As filed with the Securities and Exchange Commission on January 25, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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iTurf Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 5961 13-3963754
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
435 Hudson Street
New York, New York 10014
(212) 741-7785
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
STEPHEN I. KAHN
435 Hudson Street
New York, New York 10014
(212) 807-9060
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
---------------
Copies of Communications to:
<TABLE>
<S> <C>
RONALD R. PAPA, ESQ. ROBERT A. SCHWED, ESQ.
Proskauer Rose LLP OTHON A. PROUNIS, ESQ.
1585 Broadway Reboul, MacMurray, Hewitt, Maynard & Kristol
New York, New York 10036-8299 45 Rockefeller Plaza
(212) 969-3000 New York, New York 10111
(212) 841-5700
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title Of Each Class Of Amount to be Aggregate Amount of
Securities To Be Registered Registered (1) Offering Price (2) Registration Fee (2)
- ------------------------------------------------ ---------------- -------------------- ---------------------
<S> <C> <C> <C>
Class A Common Stock, par value $.01 per share $46,000,000 $12,788
</TABLE>
(1) Includes shares of Class A common stock which the Underwriters have
an option to purchase to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
---------------
We will amend this registration statement on such date or dates as may be
necessary to delay its effective date until we file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or
until this registration statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
Subject To Completion
, 1999
Shares
iTurf Inc.
Class A Common Stock
--------------
This is the initial public offering of iTurf Inc., and we are offering
shares of our Class A common stock. We anticipate that the initial public
offering price will be between $ and $ per share.
We have applied to list our Class A common stock on the Nasdaq Stock Market
under the symbol "TURF."
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
<TABLE>
<CAPTION>
Per Share
----------- Total
<S> <C> <C>
Public Offering Price ........................... $ $
Underwriting Discounts and Commissions .......... $ $
Proceeds to iTurf Inc. .......................... $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We have granted the underwriters the right to purchase up to additional
shares of Class A common stock to cover any over-allotments.
Joint Book-Running Managers
BT Alex. Brown Hambrecht & Quist
--------------
CIBC Oppenheimer
, 1999
<PAGE>
[Photographs of various screens depicting some of our Web sites will be
printed on the inside front cover page of this prospectus. Descriptions of the
photographs will be provided]
----------------
The information on our Web sites is not a part of this prospectus. iTurf,
the iTurf logo and gURL are some of our service marks. dELiA*s, Contents and
Discount Domain are registered trademarks of dELiA*s Inc., and Droog is a
trademark of dELiA*s Properties Inc. This prospectus also includes trademarks
and trade names of other companies. Each trade name, trademark or service mark
of any other company appearing in this prospectus is the property of its owner.
This prospectus includes statistical data regarding the Internet industry
and the Generation Y market. This data was obtained from industry publications
and reports which we believe to be reliable sources; however, the accuracy and
completeness of such information is not guaranteed. We have not independently
verified such data nor sought the consent of every organization to refer to
their reports herein.
2
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus. Unless we indicate otherwise in this prospectus, references to
the "Company," "iTurf," "we" or "our" mean iTurf Inc., and references to our
"Parent" mean dELiA*s Inc.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about iTurf and our
industry. These forward-looking statements involve risks and uncertainties.
iTurf's actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, as more fully
described in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus. iTurf undertakes no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
Our Business
iTurf is a leading provider of Internet community and e-commerce services
focused primarily on Generation Y. Generation Y is comprised of 56 million
people between the ages of 10 and 24. It is the fastest growing demographic
group under age 65 in the United States and accounts for over $278 billion of
disposable income. iTurf is an online "home turf" where members of Generation Y
can interact and shop in a domain of their own, away from the pressures of
parents and school. Our network of Web sites offers interactive web/zines with
proprietary content, chat rooms, posting boards, personal homepages and e-mail,
as well as online shopping. Our gURL online community provides users with
interactive features and regularly updated articles on topics of interest to
Generation Y girls and young women. Our e-commerce offerings include a wide
range of apparel, accessories, footwear, athletic gear and home furnishings for
Generation Y. Our most prominent online store, dELiAs.cOm, primarily offers
merchandise for Generation Y girls and young women. Our other commerce sites
include TSISoccer.com, contentsonline.com, discountdomain.com and the
recently-launched droog.com site.
We believe we are one of the few networks to focus primarily on the
Generation Y market and we possess advantages relative to other Internet
communities and marketers for this group. In particular, our strategic
relationship with our Parent, dELiA*s Inc., the leading direct marketer to
Generation Y, provides us with the following advantages:
o the exclusive online use of leading brand names including dELiA*s and
TSI Soccer;
o a proprietary nine million-name database;
o sophisticated fulfillment services from our Parent's distribution
center;
o advertising space in our Parent's catalog publications that collectively
have circulation in excess of 60 million; and
o substantial merchandising expertise and strong relationships with
hundreds of vendors.
Our Internet traffic and sales have grown rapidly over the last year. We
estimate that the number of page impressions per month on our Web sites has
grown from approximately 800,000 in February 1998 to approximately 22 million
in December 1998. Our net sales have increased from $53,000 in the quarter
ended October 31, 1997 to $1,064,000 in the quarter ended October 31, 1998. By
selling a selection of branded and proprietary products, we have been able to
achieve higher gross profits per order on merchandise sales than many other
e-commerce companies. In the nine-month period ended October 31, 1998, our
gross margin on merchandise sales was approximately 49%.
We currently generate a substantial majority of our revenue from our
e-commerce offerings, but expect to further develop other revenue streams in
the future. We derive revenue from four primary sources:
o sales of apparel, accessories, footwear, athletic gear, home furnishings
and other merchandise through our e-commerce Web sites;
o fees paid for advertising on our sites;
3
<PAGE>
o fees from licensing our gURL brand and content; and
o subscription fees paid by members of our discountdomain.com discount
shopping service.
Our Market Opportunity
The Internet has emerged as a global medium, enabling millions of people
to share information, communicate and conduct business electronically.
Generation Y is an increasingly important demographic group on the Internet.
According to eMarketer, an Internet market research firm, the number of teens
and college students who regularly access the Internet will rise from an
estimated 12 million in 1998 to 22.3 million by the year 2000.
Generation Y is difficult to reach for traditional retailers, advertisers,
and e-commerce providers. Its members desire entertainment, communication, and
advice in an environment focused on their particular needs. They also demand
engaging content that speaks to them without speaking down to them. We believe
that creating an online destination that caters exclusively to Generation Y is
essential to marketing to this group. The major Internet navigational hubs are
generally designed to appeal to a broad audience, and do not exclusively
address the issues that are relevant to teens, such as peer, parental and
school-related pressures as well as issues revolving around friendship,
sexuality and competition. Accordingly, we believe there is a need for a
Generation Y online destination consisting of an integrated network of
community and commerce in a trusted environment.
Our Strategy
Our goal is to build iTurf into the premier Generation Y online
destination so that we can realize superior revenue growth opportunities in the
form of expanded e-commerce offerings and, eventually, advertising
opportunities including sponsorship, promotion and distribution agreements with
leading brand marketers and media companies. These are the key elements of our
strategy:
Strengthen Brand Recognition. Our strategy is to enhance the brand
recognition of the iTurf name as well as independently build each brand in the
iTurf network, including dELiA*s, gURL, TSISoccer, discountdomain,
contentsonline and Droog. We plan to strengthen our brand names and build
traffic to our sites through the following:
o promotion in our Parent's marketing channels;
o traditional and Internet advertising;
o strategic alliances, such as those we have entered into with Yahoo!
Shopping as well as with CatalogCity.com, and Sportsite.com;
o our affiliate network; and
o direct marketing.
Enhance Online Offerings. We will aggressively seek to develop our
content, community and e-commerce product offerings to drive traffic to our Web
sites and increase revenue.
Expand Site Infrastructure to Support Growth. We intend to continue to
invest in scalable technologies and site infrastructure and to enhance the
functionality of our Web sites in order to better serve existing users and to
provide robust and scalable platforms to support growth.
The cornerstone of our long-term solution is iTurf.com. We intend to
develop iTurf.com as the online meeting place and community for young men and
women of Generation Y. We will promote and drive traffic to this site through
all of the properties in our network. We will promote iTurf to Generation Y
girls and young women through gURL.com, dELiAs.cOm and other female-targeted
offerings. We will promote iTurf to Generation Y boys and young men through our
male targeted offerings as well as the prospect of interacting with members of
the gURL community. In addition to our e-commerce efforts, we believe we may be
able to generate advertising and sponsorship revenue from advertisers and
retailers seeking targeted access to Generation Y.
4
<PAGE>
The Offering
Class A common stock offered by iTurf. shares
Common stock to be outstanding after the offering:
Class A common stock............... shares(1)
Class B common stock............... shares(2)
Use of proceeds........................ Marketing activities, capital
expenditures, purchase of common stock
of our Parent and other general
corporate purposes, including working
capital. See "Use of Proceeds."
Voting rights.......................... The holders of Class A common stock
have voting rights identical to
holders of Class B common stock,
except that holders of Class A common
stock are entitled to one vote per
share and holders of Class B common
stock are entitled to six votes per
share. Holders of both classes of
common stock generally will vote
together as a single class on all
matters presented to the stockholders
for their vote or approval, except as
otherwise required by applicable
Delaware law. See "Risk
Factors--Control by Our Parent and Its
Principal Stockholder" and
"Description of Capital Stock--Common
Stock."
Proposed Nasdaq National
Market symbol.......................... TURF
- ----------
(1) Excludes a total of shares of Class A common stock subject to
outstanding options or reserved for issuance under our Stock Incentive
Plan. See "Management" and "Description of Capital Stock."
(2) All the shares of Class B common stock are owned by our Parent. Each share
of Class B common stock is convertible at the option of the holder at any
time prior to a tax-free spin-off of iTurf from our Parent into one share
of Class A common stock. Each share of Class B common stock will
automatically convert into one share of Class A common stock (i) upon the
transfer of such shares by our Parent to a third party other than a person
determined by our board of directors to be a "strategic partner" of iTurf,
(ii) if the number of outstanding shares of Class B common stock
beneficially owned by our Parent falls below 10% of the aggregate number
of outstanding shares of all classes of iTurf common stock and (iii) on
the fifth anniversary of a tax-free spinoff. See "Risk Factors--Control by
Our Parent and Its Principal Stockholder" and "Description of Capital
Stock."
----------------
Our principal offices are located at 435 Hudson Street, New York, New York
10014 and our telephone number is (212) 741-7785.
Unless we otherwise state herein, the information in this prospectus does not
take into account the exercise of the underwriters' over-allotment option. Any
reference in this prospectus to a particular fiscal year is to the year ended
January 31 following the corresponding calendar year (for example, "fiscal
1998" means the period from February 1, 1998 to January 31, 1999).
5
<PAGE>
Summary Financial Data
The following statement of operations data summarize our results of
operations from March 14, 1995 (date of inception) through January 31, 1996,
for the years ended January 31, 1997 and 1998 and for the nine-month periods
ended October 31, 1997 and 1998. The following balance sheet data summarize our
balance sheet as of October 31, 1998 on an actual basis, and as adjusted to
reflect the sale of shares of Class A common stock in this offering at an
assumed initial public offering price of $ per share (the mid-point of the
offering range), after deducting estimated underwriting discounts and
commissions and estimated offering expenses, and the application of the
estimated proceeds therefrom, including our purchase of shares of common stock
of our Parent. See "Use of Proceeds" and "Capitalization." The financial data
include the Internet operations of TSI Soccer Corporation ("TSI") from March
14, 1995 (date of inception), the operations of gURL, Interactive Inc. ("gURL
Interactive") from December 17, 1997 (date of acquisition), and additional
Internet operations developed since December 17, 1997, including the dELiAs.cOm
Web site which was launched in May 1998. The following tables should be read in
conjunction with the "Selected Financial Data," the iTurf Financial Statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
March 14, 1995
(date of
inception) Nine months ended
through Year ended January 31 October 31
January 31 ------------------------- ----------------------
1996 1997 1998 1997 1998
--------------- -------------- ---------- ----------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Net sales ................................................... $ 6 $ 13 $ 134 $ 86 $ 1,893
Cost of sales ............................................... 2 6 69 45 733
---- ----- ------ ----- -------
Gross profit ................................................ 4 7 65 41 1,160
Selling, general and administrative expenses ................ 6 14 114 42 1,041
---- ----- ------ ----- -------
Income (loss) from operations ............................... (2) (7) (49) (1) 119
Interest expense ............................................ -- -- 20 -- 31
------ ------ ------ ------ -------
Income (loss) before income tax (benefit) provision ......... (2) (7) (69) (1) 88
Income tax (benefit) provision(2) ........................... (1) (3) (29) -- 36
------- ------- ------ ------ -------
Net income (loss) ........................................... $ (1) $ (4) $ (40) $ (1) $ 52
====== ====== ====== ====== =======
Basic and diluted net income (loss) per share(3) ............ $ $ $ $ $
====== ====== ====== ====== =======
Shares used to compute basic and diluted net income (loss)
per share(3) ...............................................
</TABLE>
<TABLE>
<CAPTION>
October 31, 1998
-----------------------
Actual As Adjusted
-------- ------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ............. $ 42 $26,242
Working capital (deficiency) .......... (573) 25,627
Total assets .......................... 640 26,840
Due to Parent ......................... 405 405
Total stockholder's equity(4) ......... 7 26,207
</TABLE>
- ----------
(1) The historical financial statements contained elsewhere in this prospectus
include allocations for administrative, distribution and other expenses
incurred by our Parent for services rendered to iTurf. While we believe
such allocations to be reasonable, they are not necessarily indicative of,
and it is not practical for us to estimate, the levels of expenses that
would have resulted had iTurf been operating as an independent company.
(2) See Note 2 of Notes to iTurf Financial Statements for information
concerning the computation of the income tax (benefit) provision and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Income Taxes."
(3) Based on the number of shares actually outstanding as of October 31, 1998
after giving effect to the following: (i) the reclassification of 100
shares of common stock outstanding at October 31, 1998 into shares of
Class B common stock and (ii) the purchase of common stock of our Parent.
See Note 2 of Notes to iTurf Financial Statements for information
concerning the computation of basic and diluted net income (loss) per
share.
(4) iTurf will record the purchase of common stock from our Parent as a
reduction in total stockholder's equity. See "Capitalization."
6
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our Class A common stock. We have described these risks and uncertainties under
the following general categories: "Risks Related to Our Business," "Risks
Related to Our Relationship with Our Parent," "Risks Related to the Internet
Industry" and "Risks Related to This Offering." The risks and uncertainties
described below are not the only ones facing our company and our
securityholders. Additional risks and uncertainties may also adversely impair
our business operations. In such case, the trading price of our Class A common
stock could decline, and you may lose all or part of the money you paid to buy
our Class A common stock.
Risks Related to Our Business
Our Limited Operating History
We have a limited operating history on which an investor can evaluate our
business. Our TSISoccer.com operations began in 1995, and the gURL.com Web site
was launched in 1996, but we did not begin selling merchandise from the dELiA*s
catalog on the Internet until May 1998. As a result, we have generated
substantially all of our revenues since May 1998. An investor in our Class A
common stock must consider the risks and difficulties we encounter as an
early-stage company in the new and rapidly evolving Internet, e-commerce and
online advertising markets. These risks include our ability to:
o sustain historical revenue growth rates;
o implement our business model;
o manage our expanding operations;
o attract, retain and motivate qualified personnel;
o anticipate and adapt to rapid changes in our markets;
o attract and retain a large number of advertisers;
o maintain and enhance our systems to support growth of operations and
increasing user traffic;
o retain existing customers, attract new customers and maintain customer
satisfaction;
o introduce new and enhanced Web pages, services, products and strategic
alliances;
o maintain our profit margins in the face of price competition or rising
wholesale prices;
o minimize technical difficulties, system downtime and the effect of
Internet brown-outs;
o manage the timing of iTurf promotions and sales programs; and
o respond to changes in government regulation.
If we do not successfully manage these risks, our business, results of
operations and financial condition will be materially adversely affected. We
cannot assure you that we will successfully address these risks or that our
business strategy will be successful. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
No History as Independent Company
Prior to the closing of this offering, we have operated as a wholly-owned
subsidiary of our Parent. We do not have an operating history as an independent
company. We rely on our Parent to provide merchandising, inventory management,
creative, technical, marketing, customer service, human resources, finance,
accounting, administrative, legal and other services and will continue to
receive such services pursuant to agreements between us and our Parent (the
"Intercompany Agreements"). We intend to develop the operational,
administrative and other systems and infrastructure necessary to support our
current and future business on an independent basis. Our business could be
materially adversely affected if our Parent fails to adequately provide such
services or if we fail to develop systems of our own. See "--Our Dependence on
Our Parent's Brands, Goods and Services" and "--Need to Expand Our Features,
Capacity and Operations" and "Certain Transactions--Intercompany Agreements."
7
<PAGE>
The historical financial statements contained elsewhere in this prospectus
include allocations for administrative, distribution and other expenses
incurred by our Parent for services rendered to iTurf. While we believe such
allocations to be reasonable, they are not necessarily indicative of, and it is
not practical for us to estimate, the levels of expenses that would have
resulted had iTurf been operating as a separate, stand-alone company. We have
also relied on our Parent to provide financing for our operations. Our cash
flows to date are therefore not necessarily indicative of the cash flows that
would have resulted had iTurf been operating as an independent company during
the periods presented. See "--Expectation of Losses" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Expectation of Losses
We expect to record substantial net losses for the foreseeable future. We
believe that our continued growth will depend in large part on our ability to:
o increase awareness of our brand names;
o provide our customers with superior Internet community and e-commerce
experiences; and
o continue to enhance our systems and technology to support increased
traffic to our Web sites.
Accordingly, we intend to dramatically increase our level of marketing and
promotional expenditures. In addition, we expect to invest heavily to further
develop our Web sites, technology and operating infrastructure. We will incur
increased expenses in connection with fees payable to our Parent pursuant to
the Intercompany Agreements. Slower revenue growth than we anticipate or
operating expenses that exceed our expectations would have a material adverse
effect on our business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions--
Intercompany Agreements."
Fashion Risk
We derive the majority of our revenues from the online sale of apparel,
accessories and footwear, particularly those featured in the dELiA*s catalog.
Accordingly, our success depends, in part, on our ability and our Parent's
ability to anticipate the frequently changing fashion tastes of our customers,
primarily members of Generation Y, and to offer merchandise that appeals to
their preferences on a timely and affordable basis. We believe that our Parent
plans to continue to increase the amount of merchandise manufactured under its
own labels. Poor customer reaction to our Parent's products or a failure by our
Parent to source these products effectively would have a material adverse
effect on iTurf.
Failure to successfully anticipate, identify or react to changes in
styles, trends or brand preferences of our customers may result in lower
revenue from reduced sales and promotional pricing. In addition, misjudgments
in merchandise selection could adversely affect our image with our customers.
Such events would materially adversely affect iTurf.
Our Dependence on and Integration of Key Personnel; Lack of Advertising
Personnel
Our future success depends to a significant extent on the continued
service of our key technical, sales and senior management personnel. Loss of
the services of Stephen I. Kahn, our President, Chief Executive Officer and
Chairman of the Board of Directors, Dennis Goldstein, our Chief Financial
Officer, Alex S. Navarro, our Chief Operating Officer, Oliver Sharp, our Chief
Technology Officer, or certain other key employees would have a material
adverse effect on our business. Several members of our senior management joined
us in January 1999, including our Chief Financial Officer and our Senior Vice
President--Marketing. Our Chief Technology Officer is expected to join us in
February 1999. As a result, our senior managers may not perform effectively as
individuals or work together as a team. Our future success also depends on our
ability to continue to attract, retain and motivate highly skilled employees.
Competition for employees in our industry is intense. We may be unable to
retain our key employees or attract, assimilate or retain other highly
qualified employees in the future. We have in the past experienced, and we
expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. See
"Management."
We also intend to develop a marketing and sales team for our Internet
community business, which has not generated substantial revenues to date.
Establishing our sales and marketing team involves a number of risks:
8
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o we have not previously employed dedicated advertising sales personnel;
o we may be unable to hire, retain, integrate and motivate sales and sales
support personnel; and
o new sales personnel may require a substantial period of time to become
productive.
Failure to develop and maintain an effective sales and marketing force would
have a material adverse effect on our business.
Our Quarterly Operating Results Are Subject to Significant Fluctuations
and Seasonality
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. Many of these factors are outside our
control and include:
o seasonal fluctuations in consumer purchasing patterns and advertising
spending;
o timing of, response to and quantity of our Parent's catalog mailings;
o changes in the growth rate of Internet usage;
o actions of our competitors;
o the timing and amount of costs relating to the expansion of our
operations and acquisitions of technology or businesses; and
o general economic and market conditions.
Our revenue for the foreseeable future will remain primarily dependent on
online user traffic levels, online sales of merchandise appearing in our
Parent's catalogs and online sales of other goods and services, and advertising
activity on our community Web sites. Such future revenues are difficult to
forecast. Any shortfall in revenues in relation to our expenses would have a
material adverse effect on our business and would likely affect the market
price of our Class A common stock in a manner unrelated to our long-term
operating performance.
Our limited operating history and the new and rapidly evolving Internet
markets make it difficult to ascertain the effects of seasonality on our
business. If seasonal and cyclical patterns emerge in Internet consumer
purchasing or in Internet advertising spending, our results of operations from
quarter to quarter will be less comparable. Sales of apparel, accessories and
footwear are generally lower in the first half of each year. Similarly,
advertising sales in traditional media, such as television and radio, are
generally lower in the first calendar quarter of each year. We may experience
similar seasonality in our business.
You should not rely on quarter-to-quarter comparisons of our results of
operations as indicative of our future performance. It is possible that in some
future periods our results of operations may be below the expectations of
public market analysts and investors. In this event, the price of our Class A
common stock may fall. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Need to Expand Our Features, Capacity and Operations
We have rapidly expanded our operations, and we believe that we will need
to continue to expand our features and capacity to operate as an entity
independent from our Parent. A key element of our strategy is to generate a
high volume of traffic on our Web sites. We believe that we will therefore need
to continually improve and enhance the functionality and performance of our
e-commerce, customer tracking and other technical systems. Growth in the number
of users accessing our Web sites may strain or exceed the capacity of our
computer systems and lead to degradations in performance or systems failure.
Our inability to add additional hardware and software to upgrade our existing
technology or network infrastructure to accommodate increased traffic may cause
decreased levels of customer service and satisfaction. We believe our present
systems will not be adequate to accommodate rapid growth in user demand. As a
result, we intend to implement new systems. Some systems may be licensed from
third parties and some may be developed internally. Failure to implement these
systems effectively or within a reasonable period of time would have a material
adverse effect on our business, results of operations and financial condition.
9
<PAGE>
We intend to introduce additional or enhanced features and services to
retain current users and attract new users to our sites. If we introduce a
feature or a service that is not favorably received, our current users may not
continue using our Web sites as frequently. We may also experience difficulties
that could delay or prevent us from introducing new services and features.
Furthermore, these new services or features may contain errors that are
discovered after they are introduced. We may need to significantly modify the
design of these services to correct errors. If users encounter difficulty with
or do not accept our services or features, our business would be materially
adversely affected.
Growth of our business may place a significant strain on our management
systems and resources and will require us to implement new operational and
financial systems, procedures and controls. We expect that we will need to
continue to expand, train and manage our workforce. Our inability to accomplish
any of these goals could adversely affect our business.
Risks of Failure of Our Computer Systems and Equipment
Our operations depend on our ability to maintain our computer systems and
equipment in effective working order. We must also protect our computer systems
against damage from fire, power loss, water damage, telecommunications
failures, vandalism and other malicious acts, and similar unexpected adverse
events. Most of our Web sites reside on a computer system located at our New
York City office. This system's continuing and uninterrupted performance is
critical to our success. Customers may become dissatisfied as a result of any
system failure. We continue to review and seek to upgrade our technical
infrastructure and provide for system redundancies and backup power to limit
such failures. Sustained or repeated system failures or interruptions would
reduce the attractiveness of our Web sites to customers and advertisers. In
addition, interruptions in our systems could result from the failure of our
telecommunications providers to provide the necessary data communications
capacity in the timeframe we require. Unanticipated problems affecting our
systems have caused from time to time in the past, and in the future could
cause, interruptions in our services. Any damage or failure that interrupts or
delays our operations could have a material adverse effect on our business.
Our Increasing Reliance upon Online and Traditional Advertising
We expect to increasingly rely on online and traditional advertising and
strategic alliances to attract users to our Web sites. Pursuant to the
Intercompany Services Agreement, we will commit to purchase substantial amounts
of advertising in our Parent's print catalogs. These amounts of advertising are
materially greater than we have used in the past. We cannot assure you that
this advertising will effectively attract users to our Web sites or lead to a
substantial amount of sales.
To date, we have not done a substantial amount of advertising other than
in our Parent's catalogs. We intend to use a substantial portion of the
proceeds of this offering for online and traditional advertising. Our online
advertising may include strategic alliances that require large, long-term
commitments. We cannot assure you that we will be able to identify and secure
sufficient online and offline advertising opportunities or that such spending
will effectively attract users to our Web sites or lead to a substantial amount
of sales.
Our inability to develop and maintain effective advertising campaigns
would have a material adverse effect on our business. We intend to commit
substantial resources to promoting our Web sites and our brand name through
online advertising and advertising in our Parent's catalogs. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Business--Marketing
and Promotion" and "Certain Transactions--Intercompany Agreements."
Our Dependence on Third Parties (Other than Our Parent)
iTurf depends upon a number of third parties to deliver goods and services
to it and its customers. For example, iTurf relies on third-party shippers
(including the United States Postal Service, United Parcel Service and FedEx)
to ship merchandise to its customers. Strikes or other service interruptions
affecting our shippers would have a material adverse effect on our ability to
deliver merchandise on a timely basis. We also depend on communications
providers, including Cable & Wireless plc and AT&T, to provide access to our
Web sites for Internet users. Our Web sites could experience disruptions or
interruptions in service due to failures by these providers. In addition, our
users depend on Internet service providers, online service providers and other
Web site operators for access to our Web sites. Each of these groups has
experienced significant
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outages in the past and could experience outages, delays and other difficulties
due to system failures unrelated to our systems. These types of occurrences
could cause users to perceive our Web sites as not functioning properly and
therefore cause them to stop using our services.
A third party hosts and manages two of our community Web sites,
gURLpages.com and gURLmAIL.com and also sells advertisements on such sites.
System failures by this third party have in the past and could in the future
lead to disruption in service on these sites. Such system disruptions or the
failure by this third party to successfully sell advertisements on these Web
sites could have a material adverse effect on our business.
Our business depends, in part, on the ability of third-party vendors to
provide us and our Parent with current-season brand-name apparel and
merchandise at competitive prices in sufficient quantities and of acceptable
quality. No vendor accounted for more than 9% of sales generated by the dELiA*s
catalog in fiscal 1997. However, two vendors accounted for approximately 56% of
sales of TSI in fiscal 1997. One of those vendors, adidas, accounted for
approximately 13% of our Parent's sales in fiscal 1997. Our Parent does not
have long-term contracts with adidas or any other supplier. In addition, many
of the smaller vendors used by our Parent have limited resources, production
capacities and operating histories. If any of the following events occurred,
our business could be materially adversely affected:
o if our key vendors failed to expand with iTurf and our Parent;
o if we lost one or more key vendors, including adidas;
o if our Parent's current vendor terms were changed; or
o if our Parent's ability to procure products were limited.
See "Risks Related To Our Relationship With Our Parent--Our Dependence on Our
Parent's Brands, Goods and Services."
Risks Associated with Potential Acquisitions and Investments
We may acquire or make investments in complementary businesses, products,
services or technologies. However, we have no present understanding or
agreement relating to any such acquisition or investment. We cannot assure you
that we will be able to identify suitable acquisition or investment candidates.
Even if we do identify suitable candidates, we cannot assure you that we will
be able to make such acquisitions or investments on commercially acceptable
terms. If we buy a business, we could have difficulty in assimilating that
company's personnel, operations, products, services or technologies into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our
results of operations. Furthermore, we may incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity
securities could be dilutive to our existing stockholders.
Our Dependence on Proprietary Rights and Risk of Infringement of
Proprietary Rights
We regard our service marks, trademarks, trade secrets and similar
intellectual property as critical to our success. We rely on trademark and
copyright law, trade secret protection and confidentiality, license and other
agreements with employees, customers, strategic partners and others to protect
our proprietary rights. We have pursued and applied for the registration of our
trademarks and service marks in the United States. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available online. The steps
taken by us to protect our proprietary rights may not be adequate, and third
parties may infringe or misappropriate our copyrights, trademarks and similar
proprietary rights. We also use our Parent's trademarks in connection with the
sale of many of our goods and services and rely on our Parent's ability to
adequately protect its trademarks and proprietary rights. See "Risks Related to
Our Relationship with Our Parent--Our Dependence on Our Parent's Brands, Goods
and Services."
We have licensed in the past, and expect that we may license in the
future, certain of our proprietary rights, such as trademarks or copyrighted
material, to third parties. We attempt to ensure that the quality of our brands
is maintained by such licensees. However, we cannot assure you that such
licensees will not take or omit to take actions that would materially adversely
affect the value of our
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proprietary rights or reputation, which actions would have a material adverse
effect on our business, financial condition and results of operations.
Our Markets Are Highly Competitive
Many Web sites compete for consumers' and advertisers' attention and
spending. We expect such competition to continue to increase because of the
relative ease with which new Web sites can be developed. We believe that our
ability to compete depends upon many factors, including the following:
o the market acceptance of our Web sites and online services;
o the success of our brand building and sales and marketing efforts;
o the performance, price and reliability of services developed by us or
our competitors; and
o the effectiveness of our customer service and support efforts.
Our competitors may develop products or services that are equal or superior to
our solutions or achieve greater market acceptance than ours. In addition, our
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective advertisers.
