<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 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 JULY 31, 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 September 1, 1999: 14,893,472
<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 PARTICULAR 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 FISCAL 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 FISCAL YEAR 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 JULY 31, 1999
---------------- -------------
* (UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 10,981 $ 29,423
Short-term investments..................................................... -- 55,517
Merchandise inventories ................................................... 21,232 29,850
Prepaid expenses and other current assets ................................. 11,352 16,883
---------- ----------
Total current assets .................................................. 43,565 131,673
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$3,191 at January 31, 1999 and $4,059 at July 31, 1999..................... 12,542 17,536
DEFERRED TAX ASSETS............................................................. -- 9,682
INTANGIBLE ASSETS............................................................... 25,308 6,255
OTHER ASSETS .................................................................. 729 1,451
---------- ----------
TOTAL ASSETS ................................................................. $ 82,144 $ 166,597
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities .......... $ 18,085 $ 23,746
Accrued restructuring...................................................... -- 2,662
---------- ----------
Total current liabilities.............................................. 18,085 26,408
DEFERRED TAX LIABILITY.......................................................... -- 28,991
OTHER LONG-TERM LIABILITIES .................................................... 452 1,507
MINORITY INTEREST............................................................... -- 26,832
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 14,890,022 shares at
January 31, 1999 and July 31, 1999, respectively....................... 142 149
Additional paid-in capital................................................. 54,133 72,340
Retained earnings.......................................................... 9,332 28,104
Common stock in treasury - 551,046 shares at July 31, 1999................. -- (17,734)
---------- ----------
Total stockholders' equity............................................. 63,607 82,859
---------- ----------
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 82,144 $ 166,597
---------- ----------
---------- ----------
</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
JULY 31, 1998 JULY 31, 1999
------------- ---------------
(UNAUDITED)
<S> <C> <C>
NET SALES ................................................................. $ 26,451 $ 33,375
COST OF SALES .................................................................. 13,712 20,450
-------- ---------
GROSS PROFIT .................................................................. 12,739 12,925
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................... 13,499 23,908
INTEREST AND OTHER INCOME, NET.................................................. (300) (1,027)
MINORITY INTEREST............................................................... -- (493)
-------- ---------
LOSS BEFORE INCOME TAXES........................................................ (460) (9,463)
BENEFIT FOR INCOME TAXES........................................................ (317) (3,399)
-------- ---------
NET LOSS .................................................................. $ (143) $ (6,064)
-------- ---------
-------- ---------
BASIC AND DILUTED NET LOSS PER SHARE............................................ $ (0.01) $ (0.42)
-------- ---------
-------- ---------
SHARES USED IN THE CALCULATION OF BASIC AND DILUTED
NET LOSS PER SHARE......................................................... 13,498 14,330
-------- ---------
-------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS TWENTY-SIX WEEKS
ENDED ENDED
JULY 31, 1998 JULY 31, 1999
------------- ----------------
(UNAUDITED)
<S> <C> <C>
NET SALES ................................................................. $ 57,645 $ 75,187
COST OF SALES .................................................................. 27,935 43,473
-------- ---------
GROSS PROFIT .................................................................. 29,710 31,714
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................... 27,591 47,658
RESTRUCTURING CHARGE............................................................ -- 22,907
GAIN ON SUBSIDIARY INITIAL PUBLIC OFFERING...................................... -- (70,091)
INTEREST AND OTHER INCOME, NET.................................................. (641) (1,167)
MINORITY INTEREST............................................................... -- (485)
-------- ---------
INCOME BEFORE INCOME TAXES...................................................... 2,760 32,892
PROVISION FOR INCOME TAXES...................................................... 903 14,120
-------- ---------
NET INCOME ................................................................. $ 1,857 $ 18,772
-------- ---------
-------- ---------
BASIC NET INCOME PER SHARE...................................................... $ 0.14 $ 1.31
-------- ---------
-------- ---------
DILUTED NET INCOME PER SHARE.................................................... $ 0.14 $ 1.19
-------- ---------
-------- ---------
SHARES USED IN THE CALCULATION OF BASIC NET
INCOME PER SHARE........................................................... 13,410 14,280
-------- ---------
-------- ---------
SHARES USED IN THE CALCULATION OF DILUTED NET
INCOME PER SHARE........................................................... 13,618 15,790
-------- ---------
-------- ---------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS TWENTY-SIX WEEKS
ENDED ENDED
JULY 31, 1998 JULY 31, 1999
------------- -----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income................................................................. $ 1,857 $ 18,772
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................ 762 1,911
Gain on subsidiary initial public offering............................... -- (70,091)
Restructuring charge (includes reserve for inventory liquidation)........ -- 23,407
Deferred taxes........................................................... -- 19,309
Minority interest........................................................ -- (485)
Amortization of investments.............................................. 136 (139)
Compensation expense related to issuance of restricted stock and
stock appreciation rights............................................. 44 --
Changes in operating assets and liabilities:
Merchandise inventories........................................... (6,753) (9,118)
Prepaid expenses and other current assets......................... (4,650) (5,642)
Other assets...................................................... (24) (241)
Current liabilities .............................................. (2,714) 5,272
Deferred credits.................................................. 55 120
--------- ---------
Net cash used in operating activities...................................... (11,287) (16,925)
--------- ---------
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Acquisition of businesses.................................................. (10,303) --
Capital expenditures....................................................... (2,257) (9,186)
Purchases of available-for-sale investment securities...................... (43,281) --
Purchases of held-to-maturity investment securities........................ -- (55,378)
Proceeds from the maturity of held-to-maturity investment securities....... 30,024 --
Proceeds from the sale of available-for-sale investment securities......... 37,209 --
--------- ---------
Net cash provided by (used in) investing activities............................. 11,392 (64,564)
--------- ---------
--------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from issuance of subsidiary common stock...................... -- 97,749
Proceeds from long-term debt and capital leases............................ -- 1,169
Exercise of 7,375 and 187,335 stock options, respectively.................. 82 1,088
Principal payments of long-term debt and capital lease obligations......... (69) (75)
--------- ---------
Net cash provided by financing activities....................................... 13 99,931
--------- ---------
--------- ---------
INCREASE IN CASH & CASH EQUIVALENTS............................................. 118 18,442
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD..................................... 4,485 10,981
--------- ---------
CASH & CASH EQUIVALENTS--END OF PERIOD........................................... $ 4,603 $ 29,423
--------- ---------
--------- ---------
</TABLE>
6
<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.
Purchase price adjustment in June 1999 attributable to the SCREEEM!
acquisition, canceling 33,784 shares of common stock.
See Notes to Unaudited Condensed Consolidated Financial Statements
7
<PAGE>
DELIA*S INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
dELiA*s Inc., through its 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 and operating results generally
to be lower in the first and second quarters than in the third and fourth
quarters (which include the majority of the back-to-school season and the
holiday season) of each fiscal year.
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. Immediately following the offering, we controlled approximately 72%
of the value and 94% of the vote of iTurf. Accordingly, the public ownership of
iTurf is reflected as minority interest in the accompanying financial
statements. iTurf used $17.7 million of the total $97.8 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 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. ("Taponline"). As a result of this
transaction, our interest in iTurf was reduced to 92% of vote and 66% of value.
See Note 6, "Subsequent Events", for a description of the Taponline transaction.
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 public 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.
3. SEGMENT INFORMATION
8
<PAGE>
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 were 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 JULY 31, 1998 CATALOG RETAIL ITURF TOTAL
------- ------ ----- -----
<S> <C> <C> <C> <C>
Revenues from external customers $ 20,489 $ 5,202 $ 760 $ 26,451
Operating profit (loss) (876) 140 (24) (760)
THIRTEEN WEEKS ENDED JULY 31, 1999 CATALOG RETAIL ITURF TOTAL
------- ------ ----- -----
Revenues from external customers $ 19,915 $ 10,508 $ 2,952 $ 33,375
Operating loss (4,887) (3,345) (2,751) (10,983)
SIX MONTHS ENDED JULY 31, 1998 CATALOG RETAIL ITURF TOTAL
------- ------ ----- -----
Revenues from external customers $ 48,969 $ 7,847 $ 829 $ 57,645
Operating profit (loss) 2,128 90 (99) 2,119
Property & equipment, net 6,384 3,421 212 10,017
TWENTY-SIX WEEKS ENDED JULY 31, 1999 CATALOG RETAIL ITURF TOTAL
------- ------ ----- -----
Revenues from external customers $ 49,764 $ 19,856 $ 5,567 $ 75,187
Operating loss (6,154) (6,569) (3,221) (15,944)
Property & equipment, net 8,017 7,651 1,868 17,536
</TABLE>
<TABLE>
<CAPTION>
SIX TWENTY-SIX
THREE MONTHS THIRTEEN WEEKS MONTHS WEEKS
ENDED ENDED ENDED ENDED
JULY 31, 1998 JULY 31, 1999 JULY 31, 1998 JULY 31, 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Operating profit (loss) for reportable segments $ (760) $ (10,983) $ 2,119 $ (15,944)
Restructuring charges -- -- -- (22,907)
Gain on subsidiary initial public offering -- -- -- 70,091
Interest and other income, net 300 1,027 641 1,167
Minority interest -- 493 -- 485
----------- ----------- ----------- -----------
Total income before taxes $ (460) $ (9,463) $ 2,760 $ 32,892
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Property and equipment for reportable segments $ 10,017 $ 17,536
Other assets 67,330 149,061
----------- -----------
Total consolidated assets $ 77,347 $ 166,597
=========== ===========
</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;
- - $0.7 million for the elimination of jobs at the Screeem! corporate office
and the store locations to be closed, resulting in costs incurred to sever
employees; and
- - $0.5 million for the liquidation of inventory carried at stores to be
converted or closed (reflected in cost of sales).
