<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1999
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT
-------------------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
Commission file number 0-25347
ITURF INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3963754
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
435 HUDSON STREET, NEW YORK, NEW YORK 10014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(212) 741-7785
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Number of shares of Common Stock outstanding as of August 31, 1999:
17,331,136
---------------------------
- - -------------------------------------------------------------------------------
<PAGE>
STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING, WITHOUT LIMITATION,
INFORMATION APPEARING UNDER "PART I ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY BE
FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF SECTION 27A OF THE AMENDED
SECURITIES ACT OF 1933 AND SECTION 21E OF THE AMENDED SECURITIES EXCHANGE ACT OF
1934). WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVE," "PLAN," "INTEND,"
"EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS REPORT.
THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THE FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO:
FLUCTUATIONS IN CONSUMER PURCHASING PATTERNS AND ADVERTISING SPENDING; TIMING
OF, RESPONSE TO AND QUANTITY OF OUR PARENT'S CATALOG MAILINGS AND OUR OWN
ELECTRONIC MAILINGS; CHANGES IN THE GROWTH RATE OF INTERNET USAGE AND ONLINE
USER TRAFFIC LEVELS; ACTIONS OF OUR COMPETITORS; THE TIMING AND AMOUNT OF COSTS
RELATING TO THE EXPANSION OF OUR OPERATIONS AND ACQUISITIONS OF TECHNOLOGY OR
BUSINESSES AND THEIR INTEGRATION; GENERAL ECONOMIC AND MARKET CONDITIONS; AND
OTHER FACTORS OUTSIDE OUR CONTROL. THESE FACTORS, AND OTHER FACTORS THAT APPEAR
IN THIS REPORT OR IN OUR OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS,
INCLUDING OUR REGISTRATION STATEMENT (NO. 333-15153) ON FORM S-1, COULD AFFECT
OUR ACTUAL RESULTS AND COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR ON OUR BEHALF.
ALL REFERENCES IN THIS REPORT TO A FISCAL YEAR PRIOR TO FISCAL 1999 REFER
TO THE YEAR ENDED JANUARY 31 FOLLOWING THE PARTICULAR CALENDAR YEAR (E.G.,
"FISCAL 1998" REFERS TO THE FISCAL YEAR ENDING JANUARY 31, 1999). EFFECTIVE
FEBRUARY 1, 1999, WE CHANGED OUR FISCAL YEAR TO END ON THE SATURDAY CLOSEST TO
JANUARY 31 FOLLOWING THE CALENDAR YEAR (E.G., "FISCAL 1999" REFERS TO THE FISCAL
YEAR ENDING JANUARY 29, 2000).
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
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ITURF INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, 1999 JULY 31, 1999
--------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 375 $ 22,422
Short-term investments............................................. -- 55,517
Other current assets............................................... -- 1,840
-------- --------
Total current assets 375 79,779
DEFERRED OFFERING COSTS............................................. 110 --
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $46
at January 31, 1999 and $141 at July 31, 1999.................. 414 1,868
INTANGIBLE ASSETS, NET.............................................. 317 313
-------- --------
TOTAL ASSETS $ 1,216 $ 81,960
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities..................... $ 263 $ 1,207
Due to dELiA*s..................................................... 573 2,632
-------- --------
Total current liabilities...................................... 836 3,839
STOCKHOLDERS' 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 shares authorized;
no shares issued or outstanding at January 31, 1999;
4,831,136 shares issued and outstanding at July 31, 1999...... -- 48
Class B common stock, $.01 par value, 12,500,000 shares authorized,
issued and outstanding........................................ 125 125
Additional paid-in capital......................................... -- 97,261
Investment in common stock of dELiA*s Inc.......................... -- (17,734)
Retained earnings (deficit)........................................ 255 (1,579)
-------- --------
Total stockholders' equity 380 78,121
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,216 $ 81,960
-------- --------
-------- --------
See Notes to Unaudited Condensed Consolidated Financial Statements
</TABLE>
3
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ITURF INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS
ENDED ENDED
JULY 31, 1998 JULY 31, 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
NET REVENUES:
NET PRODUCT SALES............................................... $ 653 $ 2,600
ADVERTISING AND OTHER........................................... 107 352
-------- --------
TOTAL NET REVENUES.................................................. 760 2,952
COST OF PRODUCT SALES............................................... 339 1,651
-------- --------
GROSS PROFIT........................................................ 421 1,301
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................ 445 4,052
INTEREST EXPENSE (INCOME), NET...................................... 11 (989)
-------- --------
LOSS BEFORE INCOME TAXES............................................ (35) (1,762)
BENEFIT FOR INCOME TAXES............................................ (11) --
-------- --------
NET LOSS .......................................................... $ (24) $ (1,762)
-------- --------
-------- --------
BASIC AND DILUTED NET LOSS PER SHARE................................ $ (0.00) $ (0.10)
-------- --------
-------- --------
SHARES USED IN THE CALCULATION OF BASIC AND DILUTED
NET LOSS PER SHARE.............................................. 12,500 17,331
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS TWENTY-SIX WEEKS
ENDED ENDED
JULY 31, 1998 JULY 31, 1999
------------- ----------------
(UNAUDITED)
<S> <C> <C>
NET REVENUES:
NET PRODUCT SALES............................................... $ 722 $ 5,025
ADVERTISING AND OTHER........................................... 107 542
-------- --------
TOTAL NET REVENUES.................................................. 829 5,567
COST OF PRODUCT SALES............................................... 374 2,983
-------- --------
GROSS PROFIT........................................................ 455 2,584
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................ 554 5,805
INTEREST EXPENSE (INCOME), NET...................................... 22 (1,101)
-------- --------
LOSS BEFORE INCOME TAXES............................................ (121) (2,120)
BENEFIT FOR INCOME TAXES............................................ (44) (161)
-------- --------
NET LOSS............................................................ $ (77) $ (1,959)
-------- --------
-------- --------
BASIC AND DILUTED NET LOSS PER SHARE................................ $ (0.01) $ (0.13)
-------- --------
-------- --------
SHARES USED IN THE CALCULATION OF BASIC AND DILUTED
NET LOSS PER SHARE.............................................. 12,500 15,372
-------- --------
-------- --------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
4
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ITURF INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS TWENTY-SIX WEEKS
ENDED ENDED
JULY 31, 1998 JULY 31, 1999
------------- ----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss.................................................................. $ (77) $
(1,959)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 49 130
Amortization of investments............................................. -- (139
Changes in operating assets and liabilities:
Other current assets............................................. -- (1,840
Other assets..................................................... (50) --
Current liabilities.............................................. 13 714
-------- --------
Net cash used in operating activities...................................... (65) (3,094
-------- --------
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of dELiA*s stock................................................. -- (17,734)
Capital expenditures...................................................... (131) (1,555)
Purchase of held to maturity investment securities........................ -- (55,378)
-------- --------
Net cash used in investing activities...................................... (131) (74,667)
-------- --------
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................................ -- 97,749
Loan from dELiA*s......................................................... 1,047 6,415
Repayment to dELiA*s...................................................... (845) (4,356)
-------- --------
Net cash provided by financing activities.................................. 202 99,808
-------- --------
-------- --------
INCREASE IN CASH & CASH EQUIVALENTS........................................ 6 22,047
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD............................... 31 375
-------- --------
CASH & CASH EQUIVALENTS--END OF PERIOD..................................... $ 37 $ 22,422
-------- --------
-------- --------
Supplemental disclosure of noncash financing and investing activity:
April 1999 issuance of common stock for the acquisition of TSISoccer.com domain name. See Note 1.
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE>
ITURF INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
iTurf Inc. is an Internet community and marketer of apparel, related
accessories, home furnishings and soccer merchandise that is focused primarily
on young men and women between the ages of 10 and 24, an age group known as
"Generation Y." We are a subsidiary of dELiA*s Inc. ("dELiA*s" or our "Parent").
The accompanying financial statements of iTurf, which was incorporated in August
1997, include all of dELiA*s Internet operations from that date of
incorporation, as well as the Internet operations of TSI Soccer Corporation
("TSI") prior to that date. They also include the financial results and balances
of iTurf Finance Company, a wholly-owned subsidiary of iTurf Inc. We utilize
dELiA*s business relationships, infrastructure and brand names and relied on
dELiA*s to provide financing for our operations until April 14, 1999, when we
completed an initial public offering of our Class A common stock.
On April 1, 1999, our certificate of incorporation was amended and restated
such that the authorized capital stock of iTurf 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, exchange of the 100 shares of common
stock previously outstanding and held by dELiA*s into 12,500,000 shares of Class
B common stock was approved. All share information in these financial statements
and notes has been adjusted to reflect these changes.
In our initial public offering, we issued 4,830,000 shares of our Class A
common stock to the public at a price of $22 per share to receive net cash
proceeds of approximately $97,409,000 after expenses. 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. In connection with the
initial public offering, iTurf acquired the TSISoccer.com domain name from TSI,
a wholly-owned subsidiary of dELiA*s, for 1,136 shares of Class A common stock
(valued at $25,000 at the initial public offering price). dELiA*s continues to
own all outstanding shares of iTurf's Class B common stock, which represents
approximately 94% of the voting power and 72% of the value of iTurf common
stock. Each share of Class B common stock is convertible into one share of Class
A common stock under certain circumstances.
iTurf used approximately $17,700,000 of the initial public offering
proceeds to purchase 551,046 shares of dELiA*s common stock from dELiA*s. This
purchase has been recorded as a reduction to iTurf's stockholders' equity. In
June 1999, we used $1,574,000 of the initial public offering proceeds to repay
our May 1, 1999 indebtedness to dELiA*s.
iTurf is subject to seasonal fluctuations in our merchandise sales and
results of operations. We expect our revenues and operating results generally to
be lower in the first half of each fiscal year than in the second half of such
year.
Effective February 1, 1999, we changed our fiscal year from the year ending
January 31 to the 52 weeks ending on the Saturday closest to January 31.
6
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION--The condensed consolidated financial
statements include the accounts of iTurf Inc. and subsidiaries, all of
which are wholly owned. All significant intercompany balances and
transactions have been eliminated in consolidation.
BASIS OF PRESENTATION--For periods prior to our initial public
offering, the financial statements include expenses which have been
allocated to iTurf by dELiA*s on a specific identification basis plus the
allocated share of the costs associated with resources we shared with
dELiA*s. Allocations from dELiA*s for such shared resources were made
primarily on a proportional cost method based on related revenues.
Management believes these allocations are reasonable. Since our initial
public offering, expenses are recorded in accordance with intercompany
agreements. The financial statements of iTurf for periods prior to our
initial public offering do not necessarily reflect the results of
operations or financial position that would have existed had iTurf been an
independent company.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with the requirements for Form 10-Q and in accordance with
generally accepted accounting principles for interim financial reporting.
In the opinion of management, the accompanying condensed consolidated
financial statements are presented on a basis consistent with the audited
financial statements and reflect all adjustments (consisting of normal
recurring items) necessary for a fair presentation of results for the
interim periods presented. The financial statements and footnote
disclosures should be read in conjunction with iTurf's January 31, 1999
audited financial statements and the notes thereto, which are included in
iTurf's Form S-1, as amended and filed with the Securities and Exchange
Commission. Results for the interim period are not necessarily indicative
of the results to be expected for the year.
INCOME TAXES--For periods prior to our initial public offering, our
results were included in dELiA*s consolidated federal and state income tax
returns and our income tax provision was calculated as if we had operated
as an independent company. As a result of our initial public offering, we
are required to file a separate return. We do not expect to have net income
for fiscal 1999 and expect to fully reserve deferred tax assets. Therefore,
we estimate our effective rate for the period since our initial public
offering to be zero.
CASH EQUIVALENTS--The Company considers all highly liquid investments
with maturities of 90 days or less when purchased to be cash equivalents.
Cash equivalents are stated at cost, which approximates market value.
3. COMMITMENTS AND CONTINGENCIES
In May 1999, we entered into a strategic marketing alliance with
America Online, Inc. Over the two-year term of the agreement, we have
agreed to pay America Online a total of approximately $8.1 million, of
which approximately $2.0 million has been paid as of July 31, 1999.
4. SUBSEQUENT EVENT
On August 9, 1999, we entered into an Agreement and Plan of Merger to
acquire [email protected], Inc. ("Taponline"). Under the terms of the
agreement, we will issue 1,587,000 shares of our Class A common stock to
the shareholders of Taponline in a tax-free exchange. As a result,
Taponline will become a wholly-owned subsidiary of iTurf. Upon closing,
which is expected to occur in early September 1999, we will account for the
transaction as a purchase. In connection with the transaction, MarketSource
Corporation, which is owned by certain of the shareholders of Taponline,
has agreed to
7
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enter into an arrangement to purchase advertising and other inventory on
our network of sites for resale to their clients. Separately, we have
agreed to enter into a marketing alliance with MarketSource to promote our
network of sites through MarketSource's offline marketing channels. We
have committed to purchasing approximately $6.5 million in promotional
opportunities through these channels over the next three years.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN
CONJUNCTION WITH OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT REFLECT 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 REPORT. AS USED IN THIS REPORT, THE TERM "PARENT" MEANS DELIA*S INC., 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 OUR CLASS A COMMON STOCK. THEREFORE, SINCE OUR INITIAL PUBLIC
OFFERING THROUGH JULY 31, 1999, OUR PARENT HAS HELD APPROXIMATELY 94% OF THE
VOTING POWER OF OUR OUTSTANDING CAPITAL STOCK.
OVERVIEW
We are a leading provider of Internet community, content and e-commerce
services focused primarily on young men and women between the ages of 10 and 24,
an age group known as "Generation Y." We provide Generation Y with 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.
Our historical financial statements for periods prior to our initial public
offering 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 our
initial public offering, the provision of such services and other matters
between the two companies, including use of our parent's trademarks, have been
governed by intercompany agreements.
Prior to our initial public offering, we relied on our parent to provide
financing for our operations. Therefore, our cash flows were not necessarily
indicative of the cash flows that would have resulted had we been operating as
an independent company.
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 our limited
operating history, as well as the changes in our relationship with our parent
and our expected seasonality, iTurf believes that period-to-period comparisons
of our operating results, including our 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.
On August 9, 1999, we entered into an Agreement and Plan of Merger to
acquire [email protected], Inc. ("Taponline"). Under the terms of the agreement,
we will issue 1,587,000 shares of our Class A common stock to the
shareholders of Taponline in a tax-free exchange. As a result, Taponline will
become a wholly-owned subsidiary of iTurf. We will account for the
transaction as a purchase. In connection with the transaction, MarketSource
Corporation, which is owned by certain of the shareholders of Taponline, has
agreed to enter into an arrangement to purchase advertising and
9
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sponsorship inventory on our network of sites. Separately, we have agreed to
enter into a marketing alliance with MarketSource to promote our network of
sites through MarketSource's offline marketing channels. We have committed to
purchasing approximately $6.5 million in promotional opportunities through
these channels.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statement of operations to revenues. Any
trends reflected by the following table may not be indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS THIRTEEN WEEKS SIX MONTHS TWENTY -SIX WEEKS
ENDED ENDED ENDED ENDED
JULY 31, 1998 JULY 31, 1999 JULY 31, 1998 JULY 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of product sales 44.6 55.9 45.1 53.6
----- ----- ----- ------
Gross profit 55.4 44.1 54.9 46.4
Selling, general and administrative expenses 58.6 137.3 66.8 104.3
Interest expense (income), net 1.5 (33.5) 2.7
----- ----- ----- ------
(19.8)
Loss before income taxes (4.7) (59.7) (14.6) (38.1)
Benefit for income taxes (1.5) -- (5.3) (2.9)
----- ----- ----- -----
Net loss (3.2)% (59.7)% (9.3)% (35.2)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
COMPARISON OF THIRTEEN WEEKS ENDED JULY 31, 1999 AND THREE MONTHS ENDED JULY 31,
1998
NET REVENUES. Net revenues increased from $760,000 in the second fiscal
quarter of 1998 to $3.0 million for the same period in fiscal 1999. The increase
was principally due to increased traffic as a result of our marketing efforts,
as well as to sales derived from Web sites launched subsequent to the second
fiscal quarter of 1998, including droog.com, dotdotdash.com,
StorybookHeirlooms.com and contentsonline.com. Advertising, subscription and
licensing revenues were approximately $352,000 for the second quarter of fiscal
1999 and $107,000 for the same period of fiscal 1998.
