers respond at lower rates than our existing
customers have historically responded. We have also observed that when customers
receive multiple editions of catalogs within the same fiscal quarter, aggregate
response rates decline. Increases in the cost of materials, printing, paper,
postage, shipping and labor also adversely affect the profitability of our
catalog business.
A variety of factors affects our comparable store sales, including, among
others, fashion trends, the general retail sales environment, our ability to
efficiently source and distribute products, changes in our merchandise mix and
our ability to execute our business strategy efficiently. Comparable store sales
may fluctuate significantly as we roll out new retail concepts and enter new
markets. In addition, our ability to
14
<PAGE>
expand our retail business may be limited by our ability to locate and obtain
acceptable store sites and lease terms or renew existing leases.
Our plans to expand both retail and catalog operations depend on obtaining
additional capital and recruiting experienced managers. There can be no
assurance that the company will be able to raise capital or recruit managers as
it grows.
Our business generally depends on our ability to anticipate the frequently
changing fashion tastes of our customers and to offer merchandise that appeals
to their preferences on a timely and affordable basis. If we misjudge our
merchandise selection, our image with our customers could be materially
adversely affected.
We believe that the continued growth of our Internet segment will depend in
large part on our ability to increase awareness of our brand names, to provide
our customers with superior Internet community and e-commerce experiences and to
continue to enhance our systems and technology to support increased traffic to
our Web sites. Accordingly, we intend to maintain a high level of marketing and
promotional expenditures and to invest heavily to develop our Web sites,
technology and operating infrastructure. Slower revenue growth than we
anticipate or operating expenses that exceed our expectations could have a
material adverse effect on our business.
RESTRUCTURING CHARGE
During the first quarter of fiscal 1999, we recorded a charge of
approximately $23.4 million in connection with our restructuring plan to exit
our Screeem! and Jean Country retail operations. The charge is comprised of the
following:
- - $18.0 million for the write-off of the remaining unamortized balance of
goodwill and other intangibles relating to our acquisition of the
Screeem! and Jean Country retail operations;
- - $4.2 million for the shut-down or conversion of certain retail stores
to the dELiA*s retail concept with the related adjustment for assets
that will no longer be used;
- - $700,000 for the elimination of jobs at the Screeem! corporate office
and the store locations to be closed, resulting in employee severance
costs; and
- - $500,000 for the liquidation of inventory carried at stores to be
converted or closed (reflected in cost of sales).
The total charge of $23.4 million includes $22.9 million that is included
in operating expenses as a restructuring charge and $500,000 included as cost of
sales. In addition, as part of our acquisition of the Screeem! and Jean Country
retail operations, we agreed that if the mean of the intra-day high and low bid
prices for the Company's common stock for the 20 consecutive trading days
immediately preceding January 10, 2000 (the "18-Month Price") is less than
$18.00, we will issue to the sellers that number of additional shares of dELiA*s
common stock that is equal to (i) the excess of (x) the product of 174,550
shares multiplied by $18.00 over (y) the product of 174,550 shares multiplied by
the greater of the 18-Month Price or $10.00 divided by (ii) the 18-Month Price.
If we are required to issue additional shares, the value of those shares will
result in a charge to earnings in the fourth quarter of fiscal 1999.
During the second and third quarters, we have not made any significant
changes in our estimate of the above restructuring charge, nor have we yet
incurred any of the estimated store shut-down/ conversion or job elimination
expenses. We expect such costs to be incurred primarily in the fourth quarter of
fiscal 1999 and first quarter of fiscal 2000. As our plans progress, we
anticipate that we may need to record higher than anticipated losses on
inventory liquidation and other restructuring-related costs, as well as
additional store operating losses during the transition period.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statement of operations to net sales. Any
trends reflected by the following table may not be indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS NINE MONTHS THIRTY-NINE WEEKS
ENDED ENDED ENDED ENDED
OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 49.0 53.6 48.7 56.2
----- ----- ----- -----
Gross profit 51.0 46.4 51.3 43.8
Selling, general and administrative expenses 48.2 67.4 48.0 64.9
Restructuring charge -- -- -- 18.6
Gain on subsidiary initial public offering -- -- -- (56.9)
Interest and other income, net (0.3) (1.5) (0.8) (1.5)
Minority interest -- (4.4) -- (2.1)
------ ------ ------ ------
Income (loss) before income taxes 3.1 (15.1) 4.1 20.8
Provision (benefit) for income taxes 1.3 (2.6) 1.5 10.4
----- ----- ----- -----
Net income (loss) 1.8% (12.5)% 2.6% 10.4%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
COMPARISON OF THIRTEEN WEEKS ENDED OCTOBER 30, 1999 AND THREE MONTHS ENDED
OCTOBER 31, 1998
NET SALES. Net sales increased approximately $7.3 million, or 18%, to $48.1
million in the third quarter of fiscal 1999 from $40.8 million in the third
quarter of fiscal 1998. Revenues were up in our retail segment as a result of
the introduction of dELiA*s brand full-price stores and addition of TSI
Soccer stores, offset to some degree by the closure of several Screeem & Jean
Country Stores. The increase is also partially due to increased Internet
revenues, which include sales that have shifted from our catalogs. An increase
in catalog revenues reflects sales from our Storybook Heirlooms catalog, which
was launched in January 1999, offset by a decline in sales from other catalog
titles primarily as a result of lower circulation and the migration of sales to
our Internet sites.
GROSS MARGIN. Gross margin decreased to 46.4% of net sales in the third
quarter of fiscal 1999 from 51.0% in the third quarter of fiscal 1998. The
decrease is primarily due to significant markdowns on merchandise sold through
our Screeem! stores, a higher proportion of discounted internet and catalog
sales, a lower-margin mix of TSI Soccer merchandise sales and lower pricing on
selected catalog merchandise. We expect gross margins to continue to be affected
by discounted Screeem! sales through the remainder of fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $12.7 million to $32.4 million
(or 67.4% of net sales) in the third quarter of fiscal 1999 from $19.7 million
(or 48.2% of net sales) in the third quarter of fiscal 1998. Selling, general
and administrative expenses increased primarily as a result of spending on
Internet, retail and corporate infrastructure, marketing to support retail and
Internet growth and additional expenses related to new catalog titles and the
operation of more retail stores. We expect such expenditures to continue and
selling, general and administrative expenses to remain high through the last
fiscal quarter of 1999.
COMPARISON OF THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 AND NINE MONTHS ENDED
OCTOBER 31, 1998
NET SALES. Net sales increased approximately $24.8 million, or 25%, to
$123.3 million in the first three quarters of fiscal 1999 from $98.5 million in
the first three quarters of fiscal 1998. The increase in
16
<PAGE>
sales is primarily due to increased revenues from our retail segment as a result
of our acquisition of the Screeem! and Jean Country business in July 1998, the
introduction of dELiA*s brand full-price stores beginning in February 1999 and
the opening of additional TSI Soccer stores, as well as from the growth of our
Internet segment which includes sales that have shifted from our catalogs. Sales
from our catalog segment increased only slightly as increases relating to our
new Storybook Heirlooms catalog were offset by lower sales from our core catalog
as a result of lower circulation, reduced response rates, lower fill rates and
the migration of sales to our Internet sites.