We expect the restructuring plans associated with these costs to be
substantially completed by the end of the first quarter of fiscal 2000.
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 quarter, 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 additional losses on inventory liquidation and other
restructuring-related costs, as well as store operating losses during the
transition period.
5. COMMITMENTS AND CONTINGENCIES
10
<PAGE>
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 or results of
operations.
6. SUBSEQUENT EVENTS
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
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. The loan includes 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%.
In connection with the acquisition of the distribution facility, our
environmental consultant performed an assessment of the facility. As a result of
their 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.
On September 1, 1999, iTurf acquired Taponline pursuant to an Agreement and
Plan of Merger dated August 10, 1999 by and among iTurf, iTurf Acquisition
Corporation, Taponline, the shareholders of Taponline and MarketSource
Corporation ("MarketSource"). 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, which reduced our
ownership of iTurf to 92% of vote and 66% of value. The transaction, which was
structured as a tax-free reorganization, will be accounted for under the
purchase method of accounting. In connection with the transaction, MarketSource,
which is owned by certain of the shareholders of Taponline, including Martin
Levine, who was recently elected as a member of iTurf's board of directors,
entered into an arrangement to purchase advertising and other inventory on
iTurf's network of sites for resale to MarketSource's clients. Separately, iTurf
has 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.
11
<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 five more stores in August and September, bringing the total number of
full-price dELiA*s brand stores currently in operation to ten. 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 and dot dot dash catalogs.
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. As a result of that offering, we controlled approximately 72% of the
value and 94% of the vote of iTurf through July 31, 1999. Accordingly, the
public ownership of iTurf is reflected as minority interest in the accompanying
financial statements. iTurf used $17.7 million of the total $97.8 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, or $2.57 per share on a diluted basis, after taxes).
On September 1, 1999, iTurf acquired Taponline in exchange for 1,586,996
newly issued shares of iTurf Class A common stock. As a result of that
transaction, our ownership of iTurf decreased to approximately 66% of value and
92% of vote.
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. As our revenue base grows and we further penetrate our target
market, we will probably not be able to sustain the levels of percentage annual
growth in net sales and operating income experienced historically. In addition,
as we have increased the number of catalogs we mail, we have observed 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 have
declined. In addition, increases in the cost of materials, printing, paper,
postage, shipping and labor may adversely affect the profitability of our
catalog business.
12
<PAGE>
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 expand our retail business may be limited
by our ability to locate and obtain acceptable store sites and lease terms or
renew existing leases.
In addition, 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;
- - $0.7 million for the elimination of jobs at the Screeem! corporate office
and the store locations to be closed, resulting in costs incurred to sever
employees; and
- - $0.5 million for the liquidation of inventory carried at stores to be
converted or closed (reflected in cost of sales).
We expect the restructuring plans associated with these costs to be
substantially completed by the end of the first quarter of fiscal 2000.
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.
13
<PAGE>
During the second quarter, 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.
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 SIX MONTHS TWENTY -SIX WEEKS
ENDED ENDED ENDED ENDED
JULY 31, 1998 JULY 31, 1999 JULY 31, 1998 JULY 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 51.8 61.3 48.4 57.8
------ ----- ------ -----
Gross profit 48.2 38.7 51.6 42.2
Selling, general and administrative expenses 51.0 71.6 47.9 63.4
Restructuring charge -- -- -- 30.5
Gain on subsidiary initial public offering -- -- -- (93.2)
Interest and other income, net (1.1) (3.1) (1.1) (1.5)
Minority interest -- (1.5) -- (0.7)
------ ------ ------ ------
Income (loss) before income taxes (1.7) (28.3) 4.8 43.7
Provision (benefit) for income taxes (1.2) (10.2) 1.6 18.8
------- ------ ------ -----
Net income (loss) (0.5)% (18.1)% 3.2% 24.9%
------- ------ ------ -----
------- ------ ------ -----
</TABLE>
COMPARISON OF THIRTEEN WEEKS ENDED JULY 31, 1999 AND THREE MONTHS ENDED
JULY 31, 1998
NET SALES. Net sales increased approximately $6.9 million, or 26% to $33.4
million in the second quarter of fiscal 1999 from $26.5 million in the second
quarter of fiscal 1998. The increase in 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 and introduction of dELiA*s brand
full-price stores beginning in February 1999, as well as from the growth of our
Internet segment. The increase was partially offset by a decline in sales from
our catalog segment. Lower circulation, reduced response rates and the migration
of sales to our internet sites reduced catalog sales despite the introduction of
our Storybook Heirlooms catalog in January 1999.
GROSS MARGIN. Gross margin decreased to 38.7% of net sales in the second
quarter of fiscal 1999 from 48.2% in the second quarter of fiscal 1998. The
decrease is primarily due to a higher proportion of discounted catalog sales,
significant markdowns on merchandise sold through our Screeem! stores 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 $10.4 million to $23.9 million
in the second quarter of fiscal 1999, or 71.6% of net sales, from $13.5 million
in the second quarter of fiscal 1998, or 51% of net sales. Selling, general and
administrative expenses increased primarily as a result of spending on corporate
infrastructure and marketing to support retail and Internet growth and to
improve the efficiency of our distribution processes, as well as additional
expenses related to the introduction of new catalogs. We expect such
expenditures to continue and selling, general and administrative expenses to
remain high throughout fiscal 1999.
14
<PAGE>
COMPARISON OF TWENTY-SIX WEEKS ENDED JULY 31, 1999 AND SIX MONTHS ENDED
JULY 31, 1998
NET SALES. Net sales increased approximately $17.6 million, or 30.6%, to
$75.2 million in the first half of fiscal 1999 from $57.6 million in the first
half of fiscal 1998. The increase in 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 and the introduction of dELiA*s brand
full-price stores beginning in February 1999, as well as from the growth of our
Internet segment. The increase was partially offset by a decline in sales from
our catalog segment. Lower circulation, reduced response rates, lower fill rates
and the migration of sales to our internet sites reduced catalog sales, despite
the introduction of our Storybook Heirlooms catalog in January 1999.
GROSS MARGIN. Gross margin excluding a $500,000 charge related to the first
quarter 1999 Screeem! restructuring decreased to 42.9% of net sales in the first
half of fiscal 1999 from 51.6% in the first half of fiscal 1998. The decrease is
primarily due to a higher proportion of discounted catalog sales, significant
markdowns on merchandise sold through our Screeem! stores, lower pricing on
selected catalog merchandise 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 $20.1 million to $47.7 million
in the first half of fiscal 1999, or 63.4% of net sales, from $27.6 million in
the first half of fiscal 1998, or 47.9% of net sales. Selling, general and
administrative expenses increased primarily as a result of spending on corporate
infrastructure and 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. 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.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statement of operations
data for the six fiscal quarters ended July 31, 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 QUARTER ENDED
FISCAL 1998 FISCAL 1999
APR. 30, JULY 31, OCT. 31, JAN. 31, MAY 1, JULY 31,
1998 1998 1998 1999 1999 1999
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net sales ....................................... $ 31,194 $ 26,451 $ 40,821 $ 59,898 $ 41,812 $ 33,375
Cost of sales ................................... 14,223 13,712 19,979 30,454 23,023 20,450
-------- -------- -------- -------- -------- --------
Gross profit .................................... 16,971 12,739 20,842 29,444 18,789 12,925
Selling, general and
administrative expenses ....................... 14,092 13,499 19,691 24,429 23,750 23,908
Restructuring charge ............................ -- -- -- -- 22,907 --
Gain on subsidiary initial public offering ...... -- -- -- -- (70,091) --
Interest and other income, net .................. (341) (300) (126) (195) (140) (1,027)
Minority interest ............................... -- -- -- -- 8 (493)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes ............... 3,220 (460) 1,277 5,210 42,355 (9,463)
Provision (benefit) for income taxes ............ 1,220 (317) 530 1,972 17,519 (3,399)
-------- -------- -------- -------- -------- --------
Net income (loss) ............................... $ 2,000 $ (143) $ 747 $ 3,238 $ 24,836 $ (6,064)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Per share data:
Basic net income (loss) per share ............... $ 0.15 $ (0.01) $ 0.05 $ 0.23 $ 1.75 $ (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
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Diluted net income (loss) per share ............. $ 0.15 $ (0.01) $ 0.05 $ 0.21 $ 1.56 $ (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
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
PERCENTAGE OF TOTAL NET SALES
Net sales ....................................... 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
-------- -------- -------- -------- -------- --------
Gross profit .................................... 54.4 48.2 51.0 49.2 45.0 38.7
Selling, general, and administrative expenses ... 45.2 51.0 48.2 40.8 56.8 71.6
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)
Minority interest ............................... -- -- -- -- 0.0 (1.5)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes ............... 10.3 (1.7) 3.1 8.7 101.3 (28.3)
Provision (benefit) for income taxes ............ 3.9 (1.2) 1.3 3.3 41.9 (10.2)
-------- -------- -------- -------- -------- --------
Net income (loss) ............................... 6.4% (0.5)% 1.8% 5.4% 59.4% (18.1)%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
dELiA*s is subject to seasonal fluctuations in our merchandise sales and
results of operations. We expect our net sales and results of operations
generally to be lower in the second quarter and higher in the fourth quarter
(which includes the holiday season) of each fiscal year. 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 or products introduced), the mix of products sold, the hiring and
training of additional personnel, the timing of inventory write downs, the
integration of acquisitions, the incurring of other operating costs and factors
beyond 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
16
<PAGE>
Cash used in operations in the first half of fiscal 1999 and 1998 was $16.9
million and $11.3 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 $64.6 million for the purchase of short-term
investments and capital expenditures in the first half of fiscal 1999. For the
first half of fiscal 1998, investing activities provided $11.4 million, which
reflects the sale of short-term investments in fiscal 1998. During the second
half of fiscal 1999, we expect to make additional capital expenditures of
approximately $19 million for the purchase of, and improvements to, our
warehouse and distribution facility, expansion of our retail concepts and
conversion of stores between our retail concepts, investment in the
infrastructure of iTurf, new telecommunications equipment for our New York and
North Carolina call centers and other information system projects, as well as
leasehold improvements and purchase of and improvements to other equipment
relating to new corporate office leases. 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. We expect
that we will incur indebtedness under our credit facility with First National
Bank in the third and fourth quarters of fiscal 1999 to finance working capital
and a portion of our planned capital expenditures.
