As filed with the Securities and Exchange Commission on April 6, 1999
Registration No. 333-71123
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2
to
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)
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<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)
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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)
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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)
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Copies of Communications to:
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<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
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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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Proposed Maximum
Title Of Each Class Of Amount to be Aggregate Amount of
Securities To Be Registered Registered (1) Offering Price (2) Registration Fee (3)
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<S> <C> <C> <C>
Class A Common Stock, par value $.01 per share 4,830,000 $86,940,000 $24,169
- ------------------------------------------------------------------------------------------------------------------
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(1) Includes 630,000 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.
(3) Includes $14,195 previously paid.
---------------
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.
================================================================================
<PAGE>
Subject to Completion
April 6, 1999
4,200,000 Shares
[iTurf Logo]
Class A Common Stock
--------------
This is the initial public offering of iTurf Inc., and we are offering
4,200,000 shares of our Class A common stock. We anticipate that the initial
public offering price will be between $16.00 and $18.00 per share.
Our Class A common stock has been approved for listing on the Nasdaq National
Market under the symbol "TURF."
Investing in the Class A common stock involves risks. See "Risk Factors"
beginning on page 7.
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<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price ........................... $ $
Underwriting discounts and commissions .......... $ $
Proceeds to iTurf Inc. .......................... $ $
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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 630,000 additional
shares of Class A common stock to cover any over-allotments.
Joint Book-Running Managers
BT Alex. Brown Hambrecht & Quist
--------------
J.P. Morgan & Co.
CIBC Oppenheimer
Wit Capital Corporation
as e-Manager[TM]
, 1999
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>
* United States Census Bureau, 1997
** Based on sales and traffic
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 and dot
dot dash are trademarks 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 this data are not guaranteed. We have not independently
verified this data nor sought the consent of every organization to refer to
their reports in this prospectus.
<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.
Our Business
iTurf is a leading provider of Internet community and commerce services
focused primarily on Generation Y, based on sales and online traffic.
Generation Y is comprised of 56 million people between the ages of 10 and 24
and accounts for over $278 billion of disposable income. iTurf is an online
destination, or "home turf," where Generation Y members 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 magazines, or web/zines, with
proprietary content, chat rooms, posting boards, personal homepages, e-mail,
and online shopping. Our gURL community sites provide interactive features and
regularly updated articles on topics of interest to Generation Y girls and
young women. Our electronic commerce, or e-commerce, sites offer a wide range
of apparel, accessories, footwear, athletic gear and home furnishings for
Generation Y.
We are a subsidiary of dELiA*s Inc., the leading direct marketer to
Generation Y. Our relationship with our parent provides the following
advantages:
o exclusive online use of leading brand names including dELiA*s and TSI
Soccer;
o a proprietary ten million-name database that includes six million
individuals who have made catalog purchases;
o advertising space in our parent's catalog publications that collectively
have circulation in excess of 60 million;
o substantial merchandising expertise and strong relationships with
hundreds of vendors; and
o sophisticated services from our parent's distribution center to fill our
product orders.
Our Internet traffic and sales have grown rapidly over the last year. We
estimate that the number of page views per month on our Web sites has grown
from approximately 800,000 in February 1998 to approximately 35 million in
February 1999. Our revenues have increased from $48,000 in the quarter ended
January 31, 1998 to $2.1 million in the quarter ended January 31, 1999. 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 quarter ended January 31, 1999, our gross margin
on merchandise sales was approximately 50%.
We currently generate a substantial majority of our revenue from
e-commerce sales, but expect to further develop our other revenue streams in
the future. Our four primary sources of revenue are:
o e-commerce sales through our dELiAs.cOm, TSISoccer.com,
contentsonline.com, discountdomain.com, droog.com and dotdotdash.com
sites;
o fees paid for advertising on our sites;
o fees from licensing our gURL brand name and online content; and
o subscription fees paid by members of our discountdomain.com discount
shopping service.
Our Market Opportunity
Generation Y is an increasingly important demographic group on the
Internet. Jupiter Communications estimates that e-commerce sales to teens and
college students will increase from $600 million in 1998 to $3.8 billion in
2002, while spending on advertising to this group will increase from $500
million in 1998 to $2.1 billion in 2002. However, Generation Y is difficult to
reach for traditional retailers, advertisers and e-commerce providers. Members
of Generation Y desire entertainment, communication, and advice focused on
their particular needs. They demand engaging content that does not speak down
to them. Major Internet sites generally do not exclusively address teen issues
of peer, parental and school-related pressures, 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.
3
<PAGE>
We may not enjoy the same growth rates as the recent rates of growth of
e-commerce spending by or advertising targeting Generation Y.
Our Strategy
Our goal is to build iTurf into the most heavily-trafficked Generation Y
destination online. The key elements of our strategy are to:
o strengthen the recognition of the iTurf brand and each brand in our
network;
o enhance our online offerings to drive traffic to our sites and increase
revenue; and
o expand site infrastructure to enhance functionality and support growth.
Our commerce and community sites will be linked by iTurf.com. We intend to
develop iTurf.com as the online meeting place and community for Generation Y.
We will promote and drive traffic to this site through all of the properties in
our network. We believe that iTurf.com will be able to generate advertising and
sponsorship revenue from advertisers and retailers seeking targeted access to
Generation Y.
Our Parent
Our parent is currently a reporting company under the Securities Exchange
Act of 1934. Our parent owns all of the shares of our Class B common stock as
of the date hereof. The Class B common stock entitles our parent to six votes
per share, as compared to one vote per share of the Class A common stock.
Following this offering, our parent will continue to beneficially own all of
the outstanding shares of the Class B common stock, and therefore, will hold
approximately 95% of the voting power of our outstanding capital stock. See
"Risk Factors--Our parent and its principal stockholder may exert control over
our business."
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, the information in this prospectus does not
take into account any 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.
4
<PAGE>
The Offering
Class A common stock offered by iTurf..... 4,200,000 shares
Common stock to be outstanding
after the offering:
Class A common stock.................... 4,201,471 shares(1)
Class B common stock.................... 12,500,000 shares
Use of proceeds........................... Marketing activities, capital
expenditures, repayment of
indebtedness due to our parent,
purchase of common stock of our
parent and other general corporate
purposes, including working
capital. For a more detailed
explanation of the intended use of
proceeds of this offering,
including the purchase of our
parent's common stock, see "Use of
Proceeds."
Nasdaq National Market symbol............. TURF
- ----------
(1) Excludes a total of 1,419,688 shares of Class A common stock issuable upon
exercise of options outstanding as of January 31, 1999, with a weighted
average exercise price of $9.36 per share, and 2,630,312 additional shares
of Class A common stock reserved for issuance under our stock incentive
plan. Includes 1,471 shares, assuming an initial public offering price per
share of $17.00, to be issued to another subsidiary of our parent
concurrently with this offering as consideration in connection with the
transfer to iTurf of the TSISoccer.com domain name.
5
<PAGE>
Summary Financial Data
The following tables summarize our financial results and 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. The
historical financial statements 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.
The accompanying financial data include the Internet operations of TSI
Soccer Corporation, that was acquired by our parent in a transaction accounted
for in a pooling of interests, from March 14, 1995, its date of inception. It
also includes the operations of gURL, Interactive Inc. from December 17, 1997,
the date of its acquisition, and additional Internet operations developed since
December 17, 1997, including the dELiAs.cOm Web site, which was launched in May
1998.
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<CAPTION>
Period from
March 14, 1995
(date of inception)
through Year ended January 31
January 31 ----------------------------------------
1996 1997 1998 1999
-------------------- ------------- ---------- -----------
(in thousands, except per share data)
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Statement of Operations Data:
Revenues ..................................... $ 6 $ 13 $ 134 $ 4,014
Gross profit ................................. 4 7 65 2,327
Income (loss) from operations ................ (2) (7) (49) 860
Net income (loss) ............................ $ (1) $ (4) $ (40) $ 464
======= ======= ======= =======
Basic and diluted net income (loss)
per share(1) ................................ $ (0.00) $ (0.00) $ (0.00) $ 0.04
======= ======= ======= =======
Shares used to compute basic net income (loss)
per share(1) ................................ 12,500 12,500 12,500 12,500
======= ======= ======= =======
Shares used to compute diluted net income
(loss) per share(1) ......................... 12,500 12,500 12,500 12,518
======= ======= ======= =======
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January 31, 1999
--------------------------
Actual As Adjusted(2)
-------- ---------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ............ $ 375 $55,204
Working capital (deficiency) ......... (461) 54,941
Total assets ......................... 1,255 56,109
Due to parent ........................ 573 --
Total stockholder's equity ........... 419 55,846
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(1) Based on the number of shares actually outstanding as of January 31, 1999
after giving effect to the reclassification of 100 shares of common stock
outstanding at January 31, 1999 into 12,500,000 shares of Class B common
stock. See Notes to iTurf Financial Statements for information concerning
the computation of basic and diluted net income (loss) per share.
(2) As adjusted to reflect (A) the sale of 4,200,000 shares of Class A common
stock in this offering at an assumed initial public offering price of
$17.00 per share, 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 and the repayment of an amount due to our parent, and
(B) the acquisition of the TSISoccer.com domain name from TSI Soccer
Corporation for $25,000 of Class A common stock valued at the initial
public offering price. See "Use of Proceeds" and "Capitalization."
6
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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
We have a limited operating history on which an investor can evaluate our
business
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. However, 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. You 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 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.
We have no history as an 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 intercompany agreements between us and our
parent. We intend to develop the operational, administrative and other systems
and infrastructure necessary to support our current and future business on an
independent basis. However, 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.
7
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The historical financial statements contained 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. Therefore, investors should not rely
on our cash flows to date as indicative of the cash flows that would have
resulted had iTurf been operating as an independent company during the periods
presented.
We expect to incur substantial net losses for the foreseeable future
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. We also expect to invest heavily to further develop
our Web sites, technology and operating systems. We will incur increased
expenses in connection with fees payable to our parent pursuant to intercompany
agreements with our parent. Slower revenue growth than we anticipate or
operating expenses that exceed our expectations would have a material adverse
effect on our business.
We must successfully anticipate and respond to fashion trends
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,
and to offer merchandise that appeals to their preferences on a timely and
affordable basis. 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.
Our 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. If we misjudge merchandise
selection, our image with our customers would be materially adversely affected.
We must retain and integrate our key personnel to operate our business, and we
may not be able to hire and retain qualified personnel as our business grows
Our success depends 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 our board of directors,
Dennis Goldstein, our Chief Financial Officer, Alex S. Navarro, our Chief
Operating Officer, Oliver Sharp, our Chief Technology Officer, or other key
employees would have a material adverse effect on our business. Furthermore,
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 joined us in February 1999. As a result of these recent
additions, our senior managers may not perform effectively as individuals or
work together as a team.
Our success also depends on our ability to continue to attract, retain and
motivate 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 qualified employees in the future. We have in the past
experienced, and we expect to continue to experience, difficulty in hiring and
retaining skilled employees with appropriate qualifications. Our business will
be materially adversely affected if we fail to attract and retain key
employees.
8
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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 and online user traffic
levels;
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.
As a result, our future revenues are difficult to forecast. Any shortfall
in revenues may 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.
Our success depends on our ability to expand our capacity, systems and
features
A key element of our strategy is to generate a high volume of traffic on
our Web sites. However, growth in the number of users accessing our sites may
strain or exceed the capacity of our computer systems and lead to declines in
performance or systems failure. 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. 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
upgrade our existing systems and implement new systems. 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.
We must also introduce additional or enhanced features and services to
retain current users and attract new users to our sites. If a new service is
not favorably received, our current users may visit our Web sites less
frequently. These new services or features may contain errors, and 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.
Any growth of our business may strain 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.
Our computer systems and equipment may fail or experience delays
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.
9
<PAGE>
Our customers may become dissatisfied as a result of any system failure.
Any sustained or repeated system failure or interruption 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.
We will increasingly rely upon online and traditional advertising to generate
sales
We expect to increasingly rely on online and traditional advertising and
strategic alliances to attract users to our Web sites. 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. Our inability to
develop and maintain effective advertising campaigns may have a material
adverse effect on our business. 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.
We currently lack advertising sales personnel
We intend to develop a sales team for advertising on our Internet
community sites, which advertising has not generated substantial revenues to
date. Establishing our sales team involves a number of risks, including:
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 force would have a material
adverse effect on our business.
We depend on third party shippers, communications providers and vendors to
operate our business
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 Federal
Express 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. Our Web sites could
experience disruptions or interruptions in service due to failures by these
providers. We also depend on communications providers including Cable &
Wireless plc and AT&T to provide our Internet users with access to our Web
sites. In addition, our users depend on Internet service providers and Web site
operators for access to our Web sites. Each of these groups has experienced
significant 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.
10
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Our business depends 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 retail and
catalog sales of TSI Soccer Corporation 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 us 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.
We may be unable to identify or successfully integrate 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.
We have limited protection of our intellectual property, and others could
infringe on or misappropriate our proprietary rights
We regard our service marks, trademarks, trade secrets and similar
intellectual property as critical to our success. The steps taken by us to
protect our intellectual property may not be adequate, and third parties may
infringe or misappropriate our copyrights, trademarks and similar proprietary
rights. 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. 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.
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. Such licensees may take or omit to take
actions that would materially adversely affect the value of our proprietary
rights or reputation, which actions would have a material adverse effect on our
business, financial condition and results of operations.
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We face intense competition from Internet- and retail-based businesses
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 cannot assure you
that we will be able to compete successfully or that competitive pressures will
not materially and adversely affect our business. 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
competitors may have cooperative relationships among themselves or with third
parties that increase the ability of their products or services to address the
needs of our prospective advertisers. Increased competition could cause price
reductions, reduced gross margins and loss of market share.
Our e-commerce operations in the highly competitive apparel, accessories,
footwear and home furnishings industries and the athletic goods and soccer
specialty markets face competition from store-based retailers, direct marketers
and apparel manufacturers. Our dELiA*s, TSI Soccer, Contents, Droog and dot dot
dash online catalogs compete with traditional department store retailers, as
well as specialty and catalog 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 and direct marketers. 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 believe that our
and our parent's recent success in these markets has attracted the attention of
other direct marketers, catalogers, store-based retailers and apparel
manufacturers some of which 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.
Our online advertising business 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. Moreover, advertisers may, over time, determine
that advertisements placed on our Web sites have not been effective.
Consequently our advertising revenues may decline.
We may expand our business internationally and become subject to currency,
political, tax and other uncertainties
Our international business is subject to a number of risks of 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;
o potential limits on the 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.
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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. We purchase from our
parent merchandise manufactured outside the United States. 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.
Failure of our computer systems to recognize Year 2000 could negatively affect
our business
We depend upon complex computer software and systems for all phases of our
operations, including our parent's computer systems. We have not yet begun
performing tests on all of our material operating software and systems to
assess and ensure Year 2000 compliance. We cannot assure you that all of
iTurf's material operating software and systems will be Year 2000 compliant.
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.
The failure of any of our software or systems to be Year 2000 compliant
could prevent us from being able to process or fulfill orders from our
customers or could disrupt our financial and management controls and reporting
systems. Any such failure, if not quickly remedied, would have a material
adverse effect on our business, results of operations and financial condition.
In addition to the systems and software that we use directly, our
operations also depend on the performance of software and systems of our third
party service providers. These include providers of financial,
telecommunications and parcel delivery services. We also cannot assure you that
our service providers have, or will have, operating software and systems that
are Year 2000 compliant.
In addition, a significant portion of purchases of merchandise from iTurf
are made with credit cards. 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.
Risks Related to Our Relationship with Our Parent
Our parent and its principal stockholder may exert control over our business
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 approximately 95% 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, Chief
Executive Officer and Chairman of the board of directors of our parent and
iTurf, was, as of January 31, 1999, the beneficial owner of approximately 45%
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.
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 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.
Under our parent's credit agreement, all of our common stock owned by our
parent has been pledged as security for our parent's obligations. If our parent
were to default under this credit agreement, its lender could take ownership of
all the common stock of iTurf now owned by our parent. In that case, the lender
would be able to control iTurf in the same manner as our parent.
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Overlapping management and boards of directors could cause conflicts of
interest between us and our parent
Several of iTurf's officers and directors serve as officers and directors
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.
Stephen I. Kahn, who is the President, Chief Executive Officer and
Chairman of the board of directors of iTurf, is the Chief Executive Officer and
Chairman of the board of directors of 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 Chief Operating Officer and
Vice Chairman 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
President and Chief Financial Officer of our parent.
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.
Messrs. Kahn, Edgar, Guillemin and Navarro 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 this 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.
We depend 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. Under these agreements, we will depend
on our parent to provide us with trademark rights, goods and services that are
key to the success of our business. The termination of the intercompany
agreements on the failure of our parent to satisfactorily perform its
obligations under these agreements would have a material adverse effect on our
business. In addition, we anticipate making material payments to our parent
each year for the foreseeable future under the intercompany agreements. See
"Transactions with Our Parent--Intercompany Agreements."
We depend on our parent as a trademark licensor. Pursuant to the trademark
license and customer list agreement, we license the dELiA*s logo and name,
other valuable trademarks, and online content from our parent and its other
subsidiaries on an exclusive basis for Internet use. 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. Our parent may terminate the
trademark license and customer list agreement if any person other than our
parent, its affiliates or strategic partners acquire 20% or more of the voting
power of iTurf and under other circumstances.
In addition, the trademark license and customer list agreement contains
restrictions that may prevent us from marketing our products and services in
the same way we would if we owned these trademarks ourself. Our parent can:
o 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;
o require us to conform to our parent's guidelines for the use of its
trademarks;
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o approve all materials, such as marketing materials, that include any of
our parent's trademarks; and
o control the visual and editorial presentation of content on our Web sites
that use our parent's trademarks.
We depend 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, our
parent controls the timing and placement of these advertisements and
promotions. 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. This advertising and promotion is an important element of
our strategy to increase awareness of our brands and increase sales. If we were
not able to advertise in our parent's catalog and retail stores, we would make
substantially fewer sales on our Web sites. The advertising obligations can be
terminated by our parent under the same circumstances as the trademark license
and customer list agreement.
We depend 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 can be terminated by our parent under the same
circumstances as the trademark license and customer list agreement.
Substantially all of our sales orders are currently processed and
fulfilled through our parent's systems. 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
e-commerce sales in an accurate and timely manner.
We depend 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. 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. 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. Furthermore, our parent does not have long-term 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 can be terminated by our parent under the same circumstances as the
trademark license and customer list agreement.
We may be contingently liable for our parent's tax and pension 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. 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.
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. 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
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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.
For so long as our parent continues to own at least 80% of the voting and
economic 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 31, 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.
We face potential competition from our parent
Any of the following events could have a material adverse effect on our
business or our stockholders:
o any competition from our parent that results in a loss of a corporate
opportunity by iTurf to our parent;
o any engagement by our parent in any activity that is similar to the
businesses of iTurf; or
o the early termination of the trademark license and customer list
agreement.
However, our parent has agreed in the trademark license and customer list
agreement to refrain from competing with us in the Generation Y Internet
business. Our parent is under no other obligation to refrain from competing
with us or to share with us any future business opportunities available to it.
iTurf's Restated Certificate of Incorporation will include provisions that may
permit our parent to compete with us in areas unrelated to the Generation Y
Internet business.
The fluctuation in the price of our parent's common stock could adversely
affect the price of our Class A common stock and our business
We intend to use a portion of the proceeds of this offering to purchase
shares of our parent's common stock from our parent. 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. A decline in the price of our common stock could reduce the value of
our investment in our parent's common stock and could adversely affect the
price of our Class A common stock and our business. If the price of our Class A
common stock declines, the price of our parent's common stock could decline,
which could cause the price of our Class A common stock to decline further. We
believe it is likely that we will have to sell shares of our parent's common
stock within 12 months of the closing of this offering. The price of our
parent's common stock may be lower than we paid. We, therefore, may not fully
realize our investment in such stock. See "Use of Proceeds."
In addition, there are limits on our ability to sell shares of our
parent's common stock. As a result, our parent's common stock price could
decline for a considerable period after we have decided to sell such
securities. The shares of our parent's common stock are "restricted securities"
under 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.
Although we have registration rights on the shares of our parent's common
stock, we may not be able to demand registration of such shares for 180 days
following this offering. In addition, our parent's ability to block
registration may impede our ability to sell these shares in a timely manner. In
addition, through its control of our board of directors, our parent may be able
to control our ability to sell such securities.
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Risks Related to the Internet Industry
We depend 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 depends 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.
We depend on continued growth of online commerce
Our future revenue and profits depend upon the widespread acceptance and
use of the Web as an effective medium of commerce. Rapid growth in the use of
the Web and commercial online services is a recent phenomenon. We cannot assure
you that a large base 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
successful development of the Web and online services is subject to a number of
factors, including:
o continued growth in the number of users of such services;
o concerns about transaction security;
o continued development of the necessary technological infrastructure; and
o 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.
We depend on an unproven Internet community business model
The Internet community business model is an unproven business model. 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. It is
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. Failure of the market for online
advertising to develop or slower development than expected would materially
adversely affect our business.
We depend on the storage of personal information about our users
Web sites typically place identifying data, or 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. Any reduction or limitation in the use of cookies
could limit the effectiveness of our sales and marketing efforts. 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. Furthermore, the European Union recently
adopted a directive
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addressing data privacy that may limit the collection and use of information
regarding Internet users. This directive may limit our ability to target
advertising or collect and use information in European countries.
We may be sued regarding privacy concerns
Despite the display of our privacy policy on our Web sites, any
penetration of our network security or 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 Internet
companies of personal information. In 1998, the U.S. Congress enacted the
Children's Online Privacy Protection Act of 1998. The Federal Trade Commission
has not yet promulgated regulations interpreting this act. We depend upon
collecting personal information from our customers and we believe that the
promulgation of regulations under this act will make it more difficult for us
to collect personal information from some of our customers. We could incur
expenses if new regulations regarding the use of personal information are
introduced or if our privacy practices were investigated. See
"Business--Legal."
Government regulation and legal uncertainties could add additional burdens to
doing business on the Internet
Laws and regulations applicable to Internet communications, commerce and
advertising are becoming more prevalent. The most recent session of the U.S.
Congress passed laws regarding online children's privacy, copyrights and
taxation. The law governing the Internet, however, remains largely unsettled.
New laws may impose 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.
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. 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 online communications. Any publicized compromise of security
could deter people from accessing the Web or from using it to transmit
confidential information. Furthermore, decreased online 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.
We may be liable for information displayed on and communication through our
Web sites
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or other theories relating to the information we publish
on our Web sites. These claims have been brought 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.
Changes in registration of domain names may adversely affect our business
The regulation of domain names in the United States and in foreign
countries is expected to change in the near future. 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. iTurf holds various Web domain
names
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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. We expect future 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. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we 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.
We may be unable to respond to rapid technological change in our industry
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
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 Related to this Offering
Our shares eligible for public sale after this offering may adversely affect
our stock price
Any sale by our parent of our common stock could cause our stock price to
fall because it will increase the number of shares traded in the market. 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 an agreement with BT Alex. Brown Incorporated and Hambrecht & Quist LLC and
under applicable securities laws. The shares held by our parent will be
"restricted securities" and will become eligible for sale subject to the
limitations of Rule 144 under the Securities Act. In addition, our parent can
require us to register the shares of Class B common stock it owns for public
sale pursuant to the dELiA*s common stock registration rights agreement.
After the closing of this offering, there will be 4,201,471 shares of
Class A common stock outstanding. Of the outstanding shares, the 4,200,000
shares sold in this offering will be freely tradeable, except for any shares
purchased by our "affiliates" as defined in Rule 144. Several of our officers
intend to purchase up to an aggregate 130,000 shares of our Class A common
stock from the underwriters in this offering. These shares will be restricted
securities and will become eligible for sale subject to the limitations of Rule
144. Additionally, 1,471 shares of Class A common stock, valued at the assumed
initial offering price of $17.00, will be issued to TSI Soccer Corporation as
consideration in connection with the transfer to iTurf of the TSISoccer.com
domain name. Sales of a large number of shares held by affiliates could have an
adverse effect on the market price for our Class A common stock.
As of January 1, 1999, 4,050,000 shares of Class A common stock were
reserved for issuance under our stock incentive plan, of which options to
purchase 1,419,688 shares were then outstanding and of which no options were
then exercisable. 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
186,775 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 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.
Our Class A common stock price could be extremely volatile
We cannot assure you that a trading market in our Class A common stock
will develop or how liquid that market might become. The initial public
offering price for our shares to be sold in this offering will be determined
solely by negotiations between iTurf and the representatives of the
19
<PAGE>
underwriters and may not be indicative of prices 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 in our stock
may not be able to resell their shares of Class A common stock at or above the
initial public offering price due to the possible volatility of our Class A
common stock after this offering.
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.
Our management has broad discretion in use of proceeds of this offering
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."
Our charter documents and Delaware law may inhibit a takeover
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 Provisions of Delaware Law and Our
Restated Certificate of Incorporation and Bylaws."
FORWARD-LOOKING STATEMENTS
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.
20
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 4,200,000 shares of
Class A common stock will be approximately $65.4 million, at an assumed initial
public offering price of $17.00 per share and after deducting the estimated
underwriting discounts and offering expenses. If the underwriters exercise
their over-allotment option in full, we estimate that such net proceeds will be
approximately $75.4 million.
We intend to use the net proceeds of this offering as follows:
o at least $6.0 million for marketing activities during fiscal 1999;
o approximately $4.0 million for capital expenditures, including
investments in technology and physical infrastructure, and the
acquisition of online content and distribution relationships; and
o to repay an amount due to our parent ($573,000 at January 31, 1999).
Additionally, we intend to use $10.0 million of the net proceeds of this
offering to purchase shares of common stock of our parent from our parent. In
addition, if the underwriters exercise their over-allotment option, we intend
to use 60% of the net proceeds therefrom to purchase additional shares of our
parent's common stock from our parent. We will purchase such shares from our
parent at a price equal to the average closing price of our parent's common
stock on the five preceding trading days. While providing financing to our
parent, this mechanism returns an asset of tangible value to iTurf--
shares of our parent's common stock. See "Risk Factors--The fluctuation in the
price of our parent's common stock could adversely affect the price of our
Class A common stock and our business."
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.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of iTurf as of January
31, 1999 on an actual basis based on our audited financial statements, and as
adjusted to give effect to:
o the reclassification of 100 shares of common stock outstanding at January
31, 1999 into 12,500,000 shares of Class B common stock;
o the authorization of 67,500,000 shares of Class A common stock;
o the authorization of 1,000,000 shares of preferred stock;
o the sale of 4,200,000 shares of Class A common stock in this offering at
an assumed initial public offering price of $17.00 per share and after
deducting the estimated underwriting discounts and commissions and
estimated offering expenses;
o the purchase of parent company stock for $10,000,000;
o repayment of an amount due to our parent ($573,000 at January 31, 1999);
and
o the acquisition of the TSISoccer.com domain name from TSI Soccer
Corporation for $25,000 of Class A common stock valued at the initial
public offering price, assumed to be $17.00 per share.
<TABLE>
<CAPTION>
January 31, 1999
---------------------------
Actual As Adjusted
------------ ------------
(in thousands)
<S> <C> <C>
Due to parent ...................................................... $ 573 $ --
------ ---------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued and outstanding actual and as adjusted ......... -- --
Class A common stock, $.01 par value; 67,500,000 shares
authorized; no shares issued and outstanding actual;
4,201,471 shares issued and outstanding as adjusted(1) .......... -- 42
Class B common stock, $.01 par value; 12,500,000 shares
authorized; 12,500,000 shares issued and outstanding actual
and as adjusted ................................................. 125 125
Additional paid-in capital ........................................ -- 65,260
Investment in common stock of parent .............................. -- (10,000)
Retained earnings ................................................. 294 419
------ ---------
Total stockholders' equity ....................................... 419 55,846
------ ---------
Total capitalization ............................................ $ 992 $ 55,846
====== =========
</TABLE>
- ----------
(1) Excludes (a) 1,419,688 shares of Class A common stock issuable upon the
exercise of options outstanding with a weighted average exercise price of
$9.36 per share, and (b) an aggregate of 2,630,312 additional shares
reserved for issuance under our stock incentive plan. See
"Management--1999 Stock Incentive Plan" and Note 9 of Notes to iTurf
Financial Statements.
22
<PAGE>
DILUTION
The net tangible book value of iTurf as of January 31, 1999 was
approximately $63,000, or $.01 per share of common stock. 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 January
31, 1999. The pro forma net tangible book value of iTurf as of January 31,
1999, after giving effect to:
o the issuance and sale of the 4,200,000 shares of Class A common stock
offered hereby at an assumed initial public offering price of $17.00 per
share after deducting estimated underwriting discounts and commissions
and estimated offering expenses;
o the purchase of the common stock of our parent for $10.0 million,
accounted for as a reduction of stockholders' equity; and
o the acquisition of the TSISoccer.com domain name from TSI Soccer
Corporation for $25,000 of Class A common stock valued at the initial
public offering price, assumed to be $17.00 per share;
would have been $55.5 million, or $3.32 per share.
This represents an immediate increase in pro forma net tangible book value
per share of $3.31 to existing stockholders and an immediate dilution per share
of $13.68 to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ........................... $ 17.00
Net tangible book value per share before this offering ................. $ .01
Increase in pro forma net tangible book value per share attributable to
new investors ......................................................... 3.31
------
Pro forma net tangible book value per share after offering ................ 3.32
--------
Dilution per share to new investors ....................................... $ 13.68
========
</TABLE>
The following table summarizes, on a pro forma basis, as of January 31,
1999, 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 for Class B common stock and by new investors purchasing
shares of Class A common stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ ------------------------- Average Price
Number Percent Amount Percent Per Share
------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing Stockholder ......... 12,500,000 74.9% $ -- --% $ --
New investors ................ 4,200,000 25.1 71,400,000 100.0 17.00
---------- ----- ----------- -----
Total ..................... 16,700,000 100.0% $71,400,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock
options. As of January 31, 1999, there were options outstanding to purchase a
total of 1,419,688 shares of Class A common stock with a weighted average
exercise price of $9.36 per share. To the extent that any of these options are
exercised, there may be further dilution to new investors.
23
<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 years ended
January 31, 1997, 1998 and 1999, and the balance sheet data as of January 31,
1998 and 1999 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 selected statement of operations data presented below
for the period from March 14, 1995, date of inception, through January 31, 1996
and the balance sheet data as of January 31, 1996 and 1997 are derived from
audited financial statements not included in this prospectus. The historical
financial statements 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.
The accompanying financial data include the Internet operations of TSI
Soccer Corporation, which was acquired by our parent in a transaction accounted
for as a pooling of interests, from March 14, 1995, its date of inception, the
operations of gURL Interactive from December 17, 1997, the date of its
acquisition, and additional Internet operations of iTurf 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 31
through January 31 -----------------------------------------
1996 1997 1998 1999
-------------------- ------------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ................................................ $ 6 $ 13 $ 134 $ 4,014
Cost of product sales ................................... 2 6 69 1,687
------- ------- ------- --------
Gross profit ............................................ 4 7 65 2,327
Selling, general and administrative expenses ............ 6 14 114 1,467
------- ------- ------- --------
Income (loss) from operations ........................... (2) (7) (49) 860
Interest expense ........................................ -- -- 20 41
------- ------- ------- --------
Income (loss) before income tax (benefit) provision ..... (2) (7) (69) 819
------- ------- ------- --------
Income tax (benefit) provision .......................... (1) (3) (29) 355
------- ------- ------- --------
Net income (loss) ....................................... $ (1) $ (4) $ (40) $ 464
======= ======= ======= ========
Basic and diluted net income (loss) per share(1) ........ $ (0.00) $ (0.00) $ (0.00) $ 0.04
======= ======= ======= ========
Shares used to compute basic net income (loss) per
share(1) ............................................... 12,500 12,500 12,500 12,500
======= ======= ======= ========
Shares used to compute diluted net income (loss) per
share .................................................. 12,500 12,500 12,500 12,518
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
January 31
-----------------------------------------------
1996 1997 1998 1999
---------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .................... $ -- $ -- $ 31 $ 375
Working capital (deficiency) ................. (1) (5) (481) (461)
Total assets ................................. -- -- 467 1,255
Due to parent ................................ 1 5 512 573
Total stockholder's (deficit) equity ......... (1) (5) (45) 419
</TABLE>
- ----------
(1) Based on the number of shares actually outstanding as of January 31, 1999
after giving effect to the reclassification of 100 shares of common stock
outstanding at January 31, 1999 into 12,500,000 shares of Class B common
stock. See Notes to iTurf Financial Statements for information concerning
the computation of net income (loss) per share.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investors should read the following discussion 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, based on sales and traffic on our Web sites.
