<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1999
REGISTRATION NO. 333-74109
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- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
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 06-1544139
(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 any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/
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 $11.00 $37,950,000 $10,550.10
Representatives' Warrants (3)..................... 300,000 $13.20 $3,960,000 $1,100.88
Common stock, par value $0.01 per share (4)(5).... (6) (6) (6)
Total............................................. -- -- $41,910,000 $11,650.98(7)
</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 Representatives of the Underwriters.
(4) Issuable upon exercise of the Representatives' 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
Representatives' Warrants.
(6) Pursuant to Rule 457(g), no additional registration fee is required for
these shares.
(7) Of the total registration fee, $7,467.60 has been paid previously.
--------------------------
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>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 23, 1999
PROSPECTUS
3,000,000 SHARES
[LOGO]
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 between $9.00 and $11.00 per share.
We have applied to list the common stock on the Nasdaq National Market under
the symbol "FASH."
THIS INVESTMENT INVOLVES RISK. PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE
7.
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.
<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.
GRUNTAL & CO. FIRST SECURITY VAN KASPER
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
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.
FASHIONMALL.COM, INC.
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 revenues
have grown from $219,000 in 1996 to $2,055,000 in 1998, and our results have
improved from a loss of $451,000 in 1996 to net income of $14,000 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. 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,
Fortunoff, dELiA*s, Skechers, Steve Madden and Liz Claiborne, and we have
recently reached an agreement with Saks Fifth Avenue to be an anchor tenant on
our site.
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. 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
10.1 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. We introduced Outletmall.com on a pilot
basis in the fourth quarter of 1998 and, to date, it has not generated
significant revenues. We plan to devote substantial proceeds from the offering
to promote and build this online store.
On April 22, 1999, TRG Net Investors LLC, an affiliate of Taubman Centers,
Inc., a real estate investment trust (REIT) which is one of the leading mall
developers in the U.S., effectively purchased, for $7,416,756, shares of our
convertible preferred stock and a warrant, exercisable during the 60-day period
commencing one year after the offering, to purchase 924,898 shares of our common
stock at the initial public offering price per share (the "Taubman Financing").
The preferred stock is convertible into 824,084 shares of common stock for one
year beginning on the first anniversary of the closing of
3
<PAGE>
the offering and, based on an assumed $10.00 per share initial public offering
price, the effective conversion price of the preferred stock is $9.00 per share
and the exercise price of the warrants is $10.00 per share. In connection with
the transaction, Robert S. Taubman, the Chief Executive Officer and President of
Taubman Centers, joined our Board of Directors.
We were incorporated in Delaware on February 26, 1999, and will become 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 and as part of an integrated plan to raise additional capital in
connection with 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 and 824,084 shares of convertible preferred stock. Our
principal executive offices are located at 575 Madison Avenue, New York, New
York 10022, and our telephone number is (212) 891-6064.
4
<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(1)
Use of Proceeds..................... For advertising and marketing; hiring certain
management and other personnel; upgrading our
technology, software and basic infrastructure;
repayment of certain debt(2); 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 the date of this prospectus. Excludes (i)
135,000 shares of common stock issuable upon exercise of options at an
exercise price of $1.11 per share, (ii) 107,500 shares of common stock
issuable upon exercise of options at an exercise price of $2.50 per share,
(iii) 104,500 shares of common stock issuable upon exercise of warrants at
an exercise price equal to 105% of the per share price of the common stock
in the offering ($10.50 based on the assumed $10.00 per share offering
price), (iv) up to 12,500 shares to be issued without additional
consideration upon exercise of such options and warrants pursuant to certain
anti-dilution provisions, (v) 824,084 shares of common stock underlying
convertible preferred stock at an effective conversion price of $9.00 per
share, and (vi) 924,898 shares of common stock underlying warrants,
exercisable for 60 days one year after the offering, at an exercise price
equal to the initial public offering price. Also excludes 22,500 shares of
common stock issuable upon exercise of warrants at an exercise price of
$4.44 per share and shares of common stock underlying options to purchase an
aggregate of 320,000 shares of common stock intended to be granted after the
closing of the offering. Please see "Certain Relationships and Related
Transactions."
(2) Includes repayment of certain debt to FM/CCP Investment Partners, LLC
("FM/CCP") in connection with (i) its purchase of 225,000 shares of common
stock for $1,000,000, (ii) a loan of $1,000,000 bearing interest at 6% per
annum and due on the earlier of the closing of the offering on March 2,
2002, and (iii) a warrant 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 ($10.50 based on the assumed $10.00 per share offering
price) (collectively, the "FM/CCP Financing.")
5
<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 as of March 31, 1999 and the income statement data for the years ended
December 31, 1995 and 1996 and for the three months ended March 31, 1998 and
1999 are derived from unaudited financial statements. Results for the three
months ended March 31, 1999 are not necessarily indicative of results for the
year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: 1995(1) 1996 1997 1998 1998 1999
- --------------------------------------- ----------- ----------- ----------- --------- --------- ---------
Revenues:
Site revenues.......................... $ 14,000 $ 219,000 $1,253,000 $2,055,000 $ 419,000 $ 770,000
Expenses:
Site development, merchandise and
content.............................. 34,000 177,000 150,000 270,000 41,000 102,000
Advertising and marketing expense...... 38,000 251,000 696,000 1,104,000 261,000 311,000
Selling expense........................ 32,000 102,000 122,000 257,000 66,000 72,000
General and administrative expense..... 44,000 140,000 283,000 413,000 138,000 296,000
----------- ----------- ----------- --------- --------- ---------
148,000 670,000 1,251,000 2,044,000 506,000 781,000
----------- ----------- ----------- --------- --------- ---------
(Loss) income from operations.......... (134,000) (451,000) 2,000 11,000 (87,000) (11,000)
Other income........................... -- -- 1,000 3,000 1,000 8,000
----------- ----------- ----------- --------- --------- ---------
Net (loss) income--historical.......... $(134,000) $(451,000) $ 3,000 $ 14,000 $ (86,000) $ (3,000)
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
Pro forma net (loss) income (2)........ $(134,000) $(451,000) $ 1,000 $ 8,000 $ (87,000) $ (2,000)
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) * * * (0.14)
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 4,500,000 4,500,000
Diluted............................ 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000
</TABLE>
- ------------------------------
* less than $0.01.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------ ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET AS
DATA: 1995 1996 1997 1998 1998 1999 PRO FORMA(4) ADJUSTED(4)(5)
- ----------------- ------------- ------------- ------------- --------- ----------- ----------- ------------- ----------------
Cash............. $ -- $ -- $ 66,000 $ 82,000 $ 37,000 $1,875,000 $ 7,644,000 $35,198,000
Working
(deficiency)
capital........ (99,000) (18,000) 117,000 (247,000) 48,000 1,344,000 7,113,000 35,210,000
Total assets..... -- 74,000 274,000 508,000 191,000 2,833,000 8,602,000 35,802,000
Total
liabilities.... 99,000 294,000 491,000 650,000 126,000 2,061,000 2,061,000 528,000
Members'
(deficit)
equity/stockholders'
equity......... (99,000) (220,000) (217,000) (142,000) (303,000) 772,000 6,541,000 35,274,000
</TABLE>
- ----------------------------------------
(1) The results of operations for the year ended December 31, 1995 includes the
operations of our predecessor from our 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, we will effect a reorganization in which we 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 diluted).
(4) Includes (i) the sale of a 9.9% equity interest to TRG Net Investors LLC for
an initial payment of $5,769,000 and (ii) the issuance of warrants to
purchase an additional 10% equity interest to TRG Net Investors LLC.
(5) 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
$10.00 per share), and the receipt of the estimated net proceeds therefrom
as described under "Use of Proceeds"; (ii) 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 $314,000 and (iii) an
additional payment made to us as part of the Taubman Financing representing
an adjustment based on the initial public offering price. Please see Note 8
of Notes to Financial Statements.
6
<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 AND 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.
WE ARE AN EARLY-STAGE COMPANY WITH A LIMITED OPERATING HISTORY, AND WE EXPECT TO
ENCOUNTER RISKS FREQUENTLY FACED BY EARLY-STAGE COMPANIES IN NEW AND RAPIDLY
EVOLVING MARKETS.
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.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE EXPECT LOSSES FROM OPERATIONS, AND OUR FUTURE PROFITABILITY REMAINS
UNCERTAIN.
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 members' deficit
was $142,000 and, at March 31, 1999, as a result of the FM/
7
<PAGE>
CCP Financing, we had members' equity of $772,000. We incurred a loss of
$451,000 from operations in fiscal 1996, and we had income from operations of
$2,000 in fiscal 1997 and $11,000 in fiscal 1998. We had a net loss of $451,000
in fiscal 1996 and net income of $3,000 in fiscal 1997 and $14,000 in fiscal
1998. 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 "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WE HAVE EXPERIENCED STRAINS ON OUR MANAGEMENT BECAUSE OF PAST RAPID GROWTH, AND
THERE ARE CONTINUED RISKS ASSOCIATED WITH OUR ABILITY TO MANAGE OUR 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. Our 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."
THE LOSS OF THE SERVICES OF OUR KEY PERSONNEL, OR OUR FAILURE TO ATTRACT,
ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE, COULD
SERIOUSLY HARM OUR BUSINESS.
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
currently 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. Please see "Business-- Employees" and "Management."
OUR OPERATING RESULTS ARE VOLATILE, WHICH COULD AFFECT OUR AND YOUR ABILITY TO
PREDICT OUR OPERATING RESULTS IN ANY GIVEN PERIOD AND COULD ALSO AFFECT OUR
MARKET PRICE.
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
8
<PAGE>
the expectations of public market analysts and investors. In this event, the
price of our common stock is likely to fall. 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;
- acceptance by consumers and companies of 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, 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.
Traffic levels on Web sites may fluctuate on a seasonal 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. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE EXPECT TO INCUR SIGNIFICANT COSTS IN DEVELOPING OUR BRAND.
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. If our marketing
efforts are unsuccessful or if we cannot increase our brand awareness, our
business, financial condition and
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results of operations would be materially adversely affected. 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 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. Please see "Use of Proceeds" and "Business--Business
Strategy."
IF INTERNET USAGE DECREASES AS A RESULT OF DECLINES IN USER CONFIDENCE IN THE
INTEGRITY OF THE INTERNET, OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED.
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, commonly referred to as 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.
WE MAY NOT BE ABLE TO ADAPT TO RAPIDLY CHANGING TECHNOLOGIES, OR WE MAY INCUR
SIGNIFICANT COSTS IN DOING SO.
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 our Web site and introducing new services to address our
customers' changing demands. 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. 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.
DECREASED USE OF THE INTERNET AS AN ADVERTISING MEDIUM MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
The Internet advertising market is new and rapidly evolving, and we cannot
yet gauge its effectiveness as compared to traditional advertising media.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 for the foreseeable future. Tenant fees are fees paid by vendors for
inclusion on fashionmall.com of their marketing and advertising materials,
and/or online sales of their merchandise or services. 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
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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 a company's user base. If 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. 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 could have a material
adverse effect on our business, results of operations and financial condition.
BARTER TRANSACTIONS, WHICH CURRENTLY ACCOUNT FOR A SIGNIFICANT PORTION OF OUR
REVENUES, DO NOT RESULT IN ANY INCOME AND MAY BE SUBJECT TO CHANGES IN
ACCOUNTING TREATMENT AND CUSTOMER ACCEPTANCE.
We currently derive a significant portion of our revenues from barter
transactions. For the quarter ended March 31, 1999, we derived revenues of
$348,000 from barter transactions, constituting 45.2% of our total revenues for
such quarter. We barter or trade Web site creation services and inclusion on
fashionmall.com in exchange for advertising in consumer and trade publications
as well as, to a lesser extent, for online banner advertising and for marketing
and public relations consulting services. While we recognize barter revenue at
the fair market value of the advertising or service received, we must offset
this revenue with a corresponding fair market expense for the services or
advertising we provide in the exchange, as a result of which we do not recognize
income. 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. We also cannot be
certain that barter will continue to be accepted as a form of payment for our
services.
WE DEPEND ON RELATIONSHIPS WITH THIRD PARTIES, AND THE LOSS, OR CHANGE IN TERMS,
OF ANY RELATIONSHIP COULD ADVERSELY AFFECT 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 have entered into commercial relationships 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.
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
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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 on commercially acceptable terms or
at all.
WE MAY NOT BE ABLE TO CONTINUE TO DEVELOP OUR CONTENT AND SERVICE OFFERINGS TO
REMAIN COMPETITIVE.
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. 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 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. Please see
"Business-- Customer Loyalty and Retention."
WE MAY NOT BE ABLE TO INCREASE OUR INTERNAL DIRECT SALES FORCE TO SUPPORT OUR
ANTICIPATED GROWTH.
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."
THE NUMBER OF RETAIL INTERNET COMPETITORS CONTINUES TO INCREASE, AND WE MAY NOT
BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS.
Increased competition could result in less traffic to our Web site, price
reductions for our tenant fees 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. 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.
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 L.L. 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
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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;
- 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 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."
WE MAY NOT BE ABLE TO MAINTAIN OUR RELATIONSHIPS WITH OUR MERCHANDISE SUPPLIERS
ON ACCEPTABLE TERMS OR AT ALL.
Our suppliers for our recently launched online apparel direct sales Web
site, Outletmall.com, currently include approximately 40 manufacturers. We
cannot be certain that we will be able to establish new or continue to maintain
current vendor relationships to ensure acquisition of merchandise in a timely
and efficient manner and on acceptable commercial terms. Our loss of supplier
relationships could have a material adverse effect on our business. 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 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.
CHANGES IN THE APPAREL MARKET ARE UNCERTAIN, AND IF WE MISJUDGE TRENDS, OUR
BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.
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.
CHANGES IN THE APPAREL MARKET MAY CAUSE US TO HAVE INADEQUATE OR OVERSTOCKED
INVENTORY.
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. Conversely, we may have only limited
supplies of heavily demanded items. 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. We
could also be subject to inventory loss, or "shrink." We operate only one online
store which was recently launched on a pilot basis, 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 RISK OF RETURNS ASSOCIATED WITH APPAREL RETAILING GENERALLY,
REMOTE PURCHASES OF APPAREL OVER THE INTERNET MAY FACE HIGHER RETURN RATES.
Where we act as a retailer, we experience costs of returns. We recognize
that remote purchases of apparel and related merchandise, particularly through
the Internet, 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%, which may not be indicative of future return
rates in view of our limited operating experience to date. If return rates are
higher, which they may become, our business, results of operations and financial
condition could be materially adversely affected.
IF THE INTERNET DOES NOT GROW AS A MEDIUM FOR COMMERCE, OUR BUSINESS COULD BE
MATERIALLY ADVERSELY AFFECTED.
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
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that our services offer significant advantages to consumers and manufacturers
and retailers, we cannot be certain 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, including touching fabrics and
trying on merchandise, will accept new methods of conducting business and
exchanging information. Moreover, critical issues concerning remote purchases on
the Internet, including clarity of picture, and 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 could be materially adversely affected.
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.
IF OUR SYSTEM'S OR THE INTERNET'S INFRASTRUCTURE DO NOT GROW OR IMPROVE TO MEET
INCREASED CONSUMER DEMANDS, THE GROWTH OF OUR BUSINESS COULD BE MATERIALLY
ADVERSELY AFFECTED.
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
could 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.
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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 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.
WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.
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.
IF OUR ONLINE SECURITY MEASURES FAIL, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY
AFFECTED.
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.
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
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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.
WE MAY BE UNSUCCESSFUL IN ENTERING 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 us 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 our business, results of operations and financial
condition.
IF GOVERNMENT REGULATION INCREASES, WE MAY NEED TO CHANGE THE MANNER IN WHICH WE
CONDUCT OUR BUSINESS.
The adoption of new legislation or regulation which impacts Internet
businesses, 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. 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.
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IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS IS INADEQUATE, OUR
BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED.
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 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" or "Outletmall.com" name. We do not believe that we or
anyone else can obtain protection for such names 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.
WE MAY BE UNABLE TO ACQUIRE OR MAINTAIN THE NECESSARY WEB DOMAIN NAMES.
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 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.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL STOCKHOLDERS.
Prior to this offering, there has been no public market for our common
stock. We cannot assure you 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;
18
<PAGE>
- 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 could have a material adverse effect on our business, results
of operations and financial condition.
EXISTING STOCKHOLDERS WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OVER US.
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."
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
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."
IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER SYSTEMS WE USE ARE NOT YEAR 2000
COMPLIANT, OUR BUSINESS WILL BE MATERIALLY ADVERSELY AFFECTED.
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
19
<PAGE>
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.
WE DO NOT ANTICIPATE PAYING ANY 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."
INVESTORS WILL EXPERIENCE IMMEDIATE 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 of approximately $6.19 in the book
value per share of the common stock from the assumed $10.00 price per share paid
for the common stock. To the extent outstanding options and warrants to purchase
common stock are exercised, there will be further dilution. Please see
"Dilution."
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
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 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."
WE HAVE SUBSTANTIAL DISCRETION AS TO THE USE OF PROCEEDS OF THE OFFERING.
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
20
<PAGE>
this offering to discretionary uses. The stockholders may not agree with
management's spending decisions. Please see "Use of Proceeds."
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT
OUR STOCK PRICE.
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, as well as 824,084 shares of
convertible preferred stock. Of these shares, the 3,000,000 shares of common
stock 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 242,500
shares of common stock are outstanding, none of which are currently exercisable.
Of such options, options to purchase 121,250 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 1,051,898 shares of
common stock are outstanding. Of such warrants, warrants to purchase 32,000
shares of common stock are currently exercisable, warrants to purchase 95,000
shares of common stock become exercisable upon the closing of the offering and
924,898 become exercisable one year after the closing of the offering. The
convertible preferred stock is convertible into 824,084 shares of common stock
beginning one year after closing of the offering. Shares issued upon the
exercise of such warrants or conversion of the convertible preferred stock 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 stockholders who hold 4,500,000 shares in the
aggregate, together with the holders of options to purchase 242,500 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., L.L.C., one of the
Representatives, for a period of one year from the date of this prospectus.
Certain stockholders, holding 225,000 shares of common stock, together with
the holders of options to purchase 242,500 shares of common stock and the
holders of warrants to purchase 127,000 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."
21
<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 $27,100,000, ($31,285,000 if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discounts and estimated offering expenses, assuming a public
offering price of $10.00 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 15%
Hiring Personnel(2)............................................. 3,700,000 14%
Equipment and Software Purchases and Upgrades(3)................ 1,600,000 6%
Repayment of Debt(4)............................................ 1,000,000 4%
Payment of Deferred Salaries to Management and Repayment of
Loans from Stockholders(5).................................... 314,000 1%
General Corporate and Working Capital Purposes(6)............... 16,286,000 60%
------------- ---
$ 27,100,000 100%
------------- ---
------------- ---
</TABLE>
- ------------------------
(1) Includes both online and traditional advertising. Online advertising
includes banner advertising, as well as costs associated with obtaining
portal and Web site sponsorships and entering strategic alliances. Includes
anticipated costs to promote our online store.
(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 our 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,
2002.
(5) Includes (a) $159,000 of deferred compensation payable to Benjamin Narasin,
our Chief Executive Officer and President, and (b) repayment of a $155,000
loan to RAE, one of our principal stockholders.
(6) Includes approximately $100,000 for directors and officers liability
insurance.
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 future
operations, will be sufficient to satisfy our 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."