Cash flows from financing activities in the first half of fiscal 1999 were
$99.9 million, primarily as a result of the initial public offering of iTurf
common stock. We did not engage in significant financing activities in the first
half of fiscal 1998.
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
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. The loan includes 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%.
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. Our ability 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.
The availability of the unused revolving line of credit is limited to specified
percentages of the value of our eligible inventory determined under the credit
agreement. At our option, borrowings under this facility bear interest at First
Union National Bank's prime rate or at LIBOR plus 200 basis points.
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. 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 12,500,000 shares of Class B
common stock of iTurf currently held by us.
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 changes 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
17
<PAGE>
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 second 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. As a result of this timing, 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 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. We expect our contingency plans to be
completed by the end of the third quarter of fiscal 1999.
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 $110,000 on Year 2000
compliance. We expect our total costs of addressing Year 2000 issues to be
approximately $250,000. We believe that we have sufficiently budgeted for
technology investments, including Year 2000 compliance, and that our cash from
operations, our equipment lease arrangements and 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.
18
<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 period May 21,
1998 through June 17, 1998 and January 20, 1998 through September 10, 1998,
respectively. 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.
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) The Company filed a Current Report on Form 8-K, dated May 17, 1999,
reporting Item 4 (Changes in Certifying Accountant) and Item 8 (Change in
Fiscal Year).
19
<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: September 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)
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
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 July
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)
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
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
10.24* Mortgage Note dated August 6, 1999 made by dELiA*s Distribution Company in favor of
Allfirst Bank
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).
27* Financial Data Schedule
</TABLE>
22
<PAGE>
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* Filed herewith
** Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
23
<PAGE>
EXHIBIT 10.23
CONSTRUCTION LOAN AGREEMENT
THIS AGREEMENT, made the 6th day of August, 1999, by and between
ALLFIRST BANK, a Maryland state-chartered commercial bank, having an office at
213 Market Street, Harrisburg, Pennsylvania 17105 (the "Bank") and dELiA*S
DISTRIBUTION COMPANY, a Delaware corporation, having offices at 348 Poplar
Street, Hanover, Pennsylvania 17331 (the "Borrower"), and with the joinder of
dELiA*S, INC. (the "Surety").
B A C K G R O U N D :
The Borrower is or is about to become the owner of 24.9 acres with
improvements located on the south side of Poplar Street in Penn Township, York
County, Pennsylvania (the "Real Property"). Borrower desires to borrow from the
Bank and the Bank, subject to the terms and conditions set forth herein, is
prepared to lend to Borrower up to Five Million Three Hundred Twenty Thousand
Dollars ($5,320,000) to purchase the Real Property and to renovate the existing
building (the "Improvements") on the Real Property.
NOW THEREFORE, in consideration of the premises, and of the mutual
promises and undertakings of the parties set forth herein, and with the
intention of being legally bound hereby, the parties hereto agree as follows:
1. THE LOAN.
(a) PURPOSE AND AMOUNT. The Bank shall lend to the
Borrower up to the sum of Five Million Three Hundred Twenty Thousand Dollars
($5,320,000) (the "Loan"). The Loan shall be advanced by the Bank for the
purpose of financing the purchase of the Real Property and construction of the
Improvements, in accordance with and subject to the terms and conditions set
forth herein, as follows: (i) $5,040,000 will be advanced simultaneously with
the closing of the acquisition of the Real Property (the "Closing"), currently
scheduled for August 6, 1999, or such other date as shall be mutually agreed to
by the Bank and the Borrower, and (ii) $280,000 shall be disbursed in accordance
with Section 6 of this Agreement. The amount of the Loan will not exceed 80% of
the lower of the "as completed" appraisal or the total cost of the Real Property
and Improvements. Borrower shall pay at least twenty percent (20%) of the
purchase price of the Real Property plus all closing costs at settlement.
(b) LOAN DOCUMENTS.
(i) The Borrower's obligation to repay the
Loan and any other sums loaned to the Borrower by the Bank is evidenced by the
Borrower's promissory note dated this date in the maximum principal amount of
Five Million Three Hundred Twenty Thousand Dollars ($5,320,000) ("Note"),
providing for the payment of principal, together with interest thereon at the
rate set forth therein, in such installments, at such times, and according to
such further terms as set forth in the Note.
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(ii) As security for the Note and all of the
Borrower's obligations thereunder and hereunder, the Borrower shall execute and
deliver to the Bank or cause to be executed and delivered to the Bank, as the
case may be, the following (the "Collateral Documents"):
(A) A mortgage ("Mortgage")
covering the Real Property and all building materials, fixtures, machinery and
equipment necessary or incidental to the construction or general operation and
maintenance of the Real Property, and all renewals and replacements thereof or
additions thereto, all as more specifically described in the Mortgage.
(B) A security agreement (the
"Security Agreement") covering Borrower's interest in all machinery and
equipment, furniture and fixtures, now existing or hereafter acquired, which are
located on and affixed to the Real Property.
(C) An assignment of all
agreements affecting the Real Property, together with appropriate consents
thereto and approvals thereof ("Assignment of Agreements Affecting Real
Estate").
(D) An assignment of all leases
of or affecting the Real Property or the Improvements or any part(s) thereof
("Assignment of Leases"). Borrower shall occupy at least 51% of the building
space being acquired.
(E) A suretyship agreement of
dELiA*s, Inc. (the "Surety").
(iii) The Borrower and the Surety shall execute and
deliver such additional documents and instruments as the Bank shall reasonably
require in order to perfect the Bank's interest in any of the foregoing
property. The Note, Mortgage, Security Agreement, Assignment of Agreements
Affecting Real Estate, the Assignment of Leases, the Suretyship Agreement,
financing statements and other documents and instruments referred to above (all
of which, together with this Agreement, are hereinafter collectively referred to
as the "Loan Documents") shall be in form and substance satisfactory to the
Bank, and all necessary filing and recording fees with respect thereto shall be
paid by the Borrower.
2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to the Bank (which representations and warranties
shall survive until the Loan has been paid in full) that:
(a) Borrower and Surety are corporations duly
organized and validly existing under the laws of the State of Delaware and have
the power and authority to carry on their business(es) as now being conducted
and to own their properties and assets. Borrower is qualified to do business and
is in good standing under the laws of the Commonwealth of Pennsylvania.
(b) Borrower and Surety have the power and
authority, and have taken all corporate action, and obtained all consents and
approvals, regulatory or otherwise, necessary to make, deliver and carry out the
terms of this Agreement, the Collateral Documents and all other documents and
instruments related thereto to be issued hereunder, and to incur the obligations
herein and therein provided for.
<PAGE>
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(c) The execution, delivery and performance of
this Agreement, the Collateral Documents and all other documents and instruments
related thereto to be issued hereunder will not, at the time of execution and
delivery thereof, or at any time thereafter, violate any provision of law or
contravene the Articles of Incorporation or By-Laws of the Borrower or the
Surety or result in a material breach of or constitute a material default or
require any consent under any agreement, indenture or instrument to which
Borrower or Surety is a party, or its property may be bound or affected, nor
create or result in the imposition or any lien, charge, security interest or
other encumbrance (other than pursuant to this Agreement and the Collateral
Documents) upon or with respect to any of its properties pursuant to the
Articles of Incorporation or By-Laws of the Borrower or the Surety or any
agreement, indenture, instrument, judgment, decree or order to which Borrower or
Surety is a party or subject or by which its property may be bound or affected.
(d) This Agreement, the Collateral Documents and
all other documents and instruments related thereto to be issued hereunder have
been properly authorized and are the legal, valid and binding obligations of
Borrower and Surety, enforceable against Borrower and Surety in accordance with
their respective terms.
(e) All financial statements heretofore
furnished by Borrower or Surety to Bank have been prepared in accordance with
generally accepted accounting principles and practices consistently applied, are
substantially complete and correct, and fully and fairly present the financial
condition of Borrower and Surety as of the date or dates thereof and the results
of its operations for the periods ending on said date(s), and as of this date
there has been no material adverse change in the financial condition of Borrower
or Surety from that set forth in the most recent financial statements so
furnished or in the business, operations or assets of Borrower or Surety.
(f) Borrower and Surety have filed all Federal,
State and local tax returns and other reports which are required to be filed and
have paid or made provision for the payment of all taxes which have or may
become due under and pursuant to said tax returns, or under or pursuant to any
assessment received from any taxing authority or authorities to which Borrower
or Surety is subject; have made adequate provision for the payment of such
taxes, assessments or other charges accruing but not yet payable; and have no
knowledge of any deficiency or additional assessment in connection with any
taxes, assessments or charges not provided for in its or their books.