GROSS PROFIT. Gross profit increased from $421,000 for the second quarter
of fiscal 1998 to $1.3 million for the same period in fiscal 1999 as a result of
increased sales. Gross margin decreased from 55.4% in the second quarter of
fiscal 1998 to 44.1% in the second quarter of fiscal 1999. The decrease was
principally due to increased sales of lower-margin products on our
discountdomain.com and TSISoccer.com sites as well as seasonal promotional
offers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses are comprised of:
- sales and marketing expenses, which include advertising costs, credit
card fees and distribution costs;
- product development expenses, which include site development,
editorial content and systems costs; and
- general and administrative expenses.
Total selling, general and administrative expenses, including direct
expenses, expenses allocated from our parent for periods prior to our initial
public offering and expenses charged by our parent in connection with
intercompany agreements after our initial public offering, increased from
$445,000, or 58.6% of revenues, in the second quarter of fiscal 1998 when these
expenses related primarily to the launch of
10
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dELiAs.cOm to $4.1 million, or 137.3% of revenues, in the second quarter of
fiscal 1999 due to a substantial increase in advertising, product development
and overhead costs to support the continued expansion of iTurf.
In the second quarter of fiscal 1999, selling, general and administrative
expenses were comprised of approximately $2.5 million of selling and marketing
expenses, $1.1 million of product development costs and $500,000 of general and
administrative expenses.
COMPARISON OF TWENTY-SIX WEEKS ENDED JULY 31, 1999 AND SIX MONTHS ENDED JULY 31,
1998
NET REVENUES. Net revenues increased from $829,000 in the first half of
fiscal 1998 to $5.6 million for the same period in fiscal 1999. The increase was
due to the launch of the dELiAs.cOm and discountdomain.com Web sites in May
1998, the contentsonline.com and droog.com sites in November 1998, the
dotdotdash.com site in March 1999 and the StorybookHeirlooms.com site in April
1999, as well as increased traffic as a result of our marketing efforts.
Advertising, subscription and licensing revenues were approximately $542,000 for
the first half of fiscal 1999 and $107,000 for the same period of fiscal 1998.
GROSS PROFIT. Gross profit increased from $455,000 for the first half of
fiscal 1998 to $2.6 million for the same period in fiscal 1999 as a result of
increased sales. Gross margin decreased from 54.9% in the first half of fiscal
1998 to 46.4% in the first half of fiscal 1999. The decrease was principally due
to increased sales of lower-margin products on our discountdomain.com and
TSISoccer.com as well as seasonal promotional offers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and
administrative expenses increased from $554,000, or 66.8% of revenues, in the
first half of fiscal 1998 when these expenses related primarily to the launch of
dELiAs.cOm, to $5.8 million, or 104.3% of revenues, in the first half of fiscal
1999 due to a substantial increase in advertising, product development and
overhead costs to support the continued expansion of iTurf.
QUARTERLY RESULTS OF OPERATIONS AND 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:
- seasonal fluctuations in consumer purchasing patterns and advertising
spending;
- mix of product and other revenues;
- timing of, response to and quantity of our parent's catalog mailings;
- changes in the growth rate of Internet usage;
- actions of competitors;
- the timing and amount of costs relating to the expansion of our
operations and acquisitions of technology or businesses; and
- general economic and market conditions.
Our limited operating history and rapid growth make it difficult to
ascertain the effects of seasonality on our business although we believe our
revenues and operating results generally to be lower in the first half of each
fiscal year than in the second half of such year. 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.
11
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INCOME TAXES
Since our initial public offering, we are no longer consolidated with our
parent's taxpayer group. For periods prior to such event, we owed our parent our
proportionate share of the consolidated tax liability computed as if iTurf were
filing a separate return. Any tax loss benefits attributable to us were used by
our parent. To the extent that our parent used our tax benefits, we reduced our
debt due to our parent, which was repaid in the second quarter of fiscal 1999.
Now that 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. However, deferred tax assets recorded to
reflect such future benefits are likely to be fully reserved when recorded based
on our limited operating history.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used net cash of $65,000 and $3.1 million during the
first half of fiscal 1998 and 1999, respectively.
Net cash used in investing activities of $74.7 million for the first half
of fiscal 1999 relate primarily to our purchase of marketable securities and
shares of dELiA*s common stock from our parent in connection with our initial
public offering. Investing activities in the first half of fiscal 1998 relate to
purchases of property and equipment and used approximately $131,000. We expect
to make capital expenditures of approximately $4.0 million in fiscal 1999,
including investments in technology and physical infrastructure. In addition, a
portion of our resources may be used to fund acquisitions or investments in
businesses, products and technologies that are complementary to our current
business.
We also expect to spend significant amounts for marketing and other
alliances. In May 1999, we entered into a strategic alliance agreement with
America Online, Inc. under which we are committed to cash payments of
approximately $4.0 million in fiscal 1999 and $4.1 million in fiscal 2000.
Financing activities provided net cash of $99.8 million for the first half
of fiscal 1999 and $202,000 for the same period of fiscal 1998. The significant
amount of cash provided by financing activities during the first half of fiscal
1999 relates to the initial public offering of our common stock. Prior to our
initial public offering, financing activities were related primarily to loans
from our parent.
We have historically relied on our parent for financing capital
expenditures. Our capital requirements depend on numerous factors, including:
- the rate of market acceptance of iTurf's online presence;
- our ability to expand iTurf's customer base;
- the cost of upgrades to our online presence; and
- our 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 to develop plans to expand our
sales and marketing programs and conduct more aggressive brand promotions. We
believe that the net proceeds of our initial public offering, together with our
cash from operations, will be sufficient to meet anticipated cash needs for at
least the next 24 months.
Prior to our initial public offering, we were a borrower under our parent's
bank credit facility, which
12
<PAGE>
prohibited dividends other than to our parent. Our participation in the bank
credit facility was terminated concurrent with our initial public offering.
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 has provided a written warranty or assurance to iTurf or our parent
that such software will not be affected by the change in the century. The
majority of the third party vendors of iTurf's other material operating software
and systems have also provided warranties or assurances that such software and
systems would be compliant. iTurf has prepared a Year 2000 compliance program,
which involves:
- identifying the material operating software and systems on which iTurf
depends, whether used by iTurf or by iTurf's service providers;
- obtaining written warranties or assurances from third party software and
system vendors and service providers;
- monitoring the compliance efforts of such vendors and service providers;
and
- testing our material operating software and systems.
We expect to perform tests in the third quarter of fiscal 1999 of some of
our material operating software and systems to verify the assurances given by
third party vendors and ensure Year 2000 compliance. We have not yet begun to
perform these tests on any of our software and systems and we may not be able to
test all of our material operating systems. As a result of this timing, we have
not identified any material software or systems as requiring remediation or
replacement. However, we cannot assure you that all of our material operating
software and systems will be Year 2000 compliant.
In addition to the operating systems and software iTurf uses directly,
iTurf's operations are also dependent upon the performance of operating software
and systems used by our significant service providers, including our parent and
providers of financial, telecommunications and parcel delivery services. Our
parent has provided us with assurance that its Year 2000 compliance program 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 or would be in Year 2000 compliance.
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 and could disrupt our financial and management
controls and reporting systems. Any such worst-case scenario, if not quickly
remedied, would have a material adverse effect on iTurf. Therefore, we are
developing contingency plans with respect to such
13
<PAGE>
systems and software. We expect our contingency plans to be completed by the
end of the third quarter of fiscal 1999.
In addition, a significant portion of our merchandise sales are made with
credit cards, and iTurf's operations may be materially adversely affected to the
extent our customers are unable to use their credit cards due to Year 2000
issues that are not rectified by the customers' credit card vendors.
iTurf has not identified significant exposure to Year 2000 problems outside
of the information technology issues identified above.
COSTS. To date, we have spent less than $5,000 on Year 2000 compliance. We
expect our incremental costs of addressing Year 2000 issues to be between
$25,000 and $50,000. We believe that proceeds of our initial public 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any legal proceedings that management believes would
have a material adverse effect on our financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
USE OF PROCEEDS FROM REGISTERED SECURITIES
On April 8, 1999, the Securities and Exchange Commission declared effective
our registration statement (No. 333-15153) on Form S-1, as then amended,
relating to our initial public offering of 4,830,000 shares of Class A common
stock, 630,000 shares of which were issued upon exercise of an overallotment
option granted by us to the underwriters. The managing underwriters for the
offering were BT Alex. Brown Incorporated and Hambrecht & Quist LLC (the
"Underwriters"). In connection with the offering, we registered the Class A
common stock under the Securities Exchange Act of 1934, as amended.
The public offering commenced on April 9, 1999 and terminated upon the sale
of all of the 4,830,000 shares of Class A common stock which were registered for
sale. The offering was completed on April 14, 1999. The aggregate offering price
of the securities sold was $106,260,000. All of the securities registered were
sold for the account of the Company.
Prior to July 31, 1999, the Company incurred the following expenses in
connection with the issuance and distribution of the Common Stock registered:
Underwriting discounts and commissions $7,438,000
Other expenses (legal and accounting fees
and expenses, printing and engraving expenses,
filing and listing fees, transfer agent and
registrar fees and miscellaneous) $1,413,000
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<PAGE>
The net offering proceeds to the Company after deducting the foregoing
expenses were $97,409,000. Other than the amounts set forth for underwriting
discounts and commissions, the foregoing represent reasonable estimates of
expenses.
The Company did not make, in connection with the offering and sale of the
Common Stock registered, any direct or indirect payments to directors or
officers of the Company or, to the Company's knowledge, their associates,
persons owning 10% or more of any class of equity securities of the Company, or
affiliates of the Company.
From April 14, 1999 until July 31, 1999, approximately $1.1 million of the
net offering proceeds was used for general corporate purposes and $17,734,000
was used to purchase 551,046 shares of common stock of dELiA*s Inc.
CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
SALES OF UNREGISTERED SECURITIES
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See "Exhibit Index" following the signature page.
(b) The Company filed a Current Report on Form 8-K, dated May 17, 1999,
reporting Item 8 (Change in Fiscal Year).
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
iTurf Inc.
(Registrant)
Date: August 31, 1999
By: /S/ STEPHEN I. KAHN
------------------------
Stephen I. Kahn
Chairman of the Board, President and
Chief Executive Officer
By: /S/ DENNIS GOLDSTEIN
------------------------
Dennis Goldstein
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
16
<PAGE>
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of iTurf (incorporated by
reference to Exhibit 3.1 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
3.2 By-laws of iTurf (incorporated by reference to Exhibit 3.2 to the iTurf
Inc. Registration Statement on Form S-1 (Registration No. 333-71123))
10.1 Form of Intercompany Services Agreement (incorporated by reference to
Exhibit 10.1 to the iTurf Inc. Registration Statement on Form S-1
(Registration No. 333-71123))
10.2 Form of Trademark License and Customer List Agreement (incorporated by
reference to Exhibit 10.2 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.3 Form of Intercompany Indemnification Agreement (incorporated by
reference to Exhibit 10.3 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.4 Form of Tax Allocation Agreement (incorporated by reference to Exhibit
10.4 to the iTurf Inc. Registration Statement on Form S-1 (Registration
No. 333-71123))
10.5 Form of iTurf Common Stock Registration Rights Agreement (incorporated
by reference to Exhibit 10.5 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.6 Form of dELiA*s Common Stock Registration Rights Agreement (incorporated
by reference to Exhibit 10.6 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.7 Form of Customer Service Agreement (incorporated by reference to Exhibit
10.7 to the iTurf Inc. Registration Statement on Form S-1 (Registration
No. 333-71123))
10.8 Form of Letter Agreement between dELiA*s and iTurf (regarding a sale of
control by dELiA*s) (incorporated by reference to Exhibit 10.8 to the
iTurf Inc. Registration Statement on Form S-1 (Registration No.
333-71123))
10.9 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to
the iTurf Inc. Registration Statement on Form S-1 (Registration No.
333-71123))
10.10 Employment Agreement between iTurf and Stephen I. Kahn (incorporated by
reference to Exhibit 10.10 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.11 Employment Agreement between iTurf and Alex S. Navarro (incorporated by
reference to Exhibit 10.11 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.12 Employment Agreement between iTurf and Oliver Sharp (incorporated by
reference to Exhibit 10.12 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.13 Employment Agreement between iTurf and Dennis Goldstein (incorporated by
reference to Exhibit 10.13 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-71123))
10.14 TSISoccer.com Asset Transfer Agreement, dated April 1, 1999, between
iTurf Inc. and TSI Soccer Corporation (incorporated by reference to
Exhibit 10.14 to the iTurf Inc. Registration Statement on Form S-1
(Registration No. 333-71123))
10.15 Subscription Agreement, dated April 1, 1999, between iTurf Delaware
Investment Company and dELiA*s (incorporated by reference to Exhibit
10.15 to the iTurf Inc. Registration Statement on Form S-1 (Registration
No. 333-71123))
10.16 Advertising Agreement between iTurf and America Online, Inc., dated May
4, 1999 (incorporated by reference to Exhibit 10.16 to the iTurf Inc.
Quarterly Report on Form 10-Q for the fiscal quarter ended May 1,
1999)**
10.17* Agreement and Plan of Merger dated August 9, 1999, by and among iTurf
Inc., iTurf Acquisition Corporation, [email protected], Inc. ("Taponline"),
the stockholders of Taponline and MarketSource Corporation***
27.1* Financial Data Schedule
- - ----------------
* Filed herewith
** Confidential treatment requested as to certain portions, which portions
have been omitted and filed separately with the SEC.
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<PAGE>
**** The table of contents to the Agreement and Plan of Merger lists the
exhibits and schedules to the Agreement and Plan of Merger. In accordance
with Item 601(b)(2) of Regulation S-K, the exhibits and schedules to the
Agreement and Plan of Merger have been excluded; such exhibits and/or
schedules will be furnished supplementally upon request by the Securities
and Exchange Commission.
18
<PAGE>
Exhibit 10.17
AGREEMENT AND PLAN OF MERGER
AMONG
ITURF INC.,
A DELAWARE CORPORATION,
ITURF ACQUISITION CORPORATION,
A DELAWARE CORPORATION
[email protected], INC.,
A NEW JERSEY CORPORATION
MARKETSOURCE CORPORATION,
A DELAWARE CORPORATION,
MARTIN D. LEVINE,
SHAREHOLDER,
THE JONATHAN L. LEVINE GRANTOR TRUST,
SHAREHOLDER,
THE LAUREN E. LEVINE GRANTOR TRUST,
SHAREHOLDER,
ET AL.
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is made and
entered into as of August 9, 1999 by and among iTurf Inc., a Delaware
corporation ("ITURF"), iTurf Acquisition Corporation, a Delaware corporation and
a wholly-owned subsidiary of iTurf (the "MERGER SUB"), [email protected], Inc., a
New Jersey corporation (the "COMPANY"), MarketSource Corporation, a Delaware
corporation ("MARKETSOURCE"), Martin D. Levine ("LEVINE"), the Jonathan L.
Levine Grantor Trust u/t/a/d January 1, 1995, the Lauren E. Levine Grantor Trust
u/t/a/d January 1, 1995, David Bidwell, Deborah Cheezum, Donald Clifford, Frank
P. Morelli, Derek S. White and Anthony Fiore. Levine, the Jonathan L. Levine
Grantor Trust u/t/a/d January 1, 1995 and the Lauren E. Levine Grantor Trust
u/t/a/d January 1, 1995 are sometimes collectively referred to hereinafter as
the "LEVINE AFFILIATES" and individually as a "LEVINE AFFILIATE." The Levine
Affiliates, David Bidwell, Deborah Cheezum, Donald Clifford, Frank P. Morelli,
Derek S. White and Anthony Fiore are sometimes collectively referred to
hereinafter as the "SELLING SHAREHOLDERS" and individually as a "SELLING
SHAREHOLDER."
