<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1999
REGISTRATION NO. 333-74109
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
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 Industrial Classification Code Identification No.)
organization) 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. / /
--------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 MAY 19, 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 $10.00 and $12.00 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., L.L.C. FIRST SECURITY VAN KASPER
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
[ARTWORK APPEARS HERE]
[PICTURES OF THE FASHIONMALL.COM HOME PAGE]
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 United States, effectively purchased, for $7,416,756, shares
of our convertible preferred stock and a warrant (the "Taubman Financing"). The
warrant is exercisable during the 60-day period commencing one year after the
3
<PAGE>
offering to purchase 924,898 shares of our common stock at the initial public
offering price per share. The preferred stock is convertible into 824,084 shares
of common stock for one year beginning on the first anniversary of the closing
of the offering and, based on an assumed $11.00 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 $11.00 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 $2.75 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 ($11.55 based on the assumed $11.00 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 approximately 330,000 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 or 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 ($11.55 based on the assumed $11.00 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..... 44,000 140,000 283,000 413,000 138,000 332,000
----------- ----------- ----------- --------- --------- ---------
148,000 670,000 1,251,000 2,044,000 506,000 817,000
----------- ----------- ----------- --------- --------- ---------
(Loss) income from operations.......... (134,000) (451,000) 2,000 11,000 (87,000) (47,000)
Other income........................... -- -- 1,000 3,000 1,000 8,000
----------- ----------- ----------- --------- --------- ---------
Net (loss) income--historical.......... $(134,000) $(451,000) $ 3,000 $ 14,000 $ (86,000) $ (39,000)
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
Pro forma net (loss) income (2)........ $(134,000) $(451,000) $ 1,000 $ 8,000 $ (87,000) $ (22,000)
Pro forma basic net (loss) income per
share (2)............................ (0.03) (0.10) * * (0.02) *
Pro forma diluted net (loss) income per
share (2)............................ (0.03) (0.10) * * (0.02) *
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 $38,073,000
Working
(deficiency)
capital........ (99,000) (18,000) 117,000 (247,000) 48,000 1,344,000 7,113,000 38,116,000
Total assets..... -- 74,000 274,000 508,000 191,000 3,489,000 9,258,000 38,676,000
Total
liabilities.... 99,000 294,000 491,000 650,000 126,000 2,018,000 2,018,000 661,000
Members'
(deficit)
equity/stockholders'
equity......... (99,000) (220,000) (217,000) (142,000) (303,000) 1,471,000 7,240,000 38,015,000
</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
closing, 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 (loss) income 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
$11.00 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 $1,471,000. 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
9
<PAGE>
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 for
the foreseeable future to generate a significant portion of our revenues from
advertising in the form of tenant fees. 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
10
<PAGE>
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
11
<PAGE>
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
12
<PAGE>
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.
13
<PAGE>
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
14
<PAGE>
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 more slowly
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.
15
<PAGE>
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
16
<PAGE>
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.
17
<PAGE>
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" names. 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 $6.89 in the book
value per share of the common stock from the assumed $11.00 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 $29,840,000, ($34,444,000 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 $11.00 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 14%
Hiring Personnel(2)............................................. 3,700,000 12%
Equipment and Software Purchases and Upgrades(3)................ 1,600,000 5%
Repayment of Debt(4)............................................ 1,000,000 3%
Payment of Deferred Salaries to Management and Repayment of
Loans from Stockholders(5).................................... 314,000 1%
General Corporate and Working Capital Purposes(6)............... 19,026,000 65%
------------- ---
$ 29,840,000 100%
------------- ---
------------- ---
</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 $6,185,000, 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 $11.00 per share, would have been $37,970,000,
or $4.11 per share. This represents an immediate increase in the pro forma net
tangible book value of $3.00 per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $6.89 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............. $ 11.00
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.......................................... 3.00
---------
Pro forma net tangible book value per share after the
offering.................................................. 4.11
---------
Dilution per share to new investors......................... $ 6.89
---------
---------
</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
$11.00 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)(5)
----------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Amounts due to related parties................ $ 314,000 $ 314,000 $ 314,000 $ --
Long-term obligations:
6% notes payable(6)......................... 943,000 943,000 943,000 --
Stockholders' equity:
Warrant to purchase 924,898 shares common
stock, at fair value.................... -- -- 2,867,000 2,867,000
Preferred Stock--3,000,000 shares
authorized; 0, 0,
824,084 and 824,084 shares issued and
outstanding, respectively............... -- -- -- 35,000
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(7)............. -- -- 4,328,000 36,656,000
Members' contributed capital.............. 2,063,000 7,832,000 -- --
Accumulated deficit....................... (592,000) (592,000) -- (1,618,000)
----------- -------------- ----------------- ----------------
Total stockholders' equity.................. 1,471,000 7,240,000 7,240,000 38,015,000
----------- -------------- ----------------- ----------------
Total capitalization...................... $ 2,414,000 $ 8,183,000 $ 8,183,000 $ 38,015,000
----------- -------------- ----------------- ----------------
----------- -------------- ----------------- ----------------
</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) Gives effect to (i) the additional payment made to us as part of the Taubman
Financing, (ii) recognition of the fair value of warrants of $57,000 issued
in conjunction with notes payable, (iii) write-off of the related deferred
financing costs of $657,000 upon repayment of the notes payable out of the
net proceeds of the initial public offering and (iv) recognition of $905,000
consulting expense related to options issued to Jerome Chazen.
(6) Net of the fair value of warrants of $57,000 issued in conjunction with
notes payable.
(7) 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...... 44,000 140,000 283,000 413,000 138,000 332,000
----------- ----------- --------- --------- --------- ---------
148,000 670,000 1,251,000 2,044,000 506,000 817,000
----------- ----------- --------- --------- --------- ---------
(Loss) income from operations........... (134,000) (451,000) 2,000 11,000 (87,000) (47,000)
Other income............................ -- -- 1,000 3,000 1,000 8,000
----------- ----------- --------- --------- --------- ---------
Net (loss) income--historical........... $(134,000) $(451,000) $ 3,000 $ 14,000 $ (86,000) $ (39,000)
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
Pro forma net (loss) income(2).......... $(134,000) $(451,000) $ 1,000 $ 8,000 $ (87,000) $ (22,000)
Pro forma basic net (loss) income
per share(2).......................... (0.03) (0.10) * * (0.02) *
Pro forma diluted net (loss) income
per share(2).......................... (0.03) (0.10) * * (0.02) *
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 $38,073,000
Working
(deficiency)
capital....... (99,000) (18,000) 117,000 (247,000) 48,000 1,344,000 7,113,000 38,116,000
Total assets.... -- 74,000 274,000 508,000 191,000 3,489,000 9,258,000 38,676,000
Total
liabilities... 99,000 294,000 491,000 650,000 126,000 2,018,000 2,018,000 661,000
Members'
(deficit)
equity/stockholders'
equity........ (99,000) (220,000) (217,000) (142,000) (303,000) 1,471,000 7,240,000 38,015,000
</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
closing, 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 (loss) income 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
$11.00 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 $592,000 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 $1,471,000 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 $7,240,000. 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. Upon the
closing of the offering, we will incur a non-cash charge recorded as deferred
financing costs of $657,000 recorded in connection with the FM/CCP Financing. We
will also incur a non-cash charge to earnings per common share amortized over
one year 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
26
<PAGE>
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 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 $817,000 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 our site.
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 $194,000, or 141%, to $332,000 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
27
<PAGE>
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.
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.
28
<PAGE>
EXPENSES. Total expenses of the business increased from $670,000 in 1996 to
$1,251,000 in 1997. The increase was due to additions to the sales staff and
barter advertising, as well as increased selling expenses and general and
administrative expenses.
SITE DEVELOPMENT, MERCHANDISE AND CONTENT. Site development, merchandise
and content expenses decreased by $27,000, or 15%, to $150,000 in 1997, compared
to $177,000 in 1996. The decrease was primarily due to reduced costs of
programming and site administration through increased utilization of dedicated
staff and reduced reliance on outside contractors.
ADVERTISING AND MARKETING. Advertising and marketing expenses increased by
$445,000, or 177%, to $696,000 in 1997, compared to $251,000 in 1996. The
increase was primarily related to increased print advertising on behalf of the
fashionmall.com brand and some online advertising programs.
SELLING EXPENSES. Selling expenses increased by $20,000, or 20%, to
$122,000 in 1997, compared to $102,000 in 1996. The increase was primarily due
to increased payroll and freelance salaries for sales staff.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $143,000, or 102%, to $283,000 in 1997, compared to $140,000 in
1996. The increase was primarily due to increased payroll and professional fees.
LIQUIDITY AND CAPITAL RESOURCES
From inception, we have financed 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."
29
<PAGE>
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.
We believe that the net proceeds from the 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. This is only an estimate by us and we cannot assure you that
Year 2000 compliance costs will not exceed this estimate. Recent experience of
other companies has shown that actual expenses can exceed estimates. In
addition, such upgrades and replacements may not be completed on schedule 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 use Paymentech's
Cybercash to process our credit card transactions. We recently received an
upgrade of such software from Paymentech which we have been advised should be
Year 2000 compliant. We are in the process of seeking verification from our
other 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. As a relatively small company with little leverage, we have not
had much success in obtaining responses.
30
<PAGE>
In the event that 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.
Although we are currently assessing potential contingency plans, we have
developed no contingency plans to address the worst-case scenario that might
occur if Year 2000 issues make the Internet or our Web sites unavailable. In
such case, our dependence on the widespread and unrelated entities which
maintain the Internet's infrastructure makes it impossible to develop or
implement an adequate contingency plan and, accordingly, we do not plan to
develop one. With respect to other scenarios involving interruptions in sources
of merchandise or other goods or services, we have developed contingency plans
which principally depend on alternative suppliers. We have developed, and will
continue to add to, a list of such alternative providers. We have multiple
sources of merchandise and could more readily replace interruptions in
merchandise supplies than interruptions affecting credit card processing or
fulfillment. In any event, we cannot assure you that there will be adequate
alternative sources.
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
31
<PAGE>
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.
32
<PAGE>
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.
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 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.
33
<PAGE>
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 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.
34
<PAGE>
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 percentage of certain commissions earned by
fashionmall.com. The agreement is scheduled to terminate on July 6, 1999.
The Company also has a content licensing agreement with Yahoo! effective as
of March 1, 1998 for the placement of our site within the Yahoo! site to give
our site access to Yahoo!'s visitor base. In addition, we have agreements with
Inktomi and several other high traffic Web sites. Such agreements are generally
for one-year or less with automatic renewal provisions.
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 the 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 the offering.
fashionmall.com is the home to, or provider of traffic for, tenants
representing a variety of fashion/ apparel companies. Types of tenants include:
(i) manufacturers, (ii) retailers, (iii) catalogs and (iv) magazines, including
such recent additions as Brooks Brothers, dELiA*s, Skechers and Steve Madden,
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.