New competitors may emerge and rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margins and
loss of market share. We cannot assure you that we will be able to compete
successfully or that competitive pressures will not materially and adversely
affect our business.
We sell online advertising that competes with television, radio, cable and
print for a share of advertisers' total advertising budgets. Advertisers may be
reluctant to devote a significant portion of their advertising budgets to
Internet advertising if they perceive the Internet to be a limited or
ineffective advertising medium.
We also sell products in the highly competitive apparel, accessories,
footwear and home furnishings industries and the athletic goods and soccer
specialty markets. Our dELiA*s, TSI Soccer, Contents and Droog online catalogs
compete with traditional department store retailers, as well as specialty
apparel, accessory, and footwear retailers, for Generation Y customers. Our TSI
Soccer online catalog also competes with several soccer specialty direct
marketers, soccer specialty retailers and general athletic merchandise
retailers. Our discountdomain.com offerings compete with traditional discount
retailers. Many of our competitors are larger than and have substantially
greater financial, distribution and marketing resources than us.
There are few barriers to entry in the teen apparel, accessories,
footwear, home furnishings and soccer specialty markets. We expect competition
in these industries and markets to increase. We believe that our and our
Parent's recent success in these markets has attracted the attention of other
catalogers, store-based retailers, apparel manufacturers and Internet
companies, of which some have entered or are likely to enter these markets. In
addition, our competitors could enter into exclusive distribution arrangements
with our vendors and deny us access to the vendors' products. We may experience
pricing pressures, increased marketing expenditures and loss of market share
due to increased competition. These factors may materially adversely affect our
business.
Risks Associated with International Expansion
Although less than one percent of our sales is to customers who live
outside the United States, we intend to market our sites globally. In addition,
certain of our Parent's vendors procure products from outside the United States
(approximately 48% of our Parent's sales in fiscal 1997 were of products we
believe were manufactured outside the United States), and we purchase from our
Parent merchandise manufactured outside the United States. Our international
business is subject to a number of risks generally associated with doing
business abroad, including:
o fluctuations in currency exchange rates, the impact of recessions in
economies outside the United States and regulatory and political changes
in foreign markets;
o reduced protection for intellectual property rights in some countries;
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o potential limits on use of some of our vendors' trademarks outside the
United States;
o exposure to potentially adverse tax consequences or import/export
quotas;
o opening and managing distribution centers abroad;
o inconsistent quality of merchandise and disruptions or delays in
shipping; and
o developing customer lists and marketing channels.
These factors may have a material adverse effect on our business. Furthermore,
expansion into new international markets may present competitive and
merchandising challenges different from those we currently face. We cannot
assure you that we will expand internationally or that any such expansion will
result in profitable operations. See "Government Regulation and Legal
Uncertainties Relating to the Web."
Failure of Our Computer Systems to Recognize Year 2000
We depend heavily upon complex computer software and systems for all
phases of our operations, including, to a significant extent, our Parent's
computer systems. 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 turn of
the century. If not corrected, such computer applications could fail or create
erroneous results by or at the Year 2000. We cannot assure you that all of
iTurf's material operating software and systems will be Year 2000 compliant.
In addition to the operating systems and software iTurf uses directly,
iTurf's operations also depend on the performance of operating software and
systems used by our significant service providers, including providers of
financial, telecommunications and parcel delivery services. We also cannot
assure you that iTurf's service providers have, or will have, operating
software and systems that are Year 2000 compliant.
A software or systems Year 2000 compliance failure with respect to iTurf's
internal systems and software, or that of a third-party service provider, could
prevent iTurf from being able to process or fulfill orders from its customers
or could disrupt iTurf's financial and management controls and reporting
systems. Any such failure, if not quickly remedied, would have a material
adverse effect on iTurf's business, results of operations and financial
condition.
In addition, a significant portion of purchases of merchandise from iTurf
are made with credit cards, and our business, results of operations and
financial condition 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks Related to Our Relationship with Our Parent
Control by Our Parent and Its Principal Stockholder
We are currently a wholly-owned subsidiary of our Parent. After the
closing of this offering, our Parent will own all of our Class B shares of
common stock, which will represent % of the voting power of our common stock.
As a result of its share ownership and the other rights described in this
prospectus, our Parent will be able to elect a majority of the members of our
Board of Directors. This concentration of ownership and other rights could also
delay or prevent a change of control. Also, Stephen I. Kahn, President, Chief
Executive Officer and Chairman of the Board of Directors of our Parent and
iTurf, was, as of January 1, 1999, the beneficial owner of approximately 44% of
the outstanding common stock of our Parent and, accordingly, may be deemed to
be the beneficial owner of all of the iTurf common stock owned by our Parent.
As a result, Mr. Kahn will be able to control iTurf in the same manner that our
Parent is able to control iTurf. See "Principal Stockholder" and "Description
of Capital Stock."
In addition, our Parent could elect to sell all or a substantial portion
of its equity interest in iTurf to a third party. In the event of a sale of our
Parent's interest to a third party, that third party may be able
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to control iTurf in the same manner that our Parent is able to control iTurf.
Such a sale may adversely affect the market price of the Class A common stock
and may adversely affect iTurf's business, financial condition and results of
operations.
Risks Related to Overlapping Management and Boards of Directors
Several of iTurf's officers and directors also serve as officers and
directors of our Parent. Stephen I. Kahn, who is the President, Chief Executive
Officer and Chairman of the Board of Directors of iTurf, holds those same
offices with our Parent. Alex S. Navarro is the Chief Operating Officer and
Secretary of iTurf and also the Secretary and Chief Legal Officer of our
Parent. Christopher C. Edgar is a Vice President of iTurf and a member of
iTurf's Board of Directors and is the Executive Vice President and Chief
Operating Officer and a member of the Board of Directors of our Parent. Evan
Guillemin is a Vice President of iTurf and a member of iTurf's Board of
Directors and is the Chief Financial Officer of our Parent.
Service as both a director or officer of iTurf and a director or officer
of our Parent could create or appear to create potential conflicts of interest
when those directors and officers are faced with decisions that could have
different implications for iTurf and our Parent. Such decisions may relate to
potential acquisitions of businesses, the Intercompany Agreements, competition,
the issuance or disposition of securities, the election of new or additional
directors, the payment of dividends by iTurf and other matters.
Messrs. Kahn, Edgar, Guillemin and Navarro will be employed by both our
Parent and iTurf and will spend a substantial part of their professional time
and effort on behalf of our Parent. In many instances, such efforts for our
Parent will involve activities that are unrelated (and in some circumstances
may be adverse) to the interests of iTurf. iTurf has not established any
minimum time that Messrs. Kahn, Edgar, Guillemin and Navarro will be required
to spend on iTurf matters.
Mr. Kahn, our Parent's largest stockholder, and Messrs. Edgar, Guillemin
and Navarro will continue to participate in our Parent's stock option plans. A
significant number of iTurf's employees will continue to hold shares of and/or
options to purchase shares of common stock of our Parent acquired or granted
prior to such employee's transfer to iTurf. Such employees may not yet have
received comparable interests under our Stock Incentive Plan. In addition,
following the closing of the offering, employees of iTurf may be eligible to
participate in other benefit plans of our Parent that provide opportunities to
receive additional shares of common stock of our Parent. These substantial
equity interests in our Parent may present these officers and employees with
incentives potentially adverse to iTurf's stockholders.
Our Dependence on Our Parent's Brands, Goods and Services
Prior to the closing of this offering, we will enter into a series of
Intercompany Agreements with our Parent that were not negotiated on an
arm's-length basis. We anticipate using a portion of the proceeds of this
offering to make material payments to our Parent each year for the foreseeable
future under the Intercompany Agreements. See "Certain
Transactions--Intercompany Agreements."
Dependence on Our Parent as a Trademark Licensor. Pursuant to the
Trademark License and Customer List Agreement, we license the dELiA*s logo and
name and certain online content from our Parent on an exclusive basis for
Internet use. We also license from our Parent a number of other valuable
trademarks, including contentsonline, discountdomain, Droog and TSI Soccer. The
dELiA*s logo and name and these other trademarks are critical to our marketing
and brand-building activities. If our Trademark License and Customer List
Agreement with our Parent were terminated, we would need to change the domain
names of most of our Web sites and devote substantial resources towards
building new brand names.
Under the Trademark License and Customer List Agreement, our Parent, at
its sole discretion can demand that we remove from our Web sites any online
content that bears one of our Parent's trademarks that our Parent determines
conflicts with, interferes with or is detrimental to its reputation or business
or for certain other reasons. If our Parent makes such a demand, we are
required to either cease using such content on such sites or remove our
Parent's trademarks from such sites. We are also required to conform to our
Parent's guidelines for the use of its trademarks. Our Parent has the right to
approve all materials, such as marketing materials, that include any of our
Parent's trademarks. Our
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Parent also controls the visual and editorial presentation of content on our
Web sites that use our Parent's trademarks. These restrictions may prevent us
from marketing our products and services in the same way we would if we owned
these trademarks ourself. Our Parent may terminate the Trademark License and
Customer List Agreement and the Intercompany Services Agreement if any person
other than our Parent, its affiliate or certain strategic partners acquire 20%
or more of the voting power of iTurf and under other circumstances. The
termination of this agreement with our Parent would have a material adverse
effect on our business, results of operations and financial condition. See
"--Potential Competition with Our Parent" and "CertainTransactions--Intercompany
Agreements--Trademark License and Customer List Agreement."
To generate merchandise sales on our Web sites, we depend on our Parent's
ability to maintain and enhance the dELiA*s brand name and its other valuable
trademarks. Our Parent's failure to maintain its existing base of customers or
to maintain and enhance its brand name (and its other trademarks) would
materially adversely affect our business.
Dependence on Our Parent for Advertising. Pursuant to the Intercompany
Services Agreement, our Parent has agreed to provide us with advertising and
promotional space in its catalogs and retail stores. In addition, we are
required to purchase from our Parent minimum amounts of advertising space in at
least 50% of all of our Parent's catalogs distributed each year. However, the
timing and placement of these advertisements and promotions are subject to our
Parent's discretion. Our Parent could discontinue promoting iTurf in its
current manner. Our Parent also makes no guarantee to us as to the demographic
composition of the target audience. It does give a limited guarantee as to the
size of the audience that views these advertisements or promotions. This
advertising and promotion, as well as our association with the dELiA*s brand,
are important elements of our strategy to increase awareness of our brands and
increase sales. The advertising obligations under the Intercompany Services
Agreement can be terminated by our Parent under the same circumstances as the
Trademark License and Customer List Agreement. See "Certain
Transactions--Intercompany Agreements--Intercompany Services Agreement."
Dependence on Our Parent for Services. Pursuant to the Intercompany
Services Agreement, our Parent will provide us with services, such as
merchandising, inventory management, creative, marketing, technical, human
resources, finance, accounting, administrative, legal and other services. If
our Parent fails to provide these services satisfactorily, we would be required
to perform these services or obtain these services from another provider. In
such case, we may incur additional costs in order to obtain these services and
we may be unable to obtain these services on commercially reasonable terms. If
we choose to perform these services ourself, we may not be able to perform them
adequately, and, as a result, we could lose a substantial number of customers.
The service obligations under the Intercompany Services Agreement can be
terminated by our Parent under the same circumstances as the Trademark License
and Customer List Agreement. See "Certain Transactions--Intercompany
Agreements-- Intercompany Services Agreement."
Substantially all of our sales are currently processed and fulfilled
through our Parent's systems. Under the Intercompany Services Agreement, our
Parent is generally obligated to provide fulfillment services to us at a level
at least equal to the quality of services being provided by our Parent prior to
the date of this prospectus. As a result, our future revenue depends on our
Parent's ability to fulfill our online sales in an accurate and timely manner.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Transactions--Intercompany Agreements--Intercompany
Services Agreement" and Note 3 of Notes to iTurf Financial Statements.
Dependence on Our Parent as a Supplier. Pursuant to the Intercompany
Services Agreement, we may purchase products from our Parent for resale on the
Internet. We anticipate that, for the foreseeable future, a majority of our
revenue will be derived from the online sale of merchandise under our Parent's
trademarks. We do not have direct contractual relationships with our Parent's
suppliers relating to our Parent's merchandise sold on our Web sites. As such,
we cannot obtain the same merchandise directly and are restricted pursuant to
the Trademark License and Customer List Agreement from having such
relationships without our Parent's consent. Accordingly, iTurf's future
revenues and business success depend on our Parent's ability to maintain and
renew relationships with its existing vendors and to establish relationships
with additional vendors. Furthermore, our Parent does not have long-term
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contracts with any of its suppliers. In addition, many of the smaller vendors
used by our Parent have limited resources, production capacities and operating
histories. The supply obligations under the Intercompany Services Agreement can
be terminated by our Parent under the same circumstances as the Trademark
License and Customer List Agreement. See "Certain Transactions-- Intercompany
Agreements--Intercompany Services Agreement."
Contingent Liability for Our Parent's Obligations
For so long as our Parent continues to own 80% of the vote and value of
our capital stock, we will be included in our Parent's consolidated group for
federal income tax purposes. Under the Tax Allocation Agreement, for so long as
iTurf is included in our Parent's consolidated group, we will pay our Parent
our proportionate share of our Parent's income tax liability computed as if we
were a separate taxpayer. We will also permit our Parent to use any of our net
operating losses or other tax loss benefits, which we are unable to use at that
time. To the extent our Parent uses our tax benefits, it will establish a
receivable for our benefit and be required to repay us for the use of any such
benefit. Repayment is due in cash at the time and to the extent we are required
to pay income taxes and we are no longer consolidated in our Parent's tax
group, or at the close of the fifth calendar year following the creation of the
benefit. As long as we are members of our Parent's consolidated tax group, such
repayment by our Parent will be offset by any amount that we are required to
pay our Parent under the Tax Allocation Agreement. By virtue of its controlling
ownership and the Tax Allocation Agreement, our Parent will effectively control
all of our tax decisions. Under the Tax Allocation Agreement, for so long as
iTurf is included in our Parent's consolidated group, our Parent will have sole
authority to respond to and conduct all tax proceedings (including tax audits)
relating to us, to file all income tax returns on our behalf and to determine
the amount of our liability to (or entitlement to payment from) our Parent
under the Tax Allocation Agreement. Notwithstanding the Tax Allocation
Agreement, federal law provides that each member of a consolidated group is
liable for the group's entire tax obligation. Thus, if our Parent or other
members of its consolidated group fail to make any federal income tax payments
required by law, we would be liable for the shortfall. Similar principles apply
for state income tax purposes in many states. See "Certain Transactions--Income
Taxes."
For so long as our Parent continues to own at least 80% of the voting
power or value of iTurf's capital stock, we will also be jointly and severally
liable (together with all other members of our Parent's "control group") for
pension funding, termination and excise taxes and for other pension-related
matters in the event our Parent fails to fully satisfy its legally required
pension obligations. Because the Class B common stock held by our Parent is
entitled to six votes per share, we expect that our Parent will retain its 80%
voting interest for the foreseeable future. We believe there were no such
liabilities outstanding as of January 1, 1999.
The Intercompany Indemnification Agreement provides that our Parent will
indemnify iTurf for certain tax and pension liabilities resulting from our
relationship with our Parent (including the costs of defending against any
assertion of claims against iTurf). We cannot assure you that our Parent will
be able to fulfill its obligations under such Agreement. Therefore, we may be
liable for payments in such instance. See "Certain Transactions--Intercompany
Agreements--Intercompany Indemnification Agreement."
Potential Competition with Our Parent
Except for the Trademark License and Customer List Agreement which
contains limited non-competition provisions, and subject to applicable Delaware
law, our Parent is under no obligation to refrain from competing with us or to
share with us any future business opportunities available to it. See "Certain
Transactions--Intercompany Agreements--Trademark License and Customer List
Agreement." Accordingly, iTurf's Restated Certificate of Incorporation will
include provisions that provide that, subject to any agreement between us and
our Parent,
o our Parent will have no duty to refrain from engaging in the same or
similar activities or lines of business as iTurf;
o our Parent and its officers, directors and employees will not be liable
to iTurf or its stockholders for breach of any fiduciary duty by reason
of any activities of our Parent in competition with iTurf;
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o our Parent will have no duty to communicate or offer corporate
opportunities to iTurf and shall not be liable for breach of any fiduciary
duty as a stockholder of iTurf in connection with such opportunities; and
o if a director or officer of iTurf who is also a director or officer of
our Parent learns of a matter that may be a corporate opportunity for
either iTurf or our Parent, that director or officer will not be liable to
iTurf or its stockholders for breach of any fiduciary duty or duty of
loyalty or failure to act in the best interests of iTurf if the director
or officer offers the corporate opportunity to our Parent rather than
iTurf.
Any loss of a corporate opportunity by iTurf to our Parent, any engagement by
our Parent in any activity that is similar to the businesses of iTurf or the
early termination of the Trademark License and Customer List Agreement could
have a material adverse effect on our business or our other stockholders. See
"Description of Capital Stock" and "Certain Transactions--Intercompany
Agreements."
Risk Relating to Our Expected Ownership of Our Parent's Common Stock
We intend to use a portion of the proceeds of this offering to purchase
shares of our Parent's common stock. These securities will constitute a
substantial portion of our assets. Our Parent's common stock has fluctuated
significantly in the past and may fluctuate significantly in the future. If the
price of our common stock declines, the price of our Parent's common stock
could decline, which could cause the price of our common stock to decline
further. If the value of our Parent's common stock increases significantly as a
percentage of our total assets, we may choose to sell some or all of our
Parent's common stock. See "Use of Proceeds."
In addition, there are limits on our ability to sell shares of our
Parent's common stock. Such shares are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. These shares may be sold in the
public market only if registered or qualified for an exemption from
registration. We have certain registration rights on such shares of our
Parent's common stock. However, contractual lock-up provisions in the dELiA*s
Common Stock Registration Rights Agreement as well as our Parent's limited
ability to block registration may impede our ability to sell these shares in a
timely manner. As a result, our Parent's common stock price could decline for a
considerable period after we have decided to sell such securities. In addition,
through its control of our board of directors, our Parent may be able to
control our ability to sell such securities. See "--Control By Our Parent and
Its Principal Stockholder"; "--Risks Related to Overlapping Management and
Boards of Directors," and "Certain Transactions."
Risks Related to the Internet Industry
Our Dependence on Continued Growth in Use of the Web
Our industry is new and rapidly evolving. A decrease in the growth of Web
usage would adversely affect our business. The following factors may inhibit
growth in Web usage:
o inadequate Internet infrastructure;
o security and privacy concerns;
o inconsistent quality of service; and
o unavailability of cost-effective, high-speed service.
Our success is dependent, in large part, upon the ability of the Internet
infrastructure to support increased use. The performance and reliability of the
Web may decline as the number of users increases or the bandwidth requirements
of users increase. The Web has experienced a variety of outages due to damage
to portions of its infrastructure. If outages or delays frequently occur in the
future, Web usage, including usage of our Web sites, could grow slowly or
decline. Even if the necessary infrastructure or technologies are developed, we
may have to spend considerable amounts to adapt our solutions accordingly.
Our Dependence on Continued Growth of Online Commerce
iTurf's future revenue and profits substantially depend upon the
widespread acceptance and use of the Web as an effective medium of commerce by
consumers. Rapid growth in the use of the Web and commercial online services is
a recent phenomenon. We cannot assure you that a sufficiently broad base
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of consumers will adopt, and continue to use, the Web as a medium of commerce.
Demand for recently introduced services and products over the Web and online
services is subject to a high level of uncertainty. The development of the Web
and online services as a viable commercial marketplace is subject to a number
of factors, including continued growth in the number of users of such services,
concerns about transaction security, continued development of the necessary
technological infrastructure, and the development of complementary services and
products. Failure of the Web and online services to become a viable commercial
marketplace would materially adversely affect our business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Immaturity of the Internet Community Business Model
The profit potential for an Internet community business model is unproven.
Our ability to generate significant revenues from advertisers and sponsors will
depend, in part, on our ability to generate sufficient user traffic with
demographic characteristics attractive to our advertisers. The intense
competition among Web sites that sell online advertising has led to the
creation of a number of pricing alternatives for online advertising. These
alternatives make it difficult for us to project future levels of advertising
revenue and applicable gross margin that can be sustained by us or the online
advertising industry in general. Although we do not currently derive a
substantial portion of our revenue from advertising, our business model depends
in part on increasing the amount of such revenue. No standards have been widely
accepted for measuring the effectiveness of online advertising. If such
standards do not develop, existing advertisers may not continue their current
levels of online advertising. We cannot assure you that the market for online
advertising will continue to emerge or become sustainable. Failure of the
market for online advertising to develop or slower development than expected
would materially adversely affect our business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
"Business--Strategy" and "--Advertising and Sponsorship Sales."
Storage of Personal Information about Our Users and Other Privacy Concerns
Web sites typically place certain "cookies" on a user's hard drive without
the user's knowledge or consent. iTurf and other Web sites use cookies for a
variety of reasons, including the collection of data derived from the user's
Internet activity. Most currently available Web browsers allow users to remove
cookies at any time or to prevent cookies from being stored on their hard
drive. In addition, some commentators, privacy advocates and governmental
bodies have suggested limiting or eliminating the use of cookies. Any reduction
or limitation in the use of cookies could limit the effectiveness of our sales
and marketing efforts. In addition, the European Union recently adopted a
directive addressing data privacy that may limit the collection and use of
certain information regarding Internet users. This directive may limit our
ability to target advertising or collect and use information in certain
European countries.
We display a privacy policy on our Web sites. The policy is accessible to
users of our personalized services when they register. Notwithstanding this
policy, any penetration of our network security or other misappropriation of
our users' personal or credit card information could subject us to liability.
We may be liable for claims based on unauthorized purchases with credit card
information, impersonation or other similar fraud claims. Claims could also be
based on other misuses of personal information, such as for unauthorized
marketing purposes. These claims could result in litigation. In addition, the
Federal Trade Commission and several states have investigated the use by
certain Internet companies of personal information. We could incur expenses if
new regulations regarding the use of personal information are introduced or if
our privacy practices were investigated.
In 1998, the U.S. Congress enacted the Children's Online Privacy
Protection Act of 1998. The principal provisions of the law are to become
effective on the later of (1) April 21, 2000 and (2) the date on which the
Federal Trade Commission issues a first ruling on applications for safe harbor
treatment under the Act if the Commission does not rule on the first such
application by October 21, 1999, but in no case later than April 21, 2001.
Among other things, subject to certain limited exceptions, this act:
o makes it unlawful for an operator of a Web site or online service
directed to children under age 13, and any operator that has actual
knowledge that it is collecting personal information from such a child, to
collect personal information from the child without having obtained
verifiable parental consent; and
18
<PAGE>
o prohibits conditioning the participation of a child under age 13 in a
game, the offering of a prize, or another activity on the child disclosing
more personal information than is reasonably necessary to participate in
such activity.
The Federal Trade Commission has not yet promulgated Regulations interpreting
this act. We depend upon collecting personal information from our customers. We
believe that the promulgation of regulations under this act will make it more
difficult for us to collect personal information from our customers.
Government Regulation and Legal Uncertainties
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. The law governing the
Internet, however, remain largely unsettled, even in areas where there has been
some legislative action. The most recent session of the U.S. Congress resulted
in Internet laws regarding online children's privacy, copyrights and taxation.
Such legislation could dampen growth in use and acceptance of the Web. Although
our online transmissions generally originate in New York, the governments of
other states or foreign countries might attempt to regulate our transmissions
or levy sales or other taxes relating to our activities. It may take years to
determine whether and how existing laws governing intellectual property,
privacy, libel and taxation apply to the Internet and online advertising. In
addition, the growth and development of e-commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad. New
laws may impose additional burdens on companies conducting business over the
Internet. The adoption or modification of laws or regulations applicable to the
Internet could adversely affect our business. We also may be subject to
regulation not specifically related to the Internet, including laws affecting
direct marketers and advertisers.
Web Security Concerns Could Hinder E-commerce and Online Advertising
The need to securely transmit confidential information (such as credit
card and other personal information) over the Internet has been a significant
barrier to e-commerce and communications over the Web. Any publicized
compromise of security could deter more people from using the Web or from using
it to transmit confidential information. Furthermore, decreased traffic and
e-commerce sales as a result of general security concerns could cause
advertisers to reduce their amount of online spending. Such security concerns
could reduce our market for e-commerce and indirectly influence our ability to
sell online advertising. We may also incur significant costs to protect iTurf
against the threat of problems caused by such security breaches.
Liability for Information Displayed on and Communication Through Our Web
Sites
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or based on other theories relating to the information
we publish on our Web sites. These types of claims have been brought, sometimes
successfully, against Internet companies as well as print publications in the
past. Based on links we provide to other Web sites, we could also be subjected
to claims based upon the online content we do not control that is accessible
from our Web sites. Claims may also be based on statements made and actions
taken as a result of participation in our chat rooms.
Risks Associated with Domain Names
iTurf holds various Web domain names relating to its brands, including the
iTurf.com, dELiAs.cOm and gURL.com domain names. The acquisition and
maintenance of domain names generally is regulated by governmental agencies and
their designees. In the United States, the National Science Foundation has
appointed Network Solutions, Inc. as the current exclusive registrar for the
".com," ".net" and ".org" generic top-level domains. The regulation of domain
names in the United States and in foreign countries is expected to change in
the near future. We expect such changes in the United States to include a
transition from the current system to a system controlled by a non-profit
corporation and the creation of additional top-level domains. Requirements for
holding domain names also are expected to be affected. As a result, we cannot
assure you that we will be able to acquire or maintain relevant domain names in
all countries in which iTurf conducts business. Furthermore, the relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. iTurf, therefore, may be unable to
prevent third parties from acquiring domain names that are similar to, infringe
upon or otherwise decrease the value of its trademarks and other proprietary
rights. Any such inability could have a material adverse effect on our
business, results of operations and financial condition.
19
<PAGE>
Risks Associated with Technological Change
The Internet, e-commerce and online advertising markets are characterized
by rapidly changing technologies, evolving industry standards, frequent new
product and service introductions, and changing customer preferences. Our
future success will depend on our ability to adapt to rapidly changing
technologies and address our customers' changing preferences. We may experience
difficulties that delay or prevent our being able to do so. Material delays in
introducing new technologies and enhancements to our services may cause
customers and advertisers to make purchases from or visit the Web sites of our
competitors.
Risks Associated with This Offering
Shares Eligible for Public Sale after This Offering May Affect Our Stock
Price
After this offering there will be outstanding shares of our Class A
common stock. After the closing of this offering, there will be shares of
Class A common stock outstanding if the underwriters' over-allotment option is
fully exercised. Of these shares, the shares sold in this offering will be
freely tradeable except for any shares purchased by our "affiliates" as defined
in Rule 144 under the Securities Act. The shares held by our affiliates will be
"restricted securities" and will become eligible for sale subject to the volume
limitations and other conditions of Rule 144 under the Securities Act. Sales of
a large number of shares could have an adverse effect on the market price for
our Class A common stock.
After the closing of this offering, our Parent will own all of the
outstanding shares of Class B common stock. Our Parent will not have any
restrictions on selling any of our securities held by it in the public market,
other than as provided in a lock-up agreement with BT Alex. Brown Incorporated
and Hambrecht & Quist LLC and under applicable securities laws. In addition,
our Parent can require us to register the shares of Class B common stock it
owns for public sale. Any sales by our Parent could adversely affect the
trading price of our Class A common stock. See "Management--Director
Compensation," "Management--1999 Stock Incentive Plan," "Certain
Transactions--Intercompany Agreements--iTurf Common Stock Registration Rights
Agreement" and "Shares Eligible for Future Sale."
As of January 1, 1999, shares of Class A common stock were reserved
for issuance under our Stock Incentive Plan, of which options to purchase
shares were then outstanding and of which no options were then exercisable. See
"Management--1999 Incentive Stock Plan." iTurf intends to file, within 180 days
after the date of this prospectus, a Form S-8 registration statement under the
Securities Act to register shares issued and reserved for issuance under the
Stock Incentive Plan. Beginning 180 days after the date of this prospectus,
approximately shares of Class A common stock issuable upon the exercise
of vested options will become eligible for sale. Shares of Class A common stock
issued under our Stock Incentive Plan or upon exercise of options after the
effective date of the Form S-8 will be available for sale in the public market,
subject to Rule 144 volume limitations applicable to affiliates and certain
lock-up agreements with the representatives of the underwriters. The possible
sale of a significant number of these shares may cause the price of our Class A
common stock to fall.
Possible Volatility of Our Class A Common Stock Price
We cannot predict the extent to which investor interest in iTurf will lead
to the development of a trading market in our Class A common stock or how
liquid that market might become. The initial public offering price for the
shares to be sold in this offering will be determined by negotiations between
iTurf and the representatives of the underwriters and may not be indicative of
prices that will prevail in the trading market. The stock market has
experienced significant price and volume fluctuations, and the market prices of
securities of technology companies, particularly Internet-related companies,
have been highly volatile. Investors may not be able to resell their shares of
our Class A common stock at or above the initial public offering price. See
"Underwriting."
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. The institution of such litigation against
us could result in substantial costs to us and a diversion of our management's
attention and resources.
20
<PAGE>
Broad Discretion in Use of Proceeds
Our management can spend most of the proceeds from this offering in ways
with which our stockholders may not agree. iTurf intends to use a portion of
the net proceeds from the offering for marketing, capital expenditures and to
purchase shares of our Parent's common stock. The remaining net proceeds will
be available for general corporate purposes, including working capital. See
"Use of Proceeds."
Anti-Takeover Provisions of Applicable Delaware Law and Our Restated
Certificate of Incorporation and Bylaws
Provisions of Delaware law, our Restated Certificate of Incorporation, or
our Bylaws could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. See "Description of
Capital Stock--Anti-Takeover Effects of Certain Provisions of Delaware Law and
Our Restated Certificate of Incorporation and Bylaws."