WHEREAS, each of the Boards of Directors of iTurf, Merger Sub and
the Company has approved the merger of Merger Sub with and into the Company (the
"MERGER") in accordance with the New Jersey Business Corporation Act ("NEW
JERSEY LAW") and the General Corporation Law of the State of Delaware ("DELAWARE
LAW") and upon the terms and subject to the conditions set forth herein; and
WHEREAS, each Selling Shareholder is the owner of such number of
shares of common stock, no par value, of the Company (the "COMPANY COMMON
STOCK") set forth opposite his or its name in SCHEDULE 2.3 and such shares
collectively represent 100% of the issued and outstanding shares of capital
stock of the Company.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained and other good and valuable
consideration, the receipt, sufficiency and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereby agree
as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement and in accordance with New Jersey Law and Delaware Law,
at the Effective Time (as defined herein), Merger Sub shall merge with and into
the Company. As a result of the Merger, the separate corporate existence of
Merger Sub shall cease and the Company shall continue as the surviving
corporation of the Merger. The Company as the surviving corporation after the
Merger is hereinafter sometimes referred to as the "SURVIVING CORPORATION."
<PAGE>
1.2 EFFECTIVE TIME. Unless this Agreement shall have been terminated
and the transactions herein contemplated shall have been abandoned pursuant to
Article VII and subject to the satisfaction or waiver of the conditions set
forth in Article V, the consummation of the Merger (the "CLOSING") shall take
place as promptly as practicable (and in any event within two business days)
after each of the conditions set forth in Article V shall have been satisfied or
waived in accordance with this Agreement (the "CLOSING DATE") at 10:00 a.m., New
York City time, at the offices of Proskauer Rose LLP, 1585 Broadway, New York,
New York 10036, unless the parties shall agree in writing upon a later date,
time or place.
1.3 CLOSING. On the Closing Date, the parties hereto shall cause the
Merger to be consummated by (i) filing a certificate of merger with the New
Jersey Secretary of State, in such form as required by, and executed in
accordance with the relevant provisions of New Jersey Law, and shall make all
other filings or recordings required under New Jersey Law and (ii) filing a
certificate of merger with the Delaware Secretary of State, in such form as
required by, and executed in accordance with the relevant provisions of Delaware
Law, and shall make all other filings or recordings required under Delaware Law.
The Merger shall become effective upon the later of the filing of the
certificate of merger with the Delaware Secretary of State and the filing of the
certificate of merger with the New Jersey Secretary of State, or at such other
time as iTurf and the Company shall agree and specify in the certificates of
merger (the "EFFECTIVE TIME").
1.4 EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the certificates of merger and
the applicable provisions of New Jersey Law and Delaware Law. Without limiting
the generality of the foregoing, at the Effective Time, all the rights,
privileges, powers, franchises and property of the Company and Merger Sub shall
vest in the Surviving Corporation, and all duties, debts and liabilities of the
Company and Merger Sub shall become the duties, debts and liabilities of the
Surviving Corporation.
1.5 CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective Time, the
certificate of incorporation of Merger Sub as in effect immediately prior to the
Effective Time shall be the certificate of incorporation of the Surviving
Corporation, except that the name of the Surviving Corporation shall be "OnTap
Inc." and the bylaws of Merger Sub shall be the bylaws of the Surviving
Corporation, each of which shall continue in full force and effect until
thereafter amended.
1.6 DIRECTORS AND OFFICERS. The directors and officers of Merger Sub
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified or until their earlier
death, resignation or removal.
1.7 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of iTurf, Merger Sub, the Company or
the holders of any of the following securities:
2
<PAGE>
(a) CONVERSION OF SECURITIES. Subject to Sections 1.8 and 1.9,
each share of Company Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares held in the treasury of the Company) shall
be converted into the right to receive Fifteen Thousand Eight Hundred and
Seventy (15,870) shares of fully paid and non-assessable shares of Class A
common stock, par value $.01 per share, of iTurf ("ITURF COMMON STOCK") (the
"MERGER CONSIDERATION").
(b) CANCELLATION. Each share of the Company Common Stock
issued and outstanding immediately prior to the Effective Time and held in the
treasury of the Company shall cease to be outstanding, be canceled and retired
without payment of any consideration therefor and cease to exist.
(c) CAPITAL STOCK OF MERGER SUB. Each share of common stock,
par value $.01 per share, of Merger Sub issued and outstanding immediately prior
to the Effective Time shall be converted into and exchanged for one validly
issued, fully paid and non-assessable share of common stock, par value $.01 per
share, of the Surviving Corporation. Each stock certificate of Merger Sub
evidencing ownership of any such shares shall continue to evidence ownership of
such shares of capital stock of the Surviving Corporation.
1.8 ADJUSTMENT OF MERGER CONSIDERATION. In the event that,
subsequent to the date of this Agreement but prior to the Effective Time, the
outstanding shares of iTurf Common Stock or Company Common Stock, respectively,
shall have been changed into a different number of shares or a different class
as a result of a stock split, reverse stock split, stock dividend, subdivision,
reclassification, split, combination, exchange, recapitalization or other
similar transaction, the shares of iTurf Common Stock constituting the Merger
Consideration shall be appropriately adjusted.
1.9 NO FRACTIONAL SHARES. No fractional shares of iTurf Common Stock
shall be issued upon the surrender for exchange of certificates that immediately
prior to the Effective Time represented Company Common Stock which have been
converted pursuant to Section 1.7(a), and any such fractional shares of Parent
Common Stock that would be issued absent this Section 1.9 shall be canceled
without consideration therefor.
3
<PAGE>
1.10 HOLDBACK. At the Closing, (i) 10% of the iTurf Common Stock to
be issued to the Selling Shareholders under this Agreement (collectively, the
"HELDBACK SHARES") shall be issued in the names of such shareholders and held by
iTurf to partially secure the indemnification obligations of the Selling
Shareholders pursuant to SECTION 6.1, and each Selling Shareholder shall execute
and deliver to iTurf at the Closing a stock power, endorsed in blank, with
respect to the Heldback Shares, and (ii) the balance of the Merger Consideration
to be issued to the Selling Shareholders under this Agreement shall be issued in
the names of such shareholders pro rata in accordance with SCHEDULE 2.3 and
delivered to such shareholders as soon as practicable after the Closing. The
aggregate Merger Consideration held by iTurf and delivered to the Selling
Shareholders in accordance with the foregoing sentence shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Company Common Stock, and there shall be no further registration of transfers on
the records of the Surviving Corporation of shares of Company Common Stock which
were outstanding immediately prior to the Effective Time.
1.11 TAX-FREE REORGANIZATION. For Federal income tax purposes, the
parties intend that the Merger be treated as a tax-free reorganization within
the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue
Code of 1986, as amended (the "CODE"), to the extent of the Merger Consideration
received herein.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY, MARKETSOURCE AND
THE SELLING SHAREHOLDERS
Each of the Company, MarketSource and each Selling Shareholder,
severally, hereby make the following representations and warranties to iTurf and
Merger Sub, each of which shall be unaffected by any investigation heretofore or
hereafter made by iTurf or Merger Sub or any notice to iTurf or Merger Sub other
than in the schedules to this Agreement relating to the Company:
2.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its incorporation and has the requisite power and authority to own,
lease and operate its assets and properties and to conduct its business as it is
presently being conducted. The Company is duly qualified or licensed as a
foreign corporation to do business and is in good standing under the laws of
those jurisdictions listed on SCHEDULE 2.1 hereto, constituting all
jurisdictions in which the nature of its business or the ownership or leasing of
its assets requires such qualification, except for such failures to be so duly
qualified or licensed and in good standing that would not have a material
adverse effect on the business, results of operations or financial condition of
the Company. True and correct copies of the Company's certificate of
incorporation and bylaws, each as amended to date, have been previously
delivered to iTurf. The Company is not in violation of any of the provisions of
its certificate of incorporation or bylaws or equivalent governing documents.
4
<PAGE>
2.2 AUTHORITY RELATIVE TO THIS AGREEMENT. (a) Each of the Company
and MarketSource has all requisite corporate power and authority, and each
Selling Shareholder has all requisite power and authority, to enter into and to
deliver this Agreement and to perform the obligations hereunder and to
consummate the transactions contemplated hereby and, where applicable, other
agreements (including the Ancillary Agreements (as defined herein)),
instruments, certificates and documents executed or delivered, or to be executed
or delivered, pursuant to this Agreement (such other agreements, instruments,
certificates and documents, the "TRANSACTION DOCUMENTS"). The execution,
delivery and performance of this Agreement and the Transaction Documents by the
Company, MarketSource and each Selling Shareholder, where applicable, have been
duly authorized by all necessary action, corporate or otherwise, on the part of
the Company and each Selling Shareholder and no other corporate or other
proceedings on the part of the Company or any Selling Shareholder is necessary
to authorize this Agreement or the Transaction Documents to consummate the
transactions contemplated hereby or thereby (other than the adoption of this
Agreement by the holders of at least a majority of the outstanding shares of
Company Common Stock entitled to vote in accordance with New Jersey Law and the
Company's certificate of incorporation and bylaws). This Agreement has been, and
the Transaction Documents at Closing will be, duly executed and delivered by the
Company, MarketSource and the Selling Shareholders, where applicable, and this
Agreement and the Transaction Documents will be legal, valid and binding
agreements of the Company, MarketSource and the Selling Shareholders,
enforceable against each of them in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws now or hereafter in effect relating to creditor's rights
generally and general principles of equity (regardless of whether enforceability
is considered a proceeding at law or in equity).
(b) Each of the Boards of Directors of the Company and
MarketSource (i) has declared that this Agreement, the Merger and the other
transactions contemplated hereby and thereby are advisable and in the best
interests of the shareholders of such corporation, (ii) has authorized, approved
and adopted this Agreement, the Merger and the other transactions contemplated
hereby and thereby, and (iii) has taken appropriate action pursuant to
applicable law to cause the Merger to become effective at the Effective Time.
2.3 CAPITAL STRUCTURE. (a) As of the date of this Agreement, the
authorized capital stock of the Company consists of 1,000 shares of common
stock, no par value, of which 100 shares are issued and outstanding. SCHEDULE
2.3 sets forth a true and complete list of all record owners of all classes of
Company capital stock. Each outstanding share of Company Common Stock is duly
authorized, validly issued and outstanding, fully paid and nonassessable, free
of any preemptive rights and not issued in violation of any federal or state
securities laws.
(b) Except as set forth in SCHEDULE 2.3, (i) there are no
equity securities or similar ownership interests of any class of capital stock
of the Company, or any securities exchangeable for or convertible into or
exercisable for such equity securities or similar ownership interests, issued,
reserved for issuance or outstanding and (ii) there are no outstanding
5
<PAGE>
subscriptions, options, warrants, calls, commitments or other agreements to
which the Company or any Selling Shareholder is a party or by which he or it is
bound obligating the Company or any Selling Shareholder to issue, deliver or
sell, or repurchase redeem or otherwise acquire, any shares of capital stock or
similar ownership interests of the Company or obligating the Company or any
Selling Shareholder to grant, extent, accelerate the vesting of or enter into
any such subscription, option, warrant, call, commitment or agreement. Except as
contemplated by this Agreement, there are no registration rights and there is no
voting trust, proxy or other agreement or understanding to which the Company or
any Selling Shareholder is a party or by which he or it is bound with respect to
any equity security or similar ownership interest of any class of capital stock
of the Company requiring the issuance or sale of any additional shares of
capital stock or other securities convertible into, exchangeable for or
evidencing the right to subscribe for any shares of capital stock of the
Company. No shares of capital stock or other securities of the Company are
reserved for issuance for any purpose and there are no agreements, commitments
or restrictions relating to ownership or voting of any shares of stock or other
securities of the Company.
(c) There are no outstanding purchase agreements, shareholders
agreements, registration rights agreements, investors' rights agreements,
co-sale agreements, rights of first refusal or similar agreements between any
Selling Shareholder and the Company.
2.4 TITLE TO SHARES. Each Selling Shareholder owns all of his or its
shares of Company Common Stock as set forth on SCHEDULE 2.3, of record and
beneficially, free and clear of any lien, pledge, security interest, liability,
charge or other encumbrance or claim of any person or entity, voting trusts,
proxies, preemptive rights, rights of first refusal, buy-sell arrangements or
other shareholder agreements. On the Closing Date, each Selling Shareholder will
own all of his or its shares of Company Common Stock, of record and
beneficially, free and clear of any such liens.
2.5 SUBSIDIARIES AND AFFILIATES. Except as set forth on SCHEDULE
2.5(A), the Company has no subsidiaries or affiliates and has no equity interest
in any corporation, partnership, joint venture or other entity. Except as set
forth on SCHEDULE 2.5(B), the Company has conducted its business only through
the Company. "AFFILIATE" means any person or entity that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the Company.
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2.6 FINANCIAL STATEMENTS. The Company has previously delivered to
iTurf true and complete copies of (i) the audited balance sheet of the Company
at December 31, 1996, 1997 and 1998 and the related statements of income, cash
flow and changes in shareholders' equity for the fiscal years then ended, and
the notes thereto, accompanied by the reports thereon of the applicable firm of
independent public accountants and (ii) the unaudited balance sheet (the
"INTERIM BALANCE SHEET") and the related unaudited statements of income, cash
flow and changes in shareholders' equity for the six-month period ended June 30,
1999 and the unaudited statements of income for the six-month period ended June
30, 1998 (collectively, all financial information referred to in this Section
2.5 is hereafter referred to as the "FINANCIAL STATEMENTS"). The Financial
Statements have been prepared from the books and records of the Company, present
fairly the financial condition of the Company at the dates specified and the
results of its operations for the periods specified and have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis ("GAAP").
2.7 NO UNDISCLOSED LIABILITIES. The Company does not have any
Liabilities (as defined herein), except for (a) Liabilities specifically
identified in the Interim Balance Sheet that are required under GAAP to be
identified in the Interim Balance Sheet and (b) obligations to be performed in
the ordinary course of business as theretofore conducted. The Company does not
know of any basis for the assertion against the Company of any other loss
contingency of a nature defined by GAAP. For purposes of this Agreement,
"Liabilities" mean direct or indirect debts, obligations or liabilities of any
nature, whether absolute, accrued, unmatured, contingent, liquidated or
otherwise and whether due or to become due, asserted or unasserted, known or
unknown.
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the
Interim Balance Sheet, the Company has operated its business consistent with
ordinary commercial business practices and only in the ordinary course of
business as theretofore conducted, and there has been no (a) amendments or
changes to the certificate of incorporation or bylaws of the Company; (b)
material adverse change in the business, properties, assets, Liabilities,
commitments, earnings, financial condition or prospects of the Company; (c)
material damage or destruction to property or assets of the Company resulting in
a loss or cost to the Company (whether or not covered by insurance); or (d) act
or omission which, if taken or omitted after the date of this Agreement and
before the Closing would conflict with Section 4.1.
2.9 TAXES. The Company has properly filed on a timely basis all
federal, foreign, state, local and other tax returns and reports which are
required to be filed by it. All such tax returns were true, correct and
complete, and all taxes, interest and penalties due and payable as shown on such
returns or claimed to be due by any taxing authority have been timely paid. All
unpaid federal, foreign, state, local and other taxes, fees, assessments, duties
and other similar governmental charges payable by the Company or which will,
with the passage of time, become payable by the Company (including interest and
penalties) whether or not disputed (x) with respect to any period prior to
December 31, 1998 have been adequately reserved against in accordance with GAAP
on the
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face of the Financial Statements and (y) with respect to any period prior to
June 30, 1999 have been adequately reserved against in accordance with GAAP on
the face of the Interim Balance Sheet. There are no outstanding waivers or
extensions of time with respect to the assessment or audit of any tax or tax
return of the Company, or audits, examinations or claims now pending or matters
under discussion with any taxing authority in respect of any tax of the Company.
