<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 1999
REGISTRATION NO. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
FASHIONMALL.COM, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7375 APPLIED FOR
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Code Identification No.)
Number)
</TABLE>
FASHIONMALL.COM, INC.
575 MADISON AVENUE
NEW YORK, NEW YORK 10022
(212) 891-6064
(Address and telephone number of principal executive offices)
BENJAMIN NARASIN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
FASHIONMALL.COM, INC.
575 MADISON AVENUE
NEW YORK, NEW YORK 10022
(212) 891-6064
(Name, address and telephone number of agent for service)
COPIES TO:
<TABLE>
<S> <C>
KENNETH R. KOCH, ESQ. GERALD A. EPPNER, ESQ.
Squadron, Ellenoff, Plesent & Sheinfeld, LLP Cadwalader, Wickersham & Taft
551 Fifth Avenue 100 Maiden Lane
New York, New York 10176 New York, New York 10038
(212) 661-6500 (212) 504-6286
(212) 697-6686 (fax) (212) 504-6735/6666 (fax)
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement. If this Form is filed
to register additional securities for an offering pursuant to Rule 462(b) under
the Securities Act of 1933, as amended (the "Securities Act"), please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common stock, par value $0.01 per share........... 3,450,000 $7.00 $24,150,000 $6,762
Representative's Warrants (3)..................... 300,000 $8.40 $2,520,000 $705.60
Common stock, par value $0.01 per share (4)(5).... (6) (6) (6)
Total............................................. -- -- $26,670,000 $7,467.60
</TABLE>
(1) Includes 450,000 shares of common stock, par value $0.01 per share, which
the Underwriters have the option to acquire solely to cover over-allotments,
if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a) under the Securities Act.
(3) Issued to the Representative of the Underwriters.
(4) Issuable upon exercise of the Representative's Warrants.
(5) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of any
anti-dilution adjustment in accordance with the terms of the
Representative's Warrants.
(6) Pursuant to Rule 457(g), no additional registration fee is required for
these shares.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
3,000,000 SHARES
[LOGO]
FASHIONMALL.COM, INC.
COMMON STOCK
This is an initial public offering of fashionmall.com, Inc. fashionmall.com,
Inc. is selling all of the 3,000,000 shares of common stock offered under this
prospectus.
There is currently no public market for our common stock. We expect that the
public offering price will be $7.00 per share. The market price of our common
stock after this offering may be higher or lower than the actual price at which
the shares of our common stock will be sold in this offering.
We intend to apply to list the common stock on the Nasdaq National Market
under the symbol "FASH".
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------------------- ---------------------------
<S> <C> <C>
Public offering price
Underwriting discounts and commissions
Proceeds, before expenses, to us
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 450,000 shares of common stock from us to cover any over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
GRUNTAL & CO.
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
[ARTWORK APPEARS HERE]
[PICTURES OF THE FASHIONMALL.COM HOME PAGE AND VARIOUS OTHER SCREENS LINKED
VIA THE WEB SITE]
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU
SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING
IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS." REFERENCES IN THIS
PROSPECTUS TO THE "COMPANY," "WE," "OUR," AND "US" REFER TO FASHIONMALL.COM,
INC., A DELAWARE CORPORATION, AND ITS PREDECESSORS AND SUBSIDIARIES (UNLESS THE
CONTEXT REQUIRES OTHERWISE). EXCEPT AS OTHERWISE NOTED OR WHERE THE CONTEXT
OTHERWISE REQUIRES, ALL INFORMATION IN THIS PROSPECTUS ASSUMES:
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR WARRANTS, AND
- THE REORGANIZATION OF OUR COMPANY FROM A LIMITED LIABILITY COMPANY TO A
CORPORATION.
THE COMPANY
fashionmall.com's Web site (www.fashionmall.com) engages in the marketing
and sale of fashion, apparel, footwear, beauty and related lifestyle products
and accessories over the Internet. We combine an online shopping mall with
fashion content to provide a centralized site for manufacturers, retailers,
magazines and catalogs to advertise, display and sell their product lines. Our
revenues have grown from $219,000 in 1996 to $2,055,000 in 1998. fashionmall.com
has become one of the most popular sites for apparel and fashion-related content
on the Internet.
Our Web site is divided into several areas, each consisting of a number of
"tenants" which include fashion/apparel vendors and content providers, whose
sales and marketing efforts are generally aimed towards a targeted common
market. These areas currently focus on specific markets, including upscale
fashion, teen fashion, sports apparel and beauty. fashionmall.com has a diverse
tenant base of brand name companies, including Brooks Brothers, Fortunoff,
dELiA*s, Skechers, Steve Madden and Liz Claiborne.
Our objective is to become the primary fashion destination on the Internet
by continuing to increase site traffic and awareness of the fashionmall.com
brand. As part of this marketing strategy, we have formed strategic alliances
with high-traffic Web portals, such as Excite and Microsoft/MSN. After this
offering, we plan to significantly increase our promotional marketing efforts
through targeted advertising, public relations campaigns and business alliances
and partnerships. We believe that increased brand recognition and site traffic
will attract additional tenants, which in turn, will increase traffic and
further fuel our revenue growth and expansion.
To date, our revenue has primarily come from fees paid by tenants for their
inclusion on the fashionmall.com site. However, we expect to derive significant
revenue from expansion of our direct electronic commerce ("e-commerce") sales of
apparel and related merchandise through our own online stores. We believe that
the e-commerce apparel market is large and growing and that our brand
recognition and site traffic position us to take advantage of that opportunity.
Jupiter Communications, an independent Internet market research organization,
ranks apparel among the top five product categories for Internet sales and
estimates that the number of people shopping on the Internet will increase from
10 million in 1997 to 61 million in 2002. Our first online store is our recently
launched Outletmall.com site, through which we sell quality, branded merchandise
at significant discounts.
We were incorporated in Delaware on February 26, 1999, and we are the parent
company of Internet Fashion Mall LLC, a Delaware limited liability company that
was formed on June 28, 1996 and owns fashionmall.com (which was established in
1994 and was launched in July 1995). Effective as of the closing of the
offering, the members of Internet Fashion Mall LLC will contribute all their
membership interests in exchange for 4,500,000 shares of our common stock. Our
principal executive offices are located at 575 Madison Avenue, New York, New
York 10022, and our telephone number is (212) 891-6064.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered................ 3,000,000 shares
Common Stock Outstanding Prior to
this Offering..................... 4,500,000 shares(1)
Common Stock Outstanding After this
Offering.......................... 7,500,000 shares
Use of Proceeds..................... For advertising and marketing; hiring certain
management and other personnel; upgrading our
technology, software and basic infrastructure;
repayment of certain debt; payment of deferred
salaries to management and repayment of loans to
stockholders; and working capital and general
corporate purposes
Proposed Nasdaq National Market
Symbol............................ "FASH"
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of March 8, 1999. Excludes 142,500 shares of
common stock issuable upon exercise of options outstanding at an exercise
price of $1.11 per share, 95,000 shares of common stock issuable upon
exercise of warrants at an exercise price of $7.35 per share and up to
12,500 shares to be issued to a principal stockholder upon exercise of such
options and warrants. Also excludes 22,500 shares of common stock issuable
upon exercise of warrants at an exercise price of $4.44 per share.
4
<PAGE>
SUMMARY FINANCIAL DATA
The balance sheet information as of December 31, 1998 and the income
statement data set forth below for the years ended December 31, 1997 and 1998
are derived from the audited financial statements included elsewhere in this
prospectus. The balance sheet information as of December 31, 1995, 1996 and 1997
and the income statement data for the years ended December 31, 1995 and 1996 are
derived from unaudited financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: 1995(1) 1996 1997 1998
- ----------------------------------------------------------- ----------- ----------- ------------ ------------
Site revenues.............................................. $ 14,000 $ 219,000 $ 1,253,000 $ 2,055,000
Site development, merchandise and content.................. 34,000 177,000 150,000 270,000
Advertising and marketing expense.......................... 38,000 251,000 696,000 1,104,000
Selling expense............................................ 32,000 102,000 122,000 257,000
General and administrative expense......................... 44,000 140,000 283,000 413,000
----------- ----------- ------------ ------------
148,000 670,000 1,251,000 2,044,000
----------- ----------- ------------ ------------
(Loss) income from operations.............................. (134,000) (451,000) 2,000 11,000
Other income............................................... -- -- 1,000 3,000
----------- ----------- ------------ ------------
Net (loss) income--historical.............................. $ (134,000) $ (451,000) $ 3,000 $ 14,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Pro forma net (loss) income (2)............................ $ (134,000) $ (451,000) $ 2,000 $ 10,000
Pro forma basic net (loss) income per share (2)............ (0.03) (0.10) * *
Pro forma diluted net (loss) income per share (2).......... (0.03) (0.10) * (0.04)
Shares used in the calculation of pro forma net (loss)
income per share (3):
Basic.................................................. 4,500,000 4,500,000 4,500,000 4,500,000
Diluted................................................ 4,500,000 4,500,000 4,500,000 4,368,000
</TABLE>
- ------------------------
* less than $0.01.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AS
BALANCE SHEET DATA: 1995 1996 1997 1998 ADJUSTED(4)
- --------------------------------------------------- ---------- ---------- ---------- ---------- -------------
Cash............................................... $ -- $ -- $ 66,000 $ 82,000 $ 19,536,000
Working (deficiency) capital....................... (99,000) (18,000) 117,000 (247,000) 19,199,000
Total assets....................................... -- 74,000 274,000 508,000 19,923,000
Total liabilities.................................. 99,000 294,000 491,000 650,000 253,000
Members' deficit/stockholders' equity.............. (99,000) (220,000) (217,000) (142,000) 19,670,000
</TABLE>
- ------------------------------
(1) The results of operations for the year ended December 31, 1995 includes the
operations of the Company's predecessor from its commencement of operations
on December 22, 1994 to August 1995, which reflected a net (loss) of
($15,000) and site revenues of $2,000.
(2) Computed on the basis described in Note 3 of Notes to Financial Statements
and assuming the pro forma tax provisions described therein. Prior to this
offering, the Company will effect a reorganization in which the Company will
convert from a limited liability company to a C corporation.
(3) See Note 3 of Notes to Financial Statements for an explanation of the
determination of shares used in computing pro forma net income (loss) per
share (basic and dilutive).
(4) As adjusted to reflect (i) the issuance and sale of the 3,000,000 shares of
common stock offered hereby (assuming an initial public offering price of
$7.00 per share), and the receipt of the estimated net proceeds therefrom as
described under "Use of Proceeds"; (ii) the issuance of 225,000 shares of
common stock to FM/CCP Investment Partners, LLC and the issuance of
$1,000,000 of notes payable and warrants to FM/CCP Investment Partners, LLC
(together, the "FM/CCP Financing"); and (iii) the repayment of the
$1,000,000 notes payable to FM/CCP Investment Partners, LLC, and the
deferred salaries to management and loans to stockholders, totaling
$366,000. Please see Note 8 to the financial statements.
5
<PAGE>
RISK FACTORS
YOU SHOULD READ THE FOLLOWING RISK FACTORS CAREFULLY BEFORE PURCHASING OUR
COMMON STOCK. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS BASED
ON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THE RISK FACTORS SET FORTH
BELOW AND ELSEWHERE IN THIS PROSPECTUS. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. IF ANY OF THESE RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY
LOSE PART OR ALL OF YOUR INVESTMENT. THE CAUTIONARY STATEMENTS MADE IN THIS
PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY
We founded our company in 1994, launched fashionmall.com in July 1995 and
were incorporated on February 26, 1999. Accordingly, we have a limited operating
history upon which you can evaluate our business. In order to be successful, we
must attract more traffic to fashionmall.com and generate significant tenant
fees and e-commerce revenues. However, as an early stage company in a new and
rapidly evolving market like the Internet, we face numerous risks and
uncertainties. Some of these risks and uncertainties relate to our ability to:
- develop further fashionmall.com awareness and brand loyalty;
- attract a larger audience to, and increase frequency of use of, our
fashionmall.com Web site;
- increase customer acceptance of the online purchase of apparel and related
merchandise;
- generate increased revenues through our Web site from consumers, apparel
manufacturers and retailers and other commercial vendors;
- generate significant revenues from tenant fees;
- generate significant revenues from e-commerce;
- anticipate and adapt to the changing market for Internet services and
e-commerce;
- respond to actions taken by our competitors;
- manage our growth effectively;
- increase our internal sales and merchandising force;
- implement our advertising and marketing strategies;
- develop and renew strategic relationships;
- attract, retain and motivate qualified personnel;
- offer content on our Web site that is attractive to our visitors;
- continue to upgrade and enhance our technologies and retailing services to
accommodate expanded service offerings and increased consumer traffic;
- provide satisfactory customer service and order fulfillment; and
- integrate acquired businesses, technologies and services.
We may not be successful in accomplishing any or all of these objectives,
and we cannot be certain that we will be able to maintain our current level of
revenues from our present operations.
6
<PAGE>
We depend on the growing use of the Internet for advertising and e-commerce,
and are affected by general economic conditions. The number of Internet users
may not continue to grow and the use of the Internet for advertising or
e-commerce may not become more widespread. If we are unsuccessful in addressing
these risks or in executing our business strategy, our business, results of
operations and financial condition will be materially adversely effected. Please
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAIN PROFITABILITY; HISTORICAL DEFICIT; ANTICIPATED LOSSES
Our ability to generate significant revenue is uncertain. We have incurred
substantial costs to create, launch and enhance fashionmall.com, to build brand
awareness and to grow our business. At December 31, 1998, our accumulated
deficit was $142,000. We expect losses from operations and negative cash flows
for the foreseeable future because we plan to incur significant expenses as we
expand our advertising and marketing programs, continue to develop and extend
the fashionmall.com brand, hire more management, sales and other personnel, fund
greater offerings of merchandise, expand our infrastructure and customer support
services, and seek to acquire complementary businesses and technologies. If our
revenues do not increase and if our spending levels are not adjusted
accordingly, we may not generate sufficient revenues to achieve profitability.
Even if we do achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future. Please see
"--Volatility of Quarterly Operating Results," "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
MANAGEMENT OF GROWTH
Our ability to implement our business strategy in a rapidly evolving market
requires effective planning and management oversight. Our anticipated future
operations will continue to place a significant strain on our management, sales
personnel, information systems and resources. To manage the expected growth of
our operations and personnel, we will be required to improve existing and
implement new transaction-processing, operational and financial systems,
procedures and controls, and to expand, train and manage our limited employee
base on a timely basis. Further, we will be required to maintain and expand our
relationships with various merchandise manufacturers, retailers, Internet and
other online service providers and other third parties necessary to our
business. In addition, our current sales fulfillment operations are not adequate
to accommodate any significant increase in sales of merchandise from our online
operations. We will need to hire and retain highly skilled personnel to manage
our expected growth. Any inability to manage our growth effectively would have a
material adverse affect on our business, results of operations and financial
condition. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business-- Employees."
VOLATILITY OF QUARTERLY OPERATING RESULTS
We expect our quarterly operating results to vary significantly in the
future due to a variety of factors, many of which are outside of our control.
These factors include:
- the demand for marketing on the Internet in general or on fashionmall.com
in particular;
- traffic levels on fashionmall.com and on other Web sites that refer
consumers to our Web site;
- our ability to attract and retain tenants and e-commerce partners;
- the announcement or introduction of new or enhanced sites, services and
products by us or our competitors;
- our ability to attract and retain qualified personnel in a timely and
effective manner;
7
<PAGE>
- acceptance by consumers and companies of using the Internet for apparel
and fashion-related products and advertising;
- our ability to maintain and implement strategic alliances and
relationships with manufacturers, retailers, magazines, catalogs,
high-traffic Web sites and portals and other third parties;
- changes in tenant fees resulting from competition or other factors;
- technical difficulties or system downtime affecting the Internet or the
operation of fashionmall.com;
- the amount and timing of our costs related to advertising and marketing
efforts, sales and other initiatives and the timing of revenues generated
from such activities;
- fees we may pay for distribution or content or other costs we may incur as
we expand our operations;
- changes in state and federal government regulations and their
interpretations, especially with respect to the Internet;
- costs related to possible acquisitions of businesses, technologies and
services; and
- general economic conditions and those conditions that specifically affect
the Internet and Internet services.
As we expect to be substantially dependent on revenues from tenant fees and
e-commerce for the foreseeable future, our quarterly revenues are likely to be
particularly affected by traffic levels on fashionmall.com. Our operating
expenses are based on our expectations of our future traffic levels and revenues
and are relatively fixed in the short term. In particular, we intend to
significantly expand our internal sales and merchandising force. In addition, in
order to build brand awareness of fashionmall.com, we intend to significantly
increase our advertising and marketing budget. Traffic levels and revenues are
difficult to forecast accurately. We may be unable to adjust spending quickly
enough to offset any unexpected shortfall. If we have a greater than expected
shortfall in revenues in relation to our expenses, or if our expenses precede
increased revenues, then our business, results of operations and financial
condition would be materially and adversely affected. This could affect the
market price of our common stock.
In general, traffic levels on Web sites have typically fluctuated on a
quarterly basis, which could result in a decrease in user traffic on
fashionmall.com during certain periods. We believe that advertising sales in
traditional media, such as television and radio, generally are lower in the
first and third calendar quarters of each year. In addition, sales in the
traditional retail industry are much higher in the fourth calendar quarter of
each year than in the preceding three quarters. Similar seasonal or other
patterns may develop in our industry.
Due to all of the foregoing factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. In this event, the price of our common stock is
likely to fall. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
IMPORTANCE OF BRAND IDENTITY
To be successful, we must continue to build the brand identity of
fashionmall.com. To build brand awareness, which may be particularly critical
for Internet companies, we must succeed in our marketing efforts, provide
high-quality services and increase traffic to fashionmall.com. We have spent a
substantial amount of our limited resources in marketing our brand. We intend to
increase our marketing budget substantially as part of our brand-building
efforts. We may find it necessary to further
8
<PAGE>
increase our financial commitment to creating and maintaining a strong brand
name among consumers. If we incur excessive expenses in our attempt to promote
and maintain fashionmall.com, our business, results of operations and financial
condition could be materially adversely affected. If our marketing efforts are
unsuccessful or if we cannot increase our brand awareness, our business,
financial condition and results of operations would be materially adversely
affected. Please see "Use of Proceeds" and "Business--Business Strategy."
DEPENDENCE ON THE INTERNET; RISKS ASSOCIATED WITH EVOLVING MARKET
Our future success is substantially dependent on the continued growth in the
use of the Internet. The Internet is relatively new and is rapidly evolving. Our
business would be adversely affected if Internet usage does not continue to
grow. Internet usage may be inhibited for a number of reasons, such as:
- the Internet infrastructure may not be able to support the demands placed
on it, or its performance and reliability may decline as usage grows;
- security and authentication concerns with respect to transmission over the
Internet of confidential information, such as credit card numbers, and
attempts by unauthorized computer users ("hackers") to penetrate online
security systems; and
- privacy concerns, such as those related to the placement by Web sites of
certain information to gather user information, known as "cookies," on a
user's hard drive without the user's knowledge or consent.
Our market is characterized by rapidly changing technologies, evolving
industry standards, frequent new service introductions and changing customer
demands. To be successful, we must adapt to our rapidly evolving market by
continually enhancing fashionmall.com and introducing new services to address
our customers' changing demands. We could incur substantial costs if we need to
modify our services or infrastructure in order to adapt to these or other
changes affecting providers of Internet services. Our business, results of
operations and financial condition could be materially adversely affected if we
incurred significant costs to adapt, or cannot adapt, to these changes. Due to
the rapidly changing nature of the Internet business, we may be subject to
risks, now and in the future, of which we are not currently aware.
RISKS ASSOCIATED WITH INTERNET ADVERTISING
We are increasingly relying on online and traditional advertising, as well
as certain strategic alliances, to attract users to our Web site. We currently
expect to generate a significant portion of our revenues from advertising in the
form of tenant fees (I.E. fees paid by vendors for inclusion on fashionmall.com
of their marketing and advertising materials, and/or online sales of their
merchandise or services) for the foreseeable future. The Internet advertising
market is new and rapidly evolving, and we cannot yet gauge its effectiveness as
compared to traditional advertising media. Our business, results of operations
and financial condition would be materially adversely affected if the market for
Internet advertising fails to develop or develops more slowly than expected.
Most of our current or potential advertising and e-commerce partners have little
or no experience using the Internet for advertising purposes, and they have
allocated only a limited portion of their advertising budgets to Internet
advertising. The adoption of Internet advertising, particularly by those
entities that have historically relied upon traditional media for advertising,
requires the acceptance of a new way of conducting business, exchanging
information and advertising products and services. Advertisers that have
traditionally relied upon other advertising media may be reluctant to advertise
on the Internet. Such customers may find Internet advertising to be less
effective than traditional advertising media for promoting their products and
services. No standards have been widely accepted to measure the effectiveness of
Internet advertising or to measure the demographics of the Company's user base.
If
9
<PAGE>
such standards do not develop, advertisers may not advertise on the Internet. We
are currently implementing additional systems designed to track and mine usage
patterns of visitors to our Web site. Our ability to implement these systems may
be affected, among other matters, by concerns about Internet privacy. Please see
"--Governmental Regulation and Legal Uncertainties." If we do not implement
these systems successfully, we may not be able to accurately evaluate these
usage patterns. Advertisers and e-commerce marketers may choose not to advertise
on fashionmall.com or may pay less for advertising on fashionmall.com if they do
not perceive our measurements to be reliable, which action could have a material
adverse effect on our business, results of operations and financial condition.
In addition, we currently derive a significant portion of our revenues from
barter transactions. Although we expect the percentage of barter revenue to
decrease following the offering, we intend to continue to engage in barter
transactions when management believes it is appropriate. The proper accounting
for barter transactions has been a topic of discussion among accountants from
time to time, and we cannot be certain that the accounting treatment of barter
transactions will not be changed in a way that adversely affects us.
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
We have entered into agreements with various third parties, some of which
require us to feature them prominently in certain sections of our Web site. For
example, we have entered into an agreement with VISA pursuant to which we have
integrated the VISA logo and payment option into our Web site in exchange for a
fee and promotion of fashionmall.com. Existing and future arrangements may
prevent us from entering into other content agreements, advertising or
sponsorship arrangements or other commercial relationships. Many companies that
we may pursue for a commercial relationship may also offer competing services.
As a result, these competitors may be reluctant to enter into commercial
relationships with us. Our business could be adversely affected if we do not
maintain our existing commercial relationships on terms as favorable as
currently in effect, if we do not establish additional commercial relationships
on commercially reasonable terms or if our commercial relationships do not
result in the expected increased use of our Web site.
We also depend on establishing and maintaining a number of commercial
relationships with high-traffic Web sites to increase traffic on
fashionmall.com. We currently have agreements with Excite and Microsoft/MSN for
placement of fashionmall.com in their shopping areas. There is intense
competition for placements on these sites, and in the future we may not be able
to enter into distribution relationships for such placement on commercially
reasonable terms or at all. Even if we enter into distribution relationships
with these Web sites, they may not attract significant numbers of consumers.
Therefore, our Web site may receive less than the number of additional consumers
we expect from these relationships. Moreover, we may have to pay significant
fees to establish or renew these or comparable relationships.
We also depend on establishing and maintaining a number of commercial
relationships with apparel manufacturing, retailing, catalog and magazine
companies. Our current relationships include tenants on our Web site (from which
we receive tenant fees and, depending on the arrangement with the tenant, fees
from online sales). We cannot assure you that we will be able to establish new
agreements or maintain existing agreements or that the above agreements can be
renewed on commercially acceptable terms.
CONTINUING DEVELOPMENT OF OUR CONTENT AND SERVICE OFFERINGS
To remain competitive, we must continue to enhance and improve our content
offerings, the ease of use, responsiveness, functionality and features of the
fashionmall.com site and develop new services in addition to continuing to
improve the consumer purchasing experience on our site. These efforts
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may require the development or licensing of increasingly complex technologies.
We may not be successful in developing or introducing new features, functions
and services, and these features, functions and services may not achieve market
acceptance or enhance our brand loyalty. If we fail to develop and introduce new
features, functions or services effectively, it could have a material adverse
effect on our business, results of operations and financial condition. Please
see "Business--Customer Loyalty and Retention."
DEVELOPMENT OF DIRECT SALES FORCE
We rely on our sales personnel to lease space on our site to brand name
tenants. To support our growth, we need to substantially increase our internal
sales force in the near future. Our ability to do this involves a number of
risks, including:
- the competition we face in hiring sales personnel;
- our ability to integrate, motivate and retain our sales personnel; and
- the length of time it takes new sales personnel to become productive.
Our business, results of operations and financial condition will be
adversely affected if we do not develop and maintain an effective internal sales
force. Please see "Use of Proceeds."
HIGHLY COMPETITIVE MARKETS
We compete with other Web sites, including, in particular, apparel shopping
areas of Internet portals, for Internet advertisers' and e-commerce marketers'
dollars. The number of these Web sites has increased significantly, and we
expect such competition to continue to increase because there are no substantial
barriers to entry into our market. Competition may also increase as a result of
ongoing industry consolidation. Increased competition could result in less
traffic to our Web site, price reductions for our advertising inventory and
reduced margins or loss of market share, any of which would have a material
adverse effect on our business, results of operations and financial condition.
In addition, the retail apparel shopping industry is intensely competitive.
As a seller of apparel, we compete with a variety of other companies, including:
- traditional retailers of apparel, many of which also support dedicated Web
sites that compete with us, such as The Gap and J. Crew;
- non-traditional retailers, such as television retailers, and mail order
catalogs, such as QVC and LL Bean;
- apparel shopping areas of Internet portals; and
- other online retailers, such as Bluefly.
Many of our tenants operate their own Web sites but still maintain a
presence on fashionmall.com. Although many of our existing and potential
competitors are also our tenants, such tenants could choose not to use our Web
site as a platform to market and sell their products and, instead, could decide
to market and sell products solely on their own site or on other sites.
Competitive pressures created by any one of these companies, or by our
competitors collectively, could have a material adverse effect on our business,
results of operations and financial condition.
We believe that our ability to compete depends on many factors, many of
which are beyond our control. We believe that the principal competitive factors
in attracting consumers to our Web site are:
- brand awareness and loyalty;
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- our ability to attract high quality manufacturers, retailers, catalogs and
magazines as tenants on our Web site;
- strategic relationships with high-traffic Web sites and leading search
engines;
- a positive shopping and purchasing experience for the consumer;
- breadth and depth of selection;
- price of products offered for sale;
- ease of use;
- quality of content, other service offerings and customer service; and
- Web site functionality, responsiveness, reliability, and speed of
fulfillment of orders.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. This may allow them to devote greater resources than we
can to the development and promotion of customer services. Such competitors may
also engage in more extensive research and development, undertake more
far-reaching marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to existing and potential employees, manufacturers,
retailers, distribution partners, and advertisers and e-commerce partners. Our
competitors may develop services that are equal or superior to those of
fashionmall.com or that achieve greater market acceptance than fashionmall.com.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their services to address the needs of advertisers and e-commerce
marketers. As a result, it is possible that new competitors may emerge and
rapidly acquire significant market share. We may not be able to compete
successfully or competitive pressures may have a material adverse effect on our
business, results of operations and financial condition.
We also compete with television, radio, cable and print (traditional
advertising media) for a share of advertisers' total advertising budgets. If
advertisers perceive the Internet or fashionmall.com to be a limited or
ineffective advertising medium, advertisers may be reluctant to devote a
significant portion of their advertising budget to Internet advertising or to
advertise on fashionmall.com. Please see "Business--Competition."
RELIANCE ON CERTAIN SUPPLIERS; AVAILABILITY OF MERCHANDISE
Our suppliers for our recently launched online apparel direct sales Web
site, Outletmall.com, currently include approximately 40 manufacturers. We have
no long-term contracts or arrangements with any of our suppliers that guarantee
the availability of merchandise or the continuation of particular pricing
practices. Our contracts with our suppliers typically do not restrict such
suppliers from selling products to other retailers or directly to consumers. We
cannot be certain that our current vendors will continue to sell merchandise to
us on current terms or that we will be able to establish new or extend current
vendor relationships to ensure acquisition of merchandise in a timely and
efficient manner and on acceptable commercial terms. Our loss of any of these
relationships could have a material adverse effect on our business. We also rely
on many of our suppliers to process and ship merchandise directly to customers.
We have limited control over the shipping procedures of manufacturers, and
shipments by these manufacturers have at times been subject to delays. If the
quality of service provided by such manufacturers falls below a satisfactory
standard or if our level of returns exceeds our expectations, then our business,
results of operations and financial condition could be materially adversely
affected.
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Although we believe we can maintain our current relationships and establish
additional relationships with vendors which offer competitive sources of brand
name apparel and related merchandise for fashionmall.com, we cannot be certain
that we will be able to continue to obtain the quantity, selection or brand
quality of items that we believe is necessary to be successful. If we are unable
to satisfy any of these objectives or are unable to develop and maintain our
relationships with suppliers to allow us to obtain a sufficient variety and
quantity of quality merchandise on acceptable commercial terms, then our
business, results of operations and financial condition will be materially
adversely affected.
UNCERTAINTIES IN APPAREL MARKET
The apparel industry historically has been subject to substantial cyclical
variations. Any downturn, whether real or perceived, in economic conditions or
prospects could adversely affect consumer spending habits and our business.
Fashion and shopping trends can change rapidly, and our business may be
sensitive to those changes. We cannot be certain that we will accurately
anticipate shifts in fashion or shopping trends and adjust our tenant base,
merchandise mix or presentation format to appeal to changing consumer tastes in
a timely manner. If we misjudge the market for our products or for our tenants'
products or if we are unsuccessful in responding to changes in fashion or
shopping trends or in market demand, our business, results of operations and
financial condition could be materially adversely affected.
INVENTORY RISK
We do not currently take ownership of substantial amounts of inventory, but
intend to take ownership of increasing amounts of inventory as we expand our
online direct sales of apparel and related merchandise through our online
stores. As a result, the changing trends in the market for apparel and related
merchandise could subject us to significant inventory risks. The demand for
certain products can change between the time the products are ordered and the
date of receipt. In the event that consumers do not accept certain of our
products, we may be required to take significant inventory markdowns, which
could adversely affect our business. We could also be subject to inventory loss,
or "shrink." Currently, we operate only one online store, but we expect to open
additional stores in the future. We believe that the risks associated with
inventory ownership will increase as we open new online stores. In addition, to
the extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any such increase would subject us to a higher level
of inventory risks.
COST OF RETURNS
Where fashionmall.com acts as a retailer, we experience certain costs of
returns. We recognize that remote purchases of apparel and related merchandise
may be subject to higher return rates than for traditional store-bought
merchandise. We have established a 30-day return policy and may be required to
change our return policy to accommodate our customers. Our current return rates
are less than 2%. If return rates are higher than expected, our business,
results of operations and financial condition could be materially adversely
affected.
DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE
The market for Internet-based purchasing services has only recently begun to
develop and is rapidly evolving. While many Internet commerce companies have
grown in terms of revenue, few are profitable. We cannot assure that we will be
profitable, and we anticipate losses for the foreseeable future. As is typical
for a new and rapidly evolving industry, demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty and there are few proven services and products.
Moreover, as the market for selling apparel online is relatively new and
evolving, it is difficult to predict the future growth rate, if any, and size of
this market.
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Our future success and revenue growth will depend upon the adoption of the
Internet by consumers and manufacturers and retailers as a mainstream medium for
commerce. While we believe that our services offer significant advantages to
consumers and manufacturers and retailers, there can be no assurance that
widespread acceptance of Internet commerce in general, or of our services in
particular, will occur. Our success assumes that consumers who have historically
relied upon traditional means of commerce to purchase apparel or related
products will accept new methods of conducting business and exchanging
information. Moreover, critical issues concerning the commercial use of the
Internet (including ease of access, security, reliability, cost, and quality of
service) remain unresolved and may impact the growth of Internet use. If the
market for Internet-based apparel sales fails to develop, develops slower than
expected or becomes saturated with competitors, or if our services do not
achieve market acceptance, our business, results of operations and financial
condition will be materially adversely affected.
DEPENDENCE ON CONTINUED IMPROVEMENTS IN OUR SYSTEMS AND INTERNET INFRASTRUCTURE
Our ability to retain and attract consumers, manufacturers, retailers and
advertisers, and to achieve market acceptance of our services and our brand,
depends significantly upon the performance of our systems and network
infrastructure. Our revenues depend on the number of visitors to our Web site
and the volume of sales orders we fulfill. Any system or network failure that
causes interruption or slower response time of our services could result in less
traffic to our Web site and, if sustained or repeated, could reduce the
attractiveness of our services to consumers, manufacturers, retailers and
advertisers. We have experienced periodic system interruptions, which we believe
may continue to occur from time to time. An increase in the volume of our Web
site traffic could strain the capacity of our technical infrastructure, which
could lead to slower response times or system failures. This would cause the
number of purchase inquiries, advertising impressions, other revenue producing
e-commerce offerings and our information offerings to decline, any of which
could hurt our revenue growth and our brand loyalty. In addition, if traffic
increases, we cannot assure you that our technical infrastructure, such as a
reliable network backbone with the necessary speed and data capacity and the
development of complementary products such as high-speed modems, will be able to
increase accordingly, and we face risks related to our ability to scale up to
expected consumer levels while maintaining performance. Further, security and
authentication concerns regarding the transmission of confidential information
over the Internet, such as credit card numbers, may continue. Any failure of our
server and networking systems to handle current or higher volumes of traffic
would have a material adverse effect on our business, results of operations and
financial condition.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, requiring Internet service providers and users of the
Internet to upgrade their infrastructures. If Internet usage continues to
increase rapidly, the Internet infrastructure may not be able to support the
demands placed on it by this growth and its performance and reliability may
decline. If these outages or delays on the Internet occur frequently, overall
Internet usage or usage of our Web site could increase more slowly or decline.
Our ability to increase the speed with which we provide services to consumers
and to increase the scope of such services is limited by and dependent upon the
speed and reliability of the Internet. Consequently, the emergence and growth of
the market for our services is dependent on future improvements to the entire
Internet.
In addition, our operations depend upon our ability to maintain and protect
our computer systems, most of which are located at our corporate headquarters in
New York, New York. Our Internet connectivity is provided by three servers on
our premises and one in Washington, D.C. at a third-party vendor location. We
currently do not have a backup disaster recovery program or fully redundant
systems for our service at an alternate site. The system therefore is vulnerable
to damage from a disastrous event, such as fire, flood, earthquake, power loss,
telecommunications failures, hackers and similar occurrences. Although we
currently do not have insurance against fires, floods, earthquakes and general
business interruptions, we are in the process of determining our coverage needs
and expect to
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seek such insurance within the next few months. We cannot be certain that we
will be able to obtain and maintain such insurance. If and when we do obtain
insurance, the amount of coverage may not be adequate in any particular case.
The occurrence of a disastrous event, whether or not covered by insurance, could
have a material adverse effect on our business, results of operations and
financial condition.
RAPID TECHNOLOGICAL CHANGE
To remain competitive, we must continue to enhance and improve the
functionality and features of our Web site. If competitors introduce new
services and features embodying new technologies, or if new industry standards
and practices emerge, our existing Web site and proprietary technology and
systems may become obsolete. Our future success will significantly depend on our
ability to continually improve the performance, features and reliability of our
Web site and to add new and useful services and content to our site. To develop
our Web site and other proprietary technology entails significant technical and
business risks. We may use new technologies ineffectively or we may fail to
adapt our Web site, transaction-processing systems and network infrastructure to
customer requirements, competitive pressures or emerging industry standards. Any
of these risks could materially adversely affect our business, results of
operations and financial condition.
POTENTIAL LIABILITY FOR CONTENT AND PRODUCTS SOLD OVER THE INTERNET
We could be exposed to liability for third-party information that may be
accessible through our Web site. Such claims might assert, among other things,
that, by directly or indirectly providing links to Web sites operated by third
parties, we should be liable for copyright or trademark infringement or other
wrongful actions by such third parties through such Web sites. It is also
possible that, if any third-party content information provided on our Web site
contains errors, consumers might make claims against us for losses incurred in
reliance on such information.
At times, we also enter into agreements with other companies under which any
revenue that results from the purchase of services through direct links to or
from our Web site is shared. Such arrangements may expose us to additional legal
risks and uncertainties, including local, state, federal and foreign government
regulation and potential liabilities to consumers of these services, even if we
do not provide the services ourselves. We cannot assure you that any
indemnification provided to us in our agreements with these parties, if
available, will be adequate.
Even to the extent any of the claims referred to above do not result in
liability to us, we could incur significant costs in investigating and defending
against such claims. The imposition on us of potential liability for information
carried on or disseminated through our system could require us to implement
measures to reduce our exposure to such liability, which might require the
expenditure of substantial resources or limit the attractiveness of our services
to consumers, manufacturers, retailers and others.
We may not be able to obtain and maintain adequate insurance. Our general
liability insurance may not cover all potential claims to which we are exposed
and may not be adequate to indemnify us for all liability that may be imposed.
Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our business, results
of operations and financial condition.
INTERNET SECURITY RISKS
Our network is vulnerable to computer viruses, physical or electronic
break-ins and similar disruption. We expect that these problems will occur from
time to time. The inadvertent transmission of computer viruses could expose us
to litigation or to a material risk of loss. Such security breaches and
inadvertent transmissions could have a material adverse effect on our business,
results of operations and financial condition.
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In offering certain online payment services, we rely on technology licensed
from third parties to provide the security and authentication necessary to
effect secure transmission of confidential information, such as consumer credit
card numbers. Advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments may result in a compromise or
breach of the algorithms that we use to protect our consumers, transaction data
or our software vendors and products. Any well-publicized compromise of security
could deter use of the Internet in general or use of the Internet to conduct
transactions that involve transmitting confidential information or downloading
sensitive materials. Someone who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. We may be required to expend significant capital and other resources
to protect against such security breaches or alleviate problems caused by such
breaches. Such expenditures could have a material adverse effect on our
business, results of operations and financial condition.
RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS
We may choose to expand our operations by developing new Web sites,
promoting new or complementary products or sales formats, expanding the breadth
and depth of products and services offered or expanding our market presence
through relationships with third parties. In addition, we may pursue the
acquisition of new or complementary businesses, products or technologies,
although we have no present plans or commitments with respect to any material
acquisition or investment. If we acquire a company, we could face difficulties
in assimilating that company's personnel and operations. In addition, key
personnel of the acquired company might decide not to work for us. Furthermore,
any new business or Web site launched by the Company not favorably received by
consumers could damage the reputation of the fashionmall.com brand. The lack of
market acceptance of such efforts or our inability to generate satisfactory
revenues from such expanded services or products to offset their cost could have
a material adverse effect on the Company's business, results of operations and
financial condition.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to access to online commerce.
However, due to the increasing popularity and use of the Internet and other
online services, it is possible that laws and regulations may be adopted with
respect to the Internet or other online services covering issues such as user
privacy, pricing, content, copyrights, distribution, and characteristics and
quality of products and services. Furthermore, the growth and development of the
market for online commerce may prompt more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for our products and services and increase our cost of doing
business. Moreover, the applicability to the Internet and other online services
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes and personal privacy is uncertain and may take
years to resolve. In addition, as our Web site is available over the Internet in
many states and foreign countries, and as we sell to numerous consumers residing
in such states and foreign countries, such jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each such state
and foreign country. We are qualified to do business in only two states, and our
failure to qualify as a foreign corporation in a jurisdiction where such
qualification is required could subject us to taxes and penalties for the
failure to qualify. Any such new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could have a material adverse effect on our business.
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DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
Our future success depends, in part, on the continued services of our senior
management, particularly Benjamin Narasin, our President and Chief Executive
Officer. Our future success also depends on our ability to retain and motivate
our key employees. The loss of the services of Mr. Narasin or any key employee
would have a material adverse effect on our business, results of operations and
financial condition. We intend to obtain key man life insurance on the life of
Mr. Narasin, but may be unable to obtain adequate insurance on satisfactory
terms. Except for Mr. Narasin, none of our officers or key employees is bound by
an employment agreement for any specific term. Our relationships with these
officers and key employees can be terminated at any time.
Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial, merchandising,
marketing and customer service personnel. Competition for such personnel is
intense, and we cannot be certain that we will be able to successfully attract,
assimilate or retain sufficiently qualified personnel. Our inability to do so
could have a material adverse effect on our business, results of operations and
financial condition. We intend to hire a chief financial officer within the next
several weeks. We cannot be certain that such chief financial officer will
effectively work together with our current management team. Please see
"Business--Employees" and "Management."
POTENTIAL INABILITY TO PROTECT TRADEMARKS AND PROPRIETARY RIGHTS
Although our ability to compete depends, to some extent, upon copyright law
and confidentiality agreements, we believe that the technical and creative
skills of our personnel, continued development of our proprietary systems and
technology, brand name recognition and reliable Web site maintenance are more
essential in establishing and maintaining a leadership position and
strengthening our brand. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our services or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our proprietary rights is difficult. Other than our registration of certain
domain names, we do not have any other protection for the "fashionmall.com"
name. We do not believe that we or anyone else can obtain protection for such
name in the United States. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
products and services are made available online. In addition, litigation may be
necessary in the future to enforce or protect our intellectual property rights
or to defend against claims or infringement. As part of our confidentiality
procedures, we generally enter into agreements with our employees and
consultants. We cannot assure that the steps taken by us will prevent
misappropriation of technology or that the agreements entered into for that
purpose will be enforceable. Misappropriation of our intellectual property or
the costs associated with litigation related thereto could have a material
adverse effect on our business, results of operations and financial condition.
PROTECTION OF DOMAIN NAME IS UNCERTAIN
We currently hold various Web domain names relating to our brand, including
the "fashionmall.com" and "Outletmall.com" domain names. The acquisition and
maintenance of domain names generally is regulated by governmental agencies and
their designees. For example, in the United States, the National Science
Foundation has appointed Network Solutions, Inc. as the current exclusive
registrar for the ".com", ".net" and ".org" generic top-level domains. The
regulation of domain names in the United States and in foreign countries is
subject to change in the near future. Such changes in the United States are
expected to include a transition from the current system to a system which is
controlled by a non-profit corporation and the creation of additional top-level
domains. Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, we may be unable to acquire or maintain relevant domain
names in all countries in which we conduct business. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary
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rights is unclear. Therefore, we may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of our proprietary rights.
NO PUBLIC MARKET FOR THE COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for our common
stock. We cannot assure that an active trading market will develop or be
sustained or that the market price of the common stock will not decline. Even if
an active trading market does develop, the market price of the common stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to factors such as:
- actual or anticipated variations in our quarterly operating results;
- announcements of new product or service offerings;
- technological innovations;
- competitive developments;
- changes in financial estimates by securities analysts;
- conditions and trends in the Internet and electronic commerce industries;
- changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies; and
- general market conditions and other general factors.
Further, the stock markets, and in particular the Nasdaq National Market,
have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies and
have often been unrelated or disproportionate to the operating performance of
such companies. Additionally, the market price of our common stock could be
adversely affected by losses or other negative news regarding one or more other
companies, despite the fact that such information is not related specifically to
us and may even be contradictory to information that is specifically applicable
to us. The trading prices of many technology companies' stocks are at or near
historical highs. We cannot assure that such high trading prices will be
sustained. These broad market factors may adversely affect the market price of
our common stock. In addition, general economic, political and market conditions
such as recessions, interest rates or international currency fluctuations, may
adversely affect the market price of the common stock. Trading in Internet
stocks has been extremely volatile, and recent newspaper articles have suggested
that, in response to such volatility, the Nasdaq National Market is considering
authorizing trading halts on such stocks under certain circumstances and that
certain broker-dealer firms have imposed restrictions on purchasing Internet
stocks with borrowed funds. We are unable to predict whether the Securities and
Exchange Commission, Nasdaq, broker-dealers or others may adopt regulations or
internal policies governing trading in Internet stocks or the impact of any such
regulations or policies. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against such a company. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on our business, results
of operations and financial condition.