GROSS MARGIN. Gross margin excluding a $500,000 charge related to the first
quarter 1999 Screeem! restructuring decreased to 44.2% of net sales in the first
three quarters of fiscal 1999 from 51.3% in the first three quarters of fiscal
1998. The decrease is primarily due to significant markdowns on merchandise sold
through our Screeem! stores, a higher proportion of discounted catalog sales,
lower catalog pricing, and, in the first quarter of fiscal 1999, higher freight
costs resulting from lean inventory levels. We expect gross margins to continue
to be affected by discounted Screeem! sales through the remainder of fiscal
1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $32.8 million to $80.1 million
(or 64.9% of net sales) in the first three quarters of fiscal 1999 from $47.3
million (or 48.0% of net sales) in the first three quarters of fiscal 1998.
Selling, general and administrative expenses increased primarily as a result of
spending on Internet, retail and corporate infrastructure, marketing to support
retail and Internet growth and to improve the efficiency of our distribution
processes, as well as additional catalog expenses related to the introduction of
new catalogs and the operation of more retail stores. We expect such
expenditures to continue and selling, general and administrative expenses to
remain high throughout fiscal 1999.
RESTRUCTURING CHARGE. During the first quarter of fiscal 1999, we recorded
a charge of approximately $23.4 million in connection with our restructuring
plan to close our Screeem! and Jean Country retail operations. This charge
includes approximately $500,000 related to inventory and recorded as cost of
sales. As our plans progress, we anticipate that we may need to record
additional losses on inventory liquidation and other restructuring-related costs
as well as additional store operating losses during the transition period.
GAIN ON SUBSIDIARY INITIAL PUBLIC OFFERING. On April 14, 1999, we completed
an initial public offering of approximately 4.8 million shares of class A common
stock of iTurf Inc., our publicly-traded Internet-focused subsidiary. As a
result of the transaction, we recognized a one-time gain of approximately $70.1
million before taxes.
17
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statement of operations
data for the seven fiscal quarters ended October 30, 1999, as well as such data
expressed as a percentage of total net sales for the periods indicated. This
data has been derived from our 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 our annual audited financial statements and notes
thereto.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999
FISCAL QUARTER ENDED
APR. 30, JULY 31, OCT. 31, JAN. 31, MAY 1, JULY 31, OCTOBER 30,
1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .................... $ 31,194 $ 26,451 $ 40,821 $ 59,898 $ 41,812 $ 33,375 $ 48,085
Cost of sales ................ 14,223 13,712 19,979 30,454 23,023 20,450 25,776
-------- -------- -------- -------- -------- -------- --------
Gross profit ................. 16,971 12,739 20,842 29,444 18,789 12,925 22,309
Selling, general and
administrative expenses .... 14,092 13,499 19,691 24,429 23,750 23,908 32,395
Restructuring charge ......... -- -- -- -- 22,907 -- --
Gain on subsidiary initial
public offering ............ -- -- -- -- (70,091) -- --
Interest and other income, net (341) (300) (126) (195) (140) (1,027) (703)
Minority interest ............ -- -- -- -- 8 (493) (2,125)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes ...................... 3,220 (460) 1,277 5,210 42,355 (9,463) (7,258)
Provision (benefit) for income
taxes ...................... 1,220 (317) 530 1,972 17,519 (3,399) (1,257)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ............ $ 2,000 $ (143) $ 747 $ 3,238 $ 24,836 $ (6,064) $ (6,001)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Per share data:
Basic net income (loss) per
share ...................... $ 0.15 $ (0.01) $ 0.05 $ 0.23 $ 1.75 $ (0.42) $ (0.42)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Shares used in the calculation
of basic net income (loss)
per share .................. 13,321 13,498 14,139 14,159 14,231 14,330 14,342
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Diluted net income (loss) per
share ...................... $ 0.15 $ (0.01) $ 0.05 $ 0.21 $ 1.56 $ (0.42) $ (0.42)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Shares used in calculation of
diluted net income (loss)
per share .................. 13,569 13,498 14,735 15,300 15,966 14,330 14,342
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PERCENTAGE OF TOTAL NET SALES
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 45.6 51.8 49.0 50.8 55.0 61.3 53.6
-------- -------- -------- -------- -------- -------- --------
Gross profit.................. 54.4 48.2 51.0 49.2 45.0 38.7 46.4
Selling, general, and
administrative expenses..... 45.2 51.0 48.2 40.8 56.8 71.6 67.4
Restructuring charge.......... -- -- -- -- 54.8 -- --
Gain on subsidiary initial
public offering............. -- -- -- -- (167.6) -- --
Interest and other income, net (1.1) (1.1) (0.3) (0.3) (0.3) (3.1) (1.5)
Minority interest............. -- -- -- -- 0.0 (1.5) (4.4)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes....................... 10.3 (1.7) 3.1 8.7 101.3 (28.3) (15.1)
Provision (benefit) for income
taxes....................... 3.9 (1.2) 1.3 3.3 41.9 (10.2) (2.6)
Net income (loss)............. 6.4% (0.5)% 1.8% 5.4% 59.4% (18.1)% (12.5)%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
dELiA*s is subject to seasonal fluctuations in our merchandise sales
and results of operations. We expect our net sales generally to higher in the
second half of each year than in the first half of the same fiscal
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<PAGE>
year. In addition, our 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, sales
performance in comparable stores year-over-year, our ability to open new stores,
the timing of merchandise deliveries, market acceptance of merchandise
(including new merchandise categories and products introduced), the mix of
products sold, the hiring and training of additional personnel, the timing of
inventory write downs, the integration of acquisitions, and other operating
costs and factors beyond our 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations in the first three quarters of fiscal 1999 and 1998
was $30.9 million and $18.5 million, respectively. The increase in cash used in
operations primarily relates to operating losses and an increase in inventory
levels in an effort to improve catalog fill rates and in anticipation of greater
sales due to the growth of our retail segment.
Investing activities used $73.2 million for the purchase of short-term
investments and capital expenditures in the first three quarters of fiscal 1999.
For the first three quarters of fiscal 1998, investing activities provided $17.5
million, which reflects proceeds from the maturity and sale of short-term
investments in fiscal 1998. During the fourth quarter of fiscal 1999, we expect
to make additional capital expenditures of approximately $2.0 million for
expansion of our retail concepts and conversion of stores between our retail
concepts as well as for investment in the infrastructure of iTurf and other
information system projects. We expect to fund these capital expenditures
through equipment leases, a mortgage loan secured by our distribution facility,
our credit facility and cash from operations.
In addition to capital expenditures, iTurf expects to spend significant
amounts for marketing and other alliances. In May 1999, iTurf entered into a
strategic alliance agreement with America Online, Inc. under which we are
committed to cash payments of approximately $4.0 million in fiscal 1999 and $4.1
million in fiscal 2000. In August 1999, iTurf entered into a strategic marketing
alliance with Microsoft Corporation under which we have agreed to pay Microsoft
a total of at least $4.6 million over the one-year term of the agreement. In
connection with the September 1999 Taponline transaction, iTurf has agreed to
pay MarketSource $6.5 million over three years to promote our network of sites
through MarketSource's offline marketing channels.
