<PAGE>
================================================================================
FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
Commission file number 0-26151
-------
fashionmall.com, Inc.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 06-1544139
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
575 Madison Avenue, New York, NY 10022
---------------------------------------------------
(Address of principal executive offices) (Zip code)
(212) 891-6064
----------------------------------------------------
(Registrant's telephone number, including area code)
The number of shares of common stock, $.01 par value, outstanding as of November
7, 2000 was 7,500,000.
================================================================================
<PAGE>
Form 10-QSB
Index
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999................................................................3
Consolidated Statements of Operations (unaudited) for the three months
ended September 30, 2000 and 1999 and for the nine months ended September 30,
2000 and 1999....................................................................4
Consolidated Statements of Cash Flows (unaudited) for the three months
ended September 30, 2000 and 1999 and for the nine months ended September 30,
2000 and 1999....................................................................5
Notes to Unaudited Consolidated Financial Statements.................................6
Item 2. Management's Discussion and Analysis or Plan of Operations...........................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................................14
Item 6. Exhibits and Reports on Form 8-K ...................................................14
Signatures..........................................................................15
Financial Data Schedule.............................................................15
</TABLE>
2
<PAGE>
fashionmall.com, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents $ 26,960,000 $34,114,000
Marketable securities 8,256,000 7,452,000
Accounts receivable, net of an allowance of $327,000
and $232,000, respectively 994,000 797,000
Inventories, net of a reserve of $0 and $100,000, respectively -- 191,000
Prepaid expenses and other current assets 498,000 434,000
------------ -----------
Total current assets 36,708,000 42,988,000
------------ -----------
INVESTMENTS 1,728,000 --
PROPERTY AND EQUIPMENT - net of accumulated depreciation of $80,000
and $36,000, respectively 259,000 223,000
CAPITALIZED SOFTWARE COSTS - net of accumulated amortization of $150,000
and $52,000, respectively 246,000 310,000
OTHER ASSETS 751,000 20,000
------------ -----------
Total assets $ 39,692,000 $43,541,000
============ ===========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Accounts payable $ 1,921,000 $2,784,000
Accrued expenses 1,112,000 295,000
Customer deposits 84,000 14,000
Deferred revenue -- 25,000
------------ -----------
Total liabilities 3,117,000 3,118,000
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock - $.01 par value; 3,000,000 shares authorized;
824,084 shares issued and outstanding 8,000 8,000
Common stock - $.01 par value; 35,000,000 shares authorized; 7,500,000 shares
issued and outstanding 75,000 75,000
Additional paid-in capital 51,668,000 49,396,000
Unrealized gain on marketable securities available for sale, net of tax 17,000 46,000
Accumulated deficit (15,193.000) (9,102,000)
------------ -----------
Total stockholders' equity 36,575,000 40,423,000
------------ -----------
Total liabilities and stockholders' equity $39,692,000 $43,541,000
============ ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
fashionmall.com, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SITE REVENUES $ 1,127,000 $ 889,000 $ 3,678,000 $ 2,609,000
COSTS AND EXPENSES:
Site development, merchandise and content 416,000 176,000 649,000 520,000
Advertising and marketing 533,000 922,000 3,924,000 1,597,000
Selling expense 430,000 114,000 994,000 243,000
General and administrative 1,332,000 879,000 3,979,000 4,392,000
----------- ----------- ----------- -----------
Total costs and expenses 2,711,000 2,091,000 9,546,000 6,752,000
----------- ----------- ----------- -----------
Loss from operations (1,584,000) (1,202,000) (5,868,000) (4,143,000)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest and dividend income 651,000 705,000 1,699,000 772,000
Interest expense and other financing costs -- -- -- (737,000)
----------- ----------- ----------- -----------
Total other income (expense) 651,000 705,000 1,699,000 35,000
----------- ----------- ----------- -----------
Net loss $ (933,000) $ (497,000) $(4,169,000) $(4,108,000)
=========== =========== =========== ===========
NET LOSS DATA:
Net loss available to common shareholders $ (933,000) $(1,660,000) $(6,108,000) $(6,046,000)