CONTROL BY EXISTING STOCKHOLDERS
Following this offering, approximately 45.6% of the outstanding common stock
will be beneficially owned by Benjamin Narasin, our President and Chief
Executive Officer, and approximately 11.4% will be beneficially owned by Richard
A. Eisner & Company, LLP ("RAE"). Accordingly, Mr. Narasin and RAE will have
substantial influence over the outcome of any matter submitted to a vote of
stockholders, including the election of directors and the approval of
significant corporate transactions (such as acquisitions of us or our assets).
Such influence could delay or prevent a change of control of our Company. Please
see "Principal Stockholders" and "Description of Securities."
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RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
We are in the process of conducting an analysis to determine the extent to
which our own and our major suppliers' or other third parties' systems (insofar
as they relate to our business) are subject to the Year 2000 issue. We are
currently unable to predict the extent to which the Year 2000 issue will affect
these third parties, or the extent to which we would be vulnerable to such third
parties' failure to remediate any Year 2000 issues on a timely basis. The
failure of a major supplier subject to the Year 2000 to convert its systems on a
timely basis or a conversion that is incompatible with our systems could have a
material adverse effect on our business, results of operations and financial
condition. In the event that our production, operational and Web-hosting
facilities that support our Web sites are not Year 2000 compliant, some or all
of our Web sites may become unavailable to our users. The Year 2000 readiness of
the general infrastructure necessary to support our operations is difficult to
assess. For instance, we depend on the integrity and stability of the Internet
to provide our services. In addition, most of the purchases from our Web site
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
the Year 2000 issues that are not rectified by their credit card vendors.
NO DIVIDENDS
We have never paid any cash or other dividends on our common stock. Payment
of dividends on our common stock is within the discretion of the Board of
Directors and will depend upon our earnings, our capital requirements and
financial condition, and other factors deemed relevant by the Board. For the
foreseeable future, the Board intends to retain future earnings, if any, to
finance our business operations and does not anticipate paying any cash
dividends with respect to the common stock. Please see "Management's Discussion
and Analysis and Results of Operations--Liquidity and Capital Resources" and
"Dividend Policy."
ANTI-TAKEOVER PROVISIONS
Certain provisions of our Certificate of Incorporation, our Bylaws and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so might be beneficial to our stockholders. Please see "Description of
Securities."
DILUTION
The initial public offering price per share will exceed the net tangible
book value per share. Accordingly, investors purchasing shares in this offering
will incur immediate and substantial dilution in their investment. To the extent
outstanding options and warrants to purchase common stock are exercised, there
will be further dilution. Please see "Dilution."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
We currently anticipate that the net proceeds from this offering, together
with available funds and cash flow from operations, will be sufficient to meet
our anticipated working capital needs for at least the next 12 months. We may
need to raise additional funds in the future in order to fund more aggressive
brand promotion or more rapid expansion, to develop new or enhanced services, to
respond to competitive pressures or to acquire complementary businesses,
technologies or services. We cannot assure you that any required additional
financing will be available on terms favorable to us, or at all. If additional
funds are raised by our issuing equity securities, stockholders may experience
dilution of their ownership interest and such securities may have rights senior
to those of the holders of our
19
<PAGE>
common stock. If additional funds are raised by our issuing debt, we may be
subject to certain limitations on our operations, including limitations on the
payment of dividends. If adequate funds are not available or not available on
acceptable terms, we may be unable to fund our expansion, successfully promote
our brand name, take advantage of acquisition opportunities, develop or enhance
services or respond to competitive or business pressures, which could have a
material adverse effect on our business, results of operations and financial
condition. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DISCRETION AS TO USE OF PROCEEDS
Our management can spend the proceeds from this offering in ways which
differ from the specific proposed uses described in this prospectus. We have
also allocated a large portion of the proceeds from this offering to
discretionary uses. The stockholders may not agree with management's spending
decisions. Please see "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could decline as a result of sales of a
substantial number of shares of our common stock in the market after this
offering, or the perception that such sales could occur. Such sales also might
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate. After this offering, we will have
7,500,000 outstanding shares of common stock. Of these shares, the 3,000,000
shares being offered hereby (as well as up to an additional 450,000 shares that
may be issued to cover any underwriters' over-allotments) will be freely
tradeable.
As of the date of this prospectus, options to purchase a total of 142,500
shares of common stock are outstanding, none of which are currently exercisable.
Of such options, options to purchase 71,250 shares of common stock shall
immediately vest and become exercisable upon the closing of this offering.
Shares issued upon the exercise of stock options will be eligible for resale in
the public market from time to time subject to, in the case of certain options,
the expiration of the lock-up agreements referred to below.
As of the date of this prospectus, warrants to purchase 117,500 shares of
common stock are outstanding. Of such warrants, warrants to purchase 22,500
shares of common stock are currently exercisable, and warrants to purchase
95,000 shares of common stock become exercisable upon the closing of the
offering. Shares issued upon the exercise of such warrants will be eligible for
resale in the public market upon the expiration of the lock-up agreements
referred to below.
Our directors and officers and certain of our stockholders who hold
4,500,000 shares in the aggregate, together with the holders of options to
purchase 142,500 shares of common stock and the holders of warrants to purchase
95,000 shares of common stock, have entered into lock-up agreements pursuant to
which they have agreed that they will not sell, directly or indirectly, any
shares of common stock without the prior written consent of Gruntal & Co. for a
period of one year from the date of this prospectus.
Certain stockholders, holding 237,500 shares of common stock, together with
the holders of options to purchase 142,500 shares of common stock and the
holders of warrants to purchase 95,000 shares of common stock, have the right,
subject to certain conditions and limitations, to include their shares in
certain future registration statements relating to our securities. By exercising
their registration rights and causing a large number of shares to be registered
and sold in the public market, these holders may cause the price of the common
stock to fall. In addition, any demand to include such shares in our
registration statements could have an adverse effect on our ability to raise
needed capital. These rights are subject to the lock-up arrangements referred to
above. Please see "Principal Stockholders," "Shares Eligible for Future Sale"
and "Underwriting."
20
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 3,000,000
shares of common stock will be approximately $18,905,000, ($21,803,000 if the
Underwriters' over-allotment is exercised in full), after deducting the
underwriting discounts and estimated offering expenses, assuming a public
offering price of $7.00 per share.
We intend to use the net proceeds of the offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
USE AMOUNT NET PROCEEDS
- ---------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
Advertising and Marketing(1).................................... $ 4,200,000 22%
Hiring Personnel(2)............................................. 3,700,000 20%
Equipment and Software Purchases and Upgrades(3)................ 1,600,000 8%
Repayment of Debt(4)............................................ 1,000,000 5%
Payment of Deferred Salaries to Management and Repayment of
Loans from Stockholders(5).................................... 366,000 2%
General Corporate and Working Capital Purposes.................. $ 8,039,000 43%
------------- ---
$ 18,905,000 100%
------------- ---
------------- ---
</TABLE>
- ------------------------
(1) Includes both online and traditional advertising. Online advertising
includes banner advertising, as well as costs associated with obtaining
portal and Web site sponsorship and entering strategic alliances.
(2) Includes (a) sales personnel both to develop merchandise available for sale
online and to increase the number of tenants that advertise or promote their
products on the Company's sites, (b) content management personnel to create
and edit the content at such sites, (c) business development personnel to
establish and manage strategic alliances, and (d) certain additional
management personnel.
(3) Includes new office space and infrastructure, including, possibly, an
expanded call center and Internet-based toll-free consumer support.
(4) Includes repayment of $1,000,000 principal amount of debt incurred in
connection with the FM/CCP Financing bearing interest at a rate of 6% per
annum and due on the earlier of the closing of the offering or March 2,
2000.
(5) Includes (a) $248,000 of deferred compensation payable to Benjamin Narasin,
the Company's President and Chief Executive Officer and (b) repayment of a
$118,000 loan to RAE, a principal stockholder of the Company.
We reserve the right to reallocate proceeds to different uses if, in
management's view, the needs of the business so require. In addition, a large
portion of the proceeds is allocated to discretionary purposes. Investors may
not agree with any such allocation or reallocation.
Based on our operating plan, we believe that the net proceeds of this
offering, together with available funds on hand and cash flow from operations,
will be sufficient to satisfy our current working capital requirements for at
least 12 months following this offering. Such belief is based upon certain
assumptions (including assumptions as to our contemplated operations and
business plan and economic and industry conditions). We cannot be certain that
such resources will be sufficient for such purpose. Furthermore, if we were to
make significant acquisitions for cash consideration, we would require
additional capital. In addition, contingencies may arise that may require us to
obtain additional capital. We cannot be certain that we will be able to obtain
such capital on favorable terms or at all. Pending use of the net proceeds of
this offering, we intend to invest the net proceeds in short-term, interest-
bearing, investment grade securities. Please see "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
21
<PAGE>
DIVIDEND POLICY
We have not paid dividends on our common stock since inception and do not
intend to pay any dividends to our stockholders in the foreseeable future. We
currently intend to retain earnings, if any, for the development and expansion
of our business. The declaration of dividends in the future will be at the
election of the Board of Directors and will depend upon our earnings, capital
requirements and financial position, general economic conditions and other
factors our Board believes are relevant.
DILUTION
The net tangible book value (deficit) of the Company as of December 31,
1998, was approximately $(234,000), or $(0.05) per share pro forma of common
stock. Pro forma net tangible book value, giving effect to the issuance of
shares and debt in connection with the FM/CCP Financing and the receipt and
application of the estimated net proceeds from the sale of the 3,000,000 shares
of common stock offered hereby, at an assumed initial public offering price of
$7.00 per share, would have been $19,617,000, or $2.62 per share. This
represents an immediate increase in the pro forma net tangible book value of
$2.67 per share to existing stockholders and an immediate dilution in pro forma
net tangible book value of $4.38 per share to new investors. Please see "Certain
Relationships and Related Transactions" and "Description of Securities." The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 7.00
Net tangible book value (deficit) per pro forma share as of
December 31, 1998.......................................... $ (0.05)
Increase in net tangible book value per share attributable to
new investors.............................................. 2.67
---------
Pro forma net tangible book value per share after the
offering................................................... 2.62
---------
Dilution per share to new investors.......................... $ 4.38
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1998, the differences between the number of shares of common stock purchased
from the Company, the total consideration paid and the average price per share
paid by existing stockholders (including the issuance of 225,000 shares of
common stock to FM/CCP Investment Partners, LLC) and by new investors (at an
assumed offering price of $7.00 per share and before deducting estimated
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED
----------------------- TOTAL AVERAGE
NUMBER PERCENT AMOUNT PRICE PER SHARE
---------- ----------- ------------- -----------------
<S> <C> <C> <C> <C>
Existing stockholders................... 4,500,000 60% $ 1,411,000 $ 0.31
New investors........................... 3,000,000 40% 21,000,000 7.00
---------- --- -------------
7,500,000 100% $ 22,441,000
---------- --- -------------
---------- --- -------------
</TABLE>
The foregoing discussion and table assumes no exercise of outstanding
options or warrants subsequent to December 31, 1998, and excludes: (i) an
aggregate of 1,125,000 shares of common stock reserved for future grants or
purchases under the Company's 1999 Stock Option Plan; (ii) 237,500 shares
reserved for issuance for warrants and options issued in connection with the
FM/CCP Financing as well as up to 12,500 shares which may be issued upon
exercise of such options and warrants; (iii) 22,500 shares of common stock
reserved for issuance upon the exercise of warrants issued to Wit Capital as
placement agent for the FM/CCP Financing, and (iv) 300,000 shares of common
stock reserved for issuance upon the exercise of the Representative's Warrants.
Please see "Management-- 1999 Stock Option Plan," "Certain Relationships and
Related Transactions," "Description of Securities" and "Underwriting."
22
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1998: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company,
giving effect to (a) the sale of shares of common stock to FM/CCP
Investment Partners LLC for $1,000,000 and (b) the issuance of $1,000,000
principal amount of 6% notes payable to FM/CCP Investment Partners LLC, (iii)
the reorganization of Internet Fashion Mall LLC into fashionmall.com, Inc., and
(iv) the pro forma as adjusted capitalization of the Company adjusted to reflect
(a) the FM/CCP Financing, (b) the issuance of the 3,000,000 shares of common
stock offered hereby (assuming an initial offering price of $7.00 per share) and
the receipt of the estimated net proceeds therefrom and (c) the repayment of the
$1,000,000 notes payable to FM/CCP Investment Partners, LLC, and the deferred
salaries to management and loans to stockholders, totaling $366,000. Please see
"Use of Proceeds" and "Description of Securities."
<TABLE>
<CAPTION>
PRO FORMA
AS
ACTUAL PRO FORMA A(1) PRO FORMA B(1)(2) ADJUSTED(3)
----------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
Long-term obligations:
6% notes payable(4)........ $ -- $ 963,000 $ 963,000 $ --
Stockholders' equity:
Common stock--$.01 par
value; 35,000,000
shares authorized; 0,
0, 4,500,000 and
7,500,000 shares issued
and outstanding,
respectively........... -- -- 45,000 75,000
Additional paid-in
capital(5) -- 136,000 757,000 19,632,000
Members' contributed
capital................ 411,000 1,219,000 -- --
Accumulated deficit...... (553,000) (553,000) -- (37,000)
----------- --------------- ----------------- -------------
Total stockholders'
(deficit) equity......... (142,000) 802,000 802,000 19,670,000
----------- --------------- ----------------- -------------
Total capitalization..... $ (142,000) $ 1,765,000 $ 1,765,000 $19,670,000
----------- --------------- ----------------- -------------
----------- --------------- ----------------- -------------
</TABLE>
- ------------------------
(1) Gives effect to (i) the sale of equity interest to FM/CCP Investment
Partners, LLC for $1,000,000 and (ii) the issuance of $1,000,000 principal
amount of 6% notes payable to FM/CCP Investment Partners, LLC.
(2) Assumes the reorganization of Internet Fashion Mall LLC into
fashionmall.com, Inc. See Note 8 of Notes to Financial Statements.
(3) Excludes: (i) an aggregate of 1,125,000 shares of common stock reserved for
future grants or purchases under the Company's 1999 Stock Option Plan, (ii)
95,000 shares of common stock reserved for issuance upon exercise of
warrants issued in connection with the FM/CCP Financing, (iii) 142,500
shares of common stock reserved for issuance upon exercise of options issued
to Jerome Chazen, a director of the Company, (iv) up to 12,500 shares
issuable upon exercise of the options and warrants referred to in (ii) and
(iii) above, and (v) 300,000 shares of common stock reserved for issuance
upon exercise of Representative's Warrants. Please see "Management--1999
Stock Option Plan," "Certain Relationships and Related Transactions,"
"Description of Securities" and "Underwriting."
(4) Net of the fair value of warrants issued in conjunction with notes payable
of $37,000.
(5) Includes amounts assigned to warrants issued in conjunction with notes
payable and warrants issued to placement agent as a portion of the finders
fee for the private placement.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The balance sheet information as of December 31, 1998 and the income
statement data set forth below for the years ended December 31, 1997 and 1998
are derived from the Company's audited financial statements included elsewhere
in this prospectus. The balance sheet information as of December 31, 1995, 1996
and 1997 and the income statement data for the years ended December 31, 1995 and
1996 are derived from the Company's unaudited financial statements. The
unaudited financial statements have been prepared on substantially the same
basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for the period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
<S> <C> <C> <C> <C>
1995(1) 1996
(UNAUDITED) (UNAUDITED) 1997 1998
----------- ----------- ------------ ------------
STATEMENT OF OPERATIONS DATA:
Site revenues.................................... $ 14,000 $ 219,000 $ 1,253,000 $ 2,055,000
Cost and Expenses:
Site development, merchandise and content........ 34,000 177,000 150,000 270,000
Advertising and marketing expense................ 38,000 251,000 696,000 1,104,000
Selling expense.................................. 32,000 102,000 122,000 257,000
General and administrative expense............... 44,000 140,000 283,000 413,000
----------- ----------- ------------ ------------
148,000 670,000 1,251,000 2,044,000
----------- ----------- ------------ ------------
(Loss) income from operations.................... (134,000) (451,000) 2,000 11,000
Other income..................................... -- -- 1,000 3,000
----------- ----------- ------------ ------------
Net (loss) income--historical.................... $ (134,000) $ (451,000) $ 3,000 $ 14,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Pro forma net (loss) income(2)................... $ (134,000) $ (451,000) $ 3,000 $ 14,000
Pro forma basic net (loss) income
per share(2)................................... (0.03) (0.10) * *
Pro forma diluted net (loss) income
per share(2)................................... (0.03) (0.10) * (0.04)
Shares used in the calculation of pro forma net
(loss) income per share(3):
Basic.......................................... 4,500,000 4,500,000 4,500,000 4,500,000
Diluted........................................ 4,500,000 4,500,000 4,500,000 4,368,000
</TABLE>
- ------------------------------
* less than $0.01
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 AS ADJUSTED
(UNAUDITED) (UNAUDITED) (UNAUDITED) 1998 (4)
----------- ----------- ----------- ----------- --------------
BALANCE SHEET DATA:
Cash.................................. $ -- $ -- $ 66,000 $ 82,000 $ 19,536,000
Working (deficiency) capital.......... (99,000) (18,000) 117,000 (247,000) 19,199,000
Total assets.......................... -- 74,000 274,000 508,000 19,923,000
Total liabilities..................... 99,000 294,000 491,000 650,000 253,000
Members' deficit/stockholders'
equity.............................. (99,000) (220,000) (217,000) (142,000) 19,670,000
</TABLE>
- ------------------------------
(1) The results of operations for the year ended December 31, 1995 includes
the operations of the Company from its commencement of operations on
December 22, 1994 to August 1995, which reflected a net (loss) of
($15,000) with revenues of $2,000.
24
<PAGE>
(2) Computed on the basis described in Note 3 of Notes to Financial
Statements and assuming the pro forma tax provisions described therein.
Prior to this offering, the Company will effect a reorganization, in
which the Company will change from a limited liability company to a C
corporation.
(3) See Note 3 of Notes to Financial Statements for an explanation of the
determination of shares used in computing pro forma net income (loss) per
share (basic and dilutive).
(4) As adjusted to reflect (i) the issuance and sale of the 3,000,000 shares
of common stock offered hereby (assuming an initial public offering price
of $7.00 per share), and the receipt and application of the estimated net
proceeds therefrom, (ii) the FM/CCP Financing, and (iii) the repayment of
the $1,000,000 notes payable to FM/CCP Investment Partners, LLC, and the
deferred salaries to management and loans to stockholders, totaling
$366,000. See Note 8 of Notes to Financial Statements.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes thereto.
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding the Company's current business strategy
and the Company's plans for future development and operations, are based upon
current expectations. These statements are forward-looking in nature and involve
a number of risks and uncertainties. Generally, the words "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to the
Company and its management are intended to identify forward-looking statements.
Actual results may differ materially. Among the factors that could cause actual
results to differ materially are those set forth under "Risk Factors." The
Company urges prospective investors to exercise caution and not to place undue
reliance on any such forward-looking statements. Forward-looking statements
contained in this prospectus speak only as of the date made, and the Company
does not intend to update such information after the offering.
OVERVIEW
Our Web site (www.fashionmall.com) engages in the marketing and sale of
fashion, apparel, footwear, beauty and related lifestyle products and
accessories over the Internet. fashionmall.com, Inc. combines an online shopping
mall with fashion content to provide a centralized site for manufacturers,
retailers, magazines and catalogs to advertise, display and sell their product
lines.
To date, our revenue has primarily come from fees paid by tenants for their
inclusion on the fashionmall.com site. However, we expect to derive significant
revenue from expansion of our direct electronic commerce ("e-commerce") sales of
apparel and related merchandise through our own online stores. We believe that
the e-commerce apparel market is large and growing and that our brand
recognition and site traffic position us to take advantage of that opportunity.
Jupiter Communications, an independent Internet market research organization,
ranks apparel among the top five product categories for Internet sales and
estimates that the number of people shopping on the Internet will increase from
10 million in 1997 to 61 million in 2002. Our first online store is our recently
launched Outletmall.com site, through which we sell quality, branded merchandise
at significant discounts.
As of December 31, 1998, the Company had an accumulated deficit of $553,000.
We expect operating losses and negative cash flow to continue for the
foreseeable future. We anticipate our losses will increase significantly from
current levels because we expect to incur additional costs and expenses related
to brand development; marketing and other promotional activities; hiring of
management, sales and other personnel; the expansion of our merchandise
offerings; the expansion of our infrastructure and customer support services;
strategic relationship development; and, possibly, the acquisition of related or
complementary businesses. Although we have experienced revenue growth in recent
periods, historical growth rates may not be sustainable and are not indicative
of future operating results, and there can be no assurance that we will achieve
or maintain profitability. Please see "Risk Factors-- Uncertain Profitability;
Historical Deficit; Anticipated Losses."
We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as the Internet. Such risks for us include, but are not limited to, an
evolving and unpredictable business model and management of our growth. To
address these risks, we must, among other things, maintain and expand our tenant
base and traffic to our Web site, implement and successfully execute our
business and marketing strategy, continue to develop and upgrade our technology
and transaction-processing systems, improve our Web site, provide satisfactory
customer service and order fulfillment, respond to competitive developments and
attract, retain and motivate
26
<PAGE>
qualified personnel. We cannot be certain that we will be successful in
addressing such risks, and our failure to do so could have a material adverse
effect on our business, financial condition and results of operations. Please
see "Risk Factors--Limited Operating History."
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our results of operations are not necessarily a good indication of our future
performance. It is likely that our results of operations in some future quarter
may be below the expectations of public market analysts and investors. In that
event, the price of our common stock is likely to decline. Please see "Risk
Factors-- Volatility of Quarterly Operating Results."
During the year ended December 31, 1998, 51.3% of our revenues were
generated by barter arrangements (agreements whereby we trade advertisements on
fashionmall.com in exchange for advertisements in third-party publications or on
Web sites). The corresponding barter expenses, which equal the amount of barter
revenues, are included as a component of advertising and marketing expenses.
Although we expect the percentage of barter revenue to decrease following the
offering, we intend to continue to engage in barter transactions for the
foreseeable future. See Note 2 of Notes to Financial Statements for information
concerning the accounting treatment of barter activities.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
SITE REVENUES. Total revenues increased by $802,000, or 64%, to $2,055,000
in 1998, compared to $1,253,000 in 1997. Barter revenue increased by $321,000,
or 44%, to $1,055,000 in 1998, compared to $734,000 in 1997. The increase was
due to increased industry acceptance of the fashionmall.com model resulting in
additional new clients and increased rates for space on fashionmall.com based on
traffic growth.
EXPENSES. Total expenses of the business increased from $1,251,000 in 1997
to $2,044,000 in 1998. The increase was due to increased expenditures for
technical staff, increased barter advertising and increased equipment and
infrastructure needs. The Company capitalizes costs incurred in the process of
creating software for internal use. The capitalized software costs are amortized
on a straight-line basis over the estimated useful life of two years. At
December 31, 1998, approximately $67,000 of capitalized software costs had been
incurred; prior to 1998, such costs were not material. Amortization expense for
the year ended December 31, 1998, was $9,000 and is included in general and
administrative expenses.
SITE DEVELOPMENT, MERCHANDISE AND CONTENT. Site development, merchandise
and content expenses increased by $120,000, or 80%, to $270,000 in 1998,
compared to $150,000 in 1997. The increase was primarily due to increased
payroll for site development related salaries as well as increased costs of
content creation and merchandise for the Company's Web site.
ADVERTISING AND MARKETING. Advertising and marketing expenses increased by
$408,000, or 59%, to $1,104,000 in 1998, compared to $696,000 in 1997. The
increase was primarily due to increased barter advertising expense primarily
related to increased print advertising on behalf of the fashionmall.com brand
and some online banner advertising programs. We expect these expenses will
continue to grow significantly, as we pursue an aggressive growth strategy and
aggressively market the fashionmall.com brand through both print and online
advertising.
SELLING EXPENSES. Selling expenses increased by $135,000, or 111%, to
$257,000 in 1998, compared to $122,000 in 1997. The increase was primarily due
to increased payroll and salaries for sales staff. We expect these expenses will
continue to grow significantly, as we pursue an aggressive growth strategy and
hire additional sales personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $130,000, or 46%, to $413,000 in 1998, compared to $283,000 in 1997. The
increase was primarily due to increased payroll expenses associated with the
management team and additional support staff required by our growth.
27
<PAGE>
We expect these expenses to grow as additional personnel are hired and
additional expenses are incurred. These increased expenses relate to growing our
business and operating as a public company.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
SITE REVENUES. Total revenues increased by $1,034,000, or 472%, to
$1,253,000 in 1997, compared to $219,000 in 1996. Barter revenue increased by
$586,000, or 396%, to $734,000 in 1997, compared to $148,000 in 1996. The
increase was due to the expansion of the sales staff, increased pricing for
fashionmall.com space and the adoption of a performance based pricing model that
allowed us to increase our revenue as traffic increased.
EXPENSES. Total expenses of the business increased from $670,000 in 1996 to
$1,251,000 in 1997. The increase was due to additions to the sales staff and
barter advertising, as well as increased selling expenses and general and
administrative expenses.
SITE DEVELOPMENT, MERCHANDISE AND CONTENT. Site development, merchandise
and content expenses decreased by $27,000, or 15%, to $150,000 in 1997, compared
to $177,000 in 1996. The decrease was primarily due to reduced costs of
programming and site administration through increased utilization of dedicated
staff and reduced reliance on outside contractors.
ADVERTISING AND MARKETING. Advertising and marketing expenses increased by
$445,000, or 177%, to $696,000 in 1997, compared to $251,000 in 1996. The
increase was primarily related to increased print advertising on behalf of the
fashionmall.com brand and some online advertising programs.
SELLING EXPENSES. Selling expenses increased by $20,000, or 20%, to
$122,000 in 1997, compared to $102,000 in 1996. The increase was primarily due
to increased payroll and freelance salaries for sales staff.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $143,000, or 102%, to $283,000 in 1997, compared to $140,000 in
1996. The increase was primarily due to increased payroll and professional fees.
LIQUIDITY AND CAPITAL RESOURCES
From inception, we have financed our operations primarily from private
investment and cash flows from operations.
At December 31, 1998, we had cash and cash equivalents on hand of $82,000.
During the years ended December 31, 1998 and 1997, our owners loaned us
funds to cover various costs and expenses, including, but not limited to,
salaries and other general and administrative expenses. These loans are
non-interest bearing and are due on demand. At December 31, 1998 and 1997,
amounts due to the owners totaled $96,000 and $167,000, respectively. Also
during 1997, an owner loaned us $24,000 for payroll. The loan is repayable in
equal installments over 12 months. The loan does not bear interest. At December
31, 1998 and 1997, the outstanding loan balance totaled $22,000 and $24,000,
respectively. As of March 8, 1999, loans from owners aggregated $22,000, all of
which will be repaid from the net proceeds of the offering.
We had no material commitments for capital expenditures at December 31,
1998. As of that date, we had no minimum lease obligations as the operating
lease of office space is month to month. As of December 31, 1998, we had
deferred compensation of $248,000 representing money owed to our President (who
is also a principal stockholder) for services rendered, which will be paid from
the net proceeds of the offering.
We intend to take ownership of inventory as we expand our online direct
sales of apparel and related merchandise through our online stores. As a result,
we may be subject to significant inventory risks which could have a material
adverse effect on our business, financial condition and results of operations.
Please see "Risk Factors--Inventory Risk."
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We believe that the net proceeds from this offering, together with funds on
hand and any cash flow from operations, will be sufficient for the next 12
months. Depending on our rate of growth and cash requirements, we may require
additional equity or debt financing to meet future working capital or capital
expenditure needs. There can be no assurance that such additional financing will
be available or, if available, that such financing can be obtained on terms
satisfactory to us. Please see "Risk Factors--Future Capital Needs; Uncertainty
of Additional Financing."
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We may realize exposure and risk if the systems on which we are dependent
to conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. We are in the process of
conducting an analysis to determine the extent to which our own and our major
suppliers' or other third parties' systems (insofar as they relate to our
business) are subject to the Year 2000 issue. We expect to resolve any internal
Year 2000 compliance issues primarily through normal upgrades of our software
or, when necessary, through replacement of existing software with Year 2000
compliant applications. The cost of these upgrades or replacements is included
in our capital expenditure budget and is not expected to be material to our
financial position or results of operations. We estimate that our total cost to
become Year 2000 compliant will not exceed $50,000. However, such upgrades and
replacements may not be completed on schedule or within estimated costs or may
not successfully address our Year 2000 compliance issues.
We are also dependent on Year 2000 compliance of third parties. Examples
include credit card processing, server hosting and delivery of goods by the
United States Postal Service or other third party carriers. We are in the
process of seeking verification from our key distributors, vendors and suppliers
that they are Year 2000 compliant or, if they are not presently compliant, to
provide a description of their plans to become so.
In the event that our production and operational facilities that support our
Web sites are not Year 2000 compliant, some or all of our Web sites may become
unavailable. Our review of our systems has shown that there is no single
application that would make our Web sites totally unavailable and we believe
that we can quickly address any difficulties that may arise.
In the event that our Web-hosting facilities are not Year 2000 compliant,
our Web sites would be unavailable and we would not be able to deliver services
to our users. If our present efforts to address the Year 2000 compliance issues
are not successful, or if distributors, suppliers and other third parties with
which we conduct business do not successfully address such issues, our business,
operating results and financial position could be materially and adversely
affected.
Although we are assessing contingency plans (such as using other third party
carriers if one or more are unavailable due to Year 2000 problems) our
dependence on third parties may make it impossible to develop or implement an
adequate contingency plan.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. SFAS No. 130 offers alternatives for
presentation of disclosures required by the standard. The adoption of SFAS No.
130 has no impact on our results of operations, financial position or cash
flows.
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In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segment of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way the public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about the operating segments
in interim financial reports issued to shareholders. This statement is effective
for financial statements for periods beginning after December 15, 1997 and need
not be applied to interim periods in the initial year of application.
Comparative information for earlier years presented is to be restated. The
adoption of this statement has no impact on our results of operations, financial
position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." Statement of Position 98-1 is effective
for financial statements for years beginning after December 15, 1998. Statement
of Position 98-1 provides guidance on accounting for computer software developed
or obtained for internal use, including the requirement to capitalize specified
costs and amortization of such costs. We do not expect this standard to have a
material effect on our capitalization policy.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits," which revises employers' disclosures
about pension and other post-retirement benefit plans. SFAS No. 132 does not
change the measurement or recognition of those plans. SFAS No. 132 is effective
for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 132
has no impact on our results of operations, financial position or cash flows.
In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. As we have
expensed these costs historically, the adoption of this standard is not expected
to have a significant impact on our results of operations, financial position or
cash flows.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. As we do not currently engage or plan to engage
in derivative or hedging activities, there will be no impact to our results of
operations, financial position or cash flows upon the adoption of this standard.
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BUSINESS
OVERVIEW
The Company's Web site (www.fashionmall.com) engages in the marketing and
sale of fashion, apparel, footwear, beauty and related lifestyle products and
accessories over the Internet. Fashionmall.com combines the concept of an online
shopping mall with fashion content to provide a centralized site for
manufacturers, retailers, magazines and catalogs to advertise, display and sell
their product lines. The Company's revenues have grown from $219,000 in 1996 to
$2,055,000 in 1998. fashionmall.com has become one of the most popular sites for
apparel and fashion-related content on the Internet.
fashionmall.com is divided into several areas, each consisting of a number
of fashion/apparel content and magazine company "tenants" whose sales and
marketing efforts are generally aimed towards a certain target market. These
areas currently focus on specific markets including upscale fashion, teen
fashion, sports apparel and beauty. fashionmall.com has a diverse tenant base of
brand name companies, including Brooks Brothers, Fortunoff, dELiA*s, Skechers,
Steve Madden and Liz Claiborne.
DEVELOPMENT OF ONLINE FASHION/APPAREL SHOPPING INDUSTRY
The fashion/apparel retail industry is a well established, approximately
$170 billion component of the U.S. retail economy. Historically, the
fashion/apparel industry has been a leader in the development of new
distribution channels. Shopping destinations for apparel and related merchandise
have evolved over the years from department stores such as Macy's and
Bloomingdales to malls and outlet malls where a variety of retail and specialty
stores (apparel and non-apparel) are conveniently centralized for shoppers in
one location. The ambition of apparel companies to further capitalize on the
customer's desire for convenience fueled the growth of the catalog industry.
Companies such as L.L. Bean, Lands' End and J. Crew have established the print
catalog as a vehicle through which customers purchase apparel from the
convenience and comfort of their home or office. In the past decade, companies
such as QVC and Home Shopping Network, Inc. have applied the same principles to
the medium of television and created a new, multi-billion dollar industry.
Today, the Internet represents a new, global distribution channel for the
fashion/apparel industry to exploit.
The Company believes that the Internet is particularly well-suited for
promoting, marketing and selling merchandise such as apparel. The Company's
fashionmall.com site combines the mall concept of grouping retail and speciality
venues in a centralized location with the at-home shopping convenience of
catalog sales and television home shopping. A retail site on the Internet can
provide direct product service and information to a large number of users
located throughout the world simultaneously with a substantially smaller sales
staff than traditional retailers, and has the ability to rapidly and continually
update such information. Internet merchandisers, unlike traditional department
stores or mall operations, are not limited by the constraints or expenses of
store or mall construction and rental, or the difficulty of consumers traveling
to their locations. In contrast to catalog merchandisers, Internet retailers can
react quickly to the need to change product description advertising and
promotional materials, pricing and mix and are not subject to the costs of
catalog publication and distribution. The Internet is a highly interactive
medium through which shopper responses and preferences can be tracked, thereby
enabling the merchandiser to customize the online stores, advertising and
promotional materials and to target specific consumer groups and individuals.
Jupiter Communications ("Jupiter"), an independent Internet market research
organization, estimates that the number of people shopping on the Internet will
increase from 10 million in 1997 to 61 million in 2002. Jupiter also estimates
that these shoppers will increase their spending on products offered on the
Internet from $2.6 billion in 1997 to $41 billion in 2002. According to a study
released by the Marketing Corporation of America, approximately $8.2 billion was
spent online during the 1998
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holiday season. According to Jupiter, apparel now ranks among the top five
product categories for Internet sales. The Company believes that the volume of
online apparel sales will grow quickly as the Internet develops as a
distribution channel and the Company feels that it is well positioned to
capitalize on this market opportunity.
BUSINESS OBJECTIVE AND STRATEGIES
The Company's objective is to be the primary fashion/apparel destination on
the Internet.
In order to achieve this objective, the Company intends to:
- increase brand awareness and site traffic;
- expand its tenant base;
- convert increased traffic into additional tenant fees;
- convert increased traffic into e-commerce revenues; and
- create customer loyalty and retention.
INCREASE BRAND AWARENESS AND TRAFFIC
The Company believes that building awareness of the fashionmall.com brand is
critical in its effort to be the premier site for fashion/apparel on the
Internet. Consequently, the Company is focused on building on its traffic by (i)
aggressively marketing the Company's site and (ii) entering into key strategic
alliances with high-traffic Web sites.
ADVERTISING AND MARKETING
The Company utilizes numerous marketing techniques to increase brand
recognition and traffic, including both traditional and online advertising. To
date, the Company's lack of financial resources has limited its ability to spend
the funds necessary to increase its brand recognition and traffic to desired
levels. The Company intends to use a substantial part of the proceeds from this
offering to significantly increase its marketing efforts.
The Company promotes its site through print advertising in industry and
consumer publications. To date, due to its limited financial resources, the
Company's use of advertising has primarily been through barter arrangements. The
Company provides space for magazines on fashionmall.com in exchange for
advertising in their print publications. In 1998, the Company placed
approximately $1,038,000 worth of advertising through this model. Upon
consummation of this offering, the Company intends to increase its cash payments
in promotion of its site in print publications. In addition, the Company has
utilized, and intends to utilize, outdoor media, trade shows and radio and
television promotions.
The Company's online marketing tactics include sponsorship agreements with
well-known companies, as well as banner advertising on various Web sites. The
Company's sponsorship agreements include an agreement with VISA pursuant to
which the VISA logo and payment option are integrated into fashionmall.com in
exchange for a fee and promotion of fashionmall.com by VISA. The Company also
has an agreement with CBS Sportsline, a leading sports Web site, pursuant to
which the Company places CBS Sportsline as the sponsor of a newly developed
"Sports" area on fashionmall.com. The Company plans to pursue agreements with
other brand name companies to cross-promote each other's products or services.
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STRATEGIC ALLIANCES
To date, the Company has focused its consumer marketing efforts on
fashionmall.com's placement on selected high traffic Web sites. The Company has
formed key strategic alliances with two of the highest trafficked portals on the
Internet: Excite (and by extension Netscape, Prodigy and Webcrawler) and
Microsoft/MSN. These relationships are designed to attract additional traffic to
the Company's Web site, thereby directing traffic to tenants' sites,
representing a significant opportunity for brand awareness, traffic creation,
and revenue growth. The Company intends to develop relationships with additional
high traffic Web sites after the consummation of the offering.
- EXCITE. Excite is currently the sixth ranked Web site in terms of unique
monthly visitors. The Company and Excite entered into an agreement
effective as of June 5, 1998, pursuant to which Excite features
fashionmall.com on the "Clothes and Beauty" channel within the Excite
shopping area. The area contains content and merchandising offers from
fashionmall.com. The Company and Excite each receive a share of certain
revenues generated from each other's respective site. Through Excite's
recent agreement with Netscape for frontal positioning in the Netscape
search area as well as Excite's agreement to provide content (including
the Company's) for the Netscape.com home page, the Company is receiving
exposure on Netscape's site as well (although there can be no assurance
that this positioning will continue). Netscape is currently the fifth
ranked site in terms of unique monthly visitors. In addition, the Company
will receive exposure through Excite's agreement to provide content
(including the Company's) for Prodigy's Internet Service and its ownership
of the Webcrawler search engine. The agreement has a one-year term with a
subsequent six-month automatic renewal provision, unless either party
notifies the other of its determination not to renew.
- MICROSOFT/MSN. Microsoft.com is currently the fourth ranked Web site in
terms of unique monthly visitors. The Company and Microsoft entered into
an agreement effective as of March 4, 1998, pursuant to which Microsoft
features fashionmall.com on the "Clothes and Accessories" channel within
MSN's shopping area, and also features fashionmall.com on Microsoft.com,
Expedia, and other Microsoft sites. Microsoft has also agreed to work with
the Company on various joint promotions and "special offers" through this
agreement and through the fashionmall.com site. Pursuant to their
agreement, the Company will pay Microsoft a certain fee per month in
addition to a percentage of the commissions earned by fashionmall.com. The
agreement has a one-year term with subsequent automatic renewal
provisions, unless either party notifies the other of its determination
not to renew.
The Company also has a content licensing agreement with Yahoo! effective as
of March 1, 1998 for the placement of fashionmall.com within the Yahoo! shopping
area to give the site access to Yahoo!'s visitor base. In addition, the Company
has agreements with Amazon.com, Inktomi and several other high traffic Web sites
designed to attract traffic to fashionmall.com.
In addition to the above agreements, the Company has an affiliates program
consisting of other Web sites which provide traffic to the Company's site in
exchange for a percentage of revenue generated or for other consideration. At
present, these relationships primarily represent traffic generation and brand
building vehicles. The Company has been solicited by numerous Web sites desiring
affiliate status. The Company plans to pursue marketing agreements and other
strategic alliances with these and other leading Internet companies.
EXPANSION OF THE COMPANY'S TENANT BASE
The Company believes that it has assembled a collection of well-recognized
brand name tenants. To accomplish the Company's goal of being the primary
fashion/apparel destination on the Internet, the Company intends to add to its
tenant roster through an aggressive sales campaign. As fashionmall.com's brand
and site recognition and traffic increase, the Company believes that it will be
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able to attract additional national designer and brand name companies as
tenants. In this connection, upon consummation of this offering, the Company
plans to hire additional sales personnel who will be charged with developing and
establishing relationships with apparel companies. Recruitment of staff for this
effort is a primary use of the proceeds from this offering.
fashionmall.com is the home to, or provider of traffic for, tenants
representing a variety of fashion/ apparel companies. Types of tenants include:
(i) manufacturers, (ii) retailers, (iii) catalogs and (iv) magazines, including
such recent additions as Brooks Brothers, dELiA*s, Skechers and Steve Madden.
MANUFACTURERS. The Company's largest group of tenants are manufacturers of
apparel, accessories and beauty products. These manufacturers lease space on
fashionmall.com to provide promotional and educational material, educating
consumers as to the manufacturer's products and stimulating purchases of such
products online or off-line. In addition, manufacturers may use fashionmall.com
for customer research, mailing list creation and product testing.
CATALOGS. Catalog companies currently comprise a small percentage of the
Company's tenants, but represent a growing target of the Company as tenants on
fashionmall.com. The Company believes that it can assist manufacturers and
retailers in gathering the necessary information and targeted mailing lists to
either supplant, or justify, a catalog production effort.
RETAILERS. Retailers also currently comprise a small percentage of the
Company's tenants, but represent a growing target of the Company as tenants on
fashionmall.com. Retailers have generally established their own online presence
on the Internet and use the Company's Web site as a creator of additional
traffic from targeted consumers to fuel their own online sales and/or marketing
efforts.
MAGAZINES. Fashion trade and consumer magazines and consumer lifestyle
magazines comprise an important group of the Company's tenants. Such magazines
use the Company's Web site to promote their own publication, solicit additional
advertising, deliver value back to advertisers and solicit subscriptions to
their publication. Magazine tenants may display articles (or portions thereof),
highlights of or teasers from their magazine and/or deliver advertising.
CONVERSION OF TRAFFIC INTO TENANT FEES
The Company intends to leverage the strength of its traffic and brand equity
to drive revenue growth. The Company currently generates revenue from its
tenants through: (i) tenant fees, (ii) Web site development in the form of site
construction and management, (iii) banner advertising and (iv) online sales.
TENANT FEES
Manufacturers, retailers, magazines and others pay fees to the Company to
lease space on the fashionmall.com site, thereby taking advantage of the traffic
the Web site receives to market and advertise their products. The Company's
tenants either pay fees tied to the amount of traffic the client receives (i.e.
on a per click-through basis) or a flat rate per month. The Company expects to
convert its Web site traffic into revenues by broadening the Company's base of
tenants and leveraging increased traffic into higher tenant fees.
WEB SITE DEVELOPMENT
The Company provides Web site development services to fashion/apparel
companies for Web pages to be displayed through the fashionmall.com Web site in
exchange for fees. The Company has pre-designed working models for
fashion/apparel companies who desire to get online quickly and at minimal
expense. Since incremental costs are minimal, these represent very high margin
services. In
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addition, the Company designs fully customized sites for long-term potential
fashionmall.com tenants and current tenants who desire larger sites or more
advanced features.
BANNER ADVERTISING
Although it is presently not a significant focus of the Company, the Company
offers banner advertisements on its site and intends to expand this effort to
create a new source of revenue from non-fashion/apparel advertisers.
ONLINE SALES OF TENANTS' MERCHANDISE
Revenue from online sales of tenants' apparel, accessories and related
merchandise are derived from the commissions and fees the Company receives from
the online sale of merchandise by its tenants through fashionmall.com. Tenants
who desire to sell merchandise on fashionmall.com may do so through one of two
pricing models (in addition to applicable tenant fees and Web site development
fees): (i) fashionmall.com as an intermediary in which the tenant is the direct
retailer (I.E., makes the margin between wholesale and retail) and typically
pays a commission to the Company and (ii) fashionmall.com as retailer in which
the Company purchases the tenant's merchandise at wholesale to fill customer
orders at retail at no additional cost to that tenant.
CONVERSION OF TRAFFIC INTO DIRECT ONLINE SALES
While in the past the Company has derived nominal revenues from online sales
in which the Company has acted as an intermediary or retailer, the Company sees
a significant opportunity for revenue growth from launching its own online
stores. The Company's first online store is its recently launched
Outletmall.com. site, and the Company is in the process of developing a site
devoted to teens as part of a joint venture with a print catalog company.
OUTLETMALL.COM
Outletmall.com is an adjunct to the primary fashionmall.com site--and is a
key part of the Company's strategy to grow its e-commerce transaction volume.
