-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Enc2IWC0vILF+Av1dmkPa7KfIwxqJan0OBxzLQbNASjsEILfupX3ugWSQtS7Kbqx /HAuIFUIZtYTI8ZOy/HNnQ== 0000912057-99-009308.txt : 19991215 0000912057-99-009308.hdr.sgml : 19991215 ACCESSION NUMBER: 0000912057-99-009308 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELIAS INC CENTRAL INDEX KEY: 0001026114 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 133914035 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21869 FILM NUMBER: 99774083 BUSINESS ADDRESS: STREET 1: 435 HUDSON ST CITY: NEW YORK STATE: NY ZIP: 10014 BUSINESS PHONE: 2128079060 MAIL ADDRESS: STREET 1: 435 HUDSON ST CITY: NEW YORK STATE: NY ZIP: 10014 10-Q 1 FORM 10-Q FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14, 1999 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT ------------------------- Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999 Commission file number 0-21869 DELIA*S INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3914035 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 435 HUDSON STREET, NEW YORK, NEW YORK 10014 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (212) 807-9060 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of Common Stock outstanding as of December 1, 1999: 14,906,472 ---------- - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING, WITHOUT LIMITATION, INFORMATION APPEARING UNDER "PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY BE FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF SECTION 27A OF THE AMENDED SECURITIES ACT OF 1933 AND SECTION 21E OF THE AMENDED SECURITIES EXCHANGE ACT OF 1934). WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVE," "PLAN," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS REPORT. THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, GENERAL ECONOMIC CONDITIONS; CHANGES IN CONSUMER SPENDING PATTERNS; INCREASES IN THE COST OF MATERIALS, PRINTING, PAPER, POSTAGE, SHIPPING AND LABOR; TIMING OF CATALOG MAILINGS; CUSTOMER RESPONSE RATES; OPPORTUNITIES TO EXPAND AND THE ABILITY TO INCREASE COMPARABLE STORE SALES; LEVELS OF COMPETITION; DIFFICULTIES IN INTEGRATING ACQUISITIONS; THE ABILITY TO LOCATE AND OBTAIN ACCEPTABLE STORE SITES AND LEASE TERMS OR RENEW EXISTING LEASES; THE ABILITY TO OBTAIN ADDITIONAL CAPITAL TO FUND THE BUILD-OUT OF NEW STORES; ACCEPTANCE OF NEW RETAIL CONCEPTS; ADVERSE WEATHER CONDITIONS, CHANGES IN WEATHER PATTERNS AND OTHER FACTORS AFFECTING RETAIL STORES; AND OTHER FACTORS OUTSIDE OUR CONTROL. THESE FACTORS, AND OTHER FACTORS THAT APPEAR IN THIS REPORT OR IN OUR OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 31, 1999, COULD AFFECT OUR ACTUAL RESULTS AND COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR ON OUR BEHALF. ALL REFERENCES IN THIS REPORT TO A FISCAL YEAR PRIOR TO FISCAL 1999 REFER TO THE YEAR ENDED JANUARY 31 FOLLOWING THE PARTICULAR CALENDAR YEAR (E.G., "FISCAL 1998" REFERS TO THE YEAR ENDING JANUARY 31, 1999). EFFECTIVE FEBRUARY 1, 1999, WE CHANGED OUR FISCAL YEAR TO END ON THE SATURDAY CLOSEST TO JANUARY 31 (E.G., "FISCAL 1999" REFERS TO THE FIFTY-TWO WEEKS ENDING JANUARY 29, 2000). PART I FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2 DELIA*S INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, 1999 OCTOBER 30, 1999 ---------------- ---------------- * (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents ....................................................... $ 10,981 $ 22,018 Short-term investments .......................................................... -- 48,482 Merchandise inventories ......................................................... 21,232 39,310 Prepaid expenses and other current assets ....................................... 11,352 26,195 --------- --------- Total current assets ........................................................ 43,565 136,005 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $3,191 at January 31, 1999 and $5,219 at October 30, 1999 ....................... 12,542 32,627 DEFERRED TAX ASSETS .................................................................. -- 9,682 INTANGIBLE ASSETS .................................................................... 25,308 24,516 OTHER ASSETS ......................................................................... 729 241 --------- --------- TOTAL ASSETS ....................................................................... $ 82,144 $ 203,071 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable ................................................................ $ 10,185 $ 27,433 Accrued expenses and other current liabilities .................................. 7,706 6,088 Current portion of long-term debt and capital lease obligations ................. 194 9,550 Accrued restructuring ........................................................... -- 2,662 --------- --------- Total current liabilities ................................................... 18,085 45,733 DEFERRED TAX LIABILITY ............................................................... -- 28,991 LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES .................................. -- 6,970 OTHER LONG-TERM LIABILITIES .......................................................... 452 635 MINORITY INTEREST .................................................................... -- 36,932 STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share; Authorized - 1,000,000 shares; Issued and outstanding - none ............................................... -- -- Common stock, par value $.01 per share; Authorized - 50,000,000 shares; Issued and outstanding - 14,185,425 and 14,895,972 shares at January 31, 1999 and October 30, 1999, respectively ......................... 142 149 Additional paid-in capital ...................................................... 54,133 79,292 Retained earnings ............................................................... 9,332 22,103 Common stock in treasury - 551,046 shares at October 30, 1999 ................... -- (17,734) --------- --------- Total stockholders' equity .................................................. 63,607 83,810 --------- --------- 3 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................... $ 82,144 $ 203,071 --------- --------- --------- ---------
* Condensed from audited financial statements See Notes to Unaudited Condensed Consolidated Financial Statements 4 DELIA*S INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS THIRTEEN WEEKS ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ---------------- (UNAUDITED) NET SALES ................................... $ 40,821 $ 48,085 COST OF SALES ............................... 19,979 25,776 -------- -------- GROSS PROFIT ................................ 20,842 22,309 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 19,691 32,395 INTEREST AND OTHER INCOME, NET .............. (126) (703) MINORITY INTEREST ........................... -- (2,125) -------- -------- INCOME (LOSS) BEFORE INCOME TAXES ........... 1,277 (7,258) PROVISION (BENEFIT) FOR INCOME TAXES ........ 530 (1,257) -------- -------- NET INCOME (LOSS) ........................... $ 747 $ (6,001) -------- -------- -------- -------- BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ 0.05 $ (0.42) -------- -------- -------- -------- SHARES USED IN THE CALCULATION OF BASIC NET INCOME (LOSS) PER SHARE ............ 14,139 14,342 -------- -------- -------- -------- SHARES USED IN THE CALCULATION OF DILUTED NET INCOME (LOSS) PER SHARE ............ 14,735 14,342 -------- -------- -------- --------
NINE MONTHS THIRTY-NINE WEEKS ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 ----------------------------------- (UNAUDITED) NET SALES .................................. $ 98,466 $123,272 COST OF SALES .............................. 47,914 69,249 -------- -------- GROSS PROFIT ............................... 50,552 54,023 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 47,282 80,053 RESTRUCTURING CHARGE (NOTE 4) .............. -- 22,907 GAIN ON SUBSIDIARY INITIAL PUBLIC OFFERING . -- (70,091) INTEREST AND OTHER INCOME, NET ............. (767) (1,870) MINORITY INTEREST .......................... -- (2,610) -------- -------- INCOME BEFORE INCOME TAXES ................. 4,037 25,634 PROVISION FOR INCOME TAXES ................. 1,433 12,863 -------- -------- NET INCOME ................................. $ 2,604 $ 12,771 -------- -------- -------- -------- BASIC NET INCOME PER SHARE ................. $ 0.19 $ 0.89 -------- -------- -------- -------- DILUTED NET INCOME PER SHARE ............... $ 0.19 $ 0.82 -------- -------- -------- -------- SHARES USED IN THE CALCULATION OF BASIC NET INCOME PER SHARE .................. 13,653 14,301 -------- -------- -------- -------- 5 SHARES USED IN THE CALCULATION OF DILUTED NET INCOME PER SHARE .................. 13,990 15,494 -------- -------- -------- --------
See Notes to Unaudited Condensed Consolidated Financial Statements 6 DELIA*S INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS THIRTY-NINE WEEKS ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ----------------- (UNAUDITED) CASH FLOWS USED IN OPERATING ACTIVITIES: Net income .................................................................. $ 2,604 $ 12,771 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization ............................................. 1,631 2,950 Gain on subsidiary initial public offering ................................ -- (70,091) Restructuring charge (see Note 4) ......................................... -- 23,407 Deferred taxes ............................................................ -- 19,309 Minority interest ......................................................... -- (2,610) Amortization of premiums and discounts on investments, net ................ 160 (318) Compensation expense related to issuance of restricted stock and stock appreciation rights .............................................. 44 -- Changes in operating assets and liabilities: Merchandise inventories ............................................ (18,262) (18,578) Prepaid expenses and other current assets .......................... (6,677) (14,954) Other assets ....................................................... 165 1,718 Current liabilities ................................................ 2,139 15,343 Deferred credits ................................................... (310) 183 --------- --------- Net cash used in operating activities ....................................... (18,506) (30,870) --------- --------- --------- --------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ............................. (15,187) (444) Capital expenditures ........................................................ (4,180) (24,571) Purchases of held-to-maturity investment securities ......................... -- (65,158) Proceeds from the maturity of held-to-maturity investment securities ........ 30,024 16,994 Purchases of available-for-sale investment securities ....................... (46,513) -- Proceeds from the sale of available-for-sale investment securities .......... 53,404 -- --------- --------- Net cash provided by (used in) investing activities .............................. 17,548 (73,179) --------- --------- --------- --------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Net proceeds from issuance of subsidiary common stock ....................... -- 97,639 Proceeds from long-term debt and capital leases ............................. -- 16,585 Exercise of 7,375 and 193,285 stock options, respectively ................... 82 1,121 Principal payments of long-term debt and capital lease obligations .......... (155) (259) --------- --------- Net cash provided by (used in) financing activities .............................. (73) 115,086 --------- --------- --------- --------- INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ................................... (1,031) 11,037 CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD ..................................... 4,485 10,981 --------- --------- CASH & CASH EQUIVALENTS--END OF PERIOD ........................................... $ 3,454 $ 22,018 --------- --------- --------- --------- 7