35
<PAGE>
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 a significant focus for us, 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"
promotion, or through sponsorships of specific areas of the site, such as 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. These pricing models are (i) fashionmall.com as an intermediary in which
the
36
<PAGE>
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 in September 1998 on a pilot basis, is in an
early stage of development, and consequently, we have conducted limited
promotion of the site. From inception through March 31, 1999, we have generated
revenues of approximately $28,000 from Outletmall.com. 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 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
37
<PAGE>
the Internet to identify a mailing group for the print version. The letter of
intent contemplates that Diplomat will fund the joint venture with an initial
contribution of $500,000, and that 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 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
38
<PAGE>
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."
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 the offering for our distribution activities.
39
<PAGE>
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.
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. 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.
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."
40
<PAGE>
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, 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. 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.
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. 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. 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.
41
<PAGE>
MANAGEMENT
Our current executive officers and directors are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Benjamin Narasin............................. 33 Chairman of the Board, Chief Executive Officer and President
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
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 Chairman of the Board, 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 one of our directors
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 when Mr. Forehand joined us. Mr.
Forehand is Anne-Marie Forehand's husband.
42
<PAGE>
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.
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 consulting 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 one of our directors 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 served as one of our directors since April 1999. Mr.
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 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 ten-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
43
<PAGE>
1999, (ii) a ten-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 ten-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 and his minor son, Grant
Narasin, for 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 $2.75
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 was paid in March 1999.
(3) $82,500 of such salary was deferred and $3,500 was paid in March 1999. The
remaining $79,000 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.
44
<PAGE>
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.
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
45
<PAGE>
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. Mr. Narasin's employment agreement also contemplates
the grant of additional options.
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.
46
<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 the date of this prospectus.
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(1) BENEFICIAL OWNERSHIP BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------------- ------------------------ ----------------- ---------------
<S> <C> <C> <C>
Benjamin Narasin(2)..................................... 3,420,000 shares 76.0% 45.6%
Richard A. Eisner & Company, LLP(3)..................... 855,000 shares 19.0% 11.4%
TRG Net Investors LLC(4)................................ 824,084 shares 15.5% 9.9%
Robert S. Taubman(4)(5)................................. 824,084 shares 15.5% 9.9%
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)......................................... -- -- --
Ronald Forehand(10)(11)................................. -- -- --
Susan Mohr(12).......................................... -- -- --
Anne-Marie Forehand(10)(13)............................. -- -- --
Executive Officers and Directors(14)....................
as a group (nine 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. Richard A. Eisner and Theodore Levine, managing partners of
RAE, control the voting and 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 to 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. Does not include 924,898 shares of common stock
underlying a warrant which is not exercisable until one year after this
offering. TRG Net Investors LLC is owned (i) 75% by The Taubman Realty
Group Limited Partnership ("TRG LP") and (ii) 25% by Taubman Net LLC, which
is the Managing Member of TRG Net Investors LLC and which is owned 100% by
The Taubman Company Limited Partnership, a shopping mall property manager
which is 99% directly and indirectly owned by TRG LP. Consequently, TRG LP
owns directly or indirectly over 99% of TRG Net Investors LLC. In turn,
Taubman Centers, Inc., a public real estate investment trust, is the
Managing General Partner of and owns 62.8% of TRG LP.
(5) Does not include 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 TRG LP, 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
47
<PAGE>
upon exercise of such warrants and the options owned by Mr. Chazen referred
to below. The amount shown as owned by Mr. Chazen includes common stock
beneficially 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.
(7) Does not include options to purchase 20,000 shares of common stock which we
intend to grant upon the consummation of the offering.
(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) Mr. and Ms. Forehand are married.
(11) Does not include options to purchase 36,000 shares of common stock which we
intend to grant upon the consummation of the offering.
(12) Does not include options to purchase 41,000 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) See footnotes (2) and (5)-(13) above
48
<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 indemnify Mr. Narasin, Grant Narasin and RAE for tax
liabilities arising out of our reorganization into a C corporation. It is
expected that the aggregate amount of such indemnification payments will not
exceed $100,000.
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. Such administrative
services shall terminate upon the consummation of the offering. 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 ($11.55 based on the
assumed $11.00 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 $11.00 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 $2.75 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
49
<PAGE>
offering, (ii) an additional 16% on March 2, 2000 and (iii) the balance (34%)
monthly over the 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 United States, 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
$11.00 per share, the investment will be increased to $7,416,756. Based on such
$11.00 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 $11.00 per share price, will be $11.00 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.
50
<PAGE>
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.
51
<PAGE>
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
52
<PAGE>
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. Within 90 days after consummation of the offering, an
aggregate of 4,275,000 shares of such restricted common stock may be eligible
for sale under Rule 144 subject to the lock-up agreement described below. An
aggregate of 225,000 shares of such restricted common stock may be eligible for
sale under Rule 144 in March 2000 and 824,084 shares of common stock underlying
the convertible preferred stock may be eligible for sale under Rule 144 in April
2000. 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 Gruntal.
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 four-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 six-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.
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 Sheets 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' (Deficit) 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 1,010,000
-------- --------------
Total assets.............................................................. $ 508,000 $ 3,489,000
-------- --------------
-------- --------------
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................................................. -- 943,000
-------- --------------
Total liabilities......................................................... 650,000 2,018,000
-------- --------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' (DEFICIT) EQUITY:
Members' contributed capital................................................ 411,000 2,063,000
Accumulated deficit......................................................... (553,000) (592,000)
-------- --------------
Total members' (deficit) equity........................................... (142,000) 1,471,000
-------- --------------
Total liabilities and members' (deficit) equity........................... $ 508,000 $ 3,489,000
-------- --------------
-------- --------------
</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 ENDED
DECEMBER 31, 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............................. 283,000 413,000 138,000 332,000
------------ ------------ ------------ ------------
Total cost and expenses.............................. 1,251,000 2,044,000 506,000 817,000
------------ ------------ ------------ ------------
Income from operations............................... 2,000 11,000 (87,000) (47,000)
OTHER INCOME, NET........................................ 1,000 3,000 1,000 8,000
------------ ------------ ------------ ------------
Net income (loss).................................... $ 3,000 $ 14,000 $ (86,000) $ (39,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PRO FORMA NET INCOME DATA (Unaudited):
Net income before provision for income taxes........... $ 3,000 $ 14,000 $ (86,000) $ (39,000)
Pro forma income tax provision (benefit)............... 2,000 6,000 1,000 (17,000)
------------ ------------ ------------ ------------
Pro forma net income (loss).......................... $ 1,000 $ 8,000 $ (87,000) $ (22,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PRO FORMA PER SHARE INFORMATION (Unaudited):
Basic................................................ $ -- $ -- $ (0.02) $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted.............................................. $ -- $ -- $ (0.02) $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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............ 876,000 -- 876,000
Incremental difference between issue price and fair value of
capital contribution............................................ 576,000 -- 576,000
Issuance of warrants to purchase 95,000 shares of common stock, at
fair value...................................................... 58,000 -- 58,000
Issuance of warrants to purchase 32,000 shares of common stock, at
fair value...................................................... 74,000 -- 74,000
Non-cash compensation expense..................................... 68,000 -- 68,000
Net loss.......................................................... -- (39,000) (39,000)
------------ ------------ --------------
BALANCE, March 31, 1999 (unaudited)................................... $ 2,063,000 $ (592,000) $ 1,471,000
------------ ------------ --------------
------------ ------------ --------------
</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) $ (39,000)
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.......................... -- -- -- 68,000
Changes in operating assets and liabilities:
Accounts receivable.................................. (154,000) (259,000) (47,000) (199,000)
Other assets......................................... (3,000) (43,000) 3,000 (375,000)
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) (28,000)
------------ ------------ ---------- ------------
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................... -- -- -- 876,000
------------ ------------ ---------- ------------
Net cash provided by financing activities................ 140,000 75,000 16,000 1,824,000
------------ ------------ ---------- ------------
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..................................... $ -- $ -- $ -- $ 58,000
Incremental difference between issue price and fair
value of capital contribution........................ $ -- $ -- $ -- $ 576,000
Revenue generated from barter contracts................ $ 734,000 $ 1,055,000 $ 251,000 $ 348,000
Advertising and consulting expense incurred related to
barter contracts..................................... $ 734,000 $ 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 based on their level
of advertising. Generally, barter revenue is recognized over the term of the
customer contract, which commences upon the placement of the customer's
advertisement on the Company's fashionmall.com website. Barter revenues equal
barter expenses; however, due to timing,
F-7
<PAGE>
INTERNET FASHION MALL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and Diluted....................... $ 1,000 $ 8,000 $ (87,000) $ (22,000)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
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.
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, LLP, a limited liability partnership with a
F-11
<PAGE>
4. MEMBERS' CAPITAL ACCOUNTS (CONTINUED)
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.
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.
F-12
<PAGE>
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 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
F-13
<PAGE>
8. SUBSEQUENT EVENTS (CONTINUED)
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.
The difference between the per share fair value granted to FM/CCP of $4.44
and the per share fair value based on the originally estimated IPO price of
$7.00 per share has been recognized as deferred financing costs. The total
difference of $576,000 will be amortized over the period commencing on the date
of issuance of the promissory note through the maturity date, using the
effective interest method.
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 up to 5% ownership interest in the Company in
consideration for his consulting services. These options vest over three years
and expire on the fifth anniversary of the grant date. The vesting period
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. Chazen will receive
additional options to purchase Common Stock at an exercise price equal to 25% of
the per share price of the Common Stock in the offering ($2.75 based on the
assumed $11.00 per share offering price). The number of additional options is
based on the IPO price. Based on an assumed IPO price of $11.00, Chazen will
receive options to purchase an aggregate of 242,500 shares of Common Stock. All
grants of options to individuals other than those considered employees must be
accounted for under the provisions of Statement of Financial Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No. 123"). Under SFAS No. 123,
the fair value of these options as of the date of grant, using the Black-Scholes
pricing model, is $1,810,000. The fair value will be recognized as consulting
expense over the term of the consulting agreement. Exercising of 135,000 of
these options and the warrants referred to above will not dilute the original 5%
ownership interest purchased by FM/ CCP and Chazen. As a result, if these
options and warrants are exercised in 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 ($11.55 based on the assumed $11.00 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. The fair value of the warrants as of the date of grant is $74,000,
calculated using the Black-Scholes pricing model. One-half of the cash payment
and one-half of the fair value of the warrants has been offset against the
proceeds of the $1 million equity investment as offering costs. The remaining
amount has been recognized as deferred financing costs, to be amortized over the
period commencing on the date of issuance of the promissory note through the
maturity date, using the effective interest method.
