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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number 0-28088
STYLECLICK.COM INC.
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(Exact name of registrant as specified in its charter)
California 95-4145930
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3861 Sepulveda Blvd., Culver City 90230
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 751-2100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered:
Common Stock Nasdaq National Market
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (sect. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ ]
The aggregate market value of voting and non-voting common stock held by
non-affiliates of the registrant was $70,229,579 based on the average bid and
asked prices of $12.41 per share as quoted on the NASDAQ National Market on
March 27, 2000. As of March 27, 1999, there were 7,722,930 shares of the
Company's common stock outstanding.
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PART I
Item 1. Description of Business
Forward-looking Statements
Discussion of certain matters contained in this Annual Report on Form 10-K may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") and, as such, may
involve risks and uncertainties. Those forward-looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, product introductions,
perceived opportunities in the market and statements regarding the Company's
mission and vision. The Company's actual results, performance and achievements
may differ materially from the results, performance and achievements expressed
or implied in such forward-looking statements. From time to time, the Company
details other risks with respect to its business and financial results and
conditions in its filings with the Commission.
The Company
Styleclick.com Inc. ("Styleclick.com" or the "Company"), formerly known as
Modacad, Inc., is an enabler of electronic commerce in merchandising intensive
categories of commerce, including fashion, accessories, footwear, cosmetics,
home furnishing, decorating and improvement industries. Styleclick.com offers
outside third parties and affiliates services such as web-site and content
development, and Internet based merchandising. In addition, the Company
facilitates fulfillment and customer services. Styleclick.com also owns and
operates its own E-commerce sites.
The Company provides these services by leveraging its proprietary technologies
and capabilities, including a complex technology platform used to manage,
search, and display web-site content and merchandising capabilities by utilizing
highly experienced merchandisers to source best selling products for various
online environments in a context that creates immediacy in the purchasing
process.
Styleclick.com was founded in 1988, under the name Modacad, Inc., to develop,
market and support software products based on its proprietary modeling and
rendering technology for use in the apparel, textile and home furnishings
industries. Prior to 1998, the Company's primary focus was in the business and
consumer software industry. In the business-to-business marketplace, the
Company's initial focus was on designing computer-aided design ("CAD") products
for the industrial design segment of the textile and apparel industries. The
Company also offered a variety of electronic merchandising software products to
manufacturers and retailers doing business in fashion, home furnishings, and
related industries, which have been used to support their customers'
business-to-business electronic commerce efforts primarily in the area of
merchandising, store planning, assortment planning and product development. In
the consumer software industry the Company, under the name Modacad, developed a
family of consumer software products aimed at the do-it-yourself home decorating
and design marketplace. It subsequently developed consumer software for use by
and in connection with the fashion industry. Until 1992, the Company was
primarily engaged in research and development and generated limited revenues
from product sales.
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In 1998, the Company began to shift its focus to the emerging consumer and
business-to-business Internet electronic commerce market, using its technologies
and data bases developed for the business-to-business market to position the
Company as a key enabler of electronic commerce for the fashion, home
furnishings and other related industries.
In early 2000, Styelclick.com and USA Networks, Inc. ("USAi") announced their
intent to form a new company by merging Styleclick.com and USA's Internet
Shopping Network. The new company, Styleclick Inc. is expected to launch as one
of the leading Internet-based merchandising, sales and services organizations
providing retail opportunities to consumers and third-party retail services to
businesses.
Products and Services
Styleclick.com's products are divided into three major classes: (i)
business-to-business services that utilize the Company's core electronic
merchandising, content management and visualization technologies to provide
Internet solutions to retailers and manufacturers; (ii) Internet based
E-commerce sites intended to search and manage digital content and facilitate
Internet commerce targeted at the consumer marketplace; and (iii) consumer
software applications on CD-ROM for E-commerce.
Business-to-Business
Styleclick.com's business-to-business unit offers manufacturers and retailers
the following services/products: web-site development, creation and maintenance
of e-catalogs, site merchandising, site management, including coordination with
out-source fulfillment and tele-service logistics, and an efficient reach of
consumers via a distributed network of affiliates, ("Syndication Network").
Styleclick.com builds highly customized sites via a proprietary technology
called "servlet explosion." This technology allows the Company to use templates
that can be customized with minimum programming and developed with high
efficiency.
The Company also owns technology for content management, allowing it to build
complex electronic catalogs of products efficiently.
In addition, Styleclick.com manages E-commerce venues inside portals such as
America Online, Excite, iVillage, and Women.com which it merchandises with
products from its customers. Through this product syndication network,
Styleclick.com provides its vendors with real-estate in various locations across
the internet, extending the consumer reach of its participating vendors.
Internet Applications
The company's flagship consumer web-site, www.styleclick.com, offers consumers
an easy and convenient way to find and buy apparel, accessories, and related
products online. The site offers one of the largest online selections of
designer brand original items for men, women, and children of all ages and
sizes. The site features state-of-the-art navigation and content search
technology, enabling consumers to make highly informed purchasing decisions.
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Additionally, the site enables consumers to view high resolution product images
with the ability to pan and zoom to inspect details such as fabric texture, and
stitching.
FashionTrip.com is the Company's teen-oriented web-site. Styleclick.com has
incorporated its proprietary E-commerce and e-merchandising platform to
FashionTrip.com enabling the site to deliver a state-of-the-art online shopping
and lifestyle environment catering to the teenage consumer market. Fashiontrip
offers a comprehensive selection of apparel, shoes, accessories, bath & beauty
products, and style related merchandise.
In addition, Styleclick.com also manages a variety of web-sites on behalf of the
brands it works with. These sites currently include but are not limited to:
Cindystore.com, Daisyfuentesstore.com, Hunterdouglas.com, Jennalanegroup.com,
Pingcollectionstore.com, Susandunn.com, Pjsalvage.com, Freestyleusa.com.
Consumer Software, CD-ROM Applications
The precursor to the Company's Internet E-commerce strategy was a series of
consumer software applications which the Company developed beginning in 1996.
Styleclick.com developed the software known as the 3D Home Interiors product
line, under a Software Development and Publishing Agreement with Broderbund (the
"Broderbund Agreement") which appointed Broderbund as publisher. This product
line was extended in 1997 with the publication of 3D Home Suite. These products
offer consumer home design and decorating tools, including shopping and
reference materials for actual products of various participating vendors. The
Company amended its agreement with Broderbund in 1998 to provide for the grant
of exclusive rights to these products to Broderbund in consideration of a
one-time royalty payment.
Fashion Trip and iStyle were jointly developed by Styleclick.com and Intel
Corporation ("Intel") pursuant to a development agreement entered into in late
1997. The Sierra Division of Cendant Software Corporation which was subsequently
purchased by Havas Interactive of France ("Sierra") published the Fashion Trip
and iStyle CD-ROM's and, pursuant to its agreement with the Company, distributes
portions of Fashion Trip and iStyle as shrink-wrapped software applications
through its distribution channels.
Business Strategy
Business-to-Business
The business model is based on up-front, one-time fees for the creation of a
web-site and related services, plus a revenue share on transactions conducted at
the sites. The revenue share rates can be as high as 50%, but are typically in
the 30% range. Generally merchandise is placed in inventory under consignment,
so there are no cost of goods or inventory costs with this business.
Internet Applications
The apparel market is very brand driven, presenting Styleclick.com with an
opportunity to develop strong, possibly exclusive, relationships with brands.
Currently the Company has secured strong relationships with over 200 brands,
many of which are exclusive. This presents a significant barrier to competitive
entry.
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www.styleclick.com features a wide variety of vendor's products which may be
viewed and purchased on the site. The Company expects vendors to benefit from
the exposure their products receive to a large on-line consumer audience and
from the order fulfillment and other services offered in connection with
Styleclick.com. The Company receives revenues from the services it provides to
its vendors, and it will share in the revenues generated from sales of products
and advertising on the site. By outsourcing order fulfillment services,
Styleclick.com offers an efficient cost structure and avoids the inventory costs
associated with traditional brick-and-mortar retail operations.
The success of www.styleclick.com depends largely on the ability of the Company
to solicit vendors who wish to display and sell their products on the site.
Vendor representation on the web-site increases the site's attractiveness to
consumers, who wish to find a broad assortment of fashions, and to other
potential vendors, who wish to reach a broad consumer audience and who must meet
their competitors' efforts. The Company has already secured the agreement of a
wide assortment of vendors to participate on the site. The Company believes that
it will continue to attract vendors by removing barriers to entry into the
E-commerce arena and providing business solutions to companies that have no
end-user order fulfillment capability, no E-commerce enabled web-site, no
capacity to image or create content for E-commerce catalogs, no end-user
customer service capability and/or no end-user transaction capacity.
Additionally, the success of the Company's shopping site depends on the
Company's execution of an aggressive marketing campaign designed to direct
consumer traffic.
FashionTrip.com features a wide variety of vendor's products, in a teen
lifestyle environment, which may be viewed and purchased on the site. The
Company expects vendors to benefit from the exposure their products receive to a
targeted on-line consumer audience. The Company receives revenues from the
services it provides to its vendors, and it will share in the revenues generated
from sales of products and advertising on the site.
Consumer software, CD-ROM Applications
The Company plans to continue to develop consumer software and adapt the
functionality of such software to the Internet. Many of the core technologies
developed for CD-ROM products have applications to the broad-band Internet
market, and the Company intends to leverage them aggressively as broad-band
access to the Internet emerges. The Company also intends to link consumer CD-ROM
products with Styleclick.com's on-line shopping site.
Marketing, Sales and Distribution
The Company employs 18 sales and marketing personnel. The Company maintains, in
addition to its Los Angeles headquarters, an additional sales office in New York
where two members of the sales team are located and a sales representative in
Italy.
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Business-to-Business
The target customer of Styleclick.com's business-to-business unit is a
manufacturer who has a consumer brand to exploit on-line and wishes to begin
selling directly to consumers. The Company focuses primarily on categories that
involve strong merchandising such as fashion, accessories, eyewear, footwear,
home furnishing, beauty, and fragrances. The Company believes that these brands
are most likely to seek to partner with an on-line licensee, who will receive
exclusive use of the brand and have privileged access to the products in
exchange for building and managing the brand's on-line business. The targeted
consumer brand is middle sized ($200 million to $800 million), since this market
segment is (1) the largest segment in terms of number of brands, (2) has
embraced the strategy of outsourcing and the Internet.
The Company currently provides such services to over 40 brands and expects this
to increase steadily. The Company's marketing strategy is to reach these
customers centers on trade activities. The Company has segmented the market into
key verticals and is reaching executives in those verticals with an education
campaign that involves trade seminars, trade shows, direct mail and PR
activities.
Internet Applications
The Company plans to market its Internet shopping sites to the consumer through
direct business-to-consumer channels such as the Internet and other on-line
services, print and radio advertising, editorial and cross vendor promotions, as
well as through affiliated site's programs. The Company expects to deploy a
blend of on-line and off-line advertising, as well as continued reliance on
affiliates and syndication, including the development of person-to-person
multi-level-marketing to enhance customer retention and stimulate repeat buyers.
Consumer Software, CD-ROM Applications
In June of 1998, Styleclick.com entered into an agreement (the "Sierra
Agreement") with Sierra, a leader in entertainment and educational software.
Under the Sierra Agreement, Sierra is responsible for the publication,
marketing, promotion and distribution in retail channels of Fashion Trip and
iStyle a follow-on product developed by Styleclick.com under the Sierra
Agreement.
The core technology developed for the CD-ROMs are compatible with the Internet
and provide the Company with a technology platform for emerging broad-band
applications on the Internet. As such broad-band capabilities emerge, the
Company expects to leverage these core technologies as part of its consumer
Internet strategies.
Competition
The E-commerce, electronic merchandising and computer software design markets
are intensely competitive and subject to rapidly changing technologies and
evolving product standards. The Company believes that principal competitive
factors in the markets in which the Company competes include product
functionality and ease of use, product performance and reliability, customer
service and support, timeliness of product upgrades, vendor credibility and
brand awareness, technological advantages and price/performance characteristics.
The Company believes that its products compete favorably with the products of
its competitors principally due to the advantages of the Company's imaging
functions, the ease with which the products may be used with existing operating
systems and its relationships with a variety of manufacturers and retailers.
Although the Company believes that it competes favorably in the markets it
serves, there can be no assurance that new or established competitors will not
offer products superior to, or lower in price than, those of the Company, or
that completely new technologies might be developed to supplant the technologies
currently being used by the Company.
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Business-to-Business Applications
The Company believes that the complexities of delivering all of the integrated
services and tools are significant and involve tremendous investments in
technology. The Company has established itself as an e-merchandising services
company, and believes it has no direct competitors as of yet.
The Company, in the future, may compete with web development companies such as
US Web or Organic, but believes it is increasingly viewed as providing a service
to those companies, and is steadily becoming considered a subcontractor for many
of the leading US web companies and agencies.
Internet Applications
An increasing number of entities have entered into the e-commerce marketplace,
and there are a number of entities whose activities may directly compete with
the Company. In the apparel industry, a number of retailers who have
traditionally conducted their activities out of brick-and-mortar premises are
transitioning into the E-commerce arena in order to expand their businesses. The
Company believes that retailers such as Lands' End, J. Crew, the Gap, L.L. Bean,
Macy's, Bloomingdale's and Eddie Bauer will not significantly compete with the
Company's Internet shopping web-site because they use the Internet as an
additional distribution channel, while retaining their emphasis on sales through
traditional distribution channels. Consequently, the cost structure of these
retailer's products is significantly different than the Company's. There is no
assurance that these retailers will not alter their strategies and concentrate
more of their resources in developing Internet shopping portals or other sites
or projects that will compete directly with the Company.
The Company faces competition in the following four areas: on-line outlets,
which primarily sell seconds or grey-market goods; on-line department stores,
which offer some, but rarely all, of the selection their traditional brick &
mortar counterparts offer; brand sites such as catalog companies and basics
retailers that only offer their brand selection; and, aggregators, such as
on-line malls which link consumers to third party web-sites. The Company is not
currently aware of any web-sites with the Company's multi-brand emphasis and
business strategy.
In the Internet e-commerce sector, the Company competes with numerous product
aggregators and style destination web-sites such as Bluefly.com, Buy.com,
Ivillage.com, Amazon.com, Fashionmall.com, Shopfind.com, and Girlshop.com. Some
of these competitors offer product guides, search engine shopping guides and
destination shopping sites. Other destination web-sites, such as Elle.com,
Gurl.com and Cosmopolitan.com, which are sponsored by various fashion magazines,
have targeted the fashion and [glamour] industries. While such web-sites often
offer superior editorial content, the Company believes that its technical and
logistical infrastructure gives it a competitive advantage over such actual and
potential competitors. The Company cannot give any assurance that such
competitors will not be able to overcome the technical and logistical barriers
to entry in this market and exert greater competitive pressure on the Company.
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Consumer software, CD-ROM Applications
The consumer software market is increasingly competitive, with numerous
suppliers directing new products into a highly differentiated and rapidly
developing marketplace. The Company's competitors in this market include several
large companies with substantially greater financial, technical and marketing
resources (such as Mattel/The Learning Company and Sierra). Although the Company
entered into agreements with both The Learning Company's Broderbund Division and
with Sierra for the 3D Home Interiors product line, Fashion Trip and iStyle,
respectively, and such agreements contain certain mutual non-compete covenants,
the agreements do not prohibit Broderbund or Sierra, or their parent companies,
from publishing or distributing similar products which could compete with the
Company's products. The Company believes that the core visualization technology
embodied in its products constitute a competitive advantage over similarly
situated companies in the consumer software market.
Dependence on Significant Customers
During 1999, Lectra Systems, Inc. and Sierra Online, Inc. accounted for
approximately 56% and 13%, respectively, of the Company's total revenues. During
1998, Broderbund Software and Sierra Online, Inc., accounted for approximately
30% and 24%, respectively, of the Company's total revenues. During 1997, Intel
Corporation accounted for 34% of the Company's total revenues. The revenue
earned from these customers cannot be expected to reoccur and the Company may
continue to be dependent on other significant customers, the loss of which could
have a material and adverse effect on the Company's business.
Research and Development
The Company believes that its success will depend primarily on its ability to
develop new products, maintain technological competitiveness and fulfill an
expanding range of customer requirements. To date, the Company has designed and
developed all of its key products internally. The Company's research and
development expenditures (including expenses that are required to be capitalized
under generally accepted accounting principle) totaled $7,177,000 or 117% of
revenues in 1999, $6,592,000 or 99% of revenues in 1998 and $3,000,000 or 67% of
revenues in 1997. The Company's primary expenses for research and development
include the personnel costs of the Company's engineers and other specialists in
software infrastructure, interface development, database technologies and 3-D
computer graphic design. Research and development expenses also include the
depreciation and cost of maintenance of computer hardware used in research and
development. As of December 31, 1999, 93 of the Company's 157 full-time
employees were employed in various aspects of product development and digital
content creation activities. During 1999, 1998 and 1997, no significant amount
of the Company's research and development expenditures was customer sponsored.
The Company believes that it has completed most of the development of the core
technologies necessary to deploy Styleclick.com. These core technologies include
the search engine, the data harvesting engine, the visualization engines, the
data streaming engine, and the intelligent shopping agents. Currently the focus
of the Company's product development efforts is centered on the creation of the
user interface for the site art creation, content acquisition, optimizing user
experience for faster access from low bandwidth Internet access, load balancing
traffic for optimal handling of concurrent transactions, expanding the Company's
content acquisition technology to include higher degrees of automation,
developing data streaming technologies to increase delivery of rich content
through low bandwidth environments, and expanding the intelligent nature of
shopping agents for smarter searches and personal advice.
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The Company's development teams are continuously working towards new extensions
and enhancements to its core rendering engine in an on-going effort to maintain
and extend its leadership in the area. The Company also maintains research and
development in a variety of advanced technical areas, including object-oriented
technology, data management technology, expert systems and rule-based systems,
rendering and other evolving imaging technologies.
Patents and Proprietary Rights
The Company holds three United States patents. One patent covers the Company's
core rendering and modeling technology. Another patent covers 3-D modeling
techniques and the third relates to business-to-business products. Additionally,
the Company also has received a notice of allowance of two pending patent
applications covering the ability to create an interactive digital dressing room
that allows apparel to be fitted to specific body dimensions. In addition to
patent protection, the Company relies on a combination of (i) trade secret,
copyright and trademark laws, (ii) confidentiality and nondisclosure agreements
and (iii) other contractual and technical measures to protect its proprietary
rights. There is no assurance that these measures will deter misappropriation of
the Company's proprietary rights. The Company employs a "lock and key" system
with respect to the proprietary information underlying its software. This system
is designed to ensure that only certain key employees have access to such
information, all of whom have signed confidentiality and nondisclosure
agreements. The Company has nine registered trademarks, including the mark
Modacad. The Company believes that its products, trademarks and other
proprietary rights do not infringe on the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert
infringement claims against the Company in the future with respect to current or
future products or that any such asserted claims may not result in costly
litigation.
Employees
As of December 31, 1999, the Company employed 157 full-time employees, including
18 in sales and marketing, 55 in product development and systems, 31 in
product-related and fulfillment, 38 in content and creative areas and 15 in
general and administrative areas. None of the Company's employees are
represented by a labor union, and the Company has never experienced a work
stoppage.
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Item 2. Property
In 1998, the Company moved its executive headquarters to a three-story office
building with approximately 23,000 square feet of office space in Culver City,
California, under a lease that will expire in 2006, with an option to extend the
lease term for additional ten years. The Company anticipates that it may require
additional space in Los Angeles in the first half of 2000 to handle the expected
increased levels of its business activities. The Company believes it can readily
acquire any needed additional space when and as needed on commercially
reasonable terms. The Company acquired this additional space at commercially
reasonable terms. The Company has sub-leased its other Los Angeles property
under a sub-lease that will expire in 2002, the same expiration date of the
original lease.
The Company leases approximately 4,800 square feet in High Point, North
Carolina, under a lease that expires in 2004, for production and customer
service activities, directed primarily at electronic merchandising customers and
consumer product lines. The facility was necessary to accommodate the Company's
recent growth in its personnel in this office. The Company acquired this
additional space at commercially reasonable terms. The Company leases
approximately 1,500 square feet in New York primarily for facilitating sales and
marketing support activities in the Northeast region under a lease that expires
in August, 2000. The Company anticipates that it may require additional space in
New York in the first half of 2000 to handle the expected increased levels of
its business activities.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Trading Prices of Securities
Since July 19, 1999, the Company's common stock has traded on the Nasdaq
National Market under the symbol "IBUY". From March 1996 until July 19, 1999,
the Company's common stock traded on the Nasdaq National Market under the symbol
"MODA". The following table sets forth the high and low sales prices for the
Company's common stock for the fiscal years ended December 31, 1998 and 1999, as
reported by Nasdaq:
Sales Prices
High Low
Fiscal Year Ended December 31, 1998
1st Quarter 20-1/4 11
2nd Quarter 24-7/8 13-3/4
3rd Quarter 23-5/8 10-7/8
4th Quarter 24-3/4 6
Fiscal Year Ended December 31, 1999
1st Quarter 21-1/2 11-5/8
2nd Quarter 15-1/8 8-3/8
3rd Quarter 12-1/4 6-3/4
4th Quarter 15 6-1/4
At December 31, 1999, the Company had approximately 3,500 shareholders of
record. The Company did not declare or pay dividends on its common stock during
1998 or 1999 and does not intend to pay dividends in the foreseeable future.
Recent Sales of Unregistered Securities
During 1999 the Company sold the following securities which were not registered
under the Securities Act of 1933, as amended (the "1933 Act"):
(a) In March 1999, the Company issued warrants to a third party to purchase
250,000 shares of common stock at an exercise price of $16.80 per share.
Such warrants were issued in consideration of business promotion services
to be provided to the Company and were fully vested and immediately
exercisable on the grant date, and expire in March 2004. In October 1999,
the Company changed the exercise price to $10.86 per share of common stock,
which was 110% of the then-current market value.
(b) In April 1999, in consideration of a waiver of the future royalties to be
paid to its project co-developer, the Company issued to such co-developer
(i) 455,218 shares of common stock, (ii) warrants, expiring in April 2000,
to purchase 189,674 shares of common stock at an exercise price of $13.18
per share, (iii) warrants, expiring in July 2000, to purchase 189,674
shares of common stock at an exercise price of $13.18 per share and (iv)
warrants, expiring in April 2004, to purchase 159,326 shares of common
stock at an exercise price of $10.98 per share.
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(c) In April 1999, in consideration of $7,721,510 the Company received in net
proceeds from a private placement of its securities (after paying costs
associated with the offering), the Company issued to four investors an
aggregate of (i) 776,827 shares of the Company's common stock, (ii)
warrants, expiring in April 2000, to purchase 323,677 shares of common
stock at an exercise price of $13.18 per share, (iii) warrants, expiring in
July 2000, to purchase 323,677 shares of common stock at an exercise price
of $13.18 per share, and (iv) warrants, expiring in April 2004, to purchase
271,889 shares of common stock at an exercise price of $13.73 per share. In
consideration of services rendered to the Company by two placement agents
in connection with this private placement, the Company issued warrants,
expiring in April 2004, to purchase 15,536 shares of common stock at an
exercise price of $10.98 per share.