=========== =========== =========== ===========
Basic and diluted earnings per share $(0.12) $(0.22) $(0.81) $(1.04)
=========== =========== =========== ===========
Basic and diluted weighted average common shares
outstanding 7,500,000 7,500,000 7,500,000 5,833,333
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
fashionmall.com, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- -------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Activities
Net loss $ (933,000) $ (497,000) $(4,169,000) $(4,108,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Bad debt 119,000 132,000 120,000 329,000
Depreciation and amortization 131,000 18,000 228,000 38,000
Unrealized gain on marketable securities 20,000 18,000 (29,000) 18,000
Non-cash interest expense and other financing
costs - - - 668,000
Non-cash compensation expense 111,000 107,000 333,000 2,917,000
Changes in operating assets and liabilities:
Accounts receivable 41,000 (51,000) (317,000) (361,000)
Inventories 116,000 (141,000) 191,000 (249,000)
Prepaid expenses and other current assets (133,000) 32,000 (64,000) (508,000)
Other assets 107,000 - (731,000) -
Deferred financing costs - - - 397,000
Accounts payable (688,000) 128,000 (863,000) 80,000
Accrued expenses 337,000 - 746,000 -
Customer deposits 32,000 - 70,000 17,000
Deferred revenue (25,000) (16,000) (25,000) (20,000)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities (765,000) (270,000) (4,510,000) 18,000
----------- ----------- ----------- -----------
Investing Activities
Marketable securities 629,000 - (2,532,000) -
Purchase of property and equipment (12,000) (196,000) (78,000) (219,000)
Software development costs (1,000) - (34,000) -
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities 616,000 (196,000) (2,644,000) (219,000)
----------- ----------- ----------- -----------
Financing Activities
Repayment of loans - (58,000) - (489,000)
Initial public offering proceeds - - - 34,775,000
Capital contributions - - - 8,293,000
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities - (58,000) - 42,579,000
----------- ----------- ----------- -----------
Increase (decrease) in cash & cash equivalents (149,000) (524,000) (7,154,000) 42,378,000
Cash and cash equivalents - beginning of period 27,109,000 42,984,000 34,114,000 82,000
----------- ----------- ----------- -----------
Cash and cash equivalents - end of period $26,960,000 $42,460,000 $26,960,000 $42,460,000
=========== =========== =========== ===========
Supplemental Cash Flow Information
Cash paid during the period for:
Taxes and interest $ -- $ -- $ -- $ 15,000
Non-cash operating, investing and financing activities:
Fair value of warrants issued in connection with
loan to related party -- -- -- 56,000
Incremental difference between issue price and
fair value of capital contribution -- -- -- 576,000
Fair value of warrants issued in connection with
convertible preferred stock -- 1,163,000 1,939,000 1,938,000
Revenue generated from barter contracts 150,000 402,000 401,000 1,127,000
Advertising and consulting expenses incurred
related to barter contracts 212,000 403,000 484,000 1,030,000
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
fashionmall.com, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
1. Description of Business
Fashionmall.com, Inc. ("FASH" or the "Company") operates multiple
internet properties within the fashion lifestyle segment and generates revenues
from these properties by charging fees for the placement of either store links,
advertising, content or other materials on the sites.
FASH properties include www.fashionmall.com, our original property,
which is a general fashion mall, www.outletmall.com, our online outlet mall, and
www.boo.com, a global style guide for the web. Our clients include traditional
and on-line retailers and catalogs as well as manufacturers, magazines and
advertisers who desire to tap into our consumer traffic. Clients pay a fixed or
variable fee for site placements tied to the location and or amount of traffic
they are exposed to.
The accompanying unaudited consolidated financial statements of the
Company have been prepared pursuant to the rules of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
as of and for the year ended December 31, 1999 included in the Company's Form
10-KSB. In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, which are of a normal recurring
nature, necessary for fair presentation of the results for the periods
presented.
The results of operations presented for the three and nine months ended
September 30, 2000 and 1999, are not necessarily indicative of the results to be
expected for any other interim period or any future fiscal year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and subsidiaries, all significant intercompany balances and
transactions have been eliminated.