F-14
<PAGE>
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 IPO, 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 IPO by the
Company and, based on an assumed $11.00 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 $11.00 per share. Upon closing of
Taubman's investment, the Company allocated $2,867,000 of the $5,769,000 to
represent the fair value of the Warrants. The remaining portion of the net
proceeds of $2,902,000 represents the beneficial conversion feature of the
Preferred Stock, to be allocated to additional paid-in capital upon closing of
the IPO and accreted to the book value of the Preferred Stock. Up to $1,613,000
of an additional payment of up to $1,648,000 to be received based on the IPO
price will also be allocated to additional paid-in capital as an addition to the
beneficial conversion feature to be accreted to the book value of the Preferred
Stock. The accretion period will be one year, beginning on the date of closing
of the IPO. 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.
Through March 31, 1999, the Company recognized $68,000 in consulting expense
related to the options granted to Chazen in consideration for his consulting
services.
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.................................................................. 33
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., L.L.C.
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 $12.00 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.................................... 414,000*
Miscellaneous..................................................... 20,000*
---------
Total............................................................. $ 850,000*
---------
---------
</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 ($11.55 based on the assumed $11.00 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 ($11.55 based on the assumed $11.00 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
$2.75 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 United States, 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 $11.00 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 $11.00 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 (1)
4.5 Warrant No. 1 issued to TRG Net Investors LLC (1)
4.1 Form of Representative's Warrant (1)
4.2 Form of Stock Certificate (1)
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 (1)
10.1 Employment Agreement effective on the completion of the offering, by and between the Company and
Benjamin Narasin (1)
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 (1)
10.7 Standard Merchant Agreement effective as of March 4, 1998, between Microsoft Corporation and the
Company (2)
10.8 Content License Area Agreement effective as of June 5, 1998, between Excite, Inc. and the Company (2)
10.9 Merchant Agreement effective as of October 11, 1998 between Inktomi Corporation and the Company (2)
10.10 Content License Agreement effective as of March 1, 1998 between Yahoo!, Inc. and the Company (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) (1)
24.1 Power of Attorney (1)
27.1 Financial Data Schedule (1)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed with this Amendment No. 2
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-3
<PAGE>
(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 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. 2
to the Registration Statement to be signed on its behalf by the undersigned, in
the New York, New York, on May 19, 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 May 19, 1999
Benjamin Narasin (Principal Executive
Officer)
/s/ RAYMOND J. MURPHY
- ------------------------------ (Principal Financial May 19, 1999
Raymond J. Murphy and Accounting Officer)
*
- ------------------------------ Director May 19, 1999
Richard Marcus
*
- ------------------------------ Director May 19, 1999
Jerome Chazen
/s/ ROBERT S. TAUBMAN
- ------------------------------ Director May 19, 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 10.7
MICROSOFT STANDARD MERCHANT AGREEMENT
This Agreement, by and between MICROSOFT CORPORATION ("MS"), a Washington
corporation, with its principal offices at On Microsoft Way, Redmond, WA 98052
and Internet Fashionmall.com, a Limited liability corporation, with its
principal offices at 575 Madison Ave., 7th floor, New York, NY 10022
("Merchant") is made and entered into as of the latter of the two signature
dates below (the "Effective Date").
Merchant and MS agree as follows:
1. LINKS TO WEBSITES: MS shall include within the web site currently titled "The
Microsoft Plaza" or such replacement sites which MS may provide from time to
time under this Agreement (the "Plan Site") either a text link or logo link (as
provided by Merchant in accordance with the specifications provided by MS) (the
"Merchant Link") to Merchant's web site (the "Merchant Site"). The placement
type and position of the Merchant Link within the Plaza Site shall be at MS'
sole discretion. MS may, in its sole discretion, include the Merchant Link to
the Merchant Site within other web sites owned, controlled or operated by MS or
any affiliated company, including without limitation MSNBC, Computing Central,
Sidewalk, Microsoft Start, MSN Premier, msn.com and microsoft.com (the
"Microsoft Site(s)"). The inclusion, placement type and position of the Merchant
Link within any Microsoft Site shall be at MS' sole discretion. Merchant shall
include a logo link to the Plaza Site on the web page linked to by the Merchant
Link included in the Plaza Site (the "Plaza Link Page") in a mutually acceptable
location in accordance with the Logo Linking Guidelines attached hereto so
Exhibit A. Merchant shall include a similar reciprocal logo link, as may be
provided by MS from time to time, to the applicable Microsoft Sites in
accordance with the logo linking guidelines for such logo link as provided from
time to time by MS.
2. PROMOTIONS: Merchant shall submit to MS, at least fifteen (15) days prior to
the first day of each month during the Term, information regarding current
promotions being offered by Merchant which may be used by MS in its sole
discretion, in the pre-programmed Daily Specials area of the Plaza Site or the
Microsoft Sites during the applicable month. MS shall provide the guidelines for
such programs and Merchant shall provide all information in accordance with such
guidelines.
3. CUSTOMER SERVICE: Merchant shall be solely responsible for the Merchant Site
(including all usage by users which linked to the Merchant Site through the
Plaza Site and/or any Microsoft Site) including but not limited to customer
service, web operations, product support, quality and availability of products
and/or services made available at the Merchant Site, fulfillment of orders and
returns. Merchant shall ensure that all users of the Merchant Site placing an
order for product(s) and/or service(s) are timely advised of the status of such
purchase(s) including the timely confirmation of all orders via electronic mail.
Merchant shall provide electronic mall capabilities between the user and
Merchant. Merchant shall ensure that the Merchant Link meets or exceeds the
industry performance standards for links from the Plaza Site and the Microsoft
Sites to Merchant's Site.
4. MERCHANT REPORTING: Merchant shall develop, implement and maintain the
technology required to track usage of the Merchant Site by users linking to the
Merchant Site from the Plaza Site and/or any Microsoft Site and provide MS with
monthly usage reports no later than ten (10 days following the end of each month
of the Term. Such reports shill include, at a minimum, traffic from refuting URL
to the Merchant Site, number of unique users, number of daily orders, total
revenue and average revenue per order.
5. FEES: During the Term of this Agreement, Merchant shall pay MS five hundred
dollars (US $500) per month no later than the fifth day of each month of the
Term (the "Guaranteed Fee). Additionally, Merchant shall pay MS fifty percent
(50%) of the commission earned by Fashionmall.com, to a minimum limit of 5% and
a maximum limit of 15% per applicable order, less actual returns and actual bad
debt applicable to such Net Sales incurred during the applicable period (the
"Commission"). Commissions shall be due monthly to MS less the Guaranteed Fee
for the applicable month no later than five (5) days following the last day of
each month of the Term. As used herein "Commission earned" shall reflect the
difference, as percentage, between what merchandise is sold for and what
Fashionmall.com pays to its suppliers for the merchandise for merchandise sold
to users who have linked to the Merchant site through the Merchant Link included
in the Plaza Site or any Microsoft Site. Merchant shall submit to MS
1
<PAGE>
within ten (10) days after the end of each month of the Term complete and
accurate reports, in the form requested by MS of the Gross Revenue for such
month and any other information relevant to the calculation of fees hereunder.
Merchant shall also indicate in such reports how such amounts were calculated.
Receipt or acceptance by MS of any reports or payments shall not prevent MS from
questioning the accuracy of such reports or payments at any time, up to two (2)
years after receipt of the report or payment, and in the event that any mistake
is discovered in any such report or payment, and Merchant is apprised of it,
Merchant shall immediately rectify the mistake.
6. AUDITS: During the Term of this Agreement and for two (2) years thereafter,
Merchant agrees to keep all usual and proper records and books of account and
all usual and proper entries relating to the calculation of Gross Revenue,
including, without limitation, any specific items required to be reported under
this Agreement. During the above referenced period, MS shall have the right to
cause an audit and/or inspection to be made of the applicable Merchant records
and facilities in order to verify statements issued by Merchant and Merchant's
compliance with the terms of this Agreement. Any such audit shall be conducted
by an independent certified public accountant selected by MS' (other than on a
contingent fee basis). Merchant agrees to provide MS' designated audit or
inspection team access to the relevant Merchant records and facilities. Such
audits shall be made no more often than once every twelve (12) months. If an
audit reveals that Merchant has under-paid MS by five percent (5%) or more of
the amounts due for any audited period of time, Merchant agrees, in addition to
recomputing and making immediate payment to MS of all amounts due, plus interest
at the highest prime rate set forth from time to time in the Wall Street Journal
in the United States during the period that such amount is outstanding plus two
percentage points (or, if less, at a rate equal to the highest rate permitted
under applicable law), based on the actual and true amounts due and owing, to
pay MS all reasonable costs and expenses incurred by MS in conducting such
audit, including, but not limited to, any amounts paid to any auditor or
attorney.
7. TERM: The term of this Agreement (the "Term") shall begin on the Effective
Date and shall continue for a period of twelve ([12]) months following the
Effective Date. The Term shall automatically extend for consecutive six (6)
month periods unless either party notifies the other party in writing of its
intent not to renew the Term at least thirty (30) days prior to the expiration
date of the initial term or any renewal period. Notwithstanding the foregoing,
either party shall have the right to terminate this agreement upon sixty (60)
days written notice to the other party. If either MS or Merchant defaults under
this Agreement, the non-defaulting party will notify the other in writing. If
the failure is not cured within ten (10) business days after written notice is
received by the notified party, or if, in the event that the default is
incapable of being cured within ten (10) business days and the notified party
does not undertake a good faith effort to cure the failure within the ten (10)
business day period, the non-defaulting party may terminate this Agreement with
no further obligation to the notified party; except for payment of any amount
properly due pursuant to Section 5.
8. REMOVAL OF LINK: in the event that MS receives a claim of infringement
concerning the Merchant Link or a deem which alleges a breach of Section 3, the
parties agree that MS may, in addition to any other remedies provided for
herein, immediately remove the Merchant Link from the Plaza Site at its sole
discretion, pending receipt of a non-infringing replacement link or satisfactory
resolution of the claim and any such removal shall not constitute a breach of
this Agreement.
9. WARRANTIES: Merchant warrants, represents and agrees that (a) all products
and/or services offered, sold or otherwise provided as part of the Merchant Site
are made, offered, sold or otherwise provided in compliance with applicable laws
and will not infringe the copyrights, trademarks, service marks or any other
proprietary right of any third party, (b) except as specifically provided for in
Exhibit A or as otherwise agreed to in writing by the parties, Merchant will not
use in any manner any of MS or any affiliated companies' trade names,
trademarks, logos or product names, (c) the Merchant Site is in compliance with
all applicable laws, and (d) Merchant has the power and authority to enter into
and perform its obligations under this Agreement. MS warrants, represents and
agrees that (a) the Plaza Site is in compliance with all applicable laws, and
(b) MS has the power and authority to enter into and perform its obligations
under this Agreement. THIS SECTION CONTAINS THE ONLY WARRANTIES, EXPRESS OR
IMPLIED, MADE BY MERCHANT AND MS. ANY AND ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, ARE EXPRESSLY EXCLUDED AND DECLINED, EACH PARTY DISCLAIMS ANY IMPLIED
WARRANTIES, PROMISES AND CONDITIONS OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, TITLE AND/OR NON-INFRINGEMENT, WHETHER AS TO THE PLAZA SITE, THE
MERCHANT SITE,
2
<PAGE>
ANY SERVICES RENDERED BY MS AND/OR THE TECHNOLOGY DEPLOYED IN CONNECTION
THEREWITH.