Cash flows from financing activities in the first three quarters of fiscal
1999 were $115.1 million, primarily as a result of the initial public offering
of iTurf common stock. In addition, during the third quarter we borrowed a total
of $9 million under our credit facility with First Union National Bank. We did
not engage in significant financing activities in the first three quarters of
fiscal 1998.
Our credit facility with First Union National Bank, which terminates on
December 7, 2001, consists of a revolving line of credit permitting us to borrow
up to $25 million and provides for the issuance of documentary and standby
letters of credit up to $10 million. At our option, borrowings under this
facility bear interest at First Union National Bank's prime rate or at LIBOR
plus 200 basis points. Our ability to continue to borrow under the credit
agreement is contingent on a number of conditions including our compliance with
tangible net worth, fixed charge coverage ratio and debt to cash flow covenants.
In addition, borrowings are limited to specified percentages of the value of our
eligible inventory as determined under the credit agreement. As our inventory
levels decrease due to sales, we will be required to repay a portion of the
amount outstanding.
In April 1999, we amended our credit agreement with First Union National
Bank in connection with the iTurf initial public offering such that iTurf is no
longer considered a borrower under such agreement.
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<PAGE>
Accordingly, First Union National Bank released its security interest in the
assets of iTurf as well as its pledge, assignment and security interest in the
shares of common stock of iTurf that we hold.
On August 6, 1999, we purchased for $6.2 million an approximately 415,000
square foot distribution facility in Hanover, Pennsylvania, of which we were
previously leasing approximately 360,000 square feet. We borrowed $5.3 million
from Allfirst Bank in the form of a mortgage loan on the property to pay for
$4.9 million of the purchase price and $400,000 of planned capital improvements.
We are subject to certain covenants under the loan agreement, including a
covenant to maintain a fixed charge coverage ratio. Interest on the loan is
calculated using a variable LIBOR-based interest rate. On August 10, 1999 we
entered into an interest-rate swap agreement with Allfirst Bank under which we
effectively converted the mortgage to a fixed-rate loan with an interest rate of
approximately 8.78%.
YEAR 2000
We are heavily dependent upon complex computer software and systems for our
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.
STATE OF READINESS. All of our material operating software and our
information technology and other systems, including telecommunications and
warehouse systems, were developed by and are supported by third party vendors.
Each of the third party vendors of our mission-critical operating software has
provided a written warranty or assurance that such software will not be affected
by the change in the century. We have modified certain of our mission-critical
software provided by third party vendors, but we believe that such modifications
will not affect the ability of such software to account for the change in the
century. The majority of the third party vendors of our other material operating
software and systems have also provided warranties or assurances that such
software and systems are able to account for the change in the century.
We have prepared a Year 2000 compliance program, which involves:
- - identifying the material operating software and systems on which we
depend, whether used by us or by our service providers;
- - obtaining written warranties or assurances from third party software
and system vendors and service providers;
- - monitoring the compliance efforts of those vendors and service
providers; and
- - testing our material operating software and systems.
We began performing tests in the third quarter of fiscal 1999 of our
material operating software and systems to verify the assurances given by third
party vendors and ensure Year 2000 compliance. We have not yet begun to perform
these tests on certain of our software and systems and we may not be able to
test all of our material operating systems. Although we have not identified any
material software or systems as requiring remediation or replacement, we cannot
assure you that all of our material operating software and systems will be Year
2000 compliant.
In addition to the operating systems and software we use directly, our
operations are also dependent upon the performance of operating software and
systems used by our significant service providers, including providers of
financial, telecommunications and parcel delivery services. We have contacted
each of our significant service providers and have obtained written assurances
from the majority of such providers that their relevant operating software and
systems are or would be Year 2000 compliant. We
20
<PAGE>
are monitoring the status of all our significant service providers' Year 2000
compliance efforts to minimize the risk of any material adverse effect on our
operations resulting from compliance failures. However, there can be no
assurance that our service providers have, or will have, operating software and
systems that are Year 2000 compliant.
RISKS. The failure of our software or systems to be Year 2000 compliant
could prevent us from being able to process or fulfill orders from our customers
or being able to distribute merchandise to stores in a timely manner and could
disrupt our financial and management controls and reporting systems. Any such
worst-case scenario, if not quickly remedied, would have a material adverse
effect on our business. Therefore, we are developing contingency plans with
respect to our systems and software.
In addition, a significant portion of our merchandise sales are made with
credit cards, and our operations may be materially adversely affected to the
extent our customers are unable to use their credit cards due to Year 2000
issues that are not rectified by the customers' credit card vendors.
We have not identified significant exposure to Year 2000 problems outside
of the information technology issues identified above.
COSTS. To date, we have spent approximately $175,000 on Year 2000
compliance. We do not expect our total costs of addressing Year 2000 to exceed
$200,000. We believe that we have sufficiently budgeted for technology
investments, including Year 2000 compliance, and that our cash from operations,
our equipment lease arrangements, the proceeds of the iTurf initial public
offering and our credit facility, as necessary, will fund such investments.
However, given our dependence on third-party software and system vendors and
service providers, including our customers' vendors, there can be no assurance
to that effect.
21
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, two separate purported securities class action lawsuits were
filed against us and certain of our officers and directors and one former
officer of a subsidiary. The complaints in these lawsuits purport to be class
actions on behalf of the purchasers of our securities during the periods May 21,
1998 through June 17, 1998 and January 20, 1998 through September 10, 1998. The
complaints generally allege that the defendants violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder by making material
misstatements and by failing to disclose certain allegedly material information
regarding trends in our business. The complaints also allege that the individual
defendants are liable for those violations under Section 20(a) of the Securities
Exchange Act. The complaints seek unspecified damages, attorneys' and experts'
fees and costs, and such other relief as the court deems proper. The complaints
were filed in Federal District Court for the Southern District of New York by
Allain Roy on June 1, 1999 and by Lorraine Padgett on June 3, 1999. On August 3,
1999, the plaintiffs in both suits filed a motion to consolidate the suits. No
decision has been rendered on this motion.
We intend to vigorously defend against these actions. Based upon
information presently known to management, we do not believe that the ultimate
resolution of these lawsuits will have a material adverse effect on our
financial condition, results of operations or cash flow.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See "Exhibit Index" following the signature page.
(b) We filed the following reports on Form 8-K during the fiscal quarter:
(i) current report on Form 8-K, dated August 12, 1999,
reporting Item 5. This report contained information
iTurf's agreement to acquire [email protected], Inc.
(ii) current report on Form 8-K, dated September 7, 1998,
reporting Item 5 and Item 7 Exhibits. This report
contained information about iTurf's acquisition
[email protected], Inc.
22
<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 14, 1999
By: /s/ Stephen I. Kahn
-----------------------------------
Stephen I. Kahn
Chairman of the Board and
Chief Executive Officer
By: /s/ Evan Guillemin
-----------------------------------
Evan Guillemin
President, Chief Financial
Officer and Treasurer
(principal financial and
accounting officer)
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<PAGE>
EXHIBIT INDEX
2.1 Bill of Sale and Contribution and Assumption Agreement between dELiA*s
LLC and dELiA*s Inc. (incorporated by reference to Exhibit 2.1 to the
dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153))
3.1 Certificate of incorporation of dELiA*s Inc. (incorporated by reference
to Exhibit 3.1 to the dELiA*s Inc. Registration Statement on Form S-1
(Registration No. 333-15153))
3.2 Bylaws of dELiA*s Inc. (incorporated by reference to Exhibit 3.2 to the
dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153))
10.1 Form of Employment Agreement between dELiA*s Inc. and Stephen I. Kahn
(incorporated by reference to Exhibit 10.1 to the dELiA*s Inc.