2. Revenue Recognition
The Company's primary source of revenue is from tenant fees.
Manufacturers, retailers and others pay fees to the Company to lease space on
the fashionmall.com web site. Revenues are recognized as services are rendered.
The Company recognizes revenue earned from tenant fees in accordance with its
customer contracts that specify either a fixed fee or a fee based on traffic
delivered.
6
<PAGE>
Barter Arrangements
In January 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on EITF Issue 99-17, "Accounting for Advertising Barter Transactions."
The EITF agreed that advertising barter transactions entered into after January
20, 2000 should be accounted for at fair value on a one-for-one basis with
revenue from similar advertising sold in a cash transaction that occurred in the
preceding six months with comparable terms, such as length of program, cost and
type of advertisement. A cash transaction may be used only once as the basis for
providing fair value evidence for a barter transaction. The Company adopted EITF
99-17 on January 1, 2000.
The Company's barter revenue for the three months and nine months ended
September 30, 2000 was $150,000 and $401,000. On a pro forma basis, the
Company's barter revenue for the three months and nine months ended September
30, 1999 was $402,000 and $1,127,000 based on the requirements of EITF 99-17.
3. Inventories
Inventories, which consisted of purchased apparel and accessories were
stated at the lower of cost (first-in, first-out) or market value as of December
31, 1999. As of September 30, 2000, the Company has liquidated its inventory and
currently has no plans to stock inventory. Fulfillment will be completed
directly by tenants on our sites.
4. Net Loss per Share
A reconciliation between the numerator and denominator of basic and
diluted net loss per share is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(unaudited) (unaudited)
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $(933,000) $ (497,000) $(4,169,000) $(4,108,000)
Accretion of beneficial conversion feature of
convertible preferred stock - (1,163,000) (1,939,000) (1,938,000)
--------- ----------- ----------- -----------
Net loss available to common shareholders
$(933,000) $(1,660,000) $(6,108,000) $(6,046,000)
========= =========== =========== ===========
Basic and diluted per share information:
Weighted-average shares 7,500,000 7,500,000 7,500,000 5,833,333
Earnings per common share $(0.12) $(0.22) $(0.81) $(1.04)
</TABLE>
As a result of the Company's reorganization from a limited liability
company to a C corporation, the 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. Accordingly, the
Company computes net loss per share in accordance with SFAS No. 128, "Earnings
per Share." Basic and diluted loss per share requires that all equity
instruments issued at normal prices prior to the effective date of an initial
public offering be included in the calculation of basic and diluted loss per
share as if they were outstanding for all periods presented whether or not the
impact is dilutive. Basic net loss per share is computed by dividing the net
loss attributable to common stockholders for the period by the weighted average
number of common shares outstanding during each period. Diluted net loss per
share is computed by dividing the net loss for the period by the weighted
7
<PAGE>
average number of common shares and common share equivalents outstanding during
each period. Common share equivalents, composed of common shares issuable upon
the exercise of stock options and warrants and upon conversion of mandatory
redeemable preferred stock, are included in the net loss per share to the extent
such shares are dilutive. The effect of the exercise of certain warrants and
options issued during 2000 are not included, as their effect on diluted earnings
per share would be anti-dilutive.
5. Comprehensive Income (Loss)
During 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report all changes in equity during a
period except those resulting from investments by owners and distributions to
owners, for the period in which they are recognized. Comprehensive income is the
total of net income and all other non-owner changes in equity (or other
comprehensive income) such as unrealized gains/losses on securities classified
as available-for-sale, foreign currency translation adjustments and minimum
pension liability adjustments. Comprehensive income and other comprehensive
income must be reported on the face of annual financial statements. The
components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(unaudited) (unaudited)
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net loss $(933,000) $(497,000) $(4,169,000) $(4,108,000)
Unrealized gains on investments in
marketable securities available-for-sale 20,000 - 17,000 -
--------- --------- ----------- -----------
Comprehensive loss $(913,000) $(497,000) $(4,152,000) $(4,108,000)
========= ========= =========== ===========
</TABLE>
6. Commitments and Contingencies
In August 2000, Boo, Inc. commenced an action against fashionmall.com, Inc.