The Company has furnished to iTurf true and complete copies of the federal,
foreign, state and local tax returns of the Company for the fiscal year ended on
December 31, 1998, which tax returns have been filed with the relevant taxing
authorities. The Company has not at any time consented to have the provisions of
Section 341(f)(2) of the Code apply to it. All taxes to be collected or withheld
by the Company have been duly collected or withheld and any such amounts that
were required to be remitted to any taxing authority have been duly remitted.
There are no tax rulings, requests for ruling, closing agreements or changes of
accounting method relating to the Company that could affect its tax liability
for any period after the Effective Time. There will not be includible in the
Company's gross income for a taxable period after the Effective Time any amount
attributable to a prior tax period, as a result of any of the following methods
of accounting: installment, completed contract, long-term contract, cash, or as
a result of the application of Section 481 of the Code or comparable provisions
of state, local or foreign tax law. For purposes of this Agreement, "TAX" or
"TAXES" means taxes of any kind, levies or other like assessments, customs,
duties, imposts, charges or, including, without limitation, income, gross
receipts, ad valorem, value added, excise, real or personal property, asset,
sales, use, license, payroll, transaction, capital, net worth and franchise
taxes, estimated taxes, withholding, employment, social security, workers
compensation, occupation or other governmental taxes imposed or payable to the
United States or any state, local or foreign government or subdivision or agency
thereof, and in each instance such term shall include any interest, penalties or
additions to tax attributable to any such tax.
2.10 TITLE TO ASSETS. Except as set forth on SCHEDULE 2.10, the
Company has good and marketable title to or, in the case of leases and licenses,
valid and subsisting leasehold interests or licenses in, all of its properties
and assets of whatever kind (whether real or personal, tangible or intangible),
including, without limitation, all properties and assets that are shown on the
Financial Statements and to properties and assets that are shown on any schedule
hereto, in each case free and clear of any and all liens, mortgages, pledges,
security interests, restrictions, prior assignments, claims and encumbrances of
any kind whatsoever (collectively "LIENS"), except for Liens for current taxes
and assessments not yet due and payable (which the Company will promptly pay
when due if due prior to the Closing Date). All assets, properties and rights
relating to the Company's business are held by, and all agreements, obligations
and transactions relating to the Company's business have been entered into,
incurred and conducted by, the Company.
2.11 REAL AND PERSONAL PROPERTY. SCHEDULE 2.11 contains a true and
complete list of all real property owned or leased by the Company and all
interests therein (including a brief description of the property, the record
title holder, the location and the improvements thereon). All such real
property, and the equipment therein, and the operations and maintenance thereof,
comply with any applicable agreements and restrictive covenants and conform to
all applicable legal requirements including those relating to the environment,
health and safety, land use and zoning, and all work required to be done by the
Company as landlord or tenant has been
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duly performed. No condemnation or other proceeding is pending or, to the
knowledge of the Company, after due investigation, threatened, which would
affect the use of any such property by the Company. SCHEDULE 2.11 contains a
true and complete list and brief description of all equipment, machinery,
computers, furniture, leasehold improvements, vehicles and other personal
property owned or leased by the Company and all interests therein. The Company's
buildings and other structures, equipment and other assets (whether leased or
owned) are in good operating condition and repair, subject to ordinary wear and
tear.
2.12 INTELLECTUAL PROPERTY. SCHEDULE 2.12 contains a true and
complete list and brief description of all trademarks, service marks, trade
names, brands, copyrights and patents which are presently being used or have
been used in the Company's business, including certain trademarks listed on
Schedule 2.10 as being currently owned by MarketSource, all applications for
registration and registrations for such trademarks, copyrights and patents, and
all mask works, trade secrets, confidential and proprietary information,
compositions of matter, formulas, designs, proprietary rights, know-how and
processes (collectively, the "PROPRIETARY ASSETS") and all licenses, contracts,
rights and arrangements with respect to the foregoing. Except as set forth in
SCHEDULE 2.12, (a) the Company owns the entire, unencumbered right, title and
interest to all such Proprietary Assets, free and clear of all Liens, and,
except as set forth in SCHEDULE 2.12, no rights or licenses to others have been
granted with respect to any of such properties; (b) all filings and other action
necessary to perfect the full legal right of the Company in the United States to
the foregoing have been effected; (c) the Company owns or possesses the right to
use all the trademarks, service marks, trade names, brands, copyrights, patents,
franchises, permits and licenses and rights with respect to the foregoing,
necessary for the conduct of its business as presently conducted, without any
conflict with or infringement of the rights of others; and (d) the Company has
not received notice of any claimed conflict with respect to any of the
foregoing. The Company has no knowledge of any default or alleged default which
with notice or lapse of time or both would constitute a default on the part of
any party in the performance of any obligation to be performed or paid by any
party under any licenses, contracts, agreements or arrangements referred to in
or submitted as a part of SCHEDULE 2.12. The Company has taken, and until the
Closing Date, the Company will take, all steps necessary to preserve its legal
rights in, and the secrecy of, all its Proprietary Assets, except those for
which disclosure is required for legitimate business or legal reasons. All
intellectual property rights to all processes, systems and techniques used by
the Company that were developed by any employee of the Company engaged in
research or product development while such employee was employed by the Company
have, by virtue of an invention assignment agreement, been assigned to the
Company. In addition, all intellectual property rights to all processes, systems
and techniques used by the Company or which the Company currently intends to use
in its business which were developed by any of its employees at any time have
been assigned by such employees to the Company.
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2.13 CONTRACTS, LEASES AND COMMITMENTS. (a) The Company has
furnished to iTurf true and complete copies of the material contracts, leases
and commitments listed in SCHEDULE 2.13 hereto, including summaries of the terms
of any unwritten commitments. Except as set forth in SCHEDULE 2.13, (i) the
Company, and to the knowledge of the Company, the other parties thereto, have
complied in all material respects with such contracts, leases and commit ments,
all of which are valid and enforceable; (ii) such contracts, leases and
commitments are in full force and effect and there exists no event or condition
which with or without notice or lapse of time would be a default thereunder,
give rise to a right to accelerate or terminate any provision thereof or give
rise to any Lien on any of the assets or properties of the Company; and (iii)
all of such contracts, leases and commitments have been entered into on an
arm's-length basis and in the ordinary course of business, and none is
materially burdensome to the Company's business.
(b) The Company is not a party, nor is any of its assets or
business subject, to any contract, lease or commitment not listed in SCHEDULE
2.13 (including, without limitation, purchase or sales commitments, financing or
security agreements or guaranties, repurchase agreements, agency agreements,
manufacturers representative agreements, commis sion agreements, employment or
collective bargaining agreements, pension, bonus or profit-sharing agreements,
group insurance, medical or other fringe benefit plans and leases of real or
personal property), other than contracts terminable without penalty on not more
than 30 days' notice that do not involve, individually or in the aggregate, the
receipt or expenditure of more than $10,000 in any one year. The Company is not
engaged in any material disputes with customers or suppliers. To the knowledge
of the Company, no customer or supplier is con sidering termination, non-renewal
or any adverse modification of its arrangements with the Company, and the
Company has not received any notice that the transactions contemplated by this
Agreement would have a material adverse effect on the Company's relationship
with any of its suppliers or customers.
(c) The Company is not currently using the SiteServer Commerce
Edition component, the e-mail component or the newsgroup component of the
software covered by the Microsoft Commercial Internet System 2.X License
Agreement, dated March 2, 1999 by and between Microsoft Corporation and
MarketSource, as amended by Amendment No. 1 thereto (the "MICROSOFT AGREEMENT"),
in a manner that has or would obligate the Company to pay any Subscriber Access
License Fees (as such term is defined in the Microsoft Agreement).
2.14 NO CONFLICTS, REQUIRED FILINGS OR CONSENTS. (a) Except as set
forth in SCHEDULE 2.14, the execution and delivery of this Agreement and the
Transaction Documents by the Company, MarketSource and each Selling Shareholder
does not, and the performance of this Agreement and the Transaction Documents by
such parties will not, (i) conflict with or violate the certificate of
incorporation or bylaws of the Company, MarketSource or any Selling Shareholder,
(ii) conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to the Company, MarketSource of any Selling Shareholder or by
which their respective properties are bound or affected or (iii) result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or impair the Company's rights or
alter the rights or obligations of any third party under, or give to others
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any rights of termination, amendment, acceleration or cancellation of, any
contracts material to the business of the Company or result in the creation of a
Lien on any of the properties or assets of the Company pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company is a party or
by which the Company or its properties are bound or affected.
(b) The execution and delivery of this Agreement by each of
the Company, MarketSource and each Selling Shareholder will not require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental entity, except (i) for applicable requirements, if any, of
the Securities Act of 1933, as amended (the "SECURITIES ACT"), the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), state securities laws
("BLUE SKY LAWS") and the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR ACT") and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not prevent or delay consummation of the Merger, or otherwise prevent the
Company, MarketSource of any Selling Shareholder from performing its respective
obligations under this Agreement.
2.15 NO PERMITS REQUIRED; COMPLIANCE WITH LAWS. The Company does not
hold any governmental licenses, permits or authorizations nor are any such
licenses, permits or authorizations required for the ownership or occupancy of
its properties and assets or the operation of its business. The Company's
business is and has been operated in compliance therewith and all laws and
regulations (federal, state, local and foreign) applicable to it, and all
required reports and filings with governmental authorities have been properly
made.
2.16 PERSONNEL MATTERS. SCHEDULE 2.16 contains a true and complete
list of the names, office locations, compensation and years of credited service
for severance, vacation and pension plan purposes of all full- and part-time
employees of the Company as of the date of this Agreement. The Company does not
know of any efforts within the last five years to attempt to organize the
Company's employees, and no strike or labor dispute involving the Company has
occurred during the last three years or, to the knowledge of the Company, is
threatened. No key employee of the Company has indicated that he is considering
terminating his employment. The Company has complied with applicable wage and
hour, equal employment, safety and other legal requirements relating to its
employees.
2.17 EMPLOYEE BENEFIT PLANS. (a) Except as set forth on SCHEDULE
2.17, neither the Company nor any entity that would be deemed a "single
employer" with the Company under Section 414(b), (c), (m) or (o) of the Code or
Section 4001 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (an "ERISA AFFILIATE") maintains, sponsors, contributes to, or has or
has had an obligation to, or otherwise participated in or participates in or in
any way, directly or indirectly, has or has had any liability with respect to
any "employee benefit plan," as defined in Section 3(3) of ERISA, or any other
bonus, profit sharing, pension, deferred compensation, incentive, stock option,
fringe benefit, health, welfare, change in control, or other plan, agreement,
policy, trust fund, or arrangement, whether written or unwritten, insured or
self-insured (each a "PLAN"). None of the Company, any ERISA Affiliate or any of
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their respective predecessors has ever contributed to, contributes to, has ever
been required to contribute to, or otherwise participated in or participates in
or in any way, directly or indirectly, has any liability with respect to any
plan subject to Section 412 of the Code, Section 302 of ERISA or Title IV of
ERISA, including, without limitation, any "multiemployer plan" (within the
meaning of Sections (3)(37) or 4001(a)(3) of ERISA or Section 414(f) of the
Code), or any single employer pension plan (within the meaning of Section
4001(a)(15) of ERISA). The consummation of the transactions contemplated by this
Agreement will not give rise to any liability of the Company for severance pay
or termination pay or accelerate the time of payment or vesting or increase the
amount of compensation or benefits due to an employee, director, shareholder or
beneficiary of the Company (whether current, former or restricted) or their
beneficiaries solely by reason of such transactions or by reason of a
termination of employment following such transactions. No event, condition or
circumstance exists that would prevent the amendment or termination of any Plan.
SCHEDULE 2.17 hereto contains a true and complete list of all Plans, benefits or
perks of the Company and a description of the Company's severance pay policy. A
true and correct copy of each such Plan has previously been delivered by the
Company to iTurf.
(b) With respect to each of the Plans on SCHEDULE 2.17:
(i) each Plan intended to qualify under Section 401(a)
of the Code has been qualified since its inception and has received
a determination letter from the Internal Revenue Service ("IRS") to
the effect that the Plan is qualified under Section 401 of the Code
and any trust maintained pursuant thereto is exempt from federal
income taxation under Section 501 of the Code and nothing has
occurred or is expected to occur through the date of the Closing
that caused or could cause the loss of such qualification or
exemption or the imposition of any penalty or tax liability;
(ii) all payments required by any Plan, any collective
bargaining agreement or other agreement, or by law (including,
without limitation, all contributions, insurance premiums, or
intercompany charges) with respect to all periods through the date
of the Closing shall have been made prior to the Closing (on a pro
rata basis where such payments are otherwise discretionary at year
end) or provided for by the Company as applicable, by full accruals
as if all targets required by such Plan had been or will be met at
maximum levels) on its financial statements;
(iii) no claim, lawsuit, arbitration or other action has
been threatened, asserted, instituted, or anticipated against the
Plans (other than non-material routine claims for benefits, and
appeals of such claims), any trustee or fiduciaries thereof, the
Company, any ERISA Affiliate, any director, officer, or employee
thereof, or any of the assets of any trust of the Plans;
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(iv) the Plan complies in all material respects and has
been maintained and administered at all times in accordance with its
terms and all applicable laws, rules and regulations, including,
without limitation, ERISA and the Code;
(v) no "prohibited transaction," within the meaning of
Section 4975 of the Code and Section 406 of ERISA, has occurred or
is expected to occur with respect to the Plan (and the consummation
of the transactions contemplated by this Agreement will not
constitute or directly or indirectly result in a "prohibited
transaction");
(vi) no Plan is or is expected to be under audit or
investigation by the IRS, Department of Labor, or any other
governmental authority and no such completed audit, if any, has
resulted in the imposition of any tax or penalty;
(vii) with respect to each Plan that is funded mostly or
partially through an insurance policy, neither the Company nor any
ERISA Affiliate has any liability in the nature of retroactive rate
adjustment, loss sharing arrangement or other actual or contingent
liability arising wholly or partially out of events occurring on or
before the Closing.
(c) Neither the Company nor any ERISA Affiliate maintains,
contributes to, or in any way provides for any benefits of any kind whatsoever
(other than under Section 4980B of the Code, the Federal Social Security Act, or
a plan qualified under Section 401(a) of the Code) to any current or future
retiree or terminee. Neither the Company nor any ERISA Affiliate has any
unfunded Liabilities pursuant to any Plan that is not intended to be qualified
under Section 401(a) of the Code.
2.18 Intentionally omitted.
2.19 INSURANCE. SCHEDULE 2.19 sets forth a true and complete list of
the Company's general liability, fire and casualty insurance policies and
liability insurance providing coverage in such amounts as is customary in the
industry for a similar company. Such policies are in full force and effect, with
extended coverage, sufficient in amount (subject to reasonable deductibles) to
allow it to replace any of its properties that might be damaged or destroyed.
2.20 LITIGATION. SCHEDULE 2.20 contains a true and complete list of
all actions, suits, proceedings, claims or governmental investigations pending
or, to the knowledge of the Company, threatened against, the Company or any of
its assets, or, in connection with the Company's business, or any of the
Company's officers, directors or employees. Except as set forth on SCHEDULE
2.20, neither the Company nor, in connection with the Company's business, any of
the Company's officers, directors or employees is subject or party to any
judgment, order, or other direction of or stipulation with any court or other
governmental authority or tribunal, or in violation of any other legal
requirements (as defined below), and the Company does not know
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of any reasonable basis for a claim that such a violation exists. The Company is
unaware of any proposed legal requirement that might adversely affect in any
material respect the operation or prospects of the Company's business.
Notwithstanding the foregoing, the Company is aware that there have been various
proposals to enact federal and state laws directed at regulating Internet
advertising.
