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FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 0-26151
fashionmall.com, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 06-1544139
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
575 Madison Avenue New York, NY 10022
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(Address of principal executive offices) (Zip code)
(212) 891-6064
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(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
Transitional Small Business Disclosure Format (check one)
Yes No X
---- -----
The number of shares of common stock, $.01 par value, outstanding as of August
10, 1999 was 7,500,000.
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<PAGE>
fashionmall.com, Inc.
Form 10-QSB
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1999 (unaudited) and December 31, 1998......2
Statements of Operations - three months ended June 30, 1999 and
1998 and six months ended June 30, 1999 and 1998 (unaudited)..........3
Statement of Changes in Stockholders' and Members' Equity (Deficiency)
- six months ended June 30, 1999 (unaudited)..........................4
Statements of Cash Flows - three months ended June 30, 1999 and
1998 and six months ended June 30, 1999 and 1998 (unaudited)..........5
Notes to Unaudited Financial Statements...............................7
Item 2. Management's Discussion and Analysis or Plan of Operation............13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 2. Changes in Securities and Use of Proceeds............................19
Item 3. Defaults Upon Senior Securities......................................21
Item 4. Submission of Matters to a Vote of Securities Holders................21
Item 5. Other Information....................................................21
Item 6. Exhibits and Reports on Form 8-K.....................................21
Signatures...........................................................22
1
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fashionmall.com, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------- -------------------
Assets (Unaudited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 42,984,000 $ 82,000
Accounts receivable, net of an allowance for losses of $222,000 at
June 30, 1999 and $105,000 at December 31, 1998 462,000 314,000
Prepaid expenses, inventory and other current assets 276,000 7,000
------------------- -------------------
Total current assets 43,722,000 403,000
------------------- -------------------
Property and equipment - net of accumulated depreciation of $12,000 and
$9,000, respectively 33,000 13,000
Capitalized software costs, net of accumulated amortization of $31,000
and $14,000, respectively 36,000 53,000
Deferred financing costs -- 39,000
Other assets 125,000 --
------------------- -------------------
Total Assets $ 43,916,000 $ 508,000
=================== ===================
Liabilities
Current liabilities
Accounts payable and accrued expenses $ 973,000 221,000
Amounts due to related parties 35,000 366,000
Customer deposits 35,000 18,000
Deferred revenue 41,000 45,000
------------------- -------------------
Total current liabilities 1,084,000 650,000
------------------- -------------------
Stockholders' and Members' Equity (Deficiency)
Members' contributed capital -- 411,000
Members' accumulated deficit -- (553,000)
Convertible preferred stock, $.01 par value,
Authorized - 3,000,000 shares
Issued and outstanding - 824,084 and 0 shares at June 30, 1999 and
and December 31, 1998, respectively 775,000 --
Common stock - $.01 par value
Authorized - 35,000,000 shares
Issued and outstanding - 7,500,000 and 0 shares at June 30, 1999
and December 31, 1998, respectively 75,000 --
Additional paid-in capital 46,087,000 --
Accumulated deficit (4,105,000) --
------------------- -------------------
Total stockholders' and members' equity (deficiency) 42,832,000 (142,000)
------------------- -------------------
Total Liabilities and Stockholders' and Members' Equity (Deficiency) $ 43,916,000 $ 508,000
=================== ===================
</TABLE>
See accompanying notes to financial statements.
2
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fashionmall.com, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Site revenues $ 950,000 $ 423,000 $ 1,720,000 $ 841,000
Costs and expenses:
Site development, merchandise and content
242,000 67,000 344,000 110,000
Advertising and marketing 363,000 205,000 675,000 450,000
Selling 57,000 39,000 129,000 111,000
General and administrative 3,174,000 107,000 3,513,000 252,000
------------------ ----------------- ---------------- -----------------
Total costs and expenses 3,836,000 418,000 4,661,000 923,000
------------------ ----------------- ---------------- -----------------
Income (loss) from operations (2,886,000) 5,000 (2,941,000) (82,000)
------------------ ----------------- ---------------- -----------------
Other income (expense):
Interest and dividend income 52,000 1,000 67,000 12,000
Interest expense and other
financing costs (730,000) -- (737,000) (11,000)
------------------ ----------------- ---------------- -----------------
(678,000) 1,000 (670,000) 1,000
------------------ ----------------- ---------------- -----------------
Net (loss) income $ (3,564,000) $ 6,000 $ (3,611,000) $ (81,000)
================== ================= ================ =================
Comprehensive (loss) income $ (3,564,000) $ 6,000 $ (3,611,000) $ (81,000)
================== ================= ================ =================
Pro-forma basic and diluted earnings per
common share $ (0.79) $ -- $ (0.88) $ (0.02)
================== ================= ================ =================
Pro-forma weighted average shares
outstanding 5,500,000 4,500,000 5,000,000 4,500,000
================== ================= ================ =================
</TABLE>
See accompanying notes to financial statements.