(d) During 1999, in consideration for services provided to the Company, the
Company issued (i) warrants to an outside promotion agency expiring in
December 2003, to purchase 8,333 shares of common stock at an exercise
price of $16.68 per share, (ii) warrants, expiring in January 2004, to
purchase 8,333 shares of common stock at an exercise price of $20.00 per
share, (iii) warrants, expiring in February 2004, to purchase 8,333 shares
of common stock at an exercise price of $16.00 per share, (iv) warrants,
expiring in March 2004, to purchase 8,333 shares of common stock at an
exercise price of $11.56 per share, and (v) warrants, expiring in April
2004, to purchase 8,335 shares of common stock at an exercise price of
$11.88 per share.
(e) In June 1999, in consideration for services provided to the Company, the
Company issued warrants to an Internet portal company expiring in December
2001, to purchase up to 100,000 shares of common stock at an exercise price
of $12.34 per share.
(f) In June, July and August 1999, in consideration for services provided to
the Company, the Company issued warrants to purchase an aggregate of 30,000
shares of common stock to a financial advisor for services provided to the
Company. The warrants had an exercise price of $13.00 per common share and
expire in June, July and August 2002, respectively.
(g) In October 1999, in consideration of services rendered to the Company, the
Company granted to three non-employee directors ten-year warrants, expiring
October 2009, to purchase a total of 45,000 shares of common stock at an
exercise price of $7.50 per share.
Exemption from the registration provisions of the 1933 Act for all of the
transactions described above is claimed pursuant to Section 4(2) of the 1933 Act
and/or Rule 504 of Regulation D promulgated thereunder on the grounds that such
transactions did not involve any public offering. The purchasers in such
transactions represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends were affixed to the certificates evidencing the securities issued in
such transactions. All purchasers either received adequate information about the
Company or had access to such information. The Company filed Registration
Statements on Form S-3 covering the resale of securities referenced in
paragraphs (b), (c), (d), and (f). All net proceeds from the sale of such
securities will go to the selling shareholder who offered and sold their shares.
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Item 6. Selected Financial Data
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<CAPTION>
Years Ended December 31,
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1999 1998 1997 1996 1995
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(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $6,174 $6,681 $4,450 $ 3,370 $ 1,905
Net income (loss) (15,879) (9,688) 354 645 8
Total assets 15,047 13,050 21,404 7,182 1,864
Long-term debt - - - - 4,545
Per common share:
Net income (loss) - Basic (2.24) (1.59) 0.07 0.20 0.00
(loss) - Diluted (2.24) (1.59) 0.06 0.20 0.00
Cash dividends declared - - - - -
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those set forth below and elsewhere in this Form 10-K.
General
The Company is in the business of developing, marketing, and supporting
electronic commerce ("E-commerce") Internet web-sites, Internet enabled
applications and business and consumer software products based on its
proprietary technology for content management, including modeling and rendering
technology. The Company has three principal product groups: E-commerce Internet
web-sites, software including CD-ROM products and applications including CAD and
electronic merchandising products, referred to as business software products.
Since 1998, the Company has divested many of its products in the business and
consumer software product groups and has shifted its primary business focus to
the emerging Internet E-commerce market. The Company is focusing its technology
on building and deploying E-commerce Internet sites, such as comparative search
and shopping solutions aimed at facilitating businesses' use of E-commerce to
reach consumers in the apparel, footwear, accessories, cosmetics and home
furnishing industries.
12
<PAGE>
Revenues generated from the Company's E-commerce Internet web-sites include
revenues received in connection with (i) web-site development and maintenance
fees for services provided to customers in the development and maintenance of
their web-sites, (ii) project participation fees for vendor participation in the
Company's on-line shopping Internet web-sites, (iii) on-line advertising revenue
for advertising on the Company's on-line shopping web-sites, (iv) transactional
revenue from the Company's fulfillment services provided to the Company's
on-line shopping Internet web-site participant vendors and (v) product referral
fees from referral of vendor products to Internet consumers through the
Company's on-line shopping Internet web-sites. Revenues from project
participation fees are recognized based upon the accomplishment of contractual
milestones in a manner that matches revenue with the related costs. Web-site
development and maintenance fees and on-line advertising revenue are recognized
over the terms of the corresponding contracts. Transactional revenue and product
referral fees are recognized based on a percentage of gross revenues from the
related transactions. Transactional revenue is recognized upon notification of
shipment of the vendors' products by the Company's fulfillment warehouse or the
participant vendors. Product referral fees are recognized based upon
notification of the sales information by the Company's vendors, the independent
Internet traffic tracking companies or the Company's on-line tracking reports.
Revenues generated from the Company's consumer CD-ROM products include revenues
received in connection with sales of the Company's developed consumer CD-ROM
products and vendor participation in the Company's developed CD-ROM
applications. Sales of the products are recognized at the time of shipment.
Revenues from CD-ROM participation fees are recognized based upon the
accomplishment of contractual milestones in a manner that matches revenue with
the related costs.
Revenues generated from the Company's business software products include
revenues received in connection with sales and licenses of the Company's
developed business software products and software maintenance revenues. Sales
and licenses of the products are recognized at the time of shipment. Revenue
generated from software maintenance is recognized on a straight-line basis over
the term of the corresponding contract, which is generally twelve months.
Results of Operations
The following table sets forth selected items from the Company's statement of
operations for the years ended 1999, 1998 and 1997 and the percentages that such
items bear to net revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997
---------------- ------------------ ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues $6,174 100.0 % $6,681 100.0 % $4,450 100.0 %
Cost of sales 668 10.8 82 1.2 87 2.0
------ ------- ------ ------- ------ -------
Gross profit 5,506 89.2 6,599 98.8 4,363 98.0
Operating costs and
expenses:
Selling, general and
administrative 13,362 216.4 8,291 124.1 3,394 76.3
Research and development 6,054 98.1 3,541 53.0 172 3.9
Merger related costs 405 6.6 - - - -
Amortization of software
development costs 1,842 29.8 4,890 73.2 774 17.4
------ ------- ------ ------- ------ -------
Total operating costs
and expenses 21,663 350.9 16,722 250.3 4,340 97.5
------ ------- ------ ------- ------ -------
Loss from operations (16,157) (261.7) (10,123) (151.5) 23 0.5
Investment and other
income, net 278 4.5 435 6.5 331 7.5
------- ------- ------ ------- ------ -------
Net loss $(15,879) (257.2 %) $(9,688) (145.0 %) $ 354 8.0 %
======= ======= ====== ======= ====== =======
</TABLE>
13
<PAGE>
1999 Compared with 1998
Net Revenues
Revenues in the amount of $4,810,000, or 78% of total revenues for the year
ended December 31, 1999 were earned from three sources which cannot be expected
to reoccur, including product development fees ($400,000, or 6%), web-site
development fees ($910,000, or 15%) and the sale of the Company's business
software product line ($3,500,000, or 57% of revenues). Net revenues decreased
$507,000, or 8%, to $6,174,000 in 1999 from $6,681,000 in 1998. The decrease was
primarily due to (i) a decrease of $4,368,000 in revenues from the Company's
consumer CD-ROM products, (ii) a decrease of $54,000 in revenues from training
services and (iii) a decrease of $128,000 in maintenance fees. These decreases
were offset by an increase of $1,887,000 in sales of the Company's business
software products, an increase of $1,623,000 in revenues generated from the
Company's E-commerce Internet web-sites and an increase of $533,000 in revenues
from consulting services.
Revenues generated from the Company's E-commerce Internet web-sites were
$1,623,000 in 1999 as compared to no such revenue generated in 1998. The
$1,623,000 in revenues primarily consisted of revenues generated from web-site
development and maintenance fees, project participation fees, on-line
advertising revenue, digital content generation fees, transactional revenues and
product referral fees.
Revenues generated from consumer CD-ROM products decreased $4,368,000, or 88%,
to $607,000 in 1999 from $4,975,000 in 1998 primarily due to $1,980,000 of
revenue generated in 1998 from the one-time license of the Company's 3-D Home
Interiors product to its publisher and $395,000 of revenue generated in
connection with consumer product developing services provided to one of the
Company's major customers in 1998. These revenues were not repeated in 1999 as
the Company has shifted its primary business focus to the emerging consumer
Internet E-commerce market. Additionally, revenue generated in connection with
the Company's developing CD-ROM applications decreased $1,200,000 to $400,000 in
1999 from $1,600,000 in 1998. The $400,000 in revenue generated in 1999 resulted
from the completion of development of one of the CD-ROM applications which had
been in development since 1998. Finally, $793,000 of the decrease was due to
lower CD-ROM participation revenue generated from the Company's consumer CD-ROM
applications in 1999 as compared to 1998. The decrease in CD-ROM participation
revenues resulted from the Company's strategy to shift its marketing focus to
Internet E-commerce during 1999.
Sales of business software products increased $1,887,000, or 135%, to $3,285,000
in 1999 from $1,398,000 in 1998 primarily due to the sale of two of the
Company's business software product lines and the license of certain related
technologies for an up-front fee of $3,000,000 in 1999. In March 1999, the
Company entered into an agreement with one of its major competitors. Under the
agreement, the Company sold two of its business software product lines and
licensed its cataloging software to the buyer for an up-front fee of $3,000,000,
additional support fees of up to $1,000,000, and a contingent payment of up to
$1,000,000 depending on future sales over the next 24 months generated from the
product lines sold to the buyer. Except for support services, the Company has no
further obligations to this buyer (including further development of the products
sold or the software licensed, as all development has been completed on such
products and software). The sale of these product lines was part of the overall
shift in the Company's primary business focus from the business software product
marketplace to the emerging consumer Internet E-commerce market. As such, the
revenues recognized from the sale did not arise from, and are not necessarily
representative of, the Company's ongoing business. As a result of the sale, the
Company generated less revenue from its business software products in the
remaining period of 1999 as compared to the comparable period in 1998.
14
<PAGE>
Revenues from consulting services increased $533,000 to $538,000 in 1999 from
$5,000 in 1998 primarily due to $500,000 in revenues for consulting services
generated from the purchaser of two of the Company's business software product
lines in the first quarter of 1999. No such revenue was generated in 1998.
Revenues from training services decreased $54,000, or 73%, to $20,000 in 1999
from $74,000 in 1998, and maintenance fees decreased $128,000, or 56%, to
$101,000 in 1999 from $229,000 in 1998, primarily due to the Company's overall
shift in its primary business focus away from the business software products, as
discussed above, from which most training and maintenance fees were generated.
Cost of Sales
Costs of sales are comprised primarily of product fulfillment costs, credit card
processing fees, direct shipping material and product royalties associated with
the respective revenues. Cost of sales increased $586,000 to $668,000 in 1999
from $82,000 in 1998 primarily due to $117,000 in cost of sales incurred in
connection with the $3,000,000 sale and license of certain of the Company's
business software products in 1999 and a $475,000 non-cash charge to royalty
expense. The Company issued stock and warrants to Intel, the Company's project
co-developer, valued at $5,539,000 in exchange for future royalties through
December 2007. Such amount was recorded as prepaid royalties and will be
continuously amortized at $158,000 per quarter until December 2007. No such
costs of sales were incurred in 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5,071,000, or 61%, to
$13,362,000 in 1999 from $8,291,000 in 1998 due to the following factors.
Personnel costs increased $1,627,000, or 58%, to $4,418,000 in 1999 from
$2,791,000 in 1998. The increase in personnel costs resulted primarily from the
hiring of additional personnel in late 1998 to support the Company's increased
operating activities, increasing the total number of employees from 121 as of
December 31, 1998 to 157 as of December 31, 1999, and $200,000 of bonuses paid
to the Company's executives in 1999. Additionally, certain related costs
including travel, marketing, telephone, office supplies expenses, taxes and
licenses, repair and maintenance and depreciation expense increased $3,571,000,
or 102%, to $7,076,000 in 1999 from $3,505,000 in 1998. Of that increase,
$3,522,000 was related to an increase in the Company's marketing activities in
1999 to support its new E-commerce products. Additionally, professional services
including accounting, legal and consulting services increased $693,000, or 75%,
to $1,612,000 in 1999 from $919,000 in 1998. The increase in professional
services was primarily due to the Company's increased requirements for these
services in 1999 compared to 1998, resulting from the Company's increased
operating activities in the emerging E-commerce market and support of its new
E-commerce products and dispositions of certain of the Company's business
software product lines. Finally, bad debt expense decreased $857,000, or 93%, to
$60,000 in 1999 from $917,000 in 1998. Such decrease was primarily attributable
to the additional bad debt reserve in the amount of $865,000 recorded by the
Company during 1998 upon the Company's review of certain specific accounts. No
such reserve was needed in 1999.
15
<PAGE>
Research and Development
The Company incurred $7,177,000 of research and development expenditures in
1999, of which $1,123,000 was capitalized and $6,054,000 was expensed, compared
to $6,592,000 in 1998, of which $3,051,000 was capitalized and $3,541,000 was
expensed. The 9% increase in research and development expenditures from 1998 to
1999 was primarily due to the hiring of additional personnel in connection with
the further development of the Company's Internet application projects.
Merger Related Costs
The Company incurred $405,000 of expense in connection with its merger plan with
Internet Shopping Network, LLC in the fourth quarter of 1999. No such expense
was incurred in 1998. The $405,000 expense was primarily related to legal and
accounting services. Costs related to merger are expected to increase
significantly in the first and second quarter of 2000.
Amortization of Software Development Costs
The amortization of software development costs decreased $3,048,000, or 62%, to
$1,842,000 in 1999 from $4,890,000 in 1998 primarily due to a $3,193,000
decrease in the Company's write-off of its research and development costs in
1999 as compared to 1998. In 1998, the Company wrote off a total of $3,443,000
of its research and development cost. $1,038,000 of the total write-off was
related to the exclusive license of the Company's 3D Home Interiors product to
its Company's publisher. The remaining $2,405,000 was primarily attributable to
the software capitalized prior to 1998 in relation to certain products in the
business-to-business market place which the Company is exiting as a result of
its new business strategy to target the emerging E-commerce market. In 1999, the
Company wrote off a total of $250,000 of its research and development cost. The
write-off was related to the product lines sold to one of the Company's
competitors in the first quarter of 1999. The remaining $145,000 increase in
amortization of software development costs is due to higher capitalized project
costs being amortized in 1999 as compared to 1998.
Investment and Other Income
Investment and other income decreased $157,000, or 36%, to $278,000 in 1999 from
$435,000 in 1998 due to the decrease in income generated from a money market
account in which the Company's funds are maintained. The decrease resulted from
a lower average cash balance maintained in this account in 1999 as compared to
1998.
Income Taxes
The Company recorded no provision for income taxes in 1999 and 1998 due to net
operating losses in both years.
16
<PAGE>
1998 Compared with 1997
Net Revenues
Net revenues increased $2,231,000, or 50%, to $6,681,000 in 1998 from $4,450,000
in 1997. The increase was primarily due to (i) an increase in the revenues from
the Company's consumer CD-ROM products, (ii) an increase of $5,000 in revenue
from training services, and (iii) an increase of $71,000 in maintenance fees.
These increases were offset by a decrease of $887,000 in sales of the Company's
business software products and a decrease of $131,000 in revenues from
consulting services.
Revenue generated from consumer CD-ROM products increased $3,173,000 or 176%, to
$4,975,000 in 1998 from $1,802,000 in 1997. The increase was primarily due to
(i) $1,980,000 of revenue generated from the exclusive license of the Company's
3D Home Interiors product to its publisher, (ii) $1,600,000 of revenue generated
in connection with the Company's developing two CD-ROM applications, (iii)
$395,000 of revenue generated in connection with consumer product developing
services provided to one of the Company's major customers and (iv) $1,000,000
CD-ROM participation revenue generated form the Company's consumer CD-ROM
applications in 1998. No such revenues were generated in 1997. The increase was
offset by a total of $1,802,000 revenues generated in 1997 which were not
repeated in 1998, including a one-time payment of $1,500,000 in connection with
the Company's fulfillment of certain obligations under an agreement with Intel
in connection with the co-development of consumer software.
Sales of business software products decreased $887,000, or 39%, to $1,398,000 in
1998 from $2,285,000 in 1997 primarily due to $400,000 in the foreign sales
generated by two of the Company's major customers in Europe in 1997, which sales
were not repeated in 1998. The remaining decrease resulted from the Company's
strategy to shift its marketing focus to Internet E-commerce.
Cost of Sales
Cost of sales associated with the Company's CD-ROM consumer products does not
have a major impact on the total cost of sales since an insignificant amount of
cost of sales was incurred in connection with the CD-ROM consumer products in
1998 and no such cost of sales was incurred in 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4,897,000, or 144%, to
$8,291,000 in 1998 from $3,394,000 in 1997. Personnel costs increased
$1,218,000, or 78%, to $2,791,000 in 1998 from $1,573,000 in 1997. The increase
in personnel costs resulted from the hiring of additional personnel in late 1997
and 1998 to support the Company's increased operating activities, increasing the
total number of employees from 86 as of December 31, 1997 to 121 as of December
31, 1998. Additionally, certain related costs including travel, marketing,
telephone, office supplies expenses, taxes and licenses, repair and maintenance
and depreciation expense increased $2,253,000, or 180%, to $3,505,000 in 1998
from $1,252,000 in 1997. $1,420,000 of such increase was related to the
Company's increasing marketing activities in 1998 to support its new E-commerce
products. Also, professional services including accounting, legal and consulting
services increased $477,000, or 108%, to $919,000 in 1998 from $442,000 in 1997.
The increase in professional services was primarily due to the Company's
increased requirements for these services in 1998 compared to 1997 resulting
from the Company's increased operating activities. Finally, bad debt expense
increased $865,000, or 1,663%, to $917,000 in 1998 from $52,000 in 1997 due to
the Company's decision in 1998 to increase its bad debt reserve by $865,000 due
to the Company's increasing sales volume, and based on a review of specific
accounts.
17
<PAGE>
Research and Development
The Company incurred $6,592,000 of research and development costs in 1998, as
compared to $3,000,000 in 1997. In 1997, $3,051,000 of such costs were
capitalized as software development costs, while in 1998, $2,828,000 of such
costs were capitalized as software development costs. The remaining $3,541,000
of research and development costs in 1998 were expensed, compared to $172,000 in
1997. The 102% increase in research and development expenditure from 1997 to
1998 was primarily due to the hiring of additional personnel to perform software
programming services in connection with the further development of the Company's
business software, consumer software and Internet products. A lower percentage
of research and development expenditures were capitalized in 1998 as compared to
1997 due primarily to the Company's completion of two of its major projects at
the beginning of 1998. A significant portion of the research and development
expenses incurred prior to the completion of those two major projects was
capitalized as software development costs.
Amortization of Software Development Costs
The amortization of software development costs increased $4,116,000, or 532%, to
$4,890,000 in 1998 from $774,000 in 1997 partially because the Company began
marketing and amortizing development costs associated with several new versions
of software products in late 1997 and in 1998. In addition, the Company took a
one-time charge to write off a total of $3,443,000 of its research and
development cost in 1998. Of the total write-off $1,038,000 was related to the
exclusive license of the Company's 3D Home Interiors product to its publisher.
The remaining $2,405,000 write-off was primarily attributable to the software
capitalized prior to 1998 in relation to certain products in the business
software market which the Company is exiting as a result of its new business
strategy to target the emerging E-commerce market.
Investment and Other Income
Investment and other income increased $104,000, or 31%, to $435,000 in 1998 from
$331,000 in 1997. This increase is due to the increase in income generated from
a money market account in which the proceeds received in July 1997 upon the
exercise by warrant holders of the Company's public warrants after notice of
redemption was given in June 1997, along with other amounts, are maintained.
Income Taxes
The Company recorded no provision for income taxes in 1998 and 1997 due to net
operating losses in 1998 and the utilization of net operating loss carryforwards
in 1997.
18
<PAGE>
Liquidity and Capital Resources
The Company's ratio of current assets to current liabilities decreased to 2.6 on
December 31, 1999 from 10.12 at December 31, 1998. The decrease was primarily
due to a 32% decrease in the Company's current assets balance and a 167%
increase in its current liabilities balance from December 31, 1998 to December
31, 1999. The 32% decrease in current assets balance was primarily due to a
$4,947,608 decrease in cash. The decease was offset by a $157,104 increase in
accounts receivable, a $1,396,080 increase in prepaid expenses and other current
assets, a $632,988 increase in deferred royalties and a $467,496 increase in
deferred advertising and promotion. The 167% increase in current liabilities was
primarily due to a $1,275,530 increase in accounts payable and accrued expenses.
The Company's cash balance decreased $4,947,608, or 78%, to $1,395,991 at
December 31, 1999 from $6,343,599 at December 31, 1998 primarily due to a
decrease of $13,492,734 resulting from cash used by the Company in its operating
activities and a decrease of $894,820 resulting from cash used for the purchase
of fixed assets. Such decreases were offset by an increase of $422,750 in cash
received by the Company in connection with stock options exercised by the
Company's employees in 1999, $6,000 received by the Company in connection with
warrants exercised by its IPO principal underwriter, $1,250,000 received by the
Company in connection with warrants exercised by one of its outside consultants
and net proceeds of $7,761,196 received by the Company in connection with the
issuance of 776,827 shares of its common stock in April 1999.
The Company's accounts receivable balance increased $157,104, or 18%, to
$1,042,091 at December 31, 1999 from $884,987 at December 31, 1998. This
increase was primarily due to a $450,000 receivable balance at December 31,
1999, which was related to the revenue generated in late 1999 from one of the
Company's major customers. The increase was offset by a decrease resulting from
the collection during 1999 from two of the Company's major customers of
approximately $259,000 in accounts receivable from such customers at December
31, 1998.
The Company's prepaid expenses and other current assets balance increased
$1,396,080 to $1,793,181 at December 31, 1999 from $397,101 at December 31, 1998
primarily due to a $3,414,286 prepayment recorded in 1999 in connection with a
two-year E-commerce marketing agreement entered into by the Company with an
Internet portal company as a prepayment of future marketing expense. Of this
amount, $1,925,000 was expensed in 1999.
The Company had $5,063,930 in deferred royalties at December 31, 1999 compared
to none at December 31, 1998. In April 1999, the Company recorded $5,538,674 in
deferred royalties in connection with the issuance of 455,218 shares of the
Company's common stock and warrants to purchase a total of 538,674 shares of the
Company's common stock to Intel, its project co-developer. Of this amount,
$474,744 was expensed in 1999.
The Company had $1,012,917 in deferred advertising and promotion expense at
December 31, 1999 compared to none at December 31, 1998. In 1999, the Company
recorded $1,402,500 in deferred advertising and promotion expenses related to
the issuance of warrants to purchase a total of 250,000 shares of the Company's
common stock in consideration of business promotion services to be provided to
the Company. Of this amount, $389,583 was expensed in 1999.
19
<PAGE>
The Company's accounts payable and accrued expenses balance increased $1,275,530
to $1,778,728 at December 31, 1999 from $503,198 at December 31, 1998 primarily
due to a $176,554 increase in accrued legal service fees from December 31, 1998
to December 31, 1999 and a $245,264 increase in accrued bonuses primarily due to
$200,000 in bonuses accrued for the Company's executive officers at December 31,
1999. Finally, the total balance from the year-end outstanding bills increased
$730,495 from December 31, 1998 to December 31, 1999 primarily due to
advertising bills in a total amount of $588,223 recorded in late 1999 and paid
subsequent to December 31, 1999. No such bills were recorded at December 31,
1998.