22
<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
After giving pro forma effect to consummation of the Taubman Financing as if
it had occurred on March 31, 1999 and had been converted into common shares, our
net tangible book value as of March 31, 1999, was approximately $6,142,000, or
$1.11 per share of common stock. Pro forma net tangible book value, giving
effect to the issuance of shares of preferred stock and warrants in the Taubman
Financing and 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 $10.00 per share, would have been $35,229,000,
or $3.81 per share. This represents an immediate increase in the pro forma net
tangible book value of $2.70 per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $6.19 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............. $ 10.00
Net tangible book value per pro forma share as of March 31,
1999...................................................... $ 1.11
Increase in net tangible book value per share attributable
to new investors.......................................... 2.70
---------
Pro forma net tangible book value per share after the
offering.................................................. 3.81
---------
Dilution per share to new investors......................... $ 6.19
---------
---------
</TABLE>
The following table summarizes, as of March 31, 1999, the differences
between the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by existing stockholders
and by new investors at an assumed offering price of $10.00 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% 30,000,000 $ 10.00
---------- --- -------------
7,500,000 100% $ 31,411,000
---------- --- -------------
---------- --- -------------
</TABLE>
The foregoing discussion and table does not give effect to the preferred
stock issued in the Taubman Financing and excludes: (i) an aggregate of
1,125,000 shares of common stock reserved for future grants or purchases under
our 1999 Stock Option Plan; (ii) 337,500 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) 32,000 shares of common stock reserved for issuance upon the
exercise of warrants issued to Wit Capital as placement agent for the FM/CCP
Financing; (iv) 300,000 shares of common stock reserved for issuance upon the
exercise of the Representatives' Warrants; and (v) 824,084 shares of common
stock underlying preferred stock and 924,898 shares of common stock underlying
warrants issued in the Taubman Financing. Please see "Management--1999 Stock
Option Plan," "Certain Relationships and Related Transactions," "Description of
Securities" and "Underwriting."
23
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999: (i) our actual
capitalization, (ii) our pro forma capitalization, giving effect to the initial
payment of the Taubman Financing, (iii) our pro forma capitalization, giving
effect to the initial payment of the Taubman Financing and the reorganization of
Internet Fashion Mall LLC into fashionmall.com, Inc., and (iv) our pro forma as
adjusted capitalization adjusted to reflect (a) the initial payment of the
Taubman Financing, (b) the reorganization, (c) the issuance of the 3,000,000
shares of common stock offered hereby (assuming an initial offering price of
$10.00 per share) and the receipt of the estimated net proceeds therefrom, (d)
the repayment of the $1,000,000 notes payable to FM/CCP, and the deferred
salaries to management and loans to stockholders, totaling $314,000, and (e) an
additional payment made to us as part of the Taubman Financing representing an
adjustment based on the initial public offering price. Please see "Use of
Proceeds" and "Description of Securities."
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA AS
ACTUAL PRO FORMA A(1) B(1)(2)(3) ADJUSTED(1)(2)(3)(4)
----------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Amounts due to related parties.................. $ 314,000 $ 314,000 $ 314,000 $ --
Long-term obligations:
6% notes payable(5)........................... 985,000 985,000 985,000 --
Stockholders' equity:
Warrant to purchase 924,898 shares common
stock, at fair value...................... -- -- 3,168,000 3,168,000
Preferred Stock--3,000,000 shares
authorized; 0, 0,
824,084 and 824,084 shares issued and
outstanding, respectively................. -- -- -- 2,298,000
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(6)............... -- -- 3,328,000 30,398,000
Members' contributed capital................ 1,322,000 7,091,000 -- --
Accumulated deficit......................... (550,000) (550,000) -- (665,000)
----------- -------------- ----------------- ---------------
Total stockholders' equity.................... 772,000 6,541,000 6,541,000 35,274,000
----------- -------------- ----------------- ---------------
Total capitalization........................ $ 1,757,000 $ 7,526,000 $ 7,526,000 $ 35,274,000
----------- -------------- ----------------- ---------------
----------- -------------- ----------------- ---------------
</TABLE>
- ------------------------
(1) Gives effect to (i) the sale of a 9.9% equity interest to TRG Net Investors
LLC for an initial payment of $5,769,000 representing part of the Taubman
Financing, the equivalent of $7.00 per share, and (ii) the issuance of
warrants to purchase an additional 10% equity interest to TRG Net Investors
LLC.
(2) Assumes the reorganization of Internet Fashion Mall LLC into
fashionmall.com, Inc., a C corporation. See Note 8 of Notes to Financial
Statements.
(3) Gives effect to amounts assigned to warrants to purchase 924,898 shares of
common stock, at fair value and recognition of the beneficial conversion
feature.
(4) Excludes: (i) an aggregate of 1,125,000 shares of common stock reserved for
future grants or purchases under our 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) 242,500 shares of
common stock reserved for issuance upon exercise of options issued to Jerome
Chazen, one of our directors, (iv) up to 12,500 shares issuable upon
exercise of the options and warrants referred to in (ii) and (iii) above,
(v) 32,000 shares of common stock reserved for issuance upon the exercise of
warrants issued to Wit Capital Corporation as placement agent for the FM/CCP
Financing and (vi) 300,000 shares of common stock reserved for issuance upon
exercise of Representatives' Warrants. Please see "Management--1999 Stock
Option Plan," "Certain Relationships and Related Transactions," "Description
of Securities" and "Underwriting."
(5) Net of the fair value of warrants of $15,000 issued in conjunction with
notes payable.
(6) Includes amounts assigned to warrants issued in conjunction with notes
payable and warrants issued to the placement agent as a portion of the
finder's fee for the private placement.
24
<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 our audited financial statements included elsewhere in this
prospectus. The balance sheet information as of December 31, 1995, 1996 and 1997
and as of March 31, 1999 and the income statement data for the years ended
December 31, 1995 and 1996 and for the three months ended March 31, 1998 and
1999 are derived from our 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 we consider necessary for a fair presentation
of the financial position and results of operations for the period. Results for
the three months ended March 31, 1999 are not necessarily indicative of results
for the year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------------
STATEMENT OF OPERATIONS DATA: 1995(1) 1996 1997 1998 1998 1999
- ---------------------------------------- ----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Site revenues........................... $ 14,000 $ 219,000 $1,253,000 $2,055,000 $ 419,000 $ 770,000
Expenses:
Site development, merchandise and
content............................... 34,000 177,000 150,000 270,000 41,000 102,000
Advertising and marketing expense....... 38,000 251,000 696,000 1,104,000 261,000 311,000
Selling expense......................... 32,000 102,000 122,000 257,000 66,000 72,000
General and administrative expense...... 44,000 140,000 283,000 413,000 138,000 296,000
----------- ----------- --------- --------- --------- ---------
148,000 670,000 1,251,000 2,044,000 506,000 781,000
----------- ----------- --------- --------- --------- ---------
(Loss) income from operations........... (134,000) (451,000) 2,000 11,000 (87,000) (11,000)
Other income............................ -- -- 1,000 3,000 1,000 8,000
----------- ----------- --------- --------- --------- ---------
Net (loss) income--historical........... $(134,000) $(451,000) $ 3,000 $ 14,000 $ (86,000) $ (3,000)
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
Pro forma net (loss) income(2).......... $(134,000) $(451,000) $ 1,000 $ 8,000 $ (87,000) $ (2,000)
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) * * * (0.14)
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 4,500,000 4,500,000
Diluted............................... 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000
</TABLE>
- ------------------------------
* less than $0.01
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET AS
DATA: 1995 1996 1997 1998 1998 1999 PRO FORMA(4) ADJUSTED(4)(5)
- ---------------- ------------- ----------- ----------- --------- ----------- ----------- ------------- ----------------
Cash............ $ -- $ -- $ 66,000 $ 82,000 $ 37,000 $1,875,000 7,644,000 $35,198,000
Working
(deficiency)
capital....... (99,000) (18,000) 117,000 (247,000) 48,000 1,344,000 7,113,000 35,210,000
Total assets.... -- 74,000 274,000 508,000 191,000 2,833,000 8,602,000 35,802,000
Total
liabilities... 99,000 294,000 491,000 650,000 126,000 2,061,000 2,061,000 528,000
Members'
(deficit)
equity/stockholders'
equity........ (99,000) (220,000) (217,000) (142,000) (303,000) 772,000 6,541,000 35,274,000
</TABLE>
- ------------------------------
(1) The results of operations for the year ended December 31, 1995 includes our
operations 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.
(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, we will effect a reorganization, in which we 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 diluted).
(4) Includes (i) the sale of a 9.9% equity interest to TRG Net Investors LLC for
an initial payment of $5,769,000 and (ii) the issuance of warrants to
purchase an additional 10% equity interest to TRG Net Investors LLC.
(5) 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
$10.00 per share), and the receipt and application of the estimated net
proceeds therefrom, the repayment of the $1,000,000 notes payable to FM/CCP,
and the deferred salaries to management and loans to stockholders, totaling
$314,000 and (iii) an additional payment made to us as part of the Taubman
Financing representing an adjustment based on the initial public offering
price. 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 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." We urge
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 we do 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.
We had an accumulated deficit of $553,000 and $556,000 as of December 31,
1998 and March 31, 1999, respectively, and a members' deficit of $142,000 at
December 31, 1998 and, as a result of the FM/ CCP Financing, a members' equity
of $772,000 at March 31, 1999. After giving pro forma effect to the initial
payment of the Taubman Financing as if it had occurred on March 31, 1999,
members equity would have been $6,541,000. 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. We will incur
a non-cash charge to earnings per common share equal to the difference between
the per share fair value of the convertible preferred stock issued pursuant to
the Taubman Financing and the per share fair value of the common stock into
which it converts. 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.
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 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.
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
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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.
During the years ended December 31, 1997 and 1998 and the quarter ended
March 31, 1999, 59%, 51% and 45%, respectively, of our revenues were generated
by barter arrangements 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
QUARTER ENDED MARCH 31, 1999 COMPARED WITH QUARTER ENDED MARCH 31, 1998
SITE REVENUES. Total revenues increased by $351,000, or 84%, to $770,000 in
the first quarter of 1999 as compared to $419,000 in the first quarter of 1998.
Barter revenue increased by $97,000, or 39%, to $348,000 in the first quarter of
1999 from $251,000 in the first quarter of 1998. 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 $506,000 in the
first quarter of 1998 to $781,000 in the first quarter of 1999. The increase was
due to increased expenditures for technical staff, increased barter advertising
and increased equipment and infrastructure needs. The capitalized software costs
are amortized over a straight-line basis over the estimated useful life of two
years. At March 31, 1999, approximately $67,000 of software costs has been
capitalized. Accumulated amortization of capitalized software costs at March 31,
1999 was $22,000.
SITE DEVELOPMENT, MERCHANDISE AND CONTENT. Site development, merchandise
and content expenses increased by $61,000, or 149%, to $102,000 in the first
quarter of 1999 from $41,000 in the first 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 the fashionmall.com
website.
ADVERTISING AND MARKETING. Advertising and marketing expenses increased by
$50,000, or 19%, to $311,000 in the first quarter of 1999 from $261,000 in the
first 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 $6,000, or 9%, to $72,000
in the first quarter of 1999 from $66,000 in the first 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 $158,000, or 114%, to $296,000 in the first quarter of 1999 from
$138,000 in the first quarter of 1998. The increase was primarily due to
increased 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.
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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. We capitalize costs incurred in the process of creating
software for site 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 our 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 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 EXPENSES. 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. We
expect these expenses to grow 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.
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.
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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 substantially all of our operations from
private investment and an insignificant portion has been financed with cash
generated from operations.
At December 31, 1998, we had cash and cash equivalents on hand of $82,000.
As of March 31, 1999, cash and cash equivalents had grown to $1,875,000
primarily as a result of the FM/CCP Financing. Subsequent to March 31, 1999, we
received $5,768,588 in the initial payment of the Taubman Financing.
Our accounts receivable increased by approximately $259,000 in 1998. This
increase was a result of increased acceptance of our business model and the
growth attributable to new customers. The allowance for doubtful accounts
increased by $80,000 in 1998 as a result of the overall increase in accounts
receivable and an increase in our general reserve. Accounts payable and accrued
expenses increased approximately $193,000 in 1998 as a result of the increase in
our overall business operations resulting from the growth in our customer base
and level of services provided. In 1997, accounts receivable increased
approximately $154,000 as a result of our implementation of our business model.
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 March 31, 1999 and December 31,
1998 and 1997, amounts due to the owners totaled $133,000, $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 31, 1999, loans from owners
aggregated $22,000, all of which will be repaid from the net proceeds of the
offering. In addition, we will pay Mr. Narasin and Richard A. Eisner & Company,
LLP up to an aggregate of $100,000 to indemnify them for tax liabilities arising
out of our reorganization into a C corporation.
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 will be repaid from the net proceeds of the
offering. Please see "Certain Relationships and Related Transactions."
We had no material commitments for capital expenditures at March 31, 1999.
As of that date, we had no minimum lease obligations as the operating lease of
office space is month to month. As of March 31, 1999, we had deferred
compensation of $159,000 representing money owed to our Chief Executive Officer,
who is also a principal stockholder, for services rendered, which will be paid
from the net proceeds of the offering.
We currently have a small amount 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.
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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.
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 are at risk if the information technology systems or non-IT 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
anticipate completion of our Year 2000 assessment by the end of the second
quarter of 1999 and anticipate the replacement or remediation of any non-Year
2000 compliant technologies by the end of the third quarter of 1999. While we
have confirmed compliance of our systems in some cases, and upgraded software to
achieve compliance in other cases, we are currently unable to predict whether
Year 2000 issues will affect the operations of our customers or vendors. We
expect to resolve any further 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 have not incurred significant costs to date in addressing our Year 2000
issues. 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. For instance, we depend on the integrity and stability of the
Internet to provide our services. We also depend on the Year 2000 compliance of
the computer systems and financial services used by customers. Thus, the
infrastructure necessary to support our operations consists of a network of
computers and telecommunications systems located throughout the world and
operated by numerous unrelated entities and individuals, none of which
individually has the ability to control or manage the potential Year 2000 issues
that may impact the entire infrastructure. A significant disruption in the
ability of consumers to reliably access the Internet or portions of it or to use
their credit cards would have an adverse effect on demand for our services and
would have a material adverse effect on us.
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.
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Although we are currently assessing potential contingency plans, we have
developed no contingency plans to address the worst-case scenario that might
occur if technologies we are dependent upon are not Year 2000 compliant. 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.
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 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, which are 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
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 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. Our
revenues have grown from $219,000 in 1996 to $2,055,000 in 1998. Revenues for
the quarter ended March 31, 1999 were $770,000 as compared to $419,000 for the
quarter ended March 31, 1998. Results for the three months ended March 31, 1999
are not necessarily indicative of results for the year. 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
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. We have a diverse tenant base of brand name
companies, including Brooks Brothers, Fortunoff, dELiA*s, Skechers, Steve Madden
and Liz Claiborne, and we have recently reached an agreement with Saks Fifth
Avenue to be an anchor tenant on our site.
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.
We believe that the Internet is particularly well-suited for promoting,
marketing and selling merchandise such as apparel. Our 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 10.1 million in 1997 to 58.4 million in 2002. Jupiter also
estimates that these shoppers will increase their spending on products offered
on the Internet from $3 billion in 1997 to $41 billion in 2002. According to a
study released by
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the Marketing Corporation of America, approximately $8.2 billion was spent
online during the 1998 holiday season. According to Jupiter, apparel now ranks
among the top five product categories for Internet sales. We believe that the
volume of online apparel sales will grow quickly as the Internet develops as a
distribution channel, and we believe that we are well positioned to capitalize
on this market opportunity.
BUSINESS OBJECTIVE AND STRATEGIES
Our objective is to be the primary fashion/apparel destination on the
Internet.
In order to achieve this objective, we intend to:
- increase brand awareness and site traffic;
- expand our 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
We believe that building awareness of the fashionmall.com brand is critical
in our effort to be the premier site for fashion/apparel on the Internet.
Consequently, we are focused on building on our traffic by (i) aggressively
marketing our site and (ii) entering into key strategic alliances with
high-traffic Web sites.
ADVERTISING AND MARKETING
We utilize numerous marketing techniques to increase brand recognition and
traffic, including both traditional and online advertising. To date, our lack of
financial resources has limited our ability to spend the funds necessary to
increase our brand recognition and traffic to desired levels. We intend to use a
substantial part of the proceeds from the offering to significantly increase our
marketing efforts.
We promote our site through print advertising in industry and consumer
publications. To date, due to our limited financial resources, our use of
advertising has primarily been through barter arrangements. We provide space for
magazines on fashionmall.com in exchange for advertising in their print
publications. In 1998, we placed approximately $1,038,000 worth of advertising
through this model. Upon consummation of the offering, we intend to increase our
cash payments in 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.
STRATEGIC ALLIANCES
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
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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 after the consummation of the offering.
- EXCITE. Excite is currently the seventh ranked Web site in terms of unique
monthly visitors. We entered into an agreement with Excite 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. We share
with Excite 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
for the Netscape.com site, we are receiving exposure on Netscape as well.
However, there can be no assurance that this positioning will continue.
Netscape is currently the sixth ranked site in terms of unique monthly
visitors. In addition, we will receive exposure through Excite's agreement
to provide content for Prodigy's Internet Service and through Excite's
ownership of the Webcrawler search engine. Our agreement with Excite has a
one-year term with a subsequent renewal provision.
- MICROSOFT/MSN. msn.com is currently the third ranked Web site in terms of
unique monthly visitors. We entered into an agreement with Microsoft
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
us on various joint promotions and "special offers" through the msn.com
and through the fashionmall.com sites. Pursuant to the agreement, we will
pay Microsoft a certain fee as a percentage of the commissions earned by
fashionmall.com. The agreement has a one-year term with subsequent
automatic renewal provisions.
The Company also has a content licensing agreement with Yahoo! effective as
of March 1, 1998 for the placement of our Web site within the Yahoo! site to
give our site access to Yahoo!'s visitor base. In addition, we have agreements
with Amazon.com, Inktomi and several other high traffic Web sites.
In addition to the above agreements, we have an affiliates program with
other Web sites that provide traffic to our 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. We have been
solicited by numerous Web sites desiring affiliate status. We plan to pursue
marketing agreements and other strategic alliances with other leading Internet
companies after the consummation of the offering.
EXPANSION OF OUR TENANT BASE
We believe that we have assembled a collection of well-recognized brand name
tenants. To accomplish our goal of being the primary fashion/apparel destination
on the Internet, we intend to add to our tenant roster through an aggressive
sales campaign. As fashionmall.com's brand and site recognition and traffic
increase, we believe that we will be able to attract additional national
designer and brand name companies as tenants. In this connection, upon
consummation of this offering, we plan 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
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(iv) magazines, including such recent additions as Brooks Brothers, dELiA*s,
Skechers and Steve Madden, with Saks Fifth Avenue to be added in the near
future.
MANUFACTURERS. Our largest group of tenants are manufacturers of apparel,
accessories, footwear 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 our
tenants but represent a growing target as potential tenants on fashionmall.com.
We believe that we 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 our
tenants but represent a growing target as potential tenants on fashionmall.com.
Retailers have generally established their own online presence on the Internet
and use our 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 our tenants. Such magazines use our 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
We intend to leverage the strength of our traffic and brand equity to drive
revenue growth. We currently generate revenue from our tenants through: (i)
tenant fees, (ii) Web site development in the form of site construction and
management, (iii) banner and sponsorship advertising and (iv) online sales.
TENANT FEES
Manufacturers, retailers, magazines and others pay us fees to lease space on
the fashionmall.com site, thereby taking advantage of the traffic the Web site
receives to market and advertise their products. Our tenants either pay fees
tied to the amount of traffic the tenant receives on a per click-through basis
or a flat rate per month. We expect to convert our Web site traffic into
revenues by broadening our base of tenants and leveraging increased traffic into
higher tenant fees.
WEB SITE DEVELOPMENT
We provide Web site development services to fashion/apparel companies for
Web pages to be displayed through the fashionmall.com Web site in exchange for
fees. We have 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 addition, we design
fully-customized sites for long-term potential fashionmall.com tenants and
current tenants who desire larger sites or more advanced features.
BANNER AND SPONSORSHIP ADVERTISING
Although it is presently not our significant focus, we offer banner
advertisements on our site and intend to expand this effort to create a new
source of revenue from non-fashion/apparel advertisers. We also derive revenue
from paid sponsorship of this site, such as the "fashionmall prefers Visa"
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promotion, or through sponsorships of specific areas of the site, The Knot's
sponsorship of the bridal area and CBS Sportsline's sponsorship of the sports
area.
ONLINE SALES OF TENANTS' MERCHANDISE
Revenue from online sales of tenants' apparel, accessories and related
merchandise are derived from the commissions and fees we receive from the online
sale of merchandise by our 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.
These pricing models are (i) fashionmall.com as an intermediary in which the
tenant is the direct retailer, and thus the tenant makes the margin between
wholesale and retail and typically pays us a commission and (ii) fashionmall.com
as retailer in which we purchase the tenant's merchandise at wholesale to fill
customer orders at retail at no additional cost to that tenant. In such
instances, our wholesale purchases are not typically made in advance of the
related retail sale.