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fashionmall.com, Inc.
Statement of Changes in Stockholders' and Members' Equity (Deficiency)
Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Par Preferred Paid-in Members' Member' Accumulated
Shares Value Stock Capital Capital Deficit Deficit
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 -- $ -- $ -- $ -- $ 411,000 $ (553,000) $ -- $ (142,000)
Contribution of capital,
net of related issuance costs -- -- -- -- 876,000 -- -- 876,000
Incremental difference
between issue price and fair
value of capital contribution -- -- -- -- 576,000 -- -- 576,000
Issuance of warrants to
purchase 95,000 shares of
common stock, at fair value -- -- -- -- 56,000 -- -- 56,000
Issuance of warrants to
purchase 32,000 shares of
common stock, at fair value -- -- -- -- 74,000 -- -- 74,000
Issuance of preferred stock
in connection with capital
contribution -- -- -- -- 5,040,000 -- -- 5,040,000
Issuance of warrants to
purchase 924,898 shares of
of common stock, at fair value,
in connection with the issuance
of preferred stock -- -- -- -- 2,377,000 -- -- 2,377,000
Non-cash compensation
expense prior to initial
public offering ("IPO") -- -- -- -- 149,000 -- -- 149,000
Net loss prior to IPO -- -- -- -- -- (281,000) -- (281,000)
Issuance of common stock in
connection with IPO, net
of expenses 7,500,000 75,000 -- 34,700,000 -- -- -- 34,775,000
Reorganization from Limited
Liability Company to C
corporation -- -- -- 8,725,000 (9,559,000) 834,000 -- --
Non-cash compensation
expense subsequent to IPO -- -- -- 2,662,000 -- -- -- 2,662,000
Accretion of preferred
stock beneficial
conversion feature -- -- 775,000 -- -- -- (775,000) --
Net loss for the period
subsequent to IPO -- -- -- -- -- -- (3,330,000) (3,330,000)
------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 7,500,000 $ 75,000 $ 775,000 $ 46,087,000 $ -- $ -- $ (4,105,000) $ (42,832,000)
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</TABLE>
See accompanying notes to financial statements.
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fashionmall.com, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------------------------ -------------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- -----------------
Operating Activities
<S> <C> <C> <C> <C>
Net (loss) income $ (3,564,000) $ 6,000 $ (3,611,000) $ (81,000)
Adjustments to reconcile net (loss) income to net
cash provided by (used for) operating activities:
Depreciation and amortization 10,000 -- 20,000 4,000
Non-cash interest expense and other
financing costs 668,000 -- 668,000 --
Non-cash compensation expense 2,736,000 -- 2,810,000 --
Allowance for doubtful accounts 86,000 25,000 117,000 70,000
Changes in operating assets and liabilities
Accounts receivable (66,000) (42,000) (265,000) (89,000)
Prepaid expenses and other assets (239,000) -- (613,000) 3,000
Deferred financing costs 397,000 -- 397,000 --
Accounts payable 288,000 53,000 752,000 87,000
Customer deposits -- (5,000) 17,000 (5,000)
Deferred revenue -- -- (4,000) 6,000
----------------- ---------------- ----------------- -----------------
Net cash provided by (used in) operating
activities 316,000 37,000 288,000 (5,000)
----------------- ---------------- ----------------- -----------------
Investing Activities
Purchase of equipment (20,000) -- (23,000) (3,000)
Capitalization of software development costs -- -- -- --
----------------- ---------------- ----------------- -----------------
Net cash used in investing activities (20,000) -- (23,000) (3,000)
----------------- ---------------- ----------------- -----------------
Financing Activities
Proceeds (repayment) of loans (1,379,000) -- (431,000) 16,000
Initial public offering proceeds 34,775,000 -- 34,775,000 --
Capital contributions 7,417,000 -- 8,293,000 --
----------------- ---------------- ----------------- -----------------
Net cash provided by financing activities 40,813,000 -- 42,637,000 16,000
----------------- ---------------- ----------------- -----------------
Increase in cash 41,109,000 37,000 42,902,000 8,000
Cash - beginning of period 1,875,000 37,000 82,000 66,000
----------------- ---------------- ----------------- -----------------
Cash - end of period $ 42,984,000 $ 74,000 $ 42,984,000 $ 74,000
================= ================ ================= =================
</TABLE>
See accompanying notes to financial statements.
5
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fashionmall.com, Inc.