10. INDEMNIFICATION: The parties agree to indemnify, defend, and hold each other
and their successors, officers, directors and employees harmless from any and
all actions, causes of action, claims. demands, costs, liabilities, expenses
(including reasonable attorneys' fees) and damages arising out of or in
connection with any claim made by a third party which, if true, would be (a) a
breach by Merchant of Section 3; or (b) a breach by either party of any warranty
set forth in this Agreement. The party seeking indemnification shall notify the
indemnifying party in writing of any claim for which indemnification is sought.
11. LIMITATION OF LIABILITY: IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY
CONSEQUENTIAL, INDIRECT, INCIDENTAL, OR SPECIAL DAMAGES WHATSOEVER, INCLUDING
WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION,
LOSS OF BUSINESS INFORMATION, AND THE LIKE, INCURRED BY THE OTHER PARTY ARISING
OUT OF THIS AGREEMENT (PROVIDED THAT THIS LIMITATION SHALL NOT LIMIT EITHER
PARTY'S OBLIGATION TO INDEMNIFY THE OTHER PARTY FOR THIRD PARTY CLAIMS WHICH
INCLUDE SUCH DAMAGES), EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. BECAUSE SOME STATES DO NOT ALLOW THE EXCLUSION OR LIMITATION OF
LIABILITY FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES, THE ABOVE LIMITATION MAY NOT
APPLY.
12. CONFIDENTIALITY: If MS and Merchant have entered into a MS Non-Disclosure
Agreement, MS and Merchant agree that the terms of such agreement shall be
deemed incorporated herein, and further, that all terms and conditions of this
Agreement shell be deemed Confidential Information as defined therein. If MS and
Merchant have not entered into a MS Non-Disclosure Agreement, then Merchant
agrees that at all times during the term of this Agreement, and for five (5)
years thereafter, Merchant will hold in strictest confidence, and will not use
or disclose to any third party, any confidential information of MS. The term
"confidential information of MS" shall mean an non-public information that MS
designates as being confidential, or which, under the circumstances of
disclosure ought to be treated as confidential. "Confidential information of MS"
includes, without limitation, the terms and conditions of this Agreement,
information relating to released or unreleased MS software or hardware products,
marketing or promotion of any MS product, business policies or practices of MS
customers or suppliers of MS, or information received from others that MS is
obligated to treat as confidential. If Merchant has any questions as to what
comprises such confidential information, Merchant agrees to consult with MS.
"Confidential information of MS" shall not include information that was known to
Merchant prior to MS's disclosure to Merchant, or information that becomes
publicly available through no fault of Merchant.
13. NOTICES: All notices and requests in connection with this Agreement shall be
deemed given as of the day they are received either by messenger, delivery
service, or in the United States of America mails, postage prepaid, certified or
registered, return receipt requested, and addressed to the party signing this
Agreement as set forth in the first paragraph with a copy to MS' Law and
Corporate Affairs department or to such other address as the party to receive
the notice or request so designates by at least ten (10) days prior written
notice to the other.
14. GENERAL PROVISIONS: Merchant is an independent contractor, and nothing in
this Agreement shall be construed as creating an employer-employee relationship,
partnership, or joint venture between the parties. This Agreement shall be
governed by the laws of the State of Washington and the parties consent to the
exclusive jurisdiction and venue in the state and federal courts sitting King
County, Washington, USA. In any suit or action to enforce any right or remedy
under this Agreement or to interpret any provision of this Agreement, the
prevailing party will be entitled to recover its costs, including reasonable
attorneys' fees. This Agreement and any rights and/or obligations hereunder may
be assigned by MS but may not be assigned by Merchant without MS' prior written
approval. Any attempted assignment, sub-license, transfer, encumbrance or other
disposal without such consent shall be void and shall constitute a material
default and breach of this Agreement. Except as otherwise provided, this
Agreement shall be binding upon and inure to the benefit of the parties'
successors and lawful assigns. The section headings used in this Agreement are
intended for convenience only and shall not be deemed to affect in any manner
the meaning or intent of this Agreement or any provision hereof. This Agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior and
3
<PAGE>
contemporaneous agreements or communications. This Agreement shall not be
modified except by a written agreement dated subsequent to the date of this
Agreement and signed on behalf of Merchant end MS by their respective duly
authorized representatives. No waiver of any breach of any provision of this
Agreement shall constitute a waiver of any prior, concurrent or subsequent
breach of the same or any other provisions hereof, and no waiver shall be
effective unless made in writing and signed by an authorized representative of
the waiving party. In the event that any provision of this Agreement conflicts
with governing law or if any provision is held to be null, void or otherwise
ineffective or invalid by a court of competent jurisdiction, (i) such provision
shall be deemed to be restated to reflect as nearly as possible the original
intentions of the Parties in accordance with applicable law, and (ii) the
remaining terms, provisions. covenants and restrictions of this Agreement shall
remain in full force and effect. This Agreement does not constitute an offer by
MS and it shall not be effective until signed by both parties.
MICROSOFT CORPORATION Fashionmall.com
By /s/ D. Levinger By /s/ Ben Narasin
--------------------------------- --------------------------------------
Name (Print) D. Levinger Name (Print) Ben Narasin
----------------------- ----------------------------
Title [ILLEGIBLE] Title President
------------------------------ -----------------------------------
Date 3/4/98 Date March 1, 1998
------------------------------- ------------------------------------
Merchant Contact Info:
Name: Ben Nerasin, Internet Fashion Mall LLC
Address: 575 Madison Avenue, 7th Floor, New York, NY 10022
Phone: 212-891-4054
Fax: 212-891-8033
Email: [email protected]
4
<PAGE>
EXHIBIT A
GUIDELINES FOR DISPLAYING THE MICROSOFT PLAZA LINK LOGO
These are the Microsoft policies for displaying the Microsoft Plaza link logo by
merchants who have executed a MICROSOFT STANDARD MERCHANT AGREEMENT (the
"Agreement"). Please consult Microsoft's other trademark and logo policies for
questions concerning other brands.
1. Except as Microsoft may authorize elsewhere, you may display only the link
logo shown below ("Logo"). By downloading the Logo and signing the
Agreement you agree to be bound by these Policies.
2. You shall display the Logo on your Plaza Link Page, as this term is
defined in the Agreement, and you may display the Logo on all other pages
included in the Merchant Site, as this term is defined in the Agreement,
which are linked to by users of the Plaza Site but not in any other
manner. It must always be an active link to The Microsoft Plaza homepage
at http://www.plaza.msn.com/. HTML code for the link is shown below.
3. The Logo GIF includes the words "To Microsoft Plaza", describing the
significance of the Logo on your site (i.e., the Logo is a link to The
Microsoft Plaza, not an endorsement of your site). You may not remove or
alter this or any other element of the Logo.
4. You may only display the Logo on your Plaza Link Page and other pages in
the Merchant Site that make accurate references to The Microsoft Plaza.
The Logo must be displayed "above the fold" (as such term is generally
used within the Internet industry) and/or adjacent to those references.
Your web page title and other trademarks and logos must appear at least as
prominent as the Logo. You may not display the Logo in any manner that
implies sponsorship, endorsement, or license by Microsoft or any
affiliated company.
5. The Logo must appear by itself, with a minimum spacing (the height of the
Logo) between each side of the Logo and other graphic or textual elements
on your page. The Logo may not be used as a feature or design element of
any other logo.
6. Except for size subject to the terms herein, you may not alter the Logo in
any manner, including proportions, colors, elements, etc., or animate,
morph or otherwise distort its perspective or two-dimensional appearance.
7. You may not display the Logo on any site that disparages Microsoft or any
affiliated company, or its products or services, infringes any
intellectual property or other rights of Microsoft or any affiliated
company, or violates any state, federal or international law.
8. These Policies do not grant a license or any other right in Microsoft's
logos or trademarks. Microsoft reserves the right in its sole discretion
to terminate or modify permission to display the Logo at any time.
Microsoft reserves the right to take action against any use that does not
conform to these Policies, infringes any Microsoft intellectual property
or other right, or violates other applicable law.
9. MICROSOFT DISCLAIMS ANY WARRANTIES THAT MAY BE EXPRESS OR IMPLIED BY LAW
REGARDING THE LOGO, INCLUDING WARRANTIES AGAINST INFRINGEMENT.
5
<PAGE>
Exhibit B
Co-Marketing Agreement
1. Fashionmall.com will feature the Plaza on their New section for a minimum
of four weeks over the course of the contract with dates to be mutually
agreed upon with MS.
2. Fashionmall.com will provide the Plaza with co-marketing opportunities
once per quarter over the course of the contract may include but are
not limited to press releases, emails to user base, branding at trade
shows and/or other opportunities to be mutually agreed upon with MS.
6
<PAGE>
Exhibit 10.8
CONFIDENTIAL
CONTENT LICENSE AREA AGREEMENT
This agreement ("Agreement") is entered into as of the 15th day of April, 1998
("Effective Date"), by and between Excite, Inc., a California corporation,
located at 555 Broadway, Redwood City, California 94063 ("Excite"), and Internet
Fashion Mall, a Limited Liability corporation, located at 575 Madison Avenue,
New York, NY 10022 ("Content Provider").
RECITALS
A. Excite maintains a site on the Internet at http://www.excite.com and owns
and/or manages related Web sites worldwide (collectively, the "Excite
Network") which, among other things, allow its users to search for and
access content and other sites on the Internet.
B. Excite also maintains and/or manages certain Web pages which may be
delivered to users worldwide via email, desktop "channels" or Internet
"push" technologies (collectively, "Broadcast Pages") which may
incorporate content supplied to Excite by third parties for the purpose of
providing value to Excite users and providing access to the content,
products and/or services of such third parties.
C. Content Provider owns or has the right to distribute certain shopping
information and maintains a related site on the Internet at
http://www.fashionmall.com (the "Content Provider Site").
D. Excite and Content Provider wish to distribute certain portions of Content
Provider's content through the Excite Network and/or Broadcast Pages.
Therefore, the parties agree as follows:
1. CONTENT PROVIDED TO EXCITE
a) Content Provider will provide to Excite the content described in
Exhibit A (the "Content").
b) Content Provider will create co-branded web pages incorporating the
Content (the "Content Pages"). The Content, which will be at least
five (5) pages deep, will be placed on the front page of the Clothes
Department in the Excite Shopping Channel.
c) Excite reserves the right to feature Excite commerce partners in up
to fifty percent (50%) of the Content. Content Provider will work
with Excite to incorporate the Excite commerce partners into the
Content.