CONVERSION OF TRAFFIC INTO DIRECT ONLINE SALES
While in the past we have derived nominal revenues from online sales in
which we have acted as an intermediary or a retailer, we see a significant
opportunity for revenue growth from launching our own online stores. Our first
online store is our recently launched Outletmall.com site, and we are in the
process of developing an online store 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 our strategy to grow our e-commerce transaction volume.
Outletmall.com, which we launched on a pilot basis, is in an early stage of
development, and consequently, we have conducted limited promotion of the site.
We intend to use a significant portion of the net proceeds of this offering to
market and build this online store. 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.
We currently do not take ownership of substantial amounts of inventory,
although this may change. Distribution facilities are available should suppliers
be unable to fulfill merchandise directly. In some cases, merchandise that is
not sold may be returned to the vendor, or liquidated on their behalf for a fee.
We bear the risk of product returns, except for returns due to vendor error or
defect, which are
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generally assumed by the vendor. As we increase our focus on online sales, we
may take ownership of an increasing amount of inventory.
CATALOG JOINT VENTURE
We believe that we can expand our e-commerce efforts while reducing our
costs and risk through joint ventures that target niche markets. As part of this
strategy, in February 1999, we 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 us and Diplomat for the
purpose of developing an 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, all of which has been paid,
and that we will provide the joint venture with an anchor position on
fashionmall.com and provide certain other services. The joint venture is not
intended to be the exclusive vehicle for the sale, display or marketing of
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
We strive 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. We believe that doing so successfully will increase user loyalty,
repeat usage and duration per visit.
PROVIDE COMPELLING AND SECURE SHOPPING EXPERIENCE
We are providing or intend to provide our customers with a compelling and
secure shopping experience by (i) making our 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. We offer our visitors entertaining and informative content,
including fashion articles covering news, trends, guides and other
fashion/apparel related features. We intend to expand our 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, we plan to deliver
community elements, such as bulletin boards and dedicated chat rooms, to our
site's visitors.
Our online stores display information about items offered on our 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 us, the datasets are published to our Web site. Our
selling system is our Web site on the Internet, which was designed to give
customers a convenient and safe "shopping basket" or ordering system to effect
their purchases. Our site uses Web servers to handle the transactional events,
queries and updates to the various server databases.
Our ordering system retrieves ordering information from selling systems,
validates credit cards, processes the orders, creates and issues purchase orders
to manufacturers and handles all 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 us 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. We intend to access this customer profile information to
search and
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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. We believe that security systems currently in place are at
least as secure as those used for traditional in-store or mail order
transactions. We believe that shopping electronically may expose customers to
two potential areas for theft of credit card numbers. The first is theft of
credit card numbers traveling through phone lines and the second is theft of
credit card numbers residing on our system. Transactions are secured by using
Secure Sockets Layer ("SSL") encryption which protects the information as it is
transmitted between the customer browser and our site on the Internet. We
address 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.
We also offer other payment alternatives. We have installed a toll-free
telephone number for taking orders, handling customer service, and receiving
credit card information. We post the toll free phone number for the customer
during the checkout phase. After a customer calls this phone number with his or
her order, our 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
We intend to capitalize on the unique capabilities of the Internet to
maximize the buying potential of our audience. We will use proprietary operating
processes to track and mine usage patterns for each visitor to the
fashionmall.com Web site. We intend to analyze this data in great detail and,
based on our 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 may make for a much more compelling shopping experience as
compared to more traditional distribution channels, such as catalogs, while also
allowing the merchandiser to suggest products and potentially create sales that
might not otherwise take place.
We believe that a strong understanding of the customer demographic profile
and purchasing habits is critical to effective and successful merchandising. We
intend to aggregate demographic information relating to our customer base by
requesting certain information upon a customer's registration and collecting
data, based on previous purchasing and browsing behavior. Collecting such
demographic consumer data will permit us to target promotional e-mail directly
to customers or to sell the data to advertisers and catalog companies as
appropriate.
CUSTOMER SERVICE
We believe that high levels of customer service and support are critical to
the value of our services and to retaining and expanding our 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 keeping customers up-to-date on the status of their orders. Our
representatives handle general questions about our tenants, provide product
information and take orders by telephone. We believe that these representatives
are a valuable source of feedback regarding customer satisfaction, which we use
to improve our services. Customers are not charged for service and support. We
intend to expand our call center and Internet-based toll free support and
enhance our functionality as it relates to cross-promoting products with a
portion of the proceeds of the offering. Please see "Use of Proceeds."
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ORDER FULFILLMENT
We currently carry minimal inventory and rely to a large extent on order
fulfillment from our tenant manufacturers and retailers that ship merchandise
directly to customers wherever possible. We intend to ship merchandise directly
from third party distribution facilities as we expand our online direct sales of
apparel and related merchandise through our own online stores. We may use a
portion of the proceeds of this offering for our distribution activities.
TECHNOLOGICAL ENHANCEMENTS
We continually evaluate 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 we intend 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 our Web site. We are also currently developing an extranet system which
will allow our vendors and tenants to access our selling system directly over
the Internet.
COMPETITION
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. In addition, the retail apparel shopping
industry is intensely competitive. As a seller of apparel, we currently or
potentially compete with a variety of other companies, including (i) traditional
retailers of apparel, many of which also support dedicated Web sites, 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 our tenants, who may eventually be competitors, have their own
Web sites but maintain a presence on fashionmall.com.
We believe that the principal competitive factors in our market are brand
awareness and loyalty, site traffic, 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 our current and
potential competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than us. 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 our competitors may be able to
secure merchandise from manufacturers exclusively or 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 we can. 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 us.
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TECHNOLOGY
We use commercially available software, as well as our own developed
proprietary software. Our systems combine our proprietary technologies and
commercially available, licensed technologies. Our current strategy is to
license commercially available technology to augment internally developed
solutions. Our Internet content delivery is provided by a variety of servers,
including three on our premises and one in Washington, D.C. at a third party
vendor location. Several systems administrators and network managers monitor and
operate our site on the Internet, network operations and transaction-processing
systems. Like other Internet sites, our sites have, from time to time,
experienced interruption and overload. The uninterrupted operation of our site
on the Internet and transaction-processing systems is essential to our 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
Our performance and ability to compete are dependent to a significant degree
on our proprietary knowledge. We regard our copyrighted material, domain names,
trade secrets and similar intellectual property as important, and rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with our employees, customers, partners and others to protect
our proprietary rights. We have registered the domain names "fashionmall.com"
and "Outletmall.com." There can be no assurance that we will be able to secure
significant protection for these names and our other proprietary information.
Other than our registration of the domain names, the Company does not have any
other protection for the "fashionmall.com" or "Outletmall.com" name. We do not
believe that we or anyone else can obtain protection for such names in the
United States. It is possible that competitors or others will adopt product or
service names similar to "fashionmall.com" or "Outletmall.com", thereby impeding
our ability to build brand identity and possibly leading to customer confusion.
Our inability to protect the names "fashionmall.com" and "Outletmall.com"
adequately could have a material adverse effect on us.
GOVERNMENTAL REGULATION
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 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 our products and services and increase our cost
of doing business, or otherwise have an adverse effect on us. 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 service is available over the Internet in multiple 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 it is required to do so
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 us.
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EMPLOYEES
At April 19, 1999, we employed 24 employees and independent contractors. In
addition, we use additional independent contractors when needed. We currently
lack the personnel that will be necessary for our expected growth. We intend to
use a significant portion of the proceeds of the 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 we will be able to successfully
attract, assimilate, or retain sufficiently qualified personnel. Please see "Use
of Proceeds." In order to attract qualified personnel, we 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. Our
future success will depend on our ability to attract and retain qualified
personnel to operate and manage our growth. If we are unable to manage our
growth effectively, it could have a material adverse effect on our business,
results of operations and financial condition. None of our employees is
represented by a labor union, and we consider our employee relations to be
satisfactory.
PROPERTIES
We sublease approximately 2,000 square feet of office space in New York, New
York for our 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." We expect to look for larger office space in New York
upon consummation of the offering.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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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
Jerome A. Chazen(1).......................... 72 Director and Senior Consultant
Raymond Murphy............................... 38 Vice President--Finance
Ronald Forehand.............................. 52 Vice President--Operations
Jon Williams................................. 37 Vice President--Technology and Senior Consultant
Kenneth Byrne................................ 33 Director of Technology
Susan Mohr................................... 55 Vice President--fashionmall.com
Anne-Marie Forehand.......................... 36 Vice President--Outletmall.com
Richard C. Marcus(1)......................... 59 Director
Robert S. Taubman............................ 45 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee
Directors are elected to serve until the next annual meeting of stockholders
and until their successors have been elected and have qualified. Mr. Taubman
serves as the director designee of the preferred stockholder. Other than stock
options, non-employee directors do not currently 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. The Audit Committee has the authority to recommend annually to
the Board of Directors the engagement of our independent auditors and to review
the scope and results of the audits, our internal accounting controls, our audit
practices and the professional services furnished by the independent auditors.
BENJAMIN NARASIN has served as our Chief Executive Officer and President and
our predecessor since our inception in 1994. Prior to joining us, from 1986 to
1994, Mr. Narasin served as President for Boston Prepatory Co., an apparel
company which he still owns and at which he developed the concept of
fashionmall.com.
JEROME A. CHAZEN has served as a senior consultant and our director since
March 1999. Since 1996, Mr. Chazen has been Chairman of Chazen Capital Partners,
LLC. Mr. Chazen was a founder of Liz Claiborne, Inc., an apparel company, where
he served in various senior executive positions until his 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."
RAYMOND J. MURPHY has served as our Vice President--Finance since April
1999. Prior to joining us, from January 1996 to November 1998, Mr. Murphy served
as Chief Financial Officer of Country Road Clothing, LLC, a U.S. subsidiary of
an Australian speciality apparel retailer. In addition, from July 1989 to
January 1996, Mr. Murphy served as a Senior Manager in the Retail, Textile and
Apparel Group of the Commercial Division of Ernst & Young, LLP, an international
audit, tax and consulting firm.
RONALD FOREHAND has served as our Vice President of Operations since October
1998. Prior to joining us, 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 terminated operations upon joining us. Mr. Forehand is
Anne-Marie Forehand's husband.
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JON WILLIAMS has served as a senior consultant and our Vice
President--Technology since March 1999. Prior to joining us, from December 1996
to November 1998, Mr. Williams served as the Vice President, Technology for N2K,
Inc., a global music e-commerce company, where he developed large scale Web
sites. In addition, from July 1996 to December 1996, Mr. Williams served as
Chief Technology Officer for Interactive Imaginations, an online gaming company.
From August 1992 to July 1996, Mr. Williams was the Director of Software of
Zyware, Inc., a consulting company that created client/server travel systems.
Mr. Williams was also a founder of Zyware, Inc.
KENNETH E. BYRNE has served as our Director of Technology of the Company
since April 1999. From March 1998 to March 1999, Mr. Byrne served as a Database
Architect for KB Software, a company that developed database driven Web sites.
In addition, from November 1997 to February 1998, Mr. Byrne served as Database
Developer for The Voodoo Softworks, Ltd., a Web site development company. From
January 1997 to November 1997, Mr. Byrne served as Database/Systems
Administrator for Rhotech, a Web site development company. From December 1994 to
June 1996, Mr. Byrne served as a Project Manager for Adobe Systems, Inc. a
computer software development company. In addition, Mr. Byrne served as a QA
Engineer for Adobe Systems, Inc. from August 1992 to December 1994.
SUSAN MOHR has served as our consultant since 1995 and our Vice
President--fashionmall.com since March 1999. Prior to joining us, 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 our employee since February 1998 and
became Vice President--Outletmall.com in March 1999. Prior to joining us, 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 our consultant since February 1997 and has
served as our director since March 1999. 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, a public jewelry retail company.
ROBERT S. TAUBMAN has been the President and Chief Executive Officer of
Taubman Centers, Inc., a real estate investment trust which is a leading
developer of malls, since 1992 and has also been a director of such company
since 1992. He is also a member of the Board of Governors of the National
Association of Real Estate Investment Trusts, a director of Comerica Bank, and a
Trustee of the International Council of Shopping Centers and of the Urban Land
Institute. Mr. Taubman was a director of Woodward & Lothrop Incorporated, which
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code in January 1994. Their plan of reorganization was confirmed by the
Bankruptcy Court in December 1995.
EMPLOYMENT AND CONSULTING AGREEMENTS
We entered into a three-year employment agreement with Benjamin Narasin,
effective as of the closing date of the offering, pursuant to which Mr. Narasin
will serve as our Chief Executive Officer, President and Chairman of the Board
and will receive an annual base salary of $180,000 during each year of the
three-year term. Such base salary will be subject to additional increase and
bonuses within
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the discretion of the Board of Directors which will take into account, among
other things, our performance and the performance, duties and responsibilities
of Mr. Narasin. Mr. Narasin will receive a bonus of $40,000 if we achieve
revenues in excess of $6 million during fiscal year 1999 and an additional bonus
of $40,000 if we achieve revenues in excess of $8 million during such fiscal
year. Mr. Narasin also will receive (i) a five-year, fully-vested option to
purchase 50,000 shares of common stock at the initial offering price per share
if we achieve revenues in excess of $6 million during fiscal year 1999, (ii) a
five-year, fully-vested option to purchase an additional 50,000 shares of common
stock at the initial offering price per share if we achieve revenues in excess
of $8 million during fiscal year 1999, and (iii) a five-year, fully-vested
option to purchase an additional 100,000 shares of common stock at the initial
offering price if we achieve revenues in excess of $12.5 million during fiscal
year 1999. No more than $2 million of barter revenue may be counted towards the
cash bonus thresholds or the option bonus thresholds. The shares underlying any
such options will be subject to one-year lock-up arrangements. We will also
agree to pay for certain life insurance for the benefit of Mr. Narasin's family
and to indemnify him for up to $75,000 of tax liabilities arising from our
reorganization into a C corporation. Mr. Narasin's agreement also permits him to
devote up to 10% of his time to Boston Prepatory Co., an apparel company owned
by him, provided that the Board of Directors makes a determination that such
company is not directly competitive to us. In the event of a change of control
as defined in the agreement, Mr. Narasin may terminate the agreement and receive
three times his compensation, including bonuses earned during the previous 12
months, and his compensation for the balance of the term.
On March 2, 1999, we 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 us aggregating at least 30 hours per month. In addition, Mr. Chazen
agreed to become a director. Mr. Chazen will receive an aggregate of $150,000
over the term of the Consulting Agreement plus five-year options to purchase
135,000 shares of common stock at an exercise price of $1.11 per share and
options to purchase 107,500 shares of common stock at an exercise price of $2.50
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.
We currently do not have written employment agreements with any of our other
officers.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities paid by us to Benjamin Narasin, our Chief Executive
Officer and President during fiscal 1996, 1997 and 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.
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(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.
1999 STOCK OPTION PLAN
We intend to adopt the 1999 Stock Option Plan prior to the closing of the
offering.
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 our officers, directors,
agents, consultants and independent contractors. 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 our
employees or employees of our subsidiaries, while non-qualified options may be
issued to non-employee directors and consultants, as well as to our employees or
employees of our subsidiaries.
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, as 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 will provide for the payment of the exercise price
in cash or check or by delivery to us 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.
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Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under the 1999
Plan. To date, no options have been granted under the 1999 Plan. However, we
intend to grant to certain of our employees and consultants (i) options to
purchase an aggregate of 129,750 shares of common stock at an exercise price of
$5.00 per share, (ii) options to purchase an aggregate of 71,000 shares of
common stock at an exercise price equal to the initial public offering price per
share and (iii) options to purchase 100,000 shares of common stock at an
exercise price of $7.00 per share.
DIRECTOR COMPENSATION
We intend to grant non-employee members of the Board of Directors at the
time of the offering options to purchase 10,000 shares of common stock at the
initial offering price. We also intend to grant any individual who joins the
Board of Directors after the offering options to purchase 10,000 shares of
common stock at the fair market value at the date of grant. Options granted to
existing and future directors will vest one year after the date of grant.
In addition, we intend to grant Mr. Marcus options to purchase 20,000 shares
of common stock at an exercise price of $5.00. Mr. Marcus's options would be
exercisable immediately upon the date of their grant.
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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 us in this offering regarding the beneficial ownership of our common
stock by (i) all persons known by us to own beneficially more than 5% of our
common stock, (ii) each of our directors and executive officers and (iii) all of
our directors and executive officers as a group. The following table gives
effect to the shares of common stock that could be issued upon the exercise of
outstanding options and warrants within 60 days of April 23, 1999. Unless
otherwise indicated in the footnotes to the table, the following individuals
have sole voting and sole investment control with respect to the shares they
beneficially own, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
STOCK OWNED
AMOUNT AND NATURE OF ----------------------------------
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------------- ------------------------ ----------------- ---------------
<S> <C> <C> <C>
Benjamin Narasin(1)(2).................................. 3,420,000 shares 76.0% 45.6%
Richard A. Eisner & Company, LLP(1)(3).................. 855,000 shares 19.0% 11.4%
TRG Net Investors LLC(4)(5)............................. 824,084 shares 15.5% 9.9%
Robert S. Taubman(5).................................... 0 shares 0% 0%
FM/CCP Investment Partners, LLC(6)...................... 320,000 shares 7.0% 4.2%
Jerome Chazen(6)........................................ 441,250 shares 9.4% 5.7%
Richard Marcus(7)....................................... -- -- --
Raymond Murphy(8)....................................... -- -- --
Jon Williams(9)......................................... -- -- --
Kenneth Byrne(10)....................................... -- -- --
Ronald Forehand(11)(12)................................. -- -- --
Susan Mohr(13).......................................... -- -- --
Anne-Marie Forehand(11)(14)............................. -- -- --
Executive Officers and Directors(15)....................
as a group (ten persons) 3,861,250 shares 82.3% 50.2%
</TABLE>
- ------------------------
(1) Except as otherwise indicated, the address for the referenced stockholders
is c/o fashionmall.com, Inc., 575 Madison Avenue, New York, New York 10022.
(2) Includes 427,500 shares owned by Grant Narasin, the minor son of Mr.
Narasin. Mr. Narasin has voting power over Grant Narasin's shares until
April 9, 2018. Does not include options to purchase 100,000 shares of
common stock which we intend to grant upon the consummation of the
offering.
(3) Richard A. Eisner & Company, LLP ("RAE") is a professional limited
partnership. No individual owns 5% or more of the partnership or controls
the voting or the disposition of the shares of common stock owned by RAE.
Does not include options to purchase 40,000 shares of common stock which we
intend to grant RAE upon the consummation of the offering.
(4) Includes 824,084 shares of common stock underlying convertible preferred
stock owned by TRG Net Investors LLC which is not convertible until one
year after the offering.
(5) Does not include 924,898 shares of common stock underlying a warrant which
is not exercisable until one year after this offering. Also does not
include, as to Mr. Taubman, options to purchase 10,000 shares of common
stock which we intend to grant upon the consummation of the offering.
Robert S. Taubman is the President and Chief Executive Officer of TRG Net
Investors LLC. Mr. Taubman disclaims any beneficial ownership interest in
the shares owned or which may be acquired by TRG Net Investors LLC beyond
his indirect interest therein through his pecuniary interest in The Taubman
Realty Group Limited Partnership, which directly or indirectly owns
substantially all of TRG Net Investors LLC. The address of Robert S.
Taubman and TRG Net Investors LLC is 200 East Long Lake Road, Suite 300,
Bloomfield Hills, Michigan 48303-0200.
(6) 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 the amount of common stock owned by FM/CCP and
121,250 shares underlying options which are exercisable by Mr. Chazen upon
the consummation of the offering and excludes 121,250 shares underlying
options which are not currently exercisable and the shares beneficially
owned by FM/CCP Investment Partners, LLC.
(7) Does not include options to purchase 20,000 shares of common stock which we
intend to grant upon the consummation of the offering.
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<PAGE>
(8) Does not include options to purchase 20,000 shares of common stock which we
intend to grant upon the consummation of the offering.
(9) Does not include options to purchase 8,500 shares of common stock which we
intend to grant upon the consummation of the offering.
(10) Does not include options to purchase 25,000 shares of common stock which we
intend to grant upon the consummation of the offering.