Registration Statement on Form S-1 (Registration No. 333-15153))
10.2 Employment Agreement between dELiA*s Inc. and Christopher C. Edgar
(incorporated by reference to Exhibit 10.2 to the dELiA*s Inc.
Registration Statement on Form S-1 (Registration No. 333-15153))
10.3 Employment Agreement between dELiA*s Inc. and Evan Guillemin
(incorporated by reference to Exhibit 10.3 to the dELiA*s Inc.
Registration Statement on Form S-1 (Registration No. 333-15153))
10.4 Form of Family Stockholders Agreement among dELiA*s Inc., Stephen I.
Kahn and the persons listed on Exhibit A thereto (incorporated by
reference to Exhibit 10.4 to the dELiA*s Inc. Registration Statement on
Form S-1 (Registration No. 333-15153))
10.5 Amended and Restated 1996 Stock Incentive Plan (incorporated by
reference to the dELiA*s Inc. Schedule 14A filed on June 12, 1998)
10.6 Restricted Stock Plan (incorporated by reference to Exhibit 10.6 to the
dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153))
10.7 Stock Option Agreement between dELiA*s Inc. and Evan Guillemin
(incorporated by reference to Exhibit 10.7 to the dELiA*s Inc.
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 dELiA*s Inc.
(incorporated by reference to Exhibit 10.8 to the dELiA*s Inc.
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31,
1998)
10.9 Lease Agreement dated May 3, 1995 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York
(the "Lease Agreement"); Modification and Extension of Lease Agreement
dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to
the dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153))
10.10 Form of Restricted Stock Agreements between dELiA*s Inc. and holders of
Common Stock subject to the Restricted Stock Plan (incorporated by
reference to Exhibit 10.10 to the dELiA*s Inc. Registration Statement
on Form S-1 (Registration No. 333-15153))
10.11 Employment Agreement dated April 5, 1999 between iTurf Inc. and Stephen
I. Kahn (incorporated by reference to Exhibit 10.10 to the iTurf Inc.
registration statement on Form S-1 (Registration No. 333-71123))
10.12 Lease Agreement dated April 25, 1997 between dELiA*s Inc. and Keystone
Distribution Center, Inc. (incorporated by reference to Exhibit 10.12
to the dELiA*s Inc. Annual Report on Form 10-K for the fiscal year
ended January 31, 1997)
24
<PAGE>
10.13 Agreement dated April 4, 1997 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York
amending the Lease Agreement (incorporated by reference to Exhibit
10.13 to the dELiA*s Inc. Annual Report on Form 10-K for the fiscal
year ended January 31, 1997)
10.14 Agreement dated October 7, 1997 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York
amending the Lease Agreement (incorporated by reference to Exhibit
10.14 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1997)
10.15 Amendment No. 1 to Employment Agreement between dELiA*s Inc. and
Christopher C. Edgar, dated September 15, 1998 (incorporated by
reference to Exhibit 10.15 to the dELiA*s Inc. Quarterly Report on Form
10-Q for the fiscal quarter ended October 31, 1998)
10.16 Amendment No. 1 to Employment Agreement between dELiA*s Inc. and Evan
Guillemin, dated September 15, 1998 (incorporated by reference to
Exhibit 10.16 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 1998)
10.17 Credit Agreement dated December 7, 1998 between First Union National
Bank, dELiA*s Inc. and the subsidiaries listed on Schedule 1 thereto
(incorporated by reference to Exhibit 10.17 to the dELiA*s Inc.
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31,
1998)
10.18 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.17
to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1998)
10.19 Intercompany Services Agreement between dELiA*s Inc. and iTurf Inc.,
dated April 8, 1999 (incorporated by reference to Exhibit 10.1 to the
iTurf Inc. registration statement on Form S-1 (Registration No.
333-71123))
10.20 Trademark License Agreement between dELiA*s Inc. and iTurf Inc., dated
April 8, 1999 (incorporated by reference to Exhibit 10.2 to the iTurf
Inc. registration statement on Form S-1 (Registration No. 333-71123))
10.21 Amendment No. 1, dated April 8, 1999, to Credit Agreement between First
Union National Bank, dELiA*s Inc. and our subsidiaries listed on the
signature page thereto (incorporated by reference to Exhibit 10.21 to
the dELiA*s Inc. annual report on Form 10-K for the fiscal year ended
January 31, 1999)
10.22 Advertising Agreement between iTurf and America Online, Inc., dated May
4, 1999 (incorporated by reference to Exhibit 10.16 to the iTurf Inc.
Quarterly Report on Form 10-Q for the fiscal quarter ended May 1,
1999)**
10.23 Construction Loan Agreement dated August 6, 1999, among dELiA*s
Distribution Company, dELiA*s Inc. and Allfirst Bank (incorporated by
reference to Exhibit 10.23 to the dELiA*s Inc. Quarterly Report on Form
10-Q for the fiscal quarter ended July 31, 1999)
10.24 Mortgage Note dated August 6, 1999 made by dELiA*s Distribution Company
in favor of Allfirst Bank (incorporated by reference to Exhibit 10.24
to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended July 31, 1999)
10.25 Online Advertising Authorized Reseller Agreement between iTurf,
Taponline and MarketSource Corporation, dated September 1, 1999
(incorporated by reference to Exhibit 99.1 of iTurf's Current Report on
Form 8-K dated September 7, 1999)
10.26 Offline Advertising Purchase Agreement between iTurf and MarketSource
Corporation, dated September 1, 1999 (incorporated by reference to
Exhibit 99.2 of iTurf's Current Report on Form 8-K dated September 7,
1999)
25
<PAGE>
10.27 Registration Rights Agreement between iTurf and Marketsource
Corporation (incorporated by reference to Exhibit 10.19 to the iTurf
Inc. Registration Statement on Form S-1 (Registration No. 333-90435)
10.28* Amendment No. 2 to Employment Agreement between dELiA*s Inc. and
Christopher C. Edgar, dated October 18, 1998
10.29* Amendment No. 2 to Employment Agreement between dELiA*s Inc. and Evan
Guillemin, dated October 18, 1998
10.30* Employment Agreement dated August 1998 between Storybook Inc. (a
wholly-owned subsidiary of dELiA*s Inc.) and Estelle DeMuesy
27.1* Financial Data Schedule
- ---------------------------
* Filed herewith
** Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
26
<PAGE>
Exhibit 10.28
dELiA*s
435 Hudson Street
New York, NY 10014
October 18, 1999
Mr. Christopher C. Edgar
dELiA*s
435 Hudson Street
New York, NY 10014
Re: SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
Dear Mr. Edgar:
This letter, when countersigned by you, shall constitute the Second
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 "$150,000" and replacing it with "$200,000." 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/ TIMOTHY B. SCHMIDT
----------------------------
Timothy B. Schmidt
Senior Vice President
ACKNOWLEDGED AND AGREED:
/s/ CHRISTOPHER C. EDGAR
- ----------------------------
CHRISTOPHER C. EDGAR
<PAGE>
Exhibit 10.29
October 18, 1999
Mr. Evan Guillemin
dELiA*s
435 Hudson Street
New York, NY 10014
Re: SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
Dear Mr. Guillemin:
This letter, when countersigned by you, shall constitute the Second
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
"$150,000" and replacing it with "$200,000." 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
--------------------------------
Timothy B. Schmidt
Senior Vice President
ACKNOWLEDGED AND AGREED:
- ------------------------------
EVAN GUILLEMIN
<PAGE>
Exhibit 10.30
EMPLOYMENT AGREEMENT
BETWEEN
STORYBOOK INC.