Statements of Cash Flows
(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------------------------ -------------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
<S> <C> <C> <C> <C>
Interest $ 15,000 $ -- $ 15,000 $ --
Taxes $ -- $ -- $ -- $ --
Non-cash investing and financing activities:
Conversion of related party loan to contributed
capital $ -- $ 61,000 $ -- $ 61,000
Fair value of warrants issued in connection
with loan to related party $ -- $ -- $ 56,000 $ --
Incremental difference between issue price and
fair value of capital contribution $ -- $ -- $ 576,000 $ --
Fair value of warrants issued in connection
with convertible preferred stock $ 2,377,000 $ -- $ 2,377,000 $ --
Revenue generated from barter contracts $ 377,000 $ 255,000 $ 725,000 $ 506,000
Advertising and consulting expense incurred
related to barter contracts $ 355,000 $ 195,000 $ 627,000 $ 431,000
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
fashionmall.com, Inc.
Notes to Unaudited Financial Statements
June 30, 1999
1. Organization
Initial Public Offering and Reorganization
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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").
On May 21, 1999, fashionmall.com, Inc. (the "Company") completed an initial
public offering ("IPO") of 3,000,000 shares of its common stock. The offering
resulted in net proceeds, after related expenses, of approximately $35 million.
In connection with the IPO and immediately prior thereto, the existing members
of IFM contributed all of their membership interests in IFM in exchange for
4,500,000 shares of common stock of the Company. The Company was incorporated in
Delaware as a C corporation on February 26, 1999.
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 the fashionmall.com website. The Company 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 have been directed primarily to developing
the fashionmall.com brand through a marketing strategy that, in part, includes
the exchange of the Company's services for advertising space in various
magazines, journals and websites or consulting services.
2. Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions of Form 10-QSB and Rule 310 of Regulation SB and, therefore, do
not include all information and notes necessary for a presentation of results of
operations, financial position and cash flows in conformity with generally
accepted accounting principles. The balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with the Company's Registration Statement on Form SB-2. In
the opinion of the Company, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been made. Results of
operations for the six months ended June 30, 1999 are not necessarily indicative
of those expected for the year ending December 31, 1999.
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.
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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 on websites, or for consulting services. A
portion of the advertising received by the Company, in exchange for its
services, is in the form of online website advertising. The fair value of the
online website advertising is determined based on the online providers' "cost
per thousand impressions" and the number of impressions delivered. The
consulting services received by the Company are primarily marketing and public
relations. Expenses for consulting services are recorded as incurred, based upon
the consulting firms' established rates.
Barter revenue and the related advertising expense is recognized in accordance
with the established advertising rate card, of the advertiser customer, which
represents the rates charged to cash buyers based on their level of advertising.
Generally, barter revenue is 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. Barter revenues equal barter expenses;
however, due to timing, barter accounts receivable and barter accounts payable
may result. Barter expenses are included in advertising and marketing expenses
in the accompanying statements of operations.
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.
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
three months ended June 30, 1999 and 1998, was approximately $2,000 and $2,000,
respectively. Depreciation for the six months ended June 30, 1999 and 1998 was
approximately $3,000 and $4,000, respectively. Depreciation expense is included
in general and administrative expenses in the accompanying statements of
operations.
Capitalized Software Costs
- --------------------------
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 June 30,
1999, approximately $67,000 of capitalized software costs had been incurred.
Amortization expense for the three months ended June 30, 1999 and 1998 was
$8,000 and $0, respectively; amortization expense for the six months ended June
30, 1998 and 1998 was $17,000 and $0, respectively. Amortization expense is
included in 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,
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<PAGE>
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 June 30, 1999.
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 each magazine's or journal's printed advertising rate
card with pricing provided to cash buyers based on frequency of advertisement
placement or by a website provider's "cost per thousand impressions" and the
number of impressions delivered. In accordance with Statement of Position 93-7,
Reporting On Advertising Costs, the Company expenses its advertising costs as
incurred.
Income Taxes
- ------------
Prior to the IPO, the Company was a limited liability company, and each of the
Company's member's respective portion of taxable income or loss was reportable
on such members' own Federal and state income tax returns. Additionally, as a
limited liability company, the Company was subject to the New York City income
tax on unincorporated businesses.
Effective upon the consummation of the Company's initial public offering, the
Company's income tax status converted from a limited liability company to that
of a C corporation. Accordingly, the provision for income taxes is 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,
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. Since the Company
does not expect to have net income in fiscal 1999, it expects to fully reserve
deferred tax assets.
Basic and Diluted Earnings per Share
- ------------------------------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where necessary, restated
to conform to the SFAS No. 128 requirements. The weighted average shares
outstanding are determined as the mean average of the shares outstanding and
assumed to be outstanding during the period.
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
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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, 2000. 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.