(11) Mr. and Ms. Forehand are married.
(12) Does not include options to purchase 36,000 shares of common stock which we
intend to grant upon the consummation of the offering.
(13) Does not include options to purchase 41,000 shares of common stock which we
intend to grant upon the consummation of the offering.
(14) Does not include options to purchase 41,000 shares of common stock which we
intend to grant upon the consummation of the offering.
(15) See footnotes (2) and (5)-(14) above
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our 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. We were 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, our Chief Executive
Officer, President and Chairman of the Board, 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, and RAE contributed $100,000 for a 20%
membership interest. Narasin and RAE entered into an Amended and Restated
Limited Liability Company Agreement, dated March 1, 1999, which restated the
terms of the original limited liability company agreement and recognized Mr.
Narasin's prior transfer of a 10% membership interest to his minor son, Grant
Narasin.
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 our behalf, in addition to providing a
cash loan to us. No additional loans were incurred during the quarter ended
March 31, 1999. All of these loans are non-interest bearing. At March 31, 1999
and December 31, 1998 and 1997, the amount due to Narasin in respect of these
loans totaled $0, $0 and $82,000, respectively. At March 31, 1999, December 31,
1998 and 1997, the amount due to RAE in respect of these loans totaled $133,000,
$118,000 and $159,000, respectively. Please see "Use of Proceeds."
In addition, we will pay Mr. Narasin and RAE up to an aggregate of $100,000
to indemnify them for tax liabilities arising out of our reorganization into a C
corporation.
We sublease approximately 2,000 square feet from RAE in New York for our
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 at cost. For the quarter ended
March 31, 1999, we incurred approximately $14,000 for administrative services,
payable to RAE.
On March 2, 1999, we sold to FM/CCP Investment Partners, LLC ("FM/CCP")
225,000 shares of our common stock for $1,000,000 ($4.44 per share). In
addition, 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. 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 ($10.50 based on the
assumed $10.00 per share offering price). Mr. Chazen, one of our directors and a
senior consultant, and certain affiliates of Mr. Chazen are investors in FM/CCP
Investment Partners, LLC. Pursuant to certain anti-dilution provisions, we 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, we 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 us
aggregating at least 30 hours per month. Mr. Chazen will receive an aggregate of
$150,000 over the term of the Consulting Agreement plus, assuming an initial
public offering price of $10.00 per share, five-year options to purchase 135,000
shares of common stock at an exercise price of $1.11 per share and options to
purchase 107,500 shares of common stock at an exercise price of $2.50 per share.
The number of options may decrease if the initial public offering price is below
the contemplated range. 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 (34%) monthly over the
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<PAGE>
12-month period commencing March 2, 2000. In addition, Mr. Chazen has become one
of our directors.
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 our consent, except to certain partners or family members. In addition,
we have 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.
On April 23, 1999, TRG Net Investors LLC, an affiliate of Taubman Centers,
Inc., a real estate investment trust (REIT) which is one of the leading mall
developers in the U.S., paid $5,768,588 for shares of our convertible preferred
stock and a warrant, exercisable during the 60-day period commencing one year
after the offering, to purchase 924,898 shares of our common stock at the
initial public offering price per share. The initial investment by TRG Net
Investors LLC of $5,768,588 was based on an effective $7.00 per share purchase
price, subject to adjustment to up to $9.00 per share to reflect the initial
public offering price. Based on the assumed initial public offering price of
$10.00 per share, the investment will be increased to $7,416,756. Based on such
$10.00 per share offering price, the convertible preferred stock will have a
liquidation preference of $7,416,756 and will be convertible into 824,084 shares
of common stock, at a conversion price of $9.00 per share, for one year
beginning on the first anniversary of the closing of the offering. The exercise
price of the warrants will be equal to the initial public offering price and,
based on the assumed $10.00 per share price, will be $10.00 per share. In
connection with the transaction, Robert S. Taubman, the Chief Executive Officer
and President of Taubman Centers, joined our Board of Directors.
The holders of the convertible preferred stock have the right to elect Mr.
Taubman to the Board of Directors and, if he is deceased or disabled, to elect
another person reasonably acceptable to us. After the conversion of the
convertible preferred stock and so long as TRG Net Investors LLC beneficially
owns at least 750,000 shares of our common stock, we have agreed to use our best
efforts to cause Mr. Taubman, or, if he is deceased or disabled, another nominee
of TRG Net Investors LLC, to be nominated to our Board of Directors.
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DESCRIPTION OF SECURITIES
The following summary description of our capital stock and selected
provisions of our Certificate of Incorporation and Bylaws is a summary and is
qualified in its entirety by reference to our Certificate of Incorporation and
Bylaws.
COMMON STOCK
We are 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
of this prospectus. 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 our liquidation, dissolution or winding up, 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
We are authorized to issue up to 3,000,000 shares of preferred stock, par
value $.01 per share, of which 824,084 shares of Series A Convertible Preferred
Stock are outstanding. 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. The Series
A Convertible Preferred Stock has a liquidation preference of $7,416,756, and is
convertible at the option of the holder, in whole or in part, into 824,084
shares of common stock (an effective conversion price of $9.00 per share) at any
time during the one year period commencing one year after the closing of the
offering. No dividends may be paid on the common stock unless an equal dividend
is paid on the Series A Preferred Stock on an "as converted" basis. The holder
of the Preferred Stock has the right to elect one member to our Board of
Directors, which member shall be Robert S. Taubman, unless he is deceased or
disabled, in which case the director must be reasonably acceptable to us.
TRANSFER AGENT
American Stock Transfer and Trust Company is the Transfer Agent for our
common stock.
DIRECTORS' LIMITATION OF LIABILITY AND INDEMNIFICATION
Our 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). We
believe 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.
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Our Certificate of Incorporation provides that we will indemnify, to the
fullest extent permitted under law, each of our 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 one of our directors or officers. We are 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.
We intend to obtain a policy of insurance under which our directors and
officers 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 our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have 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
We are 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, we 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
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stock, as well as 824,084 shares of convertible preferred 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, including 824,084 shares of common stock underlying the
convertible preferred stock, would become eligible for sale in the public market
pursuant to Rule 144. The beneficial owners of 4,500,000 shares of common stock
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 our "affiliate" 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 us. After two years have elapsed from the date of the issuance of
restricted securities by us or their acquisition from an affiliate, such shares
may be sold without limitation by persons who have not been our affiliates 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 our ability to raise additional capital through the sale of its
equity securities or debt financing.
The holders of the Representatives' 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, certain stockholders holding 225,000 shares of common
stock, together with the holders of options to purchase 242,500 shares of common
stock and the holders of warrants to purchase 127,000 shares of common stock,
have certain demand and "piggyback" registration rights. Please see
"Underwriting."
If the Representatives should exercise registration rights to effect the
distribution of the securities underlying the Representatives' Warrants, they
will be unable to make an active market in our securities prior to and during
such distribution. If they cease 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 our 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 our ability to raise capital
through the sale of its equity securities. Please see "Underwriting."
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
we have agreed to sell an aggregate of 3,000,000 shares of common stock to the
Underwriters named below, for whom Gruntal and First Security Van Kasper are
acting as the Representatives, 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., L.L.C. .....................................................
First Security Van Kasper..................................................
-----------------
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
Representatives.
We have agreed to pay the Representatives a non-accountable expense
allowance equal to 1% of the gross proceeds received by us from the sale of the
3,000,000 shares of common stock offered hereby. We have 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. We have also granted to the
Representatives and their designees, for nominal consideration, warrants to
purchase 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 Representatives'
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 Representatives' 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 our
expense, at the request of the holders of a majority thereof, on no more than
one occasion, during the five-year period beginning on the first anniversary of
the date of this prospectus and "piggyback" registration rights, on no more than
one occasion, during the seven-year period beginning on the first anniversary of
the date of this prospectus.
We have 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
54
<PAGE>
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 may 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.
We have agreed to indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
Our directors and officers, and certain of our stockholders, beneficially
owning an aggregate of 4,500,000 shares of common stock prior to the offering,
together with the holder of options to purchase 242,500 shares of common stock
and the holders of warrants to purchase up to 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 Gruntal.
Prior to this offering there has been no public market for our common stock.
Accordingly, the offering price of the common stock was determined by
negotiation between us and the Representatives. Factors considered in such
negotiation, in addition to prevailing market conditions, included the history
of and prospects for the industry in which we compete, an assessment of our
management, our prospects, our 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 our assets, net worth, earnings, book
value, or other criteria of value applicable to us 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 we 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
we 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, we have agreed that, until the third
anniversary of the date of this prospectus, Gruntal may appoint an observer to
attend all meetings of the 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 our directors.
LEGAL MATTERS
The validity of the shares offered hereby and certain other legal matters
will be passed upon for us 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.
55
<PAGE>
EXPERTS
Our financial statements 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.
AVAILABLE INFORMATION
We 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 us may be inspected
at the offices of the Nasdaq National Market, 1735 K Street, NW, Washington, DC
20006.
We have 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 us and our 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.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheet as of December 31, 1998 and March 31, 1999 (unaudited)....................................... F-3
Statements of Operations for the years ended December 31, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 (unaudited)...................................................................... F-4
Statements of Changes in Members' Equity for the years ended December 31, 1997 and 1998 and for the three
months ended March 31, 1999 (unaudited).................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 (unaudited)...................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<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.
Arthur Andersen LLP
New York, New York
February 26, 1999
F-2
<PAGE>
INTERNET FASHION MALL LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 82,000 $ 1,875,000
Accounts receivable, net of allowance for doubtful accounts of $105,000 and
$136,000, respectively.................................................... 314,000 482,000
Prepaid expenses and other current assets................................... 7,000 62,000
-------- --------------
Total current assets...................................................... 403,000 2,419,000
CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $14,000 and
$22,000, respectively....................................................... 53,000 45,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $9,000 and $10,000,
respectively................................................................ 13,000 15,000
DEFERRED FINANCING COSTS...................................................... 39,000 354,000
-------- --------------
Total assets.............................................................. $ 508,000 $ 2,833,000
-------- --------------
-------- --------------
LIABILITIES AND MEMBERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses....................................... $ 221,000 $ 685,000
Amounts due to related-parties.............................................. 366,000 314,000
Customer deposits........................................................... 18,000 35,000
Deferred revenue............................................................ 45,000 41,000
-------- --------------
Total current liabilities................................................. 650,000 1,075,000
-------- --------------
LOAN PAYABLE TO RELATED-PARTY................................................. -- 986,000
-------- --------------
Total liabilities......................................................... 650,000 2,061,000
-------- --------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' (DEFICIT) EQUITY:
Members' contributed capital................................................ 411,000 1,328,000
Accumulated deficit......................................................... (553,000) (556,000)
-------- --------------
Total members' (deficit) equity........................................... (142,000) 772,000
-------- --------------
Total liabilities and members' (deficit) equity........................... $ 508,000 $ 2,833,000
-------- --------------
-------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
INTERNET FASHION MALL LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------------
1997 1998 1998 1999
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
SITE REVENUES................................................ $ 1,253,000 $ 2,055,000 $ 419,000 $ 770,000
COST AND EXPENSES:
Site development, merchandise and content.................. 150,000 270,000 41,000 102,000
Advertising and marketing.................................. 696,000 1,104,000 261,000 311,000
Selling expense............................................ 122,000 257,000 66,000 72,000
General and administrative................................. 283,000 413,000 138,000 296,000
------------ ------------ ---------- ----------
Total cost and expenses.................................. 1,251,000 2,044,000 506,000 781,000
------------ ------------ ---------- ----------
Income from operations................................... 2,000 11,000 (87,000) (11,000)
OTHER INCOME, NET............................................ 1,000 3,000 1,000 8,000
------------ ------------ ---------- ----------
Net income (loss)........................................ $ 3,000 $ 14,000 $ (86,000) $ (3,000)
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
PRO FORMA NET INCOME DATA (Unaudited):
Net income before provision for income taxes............... $ 3,000 $ 14,000 $ (86,000) $ (3,000)
Pro forma income tax provision (benefit)................... 2,000 6,000 1,000 (1,000)
------------ ------------ ---------- ----------
Pro forma net income (loss).............................. $ 1,000 $ 8,000 $ (87,000) $ (2,000)
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
PRO FORMA PER SHARE INFORMATION (Unaudited):
Basic.................................................... $ -- $ -- $ -- $ --
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Diluted.................................................. $ -- $ -- $ -- $ (0.14)
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Weighted average common shares outstanding:
Basic.................................................... 4,500,000 4,500,000 4,500,000 4,500,000
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Diluted.................................................. 4,500,000 4,500,000 4,500,000 4,500,000
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INTERNET FASHION MALL LLC
STATEMENT OF CHANGES IN MEMBERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
MEMBERS'
CONTRIBUTED ACCUMULATED TOTAL MEMBERS'
CAPITAL DEFICIT (DEFICIT)/EQUITY
------------ ------------ --------------
<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)
Unaudited:
Contribution of capital, net of related issuance costs............ 917,000 -- 917,000
Net income........................................................ -- (3,000) (3,000)
------------ ------------ --------------
BALANCE, March 31, 1999 (unaudited)................................... $ 1,328,000 $ (556,000) $ 772,000
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
INTERNET FASHION MALL LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------------- ------------------------
1997 1998 1998 1999
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 3,000 $ 14,000 $ (86,000) $ (3,000)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization.......................... 6,000 14,000 4,000 9,000
Allowance for doubtful accounts........................ 25,000 80,000 45,000 31,000
Non-cash compensation expense.......................... -- -- -- 31,000
Changes in operating assets and liabilities:
Accounts receivable.................................. (154,000) (259,000) (47,000) (199,000)
Other assets......................................... (3,000) (43,000) 3,000 (370,000)
Accounts payable and accrued expenses................ 10,000 193,000 33,000 464,000
Customer deposits.................................... 21,000 (10,000) -- 17,000
Deferred revenue..................................... 32,000 13,000 6,000 (4,000)
------------ ------------ ---------- ------------
Net cash (used in) provided by operating activities...... (60,000) 2,000 (42,000) (24,000)
------------ ------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment......... (14,000) (1,000) (3,000) (3,000)
Costs incurred to develop software....................... -- (60,000) -- --
------------ ------------ ---------- ------------
Net cash used in investing activities.................... (14,000) (61,000) (3,000) (3,000)
------------ ------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan to related-party....................... 7,000 -- -- --
Proceeds from loan payable from related-party............ 133,000 75,000 16,000 948,000
Net proceeds from capital contribution................... -- -- -- 872,000
------------ ------------ ---------- ------------
Net cash provided by financing activities................ 140,000 75,000 16,000 1,820,000
------------ ------------ ---------- ------------
Net increase (decrease) in cash.......................... 66,000 16,000 (29,000) 1,793,000
Cash and cash equivalents, beginning of the period....... -- 66,000 66,000 82,000
------------ ------------ ---------- ------------
Cash and cash equivalents, end of the period............. $ 66,000 $ 82,000 $ 37,000 $ 1,875,000
------------ ------------ ---------- ------------
------------ ------------ ---------- ------------
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 $ 61,000 $ --
Fair value of warrants issued in conjunction with loan
to related-party..................................... $ -- $ -- $ -- $ 15,000
Revenue generated from barter contracts................ $ 1,231,000 $ 1,055,000 $ 251,000 $ 348,000
Expense incurred related to barter contracts........... $ 1,231,000 $ 1,038,000 $ 236,000 $ 272,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<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"). 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, journals and websites 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 on websites, or for consulting services.
Approximately 20% 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 determined 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 equals barter expenses, however, due to
F-7
<PAGE>
INTERNET FASHION MALL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 for the years ended December 31, 1997 and
1998.
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 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.
F-8
<PAGE>
INTERNET FASHION MALL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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.
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
F-9
<PAGE>
INTERNET FASHION MALL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 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.................................................................. $ -- $ 3,000
State.................................................................... 1,000 1,000
--------- ---------
Total Income Tax Provision................................................. $ 1,000 $ 4,000
--------- ---------
--------- ---------
Deferred
Federal................................................................ $ 1,000 $ 1,000
State.................................................................. -- 1,000
--------- ---------
$ 1,000 $ 2,000
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
3. UNAUDITED PRO FORMA INFORMATION (CONTINUED)
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) (3)
--------- ---------
Total.......................................................................................... (827)% 43%
--------- ---------
--------- ---------
</TABLE>
Temporary differences are primarily due to the differences 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
investments (see Note 8, Subsequent Events--PRIVATE PLACEMENTS).
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, 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. SFAS No. 128 requires the presentation of both Basic EPS
and Diluted EPS on the face of the statements of operations.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
------------ ------------- ------------ -------------
Pro Forma Net Income (Loss) Available for Common
Shareholders--Basic................................... $ 1,000 $ 8,000 $ (87,000) $ (2,000)
Beneficial Conversion of Preferred Stock................ -- -- -- (650,000)
------------ ------------- ------------ -------------
Pro Forma Net Income (Loss) Available for Common
Shareholders--Diluted................................. $ 1,000 $ (8,000) $ (87,000) $ (652,000)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Weighted Average Common Shares Outstanding--Basic and
Diluted............................................... 4,500,000 4,500,000 4,500,000 4,500,000
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
The effect of the exercise of certain warrants and options issued are not
included as their effect on diluted earnings per share is anti-dilutive.
F-11
<PAGE>
4. MEMBERS' CAPITAL ACCOUNTS
The Company has three members (collectively, the "Members"), Benjamin
Narasin, an individual with an 70% ownership interest ("Narasin"), Grant
Narasin, the minor son of Narasin, with a 10% ownership interest, 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).
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.
F-12
<PAGE>
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company in its normal course of business is subject to certain
litigation. In the opinion of the Company's management, settlements of
litigation will not have a material adverse effect on the Company's results of
operations, financial position or cash flows.
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 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 an 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 site and certain other services and DDMC made 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
F-13
<PAGE>
8. SUBSEQUENT EVENTS (CONTINUED)
warrants in exchange for an additional $1 million (the "FM/CCP 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 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
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 paid to its placement agent $85,000, and will issue a warrant to
purchase 22,500 shares of Common Stock at an exercise price of $4.44 per share
(assuming the closing of this offering) and a warrant to purchase 9,500 shares
of Common Stock at an exercise price equal to 105% of the per share price of the
common stock in the offering ($10.50 based on the assumed $10.00 per share
offering price), 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.
9. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
(UNAUDITED)
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 an approximate initial payment of $5,769,000, 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 initial public offering, the Series B Interest will be 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 initial public offering by the Company and, based on an assumed $10.00 per
share initial public offering price, the effective conversion price of the
Preferred Stock will be $9.00 per share and the exercise price of the Warrants
will be $10.00 per share. 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.
F-14
<PAGE>
9. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
(UNAUDITED) (CONTINUED)
The Company intends to grant to certain employees, consultants and directors
options to purchase an aggregate of approximately 320,000 shares of common stock
with exercise prices between $5.00 and the price per share in the offering.
Pursuant to an employment agreement to be effective upon the closing of the
IPO, Narasin is entitled to an annual salary of $180,000, plus certain
performance-based incentive bonuses, as consideration for Narasin's future
service as President of fashionmall.com, Inc. In addition, the Company agreed to
indemnify Narasin and Eisner for up to $100,000 of tax liabilities arising from
the reorganization.
10. INTERIM INFORMATION (UNAUDITED)
Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments necessary for a fair statement of interim results
have been included in accordance with generally accepted accounting principles.
All adjustments are of a normal recurring nature. The results for interim
periods are not necessarily indicative of results to be expected for the entire
year. These financial statements and notes should be read in conjunction with
the Company's annual financial statements and the notes thereto for the fiscal
year ended December 31, 1998.
F-15
<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.............................................................. 7
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 23
Dilution.................................................................. 23
Capitalization............................................................ 24
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business.................................................................. 32
Management................................................................ 42
Principal Stockholders.................................................... 47
Certain Relationships and Related Transactions............................ 49
Description of Securities................................................. 51
Shares Eligible for Future Sale........................................... 52
Underwriting.............................................................. 54
Legal Matters............................................................. 55
Experts................................................................... 56
Available Information..................................................... 56
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
GRUNTAL & CO.
FIRST SECURITY
VAN KASPER
, 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.