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: - - Issuance of 812,501 shares of common stock in connection with the July 1998 Screeem! acquisition. - - Cancellation in June 1999 of 33,784 shares of common stock originally issued in the Screeem! acquisition. - - Issuance in September 1999 of 1,586,996 shares of iTurf common stock in connection with the Taponline acquisition. (Note 5) See Notes to Unaudited Condensed Consolidated Financial Statements 8 DELIA*S INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS dELiA*s Inc., through our catalogs, retail stores and Web sites, is a leading marketer of casual apparel, accessories, soccer merchandise and home furnishings to young men and young women between the ages of 10 and 24, an age group known as "Generation Y." We are subject to seasonal fluctuations in our merchandise sales and results of operations. We expect our net sales generally to be higher in the second half of each fiscal year than in the first half of the same fiscal year. On April 14, 1999, we completed an initial public offering of approximately 4.8 million shares of class A common stock of iTurf Inc., our Internet-focused subsidiary. iTurf used $17.7 million of the total $97.4 million in net offering proceeds to purchase 551,046 shares of our common stock from us, which shares have been treated as treasury stock in consolidation. As a result of the offering, we recognized a pre-tax gain of approximately $70 million. On September 1, 1999, iTurf issued 1,586,996 new shares of its Class A common stock in connection with its acquisition of T@ponline.com, Inc. See Note 5, "Acquisition", for a description of the Taponline transaction. As of October 30, 1999, we owned 92% of the vote and 66% of the value of iTurf. Subsequent to the end of the quarter, our interest in iTurf was reduced as a result of transactions described in Note 7. Effective February 1, 1999, we changed our fiscal year from the year ending January 31 to the 52 weeks ending on the Saturday closest to January 31. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION PRINCIPLES OF CONSOLIDATION--The condensed consolidated financial statements include the accounts of dELiA*s Inc. and subsidiaries, all of which, except iTurf, are wholly owned. The accounts of iTurf are included in the consolidated financial statements while the outside ownership of iTurf is reflected as minority interest on the balance sheet and income statement. All significant intercompany balances and transactions have been eliminated in consolidation. UNAUDITED INTERIM FINANCIAL STATEMENTS--The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements for Form 10-Q and in accordance with generally accepted accounting principles for interim financial reporting. In the opinion of management, the accompanying condensed consolidated financial statements are presented on a basis consistent with the audited consolidated financial statements and reflect all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The financial statements and footnote disclosures should be read in conjunction with our January 31, 1999 audited consolidated financial statements and the notes thereto, which are included in our annual report on Form 10-K for the year ended January 31, 1999, which was filed under the Securities Exchange Act of 1934. Results for the interim periods are not necessarily indicative of the results to be expected for the year. 9 3. SEGMENT INFORMATION dELiA*s determines operating segments in accordance with Statement of Financial Accounting Standards No. 131. Our reportable segments are generally defined by their method of distribution; different segments may offer similar products to similar customers, but are managed separately because of their distribution methods. Commencing in fiscal 1999, dELiA*s has three reportable segments: catalog, retail and iTurf. Each of these segments earns revenues primarily from the sale of apparel, accessories and soccer equipment to consumers. The catalog segment takes phone and mail orders from our customers and mails merchandise directly to those customers. Our retail stores display merchandise in mall and strip mall stores and sell directly to customers who visit those locations. iTurf sells merchandise through our various Web sites and also recognizes advertising, subscription and licensing revenues. Sales outside of the United States are insignificant. The Company evaluates performance and allocates resources primarily based on profit and loss after expense allocations for shared resources but before unusual items, income taxes, interest and other income and minority interest. There are no material differences between accounting policies used by the reportable segments in preparation of this information and those described in the summary of significant accounting policies in this report and in our annual report on Form 10-K for the year ended January 31, 1999. In connection with the iTurf initial public offering in April 1999, dELiA*s and iTurf entered into intercompany agreements that govern the transactions between iTurf and the other segments. Intercompany profit or loss generated by such agreements is eliminated in consolidation. For transactions between the other segments, and for transactions involving iTurf prior to its initial public offering, inter-segment product sales are recorded at cost and shared costs are allocated on a basis believed by management to be reasonable. The segment disclosure for fiscal 1998 has been restated to reflect the operating segments as defined for fiscal 1999.
(in thousands) THREE MONTHS ENDED OCTOBER 31, 1998 Catalog Retail iTurf Total ------- ------ ----- ----- Revenues from external customers $ 24,419 $ 15,338 $ 1,064 $ 40,821 Operating profit (loss) (179) 1,139 191 1,151 THIRTEEN WEEKS ENDED OCTOBER 30, 1999 Catalog Retail iTurf Total ------- ------ ----- ----- Revenues from external customers $ 25,147 $ 17,637 $ 5,301 $ 48,085 Operating loss (1,631) (1,136) (7,319) (10,086) NINE MONTHS ENDED OCTOBER 31, 1998 Catalog Retail iTurf Total ------- ------ ----- ----- Revenues from external customers $ 73,388 $ 23,185 $ 1,893 $ 98,466 Operating profit 1,949 1,229 92 3,270 Property & equipment, net 6,701 4,090 269 11,060 THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 Catalog Retail iTurf Total ------- ------ ----- ----- Revenues from external customers $ 74,911 $ 37,493 $ 10,868 $ 123,272 Operating loss (7,785) (7,205) (10,540) (25,530) Property & equipment, net 16,237 13,323 3,067 32,627
10
THREE MONTHS THIRTEEN WEEKS NINE MONTHS THIRTY-NINE WEEKS ENDED ENDED ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ---------------- ---------------- ---------------- (in thousands) Operating profit (loss) for reportable segments $ 1,151 $(10,086) $ 3,270 $(25,530) Restructuring charges (Note 4) ................ -- -- -- (23,407) Gain on subsidiary initial public offering .... -- -- -- 70,091 Interest and other income, net ................ 126 703 767 1,870 Minority interest ............................. -- 2,125 -- 2,610 -------- -------- -------- -------- Total income (loss) before taxes .............. $ 1,277 $ (7,258) $ 4,037 $ 25,634 -------- -------- -------- -------- -------- -------- -------- --------
OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ---------------- (in thousands) Property and equipment for reportable segments $ 11,060 $ 32,627 Other assets 73,103 170,444 ----------- ----------- Total consolidated assets $ 84,163 $ 203,071 ----------- ----------- ----------- -----------
4. RESTRUCTURING CHARGE During the first quarter of fiscal 1999, we recorded a charge of approximately $23.4 million in connection with our restructuring plan to exit our Screeem! and Jean Country retail operations. The charge is comprised of the following: - - $18.0 million for the write-off of the remaining unamortized balance of goodwill and other intangibles relating to our acquisition of the Screeem! and Jean Country retail operations; - - $4.2 million for the shut-down or conversion of certain retail stores to the dELiA*s retail concept with the related adjustment for assets that will no longer be used; - - $700,000 for the elimination of jobs at the Screeem! corporate office and the store locations to be closed, resulting in employee severance costs; and - - $500,000 million for the liquidation of inventory carried at stores to be converted or closed (reflected in cost of sales). The total charge of $23.4 million includes $22.9 million that is included in operating expenses as a restructuring charge and $500,000 included as cost of sales. In addition, as part of our acquisition of the Screeem! and Jean Country retail operations, we agreed that if the mean of the intraday high and low bid prices for the Company's common stock for the 20 consecutive trading days immediately preceding January 10, 2000 (the "18-Month Price") is less than $18.00, we will issue to the sellers that number of additional shares of dELiA*s common stock that is equal to (i) the excess of (x) the product of 174,550 shares multiplied by $18.00 over (y) the product of 174,550 shares multiplied by the greater of the 18-Month Price or $10.00 divided by (ii) the 18-Month Price. If we are required to issue additional shares, the value of those shares will result in a charge to earnings in the fourth quarter of fiscal 1999. During the second and third quarters, we did not make any significant changes in our estimate of the above restructuring charge, nor did we incur any of the estimated store shut-down/ conversion or job elimination expenses. We expect such costs to be incurred primarily in the fourth quarter of fiscal 1999 and first quarter of fiscal 2000. As our plans progress, we anticipate that we may need to record additional losses on inventory liquidation and other restructuring-related costs, as well as store operating losses during the transition period. 11 5. ACQUISITION On September 1, 1999, iTurf acquired T@ponline.com, Inc. pursuant to an Agreement and Plan of Merger dated August 10, 1999. As a result of the transaction, Taponline became a wholly owned subsidiary of iTurf. The aggregate consideration paid consisted of 1,586,996 newly issued shares of iTurf Class A common stock. The transaction, which was structured as a tax-free reorganization, was accounted for under the purchase method of accounting. On November 17, 1999, we announced our intention to spin off our iTurf interest to our shareholders. Accordingly, no gain was recognized in connection with issuance of iTurf common stock for the Taponline transaction and no gain will be recognized on the future issuance of shares of iTurf common stock by iTurf. 