and other defendants in U. S. District Court, District of Minnesota, for
trademark infringement of the mark "Boo" and related claims. Among other relief,
the complaint seeks an injunction to prevent us and the other defendants from
using the `Boo' mark, and three times the amount of unspecified damages. The
facts underlying the proceeding are that Boo. Inc. is a designer and seller of
clothing and accessories under various "Boo" labels in the United States with
the majority of sales occurring in Minnesota. In June 2000, the Company acquired
the name, trademarks and content of boo.com after its previous owners liquidated
the company. This action is in a preliminary stage. The Company intends to
vigorously defend itself against the action. The Company has been advised by
counsel that that this action is without merit.
In September 2000, Boo Club, Inc. filed an action against fashionmall.com,
Inc. and other defendants in the U.S. District Court of California, alleging
trademark and trade dress infringement and dilution, unfair competition, unfair
business practices and fraudulent transfer for the alleged use of marks "boo,"
"cluboo," "Boomclub" and Boom. Among other relief, the complaint seeks an
injunction preventing the Company or any of the other defendants from using the
marks in question and at least $1,000,000 in compensatory damages and $3,000,000
in punitive damages. This action is in the preliminary stage. The Company
intends to vigorously defend itself. The Company has been advised by counsel
that this action is without merit.
8
<PAGE>
There are no other material legal proceedings to which we are a party or
known to be contemplated and we know of no material legal proceedings pending or
threatened, or judgments entered, against any of our directors or officers in
their capacity as such.
Item 2. Management's Discussion and Analysis or Plan of Operations
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto.
All statements contained herein that are not historical facts,
including but not limited to, statements regarding the Company's current
business strategy and the Company's plans for future development and operations,
are based upon current expectations. These statements are forward-looking in
nature and involve a number of risks and uncertainties. Generally, the words
"anticipates," "believes," "estimates," "expects" and similar expressions as
they relate to the Company and its management are intended to identify
forward-looking statements. Actual results may differ materially. Among the
factors that could cause actual results to differ materially are those set forth
under the caption "Cautionary Statements Regarding Forward-Looking Statements."
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements speak only as of the date made.
Overview
Fashionmall.com, Inc. operates multiple internet properties within the
fashion lifestyle segment and generates revenues from these properties by
charging fees for the placement of either store, links, advertising, content or
other materials on the sites.
FASH properties include www.fashionmall.com, our original property,
which is a general fashion mall, www.outletmall.com, our online outlet mall,
and www.boo.com, a global style guide for the web. Our clients include
traditional and on-line retailers and catalogs as well as manufacturers,
magazines and advertisers who desire to tap into our consumer traffic. Clients
pay a fixed or variable fee for site placements tied to the location and or
amount of traffic they are exposed to.
Results of Operations
Quarter ended September 30, 2000 vs. Quarter ended September 30, 1999
Site Revenues. Total revenues increased by $238,000, or 27%, to
$1,127,000 in the third quarter of 2000 as compared to $889,000 in the third
quarter of 1999. Barter revenue decreased by $252,000, or 63%, to $150,000 in
the third quarter of 2000 as compared to $402,000 in the third quarter of 1999.
Barter revenue represented 13% and 45% of total revenues for the quarters ended
September 30, 2000 and 1999, respectively. The increase in total revenues was
due to new clients and sponsors and increased rates for space on fashionmall.com
based on traffic growth.
Costs and Expenses. Total expenses increased by $620,000 or 30% to
$2,711,000 for the quarter ended September 30, 2000 from $2,091,000 for the
quarter ended September 30, 1999. The increase was due to expenses associated
with increased expenditures for technical staff, sales staff, and an inventory
write-off and infrastructure development to support the growth of our business.
The Company incurred non-cash compensation charges in connection with the Chazen
options of approximately $111,000 for the quarter ended September 30, 2000 and
$107,000 for the quarter ended September 30, 1999 and will continue to incur
these charges in each of the next three quarters.