1
<PAGE>
CONFIDENTIAL
d) Content Pages on the Excite Network will include prominent Content
Provider branding. The exact type and placement of the branding will
be mutually determined by Content Provider and Excite. Excite will
have final approval over the "look and feel" of the Content Pages
including, but not limited to, the display, appearance and placement
of the parties' respective names and/or brands and of advertising
displayed.
e) Content Provider will update the Content at least monthly, excluding
"Hot Deals" which Content Provider will update at least weekly.
f) The Content may be incorporated into certain pages in the Excite
Network and reasonable excerpts or portions of the Content may be
incorporated into Broadcast Pages, at Excite's discretion.
g) Content Provider and Excite will determine mutually agreeable
methods for the transmission and incorporation of updates to the
Content. Other than updates to the Content, Content Provider shall
not alter the Content without Excite's prior consent.
h) Excite will have sole control over of the "look and feel" of the
Excite Network. Excite will have sole control over of the content
composition, "look and feel" and distribution of the Broadcast
Pages. Excite will have sole responsibility for providing, hosting
and maintaining, at its expense the Excite Network and for providing
and delivering the Broadcast Pages.
i) Content Provider will have sole responsibility for providing, at its
expense, the Content to Excite.
2. ADVERTISING
a) Excite will be solely responsible for selling any advertising on the
Excite Network.
b) Excite will pay Content Provider on a quarterly basis thirty percent
(30%) of the "Net Advertising Revenue" that accrues to Excite
during, the term of this Agreement from advertising that appears on
any and all Content Pages. "Net Advertising Revenue" means all
advertising banner revenue that accrues to Excite during the
applicable payment period, minus the lesser of (i) Excite's actual
sales agency discounts and commissions, both internal and external,
paid by Excite during the term of this Agreement for the advertising
displayed on the Content Pages or (ii) twenty percent (20%) of
Excite's actual rates charged for the advertising displayed on the
Content Pages.
2
<PAGE>
CONFIDENTIAL
c) Payments by Excite to Content Provider will be due within thirty
(30) days of the end of each calendar quarter.
d) With each payment, Excite will provide to Content Provider
documentation reasonably detailing the calculation of the payment.
e) Excite will maintain accurate records with respect to the
calculation of all payments due under this Agreement. Content
Provider may, upon no less than thirty (30) days prior written
notice to Excite, cause an independent Certified Public Accountant
to inspect the records of Excite reasonably related to the
calculation of such payments during Excite's normal business hours.
The fees charged by such Certified Public Accountant in connection
with the inspection will be paid by Content Provider unless the
payments made to Content Provider are determined to have been less
than ninety-five percent (95%) of the payment owed to Content
Provider, in which case Excite will be responsible for the payment
of the reasonable fees, for such inspection.
f) Content Provider shall pay Excite on a quarterly basis twenty five
percent (25%) of the commission earned by Content Provider on the
"Net Sales" of products purchased by users sent to the Content
Provider Site by means of the Content Pages during the term of this
Agreement. "Net Sales" means sales revenues less tax, freight,
returns and chargebacks. As used herein "commission" shall reflect
the difference, as a percentage, between what merchandise is sold
for and what Content Provider pays to its suppliers for the
merchandise, for merchandise sold at the Content Provider Site and
resulting from traffic created by the Content Pages.
g) Payments by Content Provider to Excite will be due within thirty
(30) days of the end of each calendar quarter.
h) With each payment, Content Provider will provide to Excite
documentation reasonably detailing the calculation of the payment.
i) Content Provider will maintain accurate records with respect to the
calculation of all payments due under this Agreement Excite may,
upon no less than thirty (30) days prior written notice to Content
Provider, cause an independent Certified Public Accountant to
inspect the records of Content Provider reasonably related to the
calculation of such payments during Content Provider's normal
business hours. The fees charged by such Certified Public Accountant
in connection with the inspection will be paid by Excite unless the
payments made to Excite are determined to have been less than
ninety-five percent (95%) of the payment owed to Excite, in which
case Content Provider will be responsible for the payment of the
reasonable fees for such inspection.
3
<PAGE>
CONFIDENTIAL
j) Neither party will make any public statement, press release or other
announcement relating to the terms of or existence of this Agreement
without the prior written approval of the other. Notwithstanding the
foregoing, Content Provider hereby grants to Excite the right to
issue an initial press release, the timing and wording of which will
be subject to Content Providers reasonable approval, regarding the
relationship between Excite and Content Provider.
3. EXCLUSIVITY
Content Provider will not provide the content described as
"Contextual Content" in Exhibit A to Yahoo, Lycos or InfoSeek.
4. CONTENT OWNERSHIP AND LICENSE
a) Content Provider will retain all right, title and interest in and to
the Content worldwide (including, but not limited to, ownership of
all copyrights and other intellectual property rights therein).
Subject to the terms and conditions of this Agreement, Content
Provider hereby grants to Excite a royalty-free, non-exclusive,
worldwide license to use, reproduce, distribute, transmit and
publicly display the Content in accordance with this Agreement and
to sub-license the Content to Excite's wholly-owned subsidiaries or
to joint ventures in which Excite participates for the sole purpose
of using, reproducing, distributing, transmitting and publicly
displaying the Content in accordance with this Agreement
b) Excite will retain all right, title, and interest in and to the
Excite Network and the Broadcast Pages worldwide (including, but not
limited to, ownership of all copyrights, look and feel and other
intellectual property rights therein).
5. TRADEMARK OWNERSHIP AND LICENSE
a) Content Provider will retain all right, title and interest in and to
its trademarks, service marks and trade names worldwide, subject to
the limited license granted to Excite hereunder.
b) Excite will retain all right, title and interest in and to its
trademarks, service marks and trade names worldwide, subject to the
limited license granted to Content Provider hereunder.
c) Each party hereby grunts to the other a non-exclusive, limited
license to use its trademarks, service marks or trade names only as
specifically described in this Agreement. All such use shall be in
accordance with each party's reasonable policies regarding
advertising and trademark usage as established from time to time.
4
<PAGE>
CONFIDENTIAL
d) Upon the expiration or termination of this Agreement, each party
will cease using the trademarks, service marks and/or trade names of
the other except:
i) As the parties may agree in writing; or
ii) To the extent permitted by applicable law.
6. TERM
The term of the Agreement will be one (1) year. This Agreement will
automatically renew for additional terms of six (6) months each,
unless either party notifies the other in writing at least thirty
(30) days prior to automatic renewal that it does not wish to renew
this Agreement.
7. TERMINATION
a) Either party may terminate this Agreement if the other party
materially breaches its obligations hereunder and such breach
remains uncured for thirty (30) days following the notice to the
breaching party of the breach, with the following exceptions:
(i) In the event of three or more errors, failures or outages of
the Content in any thirty (30) day period, Excite may elect to
immediately terminate this Agreement upon written notice to
Content Provider and enter into an other arrangements for the
acquisition of similar content; or
(ii) Content Provider will ensure that the Content will at all
times be at least comparable to any other source of similar
topical content available on the Internet in terms of the
following factors, taken as a whole: (i) breadth and depth of
coverage, (ii) timeliness of content updates and (iii)
reputation and ranking based on a cross-section of third party
reviewers in terms of features, functionality, quality and
other qualitative factors. In the event that Content Provider
fails to meet these quality criteria, Excite may terminate
this agreement on thirty (30) days written notice and enter
into an other arrangements for the acquisition of similar
content.
b) All payments that have accrued prior to the termination or
expiration of this Agreement will be payable in full within thirty
(30) days thereof.
c) The provisions of this Section, Section 8 (Confidentiality), Section
9 (Warranty and Indemnity), Section 10 (Limitation of Liability) and
Section 11 (Dispute Resolution) will survive any termination or
expiration of this Agreement.
5
<PAGE>
CONFIDENTIAL
8. CONFIDENTIALITY
a) For the purposes of this Agreement, "Confidential Information" means
information about the disclosing party's (or its suppliers')
business or activities that is proprietary and confidential, which
shall include all business, financial, technical and other
information of a party marked or designated by such party as
"confidential" or "proprietary"; or information which, by the nature
of the circumstances surrounding the disclosure, ought in good faith
to be treated as confidential.
b) Confidential Information will not include information that (i) is in
or enters the public domain without breach of this Agreement, (ii)
the receiving party lawfully receives from a third party without
restriction on disclosure and without breach of a nondisclosure
obligation or (iii) the receiving party knew prior to receiving such
information from the disclosing party or develops independently.
c) Each party agrees (i) that it will not disclose to any third party
or use any Confidential Information disclosed to it by the other
except as expressly permitted in this Agreement and (ii) that it
will take all reasonable measures to maintain the confidentiality of
all Confidential Information of the other party in its possession or
control, which will in no event be less than the measures it uses to
maintain the confidentiality of its own information of similar
importance.
d) Notwithstanding the foregoing, each party may disclose Confidential
Information (i) to the extent required by a court of competent
jurisdiction or other governmental authority or otherwise as
required by law or (ii) on a "need-to-know" basis under an
obligation of confidentiality to its legal counsel, accountants,
banks and other financing sources and their advisors.
e) The terms and conditions of this Agreement will be deemed to be the
Confidential Information of each party and will not be disclosed
without the written consent of the other party.
9. WARRANTY AND INDEMNITY
a) Content Provider warrants that it owns, or has obtained the right to
distribute and make available as specified in this Agreement, any
and all content provided to Excite or made available to third
parties in connection with this Agreement.
b) Content Provider warrants that the Content will comply with the
description and technical specifications as contemplated by this
Agreement, Content Provider warrants that the Content will comply
with
6
<PAGE>
CONFIDENTIAL
the description and technical specifications as contemplated by this
Agreement.
c) Content Provider will indemnify, defend and hold harmless Excite,
its affiliates, officers, directors, employees, consultants and
agents from any and all third party claims, liability, damages
and/or costs (including, but not limited to, attorneys fees) arising
from:
i) The breach of any warranty, representation or covenant in this
Agreement;
ii) Any claim that the Content infringes or violates any third
party's copyright, patent, trade secret, trademark, right of
publicity or right of privacy or contains any defamatory
content; or
(iii) The purchase of any product from the Content Provider Site.
d) Excite will promptly notify Content Provider of any and all such
claims end will reasonably cooperate with Content Provider with the
defense and/or settlement thereof; provided that if any settlement
requires an affirmative obligation of, results in any ongoing
liability to or prejudices or detrimentally impacts Excite in any
way and such obligation, liability, prejudice or impact can
reasonably be expected to be material, then such settlement shall
require Excite's written consent (not to be unreasonably withheld
or delayed) and Excite may have its own counsel in attendance at all
proceedings and substantive negotiations relating to such claim.
e) EXCEPT AS SPECIFIED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY
WARRANTY IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT AND
HEREBY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES, INCLUDING ALL
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE REGARDING SUCH SUBJECT MATTER.