6. COMMITMENTS AND CONTINGENCIES In May 1999, iTurf entered into a strategic marketing alliance with America Online, Inc. Over the two-year term of the agreement, iTurf has agreed to pay America Online a total of approximately $8,100,000. In June 1999, two separate purported class action complaints were filed against dELiA*s, certain of our officers and directors, and a former officer of one of our subsidiaries, alleging violations of the federal securities laws. The class periods run from May 21, 1998 through June 17, 1998 and January 20, 1998 through September 10, 1998, respectively. On August 3, 1999, the plaintiffs in both suits filed a motion to consolidate the suits. We intend to vigorously defend against the allegations. Based upon information presently known to management, we do not believe that the ultimate resolution of these lawsuits will have a material adverse effect on our financial condition, results of operations or cash flows. In August 1999, iTurf entered into a strategic marketing alliance with Microsoft Corporation under which we have agreed to pay Microsoft a total of at least $4.6 million over the one-year term of the agreement. On August 6, 1999, we purchased for $6.2 million an approximately 415,000 square foot distribution facility in Hanover, Pennsylvania, of which we previously leased approximately 360,000 square feet. We borrowed $5.3 million from Allfirst Bank in the form of a mortgage loan on the property to pay for $4.9 million of the purchase price and $400,000 of planned capital improvements. We are subject to certain covenants under the loan agreement, including a covenant to maintain a fixed charge coverage ratio. On August 10, 1999 we entered into an interest-rate swap agreement with Allfirst Bank under which we effectively converted the LIBOR-based variable interest rate mortgage to a fixed rate loan with an interest rate of approximately 8.78%. In connection with the acquisition of the distribution facility, we hired an environmental consultant to perform an assessment of the facility. As a result of that assessment, the seller of the property performed certain soil remediation and created a groundwater remediation plan, each relating to the presence of underground fuel oil, waste oil and gasoline tanks located on the property and subsequently removed by the seller. The Pennsylvania Department of Environmental Protection has released the seller from liability with respect to soil contamination and has approved the ground water remediation plan. The seller has set funds aside in escrow to cover up to $250,000 in ground water remediation costs. We do not believe that the environmental conditions at the facility will have a material adverse effect on our consolidated financial condition, results of operations or cash flows. In connection with its acquisition of T@ponline.com, Inc., iTurf agreed to enter into a marketing alliance with MarketSource to promote iTurf's network of sites through MarketSource's offline marketing channels. iTurf committed to purchasing approximately $6.5 million in promotional opportunities through these channels over the next three years. 12 During the third quarter we borrowed a total of $9 million under our credit facility with First Union National Bank. The facility consists of a revolving line of credit permitting us to borrow up to $25 million and provides for the issuance of documentary and standby letters of credit up to $10 million. Our ability to continue to borrow under the credit agreement is contingent on a number of conditions including our compliance with tangible net worth, fixed charge coverage ratio and debt to cash flow covenants. In addition, amounts outstanding under the facility are limited to specified percentages of the value of our eligible inventory as determined under the credit agreement. As our inventory levels decrease due to sales, we will be required to repay a portion of the amounts outstanding. 7. SUBSEQUENT EVENTS On November 17, 1999, we converted 325,000 shares of our iTurf Inc. Class B common stock to Class A common stock and sold such shares to Kistler Joint Venture at a price of $11.3125 per share. On November 29, 1999 we registered 1,675,000 shares of iTurf Inc. Class A common stock, to be issued upon conversion, for future sale. On December 6, 1999, we converted 750,000 of Class B common stock of iTurf Inc. to Class A common stock and sold those shares to Deutsche Bank Securities pursuant to the registration statement. The sale price for the Deutsche Bank transaction was $13.875 per share. As a result of these transactions, our interest in iTurf was reduced to 90% of vote and 60% of value. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT DELIA*S PLANS, ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT AND THOSE DISCUSSED IN OUR OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 31, 1999. OVERVIEW We are a teen-focused marketer of casual apparel, accessories, cosmetics, home furnishings and soccer merchandise. Through the dELiA*s catalog and Web site, which target girls and young women between the ages of 10 and 24 (an age group known as "Generation Y"), we believe we are the leading direct marketer of casual apparel, related accessories and cosmetics focused on Generation Y. In February 1999, we opened our first full-priced dELiA*s store in New York. We opened four additional dELiA*s stores during the second quarter of fiscal 1999 and six more stores during the third quarter, bringing the total number of full-price dELiA*s brand stores in operation to eleven at October 30, 1999. We plan to continue the expansion of this concept through new store openings and the conversion of certain of our Screeem! and Jean Country stores. Through our TSI Soccer catalog, retail stores and Web site, we are a leading direct marketer and retailer of specialty soccer and other athletic merchandise to Generation Y boys and girls. Our other catalog titles include Contents, which offers home furnishings to Generation Y, and Droog, which offers apparel and accessories to Generation Y boys and young men. We also target pre-teen girls with our Storybook Heirlooms catalog. On April 14, 1999, we completed an initial public offering of approximately 4.8 million shares of Class A common stock of iTurf Inc., our Internet-focused subsidiary. iTurf used $17.7 million of the total $97.4 million in net offering proceeds to purchase 551,046 shares of dELiA*s common stock from dELiA*s, which we have treated as treasury stock in consolidation. As a result of the offering, we recognized a gain of approximately $70 million before taxes ($41 million after taxes). On September 1, 1999, iTurf acquired T@ponline.com, Inc. in exchange for 1,586,996 newly issued shares of iTurf Class A common stock. As of October 30, 1999, we owned approximately 66% of the value and 92% of the vote of iTurf. The outside ownership of iTurf is reflected as minority interest in the accompanying financial statements. dELiA*s maintains its corporate and Internet headquarters and a telemarketing and customer service group in New York, New York, additional telemarketing and corporate facilities in Durham, North Carolina and a fulfillment facility for processing merchandise in Hanover, Pennsylvania. The Storybook Heirlooms business is based in the San Francisco, California area. RISKS. Growth in our revenue base and further penetration of our target market may negatively affect our levels of percentage annual growth in net sales and operating income. In addition, when we increase the number of catalogs we mail, we observe that new customers respond at lower rates than our existing customers have historically responded. We have also observed that when customers receive multiple editions of catalogs within the same fiscal quarter, aggregate response rates decline. Increases in the cost of materials, printing, paper, postage, shipping and labor also adversely affect the profitability of our catalog business. A variety of factors affects our comparable store sales, including, among others, fashion trends, the general retail sales environment, our ability to efficiently source and distribute products, changes in our merchandise mix and our ability to execute our business strategy efficiently. Comparable store sales may fluctuate significantly as we roll out new retail concepts and enter new markets. In addition, our ability to 14 expand our retail business may be limited by our ability to locate and obtain acceptable store sites and lease terms or renew existing leases. Our plans to expand both retail and catalog operations depend on obtaining additional capital and recruiting experienced managers. There can be no assurance that the company will be able to raise capital or recruit managers as it grows. Our business generally depends on our ability to anticipate the frequently changing fashion tastes of our customers and to offer merchandise that appeals to their preferences on a timely and affordable basis. If we misjudge our merchandise selection, our image with our customers could be materially adversely affected. We believe that the continued growth of our Internet segment will depend in large part on our ability to increase awareness of our brand names, to provide our customers with superior Internet community and e-commerce experiences and to continue to enhance our systems and technology to support increased traffic to our Web sites. Accordingly, we intend to maintain a high level of marketing and promotional expenditures and to invest heavily to develop our Web sites, technology and operating infrastructure. Slower revenue growth than we anticipate or operating expenses that exceed our expectations could have a material adverse effect on our business. RESTRUCTURING CHARGE During the first quarter of fiscal 1999, we recorded a charge of approximately $23.4 million in connection with our restructuring plan to exit our Screeem! and Jean Country retail operations. The charge is comprised of the following: - - $18.0 million for the write-off of the remaining unamortized balance of goodwill and other intangibles relating to our acquisition of the Screeem! and Jean Country retail operations; - - $4.2 million for the shut-down or conversion of certain retail stores to the dELiA*s retail concept with the related adjustment for assets that will no longer be used; - - $700,000 for the elimination of jobs at the Screeem! corporate office and the store locations to be closed, resulting in employee severance costs; and - - $500,000 for the liquidation of inventory carried at stores to be converted or closed (reflected in cost of sales). The total charge of $23.4 million includes $22.9 million that is included in operating expenses as a restructuring charge and $500,000 included as cost of sales. In addition, as part of our acquisition of the Screeem! and Jean Country retail operations, we agreed that if the mean of the intra-day high and low bid prices for the Company's common stock for the 20 consecutive trading days immediately preceding January 10, 2000 (the "18-Month Price") is less than $18.00, we will issue to the sellers that number of additional shares of dELiA*s common stock that is equal to (i) the excess of (x) the product of 174,550 shares multiplied by $18.00 over (y) the product of 174,550 shares multiplied by the greater of the 18-Month Price or $10.00 divided by (ii) the 18-Month Price. If we are required to issue additional shares, the value of those shares will result in a charge to earnings in the fourth quarter of fiscal 1999. During the second and third quarters, we have not made any significant changes in our estimate of the above restructuring charge, nor have we yet incurred any of the estimated store shut-down/ conversion or job elimination expenses. We expect such costs to be incurred primarily in the fourth quarter of fiscal 1999 and first quarter of fiscal 2000. As our plans progress, we anticipate that we may need to record higher than anticipated losses on inventory liquidation and other restructuring-related costs, as well as additional store operating losses during the transition period. 15 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship of certain items from our statement of operations to net sales. Any trends reflected by the following table may not be indicative of future results.