Site Development, Merchandise and Content Expenses. Site development,
merchandise and content expenses increased by $240,000 or 136% to $416,000 for
the quarter ended September 30, 2000 from $176,000 for the quarter ended
September 30, 1999. The increase was primarily due to an inventory write-off
associated with liquidating outletmall.com inventory and discontinuing the
business of direct order
9
<PAGE>
fulfillment by the company as well as consulting expenses related to the
reintroduction of the boo.com site.
Advertising and Marketing Expenses. Advertising and marketing expenses
decreased by $389,000 or 42% to $533,000 for the quarter ended September 30,
2000 from $922,000 for the quarter ended September 30, 1999. The decrease was
primarily due to reduced print, outdoor and other advertising on behalf of the
fashionmall.com brand as well as a reduction of online banner advertising
programs, reduction of barter and a reduction in purchasing traffic.
Selling Expenses. Selling expenses increased by $316,000 or 277% to
$430,000 for the quarter ended September 30, 2000 from $114,000 for the quarter
ended September 30, 1999. The selling expense increase was primarily due to
increasing our sales force.
General and Administrative Expenses. General and administrative
expenses increased by $453,000 or 52% to $1,332,000 for the quarter ended
September 30, 2000, from $879,000 for the quarter ended September 30, 1999.
During the respective quarters, we incurred non-cash compensation charges in
connection with the Chazen options of approximately $111,000 and $107,000,
respectively, and will continue to incur these charges in each of the next three
quarters. The increase was primarily due to the impact of expenses incurred in
the current year to build the staff for the increased growth of the company.
Other Income and Expense. Interest and dividend income was $651,000 for
the quarter ended September 30, 2000 as compared $705,000 for the third quarter
of 1999. The income earned is attributed to having higher interest rates in the
current year offset by the cash used during the previous year.
Nine months ended September 30, 2000 vs. Nine months ended September
30, 1999
Site Revenues. Total revenues increased by $1,069,000 or 41% to
$3,678,000 for the nine months ended September 30, 2000 as compared to
$2,609,000 for the nine months ended September 30, 1999. Barter revenue
decreased by $726,000 or 64% to $401,000 for the nine months ended September 30,
2000 from $1,127,000 for the six months ended September 30, 1999. Barter revenue
represented 11% and 43% of total revenues for the nine months ended September
30, 2000 and September 30, 1999, respectively. The revenue increase was due to
new clients and increased rates for space on fashionmall.com based on traffic
growth.
Costs and Expenses. Total expenses of the business increased by
$2,794,000 or 41% to $9,546,000 for the nine months ended September 30, 2000
from $6,752,000 for the nine months ended September 30, 1999. The increase was
due to increased expenditures for technical staff and advertising. The Company
incurred non-cash compensation charges in connection with the Chazen options of
approximately $333,000 for the nine months ended September 30, 2000 and $185,000
for the nine months ended September 30, 1999 and will continue to incur these
charges in each of the next three quarters.
10
<PAGE>
Site Development, Merchandise and Content Expenses. Site development,
merchandise and content expenses increased by $129,000 or 25% to $649,000 for
the nine months ended September 30, 2000 from $520,000 for the nine months ended
September 30, 1999. The increase was primarily due to an inventory write-off
associated with the liquidation of our outletmall.com inventory and
discontinuing the business of direct order fulfillment by the company as well as
consulting expenses related to the re introduction of the boo.com site.
Advertising and Marketing Expenses. Advertising and marketing expenses
increased by $2,327,000 or 146% to $3,924,000 for the nine months ended
September 30, 2000 from $1,597,000 for the nine months ended September 30, 1999.
The increase was primarily due to increased print, outdoor and other advertising
on behalf of the fashionmall.com brand as well as online banner advertising
programs.
Selling Expenses. Selling expenses increased by $751,000 or 309% to
$994,000 for the nine months ended September 30, 2000 from $243,000 for the nine
months ended September 30, 1999. The selling expense increase was primarily due
to increasing our sales force. These expenses are expected to continue to
increase as we pursue our growth strategy and hire additional sales personnel.