2.21 ENVIRONMENTAL MATTERS. The Company's business, assets and
properties are and have been operated and maintained in compliance with all
applicable federal, state and local environmental protection laws and
regulations (the "ENVIRONMENTAL LAWS"). No event has occurred or condition
exists which, with or without the passage of time or the giving of notice, or
both, would constitute a non-compliance by the Company with, or a violation by
the Company of, the Environmental Laws. To the Company's knowledge, no real
property owned, leased, occupied or used by the Company contains any underground
storage tanks, asbestos, polychlorinated biphenyls, hazardous wastes or other
hazardous substances, as such terms are defined in the Environmental Laws. To
the Company's knowledge, neither the Company nor any of its predecessor
companies has caused or permitted to exist, as a result of an intentional or
unintentional act or omission, a disposal, discharge or release of solid wastes,
hazardous wastes, pollutants or hazardous substances, as such terms are defined
in the Environmental Laws, on or from any site which currently is or formerly
was owned, leased, occupied or used by the Company or any predecessor company,
except where such disposal, discharge or release was pursuant to and in
compliance with the conditions of a permit issued by the appropriate federal,
state and/or local governmental agency or otherwise in compliance with
Environmental Laws.
2.22 RESTRICTIONS ON BUSINESS ACTIVITIES. Other than this Agreement,
there is no agreement, judgment, injunction, order or decree binding upon the
Company which has or could reasonably be expected to have the effect of
prohibiting or impairing any material business of the Company as presently
conducted.
2.23 TRANSACTIONS WITH AFFILIATES. Except as set forth on SCHEDULE
2.23, and except for ordinary dealings with its employees, since December 31,
1998, the Company has had no direct or indirect dealings with any shareholder of
the Company or with any key employee of the Company or with any of their
affiliates, associates or relatives. Except for employment arrangements with its
employees, the Company has no obligation to or claim against any shareholder of
the Company or any key employee of the Company, or any of their affiliates,
associates or relatives, and no such person or entity has any obligation to or
claim against the Company. Neither the Selling Shareholders nor any key employee
of the Company nor any of their respective affiliates, associates or relatives
has any direct or indirect interest of any kind in any business or entity which
is directly or indirectly competitive with the Company.
2.24 BOOKS AND RECORDS. The books and records of the Company are
complete and correct in all material respects and have been maintained in
accordance with good business practices. The minute books of the Company contain
complete and accurate records of all meetings and accurately reflect all other
corporate action of the shareholders and board of di rectors of the Company.
True and complete copies of the books and records and the minute
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books of the Company for the period from August 8, 1998 to the Closing Date have
been previously delivered to iTurf.
2.25 IMPROPER PAYMENTS. The Company and its officers and agents have
not made any illegal or improper payments to, or provided any illegal or
improper benefit or inducement for, any governmental official, supplier,
customer or other person, in an attempt to influence any such person to take or
to refrain from taking any action relating to the Company.
2.26 BROKERS. All negotiations relating to this Agreement and the
transactions contemplated hereby have been carried out by the Company directly
with iTurf without the intervention of any person engaged by the Company (other
than Deutsche Banc Alex. Brown ("DEUTSCHE BANC") ) in such a manner as to give
rise to any valid claim by any person against the Company, iTurf, Merger Sub or
the Surviving Corporation for a finder's fee, brokerage commission or similar
payment. A true and complete copy of all agreements among the Company,
MarketSource and Deutsche Banc pursuant to which Deutsche Banc would be entitled
to any payment relating to the transactions contemplated hereunder is set forth
on SCHEDULE 2.26.
2.27 INVESTMENT REPRESENTATION. The Selling Shareholders possess
such knowledge and experience in financial and business matters that they are
capable of evaluating the merits and risks of the Merger Consideration
consisting of shares of iTurf Common Stock. The Selling Shareholders are fully
aware of the restrictions on resale of such shares pursuant to applicable
securities laws prior to registration thereof. On the Closing Date, the Selling
Shareholders are acquiring the shares of iTurf Common Stock for investment
purposes and not with a view to or in connection with a distribution within the
meaning of the Securities Act, except pursuant to an effective registration
statement or an exemption therefrom.
The Selling Shareholders understand and acknowledge that the shares
of iTurf Common Stock constituting the Merger Consideration will not be
registered under the Securities Act, in reliance upon an exemption from the
registration requirements thereof, and that such shares will not be registered
or qualified under the securities or Blue Sky laws of any other jurisdiction.
The Selling Shareholders understand and acknowledge that the availability of
such exemption is based, in part, upon their representations in this Agreement.
The Selling Shareholders have also been afforded had an opportunity to ask
questions of iTurf and its senior management regarding iTurf and the terms of
the transactions contemplated by this Agreement and have been given all
information as has been requested by such Selling Shareholders in order to fully
evaluate the merits and risks of the Merger Consideration.
2.28 VOTE REQUIRED. The affirmative vote of the holders of at least
a majority of the outstanding shares of Company Common Stock is the only vote of
the holders of any class or series of the Company's capital stock that is
necessary to approve the Merger.
2.29 WEB SITE TRAFFIC. A true and correct statement of the number of
page views on, user sessions, and unique visitors to Taponline.com for each
calendar month of 1999
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(through June 1999) is set forth on SCHEDULE 2.29.
2.30 YEAR 2000 COMPLIANCE. The computer systems of the Company
(including, without limitation, all software, hardware, workstations and related
components, automated devices, products consisting of or containing one or more
thereof; and any and all enhancements, upgrades, customizations, modifications
or maintenance, embedded chips and other date sensitive equipment such as
security systems, alarms, elevators and other systems) ("COMPUTER SYSTEMS") are
Year 2000 Compliant (as defined below). The Company's supply of services through
its Computer Systems shall not be interrupted, delayed, decreased, or otherwise
affected by dates/times prior to, on, after or spanning January 1, 2000. The
Company's Computer Systems have the ability to properly interface and, to the
best knowledge of the Company, will continue to properly interface with internal
and external applications and systems of third parties with whom the company and
its subsidiaries exchange data electronically (including, without limitation,
customers, clients, suppliers, service providers, subcontractors, processors,
converters, shippers, warehousemen, outsourcers, data processors, regulatory
agencies and banks) whether or not they have achieved Year 2000 Compliance. The
Company has inquired of all such third parties whose lack of Year 2000
Compliance would be materially adverse to it.
For purposes of this Agreement, "YEAR 2000 COMPLIANT" means that (1)
the Computer Systems (1) are capable of recognizing, processing, managing,
representing, interpreting, and manipulating correctly date related data for
dates earlier and later than January 1, 2000, including, but not limited to,
calculating, comparing, sorting, storing, tagging and sequencing, without
resulting in or causing logical or mathematical errors or inconsistencies in any
user-interface functionalities or otherwise, including data input and retrieval,
data storage, data fields, calculations, reports, processing, or any other input
or output, (2) have the ability to provide date recognition for any data element
without limitation (including, but not limited to, date-related data represented
without a century designation, date-related data whose year is represented by
only two digits and date fields assigned special values), (3) have the ability
to automatically function into and beyond the year 2000 without human
intervention and without any change in operations associated with the advent of
the year 2000, (4) have the ability to correctly interpret data, dates and time
into and beyond the year 2000, (5) have the ability not to produce noncompliance
in existing information, nor otherwise corrupt such data into and beyond the
year 2000, (6) have the ability to correctly process after January 1, 2000 data
containing dates before that date, (7) have the ability to recognize all "leap
years," including February 29, 2000.
2.31 INDEBTEDNESS TO CERTAIN AFFILIATES; GUARANTIES. Immediately
prior to the Effective Time, neither the Company nor any subsidiary thereof
shall have any liability or obligation (including indebtedness) owed or owing to
MarketSource, any Selling Shareholder or any Affiliate of any of the foregoing.
The Company is not a guarantor or otherwise liable for any Liability or
obligation (including indebtedness) of any other person, firm or entity.
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2.32 DISCLOSURE. No representation, warranty or other written
statement by MarketSource, the Company or any Selling Shareholder herein or in
any other of the Transaction Documents or made in connection with the
Transaction Documents, contains or will contain an untrue statement of a
material fact, or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading. Neither MarketSource
nor the Company nor any Selling Shareholder has any knowledge of any matter that
could reasonably be expected to have a materially adverse effect on the
Company's business or prospects that has not been disclosed in writing to iTurf.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF ITURF AND MERGER SUB
ITurf and Merger Sub, jointly and severally, hereby make the
following representations and warranties to the Company:
3.1 ORGANIZATION AND QUALIFICATION. (a) Each of iTurf and Merger Sub
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to conduct its
business as it is presently being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority and
approvals would not have a material adverse effect on the business, results of
operations or financial condition of iTurf and its subsidiaries, taken as a
whole (an "ITURF MATERIAL ADVERSE EFFECT"). Each of iTurf and Merger Sub is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the conduct of its business or the
ownership or leasing of its properties requires such qualification, except for
such failures to be so duly qualified or licensed and in good standing that
would not have an iTurf Material Adverse Effect.
(b) iTurf has heretofore furnished to the Company true and
complete copies of iTurf's and Merger Sub's respective certificate of
incorporation and bylaws, each as amended to date. Such certificates of
incorporation and bylaws are in full force and effect. Neither iTurf nor Merger
Sub is in violation of any of the provisions of its certificate of incorporation
or bylaws, except for any such violations as would not have an iTurf Material
Adverse Effect.
3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. (a) Each of iTurf and
Merger Sub has all necessary right, power and authority to enter into and
deliver this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by iTurf and Merger Sub and the consummation by iTurf and Merger
Sub of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of iTurf and Merger
Sub, and no other corporate proceedings on the part of iTurf and Merger Sub are
necessary to authorize this
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Agreement or to consummate the transactions so contemplated hereby. This
Agreement has been duly and validly executed and delivered by iTurf and Merger
Sub and, assuming the due authorization, execution and delivery of this
Agreement by the other parties hereto, constitutes a legal, valid and binding
obligation of iTurf and Merger Sub, except as may be limited bankruptcy,
insolvency, reorganization, moratorium or similar laws now or hereafter in
effect relating to creditor's rights generally and general principles of equity
(regardless of whether enforceability is considered a proceeding at law or in
equity).
(b) The Board of Directors of iTurf (i) has declared that this
Agreement, the Merger and the other transactions contemplated hereby and thereby
are advisable and in the best interests of the stockholders of iTurf, (ii) has
authorized, approved and adopted this Agreement, the Merger and the other
transactions contemplated hereby and thereby, and (iii) has taken appropriate
action, pursuant to applicable law, to cause the Merger to become effective at
the Effective Time.
3.3 NO CONFLICT, REQUIRED FILINGS AND CONSENTS. (a) The execution
and delivery of this Agreement by iTurf and Merger Sub do not, and the
performance of this Agreement by iTurf and Merger Sub will not, (i) conflict
with or violate the certificate of incorporation or bylaws of iTurf or Merger
Sub, (ii) conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to iTurf or Merger Sub or by which its or their respective
properties are bound or affected or (iii) result in any breach of or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or impair iTurf's or Merger Sub's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any contracts material
to the business of iTurf and Merger Sub, taken as a whole, or result in the
creation of a Lien or encumbrance on any of the properties or assets of iTurf
and Merger Sub pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which iTurf and Merger Sub is a party or by which iTurf and Merger Sub or its
or any of their respective properties are bound or affected, except in any such
case for any such breaches, defaults or other occurrences that would not have an
iTurf Material Adverse Effect.
(b) The execution and delivery of this Agreement by iTurf and
Merger Sub will not require any consent, approval, authorization or permit of,
or filing with or notification to, any governmental entity except (i) for
applicable requirements, if any, of the Securities Act, the Exchange Act, Blue
Sky Laws and the HSR Act and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not prevent or delay consummation of the Merger, or otherwise prevent
iTurf and Merger Sub from performing their respective obligations under this
Agreement and (iii) as would not have an iTurf Material Adverse Effect.
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3.4 CAPITAL STOCK. (a) As of the date of this Agreement, the
authorized capital stock of iTurf consists of (i) 67,500,000 shares of Class A
common stock, par value $.01 per share, of which 17,331,136 shares are issued
and outstanding, (ii) 12,500,000 shares of Class B common stock, par value $.01
per share, of which 12,500,000 shares are issued and outstanding and (iii)
1,000,000 shares of preferred stock, par value $.01 per share, none of which are
issued and outstanding. Each outstanding share of iTurf capital stock is duly
authorized, validly issued and outstanding, fully paid and nonassessable and
free of any preemptive rights.
(b) The shares of iTurf Common Stock to be issued in the
Merger have been duly authorized and, when so issued in accordance with the
terms hereof, such shares will be validly issued, fully paid and non-assessable.
3.5 SEC FILINGS, FINANCIAL STATEMENTS. (a) iTurf has filed all
forms, reports and documents required to be filed by it with the SEC since April
9, 1999. iTurf has heretofore delivered to the Company, in the form filed with
the SEC, its (i) prospectus dated April 9, 1999 and (ii) Quarterly Report on
Form 10-Q for the fiscal quarter ended May 1, 1999; (collectively, the "ITURF
SEC REPORTS"). The iTurf SEC Reports (A) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
(B) did not at the time they were filed (or if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) Each of the financial statements (including, in each case,
any related notes thereto) contained in the iTurf SEC Reports was prepared in
accordance with GAAP (except as may be indicated in the notes thereto) and each
fairly presents in all material respects the financial position of iTurf as at
the respective dates thereof and the results of its operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments and
such statements do not contain all notes required by GAAP.
3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
iTurf SEC Reports, since May 1, 1999, to iTurf's knowledge, no event or events
has or have occurred that, either individually or in the aggregate, has had, or
reasonably could be expected to have, an iTurf Material Adverse Effect.
3.7 BROKERS. All negotiations relating to this Agreement and the
transactions contemplated hereby have been carried out by iTurf directly with
the Company without the intervention of any person engaged by iTurf in such a
manner as to give rise to any valid claim by any person against iTurf, Merger
Sub, the Company or the Surviving Corporation for a finder's fee, brokerage
commission or similar payment.