3. Equity Transactions
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 "FM/CCP Private Placement"). FM/CCP purchased a 5% ownership interest in
the Company, reducing Benjamin Narasin's ("Narasin") and Richard A. Eisner &
Company LLP's ("Eisner") (two of the Company's original Members) ownership
interests to 76% and 19%, respectively. The promissory note accrued interest at
6% and was due on the earlier of February 25, 2002, or the closing date of the
Company's IPO. The warrants, which expire March 2, 2004, became exercisable upon
the closing date of the Company's IPO to purchase up to 95,000 shares of common
stock at an exercise price of $13.65 per share. With a portion of the proceeds
from the IPO, the Company repaid the $1 million promissory note plus accrued
interest. Interest expense related to the note was approximately $15,000. In
addition, the Company recorded a $55,000 charge to interest expense representing
the unamortized discount relating to the note.
The difference between the per share fair value granted to FM/CCP of $4.44 and
the per share fair value based on the originally estimated IPO price of $7.00
per share has been recognized as deferred financing costs. Upon repayment of the
note, the Company recognized the remaining deferred financing amount as interest
expense.
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. Pursuant to this agreement, the Company recognized consulting expense of
$14,000 and $31,000 for the quarter and six months ended June 30, 1999,
respectively.
Additionally, Chazen received options to purchase up to 5% ownership interest in
the Company in consideration for his consulting services. These options vest
over three years and expire on the fifth anniversary of the grant date. The
vesting period accelerated upon the closing of the Company's IPO, such that 50%
became exercisable upon consummation of the IPO, an additional 16% becomes
exercisable on March 1, 2000, and the balance becomes exercisable in equal
monthly installments over the 12-month period commencing March 1, 2000. The
aggregate exercise price of these options is $150,000. Chazen received
additional options to purchase 242,500 shares of Common Stock at an exercise
price of $3.25 per share. All grants of options to individuals other than those
considered employees must be accounted for under the
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provisions of Statement of Financial Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"). Under SFAS No. 123, the fair value of
these options as of the date of grant, using the Black-Scholes pricing model,
was $1,987,000. The fair value will be recognized as consulting expense over the
term of the consulting agreement. The future exercising of 135,000 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 full, FM/CCP and Chazen will receive an additional
5,000 and 7,500 shares of common stock, respectively. The Company recognized
$1,074,000 and $1,135,000 of non-cash consulting expense in connection with
these options and warrants for the quarter and six months ended June 30, 1999,
respectively. In connection with this transaction, Chazen joined the Company's
Board of Directors.
The Company paid to its placement agent $85,000, and issued a warrant to
purchase 22,500 shares of Common Stock at an exercise price of $4.44 per share
and a warrant to purchase 9,500 shares of Common Stock at an exercise price of
$13.65 per share, as a finders fee in connection with the consummation of the
FM/CCP Private Placement. The warrants are exercisable for five years from the
date of grant and the shares underlying such warrants shall be registered at the
same time as the Company registers the shares underlying the warrants issued to
FM/CCP. The fair value of the warrants as of the date of grant was $74,000,
calculated using the Black-Scholes pricing model. One-half of the cash payment
and one-half of the fair value of the warrants has been offset against the
proceeds of the $1 million equity investment as offering costs. The remaining
amount has been recognized as deferred financing costs, to be amortized over the
period commencing on the date of issuance of the promissory note through the
maturity date, using the effective interest method. Upon repayment of the Chazen
promissory note, this amount was recognized as interest expense.
On April 22, 1999, the Company entered into an agreement with TRG Net Investors
LLC ("TRG Net"), an affiliate of Taubman Centers, Inc., a real estate investment
trust and one of the leading mall developers in the U.S., whereby TRG Net
purchased, for $7,417,000, a 9.9% membership interest in the Company (the
"Series B Interest") and warrants (the "Warrants") to purchase an additional 10%
membership interest. Upon closing of the IPO, the Series B Interest was
contributed for 824,084 shares of convertible preferred stock (the "Preferred
Stock"), which in turn are convertible into an aggregate of 824,084 common
shares and the Warrants can be exercised to purchase 924,898 common shares. The
Preferred Stock is convertible for one year beginning on the first anniversary
of the closing of the IPO by the Company and, based on the $13.00 per share
initial public offering price, the effective conversion price of the Preferred
Stock was $9.00 per share and the exercise price of the Warrants was $13.00 per
share. Upon closing of Taubman's investment, the Company allocated $2,377,000 of
the $7,417,000 to represent the fair value of the Warrants. The remaining
portion of the net proceeds of $5,040,000 represents the beneficial conversion
feature of the Preferred Stock, and was allocated to additional paid-in capital
upon closing of the IPO and will be accreted to the book value of the Preferred
Stock. The accretion period will be one year, beginning on the date of closing
of the IPO. For the quarter and six months ended June 30, 1999, the Company
accreted $775,000 to the book value of the Preferred Stock. In connection with
this transaction, Robert S. Taubman, the Chief Executive Officer and the
President of Taubman Centers, Inc., joined the Company's Board of Directors.