21
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of Class
A common stock offered hereby will be approximately $36.2 million, based on an
assumed initial public offering price of $ per share (the mid-point of the
offering range) and after deducting the estimated underwriting discounts and
estimated offering expenses. If the underwriters exercise their over-allotment
option in full, we estimate that such net proceeds will be approximately $41.8
million based on an assumed initial public offering price of $ per share
(the mid-point of the offering range).
We intend to use at least $6.0 million of the net proceeds of this
offering for marketing activities during fiscal 1999, and approximately $4.0
million of the net proceeds for capital expenditures, including investments in
technology and physical infrastructure and the acquisition of content and
distribution relationships. Additionally, we intend to use $10 million of the
gross proceeds of this offering, based on an assumed initial public offering
price of $ per share (the mid-point of the offering range), to purchase
shares of common stock of our Parent (or $13.5 million if the underwriters
exercise their over-allotment option in full). We will purchase such shares,
through a wholly-owned subsidiary, at a price equal to the average closing
price of our Parent's common stock on the five preceding trading days.
We expect to use the remainder of the net proceeds for other general
corporate purposes, including working capital. The amounts actually expended
for such working capital purposes may vary significantly and will depend on a
number of factors, including the amount of our future revenues and the other
factors described under "Risk Factors." Accordingly, we will retain broad
discretion in the allocation of the net proceeds of this offering. A portion of
the net proceeds may also be used to acquire or invest in complementary
businesses, technologies, product lines or products. We have no current plans,
agreements or commitments with respect to any such acquisition. Pending such
uses, we will invest the net proceeds of this offering in interest-bearing,
investment grade securities through a wholly-owned subsidiary.
DIVIDEND POLICY
We currently intend to retain all of our earnings to finance our
operations and we do not anticipate paying any cash dividends on our capital
stock in the foreseeable future. We may incur indebtedness in the future which
may prohibit or effectively restrict the payment of dividends, although we have
no current plans to do so.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of iTurf as of October
31, 1998 on an actual basis, and as adjusted to give effect to (i) the
reclassification of 100 shares of common stock outstanding at October 31, 1998
into shares of Class B common stock; (ii) the authorization of shares
of Class A common stock; (iii) the authorization of shares of preferred
stock and (iv) the sale of the shares of Class A common stock offered
hereby at an assumed initial public offering price of $ per share (the
mid-point of the offering range) and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses that we will pay and
the application of the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
October 31, 1998
---------------------------
Actual As Adjusted
------------ ------------
(In thousands)
<S> <C> <C>
Due to Parent. .................................................. $ 405 $ 405
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized; no
shares issued and outstanding actual and as adjusted ......... -- --
Common stock, $.01 par value; 1,000 shares authorized;
100 shares issued and outstanding actual;
no shares issued and outstanding as adjusted(1) .............. 0 --
Class A common stock, $.01 par value; shares
authorized; no shares issued and outstanding actual;
shares issued and outstanding as adjusted(2) ................. --
Class B common stock, $.01 par value; shares
authorized; no shares issued and outstanding actual;
shares issued and outstanding as adjusted .................... --
Additional paid-in capital ..................................... -- 36,200
Investment in common stock of Parent(3) ........................ -- (10,000)
---------
Retained earnings .............................................. 7 7
------ ---------
Total stockholders' equity .................................... 7 26,207
------ ---------
Total capitalization ......................................... $ 412 $ 26,612
====== =========
</TABLE>
- ----------
(1) Prior to the closing of this offering, these shares of common stock will be
reclassified as our Class B common stock.
(2) Excludes (i) shares of Class A common stock issuable upon the exercise
of options outstanding with a weighted average exercise price of $ per
share, and (ii) an aggregate of additional shares reserved for
issuance under our Stock Incentive Plan. See "Management--1999 Stock
Incentive Plan" and Note 8 of Notes to iTurf Financial Statements.
(3) iTurf will record the purchase of the common stock from our Parent as a
reduction in total stockholders' equity.
23
<PAGE>
DILUTION
The negative net tangible book value of iTurf as of October 31, 1998 was
approximately $(304,000), or $ per share of common stock. Negative net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the shares of common stock outstanding as of
October 31, 1998. The pro forma net tangible book value of iTurf as of October
31, 1998, after giving effect to (i) the issuance and sale of the shares
of Class A common stock offered hereby at an assumed initial public offering
price of $ per share (the mid-point of the offering range) after deducting
estimated underwriting discounts and commissions and estimated offering
expenses and (ii) the purchase of the common stock of our Parent (accounted for
as a reduction of stockholder's equity), would have been $25.9 million, or $
per share. This represents an immediate increase in pro forma net tangible book
value per share of $ to existing stockholders and an immediate dilution per
share of $ to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ........................... $
Negative net tangible book value per share before this offering ........ $
Increase in pro forma net tangible book value per share attributable to
new investors ......................................................... ------
Pro forma net tangible book value per share after offering ................ ------
Dilution per share to new investors ....................................... $
======
</TABLE>
The following table summarizes, on a pro forma basis, as of October 31,
1998, the number of shares of Class A common stock purchased in this offering,
the aggregate cash consideration paid and the average price per share paid by
existing stockholders and by new investors purchasing shares of Class A common
stock in this offering:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
-------------------- -------------------- Per
Number Percent Amount Percent Share
-------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing Stockholder ....... % $ % $
New investors .............. $
------ ------- -------- ------ ------
Total ................... 100.0% $ 100.0%
====== ======= ======== ======
</TABLE>
The foregoing discussion and tables assume no exercise of any stock
options. As of , there were options outstanding to purchase a total
of shares of Class A common stock with a weighted average exercise price
of $ per share. To the extent that any of these options are exercised,
there may be further dilution to new investors. See "Capitalization,"
"Management--1999 Stock Incentive Plan" and Note 8 of Notes to iTurf Financial
Statements.
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to, and
should be read in conjunction with, the Financial Statements of iTurf, the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this prospectus. The selected
statement of operations data of iTurf presented below for the period from March
14, 1995 (date of inception) through January 31, 1996, the years ended January
31, 1997 and 1998 and the nine month period ended October 31, 1998, and the
balance sheet data as of January 31, 1997 and 1998 and October 31, 1998 are
derived from financial statements of iTurf that have been audited by Ernst &
Young LLP, independent auditors, and are included elsewhere in this prospectus.
The balance sheet data at January 31, 1996 are derived from the audited
financial statements not included in this prospectus. The statement of
operations data for the nine month period ended October 31, 1997 are derived
from unaudited financial data of iTurf and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of iTurf's results of operations for such
period. The operating results for the interim periods presented are not
necessarily indicative of the results to be expected for any other interim
period or the year ending January 31, 1999.
The accompanying financial data include the Internet operations of TSI
from March 14, 1995 (date of inception), the operations of gURL Interactive
from December 17, 1997 (date of acquisition) and additional Internet operations
developed since December 17, 1997, including the dELiAs.cOm Web site which was
launched in May 1998.
<TABLE>
<CAPTION>
Period from
March 14, 1995
(date of
inception) Year Ended January Nine Months Ended
through 31 October 31
January 31 ------------------- --------------------
1996 1997 1998 1997 1998
--------------- ---------- -------- ---------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Net sales ............................................... $ 6 $13 $ 134 $ 86 $1,893
Cost of sales ........................................... 2 6 69 45 733
---- ---- ----- ---- ------
Gross profit ............................................ 4 7 65 41 1,160
Selling, general and administrative expenses ............ 6 14 114 42 1,041
---- ---- ----- ---- ------
Income (loss) from operations ........................... (2) (7) (49) (1) 119
Interest expense ........................................ -- -- 20 -- 31
----- ----- ----- ----- ------
Income (loss) before income tax (benefit) provision ..... (2) (7) (69) (1) 88
------ ------ ----- ------ ------
Income tax (benefit) provision(2) ....................... (1) (3) (29) -- 36
------ ------ ----- ----- ------
Net income (loss) ....................................... $(1) $(4) $(40) $(1) $ 52
===== ===== ===== ===== ======
Basic and diluted net income (loss) per share(3) ........ $ $ $ $ $
===== ===== ===== ===== ======
Shares used to compute basic and diluted net income
(loss) per share(3) .................................... ===== ===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
January 31
----------------------------------- October 31
1996 1997 1998 1998
---------- ---------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ....................... $ -- $ -- $ 31 $ 42
Working capital (deficiency) .................... (1) (5) (475) (573)
Total assets .................................... -- -- 461 640
Due to Parent ................................... 1 5 506 405
Total stockholder's (deficit) equity(4) ......... (1) (5) (45) 7
</TABLE>
- ----------
(1) The historical financial statements contained elsewhere in this prospectus
include allocations for administrative, distribution and other expenses
incurred by our Parent for services rendered to iTurf. While we believe
such allocations to be reasonable, they are not necessarily indicative of,
and it is not practical for us to estimate, the levels of expenses that
would have resulted had iTurf been operating as an independent company.
(2) See Note 2 of Notes to iTurf Financial Statements for information
concerning the computation of the income tax (benefit) provision and
"Managements Discussion and Analysis of Financial Condition and Results of
Operations--Income Taxes."
(3) Based on the number of shares actually outstanding as of October 31, 1998
after giving effect to the following: (i) the reclassification of 100
shares of common stock outstanding at October 31, 1998 into shares
of Class B common stock and (ii) the purchase of the common stock of our
Parent. See Note 2 of Notes to iTurf Financial Statements for information
concerning the computation of net income (loss) per share.
(4) iTurf will record the purchase of common stock from our Parent as a
reduction in total stockholders' equity. See "Capitalization."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and related Notes thereto of iTurf which appear elsewhere in this
prospectus. The following discussion contains forward-looking statements that
reflect iTurf'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 prospectus, particularly in "Risk
Factors."
Overview
iTurf is a leading provider of Internet community and e-commerce services
focused primarily on Generation Y. We provide Generation Y with an online
destination that encompasses a network of Web sites that address this
demographic group's concerns, interests, tastes and needs. Our sites offer
interactive web/zines with proprietary content, chat rooms, posting boards,
personal homepages and e-mail as well as online shopping opportunities.
iTurf is a subsidiary of dELiA*s Inc., and was incorporated on August 7,
1997. Prior to the closing of this offering, our Parent owned all of the
outstanding capital stock of iTurf. iTurf's results of operations include the
following:
o The Internet operations of TSI, a wholly-owned subsidiary of our Parent,
which was acquired by our Parent in December 1997. The acquisition was
accounted for as a pooling of interests. Therefore, the financial
statements of iTurf reflect the Internet operations of TSI from March 14,
1995 when TSI began Internet operations.
o The operations of gURL Interactive, which was acquired by iTurf on
December 17, 1997.
o The Internet operations developed since December 17, 1997, including the
dELiAs.cOm Web site which was launched in May 1998.
We rapidly expanded our operations in fiscal 1998. Following the
acquisition of gURL.com, we launched the dELiAs.cOm and discountdomain.com
sites in May 1998 and the contentsonline.com and droog.com sites in November
1998. We sell merchandise from these Web sites, each of which shares
merchandise and branding with catalog offerings of our Parent. In addition, we
expanded our Web community features during the same periods. We launched
gURLmAIL.com in February 1998 and gURLpages.com in June 1998. In December 1998,
we also began to add additional third party content to our gURL.com web site,
such as music news and film trailers. See "Business--The iTurf Network" and
"Business--iTurf E-Commerce."
We generate revenue from four primary sources:
o sales of apparel, accessories, footwear, athletic gear, home furnishings
and other merchandise through our e-commerce Web sites,
o fees paid for advertising on our Web sites,
o fees from licensing the gURL brand and content, and
o subscription fees paid by members of our discount shopping service,
discountdomain.com.
Sales of apparel, accessories and footwear for Generation Y girls and young
women on our dELiAs.cOm site accounted for a substantial majority of our
revenue in the nine months ended October 31, 1998 and is expected to account
for the majority of our revenue for the next twelve months. Sales of athletic
gear on our TSISoccer.com site, primarily soccer merchandise sold to Generation
Y boys and young men, was our second largest source of product revenue in that
period. We expect this trend to continue and for sales of apparel, accessories,
footwear and other products to grow more rapidly than sales of advertising over
the next twelve months. Because advertising sales are generally higher-margin
than merchandise sales, we expect our gross margin to decline in the near
future.
26
<PAGE>
The historical financial statements contained elsewhere in this prospectus
include allocations for administrative, distribution and other expenses
incurred by our Parent for services rendered to iTurf. While we believe such
allocations to be reasonable, they are not necessarily indicative of, and it is
not practical for us to estimate, the levels of expenses that would have
resulted had iTurf been operating as an independent company.
Following the closing of this offering, the provision of services and
other matters between the two companies, including use of our Parent's
trademarks, will be governed by the Intercompany Agreements. We believe that
the Intercompany Agreements, had they been in effect during the historical
periods presented, would not have had a material effect on our net income
(loss), given the level of benefits received from our Parent. Expenses would
have increased marginally in connection with fees to be paid to our Parent
pursuant to the Trademark License and Customer List Agreement. However, the
effect of the Trademark License and Customer List Agreement would have been
substantially offset by iTurf's ability under the supply arrangements of the
Intercompany Services Agreement to purchase clearance inventory from our Parent
at lower costs. We do not expect this offset to continue to the same degree
following the closing of this offering. We expect selling, general and
administrative expenses to increase as a percentage of sales due to fees
associated with higher levels of advertising provided by our Parent and with
increased sales made under trademarks licensed from our Parent. See "Certain
Transactions--Intercompany Agreements."
iTurf has also relied on our Parent to provide financing for our
operations. Therefore, our cash flows to date are not necessarily indicative of
the cash flows that would have resulted had iTurf been operating as an
independent company during the periods presented.
Since the inception of iTurf's business in 1995 through the fiscal year
ended January 31, 1998, iTurf incurred net losses of approximately $45,000. For
the nine months ended October 31, 1998, iTurf's operatio-ns resulted in net
income of approximately $52,000. We believe that our continued growth will
depend in large part on our ability to increase our brand awareness, provide
our customers with superior Internet community and e-commerce experiences and
continue to enhance our systems and technology to support increased traffic to
our Web sites. We intend to invest heavily in marketing and promotion
(including advertising in our Parent's print catalogs) and to further develop
our Web sites, technology and operating infrastructure. As a result, we expect
to record substantial net losses for the foreseeable future.
In view of the rapidly changing nature of iTurf's business and its limited
operating history, as well as the expected seasonality, iTurf believes that
period-to-period comparisons of its operating results, including iTurf's gross
profit margin and operating expenses as a percentage of sales, are not
necessarily meaningful. You should not rely on this information as an
indication of future performance.
27
<PAGE>
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended January 31, Ended October 31,
------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales .............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 46.2 51.5 52.3 38.7
----- ----- ----- -----
Gross profit ........................... 53.8 48.5 47.7 61.3
Selling, general and administrative
expenses ............................. 107.7 85.1 48.9 55.0
Interest expense, net .................. -- 14.9 -- 1.6
----- ----- ----- -----
Income (loss) before income tax
(benefit) provision .................. (53.9) (51.5) (1.2) 4.7
Income tax (benefit) provision ......... (23.1) (21.6) -- 1.9
----- ----- ----- -----
Net income (loss) ...................... (30.8)% (29.9)% (1.2)% 2.8%
===== ===== ===== =====
</TABLE>
Comparison of Nine Months Ended October 31, 1997 and 1998
Net Sales. Net sales increased from $86,000 in the nine months ended
October 31, 1997 to $1,893,000 in the nine months ended October 31, 1998. The
increase was primarily due to the launch of the dELiAs.cOm Web site in May 1998
and advertising revenue of approximately $290,000 during the nine months ended
October 31, 1998. iTurf did not sell any advertising in the nine month period
ended October 31, 1997. Subscription fees and licensing revenue was
approximately $167,000 for the nine month period ended October 31, 1998, and
such revenue was insignificant for the 1997 period.
Gross Profit. Gross profit increased from $41,000 in the nine months
ended October 31, 1997 to $1,160,000 in the nine months ended October 31, 1998
as a result of both increased sales and a higher gross margin. Gross margin
increased from 47.7% in the nine months ended October 31, 1997 to 61.3% in the
nine months ended October 31, 1998. This increase was due to both the increased
sales of higher-margin apparel and accessories on the dELiAs.cOm Web site
(which was launched in May 1998) as well as revenue from advertising, licensing
and subscriptions during the second and third quarters of fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include administrative, distribution and other expenses
allocated from our Parent, as well as direct expenses for advertising,
development, editorial and network operations personnel and consultants,
including costs of the Internet systems infrastructure. Selling, general and
administrative expenses increased from $42,000, or 48.9% of sales, in the nine
months ended October 31, 1997 to $1,041,000, or 55.0% of sales, in the nine
months ended October 31, 1998. This increase was due to a substantial increase
in advertising, allocated expenses from our Parent and additional direct
expenses related to personnel and infrastructure development in anticipation of
greater sales.
Comparison of Fiscal Years 1996 and 1997
Net Sales. Net sales in fiscal 1996 and fiscal 1997 were substantially
from soccer merchandise. Net sales increased from $13,000 in fiscal 1996 to
$134,000 in fiscal 1997. This increase was primarily due to an enhancement of
TSISoccer.com and additional customer awareness of the site, as well as a
general increase in the use of the Web for electronic commerce.
Gross Profit. Gross profit increased from $7,000 in fiscal 1996 to $65,000
in fiscal 1997, primarily due to an increase in net sales. Gross margin
decreased from 53.8% in fiscal 1996 to 48.5% in fiscal 1997, primarily due to a
change in the mix of TSI Soccer merchandise sold from year to year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $14,000 for the year ended January 31,
1997 to $114,000 in fiscal 1997. Selling, general and administrative expenses
as a percentage of net sales decreased from 107.7% to 85.1%, primarily due to
the leveraging of fixed costs over a larger revenue base.
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Quarterly Results of Operations
The following table sets forth certain unaudited quarterly statement of
operations data for the seven quarters ended October 31, 1998. This unaudited
quarterly information has been derived from unaudited financial statements of
iTurf and, in the opinion of management, includes all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
information for the periods covered. The quarterly data should be read in
conjunction with the iTurf Financial Statements and the notes thereto. The
operating results for the quarters are not necessarily indicative of the
operating results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
Apr. 30, July 31, Oct. 31, Jan. 31, Apr. 30, July 31, Oct. 31,
1997 1997 1997 1998 1998 1998 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------
(in thousands)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .......................... $ 9 $ 24 $53 $ 48 $ 69 $ 760 $1,064
Cost of sales ...................... 5 13 27 24 35 339 359
---- ---- --- ------ ------ ------ ------
Gross profit ....................... 4 11 26 24 34 421 705
Selling, general and
administrative expenses ........... 6 18 18 72 100 436 505
Interest expense, net .............. -- -- -- 20 11 11 9
---- ---- --- ------ ------ ------ ------
Income (loss) before income tax
(benefit) provision ............... (2) (7) 8 (68) (77) (26) 191
Income tax (benefit) provision ..... (1) (3) 3 (28) (32) (11) 79
------- ------- --- ------ ------ ------ ------
Net income (loss) .................. $ (1) $ (4) $ 5 $ (40) $ (45) $ (15) $ 112
====== ====== === ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Percentage of Net Sales
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ............................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................... 55.6 54.2 50.9 50.0 50.7 44.6 33.7
----- ----- ----- ------ ------ ----- -----
Gross profit ............................ 44.4 45.8 49.1 50.0 49.3 55.4 66.3
Selling, general and
administrative expenses ................ 66.6 75.0 34.0 150.0 144.9 57.4 47.5
Interest expense, net ................... -- -- -- 41.7 16.0 1.4 0.8
----- ----- ----- ------ ------ ----- -----
Income (loss) before income tax
(benefit) provision .................... (22.2) (29.2) 15.1 (141.7) (111.6) (3.4) 18.0
Income tax (benefit) provision .......... (11.1) (12.5) 5.7 (58.4) (46.4) (1.4) 7.5
----- ----- ----- ------ ------ ----- -----
Net income (loss) ....................... (11.1)% (16.7)% 9.4% ( 83.3)% (65.2)% (2.0)% 10.5%
===== ===== ===== ====== ====== ===== =====
</TABLE>
Net Sales. Net sales have generally increased from quarter to quarter due
to the launch of new Web sites, notably dELiAs.cOm in the second quarter of
fiscal 1998, as well as enhanced design elements, broader product offerings and
increases in the customer awareness of our sites and in consumer use of the web
for electronic commerce. In the second and third quarters of fiscal 1998, net
sales also increased due to the sale of advertising by iTurf.
Gross Profit. Gross profit has increased quarter over quarter since the
first quarter of fiscal 1998 due to the sale of higher-margin apparel and
accessories following the launch of the dELiAs.cOm Web site and the sale of
advertising in the second and third quarters of fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses have increased from quarter to quarter due to higher
allocation of expenses from our Parent and higher direct expenses. Selling,
general and administrative expenses as a percentage of net sales have decreased
from quarter to quarter over the four most recent quarters primarily because
iTurf has been able to leverage certain fixed costs over a larger revenue base.
The significant increase in selling, general and administrative expenses from
the third quarter to the fourth quarter of fiscal 1997 reflects the costs
associated with the development of our Web sites and the purchase and
integration of gURL.com, while the increase from the first quarter to the
second quarter of fiscal 1998 reflects the startup of dELiAs.cOm and related
marketing costs.
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Seasonality
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control.
These factors include:
o seasonal fluctuations in consumer purchasing patterns and advertising
spending,
o timing of, response to and quantity of our Parent's catalog mailings,
o changes in the growth rate of Internet usage,
o actions of competitors,
o the timing and amount of costs relating to the expansion of our
operations and acquisitions of technology or businesses, and
o general economic and market conditions.
Our limited operating history and rapid growth make it difficult to
ascertain the effects of seasonality on our business. We believe that
period-to-period comparisons of our historical results are not necessarily
meaningful and should not be relied upon as an indication of future results.
Income Taxes
Pursuant to the Tax Allocation Agreement, if our Parent continues to file
a consolidated tax return including iTurf, we will pay our proportionate share
of such tax liability computed as if iTurf were filing a separate return.
So long as iTurf is consolidated with our Parent's taxpayer group, any tax
loss benefits attributable to iTurf that we are unable to use at that time will
be used by our Parent. To the extent that our Parent uses our tax benefits, it
will establish a receivable for our benefit. Our Parent will be required to
repay us for the use of any such benefit. Repayment is due in cash at the time
and to the extent we are required to pay income taxes and we are no longer
consolidated in our Parent's tax group, or at the close of the fifth calendar
year following the creation of the benefit. Such repayment by our Parent will
be offset by any amount that we are required to pay our Parent under the Tax
Allocation Agreement.
If iTurf is no longer consolidated with our Parent's taxpayer group, we
may not be able to realize the tax benefit of future losses. Losses generated
subsequent to deconsolidation will be available to us to offset any future
taxable income for twenty years. Deferred tax assets normally recorded to
reflect such future benefit may or may not be recorded depending on our ability
to demonstrate the likelihood of future profitability. See "Certain
Transactions--Intercompany Agreements--Tax Allocation Agreement."
Liquidity and Capital Resources
Net cash flows provided by operating activities of $313,000 for the nine
months ended October 31, 1998 were primarily due to a $228,000 increase in
accounts payable and other current liabilities and $52,000 of net income. The
net cash flow effect of operating activities was insignificant for the nine
months ended October 31, 1997.
Net cash used in investing activities of $201,000 for the nine months
ended October 31, 1998 related to purchases of property and equipment. The net
cash flow effect of investing activities was insignificant for the nine months
ended October 31, 1997. We expect to make capital expenditures of at least $4.0
million in fiscal 1999, including investments in technology and physical
infrastructure and the acquisition of content and distribution relationships.
Financing activities used net cash of $101,000 for the nine months ended
October 31, 1998. The net cash flow effect of financing activities was
insignificant for the nine months ended October 31, 1997. Financing activities
primarily relate to loans from our Parent.
iTurf has historically relied on its Parent for financing capital
expenditures. iTurf's capital requirements depend on numerous factors,
including the rate of market acceptance of iTurf's online presence, the ability
to expand iTurf's customer base, the cost of upgrades to its online presence,
the
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<PAGE>
level of expenditures for sales and marketing and other factors. The timing and
amount of such capital requirements cannot accurately be predicted.
Additionally, iTurf will continue to evaluate possible investments in
businesses, products and system technologies and plans to expand its sales and
marketing programs and conduct more aggressive brand promotions. iTurf believes
that the net proceeds from this offering, together with iTurf's operating
revenue, will be sufficient to meet anticipated cash needs for at least the
next 24 months.
iTurf is currently a borrower under our Parent's bank credit facility,
which prohibits dividends other than to our Parent. We expect to terminate our
participation in the bank credit facility concurrent with the closing of this
offering.
Concurrent with the closing of this offering, iTurf intends to use $10
million of the gross proceeds of this offering, based on an assumed offering
price of $ per share (the mid-point of the offering range), to purchase
shares of our Parent's common stock (or $13.5 million if the underwriters
exercise their over-allotment option in full). We will purchase such shares,
through a wholly-owned subsidiary, at a price equal to the average closing
price of our Parent's common stock on the five preceding trading days. iTurf
will record this transaction as a reduction to stockholders' equity. In
addition, we have registration rights, subject to certain restrictions, on such
shares of our Parent's common stock. See "Certain Transactions--Intercompany
Agreements--dELiA*s Common Stock Registration Rights Agreement."
Year 2000
iTurf is heavily dependent upon complex computer software and systems for
our operations, including, to a significant extent, our Parent's computer
systems. Many existing computer programs and systems use only two digits to
identify a year in the date field. These programs and systems were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. Accordingly, iTurf has prepared a Year 2000
compliance program which involves (i) identifying the material operating
software and systems on which iTurf depends (whether used by iTurf or by
iTurf's service providers), (ii) obtaining written warranties or assurances
from third party software and systems vendors and service providers, (iii)
monitoring the compliance efforts of such vendors and service providers and
(iv) testing its material operating software and systems.
All of iTurf's material operating software and information technology
systems, including telecommunications and warehouse systems were developed by
and are supported by third party vendors. Each of the third party vendors of
iTurf's mission-critical operating software have provided written warranties or
assurances to iTurf or our Parent that such software will not be affected by
the change in the century. The majority of the third party vendors of iTurf's
other material operating software and systems have also provided warranties or
assurances that such software and systems would be compliant by December 31,
1998. We expect to begin performing tests of all of iTurf's material operating
software and systems to verify the assurances given by these third party
vendors and ensure Year 2000 compliance in the first quarter of fiscal 1999.
However, we cannot assure you that all of iTurf's material operating software
and systems will be Year 2000 compliant.
In addition to the operating systems and software iTurf uses directly,
iTurf's operations are also dependent upon the performance of operating
software and systems used by our significant service providers, including our
Parent and providers of financial, telecommunications and parcel delivery
services. Our Parent has provided us with assurance that its Year 2000
compliance programs is consistent with ours and the status of its efforts is
the same as ours. We have contacted each of iTurf's other significant service
providers and have obtained written assurances from the majority of such
providers that the providers' relevant operating software and systems are in
Year 2000 compliance or will be by December 31, 1998. We are monitoring the
status of all iTurf's significant service providers' Year 2000 compliance
efforts to minimize the risk of any material adverse effect on iTurf's
operations resulting from compliance failures. However, there can be no
assurance that iTurf's service providers have, or will have, operating software
and systems that are Year 2000 compliant.
A software or systems Year 2000 compliance failure with respect to iTurf's
internal systems and software, or that of a third party service provider, could
prevent iTurf from being able to process or
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fulfill orders from its customers or could disrupt iTurf's financial and
management controls and reporting systems. Any such failure, if not quickly
remedied, would have a material adverse effect on iTurf. Therefore, we are
developing contingency plans with respect to such systems and software.
In addition, a significant portion of purchases of merchandise from iTurf
are made with credit cards, and iTurf's 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.
iTurf has not identified significant exposure to Year 2000 problems
outside of the information technology issues identified above.
iTurf does not expect its costs of addressing Year 2000 issues to be
significant. However, given iTurf's dependence on third party software and
system vendors and service providers and on its customers' vendors, there can
be no assurance to that effect.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that public companies
report certain information about operating segments in their annual financial
statements and in subsequent condensed financial statements of interim periods
issued to shareholders. This statement also requires that public companies
report certain information about their products and services, the geographic
areas in which they operate and their major customers. iTurf has determined
that the adoption of this new standard did not have a material effect on its
disclosure for all periods presented because iTurf currently operates in one
segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, which is effective for
fiscal years beginning after June 15, 1999, requires iTurf to recognize all
derivatives on the balance sheet at fair value. iTurf has determined that the
adoption of this new standard will not have a material effect on its financial
statements or disclosure for all periods presented.
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BUSINESS
Our Business
iTurf is a leading provider of Internet community and e-commerce services
focused primarily on Generation Y. Generation Y is comprised of 56 million
young people between the ages of 10 and 24. It is the fastest growing
demographic group under age 65 in the United States and accounts for over $278
billion of disposable income. We offer Generation Y an online destination that
addresses this group's concerns, interests, tastes and needs. Our network of
sites offers interactive web/zines with proprietary content, chat rooms,
posting boards, personal homepages and e-mail, as well as online shopping
opportunities. iTurf combines the style and editorial flair of Generation
Y-focused media with core direct marketing and e-commerce competencies.
iTurf is an online "home turf" where members of Generation Y can interact
and shop in a domain of their own, away from the pressures of parents and
schools. Our network is currently comprised of our gURL community and multiple
online retail properties, including dELiAs.cOm, TSISoccer.com,
contentsonline.com, and discountdomain.com. Our commerce offerings include a
wide range of apparel, accessories, footwear, athletic gear and home
furnishings for Generation Y.
A key driver of our success is our relationship with our Parent, dELiA*s
Inc., a leading catalog marketer targeting the Generation Y market. Our
relationship with our Parent provides us with the following advantages:
o the exclusive online use of leading brand names including dELiA*s and
TSI Soccer;
o a proprietary nine million-name database;
o sophisticated fulfillment services from our Parent's distribution
center;
o advertising space in our Parent's catalog publications that collectively
have circulation in excess of 60 million; and
o substantial merchandising expertise and strong relationships with
hundreds of vendors.