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ARTICLE IV
ADDITIONAL COVENANTS AND AGREEMENTS
4.1 CONDUCT OF BUSINESS. During the period from the date of this
Agreement and continuing until the Effective Time, the Company covenants and
agrees that, unless iTurf shall otherwise agree in writing and unless otherwise
expressly permitted under this Agreement the Company shall conduct its business
only in the ordinary course and consistent with past practice, and the Company
shall use its best efforts to maintain, preserve and protect the assets and
goodwill of the Company, to keep available the services of the present officer,
employees and consultants of the Company and to preserve the present
relationships of the Company with customers, suppliers and other persons which
the Company has business relations. Without uniting the generality of the
foregoing, the Company shall not, without the prior written consent of iTurf and
unless otherwise expressly permitted under this Agreement, take or commit to
take any of following actions:
(i) amend its bylaws or certificate of incorporation;
(ii) issue, sell, pledge, dispose of or encumber, or authorize
the issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest of the Company;
(iii) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of any of its capital stock, or split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of shares of its capital stock;
(iv) amend the terms of, repurchase, redeem or otherwise
acquire any shares of its capital stock or propose to do any of the foregoing;
(v) pay, discharge, settle or satisfy any lawsuits, claims,
Liabilities or obligations, other than in the ordinary course of business
consistent with past practice, or incur, or perform, pay or otherwise discharge,
any obligation or liability (absolute or contingent), except for current
obligations and Liabilities incurred in the ordinary course of business con
sistent with past practice;
(vi) increase the compensation payable or to become payable to
its officers, directors or employees or grant any severance or termination pay
to, or enter into any employment or severance agreement with any director,
officer or employee, or establish, adopt or enter into or, except as required by
applicable law, terminate or amend in any material respect any Plan;
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(vii) sell, pledge, dispose of or encumber any assets of the
Company, tangible or intangible, other than for fair consideration in the
ordinary course of business, or sell, transfer, license, sublicense or otherwise
dispose of any Proprietary Assets (other than in the ordinary course of business
consistent with past practice) or amend or modify any existing agreements with
respect to any Proprietary Assets;
(viii) (A) acquire any corporation, partnership or other
business organization, (B) incur any indebtedness for borrowed money or issue
any debt securities or assume, guarantee or endorse or otherwise as an
accommodation become responsible for, the obligations of any person, or make
loans or advances (other than to employees in the ordinary course of business
consistent with past practice), (C) enter into or amend any contract or
agreement other than in the ordinary course of business, (D) authorize or make
any capital expenditures that are not currently budgeted and that in the
aggregate exceed $10,000, (E) terminate any material contract of the Company or
amend any of its material terms or (E) enter into or amend any contract,
agreement, commitment or arrangement to effect any of the matters prohibited by
this Section 4.1(viii);
(ix) take any action, other than as required by GAAP, to
change accounting policies or procedures or cash maintenance policies or
procedures, or make any material changes in its customary method of operations,
including marketing, selling and pricing policies and maintenance of business
premises, fixtures, furniture and equipment;
(x) modify, amend or cancel any of its existing leases or
enter into any contracts, agreements, leases or understandings other than in the
ordinary course of business or involving more than $10,000 or enter into any
loan agreements;
(xi) issue any note, bond or other debt security or create,
incur, assume or guarantee any indebtedness for borrowed money or capitalized
lease obligations either involving more than $5,000 singly or $10,000 in the
aggregate;
(xii) delay or postpone the payment of accounts payable or
other Liabilities and, in no event, shall the Company fail to pay any such
accounts payable or other Liabilities when and in the amounts due;
(xiii) grant any increase in the base compensation payable or
to become payable to any of its directors, officers or employees, grant any
severance or termination pay to any of its directors, officers or employees or
make any other change in employment terms applicable to any of its directors,
officers or employees other than in the ordinary course of business;
(xiv) adopt, amend, modify or terminate any bonus,
profit-sharing, incentive, severance or other plan, contract or commitment for
the benefit of any of its directors, officers or employees or take any such
action with respect to any other employee benefit plan, except as required by
law; or
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(xv) take or fail to take, or agree in writing or otherwise to
take or fail to take, any of the actions described in Sections 4.1(i) through
(xiv) above, or any action which would cause any of the representations and
warranties made by the Company, MarketSource or the Selling Shareholders herein
and in the Transaction Documents not to be true and correct or prevent the
Company, MarketSource or the Selling Shareholders not to perform any of their
respective covenants herein or result in any of the conditions to the Merger set
forth herein not being satisfied.
4.2 ACCESS TO INFORMATION. Prior to the Closing, the Company shall
afford to iTurf and its officers, employees, counsel, financial advisers and
other representatives reasonable access during normal business hours to the
Company's assets, premises, books and records and key employees and accountants,
including, without limitation, the audit work papers of the Company's
accountants relating to the Financial Statements, and the Company shall furnish
to iTurf such information concerning its business, properties, financial
condition, operations and personnel as iTurf may from time to time reasonably
request. The Company shall promptly furnish to iTurf all financial statements of
the Company that are prepared in the ordinary course of business, including,
without limitation, monthly reports of sales, revenue and cash flow and
quarterly balance sheets.
4.3 NOTIFICATION OF CERTAIN MATTERS. The Company and the Selling
Shareholders shall give prompt written notice to iTurf, and iTurf shall give
prompt written notice to the Company and the Selling Shareholders, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause any representation or warranty contained in
this Agreement to be untrue or inaccurate and (ii) any failure of by the
Company, any Selling Shareholder, iTurf or Merger Sub, as the case may be,
materially to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; PROVIDED, HOWEVER, that the delivery
of any notice pursuant to this Section 4.3 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice.
4.4 Intentionally omitted.
4.5 FULFILLMENT OF CONDITIONS. The parties hereto agree not to take
any action that would cause the conditions on the obligations of the parties to
effect the transactions contemplated hereby not to be fulfilled, including,
without limitation, by taking or causing to be taken any action that would cause
the representations and warranties made by it herein not to be true and correct
as of the Closing. The parties hereto shall use all reasonable efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all other
things necessary, proper, or advisable, and to obtain in a timely manner all
necessary waivers, consents and approvals and to effect all registrations and
filings to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement.
4.6 PUBLIC ANNOUNCEMENTS. The initial press release with respect to
the execution of this Agreement shall be a joint press release acceptable to the
Company and iTurf.
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Therefore, so long as this Agreement is in effect, the Company and iTurf shall
consult with each other before issuing any press release or other public
statement with respect to the transactions contemplated by this Agreement,
including the Merger, and no party hereto shall issue any such press release or
make any such public statement without the prior consent of the Company and
iTurf (which shall not be unreasonably withheld or delayed), except as may be
required by applicable law or judicial process.
4.7 BOARD OF DIRECTORS OF ITURF. At or prior to the Effective Time,
iTurf shall increase the size of its Board of Directors to six (6) members and
Martin D. Levine shall be appointed to the Board of Directors of iTurf to serve
as a member thereof for a term ending on the date of iTurf's annual meeting of
stockholders in 2002.
4.8 NO SOLICITATION. Neither the Company nor any representatives or
affiliates of the Company (including MarketSource) shall, directly or
indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries
or the making of any proposal or offer with respect to a merger, reorganization,
share exchange, consolidation or similar transaction involving the Company, or
any purchase or 15% or more of the assets or capital stock of the Company (any
such proposal or offer being hereinafter referred to as an "ACQUISITION
PROPOSAL"). Neither the Company nor any representatives of the Company shall,
directly or indirectly, engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any party
relating to an Acquisition Proposal, whether made before or after this
Agreement. The Company and any representatives of the Company will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing. The Company will notify in writing iTurf immediately of any such
inquiries, proposals or offers are received by, any such information requested
from, or any such discussions or negotiations are sought to be initiated or
continued with, any of its representatives indicating, in connection with such
notice, the name of such party and the material terms and conditions of any
proposals or offers. The Company will also promptly request that each party that
has heretofore executed a confidentiality agreement in connection with its
consideration of an Acquisition Proposal to return all confidential information
heretofore furnished to such party by or on behalf of the Company.
4.9 RELEASE BY THE SELLING SHAREHOLDERS. Effective upon the Closing,
the Selling Shareholders, jointly and severally, for themselves and their heirs,
executors, administrators, successors and assigns, hereby fully and
unconditionally release and forever discharge and hold harmless the Company,
Merger Sub and their respective employees, officers, directors, successors and
assigns from any and all claims, demands, losses, costs, expenses (including,
without limitation, attorneys' fees and expenses), obligations, Liabilities
and/or damages of every kind and nature whatsoever, whether or not now existing
or known, relating in any way, directly or indirectly, to the Company or its
business, that the Selling Shareholders may now have or may hereafter claim to
have against the Company, Merger Sub or any of their employees, officers,
directors, successors or assigns.
4.10 SHAREHOLDERS MEETING AND APPROVAL. The Company shall take, in
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accordance with applicable law, its certificate of incorporation and its bylaws,
all action necessary to convene a meeting of shareholders (the "SHAREHOLDERS'
MEETING") of the Company as promptly as practicable after the date of this
Agreement but in no event later than five (5) business days following the date
hereof to consider and vote upon the adoption and approval of this Agreement and
the Merger. The Board of Directors of the Company shall recommend such adoption
and approval and the Company shall take all lawful action to solicit such
approval by its shareholders. By executing this Agreement, each Selling
Shareholder evidences his or its irrevocable agreement to vote all shares of
Company Common Stock owned by him or it in favor of the Merger.
4.11 WAIVER OF APPRAISAL RIGHTS. Each Selling Shareholder hereby
waives any rights of appraisal or rights to dissent from the Merger that he or
it may have.
4.12 LOCK-UP ARRANGEMENTS. Each of the Selling Shareholders hereby
covenants and agrees that he, she or it shall not sell or otherwise transfer or
dispose of any shares of iTurf Common Stock acquired hereunder in violation of
the Securities Act or any other applicable law. In addition, each of the Selling
Shareholders hereby covenants and agrees that they shall not sell or otherwise
transfer or dispose of shares of iTurf Common Stock acquired hereunder in the
amounts and for the periods set forth on SCHEDULE 4.12. In order to enforce the
foregoing covenants, iTurf shall have the right to place restrictive legends on
the certificates representing the shares subject to this Section 4.12 and to
impose stop transfer instructions with respect to such shares until the end of
the relevant periods.
4.13 REGISTRATION RIGHTS AGREEMENT. Prior to or simultaneously with
the Closing, iTurf and the Selling Shareholders shall enter into a registration
rights agreement in substantially the form attached hereto as EXHIBIT A (the
"REGISTRATION RIGHTS AGREEMENT").
4.14 ANCILLARY AGREEMENTS. Prior to or simultaneously with the
Closing, (i) iTurf, the Company and MarketSource shall enter into on-line
advertising authorized reseller agreement in substantially the form attached
hereto as EXHIBIT B (the "ON-LINE ADVERTISING AGREEMENT"), (ii)Turf and
MarketSource shall enter into an off-line advertising purchase agreement in
substantially the form attached hereto as EXHIBIT C (the "OFF-LINE ADVERTISING
AGREEMENT"), (iii) the Company and MarketSource shall enter into an
administrative services agreement in substantially the form attached hereto as
EXHIBIT D (the "TRANSITIONAL SERVICES AGREEMENT"), (iv) MarketSource and the
Company shall enter into a software license agreement in substantially the form
attached hereto as EXHIBIT E (the "SOFTWARE LICENSE AGREEMENT") and a Sublease
Agreement in substantially the form attached hereto as EXHIBIT F (the "SUBLEASE
AGREEMENT") and (v) MarketSource and Levine shall enter into a non-competition
agreement in substantially the form attached hereto as EXHIBIT G (the
"NON-COMPETITION AGREEMENT" and together with the Registration Rights Agreement,
the On-Line Advertising Agreement, the Off-line Advertising Agreement, the
Transitional Services Agreement, the Software License Agreement and the Sublease
Agreement, the "ANCILLARY AGREEMENTS").
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4.15 TAX MATTERS. All transfer, documentary, sales, use, stamp,
registration and other such taxes and fees (including any penalties and
interest) incurred in connection with this Agreement shall be paid by the
Selling Shareholders when due, and each Selling Shareholder will, at his or its
own expense, file all necessary tax returns and other documentation with respect
to all such transfer, documentary, sales, use, stamp, registration and other
taxes and fees, and, if required by applicable law, iTurf will, and will cause
its affiliates to, join in the execution of any such tax returns and other
documentation.
4.16 HSR ACT FILING. Promptly following the execution of this
Agreement, the Company, Levine and iTurf, if required, shall prepare and file
all documents required to be filed with the U.S. Federal Trade Commission and
the Department of Justice in order to comply with the HSR Act in connection with
the Merger.
4.17 MARKETSOURCE RELEASE. Effective upon the Closing, MarketSource,
for itself and its successors and assigns, hereby fully and unconditionally
releases and forever discharges and holds harmless each employee of the Company
and his or her heirs, executors, administrators, successors and assigns, from
any and all claims, demands, losses, costs, expenses (including, without
limitation, attorneys' fees and expenses), obligations, Liabilities and/or
damages of every kind and nature whatsoever, whether or not now existing or
known, relating in any way, directly or indirectly, to any non-competition
covenant made by such employee that MarketSource may now have or may hereafter
claim to have against such employee.
4.18 DOMAIN NAMES. On or prior to the Closing, MarketSource and the
Selling Shareholders shall take all actions necessary to transfer full and
complete ownership of the domain names listed on SCHEDULE 4.18 to the Company.
4.19 AT&T AGREEMENT. As soon as practicable after the date hereof,
the Company shall enter into an agreement with AT&T Corp. pursuant to which AT&T
Corp. will provide telecommunication related services through the Company's web
site (the "AT&T AGREEMENT"), the form and substance of which agreement shall be
reasonably satisfactory to iTurf.
4.20 PAYROLL EXPENSES/SPRINT CONTRACT. MarketSource shall pay to the
Surviving Corporation within thirty (30) days following the Closing an amount in
cash equal to the sum of (i) the amount of expense for payroll and
payroll-related items (except bonus accruals) accrued by the Company as of the
Closing Date and (ii) the amount of cash received by the Company from Sprint
Communications Company, L.P. regarding the contract of July 8, 1999.
4.21 EXPENSES PAID BY THE COMPANY. The Company shall pay to
MarketSource within thirty (30) days following the Closing an amount in cash
equal to the amount of expenses actually paid by the Company between the date
hereof and the Closing Date relating to the following marketing programs: campus
newspaper advertising and decoder insert shipping, sweepstakes,
premiums/incentives, CollegeSource Board production, registration opt-in and
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guerilla marketing.
ARTICLE V
CONDITIONS PRECEDENT
5.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of each party to effect the Merger is subject to the satisfaction or
waiver on or prior to the Closing Date of each of the following conditions:
(a) HSR ACT. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or shall
have otherwise expired.
(b) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restrain or prohibition preventing the
consummation of the Merger shall be in effect; PROVIDED, HOWEVER, that the party
invoking this condition shall use its reasonable best efforts to have any such
order or injunction vacated.
5.2 CONDITIONS TO OBLIGATIONS OF ITURF AND MERGER SUB. The
respective obligations of iTurf and Merger Sub to consummate the Merger is
subject to the satisfaction or waiver on or prior to the Closing Date of each of
the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of the Company, MarketSource and the Selling
Shareholders in this Agreement and the Transaction Documents shall be true and
correct in all material respects on and as of the date hereof, and, except to
the extent such representations and warranties speak as of an earlier date, as
of the Effective Time as though made at and as of the Effective Time.
(b) PERFORMANCE OF THE OBLIGATIONS. The Company, MarketSource
and the Selling Shareholders shall have performed and complied in all material
respects with all agreements, covenants and conditions required by this
Agreement and the Transaction Documents to be performed or complied with by the
Company, MarketSource and the Selling Shareholders at or before the Effective
Time.
(c) DUE DILIGENCE. iTurf shall have completed its due
diligence investigation of the Company by August 15, 1999 and the results of
such investigation shall have been reasonably satisfactory to iTurf in all
material respects.
(d) ASSIGNMENT OF AGREEMENTS. MarketSource shall have assigned
those agreements listed on SCHEDULE 5.2 to the Company and obtained any and all
necessary consents, waivers and approvals with respect to such assignment.
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(e) ANCILLARY AGREEMENTS. The Company, MarketSource and Levine
(as appropriate) shall have entered into the On-line Advertising Agreement, the
Off-line Advertising Agreement, the Transitional Services Agreement, the
Software License Agreement, the Sublease and the Non-Competition Agreement.
(f) OPINION OF COUNSEL. The Company shall have delivered to
iTurf an opinion of Shanley & Fisher P.C., counsel to the Company, MarketSource
and the Selling Shareholders, dated the Closing Date, substantially in the form
attached hereto as EXHIBIT H.
(g) CONSENTS. All consents, approvals or waivers from
regulatory authorities and third parties necessary for the execution, delivery
and performance of this Agreement and the Transaction Documents and the
transactions contemplated hereby and there by shall have been obtained.
(h) MATERIAL ADVERSE CHANGE. There shall not have occurred any
(i) change, occurrence or circumstance in the business, results of operations or
financial condition of the Company having or reasonably likely to have a
material adverse effect on the Company, (ii) declaration of a banking moratorium
by New York or United States authorities or (iii) an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak or
escalation of any other insurrection or armed conflict involving the United
States or any other national or international calamity or emergency.
(i) PAYMENT OF LIABILITIES. The Company shall have paid in
full all Liabilities relating to the Microsoft software licenses, Dell Computers
and decoder insert production.
(j) CERTIFICATES. iTurf shall have received a certificate or
certificates signed by the Chief Executive Officer or Chief Financial Officer of
each of the Company and MarketSource and by the Selling Shareholders, dated the
Closing Date, certifying as to such matters as may be reasonably requested by
iTurf, including, without limitation, to (i) certificates with respect to the
Company's and MarketSource's certificate of incorporation, bylaws, board of
directors' and shareholder resolutions relating to the transactions contemplated
hereby and the incumbency and signatures of each of the officers of the Company
who shall execute on behalf of the Company any document delivered on the Closing
Date, (ii) a certificate certifying to the fulfillment of the conditions set
forth in Section 5.2(a), (b), (d), (g), (h) and (i); and (iii) a certificate
certifying as to the matters set forth in EXHIBIT I attached hereto.