We provide Generation Y with an online destination that encompasses a network
of Web sites that addresses 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 has owned all of the
outstanding capital stock of iTurf. iTurf's results of operations include the
following:
o the Internet operations of TSI Soccer Corporation, 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.
Concurrently with the closing of this offering, iTurf will acquire the
TSISoccer.com domain name from TSI Soccer for $25,000 of Class A common
stock, valued at the initial public offering price per share. 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; and
o the Internet operations of iTurf, which were developed since December 17,
1997, including the dELiAs.cOm Web site which was launched in May 1998.
Following the acquisition of gURL Interactive, we launched the dELiAs.cOm
and discountdomain.com sites in May 1998, the contentsonline.com and droog.com
sites in November 1998 and, most recently, the dotdotdash.com site in March
1999. We sell products from these 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 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 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 year ended January 31, 1999 and is expected to account for the
majority of our revenue for at least 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 revenue from 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.
25
<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
"Transactions with Our Parent--Intercompany Agreements."
We have 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 we 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 year ended January 31, 1999, iTurf's operations resulted in net income of
approximately $464,000. 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.
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year
Ended January 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues ............................................. 100.0% 100.0% 100.0%
Cost of product sales ................................ 46.2 51.5 42.0
----- ----- -----
Gross profit ......................................... 53.8 48.5 58.0
Selling, general and administrative expenses ......... 107.7 85.1 36.6
Interest expense, net ................................ -- 14.9 1.0
----- ----- -----
Income (loss) before income tax
(benefit) provision ................................. (53.9) (51.5) 20.4
Income tax (benefit) provision ....................... (23.1) (21.6) 8.8
----- ----- -----
Net income (loss) .................................... (30.8)% (29.9)% 11.6%
===== ===== =====
</TABLE>
26
<PAGE>
Comparison of Fiscal Years 1997 and 1998
Revenues. Revenues increased from $134,000 in fiscal 1997 to $4,014,000 in
fiscal 1998. The increase was primarily due to the launch of the dELiAs.cOm Web
site in May 1998 and advertising revenue of approximately $444,000 during
fiscal 1998. iTurf did not sell any advertising in fiscal 1997. Subscription
fees and licensing revenue was approximately $218,000 for fiscal 1998; we did
not have any such revenue for fiscal 1997.
Gross Profit. Gross profit increased from $65,000 in fiscal 1997 to
$2,327,000 in fiscal 1998 as a result of both increased sales and a higher
gross margin. Gross margin increased from 48.5% in fiscal 1997 to 58.0% in
fiscal 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, third and fourth quarters of fiscal 1998. These new revenue sources
improve gross margins because they have no direct cost of sales. The indirect
expenses incurred in connection with such revenue sources are included in
selling, general and administrative expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses are comprised of sales and marketing expense, which
includes advertising costs, credit card fees and distribution costs, product
development and operations expense, which includes site development, editorial
content and systems costs, and general and administrative expenses. Total
selling, general and administrative expenses, including direct expenses and
expenses allocated from our parent, increased from $114,000, or 85.1% of
revenues, in fiscal 1997 to $1,467,000, or 36.6% of revenues, in fiscal 1998
due to a substantial increase in advertising, product development and overhead
costs to support the continued expansion of iTurf.
In 1998, selling, general and administrative expenses were comprised of
selling and marketing expense of $633,000, product development expense of
$341,000 and general and administrative cost of $493,000. In 1997 selling,
general and administrative expenses were comprised substantially of general and
administrative expenses with the primary components being payroll and telephone
expenses. A significant portion of these expenses, $45,000 in fiscal 1997 and
$219,000 in fiscal 1998, were allocated from our parent.
Comparison of Fiscal Years 1996 and 1997
Revenues. Revenues in fiscal 1996 and fiscal 1997 were substantially from
soccer merchandise. Revenues 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 with the primary components being payroll and
telephone expenses. Of these totals, $13,000 and $45,000 for fiscal 1996 and
fiscal 1997, respectively, were allocations from our parent. The increases in
total selling, general and administrative expenses and parent allocations
correspond with our growth in revenues. As a percentage of revenues, however,
such expenses decreased from 107.7% to 85.1%, primarily due to the leveraging
of fixed costs over a larger revenue base.
27
<PAGE>
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly statement of
operations data for the eight quarters ended January 31, 1999. 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, Jan. 31,
1997 1997 1997 1998 1998 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
(in thousands)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............................... $ 9 $ 24 $53 $ 48 $ 69 $ 760 $1,064 $2,121
Cost of product sales .................. 5 13 27 24 35 339 359 954
---- ---- --- ------ ------ ------ ------ ------
Gross profit ........................... 4 11 26 24 34 421 705 1,167
Selling, general and
administrative expenses ............... 6 18 18 72 100 436 505 426
Interest expense, net .................. -- -- -- 20 11 11 9 10
---- ---- --- ------ ------ ------ ------ ------
Income (loss) before income tax
(benefit) provision ................... (2) (7) 8 (68) (77) (26) 191 731
Income tax (benefit) provision ......... (1) (3) 3 (28) (33) (11) 83 316
----- ------- --- ------ ------ ------ ------ ------
Net income (loss) ...................... $ (1) $ (4) $ 5 $ (40) $ (44) $ (15) $ 108 $ 415
==== ====== === ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Percentage of Revenues
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ........................... 100.0% 100.0% 100.0% 100.0%
Cost of product sales .............. 55.6 54.2 50.9 50.0
----- ----- ----- ------
Gross profit ....................... 44.4 45.8 49.1 50.0
Selling, general and
administrative expenses ........... 66.6 75.0 34.0 150.0
Interest expense, net .............. -- -- -- 41.7
----- ----- ----- ------
Income (loss) before income tax
(benefit) provision ............... (22.2) (29.2) 15.1 (141.7)
Income tax (benefit) provision ..... (11.1) (12.5) 5.7 (58.4)
----- ----- ----- ------
Net income (loss) .................. (11.1)% (16.7)% 9.4% (83.3)%
===== ===== ===== ======
<CAPTION>
Percentage of Revenues
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ........................... 100.0% 100.0% 100.0% 100.0%
Cost of product sales .............. 50.7 44.6 33.7 45.0
------ ----- ----- -----
Gross profit ....................... 49.3 55.4 66.3 55.0
Selling, general and
administrative expenses ........... 144.9 57.4 47.4 20.0
Interest expense, net .............. 16.0 1.5 0.9 0.5
------ ----- ----- -----
Income (loss) before income tax
(benefit) provision ............... (111.6) (3.5) 18.0 34.5
Income tax (benefit) provision ..... (47.8) (1.5) 7.8 14.9
------ ----- ----- -----
Net income (loss) .................. (63.8)% (2.0)% 10.2% 19.6%
====== ===== ===== =====
</TABLE>
Revenues. Revenues 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,
revenues also increased due to the sale of advertising by iTurf.
Gross Profit. Gross profit has generally 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. In the fourth
quarter of 1998, gross profit decreased as advertising represented a smaller
percentage of revenues than in the prior two quarters.
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 revenues have decreased
from quarter to quarter over the five most recent quarters primarily because we
have been able to leverage our 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
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the first quarter to the second quarter of fiscal 1998 reflects the startup of
dELiAs.cOm and related marketing costs.
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 we are consolidated with our parent's taxpayer group, any tax
loss benefits attributable to us 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 we are 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 "Transactions with
Our Parent--Income Taxes."
Liquidity and Capital Resources
Net cash flows provided by operating activities of $646,000 for fiscal
1998 were primarily due to a $104,000 increase in accounts payable and other
current liabilities and $464,000 of net income. Net cash flows used in
operating activities for fiscal 1997 of $34,000 relate primarily to a net loss
of $40,000. The net cash flow effect of operating activities was insignificant
for fiscal 1996.
Net cash used in investing activities of $265,000 for fiscal 1998 related
to purchases of property and equipment. Investing activities in fiscal 1997
used $224,000, which relates to cash paid for the gURL acquisition and
purchases of property and equipment. The net cash flow effect of investing
activities was insignificant for fiscal 1996. 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 $37,000 for fiscal 1998 and provided
net cash of $289,000 for fiscal 1997. The net cash flow effect of financing
activities was insignificant for fiscal 1996. Financing activities primarily
relate to loans from our parent.
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We have historically relied on our parent for financing capital
expenditures. Our capital requirements depend on numerous factors, including:
o the rate of market acceptance of iTurf's online presence;
o the ability to expand iTurf's customer base;
o the cost of upgrades to its online presence; and
o the level of expenditures for sales and marketing.
The timing and amount of such capital requirements cannot accurately be
predicted. Additionally, we will continue to evaluate possible investments in
businesses, products and system technologies and plans to expand our sales and
marketing programs and conduct more aggressive brand promotions. We believe
that the net proceeds from this offering, together with our operating revenue,
will be sufficient to meet anticipated cash needs for at least the next 24
months.
We are 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, we intend to use $10 million
of the gross proceeds of this offering to purchase shares of our parent's
common stock. 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 will record this transaction as a reduction
to stockholders' equity. In addition, we have registration rights on such
shares of our parent's common stock. See "Transactions with Our
Parent--Intercompany Agreements--dELiA*s Common Stock Registration Rights
Agreement."
Year 2000 Compliance
We are 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.
State of Readiness
All of iTurf's material operating software and our information technology
systems and other systems, including telecommunications and warehouse systems,
were developed by and are supported by third party vendors. Each of the third
party vendors of iTurf's mission-critical operating software have provided
written warranties or assurances to iTurf or its 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. iTurf has prepared a Year 2000 compliance
program, which involves:
o identifying the material operating software and systems on which iTurf
depends, whether used by iTurf or by iTurf's service providers;
o obtaining written warranties or assurances from third party software and
systems vendors and service providers;
o monitoring the compliance efforts of such vendors and service providers;
and
o testing its material operating software and systems.
We expect to begin performing tests in the first quarter of fiscal 1999 of
all of our material operating software and systems to verify the assurances
given by these third party vendors and ensure Year 2000 compliance. To date, we
have not identified any material software or systems as requiring remediation
or replacement. However, we cannot assure you that all of our material
operating software and systems will be Year 2000 compliant.
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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 its
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 would 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.
Risks
The failure of our software or systems to be Year 2000 compliant could
prevent us from being able to process or fulfill orders from our customers,
could cause users of our Web sites to consider alternative Web community and
content providers, or could disrupt our financial and management controls and
reporting systems. Any such worst-case scenario, if not quickly remedied, would
have a material adverse effect on iTurf. Therefore, we are developing
contingency plans with respect to such systems and software. We expect our
contingency plans to be completed by the end of the second quarter of fiscal
1999.
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 its 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.
Costs
To date, iTurf has spent an immaterial amount on Year 2000 compliance.
iTurf does not expect our costs of addressing Year 2000 issues in fiscal 1999
or beyond to be significant. We believe that proceeds of this offering budgeted
for investment in technology infrastructure and maintenance will be sufficient
to fund our Year 2000 compliance program and contingency plan. However, given
iTurf's dependence on third party software and system vendors and service
providers and on our customers' vendors, there can be no assurance to that
effect.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income. The
adoption of SFAS No. 130 as of February 1, 1998 did not have an effect on the
iTurf's financial statements or disclosure as iTurf has no reconciling items.
Therefore net income (loss) and comprehensive income (loss) are the same.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that public companies
report certain information about operating segments in their annual financial
statements and in subsequent condensed financial statements of interim periods
issued to shareholders. This statement also requires that public companies
report certain information about their products and services, the geographic
areas in which they operate and their major customers. 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, based on sales and traffic on our Web sites.
Generation Y is comprised of 56 million people between the ages of 10 and 24
and accounts for over $278 billion of disposable income. iTurf is an online
destination, or "home turf," that addresses Generation Y's concerns, interests,
tastes and needs. iTurf combines the style and editorial flair of Generation
Y-focused media with core direct marketing and e-commerce competencies. 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. Our network is currently comprised of our gURL
community sites and the following e-commerce sites that offer a wide range of
apparel, accessories, footwear, athletic gear and home furnishings:
o dELiA*s.cOm o discountdomain.com
o TSISoccer.com o droog.com
o contentsonline.com o dotdotdash.com
We are a subsidiary of dELiA*s Inc., a leading catalog marketer targeting
the Generation Y market. Our relationship with our parent provides the
following advantages:
o exclusive online use of leading brand names including dELiA*s and TSI
Soccer;
o a proprietary ten million-name database and access to six million
individuals who have made catalog purchases;
o advertising space in our parent's catalog publications that collectively
have circulation in excess of 60 million;
o substantial merchandising expertise and strong relationships with
hundreds of vendors; and
o sophisticated services from our parent's distribution center to fill our
product orders.
Our Internet traffic and sales have grown rapidly over the last year. We
estimate that the number of page views per month on our Web sites has grown
from approximately 800,000 in February 1998 to approximately 35 million in
January 1999. Our revenues have increased from $48,000 in the quarter ended
January 31, 1998 to $2.1 million in the quarter ended January 31, 1999. By
selling a selection of branded and proprietary products, we achieved higher
gross profits per order on merchandise sales than many other e-commerce
companies. In the quarter ended January 31, 1999, our gross margin on
merchandise sales was approximately 50%.
Industry Background
Growth of the Internet and E-Commerce
The Internet has emerged as a global medium, enabling millions of people
to share information, communicate and conduct business electronically.
International Data Corporation, 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 rapid adoption
represents a significant opportunity for businesses to advertise and sell
products. According to IDC, e-commerce transactions to the home are expected to
increase from approximately $5 million in 1997 to approximately $94 billion in
2002. At the same time, Jupiter Communications projects that Internet
advertising will increase from approximately $1.9 billion in 1998 to $7.7
billion in 2002.
Growth of Online Communities
As the Internet grows, we believe that users seek the same opportunity for
compelling content, information, expression, interaction, support and
recognition that they seek in the everyday world. The major navigational sites
typically provide general information and search services. These sites are not
dedicated to publishing proprietary content and aggregating user-generated
content. Often, the most relevant content for a user is generated by others who
share an interest in what is published. Multi-faceted online communities
linking related Web sites provide users with the ability to access unique,
proprietary content and to interact directly with the authors of personalized
content.
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Generation Y's Increasing Importance to the Internet
The United States Census Bureau projects that Generation Y will grow from
56.3 million in 1998 to 63.1 million in 2010. This growth rate is estimated to
outpace growth of the general popuation by 19.5%. Generation Y also possesses
substantial disposable income. Based upon Census Bureau estimates, we believe
that 10-24 year olds generated disposable income in excess of $278 billion in
1997.
At the same time, Generation Y is becoming increasingly involved in the
Internet. E-marketer estimates that the number of teens and college students
who regularly access the Internet will rise from 12 million in 1998 to over 22
million by 2000. Their increased activity creates a significant opportunity for
both selling products and advertising to Generation Y online. Jupiter
Communications projects that e-commerce sales to teens and college students
will increase from $600 million in 1998 to $3.8 billion in 2002 and advertising
to Generation Y will increase from $500 million in 1998 to $2.1 billion in
2002.
We may not enjoy the same growth rates as the recent rates of growth of
Generation Y or Web users, e-commerce growth or spending by Generation Y.
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 sites are
generally:
o 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;
o do not exclusively address the issues that are relevant to teens, such as
peer, parental and school-related pressures, and issues revolving around
friendship, sexuality and competition; and
o do not provide the kind of interactivity and services that this group
seeks, such as communication with their peers through chat 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. We believe marketing products
and services indirectly in the context of demographically appropriate editorial
information, rather than traditional advertising methods, is a more effective
way to reach 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 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 branded community sites and
multiple e-commerce sites. The gURL sites provide 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 sites provide 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 award for best
site in the "living" category.
Our commerce sites 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
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apparel, cosmetics, accessories, footwear and other products for Generation Y
girls and young women. Our other commerce sites include:
o TSISoccer.com, offering soccer and other sports related products;
o contentsonline.com, offering home furnishings, light furniture and
household articles;
o discountdomain.com, a membership-based discount shopping service;
o droog.com, a site that offers apparel, accessories and footwear for
Generation Y boys and young men; and
o dotdotdash.com, a site that offers similar products to girls under age
13.
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.
Our commerce and community sites are linked by 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 significant 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, and that our relationship with our parent, the leading
direct marketer to Generation Y, provides us with the following advantages:
Ability to Attract Customers and Users to Web Sites.
o Access to Proprietary Database of Over Ten Million Names. We have the
exclusive online right to our parent's database of catalog buyers and
requesters. This database has grown rapidly from 198,000 names as of
January 31, 1996 to over ten million names today and is growing by over
100,000 names each month. In excess of 500,000 customer records in the
database have e-mail addresses. This database includes six 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
online content is critical to driving repeat customers and users to our
Web sites. We obtain content from both our internal staff and our parent.
This 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 our parent's
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,
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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. 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.
o Sophisticated Fulfillment Capability. We are able to fill orders through
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 fulfilling our product orders than other online marketers who
outsource fulfillment services to unrelated 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. Our
relationship with our parent enables us 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 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 and 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 most heavily-trafficked Generation Y
online destination. We intend 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. We expect to fund our future
expansion with the proceeds from this offering. We intend to reach the above
goal by implementing the following interconnected strategies:
Strengthen Brand Recognition. We believe that building brand recognition
for our sites is critical to attracting and expanding our global user base and
customer loyalty. Our strategy is to enhance the recognition of the iTurf brand
name as well as to independently build each brand in the iTurf network,
including dELiA*s, gURL, TSI Soccer, discountdomain, contentsonline, Droog and
dot dot dash, 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 and instead 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.
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We seek to build brand recognition and traffic through multiple methods,
such as:
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 and our parent's retail
stores. 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. We have 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 use direct marketing techniques to effectively target and
retain customers. Currently we send regular broadcast e-mails to our
users promoting special discounts and offers. We 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.
o Strategic Alliances. We believe iTurf can enhance its brand names and
increase its customer base through alliances with community, content and
e-commerce providers. We have created satellite dELiAs.cOm stores on
Yahoo! Shopping and CatalogCity.com and have tenancy positions in the
shopping area on AOL.com and Fashionmall.com. We are the exclusive
provider of soccer merchandise on Fogdog.com. We intend to enter into
additional alliances with other sites to build traffic and gain
customers.
o Affiliate Network. We recently created the dELiA*s Affiliate Network, a
marketing tool that increases exposure on the Internet and directly
generates sales. We offer affiliates 5% of net 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 by coupling
community with commerce. We believe our target audience places great
value on opportunities to interact with their peers through interactive
services that we currently offer, including e-mail, chat rooms, home
pages and other services. In the near term, we intend to add 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 content offerings targeted at additional customer groups within
Generation Y, such as offerings directed at young men and 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
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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 technologies and site infrastructure and to enhance the functionality
of our sites. This will enable us to better serve existing users and to provide
robust 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.
The iTurf Network
The iTurf network is currently composed of the iTurf.com home page and the
ten sites described below:
Community Sites
[gURL Logo] gURL.com offers Web/zines and community features
targeting teen girls and featuring chat, posting boards
and other interactive functionality.
[gURLnet Logo] gURLnet.com is a network of third-party Web sites
featuring content designed for Generation Y females.
[gURLpages Logo] gURLpages.com is a 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 Logo] gURLmAIL.com is a free Web-based e-mail service that is
open to users who register and provide certain
demographic information.
E-commerce Sites
[dELiA*s Logo] dELiAs.cOm is an e-commerce site based on the dELiA*s
print catalog selling apparel, accessories, footwear and
cosmetics to Generation Y girls and young women.
[TSI Soccer Logo] TSISoccer.com is an e-commerce site based on the TSI
Soccer print catalog selling soccer merchandise,
including footwear, apparel and equipment.
[DiscountDomain Logo] discountdomain.com is an e-commerce site selling
discounted merchandise (primarily apparel) to Generation
Y girls and young women who pay a monthly subscription
fee.
[ContentsOnline Logo] contentsonline.com is an 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 Logo] droog.com is an e-commerce site based on the Droog print
catalog selling apparel, accessories and footwear to
Generation Y boys and young men.
[dotdotdash Logo] dotdotdash.com is an e-commerce site based on the dot
dot dash print catalog selling apparel, accessories and
footwear to girls under age 13.
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iTurf Community
Our current community offerings are built around the gURL brand. Our gURL
sites serve hundreds of thousands of registered Generation Y users. 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. Our gURL sites collectively accounted for less than five percent of
our revenues in fiscal 1998.
[gURL Logo]
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.
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:
o proprietary content developed by our staff writers and designers as well
as free-lancers operating under work-for-hire or exclusive license
arrangements;
o user-generated content, such as postings and poetry submissions; and
o 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 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 expect to publish a book in the fall of 1999 for teen girls based upon
editorial content drawn from and inspired by the gURL.com site. We are
currently in negotiations with two major book publishers, and expect to title
the book "DEAL WITH IT: A whole new approach to your body, brain and life as a
teenage gURL." 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
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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 Logo]
gURLnet is a gURL-branded network of third-party 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, a network of third party sites featuring content primarily for
women in their 20's and 30's. gURLnet is featured as the "teen channel" of
ChickClick.com. 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.
[gURLpages Logo]
gURLpages is one of the world's largest communities of personal teen
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. These communities include entertainment-oriented
topical groupings such as "Movies," "Music" and "TV;" more expressionist areas
such as "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 135,000 registered page owners as of March 1, 1999. gURLpages is
hosted by Lycos, Inc.
[gURLmAIL Logo]
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 343,000
registered users as of March 1, 1999. gURLmAIL is hosted by Lycos, Inc.
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.
[dELiA*s Logo]
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. Product sales and advertising on dELiAs.cOm accounted for
approximately 74% of our revenues in fiscal 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.
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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, 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. 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 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.
[TSI Soccer Logo]
TSISoccer.com is our second largest source of merchandise sales,
accounting for approximately 11% of our revenues in fiscal 1998. 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 stock keeping units, 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 Logo]
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. discountdomain.com accounted for approximately 8% of our
revenues in fiscal 1998. 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
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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 to 400 stock
keeping units. The closets are updated weekly and a majority of the inventory
turns over monthly.
[ContentsOnline Logo]
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.
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 Logo]
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 stock keeping units. Our parent mailed the first
issue of the catalog in October 1998 and we launched the droog.com site in
November 1998.
[dot dot dash Logo]
dotdotdash.com offers apparel, footwear and accessories for girls under
age 13 from our parent's new dot dot dash catalog. The site's playful graphics
and icons are designed to appeal the sense of fun of its young target market.
Users can order approximately 125 products, comprising over 500 stock keeping
units. Currently, users need a dot dot dash print catalog to place an order.
Our parent mailed the first issue of dot dot dash in March 1999 and we launched
the dotdotdash.com Web site that month.
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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:
o traditional and Internet advertising;
o direct marketing to existing and potential customers;
o expanding and strengthening strategic alliances with our Web sites; and
o 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 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 online banner advertising
and sponsorship opportunities on sites specifically targeted to Generation Y.
Direct Marketing. We use direct marketing techniques to attract and retain
customers. Our parent's proprietary database of catalog requesters 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 a variety of relationships with
several sites to build traffic and attract customers. We have created satellite
dELiAs.cOm stores on Yahoo! Shopping and CatalogCity.Com and have tenancy
positions in the shopping area on AOL.com and Fashionmall.com. In addition, we
are the exclusive provider of soccer merchandise on Sportsite.Com. We intend to
expand our use of these kinds of 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 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.
Typical agreements relating to banner advertising provide for placement of
small
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advertisements on a specified number of Web pages, have a short duration and
are measured only by page views. We intend to explore sponsorship, promotional
and distribution arrangements that generally have longer terms and higher
dollar values than typical banner advertising deals 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. In these arrangements, these parties
typically provide iTurf and its users with Web-based software applications or
content and sell the advertising inventory placed in or adjacent to the
content. These parties pay to iTurf a percentage of the ad sales revenue
generated by iTurf. We intend to develop a marketing and sales team to better
understand advertisers' needs and to better target the Generation Y community.
Advertising and sponsorship sales accounted for approximately 11% of our
revenues in fiscal 1998.
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 19% of gURLmAIL users reside outside of the United States.
Warehousing and Fulfillment
Our parent provides warehousing and order 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 our 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.
Technology and Systems
We have implemented a broad array of site management, customer service,
transaction-processing and fulfillment services and systems using a combination
of our own proprietary technologies and commercially available licensed
technologies.
Our product order processing is primarily handled by a mature, widely used
software application licensed by our parent, called MACS II, and by a software
application licensed by us called WebOrder that:
o accept and validate orders;
o organize and manage orders with suppliers;
o receive product and assign it to customer orders;
o manage shipments; and
o integrate inventory management, purchasing and accounting.
MACS II and WebOrder are licensed from and supported by their developer,
Smith-Gardner Associates. These systems handle multiple shipment methods,
credit card transaction processing and automated customer communication. They
allow the customer to choose whether to receive single or multiple shipments
based on availability.
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Our community services, other than gURLmAIL and gURLpages, are primarily
run on internally-developed database applications. The gURLmAIL and gURLpages
operating technology and software were developed and are operated and supported
by Lycos, Inc. Our various Internet applications run on both the UNIX and
Windows NT operating systems, on computers located in our offices. AT&T and
Cable & Wireless plc currently provide our Internet connection. We have
contracted with Lycos, AT&T and Cable & Wireless plc for these services. These
contracts have 12 to 36 month terms.
In response to capacity concerns and site development needs, in fiscal
1998, we increased the number of computers that run our Web sites from three to
ten and installed a considerably more powerful system for online catalog
navigation functions. We intend to continue to invest in technologies that will
handle growth in traffic and e-commerce and Web site infrastructure to enhance
the functionality of our sites.
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.
Competition
E-Commerce. The apparel, footwear, accessories and home furnishings
industries and the athletic goods and soccer specialty markets are highly
competitive. We expect competition in these markets to increase. Our
dELiAs.cOm, contentsonline.com, discountdomain.com, droog.com and
dotdotdash.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.
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.
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.
Internet Community Services. The market for community services is highly
competitive, and we expect competition to continue to increase significantly.
There are no substantial barriers to entry in these markets. We compete with
many providers of community services, including companies that attempt, as we
do, to target Generation Y consumers. In addition, high-traffic, mass-market
Web sites, such as the Regional Bell Operating Companies or internet service
providers such as Microsoft and America Online, currently offer and could
further develop or license the products and services we offer. They 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 offer informational and
community features, such as news, stock quotes, sports coverage, Yellow Pages,
e-mail listings, chat services and bulletin board listings that are competitive
with the services we offer. These sites include Microsoft, AOL and other Web
navigation companies such as Yahoo!, Excite, Lycos and Infoseek. A number of
companies,
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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.
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:
o brand recognition;
o ease of use;
o comprehensiveness;
o quality of content and products;
o access to end users; and
o with respect to advertisers and sponsors, the number of users, duration
and frequency of visits and user demographics.
Competition among Internet navigational and informational services,
high-traffic Web sites and other media for advertising placements could result
in significant price competition and reductions in advertising revenue.
Many of our 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.
Employees
We currently employ 30 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.
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
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. This act generally:
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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
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. 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.
Facilities
Our principal offices are located at 435 Hudson Street, New York, New York
10014. We have historically shared them 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.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of iTurf, their ages
as of March 1, 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. ........... 32 Chief Technology Officer
Renny Gleeson ................. 30 Senior Vice President--Marketing
Christopher C. Edgar .......... 33 Vice President and Director
Evan Guillemin ................ 33 Vice President and Director
Beth Vanderslice .............. 35 Director Designee
Thomas R. Evans ............... 44 Director Designee
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>
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 and Chief Executive Officer
of our parent since October 1996, and until recently served as its President.
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
from the time he co-founded our parent's business in 1993 until October 1996.
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,
receiving an MBA. 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. has served as Chief Technology Officer of iTurf since
February 1999. He previously worked for Microsoft Corporation, a computer
software company. He held a variety of positions with Microsoft, and most
recently was the assistant to the chief executive officer's technical
assistant. From 1995 to 1996, he was a principal in Colusa 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 Gleeson has served as Senior Vice President--Marketing of iTurf
since January 1999. Prior to joining iTurf, Mr. Gleeson served as Creative
Director of Darwin Digital, the interactive advertising unit
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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 was recently elected Vice Chairman of its
board of directors. He was Executive Vice President of dELiA*s LLC and a member
of the board of managers of dELiA*s LLC from the time he co-founded our
parent's business in 1993 until October 1996. 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 and was recently elected President of our parent. Prior to
joining our parent he was employed by K-III Communications Corporation, a media
investment company, first as an associate with and later as 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.
Beth Vanderslice has been elected and has agreed to serve as a director of
iTurf effective upon the commencement of this offering. Ms. Vanderslice has
served as President of Wired Digital, Inc., a provider of Web-based products
and services, including Hot Bot, Hot Wired and Wired News, since her promotion
from Vice President of Marketing in April 1997. Wired Digital is in the process
of being acquired by Lycos, Inc., a provider of Web navigational, community and
commerce services. Prior to joining Wired Digital in March 1995, Ms.
Vanderslice was a Vice President from 1994 to 1995 at H.W. Jesse & Co., an
investment banking and business strategy consulting firm in San Francisco. From
1992 to 1994, she was a Principal at the investment banking firm of Sterling
Payet Company. Ms. Vanderslice has also served as a director of Wired Ventures,
the privately held parent company of Wired Digital, since October 1998.
Thomas R. Evans has been elected and has agreed to serve as a director of
iTurf effective upon the commencement of this offering. Mr. Evans has served as
the Chief Executive Officer and President of Geocities, the world's largest and
one of the fastest-growing communities of personal Web sites on the Internet,
since April 1998. From 1991 to April 1998, Mr. Evans served as President and
Publisher of U.S. News & World Report, a magazine that reports on domestic and
international current events. From January 1997 to April 1998, Mr. Evans also
served as President and Publisher of The Atlantic Monthly, a magazine that
features articles on art, literature, politics and technology. In addition,
from May 1995 to April 1998, Mr. Evans also served as President and Publisher
of Fast Company, a magazine that showcases business people and ideas.
Esther Drill, a co-founder of gURL Interactive, served as Executive
Editor of gURL, for gURL Interactive from 1996 to 1997, 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, served as Senior
Producer of gURL, for gURL Interactive from 1996 to 1997, 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, for gURL Interactive from 1996 to 1997, and then for iTurf
since our acquisition of gURL Interactive in December
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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.
Board Committees
Prior to or immediately following the closing of this offering, our board
of directors will 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 our 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 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 50,000 shares of Class A common stock. Directors elected
prior to the date of this prospectus 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 date of this prospectus shall
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% of the covered shares
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. Those options
generally will cease to be exercisable 10 years from the date of grant. Upon a
"change of control" of iTurf, all options that have not yet expired will
automatically become exercisable. Directors who are affiliates of our parent
are not compensated for service as directors of iTurf, so long as our parent
beneficially owns at least 20% of our outstanding voting securities.
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 the 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, 1999
for services rendered to iTurf. During the year ended January 31, 1999, our
Chief Executive Officer, Stephen I. Kahn, received a salary of $100,000 from
our parent in his capacity as President, Chief Executive Officer and Chairman
of the board of directors of that company and options to purchase 376,000
shares of our parent's common stock. During the year ended January 31, 1998,
Mr. Kahn received a salary of $100,000 from our parent and an option to
purchase 80,000 shares of our parent's common stock. He did not receive any
other compensation from our parent during such periods 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
applicable year. In fiscal 1998, iTurf granted Mr. Kahn an option to purchase
503,125 shares of our Class A common stock at an exercise price of $9.36 per
share. This option constituted 35.4% of the
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options granted to iTurf employees in fiscal 1998. The option expires on
January 1, 2009. The potential realizable value of this option, assuming the
market price of iTurf common stock appreciates in value from the date of grant
to the end of the option term at 5% or 10% annually, is $2,962,000 or
$7,505,000, respectively. Mr. Kahn did not exercise any options in fiscal 1998.
Kahn 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 increases in salary and 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.
Under our stock incentive plan, the vesting of all employee stock options
will be accelerated in some circumstances upon 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 of the
material terms of the plan. The stock incentive plan is filed as an exhibit to
the registration statement of which this prospectus is a part. As of March 1,
1999, we have granted options to purchase an aggregate 1,419,688 shares of
Class A common stock.