10. LIMITATION OF LIABILITY
EXCEPT UNDER SECTION 9 (c), IN NO EVENT WILL EITHER PARTY BE LIABLE
TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR
OTHERWISE, WHETHER OR NOT THAT PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF EXCITE FOR DAMAGES OR
ALLEGED DAMAGES HEREUNDER WHETHER IN CONTRACT, TORT OR ANY OTHER
LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, THE AMOUNTS
ACTUALLY PAID BY CONTENT PROVIDER TO EXCITE HEREUNDER.
7
<PAGE>
CONFIDENTIAL
11. DISPUTE RESOLUTION
a) The parties agree that any breach of either of the parties'
obligations regarding trademarks, service marks or trade names
and/or confidentiality would result in irreparable injury for which
there is no adequate remedy at law. Therefore, in the event of any
breach or threatened breach of a party's obligations regarding
trademark, service marks or trade names or confidentiality, the
aggrieved party will be entitled to seek equitable relief in
addition to its other available legal remedies in a court of
competent jurisdiction. For the purposes of this section only, the
parties consent to venue in either the state courts of the county in
which Excite has its principal place of business or the United
States District Court for the Northern District of California.
b) In the event of disputes between the parties arising from or
concerning in any manner the subject mailer of this Agreement, other
than disputes arising from or concerning trademarks, service marks
or trade names and/or confidentiality, the parties will first
attempt to resolve the dispute(s) through good faith negotiation. In
the event that the dispute(s) cannot be resolved through good faith
negotiation, the parties will refer the dispute(s) to a mutually
acceptable mediator for hearing in the county in which Excite has
its principal place of business.
c) In the event that disputes between the parties arising from or
concerning in any manner the subject matter of this Agreement,
other than disputes arising from or concerning trademarks, service
marks or trade names and/or confidentiality, cannot be resolved
through good faith negotiation and mediation, the parties will refer
the dispute(s) to the American Arbitration Association for
resolution through binding arbitration by a single arbitrator
pursuant to the American Arbitration Association's rules applicable
to commercial disputes. The arbitration will be held in the county
in which Excite has its principal place of business.
12. GENERAL
a) Assignment. Neither party may assign this Agreement, in whole or in
part, without the other party's written consent (which will not be
unreasonably withheld), except that no such consent will be required
in connection with a merger, reorganization or sale of all, or
substantially all, of such party's assets. Any attempt to assign
this Agreement other than as permitted above will be null and void.
b) Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of California, notwithstanding
the actual state or country of residence or incorporation of Content
Provider.
8
<PAGE>
CONFIDENTIAL
c) Notice. Any notice under this Agreement will be in writing and
delivered by personal delivery, express courier, confirmed
facsimile, confirmed email or certified or registered mail, return
receipt requested, and will be deemed given upon personal delivery,
one (1) day after deposit with express courier, upon confirmation of
receipt of facsimile or email or five (5) days after deposit in the
mail. Notices will be sent to a party at its address set forth below
or such other address as that party may specify in writing pursuant
to this Section.
d) No Agency. The parties are independent contractors and will have no
power or authority to assume or create any obligation or
responsibility on behalf of each other. This Agreement will not be
construed to create or imply any partnership, agency or joint
venture.
e) Force Majeure. Any delay in or failure of performance by either
party under this Agreement will not be considered a breach of this
Agreement and will be excused to the extent caused by any occurrence
beyond the reasonable control of such party including, but not
limited to, acts of God, power outages and governmental
restrictions.
f) In the event that any of the provisions of this Agreement are held
by to be unenforceable by a court or arbitrator, the remaining
portions of the Agreement will remain in full force and effect.
g) Entire Agreement. This Agreement is the complete and exclusive
agreement between the parties with respect to the subject matter
hereof, superseding any prior agreements and communications (both
written and oral) regarding such subject matter. This Agreement may
only be modified, or any rights under it waived, by a written
document executed by both parties.
9
<PAGE>
CONFIDENTIAL
Internet Fashion Mall Excite, Inc.
By: /s/ Ben Narasin By: /s/ Robert C. Hord
-------------------------------- -------------------------------------
Name: Ben Narasin Name: Robert C. Hord
------------------------------ -----------------------------------
Title: President Title: EVP-CFO
----------------------------- ----------------------------------
Date: March 24, 1998 Date: 3/24/98
----------------------------- -----------------------------------
575 Madison Ave 555 Broadway
New York, NY 10022 Redwood City, California 94063
(212) 891-4054 (voice) 415.568.6000 (voice)
(212) 891-4033 (fax) 415.568.6030 (fax)
10
<PAGE>
CONFIDENTIAL
EXHIBIT A
DESCRIPTION AND TECHNICAL SPECIFICATIONS
FOR THE CONTENT
Content Provider will create the following content on the Content Pages:
o Contextual Content/short content pieces where possible online purchasing
opportunities are integrated into the article
o Hot Deals/deals being offered by clothing sites all over the web
o Designer Profiles
o Runway Coverage
o Contests
o Fashion Magazines
o Any other content mutually agreed upon by parties
/s/ [ILLEGIBLE]
11
<PAGE>
[LETTERHEAD OF FASHION MALL]
Memo
Phone (212) 891-6064
Fax (212) 891-6033
To: Stella Kleinman
Cc: Excite, Inc.
Address: 555 Broadway
Redwood City, CA 94063
From: Ben Narasin
Comments
This memo shall serve as an addendum to the Excite, Inc. Content License Area
Agreement with Internet Fashion Mall, LLC.
The new "Effective Date" of the contract shall now be the date of the launch
Fashionmall.com content on the new ExcIte Shopping Channel currently scheduled
for June 4, 1998, and the term of the contract will commence on that date.
Agreed:
Excite, Inc.
By: /s/ [ILLEGIBLE]
--------------------------------
Title: EVP
-----------------------------
Date: 6/2/98
------------------------------
Internet Fashion Mall, LLC
By: /s/ Ben Narasin
--------------------------------
Title: President
-----------------------------
Date: June 1, 1998
------------------------------
<PAGE>
Exhibit 10.9
Agreement Number:________
INKTOMI MERCHANT AGREEMENT
This MERCHANT AGREEMENT ("Agreement") is effective October 11th, 1998
("Effective Date"), by and between Inktomi Corporation ("Inktomi"), a Delaware
corporation with principal offices at 1400 Fashion Island Blvd. #309, San Mateo,
California 94404 and the "Merchant" listed below,
- --------------------------------------------------------------------------------
Merchant: FashionMall Contact: Ben Narasin
- --------------------------------------------------------------------------------
Address: 575 Madison Avenue Phone: 212-891-4054
- --------------------------------------------------------------------------------
New York, NY 10022 Fax: 212-891-6033
- --------------------------------------------------------------------------------
E-mail: [email protected]
- --------------------------------------------------------------------------------
Services and Fee Information
- --------------------------------------------------------------------------------
Term 12 months initial term. Merchant may cancel
participation with fifteen days written notice.
- --------------------------------------------------------------------------------
Store www.fashionmall.com and www.outletmall.com
- --------------------------------------------------------------------------------
Fees Transaction Fee: Five percent (5%) of the gross
amount of each
*Completed Transaction.
- --------------------------------------------------------------------------------
*Completed Transaction--Exclusive of taxes, returns, bad debt, shipping and
handling charges.
This Agreement includes the attached Terms and Conditions Addendum, and any duly
executed Additions Schedules. This Agreement contains, among other things,
warranty disclaimers, liability limitations and use limitations. For additional
services, each an executed Additions Schedule in Inktomi's standard form.
Capitalized terms that are not defined in the Agreement refer to the similar
term as set forth on this cover page (the "Cover Page"), or on an applicable
Additions Schedule, respectively. Any different or additional terms of any
related purchase order, confirmation, or similar form, even if signed by the
parties after the Effective Date, shall have no force or effect
FashionMall: Inktomi:
Signed: /s/ Ben Narasin Signed: /s/ Jerry Kennelly
---------------------------- --------------------------------
Printed: BEN NARASIN Printed: JERRY KENNELLY
--------------------------- -------------------------------
Title: PRESIDENT Title: C.F.O.
----------------------------- ---------------------------------
<PAGE>
Agreement Number:________
TERMS AND CONDITIONS ADDENDUM
1. Scope of Services. Merchant hereby grants Inktomi a license to copy, modify,
display, perform and electronically distribute information related to Merchant's
online store (the "Store"), products, services and other information
(collectively, "Merchant Information") for the purpose of integrating the Store
with the Inktomi shopping services offered to consumers through the Inktomi Web
Sites ("Inktomi Shopping Services"), and to allow users to access Merchant
Information using the Inktomi Shopping Services or other Inktomi products. The
"Inktomi Web Sites" shall mean, collectively, the world wide web sites operated
or hosted by or on behalf of Inktomi, and any an all successor, companion,
mirror, derivative or related sites, including, without limitation, third party
web sites that provide a link to a Inktomi Web Site and/or provide access to
services offered by on or behalf of Inktomi, pursuant to a Destination Site
Agreement, completion of application information as required by Inktomi,
delivery of the Merchant Information in electronic form to Inktomi, and payment
of the Monthly Fee (as set forth in Section 2(a) below) for the first month of
Inktomi providing the services described in this Section (the "Services"),
Inktomi will include the Merchant Information in the Inktomi Shopping Services.
2. Fees
2(a) For each Store transaction between Merchant and a customer using the
Inktomi Shopping Services (each a "Transaction"), Merchant will pay to Inktomi a
Transaction Fee, as set forth on the Cover Page. Merchant shall provide
accurate, timely accounting of the Transactions and pay Inktomi the Transaction
Fee monthly, within thirty (30) days of receipt of the monthly Inktomi tracking
report.
2(b) Merchant shall keep complete and accurate books and records of all
Transactions. Inktomi shall have the right to examine or appoint an independent
certified public accountant to examine and audit, at the expense of Inktomi,
not more than once a year, during normal business hours, all records and
accounts as may contain information bearing upon the Transactions. If such audit
uncovers a deficiency in accounting of greater than five percent (5%), then
Merchant shall immediately reimburse Inktomi for the costs of such audit.
3. Intellectual Property. Inktomi shall retain all right, title and interest in
and to the Inktomi Shopping Services and any portion thereof, including but not
limited to, copyrights, patents and trademarks ("Inktomi IP"). Merchant shall
retain all right, title and interest in and to the Store and Merchant
Information, including but not limited to, copyrights, patents, and trademarks
("Merchant IP"). Merchant agrees to defend, indemnify, and hold harmless Inktomi
against any claims or actions alleging that the Merchant IP infringes any U.S.
patent or copyright or any third party trademark right and to pay costs and
damages finally awarded in any such suit.