Our Internet traffic and sales have grown rapidly over the last year. We
estimate that the number of page impressions per month on our Web sites has
grown from approximately 800,000 in February 1998 to approximately 22 million
in December 1998. Our net sales have increased from $53,000 in the quarter
ended October 31, 1997 to $1,064,000 in the quarter ended October 31, 1998. By
selling a selection of branded and proprietary products, we have been able to
achieve higher gross profits per order on merchandise sales than many other
e-commerce companies. In the nine-month period ended October 31, 1998, our
gross margin on merchandise sales was approximately 49%.
We currently generate a substantial majority of our revenue from our
e-commerce offerings. However, we expect to further develop and enhance our
other revenue streams in the future. We derive revenue through four primary
sources:
o sales of apparel, accessories, footwear, athletic gear, home furnishings
and other merchandise through our e-commerce Web sites;
o fees paid for advertising on our sites;
o fees from licensing the gURL brand and content; and
o subscription fees paid by members of our discountdomain.com discount
shopping service.
Industry Background
Growth of the Internet
The Internet has emerged as a global medium, enabling millions of people
to share information, communicate and conduct business electronically.
International Data Corporation ("IDC"), a market research firm, estimates that
the number of Web users will grow from approximately 69 million worldwide in
1997 to approximately 320 million worldwide by the end of 2002. This growth is
expected to be driven by the large and growing number of PCs installed in
homes, offices and schools; the
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<PAGE>
decreasing cost of PCs; easier, faster and cheaper access to the Internet;
improvements in network infrastructure; the proliferation of Internet content;
and the increasing familiarity with and acceptance of the Internet by
businesses and consumers.
Growth of Internet Advertising and Online Commerce. The growing
adoption of the Web represents a significant opportunity for businesses to
advertise and conduct commerce over the Internet. According to IDC,
e-commerce transactions to the home are expected to increase from
approximately $5 billion in 1997 to approximately $94 billion in 2002.
Online retailers are able to gather a wealth of information about the
preferences and purchasing activities of their customers and develop
one-to-one relationships with users worldwide without making significant
investments in traditional infrastructure such as retail outlets and sales
personnel. We believe online retailers with a core competence in direct
marketing are particularly well positioned to leverage their expertise in
data mining, customer acquisition and retention, catalog merchandising and
marketing, fulfillment, quality control and customer service to capture
market share efficiently.
Interest in Web advertising is also increasing as a result of greater
web usage and online functional advantages such as the ability to
customize advertising to specific individuals and reach highly targeted
audiences. Jupiter Communications projects that advertising on the Web
will increase from approximately $1.9 billion in 1998 to $7.7 billion in
2002. We believe that companies that offer advertisers access to such
audiences can capitalize on this trend.
Growth in Internet Communities. As the Internet grows, we believe that
users seek from the Web the same opportunity for compelling content,
information, expression, interaction, sharing, support and recognition
they seek in the everyday world. Users are generally able to obtain
general content through the major navigational sites. However, most of
these Web sites are not dedicated to publishing proprietary content and
aggregating and accessing user-created content. Often, the most relevant
content for a user is generated by other users who share an interest in
what is published. Multi-faceted online communities provide the user with
the ability to access proprietary content and to interact directly with
authors of personalized content. We believe there is a significant and
growing demand among users for an online community site that offers
proprietary as well as personally created content in an easy-to-navigate
contextual manner.
Generation Y's Increasing Importance to the Economy and Online Commerce
Generation Y is the fastest growing and largest population segment of
consumers under age 65. The United States Census Bureau projects that
Generation Y will continue to grow through 2015 when it will reach 63.5 million
people, up 12.8% from its 1998 level of 56.3 million. Over the next twelve
years, growth of Generation Y is estimated to outpace growth of the general
population by 19.5%. While Generation Y is both large and rapidly growing, it
also possesses substantial disposable income. Based on United States Census
Bureau estimates, we believe that 10 to 24 year-olds generated disposable
income in excess of $278.2 billion in 1997. Industry sources estimate that
approximately 62% of teens' disposable income is spent on apparel, sporting
goods and entertainment.
At the same time, Generation Y is becoming increasingly involved with the
Internet. According to eMarketer, the number of teens and college students who
regularly access the Internet will rise from an estimated 12 million in 1998 to
22.3 million by the year 2000. Further, we believe that Internet access is
taking audience share directly away from television. According to a Nielsen
Media Research study, in homes with Internet access, television use by 12 to 24
year-olds declined 6.8% from 1996 to 1997, while television use by that segment
remained constant among non-Internet households.
The Need for a Generation Y Online Destination
We believe Generation Y is a large and underserved audience that desires
entertainment, communication, content and advice in an environment focused on
their particular needs. Members of Generation Y are influenced by new media and
information sources and demand fresh and engaging content that speaks to them
without speaking down to them. The major Internet navigational hubs are
generally designed to appeal to a broad audience and therefore have not created
an environment focused on the specific programming needs and buying habits of
Generation Y. These hubs do not
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exclusively address the issues that are relevant to teens, such as peer,
parental and school-related pressures as well as issues revolving around
friendship, sexuality and competition. Additionally, these hubs do not provide
the kind of interactivity and services that this group seeks, such as
communication with their peers through chat, instant messaging and e-mail, away
from the adults in their lives, as well as news, online games and personal home
page building.
We believe that creating an online destination that caters exclusively to
Generation Y is essential to marketing to this group. From a marketing
perspective, Generation Y is difficult to reach and has demonstrated a
resistance to traditional marketing techniques. This group favors consensus
building through peer interaction on a variety of topics, including purchasing
decisions. We believe contextual selling and advocacy marketing techniques
rather than traditional advertising methods are more effective in marketing
products and services to this audience. Accordingly, we believe there is a need
for a Generation Y online destination consisting of an integrated network of
community and commerce in a trusted environment.
The iTurf Solution
iTurf is a "home turf" where members of Generation Y can interact and shop
in a domain of their own, away from the pressures of parents and school.
Moreover, iTurf is an online destination where this group can congregate in an
environment that caters exclusively to its interests and promotes its
participation and personal growth. iTurf integrates community and commerce
through a network of sites focused primarily on Generation Y, providing
compelling and topical content as well as forums for interactive communication.
Our network is currently comprised of our gURL community and multiple
online retail properties. Currently, the gURL community provides a place where
girls and young women can find peer support and advice from like-minded users
through community resources such as chat rooms, posting boards, home-page
hosting services and Web-based e-mail services. Our gURL community provides
interactive features and regularly updated articles on topics of interest to
Generation Y girls and young women, such as shopping, fashion and beauty, peer
pressure, entertainment, music, relationships, emotions, gossip and news.
iTurf's gURL.com site has received various awards including a 1998 Webby
people's voice award for best site in the "living" category.
Our commerce offerings include a wide range of apparel, accessories,
footwear, athletic gear and home furnishing products for both teen girls and
boys. Our most prominent online store, dELiA.cOm, offers apparel, cosmetics,
accessories, footwear and other products for Generation Y girls and young
women. Our other commerce sites include (i) TSISoccer.com, offering soccer and
other sports related products; (ii) contentsonline.com, offering home
furnishings, light furniture and household articles; and (iii)
discountdomain.com, a membership-based discount shopping service. We have also
recently launched droog.com, a site that offers apparel, accessories and
footwear for Generation Y boys and young men. We intend to leverage the traffic
and brand name recognition generated from these sites to develop and expand
existing and additional sites on our network.
The cornerstone of our long-term solution is iTurf.com. We intend to
develop iTurf.com as the online meeting place and community for young men and
women of Generation Y. We will promote and drive traffic to this site through
all of the properties in our network. We will promote iTurf.com to Generation Y
girls and young women through gURL.com, dELiAs.cOm and other female-targeted
offerings. We will promote iTurf to Generation Y boys and young men through our
male-focused offerings as well as the prospect of interaction with the members
of the gURL community. In addition to our e-commerce efforts, we believe we may
be able to generate material advertising and sponsorship revenue from
advertisers and retailers seeking targeted access to Generation Y.
The iTurf Advantage
We believe we are one of the few online networks to focus primarily on the
Generation Y market. We believe that we possess advantages relative to other
Internet communities and marketers. In particular, our strategic relationship
with our Parent, the leading direct marketer to Generation Y, provides us with
the following advantages:
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Superior Ability to Attract Customers and Users to Web Sites. We believe
that we can raise brand awareness and heighten the popularity of our Web sites
by leveraging the following assets:
o Access to Proprietary Database of Over Nine Million Names. We have the
exclusive online right to our Parent's Generation Y database. The size of
our Parent's database of catalog buyers and requesters has grown rapidly
from 198,000 names as of January 31, 1996 to over 9 million names today
and is growing by over 100,000 names each month. In excess of 500,000
names in the database have e-mail addresses in their customer records.
This database includes over 4 million buyers of direct mail products and
contains extensive individual purchasing histories. We believe this
proprietary database would be difficult for competitors to replicate and
creates a significant competitive advantage in targeting Generation Y.
o Compelling, Topical Content. Compelling, topical and regularly-updated
content is critical to driving repeat customers and users to our Web
sites. We obtain such content from both our internal staff as well as from
our Parent. Such content consists of engaging editorial copy from direct
marketing products, and content from the gURL web/zine and community,
which presents regularly-updated articles, series and games as well as
thousands of pages of user-generated content. Accordingly, we believe we
have the editorial assets necessary to keep our content fresh and updated
and to continue to attract and retain new customers and users.
o iTurf Trade Names. We have the exclusive online right to capitalize on
the superior brand recognition of our licensed trade names (including
dELiA*s, contentsonline, TSI Soccer, discountdomain and Droog) and our
gURL trade name. We believe these trade names have been a strong
motivating factor in attracting customers, especially with regard to
consumers who have not yet made a purchase online. We believe that a
significant portion of our success has been attributable to the goodwill
and trust earned by our brands among Generation Y consumers and their
parents. Very few online marketers have successfully penetrated the teen
market in this manner.
o Exclusive Advertising and Promotional Space in the Largest Publication
Directed at Our Target Market. To date, we have advertised our Web sites
primarily through our Parent's catalogs, which have an annual circulation
in excess of 60 million. The dELiA*s catalog has the largest domestic
circulation of any publication directed at Generation Y, including
nationally recognized publications. Following this offering, we will have
certain exclusive rights to purchase promotional and advertising space in
our Parent's catalog titles (including dELiA*s, Contents, TSI Soccer and
Droog). We intend to increase the amount of advertising we place in these
titles.
Ability to Deliver Superior E-Commerce Solutions. We also believe that we
will be able to offer superior e-commerce services to our customers as a result
of the following factors:
o Sophisticated Fulfillment Capability. We have access to our Parent's
sophisticated fulfillment services that are performed from our Parent's
354,000 square foot distribution center. This access enables us to retain
significantly greater control over the quality, timeliness and cost of
fulfillment than other online marketers who outsource fulfillment services
to unrelated third party contractors that serve several direct marketers.
In addition, the scale of our Parent's operation enables us to deliver a
large number of products over a range of categories. Customers generally
have access to real-time product availability information prior to
ordering and are shipped products within 48 hours of credit approval. We
also supplement our customer service staff with support from our Parent's
three call centers with a total of 400 stations, two of which call centers
are staffed 24 hours per day, 7 days per week.
o Superior Inventory Management and Merchandising Opportunities. Through
our relationship with our Parent, we are able to offer a large selection
of merchandise without the investment in inventory and the ongoing expense
related to the management of such inventory. In addition, we do not take
ownership of the inventory until the customer order is taken, eliminating
the risk of inventory obsolescence and mark-downs. We also take advantage
of our Parent's relationships with a diverse group of hundreds of vendors
as well as the purchasing economies enjoyed by our Parent as a result of
both its scale and proprietary private label products. As a result, we
believe
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we are well positioned to continue to enjoy gross profit margins that are
superior to many other online retailers while being able to provide our
customers with a compelling selection of recognized merchandise.
o Direct Marketing Knowledge and Expertise. We expect to benefit from the
direct marketing knowledge and expertise of our management team and of our
Parent. We are transferring to the Web the contextual selling model as
well as the use of editorial and graphical elements pioneered by our
Parent and various members of our management. We believe that this
strategy is directly transferable to the Web where the contextual selling
model can be enhanced by including interactive capabilities such as chat
and personal home pages. In addition, our Parent possesses considerable
experience in gathering and mining data on Generation Y that we believe is
key to our success. Accordingly, we believe that we will be able to
effectively target and satisfy the needs of the Generation Y community.
Strategy
Our goal is to build iTurf into the premier Generation Y online
destination. We believe that successful execution of our strategy will enhance
iTurf's position as a premier destination primarily focused on the Generation Y
market. Consequently, we expect to realize superior revenue growth
opportunities based upon expanded e-commerce offerings and, eventually,
advertising opportunities including sponsorship, promotion and distribution
agreements with leading brand marketers and media companies. These are the key
elements of our strategy:
Strengthen Brand Recognition. We believe that building brand recognition
for our sites is critical to attracting and expanding our global Internet user
base and customer loyalty. Our strategy is to enhance the brand recognition of
the iTurf name as well as to independently build each brand in the iTurf
network, including dELiA*s, gURL, TSI Soccer, discountdomain, contentsonline
and Droog, each of which is designed to appeal to a specific customer segment
within Generation Y. By building each brand individually, we expect to reach
specific customer groups with product offerings and formats designed to cater
to their tastes and purchasing patterns. In doing so, we believe we can avoid
relying on one brand or segment within Generation Y, but rather can maximize
our reach to all segments of Generation Y. In the near term we will devote
substantial resources to building the leadership positions of gURL and
dELiAs.cOm.
We seek to build brand recognition and traffic to our site through
multiple methods including:
o Promotion in our Parent's Marketing Channels. To date, we have marketed
our sites and products and services in our Parent's catalogs, which have a
combined circulation of more than 60 million. We intend to continue to
advertise in our Parent's family of catalogs (dELiA*s, Contents, TSI
Soccer, Droog and other titles that have not yet been translated onto the
Web) and our Parent's retail stores (dELiA*s, Screeem! and TSI Soccer). To
date, these marketing channels have been the principal marketing mechanism
to reach our target audience.
o Traditional and Internet Advertising. We intend to use traditional
advertising, which may include print, radio and event-based promotions.
Our sites have been advertised in such teen and fashion magazines as
Seventeen and YM. We believe that promotion in such publications is
particularly effective in reaching our target audience. We also intend to
use targeted, online advertising to promote our brand name and specific
merchandising opportunities. The Company has purchased banner advertising
on the AngelfireMail, ChickClick and HotBot Web sites.
o Direct Marketing. The Internet allows rapid and effective marketing
experimentation and analysis, instant user feedback and personalization.
We intend to utilize direct marketing techniques to effectively target and
retain customers. Currently we send regular broadcast e-mails to our users
promoting special discounts and offers and intend to include more targeted
personalized electronic messages based on prior purchasing behavior and
online activity. We also send out regular electronic newsletters to
gURLmAIL registered users regarding events affecting the Generation Y
community. We may also use traditional direct mail channels to target our
customers and individuals on our Parent's database.
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o Strategic Alliances. We believe iTurf can enhance its brand names and
increase its customer base through strategic alliances with community,
content and e-commerce providers. We have entered into various strategic
alliances. We have created satellite dELiAs.cOm stores on Yahoo! Shopping
and CatalogCity.com. In addition, we are the exclusive provider of soccer
merchandise on Sportsite.com. We intend to enter into additional strategic
alliances with other sites as a means of building traffic and customers.
o Affiliate Network. To direct traffic to our Web sites, we are pursuing a
grass roots marketing program. We recently created the dELiA*s Affiliate
Network, a marketing tool that increases exposure on the Internet and
directly generates sales. We offer approved Web sites a percentage of
sales on purchases by customers referred to our network of sites.
Enhance Online Offerings. We will aggressively seek to develop our
content, community and e-commerce product offerings to drive traffic to our Web
sites and increase revenue.
o Continue to Increase Community Functionality. We believe our success to
date has been, in part, a result of building customer loyalty through the
coupling of community with commerce. We believe our target market places
great value on opportunities to interact with their peers through
interactive services we currently offer including e-mail, chat rooms, home
pages and other services. In the near term, we intend to add additional
services such as buddy lists, instant messaging, shared calendars and
organizers to further increase the community functionality of our sites.
We are continually looking for innovative and exciting interactive
services and new technologies to offer our users and customers.
o Enhance Content to Deepen Penetration of Markets. We intend to provide
new community and content offerings targeted at additional customer groups
within Generation Y, such as offerings directed at young men as well as
content designed to facilitate interaction between male and female members
of Generation Y. Our offerings for males may include online games and
sports news, among other things. We plan to drive traffic to these
offerings through our droog.com and TSISoccer.com sites. We also intend to
develop iTurf.com as the online meeting place and community for young men
and women of Generation Y.
o Expand Range of E-Commerce Products and Services. We believe that we can
further expand our product offerings to include additional products and
services targeted at and particularly attractive to Generation Y
consumers. Our product offerings have consisted principally of apparel,
accessories, footwear, and cosmetics for Generation Y females and athletic
gear for Generation Y males. We have recently expanded our offerings to
include home furnishings for Generation Y females and apparel and
accessories for Generation Y males. In the future, we may offer magazines,
software, a full array of music and videos, as well as other apparel and
athletic gear.
Expand Site Infrastructure to Support Growth. We intend to continue to
invest in scalable technologies and site infrastructure and to enhance the
functionality of our Web sites in order to better serve existing users and to
provide robust and scalable platforms to support growth. In the near term, we
expect to make substantial investments in the integration of Web and database
technologies to:
o allow increased customization and personalization of the online shopping
and community experience;
o employ basket analysis and other cross-selling strategies; and
o enable broadcast e-mails to customers based on purchasing histories and
demographic characteristics and other valuable database-driven techniques
for increasing revenue per customer.
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The iTurf Network
The iTurf network is currently composed of the iTurf.com home page and the
nine sites described below:
Community Sites
gURL.com Web/zine and community site targeting teen girls
and featuring chat, posting boards and other
interactive functionality.
gURLnet.com Network of third-party Web sites featuring content
designed for Generation Y females.
gURLpages.com Free home-page hosting service that offers users
disk space and publishing tools to create their
own sites quickly and easily in one of 23
topically organized sub-communities.
gURLmAIL.com Free Web-based e-mail service that is open to
users who register and provide certain demographic
information.
E-commerce Sites
dELiAs.cOm E-commerce site based on the dELiA*s print catalog
selling apparel, accessories, footwear and
cosmetics to Generation Y girls and young women.
TSISoccer.com E-commerce site based on the TSI Soccer print
catalog selling soccer merchandise and other
athletic equipment, primarily to Generation Y
males.
discountdomain.com E-commerce site selling discounted merchandise
(primarily apparel) to Generation Y girls and
young women who pay a monthly subscription fee.
contentsonline.com E-commerce site based on the Contents print
catalog selling home furnishings, light furniture
and household articles for a Generation Y female's
bedroom or dorm room.
droog.com E-commerce site enabling orders from the Droog
print catalog selling apparel, accessories and
footwear to Generation Y boys and young men.
iTurf Community
Our current community offerings are built around the gURL brand. Our gURL
sites serve hundreds of thousands of registered Generation Y users. By offering
a collection of services under a single brand, targeting a precise population
segment and maintaining tight controls over the quality and integrity of the
user-oriented content, we believe that we have built a cultural environment in
which our users feel comfortable, safe and secure. These traits are critical
for attracting and retaining visitors.
gURL.com
gURL Web/zine. The gURL web/zine is our flagship editorial product. gURL
presents a different approach to the experience of being a teen girl. It is
committed to discussing issues that affect the lives of Generation Y females in
a non-judgmental, personal way. Through honest writing, visuals and liberal
sense of humor, gURL seeks to provide its audience a new way of looking at
subjects that are crucial to their lives. gURL chooses the subjects it covers
carefully and deals frankly with issues such as sexuality, emotions and body
image.
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The gURL web/zine presents regularly-updated articles, series and games in
five principal departments:
o Looks Aren't Everything--a love/hate look at beauty culture, including
signature feature series such as "On Being Hairy," "The Boob Files," and
"Virtual Makeover;"
o Deal With It--getting through the day, the date and the rest of the hard
stuff...a whole new take on your body, brain and life as a teen gURL;
o Where Do I Go From Here?--decisions, directions and different ways of
getting a life;
o Ha!--real girl comics...the sad but true funny pages; and
o Exhibitionist--where we show off art, poetry and prose by girls, for
girls and stuff that matters to girls and see what they have to say about
it.
The gURL site offers content from three resources: (i) proprietary content
developed by our staff writers and designers as well as free-lancers operating
under work-for-hire or exclusive license arrangements; (ii) user-generated
content, such as postings and poetry submissions; and (iii) licensed third
party content, such as music news from SonicNet and film trailers from
Film.Com.
We attract traffic to our sites by offering compelling, topical and
regularly-updated content. The gURL site has received a number of awards for
its content and community services including a 1998 Webby people's voice award
for best site in the "living" category and a 1997 I.D. Magazine Interactive
Media Design award. The quality and increasing recognition of content from the
gURL Web site and of the gURL brand have created ancillary licensing
opportunities for iTurf. We have reached an agreement with Scholastic Inc. to
publish a book for teen girls based upon editorial content drawn from and
inspired by the gURL.com site. The book, expected to be titled "DEAL WITH IT: A
whole new approach to your body, brain and life as a teenage gURL," is
scheduled to be published in the fall of 1999. In addition, Andrews McMeel, the
leading publisher of calendars in the U.S., will publish gURL-branded
engagement and wall calendars in the fall of 1999.
gURL Connection Chat and Posting Boards. gURL Connection is the
password-protected members-only area of gURL.Com that offers a safe environment
for teen girls to interact freely with their peers. Our Web sites provide both
text-based and graphical-based Palace[TM] chat services to a membership base of
well over 140,000 members. Chat is a critical part of establishing a place for
gURL's users to "hang out" and transforming gURL into a premier destination for
Generation Y.
gURL's signature "Shout Out" posting boards provide intensely personal and
compelling media for members of the gURL community to share ideas, express
themselves and learn about others. The posting boards provide the gURL
community with a continual source of user-generated content. Most recently, we
have begun to leverage that content into another web/zine, "Mouthpiece,"
consisting of user-generated content drawn from the "Shout Out" boards.
gURLnet
gURLnet is a gURL-branded network of third-party Web sites featuring
content designed for, and, in many cases, created by Generation Y females.
gURLnet offers the gURL community a selection of engaging content from diverse
sources across the Internet. gURLnet is the product of an alliance between
iTurf and ChickClick, an advertising network and division of Imagine Media,
Inc. gURLnet is featured as the "teen channel" of ChickClick.Com, a network of
third party sites featuring content primarily for women in their 20's and 30's.
Each site links to and from the gURLnet home page and identifies itself as a
member of the gURLnet. In addition, each gURLnet member site promotes the gURL
Connection as the community of gURLnet. See "--Advertising and Sponsorship
Sales."
gURLpages
gURLpages is one of the world's largest communities of personal teen Web
sites. We provide users with free disk space and publishing tools to create
their own sites quickly and easily. The sites are organized into 23 topically
organized sub-communities. Such communities include entertainment-oriented
topical groupings such as "Movies," "Music" and "TV;" more expressionist areas
such as
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"Activism," "Comix" and "Ranting and Raving;" and for the users for whom
community means anarchy, "I Am Uncategorizable." Users are encouraged to become
and remain active participants in the gURL community by updating their sites
and communicating with others through the free e-mail, chat and bulletin-board
services we provide. We offer links from the gURL web/zine to particularly
compelling gURLpages for users seeking greater involvement and recognition
within the community. With hundreds of new gURLpages being created each day,
gURLpages has grown quickly since its launch in June 1998, and had
approximately 103,000 registered page owners as of December 31, 1998. gURLpages
is hosted by Lycos, Inc. See "--Advertising and Sponsorship Sales" and
"--Technology and Systems."
gURLmAIL
gURLmAIL offers free Web-based e-mail accounts to users who register by
providing certain demographic information. Participants can register for and
receive e-mail addresses at gURLmAIL.com that enable them to send and check
their e-mail from anywhere in the world via the Internet. gURLmAIL has grown
quickly since its launch in February 1998, and had approximately 263,000
registered users as of December 31, 1998. gURLmAIL is hosted by Lycos, Inc. See
"--Advertising and Sponsorship Sales" and "--Technology and Systems."
iTurf E-commerce
Each of our e-commerce sites, other than discountdomain.com, is based on a
print catalog published by our Parent. These sites translate the distinctive
look and editorial voice of the corresponding print catalog onto the Internet,
adding interactive functionality to make shopping an entertaining experience.
Each site is designed to be intuitive and easy to use, enabling the ordering
process to be completed with a minimum of customer effort. All of these sites
offer real-time product availability information, with the exception of
TSISoccer.com, which we expect will offer real-time availability information in
the future.
dELiAs.cOm
We have generated a substantial majority of our revenue from the sale of
apparel, accessories and footwear on the dELiAs.cOm site, which was launched in
May 1998. Apparel ranges from basics, such as jeans, shorts and t-shirts to
more fashion-oriented apparel, such as woven and knit junior dresses and
swimwear. Our footwear selections include sneakers, sandals, boots, flats and
platforms. Accessories include sunglasses, watches, costume jewelry and
cosmetics. In August 1998, we also began selling a limited selection of music
compact discs.
dELiAs.cOm features branded merchandise from a diverse group of more than
90 vendors, at any one time, complemented by our Parent's private label
products. We believe the strong customer acceptance of the dELiA*s brand helps
make the dELiA*s catalog and, by extension, our dELiAs.cOm site, preferred
outlets for certain vendors, some of which occasionally provide merchandise on
an exclusive basis. Brands currently offered through dELiAs.cOm include
nationally recognized names such as Vans, Paris Blues and Roxy (Quicksilver),
as well as brands focused on the Generation Y market, including Dawls,
Dollhouse, Free People (Urban Outfitters), Greed Girl (kikwear), Tag Rag, 26
Red Sugar and Yak Pak. We also offer brands from emerging designers that
differentiate dELiAs.cOm from other retailers and help to establish dELiAs.cOm
as a fashion resource for girls and young women. Emerging brands currently
featured on dELiAs.cOm include Buggirl, Girl Star, Itsus, Malibu, New Breed,
Paul Frank, Starlette, TO2 and Tractor.
We organize products into 11 categories, each divided into styles. For
example, the "Dresses" category is divided into "Casual" and "Fancy" styles.
Most products are shown both in a still photograph and on teen models, whose
expressions and poses convey the dELiA*s attitude. At any one time, the site
presents graphical depictions of 180 to 300 product styles offered in more than
1,000 stock-keeping units ("SKUs"). In addition, customers can purchase
products from an older dELiA*s catalog by entering an item number from the
catalog.
dELiAs.cOm also offers a gift registry, an e-mail mailing list and links
to content on gURL.com. We believe these features increase the frequency with
which customers return to our site and make
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purchases. Additionally, we will continue to explore other technology-based
aids that enhance the shopping experience such as basket analysis, other
cross-selling strategies and high-resolution graphics systems.
TSISoccer.com
TSISoccer.com is our second largest source of merchandise sales. The site
offers a full range of soccer merchandise, including footwear, apparel and
equipment, almost all of which consists of products from the leading suppliers
of athletic footwear and apparel, including adidas, Nike, Reebok and Puma, as
well as manufacturers of well-known specialty brands, such as Umbro and Mitre.
Our Parent's relationships with these suppliers enable us to offer an
exceptionally broad and deep product selection, including premier branded
products, which typically have limited distribution.
TSISoccer.com offers over 7,000 SKUs, including men's, women's and
children's styles, as well as difficult-to-find sizes, special team colors and
product color combinations. We believe that few other direct marketers
currently offer as complete a line of soccer footwear, apparel and equipment as
that offered by TSISoccer.com.
TSISoccer.com, like the TSI Soccer catalog, positions itself as more than
an online store; it is also an online soccer resource with links to
soccer-related sites on the Web.
discountdomain.com
discountdomain.com is a subscription site that offers access to close-out
merchandise at discount prices from the dELiA*s catalog and vendor closeouts of
other products. In exchange for a $5.00 fee charged automatically each month,
members can access a password-protected area where discounted merchandise can
be purchased online.
discountdomain.com organizes merchandise into "closets" of four characters
with wardrobes that fit their distinctive personalities:
o cORdELiA--"She's into shooting stars in more ways than one. When she is
not starting on the court, she's staring into space, outer space. She's
torn between basketball and astrophysics, but she's set on her
sport-infused look. She's been wearing track pants to school before it was
cool. Luckily her fashion persona is versatile enough to span both worlds
(who has time to make major fashion changes with two major life ambitions
to fulfill?)."
o CeciLiA--"More of a boy magnet than a priss. She dresses girly cuz she
knows the boys dig it. Maybe she's the good seed in the evil Heathers
clique - la Winona. Other girls may want to hate her for her popularity,
but she is so gosh-darn nice, they just can't. Her charms extend beyond
the social, too. She can turn a public speaking assignment into a comedy
monologue and the cafeteria into a one-woman cabaret."
o oPheLiA--"She's all about individuality and wears whatever she wants. She
even kinda likes freakin people out a little bit. 'Funky' girl, can dip
into the hippy thing but in a glammy non-granola way. She's one of those
'old soul' types (like, deep), but she's also the kinda girl who would
wear pj's to school just because she felt like it. Eventually, she intends
to make her own clothes."
o aMeLiA--"She's the tomboy, best friend of all boys who will later in life
lament not making the moves on her when they had the chance. She's of the
vaguely but unthreateningly tough wallet-on-a-chain breed. She could
either be a totally grounded psychological extension of her wardrobe or
just prefer to cloak her insane self in 'classic' styles in order to
provide some kind of anchor."