AND
ESTELLE DEMUESY
Agreement (this "Agreement") dated as of August __, 1998 by and between
Storybook Inc., a Delaware corporation with offices at (the "Company"), and
Estelle DeMuesy, an individual residing at 19823 Glen Brae Drive, CA 95070 (the
"Executive").
It is agreed as follows:
1. EMPLOYMENT. The Company shall employ the Executive as President of
the Company, and the Executive hereby accepts employment with the Company, upon
the terms and conditions set forth on this Agreement for the Employment Period
(as defined below).
2. POSITION AND DUTIES. (a) During the Employment Period, Executive
shall render such services to the Company and its affiliates in her capacity as
President as the Company's board of directors (the "Board") may from time to
time direct and which are commensurate with Executive's title and position.
(b) Executive shall devote all reasonable efforts and her full
business time and attention (except for permitted vacation periods and
reasonable periods of illness or other incapacity) to the business and affairs
of the Company. Executive shall perform her duties and responsibilities to the
best of her abilities in a diligent, trustworthy, businesslike and efficient
manner.
(c) For purposes of this Agreement, "affiliate" shall mean any
corporation or other entity of which the Company (or any corporation or entity
controlling the Company) has at least a 49% equity or voting interest.
(d) The Company shall use its best efforts to cause the
Executive to be elected to the Company's board of directors during the
Employment Period.
3. BASE SALARY AND BENEFITS. (a) During the Employment Period,
Executive's base salary shall be not less than $73,333 per annum (the "Base
Salary") from the Effective Date (as defined below) until February 1, 1999, at
which time such Base Salary shall be increased to one hundred eighty thousand
dollars ($180,000), which salary shall be payable in regular installments in
accordance with the Company's general payroll practices and shall be subject to
customary withholding. In addition, during the Employment Period, Executive
shall be entitled to participate, at the Company's expense (except for such
copayments as are generally required of the Company's managerial employees), in
all of the Company's benefit and retirement programs (including medical benefits
for Executive and her immediate family) for which managerial employees of the
Company are generally eligible. Executive shall be entitled to not less than
three (3) weeks of paid vacation during the first year of employment and four
weeks of vacation thereafter, which if not taken, unless otherwise required by
law, may not be carried forward to any subsequent year unless the Board approves
such vacation carry.
<PAGE>
(b) The Company shall reimburse Executive for all reasonable
expenses incurred by her in the course of performing her duties under this
Agreement which are consistent with the Company's policies in effect from time
to time with respect to travel, entertainment and other business expenses,
subject to the Company's requirements with respect to reporting and
documentation of such expenses.
(c) In addition to the Base Salary, the Board may, in its sole
discretion, establish bonus pool and award a bonus from such pool to Executive
following the end of each fiscal year during the Employment Period, based upon
Executive's performance relative to agreed-upon Company operating targets and
the operating results of dELiA*s Inc. during such year.
4. TERM. (a) The Employment Period shall commence on the Effective Date
(as defined below) and continue until the second anniversary thereof; provided
that the Employment Period shall terminate earlier: (i) upon Executive's
resignation, death or permanent disability or incapacity as determined by the
Board in its good faith ("Disability"); (ii) in accordance with subparagraph (c)
below; or (iii) upon written notice to Executive, at any time, for Cause, as
defined in subparagraph (b) below.
(b) For purposes of this Agreement, "Cause" shall mean (i) a
material breach of this Agreement by Executive that, if capable of being
remedied, Executive fails to remedy within 30 days after written notice, (ii)
any breach of Executive's duty of loyalty to the Company or any of its
affiliates or act of fraud or intentional material dishonesty with respect to
the Company or any of its affiliates, (iii) the commission by Executive of a
felony involving moral turpitude or other act or omission causing material harm
to the standing and reputation of the Company and its affiliates, (iv) failure
by the Executive to report for work for any significant period of time other
than for reasonable personal excuses, (v) willful or repeated refusal by the
Executive to perform such lawful duties as may be delegated or assigned by the
Board and that are commensurate with the Executive's position with the Company,
or (vi) willful misconduct or gross negligence in the performance of Executive's
duties to the Company.
(c) Executive may, at any time during the Employment Period by
written notice to the Company, terminate the Employment Period for "Good Reason"
effective upon such notice. "Good Reason" means (i) a material breach by the
Company of any material provision of this Agreement that the Company fails to
remedy or cease within 15 days after written notice thereof to the Company or
(ii) the relocation of the Company's executive offices to a location outside of
the "Bay Area" in California; it being understood that the historical facilities
of the Storybook Heirlooms business are deemed to be within the Bay Area for
purposes hereof.
5. VOLUNTARY SEPARATION.
(a) In the event of termination of the Employment Period upon
Executive's voluntary resignation, death or Disability, the Company shall pay to
Executive within five days all sums accrued and unpaid to the date of
termination (including unused vacation in accordance with the policies of
dELiA*s Inc. with respect to its executive officers then in effect) and
Executive shall not be entitled to receive her Base Salary, any severance pay or
any fringe
2
<PAGE>
benefits or bonuses for periods after such termination of the Employment Period.
(b) If the Employment Period is terminated by the Company
without Cause or by the Executive for Good Reason in accordance with Section
4(c), the Company (i) shall continue to pay the Executive at the higher of
$180,000 or the Executive's then-current Base Salary (determined pursuant to
Section 3) at the time of termination for a period of one year following such
termination. The provisions of this Section 5(b) and of Section 5(a) shall
constitute Executive's sole and exclusive remedy in connection with termination
of the Employment Period by the Company without Cause or by the Executive for
Good Reason in accordance with Section 4(c). If the Company fails to perform its
obligations under Section 5(a) and this Section 5(b) after notice from the
Executive and 10 days for the Company to cure, Executive's remedies shall not be
limited by this Agreement. dELiA*s Inc. hereby unconditionally guarantees the
obligations of the Company under this Section 5(b).
6. CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, trade secrets, observations, confidential knowledge and data
obtained by her while employed by the Company concerning the business, new,
planned or existing products and services, or affairs of the Company, its
customers or any affiliate of the Company ("Confidential Information") are the
property of the Company or such affiliate. Therefore, the Executive agrees that
she shall not, at any time during her employment under this Agreement and for a
period of two years subsequent thereto, disclose to any third party except in
the performance of her duties hereunder or as may be required by law, any
Confidential Information except for such information which has become publicly
available other than by an act or omission of the Executive. Executive shall
deliver to the Company at the termination of the Employment Period, or at any
other time the Company may request, all memoranda, notes, plans, records,
reports, computer files, printouts and software and other documents and data
(and all copies thereof) relating to the Confidential Information, work product
or the business of the Company or any affiliate which she may then possess or
have under her control.