THREE MONTHS THIRTEEN WEEKS NINE MONTHS THIRTY-NINE WEEKS ENDED ENDED ENDED ENDED OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999 ---------------- ---------------- ---------------- ---------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 49.0 53.6 48.7 56.2 ----- ----- ----- ----- Gross profit 51.0 46.4 51.3 43.8 Selling, general and administrative expenses 48.2 67.4 48.0 64.9 Restructuring charge -- -- -- 18.6 Gain on subsidiary initial public offering -- -- -- (56.9) Interest and other income, net (0.3) (1.5) (0.8) (1.5) Minority interest -- (4.4) -- (2.1) ------ ------ ------ ------ Income (loss) before income taxes 3.1 (15.1) 4.1 20.8 Provision (benefit) for income taxes 1.3 (2.6) 1.5 10.4 ----- ----- ----- ----- Net income (loss) 1.8% (12.5)% 2.6% 10.4% ----- ----- ----- ----- ----- ----- ----- -----
COMPARISON OF THIRTEEN WEEKS ENDED OCTOBER 30, 1999 AND THREE MONTHS ENDED OCTOBER 31, 1998 NET SALES. Net sales increased approximately $7.3 million, or 18%, to $48.1 million in the third quarter of fiscal 1999 from $40.8 million in the third quarter of fiscal 1998. Revenues were up in our retail segment as a result of the introduction of dELiA*s brand full-price stores and addition of TSI Soccer stores, offset to some degree by the closure of several Screeem & Jean Country Stores. The increase is also partially due to increased Internet revenues, which include sales that have shifted from our catalogs. An increase in catalog revenues reflects sales from our Storybook Heirlooms catalog, which was launched in January 1999, offset by a decline in sales from other catalog titles primarily as a result of lower circulation and the migration of sales to our Internet sites. GROSS MARGIN. Gross margin decreased to 46.4% of net sales in the third quarter of fiscal 1999 from 51.0% in the third quarter of fiscal 1998. The decrease is primarily due to significant markdowns on merchandise sold through our Screeem! stores, a higher proportion of discounted internet and catalog sales, a lower-margin mix of TSI Soccer merchandise sales and lower pricing on selected catalog merchandise. We expect gross margins to continue to be affected by discounted Screeem! sales through the remainder of fiscal 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased approximately $12.7 million to $32.4 million (or 67.4% of net sales) in the third quarter of fiscal 1999 from $19.7 million (or 48.2% of net sales) in the third quarter of fiscal 1998. Selling, general and administrative expenses increased primarily as a result of spending on Internet, retail and corporate infrastructure, marketing to support retail and Internet growth and additional expenses related to new catalog titles and the operation of more retail stores. We expect such expenditures to continue and selling, general and administrative expenses to remain high through the last fiscal quarter of 1999. COMPARISON OF THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 AND NINE MONTHS ENDED OCTOBER 31, 1998 NET SALES. Net sales increased approximately $24.8 million, or 25%, to $123.3 million in the first three quarters of fiscal 1999 from $98.5 million in the first three quarters of fiscal 1998. The increase in 16 sales is primarily due to increased revenues from our retail segment as a result of our acquisition of the Screeem! and Jean Country business in July 1998, the introduction of dELiA*s brand full-price stores beginning in February 1999 and the opening of additional TSI Soccer stores, as well as from the growth of our Internet segment which includes sales that have shifted from our catalogs. Sales from our catalog segment increased only slightly as increases relating to our new Storybook Heirlooms catalog were offset by lower sales from our core catalog as a result of lower circulation, reduced response rates, lower fill rates and the migration of sales to our Internet sites. GROSS MARGIN. Gross margin excluding a $500,000 charge related to the first quarter 1999 Screeem! restructuring decreased to 44.2% of net sales in the first three quarters of fiscal 1999 from 51.3% in the first three quarters of fiscal 1998. The decrease is primarily due to significant markdowns on merchandise sold through our Screeem! stores, a higher proportion of discounted catalog sales, lower catalog pricing, and, in the first quarter of fiscal 1999, higher freight costs resulting from lean inventory levels. We expect gross margins to continue to be affected by discounted Screeem! sales through the remainder of fiscal 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased approximately $32.8 million to $80.1 million (or 64.9% of net sales) in the first three quarters of fiscal 1999 from $47.3 million (or 48.0% of net sales) in the first three quarters of fiscal 1998. Selling, general and administrative expenses increased primarily as a result of spending on Internet, retail and corporate infrastructure, marketing to support retail and Internet growth and to improve the efficiency of our distribution processes, as well as additional catalog expenses related to the introduction of new catalogs and the operation of more retail stores. We expect such expenditures to continue and selling, general and administrative expenses to remain high throughout fiscal 1999. RESTRUCTURING CHARGE. During the first quarter of fiscal 1999, we recorded a charge of approximately $23.4 million in connection with our restructuring plan to close our Screeem! and Jean Country retail operations. This charge includes approximately $500,000 related to inventory and recorded as cost of sales. As our plans progress, we anticipate that we may need to record additional losses on inventory liquidation and other restructuring-related costs as well as additional store operating losses during the transition period. GAIN ON SUBSIDIARY INITIAL PUBLIC OFFERING. On April 14, 1999, we completed an initial public offering of approximately 4.8 million shares of class A common stock of iTurf Inc., our publicly-traded Internet-focused subsidiary. As a result of the transaction, we recognized a one-time gain of approximately $70.1 million before taxes. 17 SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited statement of operations data for the seven fiscal quarters ended October 30, 1999, as well as such data expressed as a percentage of total net sales for the periods indicated. This data has been derived from our unaudited financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation of such information when read in conjunction with our annual audited financial statements and notes thereto.
FISCAL 1998 FISCAL 1999 FISCAL QUARTER ENDED APR. 30, JULY 31, OCT. 31, JAN. 31, MAY 1, JULY 31, OCTOBER 30, 1998 1998 1998 1999 1999 1999 1999 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Net sales .................... $ 31,194 $ 26,451 $ 40,821 $ 59,898 $ 41,812 $ 33,375 $ 48,085 Cost of sales ................ 14,223 13,712 19,979 30,454 23,023 20,450 25,776 -------- -------- -------- -------- -------- -------- -------- Gross profit ................. 16,971 12,739 20,842 29,444 18,789 12,925 22,309 Selling, general and administrative expenses .... 14,092 13,499 19,691 24,429 23,750 23,908 32,395 Restructuring charge ......... -- -- -- -- 22,907 -- -- Gain on subsidiary initial public offering ............ -- -- -- -- (70,091) -- -- Interest and other income, net (341) (300) (126) (195) (140) (1,027) (703) Minority interest ............ -- -- -- -- 8 (493) (2,125) -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes ...................... 3,220 (460) 1,277 5,210 42,355 (9,463) (7,258) Provision (benefit) for income taxes ...................... 1,220 (317) 530 1,972 17,519 (3,399) (1,257) -------- -------- -------- -------- -------- -------- -------- Net income (loss) ............ $ 2,000 $ (143) $ 747 $ 3,238 $ 24,836 $ (6,064) $ (6,001) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Per share data: Basic net income (loss) per share ...................... $ 0.15 $ (0.01) $ 0.05 $ 0.23 $ 1.75 $ (0.42) $ (0.42) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Shares used in the calculation of basic net income (loss) per share .................. 13,321 13,498 14,139 14,159 14,231 14,330 14,342 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Diluted net income (loss) per share ...................... $ 0.15 $ (0.01) $ 0.05 $ 0.21 $ 1.56 $ (0.42) $ (0.42) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Shares used in calculation of diluted net income (loss) per share .................. 13,569 13,498 14,735 15,300 15,966 14,330 14,342 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- PERCENTAGE OF TOTAL NET SALES Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales................. 45.6 51.8 49.0 50.8 55.0 61.3 53.6 -------- -------- -------- -------- -------- -------- -------- Gross profit.................. 54.4 48.2 51.0 49.2 45.0 38.7 46.4 Selling, general, and administrative expenses..... 45.2 51.0 48.2 40.8 56.8 71.6 67.4 Restructuring charge.......... -- -- -- -- 54.8 -- -- Gain on subsidiary initial public offering............. -- -- -- -- (167.6) -- -- Interest and other income, net (1.1) (1.1) (0.3) (0.3) (0.3) (3.1) (1.5) Minority interest............. -- -- -- -- 0.0 (1.5) (4.4) -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes....................... 10.3 (1.7) 3.1 8.7 101.3 (28.3) (15.1) Provision (benefit) for income taxes....................... 3.9 (1.2) 1.3 3.3 41.9 (10.2) (2.6) Net income (loss)............. 6.4% (0.5)% 1.8% 5.4% 59.4% (18.1)% (12.5)% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
dELiA*s is subject to seasonal fluctuations in our merchandise sales and results of operations. We expect our net sales generally to higher in the second half of each year than in the first half of the same fiscal 18 year. In addition, our quarterly results may fluctuate as a result of numerous factors, including the timing, quantity and cost of catalog mailings, responses to those mailings, the timing of sale circulars and liquidations, sales performance in comparable stores year-over-year, our ability to open new stores, the timing of merchandise deliveries, market acceptance of merchandise (including new merchandise categories and products introduced), the mix of products sold, the hiring and training of additional personnel, the timing of inventory write downs, the integration of acquisitions, and other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter. LIQUIDITY AND CAPITAL RESOURCES Cash used in operations in the first three quarters of fiscal 1999 and 1998 was $30.9 million and $18.5 million, respectively. The increase in cash used in operations primarily relates to operating losses and an increase in inventory levels in an effort to improve catalog fill rates and in anticipation of greater sales due to the growth of our retail segment. Investing activities used $73.2 million for the purchase of short-term investments and capital expenditures in the first three quarters of fiscal 1999. For the first three quarters of fiscal 1998, investing activities provided $17.5 million, which reflects proceeds from the maturity and sale of short-term investments in fiscal 1998. During the fourth quarter of fiscal 1999, we expect to make additional capital expenditures of approximately $2.0 million for expansion of our retail concepts and conversion of stores between our retail concepts as well as for investment in the infrastructure of iTurf and other information system projects. We expect to fund these capital expenditures through equipment leases, a mortgage loan secured by our distribution facility, our credit facility and cash from operations. In addition to capital expenditures, iTurf expects to spend significant amounts for marketing and other alliances. In May 1999, iTurf entered into a strategic alliance agreement with America Online, Inc. under which we are committed to cash payments of approximately $4.0 million in fiscal 1999 and $4.1 million in fiscal 2000. In August 1999, iTurf entered into a strategic marketing alliance with Microsoft Corporation under which we have agreed to pay Microsoft a total of at least $4.6 million over the one-year term of the agreement. In connection with the September 1999 Taponline transaction, iTurf has agreed to pay MarketSource $6.5 million over three years to promote our network of sites through MarketSource's offline marketing channels. Cash flows from financing activities in the first three quarters of fiscal 1999 were $115.1 million, primarily as a result of the initial public offering of iTurf common stock. In addition, during the third quarter we borrowed a total of $9 million under our credit facility with First Union National Bank. We did not engage in significant financing activities in the first three quarters of fiscal 1998. Our credit facility with First Union National Bank, which terminates on December 7, 2001, consists of a revolving line of credit permitting us to borrow up to $25 million and provides for the issuance of documentary and standby letters of credit up to $10 million. At our option, borrowings under this facility bear interest at First Union National Bank's prime rate or at LIBOR plus 200 basis points. Our ability to continue to borrow under the credit agreement is contingent on a number of conditions including our compliance with tangible net worth, fixed charge coverage ratio and debt to cash flow covenants. In addition, borrowings are limited to specified percentages of the value of our eligible inventory as determined under the credit agreement. As our inventory levels decrease due to sales, we will be required to repay a portion of the amount outstanding. In April 1999, we amended our credit agreement with First Union National Bank in connection with the iTurf initial public offering such that iTurf is no longer considered a borrower under such agreement. 