Purpose. The purpose of the stock incentive plan is to increase the
profitability and value of iTurf by enabling it to offer stock-based and other
equity interests in iTurf to employees, consultants and non-employee directors
to raise the level of stock ownership by such persons, thereby:
o enhancing iTurf's ability to attract, retain and reward such individuals;
and
o strengthening the mutuality of interest between such individuals and
iTurf's stockholders.
Administration. The stock incentive plan is administered by the
compensation committee of our board of directors. This committee is intended to
be comprised solely of two or more directors who qualify as "outside directors"
under Section 162(m) of the Internal Revenue Code of 1986 and "non-employee
directors" under Rule 16b-3 of the Securities Exchange Act of 1934. The
compensation committee has authority and discretion to determine those
employees and consultants of iTurf and its subsidiaries eligible to receive
awards and the amount and type of awards.
Available Shares and Other Units.
o Maximum number of shares available under the plan. A maximum of 4,050,000
shares of Class A common stock, subject to adjustment, may be issued or
used for reference purposes with respect to stock appreciation rights
under the plan.
o Individual limits under the plan. The maximum number of shares of Class A
common stock subject to each stock option or stock appreciation right
that may be granted to any individual under the plan is 750,000 for each
of our fiscal years during the term of the 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
plan.
o Termination, cancellation or expiration of an award. The unissued shares
of Class A common stock subject to terminated, cancelled or expired
awards will again be available for awards under the plan, but will count
against the individual specified limits for the applicable fiscal year.
o Change in iTurf's business or capital structure. 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
plan to reflect any change affecting our capital structure or business.
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Types of Awards. The stock incentive plan provides for the grant of any or
all of the types of awards listed below to eligible employees and consultants
of iTurf and its subsidiaries. In addition, the plan provides for one-time,
non-discretionary awards of stock options to non-employee directors of iTurf.
Awards may be granted singly, in combination, or in tandem, as determined by
the compensation committee.
Stock Options. The compensation committee may grant awards in the form of
options to purchase shares of iTurf's Class A common stock. In general, the
following apply to all options granted:
o options may be in the form of incentive stock options or non-qualified
stock options;
o consultants are not eligible to receive incentive stock options;
o the compensation committee will determine the number of shares subject to
each option, the term of the option, the exercise price per share of
stock covered by the option, the vesting schedule and the other material
terms of the option;
o the term of an incentive stock option may not exceed ten years, but the
term of an incentive stock option granted to a ten percent stockholder of
iTurf may not exceed five years;
o no option may be granted to a ten percent stockholder of iTurf at less
than 110% of fair market value, except for modifications of the option
deemed a new issuance under the Internal Revenue Code;
o the option price may 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, by
a reduction in the number of shares of Class A common stock issuable upon
exercise of the option with approval of the compensation committee; and
o options under the stock incentive plan are subject to acceleration of
vesting or immediate termination upon termination of employment in
limited circumstances.
In addition, if shares of Class A common stock are exchanged by a
participant as full or partial payment to iTurf, or for payment of withholding
taxes, in connection with the exercise of a stock option or the number of
shares of Class A common stock otherwise deliverable is reduced for payment of
withholding taxes, such exchanged or reduced shares will again be available
under the Stock Incentive Plan.
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 the rights of a stockholder with respect to the shares, unless
otherwise specified by the compensation committee at the time of grant.
Restricted stock is subject to the conditions and restrictions generally
applicable to restricted stock, and those specifically provided in the
recipient's restricted stock award agreement. In general:
o 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; and
o recipients of restricted stock are required to enter into a restricted
stock award agreement with iTurf that states the restrictions on the
shares and the date or criteria on which the restrictions will lapse. The
compensation committee may provide for the lapse of the restrictions in
installments, or may accelerate or waive the restrictions.
Stock Appreciation Rights (SARs). The stock incentive plan authorizes the
compensation committee to grant SARs either with a stock option (called tandem
SARs) or independent of a stock option (referred to as non-tandem SARs) to
employees and consultants of iTurf. An SAR is a right to receive a payment
either in cash or Class A common stock. In general:
o Payments on SARs shall be 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
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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.
o SARs are subject to the same exceptions that apply to stock options.
Tandem SARs generally:
o 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;
o may be exercised at and only at the times and to the extent the related
stock option is exercisable;
o are exercised by surrendering the same portion of the related option;
o expire upon the termination of the related stock option; and
o will not be granted to consultants in connection with all or part of an
incentive stock option.
Non-tandem SARs generally:
o will be exercisable as provided by the compensation committee;
o will have terms and conditions as the compensation committee may
determine;
o may have a term no longer than ten years from their date of grant; and
o are subject to acceleration of vesting or immediate termination upon
termination of employment.
Awards to Non-Employee Directors. In the future, our non-employee
directors will be eligible for option grants in some circumstances. See
"--Director Compensation."
Change of Control. Unless determined otherwise by the compensation
committee at the time of grant, generally upon a change of control of iTurf,
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, stock options will not be accelerated upon a change of control
of iTurf if the compensation committee deems it reasonable. In that case,
options may be assumed by the controlling entity or new rights substituted
therefor by the controlling entity. The compensation committee may also 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 of iTurf.
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TRANSACTIONS WITH OUR PARENT
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. That
affiliated group includes us. The Internal Revenue Code requires that our
parent own at least an 80% voting and economic ownership interest in iTurf in
order 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:
o we will pay our proportionate share of our parent's tax liability
computed as if iTurf were filing a separate return;
o any tax loss benefits attributable to iTurf will be used by our parent to
the extent that we are unable to use any of those benefits at that time;
o to the extent that our parent uses our tax benefits, it will be required
to establish a receivable for our benefit; and
o our parent will be required to repay us for the use of any tax loss
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, and that repayment by our parent will be offset by any amount
that we are required to pay our parent under the tax allocation
agreement.
The tax allocation agreement also 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 those 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
we would have otherwise incurred had we operated as a separate, stand-alone
company.
Through its distribution facilities, our parent and its other subsidiaries
accounted for just under 100% of iTurf's purchases of inventory during fiscal
1998. 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
Through a wholly-owned subsidiary, we have entered into a subscription
agreement, dated April 1, 1999, with our parent to purchase from our parent
shares of common stock of our parent upon completion of this offering. This
subscription agreement provides that:
o we intend to use $10.0 million of the gross proceeds of this offering to
purchase 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 trading days
preceding the date of this prospectus, and
o if the underwriters fully exercise their over-allotment option, we will
also use 60% of the resulting net proceeds to purchase additional shares
of our parent's common stock.
See "Use of Proceeds."
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Purchase of TSISoccer.com Domain Name
Concurrently with the closing of this offering, in accordance with the
TSISoccer.com asset transfer agreement, dated April 1, 1999, between us and TSI
Soccer Corporation, a wholly-owned subsidiary of our parent, we will acquire
the TSISoccer.com domain name from TSI Soccer Corporation for $25,000 of Class
A common stock, valued at the initial public offering price per share.
Intercompany Agreements
We intend to enter into several intercompany agreements with our parent
prior to the closing of this offering. We have summarized below the anticipated
material terms of all 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 those 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. The intercompany agreements do not have fixed terms, but our parent can
terminate each agreement if any person, other than our parent or an affiliate
or strategic partner of our parent, acquires 20% or more of the voting control
of iTurf, or upon defaults by iTurf.
Trademark License and Customer List Agreement, including Noncompetition
Agreements
We 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 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 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. 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 that 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:
o 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,
o 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,
o 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
o 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 that 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 some services to us, including corporate services, fulfillment
services, inventory supply services, advertising services and
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space-sharing. Our parent's obligations to deliver those 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 its 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
o 105% of our parent's cost for the inventory, including cost of freight
and all direct costs charged to our parent by its suppliers, and
o 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.
We also have the right to purchase from our parent up to $300,000 annually
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. 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. The amount of
advertising guaranteed in each catalog is materially greater than the amount of
advertising included in our parent's catalogs over the historical periods
presented in this prospectus. 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
o the prevailing market rate for such space and
o 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 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 tax and pension-related liabilities
resulting from our inclusion in our parent's consolidated tax group. Our parent
will also indemnify us for certain tax liabilities arising out of our purchase
of its common stock. See "Risk Factors--We may be contingently liable 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 that will cover the iTurf common stock owned by
dELiA*s. Under that agreement, at any time after 180 days following the date of
this prospectus, our parent may demand that we file a registration statement
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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 a Form S-3 registration
statement 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 limited by iTurf's right to delay the
filing of a registration statement in some circumstances. iTurf can only cause
a delay, not more than once in any 12-month period and for not more than 120
days.
In addition, our parent will have registration rights that apply if we
propose to register any Class A common stock under the Securities Act, other
than pursuant to the registration rights noted above. In that case, 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 offering will
have limited rights to restrict the number of registrable securities proposed
to be included in the 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 iTurf securities
owned by it.
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 under the Securities Act.
dELiA*s Common Stock Registration Rights Agreement
We will enter into another 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. Under
that 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.
If our parent is eligible to utilize a Form S-3 registration statement 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 some circumstances. Our parent can
cause a delay not more than once in any 12-month period and for not more than
120 days.
In addition, we will have registration rights that apply if our parent
proposes to register any of its common stock under the Securities Act, other
than pursuant to the registration rights noted above. In that case, we may
require our parent to include all or a portion of its securities that we own in
the registration. However, the managing underwriter, if any, of any such
offering will have limited rights to restrict the number of registrable
securities proposed to be included in the 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
parent's securities owned by us.
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 under the Securities Act.
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PRINCIPAL STOCKHOLDERS
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 75% of the economic
interest in iTurf. Such ownership also gives our parent approximately 95% of
the combined voting power of our outstanding common stock. If the underwriters
were to fully exercise their option to purchase up to 630,000 additional shares
of our Class A common stock, our parent would hold approximately 72% of the
economic interest in iTurf and 94% of the combined voting power of our
outstanding common stock.
The following table sets forth information as of March 15, 1999 with
respect to the outstanding securities of iTurf and our parent beneficially
owned by
o each person known by iTurf to be the beneficial owner of more than 5% of
the shares of any class of such securities,
o each of our directors and director designees individually,
o each of our named executive officers individually and
o all of our executive officers, directors and director designees 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 Offering Offering(3) Number Owned
------------ ------------ ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Five Percent Holders:
dELiA*s Inc.(4) .................... 12,500,000 100.0% 100.0% 94.7%
435 Hudson Street
New York, New York 10014
Gilder Gagnon Howe & Co. LLC(5)..... -- -- -- -- 1,612,597 11.4%
1775 Broadway
New York, New York 10019
Geraldine Karetsky(6) .............. -- -- -- -- 1,028,098 7.2%
1660 Silver King Drive
Aspen, Colorado 81611
Sidney S. Kahn(6) .................. -- -- -- -- 855,440 6.0%
14 East 60th Street
New York, New York 10022
Directors, Director Designees
and Executive Officers:
Stephen I. Kahn(4)(7) .............. 12,500,000 100.0% 100.0% 94.7% 6,408,170 44.7%
Christopher C. Edgar(8) ............ -- -- -- -- 708,163 4.9%
Evan Guillemin(9) .................. -- -- -- -- 128,942 *
Beth Vanderslice ................... -- -- -- -- -- --
Thomas R. Evans .................... -- -- -- -- -- --
All directors, director designees
and executive officers as a group
(9 persons)(10) ................... 12,500,000 100.0% 100.0% 94.7% 7,326,775 49.7%
</TABLE>
- ----------
* Less than 1%.
(1) 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 67,500,000 shares of Class A
common stock, 12,500,000 shares of Class B common stock and 1,000,000
shares of preferred stock. See "Description of Capital Stock."
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(2) Shares that an individual or group has the right to acquire within 60 days
of March 15, 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) Voting power after the closing of this offering reflects (i) 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, and (ii) the issuance,
concurrent with the closing of this offering, of 1,471 shares of Class A
common stock, valued at an assumed initial public offering price of $17.00
per share, to TSI Soccer Corporation as consideration in connection with
the transfer to iTurf of the TSISoccer.com domain name. It also assumes no
conversion of any Class B common stock into Class A common stock. See
"Description of Capital Stock--Common Stock."
(4) The 12,500,000 shares of our Class B common stock owned by our parent have
been pledged as security under our parent's credit agreement.
(5) Based on an amendment to a Schedule 13G filing made on February 16, 1999.
According to the filing, the shares of our parent's common stock are held
in customer accounts over which members and/or employees of Gilder Gagnon
Howe & Co. LLC have discretionary authority to dispose of and/or direct
the disposition of shares.
(6) Includes 7,356 shares of our parent's common stock owned by Sidney Kahn
and Ms. Karetsky, as trustees, of which shares Mr. Kahn and Ms. Karetsky
have the shared power of disposition. Sidney Kahn and Geraldine Karetsky
are siblings. Sidney Kahn is the father of Stephen I. Kahn. Geraldine
Karetsky is the aunt of Stephen I. Kahn.
(7) All shares of iTurf common stock outstanding prior to this offering are
owned by our parent. Mr. Kahn is the President, Chief Executive Officer
and Chairman of the Board of our parent. As such, he may be deemed to
share voting power with respect to all the shares outstanding prior to the
offering and to the shares of iTurf common stock to be issued to TSI
Soccer Corporation concurrently with the closing of this offering. 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 216,000 shares
issuable upon the exercise of options. Sidney Kahn is the father of
Stephen I. Kahn. Geraldine Karetsky is the aunt of Stephen I. Kahn.
(8) Shares of dELiA*s Inc. common stock benefically owned includes 162,000
shares issuable upon the exercise of options.
(9) Shares of dELiA*s Inc. common stock beneficially owned includes 120,000
shares issuable upon the exercise of options.
(10) All directors, director designees 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 67,500,000 shares of Class A common stock, par value $.01
per share, 12,500,000 shares of Class B common stock, par value $.01 per share
and 1,000,000 shares of preferred stock, par value $.01 per share.
The following descriptions of our capital stock and selected provisions of
our Restated Certificate of Incorporation and bylaws are summaries. Complete
copies of our Restated Certificate of Incorporation and bylaws as they will be
in effect at the closing of this offering have been filed with the Securities
and Exchange Commission as exhibits to the registration statement containing
this prospectus.
Common Stock
4,200,000 shares of Class A common stock are being offered by this
prospectus. 12,500,000 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, 12,500,000 shares of Class B common stock will be
outstanding and held by our parent.
Voting Rights. The holders of our Class A and Class B common stock
generally have identical voting rights. However, 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 most matters to be voted on by
stockholders. Shares of Class B common stock also have conversion rights, which
are described below.
Generally, all matters to be voted on by stockholders must be approved by
a majority of the votes entitled to be cast by all shares of Class A and Class
B common stock present in person or represented by proxy, voting together as a
single class. Holders of our preferred stock might in the future be granted the
right to vote alongside holders of our common stock. When electing directors,
only a plurality vote is required. 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.
Except as otherwise provided by law, and after honoring 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 and Class B common stock, voting
together as a single class. 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. However,
amendments to our Restated Certificate of Incorporation that would alter the
powers, preferences or special rights of either the Class A or 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
will not be considered as adversely affecting the rights of holders of the
Class A common stock.
Dividends. Holders of Class A and Class B common stock will share equally
on a per-share basis in any dividend declared by the board of directors, after
honoring any preferential rights of outstanding preferred stock. Dividends
consisting of shares of Class A or Class B common stock may be paid only as
follows:
o 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
o shares will be paid proportionally with respect to each outstanding share
of Class A and Class B common stock.
We may not subdivide or combine shares of either Class A 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 into one
share of Class A common stock at any time prior to a tax-free spin-off of iTurf
from our parent, at the option of the holder.
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Following a tax-free spin-off, shares of Class B common stock will no longer be
convertible into shares of Class A common stock at the option of the holder.
Shares of Class B common stock transferred prior to a tax-free spin-off
will automatically be converted into Class A common stock on a one-to-one basis
at the time of the disposition upon their transfer to a person other than:
o our parent;
o any of our parent's subsidiaries or successors; or
o a strategic partner.
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 outstanding shares of all classes of our common stock that a majority
of our disinterested directors determines in good faith, prior to such
acquisition, 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
generally be transferable as Class B common stock to the extent allowed under
applicable laws. However, 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. This automatic conversion will not occur if prior to the
tax-free spin-off our parent delivers to us an opinion of counsel reasonably
satisfactory to us that this 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 an opinion to that
effect, we will submit approval of the conversion to a vote of the holders of
our common stock as soon as practicable after the fifth anniversary of the
tax-free spin-off. This vote will not be taken, however, if our parent delivers
to us a similar opinion prior to such anniversary that the vote could adversely
affect the status of the tax-free spin-off. Approval of the conversion will
require the affirmative vote of the holders of a majority of the shares of both
the Class A and Class B common stock present and 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 the conversion described above would be
consummated. The requirement to submit the 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 should challenge the
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
our 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 which shares of our 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 and Class B common stock
will be entitled to receive the same kind and amount of interest in the other
company.
On liquidation, dissolution or winding-up of iTurf, all holders of Class A
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, after payment
in full of the amounts required to be paid to holders of our preferred stock,
if any.
No shares of Class A 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
and Class B common stock will be legally issued, fully paid and nonassessable.
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Preferred Stock
Upon the closing of this offering, our board of directors will be
authorized, without further stockholder approval, to issue up to an aggregate
of 1,000,000 of preferred stock in one or more series. The board will also be
able to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series of
preferred stock. 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.
Sale of Control by Our Parent
Our parent has agreed that for a period of one year from the closing of
this offering, 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 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. Section 203 generally
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 that 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 that 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." Generally, an
"interested stockholder" is a person who, together with his affiliates and
associates, owns, or within the prior 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, but they
could prohibit or delay the accomplishment of mergers or other takeover or
change-in-control attempts with respect to iTurf and therefore discourage
attempts to acquire iTurf.
In addition, our Restated Certificate of Incorporation and bylaws that
will be in effect prior to the closing of this offering and are summarized
below 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, our 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. When coupled with the provision
of our Restated Certificate of Incorporation authorizing the board of directors
to fill vacant directorships and increase the size of the board of directors,
these provisions 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.
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Special Meetings of Stockholders
Our 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.
Written Consent
Under our Restated Certificate of Incorporation, the stockholders of iTurf
will no longer be allowed to take action by written consent 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
outstanding common stock.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
Our bylaws require that timely notice in writing be provided by
stockholders seeking to bring business before, or to nominate candidates for
election as directors at, the annual meeting of stockholders. 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.
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 that anniversary, notice will be timely if
received not more than 90 days later than the later of
o 60 days prior to the annual meeting of stockholders or
o 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.
Our bylaws also specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from timely
bringing matters before, or from making nominations for directors at, an annual
meeting of stockholders.
Limitations on Liability and Indemnification of Officers and Directors
The Delaware General Corporation Law 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 Delaware General Corporation Law regarding
unlawful dividends and stock purchases; and
o for any transaction from which the director derived an improper personal
benefit.
Our bylaws generally provide that:
o we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
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.
Prior to the closing of this offering, we intend to obtain directors' and
officers' insurance providing indemnification for our directors, officers and
some employees. 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 our directors for breach of their fiduciary duty.
Such provisions may also reduce the likelihood of derivative litigation against
directors and officers, even though such an action, if successful, might
otherwise benefit us and our stockholders.
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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
in connection with 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.
No Duty of Our Parent to Refrain from Competing with Us
Our Restated Certificate of Incorporation provides that, except as
otherwise agreed by 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 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 corporate
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.
A director or officer will not be liable to iTurf or its stockholders for
breach of any fiduciary duty or duty of loyalty for failure to act in the best
interests of iTurf if:
o the director or officer first offers the corporate opportunity to our
parent; or
o 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 rights
that might have been available to shareholders under Delaware law had such
provisions not been included in our Restated Certificate of Incorporation.
However, the enforceability of these provisions under Delaware law has not been
established.
Authorized but Unissued Shares
The authorized but unissued shares of common 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 these shares could discourage or make more
difficult an attempt to obtain control of iTurf by means of a proxy contest,
tender offer, merger or otherwise.
The Delaware General Corporation Law 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 its certificate of incorporation or bylaws requires a greater
percentage. Following the offering, our parent, as the beneficial owner of
approximately 95% 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
Our Class A common stock has been approved for listing on the Nasdaq
National 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 10286. Its telephone
number is 1-800-524-4458.
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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 that sales of shares or the
availability of shares for sale will have on the market price of our Class A
common stock. Sales of substantial amounts of our Class A common stock in the
public market, or the perception that sales might occur, could adversely affect
the market price of our Class A common stock. Sales of substantial amounts of
Class A common stock in the public market after the restrictions on resale
described below lapse could adversely affect the prevailing market price and
our ability to raise equity capital in the future.
Upon the closing of this offering, we expect to have outstanding 4,201,471
shares of our Class A common stock, assuming no exercise of the underwriters'
option and no exercise of other outstanding options but including $25,000 of
Class A common stock, valued at the assumed initial public offering price per
share, assumed to be $17.00, issued to TSI Soccer Corporation, a subsidiary of
our parent, as consideration in connection with the transfer to iTurf of the
TSISoccer.com domain name. All of the shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, except shares purchased by our "affiliates," as that term is
defined in Rule 144 under the Securities Act. Shares of Class A common stock
purchased by our affiliates will be "restricted securities" under Rule 144.
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.
As a result of the contractual 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 first anniversary of the date of the closing of this offering, in
accordance with 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, including our parent, will have signed agreements under which
they may not, for a period of 180 days after the date of this prospectus,
directly or indirectly transfer or dispose of, any shares of Class A common
stock or any securities convertible into or exercisable or exchangeable for
shares of Class A common stock. These restrictions apply to shares of our Class
B common stock. The shares could be available for resale immediately upon the
expiration of the 180-day period if they are available for resale under 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 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 42,015 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 the sale.
Sales under Rule 144 are also subject to manner-of-sale provisions and notice
requirements and to the availability of current public information about us.
Rule 144(k)
Under paragraph (k) of Rule 144, persons who are not our affiliate at any
time during the 90 days preceding a sale and who have beneficially owned the
shares proposed to be sold for at least two years are entitled to sell such
shares without complying with the manner-of-sale, public information, volume
64
<PAGE>
limitation or notice provisions of Rule 144. The two-year holding period
includes the holding period of any prior owner not an affiliate of iTurf.
Therefore, unless otherwise restricted, shares covered by Rule 144(k) 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 other 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 specific registration rights
applicable to shares of our common stock held by it. 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 4,050,000 shares of
Class A common stock reserved for issuance under our stock incentive plan. Upon
the expiration of the restrictive agreements entered into by our officers,
directors, and security holders as described above, at least 186,775 shares of
Class A common stock will be subject to vested options. Accordingly, shares
registered under that registration statement will, giving effect to vesting
provisions and in accordance with Rule 144 volume limitations applicable to our
affiliates, be available for sale in the public market immediately after the
180-day restrictive agreements expire.
65
<PAGE>
UNDERWRITING
BT Alex. Brown Incorporated and Hambrecht & Quist LLC are the
representatives of the underwriters and are acting as joint book-running
managers. Upon the terms and conditions of the underwriting agreement between
iTurf and the underwriters, the underwriters named below have severally agreed
through their representatives to purchase from iTurf the number of shares of
our Class A common stock set forth opposite the name of the underwriter below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ---------------------------------------- ------------
<S> <C>
BT Alex. Brown Incorporated .........
Hambrecht & Quist LLC ...............
J.P. Morgan Securities Inc. .........
CIBC Oppenheimer Corp. ..............
Wit Capital Corporation .............
Total ............................. 4,200,000
=========
</TABLE>
At our request, the underwriters have agreed to offer an aggregate 374,000
of the shares of Class A common stock in this offering to directors, officers,
employees and vendors of iTurf, as well as various other persons designated by
us. These 374,000 shares are being offered to those persons on the same terms
as the remaining 3,826,000 shares are being offered by the underwriters to the
public. Any shares not purchased by those persons designated by us will then be
offered by the underwriters to the public.
The underwriters will purchase all of the shares of Class A common stock
offered in this offering, other than those shares covered by the option
described below, if they purchase any shares.
The underwriters' representatives have advised iTurf 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 that price less a
concession not in excess of $ per share. The underwriters may allow,
and those 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 630,000 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 their option only to cover over-allotments made by them in
connection with the sale of the Class A common stock in this offering. To the
extent that the underwriters exercise their 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 4,200,000. iTurf
will be obligated to sell the shares to the underwriters. If any additional
shares of Class A common stock are purchased through exercise of the
underwriters' option, the underwriters will offer those additional shares on
the same terms as the shares not covered by the option are being offered.
A prospectus in electronic format is being made available on a Web site
maintained by Wit Capital. In addition, all dealers purchasing shares from Wit
Capital in this offering have agreed to make a prospectus in electronic format
available on Web sites maintained by each of these dealers. Other than the
prospectus in electronic format, the information on Wit Capital's Web site and
any information contained on any other Web site maintained by Wit Capital
Corporation is not part of this prospectus or
66
<PAGE>
the registration statement of which this prospectus forms a part, has not been
approved or endorsed by iTurf or any underwriter in such capacity and should
not be relied on by prospective investors.
We have asked the underwriters to allocate a limited number of shares of
Class A common stock to Wit Capital and selected dealers for sale to their
brokerage account holders. The sales of these shares will be made by Wit
Capital Corporation, acting as e-Manager[TM] in this offering. Any of these
allocated shares not purchased by Wit Capital's brokerage account customers
will be offered by the underwriters on the same basis as the shares not
allocated to Wit Capital.
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 our Class A common stock. Specifically, the
underwriters may over-allot shares of the Class A common stock in connection
with this offering, creating a short position in the underwriters' syndicate
account. Additionally, to cover 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 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 stockholders has agreed to
restrictions on its ability to dispose of any of our Class A common stock for a
period of 180 days after the effective date of the registration statement
including this prospectus. These restrictions prohibit them from offering,
selling, contracting to sell or otherwise disposing of any Class A common
stock, or entering into any transaction designed to, or which could be expected
to, result in the disposition of any portion of any Class A common stock
without the prior written consent of both BT Alex. Brown Incorporated and
Hambrecht & Quist LLC. The underwriters' representatives may give their consent
at any time without public notice. The restriction on disposition of Class A
common stock includes shares of Class A common stock converted from Class B
common stock.
iTurf has entered into a similar agreement, except that we may issue and
grant options or warrants to purchase shares of Class A common stock or
securities convertible into, exercisable for or exchangeable for shares of
Class A common stock, upon the exercise of outstanding options and warrants and
under our stock incentive plan. We may also issue shares of Class A common
stock in connection with an acquisition, a merger, a consolidation or sale of
assets or in connection with a strategic investment, partnership or joint
venture, so long as the persons receiving shares enter into the same
restrictive agreement for the 180-day period noted above.
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.
67
<PAGE>
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, 1998 and 1999, and
for the years ended January 31, 1997, 1998 and 1999 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.
WHERE YOU CAN FIND MORE INFORMATION
For more information with respect to iTurf and the Class A common stock
offered by this prospectus, see the registration statement and the exhibits and
schedule filed by us with the Securities and Exchange Commission on Form S-1
under the Securities Act. This prospectus does not contain all of the
information set forth in the registration statement and the related exhibits
and schedules. 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.
A copy of the registration statement and its exhibits and schedule 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 these 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.
68
<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 - 14
Balance Sheet ........................................ F - 15
Notes to Balance Sheet ............................... F - 16
</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, 1998 and 1999 and the related statements of operations,
stockholder's (deficit) equity and cash flows for each of the three years in
the period ended January 31, 1999. 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,
1998 and 1999 and the results of its operations and its cash flows for each of
the three years in the period ended January 31, 1999 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 28, 1999, except
for the second paragraph
of Note 1--Business as
to which the date is
April 1, 1999.
F - 2
<PAGE>
iTurf Inc.
Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS
January 31
---------------------
<S> <C> <C>
1998 1999
---- ----
Current assets:
Cash .................................................................... $ 31 $ 375
------ ------
Total current assets ..................................................... 31 375
Deferred offering costs .................................................. -- 110
------ ------
Fixed assets, net of accumulated depreciation of $3 and $46 at January 31,
1998 and 1999, respectively ............................................. 95 414
Intangible assets, net ................................................... 341 356
------ ------
Total assets ............................................................. $ 467 $1,255
====== ======
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Accounts payable and other current liabilities .......................... $ -- $ 263
Due to dELiA*s .......................................................... 512 573
------ ------
Total current liabilities ............................................... 512 836
Stockholder's (deficit) equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares
issued or outstanding ................................................. -- --
Class A common stock, $.01 par value, 67,500,000 authorized, no shares
issued and outstanding ................................................. -- --
Class B common stock, $.01 par value, 12,500,000 shares
authorized, 12,500,000 shares issued and outstanding ................... 125 125
(Deficit) retained earnings ............................................. (170) 294
------ ------
Total stockholder's (deficit) equity .................................... (45) 419
------ ------
Total liabilities and stockholder's (deficit) equity ..................... $ 467 $1,255
====== ======
</TABLE>
See accompanying notes.
F - 3
<PAGE>
iTurf Inc.
Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended January 31
1997 1998 1999
---------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Net product sales .......................................... $ 13 $ 134 $ 3,352
Advertising and other ...................................... -- -- 662
----------- ----------- -----------
Total revenues .............................................. 13 134 4,014
Cost of product sales ....................................... 6 69 1,687
----------- ----------- -----------
Gross profit ................................................ 7 65 2,327
Selling, general and administrative expenses ................ 14 114 1,467
----------- ----------- -----------
Income (loss) from operations ............................... (7) (49) 860
Interest expense ............................................ -- 20 41
----------- ----------- -----------
Income (loss) before income tax (benefit) provision ......... (7) (69) 819
Income tax (benefit) provision .............................. (3) (29) 355
----------- ----------- -----------
Net income (loss) ........................................... $ (4) $ (40) $ 464
=========== =========== ===========
Basic and diluted net income (loss)
per share .................................................. $ (0.00) $ (0.00) $ 0.04
=========== =========== ===========
Shares used to compute basic
net income (loss) per share ................................ 12,500,000 12,500,000 12,500,000
=========== =========== ===========
Shares used to compute diluted
net income (loss) per share ................................ 12,500,000 12,500,000 12,518,000
=========== =========== ===========
</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>
Balance at January 31, 1996 ......... 12,500,000 $ 125 $(126) $ (1)
Net loss ........................... (4) (4)
----- ----
Balance at January 31, 1997 ......... 12,500,000 125 (130) (5)
Net loss ........................... (40) (40)
----- ----
Balance at January 31, 1998 ......... 12,500,000 125 (170) (45)
Net income ......................... 464 464
----- ----
Balance at January 31, 1999 ......... 12,500,000 $ 125 $ 294 $419
========== ===== ===== ====
</TABLE>
See accompanying notes.
F - 5
<PAGE>
iTurf Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended January 31
------------------------------------
1997 1998 1999
---------- --------- -----------
<S> <C> <C> <C>
Operating activities
Net income (loss) ............................................. $ (4) $ (40) $ 464
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................... -- 6 78
Changes in operating assets and liabilities:
Accounts payable and other current liabilities ............ -- -- 104
---- ------ --------
Net cash provided by (used in) operating activities ........... (4) (34) 646
Investing activities
Acquisitions .................................................. -- (126) --
Purchase of fixed assets ...................................... -- (98) (265)
---- ------ --------
Net cash (used in) investing activities ....................... -- (224) (265)
Financing activities
Loan from dELiA*s ............................................. 17 372 3,286
Repayment to dELiA*s .......................................... (13) (83) (3,274)
Deferred offering costs ....................................... -- -- (49)
---- ------ --------
Net cash provided by (used in) financing activities ........... 4 289 (37)
Net increase in cash .......................................... -- 31 344
Cash at beginning of period ................................... -- -- 31
---- ------ --------
Cash at end of period ......................................... $ -- $ 31 $ 375
==== ====== ========
Supplemental disclosure of cash flow information:
Interest paid ................................................. $ -- $ -- $ --
==== ====== ========
Income taxes paid ............................................. $ -- $ -- $ --
==== ====== ========
</TABLE>
Supplemental disclosure of noncash financing and investing activity:
Issuance of dELiA*s Inc. common stock in connection with the gURL
acquisition--see Note 6.
See accompanying notes.
F - 6
<PAGE>
iTurf Inc.