5.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE SELLING
SHAREHOLDERS. The obligation of the Company and the Selling Shareholders to
consummate the Merger is subject to the satisfaction or waiver, at or before the
Effective Time, of each of the following conditions:
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<PAGE>
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of iTurf and Merger Sub in this Agreement and the
Transaction Documents shall be true and correct in all material respects on and
as of the date hereof, and, except to the extent such representations and
warranties speak as of an earlier date, as of the Effective Time as though made
at and as of the Effective Time.
(b) PERFORMANCE BY OBLIGATIONS. iTurf and the Merger Sub shall
have performed and complied in all material respects with the agreements,
covenants and conditions required by this Agreement and the Transaction
Documents to be performed or complied with by them at or before the Effective
Time.
(c) OPINION OF COUNSEL. iTurf and Merger Sub shall have
delivered to the Company an opinion of Alex S. Navarro, Esq., General Counsel of
iTurf and Merger Sub, dated the Closing Date, substantially in the form attached
hereto as EXHIBIT J.
(d) REGISTRATION RIGHTS AGREEMENT. iTurf shall have entered
into the Registration Rights Agreement.
(e) ANCILLARY AGREEMENTS. Merger Sub shall have entered into
the Software License Agreement and the Sublease.
(f) MATERIAL ADVERSE CHANGE. There shall not have occurred any
(i) change, occurrence or circumstance in the business, results of operations or
financial condition of iTurf having or reasonably likely to have an iTurf
Material Adverse Effect , (ii) declaration of a banking moratorium by New York
or United States authorities or (iii) an outbreak or escalation of hostilities
between the United States and any foreign power or an outbreak or escalation of
any other insurrection or armed conflict involving the United States or any
other national or international calamity or emergency.
(g) BOARD APPROVAL. iTurf's board of directors shall have
approved resolutions providing that the issuance of 95% of the shares of iTurf
Common Stock to be issued hereunder at Closing to each of the Levine Affiliates
shall be exempt from Section 16(b) of the Exchange Act pursuant to Rule
16b-3(d)(1) promulgated thereunder.
(h) OFFICER'S CERTIFICATES. The Company shall have received a
certificate or certificates executed by a senior officer of iTurf and Merger
Sub, dated the Closing Date, certifying as to such matters as may be reasonably
requested by the Company, including, without limitation, (i) certificates with
respect to iTurf's and Merger Sub's respective certificates of incorporation,
bylaws, board of directors' and stockholder resolutions relating to the
transactions contemplated hereby and the incumbency and signatures of each of
the officers of iTurf and Merger Sub who shall execute on behalf of iTurf and
Merger Sub any document delivered on the Closing Date; (ii) a certificate
certifying to the fulfillment of the conditions set forth in Section 5.3(a), (b)
and (f); and (iii) a certificate certifying as to the matters set forth in
EXHIBIT I attached hereto.
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ARTICLE VI
INDEMNIFICATION; ESCROW
6.1 INDEMNIFICATION BY THE SELLING SHAREHOLDERS. Each Levine
Affiliate and MarketSource, jointly and severally, and each other Selling
Shareholder, severally and pro rata in accordance with such shareholder's
percentage of the aggregate Merger Consideration issued to all Selling
Shareholders in accordance with SCHEDULE 2.3, shall indemnify, defend and hold
harmless iTurf and its affiliates (including Merger Sub and the Surviving
Corporation), promptly upon demand at any time and from time to time, against
any and all losses, Liabilities, claims, actions, damages and expenses
(including without limitation, reasonable attorneys' fees and disbursements)
(collectively, "LOSSES"), arising out of or in connection with any of the
following: (i) any misrepresentation or breach of any warranty made by the
Company, MarketSource or any Selling Shareholder herein or in the Transaction
Documents; (ii) any breach or nonfulfillment of any covenant or agreement made
by the Company, MarketSource or any Selling Shareholder herein or in the
Transaction Documents; or (iii) the claims of any broker or finder engaged by
the Company, MarketSource or any Selling Shareholder (except to the extent set
forth in Section 8.2).
6.2 INDEMNIFICATION BY ITURF. iTurf shall indemnify, defend and hold
harmless the Selling Shareholders, promptly upon demand at any time and from
time to time, against any and all Losses arising out of or in connection with
any of the following: (i) any misrepresentation or breach of any warranty made
by iTurf herein or in the Transaction Documents; (ii) any breach or
nonfulfillment of any covenant or agreement made by iTurf herein or in the
Transaction Documents; and (iii) the claims of any broker or finder engaged by
iTurf (except to the extent set forth in Section 8.2).
6.3 FURTHER PROVISIONS REGARDING INDEMNIFICATION.
(a) SURVIVAL. All representations, warranties and covenants
made by the Company, MarketSource and the Selling Shareholders in this Agreement
and the Transaction Documents or by iTurf in this Agreement shall survive the
Closing until April 30, 2001, except that the representations and warranties
contained in or made pursuant to Sections 2.9 (Tax) and 2.17 (Employee Benefits)
shall survive until 30 days after the applicable statute of limitations has run.
The expiration of any representation or warranty shall not affect any claim made
in writing prior to the date of such expiration.
(b) LIMITATIONS. Notwithstanding the foregoing:
(i) Neither any Selling Shareholder, on the one hand,
nor iTurf, on the other hand (such Selling Shareholder and iTurf are
sometimes hereinafter individually referred to in this Section 6.3
as a "PARTY") shall be entitled to indemnification for Losses
arising out of matters referred to in Section
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6.1 or 6.2, as applicable, unless it shall have given written notice
to the other party, setting forth its claim for indemnification in
reasonable detail, within the applicable period of survival as set
forth in Section 6.3(a); PROVIDED, HOWEVER, that the foregoing
limitations on each party's indemnification obligation shall not
apply to Losses arising out of or in connection with any
misrepresentation made in Sections 2.1 through 2.5.
(ii) An indemnified party shall promptly give written
notice to the indemnifying party after the indemnified party has
knowledge that any legal proceeding has been instituted or any claim
has been asserted in respect of which indemnification may be sought
under the provisions of Sections 6.1 or 6.2. If the indemnifying
party, within 10 days after the indemnified party has given such
notice (or within such shorter period of time as an answer or other
responsive motion may be required), shall have acknowledged in
writing his or its obligation to indemnify and shall have furnished
to the indemnified party a bond, letter of credit, escrow or similar
arrangement in an amount equal to the total amount demanded in such
claim or proceeding, then the indemnifying party shall have the
right to control the defense of such claim or proceeding, and the
indemnified party shall not settle or compromise such claim or
proceeding without the written consent of the indemnifying party.
The indemnified party may in any event participate in any such
defense with his or its own counsel and at his or its own expense.
(iii) The indemnified party shall be kept fully informed
by the indemnifying party of such action, suit or proceeding at all
stages thereof, whether or not it is represented by counsel. The
indemnifying party shall, at the indemnifying party's expense, make
available to the indemnified party and its attorneys and accountants
all books and records of the indemnifying party relating to such
proceedings or litigation, and the parties hereto agree to render to
each other such assistance as they may reasonably require of each
other in order to ensure the proper and adequate defense of any such
action, suit or proceeding.
(iv) Notwithstanding anything herein to the contrary,
the aggregate liability of the Selling Shareholders and MarketSource
to iTurf for Losses shall not exceed an amount equal to 60% of the
Purchase Price (as defined herein) (the "CAP"); PROVIDED, HOWEVER,
that the Cap shall not apply to Losses indemnifiable by the Levine
Affiliates and MarketSource, jointly and severally, arising out of
or in connection with any misrepresentation or breach of any
warranty in Sections 2.1 through 2.5 or Section 2.12 or any breach
of Section 4.8. For purposes of this Agreement, "Purchase Price"
means 1,587,000 multiplied by the average closing price of iTurf
Common Stock on the Nasdaq Stock Market for the ten (10) consecutive
trading days immediately preceding the Closing Date.
6.4 PROCEDURES RELATING TO HOLDBACK SHARES.
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(a) HOLDBACK PERIODS; DISTRIBUTION UPON TERMINATION OF
HOLDBACK PERIODS. Subject to the following requirements, the Heldback Shares
shall be retained by iTurf for the periods described in this Section 6.4(a).
Upon the expiration of the First Holdback Period (as defined herein), iTurf will
deliver to the Selling Shareholders 50% of the Heldback Shares less any Heldback
Shares that have been canceled in satisfaction of a claim hereunder in
accordance with this Agreement. Upon the expiration of the Second Holdback
Period (as defined herein), all remaining Heldback Shares; PROVIDED, HOWEVER,
that the number of Heldback Shares with a value (as determined below) equal to
the amount of the Losses or other obligations as to which iTurf or the Surviving
Corporation has properly made a claim under this Article VI shall be retained by
iTurf until such claims have been resolved. Within five (5) business days
following resolution of such claims, iTurf shall deliver to the Selling
Shareholders all Heldback Shares retained by iTurf and not required to satisfy
such claims. "First Holdback Period" means the period commencing on the Closing
Date and ending on the second trading day following the public release of
iTurf's results of operations for the quarter ending October 31, 1999 (the
"Earnings Release Date"). "Second Holdback Period" means the period commencing
on the Earnings Release Date and ending on the first anniversary of the Closing
Date.
(b) PROTECTION OF HELDBACK SHARES. iTurf shall hold and
safeguard the Heldback Shares during the terms of the Holdback Periods and for
any additional period pursuant to Section 6.4(e), shall treat such Heldback
Shares as a trust fund in accordance with the terms of this Agreement and not as
the property of iTurf and shall hold and dispose of the Heldback Shares only in
accordance with the terms hereof.
(c) DISTRIBUTIONS; VOTING.
(i) Any shares of iTurf Common Stock or other equity
securities issued or distributed by iTurf (including shares issued
upon a stock split) (the "NEW SHARES") in respect of Heldback Shares
that have not been released to the Selling Shareholders shall be
added to the Heldback Shares and become a part thereof. New Shares
issued in respect of Heldback Shares that have been released shall
not be added to the Heldback Shares, but shall be distributed to the
holders thereof. When and if cash dividends on Heldback Shares shall
be declared and paid, they shall not be added to the Heldback Shares
but shall be paid to the holders thereof.
(ii) The Selling Shareholders shall be the record owner
of the Heldback Shares and shall have voting rights with respect to
the Heldback Shares (including any New Shares that are voting
securities) so long as such Heldback Shares are retained by iTurf.
(d) CLAIM UPON HELDBACK SHARES.
(i) Upon written notification by iTurf or the Surviving
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Corporation to the Selling Shareholders at any time on or before the
last day of the last Holdback Period:
(A) that such party has paid or properly accrued
Losses in an aggregate stated amount to which such notifying
party is entitled to indemnity pursuant to this Agreement, and
(B) in the case of such Losses, specifying in
reasonable detail the individual items of Losses included in
the amount so stated, the date each such item was paid or
properly accrued and the nature of the misrepresentation or
breach of warranty, if any, or claim to which such item is
related, then iTurf and Merger Sub shall, unless the Selling
Shareholders object in accordance with the provisions of
Section 6.4(e) hereof, cancel the number of Heldback Shares
having a value equal to such Losses.
(ii) For the purposes of determining the number of
shares of iTurf Common Stock to be canceled from the Heldback Shares
pursuant to Section 6.4(d)(i), the shares of iTurf Common Stock
shall be valued at the average of the closing prices for iTurf
Common Stock on The Nasdaq Stock Market for the 10 consecutive days
immediately preceding the giving of any written notice of a claim in
accordance with Section 6.4(d)(i) hereof.
(e) OBJECTIONS TO CLAIMS. At the time of receipt of any
notification as set forth in Section 6.4(d)(i), the Selling Shareholders shall
have a period of thirty (30) calendar days after such delivery to object in a
written statement to the claim made in the notification, and such statement
shall have been delivered to the party giving notice under Section 6.4(d)(i)
prior to the expiration of such thirty (30) day period. If the party giving
notice under Section 6.4(d)(i) does not receive any such objection from the
Selling Shareholders within such thirty (30) day period, iTurf may cancel the
shares of iTurf Common Stock from the Heldback Shares equal to the amount of
Losses paid or properly accrued. If the party giving notice under Section
6.4(d)(i) does receive an objection from the Selling Shareholders within such
thirty (30) day period, then iTurf shall retain the Heldback Shares which are
the subject of the notice in accordance with Section 6.4(b) until such time as a
final judgment has been entered with respect to the claim made in such notice or
the parties have agreed in a writing signed by iTurf, the Surviving Corporation
and the Selling Shareholders as to the resolution of the claim at which time
iTurf may cancel such shares or release them to the Selling Shareholders, as
applicable.
(f) NO LIMITATION. The existence of this Section 6.4 and the
rights set forth herein are not intended to limit any other claims by iTurf or
the Surviving Corporation for indemnification against the Selling Shareholders.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time: (a) by mutual written consent
of the Company, iTurf and the Selling Shareholders; (b) by iTurf and Merger Sub
by giving written notice to the Company and the Selling Shareholders if the
Company or any Selling Shareholder has breached any representation or warranty
pursuant to Article III of this Agreement or otherwise materially breached any
covenant or agreement herein; or (c) by iTurf and Merger Sub by giving written
notice to the Company and the Selling Shareholders if the Closing shall not have
occurred on or before August 30, 1999 by reason of the failure of any condition
precedent set forth in Article V hereof. Notwithstanding anything herein to the
contrary, this Agreement shall terminate automatically if the Merger shall have
not been declared effective and consummated by September 30, 1999.
7.2 EFFECT OF TERMINATION. If iTurf or the Company terminates this
Agreement as provided in Section 7.1, this Agreement shall forthwith become void
and have no effect without any liability or obligation on the part of iTurf, the
Selling Shareholders, the Company or any of their respective directors,
officers, employees, shareholders or counsel, except that nothing contained in
this Section 7.2 shall relieve any party from any liability resulting from any
willful, material breach of the representations, warranties, covenants or
agreements set forth in this Agreement
7.3 AMENDMENT. Subject to the applicable provisions of New Jersey
Law and Delaware Law, at any time prior to the Effective Time, the parties
hereto may modify or amend this Agreement by written agreement executed and
delivered by duly authorized officers of iTurf, the Company and Merger Sub;
PROVIDED, HOWEVER, that no amendment shall be made which reduces the
consideration payable in the Merger or adversely affects the rights of the
Company's shareholders hereunder without the requisite approval of its
shareholders.
7.4 COST RECOVERY PAYMENT. Notwithstanding anything herein to the
contrary, in the event that the Merger shall not have been consummated for any
reason (other than because of the failure to satisfy one or more of the
conditions set forth in Section 5.1 or 5.2) on or prior to the second business
day following the expiration or termination of the waiting period (and any
extension thereof) applicable to the Merger under the HSR Act (the "Cost
Recovery Start Date"), iTurf shall pay $25,000 to MarketSource for each day
thereafter that the Merger shall not have been consummated, commencing on the
first business day after the Cost Recovery Start Date; PROVIDED, HOWEVER, that
iTurf's maximum liability pursuant to this Section 7.4 shall be $350,000.
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ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. All notices or other communications in connection with
this Agreement shall be in writing and shall be considered given when personally
delivered or when mailed by registered or certified mail, postage prepaid,
return receipt requested, or by overnight courier as follows:
If to the Company: [email protected], Inc.
2 Commerce Drive
Cranbury, NJ 08512
Attn: President
with a copy to: Shanley & Fisher, P.C.
131 Madison Avenue
Morristown, NJ 07962
Attn: Kevin M. Kilcullen, Esq.
If to MarketSource: MarketSource Corporation
10 Abeel Road
Cranbury, NJ 08512
Attn: President
with a copy to: Shanley & Fisher, P.C.