The Company's total shareholders' equity balance increased $761,779, or 6%, to
$13,071,470 at December 31, 1999 from $12,309,691 at December 31, 1998 primarily
due to $7,761,196 in net proceeds received from the issuance of a total of
776,827 shares of the Company's common stock to four of its investors in April
1999, $422,750 in proceeds received from the exercise of stock options to
purchase a total of 44,500 shares of the Company's common stock by 18 employees
during 1999, $6,000 in proceeds received from the exercise of warrants to
purchase a total of 1,000 shares of the Company's common stock by its principal
underwriter of its initial public offering and $1,250,000 received by the
Company in connection with warrants exercised by an outside consultant.
Additionally, an increase of $5,538,674 resulted from the Company's issuance to
Intel in April 1999 of 455,218 shares of the its common stock and warrants to
purchase a total of 538,674 shares of the Company's common stock. Finally, an
increase of $1,662,500 resulted from the Company's issuance of warrants to
purchase 466,667 shares of common stock in 1999 in consideration of business
promotion and consulting services provided (or to be provided) to the Company.
The increase was offset by a net operating loss in the amount of $15,879,341 in
1999.
As of December 31, 1999, employee stock options to purchase a total of 946,286
shares with a weighted average exercise price of $11.11 per share and warrants
to purchase a total of 2,225,969 shares of the Company's common stock with a
weighted average exercise price of $13 per share were exercisable. Approximately
$40 million will be received if all of such stock options and warrants are
exercised in the future. However, the exercise of these stock options and
warrants is subject to various conditions, including the Company's stock market
price, the option/warrant holders' willingness to exercise and certain
restrictive trading regulations.
In January 2000, the Company and USA Network, Inc. ("USAi") announced an
agreement to form a new company by merging the Company and Internet Shopping
Network ("ISN"), an indirect wholly owned subsidiary of USAi. The new company
will own and operate the combined properties of the Company and ISN. Under the
terms of the agreement, USAi will also invest $40 million in cash, contribute
$10 million in dedicated media and will receive warrants to purchase additional
shares of the new company. Upon both the closing of the transaction and on a
fully diluted basis, USAi will own approximately 75% of the new company and the
Company's shareholders will own approximately 25%. In the interim, USAi has
extended a $10 million bridge loan to the Company. Consummation of the merger is
subject to various conditions, including approval by the Company's shareholders
and the receipt of required regulatory approvals.
The Company anticipates continuing to use its capital primarily to fund the
activities related to the design, development, marketing, sales and support of
the Company's E-commerce web-sites. Together with its existing capital, the $10
million credit term provided by USAi and anticipated funds from operations, the
Company believes that its capital resources will be sufficient to provide its
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. The Company expects the merger to be completed in the second
quarter of 2000. If the merger is not completed and cash generated from
operations is insufficient to satisfy the Company's capital requirements, the
Company may have to sell additional equity or debt securities or obtain credit
facilities, assuming it can do so on acceptable terms.
20
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure of Market Risk
None.
Item 8. Financial Statements and Supplementary Data
See index to financial statements on page 23.
21
<PAGE>
Audited Financial Statements
Styleclick.com Inc.
Years ended December 31, 1999, 1998 and 1997
with Report of Independent Auditors
22
<PAGE>
Styleclick.com Inc.
Audited Financial Statements
Years ended December 31, 1999, 1998 and 1997
Contents
Report of Independent Auditors...............................................24
Audited Financial Statements
Balance Sheets...............................................................26
Statements of Operations.....................................................27
Statements of Stockholders' Equity...........................................28
Statements of Cash Flows.....................................................29
Notes to Financial Statements................................................31
23
<PAGE>
Report of Independent Auditors
The Board of Directors
Styleclick.com Inc.
We have audited the accompanying balance sheet of Styleclick.com Inc. (the
"Company") as of December 31, 1999 and the related statements of operations,
stockholders' equity, and cash flows of the Company for the year then ended
December 31, 1999. Our audit also included the financial statement schedule
listed in the Index at Item 14(d). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides 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 Styleclick.com Inc. at
December 31, 1999, and the results of its operations and its cash flows for the
year ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ERNST & YOUNG LLP
----------------------
Ernst & Young LLP
Los Angeles, California
February 21, 2000
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Styleclick.com Inc. (formerly ModaCAD, Inc.)
We have audited the accompanying balance sheet of Styleclick.com Inc. (formerly
ModaCAD, Inc.) as of December 31, 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(d). 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 Styleclick.com Inc. (formerly
ModaCAD, Inc.) as of December 31, 1998, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1998
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
- -------------------------------------------
Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
March 16, 1999
25
<PAGE>
Styleclick.com Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,395,991 $ 6,343,599
Accounts receivable, net of allowance for
doubtful accounts of $242,229 and $132,500
at December 31, 1999 and 1998, respectively 799,862 752,487
Deferred royalties 632,988 -
Deferred advertising and promotion 467,496 -
Prepaid expenses and other current assets 1,793,181 397,101
----------- -----------
Total current assets 5,089,518 7,493,187
Capitalized computer software development costs,
net of accumulated amortization of $7,880,904
and $6,039,105 at December 31, 1999 and
1998, respectively 2,294,914 3,014,043
Fixed assets, net of accumulated depreciation
of $1,823,850 and $1,069,832 at December 31, 1999
and 1998, respectively 2,600,458 2,459,656
Deferred royalties, non-current 4,430,942 -
Deferred advertising and promotion, non-current 545,421 -
Other assets 85,663 83,055
----------- -----------
Total assets $15,046,916 $13,049,941
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,778,728 $ 503,198
Deferred income 196,718 237,052
----------- -----------
Total current liabilities 1,975,446 740,250
Commitments (Note 3)
Stockholders' equity:
Common stock; No par value; 15,000,000 shares
authorized, 7,673,515 shares and 6,143,374
shares issued and outstanding at December 31,
1999 and 1998, respectively 43,216,747 26,575,627
Accumulated deficit (30,145,277) (14,265,936)
----------- -----------
Total stockholders' equity 13,071,470 12,309,691
----------- -----------
Total liabilities and stockholders' equity $15,046,916 $13,049,941
=========== ===========
</TABLE>
See accompanying notes to financial statements.
26
<PAGE>
Styleclick.com Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Net revenues $ 6,173,924 $ 6,681,280 $ 4,449,857
Cost of sales 667,701 82,135 87,470
------------ ----------- -----------
Gross profit 5,506,223 6,599,145 4,362,387
Operating costs and expenses:
Selling, general and administrative 13,361,980 8,290,979 3,393,765
Research and development 6,054,105 3,541,300 171,769
Merger related costs 405,333 - -
Amortization of software development
costs 1,841,798 4,889,986 774,135
------------ ----------- -----------
Total operating costs and expenses 21,663,216 16,722,265 4,339,669
------------ ----------- -----------
Operating (loss) profit (16,156,993) (10,123,120) 22,718
------------ ----------- -----------
Other income (expense):
Loss in equity investment - (55,324) -
Other income - 2,067 11,190
Investment income 277,652 488,738 320,367
------------ ----------- -----------
Total other income (expense) 277,652 435,481 331,557
------------ ----------- -----------
Net (loss) income $(15,879,341) $(9,687,639) $ 354,275
============ =========== ===========
Basic (loss) income per share $ (2.24) $ (1.59) $ 0.07
============ =========== ===========
Diluted (loss) income per share $ (2.24) $ (1.59) $ 0.06
============ =========== ===========
Weighted average shares outstanding 7,092,374 6,088,247 4,800,918
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
Styleclick.com Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Accumulated
----------------------
Shares Amount Deficit Total
--------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 3,865,790 $11,593,905 $ (4,932,572) $ 6,661,333
Issuance of common
stock for stock
options exercised 29,000 149,376 - 149,376
Warrants exercised 2,128,184 13,369,126 - 13,369,126
Warrant redemption cost - (167,055) - (167,055)
Issuance of warrants
for services - 572,000 - 572,000
Net income - - 354,275 354,275
--------- ----------- ------------ -----------
Balance at December 31, 1997 6,022,974 25,517,352 (4,578,297) 20,939,055
Issuance of common stock
for stock options
exercised 94,000 837,875 - 837,875
Warrants exercised 26,400 158,400 - 158,400
Issuance of warrants for
services - 62,000 - 62,000
Net loss - - (9,687,639) (9,687,639)
--------- ----------- ------------ -----------
Balance at December 31, 1998 6,143,374 26,575,627 (14,265,936) 12,309,691
Issuance of common stock 779,423 7,761,196 - 7,761,196
Issuance of common stock
for stock options
exercised 44,500 422,750 - 422,750
Issuance of common stock
for services 455,218 5,000,000 - 5,000,000
Warrants exercised 251,000 1,256,000 - 1,256,000
Issuance of warrants for
services - 2,201,174 - 2,201,174
Net loss - - (15,879,341) (15,879,341)
--------- ----------- ------------ -----------
Balance at December 31, 1999 7,673,515 $43,216,747 $(30,145,277) $13,071,470
========= =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
Styleclick.com Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Operating activities
Net (loss) income $(15,879,341) $(9,687,639) $ 354,275
Adjustments to reconcile net (loss)
income to net cash used in
operating activities
Depreciation 754,018 292,671 65,665
Amortization of capitalized
software development costs 1,841,797 4,889,986 774,135
Capitalized computer software
development costs (1,122,668) (2,895,512) (2,682,956)
Amortization of deferred costs
for services rendered 974,327 62,000 12,000
Fixed assets acquired in
exchange for sales - (275,000) -
Loss in equity investment - 55,324 -
Changes in operating assets
and liabilities:
Accounts receivable, net (47,375) 1,408,665 (818,299)
Prepaid expenses and other
current assets (1,246,080) 350,675 (34,343)
Other assets (2,608) 8,593 (69,208)
Accounts payable and
accrued expenses 1,275,530 142,477 (10,022)
Deferred income (40,334) 132,772 29,501
------------ ----------- -----------
Net cash used in operating
activities (13,492,734) (5,514,988) (2,379,252)
Investing activities
Purchase of fixed assets (894,820) (1,557,680) (616,166)
------------ ----------- -----------
Net cash used in investment
activities (894,820) (1,557,680) (616,166)
Financing activities
Payments on officers/stockholders
note payable - - (75,000)
Stock options exercised 422,750 837,875 149,376
Warrants exercised 1,256,000 158,400 13,369,126
Issuance of common stock 7,761,196 - (167,055)
------------ ----------- -----------
Net cash provided by financing
activities 9,439,946 996,275 13,276,447
Net (decrease) increase in cash
and cash equivalents (4,947,608) (6,076,393) 10,281,029
------------ ----------- -----------
Cash and cash equivalents at
beginning of year 6,343,599 12,419,992 2,138,963
------------ ----------- -----------
Cash and cash equivalents
at end of year $ 1,395,991 $ 6,343,599 $12,419,992
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
Styleclick.com Inc.
Statements of Cash Flows
Supplemental disclosure of noncash transactions
During 1999, the Company recorded deferred royalties and deferred advertising
and promotion costs of $7,141,174 due to the issuance of 455,218 shares of the
Company's common stock, warrants to purchase a total of 538,674 shares of the
Company's common stock to a project co-developer, and the issuance of warrants
to purchase a total of 350,000 shares of the Company's common stock in
consideration of business promotional services to be provided for the Company.
During 1999, $914,327 of such costs were expensed.
During 1997, the Company issued warrants to purchase a total of 126,316 shares
of the Company's common stock valued at $560,000 for development expenses that
were performed in 1998.
During the years ended December 31, 1999, 1998 and 1997, the Company paid no
income taxes or interest.
See accompanying notes to financial statements.
30
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
1. Line of Business and Basis of Presentation
Styleclick.com Inc. ("Styleclick" or the "Company"), formerly known as Modacad,
Inc., was incorporated in California on February 4, 1988. The Company is in the
business of developing, marketing, and supporting electronic commerce
("E-commerce") Internet web-sites; Internet enabled applications; and business
and consumer software products, based on its proprietary technology for content
management, including modeling and rendering technology.
Beginning in 1999, the Company shifted its primary business focus from the
business-to-business marketplace to the emerging consumer Internet E-commerce
market. In connection with this shift in focus, the Company divested many of its
products in the business-to-business and consumer software product groups. The
Company is focusing its technology to build and deploy E-commerce Internet
sites, such a comparative search and shopping solutions aimed at facilitating
businesses' use of electronic commerce to reach consumers in the apparel,
footwear, accessories, cosmetics and home furnishings industries. As a result of
the Company's shift in business focus, revenue of approximately $2.6 million and
$400,000 recorded in 1998 and 1997, respectively, are not expected to reoccur in
future period.
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the accompanying financial statements, the Company incurred significant
operating losses and negative cash flows from operations for the last two years
and is currently being advanced funds by USA Networks, Inc. ("USAi") pursuant to
USAi's $10 million line of credit extended to the Company in contemplation of
the Company's merger with the Internet Shopping Network (see Note 11).
The Company's continuation as a going concern is dependent upon the success of
its merger with the Internet Shopping Network or the raising of additional debt
or equity financing. The Company believes that the proceeds from USAi's
investment, in addition to revenue generated from expansion of the Company's
services in the market place will support the Company's operations through 2000.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly-liquid investments purchased with original
maturities of three months or less to be cash equivalents.
31
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Software Development Costs
Prior to 1999, software development costs were capitalized in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to Be Sold, Leased, or Otherwise Marketed ("SFAS No. 86")".
Under SFAS No. 86, software development costs were capitalized upon the
establishment of technological feasibility and discontinued when the product was
available for sale. Capitalized software development costs were comprised
primarily of direct overhead, payroll costs and consultants' fees of individuals
working directly on the development of specific software products.
On January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP
98-1")". SOP 98-1 identifies three stages of a typical software development
project: preliminary project stage, application development stage, and the post-
implementation stage. As required by SOP 98-1, the Company capitalizes certain
qualifying costs incurred during the application development stage. All other
internal use development costs are expensed as incurred.
The carrying value of software and development costs is periodically reviewed,
and a loss is recognized when the value of estimated undiscounted cash flow
benefit related to the asset falls below the unamortized cost, consistent with
the Company's policy regarding long-lived assets. During 1998, an impairment of
capitalized computer software development costs of approximately $3,443,000 was
recognized and has been included in amortization of capitalized software
development costs in the statement of operations. Costs capitalized for the
years ended December 31, 1999 and 1998 were $1,122,668 and $3,050,471,
respectively.
Amortization of capitalized software development costs is provided on a
project-by-project basis on the straight-line method over the estimated economic
life of the products (not to exceed three years).
In March 2000, Emerging Issues Task Force 00-2 (EITF 00-2), Accounting for
Website Development Costs was issued. EITF 00-2 is effective prospectively for
all costs incurred for quarters beginning after June 30, 2000 and addresses how
an entity should account for costs incurred to develop a web-site. The Company
does not expect the adoption of EITF 00-2 to have a material impact, if any, on
its financial position or results of operations.
Fixed Assets
Furniture and equipment are recorded at cost. Depreciation is computed by using
the straight-line method over an estimated useful life of five years.
Maintenance and minor replacements are charged to expense as incurred. Gains and
losses on disposals of fixed assets are included in the results of operations.
32
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Business-to-Business
The Company recognizes revenues generated from vendor participation in the
Company's CD-ROM applications ("CD-ROM participation fees") and the Company's
on-line shopping Internet web-sites ("project participation fees") based upon
the accomplishment of contractual milestones in a manner that matches revenue
with the related costs. Revenue generated from services provided to customers in
the development and maintenance of their Internet web-sites ("web-site
development and maintenance fees") is recognized based on the accomplishment of
contractual milestone in a manner that matches revenue with the related costs.
Generally, the terms of contracts that generate CD-ROM participation fees,
project participation fees, and web-site development and maintenance fees are
short term in nature (twelve months or less).
Barter
The Company has entered into several barter transaction arrangements whereby it
receives certain non-monetary benefits. The Company has not recognized any
revenue under these contracts because it does not have a history of receiving
cash for similar transactions.
Internet Applications
Revenue generated from the Company's fulfillment services provided to the
Company's on-line shopping Internet web-site participant vendors ("transactional
revenue") is recognized based on a percentage of gross revenues from the related
transactions upon notification of shipment of the vendors' products by the
Company's fulfillment warehouse or the participant vendors.
Revenue generated from referral of vendors' products to Internet consumers
through the Company's on-line shopping Internet web-sites ("product referral
fees") are recognized based on a percentage of gross revenues from the related
transactions based upon notification of the respective sales information by the
Company's vendors, the independent Internet traffic tracking companies or the
Company's on-line tracking reports.
Other
Revenue generated from advertising on the Company's on-line shopping web-sites
("on-line advertising revenue") is recognized over the terms of the
corresponding contracts on a straight-line basis.
Consumer Software, CD-ROM Applications
The Company recognizes revenues related to software licenses and software
maintenance in accordance with SOP 97-2, "Software Revenue Recognition." Product
revenue is recorded at the time of shipment, net of estimated allowances and
returns. Revenue generated from post contract customer support is recognized on
a straight-line basis over the term of the corresponding contract, which is
generally twelve months.
33
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Cost of Sales
Costs of sales are comprised primarily of product fulfillment costs, credit card
processing fees, direct shipping material and product royalties associated with
the respective revenues.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121. "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" the Company periodically reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows (on an undiscounted basis)
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising expense for the
years ended December 31, 1999, 1998 and 1997 was $4,513,918, $992,217 and
$19,629, respectively and is included in the statement of operations as selling,
general and administrative expense.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs
consist primarily of salaries, consulting fees and direct overhead.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation." The Company accounts for equity
securities issued to non-employees in accordance with the provisions of SFAS No.
123. All stock options are issued at an exercise price at or above the deemed
fair value of the Company's stock.
Income Taxes
The Company accounts for income taxes under the liability method, and deferred
tax assets and liabilities are recognized for the future tax consequences
attributed to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
34
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Net Income (Loss) Per Share
Basic net income (loss) per share excludes dilution and is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
during the reported period. Diluted net income (loss) per share reflects the
potential dilution that could occur if stock options and other commitments to
issue common stock were exercised using the treasury stock method.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. The Company's financial instruments
include cash and cash equivalents and accounts receivable and their carrying
amounts approximate fair value.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of cash and trade receivables. The Company places its cash
with high quality financial institutions. Amounts of $1,106,074 and $6,026,869
held in a money market account were fully insured at December 31, 1999 and 1998,
respectively. The Company extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral. Exposure
to losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
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 disclosures of
contingent assets and liabilities at 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.
35
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
3. Fixed Assets
Fixed assets at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Computer equipment and software $ 3,365,275 $ 2,607,578
Office equipment 318,204 233,652
Furniture and fixtures 268,969 255,510
Leasehold improvements 471,860 432,748
----------- ------------
4,424,308 3,529,488
Less accumulated depreciation 1,823,850 1,069,832
----------- ------------
$ 2,600,458 $ 2,459,656
=========== ============
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$754,018, $447,628 and $210,712, respectively.
4. Commitments
Leases
The Company leases certain facilities for its corporate and operations offices
under long-term, non-cancelable operating lease agreements which expire through
April 30, 2006.
Future minimum aggregate lease payments under non-cancelable operating leases
with initial or remaining terms of one year or more at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Years ending Sub-lease rental
December 31, Operating leases income Total
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
2000 $ 559,135 $ 105,000 $ 454,135
2001 528,375 105,000 423,375
2002 487,259 52,500 434,759
2003 446,142 - 446,142
2004 406,891 - 406,891
Thereafter 541,326 - 541,326
----------- ----------- -----------
$ 2,969,128 $ 262,500 $ 2,706,628
=========== =========== ===========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $468,557, $451,253 and $192,000, respectively.
36
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
4. Commitments (continued)
Employment Agreements
In 1998, the Company entered into two new employment agreements, expiring on
December 31, 2005, with two key officers of the Company. Under the agreements,
these officers receive aggregate annual salaries of $400,000 and monthly
aggregate automobile allowances of $1,200. In addition, these officers received
aggregate signing bonuses of $200,000. Further, the Company shall pay an annual
performance bonus to each officer for each calendar year of the employment term
in an amount determined by the Compensation Committee of the Board of Directors.
In 1999, the Company amended these two employment agreements to increase annual
salaries paid to these officers to an aggregate amount of $460,000 effective
January 1, 2000 and awarded $200,000 performance bonuses to these officers.
In connection with the employment agreements, the same key officers were granted
five-year options to purchase up to an aggregate of 400,000 shares of the
Company's common stock at an exercise price of $15.88. Such options vest and
become exercisable over the next three years and contain accelerated vesting and
exercisability criteria based on achieving certain operating results. Options to
purchase 133,332 shares are vested and became exercisable as of December 31,
1999 and options to purchase 133,334 and 133,334 shares will be vested and
become exercisable as of December 31, 2000 and 2001, respectively.
In July 1999, the Company entered into a new employment agreement with a key
officer of the company that expires on June 30, 2002. Under the agreement, the
officer receives an annual salary of $125,000 and a monthly automobile allowance
of $400.
E-Commerce Marketing Agreement
In June 1999, the Company entered into a two-year interactive marketing
agreement with an Internet Portal company (the "Portal"). Under the agreement,
the Portal will promote the Company's E-commerce Internet web-site in several
areas of the Portal's Internet web-sites. In consideration of such promotion,
the Company will make payments to the Portal totaling up to $7.5 million in cash
through January 2001. As of December 31, 1999, the Company had paid $3,214,286
in cash to the Portal under this agreement. In addition, in June 1999, the
Company issued warrants to the Portal to purchase 100,000 shares of the
Company's common stock at an exercise price of $12.34 that expire in December
2001. The fair value of such warrants was $200,000 based on the fair value of
the consideration received. This cash and the value of the warrant was deferred
and is included in prepaid expenses and other current assets at December 31,
1999, net of amortization of $1,925,000 in 1999. The entire amount of $7.7
million is being amortized to expense over the two-year term of the marketing
agreement.
37
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
5. Stockholders' Equity
Common Stock and Warrants
In November 1997, the Company issued a warrant to purchase 126,316 shares of
common stock to its project co-developer ("Co-developer") for services provided
to the Company. The warrant expires in November 2002 and has an exercise price
of $19.00 per share of common stock. Under the Project Development Agreement,
the Company had an obligation to the Co-developer for certain royalty payments
in the form of cash and common stock purchase warrants.
In April 1999, the Company entered into a Stock and Warrant Purchase and
Investor Rights Agreement ("Purchase Agreement") with the Co-developer. Under
the Purchase Agreement, the Company issued 455,218 shares of common stock to the
Co-developer. Further, in return for termination of the Company's royalty
obligation to the Co-developer, the Company issued warrants to purchase an
aggregate of 538,674 shares of common stock with exercise prices ranging from
$10.98 to $13.18. The warrants expire as follows: 189,674 shares in April 2000,
189,674 shares in July 2000 and 159,326 shares in April 2004. The value of the
common stock and warrants of approximately $5.5 million has been based on the
expected future royalty obligation and will be amortized over the original
royalty term through December 2007.
Concurrent with the Purchase Agreement, the Company entered into a Securities
Purchase Agreement with each of four investors. Under the Securities Purchase
Agreement, the investors purchased an aggregate of 776,827 shares of the
Company's common stock and warrants to purchase an aggregate of 919,243 shares
of common stock with exercise prices ranging from $13.18 to $13.73 that expire
as follows: 323,677 shares in April 2000, 323,677 shares in July 2000, and
271,889 shares in April 2004.