Notes to Financial Statements
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 accompanying financial statements of iTurf, which
was formed in August 1997, include all of dELiA*s internet operations from the
date of formation, as well as the internet operations of TSI Soccer Corporation
("TSI") prior to that date. See Note 6. The Company utilizes dELiA*s business
relationships, infrastructure and brand names and has relied on dELiA*s to
provide financing for its operations. The Company has filed a registration
statement with the Securities and Exchange Commission for a proposed initial
public offering ("IPO") of common stock. If the proposed public offering is not
consummated, the Company will be dependent on the continued support of dELiA*s.
On April 1, 1999, the Company's certificate of incorporation was amended
and restated such that the authorized capital stock of the Company consists of
67,500,000 shares of Class A common stock, par value $.01 per share, 12,500,000
shares of Class B common stock, par value $.01 per share and 1,000,000 shares
of Preferred Stock, par value $.01 per share. In addition, the exchange of the
100 shares of common stock previously outstanding into 12,500,000 shares of
Class B common stock was approved. All share and option information in the
accompanying financial statements has been adjusted to reflect these changes
and, consequently, $125,000, the par value of the Class B common stock, has
been reclassified from (deficit) retained earnings.
In its proposed IPO, iTurf plans to issue shares of its Class A common
stock to the public. 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 are
entitled to six votes per share. After the offering, dELiA*s is expected to own
all outstanding shares of iTurf's Class B common stock, which is expected to
represent approximately 95% of the voting power of iTurf common stock. Each
share of Class B common stock is convertible into one share of Class A common
stock at any time prior to a tax-free spin-off, as defined, of iTurf from
dELiA*s, at the option of the holder. Following a tax-free spin-off, shares of
Class B common stock will no longer be convertible into shares of Class A
common stock at the option of the holder, but shares that have not yet been
converted would automatically convert upon (i) the transfer of such shares by
dELiA*s to a third party other than a person determined by the iTurf board of
directors to be a "strategic partner" of iTurf, (ii) the decline of the number
of outstanding shares of Class B common stock beneficially owned by our Parent
to below 10% of the aggregate number of outstanding shares of all classes of
iTurf common stock or (iii) the fifth anniversary of the tax-free spin-off.
iTurf expects to use a portion of the IPO proceeds to purchase dELiA*s
stock from its parent. iTurf will record this purchase as a reduction to
iTurf's stockholders' equity.
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
calendar 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. TSI was acquired by dELiA*s in December 1997 in a
transaction accounted for as a pooling of interests. See Note 6. The financial
statements also include the operations of gURL, Interactive Inc. ("gURL"), from
December 17, 1997, the date of acquisition by iTurf.
F - 7
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
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.
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 relate primarily to goodwill resulting from the gURL
acquisition, which is being amortized by the straight-line method over 10
years. This amortization period was determined by management to be appropriate
based on the strength of the gURL brand name, the unique concept and the
membership list, as well as the Company's long-term plans for the acquired
business.
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 provided on a consistent basis
over the term of the contract and is therefore recognized on a straight-line
basis over the period during which the advertising is provided. Sales of the
Company's advertising inventory by third parties under revenue-sharing
arrangements are recorded at the amounts reported by the revenue-sharing
partners, which are net of agreed-upon commission fees, when the advertising
has been provided. Licensing revenue is recognized upon fulfillment of all
material contractual obligations. Subscription revenue related to
DiscountDomain.com, a membership based discount shopping service, is 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. The Company does not incur any
direct costs associated with advertising, licensing or subscription revenue.
Accordingly, all expenses incurred in connection with those revenue sources are
included in selling, general and administrative expenses.
Advertising Costs
The Company expenses the cost of advertising as incurred. For the years
ended January 31, 1997, 1998 and 1999, advertising costs were approximately $0,
$1,000, and $443,000, 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.
F - 8
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
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"). 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 reflected in the payable
balance include the Company's share 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.
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 Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income. The
adoption of SFAS No. 130 as of February 1, 1998 did not have an effect on the
iTurf's financial statements or disclosure as iTurf has no reconciling items.
Therefore net income (loss) and comprehensive income (loss) are the same.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that public companies
report certain information about operating segments in their annual financial
statements and in subsequent condensed financial statements of interim periods
issued to shareholders. This statement also requires that public companies
report certain information about their products and services, the geographic
areas in which they operate and their major customers. Adoption
F - 9
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
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 January 31, 1999 was purchased
from dELiA*s or one of its subsidiaries at an amount equal to dELiA*s or the
subsidiary's cost. For the years ended January 31, 1997, 1998 and 1999, such
purchases totaled $6,000, $69,000 and $1,687,000. 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 $13,000, $45,000, and
$219,000 for the years ended January 31, 1997, 1998 and 1999, 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.
Prior to the closing of the offering, iTurf and dELiA*s intend to enter
into several intercompany agreements. These agreements cover rights and
obligations regarding income taxes, trademarks and customer lists, competition,
intercompany services, customer service and stock registration.
The Tax Allocation Agreement generally provides that, following the
closing of the offering, for so long as iTurf remains a member of dELiA*s
taxpayer group, iTurf will pay its proportionate share of dELiA*s tax liability
computed as if iTurf were filing a separate return, provided however, that any
tax benefits attributable to iTurf will be used by dELiA*s to the extent iTurf
is unable to use such benefits at that time, and provided further, that dELiA*s
will be required to establish a liability for iTurf to the extent it uses
iTurf's tax benefits.
The Trademark License and Customer List Agreement provides iTurf with the
exclusive right to use dELiA*s trademarks in connection with the sale of goods
and services on the Internet. iTurf will pay dELiA*s a royalty equal to 5% of
net sales from iTurf Web sites bearing a trademark licensed from dELiA*s and 5%
of dELiA*s-sourced net sales from other iTurf Web sites on which sales of
dELiA*s-sourced goods exceed 50% of total net sales. The agreement also
provides for royalty-free sharing of customer lists and restricts both parties
from entering the other's business.
Under the Intercompany Services Agreement, dELiA*s will continue to
provide all of the services it currently provides to iTurf, other than
warehouse and fulfillment services, to iTurf at 105% of its cost. For
warehousing and fulfillment services, iTurf will be charged 105% of the dELiA*s
cost based on the average cost per package shipped. dELiA*s will continue to
supply inventory to iTurf for payment equal to the lesser of 105% of dELiA*s
total direct cost and the best price at which dELiA*s could resell those
products to a third party. In addition, iTurf has the right to purchase from
dELiA*s up to $300,000 annually of closeout inventory, generally at prices
discounted from dELiA*s price. Advertising for iTurf in dELiA*s print catalogs
will be at a cost of $40 per 1,000 catalogs distributed with iTurf required to
purchase minimum amonts of advertising space and dELiA*s required to provide a
minimum amount of advertising space. dELiA*s will continue to permit iTurf to
use a portion of its offices at the lesser of the
F - 10
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
3. Related Party Transactions (continued)
prevailing market rate for such space and the highest rate then being paid by
dELiA*s for comparable space in the metropolitan area in which such space is
located.
The Customer Service Agreement states that iTurf will provide to dELiA*s
e-mail-based customer service in respect of those of dELiA*s catalogs
corresponding to trademarks licensed from dELiA*s.
Had the intercompany agreements been in effect during the historical
periods presented in the financial statements, they would not have had a
material effect on the results of operations.
On April 1, 1999 iTurf and TSI Soccer Corporation (a subsidiary of
dELiA*s) entered into the TSISoccer.Com Asset Transfer Agreement, whereby
concurrently with the closing of the offering, iTurf will acquire the
TSISoccer.com domain name from TSI Soccer Corp. for $25,000 of Class A common
stock, valued at the initial public offering price per share.
On April 1, 1999 iTurf Delaware Investment Company, a subsidiary of iTurf,
and dELiA*s entered into a subscription agreement whereby concurrently with the
closing of the offering, iTurf intends to use $10.0 million of the gross
proceeds of the offering to purchase shares of dELiA*s common stock from
dELiA*s at a price equal to the average closing price of that stock on the five
trading days preceding the date of the prospectus. And, if the underwriters in
the offering fully exercise their over-allotment option, iTurf will use 60% of
the resulting net proceeds to purchase additional shares of dELiA*s common
stock.
In addition, several of iTurf's officers and directors also serve as
officers and directors of dELiA*s.
4. Credit Facility
iTurf is currently a participant under dELiA*s $25 million bank credit
facility. 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. There were no
outstanding borrowings under dELiA*s credit facility at January 31, 1998 and
1999. iTurf's participation in the credit facility is expected to be terminated
concurrent with the closing of the proposed IPO.
5. Leases
The Company utilizes equipment and space under lease to dELiA*s. Rental
expense from operating leases amounted to $0, $5,000 and $13,000 for the years
ended January 31, 1997, 1998 and 1999 respectively.
6. Acquisitions
gURL
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 based on the
fair market value of dELiA*s common stock on such date, cash of $120,000 and
rights to receive an aggregate of 10,000 additional shares of dELiA*s common
stock subject to the satisfaction of certain membership-level targets. Such
targets were subsequently met 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. The value of stock issued and to be issued by
dELiA*s in connection with the acquisition is included in iTurf's liability to
dELiA*s.
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
$387,000. This amount includes $110,000 relating to the 5,000 shares of dELiA*s
common stock issued in
F - 11
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
6. Acquisitions (continued)
December 1998 and $49,000 relating to the 5,000 shares of dELiA*s stock to be
issued in December 1999, both calculated using the fair market value of dELiA*s
common stock on the date the related membership-level targets were achieved.
Accumulated amortization at January 31, 1998 and 1999 was approximately $3,000
and $38,000, respectively.
On a pro forma basis as if the acquisition had taken place on the first
day of each fiscal year, iTurf's net loss would have been ($27,000) and
($60,000), for the years ended January 31, 1997 and 1998, respectively. Net
sales and loss per share on a pro forma basis would not have been different
from the amounts reported.
Internet Operations of TSI
On December 10, 1997, dELiA*s acquired TSI in a transaction accounted for
as a pooling of interests. In connection with this transaction, dELiA*s issued
an aggregate of 308,687 shares of its common stock and made cash payments of
approximately $730,000 to former stockholders of TSI. The acquired operations
included an internet business. In accordance with pooling-of-interests
accounting, the accompanying financial statements, which include all of dELiA*s
internet operations, include such internet operations of TSI from the date of
their inception in March 1995.
During fiscal 1997 through the date of the combination, as well as in
prior years, the internet operations of TSI represented all of iTurf's
operations. For the nine months ended October 31, 1997, these operations
resulted in net sales of $86,000 and net loss of $1,000.
7. Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended January 31
----------------------------------
1997 1998 1999
---------- ----------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal ......... $ (2) $ (23) $248
State ........... (1) (6) 97
----- ------ ----
(3) (29) 345
Deferred:
Federal ......... -- -- 8
State ........... -- -- 2
----- ----- ----
-- -- 10
----- ----- ----
Total ............ $ (3) $ (29) $355
===== ===== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company had no such
differences prior to fiscal 1998. Significant components of the Company's
deferred tax assets and liabilities as of January 31, 1999 are as follows:
<TABLE>
<CAPTION>
1999
(in thousands) --------
<S> <C>
Deferred tax liabilities -- property and equipment .......... (19)
Deferred tax assets -- reserves ............................. 9
---
Net deferred tax liability ................................ (10)
===
</TABLE>
F - 12
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
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>
Year ended January 31
----------------------------------
1997 1998 1999
---------- ---------- --------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit) ......... (34)% (34)% 34%
State income tax expense (benefit) ..................... (8) (8) 7
Other .................................................. (1) -- 2
--- --- --
(43)% (42)% 43%
=== === ==
</TABLE>
8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year Ended January 31
-------------------------------------------------
1997 1998 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
Numerator: Net income (loss) ........................ $ (4,000) $ (40,000) $ 464,000
=========== =========== ============
Denominator for basic earnings per share--
weighted-average shares ........................... 12,500,000 12,500,000 12,500,000
Effect of dilutive stock options .................... -- -- 18,000
----------- ----------- ------------
Denominator for diluted earnings per
share--adjusted weighted-average and
assumed conversions ............................... 12,500,000 12,500,000 12,518,000
=========== =========== ============
Basic and diluted earnings (loss) per share ......... $ (0.00) $ (0.00) $ 0.04
=========== =========== ============
</TABLE>
All stock options outstanding at January 31, 1999 were included in the
computation of diluted earnings per share as all exercise prices were less than
the assumed market price of the Company's common stock.
9. Stock Incentive Plan
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 4,050,000 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 employees options to purchase
1,419,688 shares of common stock at $9.36, the fair market value at the date of
grant. Of the options issued, 1,214,688 vest in eight six month intervals
generally beginning six months from the date of grant. The remaining 205,000
options issued vest 20% per year beginning one year from the date of grant.
These options represented all of the Company's outstanding options at January
31, 1999. At such date, none of the options were exercisable.
The Company applies APB No. 25 and related interpretations in accounting
for the Incentive Plan. Accordingly, no compensation expense has been
recognized for the plan. Had compensation expense been determined based on the
fair value of stock option grants on the date of grant in accordance with SFAS
No. 123, the Company's net income and earnings per share for the year ended
January 31, 1999 would have been $370,000 and $0.03, respectively.
The estimated fair market value of options granted during the year ended
January 31, 1999 was $3.17 per share. The fair value of options granted by the
Company during the year ended January 31, 1999 was
F - 13
<PAGE>
iTurf Inc.
Notes to Financial Statements (Continued)
9. Stock Incentive Plan (continued)
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used: no dividend yield and no volatility;
risk-free interest rate of 4.5 percent; expected lives of four years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
F - 14
<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 - 15
<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 - 16
<PAGE>
gURL, Interactive Inc.
Notes to Balance Sheet
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 - 17
<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
Forward-Looking Statements ................... 20
Use of Proceeds .............................. 21
Dividend Policy .............................. 21
Capitalization ............................... 22
Dilution ..................................... 23
Selected Financial Data ...................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 25
Business ..................................... 32
Management ................................... 47
Transactions with Our Parent ................. 53
Principal Stockholders ....................... 57
Description of Capital Stock ................. 59
Shares Eligible for Future Sale .............. 64
Underwriting ................................. 66
Legal Matters ................................ 68
Experts ...................................... 68
Where You Can Find More Information .......... 68
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.
4,200,000 Shares
[iTurf Logo]
Class A
Common Stock
--------------------------
PROSPECTUS
--------------------------
BT Alex. Brown
Hambrecht & Quist
J.P. Morgan & Co.
CIBC Oppenheimer
Wit Capital Corporation
as e-Manager[TM]
, 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 ....... $ 24,169
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 ............................................. 188,731
----------
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 herein:
II-1
<PAGE>
<TABLE>
<CAPTION>
Document Exhibit Number
- --------------------------------------------------------------- --------------
<S> <C>
Form of Underwriting Agreement ................................ 1.1
Form of Restated Certificate of Incorporation of Registrant ... 3.3
Form of 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 +Form of Underwriting Agreement
1.2 +Form of Lock Up Agreement
3.1 +Restated Certificate of Incorporation of iTurf
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
4.1 Form of Class A Common Stock Certificate
5.1 Opinion of Proskauer Rose LLP
10.1 +Form of Intercompany Services Agreement
10.2 +Form of Trademark License and Customer List Agreement
10.3 +Form of Intercompany Indemnification Agreement
10.4 +Form of Tax Allocation Agreement
10.5 +Form of iTurf Common Stock Registration Rights Agreement
10.6 +Form of dELiA*s Common Stock Registration Rights Agreement
10.7 +Form of Customer Service Agreement
10.8 Form of 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
10.14 TSISoccer.com Asset Transfer Agreement, dated April 1, 1999,
between iTurf and TSI Soccer Corporation
10.15 Subscription Agreement, dated April 1, 1999, between iTurf Delaware
Investment Company and dELiA*s
21.1 Subsidiaries
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
27.1 Financial Data Schedule
99.1 +Consent of Beth Vanderslice to be named as director
99.2 Consent of Thomas R. Evans to be named as director
</TABLE>
- -----------
* To be filed by amendment
+ Previously filed
(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
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 April 6, 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 April 6, 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
* Chief Financial Officer (principal financial and
========================== accounting officer)
Dennis Goldstein
* Director
==========================
Christopher C. Edgar
* Director
==========================
Evan Guillemin
*By: /s/ Alex S. Navarro
---------------------
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
Exhibit Index.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ---------- -------------------------------------------------------------------
<S> <C>
1.1 +Form of Underwriting Agreement
1.2 +Form of Lock Up Agreement
3.1 +Restated Certificate of Incorporation of iTurf
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
4.1 Form of Class A Common Stock Certificate
5.1 Opinion of Proskauer Rose LLP
10.1 +Form of Intercompany Services Agreement
10.2 +Form of Trademark License and Customer List Agreement
10.3 +Form of Intercompany Indemnification Agreement
10.4 +Form of Tax Allocation Agreement
10.5 +Form of iTurf Common Stock Registration Rights Agreement
10.6 +Form of dELiA*s Common Stock Registration Rights Agreement
10.7 +Form of Customer Service Agreement
10.8 Form of 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
10.14 TSISoccer.com Asset Transfer Agreement, dated April 1, 1999,
between iTurf and TSI Soccer Corporation
10.15 Subscription Agreement, dated April 1, 1999, between iTurf Delaware
Investment Company and dELiA*s
21.1 Subsidiaries
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
27.1 Financial Data Schedule
99.1 +Consent of Beth Vanderslice to be named as director
99.2 Consent of Thomas R. Evans to be named as director
</TABLE>
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* To be filed by amendment
+ Previously filed
II-5
Exhibit 3.3
RESTATED CERTIFICATE OF INCORPORATION
iTurf Inc.
iTurf Inc. (the "Corporation"), a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware does
hereby amend the Certificate of Incorporation of the Corporation, which was
originally filed on August 7, 1997, under the name dELiA*s Interactive Company.
FIRST. The name of the Corporation is:
iTurf Inc.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is Corporation Service Company, 1013 Centre Road, City of
Wilmington, County of New Castle, Delaware 19805. The name of its registered
agent at such 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 the State of Delaware as the same exists or may hereafter be amended
("Delaware Law").
FOURTH. Section 1. Capital Stock. (a) The total number of shares of stock
which the Corporation shall have authority to issue is 81,000,000, consisting of
80,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), and 1,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). The Common Stock of the Corporation shall be divided into
two classes, consisting of Class A Common Stock and Class B Common Stock. The
Preferred Stock may be issued in one or more series having such designations as
may be fixed by the Board of Directors.
(b) The Board of Directors is expressly authorized to provide for the
issue of all or any shares of the Common Stock and the Preferred Stock, to
determine the number of shares of each class and to fix for each class of Common
Stock and for any series of Preferred Stock such voting powers, full or limited,
or no voting powers, and such designations, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors or a duly authorized
committee thereof providing for the issue of such series and as may be permitted
by Delaware Law.
(c) The number of authorized shares of any class or classes of stock may
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote
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<PAGE>
of a majority of the Common Stock of the Corporation irrespective of the
provisions of Section 242(b)(2) of Delaware Law.
Section 2. Common Stock. (a) Issuance and Consideration. Any unissued or
treasury shares of the Common Stock may be issued for such consideration as may
be fixed in accordance with applicable law from time to time by the Board of
Directors.
(b) Dividends. Subject to the rights of holders of the Preferred Stock,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of the assets of the Corporation which
are by law available therefor, dividends payable either in cash, in property, or
in shares of stock and the holders of the Preferred Stock shall not be entitled
to participate in any such dividends (unless otherwise provided by the Board of
Directors in any resolution providing for the issue of a series of Preferred
Stock).
(c) Number of Shares. Of the 80,000,000 shares of Common Stock of the
Corporation, 67,500,000 shares are initially designated as shares of Class A
Common Stock and 12,500,000 shares are initially designated as shares of Class B
Common Stock. Subject to the rights of the holders of Preferred Stock, the
number of shares designated as Class A Common Stock or Class B Common Stock may
be increased or decreased from time to time by a resolution or resolutions
adopted by the Board of Directors or any duly authorized committee thereof and
in accordance with paragraph (d)(5)(E) below without the consent of the holders
of any outstanding shares of Common Stock or Preferred Stock.
(d) Powers, Preferences, Etc. The following is a statement of the powers,
preferences, and relative participating, optional or other special rights and
qualifications, limitations and restrictions of the Class A Common Stock and
Class B Common Stock of the Corporation:
(1) Except as otherwise set forth below in this ARTICLE FOURTH, the
powers, preferences and relative participating, optional or other special
rights and qualifications, limitations or restrictions of the Class A
Common Stock and Class B Common Stock shall be identical in all respects.
(2) Subject to the rights of the holders of Preferred Stock, and subject
to any other provisions of this Restated Certificate of Incorporation,
holders of Class A Common Stock and Class B Common Stock shall be entitled
to receive such dividends and other distributions in cash, stock of any
corporation (other than Common Stock of the Corporation) or property of
the Corporation as may be declared thereon by the Board of Directors from
time to time out of assets or funds of the Corporation legally available
therefor and shall share equally on a per share basis in all such
dividends and other distributions. In the case of dividends or other
distributions payable in Common Stock, including distributions pursuant to
stock splits or divisions of Common Stock of the Corporation, only shares
of Class A Common Stock shall be paid or distributed with respect to Class
A Common Stock and only shares of Class B Common Stock shall be paid or
distributed with respect to Class B Common Stock. The number of shares of
Class A Common Stock and Class B Common Stock so distributed shall be
equal in
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number on a per share basis. Neither the shares of Class A Common Stock
nor the shares of Class B Common Stock may be reclassified, subdivided or
combined unless such reclassification, subdivision or combination occurs
simultaneously and in the same proportion for each class.
(3) (A) At every meeting of the stockholders of the Corporation every
holder of Class A Common Stock shall be entitled to one vote in
person or by proxy for each share of Class A Common Stock standing
in his or her name on the transfer books of the Corporation, and
every holder of Class B Common Stock shall be entitled to six votes
in person or by proxy for each share of Class B Common Stock
standing in his or her name on the transfer books of the Corporation
in connection with the election of directors and all other matters
submitted to a vote of stockholders; provided, however, that with
respect to any proposed conversion of the shares of Class B Common
Stock into shares of Class A Common Stock pursuant to paragraph
(d)(5)(B), every holder of a share of Common Stock, irrespective of
class, shall have one vote in person or by proxy for each share of
Common Stock standing in his or her name on the transfer books of
the Corporation. Except as may be otherwise required by law or by
this ARTICLE FOURTH, the holders of Class A Common Stock and Class B
Common Stock shall vote together as a single class, subject to any
voting rights which may be granted to holders of Preferred Stock, on
all matters submitted to a vote of the holders of Common Stock.
(B) Every reference in this Restated Certificate of Incorporation to
a majority or other proportion of shares of Common Stock, Class A
Common Stock or Class B Common Stock, shall refer to such majority
or other proportion of the votes to which such shares of Common
Stock, Class A Common Stock or Class B Common Stock are entitled.
(4) In the event of any dissolution, liquidation or winding up of the
affairs of the Corporation, whether voluntary or involuntary, after
payment in full of the amounts required to be paid to the holders of
Preferred Stock, the remaining assets and funds of the Corporation shall
be distributed pro rata to the holders of Class A Common Stock and Class B
Common Stock. For the purposes of this paragraph (d)(4), the voluntary
sale, conveyance, lease, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the
assets of the Corporation or a consolidation or merger of the Corporation
with one or more other corporations (whether or not the Corporation is the
corporation surviving such consolidation or merger) shall not be deemed to
be a liquidation, dissolution or winding up, voluntary or involuntary.
(5) (A) Prior to the date on which shares of Class B Common Stock are
issued to stockholders of dELiA*s Inc. or its successors ("dELiA*s")
in a Tax-Free Spin-Off (as defined in paragraph (d)(5)(B)), each
share of Class B Common Stock is convertible at the option of the
holder thereof into one share of Class A Common Stock. At the time
of a voluntary conversion, the holder of shares of Class B
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<PAGE>
Common Stock shall deliver to the office of the Corporation or any
transfer agent for the Class B Common Stock (i) the certificate or
certificates representing the shares of Class B Common Stock to be
converted, duly endorsed in blank or accompanied by proper
instruments of transfer, and (ii) written notice to the Corporation
stating that such holder elects to convert such share or shares and
stating the name and address in which each certificate for shares of
Class A Common Stock issued upon such conversion is to be issued. To
the extent permitted by law and subject to the taking of any
necessary action or making any filing contemplated by paragraph
(d)(5)(E), such voluntary conversion shall be deemed to have been
effected at the close of business on the date when such delivery is
made to the Corporation or such transfer agent of the shares to be
converted, and the person exercising such voluntary conversion shall
be deemed to be the holder of record of the number of shares of
Class A Common Stock issuable upon such conversion at such time. The
Corporation shall promptly deliver certificates evidencing the
appropriate number of shares of Class A Common Stock to such person.
(B) Each share of Class B Common Stock shall automatically convert
into one share of Class A Common Stock upon the transfer of such
share if, after such transfer, such share is not beneficially owned
by dELiA*s or any of its subsidiaries (except a "Strategic Partner,"
as defined below), unless such transfer is effected in connection
with a transfer of Class B Common Stock to stockholders of dELiA*s
as a dividend intended to be on a tax-free basis under the Internal
Revenue Code of 1986, as amended from time to time (the "Code") (a
"Tax-Free Spin-Off"). For purposes of this paragraph (d)(5) and
ARTICLES SEVENTH and NINTH, (i) the term "beneficially owned" with
respect to shares of Class B Common Stock means ownership by a
person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise controls the
voting power (which includes the power to vote or to direct the
voting of) of such Class B Common Stock, and (ii) the term
"Strategic Partner" means any entity, or group of affiliated
entities, acquiring Class B Common Stock constituting, in the
aggregate, at least 10% of the outstanding common stock and which,
in the good faith determination prior to such acquisition of the
Board of Directors of the Corporation by the affirmative vote of a
majority of directors who are not directors, officers of the
beneficial owners of five percent or more of the outstanding voting
securities of dELiA*s is considered to constitute a strategic
alliance in the best interests of the Corporation and its
stockholders. In the event of a Tax-Free Spin-Off, shares of Class B
Common Stock shall automatically convert into shares of Class A
Common Stock on the fifth anniversary of the date on which shares of
Class B Common Stock are first transferred to stockholders of
dELiA*s in a Tax-Free Spin-Off unless, prior to such Tax-Free
Spin-Off, dELiA*s delivers to the Corporation an opinion of dELiA*s
counsel (which counsel shall be reasonably satisfactory to the
Corporation) to the effect that such conversion would preclude
dELiA*s from obtaining a favorable ruling from the Internal Revenue
Service that the
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<PAGE>
distribution would be a Tax-Free Spin-Off under the Code. If such an
opinion is received, approval of such conversion shall be submitted
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 dELiA*s
delivers to the Corporation an opinion of dELiA*s counsel (which
counsel shall be reasonably satisfactory to the Corporation) prior
to such anniversary to the effect that such vote would adversely
affect the status of the Tax-Free Spin-Off. At the meeting of
stockholders called for such purpose, every holder of Common Stock
shall be entitled to one vote in person or by proxy for each share
of Common Stock standing in his or her name on the transfer books of
the Corporation. Approval of such conversion shall require the
approval of a majority of the votes entitled to be cast by the
holders of the Class A Common Stock and Class B Common Stock present
and voting, voting together as a single class, and the holders of
the Class B Common Stock shall not be entitled to a separate class
vote. Such conversion shall be effective on the date on which such
approval is given at a meeting of stockholders called for such
purpose.
Each share of Class B Common Stock beneficially owned by any person shall
automically convert into one share of Class A Common Stock if a Tax-Free
Spin-Off has not occurred and the number of shares of Class B Common Stock
beneficially owned by such person is or becomes less than 10 percent of the
aggregate number of shares of Class A Common Stock and Class B Common Stock then
outstanding.
The Corporation shall at all times reserve and keep available, free from
preemptive rights, out of the aggregate of its authorized but unissued Common
Stock and its issued Common Stock held in its treasury for the purpose of
effecting any conversion of the Class B Common Stock pursuant to this paragraph
(d)(5)(B), the full number of shares of Class A Common Stock then deliverable
upon any such conversion of all outstanding shares of Class B Common Stock.
The Corporation will provide notice of any automatic conversion of shares
of Class B Common Stock to holders of record of the Common Stock not less than
30 nor more than 60 days prior to the date fixed for such conversion; provided,
however, that if the timing or nature of the effectiveness of an automatic
conversion makes it impracticable to provide at least 30 days' notice, the
Corporation shall provide such notice as soon as practicable. Such notice shall
be provided by mailing notice of such conversion first class postage prepaid, to
each holder of record of the Common Stock, at such holder's address as it
appears on the transfer books of the Corporation; provided, however, that no
failure to give such notice nor any defect therein shall affect the validity of
the automatic conversion of any shares of Class B Common Stock. Each such notice
shall state, as appropriate, the following:
(i) the automatic conversion date;
(ii) the number of outstanding shares of Class B Common Stock that are to
be converted automatically;
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<PAGE>
(iii) the place or places where certificates for such shares are to be
surrendered for conversion; and
(iv) that no dividends will be declared on the shares of Class B Common
Stock converted after such conversion date.
Immediately upon such conversion, the rights of the holders of shares of Class B
Common Stock as such shall cease and such holders shall be treated for all
purposes as having become the record owners of the shares of Class A Common
Stock issuable upon such conversion; provided, however, that such persons shall
be entitled to receive when paid any dividends declared on the Class B Common
Stock as of a record date preceding the time of such conversion and unpaid as of
the time of such conversion.
As promptly as practicable after the time of conversion, upon the delivery
to the Corporation of certificates formerly representing shares of Class B
Common Stock, the Corporation shall deliver or cause to be delivered, to or upon
the written order of the record holder of the surrendered certificates formerly
representing shares of Class B Common Stock, a certificate or certificates
representing the number of fully paid and nonassessable shares of Class A Common
Stock into which the shares of Class B Common Stock formerly represented by such
certificates have been converted in accordance with the provisions of this
paragraph (d)(5)(B).
(C) The Corporation will pay any and all documentary, stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
one class of Common Stock on the conversion of shares of the other class of
Common Stock pursuant to this paragraph (d)(5); provided, however, that the
Corporation shall not be required to pay any tax which may be payable in respect
of any registration of transfer involved in the issue or delivery of shares of
one class of Common Stock in a name other than that of the registered holder of
the other class of Common Stock converted, and no such issue or delivery shall
be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(D) Concurrently with any conversion of Class B Common Stock into Class A
Common Stock effected pursuant to paragraph (d)(5)(A) and (B) above, each share
of Class B Common Stock that is converted (i) shall be retired and canceled and
shall not be reissued and (ii) shall proportionally decrease the number of
shares of Class B Common Stock designated hereby. The Secretary of the
Corporation shall be, and hereby is, authorized and directed to file with the
Secretary of State of the State of Delaware one or more Certificates of Decrease
of Designated Shares to record any such decrease in designated shares of Common
Stock. No undesignated shares of Common Stock shall be designated shares of
Class B Common Stock following an automatic conversion of shares of Class B
Common Stock pursuant to paragraph (d)(5)(B) above.
(E) Immediately upon the effectiveness of this Restated Certificate of
Incorporation the 100 shares of common stock of the Corporation, par value $.01
per share, that are issued and
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<PAGE>
outstanding immediately prior to such effectiveness, shall be changed into and
reclassified as 12,500,000 shares of Class B Common Stock.
Section 3. Preferred Stock.
(a) Series and Limits of Variations between Series. Any unissued or
treasury shares of the Preferred Stock may be issued from time to time in one or
more series for such consideration as may be fixed from time to time by the
Board of Directors and each share of a series shall be identical in all respects
with the other shares of such series, except that, if the dividends thereon are
cumulative, the date from which they shall be cumulative may differ. Before any
shares of Preferred Stock of any particular series shall be issued, a
certificate shall be filed with the Secretary of State of Delaware setting forth
the designation, rights, privileges, restrictions, and conditions to be attached
to the Preferred Stock of such series and such other matters as may be required,
and the Board of Directors shall fix and determine, and is hereby expressly
empowered to fix and determine, in the manner provided by law, the particulars
of the shares of such series (so far as not inconsistent with the provisions of
this ARTICLE FOURTH applicable to all series of Preferred Stock), including, but
not limited to, the following:
(1) the distinctive designation of such series and the number of shares
which shall constitute such series, which number may be increased (except where
otherwise provided by the Board of Directors in creating such series) or
decreased (but not below the number of shares thereof then outstanding) from
time to time by like action of the Board of Directors;
(2) the annual rate of dividends payable on shares of such series, the
conditions upon which such dividends shall be payable and the date from which
dividends shall be cumulative in the event the Board of Directors determines
that dividends shall be cumulative;
(3) whether such series shall have voting rights, in addition to the
voting rights provided by law and, if so, the terms of such voting rights;
(4) whether such series shall have conversion privileges and, if so, the
terms and conditions of such conversion, including, but not limited to,
provision for adjustment of the conversion rate upon such events and in such
manner as the Board of Directors shall determine;
(5) whether or not the shares of such series shall be redeemable and, if
so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates;
(6) whether such series shall have a sinking fund for the redemption or
purchase of shares of that series and, if so, the terms and amount of such
sinking fund;
(7) the rights of the shares of such series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, and the
relative rights of priority, if any, of payment of shares of that series; and
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<PAGE>
(8) any other relative rights, preferences and limitations of such series.