(g) Borrower and Surety are in substantial
compliance with all laws, regulations, ordinances, statutes, rules, orders and
decrees applicable with respect to (1) any restrictions, specifications or other
requirements pertaining to the conduct of its or their business and (2) the use,
maintenance and operation of the personal and real properties owned or leased by
Borrower and Surety in the conduct of its or their business.
(h) No representation or warranty by the
Borrower or Surety contained herein or in any certificate or other document
furnished by the Borrower or Surety pursuant hereto or as an inducement hereto
contains any untrue statement of fact when made or omits to state a fact
necessary to make such representation or warranty not misleading in light of the
circumstances under which it was made.
<PAGE>
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(i) There are no claims, suits, actions or legal
proceedings pending, or to the knowledge of Borrower or Surety threatened,
against or affecting Borrower or Surety or the properties or assets owned by
Borrower or Surety or used in the conduct of the business of Borrower or Surety
which, if adversely determined, would materially and adversely affect the
financial condition of Borrower or Surety or its normal method of doing
business, and there are no proceedings by or before any governmental commission,
board, bureau, arbitrator or administrative agency, pending or, to the knowledge
of Borrower or Surety, threatened against Borrower or Surety which, if adversely
determined, would materially and adversely affect the financial condition of
Borrower or Surety or its normal method of doing business.
(j) No consent, approval or other authorization
of or by any court, administrative agency or other governmental authority is
required in connection with the Borrower's or Surety' execution and delivery of
or compliance with any of the Loan Documents or any other document or instrument
relating to the Loan executed by the Borrower or Surety.
(k) Borrower and Surety have conducted a
comprehensive review and assessment of their computer systems and applications,
micro-processor based goods and equipment owned or used by them in their
business (except with respect to certain assets acquired by a subsidiary of
Surety on September 16, 1998 from Fulcrum Direct, Inc. and its affiliates), and
all products currently sold by them, and are making inquiry of their material
suppliers, vendors and customers, with respect to functionality before, during
and after the year 2000 (the "Year 2000 Problem"). Borrower and Surety have
prepared a plan to ensure that all such systems, goods, equipment and products
owned or used by them and material to the conduct of their business will be Year
2000 Compliant in a timely manner, and have provided a copy of such plan to
Bank. Borrower and Surety reasonably believe, based on the foregoing review,
assessment and inquiry that the Year 2000 Problem will not materially and
adversely affect the financial condition of Borrower or Surety or its normal
method of doing business.
3. AFFIRMATIVE COVENANTS. The Borrower and the Surety covenant
and agree that, until the Loan has been paid in full:
(a) The Borrower shall commence construction of
the Improvements and proceed diligently, so that the construction of the
Improvements shall be substantially completed by no later than nine months
following the date of Closing (the "Completion Date"), which Completion Date is
of the essence of this Agreement.
(b) The construction of the Improvements shall
be performed in strict accordance with all applicable statutes, laws, and
ordinances, with the rules, regulations and requirements of all public
authorities having jurisdiction over the Real Property and Improvements.
(c) On or before the Completion Date the
Borrower shall deliver to the Bank a final certificate of occupancy (or its
equivalent) issued by the governmental authority having jurisdiction over the
Real Property and Improvements which confirms that construction of the
Improvements has been completed in accordance with all applicable requirements.
(d) The Borrower shall not amend or permit to
be amended in any material respect the Plans and Specifications or the
Construction Contract without in each
<PAGE>
-5-
case obtaining the prior written approval of the Bank, which approval shall not
be unreasonably withheld or delayed.
(e) Borrower and Surety shall not create, incur
or permit to exist any lien, charge, encumbrance or security interest on, in or
with respect to the Real Property, Improvements or any other property securing
the Loan except (i) liens in favor of Bank, (ii) liens for taxes not yet due or
which are being contested in good faith by appropriate proceedings, PROVIDED
that adequate reserves with respect thereto are maintained on the books of the
Surety or the Borrower, in conformity with GAAP, (iii) easements, rights of way,
restrictions and other similar encumbrances incurred in the ordinary course of
business which, in the aggregate, are not substantial in an amount and which do
not in any case materially detract from the value of the Real Property subject
thereto or materially interfere with ordinary conduct of the business of the
Borrower, and (iv) liens otherwise expressly permitted by the Loan Documents.
(f) Borrower and Surety shall not transfer
control or ownership of the Real Property or Improvements or any part thereof,
directly or indirectly, voluntarily or involuntarily, without the prior written
approval of the Bank; PROVIDED, HOWEVER, that Borrower or Surety may transfer
the Real Property to a wholly owned subsidiary of Surety, PROVIDED that such
subsidiary executes such instruments as Bank may reasonably request to ensure
that the Bank's security interest in the Real Property is not and will not be
adversely affected and all other terms and conditions, covenants, collateral and
other requirements of the Loan Documents will remain unchanged.
(g) Borrower shall pay or discharge any
mechanic's liens or other encumbrances which may be filed or recorded against
the Real Property or Improvements within sixty (60) days after it receives
notice thereof, from the Bank or otherwise.
(h) Surety shall furnish to Bank annual
CPA-audited and quarterly company-prepared financial statements. Also, if and
when separate financial statements are prepared by or for Borrower, Borrower
shall furnish to Bank such financial statements.
(i) Borrower and Surety shall furnish or cause
to be furnished to Bank any other information regarding the business affairs and
condition (financial or otherwise) of or with respect to Borrower or Surety that
Bank shall reasonably request, and permit periodic examination and the making of
abstracts from its books, accounts, records, ledgers and assets of every kind
and description, at all reasonable times upon oral or written request of Bank
(provided that such examinations will be limited to twice each year unless an
Event of Default has occurred), by Bank's authorized attorneys, accountants and
representatives, and permit the Bank or its agents or representatives to discuss
the affairs, finances and accounts of the Borrower and Surety with its officers.
(j) The Borrower shall pay or reimburse the Bank
for all reasonable out-of-pocket costs and expenses (including fees of Bank's
counsel) incurred by the Bank in connection with the preparation, review,
modification and enforcement of the Loan Documents and the administration and
collection of the Loan. Bank's counsel's fees for preparation and negotiation of
the Loan Documents will not exceed $10,000.
<PAGE>
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(k) As compensation for the expenses of
underwriting and evaluating the Loan, the Borrower shall pay to the Bank an
origination fee of 1/2% of the final amount of the Loan less service fee paid on
account. Such fee shall be in addition to the interest and any and all other
amounts which the Borrower is required to pay under the Loan Documents.
(l) The Borrower shall pay for a satisfactory
FIRREA complying "as completed" appraisal prepared by an appraiser engaged by
the Bank which complies with the FDIC's regulations and which reflects a maximum
current loan-to-value not to exceed 80%.
(m) Borrower shall complete recommendations
1-8 listed on pages 6 and 7 of the report of C.S. Davidson, Inc. dated September
2, 1998, by no later than nine months following the date of Closing.
(n) Borrower and Surety shall each duly and
timely pay and discharge all taxes or other claims which might become a lien
upon any of its or their property except to the extent that such items are being
in good faith appropriately contested with adequate reserves therefor having
been set aside and with security satisfactory to the Bank.
(o) Borrower and Surety shall each maintain,
preserve, and keep its properties in good repair, working order and condition,
reasonable wear and tear excepted, and make all reasonable repairs,
replacements, additions, betterments and improvements thereto.
(p) Borrower and Surety shall each maintain its
corporate existence and all licenses, permits and approvals necessary or useful
in the conduct of the business, and substantially comply with all statutes,
rules and regulations, the non-compliance of which would have a material adverse
effect on its business, assets or condition, financial or otherwise.
(q) Surety shall achieve and maintain at all
times during the term of the Loan a minimum fixed charge coverage ratio of at
least 1.4 to 1. For purposes of this subsection 3(q), the following terms shall
have the following meanings:
"FIXED CHARGE COVERAGE RATIO" means, as of any date of determination,
with respect to Surety and its consolidated Subsidiaries, the ratio of (i)
EBITDA plus rents for real property leases (excluding Capital Leases), for the
most recent Rolling Period, to (ii) the sum of: (A) the current portion of
long-term Indebtedness as of such date of determination plus (B) interest
expense and rents for real property leases (excluding Capital Leases), for the
most recent Rolling Period, in each case as determined in accordance with GAAP.
"CAPITAL LEASES" means capital leases and subleases, as defined in
Statement 13 of the Financial Accounting Standards Board dated November 1976, as
amended and updated from time to time.
"EBITDA" means, for any period, net income for such period as defined
in accordance with GAAP, plus interest expense, provisions for federal, state,
local and foreign income taxes, depreciation and amortization expense, non-cash
expense with respect to options or rights to acquire common stock of Surety or
any of its consolidated Subsidiaries as reflected on the financial statements of
Surety and its consolidated Subsidiaries, and non-cash, non-recurring
extraordinary items, in each case as defined in accordance with GAAP and to the
extent each has been deducted in determining net income.
<PAGE>
-7-
"INDEBTEDNESS" of any person as of any date of determination means and
includes all obligations of such person which, in accordance with GAAP, shall be
classified on a balance sheet of such person as liabilities of such person and
in any event shall include, without duplication, all (i) obligations of such
person for borrowed money or which have been incurred in connection with
acquisition of property or assets, (ii) obligations secured by any liken upon
property or assets owned by such person, notwithstanding that such person has
not assumed or become liable for the payment of such obligations, to the extent
of the fair market value of such property, (iii) obligations created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such person, notwithstanding the fact that the rights and
remedies of the seller, lender or lessor under such agreement in the event of
default are limited to repossession or sale of property, (iv) Capital Leases,
(v) guarantees and (vi) letters of credit and letter of credit reimbursement
obligations.