As a result of this offering, the Company received net proceeds of $7,721,510
after paying costs associated with the offering. The Company issued warrants to
purchase 15,536 shares of common stock at an exercise price of $10.98 per share
to two placement agents in connection with the Purchase Agreement and the
Securities Purchase Agreement. The warrants expire in April 2004.
38
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
5. Stockholders' Equity (continued)
Warrants
In connection with the Company's initial public offering ("IPO") in March 1996,
the Company issued to the principal underwriter unit purchase warrants to
purchase 140,000 units at a per unit exercise price of $6.00. Each unit
consisted of one share of common stock and one redeemable warrant exercisable to
purchase one share of common stock at an exercise price of $9.10 per share. Such
unit purchase warrants are exercisable for a four-year period, which began March
27, 1997. In 1997, the underwriter (or assignees of the underwriter) exercised a
portion of the warrants to purchase an aggregate of 88,300 shares of the
Company's common stock and 88,300 redeemable common stock purchase warrants for
an aggregate exercise price of $529,800. The underwriter (or its assignees)
further exercised redeemable common stock purchase warrants to purchase 30,800
shares of the Company's common stock for $280,280. In 1998, the underwriter (or
its assignees) exercised redeemable common stock purchase warrants to purchase
an aggregate of 26,400 shares of the Company's common stock for $158,400. In
1999, the underwriter (or its assignees) exercised redeemable common stock
purchase warrants to purchase an aggregate of 1,000 shares of the Company's
common stock for $6,000.
In December 1996, the Company issued warrants to purchase 250,000 shares of
common stock to an outside consultant for services provided to the Company. The
warrants had an exercise price of $5.00 per share and were to expire in December
1999. In 1999, the warrant holder exercised its warrants to purchase 250,000
shares of the Company's common stock for $1,250,000.
In July 1997, the Company issued warrants to purchase 100,000 shares of common
stock to a financial advisor for services provided to the Company. The warrants
expire in July 2002 and have an exercise price of $14.38 per common share. In
accordance with SFAS No. 123, the Company valued these warrants at $36,000,
which was the current market value of the services rendered by the warrant
holder. Such amount was recognized as consulting expense during 1998. As of
December 31, 1999, these warrants had not been exercised.
In June 1998, the Company issued warrants to purchase 50,000 shares of common
stock to an outside promotion agency for services provided to the Company. The
warrants expire in May 2003 and have an exercise price of $17.75 per common
share. In December 1998, the Company issued warrants to purchase 8,333 shares of
commons stock to the same agency for services provided to the Company. The
warrants expire in November 2003 and have an exercise price of $20.00 per common
share. During 1999, the Company issued warrants to purchase an aggregate of
41,667 shares of common stock with exercise prices ranging from $11.56 to $20.00
that expire in January 2004 through May 2004. In accordance with SFAS No. 123,
the Company valued these warrants at $15,000, which was the current market value
of the services rendered by the warrant holder. During 1999 and 1998, the
Company recognized $15,000 and $21,000, respectively, of promotional expense
related to these warrants. As of December 31, 1999, these warrants had not been
exercised.
39
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
5. Stockholders' Equity (continued)
Warrants (continued)
In March 1999, the Company issued warrants to a third party to purchase 250,000
shares of common stock at an exercise price of $16.80 per share. Such warrants
were issued in consideration of business promotion services to be provided to
the Company and were fully vested and immediately exercisable on the grant date,
and expire in March 2004. In October 1999, the Company changed the exercise
price to $10.86 per share of common stock, which was 110% of the then-current
market value. In accordance with SFAS No. 123, the Company valued these warrants
using an option pricing model and recorded $1,402,500 as deferred advertising
and promotion services to be amortized over the three-year term of the
advertising and promotion services, of which $389,583 was expensed during 1999.
As of December 31, 1999, these warrants had not been exercised.
In June, July and August 1999, the Company issued warrants to purchase an
aggregate of 30,000 shares of common stock to a financial advisor for services
provided to the Company. The warrants had an exercise price of $13.00 per common
share and expire in June, July and August 2002. In accordance with SFAS No. 123,
the Company valued these warrants at $45,000 which was the current market value
of the services rendered by the warrant holder. Such amount was recognized as
consulting expense during 1999. As of December 31, 1999, these warrants had not
been exercised.
The Company has granted non-employee directors warrants to purchase an aggregate
of 77,000 shares of common stock at exercise prices ranging from $4.25 to $9.50
that expire at various times from May 2001 through October 2009. Warrants to
purchase 4,000 common shares were canceled in July 1999 when one of the
directors was not re-elected during the Company's 1999 annual shareholders
meeting. These warrants have been accounted for under the provisions of APB 25
as allowed under SFAS No. 123.
40
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
6. Stock Option Plan
In 1995, the Company adopted the 1995 Stock Option Plan (the "Plan") which
expires in 2006. The Plan provides for options for 2,500,000 shares that may be
granted to any employee, officer and director of the Company. The Board of
Directors or its committee selects the optionees and determines the type of
option (incentive or non-statutory) and number of shares subject to each option.
A summary of changes in outstanding options under the Plan and warrants issued
outside of the plan follows:
<TABLE>
<CAPTION>
Weighted Weighted
Stock Average Average
Options Exercise Other Exercise
Outstanding Price Warrants Price
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 204,000 $ 4.96 2,202,000 $ 6.07
Granted 733,454 $ 16.29 528,616 $ 11.58
Exercised (29,000) $ 5.15 (2,128,184) $ 6.28
Canceled (6,000) $ 9.50 (916) $ (6.50)
--------- ------- --------- -------
Balance at December 31, 1997 902,454 $ 14.10 601,516 $ 10.16
Granted 840,000 $ 8.92 100,733 $ 13.47
Exercised (94,000) $ 6.03 (26,400) $ 6.00
Canceled (181,000) $ 15.70 - -
--------- ------- --------- -------
Balance at December 31, 1998 1,467,454 $ 11.47 675,849 $ 10.99
Granted 725,000 $ 8.90 1,941,120 $ 12.62
Exercised (44,500) $ 9.50 (251,000) $ 5.00
Canceled (181,500) $ 9.47 (4,000) $ 9.50
--------- ------- --------- -------
Balance at December 31, 1999 1,966,454 $ 10.95 2,361,969 $ 12.94
========= ======= ========= =======
Exercisable at December 31, 1999 946,286 $ 11.11 2,225,969 $ 13.00
========= ======= ========= =======
Shares available for future grant 366,046
=========
</TABLE>
41
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
6. Stock Option Plan (continued)
The weighted-average remaining contractual lives of the options are 7.6 and 9.2
years at December 31, 1999 and 1998, respectively. The weighted-average
remaining contractual lives of the warrants are 3.8 and 3.3 years at December
31, 1999 and 1998, respectively.
SFAS No. 123 requires disclosure of pro forma net loss and pro forma basic and
diluted loss per share based upon the fair value of the options issued. The
Company calculated the fair value of each option grant on the date of the grant
using an option pricing model as prescribed by SFAS No. 123 using the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Risk-free interest rate............ 5.6% 4.8% 5.7%
Expected life (in years)........... 5 4.7 4.1
Dividend yield..................... 0 % 0 % 0 %
Volatility......................... 70 % 80 % 65 %
</TABLE>
This option valuation model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing model does
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During the year ended December 31, 1998, outstanding options granted to
employees in 1997 were repriced in December 1998. The Company has included
additional compensation cost for the excess of the fair value of the modified
options issued over the value of the original options at the date of the
exchange in its pro forma disclosure and recognized the total amount over the
remaining life of the options. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(19,779,296) $(15,251,331) $ (1,365,274)
Pro forma loss per share
Basic and diluted $(2.79) $(2.51) $(0.28)
</TABLE>
42
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
6. Stock Option Plan (continued)
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.
7. Sales
Major Customers
During 1999, the Company conducted business with two customers whose sales
comprised approximately 56% and 13% of net sales.
During 1998, the Company conducted business with two customers whose sales
comprised approximately 30% and 24% of net sales.
During 1997, the Company conducted business with one customer whose sales
comprised approximately 34% of net sales.
Export Sales
For the year ended December 31, 1999, the Company's export sales were
approximately $507,740, principally comprised of $464,396 in Asia and $43,344 in
other geographic regions.
For the year ended December 31, 1998, the Company's export sales were
approximately $627,422, principally comprised of $586,725 in Europe and $40,697
in other geographic regions.
For the year ended December 31, 1997, the Company's export sales were
approximately $957,000, principally comprised of $761,000 in Europe, $91,000 in
Asia, and $105,000 in other geographic regions.
8. Deferred Contribution Plan
In 1996, the Company adopted the Styleclick 401(k) Plan, formerly known as the
Modacad 401(k) Plan, (the "401(k) Plan"). The 401(k) Plan is available to
substantially all employees who meet service and years of employment
requirements. Employees who participate in the 401(k) Plan may elect to
contribute from 3% to 15% of their annual compensation. The 401(k) Plan has a
Company discretionary contribution provision in which the Company may contribute
up to 5% of income before taxes. The amount of the contribution is determined
each year by the Company. For the years ended December 31, 1999, 1998 and 1997,
employer contributions under the 401(k) Plan were approximately $0, $0 and
$22,000, respectively.
43
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
9. Income Taxes
The following is a reconciliation of the statutory federal income tax rate to
the Company's effective income tax rate.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax computed at federal statutory tax rate 34% 34% 34%
State taxes (net of federal benefit) 3 6 6
Valuation allowance (37) (40) (40)
---- ---- ----
Total -% -% -%
==== ==== ====
</TABLE>
As of December 31, 1999, the Company has federal net operating loss
carryforwards of approximately $29,900,000 which expire through 2019.
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $11,314,485 $ 4,740,810
Warrants issued for services 589,350 253,600
Computer software development costs 211,171 133,861
Research credits 1,023,565 798,565
Other 238,789 96,037
----------- -----------
13,377,360 6,022,873
Valuation allowance for deferred tax assets (12,724,477) (5,748,785)
----------- -----------
652,883 274,088
Deferred tax liabilities:
Furniture and equipment (156,697) (109,942)
Deferred state taxes (496,186) (164,146)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the net deferred tax
assets in future tax returns, the Company has placed a valuation allowance equal
to its net deferred tax assets.
The net change in the valuation allowance for the year ended December 31, 1999
and 1998 was an increase of $6,975,692 and $3,920,450, respectively. $887,200 of
the valuation allowance relates to warrants issued for services which, if
realized, will not reduce tax expense.
44
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
10. Earnings Per Share
Earnings per share for the years ended December 31, 1999, 1998, and 1997 were as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss) $(15,879,341) $(9,687,639) $ 354,275
Weighted average shares 7,092,374 6,088,247 4,800,918
------------ ----------- -----------
Basic income (loss) per share $ (2.24) $ (1.59) $ 0.07
============ =========== ===========
Weighted average shares including
the dilutive effect of stock
options and other equity
securities 7,092,374 6,088,247 5,507,582
Diluted income (loss) per share $ (2.24) $ (1.59) $ 0.06
============ =========== ===========
</TABLE>
11. Subsequent Event
Merger of Styleclick.com and Internet Shopping Network
On January 25, 2000, the Company and USA Network, Inc. announced an agreement to
form a new company by merging the Company and Internet Shopping Network ("ISN"),
an indirect wholly owned subsidiary of USAi. The new company, which will be
named Styleclick Inc., will own and operate the combined properties of the
Company and ISN. Under the terms of the agreement, USAi will also invest $40
million in cash, contribute $10 million in dedicated media and will receive
warrants to purchase additional shares of the new company. Upon both the closing
of the transaction and on a fully diluted basis, USAi will own approximately 75%
of the new company and the Company's stockholders will own approximately 25%. In
the interim, USAi has agreed to extend a $10 million lien of credit to the
Company. The transaction is expected to close in the second quarter of 2000.
45
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On April 19, 1999, Styleclick.com Inc. dismissed Singer Lewak Greenbaum &
Goldstein LLP ("SLGG") as its independent accountants and engaged Ernst & Young
LLP as its new independent accountants. Stylelick's Audit Committee participated
in and approved the decision to change independent accountants. In connection
with its audits for the two most recent fiscal years and through April 19, 1999,
there have been no disagreements with SLGG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of SLGG would
have caused it to make reference thereto in its report on the financial
statements for such years.
46
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
Directors
The Directors of the Company, and certain information about them, are set forth
below:
Name Age Positions
Joyce Freedman 65 Chairman of the Board and Co-Chief Executive Officer
Maurizio Vecchione 38 President, Co-Chief Executive Officer and Director
Lee Freedman 76 Executive Vice President and Director
F. Stephen Wyle(1)(2) 56 Director
Peter Frank(1) 74 Secretary and Director
Leslie Saleson(1)(2) 47 Director
- -----------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Joyce Freedman is a founder of the Company and has served as a director since
its incorporation in February 1988. Ms. Freedman has served as Chairman of the
Board of the Company since its incorporation, a position to which she was
formally elected in January 1996. From February 1988 to December 1997, Ms.
Freedman also served as President of the Company and, in January 1998, became
Chief Executive Officer. From January 1986 to February 1988, Ms. Freedman was
the Chief Executive Officer of Compu-Arch, a sole proprietorship in which she
authored and marketed computer software for architects, interior designers and
engineers. Ms. Freedman holds a Master of Architecture degree from the Southern
California Institute of Architecture and engaged in private practice as an
architect from December 1984 to January 1986. Ms. Freedman is the wife of Lee
Freedman.
Maurizio Vecchione is a founder of the Company and has served as a director
since its incorporation in February 1988. Mr. Vecchione has served as Co-Chief
Executive Officer of the Company since May 1999. From January 1998 to April
1999, he was Chief Operating Officer and President, and from February 1988 to
December 1997, he was Executive Vice President. Prior to co-founding the
Company, Mr. Vecchione held various executive, technical and marketing positions
with CAECO a developer of CAD/CAM software, Tektronix Corporation a computer
graphics and instrumentation manufacturer, and Photomatrix and Proprietary
Software, developers of imaging and computer graphics software.
Lee Freedman has served as the Company's Vice President, Finance, Chief
Financial Officer and as a director since its incorporation. From 1983 to 1988,
Mr. Freedman was engaged in private practice as a business consultant. From 1957
to 1983, he was employed by HRT Industries Inc., then a New York Stock Exchange
listed company, which operated a chain of discount department and retail
specialty stores, and held the position of Executive Vice President for most of
that time. Mr. Freedman is the husband of Joyce Freedman.
47
<PAGE>
F. Stephen Wyle became a director of the Company in January 1996. Since January
1999, Mr. Wyle has been Chairman and Chief Executive Officer of CyberMDx, a
developmental stage company producing portable diagnostic telemedicine systems
for primary health care application. From December 1994 to January 1999, Mr.
Wyle was Chairman of Wyle Laboratories, a diversified engineering and testing
company serving aerospace, nuclear power and commercial markets. From February
1991 to December 1994, Mr. Wyle was an independent consultant providing
strategic marketing and financing assistance to early-stage, technology-based
companies. From October 1988 to February 1991, Mr. Wyle was the President of
Trancel Corporation (formerly Cell Biotech, Inc.) which was engaged in the
development of a long-term treatment for Type I diabetes.
Peter Frank became a director of the Company in November 1996. Since 1965, Mr.
Frank has been President of Los Angeles-based Managing Directors, Ltd., which he
founded as an independent investment banking firm specializing in the funding of
small cap companies as well as in mergers and acquisitions. In 1993, Mr. Frank
founded, and is President of, Baltic Treasures, Ltd. (operating as Bamburi), a
manufacturer and importer of antique furniture from Latvia and Western Russia
which is sold to retail stores in the United States.
Leslie Saleson became a director of the Company in November 1997. Since November
1998, Ms. Saleson has been President and Chief Operating Officer of Abbott
Resource Group, Inc., a privately held company based in Irvine, California. From
April 1997 to November 1998, Ms. Saleson served as an independent financial
advisor to several corporations. From February 1994 to April 1997, Ms. Saleson
was a managing director of The Wescott Group, a Beverly Hills-based merchant
bank. From 1990 to 1993 Ms. Saleson was an owner, Co-Chief Executive Officer and
Chief Financial Officer of Pogens, Inc., a packaged cookie manufacturer. In
1981, Ms. Saleson founded Saleson and Company, Inc., an investment banking firm,
where she served as President until 1990.
Executive Officers
The executive officers of the Company, and certain information about them, are
as follows:
Name Age Positions
Joyce Freedman 65 Chairman of the Board and Co-Chief Executive Officer
Maurizio Vecchione 38 President, Co-Chief Executive Officer and Director
Barry Hall 51 Executive Vice President, Finance and Chief
Financial Officer
Lee Freedman 76 Executive Vice President and Director
Officers are appointed by and serve at the discretion of the Board of Directors.
All officers were appointed for terms ending upon their deaths, resignations,
removal or appointment and qualification of a successor. For information
concerning Joyce Freedman, Maurizio Vecchione and Lee Freedman, see "Directors"
above.
Barry Hall, Executive Vice President and Chief Financial Officer, joined the
Company in October 1999. From May 1998 until August 1999, he was Chief Operating
Officer of Interactive Light, Inc. a developer and marketer of digital
interactive entertainment systems and platforms. From January 1998 to April
1998, Mr. Hall was Chief Financial Officer of Apparel Technologies, Inc. a
developer of digital printing technologies for the apparel industry. From
January 1996 to September 1997, he was Executive Vice President and Chief
Financial Officer of Earthlink Networks, Inc. a nationwide Internet Service
Provider. Prior to that Mr. Hall was Chairman and Chief Executive Officer at
California Amplifier, a developer, manufacturer and marketer of electronic
components used in the reception of microwave and satellite television signals.
48
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Company's directors and officers and persons holding more
than ten percent of the Company's Common Stock are required to report their
ownership of the Company's Common Stock and any changes in that ownership to the
Securities and Exchange Commission (the "SEC"). The specific due dates for these
reports have been established by the SEC, and the Company is required to
disclose in this report any failure to file by the established dates. On
February 14, 2000, each of the following officers and/or directors filed an
individual Form 5, which reported the following grants of stock options or
warrants to purchase shares of common stock of the Company. Joyce Freedman and
Lee Freedman both reported on a separate Form 5 options granted to (i) Joyce
Freedman on December 31, 1997, (ii) Lee Freedman on April 8, 1998, and (iii) Lee
Freedman on April 16, 1998. Maurizio Vecchione and Andrea Vecchione (who
resigned as a director of the Company on July 16, 1999) each reported on a
separate Form 5 (i) a warrant granted on October 27, 1997 to Andrea Vecchione,
which was subsequently cancelled and regranted on October 9, 1998, (ii) an
option granted to Maurizio Vecchione on December 31, 1997, and (iii) a warrant
granted to Andrea Vecchione on October 9, 1998. Linda Freedman (who resigned as
an officer of the Company effective December 31, 1999) reported options granted
on (i) January 2, 1997, (ii) August 28, 1997, which was subsequently cancelled
and regranted on October 9, 1998, (iii) October 27, 1997, which was subsequently
cancelled and regranted on October 9, 1998, and (iv) April 16, 1998, which was
subsequently cancelled and regranted on October 9, 1998. Steven Gentry reported
options granted on (i) April 1, 1996, (ii) March 3, 1997, (iii) December 23,
1997, and (iv) April 16, 1998, which was subsequently cancelled and regranted on
October 9, 1998. Stephen Wyle reported warrants granted on (i) May 8, 1996 and
(ii) July 30, 1997, which was subsequently cancelled and regranted on October 9,
1998. Leslie Saleson reported warrants granted on (i) October 27, 1997, which
was subsequently cancelled and regranted on October 9, 1998 and (ii) October 9,
1998. Peter Frank reported a warrant granted on October 9, 1998. All of the
transactions listed above were not timely reported. Additionally, on
February 14, 2000, Barry Hall filed a Form 5, that among other things, reported
the date on which he became an officer of the Company (October 1, 1999), which
information should have been included in a Form 3 within ten (10) days after he
attained such status.
49
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table summarizes the compensation paid during each of 1998, 1997
and 1996 to the Company's chief executive officer and other executive officers
whose compensation exceeded $100,000 in 1999:
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
Other ----------------------
Name and Annual Restricted Securities
Principal Fiscal Compen- Stock Underlying
Position Year Salary Bonus sation(1) Awards Options
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joyce Freedman 1999 $200,000 $200,000 $7,200 $ 0 0
Chairman of the 1998 $200,000 $100,000 $7,200 $ 0 200,000
Board & Co-Chief 1997 $150,000 $ 20,999 $4,800 $ 0 37,227
Executive Officer
Maurizio Vecchione 1999 $200,000 $200,000 $7,200 $ 0 0
President & Co-Chief 1998 $200,000 $100,000 $7,200 $ 0 200,000
Executive Officer 1997 $150,000 $ 20,999 $4,800 $ 0 37,227
Barry Hall 1999 $ 37,500(2) $ 0 $1,600 $ 0 150,000
Executive Vice 1998 $ 0 $ 0 $ 0 $ 0 0
President, Finance 1997 $ 0 $ 0 $ 0 $ 0 0
& Chief Financial
Officer
Lee Freedman 1999 $125,000 $ 0 $4,800 $ 0 25,000
Executive Vice 1998 $125,000 $ 0 $4,800 $ 0 50,000
President 1997 $125,000 $ 0 $4,800 $ 0 0
</TABLE>
___________________
(1) Other Annual Compensation consists of automobile allowances.
(2) Mr. Hall was only employed with the Company over three months in 1999,
during which time he received a monthly salary of $12,500 and automobile
allowance of $400 per month.
Option Grants in Last Fiscal Year
The following table sets forth information concerning option grants during
fiscal year 1999 to each of the executive officers named in the Summary
Compensation Table who received stock option grants in 1999. The Company has not
granted any stock appreciation rights (SARs). Unless otherwise indicated in the
footnotes, all options had vested and were exercisable as of December 31, 1999.
<TABLE>
<CAPTION>
Individual Grants
- --------------------------------------------------------------------------------
Number of Percent of Total Exercise or
Shares Underlying Options Granted Base Price Expiration
Name Options Granted to Employees in ($/Sh) Date
Fiscal Year(1)
- ------------ ------------------ ----------------- ------------- ----------
<S> <C> <C> <C> <C>
Barry Hall 150,000 20.9% $ 6.93 09/30/09
Lee Freedman 25,000 3.4% $10.18 05/24/04
</TABLE>
____________________
(1) The Company granted options to purchase an aggregate of 725,000 shares to
employees in 1999.
50
<PAGE>
Option Exercises and Year End Value Table
The following table sets forth information concerning option exercises during
the last fiscal year by the executive officers named in the Summary Compensation
Table and the value of options held by such officers as of December 31, 1999:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Options at In-the-Money Options at
December 31, 1999 December 31, 1999(1)
--------------------- -----------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
- ----------------- -------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Joyce Freedman 0 0 103,893 133,334 0 0
Maurizio Vecchione 0 0 103,893 133,334 0 0
Barry Hall 0 0 0 150,000 0 $750,300
Lee Freedman 0 0 70,000 5,000 $35,200 $ 8,800
</TABLE>
____________________
(1) Dollar value is based on the market value of the Company's Common Stock of
$11.94 per share at December 31, 1998 minus the per share exercise price.