4. Logos. Merchant hereby grants Inktomi the right to establish links from the
Inktomi Web Sites to the Store and to use any trademarks and logos as necessary
to establish such links and to perform the Services, and, subject to Merchants's
consent, in trade shows and press releases; Merchant hereby warrants to Inktomi
that Inktomi's use of such trademarks and logos will not infringe any third
party's rights.
5. Term and Termination. This Agreement shall be effective as of the Effective
Date and shall remain in effect until terminated according to the provisions of
this Section 5. Either party may terminate this Agreement at any time upon
thirty (30) days written notice to the other party. Additionally, Inktomi shall
have the right to either terminate this Agreement or (at its option) suspend the
Services immediately if: (i) Merchant fails to pay any fees in a timely fashion;
or (ii) Merchant breaches any material provision of this Agreement, Section
2(c), 3, and 6 through 9 of this Agreement shall survive termination.
6. Warranty Disclaimer. INKTOMI MAKES NO WARRANTIES TO MERCHANT WITH RESPECT TO
THE INKTOMI SHOPPING SERVICES, THE INKTOMI WEB SITES, THE NUMBER OF TRANSACTIONS
GENERATED BY THE INKTOMI SHOPPING SERVICE OR INKTOMI'S ABILITY TO OFFER OR
FULFILL THE SERVICES, AND HEREBY DISCLAIMS ALL IMPLIED AND EXPRESSED WARRANTIES,
INCLUDING ANY WARRANTIES OF ACCURACY, RELIABILITY, MERCHANTABILITY, FITNESS FOR
A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
7. Confidentiality. Each party agrees that all code, inventions, algorithms,
know-how and ideas and all other business, technical and financial information
they obtain from the other are the confidential property of the disclosing party
("Proprietary Information" of the disclosing party). Except as expressly and
unambiguously allowed herein, the receiving party will hold in confidence and
not use or disclose any Proprietary Information of the disclosing party and
shall similarly bind its employees in writing. The receiving party shall not be
obligated under this Section 7 with respect to information the receiving party
can document: (i) is or has become readily publicly available without
restriction through no fault of the receiving party or its employees or agents;
or (ii) is received without restriction from a third party lawfully in
possession of such information and lawfully empowered to disclose such
information; or (iii) was rightfully in the possession of the receiving party
without restriction prior to its disclosure by the other party.
<PAGE>
8. Limitation of Liability. Merchant hereby agrees to indemnify and hold Inktomi
harmless for any claims related to Merchant's sale or offer to sell goods or
services. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, INKTOMI
WILL NOT BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER
ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY
(I) FOR CLAIMS RELATED TO THE AVAILABILITY OR ACCURACY OF THE INKTOMI SHOPPING
SERVICES OR THE SUCCESS OR LEVEL OF SALES RESULTING THEREFROM; (II) FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS; OR (III) IN ANY CASE, FOR
ANY AMOUNTS IN EXCESS OF THE FEES PAID TO INKTOMI HEREUNDER DURING THE TWELVE
MONTH PERIOD PRIOR TO THE DATE THE CAUSE OF ACTION AROSE.
9. General. Merchant shall not receive any rights under this Agreement except
for those rights expressly and unambiguously set forth herein. Merchant shall
not assign or transfer any rights or obligations under this Agreement without
the prior written approval of Inktomi and any attempt to do so shall be void and
without effect. Inktomi will not be responsible for any delay in the performance
of its obligations hereunder caused by any acts, omissions, or events beyond
Inktomi's control. This Agreement represents the complete agreement and
understanding between Inktomi and Merchant with respect to the subject matter
herein, and supersedes any other written or oral agreement. The terms and
conditions of this Agreement may only be modified in a writing signed by both
parties. The invalidity or uneforceability of any provision of this Agreement
may only be modified in a writing signed by both parties. The invalidity or
unenforceability of any provision of this Agreement shall not affect the
enforceability or validity of any other provision. This Agreement shall be
governed by the laws of the State of California, without regard to conflicts of
laws provisions thereof. The sole jurisdiction and venue for actions related to
the subject matter hereof shall be the California state and U.S. federal courts
having within their jurisdiction the location of Inktomi's principal place of
business. In any action to enforce rights under this Agreement, the prevailing
party shall be entitled to recover costs and attorney's fees.
10. Terms and Conditions. Terms of this contract, including but not limited to
commissions due from merchant, shall be restricted to Inktomi's "Shopping
Service" as it has been explained to merchant, and not to Inktomi's search,
cacheing or other technology. Separately, in the event that merchant has an
existing commission, revenue share or other fee based relationship with any
online vendor which provides distribution or placement of the Inktomi Shopping
Service, the vendor's contract shall supersede Inktomi's and only the vendor
shall be paid a fee with any fees to Inktomi becoming null and void for that
vendor location and duration of contract.
<PAGE>
Exhibit 10.10
YAHOO! INC.
CONTENT LICENSE AGREEMENT
THIS CONTENT LICENSE AGREEMENT (the "Agreement") is made as of this __th
day of February, 1998 (the "Effective Date") between YAHOO!, INC, ,a California
corporation, with offices at 3400 Central Expressway, Suite 201, Santa Clara, CA
95051, ("YAHOO") and Internet Fashion Mall LLC, ("Licensor"), a New York
corporation, with offices at 575 Madison Avenue, 7th floor, New York, NY 10022.
In consideration of the mutual promises contained herein, the parties agree as
follows:
SECTION 1: DEFINITIONS.
Unless otherwise specified, capitalized terms used in this Agreement shall
have the meanings attributed to them in Exhibit A hereto.
SECTION 2: GRANT OF LICENSES.
2.1 Grant of Licenses. Subject to the terms and conditions of this Agreement,
Licensor hereby grants to Yahoo, under Licensor's Intellectual Property
Rights:
(a) A non-exclusive, worldwide license to use, modify, reproduce, distribute,
display and transmit the Licensor Content in electronic form in connection
with Yahoo Properties via the Internet, and to permit users of the Yahoo
Properties to download and print the Licensor Content for personal use.
Yahoo's license to modify the Licensor content shall be limited to
modifying the Licensor Content to fit the format and look and feel of the
Yahoo Property.
(b) A non-exclusive, worldwide, fully paid license to use, reproduce and
display the Licensor's Brand Features: (i) in connection with the
presentation of the Licensor Content on the Content Pages in the Yahoo
Properties; and (ii) in connection with the marketing and promotion of the
Yahoo Properties.
(c) Yahoo shall be entitled to sublicense the rights set forth in this Section
2.1 (1) to its Affiliates only for inclusion in Yahoo Properties, and (2)
in connection with any mirror site, derivative site, or distribution
arrangement concerning a Yahoo Property.
SECTION 3: DELIVERY OF LICENSOR CONTENT: ADVERTISING REVENUE.
3.1 Yahoo's Responsibilities. [In addition to any responsibilities that may be
set forth in Exhibit C,] Yahoo will be responsible for the design, layout,
posting, and maintenance of the Content Pages. In no event is Yahoo under any
obligation, express or implied, to
1
<PAGE>
post or otherwise include any of the Licensor Content in any Yahoo Property,
including without limitation, in any Content Pages.
3.2 Licensor Assistance [In addition to any responsibilities that may be set
forth in Exhibit C,] Licensor will provide on-going assistance to Yahoo with
regard to technical, administrative and service-oriented issues relating to the
utilization, transmission arid maintenance of the Licensor Content, as Yahoo may
reasonably request. Licensor will use its reasonable best efforts to ensure that
the Licensor Content is accurate, comprehensive and updated regularly as set
forth in Exhibit C.
3.3 Advertising Rights. Yahoo shall have the solo right to sell and retain all
Advertising Rights with respect to Content Pages.
3.4 Notices. Yahoo will not alter or impair any acknowledgment of copyright or
other Intellectual Property Rights of Licensor that may appear in the Licensor
Content and the Licensor Brand Features, including all copyright, trademark and
similar notices that Licensor may reasonably request.
3.5 Links. The parties will maintain the hypertext links specified in Exhibit D.
SECTION 4: DELIVERY OF LICENSOR CONTENT
During the term of this Agreement, Licensor shall deliver updates of the
Licensor Content to Yahoo in accordance with the Delivery Specifications set
forth in Exhibit C. Licensor also shall provide Yahoo with reasonable prior
notice of any significant Enhancements that generally affect the appearance,
updating, delivery or other elements of the Licensor Content, and shall make
such Enhancements available to Yahoo upon commercially reasonable terms.
SECTION 5: INDEMNIFICATION
Licensor, at its own expense, will indemnify, defend and hold harmless
Yahoo, its Affiliates and their employees, representatives, agents and
affiliates, against any claim, suit, action, or other proceeding brought against
Yahoo or an Affiliate based on or arising from a claim that the Licensor Content
as delivered to Yahoo or any Licensor Brand Feature infringes in any manner any
Intellectual Property Right of any third party or contains any material or
information that is obscene, defamatory, libelous, slanderous, that violates any
person's right of publicity, privacy or personality, or has otherwise resulted
in any tort, injury, damage or harm to any person; provided, however, that in
any such case: (x) Yahoo provides Licensor with prompt notice of any such
claim; (y) Yahoo permits Licensor to assume and control the defense of such
action, with counsel chosen by Licensor (who shall be reasonably acceptable
to Yahoo); and (z) Licenser does not enter into any settlement or compromise
of any such claim without Yahoo's prior written consent, which consent shall
not be unreasonably withheld. Licensor will pay any and all costs, damages,
and expenses, including, but not limited to, reasonable attorneys' fees and
2
<PAGE>
costs awarded against or otherwise incurred by Yahoo or an Affiliate in
connection with or arising from any such claim, suit, action or proceeding. It
is understood and agreed that Yahoo does not intend and will not be required to
edit or review for accuracy or appropriateness any Licensor Content.
Yahoo, at its own expense, will indemnify, defend and hold harmless
Licensor, its Affiliates and their employees, representatives, agents and
affiliates, against any claim, suit, action, or other proceeding brought by a
third party against Licensor or an Affiliate based on or arising from
modifications to the Licensor Content made by Yahoo that are not approved in
advance by Licensor, provided, however, that in any such case; (x) Licensor
provides Yahoo with prompt notice of any such claim; (y) Licensor permits Yahoo
to assume and control the defense of such action, with counsel chosen by Yahoo
(who shall be reasonably acceptable to Licensor); and (z) Yahoo does not enter
into any settlement or compromise of any such claim without Licensor's prior
written consent, which consent shall not be unreasonably withheld. Yahoo will
pay any and all costs, damages, and expenses, including, but not limited to,
reasonable attorneys' fees and costs awarded against or otherwise incurred by
Licensoror an Affiliate in connection with or arising from any such claim, suit,
action or proceeding.
SECTION 6: LIMITATION OF LIABILITY.