"ROLLING PERIOD" means a period of four consecutive fiscal quarters for
which income statements have been (or are required to have been) delivered
hereunder.
(r) Borrower shall notify Bank promptly of any
default or any event or occurrence that but for the passage of time or giving of
notice or both would constitute a default.
(s) At any time upon request of Bank, Borrower and
Surety will execute and deliver to Bank, in form to be reasonably satisfactory
to Bank, such additional documentation in respect to the indebtedness and
liability of Borrower and Surety to Bank as Bank shall deem necessary or
desirable, in the exercise of reasonable business judgment, in furtherance of
the transaction contemplated by this Agreement.
(t) Borrower shall remain a wholly-owned
subsidiary of Surety, and Surety shall own beneficially and control 100% of the
capital stock of Borrower.
4. CONDITIONS PRECEDENT. The obligation of the Bank to make
the initial advance of the proceeds of the Loan to the Borrower and to make each
subsequent advance thereof is subject to the satisfaction of the following
conditions precedent at the time of each such advance:
(a) Each and all of the representations and
warranties set forth in paragraph 2 hereof shall be true and correct in all
respects, as though separately and independently made on and as of the date of
each such advance.
(b) Each and all of the covenants set forth in
paragraph 3 hereof shall have been performed and complied with in all respects
to the extent required under such paragraph at the time of the applicable
advancement.
(c) There shall be no event of default in
existence under any of the Loan Documents.
(d) The Borrower shall have paid for all
premiums on insurance policies, all recording and conveyancing costs assessed
against the Borrower, the commitment
<PAGE>
-8-
fee of the Bank, and the legal fees and disbursements of the Bank's counsel in
connection with the Loan.
(e) The Loan Documents shall have been duly
executed and delivered to the Bank and, where applicable, shall have been
delivered for recording or filing in the appropriate public office.
(f) The following documents shall have been
delivered by or on behalf of the Borrower to the Bank:
(i) Evidence of authorization by the Board
of Directors and, if necessary, the Shareholder(s) of Borrower and Surety
authorizing Borrower's and Surety's execution and full performance of this
Agreement, the Note, the Suretyship Agreement and all other documents and
actions required hereunder.
(ii) To the extent required by law or
regulation at the time of the applicable advancement, copies of all permits and
approvals required under law, ordinance or regulation for the renovations to the
Improvements and the use thereof, and such other evidence as the Bank may
reasonably require that the construction of the Improvements and the use thereof
contemplated by the Borrower are permitted by and comply with all applicable
laws and the requirements of all governmental or quasi-governmental authorities
having jurisdiction.
(iii) A marked-up title report of the Title
Company, representing its commitment to issue in favor of the Bank, but at the
expense of the Borrower, a standard ALTA form mortgage title insurance policy,
insuring the lien of the Mortgage as a first lien on the Real Property and the
Improvements, including but not limited to all easements and appurtenances
thereto, free and clear of all liens (including possible mechanic's liens, filed
or unfiled) and encumbrances, subject only to objections and exceptions as the
Bank may approve in writing or shown in the title policy insuring the Mortgage.
(iv) Evidence of such insurance as the Bank
may reasonably require, covering any loss, damage or defect to the Real Property
and the Improvements or to persons or other property in, on, or about the Real
Property and the Improvements during the period of construction and thereafter,
including hazard and liability and business interruption insurance as required
by Bank's written commitment letter dated August 3, 1999. A flood plain
certification satisfactory to Bank is also required. If any of the Real Property
or Improvements is located in a flood hazard area, then Bank shall receive at
settlement an original of a flood insurance policy in the amount of the Loan
naming Bank as first mortgagee. All required insurance policies must be
maintained in full force until the Loan is paid in full.
(v) A stipulation against liens executed by
the general contractor and binding upon all subcontractors shall have been filed
with the appropriate public office prior to commencement of any demolition or
construction work.
(vi) Borrower shall supply to the Bank a
satisfactory Phase I Environmental Audit and such evidence as Bank may
reasonably require to demonstrate that the Real Property does not contain any
toxic or hazardous substances and is in compliance with all applicable
environmental laws and regulations.
<PAGE>
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(vii) A written opinion of Borrower's and
Surety's Counsel directed to the Bank, which shall be satisfactory in form and
substance to the Bank.
6. DISBURSEMENTS; ADVANCES OF THE LOAN.
(a) Loan proceeds for construction of the
Improvements in the amount of $280,000 shall be escrowed with Bank at closing
and disbursed by the Bank in accordance with a schedule of payments fixed by the
Bank, but in no event more often than once monthly. Such disbursements and
advances shall be made as the Improvements are completed upon written
applications for payment ("Applications") by the Borrower, following an
inspection(s) performed by or on behalf of Bank, which Applications shall be
accompanied by invoices or paid receipts of the persons or entities for whose
labor or materials payment is being sought. All sums required by paragraph
6(a)(i)(D) below must be injected prior to the advance of any loan proceeds.
Applications shall be submitted only for work completed and materials, free of
any recorded lien, encumbrance or security interest, physically incorporated
into the construction of the Improvements or suitably stored at the Real
Property. Each Application, as thus submitted,
(i) automatically shall constitute a
representation and certification by the Borrower and the General Contractor that
(A) the work done and materials supplied to date are in strict accordance with
the Plans and Specifications, (B) the work and materials for which payment is
requested have been physically incorporated into the construction of the
Improvements or suitably stored on the Real Property with the Bank's prior
approval, (C) the value is as stated, (D) with respect to each category of work
for which payment is being sought, the amount of such payment together with all
prior payments for such category represents a percentage of the total payments
to be made for such category as shown on the project cost breakdown which is not
greater than the percentage of total work for such category which has been
performed as of the date of the Application, and (E) the work and materials
conform with all applicable rules and regulations of the governmental
authorities having jurisdiction of the Real Property; and
(ii) automatically shall constitute a
further representation and certification by the Borrower that (A) payment for
the work and materials described in such Application has been made or will be
made with the proceeds of the disbursements or advances for which the
Application was submitted, (B) no uncured Event of Default exists under any of
the Loan Documents and (C) each and all of the representations and warranties
continue to be true. The Bank reserves the right to approve the form and content
of each Application and to verify the representations therein by an inspection
of the Real Property and Improvements.
(b) The Borrower shall submit Applications to the
Bank covering work completed, together with copies of invoices. Retainages will
be in accordance with the Construction Contract as approved by Bank in its
reasonable discretion. On or about fifteen (15) business days after receipt of
an Application, the Bank will disburse or advance the amount requested (less
retainages), provided that after inspection and review the Bank has verified
those representations and certifications required to be set forth in the
Application pursuant to subparagraph (a) of this paragraph 5 are true and
accurate, and provided further
<PAGE>
-10-
that all other conditions precedent to such disbursements and advances set forth
in this Agreement have been satisfied.
(c) Retainages shall not be deemed to be due and
payable until (i) the Borrower shall deliver to the Bank a final release or
releases of liens or other proof satisfactory to the Bank that final payment
less retainage has been made for all materials and labor furnished in connection
with the Improvements, (ii) all of the conditions necessary for the construction
of the Improvements to be deemed completed have occurred, (iii) all permits
necessary to occupy and operate the Real Property and Improvements have been
issued to Bank's reasonable satisfaction, and (iv) the Borrower shall have
furnished the necessary hazard and liability insurance policies to Bank.
(d) All disbursements and advances may be made
directly by the Bank or indirectly through the Title Company, as the Bank shall
determine in its sole discretion. All such disbursements and advances may be
made by co-payable check or other appropriate credit transfer to the order of
the Borrower and the General Contractor or vendor(s). All payments to persons
other than the Borrower shall be deemed made for the use and benefit of the
Borrower with the same force and effect as if disbursed or advanced directly to
the Borrower.
7. NO HAZARDOUS SUBSTANCES. Borrower shall not store or
discharge, or cause to be stored or discharged, upon the Real Property any toxic
or hazardous substances except in accordance with applicable laws and
regulations. Borrower shall defend, indemnify and hold the Bank harmless from
any loss, claim, damages, proceedings or liability of any type which it may
incur as a result of a violation or alleged violation of any environmental law
or regulation or as a result of any action of an environmental enforcement
agency with regard to the Real Property. Notwithstanding, Borrower's indemnity
shall not apply as to such events or conditions occurring after Bank forecloses
on the Mortgage or accepts a deed in lieu of foreclosure
8. INSPECTION. Although the Bank and its agents may inspect
the Plans and Specifications, the Project Cost Breakdown, the course of
construction and other matters pertaining to the construction of the
Improvements, such inspections are solely for the protection of the Bank as
lender, and the Borrower hereby confirms that the Bank is not making and will
not be deemed to make any representations or warranties as to any matters
pertaining to the Improvements by reason of such inspections.
9. LIMITATION OF BANK'S LIABILITY. The rights and benefits of
this Agreement shall not inure to the benefit of any third party.
Notwithstanding anything to the contrary contained in this Agreement or in any
of the other Loan Documents, or any conduct or course of conduct by the Borrower
or the Bank or their respective affiliates, agents or employees, neither this
Agreement nor any such Loan Documents shall be construed as creating any rights,
claims or causes of action against the Bank in favor of the General Contractor
or any other persons furnishing services or materials to or for the construction
of the Improvements, or their respective creditors or any other person or entity
other than the Borrower. Without limiting the generality of the foregoing,
disbursements or advances made directly to the General Contractor, the Architect
or any other contractor, subcontractor, laborer, materialman or any third
parties pursuant to this Agreement shall not be deemed a recognition by the Bank
of a third part beneficiary status for any such person or entity.