7. NON-COMPETE; NON-SOLICITATION.
(a) Executive agrees that during the Employment Period and for
a period of 18 months from the termination thereof (the "Non-Competition
Period"), she will not directly, either for her own account or for the benefit
of any person, firm or corporation, engage in any business activity competitive
with the retail, mail order or team sales soccer businesses of the Company (a
"Competing Business Activity"). For purposes hereof, Competing Business
Activities shall mean direct marketing of clothing for children or teen-agers.
(b) Executive agrees that during the Non-Competition Period,
Executive shall not discuss or accept any relationship, whether as a consultant,
representative, employee, executive, officer, director, manager or otherwise,
with any person, firm or corporation which is engaged in a Competing Business
Activity.
(c) During the Non-Competition Period, Executive shall not
directly or indirectly own or be a stockholder, partner of, or otherwise
participate in any company that is engaged in a Competing Business Activity.
Notwithstanding the above, Executive may hold up to a one percent (1%) interest
in any publicly held or traded company and shall have an unlimited
3
<PAGE>
right to invest in any mutual fund which is publicly traded or managed by a
major financial institution.
(d) During the Non-Competition Period, Executive shall not
directly or indirectly through another person or entity (i) induce or attempt to
induce any employee of the Company or any affiliate to leave the employ of the
Company or such affiliate, or in any way interfere with the relationship between
the Company or any affiliate and any employee thereof, (ii) hire any person who
was an employee of the Company or any affiliate at any time during the
Employment Period or (iii) induce or attempt to induce any customer, supplier,
licensee, licensor, franchisee, consultant or other business relation of the
Company or affiliate to cease doing business with the Company or such affiliate,
or in any way interfere with the relationship between any such customer,
supplier, licensee, licensor, franchisee, consultant or business relation and
the Company or any affiliate (including, without limitation, making any negative
statements or communications about the Company or its affiliates).
(e) During the Non-Competition Period, Executive shall inform
any prospective new employer or associate prior to accepting any employment or
any business relationship of the existence of this Agreement and provide such
employer or associate with a copy of this Agreement.
(f) In the event any covenant made in this Agreement shall be
more restrictive than permitted by applicable law, it shall be limited to the
extent which is so permitted. Nothing in this Agreement shall be construed as to
prevent the Company from pursuing any and all remedies available to it for the
breach or threatened breach of covenants made in this Agreement, including
recovery of money damages or temporary or permanent injunctive relief.
Accordingly, Executive acknowledges that the remedy at law for breach of the
provisions of this Agreement may be inadequate and that, in addition to any
other remedy the Company may have, it shall be entitled to an injunction
restraining any breach or threatened breach, without any bond or other security
being required and without the necessity of showing actual damages.
(g) Notwithstanding anything to the contrary contained in this
Section 7, nothing contained in this Section 7 shall be construed so as to
prohibit the Executive from being employed by a company or entity that engages
in a Competing Business Activity so long as Executive is not responsible for,
does not report to or have any involvement, whether direct or indirect, with any
division or unit of said company engaged in such Competing Business Activity.
(h) Notwithstanding anything to the contrary contained in this
Section 7, the Non-Competition Period shall not be construed to extend beyond
the date of termination of the Employment Period if the Employment Period has
terminated by the Company without Cause or by the Executive for Good Reason.
8. NOTICES. Any notice or other communication under this Agreement
shall be in writing and shall be considered given when delivered by hand, when
telecopied upon confirmation of receipt or one day after being mailed by
registered mail, return receipt requested, to the parties at the addresses set
forth below (or at such other address as a party may specify by notice to the
other in accordance with this provision):
4
<PAGE>
If to Executive:
at the address written above
If to the Company:
Storybook Inc.
435 Hudson Street
New York, New York 10014
Attention: Chairman
Fax: (212) 627-8350
with a copy to:
dELiA*s Inc.
435 Hudson Street
New York, New York 10014
Attention: Legal Department
Fax: (212) 807-9069
9. EXECUTIVE'S REPRESENTATIONS. Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity, and
(iii) upon the execution and delivery of this Agreement by the Company, this
Agreement shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms. Executive hereby acknowledges and represents that she
has consulted with independent legal counsel regarding her rights and
obligations under this Agreement or has had an opportunity to do so and that she
fully understands the terms and conditions contained herein.
10. CONDITION PRECEDENT AND EFFECTIVENESS. The consummation of the
Company's acquisition of substantially all the assets of the Storybook Heirlooms
business is a condition precedent to the Company's obligations hereunder. As
used herein, "Effective Date" shall mean the date such acquisition is
consummated.
11. STOCK OPTIONS. On the Effective Date, the Company and the Executive
shall enter into the Storybook Stock Option Agreement annexed hereto as EXHIBIT
A. In addition, the dELiA*s Inc. shall grant to the Executive options to
purchase shares of dELiA*s Inc. common stock under the dELiA*s Inc. Amended and
Restated 1996 Stock Incentive Plan (the "Plan") in accordance with the schedule
set forth below with the vesting terms set forth below and at an exercise price
equal to the closing price of dELiA*s Inc. common stock on the date of grant,
which options shall be subject to the standard terms and conditions applicable
to such dELiA*s Inc. stock options. The dELiA*s Inc. common stock issuable under
the Plan is registered for resale under the Securities Act of 1933 and there are
no restrictions under the Plan on
5
<PAGE>
transferability of such shares. Each of the options granted hereunder shall be
treated as an "incentive stock option" to the extent permissible by law.
<TABLE>
<CAPTION>
Number of
Grant Date Options Vesting
- ------------------- --------- ------------------------------------
<S> <C> <C>
Effective Date 50,000 12.5% on each of the first eight
six-month anniversaries of the
Effective Date
the date of the 5,000 100% 6 months from the date of grant
next dELiA*s Inc.
stockholders' meeting
</TABLE>
12. MISCELLANEOUS.
(a) This Agreement may not be changed or terminated orally.
(b) Executive may not assign any of her rights or delegate any
of her duties under this Agreement. The Company may assign any or all of its
rights under this Agreement to any subsequent owner of the Company's business or
any affiliate, and the assignee shall have the right to enforce this Agreement
to the same extent as the Company.
(c) No waiver of any term or condition of this Agreement shall
be deemed to be a waiver of any subsequent breach of that term or condition or
any breach of any other term or condition of this Agreement.
Any waiver must be in writing.
(d) If any provision of this Agreement would be deemed invalid
or unenforceable for any reason, including, without limitation, because of its
geographic or business scope or duration, such provision shall be construed in
such a way as to make it valid and enforceable to the maximum extent possible.
Any invalidity or unenforceability of any provision in this Agreement shall not
affect or render invalid or unenforceable any other provision of this Agreement
or any other agreement or instrument.
(e) This Agreement shall be governed by and construed in
accordance with the law of the State of New York, without giving effect to
principles or rules of choice or conflicts of laws of such State or any such
other State in which any action may be brought relating to this Agreement.
(f) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
be considered one and the same Agreement.