Compensation of Directors
Three non-employee members of the Board of Directors, Peter Frank, Leslie
Saleson, and Stephen Wyle, received compensation in the form of warrants to
purchase shares of Common Stock from the Company in 1999 for their service on
the Board. In October 1999, the Company granted to each of Peter Frank, Leslie
Saleson and Stephen Wyle ten-year warrants to purchase 15,000 shares of Common
Stock at an exercise price of $7.50 per share, 5,000 shares of which vested
immediately and the balance of which vest in two 5,000 share installments on
October 21 of 2000 and 2001.
Employment Contracts
In 1998, the Company entered into employment agreements, expiring on December
31, 2005, with Joyce Freedman, Chairman of the Board and Co-Chief Executive
Officer, and Maurizio Vecchione, President and Co-Chief Executive Officer. Under
the agreements, Ms. Freedman and Mr. Vecchione each was paid an annual salary of
$200,000 and a monthly automobile allowance of $600. In addition, each of Ms.
Freedman and Mr. Vecchione received a signing bonus of $100,000. Further, under
such agreements, the Company was to pay an annual performance bonus to each of
Ms. Freedman and Mr. Vecchione for each calendar year of the employment term in
an amount determined by the Compensation Committee of the Board of the
Directors. Effective October, 1999, the Company amended these two employment
agreements to increase the annual salary paid to each of Ms. Freedman and Mr.
Vecchione to $230,000, effective January 1, 2000
In connection with the employment agreements entered into with Ms. Freedman and
Mr. Vecchione in 1998, each was granted five-year stock options to purchase up
to 200,000 shares of the Company's common stock at an exercise price of $15.88,
the vesting of which were tied to the attainment of certain performance
criteria. Effective October 1999, the stock option agreements pursuant to which
such options were granted were amended to provide that the options vest and
become exercisable in three annual installments commencing on December 31, 1999
and to provide for accelerated vesting upon the satisfaction of certain
conditions or upon a change in control of the Company. Options to purchase
66,666 shares for each of Ms. Freedman and Mr. Vecchione vested and became
exercisable as of December 31, 1999, and options to purchase 66,667 shares each
will vest and become exercisable on December 31, 2000 and December 31, 2001,
subject to acceleration as described above.
51
<PAGE>
In July 1999, the Company entered into a new employment agreement with Lee
Freedman, Executive Vice President, that expires on June 30, 2002. Under the
agreement, Mr. Freedman receives an annual salary of $125,000 and a monthly
automobile allowance of $400.
Item 12. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 29, 2000 by: (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of the Company's Common Stock; (ii) each of the Company's
directors; (iii) each of the executive officers of the Company; and (iv) the
current directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner (1) Beneficial Ownership (2) Percent of Class(3)
- ----------------------- ------------------------- -------------------
<S> <C> <C>
Joyce Freedman 1,685,140 (4) 21.3%
Lee Freedman 1,455,800 (5) 18.4%
Intel Corporation 1,120,208 (6) 13.4%
2200 Mission College Blvd
Santa Clara, CA 95052
Maurizio Vecchione 525,512 (7) 6.7%
USANi Sub LLC 1,623,686 (8) 17.4%(8)
Carnegie Hall Tower
152 W. 57th St., 42nd Floor
New York, NY 10019
Castle Creek Technology Partners, LLC 628,392 (9) 7.6%(9)
77 W. Wacker Drive, Suite 4040
Chicago, IL 60601
Barry Hall 0 ---
F. Stephen Wyle 13,000 (10) *
128 Maryland Street
El Segundo, California 90245
Peter Frank 9,000 (11) *
9903 Santa Monica Blvd., Suite 327
Beverly Hills, California 90210
Leslie Saleson 11,000 (12) *
9925 Anthony Place
Beverly Hills, California 90210
All current directors and officers 2,383,604 29.7%
as a group (8 persons)
</TABLE>
____________________
* Less than one percent.
52
<PAGE>
(1) The business address for Joyce Freedman, Lee Freedman, Maurizio Vecchione,
and Barry Hall is 3861 Sepulveda Blvd., Culver City, California 90230.
(2) Except to the extent the shares owned are subject to community property laws
or as otherwise indicated, beneficial ownership represents sole voting and sole
investment power with respect to the Company's Common Stock. Shares that a
person is deemed to beneficially own by reason of having the right to acquire
within 60 days are deemed to be outstanding for the purpose of computing the
percentage of such person's beneficial ownership.
(3) Based on 8,159,226 total shares outstanding as of February 29, 2000.
(4) Consists of 369,292 shares held by Joyce Freedman as her separate property
and with respect to which she does not share voting or investment power with her
husband, Lee Freedman, 1,136,955 shares held jointly by Joyce Freedman and Lee
Freedman, as to which shares they share voting and investment power, 37,227
shares which may be purchased by Joyce Freedman pursuant to currently
exercisable stock options at an exercise price of $20.06 per share, 66,666
shares which may be purchased by Joyce Freedman pursuant to currently
exercisable stock options at an exercise price of $15.87 per share, 25,000
shares which may be purchased by Lee Freedman pursuant to currently exercisable
stock options at an exercise price of $15.87 per share, 25,000 shares which may
be purchased by Lee Freedman pursuant to currently exercisable stock options at
an exercise price of $16.12 per share and 25,000 shares which may be purchased
by Lee Freedman pursuant to currently exercisable stock options at an exercise
price of $10.18 per share.
(5) Consists of 139,952 shares held by Lee Freedman as his separate property and
with respect to which he does not share voting or investment power with his
wife, Joyce Freedman, 1,136,955 shares held jointly by Lee Freedman and Joyce
Freedman, as to which shares they share voting and investment power, 25,000
shares which may be purchased by Lee Freedman pursuant to currently exercisable
stock options at an exercise price of $15.87 per share, 25,000 shares which may
be purchased by Lee Freedman pursuant to currently exercisable stock options at
an exercise price of $16.12 per share, 25,000 shares which may be purchased by
Lee Freedman pursuant to currently exercisable stock options at an exercise
price of $10.18 per share, 37,227 shares which may be purchased by Joyce
Freedman pursuant to currently exercisable stock options at an exercise price of
$20.06 per share and 66,666 shares which may be purchased by Joyce Freedman
pursuant to currently exercisable stock options at an exercise price of $15.87
per share.
(6) Consists of 455,218 shares of Common Stock held by Intel Corporation
("Intel"), 126,316 shares which may be purchased by Intel upon the exercise of a
currently exercisable warrant at an exercise price of $19.00 per share, 159,326
shares which may be purchased by Intel upon the exercise of a currently
exercisable warrant at an exercise price of $10.98 per share and 379,348 shares
which may be purchased by Intel upon the exercise of currently exercisable
warrants at an exercise price of $13.18 per share.
(7) Consists of 417,619 shares of Common Stock held jointly by Maurizio and
Andrea Vecchione, 37,227 shares which may be purchased by Maurizio Vecchione
pursuant to currently exercisable stock options at an exercise price of $20.06
per share, 66,666 shares which may be purchased by Maurizio Vecchione pursuant
to currently exercisable stock options at an exercise price of $15.87 per share
and 4,000 shares which may be purchased by Andrea Vecchione upon the exercise of
vested and currently exercisable warrants at an exercise price of $9.50 per
share.
(8) Relates to an option granted to USANi Sub LLC in connection with the
agreement and plan of merger entered into between the Company and USANi Sub LLC
dated January 24, 2000. Under such option, USANi Sub LLC may purchase up to
19.9% of the common stock of the Company at $17.50 per share. The option is
exercisable at any time following certain events which may adversely affect the
proposed merger.
53
<PAGE>
(9) Consists of 89,718 shares of Common Stock held by Castle Creek Technology
Partners LLC ("Castle Creek"), 159,326 shares of Common Stock which may be
purchased by Castle Creek upon the exercise of a currently exercisable warrant
at an exercise price of $13.73 per share and 379,348 shares which may be
purchased by Castle Creek upon the exercise of currently exercisable warrants at
an exercise price of $13.18 per share. Under the terms of the warrants held by
Castle Creek, no holder thereof can exercise any portion of such warrants if
such exercise would increase such holder's beneficial ownership of common stock
to in excess of 9.99%. Absent such limitations, the warrants held by Castle
Creek would be exercisable for 538,674 shares of common stock which, when added
to the 89,718 shares currently held of record by Castle Creek, would represent
628,392 shares of common stock and 12.4% of the outstanding shares of common
stock upon such exercise. Pursuant to a management agreement, Castle Creek
Partners, LLC may be deemed to beneficially own the securities held by Castle
Creek. Castle Creek Partners, L.L.C. disclaims such beneficial ownership. John
Ziegelman and Daniel Asher, as managing members of Castle Creek Partners,
L.L.C., may be deemed to be beneficial owners of such securities. Messrs. Asher
and Ziegelman disclaim such beneficial ownership.
(10) Consists of 2,000 shares of Common Stock which may be purchased by Mr. Wyle
upon the exercise of vested and currently exercisable warrants at an exercise
price of $4.25 per share, 6,000 shares of Common Stock which may be purchased by
Mr. Wyle upon the exercise of vested and currently exercisable warrants at an
exercise price of $9.50 per share and 5,000 shares of Common Stock which may be
purchased by Mr. Wyle upon the exercise of vested and currently exercisable
warrants at an exercise price of $7.50 per share.
(11) Consists of 4,000 shares of Common Stock which may be purchased by Mr.
Frank upon the exercise of vested and currently exercisable warrants at an
exercise price of $9.50 per share and 5,000 shares of Common Stock which may be
purchased by Mr. Frank upon the exercise of vested and currently exercisable
warrants at an exercise price of $7.50 per share.
(12) Consists of 6,000 shares of Common Stock which may be purchased by Ms.
Saleson upon the exercise of vested and currently exercisable warrants at an
exercise price of $9.50 per share and 5,000 shares of Common Stock which may be
purchased by Ms. Saleson upon the exercise of vested and currently exercisable
warrants at an exercise price of $7.50 per share.
Item 13. Certain Relationships and Related Transactions
The Company has employment agreements with certain executive officers. See
"Executive Compensation-Employment Contracts" above.
54
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) (1) and (2)
The following financial statements of Registrant are presented in Item
8 of this report:
Balance sheets-December 31, 1999 and 1998
Statements of operations-Years ended December 31, 1999, 1998 and 1997
Statements of stockholders' equity-Years ended December 31, 1999, 1998
and 1997
Statements of cash flows-Years ended December 31, 1999, 1998 and 1997
Notes to financial statements-December 31, 1999
(3) Listing of Exhibits
The exhibits required by Item 601 of Regulation S-K filed as part of,
or incorporated by reference in, this report are listed in (c) below
and in the accompanying Exhibit Index.
(b) Reports on Form 8-K filed in the fourth quarter of 1999:
None.
55
<PAGE>
(c) Exhibits.
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Certificate of Amendment of Articles of Incorporation(2)
3.3 Bylaws of Registrant, as amended(1)
3.4 Amendment to Bylaws dated May 4, 1999(2)
4.1 Amendment No. 5 to 1995 Stock Option Plan(2)
4.2 Amendment No. 6 to 1995 Stock Option Plan(2)
10.1 Employee Agreement between Registrant and Joyce Freedman dated as
of January 1, 1998(2)
10.2 Employee Agreement between Registrant and Maurizio Vecchione
dated as of January 1, 1998(2)
10.3 Amendment No. 1 to Employment Agreement dated as of January 1,
1998 between the Registrant and Joyce Freedman(2)
10.4 Amendment No. 1 to Employment Agreement dated as of January 1,
1998 between the Registrant and Maurizio Vecchione(2)
10.5 Employment Agreement dated as of May 5, 1999 between the
Registrant and Lee Freedman(2)
10.6 Securities Purchase Agreement by and among the Company and Castle
Creek Technology Partners, LLC, Marshall Capital Management,
Inc., Winfield Capital Corp. and Spinner Global Technology Fund,
Ltd. Dated April 7, 1999.(3)
10.7 Stock and Warrant Purchase and Investor Rights Agreement by and
between the Company and Intel Corporation dated as of April 7,
1999.(4)
23.1 Consent of Ernst & Young LLP (2)
27.1 Financial Data Schedule (2)
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Commission File No. 333-1166-LA) filed with the Commission on
February 7, 1996.
(2) This exhibit is being filed electronically in the electronic format
specified by EDGAR.
(3) Incorporated by reference to the Company's Form 8-K (Commission File No.
33-31166) filed with the Securities Exchange Commission on April 9, 1999.
(4) Incorporated by reference to the Company's Form 8-K (Commission File No.
33-31166) filed with the Securities Exchange Commission on April 14, 1999.
56
<PAGE>
(d) Financial Statement Schedule
Schedule I: Financial information of Registrant
None.
Schedule II: Valuation and qualifying accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged Charged Balance
Beginning to to Other at
Description of Costs and Accounts- Deductions- End
Period Expenses Describe Describe Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts $ 132,500 $ 60,000 ($49,729)(1) $ 242,229
Balance at December 31, 1998
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts $ 81,500 $917,438 $866,438(1) $ 132,500
Balance at December 31, 1997
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts $ 112,141 $ 52,000 $ 82,641(1) $ 81,500
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
57
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Styleclick.com Inc.
Date: March 30, 2000 By: /s/ JOYCE FREEDMAN
-----------------------------
Joyce Freedman
Chairman of the Board and
Co-Chief Executive Officer
<TABLE>
<CAPTION>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<S> <C> <C>
/s/ JOYCE FREEDMAN Chairman of the Board and March 30, 2000
-------------------------- Co-Chief Executive Officer --------------
Joyce Freedman Date
/s/ MAURIZIO VECCHIONE President, March 30, 2000
- -------------------------- Co-Chief Executive Officer --------------
Maurizio Vecchione Director Date
/s/ BARRY HALL Executive Vice President, Finance March 30, 2000
- -------------------------- and Chief Financial Officer --------------
Barry Hall Date
/s/ LEE FREEDMAN Executive Vice President and March 30, 2000
- -------------------------- Director --------------
Lee Freedman Date
/s/ STEPHEN WYLE Director March 30, 2000
- -------------------------- --------------
Stephen Wyle Date
/s/ PETER FRANK Director March 30, 2000
- -------------------------- --------------
Peter Frank Date
/s/ LESLIE SALESON Director March 30, 2000
- -------------------------- --------------
Leslie Saleson Date
</TABLE>
58
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Certificate of Amendment of Articles of Incorporation(2)
3.3 Bylaws of Registrant, as amended(1)
3.4 Amendment to Bylaws dated May 4, 1999(2)
4.1 Amendment No. 5 to 1995 Stock Option Plan(2)
4.2 Amendment No. 6 to 1995 Stock Option Plan(2)
10.1 Employee Agreement between Registrant and Joyce Freedman dated as of
January 1, 1998(2)
10.2 Employee Agreement between Registrant and Maurizio Vecchione dated as
of January 1, 1998(2)
10.3 Amendment No. 1 to Employment Agreement dated as of January 1, 1998
between the Registrant and Joyce Freedman(2)
10.4 Amendment No. 1 to Employment Agreement dated as of January 1, 1998
between the Registrant and Maurizio Vecchione(2)
10.5 Employment Agreement dated as of May 5, 1999 between the Registrant
and Lee Freedman(2)
10.6 Securities Purchase Agreement by and among the Company and Castle
Creek Technology Partners, LLC, Marshall Capital Management, Inc.,
Winfield Capital Corp. and Spinner Global Technology Fund, Ltd. Dated
April 7, 1999.(3)
10.7 Stock and Warrant Purchase and Investor Rights Agreement by and
between the Company and Intel Corporation dated as of April 7,
1999.(4)
23.1 Consent of Ernst & Young LLP (2)
27.1 Financial Data Schedule (2)
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Commission File No. 333-1166-LA) filed with the Commission on
February 7, 1996.
(2) This exhibit is being filed electronically in the electronic format
specified by EDGAR.
(3) Incorporated by reference to the Company's Form 8-K (Commission File No.
33-31166) filed with the Securities Exchange Commission on April 9, 1999.
(4) Incorporated by reference to the Company's Form 8-K (Commission File No.
33-31166) filed with the Securities Exchange Commission on April 14, 1999.
59
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
MODACAD, INC.
MAURIZIO VECCHIONE and LEE FREEDMAN certify that:
1. They are the president and chief financial officer, respectively, of
MODACAD, INC., a California corporation (the "Corporation").
2. The following amendment of the articles of incorporation has been duly
approved by the Board of Directors of the Corporation.
3. The following amendment of the articles of incorporation has been duly
approved by the required vote of the shareholders of the Corporation in
accordance with Section 902 of the California Corporations Code. The number
of outstanding shares of the sole class of shares entitled to vote with
respect to the amendment was 7,401,515, and the number of shares voting in
favor of the amendment equaled or exceeded the vote required. The
percentage vote required was more than 50%.
4. Article 1 of the articles of incorporation is hereby amended to read in its
entirety as follows:
"I
The name of this corporation is STYLECLICK.COM INC."
5. This certificate of amendment shall become effective on July 19, 1999.
We declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: July 16, 1999
/s/ MAURIZIO VECCHIONE
----------------------------------
MAURIZIO VECCHIONE, President
/s/ LEE FREEDMAN
----------------------------------
LEE FREEDMAN, Chief Financial Officer
Amendment to Article IV, Section 4.5 of the Bylaws Dated May 4, 1999
"The Chairman of the Board shall be the chief executive officer of the
Corporation, or one of the co-chief executive officers of the Corporation, as
the case may be, and shall, together with the co-chief executive officer, if
any, subject to the control of the Board of Directors, have general supervision,
direction and control of the business of the Corporation."
AMENDMENT NO. 5 TO
MODACAD, INC.
1995 STOCK OPTION PLAN
The first sentence of Section 3 of the ModaCAD, Inc. 1995 Stock Option Plan, as
previously amended by Amendment No. 1 dated November 26, 1996; Amendment No. 2
dated June 10, 1997; Amendment No. 3 dated April 8, 1998; and Amendment No. 4
dated July 2, 1998 (as so amended, the "Plan"), is hereby amended to read in its
entirety as follows:
(b) Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares which may be
optioned and sold pursuant to the exercise of Options under the Plan
is 2,500,000 Shares.
AMENDMENT NO. 6 TO MODACAD, INC.
1995 STOCK OPTION PLAN
The text of Section 8(d)(ii) ("Termination of Status as an Employee") of the
ModaCAD, Inc. 1995 Stock Option Plan, as previously amended by Amendment No. 1
dated November 26, 1996; Amendment No. 2 dated June 10, 1997; Amendment No. 3
dated April 8, 1998; Amendment No. 4 dated July 2, 1998; and Amendment No. 5
dated July 16, 1999 (as so amended, the "Plan"), is hereby amended to read in
its entirety as follows:
(ii) Termination of Status as an Employee. If an Optionee ceases to
serve as an Employee or a consultant for any reason other than death,
Disability or Termination for Cause, and thereby terminates his or her
Continuous Employment with the Company or status as a consultant, to
the extent that such Optionee was entitled to exercise the Option at
the date of such termination, such Optionee shall have the right to
exercise the Option at any time within 90 days subsequent to the last
day of such Optionee's Continuous Employment with the Company or
status as a consultant (unless at any time prior to the termination of
Continuous Employment, the Board specifies a longer period, not to
exceed the term of the Option set forth in the Option Agreement). To
the extent that such Optionee was not entitled to exercise the Option
at the date of the terminating event, or if such Optionee does not
exercise such Option (which such Optionee was entitled to exercise)
within the time specified herein, the Option shall terminate. In the
event that any Optionee's Continuous Employment with the Company or
status as a consultant terminates due to death or Disability, to the
extent that such Optionee was entitled to exercise the Option at the
date of such termination, the Option may be exercised any time within
180 days subsequent to the death or Disability of the Optionee (unless
at any time prior to the termination of Continuous Employment, the
Board specifies a longer period, not to exceed the term of the Option
set forth in the Option Agreement). To the extent that such Optionee
was not entitled to exercise such Option at the date of his or her
termination due to death or Disability, or if such Option is not
exercised (to the extent it could be exercised) within the time
specified herein, the Option shall terminate. If an Optionee's
Continuous Employment with the Company or status as a consultant
terminates due to his or her Termination for Cause, his or her Option
shall terminate as of the date of such Termination for Cause to the
extent not exercised as of such date.
Dated: October 26, 1999
Employee Agreement between Registrant and Joyce Freedman dated as of January 1,
1998
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
the 1st day of January, 1998 ("Effective Date"), by and between ModaCAD, Inc., a
California corporation ("Employer"), and Joyce Freedman, an individual resident
in California ("Executive").
RECITALS
A. Employer is a corporation engaged in the business of designing,
developing, marketing and distributing computer software products.
B. Executive is employed by Employer as its Chairman and Chief Executive
Officer pursuant to an Employment Agreement dated January 1, 1996 (the "Existing
Agreement).
C. Employer and Executive now desire to enter into this Agreement for the
purpose of superseding the Existing Agreement in its entirety and to provide for
the continued employment of Executive by Employer on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the above recitals and the mutual
promises and covenants set forth herein, and for other valuable consideration,
the adequacy and receipt of which are hereby acknowledged, the parties hereby
agree as follows:
1. Employment; Employment Term
1.1 Employer agrees to employ Executive, and Executive agrees to be
employed by Employer, as Employer's Chairman and Chief Executive Officer,
for a term commencing on the Effective Date and continuing until December
31, 2005, unless earlier terminated in accordance with the provisions of
Section 4 hereof (the "Employment Term"). Executive's primary duties and
responsibilities hereunder shall be to manage, administer and direct,
subject to the supervision and direction of Employer's Board of Directors,
the business and operations of Employer as well as such other duties and
responsibilities as may be prescribed from time to time by Employer's Board
of Directors. Executive agrees to perform such duties and to satisfy such
responsibilities throughout the Employment Term.
1.2 The services to be rendered by Executive hereunder shall be
furnished at such places as Employer deems appropriate, but in no event
will Executive be required to relocate her principal residence outside Los
Angeles, California, or to spend more than thirty (30) days in any one
calendar year outside of Los Angeles, California, in order to perform
Executive's duties under this Agreement.
1
<PAGE>
2. Compensation
2.1 Employer agrees to pay Executive a salary at the rate of Two
Hundred Thousand Dollars ($200,000) per year, payable in accordance with
Employer's regular salary payroll policies and procedures. In addition,
upon execution and delivery of this Agreement, Employer shall pay Executive
a signing bonus of One Hundred Thousand Dollars ($100,000).
2.2 In addition to the salary payable to Executive under Paragraph
2.1, Employer shall pay to Executive an annual performance bonus for each
calendar year of the Employment Term in an amount to be determined by the
Compensation Committee of Employer's Board of Directors.
2.3 It is recognized that during the Employment Term Executive will be
required to incur ordinary and necessary business promotion expenses in
connection with the performance of her duties and Executive shall be
entitled to reimbursement for such expenses upon her own authorization or
in accordance with Employer's general reimbursement policies and procedures
as may be established from time to time by Employer's Board of Directors.
2.4 It is recognized that the services to be performed by Executive
will require the use of a suitable automobile and Employer shall pay to
Executive monthly on the first business day of each month during the
Employment Term an automobile expenses reimbursement allowance in an amount
of Six Hundred Dollars ($600).