Section 4. No Preemptive Rights. Except as otherwise set forth above in
this ARTICLE FOURTH, no holder of shares of this Corporation of any class shall
be entitled, as such, as a matter of right, to subscribe for or purchase shares
of any class now or hereafter authorized, or to purchase or subscribe for
securities convertible into or exchangeable for shares of the Corporation or to
which there shall be attached or appertain any warrants or rights entitling the
holders thereof to purchase or subscribe for shares.
FIFTH.
Section 1. Amendment of Bylaws by Directors. In furtherance and not in
limitation of the powers conferred by statute, the Board of Directors is
expressly authorized to make, repeal, alter, amend and rescind the bylaws of the
Corporation.
Section 2. Amendment of Bylaws by the Stockholders. The bylaws shall not
be made, repealed, altered, amended or rescinded by the stockholders of the
Corporation except by the vote of not less than 75 percent of the outstanding
shares of the Corporation entitled to vote thereon. Any amendment to the
Certificate of Incorporation which shall contravene any bylaw in existence on
the record date of the stockholders meeting at which such amendment is to be
voted upon by the stockholders shall require the vote of not less than 75
percent of the outstanding shares entitled to vote thereon.
SIXTH.
Section 1. Classified Board. Effective immediately upon the issuance of
more than 1,000 shares of Common Stock of the Corporation, the Board of
Directors (exclusive of directors to be elected by the holders of any one or
more series of Preferred Stock voting separately as a class or classes) shall be
divided into three classes, Class A, Class B, and Class C. The number of
directors in each class shall be the whole number contained in the quotient
arrived at by dividing the authorized number of directors by three, and if a
fraction is also contained in such quotient, then if such fraction is one-third,
the extra director shall be a member of Class A and if the fraction is two
thirds, one of the extra directors shall be a member of Class A and the other
shall be a member of Class B. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that the directors first elected to
Class A shall serve for a term ending on the date of the annual meeting next
following the end of the calendar year 1999, the directors first elected to
Class B shall serve for a term ending on the date of the annual meeting next
following the end of the calendar year 2000, and the directors first elected to
Class C shall serve for a term ending on the date of the annual meeting next
following the end of the calendar year 2001. Notwithstanding the foregoing
formula provisions, in the event that, as a result of any change in the
authorized number of directors, the number of directors in any class would
differ from the number allocated to that class under the formula provided in
this ARTICLE SIXTH immediately prior to such change, the following rules shall
govern:
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(a) each director then serving as such shall nevertheless continue as a
director of the class of which such director is a member until the expiration of
his current term, or his prior death, resignation or removal;
(b) at each subsequent election of directors, even if the number of
directors in the class whose term of office then expires is less than the number
then allocated to that class under said formula, the number of directors then
elected for membership in that class shall not be greater than the number of
directors in that class whose term of office then expires, unless and to the
extent that the aggregate number of directors then elected plus the number of
directors in all classes then duly continuing in office does not exceed the then
authorized number of directors of the Corporation;
(c) at each subsequent election of directors, if the number of directors
in the class whose term of office then expires exceeds the number then allocated
to that class under said formula, the Board of Directors shall designate one or
more of the directorships then being elected as directors of another class or
classes in which the number of directors then serving is less than the number
then allocated to such other class or classes under said formula;
(d) in the event of the death, resignation or removal of any director who
is a member of a class in which the number of directors serving immediately
preceding the creation of such vacancy exceeded the number then allocated to
that class under said formula, the Board of Directors shall designate the
vacancy thus created as a vacancy in another class in which the number of
directors then serving is less than the number then allocated to such other
class under said formula;
(e) in the event of any increase in the authorized number of directors,
the newly created directorships resulting from such increase shall be
apportioned by the Board of Directors to such class or classes as shall, so far
as possible, bring the composition of each of the classes into conformity with
the formula in this ARTICLE SIXTH, as it applies to the number of directors
authorized immediately following such increase; and
(f) designation of directorships or vacancies into other classes and
apportionments of newly created directorships to classes by the Board of
Directors under the foregoing items (c), (d) and (e) shall, so far as possible,
be effected so that the class whose term of office is due to expire next
following such designation or apportionment shall contain the full number of
directors then allocated to said class under said formula.
Notwithstanding any of the foregoing provisions of this ARTICLE SIXTH,
each director shall serve until his successor is elected and qualified or until
his death, resignation or removal.
Section 2. Election by Holders of Preferred Stock. During any period when
the holders of any Preferred Stock or any one or more series thereof, voting as
a class, shall be entitled to elect a specified number of directors, by reason
of dividend arrearages or other provisions giving them the right to do so, then
and during such time as such right continues (i) the then otherwise authorized
number of directors shall be increased by such specified number of
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directors, and the holders of such Preferred Stock or such series thereof,
voting as a class, shall be entitled to elect the additional directors so
provided for, pursuant to the provisions of such Preferred Stock or series; (ii)
each such additional director shall serve for such term, and have such voting
powers, as shall be stated in the provisions pertaining to such Preferred Stock
or series; and (iii) whenever the holders of any such Preferred Stock or series
thereof are divested of such rights to elect a specified number of directors,
voting as a class, pursuant to the provisions of such Preferred Stock or series,
the terms of office of all directors elected by the holders of such Preferred
Stock or series, voting as a class pursuant to such provisions or elected to
fill any vacancies resulting from the death, resignation or removal of directors
so elected by the holders of such Preferred Stock or series, shall forthwith
terminate and the authorized number of directors shall be reduced accordingly.
Section 3. Ballots. Elections of directors at an annual or special meeting
of stockholders need not be by written ballot unless the bylaws of the
Corporation shall provide otherwise.
Section 4. Elimination of Certain Personal Liability of Directors. A
director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of any fiduciary duty as a
director to the fullest extent permitted by Delaware Law.
SEVENTH.
Section 1. Meetings. Unless otherwise prescribed by law or this Restated
Certificate of Incorporation, special meetings of stockholders may be held at
any time on call of the Chairman of the Board of Directors, a Vice Chairman of
the Board of Directors, the President or, at the request in writing of a
majority of the Board of Directors, any officer.
Section 2. Action by Written Consent. Any corporate action required to be
taken at any annual or special meeting of stockholders of the Corporation, or
any corporate action that may be taken at any annual or special meeting of the
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the corporate action so
taken, shall be signed by the holders of outstanding stock having not less 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 voted and shall be delivered to the Corporation by delivery to its
registered office in Delaware (either by hand or by certified or registered
mail, return receipt requested), its principal place of business, or an officer
or agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded; provided, however, that on and after the
date on which none of dEliA*s, any of its subsidiaries, any Strategic Partner or
Stephen I. Kahn beneficially owns in the aggregate 50 percent or more of the
total voting power of all classes of outstanding Common Stock, any corporate
action required to be taken at any annual or special meeting of the
stockholders, or any corporate action which may be taken at any annual or
special meeting of the stockholders, may be taken only at a duly called annual
or special meeting of stockholders and may not be taken by written consent of
the stockholders in lieu of such meeting. So long as stockholders are entitled
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to consent to corporate action in writing without a meeting in accordance with
this ARTICLE SEVENTH, every written consent shall bear the date of signature of
each stockholder who signs the consent and no written consent shall be effective
to take the corporate action referred to therein unless, within sixty (60) days
of the date the earliest dated consent is delivered to the Corporation, a
written consent or consents signed by a sufficient number of holders to take
action are delivered to the Corporation in the manner prescribed in this ARTICLE
SEVENTH.
EIGHTH
Section 1. Amendment of Certain Articles. The provisions set forth in this
ARTICLE EIGHTH and in ARTICLES FIFTH, SIXTH, Section 1, SEVENTH and NINTH may
not be amended, altered, changed, or repealed in any respect unless such
amendment, alteration, change or repealing is approved by the affirmative vote
of not less than 75 percent of the outstanding shares of the Corporation
entitled to vote thereon; provided that with respect to any proposed amendment,
alteration or change to this Restated Certificate of Incorporation, or repealing
of any provision of this Restated Certificate of Incorporation, which would
amend, alter or change the powers, preferences or special rights of the shares
of Class A Common Stock or Class B Common Stock so as to affect them adversely,
the affirmative vote of not less than 75 percent of the outstanding shares
affected by the proposed amendment, voting as a separate class, shall be
required in addition to the vote otherwise required pursuant to this ARTICLE
EIGHTH.
Section 2. Amendments Generally. Subject to the provisions of Section 1 of
this ARTICLE EIGHTH, the Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation.
NINTH
Section 1. In anticipation that the Corporation will cease to be a wholly
owned subsidiary of dELiA*s, but that dELiA*s will remain a stockholder of the
Corporation, and in anticipation that the Corporation and dELiA*s may engage in
the same or similar activities or lines of business and have an interest in the
same areas of corporate opportunities, and in recognition of (i) the benefits to
be derived by the Corporation through its continued contractual, corporate and
business relations with dELiA*s (including service of officers and directors of
dELiA*s as officers and directors of the Corporation) and (ii) the difficulties
attendant to any director, who desires and endeavors fully to satisfy such
director's fiduciary duties, in determining the full scope of such duties in any
particular situation, the provisions of this ARTICLE NINTH are set forth to
regulate, define and guide the conduct of certain affairs of the Corporation as
they may involve dELiA*s and its officers and directors, and the powers, rights,
duties and liabilities of the Corporation and its officers, directors and
stockholders in connection therewith.
Section 2. The Corporation and dELiA*s may agree upon a method for
allocating business opportunities between them. Subject to and except as
provided in any such agreement:
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(a) dELiA*s shall not have a duty to refrain from engaging directly or
indirectly in the same or similar business activities or lines of business as
the Corporation;
(b) neither dELiA*s nor any officer or director thereof shall be liable to
the Corporation or its stockholders for breach of any fiduciary duty by reason
of any such activities of dELiA*s or of such person's participation therein;
(c) in the event that dELiA*s acquires knowledge of a potential
transaction or matter that may be a corporate opportunity for both dELiA*s and
the Corporation, dELiA*s shall have no duty to communicate or offer such
corporate opportunity to the Corporation and shall not be liable to the
Corporation or its stockholders for breach of any fiduciary duty as a
stockholder of the Corporation or controlling person of a stockholder by reason
of the fact that dELiA*s pursues or acquires such corporate opportunity for
itself, directs such corporate opportunity to another person or entity, or does
not communicate information regarding, or offer, such corporate opportunity to
the Corporation.
Section 3. Subject to any agreement pursuant to Section 2 of this ARTICLE
NINTH, in the event that a director, officer or employee of the Corporation who
is also a director, officer or employee of dELiA*s acquires knowledge of a
potential transaction or matter that may be a corporate opportunity for the
Corporation and dELiA*s (whether such potential transaction or matter is
proposed by a third party or is conceived of by such director, officer or
employee of the Corporation), such director, officer or employee shall be
entitled to offer such corporate opportunity to the Corporation or dELiA*s as
such director, officer or employee deems appropriate under the circumstances in
his sole discretion, and no such director, officer or employee shall be liable
to the Corporation or its stockholders for breach of any fiduciary duty or duty
of loyalty or failure to act in (or not opposed to) the best interests of the
Corporation or the derivation of any improper personal benefit by reason of the
fact that (i) such director, officer or employee offered such corporate
opportunity to dELiA*s (rather than the Corporation) or did not communicate
information regarding such corporate opportunity to the Corporation or (ii)
dELiA*s pursues or acquires such corporate opportunity for itself or directs
such corporate opportunity to another person or does not communicate information
regarding such corporate opportunity to the Corporation.
Section 4. Any person or entity purchasing or otherwise acquiring any
interest in any shares of capital stock of the Corporation shall be deemed to
have notice of and to have consented to the provisions of this ARTICLE NINTH and
the contractual provisions provided for in this ARTICLE NINTH.
Section 5. For purposes of this ARTICLE NINTH only, (i) the term
"Corporation" shall mean the Corporation and all corporations, partnerships,
joint ventures, associations and other entities in which the Corporation
beneficially owns (directly or indirectly) 50 percent or more of the outstanding
voting stock, voting power or similar voting interests, and (ii) the term
"dELiA*s" shall mean dELiA*s and all corporations, partnerships, joint ventures,
associations and other entities (other than the Corporation, defined in
accordance with clause (i) of this
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Section 5) in which dELiA*s beneficially owns (directly or indirectly) 50
percent or more of the outstanding voting stock, voting power or similar voting
interests.
Section 6. Notwithstanding anything in this Certificate of Incorporation
to the contrary, the foregoing provisions of this ARTICLE NINTH shall expire on
the date that dELiA*s ceases to own beneficially Common Stock representing at
least 10 percent of the aggregate number of outstanding shares of Class A Common
Stock and Class B Common Stock of the Corporation and no person who is a
director or officer of the Corporation is also a director or officer of dELiA*s.
Neither the alteration, amendment, change or repeal of any provision of this
ARTICLE NINTH nor the adoption of any provision of this Restated Certificate of
Incorporation inconsistent with any provision of this ARTICLE NINTH shall
eliminate or reduce the effect of this ARTICLE NINTH in respect of any matter
occurring, or any cause of action, suit or claim that, but for this ARTICLE
NINTH, would accrue or arise, prior to such alteration, amendment, repeal or
adoption.
Section 7. The provisions of this ARTICLE NINTH are in addition to the
provisions of ARTICLE SIXTH, Section 5.
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IN WITNESS WHEREOF, this Restated Certificate of Incorporation, having
been duly adopted by the written consent of the sole stockholder of the
Corporation in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware, has been executed this 1st
day of April 1999.
iTurf Inc.
By: /s/ Alex S. Navarro
---------------------------
Name: Alex S. Navarro
Title: Chief Operating Officer
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BYLAWS
of
iTurf Inc.
ARTICLE I
STOCKHOLDERS
Section 1.01. Annual Meeting. An annual meeting of stockholders for the
purpose of fixing or changing the number of directors of the Corporation,
electing directors and transacting such other business as may come before the
meeting, shall be held each year on such date, at such time and at such place as
may be specified by the Board of Directors (the "Board").
Section 1.02. Special Meetings. Special meetings of the stockholders
may be called by resolution of the Board, the Chairman of the Board, a Vice
Chairman of the Board 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. Only business related to
the purposes set forth in the notice of the meeting may be transacted at a
special meeting.
Section 1.03. 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 requesting the meeting.
Section 1.04. 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 1.06 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. Such notice shall specify the place
where the stockholders list will be open for examination prior to the meeting if
required by Section 1.10 hereof. 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. In the event of a transfer of shares after
notice has been given and prior to the holding of the meeting, it shall not be
necessary to serve notice on the transferee.
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Section 1.05. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any other
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be more
than 60 nor less than 10 days before the date of such meeting, nor more than 60
days prior to any other action. If the Board fails to fix such a record date,
(i) the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held, and (ii) in any case involving the determination of stockholders for any
purpose other than notice of or voting at a meeting of stockholders, the record
date for determining stockholders for such purpose shall be the close of
business on the day on which the Board adopts the resolution relating thereto.
Determination of stockholders entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of such meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
Section 1.06. Quorum; Adjournment. A stockholders' meeting duly called
shall not be organized for the transaction of business unless a quorum is
present. Except as otherwise expressly provided by law, or in the Certificate of
Incorporation or these Bylaws, 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. The stockholders
present at a duly organized meeting can continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum. 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. Any meeting of stockholders, annual or special, may adjourn
from time to time to reconvene at the same or some other place. 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
1.04. At any adjourned meeting at which a quorum is present, any action may be
taken that might have been taken at the meeting as originally called.
Section 1.07. Organization. The Chairman of the Board, or in his or her
absence, the Vice Chairman of the Board, or in their absence one of the
following officers, the President, or any Vice President (in order of seniority)
shall call to order meetings of stockholders, and shall act as chairman of such
meetings. The Board or, if the Board fails to act, the stockholders, may appoint
any stockholder, director or officer of the Corporation to act as chairman of
any meeting in the absence of the Chairman of the Board, the Vice Chairman of
the Board, the Chief Executive Officer, the President, and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.
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Section 1.08. Voting. (a) Each stockholder of record shall, at each
meeting of the stockholders, be entitled to vote in person or by proxy each
share or fractional share of the stock of the Corporation having voting rights
on the matter in question and which shall have been held by him and registered
in his name on the books of the Corporation on the date fixed pursuant to
Section 1.05 of these Bylaws as the record date for the determination of
stockholders entitled to notice of and to vote at such meeting. 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 1.12.
(b) Directors shall be elected in the manner provided in section 2.03.
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.
Section 1.09. Inspectors. The Board, in advance of any meeting of the
stockholders, may appoint one or more inspectors to act at the meeting. If
inspectors are not so appointed, the person presiding at the meeting may appoint
one or more inspectors. If any person so appointed fails to appear or act, the
vacancy may be filled by appointment made by the Board in advance of the meeting
or at the meeting by the person presiding thereat. Each inspector, before
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector at the meeting with strict
impartiality and according to the best of his ability. The inspectors so
appointed shall determine the number of shares outstanding, the shares
represented at the meeting, the existence of a quorum and the authenticity,
validity and effect of proxies and shall receive votes, ballots, waivers,
releases, or consents, hear and determine all challenges and questions arising
in connection with the right to vote, count and tabulate all votes, ballots,
waivers, releases, or consents, determine and announce the results and do such
acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the person presiding at the meeting, the inspectors
shall make a report in writing of any challenge, question or matter determined
by them and execute a certificate of any fact found by them. Any report or
certificate made by them shall be prima facie evidence of the facts stated and
of the vote as certified by them.
Section 1.10. List of Stockholders. The Secretary of the Corporation
shall prepare and make a complete list of the stockholders of record as of the
applicable record date entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least 10 days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
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Section 1.11. Stockholders. At an annual meeting of the stockholders,
only such business shall be conducted as shall have been brought before the
meeting (a) pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board or (c) by a stockholder of the Corporation who is a
stockholder of record at the time of giving the notice provided for in this
Section 1.11, who shall be entitled to vote at such meeting and who complies
with the notice procedures set forth in this section 1.11. For business to be
properly brought before an annual meeting by a stockholder pursuant to clause
(c) above, the stockholder must give timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 120 days nor more than 150 days prior to the first
anniversary of the date of the Corporation'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 calendar days earlier than or 60 calendar 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 10th day following
the date on which notice of the date of the meeting is given to stockholders' or
made public, whichever first occurs. A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
meeting (A) a brief description of the business desired to be brought before the
meeting and the reasons for conducting such business at the meeting, (B) the
name and address, as they appear on the Corporation's books, of the stockholder
proposing such business, and the name and address of the beneficial owner, if
any, on whose behalf the proposal is made, (C) the class and number of shares of
stock of the Corporation which are owned beneficially and of record by such
stockholder of record and by the beneficial owner, if any, on whose behalf the
proposal is made, and (D) any material interest of such stockholder of record
and of the beneficial owner, if any, on whose behalf the proposal is made, in
such business. Notwithstanding any in this Section 1.11 to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this section 1.11. The chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting whether or not business
was properly brought before the meeting in accordance with the procedures
prescribed by these Bylaws, and if he or she should so determine, he or she
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing
provisions of this section 1.11, a stockholder shall comply with all applicable
requirements of the Securities Exchange act of 1934, as amended, and the rules
and regulations thereunder, with respect to the matters set forth in this
Section 1.11.
Section 1.12. Action by Consent Without a Meeting. Any action required
or permitted to be taken at any meeting of stockholders of the Corporation 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 voted; provided, however,
that on and after the date on which none of dELiA*s Inc. ("dELiA*s"), any of its
subsidiaries, any Strategic Partner (as defined below) or Stephen I. Kahn
beneficially owns 50 percent or more of the total voting power of all classes of
outstanding Common Stock of the Corporation, any action required or permitted
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to be taken at any meeting of stockholders, may be taken only at a duly called
annual or special meeting of stockholders and may not be taken by written
consent of the stockholders in lieu of such meeting. Prompt notice of the taking
of any such action shall be given to those stockholders who did not consent in
writing. For purposes of this Section 1.12, the term "Strategic Partner" means
any entity or group of affiliated entities, acquiring Class B Common Stock of
the Corporation constituting at least 10% of the aggregate number of shares of
Class B Common Stock of the Corporation outstanding, and which, in the good
faith determination by a majority of the directors of the Board not affiliated
with dELiA*s, is considered to be a strategic partner in the best interests of
the Corporation and the stockholders of the Corporation.
ARTICLE II
BOARD OF DIRECTORS
Section 2.01. General Powers of Board. The powers of the Corporation
shall be exercised, its business and affairs conducted, and its property
controlled by the Board, except as otherwise provided by the law of Delaware or
in the certificate of incorporation.
Section 2.02. Number of Directors. The initial number of directors
which shall constitute the whole Board (exclusive of directors to be elected by
the holders of any one or more series of Preferred Stock voting separately as a
class or classes) shall be three; provided, however, that the Board, by
resolution adopted by vote of a majority of the then authorized number of
directors, or the stockholders, may increase or decrease the number of
directors, but no decrease may shorten the term of any incumbent director. As
used in these Bylaws, the term "entire Board" means the total number of
directors which the Corporation would have if there were no vacancies.
Section 2.03. Election and Term of Directors. Directors shall be
elected at each annual meeting of stockholders by a plurality of the votes cast.
The Board shall be divided into three classes, Class A, Class B, and Class C, as
nearly equal in number as possible, as determined by the Board. Each director
shall serve for a term ending on the date of the third annual meeting following
the annual meeting at which such director was elected; provided, however, that
the directors first elected to Class A shall serve for a term ending on the date
of the annual meeting next following the end of the calendar year 1999, the
directors first elected to Class B shall serve for a term ending on the date of
the annual meeting next following the end of the calendar year 2000, and the
directors first elected to Class C shall serve for a term ending on the date of
the annual meeting next following the end of the calendar year 2001.
Notwithstanding the foregoing, in the event that, as a result of any change in
the authorized number of directors, the number of directors in any class would
differ from the number allocated to that class under the formula provided in
this Section 2.03, immediately prior to such change, the following rules shall
govern:
(a) each director then serving as such shall nevertheless continue as a
director of the class of which such director is a member until the expiration of
his current term, or his prior death, resignation or removal;
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(b) at each subsequent election of directors, even if the number of
directors in the class whose term of office then expires is less than the number
then allocated to that class under said formula, the number of directors then
elected for membership in that class shall not be greater than the number of
directors in that class whose term of office then expires, unless and to the
extent that the aggregate number of directors then elected plus the number of
directors in all classes then duly continuing in office does not exceed the then
authorized number of directors of the Corporation;
(c) at each subsequent election of directors, if the number of
directors in the class whose term of office then expires exceeds the number then
allocated to that class under said formula, the Board shall designate one or
more of the directorships then being elected as directors of another class or
classes in which the number of directors then serving is less than the number
then allocated to such other class or classes under said formula;
(d) in the event of the death, resignation or removal of any director
who is a member of a class in which the number of directors serving immediately
preceding the creation of such vacancy exceeded the number then allocated to
that class under said formula, the Board shall designate the vacancy thus
created as a vacancy in another class in which the number of directors then
serving is less than the number then allocated to such other class under said
formula;
(e) in the event of any increase in the authorized number of directors,
the newly created directorships resulting from such increase shall be
apportioned by the Board to such class or classes as shall, so far as possible,
bring the composition of each of the classes into conformity with the formula in
this Section 2.03, as it applies to the number of directors authorized
immediately following such increase; and
(f) designation of directorships or vacancies into other classes and
apportionments of newly created directorships to classes by the Board under the
foregoing items (c), (d) and (e) shall, so far as possible, be effected so that
the class whose term of office is due to expire next following such designation
or apportionment shall contain the full number of directors then allocated to
said class under said formula.
Notwithstanding any of the foregoing provisions of this Section 2.03,
each director shall serve until his successor is elected and qualified or until
his death, resignation or removal.
Section 2.04. Nominations. Nominations for the election of directors
may be made by the Board or by any stockholder entitled to vote for the election
of directors. Such nominations, if not made by the Board, shall be made by
notice in writing, in accordance with the notice procedures set forth in section
1.11 of these Bylaws. Notice of nominations which are proposed by the Board
shall be given on behalf of the Board by the chairman of the meeting. The
chairman of the meeting may, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
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Section 2.05. 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 2.07. 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.
Section 2.06. Special Meetings. Special meetings of the Board shall be
held at such time and place as shall be designated in the notice of the meeting
whenever called by the Chairman of the Board, the Vice Chairman, the President
(if a director) or by a majority of the directors then in office.
Section 2.07. 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. Such
notice shall specify the place, date and hour of the meeting and, if it is for a
special meeting, the purpose or purposes for which the meeting is called. Any
acts or proceedings taken at a meeting of the Board not validly called or
constituted may be made valid and fully effective by ratification at a
subsequent meeting which shall be legally and validly called or constituted.
Notice of any regular meeting of the Board need not state the purpose of the
meeting and, at any regular meeting duly held, any business may be transacted.
If the notice of a special meeting shall state as a purpose of the meeting the
transaction of any business that may come before the meeting, then at the
meeting any business may be transacted, whether or not referred to in the notice
thereof. A written waiver of notice of a special or regular meeting, signed by
the person or persons entitled to such notice, whether before or after the time
stated therein shall be deemed the equivalent of such notice, and attendance of
a director at a meeting shall constitute a waiver of notice of such meeting
except when the director attends the meeting and prior to or at the commencement
of such meeting protests the lack of proper notice. Notice of any adjourned
meeting need not be given, other than by announcement at the meeting at which
the adjournment is taken.
Section 2.08. Place of Meeting. The Board may hold any of its meetings
in or outside Delaware, at the principal office of the Corporation or at such
other place or places as the Board may from time to time designate. Directors
may participate in any regular or special meeting of the Board by means of
conference telephone or similar communications equipment pursuant to which all
persons participating in the meeting of the Board can hear each other and such
participation shall constitute presence in person at such meeting.
Section 2.09. 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 2.14. 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 Bylaws. In
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the absence of a quorum, a majority of the directors present may adjourn any
meeting from time to time until a quorum is present.
Section 2.10. Committees. The Board may, by resolution adopted by a
majority of the entire Board, designate one or more committees, each committee
to consist of one or more directors of the Corporation; provided that persons
who are nor directors of the Corporation may also be members of such committees
to the extent provided in the resolution of the Board. 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 the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another member of the Board to act
at the meeting in place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board and permitted
by law, shall have and may exercise all of the powers and authority of the Board
in the management of the business, property and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it. Each committee of the Board may fix its own rules and procedures.
Notice of meetings of committees, other than of regular meetings provided for by
the rules, shall be given to committee members. All action taken by committees
shall be recorded in minutes of the meetings.
Section 2.11. 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.
Section 2.12. 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.
Section 2.13. Resignation and Removal of Directors. Any director may
resign at any time by giving written notice to the Chairman of the Board or the
Secretary of the Corporation. Such resignation shall take effect at the time
specified therein, and, unless otherwise specified therein, the acceptance of
such resignation 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 the
holders of a majority of the shares entitled at the time to vote at an election
of directors.
Section 2.14. 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.
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<PAGE>
Section 2.15. 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.
ARTICLE III
OFFICERS
Section 3.01. Executive Officers. The executive officers of the
Corporation shall be the Chairman of the Board, the Vice Chairman of the Board,
the President, one or more Vice Presidents, the Secretary and the Treasurer. Any
person may hold at one time two or more offices.
Section 3.02. Election, Terms 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 3.04.
Section 3.03. 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.
Section 3.04. Resignation and Removal of Officers. Any officer may
resign at any time by giving written notice to the Chairman of the Board, the
President or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein, and unless otherwise specified therein,
the acceptance of such resignation 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 of the Board.
Section 3.05. Vacancies. A vacancy in any office shall be filled in the
manner prescribed in these Bylaws for regular appointments or elections to such
office.
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<PAGE>
ARTICLE IV
DUTIES OF THE OFFICERS
Section 4.01. The Chairman of the Board. The Chairman of the Board
shall preside at all meetings of the stockholders and of the Board.
Section 4.02. The Vice Chairman of the Board. The Vice Chairman of the
Board shall, at the request, or in the absence or disability of the Chairman of
the Board, perform the duties and exercise the powers of such office.
Section 4.03. 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 of the business, affairs and property of the Corporation,
and shall have such other powers and duties as presidents of other corporations
usually have or as the Board assigns to him.
Section 4.04. Vice Presidents. Each Vice President shall have such
powers and duties as the Board or the President assigns to him or her.
Section 4.05. 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.
Section 4.06. 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.
Section 4.07. 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.
ARTICLE V
CAPITAL STOCK
Section 5.01. Certificate for Shares. Every owner of one or more shares
in the Corporation shall be entitled to a certificate, which shall be in such
form as the Board shall prescribe, certifying the number and class of shares in
the Corporation owned by him. When such certificate is counter-signed by an
incorporated transfer agent or registrar, the signature of any of said officers
may be facsimile, engraved, stamped or printed. The certificates for the
respective classes of such shares shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
Chairman of the Board or the Vice Chairman of the Board, or the President or a
Vice President, and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer. A record shall be kept of the name of the person,
firm, or
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<PAGE>
corporation owning the shares represented by each such certificate and the
number of shares represented thereby, the date thereof, and in case of
cancellation, the date of cancellation. Every certificate surrendered to the
Corporation for exchange or transfer shall be canceled and no new certificate or
certificates shall be issued in exchange for any existing certificates until
such existing certificates shall have been so canceled.
Section 5.02. Lost Destroyed and Mutilated Certificates. If any
certificates for shares in this Corporation become worn, defaced, or mutilated
but are still substantially intact and recognizable, the directors, upon
production and surrender thereof, may order the same canceled and issue a new
certificate in lieu of same. The holder of any shares in the Corporation shall
immediately notify the Corporation if a certificate therefor shall be lost,
destroyed, or mutilated beyond recognition, and the Corporation may issue a new
certificate in the place of any certificate theretofore issued by it which is
alleged to have been lost or destroyed or mutilated beyond recognition, and the
Board may, in its discretion, require the owner of the certificate which has
been lost, destroyed, or mutilated beyond recognition, or his legal
representative, to give the Corporation a bond in such sum and with such surety
or sureties as it may direct, not exceeding double the value of the stock, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss, destruction, or mutilation of any such certificate.
The Board may, however, in its discretion, refuse to issue any such new
certificate except pursuant to legal proceedings, under the laws of the State of
Delaware in such case made and provided.
Section 5.03. Transfers of Shares. Transfers of shares in the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, his legal guardian, executor, or administrator, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary of the Corporation or with a transfer agent appointed by the
Board, and on surrender of the certificate or certificates for such shares
properly endorsed or accompanied by properly executed stock powers and evidence
of the payment of all taxes imposed upon such transfer. The person in whose name
shares stand on the books of the Corporation shall, to the full extent permitted
by law, be deemed the owner thereof for all purposes as regards the Corporation.
Section 5.04. Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws
concerning the issue, transfer, and registration of certificates for shares in
the Corporation. It may appoint one or more transfer agents or one or more
registrars, or both, and may require all certificates for shares to bear the
signature of either or both.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 6.01. 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,
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<PAGE>
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 6.03, 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.
Section 6.02. Right of Claimant to Bring Suit. If a claim under section
6.01 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 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.
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<PAGE>
Section 6.03. 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 Article VI 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.
Section 6.04. 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.
Section 6.05. 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.
Section 6.06. 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.
ARTICLE VII
MISCELLANEOUS
Section 7.01. 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.
Section 7.02. 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.
Section 7.03. 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.
Section 7.04. Execution of Instruments Generally. All contracts and
other instruments entered into in the ordinary course of business requiring
execution by the Corporation may be executed and delivered by the President, the
Treasurer, or any Vice President and authority to sign any such contracts or
instruments, which may be general or confined to specific instances, may be
conferred by the Board upon any other person or persons. Any person having
authority to sign on behalf of the Corporation may delegate, from time to time,
by instrument in writing, all or any part of such authority to any person or
persons if authorized so to do by the Board.