Outletmall.com is in an early stage of development, and consequently, the
Company has conducted limited promotion of the site. The Company intends to use
a significant portion of the net proceeds of this offering to market and build
this online store. The Company's focus with Outletmall.com is to derive revenue
from online sales. With this site, the Company is the retailer and controls the
merchandising of products and earns the entire margin of sale from any
merchandise sold. The Company's objective for Outletmall.com is to offer
consumers a variety of brand name merchandise at significant discounts from
regular retail prices and to frequently change the offered merchandise to
stimulate repeat visits to the site. The Company intends to purchase excess
inventory and end-of-season goods in order to gain a competitive sourcing
advantage. Our online store represents a significant opportunity for the Company
to increase its product offerings from national designer or brand name companies
without their being tenants on fashionmall.com. Merchandise is offered (i) at
targeted discounts that increase incrementally over a six- week period or (ii)
at everyday low prices. The Company believes that its discount prices along with
its diverse offerings of quality, brand name merchandise will be attractive to
customers.
Outletmall.com benefits manufacturers by permitting them to sell
out-of-season, overstocked or discontinued merchandise. From the vendor's
viewpoint, fashion apparel has a limited utility and value life cycle. Prior to
the season when most sales are conducted, merchandise is at its highest
perceived value, but loses its value each day thereafter. The Outletmall.com
pricing model encourages purchases at each level in order to maximize revenue
received for the product, giving the consumer value-priced merchandise for
immediate consumption and the manufacturer a profitable vehicle for eliminating
excess inventory.
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The Company currently does not take ownership of substantial amounts of
inventory, although distribution facilities are available should suppliers be
unable to fulfill merchandise directly. Merchandise that is not sold may be
returned to the vendor, or liquidated on their behalf for a fee. The Company
bears the risk of product returns, except for returns due to vendor error or
defect, which are generally assumed by the vendor. As the Company increases its
focus on online sales, it may take ownership of an increasing amount of
inventory. Please see "Risk Factors--Inventory Risk" and "--Cost of Returns."
TEEN SITE
In February 1999, the Company entered into a letter of intent with Diplomat
Direct Marketing Corp. ("Diplomat"), a print catalog company, contemplating the
formation of an equally owned joint venture between the Company and Diplomat for
the purpose of developing a teen apparel Internet and print catalog. The catalog
is to be launched initially on the Internet to identify a mailing group for the
print version. The letter of intent contemplates that Diplomat will fund the
joint venture with an initial contribution of $500,000 and that the Company will
provide the joint venture with an anchor position at the fashionmall.com "Teen"
site and provide certain other services. The joint venture is not intended to be
the exclusive vehicle for the sale, display or marketing of "teen" merchandise
for either party. The letter of intent is not binding on the parties and is
subject to the execution of a definitive agreement. There can be no assurance
that a definitive agreement will be executed on the terms set forth above or at
all.
CUSTOMER LOYALTY AND RETENTION
The Company strives to offer fashionmall.com's visitors and customers value
by providing a compelling and secure shopping experience, personalized services
and a high level of customer service, as well as by developing certain
technological enhancements. The Company believes that implementing these
elements successfully will increase user loyalty, repeat usage and duration per
visit.
PROVIDE COMPELLING AND SECURE SHOPPING EXPERIENCE
The Company is providing or intends to provide its customers with a
compelling and secure shopping experience by (i) making its Web site's content
entertaining, informative, convenient, and easy-to-use and attractively
displaying and offering quality brand name products; (ii) providing a secure
transaction processing system; (iii) offering personalized services; and (iv)
providing outstanding customer service and product fulfillment.
CONTENT. The Company offers its visitors entertaining and informative
content, including fashion articles covering news, trends, guides and other
fashion/apparel related features. The Company intends to expand its magazine,
editorial, runway and expert forum fashion content, as well as create and
acquire unique and timely content to maintain a base of frequently changing and
valuable information that attracts and retains visitors. In addition, the
Company plans to deliver community elements, such as bulletin boards and
dedicated chat rooms, to the site's visitors.
The Company's online store displays information about items offered on the
Company's Web site, including sale price, retail price, cost, color and size
characteristics, group information and manufacturer related information. Once
the manufacturers have offered their products to the Company, the datasets are
published to the Company's Web site. The Company's selling system is its Web
site on the Internet, which was designed to give customers a convenient and safe
"shopping basket" or ordering system to effect their purchases. The Company's
Internet site uses Web servers to handle the transactional events, queries and
updates to the various server databases.
The Company's ordering system retrieves ordering information from selling
systems, validates credit cards, processes the orders, creates and issues
purchase orders to manufacturers and handles all
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post-sale marketing efforts. The ordering system also allows for orders to be
taken over the telephone, by fax or by mail. The ordering system software was
designed by the Company and is being augmented to give customer service
representatives instant access to all customer information, to automatically
update all changes to a customer's order and to inform the customer of
confirmation of receipt of orders and order status by automated e-mail
communications. The Company intends to access this customer profile information
to search and analyze customer demographics and buying patterns in order to
suggest new programs and offerings to customers.
SECURITY. A critical issue for the success of online sales is maintaining
the integrity of information, particularly the security of information such as
credit card numbers. The Company believes, however, that security systems
currently in place are at least as secure as those used for traditional
transactions (i.e., in-store or mail order purchases). The Company believes that
there are two potential areas for possible fraud by shopping electronically. The
first is theft of credit card numbers traveling through phone lines and the
second is theft of credit card numbers residing on the Company's system.
Transactions are secured by using Secure Sockets Layer ("SSL") encryption which
protects the information as it is transmitted between the customer browser and
the Company's site on the Internet. The Company addresses the possibility of
theft by using SSL encryption and a second encryption algorithm. The credit card
number is encrypted while it is traveling and is translated only once it reaches
fashionmall.com. This form of encryption is only available to customers using
SSL encryption enabled browsers. Please see "Risk Factors--Internet Security
Risks."
The Company also offers other payment alternatives. The Company has
installed a toll-free telephone number for taking orders, handling customer
service, and receiving credit card information. The Company posts the toll free
phone number for the customer during the checkout phase. After a customer calls
this phone number with his or her order, the Company's customer service
representatives ask for the customer's order number and the credit card number.
The order is then processed through normal channels.
PERSONALIZED SERVICES
fashionmall.com intends to capitalize on the unique capabilities of the
Internet to maximize the buying potential of its audience. The Company will use
proprietary operating processes to track and mine usage patterns for each
visitor to the fashionmall.com Web site. The Company intends to analyze this
data in great detail and, based on its analyses, target promotions and
cross-sell products to such visitor during future visits to fashionmall.com.
This highly personalized approach to selling leverages the Internet's unique
capabilities to structure the presentation of product around the characteristics
of a specific audience. This use of technology not only makes for a much more
compelling shopping experience as compared to more traditional distribution
channels (e.g., catalogs), but also allows the merchandiser to suggest products
and potentially create sales that might not otherwise take place.
The Company believes that a strong understanding of the customer demographic
profile and purchasing habits is critical to effective and successful
merchandising. The Company intends to aggregate demographic information relating
to its customer base by requesting certain information upon a customer's
registration and collecting data, based on previous purchasing and browsing
behavior. Through this collection of demographic consumer data, the Company will
have the ability to target promotional e-mail directly to customers or to sell
the data to advertisers and catalog companies.
CUSTOMER SERVICE
The Company believes that high levels of customer service and support are
critical to the value of its services and to retaining and expanding its
customer base. Customer service representatives are available on weekdays from 8
a.m. to 6 p.m. EST for customer service via e-mail, fax and a toll free
telephone number. Customer service is assisted by automated e-mail notifications
which greatly assist in
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keeping customers up-to-date on the status of their orders. Company
representatives handle general questions about fashionmall.com's tenants and
provide product information over the phone. The Company believes that these
representatives are a valuable source of feedback regarding customer
satisfaction, which the Company uses to improve its services. Customers of the
Company are not charged for service and support. The Company intends to expand
its call center and Internet-based toll free support and enhance its
functionality as it relates to cross-promoting products with a portion of the
proceeds of this offering. Please see "Use of Proceeds."
ORDER FULFILLMENT
The Company currently carries minimal inventory and relies to a large extent
on order fulfillment from its tenant manufacturers and retailers that ship
merchandise directly to customers. The Company intends to ship merchandise
directly from third party distribution facilities as it expands its online
direct sales of apparel and related merchandise through Company-owned online
stores.
TECHNOLOGICAL ENHANCEMENTS
The Company continually evaluates emerging technologies and new developments
in Web technologies with the objective of optimizing Web site management,
customer interaction and personalization, transaction processing, and order
fulfillment and customer service functionality. Such technology will include a
combination of proprietary technology and commercially available, licensed
technology. Examples of new features the Company intends to offer include: the
"fashion assistant," an automated personal shopper, which offers product
recommendations based on the individual's personality and interests, and live
broadcasts of fashion shows over its Web site. The Company is also currently
developing an extranet system which will allow the Company's vendors and tenants
to access the Company's selling system directly over the Internet.
COMPETITION
The Company competes with other Web sites, including, in particular, apparel
shopping areas of Internet portals, for Internet advertisers' and e-commerce
marketers' dollars. The number of these Web sites has increased significantly
and the Company expects such competition to continue to increase because there
are no substantial barriers to entry into the Company's market. Competition may
also increase as a result of ongoing industry consolidation. In addition, the
retail apparel shopping industry is intensely competitive. As a seller of
apparel, the Company currently or potentially competes with a variety of other
companies, including (i) traditional retailers of apparel, many of which also
support dedicated Web sites which compete directly with the Company, such as The
Gap and J. Crew, (ii) non-traditional retailers, such as television retailers
and mail order catalogs, such as QVC and L.L. Bean, (iii) apparel shopping areas
of Internet portals, and (iv) other online retailers, such as Bluefly. Many of
the Company's tenants, who may also be competitors, have their own Web sites but
maintain a presence on fashionmall.com.
The Company believes that the principal competitive factors in its market
are brand awareness and loyalty, the ability to attract high quality
manufacturers and retailers as tenants on the Web site, strategic relationships
with high-traffic Web sites and leading search engines, a positive apparel
purchasing experience for the consumer, breadth and depth of selection, price of
products offered for sale, ease of use, quality of content, other service
offerings and customer service, and Web site functionality, responsiveness,
reliability and speed of fulfillment of orders. Many of the Company's current
and potential competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than the Company. In addition, online retailers may be
acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Certain of the Company's
competitors may be able to secure merchandise
38
<PAGE>
from manufacturers on more favorable terms, devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies and devote substantially more resources to Web site and
systems development than the Company. Increased competition may result in
reduced operating margins, loss of market share and a diminished brand
franchise. New technologies and the expansion of existing technologies may
increase the competitive pressures on the Company. Please see "Risk
Factors--Highly Competitive Markets."
TECHNOLOGY
The Company uses commercially available software as well as its own
developed proprietary software. The Company's systems combine the Company's
proprietary technologies and commercially available, licensed technologies. The
Company's current strategy is to license commercially available technology to
augment internally developed solutions. The Company's Internet connectivity is
provided by a variety of servers, including three on the Company's premises and
one in Washington, D.C. at a third party vendor location. Several systems
administrators and network managers monitor and operate the Company's site on
the Internet, network operations and transaction-processing systems. Like other
Internet sites, the Company's sites have, from time to time, experienced
interruption and overload. The uninterrupted operation of the Company's site on
the Internet and transaction-processing systems is essential to its business,
and it is the job of the site operations staff to ensure, to the greatest extent
possible, the reliability of these systems.
TRADEMARKS AND PATENTS
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary knowledge. The Company regards its
copyrighted material, domain names, trade secrets and similar intellectual
property as important, and relies on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with its employees,
customers, partners and others to protect its proprietary rights. The Company
has registered the domain names "fashionmall.com" and "Outletmall.com." There
can be no assurance that the Company will be able to secure significant
protection for these names and its other proprietary information. Other than the
Company's registration of the domain names, the Company does not have any other
protection for the "fashionmall.com" name. The Company does not believe that it
or anyone else can obtain protection for such name in the United States. It is
possible that competitors of the Company or others will adopt product or service
names similar to "fashionmall.com," thereby impeding the Company's ability to
build brand identity and possibly leading to customer confusion. The inability
of the Company to protect the name "fashionmall.com" adequately could have a
material adverse effect on the Company. Please see "Risk Factors--Potential
Inability to Protect Trademarks and Proprietary Rights" and "--Protection of
Domain Names is Uncertain."
GOVERNMENTAL REGULATION
The Company is not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet and
other online services, it is possible that a number of laws and regulations may
be adopted with respect to the Internet or other online services covering issues
such as user privacy, pricing, content, copyrights, distribution, and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for online commerce may prompt more stringent
consumer protection laws that may impose additional burdens on those companies
conducting business online. The adoption of any additional laws or regulations
may decrease the growth of the Internet or other online services, which could,
in turn, decrease the demand for the Company's products and services and
increase the Company's cost of doing business, or otherwise have an adverse
effect on the Company.
39
<PAGE>
Moreover, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes and personal privacy is uncertain and may take
years to resolve. In addition, as the Company's service is available over the
Internet in multiple states and foreign countries,, and as the Company sells to
numerous consumers residing in such states and foreign countries, such
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in each such state and foreign country. The Company is
qualified to do business in only two states, and failure by the Company to
qualify as a foreign corporation in a jurisdiction where it is required to do so
could subject the Company to taxes and penalties for the failure to qualify. Any
such new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on the Company. Please see
"Risk Factors--Governmental Regulation and Legal Uncertainties."
EMPLOYEES
At March 3, 1999, the Company employed ten full-time employees and six
part-time employees and independent contractors. In addition, the Company uses
independent contractors when needed. The Company currently lacks the personnel
that will be necessary for the Company's expected growth. The Company intends to
hire a chief financial officer within the next several months. The Company
intends to use a significant portion of the proceeds of this offering to add
additional personnel, including management, sales and merchandising personnel,
technical personnel and business development personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to successfully attract, assimilate, or retain sufficiently qualified
personnel. Please see "Use of Proceeds." In order to attract qualified
personnel, the Company may be required to offer incentives such as stock
options, stock awards or other additional non-cash compensation or may be
required to allocate a greater portion of the proceeds of the offering for this
purpose than is currently allocated. The future success of the Company will
depend on its ability to attract and retain qualified personnel to operate the
Company and manage its growth. If the Company is unable to manage the Company's
growth effectively, it could have a material adverse effect on the Company's
business, results of operations and financial condition. None of the Company's
employees is represented by a labor union, and the Company considers its
employee relations to be satisfactory. Please see "Risk Factors--Management of
Growth" and "--Dependence on Key Personnel; Need for Additional Personnel."
PROPERTIES
The Company subleases approximately 2,000 square feet of office space in New
York, New York for its executive and administrative offices, at an annual rental
of $57,000. The sublease is with Richard A. Eisner & Company, LLP, a principal
stockholder, and is month-to-month. Please see "Certain Relationships and
Related Transactions." The Company expects to look for larger office space in
New York upon consummation of the offering.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
40
<PAGE>
MANAGEMENT
Our current executive officers and directors are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Benjamin Narasin............................. 33 Chairman of the Board, Chief Executive Officer and President
Ronald Forehand.............................. 48 Chief Operating Officer
Susan Mohr................................... 43 Vice President--fashionmall.com
Anne-Marie Forehand.......................... 35 Vice President--Outletmall.com
Richard C. Marcus............................ 59 Director
Jerome A. Chazen............................. 72 Director
</TABLE>
Directors are elected to serve until the next annual meeting of stockholders
and until their successors have been elected and have qualified. Directors do
not receive remuneration for their services as such, but may be reimbursed for
expenses incurred in connection therewith, such as the cost of travel to Board
meetings. Officers serve at the pleasure of the Board of Directors until their
successors have been elected and have qualified.
BENJAMIN NARASIN has served as Chief Executive Officer and President of the
Company and its predecessor since its inception in 1994. Prior to joining the
Company, from 1986 to 1994, Mr. Narasin served as President for Boston Prepatory
Co., an apparel company, at which he developed the concept of fashionmall.com.
RONALD FOREHAND has served as Chief Operating Officer of the Company since
October 1998. Prior to joining the Company, from April 1990 to September 1998,
Mr. Forehand was President of J.P. Callaghan's Outfitters, a men's sportswear
company which he co-founded but which has terminated operations. Mr. Forehand is
Anne-Marie Forehand's husband.
SUSAN MOHR has served as a consultant to the Company since 1995 and will
become Vice President--fashionmall.com upon consummation of the offering. Prior
to joining the Company, from 1989 to 1995, Ms. Mohr served as President of
Marketing Beauty Associates Consultants, a consulting firm that provides
consultation services to both online and traditional retailers. In addition,
from 1989 to 1995, Ms. Mohr served as a Cosmetics Buyer for Hahnes Department
Stores, a retail sales company.
ANNE-MARIE FOREHAND has served as an employee of the Company since February
1998 and will become Vice President--Outletmall.com upon consummation of the
offering. Prior to joining the Company, from April 1990 to September 1998, Ms.
Forehand managed J.P. Callaghan Outfitters, a men's sportswear company which she
co-founded but which has terminated operations. Ms. Forehand is Ronald
Forehand's wife.
RICHARD C. MARCUS has served as a director of the Company since March 1999
and has served as a consultant to the Company since February 1997. Since January
1997, Mr. Marcus has served as a Senior Advisor to Peter J. Solomon Company, a
New York investment banking firm. Mr. Marcus was principal of InterSolve Group
Inc., a management services firm, from its inception in 1991 until January 1997.
From December 1994 until December 1995, Mr. Marcus served as Chief Executive
Officer of the Plaid Clothing Group and as a director of that company from
December 1994 through December 1996. In July 1995, Plaid Clothing Group filed a
petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code and was
subsequently sold to Hartmarx in December 1996. From January 1989 to January
1992, Mr. Marcus was a principal of RCM Consulting, a provider of consulting
services to the retail industry. From 1979 to 1988, he served as Chairman and
Chief Executive Officer of Neiman-Marcus, a department store retailer. Mr.
Marcus is currently a director of Zale Corporation.
JEROME A. CHAZEN has served as a consultant to and a director of the Company
since March 1999. Since 1996, Mr. Chazen has been Chairman of Chazen Capital
Partners, LLC. Mr. Chazen was a founder of Liz Claiborne, Inc., where he served
in various senior executive positions until his
41
<PAGE>
retirement in 1996 and as a director until 1997. Mr. Chazen also serves as a
director of Taubman Centers, Inc. and The Gymboree Corporation, as Chairman of
the American Craft Museum, as a Trustee of Columbia University, as Chairman of
the Board of Overseers of the Columbia University Business School, and as
Vice-Chairman of the Greater New York Council of the Boy Scouts of America. Mr.
Chazen has various relationships with FM/CCP Investment Partners, LLC. Please
see "Principal Stockholders" and "Certain Relationships and Related
Transactions."
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company and Benjamin Narasin entered into a three-year employment
agreement effective as of January 1, 1999 pursuant to which Mr. Narasin will
serve as Chief Executive Officer of the Company and will receive an annual base
salary of $180,000 during each year of the three-year term. Such base salary is
subject to additional increase and bonuses within the discretion of the Board of
Directors which will take into account among other things, the performance of
the Company and the performance, duties and responsibilities of Mr. Narasin. Mr.
Narasin will receive a bonus of $40,000 if the Company achieves revenues in
excess of $6 million during fiscal year 1999 and an additional bonus of $40,000
if the Company achieves revenues in excess of $8 million during such fiscal
year.
On March 2, 1999, the Company entered into a consulting agreement (the
"Consulting Agreement") with Jerome Chazen, the sole owner of FM/CCP, Inc.,
which is the manager of FM/CCP Investment Partners, LLC. The Consulting
Agreement, which expires on the earlier of February 26, 2002 or two years
following the consummation of the offering, provides that Mr. Chazen shall
provide consulting services to the Company aggregating at least 30 hours per
month. In addition, Mr. Chazen agreed to become a director of the Company. Mr.
Chazen will receive an aggregate of $150,000 over the term of the Consulting
Agreement plus five-year options to purchase an aggregate of 142,500 shares of
common stock at an aggregate exercise price of $150,000 ($1.11 per share). Such
options vest and become exercisable (i) 50% upon consummation of the offering,
(ii) an additional 16% on March 1, 2000 and (iii) the balance monthly over the
12-month period commencing March 1, 2000.
The Company currently does not have written employment agreements with any
other officer of the Company.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities paid by the Company to Benjamin Narasin, its Chief
Executive Officer and President during fiscal 1996, 1997 or 1998. There was no
executive officer other than Mr. Narasin whose compensation exceeded $100,000
during such years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
- -----------------------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($)
- ------------------------------------------------------------------------ --------- ----------
<S> <C> <C>
Benjamin Narasin, President............................................. 1998 $ 180,000(2)
and Chief Executive Officer 1997 $ 120,000(3)
1996 $ 80,000(4)
</TABLE>
- ------------------------------
(1) Excludes perquisites and other personal benefits, securities and properties
otherwise categorized as salary or bonuses which in the aggregate, did not
exceed the lesser of either $50,000 or 10% of the total annual salary
reported for such person.
(2) $85,000 of such salary was deferred and is to be paid upon completion of the
offering.
(3) $82,500 of such salary was deferred and is to be paid upon completion of the
offering.
(4) All of such salary was deferred and is to be paid upon completion of the
offering.
42
<PAGE>
1999 STOCK OPTION PLAN
The Company intends to adopt the 1999 Stock Option Plan.
The 1999 Plan provides for the grant of options to purchase up to, but not
in excess of, 1,125,000 shares of common stock to key employees, including but
not limited to officers, directors, agents, consultants and independent
contractors of the Company or any parent or subsidiary of the Company. Options
may be either "incentive stock options" within the meaning of Section 422 of the
Code, or non-qualified options. Incentive stock options may be granted only to
employees of the Company or a subsidiary of the Company, while non-qualified
options may be issued to non-employee directors, as well as to employees of the
Company or its subsidiary.
The 1999 Plan is administered by a committee selected by the Board of
Directors or by the Board of Directors (the "Administrator"), which determines,
among other things, those individuals who receive options, the time period
during which the options may be exercised, the number of shares of common stock
issuable upon the exercise of each option and the option exercise price.
Pursuant to the 1999 Plan, the Administrator determines, among other things,
those individuals who receive options, the time period during which the grants
will be made, the number of shares of common stock to be granted and the price
(if any) to be paid by such key employees therefor.
The exercise price per share of common stock subject to an incentive option
may not be less than the fair market value per share of common stock on the date
the option is granted. The per share exercise price of the common stock subject
to a non-qualified option may be established by the Administrator. If the
aggregate fair market value (determined as of the date the option is granted) of
common stock for which any person may be granted incentive stock options which
first become exercisable in any calendar year exceeds $100,000, such stock
option shall be treated, to the extent of such excess, as an option which does
not qualify as an incentive stock option. No person who owns, directly or
indirectly, at the time of the granting of an incentive stock option to such
person, 10% or more of the total combined voting power of all classes of stock
of the company (a "10% Shareholder") shall be eligible to receive any incentive
stock options under the 1999 Plan unless the exercise price is at least 110% of
the fair market value of the shares of common stock subject to the option,
determined on the date of grant. Non-qualified options are not subject to such
limitation.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only by the optionee. In the event of termination of
employment other than by death, retirement, permanent and total disability,
unless extended by the Administrator on or before such employee's date of
termination of employment, the optionee will have no more than three months
after such termination during which the optionee shall be entitled to exercise
all or any part of such employee's option, unless otherwise determined by the
Administrator. Upon termination of employment of an optionee by reason of death,
retirement, permanent or total disability, such optionee's options remain
exercisable for one year thereafter to the extent such options were exercisable
on the date of such termination.
Options under the 1999 Plan must be issued within ten years from the
effective date of the Plan. Incentive stock options granted under the 1999 Plan
cannot be exercised more than ten years from the date of grant. Incentive stock
options issued to a 10% Shareholder are limited to five-year terms. All options
granted under the 1999 Plan provide for the payment of the exercise price in
cash or check or by delivery to the company of shares of common stock having a
fair market value equal to the exercise price of the options being exercised, or
by a combination of such methods, or by such other methods approved by the
Administrator pursuant to the 1999 Plan. Therefore, an optionee may be able to
tender shares of common stock to purchase additional shares of common stock and
may theoretically exercise all of such optionee's stock options with no
investment.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1999 Plan. To date, no options have been granted under the 1999 Plan.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the date of this
prospectus and as adjusted to reflect the sale of 3,000,000 shares of common
stock by the Company in this offering regarding the beneficial ownership of the
Company's common stock by (i) all persons known by the Company to own
beneficially more than 5% of the Company's common stock, (ii) each director and
executive officer of the Company and (iii) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
AMOUNT AND NATURE STOCK OWNED
OF BENEFICIAL --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) BEFORE OFFERING AFTER OFFERING
- --------------------------------------------- ------------------- --------------- ---------------
Benjamin Narasin(2).......................... 3,420,000 shares 76% 45.6%
<S> <C> <C> <C>
Richard A. Eisner & Company, LLP(2).......... 855,000 shares 19% 11.4%
FM/CCP Investment Partners, LLC(3)........... 320,000 shares 7.0% 4.2%
Jerome Chazen(3)............................. 71,250 shares 1.6% *
Richard Marcus(4)............................ -- -- --
Ronald Forehand(5)........................... -- -- --
Susan Mohr(2)................................ -- -- --
Anne-Marie Forehand(5)....................... -- -- --
Executive Officers and Directors.............
as a group (six persons) 3,491,250 shares 77.6% 46.1%
</TABLE>
- ------------------------
*Less than one percent.
(1) For purposes of the above table, a person or group of persons is deemed to
have "beneficial ownership" of any shares that such person or group has the
right to acquire within 60 days after such date; and, for purposes of
computing the percentage of outstanding shares held by each person or group
on a given date, such shares are deemed to be outstanding, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Beneficial ownership is determined in
accordance with Rule 13d-3 under the Exchange Act, and is generally
determined by voting power and/or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the Company believes that the persons named
in the table above have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them.
(2) The address for the referenced stockholders is c/o 575 Madison Avenue, New
York, New York 10022.
(3) The address of FM/CCP Investment Partners, LLC and Jerome Chazen is 767
Fifth Avenue, New York, New York 10153. FM/CCP, Inc., the Manager of FM/CCP
Investment Partners, LLC, is wholly-owned by Mr. Chazen, and certain
affiliates of Mr. Chazen are members of FM/CCP Investment Partners, LLC.
FM/CCP, Inc. and/or Mr. Chazen may be deemed the beneficial owner of
securities owned by FM/CCP Investment Partners, LLC. Mr. Chazen disclaims
such beneficial ownership. FM/CCP Investment Partners, LLC's ownership
includes 95,000 shares underlying warrants which became exercisable upon
completion of the offering and does not include up to 12,500 shares issuable
pursuant to certain anti-dilution provisions upon exercise of such warrants
and the options owned by Mr. Chazen referred to below. Mr. Chazen's
ownership includes 71,250 shares underlying options which are exercisable by
Mr. Chazen upon the consummation of the offering and excludes 71,250 shares
underlying options which are not currently exercisable and the shares
beneficially owned by FM/CCP Investment Partners, LLC.
(4) The address of Mr. Marcus is 3811 Turtle Creek Centre, Suite 300, Dallas,
Texas 75219.
(5) Mr. and Ms. Forehand are married.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's predecessor, the Internet Design Group, Ltd., commenced
operations on December 22, 1994, and continued operations to August 19, 1995,
when it became Internet Fashion Mall, L.P. The Company was restructured as a
limited liability company, Internet Fashion Mall, LLC., pursuant to a limited
liability company agreement, dated June 26, 1996, by and between Benjamin
Narasin and Richard A. Eisner & Company, LLP ("RAE"). Pursuant to such
agreement, Narasin contributed the Company's business, including
fashionmall.com, related intellectual property and $250,000, for an 80%
membership interest in the Company, and RAE contributed $100,000, for a 20%
membership interest in the Company. Narasin and RAE entered into an Amended and
Restated Limited Liability Company Agreement, dated March 1, 1999, which
restated the membership percentages in the Company as 70% for Benjamin Narasin,
10% for his son, Grant Narasin, and 20% for RAE.
During the years ended December 31, 1998 and 1997, Narasin and RAE incurred
various costs and expenses, including, but not limited to, salaries and other
general and administrative expenses, on behalf of the Company, in addition to
providing a cash loan to the Company. All of these loans are non-interest
bearing. At December 31, 1998 and 1997, the aggregate amount due to Narasin and
RAE in respect of these loans totaled $117,000 and $191,000, respectively.
The Company subleases approximately 2,000 square feet from RAE in New York
for its executive and administrative offices at an annual rental of $57,000. In
addition, RAE provides administrative services such as phone services,
accounting and maintenance of books and records to the Company at cost (as
defined).
On March 2, 1999, the Company sold to FM/CCP Investment Partners, LLC
("FM/CCP") 225,000 shares of common stock of the Company for $1,000,000 ($4.44
per share). In addition, FM/CCP loaned the Company $1,000,000 evidenced by a
promissory note in the principal amount of $1,000,000, bearing interest at 6%
per annum and due on the earlier of the closing of the offering or March 2,
2002. In connection with the foregoing promissory note, FM/CCP received a
warrant, expiring March 2, 2004, to purchase up to 95,000 shares of common stock
at an exercise price equal to 105% of the per share price of the common stock in
the offering ($7.35 based on the assumed $7.00 per share offering price).
Certain affiliates of Mr. Chazen, a director of the Company, are investors in
FM/CCP Investment Partners, LLC. Pursuant to certain anti-dilution provisions,
the Company will issue up to an additional 12,500 shares of common stock to
FM/CCP upon the exercise of such warrants and certain options granted to Jerome
Chazen.
On March 2, 1999, the Company entered into a consulting agreement (the
"Consulting Agreement") with Jerome M. Chazen. The Consulting Agreement, which
expires on the earlier of March 2, 2002 or two years following the consummation
of the offering, provides that Mr. Chazen shall provide consulting services to
the Company aggregating at least 30 hours per month. In addition, Mr. Chazen
agreed to become a director of the Company. Mr. Chazen will receive an aggregate
of $150,000 over the term of the Consulting Agreement plus five-year options to
purchase an aggregate of 142,500 shares of common stock at an aggregate exercise
price of $150,000 ($1.11 per share). Such options vest and become exercisable
(i) 50% upon consummation of the offering, (ii) an additional 16% on March 2,
2000 and (iii) the balance monthly over the 12-month period commencing March 2,
2000.
FM/CCP and Mr. Chazen have agreed, for one year following the consummation
of the offering, not to sell or dispose of the securities acquired by them
without the consent of the Company, except to certain partners or family
members. In addition, the Company has agreed to grant FM/CCP and Mr. Chazen
certain demand and "piggyback" registration rights, commencing one year after
consummation of the offering and terminating on March 2, 2004, as to the common
stock acquired by them and underlying their warrants and options.
45
<PAGE>
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock and
selected provisions of its Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by reference to the Company's Certificate of
Incorporation and Bylaws.
COMMON STOCK
The Company is authorized to issue up to 35,000,000 shares of common stock,
par value $.01 per share, of which 4,500,000 shares are outstanding as of the
date hereof. Holders of common stock are entitled to one vote for each share
held of record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, if any,
holders of common stock are entitled to receive ratably, dividends when, as, and
if declared by the Board of Directors out of funds legally available therefor
and, upon the liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preferences on the preferred
stock, if any. Holders of common stock have no preemptive rights and have no
rights to convert their common stock into any other securities. The outstanding
common stock is validly authorized and issued, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 3,000,000 shares of preferred
stock, par value $.01 per share. The preferred stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion rights, redemption
rights and sinking fund provisions. The issuance of any such preferred stock
could adversely affect the rights of the holders of common stock and, therefore,
reduce the value of the common stock. The ability of the Board of Directors to
issue preferred stock could discourage, delay or prevent a takeover of the
Company.
TRANSFER AGENT
American Stock Transfer and Trust Company is the Transfer Agent for the
Company's common stock.
DIRECTORS' LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation includes provisions which
eliminate the personal liability of directors for monetary damages resulting
from breaches of their fiduciary duty (except for liability for breaches of the
duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, violations under Section
174 of the DGCL or for any transaction from which the director derived an
improper personal benefit). The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
Section 145 of the DGCL permits indemnification by a corporation of certain
officers, directors, employees and agents.
The Company's Charter provides that the Company will indemnify, to the
fullest extent permitted under law, each of its directors and officers with
respect to all liability and loss suffered and expenses incurred by such person
in any action, suit or proceeding in which such person was or is made or
threatened to be made a party or is otherwise involved by reason of the fact
that such person is or was a director or officer of the Company. The Company is
also obligated to pay the expenses of the
46
<PAGE>
directors and officers incurred in defending such proceedings, subject to
reimbursement if it is subsequently determined that such person is not entitled
to indemnification.
The Company intends to obtain a policy of insurance under which the
directors and officers of the Company will be insured, subject to the limits of
the policy, against certain losses arising from claims made against such
directors and officers by reason of any acts or omissions covered under such
policy in their respective capacities as directors or officers, including
liabilities under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to Section 203 of the DGCL ("Section 203"), which,
subject to certain exceptions and limitations, prohibits a Delaware corporation
from engaging in any "business combination" with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (for the purposes of determining the number of shares outstanding
under the DGCL, those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer are excluded from the
calculation); or (iii) on or subsequent to such date, the business combination
is approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
For purposes of Section 203, a "business combination" includes (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder; (iii)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the offering, the Company will have outstanding
7,500,000 shares of common stock, of which the 3,000,000 shares offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act. The remaining approximately 4,500,000 shares of common stock are
"restricted securities" (as that term is defined in Rule 144 under the
Securities Act) and in the future may only be sold pursuant to a registration
statement under the Securities Act, in compliance with the exemption provisions
of Rule 144 or pursuant to another exemption under the Securities Act.
Commencing approximately 12 months following the date of this prospectus,
substantially all of these restricted securities would become eligible for sale
in the public market
47
<PAGE>
pursuant to Rule 144. The beneficial owners of 4,500,000 shares of common stock
(including shares of common stock issuable upon exercise of outstanding options)
have agreed not to sell such shares for a period of 12 months after this
offering without the consent of the Representative.
In general, under Rule 144, as currently in effect, a person (including a
person who may be deemed an "affiliate" of the Company as that term is defined
under the Securities Act) who has beneficially owned such shares for at least
one year would be entitled to sell within any three-month period a number of
shares beneficially owned for at least one year that do not exceed the greater
of (i) 1% of the then outstanding shares of common stock or (ii) the average
weekly trading volume of the common stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are further subject to certain
restrictions relating to the manner of sale, notice and the availability of
current public information about the Company. After two years have elapsed from
the date of the issuance of restricted securities by the Company or their
acquisition from an affiliate, such shares may be sold without limitation by
persons who have not been affiliates of the Company for at least three months.
The sale, or availability for sale, of substantial amounts of common stock
in the public market subsequent to this offering pursuant to Rule 144 or
otherwise could materially adversely affect the market price of the common stock
and could impair the Company's ability to raise additional capital through the
sale of its equity securities or debt financing.
The holders of the Representative's Warrants will have certain demand and
"piggyback" registration rights with respect to the shares of common stock
underlying such warrants, commencing one year after the effective date of this
offering. In addition, the holder of 95,000 shares of common stock issued upon
exercise of a warrant have demand and "piggyback" registration rights. Please
see "Underwriting."
If the Representative should exercise registration rights to effect the
distribution of the securities underlying the Representative's Warrants, it will
be unable to make an active market in the Company's securities prior to and
during such distribution. If it ceases making a market in the common stock, the
market and market prices for the common stock may be materially adversely
affected, and holders thereof may be unable to sell or otherwise dispose of the
common stock. Please see "Description of Securities" and "Underwriting."
No prediction can be made as to the effect, if any, that sales of such
securities, or the availability of such securities for sale, will have on the
market prices prevailing from time to time for the common stock. However, even
the possibility that a substantial number of the Company's securities may, in
the near future, be sold in the public market may adversely affect prevailing
market prices for the common stock and could impair the Company's ability to
raise capital through the sale of its equity securities. Please see "Shares
Eligible For Future Sale" and "Underwriting."
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell an aggregate of 3,000,000 shares of common stock
to the Underwriters named below, for whom Gruntal & Co. is acting as the
Representative, and the Underwriters have severally agreed to purchase the
number of shares of common stock set forth opposite their respective names in
the table below at the offering price, less underwriting discounts set forth on
the cover page of this prospectus.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Gruntal & Co...............................................................
-----------------
Total.................................................................. 3,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of common stock is subject to certain conditions. The
Underwriters are committed to purchase all of the shares of the common stock
(other than those covered by the over-allotment option described below), if any
are purchased.
The Underwriters propose to offer the common stock to the public initially
at the public offering price set forth on the cover page of this prospectus, and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, discounts not
in excess of $ per share; and the Underwriters may allow, and such dealers
reallow, a concession of not more than $ per share to certain other
dealers. After this offering, the public offering price, the concession to
selected dealers and the reallowance to other dealers may be changed by the
Representative.
The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 1% of the gross proceeds received by the Company from the
sale of the 3,000,000 shares of common stock offered hereby, of which
$ has already been paid. The Company has also agreed to pay certain
of the Underwriters' expenses in connection with this offering, including
expenses in connection with qualifying the shares offered hereby for sale under
the laws of such states as the Underwriters may designate and the placement of
tombstone advertisements. The Company has also granted to the Representative and
its designees, for nominal consideration, warrants to purchase from the Company
up to 300,000 shares of common stock at an exercise price per share equal to
120% of the public offering price per share. The Representative's Warrants may
not be sold, transferred, assigned, pledged or hypothecated for 12 months from
the date of this prospectus, except to members of the selling group. The
Representative's Warrants contain anti-dilution provisions upon the occurrence
of certain events, including stock dividends, stock splits and
recapitalizations, and grant registration rights to the holders thereof at the
expense of the Company, at the request of the holders of a majority thereof (on
no more than one occasion) during the four-year period beginning on the first
anniversary of the date of this prospectus and "piggyback" registration rights
(on no more than one occasion).
The Company has also granted to the Underwriters, exercisable for 30 days
from the date of this prospectus, an option to purchase up to 450,000 additional
shares of common stock at the public offering price less the underwriting
discount. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase additional shares, of
common stock proportionate to such Underwriter's initial commitment as indicated
in the preceding table. The Underwriters exercise such right of purchase only
for the purpose of covering over-allotments, if any, made in connection with the
sale of the shares of common stock.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
49
<PAGE>
The Company, its directors and officers, and certain stockholders of the
Company, beneficially owning an aggregate of 4,500,000 shares of common stock
prior to the offering, together with the holder of options to purchase 142,500
shares of common stock and the holders of warrants to purchase 95,000 shares of
common stock, have agreed with the Underwriters not to publicly sell or
otherwise dispose of any of their shares of common stock or securities
exercisable for or convertible into shares of common stock for a period of 12
months after the date of the prospectus without the prior written consent of the
Representative.
Prior to this offering there has been no public market for any of the
Company's common stock. Accordingly, the offering price of the common stock was
determined by negotiation between the Company and the Representative. Factors
considered in such negotiation, in addition to prevailing market conditions,
included the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure and certain other factors as were deemed
relevant. The public offering price of the common stock does not necessarily
bear any relationship to assets, net worth, earnings, book value, or other
criteria of value applicable to the Company and should not be considered an
indication of the actual value of the common stock. Such price is subject to
change as a result of market conditions and other factors, and no assurance can
be given that the common stock can be resold at the offering price.
During and after this offering, the Underwriters may purchase and sell
common stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the common stock sold in the offering for their
account may be reclaimed by the syndicate if such shares are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the common stock
which may be higher than the price that might otherwise prevail in the open
market. Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued at any time.
In connection with this offering, the Company has agreed that, until the
third anniversary of the date of this prospectus, the Representative may appoint
an observer to attend all meetings of the Company's Board of Directors. The
observer will be entitled to reimbursement of reasonable and accountable
out-of-pocket expenses for attendance at those meetings. In addition, the
observer will be entitled to indemnification to the same extent as the Company's
directors.
LEGAL MATTERS
The validity of the shares offered hereby and certain other legal matters
will be passed upon for the Company by Squadron, Ellenoff, Plesent & Sheinfeld,
LLP, New York, New York. Certain legal matters in connection with the offering
will be passed upon for the Underwriters by Cadwalader, Wickersham & Taft.
EXPERTS
The financial statements of the Company included in this prospectus as of
December 31, 1998 and for the years ended December 31, 1998 and 1997 have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
50
<PAGE>
AVAILABLE INFORMATION
The Company will be subject to the informational requirements of the
Exchange Act, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at prescribed rates
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, NW, Washington, DC 20549, and at the Commission's Regional
Offices at 7 World Trade Center, Suite 1300, New York, New York 10048; and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Electronic filings
made via EDGAR are publicly available through the Commission's Web site at
http://www.sec.gov. Copies of such material can be obtained from the Public
Reference Section of the Commission, Room 1024, 450 Fifth Street, NW Washington,
DC 20549 at prescribed rates. In addition, reports and other information
concerning the Company may be inspected at the offices of the NASD, 1735 K
Street, NW, Washington, DC 20006.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act, with respect to the common
stock offered hereby. This prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the common stock, reference is
hereby made to the Registration Statement which may be examined without charge
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, NW, Washington, DC 20549. Copies thereof may be obtained from
the Commission upon payment of the prescribed fees. Statements contained in this
prospectus as to the contents of any contract or document referred to herein are
not necessarily complete, and in each instance, if such contract or document is
filed as an exhibit to the Registration Statement, each such statement is
qualified in all respects by such reference to such exhibit.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-1
Balance Sheet as of December 31, 1998...................................................................... F-2
Statements of Operations for the years ended December 31, 1997 and 1998.................................... F-3
Statements of Changes in Members' Equity for the years ended December 31, 1997 and 1998.................... F-4
Statements of Cash Flows for the years ended December 31, 1997 and 1998.................................... F-5
Notes to Financial Statements.............................................................................. F-6
</TABLE>
52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Internet Fashion Mall LLC.:
We have audited the accompanying balance sheet of Internet Fashion Mall LLC
(a Delaware limited liability company) as of December 31, 1998, and the related
statements of operations, members' equity and cash flows for the years ended
December 31, 1997 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Internet Fashion Mall LLC as
of December 31, 1998, and the results of its operations and its cash flows for
the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
New York, New York
February 26, 1999
F-1
<PAGE>
INTERNET FASHION MALL LLC
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................................... $ 82,000
Accounts receivable, net of allowance for doubtful accounts of $105,000........................... 314,000
Prepaid expenses and other current assets......................................................... 7,000
------------
Total current assets............................................................................ 403,000
CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $14,000.............................. 53,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $9,000................................... 13,000
DEFERRED FINANCING COSTS............................................................................ 39,000
------------
Total assets.................................................................................... $ 508,000
------------
------------
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................................. $ 221,000
Amounts due to related-parties.................................................................... 366,000
Customer deposits................................................................................. 18,000
Deferred revenue.................................................................................. 45,000
------------
Total current liabilities....................................................................... 650,000
------------
Total liabilities............................................................................... 650,000
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIT:
Members' contributed capital...................................................................... 411,000
Accumulated deficit............................................................................... (553,000)
------------
Total members' deficit.......................................................................... (142,000)
------------
Total liabilities and members' deficit.......................................................... $ 508,000
------------
------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-2
<PAGE>
INTERNET FASHION MALL LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
<S> <C> <C>
1997 1998
------------ ------------
SITE REVENUES......................................................................... $ 1,253,000 $ 2,055,000
COST AND EXPENSES:
Site development, merchandise and content......................................... 150,000 270,000
Advertising and marketing expense................................................. 696,000 1,104,000
Selling expense................................................................... 122,000 257,000
General and administrative expense................................................ 283,000 413,000
------------ ------------
Total cost and expenses........................................................... 1,251,000 2,044,000
------------ ------------
Income from operations............................................................ 2,000 11,000
OTHER INCOME, NET..................................................................... 1,000 3,000
------------ ------------
Net income........................................................................ $ 3,000 $ 14,000
------------ ------------
------------ ------------
PRO FORMA NET INCOME DATA (Unaudited):
Net income before provision for income taxes........................................ $ 3,000 $ 14,000
Pro forma income tax provision...................................................... 2,000 6,000
------------ ------------
Pro forma net income.............................................................. $ 1,000 $ 8,000
------------ ------------
------------ ------------
PRO FORMA PER SHARE INFORMATION (Unaudited):
Basic............................................................................. $ -- $ --
------------ ------------
------------ ------------
Diluted........................................................................... $ -- $ (0.04)
------------ ------------
------------ ------------
Weighted average common shares outstanding--
Basic............................................................................. 4,500,000 4,500,000
------------ ------------
------------ ------------
Diluted........................................................................... 4,500,000 4,368,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
INTERNET FASHION MALL LLC
STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
<TABLE>
<CAPTION>
MEMBERS'
CONTRIBUTED ACCUMULATED TOTAL MEMBERS'
CAPITAL DEFICIT DEFICIT
----------- ------------ --------------
<S> <C> <C> <C>
BALANCE, January 1, 1997.............................................. $ 350,000 $ (570,000) $ (220,000)
Net income.......................................................... -- 3,000 3,000
----------- ------------ --------------
BALANCE, December 31, 1997............................................ 350,000 (567,000) (217,000)
Conversion of related-party loan to contributed capital............. 61,000 -- 61,000
Net income.......................................................... -- 14,000 14,000
----------- ------------ --------------
BALANCE, December 31, 1998............................................ $ 411,000 $ (553,000) $ (142,000)
----------- ------------ --------------
----------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INTERNET FASHION MALL LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 3,000 $ 14,000
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization............................................... 6,000 14,000
Allowance for doubtful accounts............................................. 25,000 80,000
Changes in operating assets and liabilities:
Accounts receivable....................................................... (154,000) (259,000)
Other assets.............................................................. (3,000) (43,000)
Accounts payable and accrued expenses..................................... 10,000 193,000
Customer deposits......................................................... 21,000 (10,000)
Deferred revenue.......................................................... 32,000 13,000
----------- -----------
Net cash (used in) provided by operating activities........................... (60,000) 2,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment.............................. (14,000) (1,000)
Costs incurred to develop software............................................ -- (60,000)
----------- -----------
Net cash used in investing activities......................................... (14,000) (61,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan to related-party............................................ 7,000 --
Proceeds from loan from related-party......................................... 133,000 75,000
----------- -----------
Net cash provided from financing activities................................... 140,000 75,000
----------- -----------
Net increase in cash.......................................................... 66,000 16,000
Cash and cash equivalents, beginning of year.................................. -- 66,000
----------- -----------
Cash and cash equivalents, end of year........................................ $ 66,000 $ 82,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................................... $ -- $ --
Taxes....................................................................... $ -- $ --
Non-cash investing and financing activities:
Conversion of related party loan to contributed capital..................... $ -- $ 61,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
INTERNET FASHION MALL LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. DESCRIPTION OF BUSINESS
Internet Design Group, Ltd. commenced operations on December 22, 1994 and
continued operations until August 19, 1995 when it became Internet Fashion Mall,
L.P. ("IFM L.P."). Effective June 26, 1996, IFM L.P. was reorganized as a
Delaware limited liability company, Internet Fashion Mall LLC ("IFM" or the
"Company"). The Company engages in the business of marketing, promoting,
advertising and selling fashion apparel and related accessories or products to
the public on the Internet, via fashionmall.com. IFM combines an online shopping
mall with fashion content to provide a centralized site for manufacturers,
retailers, magazines and catalogs to advertise, display and sell their product
lines.