2.5 It is recognized that during the Employment Term Executive will be
required to incur continuing expenses to stay abreast of developments in
the areas of Executive's expertise. Executive shall be entitled to
reimbursement for such expenses to the extent incurred in accordance with
Employer's policies upon presentation of vouchers or other evidence of
those expenditures in a form in accordance with Employer's policies and
procedures as may be established from time to time by Employer's Board of
Directors.
2.6 Executive shall be entitled to reimbursement for expenses incurred
in connection with her home office as may be required in order to perform
her duties under this Agreement, upon presentation of vouchers or other
evidence of those expenditures in a form in accordance with Employer's
policies and procedures as may be established from time to time by
Employer's Board of Directors. Without limitation of the immediately
preceding sentence, Employer acknowledges that it is a requirement of
Executive's duties that Executive have a separate telephone line at her
home office and the expense incurred by Executive in connection with the
installation and use of such separate telephone facilities shall be
reimbursed to Executive when and as incurred.
2.7 During the Employment Term and for a period of five (5) years
thereafter, without regard to whether Executive is employed by Employer
during any part of such period, Executive and Executive's dependents shall
be entitled to participate in any and all of Employer's group medical,
dental and medical reimbursement programs (which shall be fully paid for by
Employer, including coverage for Executive's dependents), life insurance
benefit programs, the benefits set forth in Paragraph 3, and other such
benefit programs as may be made available to Employer's executives
2
<PAGE>
generally, upon the same terms and conditions as such programs are made
available to other senior executive executives of Employer; provided,
however, that if at any time during such period of time Employer does not
offer Executive and Executive's dependents full coverage under a
comprehensive medical and dental reimbursement plan, Employer shall
promptly reimburse Executive for all costs and expenses of Executive's own
medical and dental reimbursement plan for Executive and Executive's
dependents; and provided, further, that Employer shall have no obligation
under this Section 2.7 following any termination of Executive pursuant to
Section 4.2.
2.8 Executive shall be entitled to three (3) full weeks of vacation
during each calendar year of the Employment Term, commencing with calendar
year 1998. Executive agrees that without the express prior written consent
of Employer such vacation periods shall not be accumulated, but shall be
taken during each calendar year or forfeited, and Executive agrees to
schedule and take such vacation at a time or times which do not
unreasonably impair Employer's operations.
2.9.1 Employer shall grant Executive, effective on the date of
adoption by Employer's Board of Directors of the resolutions effecting such
grant (the "Date of Grant", an incentive stock option to purchase 200,000
shares of Employer's Common Stock (the "Option") under and pursuant to
Employer's 1995 Stock Option Plan, as now and hereafter amended, and/or
Employer's 1998 Stock Option Plan, if such a plan is adopted by Employer,
subject to Employer obtaining shareholder approval at Employer's 1998
Annual Meeting of Shareholders (or at any other meeting of, or written
adoption of resolutions by, Employer's shareholders) of an increase in the
number of shares authorized for grant subject to stock options under said
plan or plans; provided, however, that the fair market value of all shares
of Common Stock subject to the Option which first become exercisable in any
one calendar year may not exceed $100,000 (such fair market value to be
determined on the Date of Grant), and, if and to the extent that the fair
market value of the shares do exceed $100,000, the number of shares whose
fair market value so exceeds $100,000 shall be deemed subject to a
3
<PAGE>
nonstatutory stock option. (For purposes of this Section 2.9.1, the term
"Option" shall collectively refer to the incentive stock option and, if
required by the immediately preceding sentence, the nonstatutory stock
option.) The Option shall be exercisable based on the following schedule:
With respect to calendar year 1998 and any calendar year of the Employment
Term in which the "ISO Trigger" (as defined herein) occurs, a portion of
the Option shall become exercisable with respect to fifty (50) shares of
Employer's Common Stock for each One Thousand Dollars ($1,000) of
Employer's net income before taxes and executive bonuses in such year, as
reported on Employer's audited financial statements for that year (for
purposes of this sentence, the term Employer shall include any subsidiary
or affiliate of Employer whose results of operations are included within
Employer's consolidated financial statements). As used herein, the term
"ISO Trigger" shall mean that, at least once during the applicable calendar
year, the closing sales price of Employer's Common Stock, as quoted on the
NASDAQ Stock Market or as listed on a recognized stock exchange, for twenty
(20) consecutive trading days averages $10 or more, which dollar figure
shall be adjusted appropriately to reflect any stock split, reverse stock
split or stock dividend, a recapitalization (other than the conversion of
convertible securities according to their terms), a combination of shares
or other like capital adjustment. The Option shall be exercisable at a
price per share equal to the fair market value of a share of Employer's
Common Stock on the Date of Grant, which for this purpose shall be deemed
the closing sales price as quoted on the NASDAQ Stock Market on the day
before the Date of Grant. As each respective portion of the Option first
becomes exercisable in accordance with the foregoing schedule, such portion
shall thereafter remain exercisable for a period of five (5) years;
provided, however, that any portion that is an incentive stock option shall
not be exercisable after the tenth (10th) anniversary of the Date of Grant.
The Option shall be granted pursuant to a written stock option agreement,
in the form attached as Exhibit "A" hereto, providing, among other things:
(a) if the employment of Executive with Employer shall terminate because of
disability (as provided in Paragraph 3.2) or death, the Option, to the
extent then presently exercisable (including, for such purpose, any portion
which becomes exercisable because the ISO Trigger occurs and the Company
has consolidated net income before taxes and executive bonuses in the
calendar year in which death or disability occurs), shall remain
exercisable for a period of twelve (12) months after the date of such
termination and, to the extent not then presently exercisable, shall
terminate as of the date of termination of employment; (b) if the
employment of Executive with Employer shall terminate for any reason other
than as described in clause (a) or other than for a reason constituting
"just cause" pursuant to Section 4.2, or if there is a "Change in Control"
(as defined below), the exercisability of the Option shall accelerate so
that it becomes immediately exercisable, as of the date of termination or
Change in Control, as to all of the shares covered by the Option and shall
thereafter remain exercisable for a period of 90 days, in the case of such
a termination (except that the 90 day period shall be extended to 12 months
if Executive shall die during such 90 day period) or, in the case of a
Change in Control, for a period of five (5) years; and (c) for customary
antidilution protections.
2.9.2 As used herein, the term "Change in Control" shall be deemed to
have occurred (a) on the date Employer first has actual knowledge that any
person (as such term in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) who is not such
beneficial owner on the Date of Grant has become the beneficial owner (as
defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of
securities of Employer representing 40% or more of the combined voting
power of Employer's then outstanding securities or (b) on a date the
stockholders of Employer approve (i) a merger of Employer with or into any
other corporation in which Employer is not the surviving corporation or in
which Employer survives as a subsidiary of another corporation, (ii) a
consolidation of Employer with any other corporation or (iii) the sale or
disposition of all or substantially all of Employer's assets or a plan of
complete liquidation.
2.9.3 In addition to any ISOs granted to Executive pursuant to Section
2.9.1, Employer shall grant such number of additional options, exercisable
for five (5) years at a per share price equal to the fair market value of a
share of Employer's Common Stock on the date of grant, to purchase shares
of Employer's Common Stock as the Compensation Committee shall determine is
appropriate from time to time. To the extent permitted under Section 422(d)
of the Internal Revenue Code of 1986, as amended, such additional options
shall be "incentive stock options" and, to the extent not so permitted,
such options will be "nonstatutory stock options".
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2.10 Executive shall be entitled to participate in any profit-sharing,
pension, stock option, stock ownership, insurance or other plans, benefits
or policies available generally to Executives of Employer on terms and
conditions not less advantageous than those applicable to such Executives.
2.11 Executive shall be entitled during the Employment Term, and
thereafter in regard to any claim or assertion relating to actions,
circumstances or events occurring during the Employment Term, to the
benefit of the indemnification provisions contained in Employer's Bylaws,
as they may be amended from time to time, to the extent permitted by
applicable law; provided, however, that, notwithstanding such
indemnification provisions, Executive shall not be required to serve as a
director of Employer during any period of time in which Executive is not
covered by a policy of directors' and officers' errors and omissions
insurance policy, having coverage in an amount and scope reasonably
satisfactory to Executive.
3. Sick Leave and Disability.
3.1 During the Employment Term, in the event that Executive shall, by
reason of illness or other physical or mental disability, be unable to
perform her duties herein for a period of up to one hundred eighty (180)
consecutive days, said disability shall be deemed for purposes of this
Agreement to be temporary and Executive shall continue to receive all
compensation payable pursuant to Section 2.
3.2 During the Employment Term, in the event that Executive shall, by
reason of illness or other physical or metal disability, be unable to
perform her duties hereunder for more than One Hundred Eighty (180)
consecutive days, said disability shall be deemed for purposes of this
Agreement to be permanent, and this Agreement shall thereupon terminate,
and, subject to the provisions of Section 3.3 hereof, Employer shall have
no further obligations whatever to Executive, except pursuant to the Option
and to make the severance payments provided in Sections 4.3.1 and 4.3.2
hereof, which payments shall be paid to Executive immediately upon such
termination. It is understood that, except as provided in Sections 3.1 and
3.3 hereof, Executive shall not be entitled to receive compensation during
any period of disability.
3.3 In the event of Executive's permanent disability as provided in
Sections 3.2 hereof, if Employer does not then have an Employer-paid
disability insurance plan providing for Executive to receive payments for
as long as Executive remains permanently disabled in amounts equal to at
least seventy percent (70%) of Executive's salary paid as provided in this
Agreement, Employer shall make disability payments monthly to Executive for
so long as Executive remains permanently disabled in an amount equal to
seventy percent (70%) of Executive's salary paid as provided in this
Agreement.
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4. Termination of Agreement.
4.1.1 Employer, acting only through a resolution adopted by its Board
of Directors, may terminate Executive's employment under this Agreement at
Employer's election by sending a six-months' written notice to Executive,
notifying Executive that effective at the end of such six-months' period
this Agreement and the Employment Term shall be terminated. Upon the
expiration of such six-months' period, Employer's employment of Executive
and the Employment Term shall cease and be at an end and Employer shall
have no further obligations whatever to Executive, except pursuant to the
Option and to continue to provide Executive the benefits set forth in
Section 2.7 and to make the severance payments provided in Sections 4.3.1
and 4.3.2 hereof, the performance of which shall be an absolute condition
to the effectiveness of any termination by Employer of Executive's
employment pursuant to this Section 4.1.1.
4.1.2 Executive may terminate her employment with Employer by giving
sixty (60) days' written notice of termination to Employer's Board of
Directors, and this Agreement and the Employment Term shall be terminated
effective at the close of business on said sixtieth (60th) day. Thereupon,
the Employment Term shall cease at the expiration of such sixty (60) day
period, Executive shall have no further obligations whatever to Employer
and Executive shall not be entitled to continue to receive the benefits set
forth in Section 2.7 or to be paid the severance payment provided in
Section 4.3 hereof.
4.2 Notwithstanding any provision set forth in Section 4.1 hereof,
Executive's employment may be terminated at any time by Employer
immediately and without any requirement of advance notice, and without any
obligation to pay any severance payment, for just cause. For purposes of
this Agreement, "just cause" means: (i) the continued use of non-medically
prescribed narcotic drugs by Executive which renders her unable to fulfill
her duties under this Agreement; and (ii) the commission by Executive of an
act of fraud or embezzlement against Employer or Executive's conviction of
a felony involving moral turpitude.
4.3.1 If Employer should terminate this Agreement for any reason other
than for a reason constituting just cause pursuant to Section 4.2 hereof,
Employer shall pay to Executive (and the vesting of the Option shall
accelerate in accordance with Section 2.9.1(b)), on the effective date of
such termination, a severance payment in an amount equal to the greater of:
(i) Seven Hundred Fifty Thousand Dollars ($750,000.00); or (ii) the
cumulative balance of Executive's salary which would have been payable to
Executive during the remainder of the full seven (7)-year Employment Term
(through December 31, 2005) pursuant to Section 2.1 of this Agreement if
Employer had not so terminated this Agreement. Further, upon the occurrence
of a Change in Control which does not result in this Employment Agreement,
and all rights and obligations hereunder, being fully assumed by, as the
case may be, the surviving corporation, the successor to Employer or the
transferee of all or substantially all of the Company's assets, such Change
in Control shall be deemed a termination entitling Executive to receive the
severance payments set forth in the immediately preceding sentence and in
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Section 4.3.2. In partial consideration of such payment and continuing for
a period of Two and One-Half years (913 days) thereafter (the "Advisory
Period"), Executive shall, to the extent that her physical and mental
conditions permit, be available to consult with and advise Employer's
officers, directors and other representatives in regard to matters
concerning Employer's business. Notwithstanding any other provision of this
Agreement, if Executive's physical or mental condition prevents her from
fulfilling her consulting or advisory duties, she shall still be paid such
severance payment. Executive and Employer agree that it is impossible to
determine with any reasonable accuracy the amount of prospective damages to
Executive from Employer's termination other than for just cause of this
Agreement; and, in consideration thereof, Executive and Employer agree that
the severance payment provided above is reasonable, and is not a penalty,
based upon facts and circumstances of the parties at the time of entering
into this Agreement, and with due regard to Executive's future
expectations. Notwithstanding the foregoing, if Executive should cease her
employment hereunder voluntarily for any reason, or if Employer should
terminate this Agreement for just cause, all compensation and benefits
payable to Executive (including those provided in Section 2.7) shall
thereupon without any further writing or act cease, lapse and be
unconditionally terminated.
4.3.2 If any payments made to Executive under this Agreement or
otherwise (the "Payments") are subject to the excise tax imposed by Section
4999 of the Code (the "Excise Tax"), then Employer shall pay Executive an
additional amount ("Gross Up") such that the net amount retained by
Executive after deduction of any Excise Tax on the Payments and any Federal
and State income taxes and Excise Tax upon the Payments shall be equal to
the Payments. For purposes of determining the amount of the Gross Up,
Executive shall be deemed to pay Federal, State and local income taxes at
the highest marginal rate of taxation in the calendar year in which the
Payment is to be made. State and local income taxes shall be determined
based upon the state and locality of Executive's domicile on the date
termination is effective. The determination of whether such Excise Tax is
payable and the amount thereof shall be based upon the opinion of tax
counsel selected by Employer and acceptable to Executive. If such opinion
is not finally accepted by the IRS upon audit, then appropriate adjustments
shall be computed (without interest but with Gross Up, if applicable) by
such tax counsel based upon the final amount of the Excise Tax so
determined. The amount shall be paid by the appropriate party in one lump
cash sum within 30 days of such computation.
4.4 On the event of Executive's death at any time during the
Employment Term, this Agreement and the Employment Term shall thereupon
terminate, and Employer shall be obligated to pay Executive's estate only
that portion of Executive's salary which had accrued through the date of
her death, plus a death benefit bonus, in an amount equal to six months'
salary of Executive, provided, that, if Executive should die after Employer
shall have given notice pursuant to Section 4.1.1 of termination of
Executive's employment other than for just cause, but prior to the
expiration of the six-month notice period required by that Section,
Employer shall nonetheless pay to Executive's estate the severance payment
provided in Section 4.3 hereof.
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4.5 Any demotion of Executive from the position set forth in Section
1.1 of this Agreement, or any material diminishment of the responsibilities
regularly exercised by an Executive holding that job title, shall be
conclusively presumed for purposes of this Agreement, unless Executive
otherwise agrees in advance in writing, to constitute Employer's
termination without just cause of Executive's employment under this
Agreement. Such presumptive termination shall entitle Executive to the
severance payment provided in Section 4.3 hereof and accelerated vesting of
the Option as provided in Section 2.9.1(b), without limitation of any other
right or remedy of Executive under this Agreement or applicable law.
5. Executive's Agreement Not to Compete With, and to Protect the
Proprietary Assets of Employer.
5.1 During the Employment Term, Executive shall not directly or
indirectly engage, be involved, or have any financial interest, in any
proprietorship, partnership, company or other business which engages in
competition with Employer in any line of business in which Employer is or
may be from time to time engaged during such period of time, whether
Executive does so as a partner, officer, director, Executive, consultant or
holder of any beneficial interest in any such business or activity. During
and after the Employment Term, Executive shall not divert nor attempt to
divert from Employer any business of any kind in which Employer is or may
be engaged. Furthermore, Executive shall not induce or attempt to induce
any person who is en Executive of Employer to leave the employ of Employer.
5.2 Employer acknowledges that in the performance of her duties as an
Executive of Employer she may have access to Employer's existing or
potential trade secrets, including, but not limited to, any formula,
discovery, idea or concept, pattern, device, compilation of information
used in Employer's business, designs, plan, proposal, software (both object
code and source code) and software documentation, flow charts, diagrams,
models, data and data bases, marketing and research and development plans,
pricing plans and price lists, financial data and projections of sales,
expenses, etc., and other confidential information, which allows Employer
to obtain an advantage over others, including competitors, who do not know
or use such trade secrets (cumulatively, "Trade Secrets"); inventions,
including but not limited to, any new machines, manufacturing or production
devices, methods, processes, uses, apparatuses, developments, improvements,
composition of matter, design, or configuration of any kind, discovered,
conceived, developed, made, or produced, or any improvements to them
(cumulatively, "Inventions"); and other confidential market information,
including, but not limited to, customer, marketing, sales, financial,
administrative, production, processing, operational and other proprietary
information used in Employer's business (cumulatively, "Confidential
Information") which are confidential and proprietary to Employer.
Accordingly, during and after the Employment Term, Executive shall keep in
confidence at all times and not disclose to any person, firm or
corporation, and not make any use of, except as expressly authorized by
Employer, any Trade Secrets, Inventions or Confidential Information which
are made available to Executive and identified as proprietary or which,
from the circumstances involved, Executive should recognize as proprietary.
Executive further agrees that all Trade Secrets, Inventions and
Confidential Information shall remain the exclusive property of Employer
and shall not be removed from Employer's premises under any circumstances
whatever, except as expressly authorized by Employer.
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5.3 If Executive at any time should have any question about
Executive's use or disclosure of Trade Secrets, Inventions or Confidential
Information or whether any ideas, procedures, information, documentation,
materials or representations are Trade Secrets, Inventions or Confidential
Information, Executive shall promptly discuss the question with Employer's
Board of Directors, whose determination shall be binding on Executive.
5.4 Executive further agrees not to disclose to Employer, or induce
Employer to use, any Trade Secrets, Inventions or Confidential Information
belonging to a third party.
6. Executive's Agreement that All Inventions Developed in the Course of
Employment Are the Property of Employer.
6.1 As part of Executive's employment responsibilities, Executive is
being hired to invent and develop further ideas, products, financial
policies and procedures relating to Employer's business, including, without
limitation, new products and systems. Accordingly, Executive shall:
(i) Disclose promptly, in writing, to such person and in such
manner as Employer may from time to time designate, all inventions,
made or conceived by Executive, either solely or jointly with others,
during the Employment Term relating to Employer's business or
Employer's actual or anticipated research and development or resulting
from any work which Executive performed for Employer. Executive also
agrees to assign and convey to Employer upon request, the complete
right, title and interest in and to all such inventions, improvements,
and developments. Executive understands that Employer does not require
disclosure or an assignment of any rights in an invention for which no
equipment, supplies, facility, Trade Secrets, Inventions or
Confidential Information of Employer was used, or which was developed
entirely on Executive's own time, and (a) which does not relate to the
business of Employer or to Employer's actual or anticipated research
or development, or (b) which does not result from any work which
Executive performed for Employer.
(ii) Upon request made during the Employment Term or thereafter,
to do all lawful acts, including the execution of papers and giving of
testimony, that may be necessary or helpful in obtaining, sustaining,
or reissuing patents of the United States and foreign counties on all
Trade Secrets and Inventions, and for perfecting and maintaining
Employer's title thereto; and to otherwise cooperate with Employer in
any controversy or legal proceedings relating to any invention or
patents thereon.
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(iii) Cooperate generally with Employer in any controversy or
legal proceedings relating to said inventions, improvement or
developments, or to patent applications or patents thereon or
copyrights thereof.
6.2 For purposes of this Agreement, an invention related to Employer's
business is deemed to have been made during the Employment Term, if, during
such period, the invention was conceived or actually reduced to practice.
Any patent applications filed by Executive during the Employment Term shall
be presumed to relate to an invention made during the Employment Term, and
Employer shall be entitled to all right, title and interest in and to each
such invention, unless a preponderance of the evidence shows that the
invention was not made during such period or was unrelated to Employer's
business.
6.3 Executive acknowledges and agrees that her covenants and
undertakings contained in this Section 6 relate to matters which are of a
special, unique and extraordinary character, which gives them a peculiar
value impossible of replacement by Employer and for the loss of which
Employer cannot be reasonably or adequately compensated by monetary
damages. Accordingly, any breach by Executive of the provisions of this
Section 6 would cause Employer irreparable injury and damages and Executive
therefore expressly agrees that Employer shall be entitled to injunctive
and other equitable relief to prevent a breach or a continuing breach of
any of the provisions of this Section 6, and to secure the enforcement of
any of these provisions, in addition to any other legal or equitable remedy
that may be available to Employer. Further, Executive agrees that the
provisions of this Section 6 shall survive any termination of Executive's
employment by Employer, and that those provisions shall not be construed to
limit any of Executive's obligations and duties to Employer which may be
provided by law.
7. Miscellaneous.
7.1 All notices hereunder to the parties hereto shall be in writing
and sent by certified or registered mail, return receipt requested, postage
prepaid, or by telegram or telex, addressed to the respective parties at
the following addresses:
EMPLOYER: ModaCAD, Inc.
1954 Cotner Avenue
Los Angeles, California 90025
Attention: The Board of Directors
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Executive: Ms. Joyce Freedman
11823 Bellagio Road
Los Angeles, CA 90049
Any party may, by written notice complying with the requirements of this
Section, specify another or different person or address for the purpose of
notification hereunder. Such notices shall be deemed to have been given and
received on the next day following the sending of such telegram or telex
and, if mailed, on the fifth business day following such mailing.
7.2 This Agreement contains the entire and only agreement of the
parties hereto respecting the matters herein set forth, supersedes all
prior agreements (including, without limitation, the Existing Employment
Agreement, provided, however, that any salary, bonus, expense allowance or
reimbursement, or other compensation or benefit accrued but unpaid to
Executive as of the Effective Date shall continue to be owing and payable
by the Employer to Executive and any incentive stock options which
Executive is entitled to under the provisions of Section 2.9 of the
Existing Employee Agreement shall be granted at the first Board of
Directors meeting following release of Employer's audited financial
statement for 1997) and understandings between the parties hereto regarding
the matters hereby contemplated, and may not be changed or terminated
orally, nor shall any change, termination or attempted waiver of any of the
provisions contained in this Agreement by binding unless in writing and
signed by the party against whom the same is sought to be enforced, nor
shall this Section itself be waived verbally. This Agreement may be amended
only by a written instrument duly executed by or on behalf of the parties
hereto.
7.3 This Agreement and all of its provisions, rights and obligations
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors. This Agreement may be assigned by the
Employer to any person, firm or cooperation which shall become the owner of
substantially all of the assets of the Employer or which shall succeed to
the business of the Employer; provided, however, that in the event of any
such assignment Employer shall obtain an instrument in writing from the
assignee in which such assignee assumes the obligations of Employer
hereunder and Employer shall deliver an executed copy thereof to Executive,
whereupon Employer shall be released of all further liability to Executive
hereunder.