General and Administrative Expenses. General and administrative
expenses decreased by $413,000 or 9% to $3,979,000 for the nine months ended
September 30, 2000, from $4,392,000 for the nine months ended September 30,
1999. During the nine months ended September 30, 2000, we incurred non-cash
compensation charges in connection with the Chazen options of approximately
$333,000 and will continue to incur these charges in each of the next three
quarters. The remaining decrease was primarily due to increased consulting and
payroll expenses associated with the management team and additional support
staff required by our growth. We expect these expenses to increase as additional
personnel are hired.
Other Income and Expense. Interest and dividend income increased by
$927,000 or 120% to $1,699,000 for the nine months ended September 30, 2000 from
$772,000 for the nine months ended September 30, 1999. During the nine months
ended September 30, 2000, such amounts were earned primarily from our cash
balances and short-term investments. The increase in income can be attributed to
having more funds on hand to invest. We raised approximately $35,000,000, net of
related expenses, in connection with the Initial Public Offering, approximately
$7,400,000 as a result of the Taubman investment and approximately $1,000,000,
net of the promissory note repayment, as a result of the FM/CCP investment. In
addition, in the prior year, fashionmall.com incurred $737,000 of interest
expense.
Year 2000 Issue
We are not aware of any year 2000 problems affecting us. The cost for
us to address this issue was immaterial. We will continue to monitor our systems
and relationships for any potential Year 2000 problems that we have not yet
uncovered.
11
<PAGE>
Liquidity and Capital Resources
From inception, we have financed substantially all of our operations
from private investments and the proceeds from our IPO. A lesser portion has
been financed with cash generated from operations.
As of September 30, 2000, we had cash and cash equivalents, marketable
securities and Investments on hand of $36,944,000. Of this amount, the cash and
cash equivalents portion was $26,960,000, the marketable securities portion was
$8,256,000 and Investments in bonds was $1,728,000 (which have a maturity of
over one year). As of December 31, 1999, cash, cash equivalents and marketable
securities were $41,566,000. Of this amount, the cash and cash equivalents a
portion of which is classified as $34,114,000 and the marketable securities
portion was $7,452,000. The decrease in funds can be attributed to increased
expenditures for technical staff, advertising, equipment and infrastructure
development to support the growth of our business. We expect that our current
cash position without taking revenues into account, based upon our present
business model, will be sufficient to meet our cash requirements for at least
the next two years.
Net cash used in operating activities was $4,510,000 for the nine
months ended September 30, 2000 as compared to net cash provided by operating
activities of $18,000 for the nine months ended September 30, 1999. Net cash
used in operating activities for the nine months ended September 30, 2000 was
primarily due to increased consulting and payroll expenses associated with the
management team and additional support staff required by our growth as well as
increased expenditures for advertising, equipment and infrastructure
development.
Net cash used in investing activities was $2,644,000 for the nine
months ended September 30, 2000 as compared to net cash used in investing
activities of $219,000 for the nine months ended September 30, 1999. Net cash
used in investing activities for the nine months ended September 30, 2000 was
due to the purchase of marketable securities and the purchase of software,
property and equipment. Net cash used in investing activities for the nine
months ended September 30, 1999 was due to payments for property and equipment.
Net cash provided by financing activities was $0 for the nine months
ended September 30, 2000 as compared to net cash provided by financing
activities of $42,579,000 for the nine months ended September 30, 1999. Net cash
provided by financing activities for the nine months ended September 30, 1999
was primarily due to the proceeds from the initial public offering and the
Taubman investment offset by the repayment of loans and capital contributions.