Activities from the date of inception to December 31, 1998 have been
directed primarily to developing the fashionmall.com brand through a marketing
strategy that includes the exchange of the Company's services for advertising
space in various magazines and journals and or consulting services.
Since inception, IFM has achieved breakeven results from operations, and has
incurred negative and/or breakeven cash flow from operations. The success of
IFM's future operations will be dependent primarily upon IFM's ability to
develop further fashionmall.com awareness and brand loyalty; attract, build and
retain significant traffic levels on its fashionmall.com website; offer content
on the fashionmall.com website which is attractive to its visitors; provide
satisfactory customer service and order fulfillment.
Reference is made to the risk factors discussed in this prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company's primary source of revenue is from tenant fees. Manufacturers,
retailers, magazines and others pay fees to the Company to lease space on the
fashionmall.com site. Revenues are recognized as services are rendered. The
Company recognizes revenue earned from tenant fees in accordance with its
customer contracts which specify either a fixed fee or a fee based on
performance.
BARTER ARRANGEMENTS
The Company enters into barter arrangements with certain of its customers,
whereby the Company's services are exchanged for either advertising space in
various magazines and journals or consulting services. Barter revenue is
recognized based on the fair value of the services received as determined by the
customers' discounted advertising "rate cards" and is generally recognized over
the term of the customer contract which commences upon the placement of the
customer's advertisement on the Company's fashionmall.com website.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-6
<PAGE>
INTERNET FASHION MALL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds or other highly-liquid
investments with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of three to five years. Depreciation expense
for the years ended December 31, 1997 and 1998, was $3,000 and $5,000,
respectively, and is included in general and administrative expenses in the
accompanying statements of operations.
In accordance with Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, the Company
capitalizes costs incurred in the process of creating software for internal use.
The costs capitalized by the Company represent the payroll and payroll-related
costs for the employees who are directly associated with and who devote time to
the internal-use computer software project, to the extent of the time spent
directly on the project. Capitalized software costs are amortized on a
straight-line basis over an estimated useful life of two years. As of December
31, 1998, approximately $67,000 of capitalized software costs had been incurred;
prior to 1998, these costs incurred were immaterial. Amortization expense for
the year ended December 31, 1998 was $9,000 and is included in selling, general
and administrative expenses in the accompanying statements of operations.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS No. 121").
SFAS No. 121 establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. Management does not believe
there is any impairment of the carrying value of its long-lived assets as of
December 31, 1998.
ADVERTISING EXPENSE
The Company's primary source of advertising expense is generated from its
barter activities. The expense is recognized based on the fair value of the
services received as determined by the discounted "rate card" for the applicable
magazine or journal. In accordance with Statement of Position 93-7, REPORTING ON
ADVERTISING COSTS, the Company expenses its advertising costs as incurred.
INCOME TAXES
As a limited liability company, each of IFM's member's respective portion of
taxable income or loss is reportable on such members' own Federal and state
income tax returns. Additionally, as a limited liability company, the Company is
subject to the New York City income tax on unincorporated businesses.
F-7
<PAGE>
INTERNET FASHION MALL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE
INCOME ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The adoption of this statement has had no
impact on the Company's results of operations, financial position or cash flows.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, DISCLOSURES ABOUT SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION
("SFAS No. 131"). SFAS No. 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
the operating segments in interim financial reports issued to shareholders. This
statement is effective for financial statements for periods beginning after
December 15, 1997 and need not be applied to interim periods in the initial year
of application. Comparative information for earlier years presented is to be
restated. The adoption of this statement has had no impact on the Company's
results of operations, financial position or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
at their fair value. This statement is effective for financial statements for
all fiscal quarters of all fiscal years beginning after June 15, 1999. The
Company does not expect the adoption of this standard to have a material impact
on the Company's results of operations, financial position or cash flows.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES ("SOP
98-5"). SOP 98-5 requires that all non-governmental entities expense the costs
of start-up activities, including organization costs, as those costs are
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Management has reviewed the provisions of SOP
98-5 and does not believe adoption of this standard will have a material effect
on the Company's results of operations, financial position or cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term maturity of
these financial instruments.
3. UNAUDITED PRO FORMA INFORMATION
INCOME TAXES
Effective upon the consummation of the Company's initial public offering,
the Company's income tax status will be converted from a limited liability
company to that of a C corporation. Accordingly, the provision for income taxes
has been determined in accordance with Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109"). SFAS No. 109
requires a company to account for income taxes using the asset and liability
method. Under this method,
F-8
<PAGE>
INTERNET FASHION MALL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
3. UNAUDITED PRO FORMA INFORMATION (CONTINUED)
deferred tax assets and liabilities are recognized for the future tax
consequence attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their tax bases for operating
profit and tax liability carryforward. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets or liabilities of a change in tax
rates is recognized in the period that the tax change occurs.
The accompanying financial statements reflect a provision for income taxes
on a pro forma basis as if the Company was liable for Federal, state and local
income taxes as an accrual basis taxable corporate entity throughout the years
presented.
The following summarizes the pro forma income tax provision for the years
ended December 31,:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Current
Federal.................................................................. $ -- $ 1,000
State.................................................................... 1,000 1,000
--------- ---------
Total Income Tax Provision................................................. $ 1,000 $ 2,000
--------- ---------
--------- ---------
Deferred
Federal................................................................ $ 1,000 $ 3,000
State.................................................................. -- 1,000
--------- ---------
$ 1,000 $ 4,000
--------- ---------
--------- ---------
</TABLE>
The pro forma provision for income taxes differs from the amounts computed
by applying Federal statutory rates due to the following at December 31,:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Pro forma provision computed at the statutory rate......................... 34% 34%
Pro forma state income taxes, net of Federal tax benefit................... 32 12
---------
Pro forma permanent difference............................................. 15 --
Pro forma temporary difference............................................. (908) --
---------
(827)%
Total...................................................................... 46%
---------
</TABLE>
Temporary differences are primarily comprised of the adjustments between
accrual basis net income and cash basis taxable income.
EARNINGS PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure due to its reorganization from a limited liability company
to a C corporation and the closing of the private placement debt and equity
investment.
Accordingly, the Company has computed net income (loss) per share in
accordance with Statement of Financial Accounting Standards No. 128, EARNINGS
PER SHARE ("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98 ("SAB No.
98"). Under the provisions of SFAS No 128 and SAB No 98,
F-9
<PAGE>
3. UNAUDITED PRO FORMA INFORMATION (CONTINUED)
basic net income (loss) per common share ("Basic EPS") is computed by dividing
net income (loss) by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share ("Diluted EPS") is computed by
dividing net income (loss) by the weighted average number of common shares and
dilutive common share equivalents then outstanding using the treasury-stock
method. Pro forma per share data has been computed using the weighted average
number of common shares outstanding during the period assuming the Company was a
C corporation since inception and the closing of the private placement debt and
equity investments as of January 1, 1998 (see Note 8, Subsequent Events--PRIVATE
PLACEMENT). SFAS No. 128 requires the presentation of both Basic EPS and Diluted
EPS on the face of the statements of operations.
<TABLE>
<CAPTION>
1997 1998
------------ -------------
<S> <C> <C>
Pro Forma Net Income Available for Common Shareholders--Basic.... $ 2,000 $ 8,000
Amortization of Discount on Debt issued with Detachable
Warrants....................................................... -- (37,000)
Consulting Expense for Options issued in exchange for Services... -- (160,000)
Pro Forma Tax Adjustment......................................... -- 6,000
------------ -------------
Pro Forma Net Income Available for Common
Shareholders--Diluted.......................................... $ 2,000 $ (183,000)
------------ -------------
------------ -------------
Weighted Average Common Shares Outstanding--Basic................ 4,500,000 4,500,000
Effect of Exercise of Detachable Warrants issued with Debt....... -- (123,000)
Effect of Exercise of Warrants issued to Placement Agent......... -- (9,000)
------------ -------------
Weighted Average Common Shares Outstanding--Diluted.............. 4,500,000 4,368,000
------------ -------------
------------ -------------
</TABLE>
The effect of the exercise of options issued as part of the private
placement for consulting services is not included as its effect on diluted
earnings per share is anti-dilutive.
4. MEMBERS' CAPITAL ACCOUNTS
The Company has two members (collectively, the "Members"), Benjamin Narasin,
an individual with an 80% ownership interest ("Narasin") and Richard A. Eisner
and Company, a limited liability partnership with a 20% ownership interest
("Eisner"). The Company was established with capital contributions of $250,000
and $100,000 from Narasin and Eisner, respectively.
5. DEFERRED FINANCING COSTS
PRIVATE PLACEMENT
During 1998, the Company incurred approximately $8,000 in costs related to a
private placement offering of debt and equity securities (the "Private
Placement"). These costs are being deferred until the closing of the Private
Placement (see Note 8, Subsequent Events--PRIVATE PLACEMENT).
INITIAL PUBLIC OFFERING
During 1998, the Company incurred approximately $31,000 in costs related to
an initial public offering of its common stock. These costs are being deferred
until such time as the initial public offering is consummated (see Note 8,
Subsequent Events--INITIAL PUBLIC OFFERING AND REORGANIZATION).
F-10
<PAGE>
6. AMOUNTS DUE TO RELATED PARTIES
WORKING CAPITAL LOANS
During the years ended December 31, 1997 and 1998, the Members incurred
various costs and expenses, including but not limited to salaries and other
general and administrative expenses, on behalf of the Company, in addition to
providing a cash loan to the Company. All of these loans are non-interest
bearing. At December 31, 1998, amounts due to the Members in repayment of these
loans totaled approximately $118,000, and are included in Amounts Due to
Related-Parties in the accompanying balance sheet.
DEFERRED COMPENSATION
Since inception of the Company, Narasin, who is the President of the
Company, has deferred a portion of his annual compensation. At December 31,
1998, this deferred compensation totaled approximately $248,000, and is included
in Amounts Due to Related-Parties in the accompanying balance sheet.
SUBLEASE ARRANGEMENT
In September 1997, the Company entered into a month-to-month sublease
arrangement, to utilize a portion of Eisner's office space as the Company's
principal offices.
Pursuant to this sublease arrangement, rent expense totaled approximately
$9,000 and $34,000, respectively, for the years ended December 31, 1997 and
1998.
7. COMMITMENTS AND CONTINGENCIES
Pursuant to an amended limited liability company agreement that is subject
to completion, Narasin is entitled to an annual salary of $180,000, plus certain
performance-based incentive bonuses, as consideration for Narasin's service as
President of the Company, until such time as the termination of the limited
liability company.
8. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING AND REORGANIZATION
The Company is pursuing an initial public offering ("IPO") of its common
stock. The IPO contemplates the sale of shares of common stock at an offering
price to be determined before underwriting commissions and offering expenses.
Pursuant to the IPO, IFM will change its name to fashionmall.com, Inc. Also
pursuant to the IPO, the Members of IFM will contribute all of their membership
interests in IFM in exchange for 4,500,000 shares of common stock of
fashionmall.com, Inc.
fashionmall.com, Inc. was incorporated in Delaware as a C corporation on
February 26, 1999.
STOCK OPTION PLAN
The Board of Directors of the Company intends to adopt the 1999 Stock Option
Plan (the "Plan").
The Plan provides for the grant of options to purchase up to, but not in
excess of 1,125,000 shares of common stock to key employees, including but not
limited to officers, directors, agents, consultants and independent contractors
of the Company or any parent or subsidiary of the Company. Options may be either
"incentive stock options" ("ISOs")within the meaning of Section 422 of the
Internal Revenue Code, or non-qualified options. Incentive stock options may be
granted only to employees of the Company or a subsidiary of the Company, while
nonqualified options may be issued to non-employee
F-11
<PAGE>
8. SUBSEQUENT EVENTS (CONTINUED)
directors, as well as to employees of the Company or its subsidiary. The Plan is
administered by a committee selected by the Board of Directors or by the Board
of Directors (the "Administrator").
Options under the Plan must be issued within 10 years from the effective
date of the Plan. ISOs granted under the Plan cannot be exercised more than 10
years from the date of grant. ISOs issued to a 10% shareholder are limited to
five-year terms. All options granted under the Plan provide for the payment of
the exercise price in cash or check or by delivery to the company of shares of
common stock having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods, or by such other
methods approved by the Administrator pursuant to the Plan.
JOINT VENTURE
On February 18, 1999, IFM entered into a letter of intent with Diplomat
Direct Marketing Corporation ("DDMC"), a third party, to formulate a joint
venture for purposes of developing a teen apparel Internet site and print
catalog. According to the terms of the letter of intent, the joint venture
ownership interest will be split 50% to IFM and 50% to DDMC. In exchange for
this interest, IFM will provide to the joint venture frontal positioning on the
fashionmall.com "Teen" site and certain other services and DDMC will provide a
cash contribution of $500,000.
PRIVATE PLACEMENT
Effective February 26, 1999, the Company received a $1 million equity
investment from FM/CCP Investment Partners, LLC, a third party ("FM/CCP") and
issued a $1 million promissory note and warrants in exchange for an additional
$1 million (the "Private Placement"). FM/CCP purchased a 5% ownership interest
in the Company, reducing Narasin's and Eisner's ownership interests to 76% and
19%, respectively. The promissory note accrues interest at 6% and is due on the
earlier of February 25, 2002, or the closing date of the Company's IPO. The
warrants, which expire March 2, 2004, are exercisable upon the closing date of
the Company's IPO to purchase up to 95,000 shares of common stock at an exercise
price equal to 105% of the per share price of the common stock in the IPO. The
warrants expire in February 2004.
A principal of FM/CCP, Jerome A. Chazen ("Chazen"), agreed to provide
consulting services to the Company for the period ending the earlier of the
three year anniversary date of the equity investment or the two year anniversary
date of the closing of the Company's IPO. The Company is obligated to pay Chazen
an aggregate of $150,000, payable on or before the expiration of the consulting
term.
Additionally, Chazen, who will also serve as a director of the Company,
received options to purchase a 3% ownership interest in the Company. These
options vest over three years and expire on the fifth anniversary of the grant
date. The vesting period accelerates upon the closing of the Company's IPO, such
that 50% become exercisable upon consummation of the IPO, an additional 16% on
March 1, 2000, and the balance monthly over the 12-month period commencing March
1, 2000. The aggregate exercise price of these options is $150,000. Exercising
of these options and the warrants referred to above will not dilute the original
5% ownership interest purchased by FM/CCP and Chazen. As a result, if these
options and warrants are exercised in total, FM/CCP and Chazen will receive an
additional 5,000 and 7,500 shares of common stock, respectively.
IFM will be required to pay its placement agent $85,000 a warrant, to the
placement agent, to purchase a 0.5% ownership interest in the Company as a
finders fee in connection with the consummation of the Private Placement. The
warrant is exercisable for five years from the grant date at an aggregate
purchase price of $100,000.
F-12
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 22
Dilution.................................................................. 22
Capitalization............................................................ 23
Selected Consolidated Financial Data...................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business.................................................................. 31
Management................................................................ 41
Principal Stockholders.................................................... 44
Certain Relationships and Related Transactions............................ 45
Description of Securities................................................. 46
Shares Eligible for Future Sale........................................... 47
Underwriting.............................................................. 49
Legal Matters............................................................. 50
Experts................................................................... 50
Available Information..................................................... 51
Index to Financial Statements............................................. 52
</TABLE>
3,000,000 SHARES
FASHIONMALL.COM, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:
No director of the Corporation shall be liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director; PROVIDED that this provision does not eliminate the liability of the
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from
which the director derived an improper personal benefit.
Article Ninth of the Certificate of Incorporation of the Company permits
indemnification of directors of the Corporation. Such Article provides as
follows:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit. Any repeal or
modification of this paragraph shall not adversely affect any right or
protection of a director of the Corporation existing hereunder with
respect to any act or omission occurring prior to such repeal or
modification.
If the Delaware General Corporation Law is hereafter amended to authorize
the further elimination or limitation of the liability of a director,
then the liability of a director of the Corporation shall be eliminated
or limited to the fullest extent permitted by the amended Delaware
General Corporation Law. Any repeal or modification of this paragraph
shall not adversely affect any right or protection of a director of the
Corporation existing hereunder with respect to any act or omission
occurring prior to such repeal or modification."
Additionally, the Company's Bylaws provide that the Company will indemnify
each of its directors and officers with respect to all liability and loss
suffered and expenses incurred by such person in any action, suit or proceeding
in which such person was or is made or threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer of the Company. The Company is also obligated to pay the expenses of
the directors and officers incurred in defending such proceedings, subject to
reimbursement if it is subsequently determined that such person is not entitled
to indemnification.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby (items
marked with an asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 7,468
Legal Fees and Expenses........................................... 150,000*
Blue Sky Fees (including counsel fees)............................ 5,000*
NASD Filing Fees.................................................. 3,167
NASDAQ National Market Fee........................................ 70,000*
Accounting Fees and Expenses...................................... 100,000*
Transfer Agent and Registrar Fees................................. 5,000*
Printing and Engraving Expenses................................... 70,000*
Underwriting Expense Allowance.................................... 210,000*
Miscellaneous..................................................... 4,000*
---------
Total............................................................. $ 625,000*
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the number
of shares of common stock sold by the Company since March 8, 1996, the
consideration received by the Company for such shares, and information relating
to the section of the Securities Act, or rule of the Commission under which
exemption from registration was claimed. None of these securities was registered
under the Securities Act. No sales of securities involved the use of an
underwriter and no commissions were paid in connection with the sale of any
securities, except for Wit Capital, which received an $85,000 finders fee and a
warrant to purchase 22,500 shares of common stock at an exercise price of $4.44
per share, in connection with the sale of securities to FM/CCP Investment
Partners described below.
On June 26, 1996, RAE purchased a 20% membership interest in IFM in
consideration for $100,000. The Company believes that the sale of such
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act.
On March 2, 1999, the Company sold to FM/CCP Investment Partners, LLC
("FM/CCP") 225,000 shares of common stock of the Company for $1,000,000 ($4.44
per share). In addition, FM/CCP loaned the Company $1,000,000 evidenced by a
promissory note in the principal amount of $1,000,000 of the Company bearing
interest at 6% per annum and due on the earlier of the closing of the offering
or March 2, 2002. In connection with the foregoing promissory note, FM/CCP
received a warrant, expiring March 2, 2004, to purchase up to 95,000 shares of
common stock at an exercise price equal to 105% of the per share price of the
common stock in the offering ($7.35 based on the assumed $7.00 per share
exercise price). The Company believes that each issuance and sale of such
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act. Certain affiliates of Jerome M. Chazen, a director of the
Company, are investors in FM/CCP Investment Partners, LLC.
On March 2, 1999, the Company entered into a consulting agreement (the
"Consulting Agreement") with Jerome M. Chazen. The Consulting Agreement, which
expires on the earlier of March 2, 2002 or two years following the consummation
of this offering, provides that Mr. Chazen shall provide consulting services to
the Company aggregating at least 30 hours per month. In addition, Mr. Chazen
agreed to become a director of the Company. Mr. Chazen will receive an aggregate
of $150,000 over the term of the Consulting Agreement plus five-year options to
purchase an aggregate of 142,500 shares of common stock at an aggregate exercise
price of $150,000 ($1.11 per share). Such options vest and become exercisable
(i) 50% upon consummation of the offering, (ii) an additional
II-2
<PAGE>
16% on March 2, 2000 and (iii) the balance monthly over the 12-month period
commencing March 2, 2000. The Company believes that the grant of such options
was exempt under Section 3(b) of the Securities and/or Rule 701 promulgated
thereunder.
FM/CCP and Mr. Chazen have agreed not to sell or dispose of the securities
acquired by them without the consent of the Company, except to certain partners
or family members. In addition, the Company has agreed to grant FM/CCP and Mr.
Chazen certain demand and "piggyback" registration rights, commencing one year
after consummation of the offering and terminating on March 2, 2004, as to the
common stock acquired by them and underlying their warrants and options.
ITEM 27. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company
3.2 By-laws of the Company
4.1* Form of Representative's Warrant
4.2* Form of Stock Certificate
4.3 Warrant executed in connection with the FM/CCP Financing
4.4 Promissory Note of the Company dated March 2, 1999, in principal amount of $1,000,000
5.1* Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP
10.1* Employment Agreement effective as of January 1, 1999, by and between the Company and Benjamin Nasarin
10.2 Consulting Agreement dated March 2, 1999 by and between the Company and Jerome Chazen
10.3 Subscription Agreement dated March 2, 1999, by and between FM/CCP Investment Partners, LLC and the
Company
10.4 Subscription Agreement dated March 2, 1999, by and between Jerome Chazen and the Company
10.5 Form of 1999 Stock Option Plan
21.1 Subsidiaries of the registrant
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the opinion filed as Exhibit
5.1)
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;
II-3
<PAGE>
(iii) to include any additional or changed material information on
the plan of distribution;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be treated as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that it will:
(1) for determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective; and
(2) for the purpose of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus
as a new registration statement relating to the securities offered therein,
and the offering of such securities at that time as the initial bona fide
offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the New York, New
York, on March 8, 1999.
<TABLE>
<S> <C> <C>
FASHIONMALL.COM, INC.
By: /s/ BENJAMIN NARASIN
-----------------------------------------
Benjamin Narasin
Chief Executive Officer and President
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Benjamin Narasin, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign
(i) any and all pre- or post-effective amendments to this Registration
Statement, and to file the same with all exhibits thereto, and other documents
in connection therewith, and (ii) any registration statements, and any and all
amendments thereto, relating to the offering covered hereby filed pursuant to
Rule 462(b) under the Securities Act, with the Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute, may lawfully do or cause to be done by virtue hereof.
In accordance with to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
Chief Executive Officer,
President and Director
/s/ BENJAMIN NARASIN (Principal Executive
- ------------------------------ Officer March 8, 1999
Benjamin Narasin and Principal Financial
and Accounting Officer)
/s/ RICHARD MARCUS
- ------------------------------ Director March 8, 1999
Richard Marcus
/s/ JEROME CHAZEN
- ------------------------------ Director March 8, 1999
Jerome Chazen
</TABLE>
<PAGE>
Exhibit 1.1
FASHIONMALL.COM, INC.
3,000,000 SHARES(1)
COMMON STOCK
FORM OF UNDERWRITING AGREEMENT
March __, 1999
Gruntal & Co., L.L.C.
____________________,
as Representatives of the Underwriters Named in Schedule I hereto
c/o Gruntal & Co., L.L.C.
One Liberty Plaza
New York, New York 10006
Ladies and Gentlemen:
fashionmall.com, Inc., a Delaware corporation (herein called the
"COMPANY"), proposes to issue and sell 3,000,000 of its authorized but unissued
shares of common stock, par value [$0.01] per share (herein called the "COMMON
STOCK") (said 3,000,000 shares of Common Stock being herein called the
"UNDERWRITTEN Shares"). Upon your request, as provided in Section 3(c) of this
Agreement, the Company shall also issue and sell to you up to an additional
450,000 shares of Common Stock for the purpose of covering over-allotments, if
any (herein called the "OPTION SHARES" and together with the Underwritten
Shares, the "SHARES"). The Company also proposes to issue and sell to Gruntal &
Co., L.L.C. warrants (the "WARRANTS") pursuant to the Warrant Agreement (the
"WARRANT AGREEMENT") for the purchase of an additional 600,000 shares of Common
Stock (the "WARRANT Shares"). The shares of Common Stock are more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Underwritten Shares by the several underwriters named in
Schedule I hereto (herein collectively called the "UNDERWRITERS," which term
shall also include any underwriter purchasing Underwritten Shares pursuant to
Section 3(b) hereof), for whom you are acting as representatives. You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
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(1) Plus an option to purchase from the Company up to 450,000 additional shares
of Common Stock to cover over-allotments.
<PAGE>
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the "COMMISSION") a registration statement on
Form SB-2 (No. 333-____), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
"SECURITIES ACT"), of the Underwritten Shares. Copies of such registration
statement and of each amendment thereto, if any, including the related
preliminary prospectus heretofore filed by the Company with the Commission have
been delivered to you.
The term "REGISTRATION STATEMENT" as used in this Agreement shall mean the
registration statement, including all exhibits and financial statements, in the
form in which it became effective, and any registration statement filed pursuant
to Rule 462(b) of the rules and regulations of the Commission with respect to
the Underwritten Shares (herein called a "RULE 462(B) REGISTRATION STATEMENT"),
and, in the event of any amendment thereto after the effective date of such
registration statement (herein called the "EFFECTIVE DATE"), shall also mean
(from and after the effectiveness of such amendment) such registration statement
as so amended (including any Rule 462(b) Registration Statement). The term
"PROSPECTUS" as used in this Agreement shall mean the prospectus relating to the
Underwritten Shares as first filed with the Commission pursuant to Rule 424(b)
and Rule 430A (or if no such filing is required, as included in the Registration
Statement) and, in the event of any supplement or amendment to such prospectus
after the Effective Date, shall also mean (from and after the filing with the
Commission of such supplement or the effectiveness of such amendment) such
prospectus as so supplemented or amended. The term Preliminary Prospectus as
used in this Agreement shall mean each preliminary prospectus included in such
Registration Statement prior to the Effective Date.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiary, Outletmall.com, Inc.
(herein called the "SUBSIDIARY") has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
to own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and is in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary,
except where the failure to be so qualified would not have a material
adverse change or effect on the business, properties, condition (financial
or other) or results of operations of the Company and
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<PAGE>
the Subsidiary (taken as a whole) as presently conducted or as proposed to
be conducted in the Registration Statement and the Prospectus (a "MATERIAL
ADVERSE CHANGE" or a "MATERIAL ADVERSE EFFECT").
(ii) The execution and delivery of this Agreement, the Warrant
Agreement and the Warrants have been duly authorized by all necessary
corporate action of the Company. This Agreement, the Warrant Agreement and
the Warrants have been duly executed and delivered by the Company, and
constitute legal, valid and binding obligations enforceable against the
Company in accordance with their respective terms.
(iii) Other than the Subsidiary, the Company does not have any
"significant subsidiaries" (as such term is defined in Regulation S-X under
the Securities Act). Except for the Subsidiary, the Company does not own
any shares of capital stock or any other equity securities of any
corporation nor does the Company have any equity interest in any firm,
partnership, association or other entity.
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
Material Adverse Change, whether or not arising from transactions in the
ordinary course of business, other than as set forth in the Registration
Statement and the Prospectus, and since such dates, except in the ordinary
course of business, neither the Company nor the Subsidiary has entered into
any material transaction not referred to in the Registration Statement and
the Prospectus.
(v) The conditions for use of a registration statement on Form SB-2
set forth in the General Instructions to Form SB-2 have been satisfied with
respect to the Company, the transactions contemplated herein and in the
Registration Statement. The Registration Statement and the Prospectus
comply, and on the Closing Date (as hereinafter defined) and any later date
on which Option Shares are to be purchased, the Prospectus will comply, in
all material respects, with the provisions of the Securities Act and the
rules and regulations of the Commission thereunder; on the Effective Date,
the Registration Statement did not contain any untrue statement of a
material fact and did not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus did not and on the
Closing Date will not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and
warranties in this subparagraph (iv) shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus made in
reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters for
use in the Registration Statement or the Prospectus.
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<PAGE>
(vi) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
National Association of Securities Dealers, Inc. (the "NASD"), if any, or
such additional steps as may be necessary to qualify the Underwritten
Shares for public offering by the Underwriters under state securities or
"blue sky" laws) has been obtained or made and is in full force and effect,
except where the failure to obtain such approval, consent, order,
authorization, designation, declaration or filing would not have a Material
Adverse Effect.
(vii) Neither the Commission nor the blue sky or securities authority
of any jurisdiction in which the Underwritten Shares has been offered or in
which the Underwritten Shares is intended to be offered by the
Underwriters, to the Company's knowledge after due inquiry, has issued an
order (a "STOP ORDER") suspending the effectiveness of, or preventing or
suspending the use of, the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or
suspending the registration or qualification of the Shares, nor has any of
such authorities instituted or, to the Company's knowledge after due
inquiry, threatened to institute any proceedings with respect to a Stop
Order.
(viii) The Shares, the Warrants and the Warrant Shares have been duly
and validly authorized. The Shares and the Warrants, when issued and sold
to, and delivered to and paid for by, the Underwriters as provided herein,
and the Warrant Shares, when issued and sold to, and delivered to and paid
for by, the holders of the Warrants as provided therein, will be duly and
validly issued, fully paid and nonassessable and conforms in all material
respects to the description thereof in the Prospectus under the caption
"Description of Securities," and to all applicable requirements of the
Company's Certificate of Incorporation, the Company's by-laws and the laws
of the State of Delaware. No further approval or authority of the
stockholders or the Board of Directors of the Company will be required for
the issuance and sale of the Shares as contemplated herein.
(ix) The Company has good and marketable title to or valid and
enforceable leasehold estates in all items of real property and good and
marketable title to all other properties and assets that the Prospectus
indicates are owned or leased by it, free and clear of all liens, claims,
security interests, pledges, charges, encumbrances, mortgages or other
defects or restrictions of any kind whatsoever, (A) with such exceptions as
are not material and do not interfere with the use made or proposed to be
made of such property and building by the Company, or (B) except as
described in the Prospectus.
(x) The Company owns or has the right to use all patents, patent
rights, inventions, trade secrets, licenses, know-how, proprietary
techniques, including processes and substances, trademarks, service marks,
trade names, copyrights and other
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<PAGE>
intellectual property described or referred to in the Registration
Statement and the Prospectus as owned or used by it or which are necessary
for the conduct of its business as now conducted and as described in the
Registration Statement and the Prospectus. All such patents, patent rights,
licenses, trademarks, service marks and copyrights are (i) valid and
enforceable and (ii) to the Company's knowledge, not being infringed by any
third parties which infringement would have a Material Adverse Effect. The
Company has no knowledge of, nor has it received any notice of the
Company's infringement of or conflict with asserted rights of others with
respect to any patents, patent rights, inventions, trade secrets, licenses,
know-how, proprietary techniques, including processes and substances,
trademarks, service marks, trade names, copyrights or other intellectual
property which is, or is reasonably likely to be, the subject of an
unfavorable decision, ruling or finding that could have a Material Adverse
Effect.
(xi) The Company possesses all consents, licenses, certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct its business, and the
Company has not received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
which, if the subject of an unfavorable decision, ruling or finding, would
have a Material Adverse Effect.
(xii) The authorized, issued and outstanding capitalization of the
Company as of ______, 1999 was, and upon consummation of the transactions
contemplated hereby and in the Prospectus will be, as set forth in the
Prospectus under the caption "Capitalization." The outstanding shares of
Common Stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase such securities. Except as disclosed in the
Prospectus, there are no outstanding (x) securities or obligations of the
Company convertible into or exchangeable for any shares of capital stock of
the Company, (y) options, warrants or other rights to subscribe for or
purchase from the Company any such capital stock or any such convertible or
exchangeable securities or obligations, and (z) obligations of the Company
to issue any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such option, warrant or right. To the
best knowledge of the Company, no such option, warrant or other right has
been granted to any person, the exercise of which would cause such person
to own beneficially or of record more than five percent of the shares of
Common Stock outstanding immediately after the offering other than as
described in the Prospectus. No person or entity holds a right, that has
not been waived in writing, to require the registration of shares of
capital stock of the Company pursuant to the Registration Statement, and
except as set forth in the Prospectus, no person holds a right to require
registration under the Securities Act of shares of capital stock of the
Company at any other time.
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<PAGE>
(xiii) _____________________, who have certified certain financial
statements of the Company and delivered their report with respect to the
audited financial statements and schedules included in the Registration
Statement and the Prospectus, are independent certified public accountants
as required by the Securities Act and the rules and regulations thereunder.
(xiv) The financial statements of the Company, together with related
notes and schedules as set forth in the Registration Statement and the
Prospectus, present fairly the financial position, results of operations
and cash flows of the Company at the indicated dates and for the indicated
periods. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein), and
all adjustments necessary for a fair presentation of results for such
periods have been made. The summary financial and other data included in
the Registration Statement present fairly the information shown therein and
have been complied on a basis consistent with the financial statements
presented therein.
(xv) The statistical and market-related data included in the
Prospectus are based on or derived from sources that the Company believes
are reliable and accurate.
(xvi) The software and hardware operated by the Company and the
Subsidiary are capable of providing uninterrupted millennium functionality
to record, store, process and present calendar dates falling on or after
January 1, 2000 and date-dependent data in substantially the same manner
and with the same functionality as such software and hardware records,
stores, processes and presents such calendar dates and date-dependent data
as of the date hereof, except as would not have a Material Adverse Effect.
(xvii) The Company has filed all federal, state and local tax returns
that are required to be filed or has requested extension thereof (except in
any case in which the failure so to file would not have a Material Adverse
Effect) and has paid all taxes required to be paid by it, to the extent any
of the foregoing are due and payable, except for any such assessment, fine
or penalty that is currently being contested in good faith.
(xviii) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which it is engaged. The Company
has not been refused insurance coverage sought or applied for, and the
Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
(xix) Upon the consummation of the sale of the Underwritten Shares
pursuant hereto, the shares of Common Stock will be authorized for trading
on the
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<PAGE>
National Market of The Nasdaq Stock Market, Inc. ("NASDAQ") upon official
notice of issuance.
(xx) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder (herein called "ERISA"). No "reportable event"
(as defined in ERISA) has occurred with respect to any pension plan (as
defined in ERISA) for which the Company would have any liability. The
Company has not incurred and does not expect to incur liability under (x)
Title IV of ERISA with respect to the termination of, or withdrawal from,
any "pension plan" or (y) Sections 412 or 4971 of the Internal Revenue Code
of 1986, as amended, including the regulations and published
interpretations thereunder (herein called the "CODE"). Each "pension plan"
for which the Company would have any liability that is intended to be
qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(xxi) No labor dispute exists with respect to the Company's employees
or is threatened or imminent that would have a Material Adverse Effect, and
the Company is not aware of any existing or imminent labor disturbance by
the employees of any of its principal suppliers, contractors or customers
that would have a Material Adverse Effect.
(xxii) The Company is not in violation of any federal or state law or
regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic materials and the Company
has received all permits, licenses or other approvals required of it under
applicable federal and state occupational safety and health and
environmental laws and regulations to conduct its business, and the Company
is in compliance with all terms and conditions of any such permit, license
or approval, except any such violation of law or regulation, failure to
receive required permits. licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals which
would not, singly or in the aggregate, have a Materials Adverse Effect.
(xxiii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Chapter 92-198 of the laws of Florida, An
Act Relating to Disclosure of Doing Business with Cuba, and the Company
further agrees that if, until October 1, 2000, it commences engaging in
business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or has
become effective with the Commission or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide notice of such
business or change, as appropriate, in a form and to such entities as may
be required by applicable law.
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<PAGE>
(xxiv) The Company is familiar with the Investment Company Act of
1940, as amended, and the rules and regulations thereunder (herein called
the "INVESTMENT COMPANY ACT"), and is not an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act.
(xxv) The Company intends to apply the net proceeds from its sale of
the Underwritten Shares as set forth in the Prospectus under the caption
"Use of Proceeds."
(xxvi) There are no legal or governmental proceedings pending to which
the Company or the Subsidiary is a party or to which any property or assets
of the Company or the Subsidiary are subject that (x) are required to be
described in the Registration Statement or the Prospectus and are not
described therein, or (y) are reasonably likely to, if determined adversely
to the Company or the Subsidiary, have a Material Adverse Effect, and to
the best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others. There are
no statutes, regulations, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not described or filed
as required.
(xxvii) There are no contracts or other documents that are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the rules and regulations of the
Commission thereunder which have not been as described in the Prospectus or
filed as exhibits to the Registration Statement.
(xxviii) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required
to be described in the Prospectus by the Securities Act or by the rules and
regulations of the Commission thereunder which is not so described.
(xxix) To the best knowledge of the Company, no officer or director of
the Company has any affiliation or association with the NASD or any member
thereof.
(xxx) Neither the Company nor the Subsidiary, nor any director,
officer, agent, employee or other person associated with or acting on
behalf of the Company or the Subsidiary, has used any corporate funds for
any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
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<PAGE>
(xxxi) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxxii) Neither the Company, nor any of its affiliates, nor any person
acting on behalf of any of them has, directly or indirectly, (x) taken any
action designed to cause or to result in, or that has constituted or which
may reasonably be expected to constitute, the stabilization or manipulation
of the price of the shares of Common Stock to facilitate the sale or resale
of the Underwritten Shares, or (y) since the initial filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Shares, or (B) paid or agreed
to pay to any person any compensation for soliciting another to purchase
any other securities of the Company.
(xxxiii) The Company is not in breach or violation of, default under,
or conflict with any term or provision of its Certificate of Incorporation,
by-laws or other governing documents or of any applicable franchise,
license, permit, judgment, decree, order, statute, rule or regulation,
foreign or domestic, the consequences of which breach, violation, default
or conflict could have a Material Adverse Effect. No default exists, and no
event has occurred which, with notice, the passage of time or both, would
constitute a default in the due performance and observance of any material
term, covenant or condition of any indenture, mortgage, deed of trust,
lease or other material agreement or instrument to which the Company or the
Subsidiary is a party or by which the Company or the Subsidiary is bound.
The execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any material
agreement or instrument to which the Company or the Subsidiary is a party,
or the Company's Certificate of Incorporation, by-laws or any order, rule
or regulation applicable to the Company or the Subsidiary of any court or
of any regulatory body or administrative agency or other governmental body
having jurisdiction over the Company or the Subsidiary.
(b) Each of Benjamin Narasin and Richard A. Eisner & Co. LLC
(collectively, the "Founders") hereby represents and warrants that such Founder
has reviewed the Registration Statement and Prospectus and, although such
Founder has not independently verified the accuracy or completeness of all the
information contained therein, nothing has come to the attention of such Founder
that would lead such Founder to believe that on the Effective Date, the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on the Effective Date,
the Prospectus contained, and on the Closing Date and any later date on which
Option Shares are to be purchased contains, any untrue statement of a material
fact or
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<PAGE>
omitted or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(c) The representations and warranties in Sections 2(a) and 2(b) shall
be deemed to be repeated on each Closing Date, and all references therein to the
Shares shall be deemed to refer to the Underwritten Shares or the Option Shares,
as applicable.
3. PURCHASE OF THE UNDERWRITTEN SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
the Underwritten Shares to the several Underwriters, and each of the
Underwriters agrees to purchase from the Company the respective aggregate number
of shares of Underwritten Shares set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Shares shall be sold by the Company
and purchased by the several Underwriters shall be $[6.51] per share. In making
this Agreement, each Underwriter is contracting severally and not jointly;
except as provided in paragraphs (b) and (c) of this Section 3, the agreement of
each Underwriter is to purchase only the respective number of shares of the
Underwritten Shares specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or Section 9 hereof) to
purchase and pay for the number of shares of the Underwritten Shares agreed to
be purchased by such Underwriter or Underwriters, the Company shall immediately
give notice thereof to you, and the non-defaulting Underwriters shall have the
right, within 24 hours after the receipt by you of such notice to purchase, or
procure one or more other Underwriters to purchase, in such proportions as may
be agreed upon between you and such purchasing Underwriter or Underwriters and
upon the terms herein set forth, all or any part of the shares of the
Underwritten Shares which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such shares and portion, the number of shares of the
Underwritten Shares which each non-defaulting Underwriter is otherwise obligated
to purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase; PROVIDED, HOWEVER, that the
non-defaulting Underwriters shall not be obligated to purchase the shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Underwritten Shares exceeds 10% of
the total number of shares of the Underwritten Shares which all Underwriters
agreed to purchase hereunder. If the total number of shares of the Underwritten
Shares which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24
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<PAGE>
hours next succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers reasonably satisfactory to you for
purchase of such shares and portion on the terms herein set forth. In any such
case, either you or the Company shall have the right to postpone the Closing
Date determined as provided in Section 5 hereof for not more than seven business
days after the date originally fixed as the Closing Date pursuant to said
Section 5 in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company shall make arrangements within the
24-hour periods stated above for the purchase of all the shares of the
Underwritten Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company to any non-defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, the Option Shares, at the same price per share as the Underwriters
shall pay for the Underwritten Shares. Said option may be exercised only to
cover over-allotments in the sale of the Underwritten Shares by the Underwriters
and may be exercised in whole or in part at any time (but not more than once) on
or before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
Option Shares as to which the several Underwriters are exercising the option.
Delivery of certificates for the Option Shares, and payment therefor, shall be
made as provided in Section 5 hereof. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage of the total number
of Option Shares to be purchased by the several Underwriters as such Underwriter
is purchasing of the Underwritten Shares, as adjusted by you in such manner as
you deem advisable to avoid fractional shares.