(g) This Agreement contains a complete statement of all the
arrangements between the parties with respect to their subject matter, supersede
any previous agreements between them relating to that subject matter, and cannot
be amended, modified or terminated except in a written document executed by all
the parties hereto.
[SIGNATURE PAGE FOLLOWS]
6
<PAGE>
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
STORYBOOK INC.
By: /s/ ALEX S. NAVARRO
------------------------------------
Alex S. Navarro
Senior Vice President--
Development and
Legal Affairs
dELiA*s Inc. (as to Sections 5(b) and 11)
By: /s/ ALEX S. NAVARRO
------------------------------------
Alex S. Navarro
Senior Vice President--
Development and
Legal Affairs
ESTELLE DEMUESY
/s/ ESTELLE DEMUESY
-----------------------------------------
7
<PAGE>
EXHIBIT A TO EMPLOYMENT AGREEMENT
STOCK OPTION AGREEMENT
BETWEEN
STORYBOOK INC. AND ESTELLE DEMUESY
DATED SEPTEMBER __, 1998
Storybook Inc., a Delaware corporation (the "Company"), hereby grants
Estelle DeMuesy (the "Optionee"), residing at 19823 Glen Brae Drive, CA 95070,
an option (the "Option") to purchase from the Company that number of shares of
common stock ("Common Stock") of the Company equal to the product of .125 and
the number of Parent Shares (as defined below) (subject to adjustment pursuant
to paragraph 5 below) (the "Option Shares") at the Exercise Price per share on
the terms and conditions set forth in this stock option agreement (this
"Agreement"). "Parent Shares" means the number of shares of Common Stock issued
to dELiA*s Inc. upon organization of the Company (the "Parent Shares").
1. EXERCISABILITY. Subject to the provisions of paragraphs 4(b) and 5
below, the Optionee may exercise the Option on and after the second anniversary
of the date hereof; in no event, however, may the Option be exercised later than
the tenth anniversary of the date hereof.
2. NONTRANSFERABILITY. The Option shall not be transferable by the
Optionee otherwise than by will or by the laws of descent and distribution.
During the lifetime of the Optionee, the Option shall be exercisable only by the
Optionee or her legal representative.
3. METHOD OF EXERCISE.
(a) The Option is exercisable with respect to all, or from time to time
with respect to any portion, of the Option Shares then permitted to be purchased
under this Agreement by delivering written notice of exercise of the Option, in
the form prescribed by the board of directors of the Company (the "Board"), to
the Chairman of the Board. Each such notice shall specify the number of Option
Shares with respect to which the Option is being exercised, and shall be
accompanied by payment in full, in cash or by certified check, of the purchase
price of such Option Shares. The Company may require the person exercising the
Option to pay the Company an amount sufficient to satisfy all applicable
withholding tax requirements prior to the delivery of any stock certificates
representing Option Shares. If the person exercising the Option so requests,
Option Shares purchased may be issued in the name of the Optionee and another
person jointly with right of survivorship.
(b) If, at the time of an exercise of the Option, a registration
statement under the Securities Act of 1933 is not effective with respect to the
Option Shares issuable upon such exercise, and the Company believes the Option
Shares can be issued pursuant to an exemption from registration, it shall be a
condition precedent to the effective exercise of the Option that the person
exercising the Option give the Company a written representation and undertaking,
reasonable under the circumstances and reasonably satisfactory in form and
substance to the Company, to assure compliance by the Company, on terms
acceptable to the Company, with the provisions of the Securities Act of 1933 and
any other applicable legal requirements.
(c) The Company may place upon the face of any stock certificates
representing Option Shares issued upon exercise of the Option appropriate
legends referring to the provisions of any representation or undertaking
referred to in this Agreement and to assure compliance with the
8
<PAGE>
Securities Act of 1933.
4. EFFECT OF TERMINATION OF EMPLOYMENT.
(a) If the Optionee's employment with the Company terminates as a
result of the Optionee's death or as a result of the Optionee's disability in
accordance with the employment agreement dated as of August __, 1998 between the
Company and the Optionee (the "Employment Agreement"), or if the Company
terminates the Optionee's employment with the Company other than for Cause (as
defined in the Employment Agreement), or if the Company fails to renew the
Employment Agreement other than for Cause, or if the Optionee terminates her
employment for "Good Reason" (as defined in the Employment Agreement) or if the
Optionee fails to renew the Employment Agreement other than for Good Reason in
accordance with the Employment Agreement (the foregoing circumstances are
collectively referred to as "Paragraph 4(a) Termination Circumstances"), the
Option shall continue to become exerciseable in accordance with paragraph 1
hereof.
(b) If the Optionee's employment with the Company terminates for any
reason other than in a Paragraph 4(a) Termination Circumstance, the portion of
the Option, if any, that was not yet exercisable pursuant to paragraph 1 hereof
shall not thereafter become exercisable.
5. ADJUSTMENTS.
(a) If there is any stock dividend, stock split or combination of
shares of Common Stock or similar recapitalization or restructuring (an
"Adjustment Event"), the number and kind of shares then subject to this
Agreement shall be proportionately and appropriately adjusted as determined in
good faith by the board of directors of the Company; no change shall be made in
the aggregate purchase price to be paid for all Option Shares subject to the
Option, but the aggregate purchase price shall be allocated among all Option
Shares after giving effect to such adjustment. Any such adjustment shall be the
same as made with respect to options issued under the Plan. Prior to the
exercise of Option in whole or in part, the Company shall not issue any shares
of Common Stock, other than (i) in an Adjustment Event, (ii) for consideration
determined in good faith by the Board to be fair, (iii) in connection with a
Proposed Transaction (as defined below), (iv) in connection with a public
offering of Common Stock or (v) in a transaction treated by the Company as if it
were an Adjustment Event and the Option is adjusted in accordance therewith,
without the consent of Optionee, which consent shall not be unreasonably
withheld unless such issuance is treated by the Company as if it were an
Adjustment Event and the Option is adjusted in accordance therewith.
(b) In the event of a Change in Control (as defined in the dELiA*s Inc.
Amended and Restated 1996 Stock Incentive Plan (the "Plan"), the Option (and the
Option Shares) shall be treated by the Company as if the Option were an option
granted under the Plan.
(c) In the event of a sale of all or substantially all of the assets of
the Company, the Option shall become immediately exercisable. In the event of
such a sale, and if Optionee has exercised the Option, the Company shall
distribute the proceeds of such sale on a pro-rata basis to its stockholders,
including Optionee (to the extent Optionee is a stockholder).
2
<PAGE>
6. NO RIGHTS. Nothing in the Option shall confer on the Optionee any
right to continue in the employ of the Company or any affiliate thereof or to
continue to perform services for the Company or interfere in any way with the
right of the Company to terminate the Optionee's employment or services at any
time or give any claim by the Optionee against the Company in respect of any
such termination (other than any claim expressly set forth in the Employment
Agreement). The Optionee shall not, by virtue of holding the Option, be entitled
to any rights of a stockholder in the Company.
7. ADMINISTRATIVE REGULATIONS. All decisions of the Board that are made
in good faith upon any question arising under the Option, shall be conclusive
and binding upon the Optionee and any person to whom rights under this Agreement
may have been transferred by will or by the laws of descent and distribution.