As part of the Taubman investment, we entered into an agreement with
TRG Net Investors LLC ("TRG Net"), an affiliate of Taubman Centers, Inc., a real
estate investment trust and a mall developer in the U.S., whereby TRG Net
purchased, for $7,417,000, a 9.9% membership interest in our predecessor LLC
(the "Series B Interest") and warrants (the "Warrants") to purchase an
additional 10% membership interest. Upon closing of the IPO, the Series B
Interest was contributed for 824,084 shares of convertible preferred stock (the
"Preferred Stock"), which in turn is convertible into an aggregate of 824,084
common shares and warrants that can be exercised to purchase 924,898 common
shares. The Preferred Stock is convertible into 824,084 shares of common stock
for one year beginning on May 26, 2000 at an effective conversion price of $9.00
per share and the exercise price of the warrants is $13.00 per share. Upon
closing of Taubman's investment (the "Taubman Investment"), we allocated
$2,377,000 of the $7,417,000 to represent the fair value of the Warrants. The
remaining portion of the net proceeds of $5,040,000 represents the beneficial
conversion feature of the Preferred Stock, to be allocated to additional paid-in
capital and accreted to the book value of the Preferred Stock. The accretion
period was one year, which began on May 26, 1999. As of September 30, 2000,
$5,040,000 was accreted to the book value of the Preferred Stock. Over the
one-year accretion period, earnings per share was negatively impacted by the
beneficial conversion feature amount of $5,040,000. In connection with this
transaction, Robert S. Taubman, the Chief Executive Officer and the President of
Taubman Centers, Inc., joined our Board of Directors.
12
<PAGE>
Certain Factors That May Affect Future Results
From time to time, information provided by us, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-QSB) may contain statements, which
are not historical facts, so-called "forward-looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Our actual future results
may differ significantly from those stated in any forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties,
including, but not limited to, product demand, pricing, market acceptance,
litigation, intellectual property rights, risks in product and technology
development, product competition, limited number of customers, key personnel,
potential transactions and other risk factors detailed in this Quarterly Report
on Form 10-QSB and in our other Securities and Exchange Commission filings.
Market Risks
The Company did not have material changes in risk for the nine months
ended September 30, 2000. Please refer to the Company's Form 10-KSB for its
fiscal year ended December 31, 1999 and Prospectus dated May 24, 1999 for a
discussion on risk factors affecting the Company.
13
<PAGE>
Part 2. Other Information
Item 1. Legal Proceedings
In August 2000, Boo, Inc. commenced an action against fashionmall.com,
Inc. and other defendants in U. S. District Court, District of Minnesota, for
trademark infringement of the mark "Boo" and related claims. Among other relief,
the complaint seeks an injunction to prevent us and the other defendants from
using the `Boo' mark, and three times the amount of unspecified damages. The
facts underlying the proceeding are that Boo. Inc. is a designer and seller of
clothing and accessories under various "Boo" labels in the United States with
the majority of sales occurring in Minnesota. In June 2000, the Company acquired
the name, trademarks and content of boo.com after its previous owners liquidated
the company. This action is in a preliminary stage. The Company intends to
vigorously defend itself against the action. The Company has been advised by
counsel that that this action is without merit.
In September 2000, Boo Club, Inc. filed an action against fashionmall.com,
Inc. and other defendants in the U.S. District Court of California, alleging
trademark and trade dress infringement and dilution, unfair competition, unfair
business practices and fraudulent transfer for the alleged use of marks "boo,"
"cluboo," "Boomclub" and Boom. Among other relief, the complaint seeks an
injunction preventing the Company or any of the other defendants from using the
marks in question and at least $1,000,000 in compensatory damages and $3,000,000
in punitive damages. This action is in the preliminary stage. The Company
intends to vigorously defend itself. The Company has been advised by counsel
that this action is without merit.
There are no other material legal proceedings to which we are a party or
known to be contemplated and we know of no material legal proceedings pending or
threatened, or judgments entered, against any of our directors or officers in
their capacity as such.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company has filed a Current Report on form 8-K on August 14, 2000,
relating to the change in the Company's auditors.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
fashionmall.com, Inc.
(Registrant)
By:
----------------------------
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Benjamin Narasin Chief Executive Officer, November 14, 2000
--------------------------- President and Chairman
of the Board of Directors
/s/ Barry Scheckner Acting Chief Financial November 14, 2000
--------------------------- Officer
</TABLE>
15