4. Earnings per Share
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, 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.
11
<PAGE>
The following table sets forth the computation of pro-forma basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------ ------------------
Numerator:
<S> <C> <C> <C> <C>
Net (loss) income $ (3,564,000) $ 6,000 $ (3,611,000) $ (81,000)
Accretion of beneficial
conversion feature of
convertible preferred stock (775,000) -- (775,000) --
------------------ ----------------- ------------------ ------------------
Net (loss) income available to
common shareholders $ (4,339,000) $ 6,000 $ (4,386,000) $ (81,000)
================== ================= ================== ==================
Denominator:
Pro-forma weighted-average shares
5,500,000 4,500,000 5,000,000 4,500,000
================== ================= ================== ==================
Pro-forma basic and diluted earnings
per common share $ (0.79) $ -- $ (0.88) $ (0.02)
================== ================= ================== ==================
</TABLE>
The effect of the exercise of certain warrants and options issued are not
included as their effect on diluted earnings per share would be anti-dilutive.
5. Commitments and Contingencies
The Company is not a party to any legal proceedings. The Company in its normal
course of business may be subject to certain litigation.
12
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with our Consolidated
Financial Statements and related notes thereto.
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding our current business strategy and our 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 us and our 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" in our Registration
Statement on Form SB-2 (File No. 333-74109). We urge prospective investors to
exercise caution and not to place undue reliance on any such forward-looking
statements.
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. 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 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. Our tenants, many of which
have their own Web sites, pay us fees to lease space on our Web site to take
advantage of the traffic our site receives as a centralized location of fashion
content on the Internet. Depending on the arrangement, our tenants also pay us
commissions for sales of their goods on or through our Web site. We have a
diverse tenant base of brand name companies, including Brooks Brothers, dELiA*s,
Skechers, Steve Madden, Clinique, American Eagle 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 entry pages to the Web, referred to as portals, such as Excite and
Microsoft/MSN. 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, we have focused our consumer marketing efforts on fashionmall.com's
placement on selected high traffic Web sites. We have formed key strategic
alliances with two of the highest trafficked portals on the Internet: (i)
Excite, and by extension, Netscape, Prodigy and Webcrawler, and (ii)
Microsoft/MSN. These relationships are designed to attract additional traffic to
our Web site, thereby directing traffic to tenants' sites, representing a
significant opportunity for brand awareness, traffic creation, and revenue
growth. We intend to develop relationships with additional high traffic Web
sites to further increase our brand awareness and to increase our traffic.
We utilize numerous marketing techniques to increase brand recognition and
traffic, including both traditional and online advertising. We promote our site
through print advertising in industry and consumer publications. Until the
completion of our initial public offering on May 26, 1999, due to our limited
financial resources, our use of advertising had primarily been through barter
arrangements. We intend to increase our cash payments in
13
<PAGE>
promotion of our site in print publications. In addition, we have utilized, and
intend to utilize, outdoor media, trade shows and radio and television
promotions.
Our online marketing tactics include sponsorship agreements with well-known
companies, as well as banner advertising on various Web sites. Our 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; an agreement with CBS Sportsline, a
leading sports Web site, pursuant to which we place CBS Sportsline as the
sponsor of a newly developed "Sports" area on fashionmall.com; and a similar
arrangement with The Knot, a leading online bridal site, for the existing
"Bridal" area on fashionmall.com. We plan to pursue agreements with other brand
name companies to cross-promote each other's products or services.
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
10.1 million in 1997 to 58.4 million in 2002. Our first online store is our
recently launched Outletmall.com site, through which we sell quality, branded
merchandise at significant discounts.
Outletmall.com is an adjunct to the primary fashionmall.com site and is a key
part of our strategy to grow our e-commerce transaction volume. Outletmall.com,
which we launched in September 1998 on a pilot basis, is in an early stage of
development, and consequently, we have conducted limited promotion of the site.
Our focus with Outletmall.com is to derive revenue from online sales. With this
site, we are the retailer and control the merchandising of products and earn the
entire margin of sale from any merchandise sold. Our 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. We intend 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 us
to increase our 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. We believe that our discount prices along with our 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.
Results of Operations
As discussed above, we intend to increase our strategic alliances and our
advertising and marketing efforts, to build further brand awareness for the
fashionmall.com brand as well as increase traffic to our Website. We believe
that these efforts will further enhance our existing tenant base and, in turn,
create more consumer traffic and additional tenant revenues and e-commerce
revenues.
14
<PAGE>
Quarter Ended June 30, 1999 vs. Quarter Ended June 30, 1998
Site Revenues. Total revenues increased by $527,000, or 125%, to $950,000 in the
second quarter of 1999 as compared to $423,000 in the second quarter of 1998.