Each closet holds 12 to 24 products that are available in 200-400 SKUs. The
closets are updated weekly and a majority of the inventory turns over monthly.
contentsonline.com
contentsonline.com offers home furnishings, light furniture and household
articles targeted at Generation Y females. The merchandise is drawn from the
Contents print catalog. Such items include sheets and other bedding, lamps,
organizers and other products designed with a Generation Y girl's bedroom or
dorm room in mind. We believe that few, if any, retailers, online or off-line,
target this market.
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contentsonline.com presents products in a variety of ways, including
"design-your-room" editorial features, presentations of stylized, decorated
rooms, still shots of individual products, and a "Gizmos and Gifts" area that
suggests gift products in particular price ranges. contentsonline.com typically
presents approximately 60 products and allows customers to order additional
products if they have a Contents catalog and enter an item number.
droog.com
droog.com offers apparel, footwear and accessories for Generation Y males
from our Parent's new Droog print catalog. The site captures the stylized
character of the Droog catalog through a distinctive font and a terse editorial
voice that speaks to its target market. Users can order from approximately 125
products comprising over 450 SKUs. Currently, users must use a Droog print
catalog to place an order. Our Parent mailed the first issue of the catalog in
October 1998 and we launched the droog.com site in November 1998.
Marketing and Promotion
To date we have done little advertising and marketing apart from
advertising in our Parent's print catalogs. We intend to expand our advertising
and marketing efforts following the closing of this offering. Our marketing
strategy will be to promote, advertise and increase the visibility of our
brands and acquire new customers through multiple channels, including: (i)
traditional and Internet advertising; (ii) direct marketing to existing and
potential customers; (iii) expanding and strengthening strategic alliances with
our Web sites; and (iv) expanding our affiliate network and linking programs.
We believe that the use of multiple marketing channels reduces reliance on any
one source of customers, lowers customer acquisition costs and maximizes brand
awareness.
Traditional and Internet Advertising. We advertise our sites in our
Parent's retail and catalog properties. Our Web site addresses can now be found
on the cover and on nearly every page of our Parent's catalogs, as well as on
point-of-sale displays at our Parent's retail stores. In addition, we have
found bind-in cards inserted in the our Parent's catalog to be a significant
driver of traffic to the dELiAs.cOm and gURL.com sites. iTurf will be the
exclusive e-commerce and community based Internet advertiser in our Parent's
catalogs following this offering. We may also pursue a targeted, traditional
media-based advertising campaign that may include television, radio, print and
event-based advertising. We may pursue advertising in the teen fashion and
lifestyle magazines in which our Parent has advertised successfully. Following
the closing of this offering, we intend to expand our activities to include
targeted online advertising to promote both our brand names and specific
merchandising opportunities. We also intend to test banner advertising and
sponsorship opportunities on sites specifically targeted to Generation Y. See
"Certain Transactions--Intercompany Agreements--
Intercompany Services Agreement."
Direct Marketing. We use direct marketing techniques to attract and retain
customers. Our Parent's proprietary database of catalog requests contains in
excess of 500,000 e-mail addresses. We send regular broadcast e-mails to these
addresses as well as to our own customers. We intend to expand our use of
broadcast e-mail to include more targeted messages and promotions to specific
segments of our list and to include embedded graphic images within e-mail to
customers who have the ability to view them. We also offer special discounts
and promotional offers from time to time on our sites to drive sales. We
promote these offers through print catalog advertising and e-mails. We may also
use direct mail to access individuals from our Parent's proprietary database.
Strategic Alliances. We have entered into strategic relationships with
several sites to build traffic and attract customers. We have created satellite
dELiAs.cOm stores on Yahoo! Shopping and CatalogCity.Com. In addition, we are
the exclusive provider of soccer merchandise on Sportsite.Com. We intend to
expand our use of strategic alliances in the future. We will carefully evaluate
each potential alliance and strive to ensure that any fees associated with it
are cost-effective in terms of the potential customers to be acquired, potential
revenue to be generated, level of exclusivity and brand exposure.
Affiliate Program. We recently created the dELiA*s Affiliate Network, a
grass-roots marketing tool designed to increase our exposure on the Internet
and generate sales. In order to join the dELiA*s
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Affiliate Network, prospective affiliates complete an automated application
form online that is generally approved within 48 hours by a member of our
staff. Registered affiliates are paid a referral fee, in most cases 5% of the
net invoice value for any sale generated via the affiliate's link to our
e-commerce sites, less any returns. We promote the program via links on
dELiAs.cOm and through LinkShare, our affiliate marketing partner. These
agreements are terminable at will by either party.
Advertising and Sponsorship Sales
We believe our Web properties provide unique access to the Generation Y
market, an audience that is not easily available through other media. As a
result, a variety of marketers are interested in using our Internet properties.
We intend to explore sponsorship, promotional and distribution arrangements
with these and other leading brand marketers and media companies. These
arrangements generally have longer-term contracts and higher dollar values than
typical banner deals and independence from page views as the sole measurement
basis. We believe they can go beyond traditional banner advertising to support
broad marketing objectives, including branding, awareness, product
introductions, online research and editorial integration.
We currently participate in revenue sharing arrangements for banner
advertisements placed on our sites with Lycos, Inc. (for our gURLmAIL and
gURLpages sites), ChickClick.com (for our gURLnet site), and SonicNet (for the
co-branded music news area on gURL.com). We intend to develop a marketing and
sales team to better understand advertisers' needs and to better target the
Generation Y community.
International Markets
We intend to market our goods and services to customers in foreign
countries. Historically, our Parent has not extensively marketed its catalogs
in foreign countries due to prohibitive mailing costs. However, we believe we
can market outside the United States through the Internet at a fraction of the
cost of direct mail marketing. Both our Parent and we have extensive customer
and user files including individuals from more than 140 countries. For example,
approximately 17% of gURLmAIL users reside outside of the United States.
Warehousing and Fulfillment
Our Parent provides warehousing and fulfillment services to iTurf pursuant
to the Intercompany Services Agreement. Each of our e-commerce sites, except
for TSISoccer.com, is fully integrated into our Parent's sophisticated
warehouse fulfillment system. Our Parent processes and fulfills customer orders
through its 354,000 square foot warehouse and fulfillment center in Hanover,
Pennsylvania. The system monitors the in-stock status of each item ordered,
processes the order and generates warehouse selection tickets and packing slips
for order fulfillment operations.
We ship a majority of our customer orders within 48 hours of credit
approval. If a customer places an order using a credit card owned by another
customer and the order exceeds a specified monetary threshold, the order is
shipped only after we have received verbal confirmation of the sale from the
cardholder. Customers generally receive orders within three to five business
days after shipping. Currently, approximately 99% of all shipments are made
through United Parcel Service or the United States Postal Service. A shipping
and handling fee is charged on each customer order, based on the total price of
the order. Our Parent's fulfillment systems automatically determine the most
cost effective method of shipping each order. See "Certain
Transactions--Intercompany Agreements--Intercompany Services Agreement."
Technology and Systems
We have implemented a broad array of site management, customer
interaction, transaction-processing and fulfillment services and systems using
a combination of our own proprietary technologies and commercially available
licensed technologies.
Our back-end transaction processing is primarily handled by Smith-Gardner
and Associates' MACS II system, which our Parent licenses. MACS II is a mature,
widely used application that (i) accepts and validates orders, (ii) organizes
and manages orders with suppliers, (iii) receives product and assigns it to
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customer orders, (iv) manages shipments and (v) integrates inventory
management, purchasing and accounting. The system handles multiple shipment
methods, credit card transaction processing and automated customer
communications and allows the customer to choose whether to receive single or
multiple shipments based on availability. The MACS II system runs on an HP/3000
running MPE/IX. We are exploring other e-commerce and customer database
platforms to support our growth.
Our community and membership services, other than gURLmAIL and gURLpages,
are primarily internally-developed applications that use SQL Server databases.
The gURLmAIL and gURLpages technology and software were developed and are
operated and supported by Lycos, Inc. Our various Internet applications run on
both UNIX and Windows NT servers which are located in our offices. AT&T and
Cable & Wireless plc currently provide iTurf with its Internet connectivity.
In response to capacity concerns and site development needs, in fiscal
1998, we increased our number of Web servers from three to ten and installed a
considerably more powerful server for online catalog navigation functions. We
intend to continue to invest in scalable technologies and site infrastructure
to enhance the functionality of our sites to better serve existing users and to
provide robust and scalable platforms to support growth. See "Risk
Factors--Need to Expand Our Business, Features and Capacity."
Customer Service
We employ Web-savvy customer service representatives who assist our
electronic commerce customers by e-mail and telephone seven days a week. We
support our community offerings principally by e-mail. We set internal goals of
returning customer e-mail within 24 hours of receipt. Lycos Inc. provides
customer service for both gURLmAIL and gURLpages.
In addition, our Parent handles routine customer service issues, such as
order tracking. Our Parent maintains three call centers, two of which are
staffed 24 hours a day, seven days a week, with more than 400 stations.
Following the closing of this offering, we expect to provide e-mail based
customer service for our Parent's print catalogs. See "Certain
Transactions--Intercompany Agreements--Customer Service Agreement."
Competition
E-Commerce. The apparel, footwear, accessories and home furnishings
industries and the athletic goods and soccer specialty markets are highly
competitive, and we expect competition in these markets to increase. Our
dELiAs.cOm, contentsonline.com, discountdomain.com and droog.com sites compete
with traditional department store retailers, as well as specialty apparel and
accessory retailers, for teen and young-adult customers. We also compete with
other catalog retailers and direct marketers, some of which may specifically
target our customers. TSISoccer.com competes with several other soccer
specialty direct marketers and soccer specialty retailers, as well as general
athletic merchandise retailers. Many of our competitors are larger and have
substantially greater financial, distribution and marketing resources than
iTurf.
There are few barriers to entry in the Generation Y apparel and
accessories market and in the soccer specialty market. We believe that our
recent success in the Generation Y apparel market has attracted the attention
of other direct marketers, as well as store-based retailers and apparel
manufacturers, some of which have entered or are likely to enter this market.
We also could face competition from manufacturers of apparel, footwear,
accessories and home furnishings (including our current vendors), who could
market their products directly to retail customers or make their products more
readily available in retail stores or through other catalogs or the Internet.
In addition, competitors could enter into exclusive distribution arrangements
with our vendors and deny us access to their products. Increased competition
could result in pricing pressures, increased marketing expenditures and loss of
market share, and could have a material adverse effect on iTurf.
iTurf believes that the direct marketing industry is being affected by
technological changes in distribution and marketing methods. Internet retailing
is becoming more sophisticated technologically. We believe our success will
depend, in part, on our ability to adapt to new technologies and to respond to
competitors' actions in these areas. Adapting to new technologies could require
significant capital
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expenditures, and we cannot assure you that we will remain competitive in
response to technological changes.
Internet Community Services. The market for community services is highly
competitive, and competition is expected to continue to increase significantly.
There are no substantial barriers to entry in these markets. Although we
believe that the diverse segments of the Internet market will provide
opportunities for more than one supplier of services similar to ours, it is
possible that a single supplier may dominate one or more market segments. We
compete with many providers of community services, including companies that
attempt, as we do, to target or seek to target Generation Y consumers.
In addition, entities that sponsor or maintain high-traffic, mass-market
Web sites or that provide an initial point of entry for Internet users, such as
the Regional Bell Operating Companies or Internet Service Providers such as
Microsoft and America Online, currently offer and could further develop,
acquire or license the kinds of product and services we offer and could take
actions that make it more difficult for consumers to use our services. This may
provide those companies with significant competitive advantages that could have
a material adverse effect on our business, results of operations and financial
condition.
A large number of sites and online services (including, among others, the
Microsoft Network, AOL and other Web navigation companies such as Yahoo!,
Excite, Lycos and Infoseek) offer informational and community features, such as
news, stock quotes, sports coverage, Yellow Pages and e-mail listings, weather
news, chat services and bulletin board listings that are competitive with the
services we offer. A number of companies, including HotMail (which was recently
acquired by Microsoft) offer Web-based e-mail services similar to those we
offer in tandem with larger navigational sites and online services.
Many of our existing competitors, as well as a number of potential
competitors, have significantly greater financial, technical, marketing and
distribution resources. In addition, providers of Internet tools and services
may be acquired by, receive investments from, or enter into other commercial
relationships with larger, well-established and well-financed companies, such
as Microsoft or AOL. Greater competition resulting from such relationships
could have a material adverse effect on our business, operating results and
financial condition.
We also compete with traditional offline media such as television, radio
and print for a share of advertisers' total advertising budgets. We believe the
number of companies selling Web-based advertising and the available inventory
of advertising space have increased substantially during recent periods.
We believe that the principal competitive factors in our markets are brand
recognition, ease of use, comprehensiveness, the availability of high-quality,
targeted content and focused value added products and services, access to end
users, and, with respect to advertisers and sponsors, the number of users,
duration and frequency of visits and user demographics. Competition among
current and future suppliers of Internet navigational and informational
services and high-traffic Web sites, as well as competition with other media
for advertising placements, could result in significant price competition and
reductions in advertising revenue. Additionally, we have faced and expect to
continue to face competition with respect to the acquisition of strategic
businesses and technologies. We cannot assure you that we will be able to
compete successfully or that the competitive pressures we face will not have a
material adverse effect on our business, results of operations, and financial
condition.
Employees
We currently employ 25 persons who devote all or substantially all of
their time to our business. In addition, approximately 1,080 of our Parent's
employees provide services to us pursuant to the Intercompany Agreements. None
of our employees are represented by unions, and we consider relations with our
employees to be good.
Legal
iTurf is not involved in any legal proceeding that management believes
would have a material adverse effect on our business, results of operations or
financial condition.
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On October 8, 1998, the Federal Trade Commission notified our Parent that
the dELiA*s print catalog and dELiAs.cOm were in violation of federal
regulations under the Wool Products Labeling Act and the Textile Fiber Products
Identification Act. Under the regulations, when a wool product or textile fiber
product is advertised in a mail-order or online catalog, the description of
that product must contain a clear and conspicuous statement that the product
was either made in the U.S.A., imported, or both. In November 1998, our Parent
agreed to enter into a Consent Order with the FTC, under which it would not
have to pay any fine or incur any other type of sanction. We believe that the
Consent Order will be finalized early in 1999, and that it will provide that
our Parent in the future will not violate the regulations described above
directly or through any subsidiary (including iTurf). We believe that our
Parent has updated the dELiA*s print catalog and dELiAs.cOm to make them comply
with the regulations. Under the Consent Order, iTurf will be required to comply
with certain record-keeping requirements and make its employees aware of the
Consent Order. Failure to comply with the Consent Order could subject our
Parent and iTurf to substantial civil penalties. The Consent Order will
terminate after 20 years.
The U.S. Congress recently enacted the Children's Online Privacy
Protection Act of 1998. The principal provisions of the law become effective on
the later of (1) April 21, 2000 and (2) the date on which the Federal Trade
Commission issues a first ruling on applications for safe harbor treatment
under the Act if the Commission does not rule on the first such application by
October 21, 1999, but in no case later than April 21, 2001. Among other things,
subject to certain limited exceptions, this act:
o makes it unlawful for an operator of a Web site or online service
directed to children under 13, and any operator that has actual knowledge
that it is collecting personal information from such a child, to collect
personal information from the child without having obtained verifiable
parental consent; and
o prohibits conditioning the participation of a child under 13 in a game,
the offering of a prize, or another activity on the child disclosing more
personal information than is reasonably necessary to participate in such
activity.
The Federal Trade Commission has not yet promulgated regulations
interpreting this act. iTurf depends on collecting personal information from
its customers in its businesses. We believe that the promulgation of
regulations under this act will make it more difficult for us to collect
personal information from our customers. iTurf is extremely respectful of the
privacy of its customers, members, users and subscribers. It does not currently
rent or otherwise provide its customer lists to third parties, except to our
Parent. See "Certain Transactions--Intercompany Agreements--Trademark License
and Customer List Agreement."
Facilities
Our principal offices are located at 435 Hudson Street, New York, New York
10014, and have historically been shared with our Parent, which leases the
property under a lease that expires in 2007. Following this offering, we expect
to continue to use a portion of this property pursuant to a space--
sharing arrangement with our Parent. As we expand, we expect that suitable
additional space will be available on commercially reasonable terms, although
no assurance can be made in this regard. We do not own any real estate. See
"Certain Transactions--Intercompany Agreements--Intercompany Services
Agreement--Space-Sharing."
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MANAGEMENT
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of iTurf, their ages
as of January 20, 1999, and their respective positions with iTurf are as
follows:
<TABLE>
<CAPTION>
Name Age Position(s)
----- ----- -----------
<S> <C> <C>
Executive Officers and Directors
Stephen I. Kahn ................. 33 President, Chief Executive Officer and
Chairman of the Board of Directors
Dennis Goldstein ................ 33 Chief Financial Officer and Treasurer
Alex S. Navarro ................. 30 Chief Operating Officer and Secretary
Oliver Sharp, Ph.D. (1) ......... 31 Chief Technology Officer
Renny Gleason ................... 30 Senior Vice President--Marketing
Christopher C. Edgar ............ 33 Vice President and Director
Evan Guillemin .................. 33 Vice President and Director
Key Employees
Esther Drill .................... 30 Executive Editor--gURL
Heather McDonald ................ 28 Senior Producer--gURL
Catherine Mouttet ............... 28 Art Director--E-Commerce
Rebecca Odes .................... 30 Creative Director--gURL
</TABLE>
- ----------
(1) Dr. Sharp is expected to join iTurf in February 1999.
Stephen I. Kahn has served as Chairman of the Board of Directors,
President and Chief Executive Officer of iTurf since its incorporation in 1997.
He has served as Chairman of the Board of Directors, President and Chief
Executive Officer of our Parent since October 1996, and he was the President
and Chief Executive Officer of dELiA*s LLC (the predecessor of our Parent) and
a member of the board of managers of dELiA*s LLC since co-founding our Parent's
business in 1993. Mr. Kahn is a director of Happy Kids Inc., a publicly-traded
designer and marketer of custom-designed, licensed and branded children's
apparel, and Danier Leather Inc., a publicly-traded integrated designer,
manufacturer and retailer of high-quality, high-fashion leather and suede
clothing.
Dennis Goldstein has served as Chief Financial Officer and Treasurer of
iTurf since January 1999. Prior to joining iTurf, Mr. Goldstein was the Vice
President for Corporate Development of Paulaur Corporation, a manufacturing
firm. From 1992 to 1997, he worked in a variety of capacities for Boston
Consulting Group, Inc., a management consulting firm. From 1990 to 1992, Mr.
Goldstein attended the Stanford University Graduate School of Business. From
1987 to 1990, he was a financial analyst with Morgan Stanley & Co.,
Incorporated, an investment banking firm.
Alex S. Navarro has served as Chief Operating Officer and Secretary of
iTurf since December 1998. He previously served as Senior Vice President in
charge of iTurf's operations from December 1997 to December 1998. Mr. Navarro
has served as Senior Vice President--Development and Legal Affairs, General
Counsel and Secretary of our Parent since April 1997. Prior to joining our
Parent, Mr. Navarro was associated with the law firm of Proskauer Rose LLP from
1994 until 1997. From 1993 to 1994, Mr. Navarro was a law clerk to the Hon.
Robert J. Wilentz, Chief Justice of the Supreme Court of New Jersey.
Oliver Sharp, Ph.D. is expected to join iTurf as Chief Technology Officer
in February 1999. He is currently an adviser to iTurf. Dr. Sharp currently
works for Microsoft Corporation, a computer software company. He has held a
variety of positions with Microsoft, and most recently has been the assistant
to the chief executive officer's technical assistant. From 1995 to 1996, he was
a principal in Colusa
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Software, a software developer, which was subsequently acquired by Microsoft.
From 1989 to 1995, he was a researcher in the physics department of Lawrence
Livermore National Laboratory.
Renny Gleason has served as Senior Vice President--Marketing of iTurf
since January 1999. Prior to joining iTurf, Mr. Gleason served as Creative
Director of Darwin Digital, the interactive advertising unit of Saatchi and
Saatchi Advertising, from 1997 until 1999. From 1996 to 1997, he was the Art
Director for CyberSites, Inc., a developer of CD-ROMs and on-line games. From
1994 to 1996, he was the studio manager for the Robert Gober Company, a
contemporary sculpture firm. Prior to that, he worked in the high yield trading
department of Bear Stearns Inc., an investment banking firm.
Christopher C. Edgar has served as a Vice President and as a member of the
Board of Directors of iTurf since iTurf's incorporation in 1997. Mr. Edgar has
served as Executive Vice President, Chief Operating Officer and a Director of
our Parent since October 1996, and as Executive Vice President of dELiA*s LLC
and as a member of the board of managers of dELiA*s LLC since co-founding our
Parent's business in 1993. Mr. Edgar oversees catalog publishing, marketing,
merchandising and inventory management at our Parent.
Evan Guillemin has served as a Vice President of iTurf since January 1999
and joined the Board of Directors of iTurf in January 1999. Mr. Guillemin
previously served as Chief Financial Officer of iTurf from 1997 to 1999. Mr.
Guillemin has served as Chief Financial Officer and Treasurer of our Parent
since July 1996. Prior to joining our Parent he was employed by K-III
Communications Corporation, a media investment company, first as an associate
with and later a director of acquisitions. From 1992 to 1994, he was executive
vice president of Observer Publications of The New York Observer Co., with
responsibility for the sales, marketing and finance for that company's regional
newspaper group.
Esther Drill, a co-founder of gURL Interactive, has served as Executive
Editor of gURL Interactive since 1996, and then for iTurf since we acquired
gURL Interactive in December 1997. From 1995 to 1997, she was enrolled in the
Interactive Telecommunications Program at New York University. From 1993 to
1995, she worked as an assistant to faculty members of the Kennedy School of
Government at Harvard University.
Heather McDonald, a co-founder of gURL Interactive, has served as Senior
Producer of gURL Interactive since 1996, and then for iTurf since our
acquisition of gURL Interactive in December 1997. From 1995 to 1997, she was
enrolled in the Interactive Telecommunications Program at New York University.
From 1993 to 1995, she worked as an assistant producer for 3D0 Company, a
developer of CD-ROM games.
Catherine Mouttet has served as iTurf's art director for e-commerce,
including dELiAs.cOm, since 1998. She worked as an independent art designer
from 1997 to 1998. From 1996 to 1997, she worked as a senior web designer for
Concrete Media, a web design firm, and from 1994 to 1995, she was the art
director of FashionInternet.com, a Web site devoted to fashion.
Rebecca Odes, a co-founder of gURL Interactive, has served as Creative
Director of gURL Interactive since 1996, and then for iTurf since our
acquisition of gURL Interactive in December 1997. From 1995 to 1997, she was
enrolled in the Interactive Telecommunications Program at New York University.
From 1993 to 1995, she worked for or was engaged in a freelance capacity as a
designer and illustrator for SonicNet, Razorfish, PBS, Kinderactive and X-Girl.
Additional Directors
Prior to or immediately following the closing of this offering, we plan to
add to our Board of Directors two independent directors who are not affiliated
with iTurf or our Parent.
Board Committees
Prior to or immediately following the closing of this offering, the Board
of Directors expects to establish an Audit Committee and a Compensation
Committee of our Board of Directors. The Audit Committee and the Compensation
Committee will each be comprised of two independent directors who are not
affiliated with iTurf or our Parent. The Audit Committee will be responsible
for reviewing our audited financial statements and accounting practices, and
considering and recommending the employment of, and approving the fee
arrangements with, independent accountants for both audit
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functions and for advisory and other consulting services. The Compensation
Committee will review and approve the compensation and benefits for our key
executive officers, administer our employee benefit plans and make
recommendations to the Board of Directors regarding such matters. See "--1999
Stock Incentive Plan."
Director Compensation
Non-employee directors are paid $2,000 for each Board of Directors meeting
attended and are entitled to reimbursement of all reasonable out-of-pocket
expenses incurred in connection with their attendance at full Board and Board
committee meetings.
Under our Stock Incentive Plan, each non-employee director will be granted
an option to purchase shares (after adjustment) of Class A common
stock. Directors elected prior to the effectiveness of the registration
statement of which this prospectus is a part shall receive options with an
exercise price equal to the offering price of the Class A common stock to the
public in this offering. Directors elected after the effectiveness of the
registration statement of which this prospectus is a part, receive options with
an exercise price equal to the fair market value of the Class A common stock on
the date of grant. All options granted to non-employee directors will become
exercisable with respect to 12.5% on each of the first eight six-month
anniversaries of the date of grant, assuming the non-employee director is a
director on those dates, and all such options generally will cease to be
exercisable 10 years from the date of grant. Upon a "change of control" (as
defined in the Incentive Plan), all options (which have not yet expired) will
automatically become exercisable. Directors who are affiliates of our Parent
(so long as our Parent beneficially owns at least 20% of our outstanding voting
securities) are not compensated for services as directors.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, our Board of Directors has not had a compensation
committee, and all compensation decisions relating to our executive officers
have been made by the full Board of Directors. Upon closing of this offering,
the compensation committee will make all compensation decisions regarding our
executive officers. No interlocking relationship exists between the
Compensation Committee and the Board of Directors or compensation committee of
any other company, nor has any such interlocking relationships existed in the
past. Currently, Stephen I. Kahn serves on the Compensation Commitee of our
Parent's Board of Directors. In fiscal 1998, Christopher C. Edgar was a member
of our Parent's Board of Directors.
Executive Compensation
No officer or employee of iTurf received total compensation (whether paid,
deferred or accrued) in excess of $100,000 in the year ended January 31, 1998
for services rendered to iTurf. During the year ended January 31, 1998, our
Chief Executive Officer, Stephen I. Kahn, received a salary of $100,000 from
our Parent as compensation in his capacity as President, Chief Executive
Officer and Chairman of the Board of Directors of that company and an option to
purchase 80,000 shares of our Parent's common stock. During the year ended
January 31, 1997, Mr. Kahn received a salary of $37,553 and a bonus of $35,000
from our Parent. During the year ended January 31, 1996, Mr. Kahn received a
salary of $20,000 from our Parent. He did not receive any other compensation
from our Parent during such period except for perquisites and other personal
benefits, securities or property, which, in the aggregate, did not exceed 10%
of his total of annual salary and bonus during any such year. Mr. Kahn did not
receive or exercise any options to purchase iTurf securities in fiscal 1997 and
did not hold any such options as of January 31, 1998.
Employment Agreement and Change of Control Arrangements
Mr. Kahn will enter into a three-year agreement with iTurf providing for
the continuation of his employment as President and Chief Executive Officer at
a minimum salary of $100,000 a year plus such increases in salary and such
bonuses as the Board of Directors may from time to time approve. If Mr. Kahn
dies, or, as a result of disability, is unable to perform substantially all his
duties for a period of nine consecutive months, iTurf may terminate his
employment (not earlier than 30 days and not later than 90 days after the
expiration of the nine-month period), in which event Mr. Kahn (or his heirs or
estate) will be entitled to his salary for the remainder of the term of the
agreement.
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Pursuant to our Stock Incentive Plan, the vesting of all employee stock
options will be accelerated in certain circumstances upon certain changes of
control of iTurf. See "--1999 Stock Incentive Plan--
Change of Control."
1999 Stock Incentive Plan
The following description of our Stock Incentive Plan is a summary and is
qualified in its entirety by reference to the text of the Stock Incentive Plan,
which is filed as an exhibit to the registration statement of which this
prospectus is a part.
Purpose. The purpose of the Stock Incentive Plan is to enhance the
profitability and value of iTurf for the benefit of its stockholders by
enabling iTurf (i) to offer employees and consultants of iTurf stock-based
incentives and other equity interests in iTurf, thereby creating a means to
raise the level of stock ownership by employees and consultants in order to
attract, retain and reward such individuals and strengthen the mutuality of
interests between such individuals and iTurf's stockholders and (ii) to make
equity based awards to non-employee directors, thereby attracting, retaining
and rewarding such non-employee directors and strengthening the mutuality of
interests between non-employee directors and iTurf's stockholders.
Administration. The Stock Incentive Plan is administered by the
Compensation Committee of the Board of Directors of iTurf, which is intended to
be comprised solely of two or more directors qualifying as "outside directors"
under Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") and "non-employee directors" as defined in Rule 16b-3 of the Exchange
Act. The Compensation Committee has full authority and discretion, subject to
the terms of the Stock Incentive Plan, to determine those employees and
consultants of iTurf or its Subsidiaries eligible to receive awards and the
amount and type of awards. Terms and conditions of awards will be set forth in
written agreements, the terms of which will be consistent with the terms of the
Stock Incentive Plan. Awards under the Stock Incentive Plan may not be made on
or after the tenth anniversary of the date of its adoption, but awards granted
prior to such date may extend beyond that date.
Available Shares and Other Units. A maximum of shares of Class A
common stock (subject to adjustment) may be issued or used for reference
purposes with respect to stock appreciation rights pursuant to the Stock
Incentive Plan. The maximum number of shares of Class A common stock subject to
each of stock options or stock appreciation rights that may be granted to any
individual under the Stock Incentive Plan is for each fiscal year of
iTurf during the term of the Stock Incentive Plan. If a stock appreciation
right is granted in tandem with a stock option, it will apply against the
individual limits for both stock options and stock appreciation rights, but
only once against the maximum number of shares available under the Stock
Incentive Plan.
In general, upon the termination, cancellation or expiration of an award,
the unissued shares of Class A common stock subject to such awards will again
be available for awards under the Stock Incentive Plan, but will still count
against the individual specified limits for the applicable fiscal year.
The Compensation Committee may make appropriate adjustments to the number
and kind of shares available for awards and the terms of outstanding awards
under the Stock Incentive Plan to reflect any change in iTurf's capital stock,
split-up, stock dividend, special distribution to stockholders, combination or
reclassification with respect to any outstanding series or class of stock or
consolidation, merger or sale of all or substantially all of the assets of
iTurf, or any similar change affecting iTurf's capital structure or business.