(d) On the Closing Date, the Company shall issue and sell to Gruntal &
Co., L.L.C. Warrants at a purchase price of $0.001 per warrant, which Warrants
shall entitle the holder thereof to purchase an aggregate of 300,000 shares of
Common Stock. The Warrants shall be exercisable for a period of four years,
commencing one year from the Effective Date, at an initial price of 120% of the
initial public offering price of the Underwritten Shares. The Warrants and the
Warrant Agreement shall be substantially in the form filed as Exhibit __ to the
Registration Statement. Payment for the Warrants shall be made on the Closing
Date.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the public offering by the Underwriters of the
Underwritten Shares to be purchased by them shall be as set forth in the
Prospectus. The Underwriters may from time to time change the public offering
price of the Underwritten
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<PAGE>
Shares sold by them after the closing of the public offering and increase or
decrease the concessions and discounts to dealers as they may determine.
(b) The Company hereby acknowledges that the information set forth in
the last paragraph on the front cover page, the list of Underwriters and the
information set forth in the [identify specific paragraphs] paragraphs under the
caption "Underwriting" in the Registration Statement, any Preliminary Prospectus
and the Prospectus (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus and the
Prospectus, and you, on behalf of the respective Underwriters, represent and
warrant to the Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE UNDERWRITTEN SHARES.
(a) Delivery of certificates for the Underwritten Shares and the
Option Shares (if the option granted by Section 3(c) hereof shall have been
exercised not later than 10:00 A.M., New York time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Cadwalader, Wickersham & Taft, 100 Maiden Lane, New York, New York
10038, at 10:00 a.m., New York time, on the fourth business day after the date
of this Agreement, or at such time on such other day, not later than seven full
business days after such fourth business day, as shall be agreed upon in writing
by the Company and you. The date and hour of such delivery and payment (which
may be postponed as provided in Section 3(b) hereof) are herein called the
"CLOSING DATE."
(b) If the option granted by Section 3(c) hereof shall be exercised
after 10:00 a.m., New York time, on the date two business days preceding the
Closing Date, delivery of certificates for the Option Shares, and payment
therefor, shall be made at the office of Cadwalader, Wickersham & Taft, 100
Maiden Lane, New York, New York 10038, at 10:00 a.m., New York time, on the
third business day after the exercise of such option.
(c) Payment for the Underwritten Shares and the Option Shares
purchased from the Company shall be made to the Company or its order by wire
transfer of same day funds. Such payment shall be made upon delivery of
certificates for the Underwritten Shares or the Option Shares, as the case may
be, to you for the respective accounts of the several Underwriters against
receipt therefor signed by you. Certificates for the Underwritten Shares or the
Option Shares, as the case may be, to be delivered to you shall be registered in
such name or names and shall be in such denominations as you may request at
least one business day before the Closing Date, in the case of Underwritten
Shares, and at least one business day prior to the purchase thereof, in the case
of the Option Shares. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at the offices of American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005 on the
business day prior to the Closing Date or, in the case of the Option Shares, by
3:00 p.m., New York time, on the business day preceding the date of purchase.
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It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose purchase price shall not
have been received by you on the Closing Date or any later date on which
Option Shares are purchased for the account of such Underwriter. Any such
payment by you shall not relieve such Underwriter from any of its obligations
hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as
follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A, if
any, and (ii) not file any amendment to the Registration Statement or supplement
to the Prospectus of which you shall not previously have been advised and
furnished with a copy or to which you shall have reasonably objected in writing
or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any Stop Order, (iii) the institution or notice of
intended institution of any action or proceeding for that purpose, (iv) the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction, or (v) the receipt by
it of notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the issuance
of a Stop Order and, if such Stop Order shall at any time be issued, to obtain
the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
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(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by you, shall occur as a result of which it is necessary,
in the opinion of counsel for the Company or of counsel for the Underwriters,
to supplement or amend the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser of the Underwritten Shares, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus
or an amended prospectus so that the Prospectus as so supplemented or amended
will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances existing at the time such Prospectus is delivered to
such purchaser, not misleading. If, after the initial public offering of the
Underwritten Shares by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion either
of counsel for the Company or of counsel for the Underwriters such proposed
variation requires that the Prospectus be supplemented or amended, the
Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the
Underwritten Shares may be sold by the several Underwriters to use the
Prospectus, as from time to time amended or supplemented, in connection with
the sale of the Underwritten Shares in accordance with the applicable
provisions of the Securities Act and the applicable rules and regulations
thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Underwritten Shares for offer and sale under the securities
or blue sky laws of such jurisdictions as you may designate and, during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, in keeping such qualifications in good standing under
said securities or blue sky laws; PROVIDED, HOWEVER, that the Company shall not
be obligated to file any general consent to service of process or to qualify as
a foreign corporation in any jurisdiction in which it is not so qualified. The
Company will, from time to time, prepare and file such statements, reports, and
other documents as are or may be required to continue such qualifications in
effect for so long a period as you may reasonably request for distribution of
the Underwritten Shares.
(g) During a period of three years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to shareholders of
the Company and of all information, documents and reports filed with the
Commission.
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(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date,
the Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the NASD of the Registration Statement, any Preliminary
Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies
of any Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 6 to be so furnished, (iii) the printing of this Agreement
and related documents delivered to the Underwriters, (iv) the preparation,
printing and filing of all supplements and amendments to the Prospectus referred
to in paragraph (d) of this Section 6, (v) the furnishing to you and the
Underwriters of the reports and information referred to in paragraph (g) of this
Section 6 and (vi) the printing and issuance of stock certificates, including
the transfer agent's fees.
(j) The Company agrees that Cadwalader, Wickersham & Taft, counsel to
the Underwriters (herein called "CADWALADER"), shall act as counsel in
qualifying the Underwritten Shares under state securities or blue sky laws and
in the review of the offering by the NASD. The Company agrees to reimburse you
(in an amount not to exceed $10,000), for the account of the several
Underwriters, for blue sky fees and related disbursements (including
Cadwalader's fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or Cadwalader in
qualifying the Underwritten Shares under state securities or blue sky laws and
in the review of the offering by the NASD.
(k) The Company hereby agrees that, without the prior written consent
of Gruntal & Co., L.L.C. on behalf of the Underwriters, the Company will not,
for a period of one year from the effective date of the Registration Statement,
directly or indirectly, (i) sell, offer, contract to sell, make any short sale,
pledge, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire shares of
Common Stock or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of shares of
Common Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of shares of Common Stock or such other securities,
in cash or otherwise. The foregoing sentence shall not apply, in the case of the
Company to (A) the Underwritten Shares to be sold to the Underwriters pursuant
to this Agreement, (B) shares of Common Stock issued by the Company upon the
exercise of options granted under the stock option plans of the Company (the
"Option Plans") or pursuant to the exercise of warrants, each as described in
footnote (__) to the table under the caption "Capitalization" in the Preliminary
Prospectus, and (C) options to purchase shares of Common Stock granted under the
Option Plans.
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(l) The Company will conduct its affairs in such a manner to ensure
that the Company will not be an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment Company Act.
(m) For a period of three years after the Effective Date, Gruntal &
Co., L.L.C. shall have the right to designate one person (the "OBSERVER"), who
shall be entitled to attend and observe (whether in person or by telephone) all
meetings of the Board of Directors of the Company and to receive all notices and
other communications and correspondence sent by the Company to the members of
its Board of Directors. The Company further agrees to reimburse the Observer for
all out-of pocket expenses incurred by the Observer in connection with his or
her attendance of meetings of the Company's Board of Directors.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company agrees to indemnify and hold harmless each Underwriter and each person
(including each member, partner or officer thereof) who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages or liabilities
(including amounts paid in settlement of any claim or litigation), joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or the common law or otherwise, and
the Company agrees to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought or threatened against,
the respective indemnified parties, in each case arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained in
(A) the Registration Statement (including the Prospectus as part thereof and any
Rule 462(b) Registration Statement) or any post-effective amendment thereto
(including any Rule 462(b) Registration Statement), (B) any Preliminary
Prospectus or the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto), or
(C) any application or other document or communication (for purposes of this
Section 7, collectively referred to as an "APPLICATION") executed by, or on
behalf of, the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify the Shares
under the blue sky or securities laws thereof or filed with Nasdaq, or in each
such case, the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that (1) the indemnity agreements of the Company contained in this paragraph (a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment
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thereof or supplement thereto, and (2) the indemnity agreement contained in this
paragraph (a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or expenses purchased the Underwritten Shares which
is the subject thereof (or to the benefit of any person controlling such
Underwriter) if at or prior to the written confirmation of the sale of such
Underwritten Shares a copy of the Prospectus (or the Prospectus as amended or
supplemented) was not sent or delivered to such person and the untrue statement
or omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented)
unless the failure is the result of noncompliance by the Company with paragraph
(c) of Section 6 hereof. The indemnity agreements of the Company contained in
this paragraph (a) and the representations and warranties of the Company
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Underwritten Shares
or the Option Shares, as the case may be.
(b) Provided a statement or omission was made in reliance upon and in
conformity with information furnished as herein stated or otherwise furnished in
writing to the Company by or on behalf of an indemnifying Underwriter for use in
the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto (as such information is described in Section 4(b) of this
Agreement), each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to the power of attorney contained in the [Custody]
Agreement, each of its directors, each other Underwriter and each person
(including each member, partner or officer thereof) who controls the Company or
any such other Underwriter within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Securities Act, the Exchange
Act, or the common law or otherwise and to reimburse each of them for any legal
or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in (i) the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) (ii) the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or (iii) any Application, or in
each such case, the omission or alleged omission to state therein a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The indemnity
agreement of each Underwriter contained in this paragraph (b) shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any indemnified party and shall survive the delivery of and
payment for the Underwritten Shares.
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(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the "NOTICE") of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the "NOTICE OF DEFENSE") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; PROVIDED, HOWEVER, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or
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proceeding. The Company agrees to promptly notify the Underwriters of the
commencementof any litigation or proceedings against the Company or any of
its officers, directors or affiliates in connection with the sale of the
Underwritten Shares, the Registration Statement, any Preliminary Prospectus
or the Prospectus, or any Application.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Underwritten Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each indemnifying
party in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the Underwritten Shares received by the Company and the total
underwriting discount received by the Underwriters, as set forth in the table on
the cover page of the Prospectus and the footnotes thereto, bear to the
aggregate public offering price of the Underwritten Shares. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Underwritten Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which
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contribution may be sought, it will promptly give written notice of such service
to the party or parties from whom contribution may be sought, but the omission
so to notify such party or parties of any such service shall not relieve the
party from whom contribution may be sought from any obligation it may have
hereunder or otherwise (except as specifically provided in paragraph (c) of this
Section 7).
(e) No indemnifying party will, without the prior written consent of
each indemnified party affected thereby, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such indemnified party or any person who controls such indemnified party
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of such
indemnified party and each such controlling person from all liability arising
out of such claim, action, suit or proceeding.
8. TERMINATION. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company if after the date of
this Agreement trading in the shares of Common Stock shall have been suspended,
or if there shall have occurred (i) the engagement in major hostilities or an
escalation of major hostilities by the United States or the declaration of war
or a national emergency by the United States on or after the date hereof, (ii)
any outbreak of hostilities or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change in economic or political conditions in the
financial markets of the United States would, in the Underwriters' reasonable
judgment, make the offering or delivery of the Underwritten Shares
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange or Nasdaq, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any United States federal, state or local government or agency, as
applicable, in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company to the Underwriters
and no liability of the Underwriters to the Company; PROVIDED, HOWEVER, that in
the event of any such termination, the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the performance
of the obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
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9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Underwritten Shares shall be subject to
the performance by the Company of all obligations to be performed by it
hereunder at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be, and to the following further
conditions:
(a) Notification that the Registration Statement has become effective
shall be received by you not later than 3:30 P.M. EST on the day following the
date of this Agreement or at such later date and time as shall be consented to
in writing by you; and no Stop Order shall have been issued and no proceedings
therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Underwritten
Shares or the Option Shares, as the case may be, hereunder and the validity and
form of the certificates representing the Underwritten Shares and the Option
Shares, as the case may be, all corporate proceedings and other legal matters
incident to the foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein), shall have
been approved at or prior to the Closing Date by Cadwalader.
(c) You shall have received from Squadron, Ellenoff, Plesent &
Sheinfeld, LLP, counsel for the Company (herein called "SQUADRON"), an opinion,
addressed to the Underwriters and dated the Closing Date, covering the matters
set forth in Annex A, and if Option Shares are purchased, (i) an additional
opinion from Squadron addressed to the Underwriters and dated the Closing Date
or the applicable later date, covering the matters set forth in Annex A, and, if
applicable, confirming that the statements expressed as of the Closing Date in
such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any Material Adverse Change or any development involving a prospective
Material Adverse Change, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, neither the Company nor the Subsidiary has entered into any
material transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein,
(iv) neither the Company nor the Subsidiary has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of the Subsidiary is a party or of which property of
the Company or the Subsidiary is the subject which are material and which are
not disclosed in
-21-
<PAGE>
the Registration Statement and the Prospectus, (vi) there are not any
franchises, contracts, leases or other documents which are required to be filed
as exhibits to the Registration Statement which have not been filed as required,
(vii) the representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later date on
which Option Shares are to be purchased, as the case may be, and (viii) there
has not been any material change in the market for securities in general or in
political, financial or economic conditions from those reasonably foreseeable as
to render it impracticable in your reasonable judgment to make a public offering
of the Underwritten Shares, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) The Company shall have executed and delivered to you (i) the
Warrant Agreement, substantially in the form filed as Exhibit __ to the
Registration Statement, and (ii)the Warrants in such denominations and to such
designees as shall have been provided to the Company.
(g) You shall have received from ___________________ a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Shares are purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the "ORIGINAL
LETTER"), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Shares are purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business, properties condition (financial or other) or results of operation of
the Company or the Subsidiary which, in your sole judgment, makes it impractical
or inadvisable to proceed with the public offering of the Underwritten Shares or
the purchase of the Option Shares as contemplated by the Prospectus.
-22-
<PAGE>
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) The Underwritten Shares to be issued and sold by the Company shall
have been duly authorized for trading on Nasdaq upon consummation of the sale of
the Underwritten Shares and upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers and beneficial holders of more than 5% of the outstanding
shares of Common Stock (after giving effect to the issuance and sale of the
Underwritten Shares) agreements, in form reasonably satisfactory to Gruntal &
Co., L.L.C., stating that, subject to certain limited exceptions set forth
therein, without the prior written consent of Gruntal & Co., L.L.C. on behalf of
the Underwriters, such person or entity will not, for a period of one year from
the Effective Date, directly or indirectly, (i) sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire shares of Common Stock or (ii) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic consequences or
ownership of shares of Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of shares of Common Stock
or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Cadwalader, counsel for the Underwriters, shall be
satisfied in its reasonable judgment that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; PROVIDED,
HOWEVER, that (i) in the event of such termination, the Company agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein or to comply with any
provision hereof, other than by reason of a default by any of the Underwriters
or by reason of the occurrence of an event set forth in clause (viii) of Section
9(d) hereof, the Company will reimburse the Underwriters severally upon demand
for all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
transactions contemplated hereby.
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<PAGE>
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Underwritten Shares and the Option Shares, as the case
may be, shall be subject to the conditions that (a) the Registration Statement
shall have become effective and (b) no Stop Order shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by the Company by giving
notice to you. Any such termination shall be without liability of the Company to
the Underwriters and without liability of the Underwriters to the Company;
PROVIDED, HOWEVER, that in the event of any such termination the Company agrees
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; PROVIDED, HOWEVER, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 7 hereof, the several parties (in addition
to the Company and the several Underwriters) entitled to indemnification or
contribution under the provisions of said Section 7, and their respective
personal representatives, successors and assigns. Nothing in this Agreement is
intended or shall be construed to give to any other person, firm or corporation
any legal or equitable remedy or claim under or in respect of this Agreement or
any provision herein contained. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the Underwritten
Shares from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Gruntal & Co., L.L.C., One Liberty Plaza,
New York, New York 10006, Attention: Leo T. Abbe (tel.: 212-820-8302; fax:
212-820-8335); if to the Company, shall be mailed, telegraphed, sent by
facsimile, or delivered to it at fashionmall.com, Inc., 575
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<PAGE>
Madison Avenue, New York, New York 10022 (fax no. (212) ___-____),
Attention: President. All notices given by telegraph shall be promptly confirmed
by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect as to the
parties with respect to which they have gone into effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the Company
or its directors or officers, and (iii) delivery and payment for the
Underwritten Shares or the Option Shares under this Agreement; PROVIDED,
HOWEVER, that if this Agreement is terminated prior to the Closing Date, the
provisions of paragraph (l) of Section 6 hereof shall be of no further force or
effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York applicable to agreements made and to be
performed entirely within New York State, without reference to principles of
conflicts of laws.
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<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company
and the several Underwriters in accordance with its terms.
Very truly yours,
FASHIONMALL.COM, INC.
By ______________________________
Benjamin Narasin
Chief Executive Officer
By ______________________________
[Name]
Chief Financial Officer
FOUNDERS
___________________________________
Benjamin Narasin
Richard A. Eisner & Co. LLC
By ______________________________
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
GRUNTAL & CO., L.L.C.
____________________________,
By Gruntal & Co., L.L.C.
By ___________________________
Name:
Title:
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
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<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES OF COMMON STOCK TO BE
UNDERWRITERS PURCHASED
Gruntal & Co., L.L.C................................
Total............................. 3,000,000
=========
<PAGE>
ANNEX A
OPINION OF SQUADRON, ELLENOFF, PLESENT & SHEINFELD, LLP
<PAGE>
CERTIFICATE OF INCORPORATION
OF
FASHIONMALL.COM, INC.
UNDER SECTION 102 OF THE DELAWARE GENERAL CORPORATION LAW
FIRST. The name of the corporation (hereinafter called the "Corporation")
is fashionmall.com, Inc.
SECOND. The address, including street, number, city and county of the
Corporation's registered office in the State of Delaware is 9 East Loockerman
Street, in the City of Dover, County of Kent. The name of its registered agent
at such address is National Corporate Research Ltd.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH. The total number of shares of stock which the Corporation shall
have authority to issue is 38,000,000 shares with a par value of $.01 per share,
consisting of 35,000,000 shares of Common Stock, par value $.01 per share
("Common Stock"); and 3,000,000 shares of Preferred Stock, par value $.01 per
share ("Preferred Shares").
FIFTH. Authority is hereby expressly granted to the Board of Directors of
the Corporation (or a committee thereof designated by the Board of Directors
pursuant to the by-laws of the Corporation, as from time to time amended (the
"By-Laws")) to issue the Preferred Shares from time to time as Preferred Shares
of any series and to declare and pay dividends thereon in accordance with the
terms thereof and, in connection with the creation of each such series, to fix
by the resolution or resolutions providing for the issue of shares thereof, the
number of shares of
<PAGE>
such series, and the designations, powers, preferences, and rights (including
voting rights), and the qualifications, limitations, and restrictions, of such
series, to the full extent now and hereafter permitted by the laws of the State
of Delaware.
SIXTH. A. The name and mailing address of the incorporator is Jeffrey
P.Schultz, Esq., c/o Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth
Avenue, New York, New York 10176.
B. The powers of the incorporator are to terminate upon the filing
of this Certificate of Incorporation. The name and mailing address of the
person who is to serve as director until the first annual meeting of
stockholders or until his respective successors have been elected and
qualified are as follows:
Name Mailing Address
---- ---------------
Benjamin Narasin c/o Internet Fashion Mall, LLC
575 Madison Avenue
New York, New York 10022
SEVENTH. Election of directors need not be by written ballot.
EIGHTH. The Board of Directors is authorized to adopt, amend, or repeal
By-Laws of the Corporation.
NINTH. A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or any of its direct or indirect
subsidiaries or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of any other corporation or of a
partnership, joint venture, trust, or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether
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<PAGE>
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee, or agent or in any other capacity while serving as
a director, officer, employee, or agent, shall be indemnified and held harmless
by the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all expense, liability, and loss (including attorneys' fees,
judgments, fines, excise or other taxes assessed with respect to an employee
benefit plan, penalties, and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith, and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators; provided, however, that, except as provided in
Paragraph C of this Article NINTH with respect to proceedings to enforce rights
to indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Paragraph A of this Article
NINTH shall include the right to be paid by the Corporation the expenses
incurred in defending any proceeding for which such right to indemnification
is applicable in advance of its final disposition (hereinafter an
"advancement of expenses"); PROVIDED, HOWEVER, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an
indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be
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<PAGE>
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Article NINTH or otherwise.
C. The rights to indemnification and to the advancement of expenses
conferred in Paragraphs A and B of this Article NINTH shall be contract rights.
If a claim under Paragraph A or B of this Article NINTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by an indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law, and (ii) any
suit by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the Corporation shall be entitled to recover such
expenses upon a final adjudication that the indemnitee has not met any
applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that
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<PAGE>
the indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article Ninth or
otherwise, shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article NINTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, this certificate of
incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
E. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee, or agent of the
Corporation or another corporation, partnership, joint venture, trust, or other
enterprise against any expense, liability, or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability, or loss under the Delaware General Corporation Law.
F. The Corporation's obligation, if any, to indemnify any person who was or
is serving as a director, officer, employee, or agent of any direct or
indirect subsidiary of the Corporation or, at the request of the Corporation,
of any other corporation or of a partnership, joint venture, trust, or other
enterprise shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture,
trust, or other enterprise.
G. Any repeal or modification of the foregoing provisions of this Article
NINTH shall not adversely affect any right or protection hereunder of any
person in respect of any act or omission occurring prior to the time of such
repeal or modification.
- 5 -
<PAGE>
TENTH. No director of the Corporation shall be liable to the Corporation or
any of its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision does not eliminate the liability of the
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from
which the director derived an improper personal benefit. For purposes of the
prior sentence, the term "damages" shall, to the extent permitted by law,
include without limitation, any judgment, fine, amount paid in settlement,
penalty, punitive damages, excise or other tax assessed with respect to an
employee benefit plan, or expense of any nature (including, without limitation,
counsel fees and disbursements). Each person who serves as a director of the
Corporation while this Article TENTH is in effect shall be deemed to be doing so
in reliance on the provisions of this Article TENTH, and neither the amendment
or repeal of this Article TENTH, nor the adoption of any provision of this
Certificate of Incorporation inconsistent with this Article TENTH, shall apply
to or have any effect on the liability or alleged liability of any director of
the Corporation for, arising out of, based upon, or in connection with any acts
or omissions of such director occurring prior to such amendment, repeal, or
adoption of an inconsistent provision. The provisions of this Article TENTH are
cumulative and shall be in addition to and independent of any and all other
limitations on or eliminations of the liabilities of directors of the
Corporation, as such, whether such limitations or eliminations arise under or
are created by any law, rule, regulation, by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
ELEVENTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or stockholder
- 6 -
<PAGE>
thereof or on the application of any receiver or receivers appointed for this
Corporation under the provisions of Section 291 of Title 8 of the Delaware Code
or on the application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8 of
the Delaware Code order a meeting of the creditors or class of creditors, and/or
of the stockholders or class of stockholders of this Corporation, as the case
may be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
IN WITNESS WHEREOF, I have executed this Certificate of Incorporation this
26th day of February, 1999.
/S/ JEFFREY P. SCHULTZ
--------------------------------
Jeffrey P. Schultz, Incorporator
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<PAGE>
BY-LAWS
of
FASHIONMALL.COM, INC.
As adopted February 26, 1999
<PAGE>
Exhibit 3.2
FASHIONMALL.COM, INC..
A Delaware Corporation
BY-LAWS
---------------------------
ARTICLE I
STOCKHOLDERS
Section 1.1 ANNUAL MEETING.
An annual meeting of stockholders for the purposes of electing directors and of
transacting such other business as may come before it shall be held on such date
and time as shall be designated from time to time by the Board of Directors or
the President, either within or without the State of Delaware, as may be
specified by the Board of Directors.
Section 1.2 SPECIAL MEETINGS.
Special meetings of stockholders for any purpose or purposes may be held at any
time upon call of the Chairman of the Board, if any, the President, the
Secretary, or a majority of the Board of Directors, at such time and place
either within or without the State of Delaware as may be stated in the notice. A
special meeting of stockholders shall be called by the President or the
Secretary upon the written request, stating time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record 25% of the
outstanding stock of all classes entitled to vote at such meeting.
<PAGE>
Section 1.3 NOTICE OF MEETINGS.
Written notice of stockholders meetings, stating the place, date, and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten days but
not more than sixty days before the date of the meeting, unless a different
period is prescribed by laws.
Section 1.4 QUORUM.
Except as otherwise provided by law or in the Certificate of Incorporation or
these ByLaws, at any meeting of stockholders, the holders of a majority of the
outstanding shares of each class of stock entitled to vote at the meeting shall
be present or represented by proxy in order to constitute a quorum for the
transaction of any business. In the absence of a quorum, a majority in interest
of the stockholders present or the chairman of the meeting may adjourn the
meeting from time to time in the manner provided in Section 1.5 of these By-Laws
until a quorum shall attend.
Section 1.5 ADJOURNMENT.
Any meeting of stockholders, annual or special, may adjourn from time to time to
reconvene at the same or some other place, and notice need not be given of any
such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more
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<PAGE>
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 1.6 ORGANIZATION.
The Chairman of the Board, if any, or in his absence the President, or in their
absence any Vice President, shall call to order meetings of stockholders and
shall act as chairman of such meetings. The Board of Directors or, if the Board
fails to act, the stockholders may appoint any stockholder, director, or officer
of the Corporation to act as chairman of any meeting in the absence of the
Chairman of the Board, the President, and all Vice Presidents. The Secretary of
the Corporation shall act as secretary of all meetings of stockholders, but, in
the absence of the Secretary, the chairman of the meeting may appoint any other
person to act as secretary of the meeting.
Section 1.7 VOTING.
Except as otherwise provided by law or in the Certificate of Incorporation or
these By-Laws and except for the election of directors, at any meeting duly
called and held at which a quorum is present, a majority of the votes cast at
such meeting upon a given question by the holders of outstanding shares of stock
of all classes of stock of the Corporation entitled to vote thereon who are
present in person or by proxy shall decide such question. At any meeting duly
called and held for the election of directors at which a quorum is present,
those directors receiving a plurality of the votes cast by the holders (acting
as such) of shares of any class or series entitled to elect directors as a class
shall be elected.
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<PAGE>
Section 1.8 ACTION WITHOUT A MEETING.
The stockholders may take any action required or permitted to be taken by them
without a meeting unless otherwise prohibited by law or the Certificate of
Incorporation.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 NUMBER AND TERM OF OFFICE.
The business, property, and affairs of the Corporation shall be managed by or
under the direction of a board of at least two directors; provided, however,
that the Board, by resolution adopted by vote of a majority of the then
authorized numbers of directors, may increase or decrease the number of
directors. The directors shall be elected by the holders of shares entitled to
vote thereon at the annual meeting of stockholders, and each shall serve
(subject to the provisions of Article IV) until the next succeeding annual
meeting of stockholders and until his respective successor is elected and
qualified.
Section 2.2 CHAIRMAN OF THE BOARD.
The directors may elect one of their members to be Chairman of the Board of
Directors. The Chairman shall be subject to the control of and may be removed by
the Board of Directors. He shall perform such duties as may from time to time be
assigned to him by the Board.
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<PAGE>
Section 2.3 MEETINGS.
Regular meetings of the Board of Directors may be held without notice at such
time and place as shall from time to time be determined by the Board. Special
meetings of the Board of Directors shall be held at such time and place as shall
be designated in the notice of the meeting whenever called by the Chairman of
the Board, if any, the President, or by a majority of the directors then in
office.
Section 2.4 NOTICE OF SPECIAL MEETINGS.
The Secretary, or, in his absence, any other office of the Corporation, shall
give each director notice of the time and place of holding of special meetings
of the Board of Directors by mail at least five days before the meeting, or by
telex, telecopy, telegraph, cable or overnight courier at least three days
before the meeting. Unless otherwise stated in the notice thereof, any and all
business may be transacted at any meeting without specification of such business
in the notice.
Section 2.5 QUORUM AND ORGANIZATION OF MEETINGS.
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except as
otherwise provided by law or in the Certificate of Incorporation or these
By-Laws, a majority of the directors present at any meeting at which a quorum is
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present may decide any question brought before such meeting. Meetings shall be
presided over by the Chairman of the Board, if any, or in his absence, by the
President, or in the absence of both by such other person as the directors may
select. The Secretary of the Corporation shall act as secretary of the meeting,
but in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
Section 2.6 COMMITTEES.
The Board of Directors may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the power and authority of
the Board of Directors in the management of the business, property, and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee shall have power or
authority which is prohibited to such committee by the General Corporation Law
of the State of Delaware. Each committee which may be established by the Board
of Directors pursuant to these By-Laws may fix its own rules and procedures.
Notice of meetings of committees, other than of regular meetings provided for
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by the rules, shall be given to committee members. All action taken by
committees shall be recorded in minutes of the meetings.
Section 2.7 ACTION WITHOUT MEETING.
The Board of Directors or any committee designated by the Board may take any
action required or permitted to be taken by them without a meeting unless
otherwise prohibited by law or the Certificate of Incorporation.
Section 2.8 TELEPHONE MEETINGS.
Nothing contained in these By-laws shall be deemed to restrict the power of
members of the Board of Directors, or any committee designated by the Board, to
participate in a meeting of the Board, or committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
ARTICLE III
OFFICERS
Section 3.1 EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a President, Vice President,
Treasurer, and a Secretary, each of whom shall be elected by the Board of
Directors. The Board of Directors may elect or appoint such other officers
(including a Controller, a Chief Executive Officer and one or more Assistant
Secretaries) as it may deem necessary or desirable. Each
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officer shall hold office for such term as may be prescribed by the Board of
Directors from time to time. Any person may hold at one time two or more
offices.
Section 3.2 POWERS AND DUTIES.
The Chairman of the Board, if any, or, in his absence, the Chief Executive
Officer, or in his absence, the President, shall preside at all meetings of the
stockholders and of the Board of Directors. The Chief Executive Officer shall be
the chief executive officer of the Corporation. In the absence of the Chief
Executive Officer, the President and, in the absence of the President, a Vice
President appointed by the President or, if the President fails to make such
appointment, by the Board, shall perform all the duties of the Chief Executive
Officer. The officers and agents of the Corporation shall each have such powers
and authority and shall perform such duties in the management of the business,
property and affairs of the Corporation as generally pertain to their respective
offices, as well as such powers and authorities and such duties as from time to
time may be prescribed by the Board of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
Section 4.1 RESIGNATIONS.
Any director or officer of the Corporation, or any member of any committee, may
resign at any time by giving written notice to the Board of Directors, the Chief
Executive Officer, the President, or the Secretary of the Corporation. Any such
resignation shall take effect at the
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time specified therein or, if the time be not specified therein, then upon
receipt thereof. The acceptance of such resignation shall not be necessary to
make it effective.
Section 4.2 REMOVALS.
The Board of Directors, by a vote of not less than a majority of the entire
Board, at any meeting thereof, or by written consent, at any time, may, to the
extent permitted by law, remove with or without cause, from office or terminate
the employment of any officer or member of any committee and may, with or
without cause, disband any committee. Any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares entitled at the time to vote at an election of directors.
Section 4.3 VACANCIES.
Any vacancy in the office of any director or officer through death, resignation,
removal, disqualification, or other cause, and any additional directorship
resulting from any increase in the number of directors, may be filled at any
time by a majority of the directors then in office (even though less than a
quorum remains) or, in the case of any vacancy in the office of any director, by
the stockholders, and, subject to the provisions of this Article IV, the person
so chosen shall hold office until his successor shall have been elected and
qualified; or, if the person so chosen is a director elected to fill a vacancy,
he shall (subject to the provisions of this Article IV) hold office for the
unexpired term of his predecessor.
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ARTICLE V
CAPITAL STOCK
Section 5.1 STOCK CERTIFICATES.
The certificates for shares of the capital stock of the Corporation shall be in
such form as shall be prescribed by law and approved, from time to time, by the
Board of Directors.
Section 5.2 TRANSFER OF SHARES.
Shares of the capital stock of the Corporation may be transferred on the books
of the Corporation only by the holder of such shares or by his duly authorized
attorney, upon the surrender to the Corporation or its transfer agent of the
certificate representing such stock properly endorsed.
Section 5.3 FIXING RECORD DATE.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion,
or exchange of stock, or for the purpose of any other lawful action, the Board
of Directors may fix, in advance, a record date, which, unless otherwise
provided by law, shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action.
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Section 5.4 LOST CERTIFICATES.
The Board of Directors or any transfer agent of the Corporation may direct a new
certificate or certificates representing stock of the Corporation to be issued
in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as the Board of
Directors (or any transfer agent so authorized) shall direct to indemnify the
Corporation against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed or
the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
Section 5.5 REGULATIONS.
The Board of Directors shall have power and authority to make all such rules and
regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
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ARTICLE VI
MISCELLANEOUS
Section 6.1 CORPORATE SEAL.
The corporate seal shall have inscribed thereon the name of the Corporation, the
year of its organization, and the words "Corporate Seal" and "Delaware".
Section 6.2 FISCAL YEAR.
The fiscal year of the Corporation shall be December 31 of each year unless
otherwise determined by resolution of the Board of Directors.
Section 6.3 NOTICES AND WAIVERS THEREOF.
Wherever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, telex, telecopy, telegraph, cable or overnight courier
addressed to such address as appears on the books of the Corporation. Any notice
given by telex, telecopy, telegraph or cable shall be deemed to have been given
when it shall have been delivered for transmission, and any notice given by mail
or overnight courier shall be deemed to have been given when it shall have been
deposited in the mail with postage thereon prepaid or given to such courier
service, as applicable.
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Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-Laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
Section 6.4 STOCK OF OTHER CORPORATIONS OR OTHER INTERESTS.
Unless otherwise ordered by the Board of Directors, the Chief Executive Officer,
the President, the Secretary, and such attorneys or agents of the Corporation as
may be from time to time authorized by the Board of Directors, the Chief
Executive Officer, or the President, shall have full power and authority on
behalf of the Corporation to attend and to act and vote in person or by proxy at
any meeting of the holders of securities of any corporation or other entity in
which the Corporation owns or holds shares or other securities, and at such
meetings shall possess and may exercise all the rights and powers incident to
the ownership of such shares or other securities which the Corporation, as the
owner or holder thereof, might have possessed and exercised if present. The
Chief Executive Officer, the President, the Secretary, or such attorneys or
agents, may also execute and deliver on behalf of the Corporation powers of
attorney, proxies, consents, waivers, and other instruments relating to the
shares or securities owned or held by the Corporation.
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ARTICLE VII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of directors
shall have power to adopt, amend, or repeal the By-laws of the Corporation by
vote of not less than a majority of such shares, and except as otherwise
provided by law, the Board of Directors shall have power equal in all respects
to that of the stockholders to adopt, amend, or repeal the By-Laws by vote of
not less than a majority of the entire Board. However, any By-Law adopted by the
Board may be amended or repealed by vote of the holders of a majority of the
shares entitled at the time to vote for the election of directors.
ARTICLE VIII
PROVISIONS OF LAW
The By-Laws shall be subject to such provisions of the statutory and common laws
of the State of Delaware as may be applicable to corporations organized under
the laws of the State of Delaware. References herein to provisions of law shall
be deemed to be references to the aforesaid provisions of law unless otherwise
explicitly stated. All references in the By-Laws to such provisions of law shall
be construed to refer to such provisions as from time to time amended.
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ARTICLE IX
CERTIFICATE OF INCORPORATION
The By-Laws shall be subject to the Certificate of Incorporation of the
Corporation. All references in the By-Laws to the Certificate of Incorporation
shall be construed to mean the Certificate of Incorporation of the Corporation
as from time to time amended.
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<PAGE>
Warrant No.
-----
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF MAY BE
TRANSFERRED EXCEPT IN A TRANSACTION REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR WHICH IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THAT ACT.
VOID AFTER 5:00 P.M. NEW YORK TIME, ON MARCH 2, 2004
INTERNET FASHION MALL LLC
THIS CERTIFIES that, for good and valuable consideration received, FM/CCP
INVESTMENT PARTNERS, LLP (the "HOLDER"), is entitled to subscribe for and
purchase from INTERNET FASHION MALL LLC, a Delaware limited liability company,
its successors and assigns (the "LLC" or the "COMPANY"), upon the terms and
conditions set forth herein, at any time or from time to time after the date, if
ever, that the Company (or the IPO Company (as defined below)) completes its
initial public offering (the "IPO"), until 5:00 P.M. New York City time on March
2, 2004 (the "EXPIRATION DATE"), all or any portion of either (i) the 2%
membership interest of the Company calculated in accordance with Section 9 of
this Warrant or (ii) if shares of common stock the IPO Company have been issued
to the members of the Company in consideration for the conversion, exchange or
cancellation of the Membership Interests and/or the transfer of the Membership
Interests to the IPO Company a number of shares of common stock of the IPO
Company ("COMMON STOCK") determined pursuant to Section 9, subject to adjustment
as provided herein (the "WARRANT SHARES"), at a price with respect to such
membership interests or per share equal to 105% of the initial public offering
price of any such membership interests or price per share of the Common Stock in
the IPO, as the case may be, subject to adjustment as provided herein (the
"EXERCISE PRICE"). The membership interests of Internet Fashion Mall, LLC shall
be converted, exchanged, canceled and/or transferred in connection with the
issuance of the Common Stock of the IPO Company on or prior to the consummation
of the IPO Company's IPO. The term "Shares" as used herein shall mean the IPO
Company's shares of Common Stock or other common equity. Subject to the terms of
the Subscription Agreement of even date herewith among the Holder and the
Company (the "SUBSCRIPTION AGREEMENT"), the Limited Liability Company Agreement
of the Company and compliance with the Securities Act of 1933, as amended (the
"ACT"), this Warrant may be sold, transferred, assigned or hypothecated at any
time and the term the "Holder" as used herein shall include any transferee to
whom this Warrant has been transferred. The term "IPO Company" means any entity,
the shares or other equity securities of which are issued to the members of the
Company in consideration for the conversion, exchange or cancellation of the
Membership Interests in the Company and/or the transfer of the Membership
Interests to the IPO Company. References herein to the "Company" shall be deemed
to refer to the IPO Company, or if any IPO is consummated by the LLC, to the LLC
and, in such case, references to the Shares shall be deemed, MUTATIS MUTANDIS,
to refer to the number of Membership Interests referred to in Section 9.
<PAGE>
1. METHOD OF EXERCISE. This Warrant may be exercised at any time after the
IPO and prior to the Expiration Date, as to the whole or any lesser number of
Warrant Shares, by the surrender of this Warrant (with the election at the end
hereof duly executed) to the Company at 575 Madison Avenue, New York, New York
10022, or at such other place as may be designated in writing by the Company,
together with a certified or bank cashier's check payable to the order of the
Company in an amount equal to the Exercise Price multiplied by the number of
Warrant Shares for which this Warrant is being exercised. Upon any exercise of
this Warrant, in lieu of any fractional Warrant Shares to which the Holder shall
be entitled, the Company shall pay to the Holder cash in accordance with the
provisions of Section 5(c) hereof.
2. ISSUANCE OF CERTIFICATES. Upon each exercise of the Holder's rights to
purchase Warrant Shares, the Holder shall, as of the close of business on such
day, be deemed to be the holder of record of the Warrant Shares issuable upon
such exercise, notwithstanding that the transfer books of the Company shall then
be closed or certificates representing such Warrant Shares shall not then have
been actually delivered to the Holder. As soon as practicable after each such
exercise of this Warrant, the Company shall issue and deliver to the Holder a
certificate or certificates for the Warrant Shares issuable upon such exercise,
registered in the name of the Holder or its designee. If this Warrant should be
exercised in part only, upon surrender of this Warrant for cancellation, the
Company shall execute and deliver a new Warrant evidencing the right of the
Holder to purchase the balance of the Warrant Shares (or portions thereof)
subject to purchase hereunder.
3. RECORDING OF TRANSFER. Any Warrants issued upon the transfer or exercise
in part of this Warrant shall be numbered and shall be registered in an Warrant
Register as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant Register as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person, and
shall not be liable for any registration or transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his or its duly authorized
attorney or representative, or accompanied by proper evidence of succession,
assignment or authority to transfer. In all cases of transfer by an attorney,
executor, administrator, guardian or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Warrant or Warrants to
the person entitled thereto. This Warrant may be exchanged, at the option of the
Holder hereof, for another Warrant, or other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares (or portions thereof), upon surrender
to the Company or its duly authorized agent. Notwithstanding the foregoing, the
Company shall have no obligation to cause this Warrant to be transferred on its
books to any person if counsel to the Company reasonably requests a legal
opinion that such transfer does
<PAGE>
not violate the provisions of the Act, and the rules and regulations thereunder,
unless such opinion is delivered. Warrants held by FM/CCP Investment Partners,
LLP may be transferred to "Permitted Transferees" as such term is defined in the
Subscription Agreement.
4. RESERVATION OF SHARES. The Company shall at all times reserve and keep
available out of its authorized and unissued Shares, solely for the purpose of
providing for the exercise of the warrants, such number of shares of Shares as
shall, from time to time, be sufficient therefor. The Company covenants that all
shares of Shares issuable upon exercise of this Warrant, upon receipt by the
Company of the full payment therefor, shall be validly issued, fully paid,
nonassessable and free of preemptive rights.
5. EXERCISE PRICE ADJUSTMENTS. Subject to the provisions of this Section 5,
the Exercise Price in effect from time to time shall be subject to adjustment,
as follows:
(a) In case the Company shall at any time after the date of the IPO
(i) declare a dividend or make a distribution on the outstanding Shares payable
in shares of its capital stock or securities convertible into or exchangeable
for capital stock, (ii) subdivide the outstanding Shares, (iii) combine the
outstanding Shares into a smaller number of shares, or (iv) issue any shares by
reclassification of the Shares (other than a change in par value, or from par
value to no par value, or from no par value to par value), THEN, in each case,
the Exercise Price in effect, and the number of Shares issuable upon exercise of
the Warrants outstanding, at the time of the record date for such dividend or at
the effective date of such subdivision, combination or reclassification, shall
be proportionately adjusted so that the holders of the Warrants after such time
shall be entitled to receive upon exercise of the Warrants the aggregate number
and kind of shares which, if such Warrants had been exercised immediately prior
to such time, such holders would have owned upon such exercise and immediately
thereafter been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) Whenever there shall be an adjustment as provided in this Section
5, the Company shall within 15 days thereafter cause written notice thereof to
be sent by registered mail, postage prepaid, to the Holder, at its address as it
shall appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares issuable
hereunder and the exercise price thereof after such adjustment and setting forth
a brief statement of the facts requiring such adjustment and the computation
thereof, which officer's certificate shall be conclusive evidence of the
correctness of any such adjustment absent manifest error.
(c) The Company may, but shall not be required to, issue fractions of
Shares or other shares of the Company upon the exercise of this Warrant. If any
fraction of a Share
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would be issuable upon the exercise of this Warrant (or specified portions
thereof), the Company may issue a whole share in lieu of such fraction or the
Company may purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price of such Shares on the date of exercise of
this Warrant.
(d) The Current Market Price per Share on any date shall be deemed to
be the average of the daily closing prices for the five (5) consecutive trading
days immediately preceding the date in question. The closing price for each day
shall be the last reported sales price regular way or, in case no such reported
sale takes place on such day, the closing bid price regular way, in either case
on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, the highest reported bid price
for the Common Stock as furnished by the National Association of Securities
Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer
reporting such information. If on any such date the Common Stock is not listed
or admitted to trading on any national securities exchange and is not quoted by
NASDAQ or any similar organization, the fair value of a share of Common Stock on
such date, as determined in good faith by the Board of Directors of the Company,
whose determination shall be conclusive absent manifest error, shall be used.
(e) No adjustment in the Exercise Price shall be required if such
adjustment is less than $0.01; provided, however, that any adjustments which by
reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest thousandth of a
share, as the case may be.