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 based
on an assumed offering price of $11.00 per share (items marked with an asterisk
(*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 11,651
Legal Fees and Expenses........................................... 150,000*
Blue Sky Fees (including counsel fees)............................ 5,000*
NASD Filing Fees.................................................. 4,691
Nasdaq National Market Fee........................................ 69,375
Accounting Fees and Expenses...................................... 100,000*
Transfer Agent and Registrar Fees................................. 5,000*
Printing and Engraving Expenses................................... 70,000*
Underwriting Expense Allowance.................................... 380,000*
Miscellaneous..................................................... 4,283*
---------
Total............................................................. $ 800,000*
---------
---------
</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 Corporation, which received an $85,000
finders fee, 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 equal to 105% of the per share price of the common stock in
the offering ($10.50 based on the assumed $10.00 per share offering price), in
connection with the sale of securities to FM/CCP Investment Partners described
below.
II-1
<PAGE>
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 ($10.50 based on the assumed $10.00 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 135,000 shares of common stock at an exercise price of $1.11 per share
and options to purchase 107,500 shares of common stock at an exercise price of
$2.50 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. The
Company believes that the grant of such options was exempt under Section 3(b) of
the Securities Act and/or Rule 701 promulgated thereunder as well as Section
4(2) of the Securities Act.
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.
On April 22, 1999, TRG Net Investors LLC, an affiliate of Taubman Centers,
Inc., a real estate investment trust (REIT) which is one of the leading mall
developers in the U.S., purchased, for an initial payment of $5,768,558,
preferred limited liability company interests in Internet Fashion Mall LLC and a
warrant, exercisable during the 60-day period commencing one year after the
offering, to purchase an additional 10% preferred limited liability company
interest, unless a public offering occurred, in which case the warrant would be
exercisable for 924,898 shares of the Company's common stock at the initial
public offering price per share. If the initial public offering is consummated,
the preferred limited liability company interest would be contributed in
exchange for the Company's preferred stock which will have a liquidation
preference of $7,416,756 and will be convertible into 824,084 shares of common
stock for one year beginning on the first anniversary of the closing of the
public offering. Based on an assumed $10.00 per share initial public offering
price, the effective conversion price of the preferred stock is $9.00 per share
and the exercise price of the warrants is $10.00 per share. In connection with
the transaction, Robert S. Taubman, the Chief Executive Officer and President of
Taubman Centers, joined the Company's 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.
II-2
<PAGE>
ITEM 27. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of the Company (1)
3.2 By-laws of the Company (1)
3.3 Certificate of Designations, Preferences, and Rights of Series A Preferred Stock (2)
4.5 Warrant No. 1 issued to TRG Net Investors LLC (2)
4.1 Form of Representative's Warrant (2)
4.2 Form of Stock Certificate (2)
4.3 Warrant executed in connection with the FM/CCP Financing (1)
4.4 Promissory Note of the Company dated March 2, 1999, in principal amount of $1,000,000 (1)
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (2)
10.1 Employment Agreement effective on the completion of the offering, by and between the Company and
Benjamin Narasin (2)
10.2 Consulting Agreement dated March 2, 1999 by and between the Company and Jerome Chazen (1)
10.3 Subscription Agreement dated March 2, 1999, by and between FM/CCP Investment Partners, LLC and the
Company (1)
10.4 Subscription Agreement dated March 2, 1999, by and between Jerome Chazen and the Company (1)
10.5 Form of 1999 Stock Option Plan (1)
10.6 Unit Purchase Agreement, dated April 22, 1999, among Internet Fashion Mall LLC, fashionmall.com, Inc.
and TRG Net Investors LLC (2)
21.1 Subsidiaries of the registrant (1)
23.1 Consent of Arthur Andersen LLP (2)
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the opinion filed as Exhibit
5.1) (2)
24.1 Power of Attorney (1)
27.1 Financial Data Schedule (1)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed with this Amendment No. 1.
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;
(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
II-3
<PAGE>
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) The Registrant hereby undertakes that it will provide to the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) 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.
(d) 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 Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the New York, New York, on April 23, 1999.
<TABLE>
<S> <C> <C>
FASHIONMALL.COM, INC.
By: /s/ BENJAMIN NARASIN
-----------------------------------------
Benjamin Narasin
Chief Executive Officer and President
</TABLE>
In accordance with to the requirements of the Securities Act, this Amendment
No. 1 to the 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,
/s/ BENJAMIN NARASIN President and Chairman
- ------------------------------ of the Board of Directors April 23, 1999
Benjamin Narasin (Principal Executive
Officer)
/s/ RAYMOND J. MURPHY
- ------------------------------ (Principal Financial April 23, 1999
Raymond J. Murphy and Accounting Officer)
*
- ------------------------------ Director April 23, 1999
Richard Marcus
*
- ------------------------------ Director April 23, 1999
Jerome Chazen
- ------------------------------ Director April 23, 1999
Robert S. Taubman
</TABLE>
The foregoing constitutes a majority of the Board of Directors.
<TABLE>
<S> <C> <C> <C>
*By: /s/ BENJAMIN NARASIN
-------------------------
Benjamin Narasin
AS ATTORNEY-IN-FACT
</TABLE>
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF DESIGNATIONS,
PREFERENCES, AND RIGHTS OF
SERIES A PREFERRED STOCK
(ADOPTED BY FASHIONMALL.COM, INC.)
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES A PREFERRED STOCK
OF
FASHIONMALL.COM, INC.
Pursuant to Section 151 of the General Corporation
Law of the State of Delaware
FASHIONMALL.COM, INC., a Delaware corporation (the "CORPORATION"),
certifies that pursuant to the authority contained in Article Fourth of its
Certificate of Incorporation, and in accordance with the provisions of Section
151 of the General Corporation Law of the State of Delaware, its Board of
Directors has adopted the following resolution creating a series of its
Preferred Stock, par value $.01 per share, designated as Series A Preferred
Stock:
RESOLVED, that a series of the class of authorized Preferred Stock, par
value $.01 per share, to be known as "SERIES A PREFERRED STOCK", of the
Corporation be hereby created, and that the designation and amount thereof and
the voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
A. DESIGNATION AND AMOUNT. The shares of this series shall be designated
as "Series A Preferred Stock" (the "SERIES A PREFERRED STOCK") and the number of
shares constituting such series shall be 824,084.
B. TERMS OF SERIES A PREFERRED STOCK.
1. DIVIDENDS
The holder of each share of Series A Preferred Stock shall be entitled to
receive dividends in cash, stock or otherwise, if, when and as declared by the
Board of Directors of the Corporation, out of funds legally available for that
purpose; PROVIDED, HOWEVER, that, so long as any shares of Series A Preferred
Stock shall be outstanding, the Corporation shall not declare or pay any
dividend, or order or make any other distribution, upon any Junior Stock or
Liquidation Parity Stock (other than a dividend payable in such Junior Stock or
Liquidation Parity Stock) unless the Corporation shall first pay, or
simultaneously therewith
1
<PAGE>
declare and set apart a sum sufficient for the payment of, a dividend upon the
Series A Preferred Stock in a per share amount at least equal to the per share
amount of such dividend or other distribution upon such Junior Stock or
Liquidation Parity Stock and, in connection therewith, each share of Series A
Preferred Stock shall be deemed to be that number of shares of Common Stock into
which it is then convertible as provided in Sections 4 and 5 hereof, rounded to
the nearest whole number.
2. LIQUIDATION PREFERENCE.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
shall be distributed in the following order of priority:
The holders of Series A Preferred Stock shall be entitled to receive,
prior and in preference to any distribution to the holders of any Junior Stock
but PARI PASSU with any distribution to the holder of any Liquidation Parity
Stock, an amount per share equal to the Series A Preferred Original Issuance
Price (subject to appropriate adjustment upon the occurrence of any stock split,
stock dividend or combination of the outstanding shares of Series A Preferred
Stock) and, in addition, an amount equal to any dividends declared but unpaid on
the Series A Preferred Stock. Thereafter, the holders of Series A Preferred
Stock shall not share in any distribution. If the assets of the Corporation
available for distribution to the holders of Series A Preferred Stock shall be
insufficient to permit the payment of the full preferential amount set forth
herein, then the holders of shares of Series A Preferred Stock shall share
ratably in any distribution of the assets of the Corporation (A) as to any
Liquidation Parity Stock, in proportion to the respective liquidation
preferences of the Series A Preferred Stock and such Liquidation Parity Stock
and (B) as to the other holders of the Series A Preferred Stock, in proportion
to their respective number of shares of Series A Preferred Stock.
3. VOTING RIGHTS.
Except as may otherwise be provided by law or in the Certificate of
Incorporation or By-laws of the Corporation, the Series A Preferred Stock shall
not be entitled to vote, provided, however, that the holders of Series A
Preferred Stock shall be entitled to elect one director, which shall be Robert
S. Taubman unless Mr. Taubman is dead or disabled, in which case such director
may be a person reasonably acceptable to the Corporation's Board of Directors.
4. OPTIONAL CONVERSION.
(a) The holder of any shares of Series A Preferred Stock shall have
the right, at such holder's option, at any time or from time to time commencing
on or after the first anniversary of the IPO (as defined below) and ending at
5:00 p.m. (New York City time) on the second anniversary of the IPO (the
"Optional Conversion Period"), to convert any of such shares into such whole
number of fully paid and nonassessable shares of Common Stock as
2
<PAGE>
is equal to the quotient obtained by dividing (A) the product obtained by
multiplying the Series A Preferred Original Issuance Price by the number of
shares of Series A Preferred Stock being converted, by (B) the Series A
Preferred Conversion Price, as last adjusted and then in effect, by surrender of
the certificates representing the shares of Series A Preferred Stock so to be
converted in the manner provided in Section 4(b) hereof. The holder of any
shares of Series A Preferred Stock exercising the aforesaid right to convert
such shares into shares of Common Stock shall be entitled to payment of any
dividends declared but unpaid with respect to such shares of Series A Preferred
Stock.
(b) The holder of any shares of Series A Preferred Stock may
exercise the conversion right pursuant to Section 4(a) hereof as to any part
thereof at any time during the Optional Conversion Period by delivering to the
Corporation during regular business hours, at the principal executive office of
the Corporation or any transfer agent of the Corporation for the Series A
Preferred Stock as may be designated by the Corporation, the certificate or
certificates for the shares to be converted, duly endorsed or assigned in blank
or to the Corporation (if required by it), accompanied by written notice stating
that the holder elects to convert such shares (or so much thereof as may be
designated in such written notice) and stating the name or names (with address)
in which the certificate or certificates for the shares of Common Stock are to
be issued. Conversion shall be deemed to have been effected on the date when the
aforesaid delivery is made (the "CONVERSION DATE"). As promptly as practicable
thereafter, the Corporation shall issue and deliver to or upon the written order
of such holder, to the place designated by such holder, a certificate or
certificates for the number of full shares of Common Stock to which such holder
is entitled and a check or cash in respect of any fractional interest in a share
of Common Stock as provided in Section 4(c) hereof and a check or cash in
payment of all dividends declared but unpaid, if any (to the extent permissible
under law), with respect to the shares of Series A Preferred Stock so converted.
The person in whose name the certificate or certificates for Common Stock are to
be issued shall be deemed to have become a holder of record of Common Stock on
the applicable Conversion Date unless the transfer books of the Corporation are
closed on that date, in which event such a person shall be deemed to have become
a holder of record of Common Stock on the next succeeding date on which the
transfer books are open, but the Series A Preferred Conversion Price shall be
that in effect on the Conversion Date. Upon conversion of only a portion of the
number of shares covered by a certificate representing shares of Series A
Preferred Stock surrendered for conversion, the Corporation shall issue and
deliver to or upon the written order of the holder of the certificate so
surrendered for conversion, at the expense of the Corporation, a new certificate
covering the number of shares of Series A Preferred Stock representing the
unconverted portion of the certificate so surrendered, which new certificate
shall entitle the holder thereof to dividends on the shares of Series A
Preferred Stock represented thereby to the same extent as if the portion of the
certificate theretofore covering such unconverted shares had not been
surrendered for conversion.
(c) No fractional shares of Common Stock or scrip shall be issued
upon conversion of shares of Series A Preferred Stock. If more than one share of
Series A Preferred Stock shall be surrendered for conversion at any one time by
the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis
3
<PAGE>
of the aggregate number of shares of Series A Preferred Stock so surrendered.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series A Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fractional interest
in an amount equal to the then Current Market Price (as defined) of a share of
Common Stock multiplied by such fractional interest. Fractional interests shall
not be entitled to dividends, and the holders of fractional interests shall not
be entitled to any rights as stockholders of the Corporation in respect of such
fractional interest.
(d) The Series A Preferred Conversion Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time after the Series A Preferred Original
Issuance Date, the number of shares of Common Stock outstanding is
increased by a stock dividend payable in shares of Common Stock or
by a subdivision or split-up of shares of Common Stock, then,
following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Series A Preferred Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of Series A Preferred Stock
shall be increased in proportion to such increase in outstanding
shares.
(ii) If, at any time after the Series A Preferred Original
Issuance Date, the number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares of Common
Stock, then, following the record date for such combination, the
Series A Preferred Conversion Price shall be appropriately increased
so that the number of shares of Common Stock issuable on conversion
of each share of Series A Preferred Stock shall be decreased in
proportion to such decrease in outstanding shares.
(iii) In case, at any time after the Series A Preferred
Original Issuance Date, of any capital reorganization, or any
reclassification of the stock of the Corporation (other than a
change in par value or from par value to no par value or from no par
value to par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or the
consolidation or merger of the Corporation with or into another
Person (other than a consolidation or merger in which the
Corporation is the continuing company and which does not result in
any change in the Common Stock) or of the sale or other disposition
of all or substantially all the properties and assets of the
Corporation as an entirety to any other Person, each share of Series
A Preferred Stock shall, after such reorganization,
reclassification, consolidation, merger, sale or other disposition,
be convertible into the kind and number of shares of stock or other
securities or property of the Corporation or of the company
resulting from such consolidation or surviving such merger or to
which such properties and assets shall have been sold or otherwise
disposed to which the holder of the number of shares of Common Stock
deliverable (immediately prior to the time of such reorganization,
reclassification,
4
<PAGE>
consolidation, merger, sale or other disposition) upon conversion of
such share of Series A Preferred Stock would have been entitled upon
such reorganization, reclassification, consolidation, merger, sale
or other disposition. The provisions of this Section 4 shall
similarly apply to successive reorganizations, reclassifications,
consolidations, mergers, sales or other dispositions.
(e) Whenever the Series A Preferred Conversion Price shall be
adjusted as provided in Section 4(d) hereof, the Corporation shall forthwith
file, at the office of Corporation or any transfer agent designated by the
Corporation for the Series A Preferred Stock, a statement, signed by its Chief
Financial Officer, showing in detail the facts requiring such adjustment and the
Series A Preferred Conversion Price then in effect. The Corporation shall also
cause a copy of such statement to be sent by first-class certified mail, return
receipt requested, postage prepaid, to each holder of shares of Series A
Preferred Stock at his or its address appearing on the Corporation's records.
Where appropriate, such copy may be given in advance and may be included as part
of a notice required to be mailed under the provisions of Section 4(f) hereof.
(f) In the event the Corporation shall propose to take any action of
the types described in clauses (i), (ii) or (iii) of Section 4(d) hereof, the
Corporation shall give notice to each holder of shares of Series A Preferred
Stock, in the manner set forth in Section 4(e) above, which notice shall specify
the record date, if any, with respect to any such action and the date on which
such action is to take place. Such notice shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Series A Preferred Conversion Price and the number, kind or class of shares
or other securities or property which shall be deliverable or purchasable upon
the occurrence of such action or deliverable upon conversion of shares of Series
A Preferred Stock. In the case of any action which would require the fixing of a
record date, such notice shall be given at least ten (10) days prior to the date
so fixed, and in case of any other action, such notice shall be given at least
fifteen (15) days prior to the taking of such proposed action. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
any such action.
(g) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of Common
Stock upon conversion of any shares of Series A Preferred Stock, except for any
transfer taxes.
(h) The Corporation shall reserve, free from preemptive rights, out
of its authorized but unissued shares of Common Stock a sufficient number of
shares of Common Stock to provide for the conversion of all outstanding shares
of Series A Preferred Stock.
(i) All shares of Common Stock which may be issued in connection
with the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and nonassessable, with no personal
liability attaching to the ownership thereof, and free from all taxes, liens or
charges with respect thereto.
5. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
5
<PAGE>
(a) The term "COMMON STOCK" shall mean the Corporation's common
stock, $0.01 par value per share.
(b) The term "CURRENT MARKET PRICE" shall mean, as of the day in
question, the fair market value of a share of Common Stock on such date as
publicly quoted by NASDAQ or, if not publicly quoted, as determined in good
faith by the Board of Directors of the Corporation.
(c) The term "IPO" shall mean an initial public offering of the
Common Stock of the Corporation.
(d) The term "IPO PRICE" shall mean the initial public offering
price per share of Common Stock of the IPO.
(e) The term "JUNIOR STOCK" shall mean the Common Stock and any
class or series of capital stock of the Corporation ranking, as to payment of
dividends or distribution of assets, junior to the Series A Preferred Stock.
(f) The term "LIQUIDATION PARITY STOCK" shall mean any class or
series of capital stock of the Corporation ranking, as to distribution of
assets, PARI PASSU to the Series A Preferred Stock.
(g) The term "PERSON" shall mean any corporation, individual,
partnership, limited liability company, association, trust, joint venture,
unincorporated organization or other entity, and any government, governmental
department or agency or political subdivision thereof.
(h) The term "SERIES A PREFERRED CONVERSION PRICE" shall mean the
IPO price, as adjusted from time to time pursuant to the provisions of Section
4(d) hereof.
(i) The term "SERIES A PREFERRED ORIGINAL ISSUE DATE" shall mean the
date on which the first share of Series A Preferred Stock has been issued.
(j) The term "SERIES A PREFERRED ORIGINAL ISSUANCE PRICE" shall mean
the lesser of the IPO Price or $9.00 per share.
6
<PAGE>
IN WITNESS WHEREOF, said FASHIONMALL.COM, INC. has caused this Certificate
of Designations, Preferences and Rights of Series A Preferred Stock to be duly
executed by its President and attested to by its Secretary and has caused its
corporate seal to be affixed hereto, this day of , 1999.
FASHIONMALL.COM, INC.
By: /s/ Benjamin Narasin
------------------------------------
President
(Corporate Seal)
ATTEST:
- ------------------------
<PAGE>
Exhibit 4.1
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND,
UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
FASHIONMALL.COM, INC.
Warrant for the Purchase of Shares of Common Stock,
par value $.01 per Share
No. 1 300,000 Shares
THIS CERTIFIES that, for receipt in hand of $300.00 ($0.001 per share of
underlying Common Stock) and other value received, GRUNTAL & CO., L.L.C. (the
"HOLDER"), is entitled to subscribe for and purchase from FASHIONMALL.COM, INC.,
a Delaware corporation (the "Company'), upon the terms and conditions set forth
herein, at any time or from time to time after May __, 2000, and before 5:00
P.M. on May __, 2004, New York time (the "EXERCISE Period"), 600,000 shares of
the Company's Common Stock, par value $.01 per share ("COMMON STOCK"), at a
price of $______ per share (the "EXERCISE PRICE"). This Warrant is the warrant
or one of the warrants (collectively, including any warrants issued upon the
exercise or transfer of any such warrants in whole or in part, the "WARRANTS")
issued pursuant to the Underwriting Agreement, dated May __, 1999, between
Gruntal & Co., L.L.C., as representative of the several Underwriters named
therein, and the Company. As used herein, the term "this Warrant" shall mean and
include this Warrant and any Warrant or Warrants hereafter issued as a
consequence of the exercise or transfer of this Warrant in whole or in part.
This Warrant may not be sold, transferred, assigned or hypothecated until May
__, 2000, except that it may be transferred, in whole or in part, to (i) one or
more officers, members or employees of the Holder (or the officers, members or
employees of any such member); (ii) any other underwriting firm or member of the
selling group which participated in the public offering of Common Stock (the
"OFFERING") which commenced on May __, 1999 (or the officers, members or
employees of any such firm); (iii) a successor to the Holder, or the officers,
members or employees of such successor; (iv) a purchaser of substantially all of
the assets of the Holder; or (v) by operation of law; and the term the "Holder"
as used herein shall include any transferee to whom this Warrant has been
transferred in accordance with the above.