Types of Awards. The Stock Incentive Plan provides for the grant of any or
all of the following types of awards to eligible employees, and in certain
cases, consultants, of iTurf and its subsidiaries: (i) stock options, including
incentive stock options and non-qualified stock options; (ii) stock
appreciation rights in tandem with stock options or freestanding, and (iii)
restricted stock. In addition, the Stock Incentive Plan provides for the
one-time non-discretionary award of stock options to non-employee directors of
iTurf. Each of these types of awards is discussed in more detail below. Awards
may be granted singly, in combination, or in tandem, as determined by the
Compensation Committee.
Stock Options. Under the Stock Incentive Plan, the Compensation Committee
may grant awards in the form of options to purchase shares of iTurf's Class A
common stock. Options may be in the form of
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incentive stock options or non-qualified stock options, provided, however, that
consultants are not eligible to receive incentive stock options. The
Compensation Committee will, with regard to each stock option, determine the
number of shares subject to the option, the term of the option (which shall not
exceed 10 years, provided, however, that the term of an incentive stock option
granted to a ten percent stockholder of iTurf shall not exceed five years), the
exercise price per share of stock subject to the option, the vesting schedule
(if any), and the other material terms of the option. In the case of an
incentive stock option granted to a ten percent stockholder of iTurf, no option
may be granted at less than 110% of fair market value, except that, in the case
of certain modifications of the stock options that are deemed to be new
issuances under the Code, the exercise price may continue to be the original
exercise price.
The option price may, to the extent determined by the Compensation
Committee at or after the time of grant, be paid by a participant in cash, in
shares of Class A common stock owned by the participant (free and clear of any
liens and encumbrances), in shares of restricted stock valued at the fair
market value on the payment date as determined by the Compensation Committee
(without regard to any forfeiture restrictions applicable to restricted stock),
by a reduction in the number of shares of Class A common stock issuable upon
exercise of the option or by such other method as is approved by the
Compensation Committee. Options under the Stock Incentive Plan are subject to
acceleration of vesting or immediate termination upon termination of employment
in certain circumstances.
Restricted Stock. The Stock Incentive Plan authorizes the Compensation
Committee to award shares of restricted stock to employees and consultants of
iTurf and its subsidiaries. Upon the award of restricted stock, the recipient
has all rights of a stockholder with respect to the shares, including the right
to receive dividends currently, unless so specified by the Compensation
Committee at the time of grant, subject to the conditions and restrictions
generally applicable to restricted stock or specifically set forth in the
recipient's restricted stock award agreement. Notwithstanding the foregoing,
unless otherwise determined by the Compensation Committee at grant, payment of
dividends, if any, will be deferred until the date that the relevant share of
restricted stock vests.
Recipients of restricted stock are required to enter into a restricted
stock award agreement with iTurf which states the restrictions to which the
shares are subject and the date or dates or criteria on which such restrictions
will lapse. Within the limits of the Stock Incentive Plan, the Compensation
Committee may, based on service or other criteria determined by the
Compensation Committee, provide for the lapse of such restrictions in
installments in whole or in part or may accelerate or waive such restrictions.
Stock Appreciation Rights ("SARs"). The Stock Incentive Plan authorizes
the Compensation Committee to grant SARs either with a stock option ("Tandem
SARs") or independent of a stock option ("Non-Tandem SARs") to employees and
consultants of iTurf. A SAR is a right to receive a payment either in cash or
Class A common stock as the Compensation Committee may determine, equal in
value to the excess of the fair market value of a share of Class A common stock
on the date of exercise over the reference price per share of Class A common
stock established in connection with the grant of the SAR. The reference price
per share covered by an SAR will be the per share exercise price of the related
option in the case of a Tandem SAR and will be the per share fair market value
of the Class A common stock on the date of grant in the case of a Non-Tandem
SAR subject to the same exception that applies to stock options.
A Tandem SAR may be granted at the time of the grant of the related stock
option or, if the related stock option is a non-qualified stock option, at any
time thereafter during the term of the stock option. A Tandem SAR generally may
be exercised at and only at the times and to the extent the related stock
option is exercisable. A Tandem SAR is exercised by surrendering the same
portion of the related option. A Tandem SAR expires upon the termination of the
related stock option. Consultants will not be eligible for a grant of Tandem
SARs granted in connection with all or part of an incentive stock option.
A Non-Tandem SAR will be exercisable as provided by the Compensation
Committee and will have such other terms and conditions as the Compensation
Committee may determine. A Non-Tandem SAR may have a term no longer than ten
years from its date of grant. A Non-Tandem SAR is subject to
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acceleration of vesting or immediate termination upon termination of employment
in certain circumstances.
The Compensation Committee is also authorized to grant "limited SARs,"
either as Tandem SARs or Non-Tandem SARs. Limited SARs would become exercisable
only upon the occurrence of a Change of Control (as defined in the Stock
Incentive Plan) or such other event as the Compensation Committee may designate
at the time of grant or thereafter.
Awards to Non-Employee Directors. In the future, our non-employee
directors will be eligible for option grants in certain circumstances. See
"--Director Compensation."
Change of Control. Subject to the next sentence, unless determined
otherwise by the Compensation Committee at the time of grant, upon a Change of
Control (as defined in the Stock Incentive Plan), all vesting and forfeiture
conditions, restrictions and limitations in effect with respect to any
outstanding award made under the Stock Incentive Plan will immediately lapse
and any unvested awards will automatically become 100% vested. However, unless
otherwise determined by the Compensation Committee at the time of grant, no
acceleration of exercisability will occur with regard to stock options that the
Compensation Committee reasonably determines in good faith prior to a Change of
Control will be honored or assumed or new rights substituted therefor by a
participant's employer immediately following the Change of Control. The
Compensation Committee may also, at its sole discretion, provide for
accelerated vesting of an award (other than a grant to non-employee directors)
upon a termination of employment during the 180-day period prior to a Change of
Control.
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CERTAIN TRANSACTIONS
Income Taxes
Our Parent is a common parent of an affiliated group of companies within
the meaning of Section 1504(a) of the Internal Revenue Code of 1986 (the
"Code") which includes us. The Code requires that our Parent own at least an
80% voting and economic ownership interest in iTurf to continue to include
iTurf in its U.S. consolidated income tax returns.
Following the closing of this offering, in accordance with the terms of
the Tax Allocation Agreement between us and our Parent, for so long as iTurf
remains a member of our Parent's affiliated group, (i) we will pay our
proportionate share of our Parent's tax liability computed as if iTurf were
filing a separate return and (ii) any tax loss benefits attributable to iTurf
will be used by our Parent to the extent that we are unable to use any such
benefit at that time. Under the Tax Allocation Agreement, to the extent that
our Parent uses our tax benefits it will be required to establish a receivable
for our benefit. Our Parent will be required to repay us for the use of any
such benefit in cash at the time and to the extent we are required to pay
income taxes and we are no longer consolidated in our Parent's tax group, or at
the close of the fifth calendar year following the creation of the benefit. As
long as we are members of our Parent's consolidated tax group, such repayment
by our Parent will be offset by any amount that we are required to pay our
Parent under the agreement. Additionally, the Tax Allocation Agreement provides
for the payment of taxes and entitlement to tax refunds for periods prior to
the closing this offering.
Certain Historical Relationships
As a subsidiary of our Parent, we receive various services from our Parent
including fulfillment, warehousing, merchandising, inventory management,
customer service, creative, marketing, technical, human resources, finance,
accounting, administrative and legal services. Prior to the closing of this
offering, our financial statements have reflected allocations for these
services rendered by our Parent to us. We believe such allocations have been
made on a reasonable and consistent basis; however, they are not necessarily
indicative of, nor is it practicable for us to estimate, the level of expenses
that would have otherwise been incurred had iTurf operated as a separate,
stand-alone company.
Through its distribution facilities, our Parent and its other subsidiaries
accounted for approximately 100% of iTurf's purchases of inventory during
fiscal 1997. In addition, we have also relied on our Parent to provide us with
financing for our cash flows. Our cash flows to date are therefore not
necessarily indicative of the cash flows that would have resulted had we been
operating as an independent company. We are currently a borrower under our
Parent's bank credit facility and expect to terminate our participation in the
facility concurrent with the closing of this offering. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Purchase of Parent Common Stock
We intend to use $10 million of the gross proceeds of this offering, based
on an assumed initial public offering price of $ per share (the mid-point
of the offering range) to purchase (through a wholly-owned subsidiary) shares
of our Parent's common stock from our Parent at a price equal to the average
closing price of that stock on the five preceding trading days. See "Use of
Proceeds."
Intercompany Agreements
We intend to enter into several agreements with our Parent prior to the
closing of this offering. We have summarized the anticipated material terms of
these agreements. These agreements will not have been negotiated on an
arms'-length basis, however, we believe the terms of these agreements are no
less favorable to us than those that could have been obtained from an
unaffiliated third party. We believe that had the Intercompany Agreements been
in effect during the historical periods presented in the iTurf financial
statements, they would not have had a material effect on our results of
operations. The material terms of the Intercompany Agreements cannot be amended
or waived without the approval of a majority of our disinterested directors.
Our Bylaws also provide that we will not enter into new material agreements
with our Parent unless such agreements are approved by a majority of our
directors who are not affiliated with our Parent. This provision can only be
amended by a majority of our directors who are not affiliated with our Parent.
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Trademark License and Customer List Agreement; including Noncompetition
Agreements.
iTurf will have the exclusive right to use our Parent's trademarks in
connection with the sale of goods and services on the Internet. iTurf will pay
our Parent a royalty equal to 5% of our net sales from iTurf Web sites bearing
a trademark licensed from our Parent. Net sales by sites in the iTurf network
not bearing a trademark licensed from our Parent ("non-licensed sites") will
not generate a royalty payable to our Parent unless sales of dELiA*s-sourced
goods on the site exceed 50% of its total net sales . On non-licensed sites
where sales of dELiA*s-sourced goods exceed 50% of the site's total net sales,
iTurf will pay to our Parent the 5% royalty based on the percentage of such
site's net sales that are dELiA*s-sourced sales . The agreement does not have a
fixed term. However, our Parent may terminate the agreement if any person
(other than our Parent, an affiliate of our Parent or a strategic partner)
acquires 20% or more of the voting control of iTurf, or upon certain defaults
by iTurf.
On a royalty-free basis, we will share our customer lists with our Parent,
and our Parent will share its customer lists with us.
Our Parent has agreed not to enter into an Internet business that targets
Generation Y without first offering to sell such business to iTurf. In
addition, if our Parent makes an acquisition that includes an Internet business
that targets Generation Y, it must offer to sell that business to iTurf. These
obligations will terminate (1) six months after the trademark license terminates
if our Parent terminates the license after the acquisition by a third party of
35% or more of the voting control of iTurf with no other person owning a greater
percentage, (2) one year after the trademark license terminates if our Parent
terminates the license after a tax-free spin-off or other public sale or
distribution of our voting securities, (3) two years after the trademark license
terminates if our Parent terminates the license after the acquisition by a third
party of less than 35% but more than 20% of the voting control of iTurf, or (4)
when the trademark license terminates for any other reason.
We have agreed not to enter into a print catalog or retail store business
without first offering to sell such business to our Parent. In addition, if we
make an acquisition that includes a paper catalog or retail store business, we
will offer to sell that business to our Parent. These obligations will terminate
two years after termination of the trademark license if our Parent terminates
the trademark license due to our material breach, and otherwise will terminate
upon termination of the trademark license.
Intercompany Services Agreement.
Following the closing of this offering, our Parent will continue to
provide certain services to us, including corporate services, fulfillment
services, inventory supply services, advertising services and space-sharing.
Our Parent's obligations to deliver services will terminate if and when the
Trademark License and Customer List Agreement is terminated.
Corporate Services. Our Parent will continue to provide all of the
services it currently provides to iTurf (other than warehouse and fulfillment
services) such as merchandising, inventory management, customer service,
creative, marketing, technical, human resources, finance, accounting,
administrative, legal and other services, as well as those services iTurf
requires by virtue of its status as an independent public company. Our Parent
will provide these services to us at 105% of its cost.
Fulfillment Services. Our Parent will continue to provide warehousing and
fulfillment services, including receiving, quality control, storage, picking,
packing and shipping of inventory and processing of customer returns. We will
pay our Parent an amount equal to our Parent's average cost per package shipped
multiplied by the product of the number of packages shipped by us and 105%,
taking into account all of our Parent's warehousing and fulfillment costs,
including rent, depreciation and operating expenses.
Inventory Supply. Our Parent will continue to supply inventory to iTurf.
We will pay our Parent an amount equal to the lesser of (i) 105% of our
Parent's cost for such inventory (including cost of freight and all direct
costs charged to our Parent by its suppliers) and (ii) the best price at which
our Parent could resell those products to a third party. In addition, our
Parent will purchase from us products returned by our customers at the price
that we paid for such products from our Parent, decreased by the amount of any
reserves taken by our Parent in connection with those products. Furthermore, we
have the right to purchase from our Parent up to an annual amount of $300,000
of closeout inventory generally at prices discounted from our Parent's price.
Advertising. Our Parent will provide us with advertising space in its
print catalogs at a cost to us of $40 per 1,000 catalogs distributed. The
amount of advertising guaranteed in each catalog is materially
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greater than the amount of advertising included in our Parent's catalogs over
the historical periods presented. If our Parent provides less advertising space
than the amount guaranteed, then iTurf will have no obligation to pay for the
amount of advertising actually provided.
Space-Sharing. Our Parent will continue to permit us to use a portion of
its offices that we mutually agree upon. Our cost for this space will be the
lesser of (1) the prevailing market rate for such space and (2) the highest
rate then being paid by our Parent for comparable space in the metropolitan
area in which such space is located.
Customer Service Agreement.
We will provide to our Parent e-mail based customer service activities in
respect of those of our Parent's catalogs corresponding to trademarks we
license from our Parent.
Intercompany Indemnification Agreement.
We will agree to indemnify our Parent for liabilities in respect of our
businesses and our Parent will agree to indemnify us for liabilities in respect
of our Parent's businesses, and certain tax and pension-related liabilities,
resulting from our participation in our Parent's consolidated tax group. Our
Parent will also indemnify us for certain tax liabilities arising out of our
purchase of our Parent's common stock. See "Risk Factors--Contingent Liability
for Our Parent's Obligations."
iTurf Common Stock Registration Rights Agreement.
We will enter into a Registration Rights Agreement with our Parent prior
to the closing of this offering. Pursuant to the agreement, at any time after
180 days following the date of this prospectus, our Parent may demand that we
file a registration statement under the Securities Act covering all or a
portion of our securities held by our Parent, its affiliates and their
permitted transferees. However, the securities to be registered must have a
reasonably anticipated aggregate public offering price of at least $3.0
million. Our Parent can effect no more than one demand registration per year.
If and when we become eligible to utilize Form S-3 to register an offering
of our securities, our Parent may request that we file a registration statement
on Form S-3, covering all or a portion of our securities held by our Parent,
its affiliates and their permitted transferees, provided that the aggregate
public offering price is at least $1.0 million. Our Parent can request one S-3
Registration per year.
These registration rights will be subject to iTurf's right to delay the
filing of a registration statement in certain circumstances, not more than once
in any 12-month period, for not more than 120 days.
In addition, our Parent will have certain "piggyback" registration rights.
If we propose to register any Class A common stock under the Securities Act
(other than pursuant to the registration rights noted above) our Parent may
require us to include all or a portion of our securities it owns in such
registration. However, the managing underwriter, if any, of any such offering
will have certain rights to limit the number of registrable securities proposed
to be included in such registration.
We would bear all registration expenses incurred in connection with these
registrations. Our Parent would pay all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of its securities.
The registration rights of our Parent under the Registration Rights
Agreement will terminate when our Parent may sell all its shares in a
three-month period under Rule 144 promulgated under the Securities Act.
dELiA*s Common Stock Registration Rights Agreement.
We will enter into a Registration Rights Agreement with our Parent at the
closing of this offering relating to the shares of our Parent's common stock
that we intend to purchase with the net proceeds of this offering. Pursuant to
the agreement, at any time after 180 days following the date of this
prospectus, we may demand that our Parent file a registration statement under
the Securities Act covering all or a portion of the securities of our Parent
held by us, our affiliates and our permitted transferees. However, the
securities to be registered must have a reasonably anticipated aggregate public
offering price of at least $3.0 million. We can effect no more than one demand
registration per year.
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If our Parent is eligible to utilize Form S-3 to register an offering of
its securities, we may request that our Parent file a registration statement on
Form S-3, covering all or a portion of the securities of our Parent held by us,
our affiliates and our permitted transferees, provided that the aggregate
public offering price is at least $1.0 million. We can request one S-3
Registration per year.
These registration rights will be subject to our Parent's right to delay
the filing of a registration statement in certain circumstances, not more than
once in any 12-month period, for not more than 120 days.
In addition, we will have certain "piggyback" registration rights. If our
Parent proposes to register any of its common stock under the Securities Act
(other than pursuant to the registration rights noted above) we may require our
Parent to include all or a portion of our Parent's securities that we own in
such registration. However, the managing underwriter, if any, of any such
offering will have certain rights to limit the number of registrable securities
proposed to be included in such registration.
We would bear our pro-rata share of all registration expenses incurred in
connection with these registrations, including all underwriting discounts,
selling commissions and stock transfer taxes applicable to the sale of our
securities.
Our registration rights under the dELiA*s Common Stock Registration Rights
Agreement will terminate when we may sell all our shares in a three-month
period under Rule 144 promulgated under the Securities Act.
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PRINCIPAL STOCKHOLDER
dELiA*s Inc. beneficially owns all of the shares of our Class B common
stock outstanding as of the date of this prospectus. Following the closing of
this offering, dELiA*s Inc. will continue to beneficially own 100% of the Class
B common stock and, accordingly, will hold approximately % of the economic
interest in iTurf ( % if the underwriters exercise their over-allotment option
in full). Such ownership also gives our Parent approximately % of the
combined voting power of our outstanding common stock (or % if the
underwriters exercise their over-allotment option in full).
The following table sets forth information as of January 1, 1999 with
respect to the outstanding securities of iTurf and our Parent beneficially
owned by (i) each person known by iTurf to be the beneficial owner of more than
5% of the shares of any class of such securities, (ii) each of our directors
individually, (iii) each of our named executive officers individually and (iv)
all of our executive officers and directors as a group.
<TABLE>
<CAPTION>
Shares of dELiA*s Inc.
Shares of iTurf Common Stock Common Stock Beneficially
Beneficially Owned(1)(2) Owned(2)
---------------------------------------------------- -------------------------
Voting Power
--------------------------
Percentage Before After Percentage
Number Owned(3) Offering Offering(4) Number Owned
-------- ------------ ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Five Percent Holder:
dELiA*s Inc. .................... 100% 100%
435 Hudson Street
New York, New York 10014
Directors and Executive
Officers:
Stephen I. Kahn(5) .............. 100% 100% 6,380,122 44.4%
Christopher C. Edgar(6) ......... -- -- 709,863 4.9%
Evan Guillemin(7) ............... -- -- 148,942 1.0%
All directors and executive
officers as a group
(7 persons)(8) ................. 100% 100% 7,263,927 49.8%
</TABLE>
- ----------
* Less than 1%.
(1) Prior to the closing of this offering, our authorized and outstanding
common stock has been comprised of a single class. Prior to the closing of
this offering, we will amend our Restated Certificate of Incorporation to
authorize (i) shares of Class A common stock, (ii) shares of Class B
common stock and (iii) shares of preferred stock. See "Description of
Capital Stock."
(2) Shares that an individual or group has the right to acquire within 60 days
of January 1, 1999 pursuant to the exercise of options, warrants or
conversion privileges are deemed to be outstanding for the purpose of
computing the percentage ownership of such person or group, but are not
deemed outstanding for the purpose of computing the percentage ownership
of any other person listed in this table. Except as indicated in the
footnotes to this table, iTurf believes that the listed stockholders have
sole voting and investment power with respect to all of the shares shown
to be beneficially owned by them, based on information provided to us by
the stockholders.
(3) Percentage ownership is based upon shares of Class B common stock
outstanding on January 1, 1999.
(4) Voting power after the closing of this offering reflects the fact that each
share of Class B common stock is entitled to six votes, while Class A
common stock is entitled to one vote per share; it also assumes no
conversion of any Class B common stock into Class A common stock. See
"Description of Capital Stock--Common Stock."
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(5) All shares of iTurf common stock are owned by our Parent. Mr. Kahn is the
President, Chief Executive Officer and Chairman of the Board of our Parent
and, as such, may be deemed to share voting power with respect to such
shares. Mr. Kahn expressly disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein. Shares of dELiA*s
Inc. common stock beneficially owned by Mr. Kahn includes 144,000 shares
issuable upon the exercise of options.
(6) Shares of dELiA*s Inc. common stock benefically owned includes 108,000
shares issuable upon the exercise of options.
(7) Shares of dELiA*s Inc. common stock beneficially owned includes 120,000
shares issuable upon the exercise of options.
(8) All directors and executive officers as a group includes four executive
officers who are not listed individually in the table. The address for all
directors and executive officers is c/o iTurf Inc., 435 Hudson Street, New
York, New York, 10014.
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DESCRIPTION OF CAPITAL STOCK
Immediately prior to the closing of this offering, our authorized capital
stock will consist of shares of Class A common stock, par value $.01
per share, shares of Class B common stock, par value $.0l per share
and shares of Preferred Stock, par value $.01 per share.
The following descriptions of our capital stock and certain provisions of
our Restated Certificate of Incorporation, and of our Bylaws, each of which
will be in effect prior to the date of this prospectus, are summaries and are
qualified by reference to the form of our Restated Certificate of Incorporation
and Bylaws, copies of which have been filed with the Securities and Exchange
Commission as exhibits to the registration statement of which this prospectus
is a part.
Common Stock
shares of Class A common stock are being offered hereby, and
shares are reserved for issuance upon conversion of Class B common
stock into Class A common stock. Immediately prior to the closing of this
offering, shares of Class B common stock will be outstanding, and
all of those shares will be held by our Parent.
Voting Rights. The holders of our Class A common stock and Class B common
stock generally have identical voting rights, except that holders of our Class
A common stock are entitled to one vote per share, while holders of our Class B
common stock are entitled to six votes per share on all matters to be voted on
by stockholders. Shares of Class B common stock also have certain conversion
rights, which are described below. Holders of shares of Class A common stock
and Class B common stock are not entitled to cumulate their votes in the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority (or, in the case of election of directors, by a
plurality) of the votes entitled to be cast by all shares of Class A common
stock and Class B common stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of preferred stock. Except as otherwise provided by law, and subject to
any voting rights granted to holders of any outstanding preferred stock,
amendments to our Restated Certificate of Incorporation must be approved by a
majority of the combined voting power of all of the Class A common stock and
Class B common stock, voting together as a single class. However, amendments to
our Restated Certificate of Incorporation that would alter or change the
powers, preferences or special rights of the Class A common stock or the Class
B common stock so as to affect them adversely also must be approved by a
majority of the votes entitled to be cast by the holders of the shares affected
by the amendment, voting as a separate class. For purposes of these provisions,
any provision for the voluntary, mandatory or other conversion or exchange of
the Class B common stock into or for Class A common stock on a one-for-one
basis shall be deemed not to adversely affect the rights of holders of the
Class A common stock. Notwithstanding the foregoing, any amendment to our
Restated Certificate of Incorporation to increase or decrease the authorized
shares of any class will be approved upon the affirmative vote of the holders
of a majority of the voting power of the common stock, voting together as a
single class. See "--Anti-Takeover Effects of Certain Provisions of Delaware
Law and Our Restated Certificate of Incorporation and Bylaws" and "Risk
Factors--Anti-Takeover Provisions of Applicable Delaware Law and Our Restated
Certificate of Incorporation and Bylaws."
Dividends. Holders of Class A common stock and Class B common stock will
share equally on a per-share basis in any dividend declared by the Board of
Directors, subject to any preferential rights of any outstanding preferred
stock. Dividends consisting of shares of Class A common stock or Class B common
stock may be paid only as follows: (i) dividend shares of Class A common stock
may be paid only to holders of shares of Class A common stock, and dividend
shares of Class B common stock may be paid only to holders of Class B common
stock; and (ii) shares will be paid proportionally with respect to each
outstanding share of Class A common stock and Class B common stock. We may not
subdivide or combine shares of Class A common stock or Class B common stock
without at the same time proportionally subdividing or combining shares of the
other class.
Conversion. Each share of Class B common stock is convertible at any time
prior to a tax-free spin-off iTurf from our Parent (a "Tax-Free Spin-Off"), at
the option of the holder, into one share of Class A common stock. Following a
Tax-Free Spin-Off, if any occurs, shares of Class B common stock will no longer
be convertible into shares of Class A common stock at the option of the holder.
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Any shares of Class B common stock transferred to a person other than our
Parent, any of its subsidiaries or successors or a strategic partner prior to a
Tax-Free Spin-Off will automatically be converted into shares of Class A common
stock (on a one-to-one basis) upon such disposition. A "strategic partner"
means any entity or group of affiliated entities, acquiring Class B common
stock constituting at least 10% of the aggregate number of shares of all
classes of common stock outstanding and which, in the good faith determination
by a majority of our disinterested directors, as determined prior to such
acquisition, is considered to be a strategic partner in the best interests of
our business and our stockholders. Shares of Class B common stock transferred
to stockholders of our Parent as a dividend intended to be a Tax-Free Spin-Off
will not be converted into shares of Class A common stock upon the occurrence
of a Tax-Free Spin-Off. Following a Tax-Free Spin-Off, shares of Class B common
stock will be transferable as Class B common stock, subject to applicable laws;
provided, however, that shares of Class B common stock will automatically
convert into shares of Class A common stock on the fifth anniversary of the
Tax-Free Spin-Off, unless prior to such Tax-Free Spin-Off, our current Parent
delivers to us an opinion of counsel reasonably satisfactory to us to the
effect that such conversion could preclude the Parent from obtaining a
favorable ruling from the Internal Revenue Service that the distribution would
be a Tax-Free Spin-Off. If we receive such an opinion, we will submit approval
of such conversion to a vote of the holders of the common stock as soon as
practicable after the fifth anniversary of the Tax-Free Spin-Off, unless the
Parent delivers to us an opinion of counsel reasonably satisfactory to us prior
to such anniversary that the vote could adversely affect the status of the
Tax-Free Spin-Off. Approval of such conversion will require the affirmative
vote of the holders of a majority of the shares of both the Class A common
stock and Class B common stock present and voting, voting together as a single
class, with each share of Class B common stock entitled to one vote for such
purpose. We cannot assure you that such conversion would be consummated. The
requirement to submit such conversion to a vote of the holders of common stock
is intended to ensure the desired tax treatment of the Tax-Free Spin-Off is
preserved if the Internal Revenue Service were to challenge such automatic
conversion as violating the requirement that the Parent maintain 80% of the
voting power of iTurf's common stock. We believe that our Parent has no current
plans with respect to a Tax-Free Spin-Off of iTurf.
All shares of the Class B common stock will automatically convert into
Class A common stock if a Tax-Free Spin-Off has not occurred and the number of
outstanding shares of Class B common stock beneficially owned by our Parent
falls below 10% of the aggregate number of outstanding shares of all classes of
common stock. This mechanism will prevent our Parent from decreasing its
economic interest in iTurf to less than 10% while still retaining control of
more than 40% of the voting power of our common stock. All conversions will be
effected on a share-for-share basis.
Other Rights. In the event of any merger or consolidation of iTurf with
or into another company in connection with which our shares of common stock are
converted into or exchangeable for shares of stock, other securities or
property (including cash) of the other company, all holders of Class A common
stock and Class B common stock will be entitled to receive the same kind and
amount of shares of stock and other securities and property (including cash) of
the other company.
On liquidation, dissolution or winding up of iTurf, after payment in full
of the amounts required to be paid to holders of our preferred stock, if any,
all holders of Class A common stock and Class B common stock are entitled to
share ratably in any of our assets available for distribution to holders of
shares of common stock.
No shares of Class A common stock or Class B common stock are subject to
redemption or have preemptive rights to purchase additional shares of common
stock.
Upon the closing of this offering, all the outstanding shares of Class A
common stock and Class B common stock will be legally issued, fully paid and
nonassessable.
Preferred Stock
Upon the closing of this offering, our Board of Directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
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limitations or restrictions of the shares of each such series, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series. Upon
the closing of this offering, there will be no shares of preferred stock
outstanding. We have no present plans to issue any shares of preferred stock.
See "--Anti-Takeover Effects of Certain Provisions of Delaware Law and Our
Restated Certificate of Incorporation and Bylaws."
Sale of Control by Our Parent
Our Parent has agreed that, if it decides to sell all or a part of our
stock representing at least 35% of our voting securities, it will require the
purchaser to offer to purchase the same percentage of stock held by our public
stockholders on the same terms.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Restated
Certificate of Incorporation and Bylaws
Upon the closing of this offering, iTurf will be subject to the provisions
of Section 203 of the Delaware General Corporation Law (the "DGCL"). Subject to
certain exceptions, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
o the transaction in which such stockholder became an "interested
stockholder" is approved by the Board of Directors prior to the date the
"interested stockholder" attained such status;
o upon consummation of the transaction that resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced--excluding those shares owned by persons
who are directors and also officers; or
o on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested
stockholder."
"Business combinations" include mergers, asset sales and other transactions
resulting in a financial benefit to the "interested stockholder." Subject to
certain exceptions, an "interested stockholder" is a person who, together with
his affiliates and associates, owns, or within three years did own, 15% or more
of the corporation's voting stock. The restrictions in this statute would not
apply to a "business combination" with our Parent or any of its subsidiaries;
however; they could prohibit or delay the accomplishment of mergers or other
takeover or change-in-control attempts with respect to iTurf and, therefore,
may discourage attempts to acquire iTurf.