Barter revenue increased by $122,000, or 48%, to $377,000 in the second quarter
of 1999 from $255,000 in the second quarter of 1998. Barter revenue represented
40% and 60% of total revenues for the quarters ended June 30, 1999 and 1998,
respectively. The revenue increase was due to increased industry acceptance of
the fashionmall.com model resulting in additional new clients and sponsors and
increased rates for space on fashionmall.com based on traffic growth.
Expenses. Total expenses of the business increased from $418,000 in the second
quarter of 1998 to $3,836,000 in the second quarter of 1999. During the quarter,
we incurred a $2,736,000 non-cash compensation charge relating to the
recognition of the fair value of certain options granted and non-cash interest
and financing charges of $668,000 in connection with the FM/CCP financing. The
Company will incur future non-cash compensation charges in connection with these
options of $125,000 each quarter over the next two (2) years. The remaining
increase was due to increased expenditures, using the proceeds of the IPO, for
technical staff, increased barter advertising and increased equipment and
infrastructure needs.
Site Development, Merchandise and Content. Site development, merchandise and
content expenses increased by $175,000, or 261%, to $242,000 in the second
quarter of 1999 from $67,000 in the second quarter of 1998. The increase was
primarily due to increased payroll for site development related salaries as well
as increased costs of content creation and merchandise for our site.
Advertising and Marketing. Advertising and marketing expenses increased by
$158,000, or 77%, to $363,000 in the second quarter of 1999 from $205,000 in the
second quarter of 1998. The increase is primarily due to increased barter
advertising expenses primarily related to increased print advertising on behalf
of the fashionmall.com brand and some online banner advertising programs. We
expect these expenses to 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 $18,000, or 46%, to $57,000 in
the second quarter of 1999 from $39,000 in the second quarter of 1998. Selling
expenses remained fairly constant compared to the prior year. We expect these
expenses to grow significantly as we pursue an aggressive growth strategy and
hire additional sales personnel.
General and Administrative Expenses. General and administrative expenses
increased by $3,068,000 to $3,174,000 in the second quarter of 1999 from
$107,000 in the second quarter of 1998. During the quarter, we incurred a
$2,736,000 non-cash compensation charge relating to the recognition of the fair
value of certain options granted. The Company will incur future non-cash
compensation charges in connection with these options of $125,000 each quarter
over the next two (2) years. The remaining increase was primarily due to
increased consulting and payroll expenses associated with the management team
and additional support staff required by our growth. We expect these expenses to
grow substantially as additional personnel are hired and additional expenses are
incurred. These increased expenses will relate to growing our business and
operating as a public company.
Other Income and Expense. Interest and dividend income for the quarters ended
June 30, 1999 and 1998 amounted to $52,000 and $1,000, respectively. During the
quarter ended June 30, 1999, such amounts were earned primarily from our cash
balances and high quality short-term investments. During the quarter ended June
30, 1998, such amounts were earned from our cash balances. During the quarters
ended June 30, 1999 and 1998, interest and financing costs were $730,000 and $0.
During the quarter ended June 30, 1999, the Company incurred non-cash interest
and financing charges of $668,000 in connection with the FM/CCP financing.
15
<PAGE>
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
Site Revenues. Total revenues increased by $879,000, or 105%, to $1,720,000 in
the six months ended June 30, 1999 as compared to $841,000 in the six months
ended June 30, 1998. Barter revenue increased by $219,000, or 43%, to $725,000
in the six months ended June 30, 1999 from $506,000 in the six months ended June
30, 1998. Barter revenue represented 42% and 60% of total revenues for the six
months ended June 30, 1999 and 1998, respectively. The revenue 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 $923,000 in the six
months ended June 30, 1998 to $4,661,000 in the six months ended June 30, 1999.
During the six months ended June 30, 1999, we incurred a $2,797,000 non-cash
compensation charge relating to the recognition of the fair value of certain
options granted and non-cash interest and financing charges of $668,000 in
connection with the Chazen financing. The Company will incur future non-cash
compensation charges in connection with these options of $125,000 each quarter
over the next two (2) years. The remaining increase was due to increased
expenditures for technical staff, increased barter advertising and increased
equipment and infrastructure needs.
Site Development, Merchandise and Content. Site development, merchandise and
content expenses increased by $234,000, or 213%, to $344,000 in the six months
ended June 30, 1999 from $110,000 in the six months ended June 30, 1998. The
increase was primarily due to increased payroll for site development related
salaries as well as increased costs of content creation and merchandise for our
site.
Advertising and Marketing. Advertising and marketing expenses increased by
$225,000, or 50%, to $675,000 in the six months ended June 30, 1999 from
$450,000 in the six months ended June 30, 1998. The increase is primarily due to
increased barter advertising expenses primarily related to increased print
advertising on behalf of the fashionmall.com brand and some online banner
advertising programs. We expect these expenses to 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 $18,000, or 16%, to $129,000 in
the six months ended June 30, 1999 from $111,000 in the six months ended June
30, 1998. Selling expenses remained fairly constant compared to the prior year.