<PAGE>
The number of shares of Common Stock issuable upon exercise of the
Warrants (the "WARRANT SHARES") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period, as to the
whole or any lesser number of whole Warrant Shares, by the surrender of this
Warrant (with the election form at the end hereof duly executed) to the Company
at its office at 575 Madison Avenue, New York, New York 10022, or at such other
place as is 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 (the "STOCK PURCHASE PRICE").
2. (a) In lieu of the payment of the Stock Purchase Price, the Holder
shall have the right (but not the obligation), to require the Company to convert
this Warrant, in whole or in part, into shares of Common Stock (the "CONVERSION
RIGHT") as provided for in this Section 2. Upon exercise of the Conversion
Right, the Company shall deliver to the Holder (without payment by the Holder of
any of the Stock Purchase Price) that number of shares of Common Stock (the
"CONVERSION SHARES") equal to the quotient obtained by dividing (x) the value of
this Warrant (or portion thereof as to which the Conversion Right is being
exercised if the Conversion Right is being exercised in part) at the time the
Conversion Right is exercised (determined by subtracting the aggregate Stock
Purchase Price of the shares of Common Stock as to which the Conversion Right is
being exercised in effect immediately prior to the exercise of the Conversion
Right from the aggregate Current Market Price (as defined in Section 6(c)
hereof) of the shares of Common Stock as to which the Conversion Right is being
exercised immediately prior to the exercise of the Conversion Right) by (y) the
Current Market Price of one share of Common Stock immediately prior to the
exercise of the Conversion Right.
(b) The Conversion Rights provided under this Section 2 may be
exercised, in whole or in part, at any time and from time to time, while any
Warrants remain outstanding. In order to exercise the Conversion Right, the
Holder shall surrender to the Company, at its offices, this Warrant with the
Cashless Exercise Form at the end hereof duly executed. The presentation and
surrender shall be deemed a waiver of the Holder's obligation to pay all or any
portion of the aggregate purchase price payable for the shares of Common Stock
as to which such Conversion Right is being exercised. This Warrant (or so much
thereof as shall have been surrendered for conversion) shall be deemed to have
been converted immediately prior to the close of business on the day of
surrender of such Warrant for conversion in accordance with the foregoing
provisions.
3. Upon each exercise of the Holder's rights to purchase Warrant Shares or
Conversion Shares, the Holder shall be deemed to be the holder of record of the
Warrant Shares or Conversion Shares issuable upon such exercise or conversion,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing such Warrant Shares or Conversion Shares shall not
then have been actually delivered to the Holder. As soon as practicable after
each such exercise or conversion of this Warrant, the Company
-2-
<PAGE>
shall issue and deliver to the Holder a certificate or certificates for the
Warrant Shares or Conversion Shares issuable upon such exercise or conversion,
registered in the name of the Holder or its designee. If this Warrant should be
exercised or converted in part only, the Company shall, upon surrender of this
Warrant for cancellation, 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.
4. Any Warrants issued upon the transfer or exercise or conversion in part
of this Warrant shall be numbered and shall be registered in a 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 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
thereof, 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 Warrants 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 Securities Act of 1933, as amended (the "ACT"), and the rules
and regulations thereunder.
5. The Company shall at all time reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the rights to purchase all Warrant Shares and/or Conversion
Shares granted pursuant to the Warrants, such number of shares of Common Stock
as shall, from time to time, be sufficient therefor. The Company covenants that
all shares of Common Stock issuable upon exercise of this Warrant, upon receipt
by the Company of the full Exercise Price therefor, and all shares of Common
Stock issuable upon conversion of this Warrant, shall be validly issued, fully
paid and nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any preemptive rights
of stockholders, optionholders, warrantholders and any other persons and the
Holders will receive good title to the securities purchased by them,
respectively, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements and voting trusts which might be created
by acts or omissions to act of the Company.
-3-
<PAGE>
6. (a) In case the Company shall at any time after the date the Warrants
were first issued (i) declare a dividend on the outstanding Common Stock payable
in shares of its capital stock, (ii) subdivide the outstanding Common Stock into
a greater number of shares, (iii) combine the outstanding Common Stock into a
smaller number of shares, or (iv) issue any shares of its capital stock by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
corporation), then, in each case, the Exercise Price, and the number and kind of
securities issuable upon exercise or conversion of this Warrant, in effect at
the time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, shall be proportionately adjusted
so that the Holder after such time shall be entitled to receive the aggregate
number and kind of shares which, if such Warrant had been exercised or converted
immediately prior to such time, the Holder would have owned upon such exercise
or conversion and 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) In case the Company shall distribute to all holders of
Common Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash (other than any cash
dividend which, together with any cash dividends paid within the 12 months prior
to the record date for such distribution, does not (on a per share basis) exceed
5% of the Current Market Price per share of Common Stock at the record date for
such distribution) or assets (other than distributions and dividends payable in
shares of Common Stock), or rights, options, or warrants to subscribe for or
purchase Common Stock), or securities convertible into or exchangeable for
shares of Common Stock, then, in each case, the Exercise Price shall be adjusted
by multiplying the Exercise Price in effect immediately prior to the record date
for the determination of stockholders entitled to receive such distribution by a
fraction, the numerator of which shall be the Current Market Price per share of
Common Stock on such record date, less the fair market value (as determined in
good faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error) of the portion of the evidences of
indebtedness or assets so to be distributed, or of such rights, options, or
warrants or convertible or exchangeable securities, or the amount of such cash,
applicable to one share, and the denominator of which shall be such Current
Market Price per share of Common Stock. Such adjustment shall be made
successively whenever any such distribution is made, and shall become effective
on the record date for the determination of stockholders entitled to receive
such distribution.
(c) For the purpose of any computation under this Section 6, the
term "CURRENT MARKET PRICE" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices for the 30 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 (including, for
purposes hereof, the National Market System of The Nasdaq Stock Market, Inc.) on
which the Common Stock is listed or admitted to trading or, if the Common Stock
is not listed or
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<PAGE>
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.
(d) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; PROVIDED, HOWEVER, that any adjustments which by
reason of this Section 6(d) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 6 shall be made to the nearest cent or to the nearest one-thousandth of
a share, as the case may be.
(e) In any case in which this Section 6 shall require that an adjustment
in the Exercise Price be made effective as of a record date for a specified
event, the Company may elect to defer, until the occurrence of such event,
issuing to the Holder, if the Holder exercised or converted this Warrant after
such record date, the shares of Common Stock, if any, issuable upon such
exercise or conversion over and above the shares of Common Stock, if any,
issuable upon such exercise or conversion on the basis of the Exercise Price in
effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing the
Holder's right to receive such additional shares upon the occurrence of the
event requiring such adjustment.
(f) Upon each adjustment of the Exercise Price as a result of the
calculations made in Section 6(a) or 6(b) hereof, this Warrant shall thereafter
evidence the right to purchase, at the adjusted Exercise Price, that number of
shares (calculated to the nearest thousandth) obtained by dividing (i) the
product obtained in multiplying the number of shares purchasable upon exercise
of this Warrant prior to adjustment of the number of shares by the Exercise
Price in effect prior to adjustment of the Exercise Price, by (ii) the Exercise
Price in effect after such adjustment of the Exercise Price.
(g) Whenever there shall be an adjustment as provided in this Section 6,
the Company shall promptly 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 purchasable upon the exercise of this
Warrant and the Exercise Price 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 correctedness of
any such adjustment absent manifest error.
(h) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise or
conversion of this Warrant. If any fraction of a share would be issuable on the
exercise or conversion of this Warrant (or specified portions thereof) but for
the preceding sentence, the Company shall
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<PAGE>
purchase such fraction for an amount in cash equal to the same fraction of the
Current Market Price of such share of Common Stock on the date of exercise or
conversion of this Warrant.
7. (a) 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), 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
successor, leasing or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise or conversion of this Warrant solely
the kind and amount of shares of stock and other securities, property, cash, or
any combination thereof receivable upon such consolidation, merger, sale, lease,
or conveyance by a holder of the number of shares of Common Stock for which this
Warrant would have been exercisable or into which this Warrant could have been
converted immediately prior to such consolidation, merger, sale, lease or
conveyance, and (ii) make effective provision in its certificate of
incorporation or otherwise, if necessary, to effect such agreement. Such
agreement shall provide for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 6 hereof.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise or conversion of this Warrant (other than a
change in par value or from a specified par value to no 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 of Common Stock (other than a change in par value, or from a specified
par value to no 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 or
conversion 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 of Common Stock for which this Warrant would have been
exercisable or into which this Warrant could have been converted 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 6.
(c) The above provisions of this Section 7 shall similarly apply
to successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases or conveyances.
8. In case at any time the Company shall propose
(i) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution
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(other than regularly scheduled cash dividends which are not in a greater
amount per share than the most recent such dividend) to all holders of
Common Stock; or
(ii) to issue any rights, warrants or other securities to all
holders of Common Stock entitling them to purchase any additional shares
of Common Stock or any other rights, warrants or other securities; or
(iii) to effect any reclassification or change of outstanding shares
of Common Stock, or any consolidation, merger, sale, lease or conveyance
of property, described in Section 7; or
(iv) to effect any liquidation, dissolution or winding-up of the
Company; or
(v) to take any other action which would cause an adjustment to the
Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to each Holder at the
address for such Holder as it shall appear in the Warrant Register, mailed at
least 15 days prior to (i) the date as of which the holders of record of shares
of Common Stock to be entitled to receive any such dividend, distribution,
rights, warrants, other securities are to be determined, (ii) the date on which
any such reclassification, change of outstanding shares of Common Stock,
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 of Common Stock 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, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
9. The issuance of any shares or other securities upon the exercise or
conversion 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 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.
10. (a) If, at any time during the six-year period commencing upon May __,
2000, the Company shall file a registration statement (other than on Form S-4,
Form S-8 or any successor form) with the Securities and Exchange Commission (the
"COMMISSION") while any Underwriters' Securities (as hereinafter defined) are
outstanding, the Company shall give all the then holders of any Underwriters'
Securities (the "ELIGIBLE HOLDERS") at least 30
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days prior written notice of the filing of such registration statement. If
requested by any Eligible Holder in writing within 20 days after receipt of any
such notice, the Company shall, at the Company's sole expense (other than the
fees and disbursements of counsel for the Eligible Holders and the underwriting
discounts, if any, payable in respect of the Underwriters' Securities sold by
any Eligible Holder), register or qualify all or, at each Eligible Holder's
option, any portion of the Underwriters' Securities of any Eligible Holder who
shall have made such request, concurrently with the registration of such other
securities, all to the extent required to permit the public offering and sale of
the Underwriters' Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its best
efforts through its officers, directors, auditors and counsel to cause such
registration statement to become effective as promptly as practicable.
Notwithstanding the foregoing, if the managing underwriter of any such offering
shall advise the Company in writing that, in its opinion, the distribution of
all or a portion of the Underwriters' Securities requested by the Eligible
Holders to be included in the registration concurrently with the securities
being registered by the Company would materially adversely affect the
distribution of such securities by the Company for its own account, then any
Eligible Holder who shall have requested registration of his or its
Underwriters' Securities shall delay the offering and sale of such Underwriters'
Securities (or the portions thereof so designated by such managing underwriter)
for such period, not to exceed 90 days (the "DELAY PERIOD"), as the managing
underwriter shall request, provided that no such delay shall be required as to
any Underwriters' Securities if any securities of the Company are included in
such registration statement and eligible for sale during the Delay Period for
the account of any person other than the Company and any Eligible Holder unless
the securities included in such registration statement and eligible for sale
during the Delay Period for such other person shall have been reduced pro rata
to the reduction of the Underwriters' Securities which were requested to be
included and eligible for sale during the Delay Period in such registration. As
used herein, "UNDERWRITERS' SECURITIES" shall mean the Warrants and the Warrant
Shares and the Conversion Shares which, in each case, have not been previously
sold pursuant to a registration statement or Rule 144 promulgated under the Act.
(b) If, at any time during the four-year period commencing upon May __,
2000, the Company shall receive a written request, from Eligible Holders who in
the aggregate own (or upon exercise of all Warrants then outstanding would own)
a majority of the total number of shares of Common Stock then included (or upon
such exercise would be included) in the Underwriters' Securities (the "MAJORITY
HOLDERS"), to register the sale of all or part of such Underwriters' Securities,
the Company shall, as promptly as practicable, prepare and file with the
Commission a registration statement sufficient to permit the public offering and
sale of the Underwriters' Securities through the facilities of all appropriate
securities exchanges and the over-the counter market, and will use such
registration statement to become effective as promptly as practicable; PROVIDED,
HOWEVER, that the Company shall only be obligated to file one such registration
statement for which all expenses incurred in connection with such registration
(other than the fees and disbursements of counsel for the Eligible Holders and
underwriting discounts, if any, payable in respect of the Underwriters'
Securities sold by the Eligible Holders) shall be borne by the Company and one
additional such registration statement for which all such expenses shall be paid
by the Eligible Holders.
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<PAGE>
Within three business days after receiving any request contemplated by this
Section 10(b), the Company shall give written notice to all the other Eligible
Holders, advising each of them that the Company is proceeding with such
registration and offering to include therein all or any portion of any such
other Eligible Holder's Underwriters' Securities, provided that the Company
receives a written request to do so from such Eligible Holder within 20 days
after receipt by him or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions of this
Section 10, the Company shall use its best efforts to cause the Underwriters'
Securities so registered to be registered or qualified for sale under the
securities or blue sky laws of such jurisdictions as the Holder or Holders may
reasonably request; PROVIDED, HOWEVER, that the Company shall not for any such
purpose be required to (A) qualify generally to do business as a foreign
corporation in any jurisdiction wherein it is not otherwise required to be so
qualified, (B) subject itself to taxation in any jurisdiction wherein it is not
so subject or (C) consent to general service of process in any such jurisdiction
or otherwise take action that would subject it to the general jurisdiction of
the courts of any jurisdiction to which it is not so subject.
(d) The Company shall keep effective any registration or qualification
contemplated by this Section 10 and shall from time to time amend or supplement
each applicable registration statement, preliminary prospectus, final
prospectus, application, document and communication for such period of time as
shall be required to permit the Eligible Holders to complete the offer and sale
of the Underwriters' Securities covered thereby. The Company shall in no event
be required to keep any such registration or qualification in effect for a
period in excess of nine months from the date on which the Eligible Holders are
first free to sell such Underwriters' Securities.
(e) In the event of a registration pursuant to the provisions of this
Section 10, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonable request to
facilitate the disposition of the Underwriters' Securities included in such
registration.
(f) In the event of a registration pursuant to the provisions of this
Section 10, the Company shall furnish each Eligible Holder of any Underwriters'
Securities so registered with an opinion of its counsel (reasonably acceptable
to the Eligible Holders) to the effect that (i) the registration statement has
become effective under the Act and no order suspending the effectiveness of the
registration statement, preventing or suspending the use of the registration
statement, any preliminary prospectus, any final prospectus or any amendment or
supplement thereto has been issued, nor has the Commission or any securities or
blue sky authority of any jurisdiction instituted or threatened to institute any
proceedings with respect to such an order, (ii) the registration statement and
each prospectus forming a part thereof (including each preliminary prospectus),
and any amendment or supplement, thereto, complies
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as to form with the Act and the rules and regulations thereunder, and (iii) such
counsel has no knowledge of any material misstatement or omission in such
registration statement or any prospectus, as amended or supplemented. Such
opinion shall also state the jurisdictions in which the Underwriters' Securities
have been registered or qualified for sale pursuant to the provisions of Section
10(c).
(g) In the event of a registration pursuant to the provision of this
Section 10, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Underwriters'
Securities.
(h) The Company covenants and agrees that, until all the Underwriters'
Securities have been sold under a registration statement or pursuant to Rule 144
under the Act, it shall keep current in filing all reports, statements and other
materials required to be filed with the Commission to permit holders of the
Underwriters' Securities to sell such securities under Rule 144.
(i) The Company may delay any requested registration hereunder by giving
written notice to Eligible Holders who have elected to include their
Underwriters' Securities in a registration under this Section 10 if the
Company's Board of Directors determines in good faith that a registration at
such time would be materially detrimental to the Company provided that any such
delay shall not exceed ninety (90) days and the Company cannot provide this
notice more than twice in any twelve-month period.
11. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Eligible Holder, its officers, directors,
members, employees, agents and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and
against any and all loss, liability, charge, claim, damage and expense
whatsoever (which shall include, for all purposes of this Section 11, but not be
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), as and when incurred,
arising out of, based upon, or in connection with (i) any untrue statement or
alleged untrue statement of a material fact contained (A) in any registration
statement, preliminary prospectus or final prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto, relating to
the sale of any of the Underwriters' Securities, or (B) in any application or
other document or communication (in this Section 11 collectively called 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 register or qualify any of the Underwriters' Securities under the
securities or blue sky laws thereof or filed with the Commission or any
securities exchange; or
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<PAGE>
any omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to such Eligible Holder by or
on behalf of such person expressly for inclusion in any registration statement,
preliminary prospectus or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be, or (ii) any breach of any
representation, warranty, covenant or agreement of the Company contained in this
Warrant. The foregoing agreement to indemnify shall be in addition to any
liability the Company may otherwise have, including liabilities arising under
this Warrant.
If any action is brought against any Eligible Holder or any of its
officers, directors, members, employees, agents or counsel, or any controlling
persons of such person (an "INDEMNIFIED PARTY") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (provided that the failure so to notify shall not
relieve the Company from any liability pursuant to this Section 11(a), but shall
only reduce the amount of the indemnification if any to the extent that the
Company is materially prejudiced by such delay) and the Company shall promptly
assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such indemnified party or parties) and payment of
expenses. Such indemnified party or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of such action or the Company shall not have
promptly employed counsel reasonably satisfactory to such indemnified party or
parties to have charge of the defense of such action or such indemnified party
or parties shall have reasonably concluded that there may be a conflict of
interest between the indemnified party or parties and the Company in the conduct
of the defense of such action in any of which events such fees and expenses
shall be borne by the Company and the Company shall not have the right to direct
the defense of such action on behalf of the indemnified party or parties.
Anything in this Section 11 to the contrary notwithstanding, the Company shall
not be liable for any settlement of any such claim or action effected without
its written consent, which shall not be unreasonably withheld. The Company shall
not, without the prior written consent of each indemnified party that is not
released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto),
unless such settlement, compromise, consent or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees promptly to notify the Eligible Holders of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of any Underwriters'
Securities or any preliminary prospectus, prospectus, registration statement, or
amendment or supplement thereto, or any application relating to any sale of any
Underwriters' Securities.
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(b) The Holder agrees to indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who shall have signed any
registration statement covering Underwriters' Securities held by the Holder,
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to the Holder in Section 11(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus or
final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to the
Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this Section 11(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
11(a).
(c) To provide for just and equitable contribution, if (i) an indemnified
party makes a claim for indemnification pursuant to Section 11(a) or 11(b)
(subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the
Underwriters' Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities, claims,
damages and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Company and such Eligible Holders in connection with the facts which resulted in
such losses, liabilities, claims, damages and expenses. The relative fault, in
the case of an untrue statement, alleged untrue statement, omission or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement, alleged statement, omission or alleged omission. The Company and the
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not
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reflect the equitable considerations referred to in this Section 11(c). In no
case shall any Eligible Holder be responsible for a portion of the contribution
obligation imposed on all Eligible Holders in excess of its pro rata share based
on the number of shares of Common Stock owned by it (or which would be owned by
it upon exercise of all Underwriters' Securities) and included in such
registration as compared to the number of shares of Common Stock owned by it (or
which would be owned by it upon exercise of all Underwriters' Securities by all
Eligible Holders) and included in such registration. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 11(c), each person,
if any, who controls any Eligible Holder within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act and each officer, director, member,
employee, agent and counsel of each such Eligible Holder or control person shall
have the same rights to contribution as such Eligible Holder or control person
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company
who shall have signed any such registration statement, each director of the
Company, and its or their respective counsel shall have the same rights to
contribution as the Company, subject in each case to the provisions of this
Section 11(c). Anything in this Section 11(c) to the contrary notwithstanding,
no party shall be liable for contribution with respect to the settlement of any
claim or action effected without its written consent. This Section 11(c) is
intended to supersede any right to contribution under the Act, the Exchange Act
or otherwise.