8. NOTICES. All notices, requests and documents to be given under this
Agreement shall be in writing and shall be either delivered personally or mailed
by first-class registered or certified mail, return receipt requested, to the
appropriate party.
9. ACCEPTANCE BY OPTIONEE. The acceptance by the Optionee of the Option
constitutes acceptance of and agreement to all the terms and conditions
contained in this Agreement.
10. GOVERNING LAW. This Agreement contains a complete statement of all
the terms of the Option, cannot be changed or terminated orally, and shall be
governed by the law of the State of Delaware applicable to agreements made and
to be performed in Delaware.
11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
be considered one and the same Agreement.
12. COMPLETE STATEMENT. This Agreement contains a complete statement of
all the arrangements between the parties with respect to their subject matter,
supersede any previous agreements between them relating to that subject matter,
and cannot be amended, modified or terminated except in a written document
executed by all the parties hereto.
13. TAG-ALONG; DRAG-ALONG; FIRST REFUSAL. The provisions of this
Section 13 shall become effective only following exercise of the Option by the
Optionee.
(a) DRAG ALONG. If dELiA*s Inc. proposes a transaction which would
cause the sale or other transfer for consideration by dELiA*s Inc. of an amount
of Common Stock of the Company, which, if completed, would result in a person or
entity (other than dELiA*s Inc. or its direct or indirect subsidiaries or
affiliates) acquiring more than 50% of the outstanding Common Stock of the
Company (a "Proposed Transaction"), then dELiA*s Inc. shall give written notice
(a "Transaction Notice") to the Optionee describing the material terms of the
Proposed Transaction. dELiA*s Inc. shall be entitled to require the Optionee to
include in such Transaction all of such Optionee's shares of Common Stock;
provided, however, that no Optionee shall be required to enter into any Proposed
Transaction pursuant to this Section 13(a) unless the terms and conditions of
the Proposed Transaction provide that such Optionee's liability will be several
and not joint and several, and (ii) such Optionee's liability will be capped at
the market value,
3
<PAGE>
determined at the of receipt, of the net pre-tax proceeds to be received by such
Optionee pursuant to the terms of the Proposed Transaction.
(b) TAG ALONG. In connection with any Proposed Transaction, the
Optionee shall have a right to include in such Proposed Transaction up to the
number of Option Shares computed by multiplying (i) the total number of shares
of Common Stock of the Company proposed to be sold or otherwise disposed of by
dELiA*s Inc. pursuant to the Proposed Transaction by (ii) a fraction, the
numerator of which shall equal the aggregate number of Option Shares owned by
such Optionee and the denominator of which shall equal the number of shares of
the Common Stock of the Company issued and outstanding on a fully diluted basis
on such date. Any Optionee desiring to exercise her or her tag-along right must
deliver a written of exercise to dELiA*s Inc. within 10 days after the date
dELiA*s Inc. gives the Notice to such Optionee.
(c) SAME TERMS AND CONDITIONS. In the case of both the drag-along
described in Section 13(a) and the tag-along rights described in 13(b), a sale
of Option Shares by Optionee shall be the same price per share (in both amount
and purchase medium) applicable to the sale of the shares of Common Stock of the
Company by dELiA*s Inc. and otherwise shall be on terms and conditions at least
as favorable as those applicable to dELiA*s Inc.
(d) If Optionee shall receive an offer to purchase its Option Shares or
if Optionee shall wish to enter into an agreement for the sale of such Option
Shares, Optionee shall first give written notice to dELiA*s Inc. setting forth
the name of the proposed purchaser, the purchase price, and all terms and
conditions of the proposed sale. Within twenty (20) calendar days following the
delivery or mailing of said notice, dELiA*s Inc. or its designee shall have the
right to purchase the Option Shares upon the same terms and conditions. Said
right shall be exercised by delivering or mailing such election to Optionee
prior to the expiration of said calendar days. If dELiA*s Inc. shall not elect
to make such purchase within said time, and the sale is made in accordance with
the terms set forth in the notice, Optionee shall not have a right to purchase
upon any resale by the person who acquires such Option Shares from Optionee..
14. ANNEX 1. Attached to this Agreement as ANNEX 1 is a statement of
(i) the proposed list of assets to be owned by the Company following the
acquisition by the Company and its affiliates of assets from the estate of
Fulcrum Direct Inc.; and (ii) the proposed initial equity structure of the
Company. The Company or dELiA*s Inc. may modify this Annex 1 at any time prior
to the consummation of the Acquisition provided that such modification does not
materially affect the economic interests of the Optionee.
15. AGREEMENT TO NEGOTIATE. Without specific obligation, the Company
and the Optionee agree to, within 30 days of the second anniversary of this
Agreement, negotiate in good faith mechanisms to increase the liquidity of the
Option, recognizing the concerns of the Optionee, the Company and the Company's
stockholders. In the event that dELiA*s Inc. fails to negotiate in good faith
and Optionee subsequently terminates its employment with the Company, the
Optionee shall tehreupon be released from its obligations under Section 7 of the
Employment Agreement.
[SIGNATURE PAGE FOLLOWS]
4
<PAGE>
[SIGNATURE PAGE TO STOCK OPTION AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
STORYBOOK INC.
By:
-----------------------------------------
Alex S. Navarro
Senior Vice President--
Development and
Legal Affairs
ESTELLE DEMUESY
--------------------------------------------
5
<PAGE>
ANNEX 1
ASSETS TO BE ACQUIRED
<TABLE>
<CAPTION>
Storybook Inc. dELiA*s Properties Inc. dELiA*s Interactive Company
- ---------------------------------- ----------------------- ---------------------------
<S> <C> <C>
Customer Lists All Trademarks Domain Names
(including Storybook Heirlooms
Zoe, After the Stork, Playclothes
and Just for Kids list)
Leases
Personal Property and Equipment
Storybook Inventory
Zoe Inventory
All Other Assets (other than
trademarks and domain names)
</TABLE>
In addition, dELiA*s Properties Inc. shall license to Storybook Inc. on a
perpetual, irrevocable basis the right to use the Storybook Heirlooms trademark
pursuant to a customary trademark license agreement to be entered into
concurrently with or subsequent to the Effective Date (as defined in the
Employment Agreement).
EQUITY STRUCTURE OF STORYBOOK INC.
Number of Authorized Shares: 1,000 shares of common stock
Number of Shares to be Issued to dELiA*s Inc. upon Organization: 80
Number of Shares Reserved for Issuance to DeMuesy and Bruml: 20 (subject to
adjustment based on stock splits, stock dividends, recapitalizations, etc.)
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 22,018
<SECURITIES> 48,482
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 39,310
<CURRENT-ASSETS> 136,005
<PP&E> 37,846
<DEPRECIATION> 5,219
<TOTAL-ASSETS> 203,071
<CURRENT-LIABILITIES> 45,735
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 83,661
<TOTAL-LIABILITY-AND-EQUITY> 203,071
<SALES> 123,272
<TOTAL-REVENUES> 123,272
<CGS> 69,249
<TOTAL-COSTS> 69,249
<OTHER-EXPENSES> 80,053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,870
<INCOME-PRETAX> 25,634
<INCOME-TAX> 12,863
<INCOME-CONTINUING> 12,771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,771
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.82
</TABLE>