<PAGE>
-11-
10. INDEMNITY. The Borrower, for itself and all those claiming
under or through it, agrees to protect, indemnify, defend and hold harmless the
Bank, its directors, officers and employees, from and against any and all
liability, expense, or damage of any kind or nature and from any suits, claims
or demands, including reasonable legal fees and out-of-pocket expenses, arising
out of the enforcement of this Agreement by the Bank or in connection with an
Event of Default by Borrower or Surety hereunder. This obligation specifically
shall survive the completion of the Improvements and the repayment of the Loan.
11. DEFAULTS.
(a) The occurrence of any one or more of the
following events shall, at the sole option of the Bank, constitute an Event of
Default hereunder:
(i) the Borrower or the Surety shall
fail to make any monthly payment of principal and/or interest due to the Bank
under the Note or under any of the other Loan Documents or under any present or
future swap agreement entered into in connection with the Note, in any case
within five days after any such principal, interest or other amount becomes due
in accordance with the terms hereof or thereof; or
(ii) the Borrower or the Surety shall fail
to observe and perform any of the covenants or agreements on its part to be
observed and performed under this Agreement or under any other Loan Documents or
any present or future swap agreement (other than as set forth in subsection (i)
hereof) entered into in connection with the Note, and such failure shall
continue unremedied for 30 days following delivery of notice thereof by the
Bank; or
(iii) any representation or warranty of the
Borrower or the Surety under this Agreement or any other Loan Documents shall
have been untrue in any material respect when made; or
(iv) work on the construction of the
Improvements shall be discontinued for a period of more than 30 days for any
reason whatsoever other than as an act of God, strikes, unavailability of
materials or other causes outside the reasonable control of Borrower and the
General Contractor or as provided in subsection (vii) hereof; or
(v) the Improvements shall be materially
injured or destroyed by fire or other casualty for which the cost of restoration
is not fully insured; or
(vi) the Borrower shall fail to comply
with any requirements of governmental or quasi governmental authorities having
jurisdiction over the Real Property or Improvements within any applicable grace
or cure period(s), after notice of such requirement has been given to the
Borrower; and such failure could reasonably be expected to have a material
adverse impact on the value of the Real Property or the security provided
thereby to the Bank; or
(vii) any permit or approval necessary for
the renovations to or the occupancy of the Improvements shall be revoked and not
reinstated or reissued within 90 days; and
<PAGE>
-12-
(viii) the Borrower or the Surety shall fail
to perform any material term, condition or covenant of any note, loan agreement,
guaranty, mortgage or other instrument or agreement in connection with the
borrowing of money or the obtaining of advances or credit to which the Borrower
or the Surety is a party or by which it is bound, or by which any of its
properties or assets may be affected (a "Debt Instrument"), so that, as a result
of any such failure to perform, the indebtedness in excess of $100,000 included
therein or secured or covered thereby is declared due and payable prior to the
date on which such indebtedness would otherwise become due and payable; or (ii)
any indebtedness in excess of $100,000 included in any Debt Instrument or
secured or covered thereby is not paid when due beyond any applicable grace
period; or
(ix) the Borrower or the Surety shall make
an assignment for the benefit of creditors generally, file a petition under the
Federal Bankruptcy Code or any similar law, state or federal, be adjudicated
insolvent or bankrupt, petition or apply to any tribunal for the appointment of
a receiver, or trustee or a custodian for it or a substantial part of its
assets, or shall commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect; or there shall have been
filed any such petition or application against it, which remains undismissed,
undischarged and unstayed for a period of ninety (90) days or more; or the
Borrower or the Surety shall consent in writing to the approval of or
acquiescence in any such petition, application or proceeding or the appointment
of a receiver or trustee or a custodian for it or any substantial part of any of
its properties, or shall suffer any such receivership, trusteeship or
custodianship to continued undismissed, undischarged or unstayed for ninety (90)
days or more; or
(x) the Borrower shall fail to complete
recommendations 1-8 on pages 6 and 7 of the report of C.S. Davidson, Inc. dated
September 2, 1998, on or before the Completion Date; or
(xi) the Borrower or the Surety shall fail
to pay, or admits in writing its inability to pay, its debts generally as they
become due.
(b) ACCELERATION AND REMEDIES. Upon the
occurrence and continuance of any event of default hereunder, in addition to any
other rights or remedies available to it hereunder or under any other Loan
Document or at law or in equity, the Bank may exercise any or all of the
following rights and remedies as it may deem necessary or appropriate.
(i) declare the outstanding principal
balance of the Loan, together with all accrued and unpaid interest thereon and
all other sums due hereunder or under any of the other Loan Documents, and all
other obligations of Borrower to Bank to be immediately due and payable in full;
(ii) cease making any further disbursements
or advances hereunder;
(iii) enter upon the Real Property and take
possession thereof, together with the Improvements in the course of construction
or completed and all materials, supplies, tools, equipment and construction
facilities and appliances located thereon, and
<PAGE>
-13-
proceed either in the name of the Bank or in the name of the Bank as the
attorney-in-fact of the Borrower (which authority is coupled with an interest
and is irrevocable by the Borrower) as the Bank shall elect, to complete the
construction of the Improvements at the cost and expense of the Borrower.
(iv) set off all property of the Borrower
now or hereafter at any time in its possession in any capacity whatsoever
including, but not limited to, any balance or share of any deposit, trust or
agency account, as to all of which property the Borrower hereby grants the Bank
a lien and security interest.
(c) REMEDIES CUMULATIVE, ETC.
(i) No right or remedy conferred upon or
reserved to the Bank under any of the Loan Documents, or with respect to any
guaranty of payment of the Loan or of performance of any of the Borrower's
obligations under any of the Loan Documents (including the Suretyship Agreement)
or any collateral securing the payment of the Loan under any of the Loan
Documents (such Suretyship Agreement and such other collateral, collectively,
the "Collateral"), now or hereafter existing at law or in equity or by statute
or other legislative enactment, is intended to be or shall be deemed exclusive
of any other such right or remedy, and each and every such right or remedy shall
be cumulative and concurrent, and shall be in addition to every other such right
or remedy, and may be pursued singly, concurrently, successively or otherwise,
at the sole discretion of the Bank, and shall not be exhausted by any one
exercise thereof but may be exercised as often as occasion therefore shall
occur. No act of the Bank shall be deemed or construed as an election to proceed
under any one such right or remedy to the exclusion of any other such right or
remedy; furthermore, each such right or remedy of the Bank shall be separate,
distinct and cumulative and none shall be given effect to the exclusion of any
other. The failure to exercise or delay in exercising any such right or remedy,
or the failure to insist upon strict performance of any term of any of the Loan
Documents, shall not be construed as a waiver or release of the same, or of any
event of default thereunder, or of any obligation or liability of the Borrower
thereunder. Nothing herein, however, shall be construed to prevent the Bank from
waiving any condition, obligation or default it should do elect. In the event of
such election by the Bank, any waiver, in order to be effective, must be in
writing and signed by the Bank, and any such waiver shall be strictly limited in
its effect to the condition, obligation or default specified therein and shall
not extend to any subsequent condition, obligation or default or impair any
right of the Bank with respect thereto.
(ii) The recovery of any judgment by the
Bank and/or the levy of execution under any judgment shall not affect in any
manner or to any extent, liens or other security interests in any Collateral, or
any rights, remedies or powers of the Bank under any of the Loan Documents or
with respect to any Collateral, but such liens and security interests, and such
rights, remedies and powers of the Bank shall continue unimpaired as before.
Further, the entry of any judgment by the Bank shall not affect in any way the
interest rate payable under any of the Loan Documents on any amounts due to the
Bank, but interest shall continue to accrue on such amounts.
(iii) Except as otherwise provided in this
Agreement and the other Loan Documents, the Borrower hereby waives presentment,
demand, notice of nonpayment, protest, notice of protest, or other notice of
dishonor, and any and all other notices in
<PAGE>
-14-
connection with any default in the payment of, or any enforcement of the payment
of, the Loan. The Borrower further waives and releases all procedural errors,
defects and imperfections in any proceedings instituted by the Bank under the
terms of any of the Loan Documents or with respect to any Collateral.
(iv) The Borrower agrees that the Bank may
release, compromise, forbear with respect to, waive, suspend, extend or renew
any of the terms of the Loan Documents (and the Borrower hereby waives any
notice of any of the foregoing), and that the Loan Documents may be amended,
supplemented or modified by the Bank and the other signatory parties and that
the Bank may resort to any Collateral in such order and manner as it may think
fit, without in any way affecting the validity of any liens over or other
security interest in the remainder of any such Collateral (or the priority
thereof or the position of any subordinate holder of any lien or other security
interest with respect thereto); and any action taken by the Bank pursuant to the
foregoing shall in no way be construed as a waiver or release of any right or
remedy of the Bank, or of any event of default, or of any liability or
obligation of the Borrower, under any of the Loan Documents.
(d) COST AND EXPENSES. Following the occurrence
of any event of default, the Borrower shall pay upon demand all reasonable
out-of-pocket costs and expenses (including all amounts paid to attorneys,
accountants, real estate brokers and other advisors employed by the Bank and/or
to any contractors for labor and materials), incurred by the Bank in the
exercise of any of its rights, remedies or powers under any of the Loan
Documents or with respect to any Collateral with respect to such event of
default, and any amount thereof not paid promptly following demand therefor
together with interest thereon, shall become part of the Loan and shall be
secured by the Mortgage and all other Collateral.