19 Accordingly, First Union National Bank released its security interest in the assets of iTurf as well as its pledge, assignment and security interest in the shares of common stock of iTurf that we hold. On August 6, 1999, we purchased for $6.2 million an approximately 415,000 square foot distribution facility in Hanover, Pennsylvania, of which we were previously leasing approximately 360,000 square feet. We borrowed $5.3 million from Allfirst Bank in the form of a mortgage loan on the property to pay for $4.9 million of the purchase price and $400,000 of planned capital improvements. We are subject to certain covenants under the loan agreement, including a covenant to maintain a fixed charge coverage ratio. Interest on the loan is calculated using a variable LIBOR-based interest rate. On August 10, 1999 we entered into an interest-rate swap agreement with Allfirst Bank under which we effectively converted the mortgage to a fixed-rate loan with an interest rate of approximately 8.78%. YEAR 2000 We are heavily dependent upon complex computer software and systems for our operations. Many existing computer programs and systems use only two digits to identify a year in the date field. These programs and systems were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. STATE OF READINESS. All of our material operating software and our information technology and other systems, including telecommunications and warehouse systems, were developed by and are supported by third party vendors. Each of the third party vendors of our mission-critical operating software has provided a written warranty or assurance that such software will not be affected by the change in the century. We have modified certain of our mission-critical software provided by third party vendors, but we believe that such modifications will not affect the ability of such software to account for the change in the century. The majority of the third party vendors of our other material operating software and systems have also provided warranties or assurances that such software and systems are able to account for the change in the century. We have prepared a Year 2000 compliance program, which involves: - - identifying the material operating software and systems on which we depend, whether used by us or by our service providers; - - obtaining written warranties or assurances from third party software and system vendors and service providers; - - monitoring the compliance efforts of those vendors and service providers; and - - testing our material operating software and systems. We began performing tests in the third quarter of fiscal 1999 of our material operating software and systems to verify the assurances given by third party vendors and ensure Year 2000 compliance. We have not yet begun to perform these tests on certain of our software and systems and we may not be able to test all of our material operating systems. Although we have not identified any material software or systems as requiring remediation or replacement, we cannot assure you that all of our material operating software and systems will be Year 2000 compliant. In addition to the operating systems and software we use directly, our operations are also dependent upon the performance of operating software and systems used by our significant service providers, including providers of financial, telecommunications and parcel delivery services. We have contacted each of our significant service providers and have obtained written assurances from the majority of such providers that their relevant operating software and systems are or would be Year 2000 compliant. We 20 are monitoring the status of all our significant service providers' Year 2000 compliance efforts to minimize the risk of any material adverse effect on our operations resulting from compliance failures. However, there can be no assurance that our service providers have, or will have, operating software and systems that are Year 2000 compliant. RISKS. The failure of our software or systems to be Year 2000 compliant could prevent us from being able to process or fulfill orders from our customers or being able to distribute merchandise to stores in a timely manner and could disrupt our financial and management controls and reporting systems. Any such worst-case scenario, if not quickly remedied, would have a material adverse effect on our business. Therefore, we are developing contingency plans with respect to our systems and software. In addition, a significant portion of our merchandise sales are made with credit cards, and our operations may be materially adversely affected to the extent our customers are unable to use their credit cards due to Year 2000 issues that are not rectified by the customers' credit card vendors. We have not identified significant exposure to Year 2000 problems outside of the information technology issues identified above. COSTS. To date, we have spent approximately $175,000 on Year 2000 compliance. We do not expect our total costs of addressing Year 2000 to exceed $200,000. We believe that we have sufficiently budgeted for technology investments, including Year 2000 compliance, and that our cash from operations, our equipment lease arrangements, the proceeds of the iTurf initial public offering and our credit facility, as necessary, will fund such investments. However, given our dependence on third-party software and system vendors and service providers, including our customers' vendors, there can be no assurance to that effect. 21 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In June 1999, two separate purported securities class action lawsuits were filed against us and certain of our officers and directors and one former officer of a subsidiary. The complaints in these lawsuits purport to be class actions on behalf of the purchasers of our securities during the periods May 21, 1998 through June 17, 1998 and January 20, 1998 through September 10, 1998. The complaints generally allege that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by making material misstatements and by failing to disclose certain allegedly material information regarding trends in our business. The complaints also allege that the individual defendants are liable for those violations under Section 20(a) of the Securities Exchange Act. The complaints seek unspecified damages, attorneys' and experts' fees and costs, and such other relief as the court deems proper. The complaints were filed in Federal District Court for the Southern District of New York by Allain Roy on June 1, 1999 and by Lorraine Padgett on June 3, 1999. On August 3, 1999, the plaintiffs in both suits filed a motion to consolidate the suits. No decision has been rendered on this motion. We intend to vigorously defend against these actions. Based upon information presently known to management, we do not believe that the ultimate resolution of these lawsuits will have a material adverse effect on our financial condition, results of operations or cash flow. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULT UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits See "Exhibit Index" following the signature page. (b) We filed the following reports on Form 8-K during the fiscal quarter: (i) current report on Form 8-K, dated August 12, 1999, reporting Item 5. This report contained information iTurf's agreement to acquire T@ponline.com, Inc. (ii) current report on Form 8-K, dated September 7, 1998, reporting Item 5 and Item 7 Exhibits. This report contained information about iTurf's acquisition T@ponline.com, Inc. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. dELiA*s Inc. (Registrant) Date: December 14, 1999 By: /s/ Stephen I. Kahn ----------------------------------- Stephen I. Kahn Chairman of the Board and Chief Executive Officer By: /s/ Evan Guillemin ----------------------------------- Evan Guillemin President, Chief Financial Officer and Treasurer (principal financial and accounting officer) 23 EXHIBIT INDEX 2.1 Bill of Sale and Contribution and Assumption Agreement between dELiA*s LLC and dELiA*s Inc. (incorporated by reference to Exhibit 2.1 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 3.1 Certificate of incorporation of dELiA*s Inc. (incorporated by reference to Exhibit 3.1 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 3.2 Bylaws of dELiA*s Inc. (incorporated by reference to Exhibit 3.2 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.1 Form of Employment Agreement between dELiA*s Inc. and Stephen I. Kahn (incorporated by reference to Exhibit 10.1 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.2 Employment Agreement between dELiA*s Inc. and Christopher C. Edgar (incorporated by reference to Exhibit 10.2 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.3 Employment Agreement between dELiA*s Inc. and Evan Guillemin (incorporated by reference to Exhibit 10.3 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.4 Form of Family Stockholders Agreement among dELiA*s Inc., Stephen I. Kahn and the persons listed on Exhibit A thereto (incorporated by reference to Exhibit 10.4 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.5 Amended and Restated 1996 Stock Incentive Plan (incorporated by reference to the dELiA*s Inc. Schedule 14A filed on June 12, 1998) 10.6 Restricted Stock Plan (incorporated by reference to Exhibit 10.6 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.7 Stock Option Agreement between dELiA*s Inc. and Evan Guillemin (incorporated by reference to Exhibit 10.7 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.8 Transitional Services Agreement, dated as of July 10, 1998, among American Retail Enterprises, L.P., Screeem Inc., and dELiA*s Inc. (incorporated by reference to Exhibit 10.8 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998) 10.9 Lease Agreement dated May 3, 1995 between dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York (the "Lease Agreement"); Modification and Extension of Lease Agreement dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.10 Form of Restricted Stock Agreements between dELiA*s Inc. and holders of Common Stock subject to the Restricted Stock Plan (incorporated by reference to Exhibit 10.10 to the dELiA*s Inc. Registration Statement on Form S-1 (Registration No. 333-15153)) 10.11 Employment Agreement dated April 5, 1999 between iTurf Inc. and Stephen I. Kahn (incorporated by reference to Exhibit 10.10 to the iTurf Inc. registration statement on Form S-1 (Registration No. 333-71123)) 10.12 Lease Agreement dated April 25, 1997 between dELiA*s Inc. and Keystone Distribution Center, Inc. (incorporated by reference to Exhibit 10.12 to the dELiA*s Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1997) 24 10.13 Agreement dated April 4, 1997 between dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York amending the Lease Agreement (incorporated by reference to Exhibit 10.13 to the dELiA*s Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1997) 10.14 Agreement dated October 7, 1997 between dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of Trinity Church in the City of New York amending the Lease Agreement (incorporated by reference to Exhibit 10.14 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997) 10.15 Amendment No. 1 to Employment Agreement between dELiA*s Inc. and Christopher C. Edgar, dated September 15, 1998 (incorporated by reference to Exhibit 10.15 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998) 10.16 Amendment No. 1 to Employment Agreement between dELiA*s Inc. and Evan Guillemin, dated September 15, 1998 (incorporated by reference to Exhibit 10.16 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998) 10.17 Credit Agreement dated December 7, 1998 between First Union National Bank, dELiA*s Inc. and the subsidiaries listed on Schedule 1 thereto (incorporated by reference to Exhibit 10.17 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998) 10.18 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.17 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998) 10.19 Intercompany Services Agreement between dELiA*s Inc. and iTurf Inc., dated April 8, 1999 (incorporated by reference to Exhibit 10.1 to the iTurf Inc. registration statement on Form S-1 (Registration No. 333-71123)) 10.20 Trademark License Agreement between dELiA*s Inc. and iTurf Inc., dated April 8, 1999 (incorporated by reference to Exhibit 10.2 to the iTurf Inc. registration statement on Form S-1 (Registration No. 333-71123)) 10.21 Amendment No. 1, dated April 8, 1999, to Credit Agreement between First Union National Bank, dELiA*s Inc. and our subsidiaries listed on the signature page thereto (incorporated by reference to Exhibit 10.21 to the dELiA*s Inc. annual report on Form 10-K for the fiscal year ended January 31, 1999) 10.22 Advertising Agreement between iTurf and America Online, Inc., dated May 4, 1999 (incorporated by reference to Exhibit 10.16 to the iTurf Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 1999)** 10.23 Construction Loan Agreement dated August 6, 1999, among dELiA*s Distribution Company, dELiA*s Inc. and Allfirst Bank (incorporated by reference to Exhibit 10.23 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999) 10.24 Mortgage Note dated August 6, 1999 made by dELiA*s Distribution Company in favor of Allfirst Bank (incorporated by reference to Exhibit 10.24 to the dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999) 10.25 Online Advertising Authorized Reseller Agreement between iTurf, Taponline and MarketSource Corporation, dated September 1, 1999 (incorporated by reference to Exhibit 99.1 of iTurf's Current Report on Form 8-K dated September 7, 1999) 10.26 Offline Advertising Purchase Agreement between iTurf and MarketSource Corporation, dated September 1, 1999 (incorporated by reference to Exhibit 99.2 of iTurf's Current Report on Form 8-K dated September 7, 1999) 25 10.27 Registration Rights Agreement between iTurf and Marketsource Corporation (incorporated by reference to Exhibit 10.19 to the iTurf Inc. Registration Statement on Form S-1 (Registration No. 333-90435) 10.28* Amendment No. 2 to Employment Agreement between dELiA*s Inc. and Christopher C. Edgar, dated October 18, 1998 10.29* Amendment No. 2 to Employment Agreement between dELiA*s Inc. and Evan Guillemin, dated October 18, 1998 10.30* Employment Agreement dated August 1998 between Storybook Inc. (a wholly-owned subsidiary of dELiA*s Inc.) and Estelle DeMuesy 27.1* Financial Data Schedule - --------------------------- * Filed herewith ** Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the SEC. 26 EX-10.28 2 EXHIBIT 10.28 Exhibit 10.28 dELiA*s 435 Hudson Street New York, NY 10014 October 18, 1999 Mr. Christopher C. Edgar dELiA*s 435 Hudson Street New York, NY 10014 Re: SECOND AMENDMENT TO EMPLOYMENT AGREEMENT Dear Mr. Edgar: This letter, when countersigned by you, shall constitute the Second Amendment to the Employment Agreement between you and dELiA*s Inc., dated as of November 22, 1996. Section 3(a) of the Employment Agreement is hereby amended by deleting the amount "$150,000" and replacing it with "$200,000." In all other respects, the Employment Agreement shall continue in full force and effect without modification. If you are in agreement with the foregoing, please countersign below in the space indicated. Sincerely, dELiA*s Inc. By: /s/ TIMOTHY B. SCHMIDT ---------------------------- Timothy B. Schmidt Senior Vice President ACKNOWLEDGED AND AGREED: /s/ CHRISTOPHER C. EDGAR - ---------------------------- CHRISTOPHER C. EDGAR EX-10.29 3 EXHIBIT 10.29 Exhibit 10.29 October 18, 1999 Mr. Evan Guillemin dELiA*s 435 Hudson Street New York, NY 10014 Re: SECOND AMENDMENT TO EMPLOYMENT AGREEMENT Dear Mr. Guillemin: This letter, when countersigned by you, shall constitute the Second Amendment to the Employment Agreement between you and dELiA*s Inc. (subsequently assigned to dELiA*s Operating Company), dated as of November 25, 1996. Section 3(a) of the Employment Agreement is hereby amended by deleting the amount "$150,000" and replacing it with "$200,000." In all other respects, the Employment Agreement shall continue in full force and effect without modification. If you are in agreement with the foregoing, please countersign below in the space indicated. Sincerely, dELiA*s Inc. By -------------------------------- Timothy B. Schmidt Senior Vice President ACKNOWLEDGED AND AGREED: - ------------------------------ EVAN GUILLEMIN EX-10.30 4 EXHIBIT 10.30 Exhibit 10.30 EMPLOYMENT AGREEMENT BETWEEN STORYBOOK INC. AND ESTELLE DEMUESY Agreement (this "Agreement") dated as of August __, 1998 by and between Storybook Inc., a Delaware corporation with offices at (the "Company"), and Estelle DeMuesy, an individual residing at 19823 Glen Brae Drive, CA 95070 (the "Executive"). It is agreed as follows: 1. EMPLOYMENT. The Company shall employ the Executive as President of the Company, and the Executive hereby accepts employment with the Company, upon the terms and conditions set forth on this Agreement for the Employment Period (as defined below). 2. POSITION AND DUTIES. (a) During the Employment Period, Executive shall render such services to the Company and its affiliates in her capacity as President as the Company's board of directors (the "Board") may from time to time direct and which are commensurate with Executive's title and position. (b) Executive shall devote all reasonable efforts and her full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company. Executive shall perform her duties and responsibilities to the best of her abilities in a diligent, trustworthy, businesslike and efficient manner. (c) For purposes of this Agreement, "affiliate" shall mean any corporation or other entity of which the Company (or any corporation or entity controlling the Company) has at least a 49% equity or voting interest. (d) The Company shall use its best efforts to cause the Executive to be elected to the Company's board of directors during the Employment Period. 3. BASE SALARY AND BENEFITS. (a) During the Employment Period, Executive's base salary shall be not less than $73,333 per annum (the "Base Salary") from the Effective Date (as defined below) until February 1, 1999, at which time such Base Salary shall be increased to one hundred eighty thousand dollars ($180,000), which salary shall be payable in regular installments in accordance with the Company's general payroll practices and shall be subject to customary withholding. In addition, during the Employment Period, Executive shall be entitled to participate, at the Company's expense (except for such copayments as are generally required of the Company's managerial employees), in all of the Company's benefit and retirement programs (including medical benefits for Executive and her immediate family) for which managerial employees of the Company are generally eligible. Executive shall be entitled to not less than three (3) weeks of paid vacation during the first year of employment and four weeks of vacation thereafter, which if not taken, unless otherwise required by law, may not be carried forward to any subsequent year unless the Board approves such vacation carry. (b) The Company shall reimburse Executive for all reasonable expenses incurred by her in the course of performing her duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (c) In addition to the Base Salary, the Board may, in its sole discretion, establish bonus pool and award a bonus from such pool to Executive following the end of each fiscal year during the Employment Period, based upon Executive's performance relative to agreed-upon Company operating targets and the operating results of dELiA*s Inc. during such year. 4. TERM. (a) The Employment Period shall commence on the Effective Date (as defined below) and continue until the second anniversary thereof; provided that the Employment Period shall terminate earlier: (i) upon Executive's resignation, death or permanent disability or incapacity as determined by the Board in its good faith ("Disability"); (ii) in accordance with subparagraph (c) below; or (iii) upon written notice to Executive, at any time, for Cause, as defined in subparagraph (b) below. (b) For purposes of this Agreement, "Cause" shall mean (i) a material breach of this Agreement by Executive that, if capable of being remedied, Executive fails to remedy within 30 days after written notice, (ii) any breach of Executive's duty of loyalty to the Company or any of its affiliates or act of fraud or intentional material dishonesty with respect to the Company or any of its affiliates, (iii) the commission by Executive of a felony involving moral turpitude or other act or omission causing material harm to the standing and reputation of the Company and its affiliates, (iv) failure by the Executive to report for work for any significant period of time other than for reasonable personal excuses, (v) willful or repeated refusal by the Executive to perform such lawful duties as may be delegated or assigned by the Board and that are commensurate with the Executive's position with the Company, or (vi) willful misconduct or gross negligence in the performance of Executive's duties to the Company. (c) Executive may, at any time during the Employment Period by written notice to the Company, terminate the Employment Period for "Good Reason" effective upon such notice. "Good Reason" means (i) a material breach by the Company of any material provision of this Agreement that the Company fails to remedy or cease within 15 days after written notice thereof to the Company or (ii) the relocation of the Company's executive offices to a location outside of the "Bay Area" in California; it being understood that the historical facilities of the Storybook Heirlooms business are deemed to be within the Bay Area for purposes hereof. 5. VOLUNTARY SEPARATION. (a) In the event of termination of the Employment Period upon Executive's voluntary resignation, death or Disability, the Company shall pay to Executive within five days all sums accrued and unpaid to the date of termination (including unused vacation in accordance with the policies of dELiA*s Inc. with respect to its executive officers then in effect) and Executive shall not be entitled to receive her Base Salary, any severance pay or any fringe 2 benefits or bonuses for periods after such termination of the Employment Period. (b) If the Employment Period is terminated by the Company without Cause or by the Executive for Good Reason in accordance with Section 4(c), the Company (i) shall continue to pay the Executive at the higher of $180,000 or the Executive's then-current Base Salary (determined pursuant to Section 3) at the time of termination for a period of one year following such termination. The provisions of this Section 5(b) and of Section 5(a) shall constitute Executive's sole and exclusive remedy in connection with termination of the Employment Period by the Company without Cause or by the Executive for Good Reason in accordance with Section 4(c). If the Company fails to perform its obligations under Section 5(a) and this Section 5(b) after notice from the Executive and 10 days for the Company to cure, Executive's remedies shall not be limited by this Agreement. dELiA*s Inc. hereby unconditionally guarantees the obligations of the Company under this Section 5(b). 