12. Unless registered pursuant to the provisions of Section 10 hereof, the
Warrant Shares or Conversion Shares issued upon exercise or conversion of the
Warrants shall be subject to a stop transfer order and the certificate or
certificates evidencing such Warrant Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
ANY STATE SECURITIES LAWS AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS."
13. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Warrant of like date, tenor and denomination.
14. 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.
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15. This Warrant shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and performed within
such State, without regard to the principles thereof respecting conflicts of
law.
Dated: May __, 1999
FASHIONMALL.COM, INC.
By:
----------------------------------
- -----------------------------------
Secretary
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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 __________________ a Warrant to purchase ______ shares of Common
Stock, par value $.01 per share, of fashionmall.com, Inc. (the "Company"),
together with all right, title and interest therein, and does hereby irrevocably
constitute and appoint ________________ attorney to transfer such Warrant on the
books of the Company, with full power of substitution.
Dated:_____________________
Signature ___________________________
NOTICE
The Signature on the foregoing Assignment must correspond to the name as
written upon the fact of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
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To: fashionmall.com, Inc.
575 Madison Avenue
New York, NY 10022
ELECTION TO EXERCISE
The undersigned hereby exercises his or 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)
Address:________________________________________________________________________
__________________________________
(Signature)
-16-
<PAGE>
To: fashionmall.com, Inc.
575 Madison Avenue
New York, NY 10022
CASHLESS EXERCISE FORM
(To be executed upon conversion of the attached Warrant)
The undersigned hereby irrevocably elects to surrender its Warrant for the
number of shares of Common Stock as shall be issuable pursuant to the cashless
exercise provisions set forth in Section 2 of the within Warrant, in respect of
____ shares of Common Stock underlying the within Warrant, 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 shares shall not be all the shares exchangeable or
purchasable under 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)
Address:________________________________________________________________________
__________________________________
(Signature)
-17-
<PAGE>
Exhibit 4.2
Incorporation under the Laws of the State of Delaware
TOTAL AUTHORIZED ISSUE 38,000,000 SHARES
<TABLE>
<S> <C> <C>
35,000,000 Shares $.01 Par Value 3,000,000 Shares $.01 Par Value See Reverse for
Common Stock Preferred Stock Certain Definitions
</TABLE>
CUSIP 31186K 10 6
THIS IS TO CERTIFY THAT SPECIMEN IS THE OWNER OF
-------------------------------------
- -------------------------------------------------------------------------------
Fully Paid and Non-Assessable Shares of Common Stock of
fashionmall.com, Inc.
transferable only on the books of the Corporation by the holder thereof in
person or by a duly authorized Attorney upon surrender of this Certificate
properly endorsed.
WITNESS, the seal of the Corporation and the signatures of
its duly authorized officers.
DATED
- ------------------------------ -----------------------------------
President
<PAGE>
EXHIBIT 4.5
Warrant No. 1 Date: April 22, 1999
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.
INTERNET FASHION MALL LLC
FASHIONMALL.COM, INC.
THIS CERTIFIES that, for good and valuable consideration
received, TRG Net Investors LLC (the "HOLDER"), is entitled to subscribe for and
purchase, upon the terms and conditions set forth herein, (a) from INTERNET
FASHION MALL LLC, a Delaware limited liability company (the "LLC"), a 10%
membership interest (the "LLC INTEREST") in the LLC calculated in accordance
with Section 9 of this Warrant or, if FASHIONMALL.COM, INC., a Delaware
corporation, (the "COMPANY"), completes its initial public offering prior to
July 22, 1999 (the "IPO") (b) from the Company 924,898 shares (the "WARRANT
SHARES") of the Company's Common Stock, par value $.01 per share (the "COMMON
STOCK"). This Warrant may be exercised for the LLC Interest, if the IPO does not
occur prior to July 22, 1999, at any time after such date and prior to 5:00 p.m.
(New York City time) on the anniversary thereof and, if the IPO is completed
prior to July 22, 1999, may be exercised for the Warrant Shares at any time or
from time to time during the 60-day period (the "EXERCISE PERIOD") commencing
one year after the date, if ever, that the Company completes the IPO (such
periods, the "Exercise Periods"). At 5:00 P.M. New York City time on the last
day of the applicable Exercise Period, this Warrant shall expire (the
"EXPIRATION DATE"). This Warrant shall be void as to the Company if the IPO has
not occurred by July 22, 1999. The number of Warrant Shares shall be subject to
adjustment as provided herein. The exercise price for the LLC Interest shall be
$6,474,286 (the "LLC PRICE") and the exercise price per share of the Warrant
Shares shall equal the initial public offering price per share of the Common
Stock in the IPO, subject to adjustment as provided herein (the "EXERCISE
PRICE"). The term "Shares" as used herein shall mean the Company's shares of
Common Stock.
1. METHOD OF EXERCISE. This Warrant may be exercised at any
time during the Exercise Period and prior to the applicable Expiration Date, as
to the whole LLC Interest or any lesser portion thereof or 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 (i) the LLC (a) for the LLC Price, if for the entire LLC Interest, or
(b) for an amount equal to the portion of the LLC Interest which Holder desires
to acquire upon exercise, expressed as a percentage of the LLC Interest,
multiplied by $6,474,286, if for a portion of the LLC Interest, or (ii) the
Company in an
<PAGE>
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 for
Warrant shares, 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 and the LLC
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 and the LLC 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
or the LLC, as the case may be, 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 the LLC, as the case may be, or their duly authorized agents.
Notwithstanding the foregoing, the Company and the LLC shall have no obligation
to cause this Warrant to be transferred on its books to any person if counsel to
the Company and the LLC reasonably requests a legal opinion that such transfer
does not violate the provisions of the Act, and the rules and regulations
thereunder, unless such opinion is delivered.
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,
2
<PAGE>
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 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
3
<PAGE>
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 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
4
<PAGE>
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
(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
5
<PAGE>
property, liquidation, dissolution or winding-up. Nothing herein shall allow a
Holder to delay or prevent any of the foregoing actions nor shall failure to
provide notice affect the validity thereof.
8. 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 8 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.
9. CALCULATION OF MEMBERSHIP INTERESTS. The 10% membership
interest shall be calculated based on the membership interests of the LLC
outstanding on the date hereof (after giving effect to the exercise of this
Warrant).
10. LEGEND. Unless the sale of the Warrant Shares is
registered or exempt from registration under Rule 144(k) 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."
11. REPLACEMENT OF WARRANTS. Upon receipt of evidence
satisfactory to the Company or the LLC, as the case may be, of the loss, theft,
destruction or mutilation of any Warrant (and upon surrender of any Warrant if
mutilated), and upon reimbursement of the Company's or the LLC's, as the case
may be, reasonable incidental expenses and execution of a reasonable lost
security
6
<PAGE>
indemnification agreement, the Company or LLC, as the case may be, shall execute
and deliver to the Holder thereof a new Warrant of like date, tenor and
denomination.
12. NO RIGHTS AS STOCKHOLDER OR MEMBER. The Holder of any
Warrant shall not have, solely on account of such status, any rights of a
stockholder of the Company or a member of the LLC, either at law or in equity,
or to any notice of meetings of stockholders, or members or of any other
proceedings of the Company or the LLC, except as provided in this Warrant.
13. 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 or the LLC, 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.
14. 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.
15. HEADINGS. The Article and Section headings in this Warrant
are inserted for purposes of convenience only and shall have no substantive
effect.
16. 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.
17. ENTIRE AGREEMENT; MODIFICATION OF AGREEMENT. This Warrant
shall not be modified, supplemented or amended in any respect unless such
modification, supplement or amendment is in writing and signed by the Company
and the LLC 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 LLC Exercise Price or 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.
18. CONSENT TO JURISDICTION. The Company, the LLC 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 and the LLC each waive personal service of any summons,
complaint or other process and agrees that service thereof may be made in
accordance with Section 13 hereof.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this
instrument as of the date set forth below.
Dated: As of April 22, 1999 INTERNET FASHIONMALL LLC
--------
By: /s/ Ben Narasin
------------------------------
Name: Ben Narasin
Title: Managing Member
FASHIONMALL.COM, INC.
By: /s/ Ben Narasin
------------------------------
Name: Ben Narasin
Title: Chief Executive Officer
8
<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 interest of Internet Fashionmall
LLC (the "LLC") or __________ shares of FASHIONMALL.COM, INC. (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 LLC or the Company, as the case may be, 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 a
______ percent (___%) membership interest in the LLC or _________ 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 membership interest shall not be the entire LLC Interest or 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 LLC Interest or the
Warrant Shares, as the case may be, 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>
Exhibit 5.1
[Letterhead of Squadron, Ellenoff, Plesent & Sheinfeld, LLP]
April 23, 1999
fashionmall.com, Inc.
575 Madison Avenue
New York, New York 10022
Re: fashionmall.com, Inc.
Registration Statement on Form SB-2
Registration No. 333-74109
-----------------------------------
Ladies and Gentlemen:
You have requested our opinion, as counsel for fashionmall.com, Inc., a
Delaware corporation (the "Company"), in connection with the Registration
Statement on Form SB-2 (Registration No. 333-74109), as amended (the
"Registration Statement"), filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
The Registration Statement relates to the offering by the Company of
3,000,000 shares of common stock, par value $.01 per share, of the Company
(the "Common Stock"), and up to 450,000 shares of Common Stock to be issued
solely to cover over-allotments (collectively, the "Shares").
We have examined such records and documents and made such examinations
of law as we have deemed relevant in connection with this opinion. Based upon
such examinations, it is our opinion that when there has been compliance with
the Act and the applicable state securities laws, the Shares to be sold by
the Company, when issued, delivered and paid for in the manner described in
the form of Underwriting Agreement filed as Exhibit 1.1 to the Registration
<PAGE>
Statement, will be validly issued, and the Shares, when so issued, delivered
and paid for, will also be fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Registration Statement. In so doing, we do not admit
that we are in the category of persons whose consent is required under
Section 7 of the Act or the rule and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
/s/ Squadron, Ellenoff, Plesent & Sheinfeld, LLP
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the closing date of
the Company's pending initial public offering (the "IPO"), between
fashionmall.com, Inc., a Delaware limited liability corporation with offices at
575 Madison Avenue, New York, New York 10022 (the "Company"), and Benjamin
Narasin ("Employee").
The Company desires to engage Employee to perform services for the Company,
any present or future parent, subsidiary, or affiliate of the Company, and
(subject to Section 10) any successor or assign of any of them (the
"Corporations") and Employee desires to perform such services, on the terms and
conditions hereinafter set forth.
1. TERM
The Company desires to engage Employee, and Employee agrees to serve, on
the terms and conditions of this Agreement for a period commencing on the date
hereof, and three years after the closing date of the Company's pending IPO, or
such shorter period as may be provided for herein. The period during which
Employee is employed hereunder is hereafter referred to as the "Employment
Period."
2. DUTIES AND SERVICES
During the Employment Period, Employee shall be employed in the business of
the Company and shall serve as the Chief Executive Officer and/or President and,
subject to the provision of Section 10 hereof, shall also perform services in a
responsible executive or managerial capacity for any of the other Corporations
when and as requested by the
<PAGE>
Company. Employee agrees to his employment as described in this Section 2 and
agrees to devote all of his working time and efforts to the performance of his
duties under this Agreement, excepting disabilities, illness, and vacation time
as provided by Section 3 and 4, and the activities permitted by Section 6
hereof. In performing his duties hereunder, Employee shall be available for
reasonable travel as the needs of the business require.
3. COMPENSATION; HEALTH BENEFITS; OTHER BENEFITS; BONUSES
(a) As compensation for his services hereunder, the Company shall pay
Employee, during the Employment Period, a salary payable in equal installments
in accordance with the then prevailing practices of the Company, but in no event
less frequently than monthly, at the annual rate of $180,000 per year.
(b) Employee's salary rate shall be reviewed annually at the end of each
fiscal year by the Board of Directors. Upon such review, Employee's salary shall
be increased at least 10% and may be adjusted further upwards to such rate as
shall be considered appropriate and fixed by the Board of Directors, taking into
account economic conditions, competitive conditions within the industry, the
Company's performance and Employee's performance and salary, which increase
shall be effective no later than the following business day. Employee's salary
shall not be decreased during the Employment Period.
(c) Employee shall be entitled to participate in all group health and
insurance programs and all other fringe benefit or retirement plans or other
compensatory plans which the Company may hereafter, in its sole and absolute
discretion, elect to make available to its employees generally, provided
Employee meets the qualifications therefor,
<PAGE>
but the Company shall not be required to establish any such program or plan or
otherwise to pay any such additional compensation, except as provided in this
Section 3.
(d) Employee shall receive a bonus of $40,000 if the Company achieves
revenues in excess of $6 million ("Bonus Threshold One") during fiscal year 1999
and an additional bonus of $40,000 if the Company achieves revenues in excess of
$8 million ("Bonus Threshold Two") during such fiscal year. Thereafter, Employee
shall receive such bonus as may be determined by the Board of Directors
throughout the Employment Period.
(e) No more than $2 million of barter revenue may be counted towards the
Bonus Thresholds.
(f) For fiscal year 1999, in the event (i) the Company achieves Bonus
Threshold One then Employee shall be granted a ten year fully-vested option to
purchase 50,000 shares of Common Stock, exercisable at the per share price in
the IPO; (ii) the Company achieves Bonus Threshold Two then Employee shall be
granted a second ten year fully-vested option to purchase 50,000 shares of
Common Stock, exercisable at the per share price in the IPO; and (iii) the
Company achieves revenues in excess of $12.5 million during Fiscal Year 1999,
then Employee shall be granted a third ten year fully-vested option to purchase
100,000 shares of Common Stock, exercisable at the per share price in the IPO.
These options shall be delivered to Executive no later than 90 days after the
close of the fiscal year.
(g) Employee shall be entitled to a paid vacation of four weeks per year.
<PAGE>
(h) Employee shall be entitled to a $1,000 per month allowance for an
automobile and related expenses retroactive for all of Fiscal Year 1999.
(i) Company shall use its best efforts to obtain and, if obtained, shall
pay the premiums for one year on a $2,000,000 life insurance policy on the life
of Employee and Employee shall be entitled to designate the beneficiary of such
policy.
(j) The Company shall indemnify, on or before April 15, 2000, Employee for
any tax liability incurred as a result of the reorganization of the Company into
a C-Corporation.
4. EXPENSES
Employee shall be entitled to reimbursement for reasonable travel and
other out-of-pocket expenses necessarily incurred in the performance of his
duties hereunder, in accordance with the then regular procedures of the Company.
5. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE
Employee represents and warrants the Company that Employee is under no
contractual or other restriction or obligation which is inconsistent with the
execution of this Agreement, the performance of his duties hereunder, or the
other rights of the Company hereunder.
6. NON-COMPETITION
In view of the unique and valuable services it is expected Employee will
render to the Company, Employee's knowledge of the customers, trade secrets, and
other proprietary information relating to the business of the Company and its
customers and suppliers and similar knowledge regarding the Company it is
expected Employee will
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obtain, and in consideration of the compensation to be received hereunder,
Employee agrees that he will not during the period he is employed by the Company
under this Agreement or otherwise participate in (hereinafter defined in this
Section 6) any other business or organization, whether or not such business or
organization now is or shall then be competing with or of a nature similar to
the business of the Company, and (b) for one (1) year after he ceases to be
employed by the Company under this Agreement or otherwise, he will not compete
with or be engaged in the same business as or participate in, any other business
or organization which during such one (1) year period competes with or is
engaged in the same business as the Company, with respect to the sale of
clothing or fashion accessories through the Internet of the World Wide Web;
provided, however, that the provisions of this Section 6 will not be deemed
breached merely because Employee (i) ownership of or engaging up to 10% of his
business time in any activity relating to Boston Preparatory Company, a company
engaged in marketing clothing or (ii) owns not more than 5% of the outstanding
common stock of a corporation, if, at the time of its acquisition by Employee,
such stock is listed on a national securities exchange, is reported on NASDAQ,
or is regularly traded in the over-the-counter market by a member of a national
securities exchange. The term "participate in" shall mean: "directly or
indirectly, for his own benefit or for, with or through any other person, firm,
or corporation, own, manage, operate, control, loan money to or participate in
the ownership, management, operation, or control of or be connected as a
director, officer, employee, partner, consultant, agent, independent contractor
or otherwise with, or acquiesce in the use of his name. Employee will not
directly or indirectly employ any
<PAGE>
person who was an employee of the Company within a period of three (3) months
after such person leaves the employ of the Company. Since a breach of the
provisions of this Section 6 could not adequately be compensated by money
damages, the Company shall be entitled, in addition to any other right and
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 herewith. Employee agrees that the provisions of this Section 6 are
necessary and reasonable to protect the Company in the conduct of its business.
If any restriction contained in this Section 6 shall be deemed to be invalid,
illegal or unenforceable by reason of the extent, duration or geographical scope
thereof, or otherwise, then the court making such termination shall have the
right to reduce such extent, duration, geographical scope or other provisions
hereof, and in its reduced form such restriction shall then be enforceable in
the manner contemplated hereby. This provision shall not be enforceable in the
event the Company has materially breached any of its obligations to Employee
pursuant to this Agreement or if it terminates Employee without cause. In the
event the Company attempts to seek judicial protection to enforce its rights
pursuant to this provision and fails to be granted the relief sought for any
reason, then the Company shall be obligated to reimburse Employee his costs,
including reasonable attorney fees, in defending himself against any such
action.
7. CONFIDENTIAL INFORMATION
All confidential information which Employee may now possess, may obtain
during or after the Employment Period, or may create prior to the end of the
period he is employed by the Company under this Agreement or otherwise relating
to the business of
<PAGE>
the Company or of any customer or supplier of the Company shall not be
published, disclosed, or made accessible by him to any other person, firm, or
corporation either during or after the termination of his employment or used by
him except during the Employment Period in the business and for the benefit of
the Company, in each case without prior written permission of the Company.
Employee shall return all physical evidence of such confidential information to
the Company prior to or at the termination of his employment. As used in this
Section 7, "confidential information" shall mean any information except that
information which (i) is known publicly; (ii) is in the public domain or
hereafter enters the public domain without the fault of Employee; (iii) is known
to Employee prior to his receipt of such information from the Company, as
evidenced by written records of Employee or (iv) is hereafter disclosed to
Employee by a third party not under an obligation of confidence to the Company.
Employees obligations under this Section 7 shall survive for 12 months after
termination unless such termination was by the Company, in which case, such
obligation shall not survive such termination.
8. LIFE INSURANCE
In addition to the provisions in Section 3 of this Agreement, if requested
by the Company, Employee shall submit to such physical examinations and
otherwise take such actions and execute and deliver such documents as may be
reasonably necessary to enable the Company, at its expense and for its own
benefit, to obtain life insurance on the life of Employee. Employee has no
reason to believe that his life is not insurable with a reputable insurance
company at rates now prevailing in the City of New York for healthy men of his
age.
<PAGE>
9. TERMINATION
Notwithstanding anything contained herein, if on or after the date hereof
and prior to the end of the Employment Period, following unanimous a vote of the
Board of Directors of the Company (excluding Employee) authorizing termination
of Employee AND
(a) either:
(i) Employee shall be convicted of a crime of moral turpitude or a
felony;
(ii) Employee shall be found by a count of competent jurisdiction to
have violated his fiduciary duty to the Company; or
(iii) Employee shall breach any material term of this Agreement and
fail to correct such breach within thirty (30) days after
notice by the Company to Employee of his commission of the
same, then, in each such case, the Company shall have the right
to give notice of termination of Employee's services hereunder
as of a date (not earlier than thirty (30) days from such
notice) to be specified in such notice and this Agreement shall
terminate on the date so specified; or
(b) Employee shall die, then this Agreement shall terminate on the date of
Employee's death, whereupon Employee or his estate, as the case may be, shall be
entitled to receive his compensation at the rate then provided pursuant to
Section 3(a) for the balance of the Employment Period.
<PAGE>
(c) Employee shall experience any disability, illness or other incapacity
which prevents Employee from performing services for 60 consecutive days or 120
days within any 360 day period as contemplated herein, the obligation of the
Company to pay compensation to Employee shall be reduced to the extent of any
amount received by Employee pursuant to any disability insurance policy
maintained and paid for by the Company.