131 Madison Avenue
Morristown, NJ 07962
Attn: Kevin M. Kilcullen, Esq.
If to the Selling
Shareholders: Martin D. Levine, as Sellers' Agent
c/o MarketSource Corporation
10 Abeel Road
Cranbury, NJ 08512
with a copy to: Shanley & Fisher, P.C.
131 Madison Avenue
Morristown, NJ 07962
Attn: Kevin M. Kilcullen, Esq.
If to iTurf or Merger Sub: iTurf Inc.
435 Hudson Street
New York, NY 10014
Attn: General Counsel
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with a copy to: Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Attn: Ronald R. Papa, Esq.
8.2 EXPENSES. Whether or not the Merger is consummated, each of the
parties shall each bear their own respective costs and expenses incident to
preparing for, entering into and carrying out this Agreement; PROVIDED, HOWEVER,
that iTurf, on the one hand, and the Selling Shareholders, on the other hand,
shall split equally the costs and expenses incurred in connection with the
filings and registrations with the U.S. Department of Justice and Federal Trade
Commission pursuant to the HSR Act and the fees of Deutsche Banc (provided that
in no event shall iTurf's share of such fees exceed $280,000). MarketSource and
the Selling Shareholders agree that the Company has not borne and will not bear
any expenses relating to this transaction, including any legal fees or
accounting fees relating to the preparation of financial statements for purposes
of this transaction and any of MarketSource's or the Selling Shareholders' costs
and expenses (including any of their legal fees and expenses) in connection with
this Agreement or the Transaction Documents or any of the transactions
contemplated hereby or thereby. In no event shall the Company, iTurf, Merger Sub
or the Surviving Corporation pay any expenses incurred on behalf of MarketSource
or any Selling Shareholder, which expenses shall be paid solely by MarketSource
or the Selling Shareholder incurring such expenses.
8.3 FURTHER ASSURANCES. Each party agrees to execute any and all
documents and to perform such other acts as may be necessary or expedient to
further the purposes of this Agreement and the transactions completed hereby.
8.4 ENTIRE AGREEMENT. This Agreement (which includes the schedules
and exhibits hereto) sets forth the parties' final and entire agreement with
respect to its subject matter and supersedes any and all prior understandings
and agreements. This Agreement can be amended, supplemented or changed, and any
provision hereof can be waived, only by a written instrument making specific
reference to this Agreement signed by the party against whom enforcement of any
such amendment, supplement, change or waiver is sought.
8.5 ASSIGNMENT; BINDING EFFECT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and assigns;
PROVIDED, HOWEVER, that neither this Agreement nor any right or obligation
hereunder may be assigned or transferred without the written consent of the
other parties, except that iTurf and/or Merger Sub may assign this Agreement and
its rights hereunder to any direct or indirect wholly-owned subsidiary of iTurf.
8.6 NO THIRD PARTY BENEFICIARY. Except as otherwise expressly
provided herein, the terms and provisions of this Agreement are intended solely
for the benefit of the parties hereto and their respective successors and
assigns, and it is not the intention of the parties to confer third-party
beneficiary rights upon any other person.
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8.7 PARAGRAPH HEADINGS. The paragraph or section headings in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
8.8 SEVERABILITY. If any provision of this Agreement shall be held
by any court of competent jurisdiction to be illegal, invalid or unenforceable,
such provision shall be construed and enforced as if it had been more narrowly
drawn so as not to be illegal, invalid or unenforceable, and such illegality,
invalidity or unenforceability shall have no effect upon and shall not impair
the enforceability of any other provision of this Agreement.
8.9 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be
gov erned by and construed and interpreted in accordance with the laws of the
State of New York. The state courts of the State of New York in New York County
and, if the jurisdictional prerequisites exist at the time, the United States
District Court for the Southern District of New York, shall have sole and
exclusive jurisdictions to hear and determine any dispute or controversy arising
under or concerning this Agreement. In any action or proceeding concerning such
dispute or controversy, the parties consent to jurisdiction and waive personal
service of any summons, complaint or other process; a summons or complaint in
any such action or proceeding may be served by mail in accordance with Section
8.1.
8.10 COUNTERPARTS. This Agreement may be executed by facsimile and
in one or more counterparts, each of which shall be deemed an original, but all
of which taken together shall constitute one and the same instrument.
8.11 SELLERS' AGENT.
(a) Appointment of Sellers' Agent.
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(i) Each of the Selling Shareholders hereby irrevocably
appoints Martin D. Levine as agent and attorney-in-fact (sometimes
referred to herein as "SELLERS' AGENT") of each of the Selling
Shareholders to take any action required or permitted to be taken by
such persons under the terms of this Agreement or any other
Transaction Document, including, without limiting the generality of
the foregoing, the execution, delivery and receipt of any funds,
notices, certificates or other documents to be executed, delivered
or received by or on behalf of any or all of the Selling
Shareholders, the representation of the Companies in the resolution
of any disputed matters hereunder and in indemnification proceedings
hereunder and the rights to waive, modify or amend the terms of this
Agreement. The Selling Shareholders severally agree to indemnify the
Sellers' Agent from and against and in respect of any and all
Liabilities, damages, claims, costs and expenses, including but not
limited to attorneys' fees, arising out of or due to any action as
the Sellers' Agent and any and all actions proceedings, demands,
assessments, judgments, costs and expenses incidental thereto,
except to the extent that the same result from bad faith or gross
negligence on the part of the Sellers' Agent.
(ii) iTurf, Merger Sub and the Surviving Corporation
shall be entitled to rely exclusively upon any communications given
by the Sellers' Agent on behalf of any of the Companies and shall
not be liable in any manner whatsoever for any action taken or not
taken in reliance upon the actions taken or not taken or
communications made by the Sellers' Agent. Notwithstanding anything
to the contrary contained herein, iTurf, Merger Sub and the
Surviving Corporation shall be entitled to disregard any notices or
communications given or made by the Selling Shareholders unless
given or made through the Sellers' Agent, except as provided in
subparagraph (b) below.
(b) SUCCESSOR AGENT. In the event of the inability of the
Sellers' Agent to perform its functions hereunder, the Selling Shareholders
shall promptly appoint a new agent as attorney-in-fact, and such appointment
shall be deemed to have made when communicated to iTurf and Merger Sub in
writing signed by a majority of the Selling Shareholders. If the Selling
Shareholders do not within 15 days appoint a new agent, then Frank P. Morelli
shall serve as the Sellers' Agent if he is able and willing to do so, until a
successor agent shall have been appointed in accordance with the provisions
hereof.
(c) SELLERS' AGENT ACTIONS. The manner and form by which the
Selling Shareholders shall decide upon any new agent and attorney-in-fact shall
be decided by a writing signed by a majority of the Selling Shareholders. The
Selling Shareholders recognize, and hereby acknowledge, that the Sellers' Agent
has an interest in the subject matter of this Agreement and that the appointment
of such Sellers' Agent (which shall include any person who becomes the Sellers'
Agent pursuant to the provisions of subparagraph (b) above) as the Sellers'
Agent constitutes an irrevocable power-of-attorney coupled with an interest.
8.12 CONSTRUCTION. Each of the parties hereto has participated
jointly in the
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negotiation and drafting of this Agreement and the other Transaction Documents.
In the event an ambiguity or question of intent or interpretation arises, this
Agreement and the other Transaction Documents shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement and the other Transaction Documents. Any reference
to any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. The word "including" shall mean including without
limitation. The parties intend that each representation, warranty, and covenant
contained herein shall have independent significance. If any party has breached
any representation, warranty, or covenant contained herein in any respect, the
fact that there exists another representation, warranty, or covenant relating to
the same subject matter (regardless of the relative levels of specificity) which
the party has not breached shall not detract from or mitigate the fact that the
party is in breach of the first representation, warranty, or covenant.
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
ITURF INC.
By: /s/ DENNIS GOLDSTEIN
------------------------------
Name: Dennis Goldstein
Title: Chief Financial Officer
ITURF ACQUISITION CORPORATION
By: /s/ DENNIS GOLDSTEIN
------------------------------
Name:
Title:
[email protected], INC.
By: /s/ MARTIN LEVINE
------------------------------
Name:
Title:
MARKETSOURCE CORPORATION
By: /s/ MARTIN LEVINE
------------------------------
Name:
Title
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SELLING SHAREHOLDERS:
/s/ MARTIN LEVINE
- - ------------------------------
Martin D. Levine
/s/ MARTIN LEVINE
- - ------------------------------
Martin D. Levine, as Trustee of
the Jonathan L. Levine Grantor
Trust u/t/a/d January 1, 1995
/s/ MARTIN LEVINE
- - ------------------------------
Martin D. Levine, as Trustee of
the Lauren E. Levine Grantor
Trust u/t/a/d January 1, 1995
/s/ DAVID BIDWELL
- - ------------------------------
David Bidwell
/s/ DEBORAH CHEEZUM
- - ------------------------------
Deborah Cheezum
/s/ DONALD CLIFFORD
- - ------------------------------
Donald Clifford
/s/ FRANK P. MORELLI
- - ------------------------------
Frank P. Morelli
/s/ DEREK S. WHITE
- - ------------------------------
Derek S. White
/s/ ANTHONY FIORE
- - ------------------------------
Anthony Fiore
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TABLE OF CONTENTS
Page
----
ARTICLE I - THE MERGER.......................................................1
1.1 The Merger.......................................................1
1.2 Effective Time...................................................2
1.3 Closing..........................................................2
1.4 Effect of the Merger.............................................2
1.5 Certificate of Incorporation; Bylaws.............................2
1.6 Directors and Officers...........................................2
1.7 Effect on Capital Stock..........................................2
1.8 Adjustment of Merger Consideration...............................3
1.9 No Fractional Shares.............................................3
1.10 Holdback.........................................................4
1.11 Tax-Free Reorganization..........................................4
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY,
MARKETSOURCE AND THE SELLING SHAREHOLDERS....................................4
2.1 Organization and Qualification...................................4
2.2 Authority Relative to This Agreement.............................5
2.3 Capital Structure................................................5
2.4 Title to Shares..................................................6
2.5 Subsidiaries and Affiliates......................................6
2.6 Financial Statements.............................................7
2.7 No Undisclosed Liabilities.......................................7
2.8 Absence of Certain Changes or Events.............................7
2.9 Taxes............................................................7
2.10 Title to Assets..................................................8
2.11 Real and Personal Property.......................................8
2.12 Intellectual Property............................................9
2.13 Contracts, Leases and Commitments................................9
2.14 No Conflicts, Required Filings or Consents......................10
2.15 No Permits Required; Compliance with Laws.......................11
2.16 Personnel Matters...............................................11
2.17 Employee Benefit Plans..........................................11
2.18 Intentionally omitted...........................................13
2.19 Insurance.......................................................13
2.20 Litigation......................................................13
2.21 Environmental Matters...........................................14
2.22 Restrictions on Business Activities.............................14
2.23 Transactions with Affiliates....................................14
2.24 Books and Records...............................................14
2.25 Improper Payments...............................................14
2.26 Brokers.........................................................15
i
<PAGE>
2.27 Investment Representation.......................................15
2.28 Vote Required...................................................15
2.29 Web Site Traffic................................................15
2.30 Year 2000 Compliance............................................15
2.31 Indebtedness to Certain Affiliates; Guaranties..................16
2.32 Disclosure......................................................16
ARTICLE III - REPRESENTATIONS AND WARRANTIES
OF ITURF AND MERGER SUB.....................................................17
3.1 Organization and Qualification..................................17
3.2 Authority Relative to this Agreement............................17
3.3 No Conflict, Required Filings and Consents......................18
3.4 Capital Stock...................................................18
3.5 SEC Filings, Financial Statements...............................19
3.6 Absence of Certain Changes or Events............................19
3.7 Brokers.........................................................19
ARTICLE IV - ADDITIONAL COVENANTS AND AGREEMENTS............................20
4.1 Conduct of Business.............................................20
4.2 Access to Information...........................................22
4.3 Notification of Certain Matters.................................22
4.4 Intentionally omitted...........................................22
4.5 Fulfillment of Conditions.......................................22
4.6 Public Announcements............................................22
4.7 Board of Directors of iTurf.....................................23
4.8 No Solicitation.................................................23
4.9 Release by the Selling Shareholders.............................23
4.10 Shareholders Meeting and Approval...............................23
4.11 Waiver of Appraisal Rights......................................24
4.12 Lock-up Arrangements............................................24
4.13 Registration Rights Agreement...................................24
4.14 Ancillary Agreements............................................24
4.15 Tax Matters.....................................................25
4.16 HSR Act Filing..................................................25
4.17 MarketSource Release............................................25
4.18 Domain Names....................................................25
4.19 AT&T Agreement..................................................25
4.20 Payroll Expenses/Sprint Contract................................25
4.21 Expenses Paid by the Company....................................25
ARTICLE V - CONDITIONS PRECEDENT............................................26
5.1 Conditions to Each Party's Obligations..........................26
5.2 Conditions to Obligations of iTurf and Merger Sub...............26
5.3 Conditions to Obligations of the Company and the Selling
Shareholders....................................................27
ARTICLE VI - INDEMNIFICATION; ESCROW........................................29
ii
<PAGE>
6.1 Indemnification by the Selling Shareholders.....................29
6.2 Indemnification By iTurf........................................29
6.3 Further Provisions Regarding Indemnification....................29
6.4 Procedures Relating to Holdback Shares..........................30
ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER.............................33
7.1 Termination.....................................................33
7.2 Effect of Termination...........................................33
7.3 Amendment.......................................................33
7.4 Cost Recovery Payment...........................................33
ARTICLE VIII - MISCELLANEOUS................................................34
8.1 Notices.........................................................34
8.2 Expenses........................................................35
8.3 Further Assurances..............................................35
8.4 Entire Agreement................................................35
8.5 Assignment; Binding Effect......................................35
8.6 No Third Party Beneficiary......................................35
8.7 Paragraph Headings..............................................36
8.8 Severability....................................................36
8.9 Governing Law; Consent to Jurisdiction..........................36
8.10 Counterparts....................................................36
8.11 Sellers' Agent..................................................36
8.12 Construction....................................................38
iii
<PAGE>
SCHEDULES
Schedule 2.1 Organization
Schedule 2.3 Stockholders
Schedule 2.5 Subsidiaries and Affiliates
Schedule 2.10 Title to Assets
Schedule 2.11 Real and Personal Property
Schedule 2.12 Intellectual Property
Schedule 2.13 Contracts
Schedule 2.14 Conflicts and Consents
Schedule 2.16 Personnel Matters
Schedule 2.17 Employee Benefit Plans
Schedule 2.19 Insurance
Schedule 2.20 Litigation
Schedule 2.23 Transactions with Affiliates
Schedule 2.26 Brokers
Schedule 2.29 Web Site Traffic
Schedule 4.12 Lock-up Arrangements
Schedule 4.18 Domain Names to be Transferred to Taponline
Schedule 5.2 MarketSource Contracts to be Assigned to Tapoline
EXHIBITS
Exhibit A Form of Registration Rights Agreement
Exhibit B Form of On-line Advertising Agreement
Exhibit C Form of Off-line Advertising Agreement
Exhibit D Form of Transitional Services Agreement
Exhibit E Form of Software License Agreement
Exhibit F Form of Sublease Agreement
Exhibit G Form of Non-Competition Agreement
Exhibit H Form of Opinion of Shanley & Fisher P.C., counsel to the
Company, MarketSource and the Selling Shareholders
Exhibit I Section 368 Certificate of iTurf, Merger Sub, the Company and
the Selling Shareholders
Exhibit J Form of Opinion of Alex S. Navarro, Esq., General Counsel of
iTurf and Merger Sub
Note: Copies of the above-listed Schedules and Exhibits to this Agreement and
Plan of Merger have been intentionally omitted pursuant to Item 601(b)(2) of
Regulation S-K. iTurf Inc. agrees to furnish supplementally a copy of any
omitted Schedule or Exhibit to the Securities and Exchange Commission upon its
request.
iv
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