7.4 This Agreement is made and intended to be performed principally in
the State of California and shall take effect under, be construed and
enforced according to, and the rights and obligations of the parties shall
be governed in all respects by, the laws of the State of California. Should
any action be brought to interpret or enforce the terms hereof, the
prevailing party shall be awarded costs and reasonable attorneys' fees.
7.5 The headings of the Sections of this Agreement have been inserted
for convenience of reference only, and shall in no way affect the
interpretation of any of the terms or conditions of this Agreement.
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7.6 If any provision or part thereof of this Agreement for any reason
shall be held by an official body to be invalid or unenforceable, the valid
and enforceable provisions or parts of this Agreement shall nonetheless
continue to be given effect and bind Employer and Executive.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
MODACAD, INC.,
a California corporation
/s/ JOYCE FREEDMAN By: /s/ MAURIZIO VECCHIONE
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Joyce Freedman Maurizio Vecchione,
"Executive" President & Chief Operating Officer
"Employer"
<PAGE>
EXHIBIT "A"
MODACAD, INC.
INCENTIVE STOCK OPTION AGREEMENT
Effective April 8, 1998 (the "Date of Grant"), ModaCAD, Inc., a California
corporation (the "Company"), hereby grants to Joyce Freedman (the "Optionee") an
option to purchase a total of 200,000 shares of Common Stock (the "Shares") of
the Company, at the price set forth herein, and in all respects subject to the
terms and provisions of the Company's 1995 Stock Option Plan, as now and
hereafter amended, and/or the Company's 1998 Stock Option Plan, if such a plan
is adopted by Employer, subject to Employer obtaining shareholder approval at
the Company's 1998 Annual Meeting of the Stockholders (or at any other meeting
of, or written adoption of resolutions by, Employer's shareholders) of an
increase in the number of shares authorized for grant subject to stock options
under said plan or plans, (the "Plan") applicable to incentive stock options
which terms and provisions are hereby incorporated by reference herein. Unless
otherwise defined or the context herein otherwise requires, the capitalized
terms used herein shall have the same meanings ascribed to them in the Plan.
1. Nature of the Option. This Option is intended to be an incentive stock
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"); provided, however, that the fair market value of all
shares of the Common Stock of the Company subject to the Option which first
become exercisable in any calendar year may not exceed $100,000 (such market
value to be determined on the Date of Grant), and if and to the extent that the
fair market value of the shares which first become exercisable in a given year
do exceed $100,000, the number of shares whose fair market value so exceeds
$100,000 shall be deemed subject to a non-statutory stock option. For purposes
of this Agreement, the term "Option" shall hereinafter collectively refer to the
incentive stock option granted hereby and, if required by the proviso of the
immediately preceding sentence, the non-statutory stock option.
2. Date of Grant; Vesting Term of Option. This Option is granted as of
April 8, 1998, subject to Employer obtaining shareholder approval at Employer's
1998 Annual Meeting of Shareholders (or at any other meeting of, or written
adoption of resolutions by, Employer's shareholders) of an increase in the
number of shares authorized for grant subject to stock options under said plan
or plans, and shall be exercisable based on the following schedule: with respect
to any calendar year of the "Employment Term" (as such term is defined in that
certain Employment Agreement dated effective as of January 1, 1998 (the
"Employment Agreement") between the Company and Optionee) in which the "ISO
Trigger" (as defined herein) occurs, a portion of the Option shall become
exercisable with respect to fifty (50) shares of the Company's Common Stock for
each one thousand dollars ($1,000) of the Company's and its subsidiaries'
consolidated net income before taxes and executive bonuses in such year as
reported on the Company's audited financial statements for that year. As used
herein, the term "ISO Trigger" shall mean that, at least once during the
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applicable calendar year, the closing sales price of the Company's common stock,
as quoted on the NASDAQ Stock Market or as listed on a recognized stock exchange
for twenty (20) consecutive trading days averages $10 or more, which dollar
figure shall be adjusted appropriately to reflect any stock splits, reverse
stock splits, stock dividends, recapitalization (other than the conversion of
convertible securities according to their terms), combination of shares or other
like capital adjustment. As each respective portion of the Option first becomes
exercisable in accordance with the foregoing schedule, such portion shall
thereafter remain exercisable for a period of five (5) years; provided, however,
that an incentive stock option shall not be exercisable after the tenth
anniversary of the Date of Grant. Notwithstanding the foregoing, exercisability
of the Option shall be accelerated, if applicable, in accordance with the
provisions of Paragraph 6.
3. Option Exercise Price. The Option exercise price is $14.00 per Share,
which price is not less than the fair market value thereof on the Date of Grant.
4. Exercise of Option. This Option shall be exercisable during it term only
in accordance with the terms and provisions of the Plan and this Option as
follows:
(a) Method of Exercise. This Option shall be exercisable by written
notice which shall state the election to exercise this Option, the number
of Shares in respect to which this Option is being exercised, such other
representations and agreements as to the Optionee's investment intent with
respect to such Shares as may be required by the Company hereunder or
pursuant to the provisions of the Plan. Such written notice shall be signed
by the Optionee and shall be delivered in person or by certified mail to
the Secretary of the Company or such other person as may be designated by
the Company. The written notice shall be accompanied by payment of the
exercise price, which shall be by cash or by check or by delivery to the
Company of shares of Common Stock of the Company, duly assigned to the
Company by a stock power with signatures guaranteed as provided on the back
of the stock certificate. The value of each share delivered in payment of
the exercise price of all or part of the Option shall be the fair market
value ("Fair Market Value") of the Common Stock on the date such shares are
delivered. The Fair Market Value of a share of the Common Stock on any date
shall be equal to the closing price of the Common Stock for the last
preceding day on which the Company's shares were traded, and the method for
determining the closing price shall be determined by the Committee. The
certificate or certificates for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and, shall be
legended as set forth in the Plan, the Stock Purchase Agreement and/or as
required under applicable law. This Option may not be exercised for a
fraction of a Share.
(b) Restrictions on Exercise. This Option may not be exercised if the
issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of this Option, the Company may
require the Optionee to make such representations and warranties to the
Company as may be required by any applicable law or regulation.
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(c) No Shareholder Rights before Exercise and Issuance. No rights as a
shareholder shall exist with respect to the Shares subject to the Option as
a result of the grant of the Option. Such rights shall exist only after
issuance of a stock certificate in accordance with Section 8(d) of the Plan
following the exercise of the Option as provided in this Agreement and the
Plan.
5. Investment Representations. In connection with the acquisition of this
Option, the Optionee represents and warrants as follows:
(a) The Optionee is acquiring this Option, and upon exercise of this
Option, she will be acquiring the Shares for investment for his own
account, not as a nominee or agent, and not with a view to, or for resale
in connection with, any distribution thereof.
(b) The Optionee has a preexisting business or personal relationship
with the Company or one of its directors, officers or controlling persons
and by reason of his business or financial experience, has, and could be
reasonably assumed to have, the capacity to evaluate the merits and risks
of purchasing Common Stock of the Company and to make an informed
investment decision with respect thereto and to protect Optionee's interest
in connection with the acquisition of this Option and the Shares.
6. Termination of Status as an Employee.
(a) If an Optionee's continuous Employment terminates for any reason
other than death or Disability (pursuant to, respectively, Paragraph 3.2 or
Paragraph 4.4 of the Employment Agreement), or a termination for "just
cause" (as defined in the Employment Agreement), or if there is a "Change
in Control" (as defined below), the exercisability of the Option shall
automatically accelerate, effective upon the date of termination of
employment or the Change in Control, so that the Option shall then become
exercisable in full, the Optionee shall have the right to exercise the
Option at any time within, as the case may be, ninety (90) days after the
date of such termination or five (5) years after the effective date of a
Change in Control.
(b) If the Optionee's Continuous Employment terminates due to the
death or disability (pursuant to, respectively, Paragraph 3.2 or Paragraph
4.4 of the Employment Agreement) of the Optionee, the Option, to the extent
then exercisable (including, for such purpose, any portion which becomes
exercisable because the ISO Trigger occurs and the Company has consolidated
net income before taxes and executive bonuses in the calendar year in which
death or disability occurs), may be exercised at any time within twelve
(12) months after the date of such termination, in the case of death, by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, or, in the case of disability, by the
Optionee.
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(c) Notwithstanding the foregoing regarding the exercise of the Option
after the termination of Continuous Employment, the Option shall not be
exercisable after the expiration of the periods of exercisability set forth
in Section 2 herein.
(d) If the Optionee's Continuous Employment with the Company
terminates due to his or her termination for "just cause," the Option shall
terminate as of the date of such termination, to the extent not exercised
prior to such date.
(e) A "Change in Control" of the Company shall be deemed to have
occurred (a) on the date the Company first has actual knowledge that any
person (as such term is used in Sections 13(d) and 14(d) (2) of the
Exchange Act) has become the beneficial owner (as defined in Rule 13(d)-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing forty percent (40%) or more of the combined voting
power of the Company's then outstanding securities or (b) on the date the
shareholders of the Company approve (i) a merger of the Company with or
into any other corporation in which the Company is not the surviving
corporation or in which the Company survives as a subsidiary of another
corporation, (ii) a consolidation of the Company with any other
corporation, or (iii) the sale or disposition of all or substantially all
of the Company's assets or a plan of complete liquidation.
7. Withholding. The Company reserves the right to withhold, in accordance
with any applicable laws, from any compensation or other consideration
payable to the Optionee, any taxes required to be withheld by federal,
state or local law as a result of the grant or exercise of this Option or
the sale or other disposition of the Shares issued upon exercise of this
Option; and, if such compensation or consideration is insufficient, the
Company may require Optionee to pay to the company an amount sufficient to
cover such withholding tax liability.
8. Nontransferability of Option. This Option may not be sold, pledged,
assigned, hypothecated, gifted, transferred or disposed of in any manner,
either voluntarily or involuntarily by operation of law or otherwise, other
than by will or by the laws of descent or distribution or a transfer
between spouses incident to a divorce, and may be exercised during the
lifetime or the Optionee only by such Optionee or his or her legal
guardian. Subject to the foregoing and the terms of the Plan, the terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
9. Changes in Capitalization.
(a) The number and class of shares subject to the Option, the exercise
price per share (but not the total price), and the minimum number of shares
as to which the Option may be exercised at any one time, shall be
proportionately adjusted in the event of any increase or decrease in the
number of the issued shares of Common Stock of the Company which results
from a split-up or consolidation of shares, payment of a stock dividend, a
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<PAGE>
recapitalization (other than the conversion of convertible securities
according to their terms), a combination of shares or other like capital
adjustment, so that upon exercise of the Option, Optionee shall receive the
number and class of shares he would have received had he been the holder of
the number of shares of Common Stock for which the Option is being
exercised upon the date of such change or increase or decrease in the
number of issued shares of the Company.
(b) Upon a reorganization, merger of consolidation of the Company with
one or more corporations as a result of which the Company is not the
surviving corporation, or in which the Company survives as a subsidiary of
another corporation, a sale of all or substantially all of the property of
the Company to another corporation or any dividend or distribution to
shareholders of more than ten percent of the Company's assets, adequate
adjustment or other provisions shall be made by the Company or other party
to such transaction so that there shall remain and/or be substituted for
the Option Shares provided for herein, the shares, securities or assets
which would have been issuable or payable in respect of or in exchange for
the Option Shares then remaining under the Option, as if Optionee had been
the owner of such shares as of the applicable date. Any securities so
substituted shall be subject to similar successive adjustments.
10. Continuation of Employment. Neither the Plan, this Option, nor any
Option granted thereunder shall (a) confer upon the Optionee any right
whatsoever to continue in the employment of the Company or any of its
Subsidiaries or (b) limit or restrict in any respect the rights of the
Company, which rights are hereby expressly reserved, to terminate the
Optionee's employment and compensation at any time for any reason
whatsoever, with or without cause, in the Company's sole discretion and
with or without notice.
11. The Plan. The Option is subject to, and the Company and the Optionee
agree to be bound by, all of the terms and conditions of the Company's Plan
(as supplemented by the further terms and conditions of this Option, which
have been determined by the Company's Board of Directors in accordance with
Section 4(b) of the Plan) as such Plan may be amended from time to time in
accordance with the terms thereof, provided that no such amendment shall
deprive the Optionee, without his consent, of this Option or any rights
hereunder. Pursuant to the Plan, the Board is authorized to adopt rules and
regulations not inconsistent with the Plan as it shall deem appropriate and
proper. A copy of the Plan in its present form is available for inspection
at the Company's principal office during business hours by the Optionee or
the persons entitled to exercise this Option.
12. Entire Agreement. The terms of this Agreement and the Plan constitute
the entire agreement between the Company and the Optionee with respect to
the subject matter hereof and supersede any and all previous agreements
between the Company and the Optionee.
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ModaCAD, Inc.
a California corporation
Date: By: /s/ MAURIZIO VECCHIONE
---------------------------
Title: President and COO
Date: /s/ JOYCE FREEDMAN
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Signature of Optionee
------------------------------
Address
------------------------------
City State Zip code
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXECUTION OF
THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR
DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION ARE SUBJECT
TO A RIGHT OF FIRST REFUSAL AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE
TERMS OF A STOCK PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF
THIS OPTION AND THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH
AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY.
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Employee Agreement between Registrant and Maurizio Vecchione dated as of January
1, 1998
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
the 1st day of January, 1998 ("Effective Date"), by and between ModaCAD, Inc., a
California corporation ("Employer"), and Maurizio Vecchione, an individual
resident in California ("Executive").
RECITALS
A. Employer is a corporation engaged in the business of designing,
developing, marketing and distributing computer software products.
B. Executive is employed by Employer as its Executive Vice President
pursuant to an Employment Agreement dated January 1, 1996 (the "Existing
Agreement").
C. Employer and Executive now desire to enter into this Agreement for the
purpose of superseding the Existing Agreement in its entirety and to provide for
the continued employment of Executive by Employer on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the above recitals and the mutual
promises and covenants set forth herein, and for other valuable consideration,
the adequacy and receipt of which are hereby acknowledged, the parties hereby
agree as follows:
1. Employment; Employment Term
1.1 Employer agrees to employ Executive, and Executive agrees to be
employed by Employer, as Employer's President and Chief Operating Officer,
for a term commencing on the Effective Date and continuing until December
31, 2005, unless earlier terminated in accordance with the provisions of
Section 4 hereof (the "Employment Term"). Executive's primary duties and
responsibilities hereunder shall be to manage, administer and direct,
subject to the supervision and direction of Employer's Board of Directors,
the business and operations of Employer as well as such other duties and
responsibilities as may be prescribed from time to time by Employer's Board
of Directors. Executive agrees to perform such duties and to satisfy such
responsibilities throughout the Employment Term.
1.2 The services to be rendered by Executive hereunder shall be
furnished at such places as Employer deems appropriate, but in no event
will Executive be required to relocate her principal residence outside Los
Angeles, California, or to spend more than thirty (30) days in any one
calendar year outside of Los Angeles, California, in order to perform
Executive's duties under this Agreement.
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2. Compensation
2.1 Employer agrees to pay Executive a salary at the rate of Two
Hundred Thousand Dollars ($200,000) per year, payable in accordance with
Employer's regular salary payroll policies and procedures. In addition,
upon execution and delivery of this Agreement, Employer shall pay Executive
a signing bonus of One Hundred Thousand Dollars ($100,000).
2.2 In addition to the salary payable to Executive under Paragraph
2.1, Employer shall pay to Executive an annual performance bonus for each
calendar year of the Employment Term in an amount to be determined by the
Compensation Committee of Employer's Board of Directors.
2.3 It is recognized that during the Employment Term Executive will be
required to incur ordinary and necessary business promotion expenses in
connection with the performance of her duties and Executive shall be
entitled to reimbursement for such expenses upon her own authorization or
in accordance with Employer's general reimbursement policies and procedures
as may be established from time to time by Employer's Board of Directors.
2.4 It is recognized that the services to be performed by Executive
will require the use of a suitable automobile and Employer shall pay to
Executive monthly on the first business day of each month during the
Employment Term an automobile expenses reimbursement allowance in an amount
of Six Hundred Dollars ($600).
2.5 It is recognized that during the Employment Term Executive will be
required to incur continuing expenses to stay abreast of developments in
the areas of Executive's expertise. Executive shall be entitled to
reimbursement for such expenses to the extent incurred in accordance with
Employer's policies upon presentation of vouchers or other evidence of
those expenditures in a form in accordance with Employer's policies and
procedures as may be established from time to time by Employer's Board of
Directors.
2.6 Executive shall be entitled to reimbursement for expenses incurred
in connection with her home office as may be required in order to perform
her duties under this Agreement, upon presentation of vouchers or other
evidence of those expenditures in a form in accordance with Employer's
policies and procedures as may be established from time to time by
Employer's Board of Directors. Without limitation of the immediately
preceding sentence, Employer acknowledges that it is a requirement of
Executive's duties that Executive have a separate telephone line at her
home office and the expense incurred by Executive in connection with the
installation and use of such separate telephone facilities shall be
reimbursed to Executive when and as incurred.
2.7 During the Employment Term and for a period of five (5) years
thereafter, without regard to whether Executive is employed by Employer
during any part of such period, Executive and Executive's dependents shall
be entitled to participate in any and all of Employer's group medical,
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dental and medical reimbursement programs (which shall be fully paid for by
Employer, including coverage for Executive's dependents), life insurance
benefit programs, the benefits set forth in Paragraph 3, and other such
benefit programs as may be made available to Employer's executives
generally, upon the same terms and conditions as such programs are made
available to other senior executive executives of Employer; provided,
however, that if at any time during such period of time Employer does not
offer Executive and Executive's dependents full coverage under a
comprehensive medical and dental reimbursement plan, Employer shall
promptly reimburse Executive for all costs and expenses of Executive's own
medical and dental reimbursement plan for Executive and Executive's
dependents; and provided, further, that Employer shall have no obligation
under this Section 2.7 following any termination of Executive pursuant to
Section 4.2.
2.8 Executive shall be entitled to three (3) full weeks of vacation
during each calendar year of the Employment Term, commencing with calendar
year 1998. Executive agrees that without the express prior written consent
of Employer such vacation periods shall not be accumulated, but shall be
taken during each calendar year or forfeited, and Executive agrees to
schedule and take such vacation at a time or times which do not
unreasonably impair Employer's operations.
2.9.1 Employer shall grant Executive, effective on the date of
adoption by Employer's Board of Directors of the resolutions effecting such
grant (the "Date of Grant", an incentive stock option to purchase 200,000
shares of Employer's Common Stock (the "Option") under and pursuant to
Employer's 1995 Stock Option Plan, as now and hereafter amended, and/or
Employer's 1998 Stock Option Plan, if such a plan is adopted by Employer,
subject to Employer obtaining shareholder approval at Employer's 1998
Annual Meeting of Shareholders (or at any other meeting of, or written
adoption of resolutions by, Employer's shareholders) of an increase in the
number of shares authorized for grant subject to stock options under said
plan or plans; provided, however, that the fair market value of all shares
of Common Stock subject to the Option which first become exercisable in any
one calendar year may not exceed $100,000 (such fair market value to be
determined on the Date of Grant), and, if and to the extent that the fair
market value of the shares do exceed $100,000, the number of shares whose
fair market value so exceeds $100,000 shall be deemed subject to a
nonstatutory stock option. (For purposes of this Section 2.9.1, the term
"Option" shall collectively refer to the incentive stock option and, if
required by the immediately preceding sentence, the nonstatutory stock
option.) The Option shall be exercisable based on the following schedule:
With respect to calendar year 1998 and any calendar year of the Employment
Term in which the AISO Trigger" (as defined herein) occurs, a portion of
the Option shall become exercisable with respect to fifty (50) shares of
Employer's Common Stock for each One Thousand Dollars ($1,000) of
Employer's net income before taxes and executive bonuses in such year, as
reported on Employer's audited financial statements for that year (for
purposes of this sentence, the term Employer shall include any subsidiary
or affiliate of Employer whose results of operations are included within
Employer's consolidated financial statements). As used herein, the term
"ISO Trigger" shall mean that, at least once during the applicable calendar
year, the closing sales price of Employer's Common Stock, as quoted on the
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NASDAQ Stock Market or as listed on a recognized stock exchange, for twenty
(20) consecutive trading days averages $10 or more, which dollar figure
shall be adjusted appropriately to reflect any stock split, reverse stock
split or stock dividend, a recapitalization (other than the conversion of
convertible securities according to their terms), a combination of shares
or other like capital adjustment. The Option shall be exercisable at a
price per share equal to the fair market value of a share of Employer's
Common Stock on the Date of Grant, which for this purpose shall be deemed
the closing sales price as quoted on the NASDAQ Stock Market on the day
before the Date of Grant. As each respective portion of the Option first
becomes exercisable in accordance with the foregoing schedule, such portion
shall thereafter remain exercisable for a period of five (5) years;
provided, however, that any portion that is an incentive stock option shall
not be exercisable after the tenth (10th) anniversary of the Date of Grant.
The Option shall be granted pursuant to a written stock option agreement,
in the form attached as Exhibit "A" hereto, providing, among other things:
(a) if the employment of Executive with Employer shall terminate because of
disability (as provided in Paragraph 3.2) or death, the Option, to the
extent then presently exercisable (including, for such purpose, any portion
which becomes exercisable because the ISO Trigger occurs and the Company
has consolidated net income before taxes and executive bonuses in the
calendar year in which death or disability occurs), shall remain
exercisable for a period of twelve (12) months after the date of such
termination and, to the extent not then presently exercisable, shall
terminate as of the date of termination of employment; (b) if the
employment of Executive with Employer shall terminate for any reason other
than as described in clause (a) or other than for a reason constituting
"just cause" pursuant to Section 4.2, or if there is a "Change in Control"
(as defined below), the exercisability of the Option shall accelerate so
that it becomes immediately exercisable, as of the date of termination or
Change in Control, as to all of the shares covered by the Option and shall
thereafter remain exercisable for a period of 90 days, in the case of such
a termination (except that the 90 day period shall be extended to 12 months
if Executive shall die during such 90 day period) or, in the case of a
Change in Control, for a period of five (5) years; and (c) for customary
antidilution protections.
2.9.2 As used herein, the term "Change in Control" shall be deemed to
have occurred (a) on the date Employer first has actual knowledge that any
person (as such term in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) who is not such
beneficial owner on the Date of Grant has become the beneficial owner (as
defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of
securities of Employer representing 40% or more of the combined voting
power of Employer's then outstanding securities or (b) on a date the
stockholders of Employer approve (i) a merger of Employer with or into any
other corporation in which Employer is not the surviving corporation or in
which Employer survives as a subsidiary of another corporation, (ii) a
consolidation of Employer with any other corporation or (iii) the sale or
disposition of all or substantially all of Employer's assets or a plan of
complete liquidation.
2.9.3 In addition to any ISOs granted to Executive pursuant to Section
2.9.1, Employer shall grant such number of additional options, exercisable
for five (5) years at a per share price equal to the fair market value of a
share of Employer's Common Stock on the date of grant, to purchase shares
of Employer's Common Stock as the Compensation Committee shall determine is
appropriate from time to time. To the extent permitted under Section 422(d)
of the Internal Revenue Code of 1986, as amended, such additional options
shall be "incentive stock options" and, to the extent not so permitted,
such options will be "nonstatutory stock options".