We expect these expenses to grow significantly as we pursue an aggressive growth
strategy and hire additional sales personnel.
General and Administrative Expenses. General and administrative expenses
increased by $3,261,000 to $3,513,000 in the six months ended June 30, 1999 from
$252,000 in the six months ended June 30, 1998. During the six months ended June
30, 1999, we incurred a $2,797,000 non-cash compensation charge relating to the
recognition of the fair value of certain options granted. The Company will incur
future non-cash compensation charges in connection with these options of
$125,000 each quarter over the next two (2) years. The remaining increase was
primarily due to increased consulting and payroll expenses associated with the
management team and additional support staff required by our growth. We expect
these expenses to grow substantially as additional personnel are hired and
additional expenses are incurred. These increased expenses will relate to
growing our business and operating as a public company.
Other Income and Expense. Interest and dividend income for the six months ended
June 30, 1999 and 1998 amounted to $67,000 and $12,000, respectively. During the
six months ended June 30, 1999, such amounts were earned primarily from our cash
balances and high quality short-term investments. During the six months ended
June 30, 1998, such amounts were earned from our cash balances. During the six
months ended June 30, 1999 and 1998, interest and financing costs were $737,000
and $11,000. During the six months ended June 30,
16
<PAGE>
1999, the Company incurred non-cash interest and financing charges of $668,000
in connection with the FM/CCP financing.
Liquidity and Capital Resources
From inception, we have financed substantially all of our operations from
private investment and our IPO and an insignificant portion has been financed
with cash generated from operations.
At June 30, 1999, we had cash and cash equivalents on hand of $42,984,000. At
December 31, 1998, cash and cash equivalents were $82,000. The increase in funds
can be attributed to raising approximately $35 million, net of related expenses,
in connection with the Company's IPO, approximately $7.4 million as a result of
the Taubman investment and approximately $1 million, net of the promissory note
repayment, as a result of the FM/CCP investment.
As part of the Taubman investment, the Company entered into an agreement with
TRG Net Investors LLC ("TRG Net"), an affiliate of Taubman Centers, Inc., a real
estate investment trust and one of the leading mall developers in the U.S.,
whereby TRG Net purchased, for $7,417,000, a 9.9% membership interest in our
predecessor LLC (the "Series B Interest") and warrants (the "Warrants") to
purchase an additional 10% membership interest. Upon closing of the IPO, the
Series B Interest was contributed for 824,084 shares of convertible preferred
stock (the "Preferred Stock"), which in turn are convertible into an aggregate
of 824,084 common shares and the Warrants can be exercised to purchase 924,898
common shares. The Preferred Stock is convertible until May 26, 2000 at an
effective conversion price of $9.00 per share and the exercise price of the
Warrants is $13.00 per share. Upon closing of Taubman's investment, we allocated
$2,377,000 of the $7,417,000 to represent the fair value of the Warrants. The
remaining portion of the net proceeds of $5,040,000 represents the beneficial
conversion feature of the Preferred Stock, to be allocated to additional paid-in
capital upon closing of the IPO and accreted to the book value of the Preferred
Stock. The accretion period will be one year, beginning on the date of closing
of the IPO. For the quarter and six months ended June 30, 1999, the Company
accreted $775,000 to the book value of the Preferred Stock. Over the one-year
accretion period, earnings per share will be negatively impacted by the
beneficial conversion feature amount of $5,040,000. In connection with this
transaction, Robert S. Taubman, the Chief Executive Officer and the President of
Taubman Centers, Inc., joined our Board of Directors.
As part of the FM/CCP Financing, FM/CCP loaned us $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. All of such $1,000,000, plus accrued interest, was repaid from the net
proceeds of the IPO.
We had no material commitments for capital expenditures at June 30, 1999. As of
that date, we had no minimum lease obligations as the operating lease for office
space is month to month.
We currently have approximately $114,000 of inventory but intend to take
ownership of an increasing amount 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.
We believe that the net proceeds from the IPO and the Taubman and FM/CCP
financings, together with funds on hand and any cash flow from operations, will
be sufficient for at least 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.
17
<PAGE>
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-QSB) may contain statements which
are not historical facts, so-called "forward-looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, intellectual property rights, risks in product and
technology development, product competition, limited number of customers, key
personnel, potential transactions and other risk factors detailed in the
Registration Statement filed on Form SB-2 filed on March 9, 1999, as amended, in
this Quarterly Report on Form 10-QSB and in the Company's other Securities and
Exchange Commission filings.
18
<PAGE>
PART II. OTHER INFORMATION
fashionmall.com, Inc.