6. (a) CONSOLIDATIONS AND MERGERS. In case of any consolidation with or
merger of the Company with or into another corporation (other than a merger or
consolidation in which the Company is the surviving or continuing corporation
and which does not result in any reclassification of the outstanding Shares or
the conversion of such outstanding Shares into shares of other stock or other
securities or property), or in case of any sale, lease or conveyance to another
corporation of the property and assets of any nature of the Company as an
entirety or substantially as an entirety (such actions being hereinafter
collectively referred to as "REORGANIZATIONS"), there shall thereafter be
deliverable upon exercise of this Warrant (in lieu of the number of Shares
theretofore deliverable) the kind and amount of shares of stock or other
securities, cash or other property which would otherwise have been deliverable
to a holder of the number of Shares upon the exercise of this Warrant upon such
Reorganization if this Warrant had been exercised in full immediately prior to
such Reorganization. In case of any Reorganization, appropriate adjustment, as
determined in good faith by the Board of Directors of the Company, shall be made
in the application of the provisions herein set forth with respect to the rights
and interests of the Holder so that the provisions set forth herein shall
thereafter be applicable, as nearly as possible, in relation to
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any shares or other property thereafter deliverable upon exercise of this
Warrant. Any such adjustment shall be made by and set forth in a supplemental
agreement between the Company, or any successor thereto, and the Holder and
shall for all purposes hereof conclusively be deemed to be an appropriate
adjustment. The Company shall not effect any such Reorganization unless upon or
prior to the consummation thereof the successor corporation, or if the Company
shall be the surviving corporation in any such Reorganization and is not the
issuer of the shares of stock or other securities or property to be delivered to
holders of Shares outstanding at the effective time thereof, then such issuer,
shall assume by written instrument the obligation to deliver to the Holder such
shares of stock, securities, cash or other property as the Holder shall be
entitled to purchase in accordance with the foregoing provisions.
(b) In case of any reclassification or change of the Shares issuable
upon exercise of this Warrant (other than a change in par value or from no par
value to a specified par value, or as a result of a subdivision or combination,
but including any change in the shares into two or more classes or series of
shares), or in case of any consolidation or merger of another corporation into
the Company in which the Company is the continuing corporation and in which
there is a reclassification or change (including a change to the right to
receive cash or other property) of the Shares (other than a change in par value,
or from no par value to a specified par value, or as a result of a subdivision
or combination, but including any change in the shares into two or more classes
or series of shares), the Holder shall have the right thereafter to receive upon
exercise of this Warrant solely the kind and amount of shares of stock and other
securities, property, cash or any combination thereof receivable upon such
reclassification, change, consolidation or merger by a holder of the number of
Shares for which this Warrant might have been exercised immediately prior to
such reclassification, change, consolidation or merger. Thereafter, appropriate
provision shall be made for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of Shares and to successive
consolidations, mergers, sales, leases, or conveyances.
7. NOTICE OF CERTAIN EVENTS. In case at any time after the IPO any of the
following occur:
(a) The Company shall take a record of the holders of its Shares for
the purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of the Company; or
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(b) The Company shall offer to all the holders of its Shares any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) The Company shall take any action to effect any reclassification
or change of outstanding Shares or any consolidation, merger, sale, lease or
conveyance of property, described in Section 6; or
(d) The Company shall take any action to effect any liquidation,
dissolution or winding-up of the Company or a sale of all or substantially all
of its property, assets and business;
THEN, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least
fifteen (15) days prior to (i) the date as of which the holders of record of
Shares to be entitled to receive any such dividend, distribution, rights,
warrants or other securities are to be determined, (ii) the date on which any
such offer to holders of Shares is made, or (iii) the date on which any such
reclassification, change of outstanding Shares, consolidation, merger, sale,
lease, conveyance of property, liquidation, dissolution or winding-up is
expected to become effective and the date as of which it is expected that
holders of record of Shares shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such reclassification,
change of outstanding shares, consolidation, merger, sale, lease, conveyance of
property, liquidation, dissolution or winding-up. Nothing herein shall allow a
Holder to delay or prevent any of the foregoing actions.
8. REGISTRATION RIGHTS. The Holder is being granted certain registration
rights with respect to the resale of the Warrant Shares, pursuant to Section 7
of the Subscription Agreement, and such rights will be governed by the
Registration Rights Agreement referred to in such Section 7.
9. CONVERSION OF MEMBERSHIP INTERESTS INTO COMMON STOCK. It is intended
that, on or prior to the consummation of the IPO of the IPO Company, the
membership interests in the Company will be converted, exchanged, canceled
and/or transferred in consideration for the issuance of shares of Common Stock
of the IPO Company. Subject to and in accordance with the letter of even date
herewith from the Company to Holder and Jerome Chazen (the "Capitalization Side
Letter"), the number of shares of Common Stock for which this Warrant shall be
initially exercisable immediately following the consummation of the IPO shall be
equal to the number of shares of Common Stock into which or for which two
percent (2%) of the membership interests of the LLC outstanding on the date
hereof (after giving effect to the purchase of 5% of such interests by the
Holder, and both before and after the acquisition and exercise of options to
purchase of 3% of such interests by Jerome Chazen pursuant to his Consulting
Agreement with the Company (but not his
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options to purchase certain shares calculated by reference to an additional 2%
of such interests) and after giving effect to subsequent issuances of membership
interests and/or Shares that would reduce the percentage interest of the
percentage interest of the holder of a 2% membership interest as of the date of
such conversion, exchange, cancellation or transfer of the membership
interests), is converted, exchanged, canceled and/or transferred upon such
consummation.
10. TAXES. The issuance of any shares or other securities upon the exercise
of this Warrant and the delivery of certificates or other instruments
representing such shares or other securities shall be made without charge to the
Holder for any tax or other charge in respect of such issuance. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder (except for any tax that is payable in respect of
any such transfer and any related exercise of this Warrant and that would be
payable pursuant to the first sentence of this Section 10 were such certificate
to be issued in the name of the Holder) and the Company shall not be required to
issue or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.
11. LEGEND. Unless the sale of the Warrant Share is registered or exempt
from registration under Rule 144(k) or otherwise the certificate or certificates
evidencing the Warrant Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR STATE SECURITIES LAWS, BUT HAVE BEEN ISSUED OR TRANSFERRED PURSUANT
TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT. NO
DISTRIBUTION, SALE, OFFER FOR SALE, TRANSFER, DELIVERY, PLEDGE, OR
OTHER DISPOSITION OF THESE SECURITIES MAY BE EFFECTED EXCEPT IN
COMPLIANCE WITH THE ACT, ANY APPLICABLE STATE LAWS, AND THE RULES AND
REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION AND STATE
AGENCIES PROMULGATED THEREUNDER."
12. REPLACEMENT OF WARRANTS. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of any Warrant (and upon
surrender of any
7
<PAGE>
Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses and execution of a reasonable lost security indemnification
agreement, the Company shall execute and deliver to the Holder thereof a new
Warrant of like date, tenor and denomination.
13. NO RIGHTS AS STOCKHOLDER. The Holder of any Warrant shall not have,
solely on account of such status, any rights of a stockholder of the Company,
either at law or in equity, or to any notice of meetings of stockholders or of
any other proceedings of the Company, except as provided in this Warrant.
14. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of this Warrant, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth on the first page of
this Warrant or to such other address as the Company may designate by notice to
the Holder.
15. SUCCESSORS. All the covenants, agreements, representations and
warranties contained in this Warrant shall bind the parties hereto and their
respective heirs, executors, administrators, distributees, successors and
assigns.
16. HEADINGS. The Article and Section headings in this Warrant are inserted
for purposes of convenience only and shall have no substantive effect.
17. GOVERNING LAW. This Warrant shall be construed in accordance with the
laws of the State of New York applicable to contracts made and performed within
such State, without regard to principles of conflicts of law.
18. ENTIRE AGREEMENT; MODIFICATION OF AGREEMENT. This Agreement, together
with the Note, the Capitalization Side Letter, the Subscription Agreement, and
the Registration Rights Agreement referenced in Section 8 constitute the entire
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, oral or written with respect thereto. This
Warrant shall not otherwise be modified, supplemented or amended in any respect
unless such modification, supplement or amendment is in writing and signed by
the Company and the holders of a majority of the then outstanding Warrants,
provided that no modification, amendment or supplement which has the effect of
increasing the Exercise Price or shortening the period during which this Warrant
is exercisable may be made without the consent of the Holder of this Warrant.
8
<PAGE>
19. CONSENT TO JURISDICTION. The Company and the Holder irrevocably consent
to the non-exclusive jurisdiction of the courts of the State of New York and of
any federal court located in such State, in each case sitting in New York
County, in connection with any action or proceeding arising out of or relating
to this Warrant, any document or instrument delivered pursuant to, in connection
with or simultaneously with this Warrant, or a breach of this Warrant or any
such document or instrument. In any such action or proceeding, the Company
waives personal service of any summons, complaint or other process and agrees
that service thereof may be made in accordance with Section 14 hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of the
date set forth below.
Dated: As of March 2, 1999 INTERNET FASHION MALL LLC
By: /s/ Benjamin Narasin
---------------------------
Name: Benjamin Narasin
Title: Managing Member
9
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer
the attached Warrant.)
FOR VALUE RECEIVED, ________________________ hereby sells, assigns, and
transfers unto ______________________________, having an address at
___________________________________________________, the attached Warrant to the
extent of the right to purchase __________ Membership Interests OF INTERNET
FASHION MALL LLC or ____________ shares of the IPO Company (collectively, the
"COMPANY"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint _________________ as attorney to
transfer such Warrant on the books of the Company, with full power of
substitution.
Dated: ,
--------------- ----- --------------------------------
Print name of holder of Warrant
By:
-----------------------------
Name:
Title:
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
<PAGE>
EXERCISE FORM
The undersigned hereby exercises its rights to purchase _________ Warrant
Shares covered by the within Warrant and tenders payment herewith in the amount
of $ _____________ in accordance with the terms thereof, and requests that
certificates for such securities be issued in the name of, and delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of,
and delivered to, the undersigned at the address stated below.
Dated: Name:
------------------ --------------------------------------
(Print)
------------------------------------
(Signature)
(Signature must conform to the name
of the Warrant Holder specified on
the face of the Warrant)
Address:
<PAGE>
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE, NOR
ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAWS.
INTERNET FASHION MALL LLC
6% Promissory Note
$1,000,000 March 2, 1999
New York, New York
INTERNET FASHION MALL LLC, a Delaware limited liability company (the
"Company"), for value received, hereby promises to pay to FM/CCP INVESTMENT
PARTNERS, LLC, with an address at 767 Fifth Avenue, New York, New York 10153, or
registered assigns (the "Holder"), the principal amount of one million Dollars
($1,000,000) on the Maturity Date (as defined below), and to pay interest on the
unpaid principal balance hereof at the rate of 6% per annum (calculated on the
basis of a 360-day year consisting of twelve 30-day months) on the Maturity Date
all as hereafter further provided.
In no event shall any interest to be paid hereunder exceed the maximum rate
permitted by law. In any such event, this Note shall automatically be deemed
amended to permit interest charges at an amount equal to, but no greater than,
the maximum rate permitted by law.
1. PAYMENTS.
(a) Principal of, and any accrued and unpaid interest on, this Note
shall be due and payable in full on the Maturity Date. The "Maturity Date" shall
be the date which is the earlier of (i) the third anniversary of the date of
this Note (the "Stated Maturity Date"), (ii) the date of the closing of an
initial public offering of securities of either the Company or the IPO Company,
whichever occurs earlier, pursuant to a registration statement filed with the
Securities and Exchange Commission under the Act, or (iii) if Benjamin Narasin
is no longer an active member of senior management, and equity holder in, the
Company, the IPO Company or any entity that, directly or indirectly, controls
the Company (a "Change of Control"), on the date that the Holder demands payment
of this Note; provided that the Holder must make such demand by notice to the
Company within 30 days following written notice from the Company to the Holder
of any such Change of Control, which notice from the Company shall be given as
promptly as practical, but in any event
<PAGE>
within 10 days of any Change of Control. The term "IPO Company" means any
corporation or other entity, the shares or other equity securities of which are
issued to the members of the Company in consideration for the conversion,
exchange or cancellation of the membership interests in the Company and/or the
transfer of such Membership Interests to the IPO Company.
(b) The Company may, at its option, prepay all or any part of the
principal of this Note, without payment of any premium or penalty. The Holder
may elect upon written notice to the Company at any time to apply any or all of
the principal or interest then outstanding under this Note to payment of the
exercise price due upon exercise of any Warrant; such application of amounts
outstanding hereunder shall be deemed to be prepayment by the Company of such
amounts. All payments on this Note shall be applied first to accrued interest
hereon and the balance to the payment of principal hereof.
(c) Payments of principal and interest on this Note shall be made by
check sent to the Holder's address set forth above or to such other address as
the Holder may designate for such purpose from time to time by written notice to
the Company, in such coin or currency of the United States of America as at the
time of payment shall be legal tender for the payment of public and private
debts.
(d) The obligations to make the payments provided for in this Note are
absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment or adjustment whatsoever. The Company
hereby expressly waives demand and presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, bringing of suit
and diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of and without any notice, diligence, act or
omission with respect to the collection of any amount called for hereunder.
2. EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an event of
default (an "Event of Default"):
(a) A default in the payment of the principal or interest on this
Note, when and as the same shall become due and payable.
(b) The entry of a decree or order by a court having jurisdiction
adjudging the Company bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of the
Company, under federal bankruptcy law, as now or hereafter constituted, or any
other applicable federal or state bankruptcy, insolvency or other similar law,
and the continuance of any such decree or order unstayed and in effect for a
period of 60 days; or the commencement by the Company of a voluntary case under
federal bankruptcy law, as now or hereafter constituted, or any other applicable
federal or state bankruptcy, insolvency, or other similar law, or the consent by
it to the institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization or relief
under
<PAGE>
federal bankruptcy law or any other applicable federal or state law, or the
consent by it to the filing of such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator or similar official of the
Company or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Company in furtherance of any such action.
3. REMEDIES UPON DEFAULT.
Upon the occurrence of an Event of Default referred to in Section
2(c), the principal amount then outstanding of, and the accrued interest on,
this Note shall automatically become immediately due and payable without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Company. Upon the occurrence of an Event of
Default referred to in Section 2(a) the entire principal amount then outstanding
of, and the accrued interest on, this Note shall be due and payable immediately,
without presentment, demand, protest or other formalities of any kind, all of
which are expressly waived by the Company.
4. TRANSFER.
(a) Any Notes issued upon the transfer of this Note shall be numbered
and shall be registered in a Note Register as they are issued. The Company shall
be entitled to treat the registered holder of any Note on the Note Register as
the owner in fact thereof for all purposes and shall not be bound to recognize
any equitable or other claim to or interest in such Note on the part of any
other person, and shall not be liable for any registration or transfer of Notes
which are registered or to be registered in the name of a fiduciary or the
nominee of a fiduciary unless made with the actual knowledge that a fiduciary or
nominee is committing a breach of trust in requesting such registration or
transfer, or with the knowledge of such facts that its participation therein
amounts to bad faith. This Note shall be transferable only on the books of the
Company upon delivery thereof duly endorsed by the Holder or by its duly
authorized attorney or representative, or accompanied by proper evidence of
succession, assignment, or authority to transfer. In all cases of transfer by an
attorney, executor, administrator, guardian, or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Note or Notes to the
person entitled thereto. This Note may be exchanged, at the option of the Holder
thereof, for another Note, or other Notes of different denominations, of like
tenor and representing in the aggregate a like principal amount, upon surrender
to the Company or its duly authorized agent. Notwithstanding the foregoing, the
Company shall have no obligation to cause Notes to be transferred on its books
to any person if, in the opinion of counsel to the Company, such transfer does
not comply with the provisions of the Act and the rules and regulations
thereunder.
(b) The Holder acknowledges that it has been advised by the Company
that this Note has not been registered under the Act, that the Note is being or
has been issued on the basis of the statutory exemption provided by Section 4(2)
of the Act or Regulation D promulgated thereunder, or both, relating to
transactions by an issuer not involving any public offering, and that the
Company's reliance thereon is based in part upon the representations made by the
original Holder
<PAGE>
in the original Holder's Subscription Agreement executed and delivered on the
date hereof. The Holder acknowledges that it has been informed by the Company
of, or is otherwise familiar with, the nature of the limitations imposed by the
Act and the rules and regulations thereunder on the transfer of securities. In
particular, the Holder agrees that no sale, assignment or transfer of the Note
shall be valid or effective, and the Company shall not be required to give any
effect to any such sale, assignment or transfer, unless (i) the sale, assignment
or transfer of the Note is registered under the Act, it being understood that
the Note is not currently registered for sale and that the Company has no
obligation or intention to so register the Notes or (ii) such sale, assignment,
or transfer is exempt from registration under the Act.
5. MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex or similar telecommunications equipment) against receipt to the party to
whom it is to be given, (i) if to the Company, at its address at 575 Madison
Avenue, New York, New York 10022, Attention: Benjamin Narasin, (ii) if to the
Holder, at its address set forth on the first page hereof, or (iii) in either
case, to such other address as the party shall have furnished in writing in
accordance with the provisions of this Section 5(a). Notice to the estate of any
party shall be sufficient if addressed to the party as provided in this Section
5(a). Any notice or other communication given by certified mail shall be deemed
given at the time of certification thereof, except for a notice changing a
party's address which shall be deemed given at the time of receipt thereof. Any
notice given by other means permitted by this Section 5(a) shall be deemed given
at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Note (and upon surrender of this Note
if mutilated), and upon reimbursement of the Company's reasonable incidental
expenses and in the case of loss, theft or destruction, indemnity as the Company
shall, at its option, reasonably request, the Company shall execute and deliver
to the Holder a new Note of like date, tenor and denomination.
(c) No course of dealing and no delay or omission on the part of the
Holder in exercising any right or remedy shall operate as a waiver thereof or
otherwise prejudice the Holder's rights, powers or remedies. No right, power or
remedy conferred by this Note upon the Holder shall be exclusive of any other
right, power or remedy referred to herein or now or hereafter available at law,
in equity, by statute or otherwise, and all such remedies may be exercised
singly or concurrently.
(d) This Note has been negotiated and consummated in the State of New
York and shall be governed by and construed in accordance with the laws of the
State of New York, without giving effect to principles governing conflicts of
laws.
(e) The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State, in each
case sitting in New
<PAGE>
York County, in connection with any action or proceeding arising out of or
relating to this Note, any document or instrument delivered pursuant to, in
connection with or simultaneously with this Note, or a breach of this Note or
any such document or instrument. In any such action or proceeding, the Company
waives personal service of any summons, complaint or other process and agrees
that service thereof may be made in accordance with Section 5(a).
6. This Note, together with the Subscription Agreement dated the date
hereof between the Company and the Holder, and the Warrant issued to the Holder
on the date hereof, constitutes the entire agreement of the Company and the
Holder with respect to the subject matter hereof and supercedes all prior
agreements oral or written. This Note may be amended, or any of its provisions
waived (which amendment or waiver shall be binding upon all future Holders) only
by written consent or consents executed by the Company and the Holder of the
Notes.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated as of the day and year first above written.
INTERNET FASHION MALL LLC
By: /s/ Benjamin Narasin
---------------------------
Name: Benjamin Narasin
Title: Managing Member
<PAGE>
Exhibit 10.2
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated as of the 2nd day of March,1999, between
INTERNET FASHION MALL LLC, a Delaware limited liability company with offices at
575 Madison Avenue, New York, New York 10022 (the "Company"), and JEROME CHAZEN,
with his principal place of business at 767 Fifth Avenue, New York, New York
10153 ("Consultant").
The Company desires to engage Consultant to perform consulting services for
the Company, and Consultant desires to perform such services, on the terms and
conditions hereinafter set forth.
1. SERVICES; TERM
Consultant hereby agrees to provide his services as a consultant to
the Company with respect to matters relating to the fashion and apparel business
and the management and operations of the Company, and other matters as requested
by the Company for a term (the "Term") beginning on the date hereof and ending
on the earlier of (a) three years from the date hereof or (b) two years
following the earlier of the date of the consummation of an initial public
offering ("IPO") of the Company or the IPO Company (the "IPO Closing Date"),
subject to earlier termination as herein provided. As used in this Agreement,
the term "IPO Company" means any corporation or other entity, the shares or
other equity securities of which are issued to the members of the Company in
consideration for the conversion, exchange or cancellation of their membership
interests, or the transfer of their membership interests to the IPO Company.
During the Term, Consultant shall provide services to the Company hereunder of
at least 30 hours per month. All services requested
<PAGE>
of Consultant by the Company shall be solely those commensurate with those
typically provided by a senior advisor of Consultant's standing in the fashion
apparel industry. The Company hereby acknowledges that Consultant has
significant other commitments, and that in making requests for Consultant's
services, including requests for out of town travel, the Company will use
reasonable efforts to honor such previous commitments and the Consultant will
use reasonable efforts to honor reasonable requests of the Company. If, on the
twentieth day of any month, the Company believes that Consultant has not
provided at least 20 hours of services to the Company in the first 20 days of
such month, the Company shall so notify Consultant in a writing that includes
the aggregate number of hours of services which the Company believes Consultant
has provided in such month through the date of such notice.
2. CASH COMPENSATION.
In consideration of Consultant's services hereunder, the Company
agrees to pay Consultant, subject to his earlier termination in accordance with
the terms of this Agreement prior to the end of the Term, an aggregate of
$150,000.00 of cash compensation, which shall accrue monthly in arrears as set
forth in this paragraph 3 at the rate of $6,250.00 per month on each of the
first 12 monthly anniversaries of the date hereof and $3,125.00 on each of the
13th through 36th monthly anniversaries of the date hereof; provided that if the
IPO Closing Date occurs during the first 12 months of the Term, the Company
shall accrue $25,000.00 of compensation as of such Closing Date and accrue
$4,166.00 of compensation on the 13th through the 24th monthly anniversaries of
the date hereof; provided, further, that if the IPO Closing Date occurs
following the 12th month of the Term and prior to the 24th month of the Term,
any of the remaining portion of the $150,000 payable to Consultant that has not
yet accrued under this paragraph 3 shall accrue in equal
<PAGE>
monthly installments beginning on the monthly anniversary hereof next occurring
after the IPO Closing Date and ending on the 24th monthly anniversary of the
date hereof. In addition to the foregoing compensation, (a) if options are
issued pursuant to paragraph 3(b), the Company shall pay Consultant additional
compensation in the aggregate amount of $50,000.00, which shall accrue in equal
monthly installments beginning on the monthly anniversary hereof next occurring
after the IPO Closing Date and ending on the twenty-fourth monthly anniversary
following the IPO Closing Date; and (b) if options are issued pursuant to
paragraph 3(c), the Company shall pay Consultant additional compensation in the
aggregate amount of $100,000.00, which shall accrue in equal monthly
installments beginning on the IPO Closing Date and ending on the twenty-fourth
monthly anniversary following the IPO Closing Date. The compensation accrued
pursuant to this paragraph 2 shall be payable to Consultant upon demand
following the expiration of the Term or the earlier termination of this
Agreement; provided, that prior to the IPO Closing Date, such accrued
compensation will be payable upon such demand only if and to the extent excess
cash flow of the Company is available therefor. Notwithstanding any language
above, total compensation under this paragraph (paragraph 2) shall not exceed
$150,000.
3. OPTION COMPENSATION
(a) As additional compensation for Consultant's services hereunder,
the Company hereby sells, grants, assigns and transfers to Consultant and
Consultant hereby purchases and accepts from the Company, pursuant to a
subscription agreement between the Company and Consultant, entered into
simultaneously herewith (the "Subscription Agreement"), five-year options,
exercisable
3
<PAGE>
at $500.00 for each one-hundredth (1/100) of a percent of all of the membership
interests of the Company (or if the membership interests of the Company are held
by the IPO Company and the former holders of the membership interests hold
common stock of the IPO Company, exercisable at a price per share equal to
$50,000.00 divided by the number of shares of common stock of the IPO Company
issued in respect of each 1% membership interest in the Company), to purchase
membership interests of the Company (or, if the membership interests of the
Company are held by IPO Company and the former holders of the membership
interests hold common stock of the IPO Company, such number of shares of common
stock), which in the aggregate shall be equal to the membership interest that a
holder of a 3% membership interest of the Company owned as of the date hereof
would be entitled to at the date of issuance of such options (in each case,
after giving effect to subsequent issuances of membership interests that would
reduce the percentage interest of the holder of a 3% membership interest as of
such date and/or issuances of securities convertible into or exchangeable or
exercisable for any such membership interests or subdivisions or combinations of
such common stock (collectively, "Subsequent Events")) as a holder of the
membership interests of the Company (or the shares of common stock of the IPO
Company).
(b) In addition to the options provided for in paragraph 3(a), if
during the Term, the Company or the IPO Company completes an IPO under the
Securities Act of 1933 which places an implied post-IPO valuation on the
membership interests of Company or the common stock of the IPO Company, as the
case may be, of at least $60 million but less than $70 million (based on the
gross proceeds per security paid in the IPO), then Consultant shall receive
options with the same
4
<PAGE>
expiration date, exercise price and other terms as the options described in
paragraph 3(a), except that the exercise price per membership interest (or per
share) of such options shall be equal to 25% of the gross proceeds per
membership interests (or per share) received by the Company in the IPO, to
purchase a number of shares of the Company's common stock upon the IPO Closing
Date (or promptly thereafter) equal to membership interests of the Company (or
to the number of shares of the IPO Company's common stock) that a holder of a 1%
membership interest received as of the date hereof would be entitled to at the
IPO Closing Date (in each case, after giving effect to Subsequent Events) as a
holder of the membership interests of the Company (or the shares of common stock
of the IPO Company).
(c) In addition to the options provided for in paragraph 3(a), if,
during the Term, the Company or the IPO Company completes an IPO which places an
implied post-IPO valuation on the membership interests of Company or the common
stock of the IPO Company, as the case may be, of at least $70 million (based on
the gross proceeds per security paid in the IPO), then Consultant shall receive
options with the same expiration date and other terms as the options described
in paragraph 3(a), except that the exercise price per membership interests (or
per share) of such options shall be equal to 25% of the gross proceeds per
membership interests (or per share) received by the Company in the IPO, to
purchase membership interests of the Company (or a number of shares of the IPO
Company's common stock) upon the IPO Closing Date (or promptly thereafter) equal
to the membership interests of the Company (or the number of shares of the IPO
Company's common stock) that a holder of a 2% membership interest received as of
the date hereof would be entitled to
5
<PAGE>
at the IPO Closing Date (after giving effect to Subsequent Events) as a holder
of the membership interests of the Company (or the shares of common stock of the
IPO Company).
(d) In no event shall Consultant acquire aggregate membership
interests (or shares of common stock) of the Company or the IPO Company pursuant
to this paragraph 3 hereof greater than the percentage membership interest (or
number of shares of common stock) that a holder of a 5% membership interest of
the Company received as of the date hereof would be entitled to thereafter in
accordance with the provisions of paragraphs 3(a) and 3(b) or (c) (after giving
effect to Subsequent Events) as a holder of the membership interests of the
Company (or the shares of common stock of the IPO Company). All options shall be
transferable by Consultant to Family Donees, as such term is defined in the
Subscription Agreement.
4. NO BENEFITS
Consultant shall not be entitled to participate in any employee
health, life insurance or other benefit plans of the Company.
5. EXPENSES
The Company shall reimburse Consultant for reasonable out-of-pocket
expenses incurred by him in connection with the performance of his services
hereunder, provided such expenses are approved in advance by the Managing Member
of the Company.
6
<PAGE>
6. TERMINATION
(a) (i) The Term of this Agreement shall end automatically upon the
death of Consultant and may be earlier terminated by a majority in interest of
the Members of the Company (excluding Consultant and/or any affiliate of
Consultant, if he or such affiliate is then a member of the Company), but only
(i) upon Consultant's being unable to perform the services requested by the
Company for an extended period due to illness, accident or other disability, or
(ii) for cause. Prior to any termination for cause, the Company shall (A)
provide Consultant with written notice signed by each Member seeking such
termination, specifying in reasonable detail the cause complained of and a
reasonable time frame for cure not to exceed 30 days, if such cause is
susceptible of cure (a "Termination Notice"), and (B) within ten business days
of Consultant's request, given not later than ten business days after the
expiration of the cure period provided in the Termination Notice, or if no cure
period is provided, within ten business days of Consultant's receipt of the
Termination Notice, provide Consultant with an in person hearing before a
meeting of all the members of the Company (at which Consultant may be
accompanied by counsel). In the event of an IPO, prior to any termination for
cause, the Company shall (A) provide Consultant with written notice signed by a
majority of the members of the Board of Directors of the Company or the IPO
Company seeking such termination, specifying in reasonable detail the cause
complained of and a reasonable time frame for cure not to exceed 30 days, if
such cause is susceptible of cure and (B) within ten business days of
Consultant's request, given not later than ten business days after expiration of
the cure period provided in the termination notice, provide Consultant with an
in person meeting of the majority of
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the members of the Board of Directors of the Company (at which Consultant may
be accompanied by counsel).
(ii) The term of this Agreement may be terminated prior to the
end of the stated Term by Consultant if, prior to the IPO Closing Date, Benjamin
Narasin is no longer an active member of senior management, and equity holder
in, the Company, the IPO Company or any entity that, directly or indirectly,
controls the Company (a "Change of Control"), within 30 days following written
notice from the Company to Consultant of any such Change of Control, which
notice from the Company shall be given as promptly as practicable, but in any
event within ten days of any Change of Control. In addition, this Agreement may
be terminated by Consultant prior to the end of the Term (A) pursuant to
paragraph 10(a) or (b) for good reason prior to the end of the Term upon a
showing that (1) the Company has materially breached any representations or
warranties contained in any of the Transaction Documents, PROVIDED, HOWEVER,
that Consultant may not terminate for any such breach after the earlier of the
IPO Closing Date or one year from the date hereof; or (2) the Company has
committed a material breach under any of the Transaction Documents; PROVIDED,
HOWEVER, that Consultant may not terminate for any such breach after one year
from the date of any such breach. Prior to any such termination by Consultant
for good reason, Consultant shall (a) provide the Company with written notice,
signed by Consultant, seeking such termination, specifying in reasonable detail
the good reason complained of and a reasonable time frame for cure not to exceed
30 days if such good reason is susceptible of cure (a "Consultant Termination
Notice"), and (b) within ten business days of the Company's request, given not
later than ten business days after the expiration of the cure period provided in
the Consultant Termination Notice, or if no cure period
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is provided, within ten business days of the Company's receipt of the Consultant
Termination Notice, provide the Company with an in person meeting attended by
Consultant regarding such termination (at which the Company's representatives
may be accompanied by counsel).
(iii) In the event that this Agreement is terminated in
accordance with paragraph 6(1)(i) or (ii), the Company shall have no further
obligation to Consultant under this Agreement after the date of such termination
except to pay all accrued, but theretofore unpaid, cash compensation, on demand,
and any unvested options shall terminate and be of no effect, except as provided
in paragraph 6(d) below.
(b) The options issued pursuant to paragraph 3(a) shall vest and
become exercisable as follows: 50% of such options shall vest and become
exercisable in equal monthly installments of 4.1666% each on each of the first
12 monthly anniversaries of the date hereof, and 50% of such options shall vest
and become exercisable in equal monthly installments of 2.0833% each on each of
the 13th through the 36th monthly anniversaries of the date hereof; provided
that if the IPO Closing Date occurs during the first 12 months of the Term,
there shall immediately vest and be payable (i) on the IPO Closing Date a number
of options equal to 50% of the total number of such options and (ii) on the
twelfth monthly anniversary of the date hereof, such number of options as shall
result in 66% of such options being vested and exercisable on or prior to the of
the twelfth month of the Term, with any theretofore unvested options up to such
66% vesting in equal monthly installments on each monthly anniversary of the
date hereof through the twelfth such anniversary; and the remaining 34% of such
options vesting in equal
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monthly installments on each monthly anniversary of the date hereof from the
13th through 24th monthly anniversaries of the date hereof; provided, further,
that if the IPO closing date occurs following the 12th month of the Term and
prior to the 24th month of the Term, all of the Consultant's previously unvested
options shall vest and become exercisable (in equal monthly installments)
beginning on the first monthly anniversary following the IPO Closing Date and
ending on the last day of the 24th monthly anniversary of the date hereof.
(c) The options issued pursuant to paragraph 3(b) or 3(c), as the case
may be, shall vest and become exercisable in equal monthly installments
beginning on the last day of the month in which the IPO Closing Date occurs and
ending on the twenty-fourth month of the Term.
(d) If Consultant shall die or this Agreement shall be terminated
prior to the date that all of the issued options have vested hereunder by the
Company for then upon the date of his death, or such termination by the Company,
as the case may be, 50% of any issued but theretofore unvested options shall
automatically vest and be exercisable by Chazen's estate or legal
representatives; provided that if this Agreement is terminated by Consultant
pursuant to clause (A) of paragraph 6(1)(ii), then (A) Consultant shall be
entitled to retain only such options as have vested prior to the earlier of the
date of such termination and the sixth option vesting date hereunder (B) any
other vested options shall, upon notice from the Company, be automatically
forfeited and (C) any unvested options shall terminate and be of no effect.
7. CONFIDENTIAL INFORMATION
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(a) All Confidential Information (as hereinafter defined) which
Consultant may now possess, may obtain during or after the Term, or may create
prior to the end of the Term relating to the business of the Company or any of
its customers, suppliers or partners shall not be used, published, disclosed or
made accessible by him to any other person, firm or corporation, either during
or after the Term, except during the Term in the business and for the benefit of
the Company, without the prior written consent of the members of the Company. As
used herein, the term "Confidential Information" shall mean and be limited to
information (whether written or oral) of the Company furnished by the Company to
Consultant in connection with the consulting services provided by Consultant
hereunder, or prior to the date hereof in connection with the transaction
between FM/CCP Investment Partners, LLC and the Company closing on the date
hereof which contains or reflects any information which is secret and
proprietary to the business of the Company; provided that the term Confidential
Information does not include information which (i) is or becomes publicly
available other than as a result of a disclosure by Consultant or (ii) is or
becomes available to Consultant on a non-confidential basis from a source (other
than the Company or its representatives, including its attorneys, accountants
and financial advisors) which, to the best of Consultant's knowledge and good
faith, is not prohibited from disclosing such information to Consultant by a
legal, contractual or fiduciary obligation to the Company.
(b) Since a breach of the provisions of this paragraph 7 could not
adequately be compensated by money damages, the Company shall be entitled, in
addition to any other right and
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remedy available to it, to an injunction restraining such breach or a threatened
breach, and in either case no bond or other security shall be required in
connection therewith.
8. NON-COMPETITION
Consultant agrees that, without the prior written consent of the
Company, he will not, during the Term or for a period of six (6) months from the
date of termination of this Agreement, voluntarily or involuntarily, for any
reason whatsoever, directly or indirectly, individually or on behalf of persons
not now parties to this Agreement, be a partner, stockholder, director, officer,
principal, agent or employee of, or in any other capacity or relationship,
engage in any business or employment with, or aid or endeavor to assist any
business or legal entity that is a direct competition of the company and in
engaged in the business of marketing or sale of fashion, apparel, footwear,
beauty or related lifestyle products of accessories over the Internet (the
"Business"); PROVIDED, HOWEVER, that (a) this paragraph 8 shall not proscribe
Consultant's ownership, either directly or indirectly, of either less than five
percent (5%) of any class of securities which are listed on a national
securities exchange or of any limited partnership, investment fund or other form
of investment over which Consultant has no investment control; (b) for purposes
of this paragraph 8, Gymboree and Blackberry, Inc. shall be deemed not to be
engaged in the Business; and (c) this paragraph 8 shall not proscribe
Consultant's engaging in any activity otherwise prohibited by this paragraph 8
on behalf of any business or legal entity that is primarily a seller of retail
goods and which is engaged in the Business if and only if (i) its gross revenues
from the Business constitute less than 10% of the gross revenues of such
business or legal entity; and (ii) Consultant's activities for
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such business or legal entity do not involve the Business, other than on a DE
MINIMIS basis. The Company and Consultant acknowledge the reasonableness of this
covenant not to compete and the reasonableness of the geographic area and
duration of time which are a part of said covenant.
9. RELATIONSHIP OF THE PARTIES
Nothing contained in this Agreement shall authorize, empower or
constitute either Consultant or the Company as the agent the other in any
manner; authorize or empower either Consultant or the Company to assume or
create any obligation or responsibility whatsoever, express or implied, on
behalf of or in the name of the other; or authorize or empower either Consultant
or the Company to bind the other in any manner or to make any representation,
warranty or commitment on behalf of the other.
10. SERVICE AS A DIRECTOR
(a) The Company has indicated that it intends, in compliance with all
necessary procedures, to invite Consultant to serve on its board of directors,
and Consultant has, based on the facts and circumstances of the Company
heretofore disclosed to him, agreed to accept such invitation. The Company
acknowledges and agrees that Consultant may, subject to the remaining provisions
of this paragraph 10(a), decline to serve as a director or resign as a director
if he terminates this Agreement upon a Change of Control or for good cause
pursuant to paragraph 6(a)(ii). Notwithstanding anything to the contrary herein,
in the event Consultant, in good faith, declines to serve as a director, or
terminates his directorship the Company shall have no claim
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whatsoever in respect thereof, and the sole result thereof shall be the lapse of
Consultant's options to the extent provided herein. The Company and Consultant
agree to use their respective best efforts (which shall not, however, include
the payment by the Company of any fees or expenses of Chazen, including, without
limitation, the fees and expenses of Chazen's counsel) to enable Consultant to
fulfill his due diligence obligations in connection with the filing of the
registration statement for the IPO (including any amendment thereto).
Notwithstanding the foregoing, if the managing underwriter for the IPO is an
underwriter generally-recognized to be of lesser standing in the financial
community than Gruntal & Co., LLC and Consultant or the Company are unable to
agree on the fulfillment of such due diligence obligations prior to the filing
of the registration statement for the IPO (or any amendment thereto), then
Consultant may terminate this Agreement for good cause upon notice to the
Company, if such disagreement is not resolved prior to earlier of the date of
such filing or five business days following the date of such notice. Consultant
agrees to serve as a director of the Company or the IPO Company, commencing upon
the IPO Closing Date and, at the option of the Company, ending upon the
termination of this Agreement, subject to the other provisions of 10(a) and
6(a)(ii).
(b) In connection with Consultant's service as a director, the Company
or the IPO Company shall provide Consultant, in his capacity as a director, with
indemnification rights, directors' and officers' liability insurance in the
amount of $5 million, provided that if coverage in such amount requires the
Company to expend for premiums in excess of $100,000 for two years of coverage,
then in such lesser amount as the Company may obtain through the expenditure in
premiums of $100,000 for two years of coverage, "33 Act" insurance providing
such coverage as the
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non-management directors of the Company (or the IPO Company) as a group shall
reasonably request and the right to avail himself, at the expense of the Company
(or the IPO Company), of counsel afforded to the other non-executive directors
of the Company (or the IPO Company) on a collective basis, all upon customary
terms to be reasonably agreed to by the Company (or the IPO Company) and
Consultant.
11. NOTICES
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, sent by overnight courier or facsimile transmission or
delivered against receipt to the party to whom it is to be given at the address
of such party set forth in the preamble to this Agreement (or to such other
address as the party shall have furnished in writing in accordance with the
provisions of this paragraph 11. Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof; any
notice sent by overnight courier shall be deemed given on the next business day
after delivery to the courier; any notice sent by facsimile transmission shall
be deemed given upon receipt (electronically or otherwise); and any notice
delivered against receipt shall be deemed given upon receipt, except in each
case for a notice changing a party's address which shall be deemed given at the
time of receipt thereof.
12. WAIVER
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Any waiver by either party of a breach of any provision of this
Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
13. BINDING EFFECT; ASSIGNMENT
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, the successors and assigns of the Company and the assigns, heirs
and personal representatives of Consultant; PROVIDED, HOWEVER, that, except with
respect to the Consultant's right to transfer, assign or otherwise convey his
options, as provided for in paragraph 3, the Consultant may not assign, transfer
or otherwise convey any of his rights or delegate any of his duties under this
Agreement without the written consent of the Company.
14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to principles governing
conflicts of law. The Company irrevocably consents to the jurisdiction of the
courts of the State of New York and of any federal court located in such State,
in each case sitting in New York County, in connection with any action or
proceeding arising out of or relating to this Agreement or a breach of this
Agreement. In any such
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action or proceeding, the Company waives personal service of any summons,
complaint or other process and agrees that service thereof may be made in
accordance with paragraph 11.
15. ENTIRE AGREEMENT
This Agreement, together with the Subscription Agreement, the
Registration Rights Agreement referred to in Section 6 of the Subscription
Agreement and the letter of even date herewith from the Company to Consultant
and FM/CCP Investment Partners, LLC, represents the entire agreement with
respect to the subject matter hereof, supersedes any prior oral or written
agreements or undertakings between the parties with respect thereto and may not
be modified or amended except in a writing duly executed by each of the parties
hereto.
16. SEVERABILITY
If at any time any of the covenants contained in this Agreement shall
be deemed invalid or unenforceable by the laws of any jurisdiction wherein it is
to be enforced, by reason of being vague or unreasonable as to duration, or
geographic scope, or scope of activities restricted, or for any other reason,
such covenants shall be considered divisible as to such portion or duration and
such covenants shall become and be immediately amended and reformed with respect
to such jurisdiction only to include such covenants as are enforceable by the
court or other body having jurisdiction of this Agreement; and the parties agree
that such covenants, as so amended and reformed, shall be valid and binding as
though the invalid or unenforceable portion had not been included herein.
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17. REMEDIES
Consultant acknowledges that the Company would not have an adequate
remedy at law in the event of Consultant's breach of its covenants contained in
paragraphs 7 and/or 8, and therefore agrees that the Company shall be entitled
to injunctive relief in addition to any other rights and remedies available
under this Agreement or at law or in equity in the event of any such breach by
Consultant. Each party hereto waives any claim for consequential or special
damages in respect of any breach of any provision hereof
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
INTERNET FASHION MALL LLC
By: /s/ Benjamin Narasin
---------------------------
Name: Benjamin Narasin
Title: Managing Member
/s/ Jerome Chazen
-------------------------------
Jerome Chazen
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Exhibit 10.3
SUBSCRIPTION AGREEMENT dated as of the 2nd day of March,1999, between
FM/CCP Investment Partners, LLC, a Delaware limited liability company with
offices at 767 Fifth Avenue, New York, New York 10153 ("Buyer"), and Internet
Fashion Mall, LLC, a Delaware limited liability company, with its principal
place of business at 575 Madison Avenue, New York, NY 10022 (the "Company").
W I T N E S S E T H:
WHEREAS, Benjamin Narasin and Grant Narasin (collectively "Narasin") and
Richard A. Eisner & Company, LLP ("RAE") are the sole members of, and the sole
owners of membership interests in the Company (all such membership interests in
the Company being hereinafter referred to singly as a "Membership Interest" and
collectively as "Membership Interests") of which Narasin owns an 80% Membership
Interest and RAE owns a 20% Membership Interest; and
WHEREAS, Buyer wishes to purchase a 5% Membership Interest (the "5%
Membership Interest") of the Company for $1,000,000; and
WHEREAS, in addition, Buyer wishes to purchase a 6% promissory note of the
Company in the principal amount of $1,000,000 (the "Note") and a warrant (the
"Warrant"), for $1,000,000; and
WHEREAS, the Company desires to sell the 5% Membership Interest, the Note
and the Warrant to Buyer; and
WHEREAS, upon the purchase by Buyer of the 5% Membership Interest, Buyer
shall be a member of the Company with a 5% Membership Interest and the
Membership Interests of Narasin and RAE shall be reduced to 76% and 19%,
respectively; and
WHEREAS, assuming, on a PRO FORMA basis, the exercise by Jerome Chazen
("Chazen") of his options to purchase up to a 3% Membership Interest (but not
his options to purchase certain shares calculated by reference to an additional
2% Membership Interest), Buyer shall be a member of the Company with a 5%
Membership Interest in accordance with the letter of even date herewith from the
Company to Buyer and Chazen concerning the capitalization of the Company (the
"Capitalization Side Letter") and the Membership Interests of Narasin and RAE
shall be reduced to 73.6% and 18.4%, respectively;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. The Company hereby sells, assigns and transfers the 5% Membership
Interest, the Note and the Warrant to Buyer and Buyer, in reliance on the
representations, warranties and covenants contained herein, hereby purchases the
same, for aggregate consideration of $2,000,000.00, payable on the date of the
execution of this Agreement or on the first business day thereafter (such date
of payment being hereafter referred to as the "Closing Date").