10. MERGER, CHANGE IN CONTROL, ETC.
(a) In the event of a future disposition of (or including) the properties
and business of the Company, substantially as an entirety, by merger,
consolidation, sale of assets or otherwise, then the Company shall assign this
Agreement and all of its rights and obligations hereunder to the acquiring or
surviving entity; provided that such entity shall assume in writing all of the
obligations of the Company hereunder; and provided, further, that the Company
(in the event and so long as it remains in existence) shall remain liable for
the performance of its obligations hereunder in the event of a breach by the
acquiring entity of this Agreement. Nothing herein shall affect Employee's
rights under (b) below.
(b) In the event of a Change of Control (defined below); at any time within
one year of a Change in Control, Employee shall have the right by written notice
to elect to receive compensation of three times his compensation, including
bonuses earned, during the previous 12 months prior to such Change of Control
AND the compensation provided in Section 3 of this Agreement for the balance of
the Employment Period (the "Termination Payment"). The Termination Payment,
shall be payable to Employee in quarterly payments for two years following the
date of any such election by Employee.
<PAGE>
A change in control of the Company shall occur in the event of (i) a
stockholder approved merger or acquisition of the Company in which 50% or more
of the surviving company's outstanding voting stock is held by stockholders
other than the former stockholders of the Company; (ii) the acquisition of 25%
or more of the Company's outstanding voting stock pursuant to a tender or
exchange offer which the Company's Board of Directors does not recommend the
stockholders of the Company's accept; (iii) a sale of substantially all of the
assets of the Company; or (iv) a change in the composition of the Board of
Directors of the Company (the last uncontested election of board members ceasing
to comprise a majority of the Board by reason of a contested election
constituting such change (a "Change in Control").
11. OFFSET; NO DUTY TO MITIGATE.
In the event that an amount becomes payable to Employee pursuant to
Sections 9 or 10 above, such amount shall be reduced by any outstanding amounts
owed by Employee to Company, but shall not be reduced by the amount of any
compensation of services earned by Employee from any source, whether paid
currently or deferred, "Employee" shall have no obligation to mitigate any
amounts to be paid to Employee pursuant to Section 9 or 10 above.
12. SURVIVAL
The covenants, agreements, representations and warranties contained in or
made pursuant to this Agreement shall survive Employee's termination of
employment as provided herein.
13. ENTIRE AGREEMENT: MODIFICATION
<PAGE>
This Agreement sets forth the entire understanding of the parties with
respect to the subject matter hereof, supersedes all existing agreements between
them concerning such subject matter and may be modified only by a written
instrument duly executed by each party.
14. 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, 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 13). Notice to the estate of
Employee shall be sufficient if addressed to Employee as provided in this
Section 13. Any notice or other communication given by certified mail shall be
deemed given seven days after 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.
15. WAIVER
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, signed by the party giving
such waiver.
<PAGE>
16. BINDING EFFECT
Employee's rights and obligations under this Agreement shall not be
transferable by assignment or otherwise, such rights shall not be subject to
commutation, encumbrance or the claims of Employee's creditors, and any attempt
to do any of the foregoing shall be void. The provisions of this Agreement shall
be binding upon the inure to the benefit of Employee and his heirs and personal
representatives, and shall be binding upon and inure to the benefit of the
Company and its successors and those who are its assigns under Section 10.
17. NO THIRD PARTY BENEFICIARIES
This Agreement does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement (except as
provided in Section 15).
18. HEADINGS
The headings in this Agreement are solely for the convenience of reference
and shall be given no effect in the construction or interpretation of this
Agreement.
19. REMEDY; LEGAL FEES
In the event that any term or provision of this Agreement shall be
deemed by a court of competent jurisdiction, arbitrator or mediator, as the case
may be, to be overly broad in scope, duration or area of applicability, the
court, arbitrator or mediator, as the case may be, considering the same shall
have the power and hereby is authorized and directed to modify such term or
provision to limit such scope, duration or area, or all of them, so that such
term or provision is no longer overly broad and to enforce the same as
<PAGE>
so limited. In the event of a dispute hereunder or if Employee requires counsel
related to his employment, the Company shall advance Employee amounts necessary
to cover legal fees and disbursements in connection therewith (such amounts to
be delivered within 10 days of written request therefor), subject to an
undertaking to repay such amounts if an non-applicable final adjudication is
made that Employee was not entitled thereto under applicable law.
20. COUNTERPARTS; GOVERNING LAW
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall constitute on and
the same instrument. It shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to the conflict of
laws.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
FASHIONMALL.COM, INC.
By: /s/ Benjamin Narasin
-----------------------------------
Name: Benjamin Narasin
Title: President and CEO
/s/ Benjamin Narasin
--------------------------------------
Benjamin Narasin
<PAGE>
EXHIBIT 10.6
UNIT PURCHASE AGREEMENT
THIS AGREEMENT is made as of April 22, 1999, among INTERNET FASHION MALL
LLC, a Delaware limited liability company (the "Company"), FASHIONMALL.COM., a
Delaware corporation ("FMI") and TRG Net Investors LLC, a Delaware limited
liability company (the "Purchaser").
The parties hereto agree as follows:
SECTION 1.--CLOSING.
1A. PURCHASE AND SALE OF THE SERIES B LLC INTEREST AND WARRANTS. At the
Closing, the Company shall sell to the Purchaser and, subject to the terms and
conditions set forth herein, the Purchaser shall purchase from the Company for
$5,768,588 ($7.00 per Unit), subject to adjustment as provided in Section 7A, a
9.9% Series B membership interest (the "Interest") in the LLC which is intended
to be transferred in an exchange under Section 351 of the Internal Revenue Code
for 824,084 shares of convertible preferred stock (the "Preferred Stock") of
FMI, which as set forth in the Certificate of Designations, Preferences and
Rights of the Series A Preferred Stock (a copy of which is attached as Exhibit A
hereto) is convertible into an aggregate of 824,084 shares, par value $0.01 per
share of common stock (the "Common Stock") and (b) warrants (the "Warrants") to
purchase an additional 10% membership interest in the LLC or, under certain
circumstances, 924,898 shares of Common Stock of FMI (the "LLC Interest" and the
"Warrants" collectively referred to as "Units").
1B. THE CLOSING. The closing of the purchase and sale of the Units
pursuant to paragraph 1A (the "Closing") shall take place at the offices of
Squadron, Ellenoff, Plesent & Sheinfeld, LLP, in New York, New York no later
than 11:59 p.m. on Thursday, April 22, 1999 or at such other place or on such
other date as may be mutually agreeable to the Company and the Purchaser. At the
Closing, the Purchaser, the Company and its members shall execute and deliver an
Amended and Restated Limited Liability Agreement in the form of Exhibit B hereto
(the "LLC Agreement") and the executed Warrants, registered in such Purchaser's
or its nominee's name, upon payment of the purchase price therefor by a
cashier's or certified check, or by wire transfer of immediately available funds
to the Company's account at Merrill Lynch (Account No. 885-07357).
SECTION 2.--CONDITIONS OF THE PURCHASER'S OBLIGATION AT THE CLOSING. The
obligation of the Purchaser to purchase and pay for the Units at the Closing is
subject to the representations and warranties contained in Section 5 hereof
being true and correct at and as of the Closing, except to the extent of changes
caused by the transactions expressly contemplated herein, and the performance by
the Company in all material respect of all of the covenants required to be
performed by it hereunder prior to the Closing.
SECTION 3.--BOARD SEAT
3A. If FMI completes the IPO (as defined in Section 7), so long as the
Purchaser owns at least 750,000 shares of the outstanding Common Stock of the
Company or Preferred Stock
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convertible into, or warrants exercisable for, at least 750,000 shares of such
outstanding Common Stock, the Company shall use its best efforts to cause one
person designated by Purchaser to be nominated to FMI's Board of Directors
provided that such person shall be Robert S. Taubman unless he is dead or
disabled and provided further that such obligation shall cease if such person's
membership on the Board of Directors would require any disclosure under Item
401(f) of Regulation S-K (other than set forth on Annex I hereto with respect to
Mr. Taubman) or comparable successor provisions of or under securities laws or
if such Person or his affiliates compete with the Company over the Internet.
SECTION 4.--TRANSFER OF RESTRICTED SECURITIES; LOCK-UP
4A. GENERAL PROVISIONS. The Purchaser agrees that the LLC Interest, the
Preferred Stock, the Warrants and the underlying Common Stock (collectively, the
"Securities") constitute restricted securities transferable only pursuant to (i)
registration under the Securities Act, (ii) Rule 144 or Rule 144A of the
Securities and Exchange Commission (or any similar rule or rules then in force)
if such rule is available and (iii) subject to the conditions specified in
paragraph 4B below, any other legally available means of transfer. Purchaser
also acknowledges and agrees that if FMI completes the IPO, Purchaser shall be
obligated to enter into a one-year lock-up with the underwriter of the IPO
subject to limited rights of resale to protect its status as a real estate
investment trust.
4B. OPINION DELIVERY. In connection with the transfer of any Securities
(other than a transfer described in Section 4A(i) or (ii) above), the holder
thereof shall deliver written notice to the Company or FMI, as the case may be,
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of Miro Weiner & Kramer or other counsel which (to the Company's or
FMI's reasonable satisfaction) is knowledgeable in securities law matters to the
effect that such transfer of Securities may be effected without registration of
such Securities under the Securities Act. In addition, if the holder of the
Securities delivers to the Company or FMI, as the case may be, an opinion of
Miro Weiner & Kramer or such other counsel that no subsequent transfer of such
Securities shall require registration under the Securities Act and has delivered
the original certificate or certificates representing such Securities to the
Company or FMI, as the case may be, the Company or FMI, as the case may be,
shall promptly upon such contemplated transfer deliver new certificates for such
Securities which do not bear the Securities Act legend set forth in Section 6.
If the Company or FMI, as the case may be, is not required to deliver new
certificates for such Securities not bearing such legend, the holder thereof
shall not transfer the same until the prospective transferee has confirmed to
the Company or FMI, as the case may be, in writing its agreement to be bound by
the conditions contained in this Section paragraph and Section 6. After such
confirmation and any required opinion has been given, the Company or FMI, as the
case may be, shall permit the transfer to occur.
4C. RULE 144A. Upon the request of the Purchaser, the Company or FMI, as
the case may be, shall promptly supply to such Purchaser or its prospective
transferees, at such Purchaser's cost, all information regarding the Company or
FMI, as the case may be, required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
4D. LEGEND REMOVAL. If any Securities become eligible for sale pursuant to
Rule 144(k), the Company or FMI, as the case may be, shall, upon the request of
the holder of such Securities and receipt of evidence sufficient in the
reasonable judgment of the Company's or FMI, as the case may
2
<PAGE>
be, counsel that the Securities are so eligible, remove the legend set forth in
Section 6 from the certificates for such Securities.
SECTION 5.--REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
and FMI hereby represent and warrant to the Purchaser that:
5A. ORGANIZATION, CORPORATE POWER AND LICENSES. FMI is a corporation and
the Company is a limited liability company, in each case duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, as the case may be, and is qualified to do
business in every jurisdiction in which the failure to so qualify has had or
would reasonably be expected to have a material adverse effect on the financial
condition, operating results, assets, operations or business prospects of the
Company or FMI and its Subsidiaries taken as a whole. FMI possesses all
requisite corporate power and authority and FMI (if the IPO occurs) and the
Company each possess all material licenses, permits and authorizations necessary
to own and operate their properties, to carry on their businesses as now
conducted and presently proposed to be conducted and to carry out the
transactions contemplated by this Agreement.
5B. CAPITAL STOCK AND RELATED MATTERS. Immediately prior to the closing of
the IPO, the authorized capital stock of FMI shall consist of (a) 3,000,000
shares of preferred stock, of which no shares shall be outstanding and (b)
35,000,000 shares of Common Stock, of which no shares are issued and
outstanding. At the closing of the IPO, it is currently contemplated that there
will be 7,500,000 shares of Common Stock outstanding.
5C. AUTHORIZATION: NO BREACH. The execution, delivery and performance of
this Agreement, the Warrants, the LLC Agreement and all other agreements
contemplated hereby to which the Company or FMI is a party, have been duly
authorized by the Company and FMI. Assuming the due and valid execution by the
other parties thereto, this Agreement, the Warrants, the LLC Agreement and all
other agreements contemplated hereby to which the Company and FMI is a party
each constitutes a valid and binding obligation of the Company or FMI, as the
case may be, enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar
laws, and to general principles of equity (whether considered in proceedings at
law or in equity). The execution and delivery by the Company and FMI of this
Agreement, the Warrants, the LLC Agreement and all other agreements contemplated
hereby to which the Company or FMI is a party, the offering, sale and issuance
of the LLC Interest, the Preferred Stock and the Warrants and the fulfillment of
and compliance with the respective terms hereof and thereof by the Company or
FMI, as the case may be, do not and shall not (i) conflict with or result in a
breach of the terms, conditions or provisions of, (ii) constitute a default
under, (iii) result in the creation of any lien, security interest, charge or
encumbrance upon the Company's or FMI's equity securities or assets pursuant to,
(iv) give any third party the right to modify, terminate or accelerate any
obligation under, (v) result in a violation of, or (vi), require any
authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency pursuant to, the charter or bylaws of FMI, the membership agreement of
the Company or any law, statute, rule or regulation to which the Company or FMI
is subject, or any agreement, instrument, order, judgment or decree to which the
Company or FMI is subject.
5D. GOVERNMENTAL CONSENT, ETC. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the
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execution, delivery and performance by the Company or FMI of this Agreement, the
Warrants, the LLC Agreement or the other agreements contemplated hereby, or the
consummation by the Company or FMI of any other transactions contemplated hereby
or thereby, except as expressly contemplated herein or therein.
SECTION 6.--REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchaser represents and warrants to the Company or FMI the following:
(i) The Purchaser hereby represents and warrants that it is
acquiring the Units purchased hereunder or acquired pursuant hereto for
its own account with the present intention of holding such securities for
purposes of investment, and that it has no intention of selling such
securities in a public distribution in violation of the federal securities
laws or any applicable state securities laws; provided that nothing
contained herein shall prevent the Purchaser and subsequent holders of the
LLC Interest, Preferred Stock and Warrants from transferring such
securities in compliance with the provisions of Section 4 hereof. Each
certificate or instrument representing the LLC Interest, Preferred Stock
or Warrants shall be imprinted with a legend in substantially the
following form:
"The securities represented by this certificate were
originally issued on ________ __, 1999, and have not been
registered under the Securities Act . The transfer of the
securities represented by this certificate is subject to the
conditions specified in the Unit Purchase Agreement, dated as
of ______ __, 1999 and as amended and modified from time to
time, between the issuer (the "Company") and the Purchaser,
and the Company reserves the right to refuse the transfer of
such securities until such conditions have been fulfilled with
respect to such transfer. A copy of such conditions shall be
furnished by the Company to the holder hereof upon written
request and without charge."
Certificates representing the Common Stock underlying the Preferred Stock or
Warrants shall be imprinted with a substantially similar legend.
(ii) The Purchaser represents and warrants that it is an "accredited
investor" as that term is defined in Regulation D promulgated under the
Securities Act. The Purchaser acknowledges that it has been given the
opportunity to ask questions and receive satisfactory answers concerning
the Company and FMI, and the terms and conditions of the LLC Interest,
Preferred Stock or Warrants and obtain additional information in order to
evaluate the merits and risks of an investment in the LLC Interest, the
Preferred Stock and Warrants and to verify the accuracy of the information
contained in this Agreement. The Purchaser represents and warrants that it
is a sophisticated investor with such knowledge and experience in business
and financial matters as will enable the Purchaser to evaluate the merits
and risks of investment in the LLC Interest, the Preferred Stock and
Warrants and is able to bear the economic risks and lack of liquidity of
an investment in the LLC Interest, the Preferred Stock and Warrants.
SECTION 7.--ADJUSTMENT OF PRICE, RECONFIRMATION AND NOTICE.
7A. ADJUSTMENT. If FMI consummates an initial public offering of its
Common Stock prior to July 22, 1999 (such offering consummated prior to such
date (the "IPO") at a price (the "IPO Price") per share in excess of $7.00, the
price of the Units shall be adjusted to the lesser of (i) $9.00
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<PAGE>
per Unit and (ii) the IPO Price. If the IPO price is less than $7.00, the price
of the Units shall be adjusted to the IPO price. In either case, the adjustment
shall take place as provided in Section 3.1 and 3.4 of the LLC Agreement.
Purchaser and the Company, as the case may be, each agree to pay any amounts
payable pursuant to the two preceding sentences immediately prior to the closing
of the IPO. Purchaser also agrees to execute and deliver to FMI, on or prior to
such closing date, a letter acknowledging that Purchaser has carefully reviewed
the Final Prospectus relating to the IPO and reconfirms its investment in the
Company and FMI.
7B. NOTICE OF REPURCHASES. If, at any time after the IPO, FMI proposes to
repurchase any of its Common Stock and if it reasonably believes, based on
information provided by Purchaser as to its ownership of FMI Common Stock that
such repurchase would cause Purchaser's ownership to exceed 10% of the
outstanding Common Stock of FMI, FMI will give Purchaser at least 10 business
days written notice of such repurchase.
SECTION 8.--MISCELLANEOUS.
8A. CONSENT TO AMENDMENTS. Except as otherwise expressly provided herein,
the provisions of this Agreement may be amended only if the Company, FMI and the
Purchaser have amended this Agreement in writing. No other course of dealing
between the Company, FMI and the Purchaser or any delay in exercising any rights
hereunder shall operate as a waiver of any rights of the Company, FMI or the
Purchaser.
8B. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by either
party without the other's written consent except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not.
8C. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
8D. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts taken together shall constitute one and the
same Agreement.
8E. DESCRIPTIVE HEADINGS: INTERPRETATION. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a substantive
part of this Agreement. The use of the word "including" in this Agreement shall
be by way of example rather than by limitation.
8F. GOVERNING LAW. The limited liability company law and the corporate law
of the State of Delaware shall govern all issues and questions concerning the
relative rights and obligations of the Company and its members and FMI and its
stockholders. All other issues and questions concerning the construction,
validity, enforcement and interpretation of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of New York, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of New York or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York. In furtherance of the
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foregoing, the internal law of the State of New York shall control the
interpretation and construction of this Agreement (and all schedules and
exhibits hereto), even though under that jurisdiction's choice of law or
conflict of law analysis, the substantive law of some other jurisdiction would
ordinarily apply.
8G. NOTICES. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid or sent to the recipient by facsimile.
Such notices, demands and other communications shall be sent to the offices of
the Company or FMI at 575 Madison Avenue, New York, New York 10022, Attention:
Ben Narasin, with a copy to Squadron, Ellenoff, Plesent & Sheinfeld, LLP,
Attention: Kenneth R. Koch, Esq., at 551 Fifth Avenue, New York, New York 10176
and to the Purchaser at the address indicated below:
TRG Net Investors LLC
200 East Long Lake Road, Suite 300
Bloomfield Hills, Michigan 48303-0200
Attn: Robert S. Taubman
WITH A COPY TO:
Miro Weiner & Kramer
500 North Woodward Avenue, Suite 100
P.O. Box 808
Bloomfield Hills, Michigan 48303-0908
Attn: Kenneth H. Gold, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
8H. NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the parties hereto and their
respective successors and permitted assigns.
8I. BROKERAGE. Each party represents and warrants to the other that there
are no claims for brokerage commissions, finders' fees or similar compensation
in connection with the transactions contemplated by this Agreement based on any
arrangement or agreement binding upon such party and each indemnifies the other
against any breach of the foregoing.
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IN WITNESS WHEREOF, the parties hereto have executed this Unit Purchase
Agreement on the date first written above.
INTERNET FASHION MALL LLC
By: /s/ Ben Narasin
----------------------------------
Name: Ben Narasin
Title: President and Managing
Member
FASHIONMALL.COM, INC.
By: /s/ Ben Narasin
----------------------------------
Name: Ben Narasin
Title: President and CEO
TRG NET INVESTORS LLC
By: /s/ Lisa A. Payne
----------------------------------
Name: Lisa A. Payne
Title: Executive Vice President
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Internet Fashion Mall LLC
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
New York, New York
April 22, 1999