12. MISCELLANEOUS
(a) TIME OF THE ESSENCE. All dates and times for
the performance of the Borrower's obligations set forth herein shall be deemed
to be of the essence of this Agreement.
(b) PUBLICITY. The Bank may announce and publicize
the source of the financing for the Improvements. In conjunction therewith, the
Bank may deliver to the Real Property signs for display indicating that it is
providing financing for the Improvements, subject, however, to Borrower's
reasonable approval. As to each sign provided, the Borrower shall, in its
reasonable discretion, provide a prominent location for its display, shall cause
the sign to be displayed in such place and shall maintain the display of such
sign for the duration of the construction of the Improvements, at the Bank's
expense.
(c) SEVERABILITY. In the event that for any reason
one or more of the provisions of this Agreement or their application to any
person or circumstance shall be held to be invalid, illegal or unenforceable in
any respect or to any extent, such provisions shall nevertheless remain valid,
legal and enforceable in all other respects and to such extent as may be
permissible. In addition, any such invalidity, illegality or unenforceability
shall not affect any other provision hereof, but this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
(d) SUCCESSORS AND ASSIGNS. This Agreement inures to
the benefit of and binds the parties hereto and their respective successors and
assigns, and the words
<PAGE>
-15-
"Borrower" and "Bank" whenever occurring herein shall be deemed to include such
successors and assigns. However, the Borrower shall not voluntarily, or by
operation of law, assign or transfer any interest which it may have under this
Agreement or convey the Real Property or the Improvements, or any part thereof,
without the prior written approval of the Bank. The Bank may assign or otherwise
transfer the Loan and any or all of the Loan Documents to any other person, and
such other person shall thereupon become vested with all of the benefits in
respect thereof granted to the Bank herein or otherwise.
(e) NOTICES. All notices required or desired to be
given to either of the parties hereunder shall be in writing and shall be deemed
to have been sufficiently given for all purposes when presented personally to
such party or sent by certified or registered mail, return receipt requested, to
such party at its address set forth below.
Borrower: 348 Poplar Street
Hanover, PA 17331
With a Copy to: dELiA*s Inc.
435 Hudson Street
New York, NY 10014
Attn: General Counsel
Bank: 13 Baltimore Street
Hanover, PA 17331
Such notice shall be deemed to be given when received, if delivered personally,
two days after the date mailed, if sent by certified or registered mail, return
receipt requested or one day after the date sent, if sent by a nationally
recognized overnight courier. Any notice of any change in such address shall
also be given in the manner set forth above. Whenever the giving of notice is
required, the giving of such notice may be waived in writing by the party
entitled to receive such notice.
(f) DEFINITIONS; NUMBER AND GENDER. In the event
the Borrower consists of more than one person or entity, the obligations and
liabilities hereunder of each of such persons and entities shall be joint and
several, and the word "Borrower" shall mean all or some or any of them. For
purposes of this Agreement, the singular shall be deemed to include the plural
and the neuter shall be deemed to include the masculine and feminine, as the
context may require.
(g) CONFLICTS BETWEEN INSTRUMENTS. The terms and
conditions of Bank's written Commitment dated August 3, 1999, are incorporated
herein by reference and made a part hereof. All obligations and requirements of
the commitment and Borrower's obligations to perform same shall survive the
execution of this Agreement and the closing of the Loan and shall continue in
full force and effect until the Loan is paid in full and shall apply with
respect to all future advances hereunder. Whenever possible, the provisions of
the Commitment shall be deemed supplemental to and not in derogation of the
Note, Mortgage, this Agreement and the documents related thereto. However, to
the extent of any conflict between the terms of this Agreement and the
Commitment, this Agreement shall govern and control.
<PAGE>
-16-
(h) CAPTIONS. The captions or headings of the
paragraphs of this Agreement are for convenience only and shall not control or
affect the meaning or construction of any of the terms or provisions of this
Agreement.
(i) GOVERNING LAW. This Agreement shall be governed
by and construed in accordance with the laws of the Commonwealth of
Pennsylvania.
(j) CROSS-DEFAULT AND CROSS-COLLATERAL. The
Borrower and the Surety consent and agree that a default on or under the Loan or
any other obligation of Borrower or Surety to Bank, present or future, direct or
contingent, shall at Bank's option constitute a default on or under all
obligations of Borrower and Surety to Bank. Similarly, the collateral (real or
personal) that secures any obligation of Borrower or any Surety to Bank shall
secure all obligations of Borrower and any Surety to Bank.
<PAGE>
-17-
IN WITNESS WHEREOF, Borrower and Bank have caused this Agreement to be
duly executed and delivered as of the date first above written.
WITNESS: dELiA*S DISTRIBUTION COMPANY
_________________________ By: /s/ Timothy B. Schmidt
Title: Senior Vice President
"Borrower"
WITNESS: dELiA*S, INC.
_________________________ By:/s/ Timothy B. Schmidt
Title: Senior Vice President
"Surety"
ALLFIRST BANK
By: /s/ Keith Mummert
Title: Vice President
"Bank"
<PAGE>
EXHIBIT 10.24
$5,320,000 August 6, 1999
Harrisburg, Pennsylvania
MORTGAGE NOTE
FOR VALUE RECEIVED, and intending to be legally bound, the undersigned,
dELiA*S DISTRIBUTION COMPANY, a Delaware corporation, with offices at 348 Poplar
Street, Hanover, Pennsylvania 17331 (the "Maker"), does hereby promise to pay,
without defalcation, to the order of ALLFIRST BANK (the "Payee") at 213 Market
Street, Harrisburg, Pennsylvania 17101, or at such other place as the holder
hereof may, from time to time, direct Maker in writing, the principal sum of
five Million Three Hundred Twenty Thousand Dollars ($5,320,000) (the "Principal
Sum"), lawful money of the United States of America, or such lesser amount as
may have been advanced by Payee under the terms of the Construction Loan
Agreement (the "Loan Agreement") of even date between Maker and Payee, together
with interest thereon at the rate or rates hereinafter provided, in accordance
with the following:
(a) Commencing as of the date hereof and continuing until the repayment
in full of all sums due under this Note, the outstanding balance of the
Principal Sum shall bear interest at a rate which is at all times equal to the
Libor Rate (as hereinafter defined) plus one hundred eighty-five (185) basis
points per annum. For the purposes hereof, the term "Libor Rate" shall be
defined as the per annum rate of interest published by Telerate News Services on
Page 3750 under the designation of "British Banker Association Interest
Settlement Rate" (or on any successor or substitute for such service, providing
rate quotations comparable to those currently provided on such page of such
service, as determined by the Payee from time to time, for purposes of providing
quotations of interest rates applicable to deposits in U.S. dollars in the
London interbank market) at approximately 11 a.m., London time, two Business
Days (as hereinafter defined) prior to the date the interest rate is to be
adjusted. The rate of interest charged under this subsection (a) shall be
established on the date hereof, but shall be automatically recalculated as of
the first day of each calendar month during the term of this Note based upon the
Libor Rate in effect two (2) Business Days prior to such date. For the purposes
hereof, the term "Business Day" shall be defined as any day other than a
Saturday, Sunday or other day on which banks are required or authorized to close
in the State of New York or on which dealings are not being carried on by
commercial banks in the London Interbank Market.
(b) Commencing September 6, 1999, and continuing monthly on the sixth
day of each month, principal and interest shall be payable in eighty-four (84)
consecutive monthly installments, which installments shall be based on a
twenty-year amortization, and shall be increased or decreased from time to time
to reflect any change(s) in the effective interest rate.
<PAGE>
(c) Unless sooner paid, the unpaid Principal Sum, together with
interest accrued and unpaid thereon, shall be due and payable in full on August
6, 2006.
Interest shall be calculated on the basis of the actual number of days
in the current calendar year divided by 360. Interest shall be payable as
provided herein. All then accrued and unpaid interest shall also be payable when
the entire principal balance of this Note becomes due and payable (whether by
stated maturity, demand or acceleration) or, if earlier, when such principal
balance is actually paid to Payee. Interest shall accrue on the unpaid balance
hereof at the rate provided for in this Note until the entire unpaid balance has
been paid in full, notwithstanding the entry of any judgment against Maker.
Maker may prepay the indebtedness evidenced by this Note in whole or in
part at any time(s) without premium or penalty, provided that any prepayment(s)
shall be accompanied by all accrued interest to the date of prepayment(s). Each
partial prepayment shall be applied against the installments of principal last
(by date) due and payable; and no prepayment shall postpone or interrupt payment
of future installments of principal and interest, which shall continue to be due
and payable until payment hereof in full. Prepaid principal may not thereafter
be reborrowed.
If any payment hereunder is not paid when due, and continues unpaid for
a period of ten (10) days thereafter, Payee, at Payee's discretion, may charge
Maker as a late charge an amount computed at a rate of two percent (2%) of such
past due amount. The late charge shall be in addition to any interest due.
Notwithstanding the foregoing, in no event shall any late charge be less than
ten dollars ($10).
This Note is secured by, among other things, a Mortgage(s) and Security
Agreement(s) from Maker to Payee of even date herewith and intended to be
recorded forthwith (the "Mortgage"), secured upon premises in Penn Township,
York County, Pennsylvania, as described in said Mortgage (the "Mortgaged
Property"). All of the agreements, conditions, covenants, provisions and
stipulations contained in the Mortgage which are to be kept and performed by
Maker, are hereby made a part of this Note to the same extent and with the same
force and effect as if they were fully set forth herein, and Maker covenants and
agrees to keep and perform them, or cause them to be kept and performed,
strictly in accordance with their terms.