<PAGE>
2. The Buyer hereby agrees to be bound by the terms and conditions of the
Amended and Restated Limited Liability Company Agreement by and among Narasin
and RAE, a copy of which is annexed hereto as Exhibit A (the "LLC Agreement")
and Narasin and RAE hereby consent to the admission of Buyer as a member of the
Company.
3. The Buyer hereby agrees that for a period of twelve (12) months
following the consummation of an initial public offering ("IPO") of the common
stock or other equity securities of the Company or the IPO Company (as defined
below) (the "Lock Up Period"), it shall not, without the prior written consent
of the Company or the IPO Company, as the case may be, directly or indirectly,
including by entering into any Hedging Transaction (as defined below), offer,
sell, contract to sell, grant any option for the sale of, or otherwise dispose
of ("Dispose of"), any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for shares of common stock or
other equity securities of the Company or the IPO Company, as the case may be.
As used herein, (a) the term "IPO Company" means any corporation or other
entity, the shares or other equity securities of which are issued to the members
of the Company in consideration for the conversion, exchange or cancellation of
the Membership Interests and/or the transfer of the Membership Interests to the
IPO Company; and (b) the term "Hedging Transaction" shall mean any short sale or
grant of any right (including, without limitation, any put or call option) with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from the
common stock or such other equity securities. Notwithstanding the foregoing
provisions of this Section 3, (i) Buyer shall have the right to transfer all or
any portion of his or its shares of the IPO Company to any Permitted Transferee,
subject to the agreement of the managing underwriter for the initial public
offering and (ii) if Narasin or RAE sells any of his or its securities of the
Company during the Lock-up Period, Buyer shall not be restricted under this
Section 3 from selling the same percentage of its securities of the Company as
the securities being sold by Narasin or RAE represent of the securities of the
Company held by him or it, as the case may be, and if Narasin or RAE is released
from his or its "lock-up" agreement, Buyer shall be similarly released from the
restrictions contained in this Section 3. For purposes of this Agreement, the
term "Permitted Transferee" shall mean any transferee of any transfer or
transfers made, at any time or from time to time by Buyer or any such transferee
to (i) any member of Buyer or (ii) any Family Donee of members of Buyer, subject
to the prior approval of either Jerome Chazen or Sidney Banon, as manager of
Buyer. For purposes of this Agreement, the term "Family Donee" shall mean: (A)
any parent, child, lineal descendant or sibling of a member of Buyer, the spouse
of any of the foregoing, or the spouse of such member of Buyer; (B) any trust
established by a member of Buyer or any Family Donee described in clause (A)
above, or any trustee, custodian, fiduciary or foundation which will hold such
shares for charitable purposes or for the benefit of such member of Buyer or any
of the persons described in clause (A) above; PROVIDED, that Buyer or any person
described in clause (A) above shall exercise a deciding influence over the
voting of the Membership Interests or shares held by a Family Donee described in
this clause (B); or (C) any beneficiary (which is a Family Donee pursuant to
clause (A) or (B) above) of any trust constituting a member of Buyer or which is
itself a Family Donee.
4. The Buyer hereby agrees, represents, and warrants, as of the date hereof
and as of the Closing Date, that:
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(a) It is acquiring the Membership Interest, the Note and the Warrant
for its own account (and not for the account of others) for investment and not
with a view to the distribution or resale thereof; provided that,
notwithstanding such intention, Buyer shall be free to transfer the 5%
Membership Interest in compliance with applicable legal requirements and the
provisions of this Agreement and the LLC Agreement;
(b) By virtue of its position, it has access to the same kind of
information which would be available in a registration statement filed under the
Securities Act of 1933, as amended (the "Act"), including, without limitation,
access to cash and barter contracts, the Company's books and records and
summaries of cash and barter clients;
(c) It is a sophisticated investor;
(d) Its members understand that they may not sell or otherwise dispose
of their share of the Membership Interest, the Note or the Warrant in the
absence of either a registration statement under the Act or an exemption from
the registration provisions of the Act; and
(e) The certificates representing the Note and the Warrant and any
certificate or other document evidencing Buyer's Membership Interest may contain
a legend thereon to the effect of (d) above.
5. The Company hereby agrees, represents and warrants, as of the date
hereof and as of the Closing Date, that:
(a) The Company (i) is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Delaware;
(ii) has all requisite limited liability company power and authority to own and
operate its property, to lease the property it operates as lessee and to conduct
the business in which it is currently engaged; (iii) is duly qualified as a
foreign limited liability company and in good standing under the laws of each
jurisdiction in which it maintains physical facilities, except to the extent
that the failure to do so or be so would not in the aggregate have a material
adverse effect on the business, financial condition, results of operations or
prospects of the Company ("Material Adverse Effect"); and (iv) has the requisite
limited liability company power and authority to execute, deliver and perform
its obligations under this Agreement, the Capitalization Side Letter, the LLC
Agreement (in the form annexed hereto), the Note, the Warrant and the
Registration Rights Agreement (as hereinafter defined) (collectively, the
"Transaction Documents").
(b) The execution, delivery and performance by the Company of this
Agreement and the other Transaction Documents to which it is a party and the
transactions contemplated hereby and thereby (i) have been (or, in the case of
the Registration Rights Agreement, will be) duly authorized by all necessary
action of the Company or its Members; (ii) do not contravene the terms of the
Certificate of Formation or LLC Agreement or any contribution agreement or
retention agreement to which the Company and any member is a party, or any other
governing document of
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the Company, in each case which has previously been delivered to Buyer (and
which are herein annexed); and (iii) except for such violations, conflicts,
breaches, contraventions or Liens (as hereinafter defined) which would not in
the aggregate have a Material Adverse Effect, do not violate, conflict with or
result in any breach or contravention of or result in the creation of any lien,
charge, pledge, security interest, mortgage or other encumbrance (each, a
"Lien") under, any contractual obligation of the Company, or any requirement of
any federal, state or foreign law, rule or regulation (each, a "Requirement of
Law"), applicable to the Company; provided, however, that no representation,
warranty or agreement is made in this clause (iii) concerning any state
securities laws, rules or regulations as they relate to publicly-offered
securities or rules or regulations of the National Association of Securities
Dealers, Inc., Nasdaq or any exchange upon which the securities of the Company
(or the IPO Company) are proposed to be listed.
(c) No approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any federal, state or foreign
governmental agency, instrumentality, court or administrative authority
("Governmental Authority") or any other person in respect of any Requirement of
Law applicable to the Company and no lapse of a waiting period under a
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance by the Company of this Agreement or any other
Transaction Documents to which it is a party or the transactions contemplated
hereby or thereby, except for any of the foregoing required under federal or
state securities laws, the rules and regulations promulgated by the National
Association of Securities Dealers, Inc., Nasdaq and any exchange upon which
securities of the Company (or the IPO Company) are proposed to be listed.
(d) This Agreement and the other Transaction Documents to which the
Company is a party have been, or in the case of the Registration Rights
Agreement will be, duly executed and delivered by the Company and each
constitutes, or in the case of the Registration Rights Agreement will
constitute, the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity relating to enforceability (regardless of whether
considered in a proceeding at law or in equity).
(e) Except for matters materially reflected in the Company's bad debt
reserve in the approximate amount of $105,000 as of December 31, 1998, subject
to audit adjustments, there are no legal actions, suits, proceedings, claims,
material complaints, material disputes or investigations pending, or to the
knowledge of the Company threatened, at law, in equity, in arbitration or before
any Governmental Authority against the Company, Narasin or their respective
property or assets ("Judgments") which in the aggregate would have a Material
Adverse Effect. No injunction, writ, temporary restraining order, decree or
order of any nature has been issued by any court or other Governmental Authority
against the Company, Narasin or their respective property or assets, purporting
to enjoin or restrain the execution, delivery or performance of this Agreement
or any of the other Transaction Documents.
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(f) The Membership Interests in the Company as of the date hereof
consist solely of the Membership Interests of RAE and Narasin described in the
preamble hereto. Except for this Agreement, any of the other Transaction
Documents and the other agreements and instruments being made by the Company
with or in favor of Buyer or Chazen, and except for the Company's agreements
with Wit Capital, there are no options, warrants, conversion privileges or other
rights (collectively "Rights") presently outstanding to purchase or otherwise
acquire any Membership Interests in the Company and all such rights are
correctly reflected in the capitalization side letter. The issued and
outstanding Membership Interests are duly authorized and validly issued.
(g) The Company has delivered to Buyer its unaudited financial
statements (balance sheet and statements of operations) for the fiscal years
ended on, and as at December 31, 1996, 1997 and 1998 (the "FINANCIAL
STATEMENTS"). The Financial Statements fairly present the financial condition
and operating results of the Company in accordance with GAAP as of the
respective dates and for the respective periods indicated, subject to audit
adjustments.
(h) (i) As used herein, the term "Intellectual Property" shall mean
all worldwide intellectual property rights, including, without limitation, any
patent, trademark, service mark, trade name, copyright or any registration or
application therefor; and any know-how, trade secret, customer list, technology,
process, formula or other proprietary information; and any source code, object
code, flowchart, algorithm, display screen, layout, system architecture,
development tool or other software; and any license to any of the foregoing; and
all documents or other information in any machine or human understandable media
related to any of the foregoing. Intellectual Property which is used in or is
otherwise material to the business of the Company as currently conducted and as
it is expected to be conducted in the future is referred to as "Intellectual
Property Assets."
(ii) The Company directly owns, or is licensed or otherwise
possesses rights to use all Intellectual Property Assets that are necessary for
the operation of its business as presently conducted, with such exceptions as
have not had and are not reasonably likely to have a material adverse effect on
the business of the Company. To the knowledge of the Company, there is no
unauthorized use, infringement or misappropriation of any Intellectual Property
Assets by any third party, except for such use, infringement or
misappropriation, individually or in the aggregate as have not had and are not
reasonably likely to have a material adverse effect on the business of the
Company. To the knowledge of the Company, no Intellectual Property Assets are
subject to any outstanding Judgment restricting in any manner the use or
licensing thereof by the Company or infringes on or misappropriates any
Intellectual Property owned or used by any other person, except to the extent
any such Judgment, infringement or misappropriation, individually or in the
aggregate, has not had and is not reasonably likely to have a material adverse
effect on the business of the Company. The Company is the sole and exclusive
owner of, free of any Liens, and is registered with Network Solutions, Inc. with
respect to the "Fashionmall.com" and domain name, has submitted to, Network
Solutions, Inc. with respect to the "Outletmall.com" domain name.
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(i) Since December 31, 1998, the operations of the Company have been
conducted, in all material respects, in a manner consistent with past practice
and in accordance with the business plan presented heretofore to Buyer, taking
into account additional expenses incurred by the Company in preparing for the
IPO.
(j) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(k) No form of general solicitation or general advertising was used by
the Company or its representatives in connection with the offer or sale of the
5% Membership Interests. Assuming the accuracy of the representations and
warranties of Buyer set forth in Section 4, no registration, pursuant to the
provisions of the Securities Act or any state securities or "blue sky" laws, is
or will be required in connection with the offer, sale or issuance of the 5%
Membership Interest.
(l) Except for the finder's fee to be paid by the Company to Wit
Capital, there are no brokerage commissions, finder's fees or similar fees or
commissions payable by the Company in connection with the transactions
contemplated hereby based on any agreement, arrangement or understanding with or
known to the Company.
(m) Upon payment of the purchase price for the 5% Membership Interest,
the 5% Membership Interest will be duly authorized and validly issued, fully
paid and non-assesable and clear of all Liens or any adverse claims,
preferential arrangements or restrictions of any kind that were granted or
otherwise created by the Company (other than any of the foregoing set forth in
the LLC Agreement), including, without limitation, any restrictions on the
exercise of any attributes of ownership. Except as may be otherwise required by
law or as may be agreed to by Buyer (or any member of Buyer, any Family Donee,
or any subsequent member of Buyer, as the case may be), ownership of the 5%
Membership Interest will not obligate Buyer (or any member of Buyer, any Family
Donee or any subsequent member of Buyer, as the case may be), to make any
contribution to the capital of, or any loans or advances to, the Company.
(n) Neither this Agreement nor any other document, certificate,
instrument or written statement furnished or made available to Buyer, or to
counsel to Buyer, by or on behalf of the Company pursuant to this Agreement or
any of the other Transaction Agreements, contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein, viewing all of the foregoing documents,
certificates, instruments and written statements in the aggregate, not
misleading. To the best of the Company's knowledge, there is no fact which
materially adversely affects the business, operations, prospects, affairs,
conditions (financial or otherwise), properties or assets of the Corporation
which has not been set forth in this Agreement or in the other Transaction
Agreements, certificates, instruments or written statements furnished to Buyer
and its counsel by or on behalf of the Company pursuant to this Agreement.
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<PAGE>
6. The Company agrees to pay the finder's fee to Wit Capital in connection
with this transaction and to fully indemnify Buyer against any and all claims in
respect thereof.
7. The Company hereby grants the following registration rights to Buyer:
Buyer, together with Chazen, shall have the right to register the resale of
their respective shares of common stock of the IPO Company, including, without
limitation, any such shares underlying the Warrant (or other equity interests
issued to the public in the IPO of the Company or the IPO Company)
(collectively, the "Registrable Securities"), as follows: (i) on one occasion,
on Form S-3 (or an equivalent form), on a demand basis, at the Company's sole
expense (other than commissions, discounts and broker's fees and legal fees and
expenses of Chazen and Buyer, which shall be borne by Chazen and Buyer,
respectively), commencing upon the Company's eligibility to utilize such form
for offerings by selling security holders and ending on February 25, 2004,
subject to agreed-upon "blackout" periods; and (ii) on an unlimited number of
occasions, on a "piggyback" basis with respect to any registration by the IPO
Company of its common stock (other than on Form S-4, Form S-8 or equivalent
forms) and subject to customary exceptions (E.G., underwriter's cutbacks and
"blackout" periods), commencing upon the termination of Lock Up Period and
ending on February 25, 2004. In furtherance of such grant, the Company, for
itself and the IPO Company, as applicable and Buyer shall as soon as practicable
after the date hereof, use their respective reasonable efforts to promptly enter
into the Registration Rights Agreement among the Company (as aforesaid), Chazen
and Buyer, which shall contain customary, mutually agreeable terms applicable to
the Company or the IPO Company (whichever first consummates an IPO).
Notwithstanding the foregoing, if the Company or the IPO Company is ineligible
to utilize Form S-3 (or an equivalent form) as a result of a failure to comply
with the requirements of such Form, then the Company or the IPO Company shall
register the Registrable Securities on Form S-1 or such other form as may be
available.
8. (a) "Covered Securities" means (i) all equity securities of the Company
or any IPO Company (for purposes of this Section 8, each, a "Company Entity" and
collectively, the "Company Entities"); (ii) all securities convertible into or
exchangeable for equity securities of the Company Entities; and (iii) all
options, warrants and other rights to purchase or otherwise acquire from the
Company Entities any such equity securities or securities convertible into or
exchangeable for such equity securities, in each case, issued prior to the
consummation of an IPO of the Company or the IPO Company, whichever is earlier
(collectively, "New Securities"); provided that the Covered Securities shall not
include any New Securities that are:
(i) issuable (A) pursuant to the Warrant, the options issued or
issuable to Chazen, (B) to Buyer or any affiliate of Buyer or any person that
would be a Permitted Transferee of Buyer hereunder (assuming prior written
approval of the Manager of Buyer, exercised by Chazen or Sid Banon) and/or their
respective permitted successors and assignors; provided the Company shall have
notified Buyer promptly, but in any event at least 10 days prior to the issuance
thereof, of the commencement of bona fide discussions contemplating proposed
issuances to persons (other than Chazen or Sidney Banon, their respective
spouses, children and children's spouses) that would
7
<PAGE>
be Permitted Transferees, but that have not become Permitted Transferees
hereunder or (C) to Wit Capital and/or their respective permitted successors and
assigns;
(ii) distributed to all of the Members or stockholders of any of
the Company Entities (including Buyer and Chazen) on the basis pro rata to their
Membership Interests or equity interests;
(iii) issued pursuant to the anti-dilution rights of any holder
of equity securities of any of the Company Entities;
(iv) issued to employees of, or consultants to, any of the
Company Entities pursuant to any of the Company Entities' Stock Option Plan
covering not more, in the aggregate, than 15% of the Membership Interests or
outstanding shares of common stock of the IPO Company (including up to 3% of
such Membership Interests (or outstanding shares of common stock) issued to
Chazen); or
(v) issued for consideration other than cash and/or promissory
notes and which consideration is intended to be used by, or as an investment of,
any or the Company Entities and which the managing member of the Company
approves, having furnished at least ten days prior written notice to Buyer of
such approval, or which Board of Directors of the IPO Company approves after
similar prior notice.
(b) If any Company Entity proposes to offer Covered Securities at any
time beginning on the date of this Agreement and ending on the effective date of
the IPO of the Company or the IPO Company, whichever is earlier, such Company
Entity shall, before such offer, deliver to Buyer an offer (the "Company Offer")
to issue to it, upon the terms (including price) which the Company Entity
proposes to issue the Covered Securities, a portion of the Covered Securities
(the "Offered Securities") equal to the product of (i) the aggregate amount of
the Covered Securities proposed to be offered; and (ii) the Pro Rata Amount of
Buyer. The Company Offer shall state that the Company Entity proposes to issue
Covered Securities, specify their number and terms (including purchase price),
and the number of the Offered Securities and the proposed purchaser thereof. The
Company Offer shall remain open and irrevocable for a period of 20 business days
(the "Participation Period") from the date of its delivery; PROVIDED, that if
the Company Entity does not issue such Covered Securities, the Company Offer may
be rescinded by the Company, or if the total amount of such Covered Securities
shall be reduced, the Company Offer shall be extended only to the Pro Rata
Amount of such reduced amount of Covered Securities. "Pro Rata Amount" means the
percentage of all of the Membership Interests owned by Buyer or its members and
any Family Donee assuming on a PRO FORMA basis, the exercise of Chazen's options
to purchase up to a 3% (or in certain circumstances, up to 5%) Membership
Interest.
(c) The Buyer may accept a Company Offer by delivering to the Company
Entity a notice (the "Purchase Notice") within the Participation Period. The
Purchase Notice shall state the number (the "Purchase Number") of Offered
Securities Buyer desires to purchase.
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(d) The issuance of Offered Securities to Buyer, should Buyer deliver
a Purchase Notice, shall be made on a business day, as designated by the Company
Entity, not more than 30 days after the expiration of the Participation Period
and shall be contemporaneous with the issuance of the Covered Securities to
other purchasers upon the terms and conditions of the Offer.
(e) If the number of Offered Securities exceeds the Purchase Number,
the Company Entity may, not more than 90 days after the expiration of the
Participation Period issue such excess or any portion thereof on the terms and
conditions of the Offer to any person or entity.
9. (a) Subject to the remaining provisions of this Section 9, during the
period from the date of this Agreement until the sixth monthly anniversary of
the date of this Agreement, the Company may sell Covered Securities to a person
or entity other than Buyer (the "Proposed Purchaser"), only after receipt of a
BONA FIDE written offer (an "Outside Offer") from the Proposed Purchaser to
purchase Covered Securities being offered by the Company (the "ROFR Securities")
and complies with the other terms hereof. Following the receipt of the Outside
Offer, the Company shall deliver a written notice (the "ROFR Notice") to Buyer.
The ROFR Notice shall state that the Company proposes to sell Covered
Securities, specify their numbers and summarize the material terms (including
purchase price) of the Outside Offer and shall attach such Outside Offer. The
delivery of the ROFR Notice shall constitute the Company's offer to sell the
ROFR Securities to Buyer on terms identical to those of the Outside Offer.
(b) Within 20 business days following the receipt by Buyer of the ROFR
Notice, Buyer may elect, by notice to the Company, to purchase all, but not less
than all, of the ROFR Securities upon the terms and conditions of the Outside
Offer.
(c) If Buyer does not elect to purchase all of the ROFR Securities,
the Company may, within 90 days after the ROFR Notice is given, sell not less
than all of the ROFR Securities to the Proposed Purchaser on the terms
(including purchase price) of the Outside Offer. After the expiration of such
90-day period or if the Outside Offer shall be modified in any material respect,
the Company's right to sell the ROFR Securities to the Proposed Purchaser
pursuant to this Section 9(c) shall terminate, and the terms of Section 9(a)
shall again become effective, during the time period described in the first
sentence of Section 9(a).
(d) During the period from the date of this Agreement until the sixth
monthly anniversary of the date of this Agreement, Buyer shall be entitled to
exercise its rights with respect to any proposed issuance of Covered Securities
under either Section 8(c) or 9(b), and the Company may furnish one notice that
is both the Company Offer and the ROFR Notice. Upon such sixth monthly
anniversary of the date of this Agreement, Buyer's rights under this Section 9
shall terminate, except with respect to any Outside Offer made prior to such
expiration.
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<PAGE>
10. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, sent by overnight courier or facsimile transmission or
delivered against receipt to the party to whom it is to be given at the address
of such party set forth in the preamble to this Agreement (or to such other
address as the party shall have furnished in writing in accordance with the
provisions of this Section 10). Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof; any
notice sent by overnight courier shall be deemed given on the next business day
after delivery to the courier; any notice sent by facsimile transmission shall
be deemed given upon receipt (electronically or otherwise); and any notice
delivered against receipt shall be deemed given upon receipt, except in each
case for a notice changing a party's address which shall be deemed given at the
time of receipt thereof.
11. This Agreement shall be binding upon and inure to the benefit of the
parties hereto, the successors and assigns of the Company, including, without
limitation, any IPO Company, and the successors and assigns of Buyer that become
such successors and assigns in connection with a transfer of all or any portion
the 5% Membership Interest in compliance with the provisions of this Agreement
and the LLC Agreement.
12. (a) This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to principles
governing conflicts of laws.
(b) The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State, in each
case sitting in New York County, in connection with any action or proceeding
arising out of or relating to this Agreement, any document or instrument
directly pursuant to, in connection with, or simultaneously with, this Agreement
or a breach of this Agreement or any such document or instrument. In any such
action or proceeding, the Company waives personal service of any summons,
complaint or other process and agrees that service thereof may be made in
accordance with Section 10 hereof.
(c) Except with respect to Chazen, Permitted Transferees and the IPO
Company, there shall be no third party beneficiary of this Agreement.
13. This Agreement, together with the Note, the Warrant, and other
Transaction Documents signed by the undersigned parties on this date represent
the entire agreement with respect to the subject matter hereof, supersedes any
prior oral or written agreements or undertakings between the parties with
respect to such subject matter and may not be modified or amended except in a
writing duly executed by each of the parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
date first written above.
FM/CCP INVESTMENT PARTNERS,
LLC
By: /s/ Jerome Chazen
------------------------
Name: Jerome Chazen
Title:
Consented and agreed to by:
INTERNET FASHION MALL, LLC
By: /s/ Benjamin Narasin
------------------------
Benjamin Narasin
Member
RICHARD A. EISNER & COMPANY,
LLP, as a Member
By: /s/ Charly Weinstein
-------------------------
Principal
/s/ Benjamin Narasin
-------------------------
Benjamin Narasin
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<PAGE>
Exhibit 10.4
SUBSCRIPTION AGREEMENT dated as of the 2nd day of March, 1999, between
Jerome Chazen, with his principal place of business at 767 Fifth Avenue, New
York, New York 10153 ("Buyer"), and Internet Fashion Mall LLC, a Delaware
limited liability company, with its principal place of business at 575 Madison
Avenue, New York, NY 10022 (the "Company").
W I T N E S S E T H:
WHEREAS, Benjamin Narasin and Grant Narasin (collectively "Narasin") and
Richard A. Eisner & Company, LLP ("RAE") are the sole members of, and the sole
owners of membership interests in, the Company (all such membership interests in
the Company being hereinafter referred to singly as a "Membership Interest" and
collectively as the "Membership Interests"), of which Narasin owns an 80%
Membership Interest and RAE owns a 20% Membership Interest; and
WHEREAS, Buyer wishes to accept options to purchase a 3% Membership
Interest of the Company in consideration for his execution and delivery of the
Consulting Agreement between him and the Company of even date herewith (the
"Consulting Agreement"); and
WHEREAS, the Company desires to sell, grant, assign and transfer such
options to Buyer; and
WHEREAS, upon receipt of $2,000,000 by the Company from FM/CCP Investment
Partners, LLC ("FM/CCP"), Buyer, after giving PRO FORMA effect to the exercise
of such options (but not his options to purchase certain shares calculated by
reference to an additional 2% Membership Interest), shall hold options entitling
him to become a member of the Company with a 3% membership interest, FM/CCP
shall be a member with a 5% membership interest in accordance with the letter of
even date herewith from the Company to Buyer and FM/CCP Investment Partners, LLC
("FM/CCP") concerning the capitalization of the Company (the "Capitalization
Side Letter") and the membership interests of Narasin and RAE shall be reduced
to 73.6% and 18.4%, respectively.
NOW THEREFORE, the parties hereto hereby agree as follows:
1. The Company hereby sells, grants, assigns and transfers to Buyer and
Buyer, in reliance on the representations, warranties and covenants of the
Company contained herein, hereby purchases and accepts, five-year options to
purchase membership interests of the Company (or, if converted to common stock,
such common stock) (the "Securities") equal to a membership interest (or number
of shares of common stock) calculated by reference to a 3% membership interest
of the Company received as of the date hereof, in consideration for services to
be rendered pursuant to the Consulting Agreement, at the exercise price and upon
the other terms set forth in the Consulting Agreement.
2. The Buyer hereby agrees upon and after any exercise of options to be
bound by the terms and conditions of the Amended and Restated Limited Liability
Company Agreement by and among Narasin and RAE, a copy of which is annexed
hereto as Exhibit A (the "LLC Agreement")
<PAGE>
and Narasin and RAE hereby consent to the admission of Buyer as a member of the
Company as of the date of the initial such exercise.
3. The Buyer hereby agrees that for twelve (12) months following the
consummation of an initial public offering ("IPO") of the common stock of the
Company or the IPO Company (as defined below) (the "Lock Up Period"), he shall
not, without the prior written consent of the Company or the IPO Company, as the
case may be, directly or indirectly, including by entering into any Hedging
Transaction (as defined below), offer, sell, contract to sell, grant any option
for the sale of, or otherwise dispose of ("Dispose of"), any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of common stock or other equity securities of the
Company or the IPO Company. As used herein, (a) the term "IPO Company" means any
corporation or other entity, the shares or other equity securities of which are
issued to the members of the Company in consideration for the conversion,
exchange or cancellation of the Membership Interests and/or the transfer of the
Membership Interests to the IPO Company; and (b) the term "Hedging Transaction"
shall mean any short sale or grant of any right (including, without limitation,
any put or call option) with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from the common stock or other equity securities.
Notwithstanding the foregoing provisions of this Section 3, (i) Buyer shall have
the right to transfer all or any portion of his options or Membership Interest
in the Company or his shares of common stock of the IPO Company to a Family
Donee which transfer, upon the closing of the IPO, shall be subject to the
agreement of the managing underwriter for the IPO, and (ii) if Narasin or RAE
sells any of his or its securities of the Company during the Lock-up Period,
Buyer shall not be restricted under this Section 3 from selling the same
percentage of his securities of the Company as the securities being sold by
Narasin or RAE represent of the securities of the Company held by him or it, as
the case may be, and if Narasin or RAE is released from his or its "lock-up"
agreement, Buyer shall be similarly released from the restrictions contained in
this Section 3. For purposes of this Agreement, the term "Family Donee" shall
mean: (A) any parent, child, lineal descendant or sibling of Buyer, the spouse
of any of the foregoing, or the spouse of Buyer; (B) any trust established by
Buyer, or any trustee, custodian, fiduciary or foundation which will hold such
shares for charitable purposes or for the benefit of Buyer or any of the persons
described in clause (A) above; PROVIDED, that Buyer or any person described in
clause (A) above shall exercise a deciding influence over the voting of the
shares held by a Family Donee described in this clause (B).
4. The Buyer hereby agrees, represents, and warrants, as of the date hereof
and as of the Closing Date (as defined in the Subscription Agreement of even
date between FM/CCP and the Company (the "FM/CCP Subscription Agreement")),
that:
(a) He is acquiring the Securities for his own account (and not for
the account of others) for investment and not with a view to the distribution or
resale thereof; provided that, notwithstanding such intention, Buyer shall be
free to transfer his securities in the Company in compliance with applicable
legal requirements and the provisions of this Agreement and the LLC Agreement;
<PAGE>
(b) By virtue of his position, he has access to the same kind of
information which would be available in a registration statement filed under the
Securities Act of 1933, as amended (the "Act"), including, without limitation,
access to cash and barter contracts, the Company's books and records and
summaries of cash and barter clients;
(c) He is a sophisticated investor;
(d) He understands that he may not sell or otherwise dispose of the
Securities in the absence of either a registration statement under the Act or an
exemption from the registration provisions of the Act; and
(e) The certificates representing his Company securities may contain a
Legend thereon to the effect of (d) above.
5. The Company hereby agrees, represents and warrants to Buyer, as of the
date hereof and as of the Closing Date, that:
(a) The Company (i) is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Delaware;
(ii) has all requisite limited liability company power and authority to own and
operate its property, to lease the property it operates as lessee and to conduct
the business in which it is currently engaged; (iii) is duly qualified as a
foreign limited liability company and in good standing under the laws of each
jurisdiction in which it maintains physical facilities, except to the extent
that the failure to do so or be so would not in the aggregate have a material
adverse effect on the business, financial condition, results of operations or
prospects of the Company ("Material Adverse Effect"); and (iv) has the requisite
limited liability company power and authority to execute, deliver and perform
its obligations under this Agreement, the Registration Rights Agreement referred
to in Section 6 of this Agreement, the Capitalization Side Letter, the LLC
Agreement and the Consulting Agreement (collectively, the "Transaction
Documents").
(b) The execution, delivery and performance by the Company of this
Agreement and the other Transaction Documents to which it is a party and the
transactions contemplated hereby and thereby (i) have been (or, in the case of
the Registration Rights Agreement, will be) duly authorized by all necessary
action of the Company or its Members; (ii) do not contravene the terms of the
Certificate of Formation or LLC Agreement or any contribution agreement or
retention agreement to which the Company and any member is a party, or any other
governing document of the Company, in each case which has previously been
delivered to Buyer and which are herein annexed; and (iii) except for such
violations, conflicts, breaches, contraventions or Liens (as hereinafter
defined) which would not in the aggregate have a Material Adverse Effect, do not
violate, conflict with or result in any breach or contravention of or result in
the creation of any lien, charge,
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pledge, security interest, mortgage or other encumbrance (each, a "Lien") under,
any contractual obligation of the Company, or any requirement of any federal,
state or foreign law, rule or regulation (each, a "Requirement of Law"),
applicable to the Company; provided, however, that no representation, warranty
or agreement is made in this clause (iii) concerning any state securities laws,
rules or regulations as they relate to publicly-offered securities or rules or
regulations of the National Association of Securities Dealers, Inc., Nasdaq or
any exchange upon which the securities of the Company (or the IPO Company) are
proposed to be listed.
(c) No approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any federal, state or foreign
governmental agency, instrumentality, court or administrative authority
("Governmental Authority") or any other person in respect of any Requirement of
Law applicable to the Company and no lapse of a waiting period under a
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance by the Company of this Agreement or any other
Transaction Documents to which it is a party or the transactions contemplated
hereby or thereby, except for any of the foregoing required under federal or
state securities laws, the rules and regulations promulgated by the National
Association of Securities Dealers, Inc., Nasdaq and any exchange upon which
securities of the Company (or the IPO Company) are proposed to be listed.
(d) This Agreement and the other Transaction Documents to which the
Company is a party have been, or in the case of the Registration Rights
Agreement will be, duly executed and delivered by the Company and each
constitutes, or in the case of the Registration Rights Agreement will
constitute, the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity relating to enforceability (regardless of whether
considered in a proceeding at law or in equity).
(e) Except for matters materially reflected in the Company's bad debt
reserve in the approximate amount of $105,000 as of December 31, 1998, subject
to audit adjustments, there are no legal actions, suits, proceedings, claims,
material complaints, material disputes or investigations pending, or to the
knowledge of the Company threatened, at law, in equity, in arbitration or before
any Governmental Authority against the Company, Narasin or their respective
property or assets ("Judgments") which in the aggregate would have a material
adverse effect. No injunction, writ, temporary restraining order, decree or
order of any nature has been issued by any court or other Governmental Authority
against the Company, Narasin or their respective property or assets, purporting
to enjoin or restrain the execution, delivery or performance of this Agreement
or any of the other Transaction Documents.
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(f) The Membership Interests in the Company as of the date hereof
consist solely of the Membership Interests of RAE and Narasin described in the
preamble hereto. Except for this Agreement, any of the other Transaction
Documents and the other agreements and instruments being made by the Company
with or in favor of Buyer or FM/CCPChazen, and except for the Company's
agreements with Wit Capital, there are no options, warrants, conversion
privileges or other rights (collectively "Rights") presently outstanding to
purchase or otherwise acquire any Membership Interests in the Company and all
such rights are correctly reflected in the Capitalization Side Letter. The
issued and outstanding Membership Interests are duly authorized and validly
issued.
(g) The Company has delivered to Buyer its unaudited financial
statements (balance sheet and statements of operations) for the fiscal years
ended on, and as at December 31, 1996, 1997 and 1998 (the "FINANCIAL
STATEMENTS"). The Financial Statements fairly present the financial condition
and operating results of the Company in accordance with GAAP as of the
respective dates and for the respective periods indicated, subject to audit
adjustments.
(h) (i) As used herein, the term "Intellectual Property" shall mean
all worldwide intellectual property rights, including, without limitation, any
patent, trademark, service mark, trade name, copyright or any registration or
application therefor; and any know-how, trade secret, customer list, technology,
process, formula or other proprietary information; and any source code, object
code, flowchart, algorithm, display screen, layout, system architecture,
development tool or other software; and any license to any of the foregoing; and
all documents or other information in any machine or human understandable media
related to any of the foregoing. Intellectual Property which is used in or is
otherwise material to the business of the Company as currently conducted and as
it is expected to be conducted in the future is referred to as "Intellectual
Property Assets."
(ii) The Company directly owns, or is licensed or otherwise
possesses rights to use all Intellectual Property Assets that are necessary for
the operation of its business as presently conducted, with such exceptions as
have not had and are not reasonably likely to have a material adverse effect on
the business of the Company. To the knowledge of the Company, there is no
unauthorized use, infringement or misappropriation of any Intellectual Property
Assets by any third party, except for such use, infringement or
misappropriation, individually or in the aggregate as have not had and are not
reasonably likely to have a material adverse effect on the business of the
Company. To the knowledge of the Company, no Intellectual Property Assets are
subject to any outstanding Judgment restricting in any manner the use or
licensing thereof by the Company or infringes on or misappropriates any
Intellectual Property owned or used by any other person, except to the extent
any such Judgment, infringement or misappropriation, individually or in the
aggregate, has not had and is not reasonably likely to have a material adverse
effect on the business of the Company. The Company is the sole and exclusive
owner of, free of any Liens, and is registered with, Network Solutions, Inc.
with respect to the "Fashionmall.com" domain name and has submitted to Network
Solutions, Inc. with respect to the "Outletmall.com" domain name.
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<PAGE>
(i) Since December 31, 1998, the operations of the Company have been
conducted, in all material respects, in a manner consistent with past practice
and in accordance with the business plan presented heretofore to Buyer, taking
into account additional expenses incurred by the Company in preparing for the
IPO.
(j) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(k) No form of general solicitation or general advertising was used by
the Company or its representatives in connection with the offer or sale of the
5% Membership Interests. Assuming the accuracy of the representations and
warranties of Buyer set forth in Section 4, no registration, pursuant to the
provisions of the Securities Act or any state securities or "blue sky" laws, is
or will be required in connection with the offer, sale or issuance of the 5%
Membership Interest.
(l) Except for the finder's fee to be paid by the Company to Wit
Capital, there are no brokerage commissions, finder's fees or similar fees or
commissions payable by the Company in connection with the transactions
contemplated hereby based on any agreement, arrangement or understanding with or
known to the Company.
(m) Upon payment of the exercise price for the options, the Membership
Interests underlying the same will be duly authorized and validly issued, fully
paid and non assesable and clear of all Liens or any adverse claims,
preferential arrangements or restrictions of any kind that were granted or
otherwise created by the Company (other than any of the foregoing set forth in
the LLC Agreement), including, without limitation, any restrictions on the
exercise of any attributes of ownership. Except as may be otherwise required by
law or as may be agreed to by Buyer (or any Family Donee), ownership of the
Membership Interest or shares underlying the options will not obligate Buyer (or
any Family Donee), to make any contribution to the capital of, or any loans or
advances to, the Company.
(n) Neither this Agreement nor any other document, certificate,
instrument or written statement furnished or made available to Buyer, or to
counsel to Buyer, by or on behalf of the Company pursuant to this Agreement or
any of the other Transaction Agreements, contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein, viewing all of the foregoing documents,
certificates, instruments and written statements in the aggregate, not
misleading. To the best of the Company's knowledge, there is no fact which
materially adversely affects the business, operations, prospects, affairs,
conditions (financial or otherwise), properties or assets of the Corporation
which has not been set forth in this Agreement or in the other Transaction
Agreements, certificates, instruments
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<PAGE>
or written statements furnished to Buyer and its counsel by or on behalf of the
Company pursuant to this Agreement.
6. The Company hereby grants the following registration rights to Buyer:
Buyer, together with FM/CCP, shall have the right to register the resale of
their respective shares of common stock of the IPO Company, (or other equity
interests issued to the public in the IPO of the Company or the IPO Company)
(collectively, the "Registrable Securities"), as follows: (i) on one occasion,
on Form S-3 (or an equivalent form), on a demand basis, at the Company's sole
expense (other than commissions, discounts and broker's fees and legal fees and
expenses of FM/CCP and Buyer, which shall be borne by FM/CCP and Buyer,
respectively), commencing upon the Company's eligibility to utilize such form
for offerings by selling security holders and ending on February 25, 2004,
subject to agreed-upon "blackout" periods; and (ii) on an unlimited number of
occasions, on a "piggyback" basis with respect to any registration by the IPO
Company of its common stock (other than on Form S-4, Form S-8 or equivalent
forms) and subject to customary exceptions (E.G., underwriter's cutbacks and
"blackout" periods), commencing upon the termination of Buyer's obligations
pursuant to Section 3 of this Agreement and ending on February 25, 2004. In
furtherance of such grant, the Company for itself and the IPO Company, as
applicable and Buyer shall as soon as practicable after the date hereof, use
their respective reasonable efforts to promptly enter into the Registration
Rights Agreement among the Company as aforesaid, FM/CCP and Buyer, which shall
contain customary, mutually agreeable terms applicable to the Company or the IPO
Company (whichever first consummates an IPO). Notwithstanding the foregoing, if
the Company or the IPO Company is ineligible to utilize Form S-3 (or an
equivalent form) as a result of a failure to comply with the requirements of
such Form, then the Company or the IPO Company shall register the Registrable
Securities on Form S-1 or such other form as may be available.
7. With respect to the Options issuable to Buyer, Buyer shall be entitled
to the same anti-dilution protection for (i) stock splits, dividends,
distributions, combinations or reclassifications as set forth in Section 5 of
the Warrant of even date herewith issued by the Company to FM/CCP and (ii)
Reorganization as set forth in Section 6 of such Warrant.
8. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, sent by overnight courier or facsimile transmission or
delivered against receipt to the party to whom it is to be given at the address
of such party set forth in the preamble to this Agreement (or to such other
address as the party shall have furnished in writing in accordance with the
provisions of this Section 8). Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof; any
notice sent by overnight courier shall be deemed given on the next business day
after delivery to the courier; any notice sent by facsimile transmission shall
be deemed given upon receipt (electronically or otherwise); and any notice
delivered against receipt shall be deemed
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<PAGE>
given upon receipt, except in each case for a notice changing a party's address
which shall be deemed given at the time of receipt thereof.
9. This Agreement shall be binding upon and inure to the benefit of the
parties hereto, the successors and assigns of the Company, including, without
limitation, any IPO Company, and the successors and assigns of Buyer that become
such successors and assigns in connection with a transfer of all or any portion
the Options (or the shares or other equity interests underlying the Options) in
compliance with the provisions of this Agreement, the Consulting Agreement and
the LLC Agreement.
10. (a) This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to principles
governing conflicts of laws.
(b) The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State, in each
case sitting in New York County, in connection with any action or proceeding
arising out of or relating to this Agreement, any document or instrument
delivered pursuant to, in connection with, or simultaneously with, this
Agreement, or a breach of this Agreement or any such document or instrument. In
any such action or proceeding, the Company waives personal service of any
summons, complaint or other process and agrees that service thereof may be made
in accordance with Section 8 hereof.
11. This Agreement, together with the Consulting Agreement, the
Registration Rights Agreement referred to in Section 6 and the Capitalization
Side Letter, represents the entire agreement with respect to the subject matter
thereof, supersedes any prior oral or written agreements or undertakings between
the parties with respect there to and may not be modified or amended except in a
writing duly executed by each of the parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
date first written above.
/s/ Jerome Chazen
----------------------------
Jerome Chazen
Consented and agreed to by:
INTERNET FASHION MALL LLC
By: /s/ Benjamin Narasin
-------------------------
Benjamin Narasin
Member
RICHARD A. EISNER & COMPANY,
LLP, as a Member
By: /s/ Charly Weinstein
-------------------------
Principal
/s/ Benjamin Narasin
---------------------------
Benjamin Narasin
9
<PAGE>
Exhibit 10.5
FORM OF
FASHIONMALL.COM, INC.
1999 STOCK OPTION PLAN
SECTION 1. PURPOSE. The purpose of the fashionmall.com, Inc.1999 Stock
Option Plan (this "Plan") is to provide a means whereby selected employees,
officers, directors, agents, consultants and independent contractors of
fashionmall.com, Inc. (the "Company") or of any parent or subsidiary (as defined
in subsection 5.7 and referred to hereinafter as "related corporations")
thereof, may be granted incentive stock options and/or non-qualified stock
options to purchase the Common Stock (as defined in Section 3) of the Company,
in order to attract and retain the services or advice of such employees,
officers, directors, agents, consultants and independent contractors and to
provide added incentive to them by encouraging stock ownership in the Company.
SECTION 2. ADMINISTRATION.
(a) This Plan shall be administered by the Board of Directors of the
Company (the "Board"), except to the extent the Board delegates its authority to
a committee of the Board to administer this Plan. The administrator of this Plan
shall hereinafter be referred to as the "Plan Administrator."
(b) For so long as the Company's Common Stock is registered under Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no
Option shall be granted to a director or officer (subject to Section 16 of the
Exchange Act) of the Company by the Board unless (i) approved in advance by the
Board or the Plan Administrator in accordance with the provisions of Rule
16b-3(d)(1) under the Exchange Act (where the Plan Administrator, if not the
entire Board, is a committee of the Board composed solely of two or more
non-employee directors who satisfy the requirements of Rule 16b-3(b)(3) under
the Exchange Act), or (ii) approved in accordance with the provisions of Rule
16b-3(d)(2) under the Exchange Act, except that an option may be granted absent
such approval if the option provides that no officer or director of the Company
may sell shares received upon the exercise of such option during the six-month
period immediately following the grant of such option.
2.1 PROCEDURES. The Board shall designate one of the members of the
Plan Administrator as chairman. The Plan Administrator may hold meetings at such
times and places as it shall determine. The acts of a majority of the members of
the Plan Administrator present at meetings at which a quorum exists, or acts
reduced to or approved in writing by all Plan Administrator members, shall be
valid acts of the Plan Administrator.
2.2 RESPONSIBILITIES. Except for the terms and conditions explicitly
set forth in this Plan, the Plan Administrator shall have the authority, in its
discretion, to determine all matters relating to the options to be granted under
this Plan, including selection of the individuals to be granted options, the
number of shares to be subject to each option, the exercise price, and all other
terms and conditions of the options, including the designation of such options
as an incentive stock option or non-qualified stock option. Grants under this
Plan need not be identical in any respect, even when made simultaneously. The
interpretation and construction by the Plan Administrator of any terms or
provisions of this Plan or any option issued hereunder, or of any rule or
regulation promulgated in connection herewith, shall be conclusive and binding
on all interested parties, so long as such interpretation and construction with
respect to incentive stock options corresponds to the requirements of Internal
Revenue Code (the "Code") Section 422, the regulations thereunder, and
any amendments thereto.