In addition, certain provisions of our Restated Certificate of
Incorporation and Bylaws that will be in effect prior to the closing of this
offering and are summarized in the following paragraphs may be deemed to have
an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its best interest,
including those attempts that might result in a premium over the market price
for the Class A common stock.
Classified Board of Directors
Immediately prior to or following the closing of this offering, iTurf's
Board of Directors will be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the members
of our Board of Directors will be elected each year. These provisions, when
coupled with the provision of the Restated Certificate of Incorporation
authorizing the Board of Directors to fill vacant directorships or increase the
size of the Board of Directors, may prevent stockholders from removing
incumbent directors and simultaneously gaining control of the Board of
Directors by filling the vacancies created by such removals with their own
nominees.
Special Meetings of Stockholders
The Restated Certificate of Incorporation provides that special meetings
of the stockholders of iTurf can be called only by the Chairman of the Board of
Directors, a Vice Chairman, the President or a majority of the members of the
Board of Directors.
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Written Consent
Our Restated Certificate of Incorporation provides that, after the date on
which our Parent together with Stephen I. Kahn and any strategic partners no
longer beneficially owns at least 50% of the voting power all classes of common
stock outstanding, the stockholders of iTurf will not be allowed to take action
by written consent.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
Our Bylaws provide that stockholders seeking to bring business before the
annual meeting of stockholders, or to nominate candidates for election as
directors at the annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to
or mailed and received at the principal executive offices of iTurf not less
than 120 days nor more than 150 days prior to the first anniversary of the date
of iTurf's notice of annual meeting provided with respect to the previous
year's annual meeting of stockholders. Notwithstanding the foregoing, if no
annual meeting of stockholders was held in the previous year or the date of the
annual meeting of stockholders has been changed to be more than 30 days earlier
than or 60 days after such anniversary, notice by the stockholder, to be
timely, must be so received not more than 90 days later than the later of (i)
60 days prior to the annual meeting of stockholders or (ii) the close of
business on the tenth day following the date on which notice of the date of the
meeting is given to stockholders or made public, whichever first occurs. The
Bylaws also specify certain requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from timely
bringing matters before an annual meeting of stockholders or from making
nominations for directors at an annual meeting of stockholders.
Limitations on Liability and Indemnification of Officers and Directors
The DGCL authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breaches of directors' fiduciary duty of care. Our Restated
Certificate of Incorporation includes a provision that eliminates the personal
liability of iTurf's directors for monetary damages for breach of fiduciary
duty as a director, except for liability:
o for any breach of the director's duty of loyalty to iTurf or its
stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the DGCL regarding unlawful dividends and stock
purchases; and
o for any transaction from which the director derived an improper personal
benefit.
Our Bylaws provide that:
o we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to certain very limited exceptions;
o we may indemnify our other employees and agents to the same extent that
we indemnify our officers and directors, unless otherwise required by law,
our Restated Certificate of Incorporation, our Bylaws or other agreements;
and
o we must advance expenses, as incurred, to our directors and executive
officers in connection with legal proceedings to the fullest extent
permitted by Delaware law, subject to certain very limited exceptions.
Prior to the closing of this offering, we intend to obtain directors' and
officers' insurance providing indemnification for our directors, officers and
certain employees for certain liabilities. We believe that these
indemnification provisions and insurance are necessary to attract and retain
qualified directors and executive officers.
The limitation of liability and indemnification provisions in our Restated
Certificate of Incorporation and Bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. Such
provisions may also have the effect of reducing the likelihood of derivative
litigation against directors and officers, even though such an action, if
successful, might otherwise
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<PAGE>
benefit us and our stockholders. Furthermore, a stockholder's investment may be
adversely affected to the extent we pay the costs of settlement and damage
awards against directors and officers pursuant to these indemnification
provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees for which indemnification is sought. We
are unaware of any threatened litigation that may result in claims for
indemnification.
Our Restated Certificate of Incorporation provides that, except as
otherwise agreed upon between us and our Parent (such as the noncompetition
provisions of the Trademark License and Customer List Agreement):
o our Parent will have no duty to refrain from engaging in the same or
similar activities or lines of business of iTurf, thereby competing with
iTurf;
o our Parent, its officers, directors and employees will not be liable to
iTurf or its stockholders for breach of any fiduciary duty by reason of
any activities of our Parent in competition with iTurf;
o our Parent will have no duty to communicate or offer corporate
opportunities to iTurf and will not be liable for breach of any fiduciary
duty as a stockholder of iTurf in connection with such opportunities; and
o if a director or officer of iTurf who is also a director or officer of
our Parent learns of a potential transaction or matter that may be a
corporate opportunity for iTurf or our Parent, that director or officer
may offer the corporate opportunity to iTurf or our Parent as such
director or officer deems appropriate under the circumstances. Also, that
director or officer will not be liable to iTurf or its stockholders for
breach of any fiduciary duty or duty of loyalty or failure to act in the
best interests of iTurf if the director or officer offers the corporate
opportunity to our Parent rather than iTurf or if our Parent pursues the
corporate opportunity for itself or does not communicate information
regarding the corporate opportunity to iTurf.
These provisions of our Restated Certificate of Incorporation eliminate certain
rights that might have been available to shareholders under Delaware law had
such provisions not been included in the Restated Certificate of Incorporation,
although the enforceability of these provisions under Delaware law has not been
established.
Authorized but Unissued Shares
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. We may use these
additional shares for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares of common stock
and preferred stock could render more difficult or discourage an attempt to
obtain control of iTurf by means of a proxy contest, tender offer, merger or
otherwise.
The DGCL provides generally that the affirmative vote of a majority in
interest of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or bylaws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Following the offering, our Parent, as the beneficial owner of
approximately % of the voting power of the outstanding common stock, will, on
its own, be able to cause iTurf to amend its Restated Certificate of
Incorporation and Bylaws.
Listing
We have applied to list our Class A common stock on the Nasdaq Stock
Market under the trading symbol "TURF."
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is The Bank of New
York, located at 101 Barclay Street, New York, New York. Its telephone number
is 1-800-524-4458.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for iTurf's Class A
common stock. We cannot predict the effect, if any, that sales of shares or the
availability of shares for sale will have on the market price of our Class A
common stock prevailing from time to time. Sales of substantial amounts of our
Class A common stock in the public market, or the perception that such sales
may occur, could adversely affect prevailing market prices of our Class A
common stock. Furthermore, since no shares will be available for sale shortly
after this offering because of certain contractual and legal restrictions on
resale described below, sales of substantial amounts of Class A common stock in
the public market after these restrictions lapse could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
See "Risk Factors--Shares Eligible for Public Sale After this Offering May
Affect Our Stock Price."
Upon the Closing of this offering, we expect to have outstanding shares
of our Class A common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless such
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act ("Affiliates"). Such shares of Class A common stock are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 promulgated under the Securities Act, which rules are summarized
below.
As a result of the contractual lock-up restrictions described below and
the provisions of Rule 144 and Rule 701, the shares of Class A common stock
that are restricted securities will be available for sale in the public market
on the date which is one year from the date of the closing of this offering,
subject to the volume limitations and other conditions of Rule 144.
Lock-Up Agreements
Prior to the closing of this offering, all of our officers, directors and
securityholders and our Parent have signed lock-up agreements under which they
have agreed not to transfer or dispose of, directly or indirectly, any shares
of Class A common stock or any securities convertible into or exercisable or
exchangeable for shares of Class A common stock (including shares of Class B
common stock), for a period of 180 days after the date of this prospectus. The
shares could be available for resale immediately upon the expiration of such
180-day period in the event such shares are available for resale pursuant to
the provisions of Rule 144. Transfers or dispositions can be made sooner with
the prior written consent of both BT Alex. Brown Incorporated and Hambrecht &
Quist LLC.
Rule 144
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned shares of our Class A common
stock (including beneficial ownership of shares of Class B common stock, which
is convertible into Class A common stock) for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
o 1% of the number of shares of Class A common stock then outstanding,
which will equal approximately shares after the closing of this
offering; or
o the average weekly trading volume of the Class A common stock on the
Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
Affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an Affiliate, is
entitled to
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<PAGE>
sell such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, 144(k) shares may be sold immediately upon the closing of this
offering.
Rule 701
In general, under Rule 701, any of our employees, consultants or advisors
who purchase shares from us in connection with a compensatory stock or option
plan or other written agreement is eligible to resell such shares 90 days after
the date of this prospectus in reliance on Rule 144, but without compliance
with certain restrictions, including the holding period, contained in Rule 144.
Registration Rights
Prior to the closing of this offering, we will enter into an agreement
with our Parent providing our Parent with certain registration rights. See
"Certain Transactions--Intercompany Agreements--iTurf Common Stock Registration
Rights Agreement.
Stock Options
Immediately after the closing of this offering, we intend to file a
registration statement under the Securities Act covering shares of
Class A common stock reserved for issuance under our Stock Incentive Plan. Upon
the expiration of the lock-up agreements described above, at least
shares of Class A common stock will be subject to vested options (based on
options outstanding as of , 1999). We expect to file such registration
statement and cause it to become effective as soon as practicable after the
date of this prospectus. Accordingly, shares registered under such registration
statement will, subject to vesting provisions and Rule 144 volume limitations
applicable to our Affiliates, be available for sale in the public market
immediately after the 180-day lock-up agreements expire.
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement between
iTurf and the underwriters (the "Underwriting Agreement"), the underwriters
named below, through their representatives BT Alex. Brown Incorporated and
Hambrecht & Quist LLC, who are acting as joint book-running managers, have
severally agreed to purchase from iTurf the number of shares of our Class A
common stock set forth opposite the name of such underwriter below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ----------
<S> <C>
BT Alex. Brown Incorporated .........
Hambrecht & Quist LLC ...............
CIBC Oppenheimer Corp. ..............
----------
Total ........................... ==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
underwriters are subject to certain conditions precedent and that the
underwriters will purchase all of the shares of Class A common stock offered
hereby, other than those shares covered by the over-allotment option described
below, if any such shares are purchased.
iTurf has been advised by the underwriters' representatives that the
underwriters propose initially to offer the shares of Class A common stock to
the public at the offering price set forth on the cover page of this prospectus
and through the underwriters' representatives to certain dealers at such price
less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $
per share to certain other dealers. After commencement of this offering, the
offering price and other selling terms may be changed by the representatives of
the underwriters.
iTurf has granted to the underwriters an option, exercisable by the
underwriters' representatives not later than 30 days after the date of this
prospectus, to purchase up to additional shares of Class A common
stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus. The underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of the Class A common stock offered hereby. To the extent that the
underwriters exercise such option, each of the underwriters will have a firm
commitment to purchase approximately the same percentage of additional shares
of Class A common stock as the number of shares of Class A common stock to be
purchased by it in the above table bears to , and iTurf will be
obligated, pursuant to the option, to sell such shares to the underwriters. If
any additional shares of Class A common stock are purchased pursuant to the
underwriters' over-allotment option, the underwriters will offer additional
shares on the same terms as those on which the shares are being offered.
iTurf and our Parent have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act.
In order to facilitate the offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Class A common stock.
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<PAGE>
Specifically, the underwriters may over-allot shares of the Class A common
stock in connection with this offering, thereby creating a short position in
the underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Class A common stock,
the underwriters may bid for and purchase shares of the Class A common stock in
the open market. Finally, the underwriters' representatives also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our Class A common stock at a
level above that which might otherwise prevail in the open market. The
underwriters are not required to engage in these activities and, if commenced,
may end any of these activities at any time.
Each of iTurf's officers, directors and securityholders has agreed not to
offer, sell, contract to sell or otherwise dispose of, or enter into any
transaction which is designed to, or could be expected to, result in the
disposition of any portion of, any Class A common stock (including upon
conversion of shares of Class B common stock) for a period of 180 days after
the effective date of the registration statement of which this prospectus is a
part without the prior written consent of both BT Alex. Brown Incorporated and
Hambrecht & Quist LLC. Such consent may be given at any time without public
notice.
We have entered into a similar agreement, except that we may issue and
grant options or warrants to purchase shares of Class A common stock or any
securities convertible into, exercisable for or exchangeable for shares of
Class A common stock, pursuant to the exercise of outstanding options and
warrants and our issuance of options and stock granted under our Stock
Incentive Plan.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Pricing of This Offering
Prior to the closing of this offering, there has been no public market for
our Class A common stock. Consequently, the initial public offering price for
our Class A common stock will be determined by negotiation among iTurf and the
representatives of the underwriters. Among the factors to be considered in
determining the public offering price will be:
o prevailing market conditions;
o iTurf's results of operations in recent periods;
o the present stage of our development;
o the market capitalizations and stages of development of other companies
that iTurf and the representatives of the underwriters believe to be
comparable to us;
o estimates of iTurf's business potential; and
o other factors deemed relevant by iTurf and the representatives of the
underwriters.
LEGAL MATTERS
The validity of the shares of Class A common stock offered hereby will be
passed upon for us by Proskauer Rose LLP. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Reboul,
MacMurray, Hewitt, Maynard & Kristol.
EXPERTS
The financial statements of iTurf Inc. at January 31, 1997 and 1998 and
October 31, 1998, and for the period March 14, 1995 (date of inception) to
January 31, 1996, the years ended January 31, 1997 and 1998 and the nine month
period ended October 31, 1998 and the balance sheet of gURL, Interactive Inc.
as of December 17, 1997, appearing in the registration statement of which this
prospectus is a part have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act that registers the shares of
Class A common stock offered hereby. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedule filed therewith. For more information with respect to iTurf and the
Class A common stock offered hereby, see the registration statement and the
exhibits and schedule filed therewith. Statements contained in this prospectus
regarding the contents of any contract or any other document to which reference
is made are not necessarily complete, and, in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
A copy of the registration statement and the exhibits and schedule filed
therewith may be inspected without charge at the public facilities maintained
by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Securities and Exchange Commission's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of all or any part of the registration
statement may be obtained from such offices upon the payment of the fees
prescribed by the Securities and Exchange Commission. The Securities and
Exchange Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
site is http://www.sec.gov.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
iTurf Inc.
Report of Independent Auditors ....................... F - 2
Balance Sheets ....................................... F - 3
Statements of Operations ............................. F - 4
Statements of Stockholder's (Deficit) Equity ......... F - 5
Statements of Cash Flows ............................. F - 6
Notes to Financial Statements ........................ F - 7
gURL, Interactive Inc.
Report of Independent Auditors ....................... F - 12
Balance Sheet ........................................ F - 13
Notes to Balance Sheet ............................... F - 14
</TABLE>
F - 1
<PAGE>
Report of Independent Auditors
To the Board of Directors
of iTurf Inc.
We have audited the balance sheets of iTurf Inc. (the "Company") as of
January 31, 1997 and 1998 and October 31, 1998 and the related statements of
operations, stockholder's (deficit) equity and cash flows for the period from
March 14, 1995 (date of inception) to January 31, 1996, the years ended January
31, 1997 and 1998 and the nine month period ended October 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at January 31,
1997 and 1998 and October 31, 1998 and the results of its operations and its
cash flows for the period from March 14, 1995 (date of inception) to January
31, 1996, the years ended January 31, 1997 and 1998, and the nine months ended
October 31, 1998 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
January 15, 1999
F - 2
<PAGE>
iTurf Inc.
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
ASSETS
January 31
--------------------- October 31
1997 1998 1998
---------- -------- -----------
<S> <C> <C> <C>
Current assets:
Cash ......................................................... $ -- $ 31 $ 42
Other current assets ......................................... -- -- 18
----- ----- -----
Total current assets .......................................... -- 31 60
Fixed assets, net of accumulated depreciation of $3 and
$30 at January 31, and October 31, 1998, respectively......... -- 95 269
Intangible assets, net ........................................ -- 335 311
----- ----- -----
Total assets .................................................. $ -- $ 461 $ 640
===== ===== =====
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current Liabilities:
Accounts payable and other current liabilities ............... $ -- $ -- $ 228
Due to dELiA*s ............................................... 5 506 405
----- ----- -----
Total current liabilities .................................... 5 506 633
Stockholder's (deficit) equity:
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding .............. -- -- --
(Deficit) retained earnings .................................. (5) (45) 7
------ ----- -----
Total stockholder's (deficit) equity ......................... (5) (45) 7
------ ----- -----
Total liabilities and stockholder's (deficit) equity .......... $ -- $ 461 $ 640
====== ===== =====
</TABLE>
See accompanying notes.
F - 3
<PAGE>
iTurf Inc.
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
March 14,
1995 (date of Year ended January Nine months ended
inception) to 31 October 31
January 31 ------------------- --------------------
1996 1997 1998 1997 1998
-------------- ---------- -------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales ............................................ $ 6 $ 13 $ 134 $86 $1,893
Cost of sales ........................................ 2 6 69 45 733
--- ---- ----- ---- ------
Gross profit ......................................... 4 7 65 41 1,160
Selling, general and administrative expenses ......... 6 14 114 42 1,041
--- ---- ----- ---- ------
Income (loss) from operations ........................ (2) (7) (49) (1) 119
Other expense:
Interest expense .................................... -- -- 20 -- 31
----- ------ ----- ----- ------
Income (loss) before income tax (benefit)
provision ........................................... (2) (7) (69) (1) 88
Income tax (benefit) provision ....................... (1) (3) (29) -- 36
------ ------- ----- ----- ------
Net income (loss) .................................... $(1) $ (4) $ (40) $(1) $ 52
===== ====== ===== ===== ======
Basic and dilutive net income (loss)
per equivalent share ................................ $ $ $ $ $
===== ====== ===== ===== ======
Shares used to compute basic and
diluted net income (loss) per
equivalent share ....................................
===== ====== ===== ===== ======
</TABLE>
See accompanying notes.
F - 4
<PAGE>
iTurf Inc.
Statements of Stockholder's (Deficit) Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock (Deficit)
------------------- Retained
Shares Amount Earnings Total
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Issuance of common stock ........... 100 $ -- $ -- $ --
Net loss ........................... -- (1) (1)
---- ------- -------
Balance at January 31, 1996 ......... 100 -- (1) (1)
Net loss ........................... (4) (4)
------- -------
Balance at January 31, 1997 ......... 100 -- (5) (5)
Net loss ........................... (40) (40)
------ ------
Balance at January 31, 1998 ......... 100 -- (45) (45)
Net income ......................... 52 52
------ ------
Balance at October 31, 1998 ......... 100 $ -- $ 7 $ 7
=== ==== ====== ======
</TABLE>
See accompanying notes.
F - 5
<PAGE>
iTurf Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Period from
March 14,
1995 (date of Year ended January Nine months ended
inception) to 31 October 31
January 31 -------------------- -----------------
1996 1997 1998 1997 1998
-------------- ---------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss) ...................................... $(1) $(4) $ (40) $(1) $ 52
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................ -- -- 6 -- 51
Changes in operating assets and liabilities:
Other current assets ................................ -- -- -- -- (18)
Accounts payable and other current
liabilities ...................................... -- -- -- 1 228
--- --- ------ --- ----
Net cash provided by (used in) operating
activities ............................................ (1) (4) (34) -- 313
Investing activities
Acquisition of gURL .................................... -- -- (120) -- --
Purchase of fixed assets ............................... -- -- (98) -- (201)
----- ----- ------ --- ----
Net cash (used in) investing activities ................ -- -- (218) -- (201)
Financing activities
Loan from (repayment to) dELiA*s ....................... 1 4 283 -- (101)
----- ----- ------ --- ----
Net cash provided by (used in) financing activities..... 1 4 283 -- (101)
Net increase in cash ................................... -- -- 31 -- 11
Cash at beginning of period ............................ -- -- -- -- 31
----- ----- ------ --- ----
Cash at end of period .................................. $-- $-- $ 31 $-- $ 42
===== ===== ====== === ====
Interest paid .......................................... $-- $-- $ -- $-- $ --
===== ===== ====== === ====
Income taxes paid ...................................... $-- $-- $ -- $-- $ --
===== ===== ====== === ====
</TABLE>
See accompanying notes.
F - 6
<PAGE>
iTurf Inc.
Notes to Financial Statements
(Information for the nine month period
ended October 31, 1997 is unaudited)
1. Business
iTurf Inc. (the "Company"), formerly known as dELiA*s Interactive Company,
a teen-focused Internet community and marketer of apparel, related accessories,
home furnishings and soccer merchandise, is a wholly-owned subsidiary of
dELiA*s Inc. ("dELiA*s"). The Company utilizes dELiA*s business relationships,
infrastructure and brand names and has relied on dELiA*s to provide financing
for its operations. If the proposed public offering is not consummated, the
Company will be dependent on the continued support of dELiA*s. See Note 8.
The Company is subject to seasonal fluctuations in its merchandise sales
and results of operations. The Company expects its net sales and operating
results generally to be lower in the first half of each fiscal year.
The Company's fiscal year ends on January 31. All references herein to a
particular fiscal year refer to the year ended January 31 following the
particular year (e.g., "fiscal 1998" refers to the fiscal year ending January
31, 1999).
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements of the Company include the Internet
operations of dELiA*s which include, for all periods presented, the Internet
operations of TSI Soccer Corporation ("TSI"). TSI was acquired by dELiA*s in
December 1997 in a transaction accounted for as a pooling of interests. The
financial statements also include the operations of gURL, Interactive Inc.
("gURL"), from December 17, 1997, the date of acquisition by iTurf.
The financial statements include expenses which have been allocated to the
Company by dELiA*s on a specific identification basis plus its allocated share
of the costs associated with resources it shares with dELiA*s. Allocations from
dELiA*s for such shared resources have been made primarily on a proportional
cost method based on related revenues. Management believes these allocations
are reasonable. The financial statements of the Company do not necessarily
reflect the results of operations or financial position that would have existed
had the Company been an independent company.
Interim Financial Statements
The accompanying statements of operations and cash flows for the nine
months ended October 31, 1997 are unaudited. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results of
operations and cash flows for the interim period.
The results of operations for the nine months ended October 31, 1998 are
not necessarily indicative of operating results to be expected for the full
fiscal year.
Fixed Assets
Fixed assets, comprised of property and equipment, are stated at cost and
depreciated using the straight-line method over 5 years, the estimated useful
lives of the assets.
Intangible Assets
Intangible assets include goodwill related to the gURL acquisition which
is being amortized by the straight-line method over 10 years.
F - 7
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
(Information for the nine month period
ended October 31, 1997 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Revenue Recognition
Sales of the Company's products are recognized at the time the products
are shipped to customers. Advertising revenue is recognized on a straight-line
basis over the period during which the advertising is provided. Subscription
revenues related to DiscountDomain.com, a membership based discount shopping
service, are billed monthly, subsequent to the earlier of a customer's first
purchase or one month from the date of initial subscription. Subscriptions are
cancelable at any time and revenue is recognized on a monthly basis.
Advertising Costs
The Company expenses the cost of advertising as incurred. For the years
ended January 31, 1996, 1997, and 1998 and the nine months ended October 31,
1997 and 1998 advertising costs were approximately $0, $0, $1,000, $0 and
$430,000, respectively.
Income Taxes
Historically, the Company's results have been included in dELiA*s
consolidated federal and state income tax returns. The income tax provision is
calculated as if the Company had operated as an independent company. Deferred
tax assets and liabilities are recognized with respect to the tax consequences
attributable to the difference between the financial statement carrying values
and tax bases of assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The Company is reimbursed for any tax benefits which dELiA*s receives
and is liable to dELiA*s for any tax liability recorded by the Company.
dELiA*s pays all taxes for the Company and, as such, income taxes payable
and deferred tax assets and liabilities have been included in amounts due to
dELiA*s.
Basic and Diluted Earnings (Loss) per Share
The Company computes net (loss) income per share in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS 128 and SAB 98, basic net income (loss) per share
is computed by dividing the net income (loss) available to common stockholders
for the period by the weighted average number of common shares outstanding for
the period. The calculation of diluted net loss per share excludes shares of
common stock issuable upon exercise of employee stock options as the effect
would be antidilutive.
To date, the Company has not had any issuances or grants for nominal
consideration.
Financial Instruments
The fair value of financial instruments approximate their carrying value.
Due to dELiA*s
Due to dELiA*s includes amounts payable to dELiA*s primarily for
operations and working capital requirements, offset by cash collected by the
Company and remitted to dELiA*s. Other transactions include the Company's share
of the current portion of dELiA*s consolidated income tax liability and other
administrative expenses incurred by dELiA*s on behalf of the Company. Such
amounts payable do not have specific repayment terms. Interest is charged at 8%
per annum.
F - 8
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
(Information for the nine month period
ended October 31, 1997 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for its stock-based employee compensation agreements
in accordance with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation."
Long-Lived Assets
In accordance with the Statement of Financial Accounting Standards Board
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of," the Company periodically reviews
long-lived assets and certain identifiable intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows (on an undiscounted basis) expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized would be
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that public companies
report certain information about operating segments in their annual financial
statements and in subsequent condensed financial statements of interim periods
issued to shareholders. This statement also requires that public companies
report certain information about their products and services, the geographic
areas in which they operate and their major customers. The Company has
determined that the adoption of this new standard did not have an effect on the
Company's disclosures for all periods presented because the Company currently
operates as one segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, which is effective for
fiscal years beginning after June 15, 1999, requires the Company to recognize
all derivatives on the balance sheet at fair value. The Company has determined
that the adoption of this new standard will not have a material effect on the
Company's financial statements or disclosure for all periods presented.
3. Related Party Transactions
All merchandise sold from inception through October 31, 1998 was purchased
from dELiA*s or one of its subsidiaries at an amount equal to dELiA*s or the
subsidiary's cost. dELiA*s charges the Company the costs associated with such
purchases, including cost of freight, handling and other costs, incurred by
dELiA*s in connection with providing such merchandise.
As a subsidiary of dELiA*s, the Company also receives, and is charged its
proportionate share of various services from dELiA*s including administrative,
distribution and other services. Such charges were $6,000, $13,000, $45,000,
$42,000 and $114,000 for the period from March 14, 1995 (date of inception) to
January 31, 1996, the years ended January 31, 1997, and 1998 and the nine
months ended October 31, 1997 and 1998, respectively. In the opinion of
management, all allocations of such costs have been made on a reasonable and
consistent basis; however; they are not necessarily indicative of nor is it
practical for management to estimate the level of expenses which might have
been incurred had the Company been operating as a separate, stand-alone
company.
F - 9
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
(Information for the nine month period
ended October 31, 1997 is unaudited)
4. Credit Facility
dELiA*s has a credit agreement providing for a $25 million revolving line
of credit. Obligations under the credit agreement are subject to certain
conditions including the maintenance of financial ratios and covenants and are
secured by a lien on substantially all of dELiA*s assets, including iTurf. The
credit agreement also limits the payment of dividends by dELiA*s.
5. Leases
The Company utilizes equipment and space under lease to dELiA*s. Rental
expense from operating leases amounted to $0, $0, $5,000, $3,000 and $6,000 for
the period from March 14, 1995 (date of inception) to January 31, 1996, the
years ended January 31, 1997 and 1998 and the nine month periods ended October
31, 1997 and 1998, respectively.
6. Acquisition of gURL, Interactive Inc.
On December 17, 1997, the Company acquired all the outstanding common
stock of gURL, Interactive Inc. ("gURL"), an interactive entertainment Web
site, for 5,000 shares of dELiA*s common stock valued at $108,000, cash of
$120,000 and rights to receive an aggregate of 10,000 additional shares of
dELiA*s common stock on December 17, 1998 and 1999 subject to the satisfaction
of certain performance targets. Such targets were met in January 1998 and 1999
and 5,000 shares of dELiA*s common stock were issued on December 31, 1998. The
remaining 5,000 shares of dELiA*s common will be issued in December 1999.
Because the first target was met in January 1998, the aggregate additional
purchase price of $110,000 has been accrued and included in the amounts due to
dELiA*s as of October 31, 1998. The second target, met in January 1999, will be
accrued in fiscal 1998. The acquisition has been accounted for by the purchase
method of accounting and the results of the operations of gURL have been
included in the financial statements of the Company from the date of
acquisition. The excess purchase price over the fair value of net assets
acquired was approximately $338,000, including $110,000 relating to the 5,000
shares of dELiA*s common stock earned in January 1998. Accumulated amortization
at January 31, 1998 and October 31, 1998 was approximately $3,000 and $27,000,
respectively.
On pro forma basis if the acquisition had taken place on February 1, 1996
or 1997, revenues, net (loss) income, and (loss) earnings per share would not
have been materially different from the amounts reported for the years ended
January 31, 1997 and 1998.
7. Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Period from
March 14,
1995 (date of Nine months ended
inception) to Year ended January 31 October 31
January 31 ------------------------ --------------------
1996 1997 1998 1997 1998
-------------- ---------- ----------- ------------ -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal ......... $ (1) $(2) $(23) $-- $28
State ........... -- (1) (6) -- 8
---- ------ ------- --- ---
$ (1) $(3) $(29) $-- $36
==== ===== ====== === ===
</TABLE>
F - 10
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
(Information for the nine month period
ended October 31, 1997 is unaudited)
7. Income Taxes (continued)
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate:
<TABLE>
<CAPTION>
Period from
March 14,
1995 (date of Nine months ended
inception) to Year ended January 31 October 31
January 31 ----------------------- -----------------------
1996 1997 1998 1997 1998
-------------- ---------- ---------- ------------ --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statutory federal income
tax expense (benefit) ......... (34)% (34)% (34)% (34)% 34%
State income tax expense
(benefit) ..................... (8) (8) (8) (8) 7
Other ........................... (8) (1) -- (8) --
------ ------ ----- ------ --
(50)% (43)% (42)% (50)% 41%
===== ===== ===== ===== ==
</TABLE>
8. Subsequent Events
On January 1, 1999, the Company established the 1999 Stock Incentive Plan
(the "Incentive Plan") for officers, employees, consultants, contractors and
directors providing for the grant of stock options, including incentive stock,
options and non-qualified stock options, stock appreciation rights and
restricted stock, and reserved 25 shares for grant. Either the Board of
Directors or the Compensation Committee of the Board of Directors may determine
the type of award, when and to whom awards are granted, the number of shares
and terms of the awards and the exercise prices. Stock options are exercisable
for a period not to exceed 10 years from the date of the grant and, to the
extent determined at the time of grant, may be paid for in cash, shares of
common stock, restricted stock or by a reduction in the number of shares
issuable upon exercise of the option.