6. CONFIDENTIAL INFORMATION. Executive acknowledges that the information, trade secrets, observations, confidential knowledge and data obtained by her while employed by the Company concerning the business, new, planned or existing products and services, or affairs of the Company, its customers or any affiliate of the Company ("Confidential Information") are the property of the Company or such affiliate. Therefore, the Executive agrees that she shall not, at any time during her employment under this Agreement and for a period of two years subsequent thereto, disclose to any third party except in the performance of her duties hereunder or as may be required by law, any Confidential Information except for such information which has become publicly available other than by an act or omission of the Executive. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer files, printouts and software and other documents and data (and all copies thereof) relating to the Confidential Information, work product or the business of the Company or any affiliate which she may then possess or have under her control. 7. NON-COMPETE; NON-SOLICITATION. (a) Executive agrees that during the Employment Period and for a period of 18 months from the termination thereof (the "Non-Competition Period"), she will not directly, either for her own account or for the benefit of any person, firm or corporation, engage in any business activity competitive with the retail, mail order or team sales soccer businesses of the Company (a "Competing Business Activity"). For purposes hereof, Competing Business Activities shall mean direct marketing of clothing for children or teen-agers. (b) Executive agrees that during the Non-Competition Period, Executive shall not discuss or accept any relationship, whether as a consultant, representative, employee, executive, officer, director, manager or otherwise, with any person, firm or corporation which is engaged in a Competing Business Activity. (c) During the Non-Competition Period, Executive shall not directly or indirectly own or be a stockholder, partner of, or otherwise participate in any company that is engaged in a Competing Business Activity. Notwithstanding the above, Executive may hold up to a one percent (1%) interest in any publicly held or traded company and shall have an unlimited 3 right to invest in any mutual fund which is publicly traded or managed by a major financial institution. (d) During the Non-Competition Period, Executive shall not directly or indirectly through another person or entity (i) induce or attempt to induce any employee of the Company or any affiliate to leave the employ of the Company or such affiliate, or in any way interfere with the relationship between the Company or any affiliate and any employee thereof, (ii) hire any person who was an employee of the Company or any affiliate at any time during the Employment Period or (iii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee, consultant or other business relation of the Company or affiliate to cease doing business with the Company or such affiliate, or in any way interfere with the relationship between any such customer, supplier, licensee, licensor, franchisee, consultant or business relation and the Company or any affiliate (including, without limitation, making any negative statements or communications about the Company or its affiliates). (e) During the Non-Competition Period, Executive shall inform any prospective new employer or associate prior to accepting any employment or any business relationship of the existence of this Agreement and provide such employer or associate with a copy of this Agreement. (f) In the event any covenant made in this Agreement shall be more restrictive than permitted by applicable law, it shall be limited to the extent which is so permitted. Nothing in this Agreement shall be construed as to prevent the Company from pursuing any and all remedies available to it for the breach or threatened breach of covenants made in this Agreement, including recovery of money damages or temporary or permanent injunctive relief. Accordingly, Executive acknowledges that the remedy at law for breach of the provisions of this Agreement may be inadequate and that, in addition to any other remedy the Company may have, it shall be entitled to an injunction restraining any breach or threatened breach, without any bond or other security being required and without the necessity of showing actual damages. (g) Notwithstanding anything to the contrary contained in this Section 7, nothing contained in this Section 7 shall be construed so as to prohibit the Executive from being employed by a company or entity that engages in a Competing Business Activity so long as Executive is not responsible for, does not report to or have any involvement, whether direct or indirect, with any division or unit of said company engaged in such Competing Business Activity. (h) Notwithstanding anything to the contrary contained in this Section 7, the Non-Competition Period shall not be construed to extend beyond the date of termination of the Employment Period if the Employment Period has terminated by the Company without Cause or by the Executive for Good Reason. 8. NOTICES. Any notice or other communication under this Agreement shall be in writing and shall be considered given when delivered by hand, when telecopied upon confirmation of receipt or one day after being mailed by registered mail, return receipt requested, to the parties at the addresses set forth below (or at such other address as a party may specify by notice to the other in accordance with this provision): 4 If to Executive: at the address written above If to the Company: Storybook Inc. 435 Hudson Street New York, New York 10014 Attention: Chairman Fax: (212) 627-8350 with a copy to: dELiA*s Inc. 435 Hudson Street New York, New York 10014 Attention: Legal Department Fax: (212) 807-9069 9. EXECUTIVE'S REPRESENTATIONS. Executive hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which Executive is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity, and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that she has consulted with independent legal counsel regarding her rights and obligations under this Agreement or has had an opportunity to do so and that she fully understands the terms and conditions contained herein. 10. CONDITION PRECEDENT AND EFFECTIVENESS. The consummation of the Company's acquisition of substantially all the assets of the Storybook Heirlooms business is a condition precedent to the Company's obligations hereunder. As used herein, "Effective Date" shall mean the date such acquisition is consummated. 11. STOCK OPTIONS. On the Effective Date, the Company and the Executive shall enter into the Storybook Stock Option Agreement annexed hereto as EXHIBIT A. In addition, the dELiA*s Inc. shall grant to the Executive options to purchase shares of dELiA*s Inc. common stock under the dELiA*s Inc. Amended and Restated 1996 Stock Incentive Plan (the "Plan") in accordance with the schedule set forth below with the vesting terms set forth below and at an exercise price equal to the closing price of dELiA*s Inc. common stock on the date of grant, which options shall be subject to the standard terms and conditions applicable to such dELiA*s Inc. stock options. The dELiA*s Inc. common stock issuable under the Plan is registered for resale under the Securities Act of 1933 and there are no restrictions under the Plan on 5 transferability of such shares. Each of the options granted hereunder shall be treated as an "incentive stock option" to the extent permissible by law.
Number of Grant Date Options Vesting - ------------------- --------- ------------------------------------ Effective Date 50,000 12.5% on each of the first eight six-month anniversaries of the Effective Date the date of the 5,000 100% 6 months from the date of grant next dELiA*s Inc. stockholders' meeting
12. MISCELLANEOUS. (a) This Agreement may not be changed or terminated orally. (b) Executive may not assign any of her rights or delegate any of her duties under this Agreement. The Company may assign any or all of its rights under this Agreement to any subsequent owner of the Company's business or any affiliate, and the assignee shall have the right to enforce this Agreement to the same extent as the Company. (c) No waiver of any term or condition of this Agreement shall be deemed to be a waiver of any subsequent breach of that term or condition or any breach of any other term or condition of this Agreement. Any waiver must be in writing. (d) If any provision of this Agreement would be deemed invalid or unenforceable for any reason, including, without limitation, because of its geographic or business scope or duration, such provision shall be construed in such a way as to make it valid and enforceable to the maximum extent possible. Any invalidity or unenforceability of any provision in this Agreement shall not affect or render invalid or unenforceable any other provision of this Agreement or any other agreement or instrument. (e) This Agreement shall be governed by and construed in accordance with the law of the State of New York, without giving effect to principles or rules of choice or conflicts of laws of such State or any such other State in which any action may be brought relating to this Agreement. (f) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall be considered one and the same Agreement. (g) This Agreement contains a complete statement of all the arrangements between the parties with respect to their subject matter, supersede any previous agreements between them relating to that subject matter, and cannot be amended, modified or terminated except in a written document executed by all the parties hereto. [SIGNATURE PAGE FOLLOWS] 6 [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above. STORYBOOK INC. By: /s/ ALEX S. NAVARRO ------------------------------------ Alex S. Navarro Senior Vice President-- Development and Legal Affairs dELiA*s Inc. (as to Sections 5(b) and 11) By: /s/ ALEX S. NAVARRO ------------------------------------ Alex S. Navarro Senior Vice President-- Development and Legal Affairs ESTELLE DEMUESY /s/ ESTELLE DEMUESY ----------------------------------------- 7 EXHIBIT A TO EMPLOYMENT AGREEMENT STOCK OPTION AGREEMENT BETWEEN STORYBOOK INC. AND ESTELLE DEMUESY DATED SEPTEMBER __, 1998 Storybook Inc., a Delaware corporation (the "Company"), hereby grants Estelle DeMuesy (the "Optionee"), residing at 19823 Glen Brae Drive, CA 95070, an option (the "Option") to purchase from the Company that number of shares of common stock ("Common Stock") of the Company equal to the product of .125 and the number of Parent Shares (as defined below) (subject to adjustment pursuant to paragraph 5 below) (the "Option Shares") at the Exercise Price per share on the terms and conditions set forth in this stock option agreement (this "Agreement"). "Parent Shares" means the number of shares of Common Stock issued to dELiA*s Inc. upon organization of the Company (the "Parent Shares"). 1. EXERCISABILITY. Subject to the provisions of paragraphs 4(b) and 5 below, the Optionee may exercise the Option on and after the second anniversary of the date hereof; in no event, however, may the Option be exercised later than the tenth anniversary of the date hereof. 2. NONTRANSFERABILITY. The Option shall not be transferable by the Optionee otherwise than by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee or her legal representative. 3. METHOD OF EXERCISE. (a) The Option is exercisable with respect to all, or from time to time with respect to any portion, of the Option Shares then permitted to be purchased under this Agreement by delivering written notice of exercise of the Option, in the form prescribed by the board of directors of the Company (the "Board"), to the Chairman of the Board. Each such notice shall specify the number of Option Shares with respect to which the Option is being exercised, and shall be accompanied by payment in full, in cash or by certified check, of the purchase price of such Option Shares. The Company may require the person exercising the Option to pay the Company an amount sufficient to satisfy all applicable withholding tax requirements prior to the delivery of any stock certificates representing Option Shares. If the person exercising the Option so requests, Option Shares purchased may be issued in the name of the Optionee and another person jointly with right of survivorship. (b) If, at the time of an exercise of the Option, a registration statement under the Securities Act of 1933 is not effective with respect to the Option Shares issuable upon such exercise, and the Company believes the Option Shares can be issued pursuant to an exemption from registration, it shall be a condition precedent to the effective exercise of the Option that the person exercising the Option give the Company a written representation and undertaking, reasonable under the circumstances and reasonably satisfactory in form and substance to the Company, to assure compliance by the Company, on terms acceptable to the Company, with the provisions of the Securities Act of 1933 and any other applicable legal requirements. (c) The Company may place upon the face of any stock certificates representing Option Shares issued upon exercise of the Option appropriate legends referring to the provisions of any representation or undertaking referred to in this Agreement and to assure compliance with the 8 Securities Act of 1933. 