<PAGE>
2.3 SECTION 16(B) COMPLIANCE AND BIFURCATION OF PLAN. It is the
intention of the Company that this Plan comply in all respects with Section
16(b) and Rule 16b-3 under the Exchange Act, to the extent applicable, and, if
any Plan provision is later found not to be in compliance with such Section or
Rule, as the case may be, the provision shall be deemed null and void, and in
all events the Plan shall be construed in favor of its meeting the requirements
of Section 16(b) and Rule 16b-3 under the Exchange Act. Notwithstanding anything
in the Plan to the contrary, the Board, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit or condition the use of any
provision of the Plan to participants who are officers and directors or other
persons subject to Section 16(b) of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other participants.
SECTION 3. STOCK SUBJECT TO THIS PLAN. The stock subject to this Plan shall
be the Company's Common Stock, par value $.01 per share (the "Common Stock"),
presently authorized but unissued or subsequently acquired by the Company.
Subject to adjustment as provided in Section 7 hereof, the aggregate amount of
Common Stock to be delivered upon the exercise of all options granted under this
Plan shall not exceed 1,125,000 shares as such Common Stock was constituted on
the effective date of this Plan. If any option granted under this Plan shall
expire, be surrendered, exchanged for another option, canceled or terminated for
any reason without having been exercised in full, the unpurchased shares subject
thereto shall thereupon again be available for purposes of this Plan, including
for replacement options which may be granted in exchange for such surrendered,
canceled or terminated options.
SECTION 4. ELIGIBILITY. An incentive stock option may be granted only to
any individual who, at the time the option is granted, is an employee of the
Company or any related corporation. A nonqualified stock option may be granted
to any director, employee, officer, agent, consultant or independent contractor
of the Company or any related corporation, whether an individual or an entity.
Any party to whom an option is granted under this Plan shall be referred to
hereinafter as an "Optionee".
SECTION 5. TERMS AND CONDITIONS OF OPTIONS. Options granted under this Plan
shall be evidenced by written agreements which shall contain such terms,
conditions, limitations and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with this Plan (the "Option
Agreement"). Notwithstanding the foregoing, options shall include or incorporate
by reference the following terms and conditions:
5.1 NUMBER OF SHARES AND PRICE. The maximum number of shares that may
be purchased pursuant to the exercise of each option and the price per share at
which such option is exercisable (the "exercise price") shall be as established
by the Plan Administrator, provided that the Plan Administrator shall act in
good faith to establish the exercise price which shall be not less than the fair
market value per share of the Common Stock at the time the option is granted
with respect to incentive stock options and not less than par value per share of
the Common Stock at the time the option is granted with respect to nonqualified
stock options and also provided that, with respect to incentive stock options
granted to greater than 10% shareholders, the exercise price shall be as
required by Section 6. In addition, no individual may be granted options under
the Plan to purchase more than 300,000 shares of Common Stock during any one
year, subject to adjustment as set forth in Section 7.
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<PAGE>
5.2 TERM AND MATURITY. Subject to the restrictions contained in
Section 6 with respect to granting incentive stock options to greater than 10%
shareholders, the term of each incentive stock option shall be as established by
the Plan Administrator and, if not so established, shall be 10 years from the
date it is granted but in no event shall the term of any incentive stock option
exceed 10 years. The term of each nonqualified stock option shall be as
established by the Plan Administrator and, if not so established, shall be 10
years from the date it is granted. To ensure that the Company or related
corporation will achieve the purpose and receive the benefits contemplated in
this Plan, any option granted to any Optionee hereunder shall, unless the
condition of this sentence is waived or modified in the agreement evidencing the
option or by resolution adopted by the Plan Administrator, be exercisable
according to the following schedule:
<TABLE>
<CAPTION>
Period of Optionee's
Continuous Relationship
With the Company or Related
Corporation From the Date Portion of Total Option
the Option is Granted Which is Exercisable
<S> <C>
after 1 year 25%
after 2 years 50%
after 3 years 75%
after 4 years 100%
</TABLE>
5.3 EXERCISE. Subject to any vesting schedule described in subsection
5.2 above, each option may be exercised in whole or in part; provided, however,
that no fewer than 100 shares (or the remaining shares then purchasable under
the option, if less than 100 shares) may be purchased upon any exercise of an
option hereunder and that only whole shares will be issued pursuant to the
exercise of any option. Options shall be exercised by delivery to the Company of
notice of the number of shares with respect to which the option is exercised,
together with payment of the exercise price.
5.4 PAYMENT OF EXERCISE PRICE. Payment of the option exercise price
shall be made in full at the time the notice of exercise of the option is
delivered to the Company and shall be in cash, bank certified or cashier's check
or personal check (unless at the time of exercise the Plan Administrator in a
particular case determines not to accept a personal check) for the Common Stock
being purchased.
The Plan Administrator can determine at the time the option is granted
for incentive stock options, or at any time before exercise for nonqualified
stock options, that additional forms of payment will be permitted. To the extent
permitted by the Plan Administrator and applicable laws and regulations
(including, but not limited to, federal tax and securities laws and regulations
and state corporate law), an option may be exercised by:
(a) delivery of shares of stock of the Company held by an Optionee
having a fair market value equal to the exercise price, such fair market value
to be determined in good faith by the Plan Administrator;
(b) delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, all in accordance with the regulations of
the Federal Reserve Board, to
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<PAGE>
promptly deliver to the Company the amount of sale or loan proceeds necessary to
pay the exercise price and any federal, state or local withholding tax
obligations that may arise in connection with the exercise; or
(c) delivery of a properly executed exercise notice together with
instructions to the Company to withhold from the shares that would otherwise be
issued upon exercise that number of shares having a fair market value equal to
the option exercise price.
5.5 WITHHOLDING TAX REQUIREMENT. The Company or any related
corporation shall have the right to retain and withhold from any payment of cash
or Common Stock under the Plan the amount of taxes required by any government to
be withheld or otherwise deducted and paid with respect to such payment. At its
discretion, the Company may require an Optionee receiving shares of Common Stock
to reimburse the Company for any such taxes required to be withheld by the
Company and withhold such shares in whole or in part until the Company is so
reimbursed. In lieu thereof, the Company, at its option in its sole discretion,
shall (a) have the right to withhold from any other cash amounts due or to
become due from the Company to the Optionee an amount equal to such taxes or (b)
retain and withhold a number of shares having a market value not less than the
amount of such taxes required to be withheld by the Company to reimburse the
Company for any such taxes and cancel (in whole or in part) any such shares so
withheld. If required by Section 16(b) of the Exchange Act, the election to pay
withholding taxes by delivery of shares held by any person who at the time of
exercise is subject to Section 16(b) of the Exchange Act, shall be made either
six months prior to the date the option exercise becomes taxable or at such
other times as the Company may determine as necessary to comply with Section
16(b) of the Exchange Act.
5.6 ASSIGNABILITY AND TRANSFERABILITY OF OPTION. Options granted under
this Plan and the rights and privileges conferred hereby may not be transferred,
assigned, pledged or hypothecated in any manner (whether by operation of law or
otherwise) other than (i) by will or by the applicable laws of descent and
distribution, (ii) pursuant to a qualified domestic relations order as defined
in Section 414(p) of the Code, or Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder or (iii) as otherwise
determined by the Plan Administrator and set forth in the applicable Option
Agreement. Any attempt to transfer, assign, pledge, hypothecate or otherwise
dispose of any option under this Plan or of any right or privilege conferred
hereby, contrary to the Code or to the provisions of this Plan, or the sale or
levy or any attachment or similar process upon the rights and privileges
conferred hereby shall be null and void. The designation by an Optionee of a
beneficiary does not, in and of itself, constitute an impermissible transfer
under this Section.
5.7 TERMINATION OF RELATIONSHIP. If the Optionee's relationship with
the Company or any related corporation ceases for any reason other than
termination for cause, death or total disability, and unless by its terms the
option sooner terminates or expires, then the Optionee may exercise, for a
three-month period, that portion of the Optionee's option which is exercisable
at the time of such cessation, but the Optionee's option shall terminate at the
end of the three-month period following such cessation as to all shares for
which it has not theretofore been exercised, unless, in the case of a
nonqualified stock option, such provision is waived in the agreement evidencing
the option or by resolution adopted by the Plan Administrator within 90 days of
such cessation. If, in the case of an incentive stock option, an Optionee's
relationship with the Company or related corporation changes (i.e., from
employee to non-employee, such as a consultant), such change shall
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<PAGE>
constitute a termination of an Optionee's employment with the Company or related
corporation and the Optionee's incentive stock option shall become a
non-qualified stock option.
If an Optionee is terminated for cause, any option granted hereunder
shall automatically terminate as of the first discovery by the Company of any
reason for termination for cause, and such Optionee shall thereupon have no
right to purchase any shares pursuant to such option. "Termination for cause"
shall mean dismissal for dishonesty, conviction or confession of a crime
punishable by law (except minor violations), fraud, misconduct or disclosure of
confidential information. If an Optionee's relationship with the Company or any
related corporation is suspended pending an investigation of whether or not the
Optionee shall be terminated for cause, all Optionee's rights under any option
granted hereunder likewise shall be suspended during the period of
investigation.
If an Optionee's relationship with the Company or any related
corporation ceases because of a total disability, the Optionee's option shall
not terminate or, in the case of an incentive stock option, cease to be treated
as an incentive stock option until the end of the 12-month period following such
cessation (unless by its terms it sooner terminates and expires). As used in
this Plan, the term "total disability" refers to a mental or physical impairment
of the Optionee which is expected to result in death or which has lasted or is
expected to last for a continuous period of 12 months or more and which causes
the Optionee to be unable, in the opinion of the Company and two (if more than
one is required by the Company in its sole discretion) independent physicians,
to perform his or her duties for the Company and to be engaged in any
substantial gainful activity. Total disability shall be deemed to have occurred
on the first day after the Company and the two (if more than one is required by
the Company in its sole discretion) independent physicians have furnished their
opinion of total disability to the Plan Administrator.
For purposes of this subsection 5.7, a transfer of relationship
between or among the Company and/or any related corporation shall not be deemed
to constitute a cessation of relationship with the Company or any of its related
corporations. For purposes of this subsection 5.7, with respect to incentive
stock options, employment shall be deemed to continue while the Optionee is on
military leave, sick leave or other bona fide leave of absence (as determined by
the Plan Administrator). The foregoing notwithstanding, employment shall not be
deemed to continue beyond the first 90 days of such leave, unless the Optionee's
reemployment rights are guaranteed by statute or by contract.
As used herein, the term "related corporation", when referring to a
subsidiary corporation, shall mean any corporation (other than the Company) or
other entity in, at the time of the granting of the option, an unbroken chain of
corporations ending with the Company, if stock or other interests possessing 50%
or more of the total combined voting power of all classes of stock or other
interests of each of the corporations or other entities other than the Company
is owned by one of the other corporations or other entities in such chain. When
referring to a parent corporation or other entity, the term "related
corporation" shall mean any corporation or other entity in an unbroken chain of
corporations or other entities ending with the Company if, at the time of the
granting of the option, each of the corporations or other entities other than
the Company owns stock or other interests possessing 50% or more of the total
combined voting power of all classes of stock or other interests in one of the
other corporations or other entities in such chain.
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<PAGE>
5.8 DEATH OF OPTIONEE. If an Optionee dies while he or she has a
relationship with the Company or any related corporation or within the
three-month period (or 12-month period in the case of totally disabled
Optionees) following cessation of such relationship, any option held by such
Optionee to the extent that the Optionee would have been entitled to exercise
such option, may be exercised within one year after his or her death by the
personal representative of his or her estate or by the person or persons to whom
the Optionee's rights under the option shall pass by will or by the applicable
laws of descent and distribution.
5.9 STATUS OF SHAREHOLDER. Neither the Optionee nor any party to which
the Optionee's rights and privileges under the option may pass shall be, or have
any of the rights or privileges of, a shareholder of the Company with respect to
any of the shares issuable upon the exercise of any option granted under this
Plan unless and until such option has been exercised.
5.10 CONTINUATION OF EMPLOYMENT. Nothing in this Plan or in any option
granted pursuant to this Plan shall confer upon any Optionee any right to
continue in the employ of the Company or of a related corporation, or to
interfere in any way with the right of the Company or of any such related
corporation to terminate his or her employment or other relationship with the
Company at any time.
5.11 MODIFICATION AND AMENDMENT OF OPTION. Subject to the requirements
of Code Section 422 with respect to incentive stock options and to the terms and
conditions and within the limitations of this Plan, the Plan Administrator may
modify or amend outstanding options granted under this Plan. The modification or
amendment of an outstanding option shall not, without the consent of the
Optionee, impair or diminish any of his or her rights or any of the obligations
of the Company under such option. Except as otherwise provided in this Plan, no
outstanding option shall be terminated without the consent of the Optionee.
Unless the Optionee agrees otherwise, any changes or adjustments made to
outstanding incentive stock options granted under this Plan shall be made in
such a manner so as not to constitute a "modification" as defined in Code
Section 424(h) and so as not to cause any incentive stock option issued
hereunder to fail to continue to qualify as an incentive stock option as defined
in Code Section 422(b).
5.12 LIMITATION ON VALUE FOR INCENTIVE STOCK OPTIONS. As to all
incentive stock options granted under the terms of this Plan, to the extent that
the aggregate fair market value (determined at the time the incentive stock
option is granted) of the stock with respect to which incentive stock options
are exercisable for the first time by the Optionee during any calendar year
(under this Plan and all other incentive stock option plans of the Company, a
related corporation or a predecessor corporation) exceeds $100,000, such options
shall be treated as nonqualified stock options. The previous sentence shall not
apply if the Code is amended or if the Internal Revenue Service publicly rules,
issues a private ruling to the Company, any Optionee, or any legatee, personal
representative or distributee of an Optionee or issues regulations, changing or
eliminating such annual limit, in which case the limitation shall be that
provided by the Code or the Internal Revenue Service, as the case may be.
5.13 VALUATION OF COMMON STOCK RECEIVED UPON EXERCISE
5.13.1 EXERCISE OF OPTIONS UNDER SECTIONS 5.4(A) AND (C). The
value of Common Stock received by the Optionee from an exercise under Sections
5.4(a) and 5.4(c) hereof
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<PAGE>
shall be the fair market value, which shall mean the last reported sales price,
regular way, of the Common Stock on the date of receipt by the Company of the
Optionee's delivery of shares under Section 5.4(a) hereof or delivery of the
exercise notice under Section 5.4(c) hereof (or, if no sale takes place on any
such day, the closing bid price of the Common Stock on such day), on the
principal securities exchange (including the National Association of Securities
Dealers, Inc.'s (the "NASD") National Market System) on which the Common Stock
is admitted or listed for trading, or, if the Common Stock is not listed on any
such exchange on any such day, the highest reported bid price for the Common
Stock as furnished by the NASD through NASDAQ, or a similar organization if
NASDAQ is no longer reporting such information, or, if the Common Stock is not
listed for trading on an exchange and is not quoted on NASDAQ or any similar
organization on any such day, the fair value of a share of Common Stock on such
day as determined by the Plan Administrator of the Company in good faith.
5.13.2 EXERCISE OF OPTION UNDER SECTION 5.4(B). The value of
Common Stock received by the Optionee from an exercise under Section 5.4(b)
hereof (a) in the case of the sale of the Common Stock received as a result of
the exercise by a broker on the date of receipt by the Company of the Optionee's
exercise notice, shall equal the sales price received for such shares; and (b)
in all other cases, shall be determined as provided in Section 5.13.1 hereof.
SECTION 6. GREATER THAN 10% SHAREHOLDERS.
6.1 EXERCISE PRICE AND TERM OF INCENTIVE STOCK OPTIONS. If incentive
stock options are granted under this Plan to employees who own more than 10% of
the total combined voting power of all classes of stock of the Company or any
related corporation, the term of such incentive stock options shall not exceed
five years and the exercise price shall be not less than 110% of the fair market
value of the Common Stock at the time the incentive stock option is granted.
This provision shall control notwithstanding any contrary terms contained in an
option agreement or any other document. The term and exercise price limitations
of this provision shall be amended to conform to any change required (or, in the
sole discretion of the Plan Administrator, permitted) by a change in the Code or
by a ruling or pronouncement of the Internal Revenue Service.
6.2 ATTRIBUTION RULE. For purposes of subsection 6.1, in determining
stock ownership, an employee shall be deemed to own the stock owned, directly or
indirectly, by or for his or her brothers, sisters, spouse, ancestors and lineal
descendants. Stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be deemed to be owned proportionately by or
for its shareholders, partners or beneficiaries. If an employee or a person
related to the employee owns an unexercised option or warrant to purchase stock
of the Company, the stock subject to that portion of the option or warrant which
is unexercised shall not be counted in determining stock ownership. For purposes
of this Section 6, stock owned by an employee shall include all stock owned by
him which is actually issued and outstanding immediately before the grant of the
incentive stock option to the employee.
SECTION 7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate number
and class of shares for which options may be granted under this Plan, the number
and class of shares covered by each outstanding option, and the exercise price
per share thereof (but not the total price), shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock of the Company resulting from a split-up or consolidation of shares or any
like
-7-
<PAGE>
capital adjustment, or the payment of any stock dividend.
7.1. EFFECT OF LIQUIDATION, REORGANIZATION OR CHANGE IN CONTROL.
7.1.1 CASH, STOCK OR OTHER PROPERTY FOR STOCK. Except as provided
in subsection 7.1.2, upon a merger (other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation,
reorganization (other than a mere reincorporation or the creation of a holding
company) or liquidation of the Company, as a result of which the shareholders of
the Company receive cash or property other than capital stock in exchange for or
in connection with their shares of Common Stock, any option granted hereunder
shall terminate, but the Optionee shall have the right immediately prior to any
such merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation to exercise such Optionee's option in whole or in
part whether or not the vesting requirements set forth in the option agreement
have been satisfied.
7.1.2 CONVERSION OF OPTIONS ON STOCK FOR STOCK EXCHANGE. If the
shareholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock in any
transaction involving a merger (other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation
or reorganization (other than a mere reincorporation or the creation of a
holding company), all options granted hereunder shall be converted into options
to purchase shares of Exchange Stock unless the Company and corporation issuing
the Exchange Stock, in their sole discretion, determine that any or all such
options granted hereunder shall not be converted into options to purchase shares
of Exchange Stock but instead shall terminate in accordance with the provisions
of subsection 7.1.1. The amount and price of converted options shall be
determined by adjusting the amount and price of the options granted hereunder in
the same proportion as used for determining the number of shares of Exchange
Stock the holders of the Common Stock receive in such merger, consolidation,
acquisition of property or stock, separation or reorganization. Unless the Board
determines otherwise, the converted options shall be fully vested whether or not
the vesting requirements set forth in the option agreement have been satisfied.
7.2 FRACTIONAL SHARES. In the event of any adjustment in the number of
shares covered by an option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
7.3 DETERMINATION OF BOARD TO BE FINAL. All Section 7 adjustments
shall be made by the Board, and its determination as to what adjustments shall
be made, and the extent thereof, shall be final, binding and conclusive. Unless
an Optionee agrees otherwise, any change or adjustment to an incentive stock
option shall be made in such a manner so as not to constitute a "modification"
as defined in Code Section 425(h) and so as not to cause his or her incentive
stock option issued hereunder to fail to continue to qualify as an incentive
stock option as defined in Code Section 422(b).
SECTION 8. SECURITIES REGULATION. Shares shall not be issued with respect
to an option
-8-
<PAGE>
granted under this Plan unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange or inter-dealer quotation system upon which the shares may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance, including the availability of an exemption from
registration for the issuance and sale of any shares hereunder. Inability of the
Company to obtain from any regulatory body having jurisdiction the authority
deemed by the Company's counsel to be necessary for the lawful issuance and sale
of any shares hereunder or the unavailability of an exemption from registration
for the issuance and sale of any shares hereunder shall relieve the Company of
any liability in respect of the nonissuance or sale of such shares as to which
such requisite authority shall not have been obtained.
As a condition to the exercise of an option, the Company may require the
Optionee to represent and warrant at the time of any such exercise that the
shares are being purchased only for investment and without any present intention
to sell or distribute such shares if, in the opinion of counsel for the Company,
such representation is required by any relevant provision of the aforementioned
laws. At the option of the Company, a stop-transfer order against any shares of
stock may be placed on the official stock books and records of the Company, and
a legend indicating that the stock may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided (concurred in by counsel
for the Company) stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on stock certificates in order to
assure exemption from registration. The Company may also require such other
action or agreement by the Optionees as it may from time to time deem to be
necessary or advisable. THE COMPANY SHALL NOT BE OBLIGATED, BY REASON OF THIS
PROVISION OR OTHERWISE, TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK
HEREUNDER.
Should any of the Company's capital stock of the same class as the stock
subject to options granted hereunder be listed on a national securities exchange
or inter-dealer quotation system, all stock issued hereunder if not previously
listed on such exchange or inter-dealer quotation system shall be authorized by
that exchange or system for listing thereon prior to the issuance thereof.
SECTION 9. AMENDMENT AND TERMINATION.
9.1 BOARD ACTION. The Board may at any time suspend, amend or
terminate this Plan, provided that except as set forth in Section 7, the
approval of the holders of a majority of the Company's outstanding shares of
voting capital stock present and entitled to vote at any meeting is necessary
for the adoption by the Board of any amendment which will:
(a) increase the number of shares which are to be reserved for
the issuance of options under this Plan;
(b) permit the granting of stock options to a class of persons
other than those presently permitted to receive stock options under this Plan;
or
(c) require shareholder approval under applicable law, including
Section 16(b) of the Exchange Act.
-9-
<PAGE>
9.2 AUTOMATIC TERMINATION. Unless sooner terminated by the Board, this
Plan shall terminate ten years from the earlier of (a) the date on which this
Plan is adopted by the Board or (b) the date on which this Plan is approved by
the shareholders of the Company. No option may be granted after such termination
or during any suspension of this Plan. The amendment or termination of this Plan
shall not, without the consent of the option holder, alter or impair any rights
or obligations under any option theretofore granted under this Plan.
SECTION 10. EFFECTIVENESS OF THIS PLAN. This Plan shall become effective
upon adoption by the Board so long as it is approved by the holders of a
majority of the Company's outstanding shares of voting capital stock present and
entitled to vote at any meeting at any time within 12 months before or after the
adoption of this Plan.
Adopted by the Board of Directors on March __, 1999 and approved by the
stockholders on on March __, 1999.
-10-
<PAGE>
FASHIONMALL.COM, INC.
NONQUALIFIED STOCK OPTION LETTER AGREEMENT
Date:
---------------
TO:
----------------
We are pleased to inform you that you have been selected by the Plan
Administrator of fashionmall.com, Inc. (the "Company") 1999 Stock Option Plan
(the "Plan"). The Plan was adopted by the Board of Directors and approved by the
stockholders. When you sign and return to the Company the Acceptance and
Acknowledgment attached to this Stock Option Agreement you will be entitled to
receive a nonqualified option for the purchase of ________ shares of the
Company's common stock, par value $____ per share ("Common Stock"), at an
exercise price of $____ per share (the "exercise price"), subject to the vesting
provisions set forth herein. A copy of the Plan is attached and the provisions
thereof, including, without limitation, those relating to withholding taxes, are
incorporated into this Agreement by reference. It is understood that this Option
is not intended to constitute an incentive stock option as that term is defined
in Section 422A of the Internal Revenue Code of 1986, as amended.
The terms of the option are as set forth in the Plan and in this Agreement.
The most important of the terms set forth in the Plan are summarized as follows:
NUMBER OF SHARES: The option granted to you covers an aggregate of ______
shares of Common Stock.
EXERCISE PRICE: The exercise price per share of Common Stock subject to
your option is $______ per share (the "Exercise Price").
ADJUSTMENTS. The number of shares of Common Stock subject to your option
and the Exercise Price may be subject to adjustment under certain circumstances
as described in the Plan.
DATE OF GRANT: The date of grant of the option is _________________.
TERM: The term of the option is ten years from date of grant, unless sooner
terminated.
VESTING: Your option shall vest according to the following schedule,
provided you continue your relationship with the Company or a related
corporation:
<TABLE>
<CAPTION>
Period of Your Continuous
Relationship With the
Company or a Related
Corporation From the Portion of Total Option
Date Option is Granted Which is Exercisable
<S> <C>
after 1 year 25%
after 2 years 50%
after 3 years 75%
after 4 years 100%
</TABLE>
-1-
<PAGE>
EXERCISE: The vested portion of the option may be exercised, in whole or in
part, but not as to any fractional shares, during the term of the option. You
should use a Notice of Exercise of Nonqualified Stock Option in the form
attached to this Agreement when you exercise the option. During your lifetime
only you can exercise the option. The Plan also provides for exercise of the
option by the personal representative of your estate or the beneficiary thereof
following your death.
PAYMENT FOR SHARES: The vested portion of this option may be exercised by
the delivery of:
(a) Cash, personal check (unless, at the time of exercise, the Plan
Administrator determines otherwise), certified or bank cashier's checks in an
amount equal to the aggregate Exercise Price for the number of shares as to
which the option is being exercised together with a properly executed Notice of
Exercise;
(b) Unless the Plan Administrator in its sole discretion determines
otherwise, shares of the capital stock of the Company held by you having a fair
market value at the time of exercise, as determined by the Plan Administrator in
accordance with the Plan, equal to the aggregate Exercise Price for the number
of shares as to which the option is being exercised;
(c) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise together with instructions to
the Company to withhold from the shares that would otherwise be issued upon
exercise that number of shares having a fair market value equal to the aggregate
Exercise Price for the number of shares as to which the option is being
exercised; or
(d) A properly executed Notice of Exercise together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds to pay the aggregate Exercise Price for the number of shares as
to which the option is being exercised;.
Upon receipt of written Notice of Exercise and payment and delivery of any
other required documentation, the Company shall deliver to the person exercising
the option a certificate or certificates for the appropriate number of shares of
Common Stock. It shall be a condition to the performance of the Company's
obligation to issue or transfer Common Stock upon exercise of this option that
you pay, or make provision satisfactory to the Company for the payment of, any
taxes which the Company is obligated to collect with respect to the issue or
transfer of Common Stock upon exercise.
TERMINATION: Your option will terminate immediately upon termination for
cause, as defined in the Plan, or three months after cessation of your
relationship with the Company or a related corporation, unless cessation is due
to death or total disability, in which case the portion of this option which is
vested at the time of such termination shall terminate one year after cessation
of such relationship. All unvested options will terminate immediately upon the
cessation of your relationship with the Company or a related corporation for any
reason, including, without limitation, termination for cause, resignation, death
or disability.
TRANSFER OF OPTION: The option is not transferable except by will or by the
applicable laws of descent and distribution or pursuant to a qualified domestic
relations order.
NOTICE: All notices sent in connection with this option shall be in
writing and, if to
-2-
<PAGE>
the Company, shall be delivered personally to the President of the Company or
mailed to its principal office, addressed to the attention of the President,
and, if to you, shall be delivered personally or mailed to you at the address
noted on the attached Acceptance and Acknowledgment. Such addresses may be
changed at any time by notice from one party to the other.
YOUR PARTICULAR ATTENTION IS DIRECTED TO SECTION 8 OF THE PLAN WHICH
DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES
LAWS THAT MUST BE SATISFIED BEFORE THE OPTION CAN BE EXERCISED AND BEFORE THE
COMPANY CAN ISSUE ANY SHARES TO YOU. THE COMPANY HAS NO OBLIGATION TO REGISTER
THE SHARES THAT WOULD BE ISSUED UPON THE EXERCISE OF YOUR OPTION, AND IF IT
NEVER REGISTERS THE SHARES, YOU WILL NOT BE ABLE TO EXERCISE THE OPTION UNLESS
AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE PRESENT TIME, EXEMPTIONS
FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY LIMITED AND
MIGHT BE UNAVAILABLE TO YOU PRIOR TO THE EXPIRATION OF THE OPTION. CONSEQUENTLY,
YOU MIGHT HAVE NO OPPORTUNITY TO EXERCISE THE OPTION AND TO RECEIVE SHARES UPON
SUCH EXERCISE. IN ADDITION, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR CONCERNING
THE RAMIFICATIONS TO YOU OF HOLDING OR EXERCISING YOUR OPTIONS OR HOLDING OR
SELLING THE SHARES UNDERLYING SUCH OPTIONS.
It is the intention of the Company that this Plan comply in all respects
with Section 16(b) and Rule 16b-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), to the extent applicable, and, if any Plan provision is later
found not to be in compliance with such Section or Rule, as the case may be, the
provision shall be deemed null and void, and in all events the Plan shall be
construed in favor of its meeting the requirements of Section 16(b) and Rule
16b-3 under the Exchange Act. Notwithstanding anything in the Plan to the
contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
participants who are officers and directors or other persons subject to Section
16(b) of the Exchange Act without so restricting, limiting or conditioning the
Plan with respect to other participants.
All decisions or interpretations made by the Plan Administrator with regard
to any question arising hereunder or under the Plan shall be binding and
conclusive on the Company and you.
This Agreement shall bind and inure to the benefit of the parties hereto
and the successors and assigns of the Company and, to the extent provided in the
Plan, your executors, administrators, legatees and heirs.
-3-
<PAGE>
Please execute the Acceptance and Acknowledgment set forth below on the
enclosed copy of this Agreement and return it to the undersigned.
Very truly yours,
FASHIONMALL.COM, INC.
By:
-----------------------
BEN NARASIN
CHIEF EXECUTIVE OFFICER
-4-
<PAGE>
ACCEPTANCE AND ACKNOWLEDGMENT
I, a resident of the State of ______________, accept the nonqualified stock
option described above and in the fashionmall.com, Inc. 1999 Stock Option Plan,
and acknowledge receipt of a copy of this Agreement, including a copy of the
Plan. I have read and understand this Agreement and the Plan, including the
provisions of Section 8.
Dated:
-------------------
- --------------------------------------- -----------------------------------
Taxpayer I.D. Number
By his or her signature below, the spouse of the Optionee, if such Optionee
is legally married as of the date of his or her execution of this Agreement,
acknowledges that he or she has read this Agreement and the Plan and is familiar
with the terms and provisions thereof, and agrees to be bound by all the terms
and conditions of this Agreement and the Plan.
Dated:
-------------------
------------------------------
Spouse's Signature
------------------------------
Printed Name
-5-
<PAGE>
NOTICE OF EXERCISE
fashionmall.com, Inc.
575 Madison Avenue
New York, New York 10022
Gentlemen:
I hereby exercise my right to purchase ______ shares of Common Stock (the
"Shares") of fashionmall.com, Inc., a Delaware corporation, pursuant to, and in
accordance with, the fashionmall.com, Inc. 1999 Nonqualified Stock Option
Agreement ("Agreement") dated ________. As provided in that Agreement, I deliver
herewith a certified or bank cashier's check in the amount of the aggregate
option price (unless alternative payment methods have been approved by the Plan
Administrator). Please deliver to me stock certificates representing the subject
shares registered as follows:
Name:
--------------------------------------
Address:
------------------------------------
------------------------------------
Social Security Number:
-----------------------
The aggregate exercise price is $_________ (total number of shares to be
purchased x $____ per share).
1. If the sale of the Shares and the resale thereof has not, prior to the
date hereof, been registered pursuant to a registration statement filed and
declared effective under the Securities Act of 1933, as amended (the "Act"), the
undersigned hereby agrees, represents, and warrants that:
(a) the undersigned is acquiring the Shares for his or her own account
(and not for the account of others), for investment and not with a view to the
distribution or resale thereof;
(b) by virtue of his or her position, the undersigned has access to
the same kind of information which would be available in a registration
statement filed under the Act;
(c) the undersigned is a sophisticated investor;
(d) the undersigned understands that he or she may not sell or
otherwise dispose of the Shares in the absence of either (i) a registration
statement filed under the Act or (ii) an exemption from the registration
provisions thereof; and
(e) the certificates representing the Shares may contain a legend to
the effect of subsection (d) of this Section 1.
-1-
<PAGE>
2. If the sale of the Shares and the resale thereof has been registered
pursuant to a registration statement filed and declared effective under the Act,
the undersigned hereby represents and warrants that he or she has received the
applicable prospectus and a copy of the most recent annual report, as well as
all other material sent to stockholders generally.
3. The undersigned acknowledges that the number of shares of Common Stock
subject to the Agreement is hereafter reduced by the number of shares of Common
Stock represented by the Shares.
4. The undersigned understands that there are certain tax implications to
his or her exercise of his or her right to purchase shares of Common Stock under
the Agreement. The undersigned further understands that it is his or her
obligation to confer with his or her own tax advisor with respect to such tax
implications.
Very truly yours,
------------------------------------
(signature)
------------------------------------
( please type or print name)
-2-
<PAGE>
FASHIONMALL.COM, INC.
INCENTIVE STOCK OPTION LETTER AGREEMENT
Date:
-----------------
TO:
-----------------------
We are pleased to inform you that you have been selected by the Plan
Administrator of the fashionmall.com, Inc. (the "Company") 1999 Stock Option
Plan (the "Plan"). The Plan was adopted by the Board of Directors, and approved
by the stockholders. When you sign and return to the Company the Acceptance and
Acknowledgment attached to this Stock Option Agreement you will be entitled to
receive an incentive option for the purchase of ________ shares of the Company's
common stock, $____ par value ("Common Stock"), at an exercise price of $_____
per share (the "exercise price") subject to the vesting provisions set forth
herein. A copy of the Plan is attached and the provisions thereof, including,
without limitation, those relating to withholding taxes, are incorporated into
this Agreement by reference.
The terms of the option are as set forth in the Plan and in this Agreement.
The most important of the terms set forth in the Plan are summarized as follows:
NUMBER OF SHARES: The option granted to you covers an aggregate of ______
shares of Common Stock.
EXERCISE PRICE: The exercise price per share of Common Stock subject to
your option is $_____ per share (the "Exercise Price").
ADJUSTMENTS. The number of shares of Common Stock subject to your option
and the Exercise Price may be subject to adjustment under certain circumstances
as described in the Plan.
DATE OF GRANT: The date of grant of the option is ________________.
TERM. The term of the option is ten years from date of grant, unless sooner
terminated.
VESTING: Your option shall vest according to the following schedule,
provided you continue your relationship with the Company or a related
corporation:
<TABLE>
<CAPTION>
Period of Your Continuous
Relationship With the
Company or a Related
Corporation From the Portion of Total Option
Date Option is Granted Which is Exercisable
<S> <C>
after 1 year 25%
after 2 years 50%
after 3 years 75%
after 4 years 100%
</TABLE>
-1-
<PAGE>
EXERCISE. The vested portion of the option may be exercised, in whole or in
part, but not as to any fractional shares, during the term of the option. You
should use a Notice of Exercise of Incentive Stock Option in the form attached
to this Agreement when you exercise the option. During your lifetime only you
can exercise the option. The Plan also provides for exercise of the option by
the personal representative of your estate or the beneficiary thereof following
your death.
PAYMENT FOR SHARES. The vested portion of this option may be exercised by
the delivery of:
(a) Cash, personal check (unless at the time of exercise the Plan
Administrator determines otherwise), or certified or bank cashier's checks in an
amount equal to the aggregate Exercise Price for the number of shares as to
which the option is being exercised together with a properly executed Notice of
Exercise;
(b) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise, together with shares of the
capital stock of the Company held by you having a fair market value at the time
of exercise, as determined by the Plan Administrator in accordance with the
Plan, equal to the aggregate Exercise Price for the number of shares as to which
the option is being exercised;
(c) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise together with instructions to
the Company to withhold from the shares that would otherwise be issued upon
exercise that number of shares having a fair market value equal to the aggregate
Exercise Price for the number of shares as to which the option is being
exercised; or
(d) A properly executed Notice of Exercise together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds to pay the aggregate Exercise Price for the number of shares as
to which the option is being exercised.
Upon receipt of written Notice of Exercise and payment and delivery of any
other required documentation, the Company shall deliver to the person exercising
the option a certificate or certificates for the appropriate number of shares of
Common Stock. It shall be a condition to the performance of the Company's
obligation to issue or transfer Common Stock upon exercise of this option that
you pay, or make provision satisfactory to the Company for the payment of , any
taxes which the Company is obligated to collect with respect to the issue or
transfer of Common Stock upon exercise.
TERMINATION. Your option will terminate immediately upon termination for
cause, as defined in the Plan, or three months after cessation of your
relationship with the Company or a related corporation thereof, unless cessation
is due to death or total disability, in which case the portion of this option
which is vested at the time of such termination shall terminate one year after
cessation of such relationship. All unvested options will terminate immediately
upon the cessation of your relationship with the Company or a related
corporation for any reason, including, without limitation, termination for
cause, resignation, death or disability.
TRANSFER OF OPTION. The option is not transferable except by will or by the
applicable laws of descent and distribution or pursuant to a qualified domestic
relations order.
-2-
<PAGE>
NOTICE: All notices sent in connection with this option shall be in writing
and, if to the Company, shall be delivered personally to the President of the
Company or mailed to its principal office, addressed to the attention of the
President, and, if to you, shall be delivered personally or mailed to you at the
address noted on the attached Acceptance and Acknowledgment. Such addresses may
be changed at any time by notice from one party to the other.
YOUR PARTICULAR ATTENTION IS DIRECTED TO SECTION 8 OF THE PLAN WHICH
DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES
LAWS THAT MUST BE SATISFIED BEFORE THE OPTION CAN BE EXERCISED AND BEFORE THE
COMPANY CAN ISSUE ANY SHARES TO YOU. THE COMPANY HAS NO OBLIGATION TO REGISTER
THE SHARES THAT WOULD BE ISSUED UPON THE EXERCISE OF YOUR OPTION, AND IF IT
NEVER REGISTERS THE SHARES, YOU WILL NOT BE ABLE TO EXERCISE THE OPTION UNLESS
AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE PRESENT TIME, EXEMPTIONS
FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY LIMITED AND
MIGHT BE UNAVAILABLE TO YOU PRIOR TO THE EXPIRATION OF THE OPTION. CONSEQUENTLY,
YOU MIGHT HAVE NO OPPORTUNITY TO EXERCISE THE OPTION AND TO RECEIVE SHARES UPON
SUCH EXERCISE. IN ADDITION, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR CONCERNING
THE RAMIFICATIONS TO YOU OF HOLDING OR EXERCISING YOUR OPTIONS OR HOLDING OR
SELLING THE SHARES UNDERLYING SUCH OPTIONS.
It is the intention of the Company that this Plan comply in all respects
with Section 16(b) and Rule 16b-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), to the extent applicable, and, if any Plan provision is later
found not to be in compliance with such Section or Rule, as the case may be, the
provision shall be deemed null and void, and in all events the Plan shall be
construed in favor of its meeting the requirements of Section 16(b) and Rule
16b-3 under the Exchange Act. Notwithstanding anything in the Plan to the
contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
participants who are officers and directors or other persons subject to Section
16(b) of the Exchange Act without so restricting, limiting or conditioning the
Plan with respect to other participants.
All decisions or interpretations made by the Plan Administrator with regard
to any question arising hereunder or under the Plan shall be binding and
conclusive on the Company and you.
This Agreement shall bind and inure to the benefit of the parties hereto
and the successors and assigns of the Company and, to the extent provided in the
Plan, your executors, administrators, legatees and heirs.
Please execute the Acceptance and Acknowledgment set forth below on the
enclosed copy of this Agreement and return it to the undersigned.
-3-
<PAGE>
Very truly yours,
FASHIONMALL.COM, INC.
By:
-------------------------
BEN NARASIN
CHIEF EXECUTIVE OFFICER
-4-
<PAGE>
ACCEPTANCE AND ACKNOWLEDGMENT
I, a resident of the State of _________, accept the stock option described
above granted under the fashionmall.com, Inc. 1999 Stock Option Plan, and
acknowledge receipt of a copy of this Agreement, including a copy of the Plan. I
have read and understand this Agreement and the Plan, including the provisions
of Section 8 thereof.
Dated:
----------------------
- --------------------------------------- -----------------------------------
Taxpayer I.D. Number Signature
By his or her signature below, the spouse of the Optionee, if such Optionee
is legally married as of the date of such Optionee's execution of this
Agreement, acknowledges that he or she has read this Agreement and the Plan and
is familiar with the terms and provisions thereof, and agrees to be bound by all
the terms and conditions of this Agreement and the Plan.
Dated:
---------------------
------------------------------
Spouse's Signature
------------------------------
Printed Name
-5-
<PAGE>
NOTICE OF EXERCISE
fashionmall.com, Inc.
575 Madison Avenue
New York, NY 10022
Gentlemen:
I hereby exercise my right to purchase ______ shares of Common Stock (the
"Shares") of fashionmall.com, Inc., a Delaware corporation, pursuant to, and in
accordance with, the fashionmall.com, Inc. 1999 Incentive Stock Option Agreement
("Agreement") dated __________. As provided in that Agreement, I deliver
herewith a certified or bank cashier's check in the amount of the aggregate
option price (unless alternative payment methods have been approved by the Plan
Administrator). Please deliver to me stock certificates representing the subject
shares registered as follows:
Name:
--------------------------------------
Address:
------------------------------------
------------------------------------
Social Security Number:
-----------------------
The aggregate exercise price is $_________ (total number of shares to be
purchased x $____ per share).
1. If the sale of the Shares and the resale thereof has not, prior to the
date hereof, been registered pursuant to a registration statement filed and
declared effective under the Securities Act of 1933, as amended (the "Act"), the
undersigned hereby agrees, represents, and warrants that:
(a) the undersigned is acquiring the Shares for his or her own account
(and not for the account of others), for investment and not with a view to the
distribution or resale thereof;
(b) by virtue of his or her position, the undersigned has access to
the same kind of information which would be available in a registration
statement filed under the Act;
(c) the undersigned is a sophisticated investor;
(d) the undersigned understands that he or she may not sell or
otherwise dispose of the Shares in the absence of either (i) a registration
statement filed under the Act or (ii) an exemption from the registration
provisions thereof; and
(e) the certificates representing the Shares may contain a legend to
the effect of subsection (d) of this Section 1.
-1-
<PAGE>
2. If the sale of the Shares and the resale thereof has been registered
pursuant to a registration statement filed and declared effective under the Act,
the undersigned hereby represents and warrants that he or she has received the
applicable prospectus and a copy of the most recent annual report, as well as
all other material sent to stockholders generally.
3. The undersigned acknowledges that the number of shares of Common Stock
subject to the Agreement is hereafter reduced by the number of shares of Common
Stock represented by the Shares.
4. The undersigned understands that there are certain tax implications to
his or her exercise of his or her right to purchase shares of Common Stock under
the Agreement. The undersigned further understands that it is his or her
obligation to confer with his or her own tax advisor with respect to such tax
implications.
Very truly yours,
------------------------------------
(signature)
------------------------------------
( please type or print name)
By:
--------------------------------
By:
--------------------------------
Name:
Title:
-2-
<PAGE>
Exhibit 21.1
Subsidiaries
------------
Internet Fashion Mall LLC
E-com, Inc.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accoutants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made part of this (the
attached) registration statement.
/s/ Arthur Andersen LLP
New York, New York
March 8, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1998 AND THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001081202
<NAME> FASHIONMALL.COM, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 82,000
<SECURITIES> 0
<RECEIVABLES> 419,000
<ALLOWANCES> 105,000
<INVENTORY> 0
<CURRENT-ASSETS> 403,000
<PP&E> 22,000
<DEPRECIATION> 9,000
<TOTAL-ASSETS> 508,000
<CURRENT-LIABILITIES> 650,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (142,000)
<TOTAL-LIABILITY-AND-EQUITY> 508,000
<SALES> 2,055,000
<TOTAL-REVENUES> 2,055,000
<CGS> 0
<TOTAL-COSTS> 2,044,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,000
<EPS-PRIMARY> 0.002
<EPS-DILUTED> (0.042)
</TABLE>