On January 1, 1999, the Company issued options to purchase 11.3575 shares
of common stock at the fair market value at the date of grant.
In January 1999, the Company intends to file a Registration Statement with
the Securities and Exchange Commission to sell common stock to the public.
F - 11
<PAGE>
Report of Independent Auditors
To the Shareholders
of gURL, Interactive Inc.
We have audited the accompanying balance sheet of gURL, Interactive Inc.
(the "Company") as of December 17, 1997. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of the Company at December 17,
1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
January 15, 1999
F - 12
<PAGE>
gURL, Interactive Inc.
Balance Sheet
<TABLE>
<CAPTION>
ASSETS
December 17
1997
------------
<S> <C>
Cash ................................................... $100
----
Total assets ........................................... $100
====
SHAREHOLDERS' EQUITY
Common stock, no par value, 200 shares
authorized; 100 shares issued and outstanding ......... $100
----
Shareholders' equity ................................... $100
====
</TABLE>
See accompanying notes.
F - 13
<PAGE>
gURL, Interactive Inc.
Notes to Financial Statements
December 17, 1997
1. Description of Business
In September 1997, the Shareholders incorporated gURL, Interactive Inc.
("gURL") and contributed $100 in cash and the gURL Web site as consideration
for receiving 100 shares of common stock. The gURL Web site was developed by
three New York University graduate school students (the "Shareholders") as the
basis for their masters thesis. The contribution of the gURL Web site was
accounted for at the Shareholders' cost, which was zero because the costs
consisted of their own time and the Web site was developed at no cost to the
Shareholders. No other costs were incurred.
2. Other
On December 17, 1997, iTurf Inc. acquired all of the gURL outstanding
common stock.
F - 14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You may rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of Class A common
stock means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy these shares of Class A common stock in any
circumstances under which the offer or solicitation is unlawful.
----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Prospectus Summary ........................... 3
Risk Factors ................................. 7
Use of Proceeds .............................. 22
Dividend Policy .............................. 22
Capitalization ............................... 23
Dilution ..................................... 24
Selected Financial Data ...................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 26
Business ..................................... 33
Management ................................... 48
Certain Transactions ......................... 54
Principal Stockholder ........................ 58
Description of Capital Stock ................. 60
Shares Eligible for Future Sale .............. 65
Underwriting ................................. 67
Legal Matters ................................ 68
Experts ...................................... 68
Where You Can Find More Information .......... 69
Index to Financial Statements ................ F-1
</TABLE>
----------------------------------
Dealer Prospectus Delivery Obligation:
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade these shares of Class A common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
Shares
iTurf Inc.
Class A
Common Stock
--------------------------
PROSPECTUS
--------------------------
BT Alex. Brown
Hambrecht & Quist
CIBC Oppenheimer
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant in connection with this offering
are as follows. All amounts other than the SEC registration fee and NASD filing
fee are estimates.
<TABLE>
<CAPTION>
Amount to be
Paid
-------------
<S> <C>
Securities and Exchange Commission registration fee ......... $ 12,880
NASD filing fee ............................................. 5,100
Nasdaq National Market listing fee .......................... 20,000
Printing fees ............................................... 150,000
Legal fees and expenses ..................................... 300,000
Accounting fees and expenses ................................ 300,000
Blue Sky fees and expenses .................................. 2,000
Transfer agent and registrar fees ........................... 10,000
Miscellaneous ............................................... 200,020
----------
Total ..................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Registrant or its stockholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock purchases) or (iv) for
any transaction from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, the Bylaws of the
Registrant provide that (i) the Registrant is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions, (ii) the
Registrant may indemnify its other employees and agents as set forth in the
Delaware General Corporation Law, (iii) the Registrant is required to advance
expenses, as incurred, to its directors and executive officers in connection
with a legal proceeding to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions and (iv) the rights
conferred in the Bylaws are not exclusive.
At present, there is no pending litigation or proceeding involving a
director, officer or employee of the Registrant regarding which indemnification
is sought, nor is the Registrant aware of any threatened litigation that may
result in claims for indemnification.
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provisions
in the Registrant's Restated Certificate of Incorporation and in its Bylaws may
be sufficiently broad to permit indemnification of the Registrant's directors
and executive officers for liabilities arising under the Securities Act.
The Registrant, with approval by the Registrant's Board of Directors,
expects to obtain directors' and officers' liability insurance. Reference is
made to the following documents filed as exhibits to this registration
statement regarding relevant indemnification provisions described above and
elsewhere
II-1
<PAGE>
herein:
<TABLE>
<CAPTION>
Document Exhibit Number
- ------------------------------------------------------------ ---------------
<S> <C>
Form of Underwriting Agreement ............................. 1.1
Form of Restated Certificate of Incorporation of Registrant 3.3
Bylaws of Registrant ....................................... 3.4
</TABLE>
Item 15. Recent Sales of Unregistered Securities
All shares issued prior to the completion of the offering described herein
were issued to dELiA*s Inc. on October 1, 1997 in connection with the
formation of the Company, a transaction exempt from Section 5 of the Securities
Act pursuant to Section 4(2) thereof.
Item 16. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ---------- ---------------------------------------------------------------------------------------------
<S> <C>
1.1 Underwriting Agreement*
3.1 Restated Certificate of Incorporation of the Company
3.2 By-laws of iTurf
3.3 Form of Restated Certificate of Incorporation of iTurf to be adopted prior to the closing of
this offering*
3.4 Form of Bylaws of iTurf to be adopted prior to the closing of this offering*
5.1 Opinion of Proskauer Rose LLP
10.1 Intercompany Services Agreement*
10.2 Trademark License and Customer List Agreement*
10.3 Intercompany Indemnification Agreement*
10.4 Tax Sharing Agreement*
10.5 iTurf Common Stock Registration Rights Agreement*
10.6 dELiA*s Common Stock Registration Rights Agreement*
10.7 Customer Service Agreement*
10.8 Letter Agreement between dELiA*s and iTurf (regarding a sale of control by dELiA*s)*
10.9 1999 Stock Incentive Plan*
10.10 Employment Agreement between iTurf and Stephen I. Kahn*
10.11 Employment Agreement between iTurf and Alex S. Navarro*
10.12 Employment Agreement between iTurf and Oliver Sharp*
10.13 Employment Agreement between iTurf and Dennis Goldstein*
23.1 Consents of Ernst & Young LLP
23.2 Consent of Proskauer Rose LLP (included in Exhibit 5.1 above)*
24.1 Power of Attorney (included in signature page hereto)
27.1 Financial Data Schedule
</TABLE>
- -----------
* To be filed by amendment
(b) Financial Statement Schedules
No financial statement schedules are provided, because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
II-2
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person or entity whose signature
appears below constitutes and appoints Stephen I. Kahn, Alex S. Navarro and
Dennis Goldstein, and each of them, its true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for it and in its
name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration Statement
on Form S-1 and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as it might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of New York, State of New York on January 25, 1999.
iTurf Inc.
By: /s/ Stephen I. Kahn
-------------------------------------
Stephen I. Kahn
President and Chief Executive Officer
In accordance with the requirements of the Securities Act, this
Registration Statement has been signed on January 25, 1999 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
Name Title
- ----------------------------- -------------------------------------------------
<S> <C>
/s/ Stephen I. Kahn President, Chief Executive Officer and Director
- -------------------------
Stephen I. Kahn
/s/ Dennis Goldstein Chief Financial Officer (principal financial and
- ------------------------- accounting officer)
Dennis Goldstein
/s/ Christopher C. Edgar Director
- -------------------------
Christopher C. Edgar
/s/ Evan Guillemin Director
- -------------------------
Evan Guillemin
</TABLE>
II-4
<PAGE>
Exhibit Index.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ---------- ---------------------------------------------------------------------------------------------
<S> <C>
1.1 Underwriting Agreement*
3.1 Restated Certificate of Incorporation of the Company
3.2 By-laws of iTurf
3.3 Form of Restated Certificate of Incorporation of iTurf to be adopted prior to the closing of
this offering*
3.4 Form of Bylaws of iTurf to be adopted prior to the closing of this offering*
5.1 Opinion of Proskauer Rose LLP
10.1 Intercompany Services Agreement*
10.2 Trademark License and Customer List Agreement*
10.3 Intercompany Indemnification Agreement*
10.4 Tax Sharing Agreement*
10.5 iTurf Common Stock Registration Rights Agreement*
10.6 dELiA*s Common Stock Registration Rights Agreement*
10.7 Customer Service Agreement*
10.8 Letter Agreement between dELiA*s and iTurf (regarding a sale of control by dELiA*s)*
10.9 1999 Stock Incentive Plan*
10.10 Employment Agreement between iTurf and Stephen I. Kahn*
10.11 Employment Agreement between iTurf and Alex S. Navarro*
10.12 Employment Agreement between iTurf and Oliver Sharp*
10.13 Employment Agreement between iTurf and Dennis Goldstein*
23.1 Consents of Ernst & Young LLP
23.2 Consent of Proskauer Rose LLP (included in Exhibit 5.1 above)*
24.1 Power of Attorney (included in signature page hereto)
27.1 Financial Data Schedule
</TABLE>
II-5
RESTATED CERTIFICATE OF INCORPORATION
OF
dELiA*s Interactive Company
dELiA*s Interactive Company (the "Corporation"), a corporation
incorporated in the State of Delaware, hereby certifies that (i) its Certificate
of Incorporation was originally filed with the Secretary of State on August 7,
1997, (ii) this Restated Certificate of Incorporation has been duly adopted by
written consent of the Board of Directors and the holders of a majority of the
outstanding shares of Common Stock of the Corporation in accordance with the
provisions of Sections 228 and 245 of the General Corporation Law of the State
of Delaware, with written notice given to the remaining stockholders of the
Corporation as provided in Section 228(d) thereof, and (iii) the Restated
Certificate of Incorporation of this Corporation, as amended to the date of
filing of this Restated Certificate of Incorporation and including amendments
set forth herein but not separately filed, is restated, integrated and amended
in full to read as follows:
FIRST: The name of the corporation is:
iTurf Inc.
SECOND: The registered office of the corporation is to be
located at 1013 Centre Road, Wilmington, Delaware, 19805-1297, New Castle
County. The name of its registered agent at that address is Corporation Service
Company
THIRD: The purpose of the corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The corporation shall have the authority to issue
1,000 shares of common stock, par value $.01 per share.
FIFTH: The name and mailing address of the incorporator
are as follows:
Alex S. Navarro, Esq.
dELiA*s Inc.
435 Hudson Street
New York, New York 10014
SIXTH: Whenever a compromise or arrangement is proposed between the
corporation and its creditors or any class of them and/or between the
corporation and its stock holders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the corporation or of any creditor or stockholder
<PAGE>
thereof or on the application of any receiver or receivers appointed for the
corporation under the provisions of ss.291 of Title 8 of the Delaware Code or on
the application of trustees in dissolution or of any receiver or receivers
appointed for the corporation under the provisions of ss.279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of the corporation, as the case may
be, to be summoned in such manner as the said court directs.
SEVENTH: A director of this corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for the
breach of any fiduciary duty as a director, except in the case of (a) any breach
of the director's duty of loyalty to the corporation or its stockholders, (b)
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (c) under section 174 of the General Corporation Law
of the State of Delaware or (d) for any transaction from which the director
derives an improper personal benefit. Any repeal or modification of this Article
by the stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification with respect to acts or omissions occurring prior to such repeal
or modification.
EIGHTH The corporation shall, to the fullest extent permitted by
law, as the same is now or may hereafter be in effect, indemnify each person
(including the heirs, executors, administrators and other personal
representatives of such person) against expenses including attorneys' fees,
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by such person in connection with any threatened, pending or completed
suit, action or proceed ing (whether civil, criminal, administrative or
investigative in nature or otherwise) in which such person may be involved by
reason of the fact that he or she is or was a director or officer of the
corporation or is or was serving any other incorporated or unincorporated
enterprise in such capacity at the request of the corporation.
NINTH: Unless, and except to the extent that, the by-laws of the
corporation shall so require, the election of directors of the corporation need
not be by written ballot.
TENTH: The corporation hereby confers the power to adopt, amend
or repeal bylaws of the corporation upon the directors.
IN WITNESS WHEREOF, the undersigned has executed this Restated
Certificate of Incorporation, and acknowledges, under penalties of perjury, that
this instrument is the act and deed of the corporation and that the facts state
herein are true.
Dated: January 20, 1999.
/s/ Alex Navarro
-----------------------
Alex S. Navarro
Chief Operating Officer
BY-LAWS
OF
dELiA*s Interactive Company
1. MEETINGS OF STOCKHOLDERS.
1.1 Annual Meeting. The annual meeting of stock-holders shall
be held on the first Monday of June in each year, or as soon thereafter as
practicable, and shall be held at a place and time determined by the board of
directors (the "Board").
1.2 Special Meetings. Special meetings of the stockholders may
be called by resolution of the Board, the chairman or the president and shall be
called by the president or secretary upon the written request (stating the
purpose or purposes of the meeting) of a majority of the directors then in
office or of the holders of a majority of the outstanding shares entitled to
vote. Only business related to the purposes set forth in the notice of the
meeting may be transacted at a special meeting.
1.3 Place and Time of Meetings. Meetings of the stockholders
may be held in or outside Delaware at the place and time specified by the Board
or the officers or stockholders requesting the meeting.
1.4 Notice of Meetings; Waiver of Notice. Written notice of
each meeting of stockholders shall be given to each stockholder entitled to vote
at the meeting, except that (a) it shall not be necessary to give notice to any
stockholder who submits a signed waiver of notice before or after the meeting,
and (b) no notice of an adjourned meeting need be given, except when required
under section 1.5 below or by law. Each notice of a meeting shall be given,
personally or by mail, not fewer than 10 nor more than 60 days before the
meeting and shall state the time and place of the meeting, and, unless it is the
annual meeting, shall state at whose direction or request the meeting is called
and the purposes for which it is called. If mailed, notice shall be considered
given when mailed to a stockholder at his address on the corporation's records.
The attendance of any stockholder at a meeting, without protesting at the
beginning of the meeting that the meeting is not lawfully called or convened,
shall constitute a waiver of notice by him.
1.5 Quorum. At any meeting of stockholders, the presence in
person or by proxy of the holders of a majority of the shares entitled to vote
shall constitute a quorum for the transaction of any business. In the absence of
a quorum, a majority in voting interest of those present or, if no stockholders
are present, any officer entitled to preside at or to act as secretary of the
meeting, may adjourn the meeting until a quorum is present. At any adjourned
meeting at which a quorum is present, any action may be taken that might have
been taken at the meeting as
<PAGE>
originally called. No notice of an adjourned meeting need be given, if the time
and place are announced at the meeting at which the adjournment is taken, except
that, if adjournment is for more than 30 days or if, after the adjournment, a
new record date is fixed for the meeting, notice of the adjourned meeting shall
be given pursuant to section 1.4.
1.6 Voting; Proxies. Each stockholder of record shall be
entitled to one vote for each share registered in his name. Corporate action to
be taken by stockholder vote, other than the election of directors, shall be
authorized by a majority of the votes cast at a meeting of stockholders, except
as otherwise provided by law or by section 1.8. Directors shall be elected in
the manner provided in section 2.1. Voting need not be by ballot, unless
requested by a majority of the stockholders entitled to vote at the meeting or
ordered by the chairman of the meeting. Each stockholder entitled to vote at any
meeting of stockholders or to express consent to or dissent from corporate
action in writing without a meeting may authorize another person to act for him
by proxy. No proxy shall be valid after three years from its date, unless it
provides otherwise.
1.7 List of Stockholders. Not fewer than 10 days prior to the
date of any meeting of stockholders, the secretary of the corporation shall
prepare a complete list of stockholders entitled to vote at the meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in his name. For a period of not fewer than 10
days prior to the meeting, the list shall be available during ordinary business
hours for inspection by any stockholder for any purpose germane to the meeting.
During this period, the list shall be kept either (a) at a place within the city
where the meeting is to be held, if that place shall have been specified in the
notice of the meeting, or (b) if not so specified, at the place where the
meeting is to be held. The list shall also be available for inspection by
stockholders at the time and place of the meeting.
1.8 Action by Consent Without a Meeting. Any action required
or permitted to be taken at any meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not fewer than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voting. Prompt notice of the taking of any such
action shall be given to those stockholders who did not consent in writing.
2. BOARD OF DIRECTORS.
2.1 Number, Qualification, Election and Term of Directors. The
business of the corporation shall be managed by the entire Board, which
initially shall consist of directors.(1) The number of directors may be changed
by resolution of a majority of the Board or
- --------
(1) There are statutory minima under section 141 of the General Corporation
Law of Delaware.
- 2 -
<PAGE>
by the stockholders, but no decrease may shorten the term of any incumbent
director. Directors shall be elected at each annual meeting of stockholders by a
plurality of the votes cast and shall hold office until the next annual meeting
of stockholders and until the election and qualification of their respective
successors, subject to the provisions of section 2.9. As used in these by-laws,
the term "entire Board" means the total number of directors the corporation
would have, if there were no vacancies on the Board.
2.2 Quorum and Manner of Acting. A majority of the entire
Board shall constitute a quorum for the transaction of business at any meeting,
except as provided in section 2.10. Action of the Board shall be authorized by
the vote of the majority of the directors present at the time of the vote, if
there is a quorum, unless otherwise provided by law or these by-laws. In the
absence of a quorum, a majority of the directors present may adjourn any meeting
from time to time until a quorum is present.
2.3 Place of Meetings. Meetings of the Board may be held in
or outside Delaware.
2.4 Annual and Regular Meetings. Annual meetings of the Board,
for the election of officers and consideration of other matters, shall be held
either (a) without notice immediately after the annual meeting of stockholders
and at the same place, or (b) as soon as practicable after the annual meeting of
stockholders, on notice as provided in section 2.6. Regular meetings of the
Board may be held without notice at such times and places as the Board
determines. If the day fixed for a regular meeting is a legal holiday, the
meeting shall be held on the next business day.
2.5 Special Meetings. Special meetings of the Board may be
called by the president(2) or by a majority of the directors.
2.6 Notice of Meetings; Waiver of Notice. Notice of the time
and place of each special meeting of the Board, and of each annual meeting not
held immediately after the annual meeting of stockholders and at the same place,
shall be given to each director by mailing it to him at his residence or usual
place of business at least three days before the meeting, or by delivering or
telephoning or telegraphing it to him at least two days before the meeting.
Notice of a special meeting also shall state the purpose or purposes for which
the meeting is called. Notice need not be given to any director who submits a
signed waiver of notice before or after the meeting or who attends the meeting
without protesting at the beginning of the meeting the transaction of any
business because the meeting was not lawfully called or convened. Notice of
- --------
(2) If there is a chairman, this responsibility may also, or in the
alternative, be his.
- 3 -
<PAGE>
any adjourned meeting need not be given, other than by announcement at the
meeting at which the adjournment is taken.
2.7 Board or Committee Action Without a Meeting. Any action
required or permitted to be taken by the Board or by any committee of the Board
may be taken without a meeting, if all the members of the Board or the committee
consent in writing to the adoption of a resolution authorizing the action. The
resolution and the written consents by the members of the Board or the committee
shall be filed with the minutes of the proceedings of the Board or the
committee.
2.8 Participation in Board or Committee Meetings by Conference
Telephone. Any or all members of the Board or any committee of the Board may
participate in a meeting of the Board or the committee by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at the meeting.
2.9 Resignation and Removal of Directors. Any director may
resign at any time by delivering his resignation in writing to the chairman, the
president or secretary of the corporation, to take effect at the time specified
in the resignation; the acceptance of a resignation, unless required by its
terms, shall not be necessary to make it effective. Any or all of the directors
may be removed at any time, either with or without cause, by vote of the
stockholders.
2.10 Vacancies. Any vacancy in the Board, including one created
by an increase in the number of directors, may be filled for the unexpired term
by a majority vote of the remaining directors, though less than a quorum.
2.11 Compensation. Directors shall receive such compensation as
the Board determines, together with reimbursement of their reasonable expenses
in connection with the performance of their duties. A director also may be paid
for serving the corporation or its affiliates or subsidiaries in other
capacities.
3. COMMITTEES.
3.1 Executive Committee. The Board, by resolution adopted by a
majority of the entire Board, may designate an executive committee of one or
more directors, which shall have all the powers and authority of the Board,
except as otherwise provided in the resolution, section 141(c) of the General
Corporation Law of Delaware or any other applicable law. The members of the
executive committee shall serve at the pleasure of the Board. All action of the
executive committee shall be reported to the Board at its next meeting.
3.2 Other Committees. The Board, by resolution adopted by a
majority of the entire Board, may designate other committees of one or more
directors, which shall serve at the Board's pleasure and have such powers and
duties as the Board determines.
- 4 -
<PAGE>
3.3 Rules Applicable to Committees. The Board may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In case of the
absence or disqualification of any member of a committee, the member or members
present at a meeting of the committee and not disqualified, whether or not a
quorum, may unanimously appoint another director to act at the meeting in place
of the absent or disqualified member. All action of a committee shall be
reported to the Board at its next meeting. Each committee shall adopt rules of
procedure and shall meet as provided by those rules or by resolutions of the
Board.
4. OFFICERS.
4.1 Number; Security. The executive officers of the
corporation shall be the chairman, the president, one or more vice presidents
(including an executive vice president, if the Board so determines), a secretary
and a treasurer. Any two or more offices may be held by the same person. The
board may require any officer, agent or employee to give security for the
faithful performance of his duties.
4.2 Election; Term of Office. The executive officers of the
corporation shall be elected annually by the Board, and each such officer shall
hold office until the next annual meeting of the Board and until the election of
his successor, subject to the provisions of section 4.4.
4.3 Subordinate Officers. The Board may appoint subordinate
officers (including assistant secretaries and assistant treasurers), agents or
employees, each of whom shall hold office for such period and have such powers
and duties as the Board determines. The Board may delegate to any executive
officer or committee the power to appoint and define the powers and duties of
any subordinate officers, agents or employees.
4.4 Resignation and Removal of Officers. Any officer may
resign at any time by delivering his resignation in writing to the president or
secretary of the corporation, to take effect at the time specified in the
resignation; the acceptance of a resignation, unless required by its terms,
shall not be necessary to make it effective. Any officer elected or appointed by
the Board or appointed by an executive officer or by a committee may be removed
by the Board either with or without cause, and in the case of an officer
appointed by an executive officer or by a committee, by the officer or committee
that appointed him or by the president or the chairman.
4.5 Vacancies. A vacancy in any office may be filled for the
unexpired term in the manner prescribed in sections 4.2 and 4.3 for election or
appointment to the office.
4.6 The President. The president shall be the chief executive
officer of the corporation. Subject to the control of the Board, he shall have
general supervision over the business of the corporation and shall have such
other powers and duties as presidents of corporations usually have or as the
Board assigns to him.
- 5 -
<PAGE>
4.7 Vice President. Each vice president shall have such powers
and duties as the Board or the president assigns to him.
4.8 The Treasurer. The treasurer shall be the chief financial
officer of the corporation and shall be in charge of the corporation's books and
accounts. Subject to the control of the Board, he shall have such other powers
and duties as the Board or the president assigns to him.
4.9 The Secretary. The secretary shall be the secretary of,
and keep the minutes of, all meetings of the Board and the stockholders, shall
be responsible for giving notice of all meetings of stockholders and the Board,
and shall keep the seal and, when authorized by the Board, apply it to any
instrument requiring it. Subject to the control of the Board, he shall have such
powers and duties as the Board or the president assigns to him. In the absence
of the secretary from any meeting, the minutes shall be kept by the person
appointed for that purpose by the presiding officer.
4.10 Salaries. The Board may fix the officers' salaries, if
any, or it may authorize the president or the chairman to fix the salary of any
other officer.
5. SHARES.
5.1 Certificates. The corporation's shares shall be
represented by certificates in the form approved by the Board. Each certificate
shall be signed by the president or a vice president, and by the secretary or an
assistant secretary or the treasurer or an assistant treasurer, and shall be
sealed with the corporation's seal or a facsimile of the seal. Any or all of the
signatures on the certificate may be a facsimile.
5.2 Transfers. Shares shall be transferable only on the
corporation's books, upon surrender of the certificate for the shares, properly
endorsed. The Board may require satisfactory surety before issuing a new
certificate to replace a certificate claimed to have been lost or destroyed.
5.3 Determination of Stockholders of Record. The Board may
fix, in advance, a date as the record date for the determination of stockholders
entitled to notice of or to vote at any meeting of the stockholders, or to
express consent to or dissent from any proposal without a meeting, or to receive
payment of any dividend or the allotment of any rights, or for the purpose of
any other action. The record date may not be more than 60 or fewer than 10 days
before the date of the meeting or more than 60 days before any other action.
- 6 -
<PAGE>
6. INDEMNIFICATION AND INSURANCE.(3)
6.1 Right to Indemnification. Each person who was or is a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person of whom he is the
legal representative, is or was a director or officer of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action or inaction in an
official capacity or in any other capacity while serving as director, officer,
employee or agent, shall be indemnified and held harmless by the corporation to
the fullest extent permitted by the General Corporation Law of Delaware, as
amended from time to time, against all costs, charges, expenses, liabilities and
losses (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith, and that indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his heirs, executors and administrators;
provided, however, that, except as provided in section 6.2, the corporation
shall indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by that person, only if that proceeding
(or part thereof) was authorized by the Board. The right to indemnification
conferred in these by-laws shall be a contract right and shall include the right
to be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
General Corporation Law of Delaware, as amended from time to time, requires, the
payment of such expenses incurred by a director or officer in his capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by that person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding shall be made only upon delivery to the corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced, if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under these by-laws or otherwise. The
corporation may, by action of its Board, provide indemnification to employees
and agents of the corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
6.2 Right of Claimant to Bring Suit. If a claim under section
6.1 is not paid in full by the corporation within 30 days after a written claim
has been received by the corporation, the claimant may at any time thereafter
bring suit against the corporation to recover the unpaid
- --------
(3) A short-form (but less inclusive) alternative to this section 6 would
be: "The corporation shall indemnify each person who is or was an
officer or director of the corporation to the fullest extent permitted
under section 145 of the General Corporation Law of Delaware, as amended
from time to time."
- 7 -
<PAGE>
amount of the claim and, if successful in whole or in part, the claimant also
shall be entitled to be paid the expense of prosecuting that claim. It shall be
a defense to any such action (other than an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition, where the required undertaking, if any, is required and has been
tendered to the corporation) that the claimant has failed to meet a standard of
conduct that makes it permissible under Delaware law for the corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
corporation (including its Board, its independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he has met that standard of conduct, nor an actual determination by the
corporation (including its Board, its independent counsel or its stockholders)
that the claimant has not met that standard of conduct, shall be a defense to
the action or create a presumption that the claimant has failed to meet that
standard of conduct.
6.3 Non-Exclusivity of Rights. The right to indemnification
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this section 6 shall not be exclusive of any
other right any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
6.4 Insurance. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against that expense,
liability or loss under Delaware law.
6.5 Expenses as a Witness. To the extent any director,
officer, employee or agent of the corporation is by reason of such position, or
a position with another entity at the request of the corporation, a witness in
any action, suit or proceeding, he shall be indemnified against all costs and
expenses actually and reasonably incurred by him or on his behalf in connection
therewith.
6.6 Indemnity Agreements. The corporation may enter into
agreement with any director, officer, employee or agent of the corporation
providing for indemnification to the fullest extent permitted by Delaware law.
7. MISCELLANEOUS.
7.1 Seal. The Board shall adopt a corporate seal, which shall
be in the form of a circle and shall bear the corporation's name and the year
and state in which it was incorporated.
7.2 Fiscal Year. The Board may determine the corporation's
fiscal year. Until changed by the Board, the last day of the corporation's
fiscal year shall be January 31.
- 8 -
<PAGE>
7.3 Voting of Shares in Other Corporations. Shares in other
corporations held by the corporation may be represented and voted by an officer
of this corporation or by a proxy or proxies appointed by one of them. The Board
may, however, appoint some other person to vote the shares.
7.4 Amendments. By-laws may be amended, repealed or adopted by
the stockholders.
- 9 -
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 15, 1999, with respect
to the balance sheet of gURL, Interactive Inc. included in the Registration
Statement (Form S-1) and the related Prospectus of iTurf Inc. for the
registration of its Class A Common Stock.
ERNST & YOUNG LLP
New York, New York
January 20, 1999
II-6
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 15, 1999, in the Registration Statement
(Form S-1) and the related Prospectus of iTurf Inc. for the registration of its
Class A Common Stock.
ERNST & YOUNG LLP
New York, New York
January 20, 1999
II-7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from iTurf's
financial statements for the year ended January 31, 1998 and for the nine months
ended October 31, 1998 included in its Prospectus, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001076914
<NAME> iTurf Inc.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1999
<PERIOD-START> FEB-01-1997 FEB-01-1998
<PERIOD-END> JAN-31-1998 OCT-31-1998
<CASH> 31 42
<SECURITIES> 0 0
<RECEIVABLES> 0 18
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 31 60
<PP&E> 98 299
<DEPRECIATION> 3 30
<TOTAL-ASSETS> 461 640
<CURRENT-LIABILITIES> 506 633
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (45) 7
<TOTAL-LIABILITY-AND-EQUITY> 461 640
<SALES> 134 1,893
<TOTAL-REVENUES> 134 1,893
<CGS> 69 733
<TOTAL-COSTS> 69 733
<OTHER-EXPENSES> 114 1,041
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20 31
<INCOME-PRETAX> (69) 88
<INCOME-TAX> (29) 36
<INCOME-CONTINUING> (40) 52
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (40) 52
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