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<PAGE>
Section 7.05. Agreements with dELiA*s. As long as dELiA*s has direct or
beneficial ownership of 30% or more of the voting power represented by the
voting securities of this Corporation and no other person directly or
beneficially owns a greater percentage of such voting power, this Corporation
shall not enter into any agreement with dELiA*s or any of its subsidiaries
(other than this Corporation and subsidiaries of this Corporation) that would be
required to be disclosed in a filing by this Corporation with the Securities and
Exchange Commission pursuant to Item 404 of Regulation S-K of the Securities Act
of 1933 or any successor rule, regulation or statute, unless such agreement has
been approved by a majority of the members of the Board of this Corporation who
are not directors or officers of dELiA*s or the beneficial owners of five
percent or more of the outstanding voting securities of dELiA*s. This section
7.05 may only be amended or repealed by the affirmative vote of a majority of
the members of the Board of this Corporation who are not directors or officers
of dELiA*s or the beneficial owners of five percent or more of the outstanding
voting securities of dELiA*s.
Section 7.06. Amendments. These By-laws may be amended, repealed or
adopted by the stockholders.
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[iTurf Logo]
Incorporated under the laws of the State of Delaware SHARES
CLASS A COMMON STOCK
CUSIP 46575Q 10 0
see reverse side for certain definitions
this certifies that ___________________________________________________________
is the owner of ________________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK, PAR VALUE $.01 OF
[iTurf Logo]
transferable on the books of the corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid unless countersigned by the Transfer Agent
and registered by the Registrar.
WITNESS the facsimile seal of the corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ Alex Navarro /s/ Stephen I. Kahn
SECRETARY CHAIRMAN OF THE BOARD
COUNTERSIGNED AND REGISTERED:
THE BANK OF NEW YORK
(NEW YORK, NY)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - __________ Custodian ____________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _____________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- shares
of common stock represented by the within Certificate and do hereby irrevocably
constitute and appoint _________________________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: ___________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
_________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR [illegible]
EXHIBIT 5.1
April 5, 1999
iTurf Inc.
435 Hudson Street
New York, New York 10014
Ladies and Gentlemen:
You have requested our opinion in connection with the filing by
iTurf Inc., a Delaware corporation (the "Company"), with the Securities and
Exchange Commission of a Registration Statement on Form S-1 (Registration
Statement No. 333- 71123) (the "Registration Statement") under the Securities
Act of 1933 (the "Securities Act") with respect to shares of Class A common
stock, par value $.01 per share, of the Company ("Class A Common Stock").
We have examined such records, documents and other instruments as we
have deemed relevant and necessary as a basis for the opinions hereinafter set
forth. We have also assumed without investigation the authenticity of any
document submitted to us as an original, the conformity to originals of any
document submitted to us as a copy, the authenticity of the originals of such
latter documents, the genuineness of all signatures and the legal capacity of
natural persons signing such documents. We have also relied on certain matters
contained in certificates of public officials and officers of the Company.
Based upon the foregoing, we are of the opinion that the Class A
Common Stock (to the extent issued and sold by the Company) have been duly
authorized and, when issued, delivered and paid for in accordance with the
underwriting agreement as described in the Registration Statement, will be
validly issued, fully paid and non-assessable.
The foregoing opinion relates only to matters of the internal law of
the State of New York and to the General Corporation Law of the State of
Delaware and to
<PAGE>
iTurf, Inc.
April 5, 1999
Page 2
the laws of the United States of America and does not purport to express any
opinion on the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement. In so
doing, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
PROSKAUER ROSE LLP
dELiA*s Inc.
435 Hudson Street
New York, New York 10014
___________ __, 1999
iTurf Inc.
435 Hudson Street
New York, NY 10014
Attention: President
Gentlemen:
In connection with the proposed initial public offering by iTurf
Inc. ("iTurf"), we have agreed as follows:
1. If dELiA*s Inc. ("dELiA*s") proposes in a single transaction or
series of related transactions to transfer all or a portion of the common stock
of iTurf ("Common Stock") held by it to one or more third parties as a result of
which a person (or persons acting as a group) to which the Common Stock is
transferred would own a Controlling Interest (as defined below) in iTurf (a
"Transaction"), then dELiA*s will refrain from effecting a Transaction unless,
prior to the consummation thereof, the public stockholders of iTurf (the "Public
Stockholders") shall have been offered the opportunity to join in such
Transaction on a pro rata basis, as provided in this letter. Any purported
transfer by dELiA*s subject to this letter agreement not made in compliance with
these provisions shall be void and shall not be consummated upon the books and
records of iTurf. For purposes of this letter agreement, a person or group has a
"Controlling Interest" if it has direct or beneficial ownership of 35% or more
of the voting power represented by the voting securities of iTurf and no other
person directly or beneficially owns a greater percentage of such voting power.
2. Prior to the consummation of any Transaction, dELiA*s shall
cause each person or persons that propose to acquire Common Stock in the
Transaction (the "Proposed Purchasers") to offer (the "Purchase Offer") to
purchase on a pro rata basis from the Public Stockholders the same percentage of
the aggregate number of shares of Common Stock held by the Public Stockholders
as the percentage determined by dividing the number of shares of Common Stock to
be purchased from dELiA*s by the aggregate number of shares of Common Stock held
by dELiA*s, at the same price per share, and on substantially the same other
terms and conditions, as the Proposed Purchaser has offered to purchase the
Common Stock to be sold by dELiA*s.
3. The provisions of this letter agreement shall not apply to (a)
Rule 144 sales by dELiA*s, (b) a sale by dELiA*s of shares in a public offering,
(c) a distribution by dELiA*s of shares to its holders of common stock, or (d)
transfers by dELiA*s to its affiliates, provided that any such affiliate agrees
in writingto be bound by the provisions of this letter agreement.
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<PAGE>
4. The provisions of this letter agreement shall terminate on the
first anniversary of iTurf's initial public offering or on May 31, 1999 if such
offering is not consummated by such date.
5. This letter agreement shall be governed by the laws of Delaware.
This letter agreement contains the entire agreement of the parties. This letter
agreement may not be amended except by written instrument executed with the same
formality as this letter agreement; provided, however, that as long as dELiA*s
has direct or beneficial ownership of 30% or more of the voting power
represented by the voting securities of iTurf and no other person directly or
beneficially owns a greater percentage of such voting power, no such amendment
of a material term or waiver of a material obligation of this Agreement shall be
valid unless it has been approved by a majority of the members of the board of
directors of iTurf who are not directors or officers of dELiA*s or the
beneficial owners of five percent or more of the outstanding voting securities
of dELiA*s. This letter agreement may be executed in counterparts.
dELiA*s Inc.
By: ___________________
AGREED:
iTurf Inc.
By: ___________________
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iTurf Inc.
AMENDED AND RESTATED
1999 STOCK INCENTIVE PLAN
<PAGE>
iTurf Inc.
AMENDED AND RESTATED 1999 STOCK INCENTIVE PLAN
ARTICLE I.
PURPOSE
The purpose of this iTurf Inc. 1999 Stock Incentive Plan, (the "Plan"),
is to enhance the profitability and value of iTurf Inc. (the "Company") for the
benefit of its stockholders by enabling the Company (i) to offer employees and
Consultants of the Company and its Subsidiaries stock based incentives and other
equity interests in the Company, 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 the Company'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 the Company's stockholders.
ARTICLE II.
DEFINITIONS
For purposes of this Plan, the following terms shall have the following
meanings:
2.1. "Award" shall mean any award under this Plan of any Stock Option,
Stock Appreciation Right or Restricted Stock. All Awards shall be confirmed by,
and subject to the terms of, a written agreement executed by the Company and the
Participant.
2.2. "Board" shall mean the Board of Directors of the Company.
2.3. "Cause" shall mean, with respect to a Participant's Termination of
Employment or Termination of Consultancy, unless otherwise determined by the
Committee at grant, or, if no rights of the Participant are reduced, thereafter,
termination due to a Participant's dishonesty, fraud, insubordination, willful
misconduct, refusal to perform services (for any reason other than illness or
incapacity) or materially unsatisfactory performance of his or her duties for
the Company as determined by the Committee in its sole discretion. With respect
to a Participant's Termination of Directorship, Cause shall mean an act or
failure to act that constitutes "cause" for removal of a director under
applicable Delaware law.
2.4. "Change in Control" shall have the meaning set forth in Article
XI.
2.5. "Code" shall mean the Internal Revenue Code of 1986, as amended.
Any reference to any section of the Code shall also be a reference to any
successor provision.
2.6. "Committee" shall mean a committee of the Board appointed from
time to time by the Board. Solely to the extent required under Rule 16b-3 and
Section 162(m) of the Code, such committee shall consist of two or more
non-employee directors, each of whom shall be a non-employee director as defined
in Rule 16b-3 and an outside director as defined under Section 162(m) of the
Code. To the extent that no Committee exists which has the authority to
administer the Plan, the functions of the Committee shall be exercised by the
Board. If for any reason the appointed Committee does not meet the requirements
of Rule 16b-3 or Section 162(m) of the Code, such noncompliance with the
requirements of Rule 16b-3 or Section 162(m) of the Code shall not affect the
validity of the awards, grants, interpretations or other actions of the
Committee.
2.7. "Common Stock" means the Common Stock, $.01 par value per share,
of the Company.
2
<PAGE>
2.8. "Consultant" shall mean any adviser or consultant to the Company
and its Subsidiaries.
2.9. "Disability" shall mean total and permanent disability, as
defined in Section 22(e)(3) of the Code.
2.10. "Effective Date" shall mean the date on which this Plan is
approved and adopted by the Board.
2.11. "Eligible Employees" shall mean the employees of the Company and
its Subsidiaries who are eligible pursuant to Section 5.1 to be granted Awards
under this Plan.
2.12. "Exchange Act" shall mean the Securities Exchange Act of 1934.
2.13. "Fair Market Value" for purposes of this Plan, unless otherwise
required by any applicable provision of the Code or any regulations issued
thereunder, shall mean, as of any date, the last sales price reported for the
Common Stock on the applicable date (i) as reported by the principal national
securities exchange in the United States on which it is then traded, or (ii) if
not traded on any such national securities exchange, as quoted on an automated
quotation system sponsored by the National Association of Securities Dealers. If
the Common Stock is not readily tradable on a national securities exchange or
any system sponsored by the National Association of Securities Dealers, its Fair
Market Value shall be set in good faith by the Committee on the advice of a
registered investment adviser (as defined under the Investment Advisers Act of
1940). For purposes of the grant of any Award, the applicable date shall be the
date for which the last sales price is available at the time of grant. For
purposes of the exercise of any Stock Appreciation Right, the applicable date
shall be the date a notice of exercise is received by the Committee or if not a
day on which the applicable market is open, the next day that it is open.
2.14. "Good Reason" shall mean, with respect to a Participant's
Termination of Employment or Termination of Consultancy unless otherwise
determined by the Committee at grant, or, if no rights of the Participant are
reduced, thereafter, a voluntary termination due to "good reason," as the
Committee, in its sole discretion, decides to treat as a Good Reason
termination.
2.15. "Incentive Stock Option" shall mean any Stock Option awarded
under this Plan intended to be and designated as an "Incentive Stock Option"
within the meaning of Section 422 of the Code.
2.16. "Non-Qualified Stock Option" shall mean any Stock Option awarded
under this Plan that is not an Incentive Stock Option.
2.17. "Participant" shall mean the following persons to whom an Award
has been made pursuant to this Plan: Eligible Employees and Consultants of the
Company and its Subsidiaries and non-employee directors of the Company;
provided, however, that non-employee directors shall be Participants for
purposes of the Plan solely with respect to awards of Stock Options pursuant to
Article IX.
2.18. "Restricted Stock" shall mean an award of shares of Common Stock
under the Plan that is subject to restrictions under Article VII.
2.19. "Restriction Period" shall have the meaning set forth in
Subsection 7.3(a) with respect to Restricted Stock for Eligible Employees.
2.20. "Retirement" with respect to a Participant's Termination of
Employment shall mean a Termination of Employment or Termination of Consultancy
without Cause from the Company by a Participant who has attained (i) at least
age sixty-five (65); or (ii) such earlier date after age fifty-five (55) as
approved by the Committee with regard to such Participant. With respect to a
Participant's Termination of Directorship, Retirement shall mean the failure to
stand for reelection or the failure to be reelected after a Participant has
attained age sixty-five (65).
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2.21. "Rule 16b-3" shall mean Rule 16b-3 under Section 16(b) of the
Exchange Act as then in effect or any successor provisions.
2.22. "Section 162(m) of the Code" shall mean the exception for
performance-based compensation under Section 162(m) of the Code and any Treasury
regulations thereunder.
2.23. "Stock Appreciation Right" shall mean the right pursuant to an
Award granted under Article IX. A Tandem Stock Appreciation Right shall mean the
right to surrender to the Company all (or a portion) of a Stock Option in
exchange for an amount in cash or stock equal to the excess of (i) the Fair
Market Value, on the date such Stock Option (or such portion thereof) is
surrendered, of the Common Stock covered by such Stock Option (or such portion
thereof), over (ii) the aggregate exercise price of such Stock Option (or such
portion thereof). A Non-Tandem Stock Appreciation Right shall mean the right to
receive an amount in cash or stock equal to the excess of (x) the Fair Market
Value of a share of Common Stock on of the date such right is exercised, over
(y) the aggregate exercise price of such right, otherwise than on surrender of a
Stock Option.
2.24. "Stock Option" or "Option" shall mean any Option to purchase
shares of Common Stock granted to Eligible Employees or Consultants pursuant to
Article VI or non-employee directors of the Company pursuant to Article IX..
2.25. "Subsidiary" shall mean any corporation that is defined as a
subsidiary corporation in Section 424(f) of the Code.
2.26. "Ten Percent Stockholder" shall mean a person owning Common
Stock of the Company possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company as defined in
Section 422 of the Code.
2.27. "Termination of Directorship" shall mean, with respect to a
non-employee director, that the non-employee director has ceased to be a
director of the Company.
2.28. "Termination of Consultancy" shall mean, with respect to a
Consultant, that the Consultant is no longer acting as a Consultant to the
Company and its Subsidiaries. In the event an entity shall cease to be a
Subsidiary, there shall be deemed a Termination of Consultancy of any individual
who is not otherwise a Consultant of the Company or another Subsidiary at the
time the entity ceases to be a Subsidiary.
2.29. "Termination of Employment" shall mean (i) a termination of
service (for reasons other than a military or personal leave of absence granted
by the Company) of a Participant from the Company and its Subsidiaries; or (ii)
when an entity which is employing a Participant ceases to be a Subsidiary,
unless the Participant thereupon becomes employed by the Company or another
Subsidiary.
2.30. "Transfer" or "Transferred" shall mean anticipate, alienate,
attach, sell, assign, pledge, encumber, charge or otherwise transfer.
2.31. "Withholding Election" shall have the meaning set forth in
Section 14.4.
ARTICLE III.
ADMINISTRATION
3.1. The Committee. The Plan shall be administered and interpreted by
the Committee.
3.2. Awards. The Committee shall have full authority to grant,
pursuant to the terms of this Plan, (i) Stock Options, (ii) Stock Appreciation
Rights, both Tandem and Non-Tandem and (iii) Restricted Stock
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to Eligible Employees or Consultants. Stock Options shall be granted to
non-employee directors of the Company pursuant to Article IX. In particular, the
Committee shall have the authority:
(a) to select the Eligible Employees and Consultants to whom
Stock Options, Stock Appreciation Rights and Restricted Stock may from time to
time be granted hereunder;
(b) to determine whether and to what extent Stock Options,
Stock Appreciation Rights and Restricted Stock or any combination thereof, are
to be granted hereunder to one or more Eligible Employees or Consultants;
(c) to determine, in accordance with the terms of this Plan,
the number of shares of Common Stock to be covered by each Award to an Eligible
Employee or Consultant granted hereunder;
(d) to determine the terms and conditions, not inconsistent
with the terms of this Plan, of any Award granted hereunder to an Eligible
Employee or Consultant (including, but not limited to, the share price, any
restriction or limitation, any vesting schedule or acceleration thereof, or any
forfeiture restrictions or waiver thereof, regarding any Stock Option or other
Award, and the shares of Common Stock relating thereto, based on such factors,
if any, as the Committee shall determine, in its sole discretion);
(e) to determine whether and under what circumstances a Stock
Option may be settled in cash, Common Stock and/or Restricted Stock under
Subsection 6.3(d);
(f) to determine whether, to what extent and under what
circumstances to provide loans (which shall be on a recourse basis and shall
bear a reasonable rate of interest) to Eligible Employees or Consultants in
order to exercise Options under the Plan;
(g) to determine whether a Stock Appreciation Right is Tandem
or Non- Tandem; and
(h) to determine whether to require an Eligible Employee or
Consultant, as a condition of the granting of any Award, to not sell or
otherwise dispose of shares acquired pursuant to the exercise of an Option or as
an Award for a period of time as determined by the Committee, in its sole
discretion, following the date of the acquisition of such Option or Award.
3.3. Guidelines. Subject to Article XII hereof, the Committee shall
have the authority to adopt, alter and repeal such administrative rules,
guidelines and practices governing this Plan and perform all acts, including the
delegation of its administrative responsibilities, as it shall, from time to
time, deem advisable; to construe and interpret the terms and provisions of this
Plan and any Award issued under this Plan (and any agreements relating thereto);
and to otherwise supervise the administration of this Plan. The Committee may
correct any defect, supply any omission or reconcile any inconsistency in this
Plan or in any agreement relating thereto in the manner and to the extent it
shall deem necessary to carry this Plan into effect, but only to the extent any
such action would be permitted under the applicable provisions of Rule 16b-3 (if
any) and the applicable provisions of Section 162(m) of the Code (if any). The
Committee may adopt special guidelines and provisions for persons who are
residing in, or subject to, the taxes of, countries other than the United States
to comply with applicable tax and securities laws. If and to the extent
applicable, this Plan is intended to comply with Section 162(m) of the Code and
the applicable requirements of Rule 16b-3 and shall be limited, construed and
interpreted in a manner so as to comply therewith.
3.4. Decisions Final. Any decision, interpretation or other action
made or taken in good faith by or at the direction of the Company, the Board, or
the Committee (or any of its members) arising out of or in connection with the
Plan shall be within the absolute discretion of all and each of them, as the
case may be, and shall be final, binding and conclusive on the Company and all
employees and Participants and their respective heirs, executors,
administrators, successors and assigns.
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3.5. Reliance on Counsel. The Company, the Board or the Committee may
consult with legal counsel, who may be counsel for the Company or other counsel,
with respect to its obligations or duties hereunder, or with respect to any
action or proceeding or any question of law, and shall not be liable with
respect to any action taken or omitted by it in good faith pursuant to the
advice of such counsel.
3.6. Procedures. If the Committee is appointed, the Board shall
designate one of the members of the Committee as chairman and the Committee
shall hold meetings, subject to the By-Laws of the Company, at such times and
places as it shall deem advisable. A majority of the Committee members shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. Any decision or determination reduced to writing and
signed by all Committee members in accordance with the By-Laws of the Company
shall be fully effective as if it had been made by a vote at a meeting duly
called and held. The Committee shall keep minutes of its meetings and shall make
such rules and regulations for the conduct of its business as it shall deem
advisable.
3.7. Designation of Consultants' Liability.
(a) The Committee may designate employees of the Company and
professional advisors to assist the Committee in the administration of the Plan
and may grant authority to employees to execute agreements or other documents on
behalf of the Committee.
(b) The Committee may employ such legal counsel, consultants
and agents as it may deem desirable for the administration of the Plan and may
rely upon any opinion received from any such counsel or consultant and any
computation received from any such consultant or agent. Expenses incurred by the
Committee or Board in the engagement of any such counsel, consultant or agent
shall be paid by the Company. The Committee, its members and any person
designated pursuant to paragraph (a) above shall not be liable for any action or
determination made in good faith with respect to the Plan. To the maximum extent
permitted by applicable law, no officer of the Company or member or former
member of the Committee or of the Board shall be liable for any action or
determination made in good faith with respect to the Plan or any Award granted
under it. To the maximum extent permitted by applicable law and the Certificate
of Incorporation and By-Laws of the Company and to the extent not covered by
insurance, each officer and member or former member of the Committee or of the
Board shall be indemnified and held harmless by the Company against any cost or
expense (including reasonable fees of counsel reasonably acceptable to the
Company) or liability (including any sum paid in settlement of a claim with the
approval of the Company), and advanced amounts necessary to pay the foregoing at
the earliest time and to the fullest extent permitted, arising out of any act or
omission to act in connection with the Plan, except to the extent arising out of
such officer's, member's or former member's own fraud or bad faith. Such
indemnification shall be in addition to any rights of indemnification the
officers, directors or members or former officers, directors or members may have
under applicable law or under the Certificate of Incorporation or By-Laws of the
Company or Subsidiary. Notwithstanding anything else herein, this
indemnification will not apply to the actions or determinations made by an
individual with regard to Awards granted to him or her under this Plan.
ARTICLE IV.
SHARE AND OTHER LIMITATIONS
4.1. Shares.
(a) General Limitation. The aggregate number of shares of
Common Stock which may be issued or used for reference purposes under this Plan
or with respect to which other Awards may be granted shall not exceed 4,050,000
shares (subject to any increase or decrease pursuant to Section 4.2) which may
be either authorized and unissued Common Stock or Common Stock held in or
acquired for the treasury of the Company. If any Option or Stock Appreciation
Right granted under this Plan expires, terminates or is cancelled for any reason
without having been exercised in full or, with respect to Options, the Company
repurchases any Option pursuant to Section 6.3(f), the number of shares of
Common Stock underlying the repurchased Option, and/or the number of shares of
Common Stock underlying any
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unexercised Stock Appreciation Right or Option shall again be available for the
purposes of Awards under the Plan. If shares of Common Stock are exchanged by a
Participant as full or partial payment to the Company of the exercise price of a
Stock Option or the number of shares deliverable to a Participant under the
terms of the Plan are reduced for payment of withholding taxes, such exchanged
or reduced shares of Common Stock will again be available for purposes of Awards
under the Plan, other than for the grant of Incentive Stock Options. If a Tandem
Stock Appreciation Right or a limited Stock Appreciation Right is granted in
tandem with an Option, such grant shall only apply once against the maximum
number of shares of Common Stock which may be issued under this Plan.
(b) Individual Participant Limitations. (i) The maximum number
of shares of Common Stock subject to any Option which may be granted under this
Plan to each Participant shall not exceed 750,000 shares (subject to any
increase or decrease pursuant to Section 4.2) during each fiscal year of the
Company.
(i) There are no annual individual Participant
limitations on Restricted Stock.
(ii) The maximum number of shares of Common Stock
subject to any Stock Appreciation Right which may be granted under this Plan to
each Participant shall not exceed 750,000 shares (subject to any increase or
decrease pursuant to Section 4.2) during each fiscal year of the Company. If a
Tandem Stock Appreciation Right or limited Stock Appreciation Right is granted
in tandem with an Option it shall apply against the Eligible Employee's or
Consultant's individual share limitations for both Stock Appreciation Rights and
Options.
4.2. Changes.
(a) The existence of the Plan and the Awards granted hereunder
shall not affect in any way the right or power of the Board or the stockholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company or Subsidiary, any issue of
bonds, debentures, preferred or prior preference stock ahead of or affecting
Common Stock, the dissolution or liquidation of the Company or Subsidiary, any
sale or transfer of all or part of its assets or business or any other corporate
act or proceeding.
(b) In the event of any such change in the capital structure
or business of the Company by reason of any stock dividend or distribution,
stock split or reverse stock split, recapitalization, reorganization, merger,
consolidation, split-up, combination or exchange of shares, distribution with
respect to its outstanding Common Stock or capital stock other than Common
Stock, sale or transfer of all or part of its assets or business,
reclassification of its capital stock, or any similar change affecting the
Company's capital structure or business and the Committee determines an
adjustment is appropriate under the Plan, then the aggregate number and kind of
shares which thereafter may be issued under this Plan, the number and kind of
shares or other property (including cash) to be issued upon exercise of an
outstanding Option or other Awards granted under this Plan and the purchase
price thereof shall be appropriately adjusted consistent with such change in
such manner as the Committee may deem equitable to prevent substantial dilution
or enlargement of the rights granted to, or available for, Participants under
this Plan or as otherwise necessary to reflect the change, and any such
adjustment determined by the Committee shall be binding and conclusive on the
Company and all Participants and employees and their respective heirs,
executors, administrators, successors and assigns.
(c) Fractional shares of Common Stock resulting from any
adjustment in Options or Awards pursuant to Section 4.2(a) or (b) shall be
aggregated until, and eliminated at, the time of exercise by rounding-down for
fractions less than one-half ( 1/2) and rounding-up for fractions equal to or
greater than one-half ( 1/2). No cash settlements shall be made with respect to
fractional shares eliminated by rounding. Notice of any adjustment shall be
given by the Committee to each Participant whose Option or Award has been
adjusted and such adjustment (whether or not such notice is given) shall be
effective and binding for all purposes of the Plan.
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(d) In the event of a merger or consolidation in which the
Company is not the surviving entity or in the event of any transaction that
results in the acquisition of substantially all of the Company's outstanding
Common Stock by a single person or entity or by a group of persons and/or
entities acting in concert, or in the event of the sale or transfer of all of
the Company's assets (all of the foregoing being referred to as "Acquisition
Events"), then the Committee may, in its sole discretion, terminate all
outstanding Options and Stock Appreciation Rights of Eligible Employees and
Consultants, effective as of the date of the Acquisition Event, by delivering
notice of termination to each such Participant at least twenty (20) days prior
to the date of consummation of the Acquisition Event; provided, that during the
period from the date on which such notice of termination is delivered to the
consummation of the Acquisition Event, each such Participant shall have the
right to exercise in full all of his or her Options and Stock Appreciation
Rights that are then outstanding (without regard to any limitations on
exercisability otherwise contained in the Option or Award Agreements) but
contingent on occurrence of the Acquisition Event, and, provided that, if the
Acquisition Event does not take place within a specified period after giving
such notice for any reason whatsoever, the notice and exercise shall be null and
void.
Notwithstanding the foregoing and solely to the extent required by
Section 16 of the Exchange Act, at the discretion of the Committee, the
provisions contained in this subsection shall be adjusted as they apply to
Options and Stock Appreciation Rights granted to Eligible Employees and
Consultants within six (6) months before the occurrence of an Acquisition Event
if the holder of such Award is subject to the reporting requirements of Section
16(a) of the Exchange Act in such manner as determined by the Committee,
including without limitation, terminating Options and Stock Appreciation Rights
at specific dates after the Acquisition Event, in order to give the holder the
benefit of the Option.
If an Acquisition Event occurs, to the extent the Committee does not
terminate the outstanding Options and Stock Appreciation Rights pursuant to this
Section 4.2(d), then the provisions of Section 4.2(b) shall apply.
4.3. Purchase Price. Notwithstanding any provision of this Plan to the
contrary, if authorized but previously unissued shares of Common Stock are
issued under this Plan, such shares shall not be issued for a consideration
which is less than as permitted under applicable law.
ARTICLE V.
ELIGIBILITY
5.1. All employees and Consultants of the Company and its Subsidiaries
are eligible to be granted Options, Stock Appreciation Rights and Restricted
Stock under this Plan. Eligibility under this Plan shall be determined by the
Committee in its sole discretion.
5.2. Non-employee directors of the Company are only eligible to
receive an Award of Stock Options in accordance with Article IX of the Plan.
ARTICLE VI.
EMPLOYEE AND CONSULTANT STOCK OPTION GRANTS
6.1. Options. Each Stock Option granted hereunder shall be one of two
types: (i) an Incentive Stock Option intended to satisfy the requirements of
Section 422 of the Code or (ii) a Non-Qualified Stock Option.
6.2. Grants. The Committee shall have the authority to grant to any
Eligible Employee one or more Incentive Stock Options, Non-Qualified Stock
Options, or both types of Stock Options (in each case with or without Stock
Appreciation Rights). To the extent that any Stock Option does not qualify as an
Incentive Stock Option (whether because of its provisions or the time or manner
of its exercise or otherwise), such Stock Option or the portion thereof which
does not qualify, shall constitute a separate Non-Qualified Stock Option. The
Committee shall have the authority to grant to any Consultant one or
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more Non-Qualified Stock Options (with or without Stock Appreciation Rights).
Notwithstanding any other provision of the Plan to the contrary or any provision
in an agreement evidencing the grant of an Option to the contrary, any Option
granted to a Consultant shall be a Non-Qualified Stock Option.
6.3. Terms of Options. Options granted under this Plan shall be
subject to the following terms and conditions, and shall be in such form and
contain such additional terms and conditions, not inconsistent with the terms of
this Plan, as the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock
purchasable under an Incentive Stock Option shall be determined by the Committee
at the time of grant but shall not be less than 100% of the Fair Market Value of
the share of Common Stock at the time of grant; provided, however, if an
Incentive Stock Option is granted to a Ten Percent Stockholder, the purchase
price shall be no less than 110% of the Fair Market Value of the Common Stock.
The purchase price of shares of Common Stock subject to a Non-Qualified Stock
Option shall be determined by the Committee. Notwithstanding the foregoing, if
an Option is modified, extended or renewed and, thereby, deemed to be the
issuance of a new Option under the Code, the exercise price of an Option may
continue to be the original exercise price even if less than the Fair Market
Value of the Common Stock at the time of such modification, extension or
renewal.
(b) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Stock Option shall be exercisable more than ten (10)
years after the date the Option is granted, provided, however, the term of an
Incentive Stock Option granted to a Ten Percent Stockholder may not exceed five
(5) years.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Committee at grant. If the Committee provides, in its discretion, that any
Stock Option is exercisable subject to certain limitations (including, without
limitation, that it is exercisable only in installments or within certain time
periods), the Committee may waive such limitations on the exercisability at any
time at or after grant in whole or in part (including, without limitation, that
the Committee may waive the installment exercise provisions or accelerate the
time at which Options may be exercised), based on such factors, if any, as the
Committee shall determine, in its sole discretion.
(d) Method of Exercise. Subject to whatever installment
exercise and waiting period provisions apply under subsection (c) above, Stock
Options may be exercised in whole or in part at any time during the Option term,
by giving written notice of exercise to the Company specifying the number of
shares to be purchased. Such notice shall be accompanied by payment in full of
the purchase price in such form, or such other arrangement for the satisfaction
of the purchase price, as the Committee may accept. If and to the extent
determined by the Committee in its sole discretion at or after grant, payment in
full or in part may also be made in the form of Common Stock withheld from the
shares to be received on the exercise of a Stock Option hereunder, Common Stock
owned by the Participant (and for which the Participant has good title free and
clear of any liens and encumbrances) or Restricted Stock based, in each case, on
the Fair Market Value of the Common Stock on the payment date as determined by
the Committee (without regard to any forfeiture restrictions applicable to such
Restricted Stock). No shares of Common Stock shall be issued until payment, as
provided herein, therefor has been made or provided for. If payment in full or
in part has been made in the form of Restricted Stock, an equivalent number of
shares of Common Stock issued on exercise of the Option shall be subject to the
same restrictions and conditions, during the remainder of the Restriction
Period, applicable to the Restricted Stock surrendered therefor.
(e) Incentive Stock Option Limitations. To the extent that the
aggregate Fair Market Value (determined as of the time of grant) of the Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by an Eligible Employee during any calendar year under the Plan
and/or any other stock option plan of the Company or any Subsidiary or parent
corporation (within the meaning of Section 424(e) of the Code) exceeds $100,000,
such Options shall be treated as Options which are not Incentive Stock Options.
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Should the foregoing provision not be necessary in order for the Stock
Options to qualify as Incentive Stock Options, or should any additional
provisions be required, the Committee may amend the Plan accordingly, without
the necessity of obtaining the approval of the stockholders of the Company.
(f) Buy Out and Settlement Provisions. The Committee may at
any time on behalf of the Company offer to buy out an Option previously granted,
based on such terms and conditions as the Committee shall establish and
communicate to the Participant at the time that such offer is made.
(g) Form, Modification, Extension and Renewal of Options.
Subject to the terms and conditions and within the limitations of the Plan, an
Option shall be evidenced by such form of agreement or grant as is approved by
the Committee, and the Committee may modify, extend or renew outstanding Options
granted under the Plan (provided that the rights of a Participant are not
reduced without his consent), or accept the surrender of outstanding Options (up
to the extent not theretofore exercised) and authorize the granting of new
Options in substitution therefor (to the extent not theretofore exercised).