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Set forth in chronological order is information regarding the number if 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 29, 1996, Richard A. Eisner & Company, LLP ("Eisner"), 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 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, bearing interest at 6% per anum 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 of
$13.65 per share. The Company believes that each issuance and sale of such
securities was exempt from registration to Section 4(2) of the Securities Act.
Certain affiliates of Jerome M. Chazen, a director of the Company, are investors
in FM/CCP.
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 second anniversary of the IPO date, provides that Mr. Chazen
shall provide consulting services to the Company aggregating at least 30 hours
per month. In addition, Mr. Chazen has 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 142,5000
shares of common stock at an aggregate price of $150,000 ($1.11 per share). Such
options vest and become exercisable (i) 50% upon the consummation of the IPO,
(ii) an additional 16 % on March 2, 2002 and (iii) the balance monthly over the
12-month period commencing March 2, 2002. The Company believes the grant of such
options was exempt under Section 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 IPO and terminating on March 2, 2004, as to the common
stock acquired by them and underlying their warrants and options.
19
<PAGE>
As part of the Taubman investment, the Company entered into an agreement with
TRG Net Investors LLC ("TRG Net"), an affiliate of Taubman Centers, Inc., a real
estate investment trust and one of the leading mall developers in the U.S.,
whereby TRG Net purchased, for $7,417,000, a 9.9% membership interest in our
predecessor LLC (the "Series B Interest") and warrants (the "Warrants") to
purchase an additional 10% membership interest. Upon closing of the IPO, the
Series B Interest was contributed for 824,084 shares of convertible preferred
stock (the "Preferred Stock"), which in turn are convertible into an aggregate
of 824,084 common shares and the Warrants can be exercised to purchase 924,898
common shares. The Preferred Stock is convertible until May 26, 2000 at an
effective conversion price of $9.00 per share and the exercise price of the
Warrants is $13.00 per share. Upon closing of Taubman's investment, we allocated
$2,377,000 of the $7,417,000 to represent the fair value of the Warrants. The
remaining portion of the net proceeds of $5,040,000 represents the beneficial
conversion feature of the Preferred Stock, to be allocated to additional paid-in
capital upon closing of the IPO and accreted to the book value of the Preferred
Stock. The accretion period will be one year, beginning on the date of closing
of the IPO. For the quarter and six months ended June 30, 1999, the Company
accreted $775,000 to the book value of the Preferred Stock. Over the one-year
accretion period, earnings per share will be negatively impacted by the
beneficial conversion feature amount of $5,040,000. In connection with this
transaction, Robert S. Taubman, the Chief Executive Officer and the President of
Taubman Centers, Inc., joined our Board of Directors.
The offering involved preferred limited liability interests, securities of a
different class than those offered hereby. The offering involved one
sophisticated, accredited investor within the meaning of Regulation D under the
Securities Act, and no general solicitation was involved. Accordingly, the
Company believes that the sale of such securities was exempt under Section 4(2)
of the Securities Act.
On May 20, 1999, in connection with the Company's initial public offering, a
Registration Statement on Form SB-2 was declared effective by the Securities and
Exchange Commission, pursuant to which 3,000,000 shares of Common Stock were
offered and sold for the account of the Company at a price of $13 per share,
generating gross proceeds of $39 million. The managing underwriters were Gruntal
& Co., LLC and First Security Van Kasper. After deducting underwriting
commissions and discounts of $3,120,000 and other related expenses of
approximately $1 million, the net proceeds to the Company were approximately $35
million. The proceeds are invested in highly rated short-term investment
securities. A portion of the proceeds was used to repay the outstanding $1
million promissory note and to repay approximately $300,000 to related parties
for deferred compensation and loans outstanding.
It is the intention of the Company to utilize the proceeds to expand our
marketing efforts and sales force thereby further promoting the fashionmall.com
brand name, to improve our internet and systems infrastructure and support, and
for working capital and general corporate purposes. The Company may invest in
complimentary businesses, products or technologies, as the opportunities arise.
However, the Company has no present understandings, commitments or agreements
with respect to any material acquisition.
20
<PAGE>
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8 - K
(a) The following exhibit is included herein:
Exhibit 27 - Financial Data Schedule
(b) Reports of Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1999.
21
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fashionmall.com, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
fashionmall.com, Inc.
(Registrant)
By:
Date: August 12, 1999 /S/ BENJAMIN NARASIN
- ---------------------- --------------------------------------
Benjamin Narasin
Chairman of the Board, Chief Executive
Officer and President
Date: August 12, 1999 /S/ RAYMOND J. MURPHY
- ---------------------- --------------------------------------
Raymond J. Murphy
Vice President - Finance
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1999 FINANCIAL STATMENTS OF FASHIONMALL.COM, Inc. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
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0
775,000
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