This Note, the Loan Agreement, the Mortgage, the Assignment(s) and the
related collateral documents are referred to herein collectively as the "Loan
Documents," and the provisions thereof are incorporated herein by reference.
Capitalized terms used herein without definition that are defined in the Loan
Agreement shall have the same meanings herein.
Subject to any applicable notice and grace period(s), if the Maker
shall fail to observe or perform any of the terms, agreements, covenants and
conditions of the
<PAGE>
Maker contained herein or in any other Loan Document, the Payee, in its
discretion, but without any duty to do so, and without waiving any default, may
perform any of such
Maker contained herein or in any other Loan Document, the Payee, in its
discretion, but without any duty to do so, and without waiving any default, may
perform any of such terms, agreements, covenants and conditions, in whole or in
part, and any money advanced or expended by the Payee in or toward the
fulfillment of such terms, agreements, covenants and conditions shall be due on
demand and shall become a part of and be added to the indebtedness due under
this Note, with interest to be paid thereon at the then current rate provided
herein from the date of the respective advance or expenditure, and secured by
the Mortgage and Security Agreement and the related collateral documents.
The occurrence of any one or more of the events, conditions or
occurrences identified in the Loan Agreement as an "Event of Default" shall be
an Event of Default hereunder.
In the event of any default hereunder, or if an event of default, as
described in the Mortgage(s) and Security Agreement(s) or any other Loan
Document, shall occur and be continuing beyond any applicable grace period, an
event of default shall occur hereunder, and Payee, at its option and without
further notice to Maker, may declare immediately due and payable the entire
unpaid balance of the principal sum of this Note with interest accrued thereon
at the rate specified to the date of default and thereafter at the rate provided
herein from time to time, and all other sums due by Maker under the Loan
Documents, anything in any of the Loan Documents to the contrary
notwithstanding; and payment thereof may be enforced and recovered in whole or
in part at any time by one or more of the remedies provided to Payee in the Loan
Documents. In such case, Payee may also recover all reasonable costs of suit and
other reasonable expenses in connection therewith, together with a reasonable
attorney's commission for collection, together with interest on any judgment
obtained by Payee at the rate provided herein from time to time, including
interest at that rate from and after the date of any Sheriff's sale until actual
payment is made by the Sheriff to Payee of the full amount.
The remedies of Payee as provided in the Loan Documents and the
warrants contained therein shall be cumulative and concurrent, and may be
pursued singly, successively or together at the sole discretion of Payee, and
may be exercised as often as occasion therefor shall occur; and the failure to
exercise any such right or remedy shall in no event be construed as a waiver or
release thereof or of any other right or remedy.
Except for any required notice(s) under the Loan Documents, Maker
hereby waives and releases all errors, defects and imperfections in any
proceedings instituted by Payee under the terms of the Loan Documents, as well
as all benefits that might accrue to Maker by virtue of any present or future
laws exempting the Mortgaged Property, or any other property, real or personal,
or any part of the proceeds arising from any sale of any such property, from
attachment, levy or sale under execution, or
<PAGE>
providing for any stay of execution, exemption from civil process, or extension
of time for payment. Maker agrees that any real estate that may be levied upon
pursuant to a judgment obtained by virtue hereof, or any writ of execution
issued thereon, may be so levied solely, in whole or in part, in any order
desired by Payee.
Maker hereby waives presentment for payment, demand, notice of demand,
notice of nonpayment or dishonor, protest and notice of protest of this Note,
and all other notices in connection with the delivery, acceptance, performance,
default or enforcement of the payment of this Note, and agrees that its
liability shall not be affected in any manner by any indulgence, extension of
time, renewal, waiver or modification granted or consented to by Payee. Maker
consents to any and all extensions of time, renewals, waivers or modifications
that may be granted in favor of Maker by Payee with respect to the payment or
other provisions of this Note, and to the release of the collateral or any part
thereof, with or without substitution.
Payee shall not be deemed, by any act of omission or commission, to
have waived any of its rights or remedies hereunder unless such waiver is in
writing and signed by Payee, and then only to the extent specifically set forth
in said writing. A waiver of one event shall not be construed as continuing or
as a bar to or waiver of any right or remedy to a subsequent event.
Upon the occurrence and during the continuance of an Event of Default,
Maker does hereby irrevocably authorize and empower any attorney of any court of
record of Pennsylvania or elsewhere to appear for the Maker and on its behalf
and to confess judgment against the Maker in favor of the Payee, with or without
declaration filed, for the unpaid principal balance hereof, together with all
amounts for which the Maker may be liable to the Payee hereunder, including, but
not limited to, unpaid interest, costs and other expenses of suit and reasonable
attorney's fees, all as aforesaid. If a copy hereof, verified by affidavit,
shall have been filed in said proceedings, it shall not be necessary to file the
original as a warrant of attorney. The authority granted herein to confess
judgment shall not be exhausted by any exercise thereof, but shall continue, and
may be exercised as aforesaid, from time to time and at all times until payment
in full of all the amounts due hereunder.
Maker shall pay the cost of any revenue, tax or other stamps now or
hereafter required by law at any time to be affixed to this Note or the
Mortgage; and if any taxes are imposed with respect to debts secured by
mortgages, or with respect to notes evidencing debts so secured, Maker agrees to
pay to the holder hereof upon demand the amount of such taxes, and hereby waives
any contrary provisions of any laws or rules of court now or hereafter in
effect.
Notwithstanding anything to the contrary herein contained, the total
liability of Maker for payment of interest pursuant hereto shall not exceed the
maximum amount, if any, of such interest permitted by applicable law to be
contracted for, charged or received, and if any payments by Maker to Payee
include interest in excess of such a
<PAGE>
maximum amount, Payee shall apply such excess to the reduction of the unpaid
principal amount due pursuant hereto, or if none is due, such excess shall be
refunded to Maker. Any such application or refund shall not cure or waive any
Event of Default. In determining whether or not any interest payable under this
Note or the Loan Documents exceeds the highest rate permitted by law, any
non-principal payment (except payments specifically stated in this Note to be
"interest"), including without limitation prepayment premiums and late charges,
shall be deemed, to the extent permitted by applicable law, to be an expense,
fee, premium or penalty rather than interest.
If any provision hereof is found by a court of competent jurisdiction
to be prohibited or unenforceable, it shall be ineffective only to the extent of
such prohibition or unenforceability, and such prohibition or unenforceability
shall not invalidate the balance of such provision to the extent it is not
prohibited or unenforceable, nor invalidate the other provisions hereof, all of
which shall be liberally construed in favor of Payee in order to effect the
provisions of the Note.
THE MAKER, AND ANY ENDORSERS, SURETIES AND GUARANTORS HEREBY WAIVE ANY
RIGHT TO TRIAL BY JURY OF ANY ISSUES OF FACT IN ANY ACTION RELATING TO ANY
RIGHTS OR OBLIGATIONS UNDER THIS NOTE OR OTHER DOCUMENTS RELATING TO THIS
TRANSACTION.
THE MAKER, AND ANY ENDORSERS, SURETIES AND GUARANTORS HEREBY AGREE THAT
ANY ACTION OR PROCEEDING AGAINST IT TO ENFORCE THIS NOTE MAY BE COMMENCED IN
STATE OR FEDERAL COURT IN ANY COUNTY IN THE COMMONWEALTH OF PENNSYLVANIA IN
WHICH THE PAYEE PRESENTLY HAS AN OFFICE, AND THE MAKER, AND ANY ENDORSERS,
SURETIES AND GUARANTORS WAIVE PERSONAL SERVICE OF PROCESS AND AGREE THAT A
SUMMONS AND COMPLAINT COMMENCING AN ACTION OR PROCEEDING IN ANY SUCH COURT SHALL
BE PROPERLY SERVED AND SHALL CONFER PERSONAL JURISDICTION IF SERVED BY
REGISTERED OR CERTIFIED MAIL.
The Maker intends this to be a sealed instrument and to be legally
bound hereby. This instrument has been executed in, and shall be governed by and
construed according to the laws of, the Commonwealth of Pennsylvania.
The terms "Note" and "Mortgage," as used herein, shall mean the same as
amended, modified or altered, from time to time.
Whenever used, the singular shall include the plural, the plural the
singular and the use of any gender shall be applicable to all genders, and the
words "Payee" and "Maker" shall be deemed to include the respective heirs,
personal representatives, successors and permitted assigns of Payee and Maker.
This obligation shall be legally binding upon the Maker and the heirs,
personal representatives, successors and assigns of the Maker and the benefits
hereof shall inure to the Payee and the successors and assigns of the Payee.
<PAGE>
IN WITNESS WHEREOF, the Maker has duly executed this Note under seal
the day and year first above written.
WITNESS: dELiA*S DISTRIBUTION COMPANY
- ----------------------- By:-------------------------
Title:----------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 29,423
<SECURITIES> 55,517
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 29,850
<CURRENT-ASSETS> 131,673
<PP&E> 21,595
<DEPRECIATION> 4,059
<TOTAL-ASSETS> 166,597
<CURRENT-LIABILITIES> 26,408
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 82,710
<TOTAL-LIABILITY-AND-EQUITY> 166,597
<SALES> 75,187
<TOTAL-REVENUES> 75,187
<CGS> 43,473
<TOTAL-COSTS> 91,131
<OTHER-EXPENSES> 22,907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,167)
<INCOME-PRETAX> 32,892
<INCOME-TAX> 14,120
<INCOME-CONTINUING> 18,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,772
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.19
</TABLE>