(h) Other Terms and Conditions. Options may contain such other
provisions, which shall not be inconsistent with any of the foregoing terms of
the Plan, as the Committee shall deem appropriate including, without limitation,
permitting "reloads" such that the same number of Options are granted as the
number of Options exercised, shares used to pay for the exercise price of
Options or shares used to pay withholding taxes ("Reloads"). With respect to
Reloads, the exercise price of the new Stock Option shall be the Fair Market
Value on the date of the "reload" and the term of the Stock Option shall be the
same as the remaining term of the Options that are exercised, if applicable, or
such other exercise price and term as determined by the Committee.
6.4. Termination of Employment or Termination of Consultancy. The
following rules apply with regard to Options upon the Termination of Employment
of a Participant:
(a) Termination by Reason of Death. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of death,
any Stock Option held by such Participant, unless otherwise determined by the
Committee at grant or, if no rights of the Participant's estate are reduced,
thereafter, may be exercised, to the extent exercisable at the Participant's
death, by the legal representative of the estate, at any time within a period of
one (1) year from the date of such death, but in no event beyond the expiration
of the stated term of such Stock Option.
(b) Termination by Reason of Disability. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of
Disability, any Stock Option held by such Participant, unless otherwise
determined by the Committee at grant or, if no rights of the Participant are
reduced, thereafter, may be exercised, to the extent exercisable at the
Participant's termination, by the Participant (or the legal representative of
the Participant's estate if the Participant dies after termination) at any time
within a period of one (1) year from the date of such termination, but in no
event beyond the expiration of the stated term of such Stock Option.
(c) Termination by Reason of Retirement. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of
Retirement, any Stock Option held by such Participant, unless otherwise
determined by the Committee at grant, or, if no rights of the Participant are
reduced, thereafter, shall be fully vested and may thereafter be exercised by
the Participant at any time within a period of one (1) year from the date of
such termination, but in no event beyond the expiration of the stated term of
such Stock Option; provided, however, that, if the Participant dies within such
exercise period, any unexercised Stock Option held by such Participant shall
thereafter be exercisable, to the extent to which it was exercisable at the time
of death, for a period of one (1) year (or such other period as the Committee
may specify at grant or, if no rights of the Participant's estate are reduced,
thereafter) from the date of such death, but in no event beyond the expiration
of the stated term of such Stock Option.
(d) Involuntary Termination Without Cause or Termination for
Good Reason. If a Participant's Termination of Employment or Termination of
Consultancy is by involuntary termination without Cause or for Good Reason, any
Stock Option held by such Participant, unless otherwise determined
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by the Committee at grant or, if no rights of the Participant are reduced,
thereafter, may be exercised, to the extent exercisable at termination, by the
Participant at any time within a period of ninety (90) days from the date of
such termination, but in no event beyond the expiration of the stated term of
such Stock Option.
(e) Termination Without Good Reason. If a Participant's
Termination of Employment or Termination of Consultancy is voluntary but without
Good Reason and occurs prior to, or more than ninety (90) days after, the
occurrence of an event which would be grounds for Termination of Employment by
the Company for Cause (without regard to any notice or cure period
requirements), any Stock Option held by such Participant, unless otherwise
determined by the Committee at grant or, if no rights of the Participant are
reduced, thereafter, may be exercised, to the extent exercisable at termination,
by the Participant at any time within a period of thirty (30) days from the date
of such termination, but in no event beyond the expiration of the stated term of
such Stock Option.
(f) Other Termination. Unless otherwise determined by the
Committee at grant or, if no rights of the Participant are reduced, thereafter,
if a Participant's Termination of Employment or Termination of Consultancy is
for any reason other than death, Disability, Retirement, Good Reason,
involuntary termination without Cause or voluntary termination as provided in
subsection (e) above, any Stock Option held by such Participant shall thereupon
terminate and expire as of the date of termination, provided that (unless the
Committee determines a different period upon grant or, if, no rights of the
Participant are reduced, thereafter) in the event the termination is for Cause
or is a voluntary termination without Good Reason within ninety (90) days after
occurrence of an event which would be grounds for Termination of Employment or
Termination of Consultancy by the Company for Cause (without regard to any
notice or cure period requirement), any Stock Option held by the Participant at
the time of occurrence of the event which would be grounds for Termination of
Employment or Termination of Consultancy by the Company for Cause shall be
deemed to have terminated and expired upon occurrence of the event which would
be grounds for Termination of Employment or Termination of Consultancy by the
Company for Cause.
ARTICLE VII.
RESTRICTED STOCK AWARDS
7.1. Awards of Restricted Stock. Shares of Restricted Stock may be
issued to Eligible Employees or Consultants either alone or in addition to other
Awards granted under the Plan. The Committee shall determine the eligible
persons to whom, and the time or times at which, grants of Restricted Stock will
be made, the number of shares to be awarded, the price (if any) to be paid by
the recipient (subject to Section 7.2), the time or times within which such
Awards may be subject to forfeiture, the vesting schedule and rights to
acceleration thereof, and all other terms and conditions of the Awards.
7.2. Awards and Certificates. The prospective Participant selected to
receive a Restricted Stock Award shall not have any rights with respect to such
Award, unless and until such Participant has delivered a fully executed copy of
the Restricted Stock Award agreement evidencing the Award to the Company and has
otherwise complied with the applicable terms and conditions of such Award.
Further, such Award shall be subject to the following conditions:
(a) Purchase Price. The purchase price of Restricted Stock
shall be fixed by the Committee. Subject to Section 4.3, the purchase price for
shares of Restricted Stock may be zero to the extent permitted by applicable
law, and, to the extent not so permitted, such purchase price may not be less
than par value.
(b) Acceptance. Awards of Restricted Stock must be accepted
within a period of sixty (60) days (or such shorter period as the Committee may
specify at grant) after the Award date, by executing a Restricted Stock Award
agreement and by paying whatever price (if any) the Committee has designated
thereunder.
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(c) Legend. Each Participant receiving a Restricted Stock
Award shall be issued a stock certificate in respect of such shares of
Restricted Stock, unless the Committee elects to use another system, such as
book entries by the transfer agent, as evidencing ownership of a Restricted
Stock Award. Such certificate shall be registered in the name of such
Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Award, substantially in the
following form:
"The anticipation, alienation, attachment, sale, transfer,
assignment, pledge, encumbrance or charge of the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the iTurf Inc. (the "Company") 1999 Stock Incentive
Plan and an Agreement entered into between the registered owner and
the Company, dated ________. Copies of such Plan and Agreement are on
file at the principal office of the Company."
(d) Custody. The Committee may require that any stock
certificates evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock Award, the Participant shall have delivered a duly signed stock
power, endorsed in blank, relating to the Common Stock covered by such Award.
7.3. Restrictions and Conditions on Restricted Stock Awards. The
shares of Restricted Stock awarded pursuant to this Plan shall be subject to
Article X and the following restrictions and conditions:
(a) Restriction Period; Vesting and Acceleration of Vesting.
The Participant shall not be permitted to Transfer shares of Restricted Stock
awarded under this Plan during a period set by the Committee (the "Restriction
Period") commencing with the date of such Award, as set forth in the Restricted
Stock Award agreement and such agreement shall set forth a vesting schedule and
any events which would accelerate vesting of the shares of Restricted Stock.
Within these limits, based on service, or other criteria determined by the
Committee, the Committee may provide for the lapse of such restrictions in
installments in whole or in part, or may accelerate the vesting of all or any
part of any Restricted Stock Award.
(b) Rights as Stockholder. Except as provided in this
subsection (b) and subsection (a) above and as otherwise determined by the
Committee, the Participant shall have, with respect to the shares of Restricted
Stock, all of the rights of a holder of shares of Common Stock of the Company
including, without limitation, the right to receive any dividends, the right to
vote such shares and, subject to and conditioned upon the full vesting of shares
of Restricted Stock, the right to tender such shares. Notwithstanding the
foregoing, the payment of dividends shall be deferred until, and conditioned
upon, the expiration of the applicable Restriction Period, unless the Committee,
in its sole discretion, specifies otherwise at the time of the Award.
(c) Lapse of Restrictions. If and when the Restriction Period
expires without a prior forfeiture of the Restricted Stock subject to such
Restriction Period, the certificates for such shares shall be delivered to the
Participant. All legends shall be removed from said certificates at the time of
delivery to the Participant except as otherwise required by applicable law.
7.4. Termination of Employment for Restricted Stock. Subject to the
applicable provisions of the Restricted Stock Award agreement and this Plan,
upon a Participant's Termination of Employment or Termination of Consultancy for
any reason during the relevant Restriction Period, all Restricted Stock still
subject to restriction will vest or be forfeited in accordance with the terms
and conditions established by the Committee at grant or thereafter.
ARTICLE VIII.
STOCK APPRECIATION RIGHTS
8.1. Tandem Stock Appreciation Rights. Stock Appreciation Rights may
be granted in conjunction with all or part of any Stock Option (a "Reference
Stock Option") granted under this Plan
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("Tandem Stock Appreciation Rights"). In the case of a Non-Qualified Stock
Option, such rights may be granted either at or after the time of the grant of
such Reference Stock Option. In the case of an Incentive Stock Option, such
rights may be granted only at the time of the grant of such Reference Stock
Option. Consultants shall not be eligible for a grant of Tandem Stock
Appreciation Rights granted in conjunction with all or part of an Incentive
Stock Option.
8.2. Terms and Conditions of Tandem Stock Appreciation Rights. Tandem
Stock Appreciation Rights shall be subject to such terms and conditions, not
inconsistent with the provisions of this Plan, as shall be determined from time
to time by the Committee, including Article X and the following:
(a) Term. A Tandem Stock Appreciation Right or applicable
portion thereof granted with respect to a Reference Stock Option shall terminate
and no longer be exercisable upon the termination or exercise of the Reference
Stock Option, except that, unless otherwise determined by the Committee, in its
sole discretion, at the time of grant, a Tandem Stock Appreciation Right granted
with respect to less than the full number of shares covered by the Reference
Stock Option shall not be reduced until and then only to the extent the exercise
or termination of the Reference Stock Option causes the number of shares covered
by the Tandem Stock Appreciation Right to exceed the number of shares remaining
available and unexercised under the Reference Stock Option.
(b) Exercisability. Tandem Stock Appreciation Rights shall be
exercisable only at such time or times and to the extent that the Reference
Stock Options to which they relate shall be exercisable in accordance with the
provisions of Article VI and this Article VIII.
(c) Method of Exercise. A Tandem Stock Appreciation Right may
be exercised by an optionee by surrendering the applicable portion of the
Reference Stock Option. Upon such exercise and surrender, the Participant shall
be entitled to receive an amount determined in the manner prescribed in this
Section 8.2. Stock Options which have been so surrendered, in whole or in part,
shall no longer be exercisable to the extent the related Tandem Stock
Appreciation Rights have been exercised.
(d) Payment. Upon the exercise of a Tandem Stock Appreciation
Right a Participant shall be entitled to receive up to, but no more than, an
amount in cash and/or Common Stock (as chosen by the Committee in its sole
discretion) equal in value to the excess of the Fair Market Value of one share
of Common Stock over the option price per share specified in the Reference Stock
Option multiplied by the number of shares in respect of which the Tandem Stock
Appreciation Right shall have been exercised, with the Committee having the
right to determine the form of payment.
(e) Deemed Exercise of Reference Stock Option. Upon the
exercise of a Tandem Stock Appreciation Right, the Reference Stock Option or
part thereof to which such Stock Appreciation Right is related shall be deemed
to have been exercised for the purpose of the limitation set forth in Article IV
of the Plan on the number of shares of Common Stock to be issued under the Plan.
8.3. Non-Tandem Stock Appreciation Rights. Non-Tandem Stock
Appreciation Rights may also be granted without reference to any Stock Options
granted under this Plan.
8.4. Terms and Conditions of Non-Tandem Stock Appreciation Rights.
Non-Tandem Stock Appreciation Rights shall be subject to such terms and
conditions, not inconsistent with the provisions of this Plan, as shall be
determined from time to time by the Committee, including Article X and the
following:
(a) Term. The term of each Non-Tandem Stock Appreciation Right
shall be fixed by the Committee, but shall not be greater than ten (10) years
after the date the right is granted.
(b) Exercisability. Non-Tandem Stock Appreciation Rights shall
be exercisable at such time or times and subject to such terms and conditions as
shall be determined by the Committee at grant. If the Committee provides, in its
discretion, that any such right is exercisable subject to certain limitations
(including, without limitation, that it is exercisable only in installments or
within certain time periods), the
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Committee may waive such limitation on the exercisability at any time at or
after grant in whole or in part (including, without limitation, that the
Committee may waive the installment exercise provisions or accelerate the time
at which rights may be exercised), based on such factors, if any, as the
Committee shall determine, in its sole discretion.
(c) Method of Exercise. Subject to whatever installment
exercise and waiting period provisions apply under subsection (b) above,
Non-Tandem Stock Appreciation Rights may be exercised in whole or in part at any
time during the option term, by giving written notice of exercise to the Company
specifying the number of Non-Tandem Stock Appreciation Rights to be exercised.
(d) Payment. Upon the exercise of a Non-Tandem Stock
Appreciation Right a Participant shall be entitled to receive, for each right
exercised, up to, but no more than, an amount in cash and/or Common Stock (as
chosen by the Committee in its sole discretion) equal in value to the excess of
the Fair Market Value of one share of Common Stock on the date the right is
exercised over the Fair Market Value of one (1) share of Common Stock on the
date the right was awarded to the Participant.
8.5. Limited Stock Appreciation Rights. The Committee may, in its sole
discretion, grant Tandem and Non-Tandem Stock Appreciation Rights either as a
general Stock Appreciation Right or as a limited Stock Appreciation Right.
Limited Stock Appreciation Rights may be exercised only upon the occurrence of a
Change in Control or such other event as the Committee may, in its sole
discretion, designate at the time of grant or thereafter. Upon the exercise of
limited Stock Appreciation Rights, except as otherwise provided in an Award
agreement, the Participant shall receive in cash or Common Stock, as determined
by the Committee, an amount equal to the amount (1) set forth in Section 8.2(d)
with respect to Tandem Stock Appreciation Rights or (2) set forth in Section
8.4(d) with respect to Non-Tandem Stock Appreciation Rights.
8.6. Termination of Employment. The following rules apply with regard
to Stock Appreciation Rights upon the Termination of Employment or Termination
of Consultancy of a Participant.
(a) Termination by Death. If a Participant's Termination of
Employment or Termination of Consultancy is by reason of death, any Stock
Appreciation Right held by such Participant, unless otherwise determined by the
Committee at grant or if no rights of the Participant's estate are reduced,
thereafter, may be exercised, to the extent exercisable at the Participant's
death, by the legal representative of the estate, at any time within a period of
one (1) year from the date of such death or until the expiration of the stated
term of such Stock Appreciation Right, whichever period is the shorter.
(b) Termination by Reason of Disability. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of
Disability, any Stock Appreciation Right held by such participant, unless
otherwise determined by the Committee at grant or, if no rights of the
Participant are reduced, thereafter, may be exercised, to the extent exercisable
at the Participant's termination, by the Participant (or the legal
representative of the Participant's estate if the Participant dies after
termination) at any time within a period of one (1) year from the date of such
termination or until the expiration of the stated term of such Stock
Appreciation Right, whichever period is the shorter.
(c) Termination by Reason of Retirement. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of
Retirement, any Stock Appreciation Right held by such Participant, unless
otherwise determined by the Committee at grant or, if no rights of the
Participant are reduced, thereafter, shall be fully vested and may thereafter be
exercised by the Participant at any time within a period of one (1) year from
the date of such termination or until the expiration of the stated term of such
right, whichever period is the shorter; provided, however, that, if the
Participant dies within such one (1) year period, any unexercised Non- Tandem
Stock Appreciation Right held by such Participant shall thereafter be
exercisable, to the extent to which it was exercisable at the time of death, for
a period of one (1) year (or such other period as the Committee may specify at
grant or if no rights of the Participant are reduced, thereafter) from the date
of such death or until the expiration of the stated term of such right,
whichever period is the shorter.
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(d) Involuntary Termination Without Cause or Termination for
Good Reason. If a Participant's Termination of Employment or Termination of
Consultancy is by involuntary termination without Cause or for Good Reason, any
Stock Appreciation Right held by such participant, unless otherwise determined
by the Committee at grant or if no rights of the participant are reduced,
thereafter, may be exercised, to the extent exercisable at termination, by the
Participant at any time within a period of ninety (90) days from the date of
such termination or until the expiration of the stated term of such right,
whichever period is shorter.
(e) Termination Without Good Reason. If a Participant's
Termination of Employment or Termination of Consultancy is voluntary but without
Good Reason and occurs prior to, or more than ninety (90) days after, the
occurrence of an event which would be grounds for Termination of Employment by
the Company for Cause (without regard to any notice or cure period
requirements), any Stock Appreciation Right held by such Participant, unless
greater or lesser exercise rights are provided by the Committee at the time of
grant or, if no rights of the participant are reduced, thereafter, may be
exercised, to the extent exercisable at termination, by the Participant at any
time within a period of thirty (30) days from the date of such termination, but
in no event beyond the expiration of the stated term of such Stock Appreciation
Right.
(f) Other Termination. Unless otherwise determined by the
Committee at grant, or, if no rights of the Participant are reduced thereafter,
if a Participant's Termination of Employment or Termination of Consultancy is
for any reason other than death, Disability, Retirement, Good Reason,
involuntary termination without Cause or voluntary termination as provided in
subsection (e) above, any Stock Appreciation Right held by such Participant
shall thereupon terminate or expire as of the date of termination, provided,
that (unless the Committee determines a different period upon grant, or, if no
rights of the Participant are reduced, thereafter) in the event the termination
is for Cause or is a voluntary termination as provided in subsection (e) above,
within ninety (90) days after occurrence of an event which would be grounds for
Termination of Employment or Termination of Consultancy by the Company for Cause
(without regard to any notice or cure period requirement), any Stock
Appreciation Right held by the Participant at the time of the occurrence of the
event which would be grounds for Termination of Employment or Termination of
Consultancy by the Company for Cause shall be deemed to have terminated and
expired upon occurrence of the event which would be grounds for Termination of
Employment or Termination of Consultancy by the Company for Cause.
ARTICLE IX.
NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS
9.1. Options. The terms of this Article IX shall apply only to Options
granted to non-employee directors.
9.2. Grants. Without further action by the Board or the stockholders
of the Company, each non-employee director who is not an affiliate of dELiA*s
Inc. (so long as dELiA*s Inc. beneficially owns at least 20% of the Company's
outstanding voting stock) elected subsequent to the Effective Date shall subject
to the terms of the Plan, be granted Options to purchase 50,000 shares of Common
Stock upon the date the non-employee director begins service as a director on
the Board.
9.3. Non-Qualified Stock Options. Stock Options granted under this
Article IX shall be Non-Qualified Stock Options.
9.4. Terms of Options. Options granted under this Article shall be
subject to the following terms and conditions and shall be in such form and
contain such additional terms and conditions, not inconsistent with terms of
this Plan, as the Committee shall deem desirable:
(a) Option Price. In the case of non-employee directors who
begin service on the Board prior to the effectiveness of the Company's
registration statement relating to its initial public offering, the purchase
price per share deliverable upon the exercise of an Option granted pursuant to
Section 9.2(a) shall
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be the initial public offering price to the public in such offering. In the case
of non-employee directors who begin service on the Board subsequent to the
effectiveness of the Company's registration statement relating to its initial
public offering, the purchase price per share deliverable upon the exercise of
an Option granted pursuant to Section 9.2(a) shall be 100% of the Fair Market
Value of such Common Stock at the time of the grant of the Option, or the par
value of the Common Stock, whichever is greater.
(b) Exercisability. Except as otherwise provided herein,
twelve and one-half percent (12.5%) of any Option granted under this Article IX
shall be exercisable on or after each of the eight six-month anniversaries
following the date of grant. All Options shall fully vest upon a Change in
Control.
(c) Method for Exercise. A non-employee director electing to
exercise one or more Options shall give written notice of exercise to the
Company specifying the number of shares to be purchased. Common Stock purchased
pursuant to the exercise of Options shall be paid for at the time of exercise in
cash or by delivery of unencumbered Common Stock owned by the non-employee
director or a combination thereof or by such other method as approved by the
Board.
(d) Option Term. Except as otherwise provided herein, if not
previously exercised each Option shall expire upon the tenth anniversary of the
date of the grant thereof.
9.5. Termination of Directorship. The following rules apply with
regard to Options upon the Termination of Directorship:
(a) Death, Disability or Otherwise Ceasing to be a Director
Other than for Cause. Except as otherwise provided herein, upon the Termination
of Directorship, on account of Disability, death, Retirement, resignation,
failure to stand for reelection or failure to be reelected or otherwise other
than as set forth in (b) below, all outstanding Options then exercisable and not
exercised by the Participant prior to such Termination of Directorship shall
remain exercisable, to the extent exercisable at the Termination of
Directorship, by the Participant or, in the case of death, by the Participant's
estate or by the person given authority to exercise such Options by his or her
will or by operation of law, for the remainder of the stated term of such
Options.
(b) Cause. Upon removal, failure to stand for reelection or
failure to be renominated for Cause, or if the Company obtains or discovers
information after Termination of Directorship that such Participant had engaged
in conduct that would have justified a removal for Cause during such
directorship, all outstanding Options of such Participant shall immediately
terminate and shall be null and void.
(c) Cancellation of Options. No Options that were not
exercisable during the period such person serves as a director shall thereafter
become exercisable upon a Termination of Directorship for any reason or no
reason whatsoever, and such Options shall terminate and become null and void
upon a Termination of Directorship.
9.6. Changes. (a) The Awards to a non-employee director shall be
subject to Sections 4.2(a), (b) and (c) of the Plan and this Section 9.6, but
shall not be subject to Section 4.2(d).
(b) If the Company shall not be the surviving corporation in
any merger or consolidation, or if the Company is to be dissolved or liquidated,
then, unless the surviving corporation assumes the Options or substitutes new
Options which are determined by the Board in its sole discretion to be
substantially similar in nature and equivalent in terms and value for Options
then outstanding, upon the effective date of such merger, consolidation,
liquidation or dissolution, any unexercised Options shall expire without
additional compensation to the holder thereof; provided, that, the Committee
shall deliver notice to each non-employee director at least twenty (20) days
prior to the date of consummation of such merger, consolidation, dissolution or
liquidation which would result in the expiration of the Options and during the
period from the date on which such notice of termination is delivered to the
consummation of the merger, consolidation, dissolution or liquidation, such
Participant shall have the right to exercise in full effective as of such
consummation all Options that are then outstanding (without regard to
limitations on exercise otherwise contained in the Options) but contingent on
occurrence of the merger, consolidation,
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dissolution or liquidation, and, provided that, if the contemplated transaction
does not take place within a ninety (90) day period after giving such notice for
any reason whatsoever, the notice, accelerated vesting and exercise shall be
null and void and, if and when appropriate, new notice shall be given as
aforesaid.
ARTICLE X.
NON-TRANSFERABILITY
No Stock Option or Stock Appreciation Right shall be Transferable by
the Participant otherwise than by will or by the laws of descent and
distribution. All Stock Options and all Stock Appreciation Rights shall be
exercisable, during the Participant's lifetime, only by the Participant. Tandem
Stock Appreciation Rights shall be Transferable, to the extent permitted above,
only with the underlying Stock Option. Shares of Restricted Stock under Article
VII may not be Transferred prior to the date on which shares are issued, or, if
later, the date on which any applicable restriction lapses. No Award shall,
except as otherwise specifically provided by law or herein, be Transferable in
any manner, and any attempt to Transfer any such Award shall be void, and no
such Award shall in any manner be liable for or subject to the debts, contracts,
liabilities, engagements or torts of any person who shall be entitled to such
Award, nor shall it be subject to attachment or legal process for or against
such person.
ARTICLE XI.
CHANGE IN CONTROL PROVISIONS
11.1. Benefits. In the event of a Change in Control of the Company (as
defined below), except as otherwise provided by the Committee upon the grant of
an Award, the Participant shall be entitled to the following benefits:
(a) Subject to paragraph (c) below with regard to Options
granted to Eligible Employees and Consultants, all outstanding Options and the
related Tandem Stock Appreciation Rights and Non-Tandem Stock Appreciation
Rights of such Participant granted prior to the Change in Control shall be fully
vested and immediately exercisable in their entirety. The Committee, in its sole
discretion, may provide for the purchase of any such Stock Options by the
Company for an amount of cash equal to the excess of the Change in Control price
(as defined below) of the shares of Common Stock covered by such Stock Options,
over the aggregate exercise price of such Stock Options. For purposes of this
Section 11.1, Change in Control price shall mean the higher of (i) the highest
price per share of Common Stock paid in any transaction related to a Change in
Control of the Company, or (ii) the highest Fair Market Value per share of
Common Stock at any time during the sixty (60) day period preceding a Change in
Control.
(b) The restrictions to which any shares of Restricted Stock
of such Participant granted prior to the Change in Control are subject shall
lapse as if the applicable Restriction Period had ended upon such Change in
Control.
(c) Notwithstanding anything to the contrary herein, unless
the Committee provides otherwise at the time an Option is granted to an Eligible
Employee or Consultant hereunder or thereafter, no acceleration of
exercisability shall occur with respect to such Option if the Committee
reasonably determines in good faith, prior to the occurrence of the Change in
Control, that the Options shall be honored or assumed, or new rights substituted
therefor (each such honored, assumed or substituted option hereinafter called an
"Alternative Option"), by a Participant's employer (or the parent or a
subsidiary of such employer) immediately following the Change in Control,
provided that any such Alternative Option must meet the following criteria:
(i) the Alternative Option must be based on stock which
is traded on an established securities market, or which will be so traded within
thirty (30) days of the Change in Control;
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(ii) the Alternative Option must provide such
Participant with rights and entitlements substantially equivalent to or better
than the rights, terms and conditions applicable under such Option, including,
but not limited to, an identical or better exercise schedule; and
(iii) the Alternative Option must have economic value
substantially equivalent to the value of such Option (determined at the time of
the Change in Control).
For purposes of Incentive Stock Options, any assumed or substituted
Option shall comply with the requirements of Treasury regulation ss. 1.425- 1
(and any amendments thereto).
(d) Notwithstanding anything else herein, the Committee may,
in its sole discretion, provide for accelerated vesting of an Award (other than
a grant to a non-employee director pursuant to Article IX hereof), upon a
Termination of Employment during the Pre-Change in Control Period. Unless
otherwise determined by the Committee, the Pre-Change in Control Period shall be
the one hundred eighty (180) day period prior to a Change in Control.
11.2. Change in Control. A "Change in Control" shall be deemed to have
occurred:
(a) upon any "person" as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, dELiA*s Inc., any trustee
or other fiduciary holding securities under any employee benefit plan of the
Company, any company owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of Common Stock
of the Company, or as a group or individually Stephen I. Kahn, his spouse and
their issue and any trusts for the benefit of any of them), becoming the owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing fifty percent (50%) or more of the
combined voting power of the Company's then outstanding securities (including,
without limitation, securities owned at the time of any increase in ownership);
(b) a change in the composition of the Board of Directors of
the Company such that the individuals who, as of the date hereof, comprise the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, for purposes of this subsection that
any individual who becomes a member of an Incumbent Board subsequent to the date
hereof whose election, or nomination for election by the Company's stockholders,
was approved in advance or contemporaneously with such election by a vote of at
least a majority of those individuals who are members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered as though such
individual were a member of the Incumbent Board; but, provided further, that any
such individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of the Company or actual or threatened tender offer
for shares of the Company or similar transaction or other contest for corporate
control (other than a tender offer by the Company) shall not be so considered as
a member of the Incumbent Board; or
(c) upon the merger or consolidation of the Company with any
other corporation, other than a merger or consolidation which would result in
the voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation;
provided, however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
(other than those covered by the exceptions in (a) above) acquires more than
fifty percent (50%) of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control of the Company;
or
(d) upon the stockholder's of the Company approval of a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets
other than the sale of all or substantially all of the assets of the Company to
a person or
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persons who beneficially own, directly or indirectly, at least fifty percent
(50%) or more of the combined voting power of the outstanding voting securities
of the Company at the time of the sale.
ARTICLE XII.
TERMINATION OR AMENDMENT OF THE PLAN
12.1. Termination or Amendment. Notwithstanding any other provision of
this Plan, the Board may at any time, and from time to time, amend, in whole or
in part, any or all of the provisions of the Plan, or suspend or terminate it
entirely, retroactively or otherwise; provided, however, that, unless otherwise
required by law or specifically provided herein, the rights of a Participant
with respect to Awards granted prior to such amendment, suspension or
termination, may not be impaired without the consent of such Participant and,
provided further, without the approval of the stockholders of the Company, if
and to the extent required by the applicable provisions of Rule 16b-3 or, if and
to the extent required, under the applicable provisions of Section 162(m) of the
Code, or with regard to Incentive Stock Options, Section 422 of the Code, no
amendment may be made which would (i) increase the aggregate number of shares of
Common Stock that may be issued under this Plan; (ii) increase the maximum
individual Participant limitations for a fiscal year under Section 4.1(b); (iii)
change the classification of employees, Consultants and non-employee directors
eligible to receive Awards under this Plan; (iv) decrease the minimum option
price of any Stock Option; (v) extend the maximum option period under Section
6.3; (vi) change any rights under the Plan with regard to non-employee
directors; or (vii) require stockholder approval in order for the Plan to
continue to comply with the applicable provisions, if any, of Rule 16b-3,
Section 162(m) of the Code or, with regard to Incentive Stock Options, Section
422 of the Code. In no event may the Plan be amended without the approval of the
stockholders of the Company in accordance with the applicable laws or other
requirements to increase the aggregate number of shares of Common Stock that may
be issued under the Plan, decrease the minimum option price of any Stock Option,
or to make any other amendment that would require stockholder approval under the
rules of any exchange or system on which the Company's securities are listed or
traded at the request of the Company.
Except with respect to the award of Stock Options to non-employee directors
under Article IX, the Committee may amend the terms of any Award theretofore
granted, prospectively or retroactively, but, subject to Article IV above or as
otherwise specifically provided herein, no such amendment or other action by the
Committee shall impair the rights of any holder without the holder's consent.
ARTICLE XIII.
UNFUNDED PLAN
13.1. Unfunded Status of Plan. This Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments as to
which a Participant has a fixed and vested interest but which are not yet made
to a Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company.
ARTICLE XIV.
GENERAL PROVISIONS
14.1. Legend. The Committee may require each person receiving shares
pursuant to an Award under the Plan to represent to and agree with the Company
in writing that the Participant is acquiring the shares without a view to
distribution thereof. In addition to any legend required by this Plan, the
certificates for such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on Transfer.
All certificates for shares of Common Stock delivered under the Plan
shall be subject to such stock transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and
19
<PAGE>
other requirements of the Securities and Exchange Commission, any stock exchange
upon which the Common Stock is then listed or any national securities
association system upon whose system the Common Stock is then quoted, any
applicable Federal or state securities law, and any applicable corporate law,
and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
14.2. Other Plans. Nothing contained in this Plan shall prevent the
Board from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases.
14.3. No Right to Employment/Consultancy/Directorship. Neither this
Plan nor the grant of any Award hereunder shall give any Participant or other
employee any right with respect to continuance of employment or consultancy by
the Company or any Subsidiary, nor shall they be a limitation in any way on the
right of the Company or any Subsidiary by which an employee is employed or a
Consultant is retained to terminate his employment or consultancy, as
applicable, at any time. Neither this Plan nor the grant of any Award hereunder
shall impose any obligations on the Company to retain any Participant as a
director nor shall it impose on the part of any Participant any obligation to
remain as a director of the Company.
14.4. Withholding of Taxes. The Company shall have the right to deduct
from any payment to be made to a Participant, or to otherwise require, prior to
the issuance or delivery of any shares of Common Stock or the payment of any
cash hereunder, payment by the Participant of, any Federal, state or local taxes
required by law to be withheld. Upon the vesting of Restricted Stock, or upon
making an election under Code Section 83(b), a Participant shall pay all
required withholding to the Company.
The Committee may permit, as it decides to approve in its sole
discretion, any such withholding obligation with regard to any Participant to be
satisfied by reducing the number of shares of Common Stock otherwise deliverable
or by delivering shares of Common Stock already owned. Any fraction of a share
of Common Stock required to satisfy such tax obligations shall be disregarded
and the amount due shall be paid instead in cash by the Participant.