EXCEPT AS PROVIDED IN SECTION 5, UNDER NO CIRCUMSTANCES SHALL LICENSOR,
YAHOO, OR ANY AFFILIATE BE LIABLE TO ANOTHER PARTY FOR THE DIRECT, INCIDENTAL,
CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES ARISING FROM THIS AGREEMENT, EVEN IF
THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, SUCH AS BUT NOT
LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS.
SECTION 7: TERMS AND TERMINATION
7.1 Initial Term and Renewals. This Agreement will become effective as of the
Effective Date and, shall, unless sooner terminated as provided below or as
otherwise agreed remain effective for an initial term of twelve (12) months
following the first date of public availability of the Licenser Content on a
Content Page within a Yahoo Property (the "Initial Term"). After the Initial
Term, this Agreement will be automatically renewed for successive additional six
month periods ("Extension Terms"), unless otherwise terminated by either party
by giving notice to the other party not less than sixty (60) days prior to the
end of a Term. As used herein, the "Term" means the Initial Term and any
Extension Term(s).
7.2 Termination for Cause. Notwithstanding the foregoing, this Agreement may be
terminated by either party immediately upon notice if the other party: (w)
becomes
3
<PAGE>
insolvent; (x) files a petition in bankruptcy; (y) makes an assignment for the
benefit of its creditors; or (z) breach any of its obligations under this
Agreement in any material respect, which breach is not remedied within thirty
(30) days following written notice to such party. Work in process best efforts
attempts to remedy breaches identified shall be considered adequate to be
construed as a "remedy".
7.3 Effect of Termination. Any termination pursuant to this Section 7 shall be
without any liability or obligation of the terminating party, other than with
respect to any breach of this Agreement prior to termination. The provisions of
Sections 5, 6, 7, 8, 9, 10, and this Section 7.3 shall survive any termination
or expiration of this Agreement.
SECTION 8: RESOLUTION OF DISPUTES:
(a) The parties desire to resolve disputes arising out of this Agreement without
litigation. Accordingly, except for action seeking a temporary restraining order
or injunction related to the purposes of this Agreement, or suit to compel
compliance with this dispute resolution process, the parties agree to use the
following alternative dispute resolution procedure as their sole remedy with
respect to any controversy or claim arising out of or relating to this Agreement
or its breach.
(b) At the written request of a party, each party will appoint a knowledgeable,
responsible representative to meet and negotiate in good faith to resolve any
dispute arising under this Agreement. The parties intend that these negotiations
be conducted by non-lawyer, business representatives. The location, format,
frequency, duration, and conclusion of these discussions shall be left to the
discretion of the representatives. Upon agreement, the representatives may
utilize other alternative dispute resolution procedures such as mediation to
assist in the negotiations. Discussions and correspondence among the
representatives for purposes of these negotiations shall be treated as
confidential information developed for purposes of settlement, exempt from
discovery and production, which shall not be admissible in the arbitration
described below or in any lawsuit without the concurrence of all parties.
Documents identified in or provided with such communications that are not
prepared for purposes of the negotiations are not so exempted and may, if
otherwise admissible, be admitted in evidence in the arbitration or lawsuit.
(c) If the negotiations do not resolve the dispute within 60 days of the initial
written request, the dispute shall be submitted to binding arbitration by a
single arbitrator pursuant to the Commercial Arbitration Rules of the American
Arbitration Association. A party may demand such arbitration in accordance with
the procedures set out in those rules. Discovery shall be controlled by the
arbitrator and shall be permitted to
4
<PAGE>
the extent set out in this section. Each party may submit in writing to a party,
and that party shall so respond, to a maximum of any combination of 35 (none of
which may have subparts) of the following: interrogatories, demands to produce
documents and requests for admission. Each party is also entitled to take the
oral deposition of one individual of another party. Additional discovery maybe
permitted upon mutual agreement of the parties. The arbitration hearing shall be
commenced within 60 days of the demand for arbitration. The arbitration shall be
held in Santa Clara, California. The arbitrator shall control the scheduling so
as to process the matter expeditiously. The parties may submit written briefs.
The arbitrator shall rule on the dispute by issuing a written opinion within 30
days after the close of hearings. The times specified in this section may be
extended upon mutual agreement of the parties or by the arbitrator upon a
showing of good cause. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.
(d) Each party shall bear its own costs of these procedures. A party seeking
discovery shall reimburse the responding party the costs of production of
documents (to include search time and reproduction costs). The parties shall
equally split the fees of the arbitration and the arbitrator.
SECTION 9: OWNERSHIP.
9.1 By Licensor. Yahoo acknowledges and agrees that: (i) as between Licensor on
the one hand, and Yahoo and its Affiliates on the other, Licensor owns all
right, title and interest in the Licensor Content and the Licensor Brand
Features; (ii) nothing in this Agreement shall confer in Yahoo or an Affiliate
any right of ownership in the Licensor Content or the Licensor Brand Features;
and (iii) neither Yahoo or its Affiliates shall now or in the future contest the
validity of the Licensor Brand Features. No licenses are granted by either party
except for those expressly set forth in this Agreement.
9.2 By Yahoo. Licensor acknowledges and agrees that: (i) as between Licensor on
the one hand, and Yahoo and its Affiliates on the other, Yahoo or the Affiliates
own all right, title and interest in any Yahoo Property and the Yahoo Brand
Features; (ii) nothing in this Agreement shall confer in Licensor any license or
right of ownership in the Yahoo Brand Features; and (iii) Licensor shall not now
or in the future contest the validity of the Yahoo Brand Features. No licenses
are hereby granted by Yahoo. Yahoo or its Affiliates shall own all derivative
works created by Yahoo from the Licensor Content, including the Content Pages,
pursuant to this Agreement, to the extent such is separable from the Licensor
Content.
5
<PAGE>
SECTION 10: PUBLIC ANNOUNCEMENTS.
The parties will cooperate to create any and all appropriate public
announcements relating to the relationship set forth in this Agreement. Neither
party shall make any public announcement regarding the existence or content of
this Agreement without the other party's prior written approval and consent.
SECTION 11: NOTICES: MISCELLANEOUS PROVISIONS
11.1 Notices. All notices, requests and other communications called for by this
agreement shall be deemed to have been given immediately if made by telecopy or
electronic mail (confirmed by concurrent written notice sent first class U.S.
mail, postage prepaid), if to Yahoo at 3400 Central Expressway, Suite 2019 Santa
Clara, CA 95051, Fax: (408) 731-3301 Attention: Vice President (e-mail:
[email protected]), with a copy to its General Counsel
(e-mail:[email protected]), and if to Licensor at the physical and electronic
mail addresses set forth on the signature page of this Agreement, or to such
other addresses as either party shall specify to the other. Notice by any other
means shall be deemed made when actually received by the party to which notice
is provided.
11.2. Miscellaneous Provisions. This Agreement will bind, and inure to the
benefit of each party's permitted successors and assigns. Neither party may
assign this Agreement, in whole or in part, without the other party's written
consent; provided, however, that: (i) either party may assign this Agreement
without such consent in connection with any merger, consolidation, any sale of
all or substantially all of such party's assets or any other transaction in
which more than fifty percent (50%) of such party's voting securities are
transferred. Any attempt to assign this Agreement other than in accordance with
this provision shall be null and void. This Agreement will be governed by and
construed in accordance with the laws of the State of California, without
reference to conflicts of laws rules, and without regard to its location of
execution or performance. If any provision of this Agreement is found invalid or
unenforceable, that provision will be enforced to the maximum extent
permissible, and the other provisions of this Agreement will remain in force.
Neither this Agreement, nor any terms and conditions contained herein may be
construed as creating or constituting a partnership, joint venture or agency
relationship between the parties. No failure of either party to exercise or
enforce any of its rights under this Agreement will act as a waiver of such
rights. This Agreement and its exhibits are the complete and exclusive agreement
between the parties with respect to the subject matter hereof, superseding and
replacing any and all prior agreements, communications, and understandings, both
written and oral, regarding such subject matter. This Agreement may only be
modified, or any rights under it waived, by a written document executed by both
parties. This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute a single instrument. Execution and
delivery of this Agreement may be evidenced by facsimile transmission.
6
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the date first written above.
YAHOO! INC. LICENSOR
By: [ILLEGIBLE] By: [ILLEGIBLE]
-------------------------------- -----------------------------------
Title: Vice President, Business Title: President
----------------------------- ---------------------------------
Development
- -----------------------------------
Address: 3400 Central Expwy Address: 575 Madison Avenue, 7th Fl.
--------------------------- ------------------------------
Santa Clara, CA 95057 New York, NY 10022
- ----------------------------------- ---------------------------------------
Telecopy: Telecopy: 212-891-6033
-------------------------- -----------------------------
E-mail: E-mail: [email protected]
---------------------------- --------------------------------
7
<PAGE>
EXHIBIT C
DELIVERY AND TECHNICAL SPECIFICATIONS
A. Licensor's Responsibilities:
1. Send "static" content via email or as Microsoft Word documents.
2. Send regularly updated content to agreed upon email address(es) at
Yahoo.
3. Agree to keep all content current and to send updates in a timely
fashion.
B. Yahoo's Responsibilities:
1. Create email address(es) at Yahoo for receiving feeds from Licensor and
process feeds when they arrive.
2. Design, post and host the pages displaying the data.
C. Format of Content Delivery:
To be mutually agreed upon by both parties.
<PAGE>
EXHIBIT D
LINKS
During the Term of this Agreement, the following links will be maintained:
<TABLE>
<CAPTION>
LOCATION OF LINK LINK TO WHERE SPECIFICS OF LINK
- ---------------- ------------- -----------------
<S> <C> <C>
At the top of each page FashionMall.com FashionMall.Logo
containing FashionMall
content
At the bottom of each FashionMall.com Text link(s) to more/related
Page containing stories.
FashionMall content.
At the bottom of each FashionMall.com Text link as a part of the
Page containing copyright text.
FashionMall content
Within the content Relevant locations on the Text links
displayed as relevant and as FashionMall.com site or to
supplied by FashionMall.com (not sites related to the topic of
to excceed 2 links per article or the article.
at Yahoo's discretion).
</TABLE>
<PAGE>
To: Ben Nerasin, FashionMall.com
From: Elizabeth Collet, Yahoo!
This memo shall serve as an addendum to the "Yahoo! Inc. Content License
Agreement" with Internet Fashion Mall, LLC.
The new "Effective Date" of the contract shall now be the date of the launch of
Fashionmall.com content on the Yahoo! site. The terms of the contract will
commence on that date. Provided, however, that should the launch date be delayed
past December 31st, 1998, the contract shall be deemed to be expired and neither
party shall have any obligations to the other.
Agreed:
Yahoo! Inc.
By: [ILLEGIBLE]
--------------------------------
Title: VP Business Development
-----------------------------
Date: 6/4/98
------------------------------
Internet Fashion Mall, LLC
By: [ILLEGIBLE]
--------------------------------
Title: 6/5/98
-----------------------------
Date: President
------------------------------
<PAGE>
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
May 19, 1999