4. EFFECT OF TERMINATION OF EMPLOYMENT. (a) If the Optionee's employment with the Company terminates as a result of the Optionee's death or as a result of the Optionee's disability in accordance with the employment agreement dated as of August __, 1998 between the Company and the Optionee (the "Employment Agreement"), or if the Company terminates the Optionee's employment with the Company other than for Cause (as defined in the Employment Agreement), or if the Company fails to renew the Employment Agreement other than for Cause, or if the Optionee terminates her employment for "Good Reason" (as defined in the Employment Agreement) or if the Optionee fails to renew the Employment Agreement other than for Good Reason in accordance with the Employment Agreement (the foregoing circumstances are collectively referred to as "Paragraph 4(a) Termination Circumstances"), the Option shall continue to become exerciseable in accordance with paragraph 1 hereof. (b) If the Optionee's employment with the Company terminates for any reason other than in a Paragraph 4(a) Termination Circumstance, the portion of the Option, if any, that was not yet exercisable pursuant to paragraph 1 hereof shall not thereafter become exercisable. 5. ADJUSTMENTS. (a) If there is any stock dividend, stock split or combination of shares of Common Stock or similar recapitalization or restructuring (an "Adjustment Event"), the number and kind of shares then subject to this Agreement shall be proportionately and appropriately adjusted as determined in good faith by the board of directors of the Company; no change shall be made in the aggregate purchase price to be paid for all Option Shares subject to the Option, but the aggregate purchase price shall be allocated among all Option Shares after giving effect to such adjustment. Any such adjustment shall be the same as made with respect to options issued under the Plan. Prior to the exercise of Option in whole or in part, the Company shall not issue any shares of Common Stock, other than (i) in an Adjustment Event, (ii) for consideration determined in good faith by the Board to be fair, (iii) in connection with a Proposed Transaction (as defined below), (iv) in connection with a public offering of Common Stock or (v) in a transaction treated by the Company as if it were an Adjustment Event and the Option is adjusted in accordance therewith, without the consent of Optionee, which consent shall not be unreasonably withheld unless such issuance is treated by the Company as if it were an Adjustment Event and the Option is adjusted in accordance therewith. (b) In the event of a Change in Control (as defined in the dELiA*s Inc. Amended and Restated 1996 Stock Incentive Plan (the "Plan"), the Option (and the Option Shares) shall be treated by the Company as if the Option were an option granted under the Plan. (c) In the event of a sale of all or substantially all of the assets of the Company, the Option shall become immediately exercisable. In the event of such a sale, and if Optionee has exercised the Option, the Company shall distribute the proceeds of such sale on a pro-rata basis to its stockholders, including Optionee (to the extent Optionee is a stockholder). 2 6. NO RIGHTS. Nothing in the Option shall confer on the Optionee any right to continue in the employ of the Company or any affiliate thereof or to continue to perform services for the Company or interfere in any way with the right of the Company to terminate the Optionee's employment or services at any time or give any claim by the Optionee against the Company in respect of any such termination (other than any claim expressly set forth in the Employment Agreement). The Optionee shall not, by virtue of holding the Option, be entitled to any rights of a stockholder in the Company. 7. ADMINISTRATIVE REGULATIONS. All decisions of the Board that are made in good faith upon any question arising under the Option, shall be conclusive and binding upon the Optionee and any person to whom rights under this Agreement may have been transferred by will or by the laws of descent and distribution. 8. NOTICES. All notices, requests and documents to be given under this Agreement shall be in writing and shall be either delivered personally or mailed by first-class registered or certified mail, return receipt requested, to the appropriate party. 9. ACCEPTANCE BY OPTIONEE. The acceptance by the Optionee of the Option constitutes acceptance of and agreement to all the terms and conditions contained in this Agreement. 10. GOVERNING LAW. This Agreement contains a complete statement of all the terms of the Option, cannot be changed or terminated orally, and shall be governed by the law of the State of Delaware applicable to agreements made and to be performed in Delaware. 11. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall be considered one and the same Agreement. 12. COMPLETE STATEMENT. This Agreement contains a complete statement of all the arrangements between the parties with respect to their subject matter, supersede any previous agreements between them relating to that subject matter, and cannot be amended, modified or terminated except in a written document executed by all the parties hereto. 13. TAG-ALONG; DRAG-ALONG; FIRST REFUSAL. The provisions of this Section 13 shall become effective only following exercise of the Option by the Optionee. (a) DRAG ALONG. If dELiA*s Inc. proposes a transaction which would cause the sale or other transfer for consideration by dELiA*s Inc. of an amount of Common Stock of the Company, which, if completed, would result in a person or entity (other than dELiA*s Inc. or its direct or indirect subsidiaries or affiliates) acquiring more than 50% of the outstanding Common Stock of the Company (a "Proposed Transaction"), then dELiA*s Inc. shall give written notice (a "Transaction Notice") to the Optionee describing the material terms of the Proposed Transaction. dELiA*s Inc. shall be entitled to require the Optionee to include in such Transaction all of such Optionee's shares of Common Stock; provided, however, that no Optionee shall be required to enter into any Proposed Transaction pursuant to this Section 13(a) unless the terms and conditions of the Proposed Transaction provide that such Optionee's liability will be several and not joint and several, and (ii) such Optionee's liability will be capped at the market value, 3 determined at the of receipt, of the net pre-tax proceeds to be received by such Optionee pursuant to the terms of the Proposed Transaction. (b) TAG ALONG. In connection with any Proposed Transaction, the Optionee shall have a right to include in such Proposed Transaction up to the number of Option Shares computed by multiplying (i) the total number of shares of Common Stock of the Company proposed to be sold or otherwise disposed of by dELiA*s Inc. pursuant to the Proposed Transaction by (ii) a fraction, the numerator of which shall equal the aggregate number of Option Shares owned by such Optionee and the denominator of which shall equal the number of shares of the Common Stock of the Company issued and outstanding on a fully diluted basis on such date. Any Optionee desiring to exercise her or her tag-along right must deliver a written of exercise to dELiA*s Inc. within 10 days after the date dELiA*s Inc. gives the Notice to such Optionee. (c) SAME TERMS AND CONDITIONS. In the case of both the drag-along described in Section 13(a) and the tag-along rights described in 13(b), a sale of Option Shares by Optionee shall be the same price per share (in both amount and purchase medium) applicable to the sale of the shares of Common Stock of the Company by dELiA*s Inc. and otherwise shall be on terms and conditions at least as favorable as those applicable to dELiA*s Inc. (d) If Optionee shall receive an offer to purchase its Option Shares or if Optionee shall wish to enter into an agreement for the sale of such Option Shares, Optionee shall first give written notice to dELiA*s Inc. setting forth the name of the proposed purchaser, the purchase price, and all terms and conditions of the proposed sale. Within twenty (20) calendar days following the delivery or mailing of said notice, dELiA*s Inc. or its designee shall have the right to purchase the Option Shares upon the same terms and conditions. Said right shall be exercised by delivering or mailing such election to Optionee prior to the expiration of said calendar days. If dELiA*s Inc. shall not elect to make such purchase within said time, and the sale is made in accordance with the terms set forth in the notice, Optionee shall not have a right to purchase upon any resale by the person who acquires such Option Shares from Optionee.. 14. ANNEX 1. Attached to this Agreement as ANNEX 1 is a statement of (i) the proposed list of assets to be owned by the Company following the acquisition by the Company and its affiliates of assets from the estate of Fulcrum Direct Inc.; and (ii) the proposed initial equity structure of the Company. The Company or dELiA*s Inc. may modify this Annex 1 at any time prior to the consummation of the Acquisition provided that such modification does not materially affect the economic interests of the Optionee. 15. AGREEMENT TO NEGOTIATE. Without specific obligation, the Company and the Optionee agree to, within 30 days of the second anniversary of this Agreement, negotiate in good faith mechanisms to increase the liquidity of the Option, recognizing the concerns of the Optionee, the Company and the Company's stockholders. In the event that dELiA*s Inc. fails to negotiate in good faith and Optionee subsequently terminates its employment with the Company, the Optionee shall tehreupon be released from its obligations under Section 7 of the Employment Agreement. [SIGNATURE PAGE FOLLOWS] 4 [SIGNATURE PAGE TO STOCK OPTION AGREEMENT] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above. STORYBOOK INC. By: ----------------------------------------- Alex S. Navarro Senior Vice President-- Development and Legal Affairs ESTELLE DEMUESY -------------------------------------------- 5 ANNEX 1 ASSETS TO BE ACQUIRED
Storybook Inc. dELiA*s Properties Inc. dELiA*s Interactive Company - ---------------------------------- ----------------------- --------------------------- Customer Lists All Trademarks Domain Names (including Storybook Heirlooms Zoe, After the Stork, Playclothes and Just for Kids list) Leases Personal Property and Equipment Storybook Inventory Zoe Inventory All Other Assets (other than trademarks and domain names)
In addition, dELiA*s Properties Inc. shall license to Storybook Inc. on a perpetual, irrevocable basis the right to use the Storybook Heirlooms trademark pursuant to a customary trademark license agreement to be entered into concurrently with or subsequent to the Effective Date (as defined in the Employment Agreement). EQUITY STRUCTURE OF STORYBOOK INC. Number of Authorized Shares: 1,000 shares of common stock Number of Shares to be Issued to dELiA*s Inc. upon Organization: 80 Number of Shares Reserved for Issuance to DeMuesy and Bruml: 20 (subject to adjustment based on stock splits, stock dividends, recapitalizations, etc.) 6 EX-27 5 EXHIBIT 27
5 1,000 9-MOS JAN-29-2000 FEB-01-1999 OCT-30-1999 22,018 48,482 0 0 39,310 136,005 37,846 5,219 203,071 45,735 0 0 0 149 83,661 203,071 123,272 123,272 69,249 69,249 80,053 0 1,870 25,634 12,863 12,771 0 0 0 12,771 0.89 0.82
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