14.5. Listing and Other Conditions.
(a) If the Common Stock becomes listed on a national
securities exchange or system sponsored by a national securities association,
the issue of any shares of Common Stock pursuant to an Award shall be
conditioned upon such shares being listed on such exchange or system. The
Company shall have no obligation to issue such shares unless and until such
shares are so listed, and the right to exercise any Option with respect to such
shares shall be suspended until such listing has been effected.
(b) If at any time counsel to the Company shall be of the
opinion that any sale or delivery of shares of Common Stock pursuant to an Award
is or may in the circumstances be unlawful or result in the imposition of excise
taxes on the Company under the statutes, rules or regulations of any applicable
jurisdiction, the Company shall have no obligation to make such sale or
delivery, or to make any application or to effect or to maintain any
qualification or registration under the Securities Act of 1933, as amended, or
otherwise with respect to shares of Common Stock or Awards, and the right to
exercise any Option shall be suspended until, in the opinion of said counsel,
such sale or delivery shall be lawful or will not result in the imposition of
excise taxes on the Company.
(c) Upon termination of any period of suspension under this
Section 14.5, any Award affected by such suspension which shall not then have
expired or terminated shall be reinstated as to all shares available before such
suspension and as to shares which would otherwise have become available during
the period of such suspension, but no such suspension shall extend the term of
any Option.
14.6. Governing Law. This Plan shall be governed and construed in
accordance with the laws of the State of Delaware (regardless of the law that
might otherwise govern under applicable Delaware principles of conflict of
laws).
20
<PAGE>
14.7. Construction. Wherever any words are used in this Plan in the
masculine gender they shall be construed as though they were also used in the
feminine gender in all cases where they would so apply, and wherever any words
are used herein in the singular form they shall be construed as though they were
also used in the plural form in all cases where they would so apply.
14.8. Other Benefits. No Award payment under this Plan shall be deemed
compensation for purposes of computing benefits under any retirement plan of the
Company or its subsidiaries nor affect any benefits under any other benefit plan
now or subsequently in effect under which the availability or amount of benefits
is related to the level of compensation.
14.9. Costs. The Company shall bear all expenses included in
administering this Plan, including expenses of issuing Common Stock pursuant to
any Awards hereunder.
14.10. No Right to Same Benefits. The provisions of Awards need not be
the same with respect to each Participant, and such Awards to individual
Participants need not be the same in subsequent years.
14.11. Death/Disability. The Committee may in its discretion require
the transferee of a Participant to supply it with written notice of the
Participant's death or Disability and to supply it with a copy of the will (in
the case of the Participant's death) or such other evidence as the Committee
deems necessary to establish the validity of the transfer of an Award. The
Committee may also require that the agreement of the transferee to be bound by
all of the terms and conditions of the Plan.
14.12. Section 16(b) of the Exchange Act. All elections and
transactions under the Plan by persons subject to Section 16 of the Exchange Act
involving shares of Common Stock are intended to comply with any applicable
condition under Rule 16b-3. The Committee may establish and adopt written
administrative guidelines, designed to facilitate compliance with Section 16(b)
of the Exchange Act, as it may deem necessary or proper for the administration
and operation of the Plan and the transaction of business thereunder.
14.13. Severability of Provisions. If any provision of the Plan shall
be held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and the Plan shall be construed and enforced
as if such provisions had not been included.
14.14. Headings and Captions. The headings and captions herein are
provided for reference and convenience only, shall not be considered part of the
Plan, and shall not be employed in the construction of the Plan.
ARTICLE XV.
TERM OF PLAN
No Award shall be granted pursuant to the Plan on or after the tenth
anniversary of the earlier of the date the Plan is adopted or the date of
stockholder approval, but Awards granted prior to such tenth anniversary may
extend beyond that date.
ARTICLE XVI.
NAME OF PLAN
This Plan shall be known as the iTurf Inc. Amended and Restated 1999
Stock Incentive Plan.
EMPLOYMENT AGREEMENT
BETWEEN iTURF INC.
AND
STEPHEN I. KAHN
DATED AS OF APRIL 5, 1999
iTurf Inc. (the "Company"), a Delaware corporation, and Stephen I.Kahn
(the "Executive") agree as follows:
1. Employment and Duties
(a) The Company shall employ the Executive, and the Executive shall serve
the Company, as the chief executive officer and president of the Company for the
Employment Period (as defined below) as the Company's board of directors (the
"Board") may from time to time direct. The Executive shall use his best efforts
to promote the interests of the Company, and shall perform his duties faithfully
and diligently, consistent with sound business practices.
(b) The Executive shall devote substantially his full business time to the
performance of his duties for the Company.
(c) For purposes of this Agreement, "Affiliate" shall mean any corporation
or other entity of which the Company (or any corporation or entity controlling
the Company) has at least a 49% equity or voting interest.
2. Compensation
(a) As compensation for all services to be rendered by the Executive
during his employment under this agreement, the Executive shall be entitled to a
base salary at the rate of $100,000 a year (payable in equal installments at
least twice a month), subject to increases as provided in section 2(b).
(b) The Company may, in the sole and absolute discretion of the board of
directors, from time to time increase the Executive's base salary and award the
Executive such bonuses as it considers appropriate.
3. Term. (a) The "Employment Period" shall commence on the date of the
completion of the Company's initial public offering and continue until the third
anniversary thereof; provided that the Employment Period shall terminate
earlier: (i) upon Executive's resignation, death or permanent disability or
incapacity (if in the good faith determination of the Company's board of
directors, such disability or incapacity has prevented the Executive from
substantially performing his duties and obligations under this Agreement during
any period of nine consecutive calendar months and the Company gives notice to
the Executive not earlier than 30 days and not later than 90 days after the
expiration of the nine months (in which case the Executive's employment under
this Agreement shall terminate when that notice is given) ("Disability"); (ii)
in accordance with subparagraph (c) below; or (iii) upon written notice to
Executive, at any time, for Cause, as defined in subparagraph (b) below.
(b) For purposes of this Agreement, "Cause" shall mean (i) a
material breach of this Agreement by Executive that, if capable of being
remedied, Executive fails to remedy within 30 days after written notice, (ii)
any breach of Executive's duty of loyalty to the Company or any of its
affiliates or act of fraud or intentional dishonesty with respect to the Company
or any of its Affiliates, which, with respect to any of the foregoing, causes
material harm to the Company's business, (iii) the commission by Executive of a
felony or crime involving moral turpitude or other wrongful act or omission
causing
<PAGE>
material harm to the standing and reputation of the Company and its Affiliates,
(iv) failure by the Executive to report for work for ten (10) consecutive
business days other than for reasonable personal excuses, which failure
Executive fails to cure after written notice, or (vi) willful misconduct or
gross negligence in the performance of Executive's duties to the Company, which
conduct is material and demonstrably injurious to the Company and, if capable of
being remedied, is not remedied within 30 days.
(c) Executive may, at any time during the Employment Period by
written notice to the Company, terminate the Employment Period for "Good Reason"
effective upon such notice. "Good Reason" means (i) a material breach by the
Company of any material provision of this Agreement that the Company fails to
remedy or cease within 30 days after written notice thereof to the Company; or
(ii) a relocation by the Company of the Executive's offices to a geographic
location outside the metropolitan New York area.
4. Separation Payments.
(a) In the event of termination of the Employment Period upon
Executive's resignation (other than for Good Reason), death or Disability, the
Company shall promptly pay to Executive all sums accrued and unpaid to the date
of termination (including unused vacation in accordance with the policies of the
Company with respect to its executive officers then in effect) and Executive
shall not be entitled to receive his Base Salary, any severance pay or any
fringe benefits or bonuses for periods after such termination of the Employment
Period.
(b) If the Employment Period is terminated by the Company without
Cause or by the Executive for Good Reason in accordance with Section 3(c), the
Company (i) shall continue to pay the Executive the Base Salary (determined
pursuant to Section 3) in effect at the time of termination for the remainder of
the Employment Period had it not been so terminated, and (ii) shall pay to
Executive within ten days thereof all sums accrued and unpaid to the date of
termination. The provisions of this Section 4(b) shall constitute Executive's
sole and exclusive remedy in connection with termination of the Employment
Period by the Company without Cause or by the Executive for Good Reason in
accordance with Section 3(c).
5. Expenses; Fringe Benefits
During the Employment Period:
(a) The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses.
(b) The Executive shall be entitled to six weeks vacation each year.
(c) Except to the extent dELiA*s Inc. ("dELiA*s") provides comparable
benefits to the Executive, the Company shall provide the Executive with medical
insurance, disability insurance and life insurance under policies no less
favorable to the Executive than the ones (i) currently in effect and (ii)
offered from time to time to the Company's other executive officers. In
addition, the Company may obtain key-man term life insurance on the life of the
Executive, and the Company shall be the beneficiary under such policy.
<PAGE>
(d) The Company shall provide the Executive with an automobile of at
least the same quality as the one he currently uses, and shall pay all expenses
reasonably incurred in connection with his use of that automobile.
(e) The Company shall provide the Executive with an annual allowance of
$20,000 to be applied, in the Executive's discretion, in any combination to one
or more of the following: tax return preparation, financial consulting, estate
planning and/or life/disability insurance premiums or similar professional
services.
6. Non-Competition
(a) Executive agrees that during the Employment Period and for a
period of two years from the termination thereof (the "Non-Competition Period"),
he will not directly, either for his own account or for the benefit of any
person, firm or corporation, engage in any business activity directly
competitive with the Company (a "Competing Business Activity"), provided,
however, that a business activity shall not be deemed to be a Competing Business
Activity if Executive did not have direct or indirect involvement in the
particular competing activity engaged in by the Company.
(b) Executive agrees that during the Non-Competition Period,
Executive shall not discuss or accept any relationship, whether as a consultant,
representative, employee, executive, officer, director, manager or otherwise,
with any person, firm or corporation which is engaged in a Competing Business
Activity.
(c) During the Non-Competition Period, Executive shall not directly
or indirectly own or be a stockholder, partner of, or otherwise participate in
any company that is engaged in a Competing Business Activity. Notwithstanding
the above, Executive may hold up to a one percent (1%) interest in any publicly
held or traded company and shall have an unlimited right to invest in any mutual
fund which is publicly traded or managed by a major financial institution.
(d) During the Non-Competition Period, Executive shall not directly
or indirectly through another person or entity (i) induce or attempt to induce
any employee of the Company or any Affiliate to leave the employ of the Company
or such Affiliate, or in any way interfere with the relationship between the
Company or any Affiliate and any employee thereof, (ii) hire any person who was
an employee of the Company or any Affiliate at any time during the Employment
Period or (iii) induce or attempt to induce any customer, supplier, licensee,
licensor, franchisee, consultant or other business relation of the Company or
Affiliate to cease doing business with the Company or such Affiliate, or in any
way interfere with the relationship between any such customer, supplier,
licensee, consultant or business relation and the Company or any Affiliate
(including, without limitation, making any negative statements or communications
about the Company or its Affiliates). Notwithstanding anything to the contrary
contained herein, Executive's obligation under clause (ii) of the preceding
sentence shall terminate six months after an acquisition of the Company by an
unrelated third party.
(e) During the Non-Competition Period, Executive shall inform any
prospective new employer or associate prior to accepting any employment or any
business relationship of the existence of this Agreement and provide such
employer or associate with a copy of this Agreement.
(f) In the event any covenant made in this Agreement shall be more
restrictive than permitted by applicable law, it shall be limited to the extent
which is so permitted. Nothing in this Agreement shall be construed as to
prevent the Company from pursuing any and all remedies available to it for the
breach or threatened breach of covenants made in this Agreement, including
recovery of money damages or temporary or permanent injunctive relief.
Accordingly, Executive acknowledges that the
<PAGE>
remedy at law for breach of the provisions of this Agreement may be inadequate
and that, in addition to any other remedy the Company may have, it shall be
entitled to an injunction restraining any breach or threatened breach, without
any bond or other security being required and without the necessity of showing
actual damages.
(g) Notwithstanding anything to the contrary contained in this
Section 6, (i) nothing contained in this Section 6 shall be construed so as to
prohibit the Executive from being employed by a company or entity that engages
in a Competing Business Activity so long as Executive is not responsible for,
does not report to or have any involvement, whether direct or indirect, with any
division or unit of said company engaged in such Competing Business Activity,
and (ii) this Section 6 shall be of no force or effect in the event the
Employment Period is terminated by the Company without Cause.
7. Confidentiality
Executive acknowledges that the information, trade secrets,
observations, confidential knowledge and data obtained by him while employed by
the Company concerning the business, new, planned or existing products and
services, or affairs of the Company, its customers or any affiliate of the
Company ("Confidential Information") are the property of the Company or such
affiliate. Therefore, the Executive agrees that he shall not, at any time during
or after his employment under this Agreement, disclose to any third party except
in the performance of his duties hereunder or as may be required by law, any
Confidential Information except for such information which has become publicly
available other than by an act or omission of the Executive. Executive shall
deliver to the Company at the termination of the Employment Period, or at any
other time the Company may request, all memoranda, notes, plans, records,
reports, computer files, printouts and software and other documents and data
(and all copies thereof) relating to the Confidential Information, work product
or the business of the Company or any affiliate which he may then possess or
have under his control.
8. Relationship with dELiA*s.
The parties acknowledge that the Executive is the Chief Executive Officer
and Chairman of the Board of Directors of dELiA*s and that he will allocate his
time and efforts between the Company and dELiA*s as he sees fit in his good
faith business judgment. Subject to the foregoing, during the term, and
excluding any periods of vacation and sick leave to which the Executive is
entitled, the Executive agrees to devote reasonable attention and time during
normal business hours to the business and affairs of the Company and, to the
extent necessary to discharge the responsibilities assigned to the Executive
hereunder, to use the Executive's reasonable best efforts to perform faithfully
and efficiently such responsibilities. During the term it shall not be a
violation of this Agreement for the Executive to (A) serve on corporate, civic
or charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions, (C) manage personal
investments, and (D) serve as Chief Executive Officer and Chairman of the Board
of Directors of dELiA*s (and in any other positions with dELiA*s and its
affiliates as Executive deems appropriate) so long as such activities do not
significantly interfere with the performance of the Executive's responsibilities
as an employee of the Company in accordance with this Agreement. The Company
shall continue to nominate the Executive as a director of the Company during the
term hereof consistent with the Company's By-Laws.
9. Executive's Representations. Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity, and
(iii) upon the execution and delivery of this Agreement by the
<PAGE>
Company, this Agreement shall be the valid and binding obligation of Executive,
enforceable in accordance with its terms. Executive hereby acknowledges and
represents that he has been given the opportunity to consult with independent
legal counsel regarding his rights and obligations under this Agreement and that
he fully understands the terms and conditions contained herein.
10. Miscellaneous
(a) The failure of a party to this agreement to insist on any occasion
upon strict adherence to any term of this agreement shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this agreement. Any waiver must be
in writing. No waiver of any term or condition of this Agreement shall be deemed
to be a waiver of any subsequent breach of that term or condition or any breach
of any other term or condition of this Agreement.
(b) All notices and other communications under this agreement shall be
in writing and shall be deemed given when delivered personally or mailed by
registered mail, return receipt requested, to a party at his or its address as
follows (or at such other address as a party may designate in any notice under
this agreement):
If to the Executive:
If to the Company:
iTurf Inc.
435 Hudson Street
New York, NY 10014
Attention: Legal Department
(c) This agreement shall be assigned to and shall inure to the benefit
of any successor to substantially all the assets and business of the Company as
a going concern, whether by merger, consolidation, liquidation or sale of
substantially all the assets of the Company or otherwise, and the Company shall
cause any such successor to assume the Company's obligations under this
agreement (but no such assignment shall relieve the Company of its obligations
under this agreement).
(d) This agreement constitutes the entire understanding of the parties
with respect to the subject matter of this agreement, cannot be changed or
terminated except by a written agreement executed by the parties and shall be
governed by the law of the State of New York applicable to agreements made and
to be performed therein.
(e) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall be considered one and
the same Agreement.
(f) At the election of either party, any controversy or claim arising
out of or relating to this contract, or the breach thereof, shall be settled by
arbitration administered by the American Arbitration Association under its
National Rules for the Resolution of Employment Disputes, and judgment upon the
award rendered by the arbitrator(s) may be entered by any court having
jurisdiction thereof.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
ITURF INC.
By:/s/ Alex S. Navarro
--------------------------
Its Authorized Signatory
STEPHEN I. KAHN
/s/ Stephen I. Kahn
-----------------------------
EXHIBIT 10.14
TSISOCCER.COM ASSET TRANSFER AGREEMENT
TSISOCCER.COM ASSET TRANSFER AGREEMENT (this "Agreement") is
entered into as of April 1, 1999 by and between iTurf Inc., a Delaware
corporation ("Buyer") and TSI Soccer Corporation, a North Carolina corporation
("Seller").
RECITALS
Seller is engaged in the business of selling soccer clothing,
accessories and related merchandise at the retail level (the "Business"); and
Seller has agreed to sell and assign to Buyer, and Buyer has
agreed to purchase and assume, the Purchased Assets (as defined below)
associated on the terms set forth in this Agreement.
THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Sale and Purchase of Assets.
1.1 Sale of Assets to Buyer. Seller hereby
agrees to sell, assign, transfer, convey and deliver to Buyer, and Buyer agrees
to purchase and acquire from Seller at the Closing (as defined below), all of
Seller's right, title and interest in and to the Purchased Assets as those
assets exist on the Closing Date (as defined below), free and clear of any
security interest, lien, charge, option, restriction on transfer, claim or other
encumbrance (a "Lien"). The term "Purchased Assets" as used herein means the
TSISoccer.com Internet domain name, the goodwill associated with that domain
name and the HTML code, graphics and other copyrightable work existing on the
TSISoccer.com web site as it exists on the Closing Date (as defined below).
1.2 Limitation on Assumption of Liabilities.
Buyer shall not assume or be responsible for any liabilities or obligations of
Seller relating to the Purchased Assets or otherwise, prior to or after the
Closing Date, and Seller shall pay, perform and discharge all such liabilities
and obligations.
<PAGE>
2. Purchase Price. The full consideration (the "Purchase
Price") for the Purchased Assets shall be that number of shares of Class A
Common Stock, par value $.01 per share, of Buyer equal to the quotient obtained
by dividing $25,000 by the initial public offering price per share of the Class
A Common Stock, to be issued and delivered on the Closing Date to Seller and
evidenced by a stock certificate or certificates in the name(s) designated by
Seller at least two days prior to Closing.
3. Closing.
3.1 Date of Closing. The closing of the
transactions contemplated by this Agreement (the "Closing") shall take place on
the closing date of Buyer's initial public offering of its Class A Common Stock,
at 10:00 A.M. at the offices of Buyer, 435 Hudson Street, New York, New York
10014 or on such other date or at such other time and place as the parties may
mutually agree. The date on which the Closing is held is referred to in this
Agreement as the "Closing Date."
3.2 Closing Deliveries. At the Closing, Seller
shall deliver a bill of sale or other instrument of assignment covering the
Purchased Assets and Buyer shall deliver to Seller the stock certificate or
certificates referred to in Section 2 hereof.
4. Representations and Warranties by Seller.
Seller represents and warrants as follows:
4.1 Organization and Authority. Seller is a
corporation duly organized, validly existing and in good standing under the laws
of the State of North Carolina, and has the full corporate power and authority
to enter into and to perform its obligations under this Agreement and any and
all agreements, instruments, or other documents delivered or to be delivered
pursuant to this Agreement ("Related Agreements") and to own and lease its
assets and to operate the Business as it is now being conducted.
4.2 Authorization. The execution, delivery and
performance by Seller of this Agreement and any Related Agreements to which
Seller is party have been duly authorized by all necessary corporate and
stockholder action of Seller, and this Agreement and any Related Agreements to
which Seller is party constitute the valid and binding obligations of Seller,
enforceable against it in accordance with their terms, except as may be limited
by bankruptcy, insolvency, moratorium or other similar laws affecting creditors'
rights generally, and subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law).
4.3 No Conflict. The execution, delivery and
performance by Seller of this Agreement and any Related Agreements to which
Seller is party does not and will not (i) violate or conflict with the
certificate of incorporation or by-laws of Seller, and will not conflict with,
or result in a breach or termination of or constitute a default under, any
lease,
<PAGE>
agreement, commitment or other instrument, or any order, judgment or decree, by
which Seller is a party, or to which the Purchased Assets are subject; (ii)
constitute a violation by Seller of any law, regulation, ordinance, order, writ,
judgment, injunction, decree or other requirement of any governmental body or
court applicable to Seller or any of its properties; or (iii) result in the
creation of any Lien upon the Purchased Assets. No consent, approval or
authorization of, or designation, declaration or filing with, any person, entity
or governmental authority is required in connection with the execution, delivery
and performance of this Agreement.
4.4 Title to Assets. Seller has and will
transfer to Buyer at the Closing, and at the Closing, Buyer will receive, good
and marketable title to the Purchased Assets, free and clear of any Lien.
4.5 Investment Intent. Seller is acquiring
Buyer's Class A Common Stock pursuant hereto for its own account for investment
and not with a view to, or for sale in connection with, any public distribution
thereof in violation of the Securities Act of 1933, as amended (the "Securities
Act"). Seller understands that such shares of Class A Common Stock have not been
registered for sale under the Securities Act of 1933 or qualified under
applicable state securities laws and that such securities will be delivered to
Seller pursuant to one or more exemptions from the registration or qualification
requirements of such securities laws and that the representations and warranties
contained in this Section 4.5 are given with the intention that Buyer may rely
thereon for purposes of claiming such exemptions. Seller understands that such
securities cannot be sold unless registered under the Securities Act of 1933 and
qualified under applicable state securities laws or unless an exemption from
such registration and qualification is available.
5. Representations and Warranties by Buyer.
Buyer represents and warrants to Seller as follows:
5.1 Organization. Buyer is a corporation duly
organized, validly existing and in good standing under the law of the State of
Delaware and has the full corporate power and authority to enter into and
perform this Agreement and any Related Agreements to which Buyer is a party in
accordance with its terms.
5.2 Authorization. The execution, delivery and
performance by Buyer of this Agreement and any Related Agreements to which Buyer
is a party have been duly authorized by all necessary corporate action of Buyer
and this Agreement and any Related Agreements to which Buyer is a party
constitute the valid and binding obligations of Buyer, enforceable against it in
accordance with their terms, except as may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting creditors' rights generally, and
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
<PAGE>
5.3 No Conflict. The execution, delivery and
performance by Buyer of this Agreement and any Related Agreements to which Buyer
is a party will not (i) conflict with the certificate of incorporation and
by-laws of Buyer and will not conflict with or result in the breach or
termination of, or constitute a default under, any lease, agreement, commitment
or other instrument, or any order, judgment or decree to which Buyer is a party
or by which Buyer is bound, or (ii) constitute a violation by Buyer of any law,
regulation, ordinance, order, writ, judgment, injunction, decree or other
requirement of any governmental body or court applicable to Buyer. No consent,
approval or authorization of, or designation, declaration or filing with, any
person, entity or governmental authority is required on the part of Buyer in
connection with the execution, delivery and performance of this Agreement.
6. Miscellaneous.
6.1 Notices. Any notice or other communication under
this Agreement shall be in writing and shall be considered given when delivered
personally, one day after delivery by a reputable overnight courier (receipt
confirmed), or four days after the postmark date if mailed by registered mail,
return receipt requested, to the parties at the addresses set forth below (or at
such other address as a party may specify by notice to the other):
If to Buyer, to it at:
iTurf Inc.
435 Hudson Street
New York, NY 10014
Attention: President
If to Seller, to it at:
c/o dELiA*s Inc.
435 Hudson Street
New York, NY 10014
Attention: President
6.2 Further Assurances. Each party shall use all
reasonable efforts to take, cause to be taken, all actions and to do, or cause
to be done, all other things necessary, proper and advisable to consummate and
make effective as promptly as practicable the transactions contemplated by this
Agreement.
6.3 Governing Law. This Agreement shall be
governed by and construed in accordance with the law of the State of New York,
without giving effect to principles governing conflicts of law.
<PAGE>
6.4 Assignment. Neither party may assign this
Agreement, any of its rights or delegate any of its duties under this Agreement
without the prior written consent of the other party hereto.
6.5 Expenses. Each party shall bear its own
expenses incurred in connection with the negotiation and preparation of this
Agreement and in connection with all obligations required to be performed by it
hereunder.
6.6 Counterparts. This Agreement may be
executed in one or more counterparts, which together shall constitute a single
instrument.
6.7 Entire Agreement. This Agreement, including
the schedules and exhibits, contains a complete statement of all the
arrangements between the parties with respect to its subject matter, supersedes
any previous agreements between them relating to that subject matter, and cannot
be amended, modified or terminated except in a written document executed by all
the parties hereto.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
[SIGNATURE PAGE TO TSISOCCER.COM ASSET TRANSFER AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be duly executed as of the date first above written.
iTurf Inc.
By:/s/Alex S. Navarro
---------------------
Name: Alex S. Navarro
Title: Chief Operating Officer
TSI Soccer Corporation
By:/s/ Alex S. Navarro
---------------------
Name: Alex S. Navarro
Title: Senior Vice President
EXHIBIT 10.15
SUBSCRIPTION AGREEMENT
APRIL 1, 1999
dELiA*s Inc., a Delaware corporation (the "Corporation"), and
iTurf Delaware Investment Company (the "Investor"), hereby agree as follows:
1. Definitions. As used herein, the following
capitalized terms have the meaning ascribed to them below:
"Common Stock"means the Corporation's Common Stock,
par value $.01 per share.
"Initial Average Trading Price" means the average of
the closing price of the Common Stock as reported by The Nasdaq Stock market on
each of the five trading days preceding the date on which iTurf's Class A
Common Stock begins trading on The Nasdaq Stock Market.
"Initial Closing Date" means the closing date of the
Investor's initial public offering.
"Initial Purchase Price" means Ten Million Dollars
($10,000,000).
"iTurf" means iTurf Inc., a Delaware Corporation.
<PAGE>
"Over-Allotment Option" means the option granted by
iTurf to the underwriters of its initial public offering to purchase
additional shares of iTurf's Class A Common Stock under certain circumstances
pursuant to an underwriting agreement between such parties.
"Over-Allotment Average Trading Price" means the
average of the closing price of the Common Stock as reported by The Nasdaq Stock
Market on each of the five trading days preceding the date on which notice of
the underwriters' intent to exercise the Over-Allotment Option is given.
"Over-Allotment Closing Date" means the closing date
of the exercise of the Over-Allotment Option.
"Over-Allotment Option Purchase Price" means the
product of (A) 0.6 multiplied by (B) the Investor's net proceeds from the
exercise of the Over-Allotment Option.
"Shares" means the Initial Shares and the Over-
Allotment Shares.
2. Subscription.
<PAGE>
(a) Initial Subscription. The Investor agrees to subscribe for
the purchase of that number of shares of the Common Stock equal to the quotient
obtained by dividing the Initial Purchase Price (as defined below) by the
Initial Average Trading Price (the "Initial Shares")), for the Initial Purchase
Price and the Corporation agrees to accept the subscription. Upon the Initial
Closing Date, the Investor shall deliver to the Corporation funds in the amount
of the Initial Purchase Price for the Initial Shares and the Corporation shall
deliver, or promptly after the Closing Date shall deliver, to the Investor a
certificate or certificates representing the Initial Shares.
(b) Over-Allotment Subscription. In the event the
Over-Allotment Option is exercised, the Investor shall subscribe for the
purchase of that number of shares of the Common Stock equal to the quotient
obtained by dividing the Over-Allotment Purchase Price by the Over-Allotment
Average Trading Price (the "Over-Allotment Shares")), for the Over-Allotment
Purchase Price and the Corporation agrees to accept the subscription. Upon the
Over-Allotment Closing Date, the Investor shall deliver to the Corporation funds
in the amount of the Over-Allotment Purchase Price for the Over-Allotment Shares
and the Corporation is delivering, or
<PAGE>
promptly after the execution of this agreement shall deliver, to the Investor a
certificate or certificates representing the Initial Shares.
3. Representations and Warranties of the
Investor. The Investor understands that the offer and sale of the Shares are
intended to be exempt from registration under the Securities Act of 1933, as
amended, (the "Act") by virtue of the private placement exemption under the Act.
Accordingly, the Investor represents and warrants to the Corporation that:
(a) The Investor is aware that there are substantial risks in
subscribing to purchase, and in purchasing, the Shares.
(b) Representatives of the Corporation have answered any
questions the Investor has asked about the Corporation and the Investor has
received any additional information the Investor has requested.
(c) The Investor is acquiring the Shares for its own account,
for investment, and not with a view to resale or distribution, in whole or in
part, in violation of the Act.
<PAGE>
(d) In deciding to subscribe for the Shares, the Investor has
relied solely upon an independent investigation of the Corporation's business
and upon consultation with the Investor's legal and financial advisers with
respect to the Corporation's business, the nature of the Investor's investment
and this agreement, and the Investor has not acted upon the basis of any other
representations or warranties.
(e) The Investor has such knowledge and experience in
financial and business matters to be capable of evaluating the merits and risks
of the investment, and is able to bear the substantial economic risks of the
investment and can afford a complete loss of the investment.
(f) The Investor understands that the Shares cannot be sold,
transferred or assigned, unless they first are registered under the Act or an
exemption from registration is available (and then may be sold only in
compliance with all applicable state securities laws), and that a legend may be
placed upon the certificates representing the Shares to that effect and that a
stop transfer order may be placed against them.
4. Miscellaneous.
(a) This agreement supersedes all prior agreements
between the parties concerning its subject matter, is intended as a complete and
exclusive statement of the terms of
<PAGE>
the agreement between the parties with respect to the transaction contemplated
by it, and cannot be changed or terminated orally.
(b) The failure of a party to insist upon strict
adherence to any term of this agreement on any occasion shall not be considered
a waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this agreement. Any waiver must be
in writing.
(c) This agreement shall be governed by and construed
in accordance with the law of New York applicable to agreements made and to be
performed in New York.
(d) Any notice or other communication under this
agreement shall be in writing and shall be considered given when mailed by
registered mail, return receipt requested, to the parties at the following
addresses (or at such other address as a party may specify by notice to the
other):
If to the Investor, to it at c/o iTurf Inc., 435
Hudson Street, New York, NY 10014; Attn: President.
If to the Corporation, to it at 435 Hudson Street,
New York, NY 10014; Attn: President.
(e) This agreement is for the purpose of defining the
respective rights and obligations of the parties to it and it not for the
benefit of any creditor of the Corporation or other third party.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
[SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT]
iTurf Delaware Investment Company
By:/s/Alex S. Navarro
---------------------
Alex S. Navarro
Assistant Secretary
dELiA*s Inc.
By:/s/ Alex S. Navarro
- ----------------------
Alex S. Navarro
Senior Vice President
EXHIBIT 21
Subsidiaries of the Registrant State of Incorporation
- ------------------------------ ----------------------
iTurf Delaware Investment Company Delaware
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 No. 333-71123) and the related Prospectus of iTurf Inc. for
the registration of its Class A Common Stock.
ERNST & YOUNG LLP
New York, New York
April 2, 1999
<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 February 28, 1999 (except to the second paragraph
of Note 1, as to which the date is April 1, 1999), in the Registration Statement
(Form S-1 No. 333-71123) and the related Prospectus of iTurf Inc. for the
registration of its Class A Common Stock.
ERNST & YOUNG LLP
New York, New York
April 2, 1999
CONSENT
The undersigned hereby consents, in accordance with Rule 438 under the
Securities Act of 1933, to (a) being named in the registration statement (as
amended, the "Registration Statement") filed by iTurf Inc. (the "Company") as
person who will become a director of the Company as described in the
Registration Statement and (b) the filing of this Consent as an exhibit to the
Registration Statement.
Dated: March 30, 1999
/s/ Thomas R. Evans
-------------------
Thomas R. Evans
<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 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>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 375
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 375
<PP&E> 461
<DEPRECIATION> 47
<TOTAL-ASSETS> 1,255
<CURRENT-LIABILITIES> 836
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 294
<TOTAL-LIABILITY-AND-EQUITY> 1,255
<SALES> 3,352
<TOTAL-REVENUES> 4,014
<CGS> 1,687
<TOTAL-COSTS> 1,687
<OTHER-EXPENSES> 1,467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 819
<INCOME-TAX> 355
<INCOME-CONTINUING> 464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