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2.10 Executive shall be entitled to participate in any profit-sharing,
pension, stock option, stock ownership, insurance or other plans, benefits
or policies available generally to Executives of Employer on terms and
conditions not less advantageous than those applicable to such Executives.
2.11 Executive shall be entitled during the Employment Term, and
thereafter in regard to any claim or assertion relating to actions,
circumstances or events occurring during the Employment Term, to the
benefit of the indemnification provisions contained in Employer's Bylaws,
as they may be amended from time to time, to the extent permitted by
applicable law; provided, however, that, notwithstanding such
indemnification provisions, Executive shall not be required to serve as a
director of Employer during any period of time in which Executive is not
covered by a policy of directors' and officers' errors and omissions
insurance policy, having coverage in an amount and scope reasonably
satisfactory to Executive.
3. Sick Leave and Disability.
3.1 During the Employment Term, in the event that Executive shall, by
reason of illness or other physical or mental disability, be unable to
perform her duties herein for a period of up to one hundred eighty (180)
consecutive days, said disability shall be deemed for purposes of this
Agreement to be temporary and Executive shall continue to receive all
compensation payable pursuant to Section 2.
3.2 During the Employment Term, in the event that Executive shall, by
reason of illness or other physical or metal disability, be unable to
perform her duties hereunder for more than One Hundred Eighty (180)
consecutive days, said disability shall be deemed for purposes of this
Agreement to be permanent, and this Agreement shall thereupon terminate,
and, subject to the provisions of Section 3.3 hereof, Employer shall have
no further obligations whatever to Executive, except pursuant to the Option
and to make the severance payments provided in Sections 4.3.1 and 4.3.2
hereof, which payments shall be paid to Executive immediately upon such
termination. It is understood that, except as provided in Sections 3.1 and
3.3 hereof, Executive shall not be entitled to receive compensation during
any period of disability.
3.3 In the event of Executive's permanent disability as provided in
Sections 3.2 hereof, if Employer does not then have an Employer-paid
disability insurance plan providing for Executive to receive payments for
as long as Executive remains permanently disabled in amounts equal to at
least seventy percent (70%) of Executive's salary paid as provided in this
Agreement, Employer shall make disability payments monthly to Executive for
so long as Executive remains permanently disabled in an amount equal to
seventy percent (70%) of Executive's salary paid as provided in this
Agreement.
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4. Termination of Agreement.
4.1.1 Employer, acting only through a resolution adopted by its Board
of Directors, may terminate Executive's employment under this Agreement at
Employer's election by sending a six-months' written notice to Executive,
notifying Executive that effective at the end of such six-months' period
this Agreement and the Employment Term shall be terminated. Upon the
expiration of such six-months' period, Employer's employment of Executive
and the Employment Term shall cease and be at an end and Employer shall
have no further obligations whatever to Executive, except pursuant to the
Option and to continue to provide Executive the benefits set forth in
Section 2.7 and to make the severance payments provided in Sections 4.3.1
and 4.3.2 hereof, the performance of which shall be an absolute condition
to the effectiveness of any termination by Employer of Executive's
employment pursuant to this Section 4.1.1.
4.1.2 Executive may terminate her employment with Employer by giving
sixty (60) days' written notice of termination to Employer's Board of
Directors, and this Agreement and the Employment Term shall be terminated
effective at the close of business on said sixtieth (60th) day. Thereupon,
the Employment Term shall cease at the expiration of such sixty (60) day
period, Executive shall have no further obligations whatever to Employer
and Executive shall not be entitled to continue to receive the benefits set
forth in Section 2.7 or to be paid the severance payment provided in
Section 4.3 hereof.
4.2 Notwithstanding any provision set forth in Section 4.1 hereof,
Executive's employment may be terminated at any time by Employer
immediately and without any requirement of advance notice, and without any
obligation to pay any severance payment, for just cause. For purposes of
this Agreement, "just cause" means: (i) the continued use of non-medically
prescribed narcotic drugs by Executive which renders her unable to fulfill
her duties under this Agreement; and (ii) the commission by Executive of an
act of fraud or embezzlement against Employer or Executive's conviction of
a felony involving moral turpitude.
4.3.1 If Employer should terminate this Agreement for any reason other
than for a reason constituting just cause pursuant to Section 4.2 hereof,
Employer shall pay to Executive (and the vesting of the Option shall
accelerate in accordance with Section 2.9.1(b)), on the effective date of
such termination, a severance payment in an amount equal to the greater of:
(i) Seven Hundred Fifty Thousand Dollars ($750,000.00); or (ii) the
cumulative balance of Executive's salary which would have been payable to
Executive during the remainder of the full seven (7)-year Employment Term
(through December 31, 2005) pursuant to Section 2.1 of this Agreement if
Employer had not so terminated this Agreement. Further, upon the occurrence
of a Change in Control which does not result in this Employment Agreement,
and all rights and obligations hereunder, being fully assumed by, as the
case may be, the surviving corporation, the successor to Employer or the
transferee of all or substantially all of the Company's assets, such Change
in Control shall be deemed a termination entitling Executive to receive the
severance payments set forth in the immediately preceding sentence and in
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Section 4.3.2. In partial consideration of such payment and continuing for
a period of Two and One-Half years (913 days) thereafter (the "Advisory
Period"), Executive shall, to the extent that her physical and mental
conditions permit, be available to consult with and advise Employer's
officers, directors and other representatives in regard to matters
concerning Employer's business. Notwithstanding any other provision of this
Agreement, if Executive's physical or mental condition prevents her from
fulfilling her consulting or advisory duties, she shall still be paid such
severance payment. Executive and Employer agree that it is impossible to
determine with any reasonable accuracy the amount of prospective damages to
Executive from Employer's termination other than for just cause of this
Agreement; and, in consideration thereof, Executive and Employer agree that
the severance payment provided above is reasonable, and is not a penalty,
based upon facts and circumstances of the parties at the time of entering
into this Agreement, and with due regard to Executive's future
expectations. Notwithstanding the foregoing, if Executive should cease her
employment hereunder voluntarily for any reason, or if Employer should
terminate this Agreement for just cause, all compensation and benefits
payable to Executive (including those provided in Section 2.7) shall
thereupon without any further writing or act cease, lapse and be
unconditionally terminated.
4.3.2 If any payments made to Executive under this Agreement or
otherwise (the "payments") are subject to the excise tax imposed by Section
4999 of the Code (the "Excise Tax"), then Employer shall pay Executive an
additional amount ("Gross Up") such that the net amount retained by
Executive after deduction of any Excise Tax on the Payments and any Federal
and State income taxes and Excise Tax upon the Payments shall be equal to
the Payments. For purposes of determining the amount of the Gross Up,
Executive shall be deemed to pay Federal, State and local income taxes at
the highest marginal rate of taxation in the calendar year in which the
Payment is to be made. State and local income taxes shall be determined
based upon the state and locality of Executive's domicile on the date
termination is effective. The determination of whether such Excise Tax is
payable and the amount thereof shall be based upon the opinion of tax
counsel selected by Employer and acceptable to Executive. If such opinion
is not finally accepted by the IRS upon audit, then appropriate adjustments
shall be computed (without interest but with Gross Up, if applicable) by
such tax counsel based upon the final amount of the Excise Tax so
determined. The amount shall be paid by the appropriate party in one lump
cash sum within 30 days of such computation.
4.4 On the event of Executive's death at any time during the
Employment Term, this Agreement and the Employment Term shall thereupon
terminate, and Employer shall be obligated to pay Executive's estate only
that portion of Executive's salary which had accrued through the date of
her death, plus a death benefit bonus, in an amount equal to six months'
salary of Executive, provided, that, if Executive should die after Employer
shall have given notice pursuant to Section 4.1.1 of termination of
Executive's employment other than for just cause, but prior to the
expiration of the six-month notice period required by that Section,
Employer shall nonetheless pay to Executive's estate the severance payment
provided in Section 4.3 hereof.
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4.5 Any demotion of Executive from the position set forth in Section
1.1 of this Agreement, or any material diminishment of the responsibilities
regularly exercised by an Executive holding that job title, shall be
conclusively presumed for purposes of this Agreement, unless Executive
otherwise agrees in advance in writing, to constitute Employer's
termination without just cause of Executive's employment under this
Agreement. Such presumptive termination shall entitle Executive to the
severance payment provided in Section 4.3 hereof and accelerated vesting of
the Option as provided in Section 2.9.1(b), without limitation of any other
right or remedy of Executive under this Agreement or applicable law.
5. Executive's Agreement Not to Compete With, and to Protect the
Proprietary Assets of Employer.
5.1 During the Employment Term, Executive shall not directly or
indirectly engage, be involved, or have any financial interest, in any
proprietorship, partnership, company or other business which engages in
competition with Employer in any line of business in which Employer is or
may be from time to time engaged during such period of time, whether
Executive does so as a partner, officer, director, Executive, consultant or
holder of any beneficial interest in any such business or activity. During
and after the Employment Term, Executive shall not divert nor attempt to
divert from Employer any business of any kind in which Employer is or may
be engaged. Furthermore, Executive shall not induce or attempt to induce
any person who is en Executive of Employer to leave the employ of Employer.
5.2 Employer acknowledges that in the performance of her duties as an
Executive of Employer she may have access to Employer's existing or
potential trade secrets, including, but not limited to, any formula,
discovery, idea or concept, pattern, device, compilation of information
used in Employer's business, designs, plan, proposal, software (both object
code and source code) and software documentation, flow charts, diagrams,
models, data and data bases, marketing and research and development plans,
pricing plans and price lists, financial data and projections of sales,
expenses, etc., and other confidential information, which allows Employer
to obtain an advantage over others, including competitors, who do not know
or use such trade secrets (cumulatively, "Trade Secrets"); inventions,
including but not limited to, any new machines, manufacturing or production
devices, methods, processes, uses, apparatuses, developments, improvements,
composition of matter, design, or configuration of any kind, discovered,
conceived, developed, made, or produced, or any improvements to them
(cumulatively, "inventions"); and other confidential market information,
including, but not limited to, customer, marketing, sales, financial,
administrative, production, processing, operational and other proprietary
information used in Employer's business (cumulatively, "Confidential
Information") which are confidential and proprietary to Employer.
Accordingly, during and after the Employment Term, Executive shall keep in
confidence at all times and not disclose to any person, firm or
corporation, and not make any use of, except as expressly authorized by
Employer, any Trade Secrets, Inventions or Confidential Information which
are made available to Executive and identified as proprietary or which,
from the circumstances involved, Executive should recognize as proprietary.
Executive further agrees that all Trade Secrets, Inventions and
Confidential Information shall remain the exclusive property of Employer
and shall not be removed from Employer's premises under any circumstances
whatever, except as expressly authorized by Employer.
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5.3 If Executive at any time should have any question about
Executive's use or disclosure of Trade Secrets, Inventions or Confidential
Information or whether any ideas, procedures, information, documentation,
materials or representations are Trade Secrets, Inventions or Confidential
Information, Executive shall promptly discuss the question with Employer's
Board of Directors, whose determination shall be binding on Executive.
5.4 Executive further agrees not to disclose to Employer, or induce
Employer to use, any Trade Secrets, Inventions or Confidential Information
belonging to a third party.
6. Executive's Agreement that All Inventions Developed in the Course of
Employment Are the Property of Employer.
6.1 As part of Executive's employment responsibilities, Executive is
being hired to invent and develop further ideas, products, financial
policies and procedures relating to Employer's business, including, without
limitation, new products and systems. Accordingly, Executive shall:
(1) Disclose promptly, in writing, to such person and in such
manner as Employer may from time to time designate, all inventions,
made or conceived by Executive, either solely or jointly with others,
during the Employment Term relating to Employer's business or
Employer's actual or anticipated research and development or resulting
from any work which Executive performed for Employer. Executive also
agrees to assign and convey to Employer upon request, the complete
right, title and interest in and to all such inventions, improvements,
and developments. Executive understands that Employer does not require
disclosure or an assignment of any rights in an invention for which no
equipment, supplies, facility, Trade Secrets, Inventions or
Confidential Information of Employer was used, or which was developed
entirely on Executive's own time, and (a) which does not relate to the
business of Employer or to Employer's actual or anticipated research
or development, or (b) which does not result from any work which
Executive performed for Employer.
(2) Upon request made during the Employment Term or thereafter,
to do all lawful acts, including the execution of papers and giving of
testimony, that may be necessary or helpful in obtaining, sustaining,
or reissuing patents of the United States and foreign counties on all
Trade Secrets and Inventions, and for perfecting and maintaining
Employer's title thereto; and to otherwise cooperate with Employer in
any controversy or legal proceedings relating to any invention or
patents thereon.
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(3) Cooperate generally with Employer in any controversy or legal
proceedings relating to said inventions, improvement or developments,
or to patent applications or patents thereon or copyrights thereof.
6.2 For purposes of this Agreement, an invention related to Employer's
business is deemed to have been made during the Employment Term, if, during
such period, the invention was conceived or actually reduced to practice.
Any patent applications filed by Executive during the Employment Term shall
be presumed to relate to an invention made during the Employment Term, and
Employer shall be entitled to all right, title and interest in and to each
such invention, unless a preponderance of the evidence shows that the
invention was not made during such period or was unrelated to Employer's
business.
6.3 Executive acknowledges and agrees that his covenants and
undertakings contained in this Section 6 relate to matters which are of a
special, unique and extraordinary character, which gives them a peculiar
value impossible of replacement by Employer and for the loss of which
Employer cannot be reasonably or adequately compensated by monetary
damages. Accordingly, any breach by Executive of the provisions of this
Section 6 would cause Employer irreparable injury and damages and Executive
therefore expressly agrees that Employer shall be entitled to injunctive
and other equitable relief to prevent a breach or a continuing breach of
any of the provisions of this Section 6, and to secure the enforcement of
any of these provisions, in addition to any other legal or equitable remedy
that may be available to Employer. Further, Executive agrees that the
provisions of this Section 6 shall survive any termination of Executive's
employment by Employer, and that those provisions shall not be construed to
limit any of Executive's obligations and duties to Employer which may be
provided by law.
7. Miscellaneous.
7.1 All notices hereunder to the parties hereto shall be in writing
and sent by certified or registered mail, return receipt requested, postage
prepaid, or by telegram or telex, addressed to the respective parties at
the following addresses:
EMPLOYER: ModaCAD, Inc.
1954 Cotner Avenue
Los Angeles, California 90025
Attention: The Board of Director
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Executive: Mr. Maurizio Vecchione
17971 Rancho Street
Encino, CA 91316
Any party may, by written notice complying with the requirements of this
Section, specify another or different person or address for the purpose of
notification hereunder. Such notices shall be deemed to have been given and
received on the next day following the sending of such telegram or telex
and, if mailed, on the fifth business day following such mailing.
7.2 This Agreement contains the entire and only agreement of the
parties hereto respecting the matters herein set forth, supersedes all
prior agreements (including, without limitation, the Existing Employment
Agreement, provided, however, that any salary, bonus, expense allowance or
reimbursement, or other compensation or benefit accrued but unpaid to
Executive as of the Effective Date shall continue to be owing and payable
by the Employer to Executive and any incentive stock options which
Executive is entitled to under the provisions of Section 2.9 of the
Existing Employee Agreement shall be granted at the first Board of
Directors meeting following release of Employer's audited financial
statement for 1997) and understandings between the parties hereto regarding
the matters hereby contemplated, and may not be changed or terminated
orally, nor shall any change, termination or attempted waiver of any of the
provisions contained in this Agreement by binding unless in writing and
signed by the party against whom the same is sought to be enforced, nor
shall this Section itself be waived verbally. This Agreement may be amended
only by a written instrument duly executed by or on behalf of the parties
hereto.
7.3 This Agreement and all of its provisions, rights and obligations
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors. This Agreement may be assigned by the
Employer to any person, firm or cooperation which shall become the owner of
substantially all of the assets of the Employer or which shall succeed to
the business of the Employer; provided, however, that in the event of any
such assignment Employer shall obtain an instrument in writing from the
assignee in which such assignee assumes the obligations of Employer
hereunder and Employer shall deliver an executed copy thereof to Executive,
whereupon Employer shall be released of all further liability to Executive
hereunder.
7.4 This Agreement is made and intended to be performed principally in
the State of California and shall take effect under, be construed and
enforced according to, and the rights and obligations of the parties shall
be governed in all respects by, the laws of the State of California. Should
any action be brought to interpret or enforce the terms hereof, the
prevailing party shall be awarded costs and reasonable attorneys' fees.
7.5 The headings of the Sections of this Agreement have been inserted
for convenience of reference only, and shall in no way affect the
interpretation of any of the terms or conditions of this Agreement.
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<PAGE>
7.6 If any provision or part thereof of this Agreement for any reason
shall be held by an official body to be invalid or unenforceable, the valid
and enforceable provisions or parts of this Agreement shall nonetheless
continue to be given effect and bind Employer and Executive.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
MODACAD, INC.,
a California corporation
/s/ MAURIZIO VECCHIONE By:/s/ JOYCE FREEDMAN
- ----------------------- ----------------------------
Maurizio Vecchione, Joyce Freedman
"Executive" Chief Executive Officer
"Employer"
12
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EXHIBIT "A"
MODACAD, INC.
INCENTIVE STOCK OPTION AGREEMENT
Effective April 8, 1998 (the "Date of Grant"), ModaCAD, Inc., a California
corporation (the "Company"), hereby grants to Maurizio Vecchione (the
"Optionee") an option to purchase a total of 200,000 shares of Common Stock (the
"Shares") of the Company, at the price set forth herein, and in all respects
subject to the terms and provisions of the Company's 1995 Stock Option Plan, as
now and hereafter amended, and/or the Company's 1998 Stock Option Plan, if such
a plan is adopted by Employer, subject to Employer obtaining shareholder
approval at the Company's 1998 Annual Meeting of the Stockholders (or at any
other meeting of, or written adoption of resolutions by, Employer's
shareholders) of an increase in the number of shares authorized for grant
subject to stock options under said plan or plans, (the "Plan") applicable to
incentive stock options which terms and provisions are hereby incorporated by
reference herein. Unless otherwise defined or the context herein otherwise
requires, the capitalized terms used herein shall have the same meanings
ascribed to them in the Plan.
1. Nature of the Option. This Option is intended to be an incentive stock
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"); provided, however, that the fair market value of all
shares of the Common Stock of the Company subject to the Option which first
become exercisable in any calendar year may not exceed $100,000 (such market
value to be determined on the Date of Grant), and if and to the extent that the
fair market value of the shares which first become exercisable in a given year
do exceed $100,000, the number of shares whose fair market value so exceeds
$100,000 shall be deemed subject to a non-statutory stock option. For purposes
of this Agreement, the term "Option" shall hereinafter collectively refer to the
incentive stock option granted hereby and, if required by the proviso of the
immediately preceding sentence, the non-statutory stock option.
2. Date of Grant; Vesting Term of Option. This Option is granted as of
April 8, 1998, subject to Employer obtaining shareholder approval at Employer's
1998 Annual Meeting of Shareholders (or at any other meeting of, or written
adoption of resolutions by, Employer's shareholders) of an increase in the
number of shares authorized for grant subject to stock options under said plan
or plans, and shall be exerciseable based on the following schedule: with
respect to any calendar year of the "Employment Term" (as such term is defined
in that certain Employment Agreement dated effective as of January 1, 1998 (the
"Employment Agreement") between the Company and Optionee) in which the "ISO
Trigger" (as defined herein) occurs, a portion of the Option shall become
exercisable with respect to fifty (50) shares of the Company's Common Stock for
each one thousand dollars ($1,000) of the Company's and its subsidiaries'
consolidated net income before taxes and executive bonuses in such year as
reported on the Company's audited financial statements for that year. As used
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<PAGE>
herein, the term "ISO Trigger" shall mean that, at least once during the
applicable calendar year, the closing sales price of the Company's common stock,
as quoted on the NASDAQ Stock Market or as listed on a recognized stock exchange
for twenty (20) consecutive trading days averages $10 or more, which dollar
figure shall be adjusted appropriately to reflect any stock splits, reverse
stock splits, stock dividends, recapitalization (other than the conversion of
convertible securities according to their terms), combination of shares or other
like capital adjustment. As each respective portion of the Option first becomes
exercisable in accordance with the foregoing schedule, such portion shall
thereafter remain exercisable for a period of five (5) years; provided, however,
that an incentive stock option shall not be exercisable after the tenth
anniversary of the Date of Grant. Notwithstanding the foregoing, exercisability
of the Option shall be accelerated, if applicable, in accordance with the
provisions of Paragraph 6.
3. Option Exercise Price. The Option exercise price is $14.00 per Share,
which price is not less than the fair market value thereof on the Date of Grant.
4. Exercise of Option. This Option shall be exercisable during it term only
in accordance with the terms and provisions of the Plan and this Option as
follows:
(a) Method of Exercise. This Option shall be exercisable by written
notice which shall state the election to exercise this Option, the number
of Shares in respect to which this Option is being exercised, such other
representations and agreements as to the Optionee's investment intent with
respect to such Shares as may be required by the Company hereunder or
pursuant to the provisions of the Plan. Such written notice shall be signed
by the Optionee and shall be delivered in person or by certified mail to
the Secretary of the Company or such other person as may be designated by
the Company. The written notice shall be accompanied by payment of the
exercise price, which shall be by cash or by check or by delivery to the
Company of shares of Common Stock of the Company, duly assigned to the
Company by a stock power with signatures guaranteed as provided on the back
of the stock certificate. The value of each share delivered in payment of
the exercise price of all or part of the Option shall be the fair market
value ("Fair Market Value") of the Common Stock on the date such shares are
delivered. The Fair Market Value of a share of the Common Stock on any date
shall be equal to the closing price of the Common Stock for the last
preceding day on which the Company's shares were traded, and the method for
determining the closing price shall be determined by the Committee. The
certificate or certificates for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and, shall be
legended as set forth in the Plan, the Stock Purchase Agreement and/or as
required under applicable law. This Option may not be exercised for a
fraction of a Share.
(b) Restrictions on Exercise. This Option may not be exercised if the
issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of this Option, the Company may
require the Optionee to make such representations and warranties to the
Company as may be required by any applicable law or regulation.
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<PAGE>
(c) No Shareholder Rights before Exercise and Issuance. No rights as a
shareholder shall exist with respect to the Shares subject to the Option as
a result of the grant of the Option. Such rights shall exist only after
issuance of a stock certificate in accordance with Section 8(d) of the Plan
following the exercise of the Option as provided in this Agreement and the
Plan.
5. Investment Representations. In connection with the acquisition of this
Option, the Optionee represents and warrants as follows:
(a) The Optionee is acquiring this Option, and upon exercise of this
Option, she will be acquiring the Shares for investment for his own
account, not as a nominee or agent, and not with a view to, or for resale
in connection with, any distribution thereof.
(b) The Optionee has a preexisting business or personal relationship
with the Company or one of its directors, officers or controlling persons
and by reason of his business or financial experience, has, and could be
reasonably assumed to have, the capacity to evaluate the merits and risks
of purchasing Common Stock of the Company and to make an informed
investment decision with respect thereto and to protect Optionee's interest
in connection with the acquisition of this Option and the Shares.
6. Termination of Status as an Employee.
(a) If an Optionee's continuous Employment terminates for any reason
other than death or Disability (pursuant to, respectively, Paragraph 3.2 or
Paragraph 4.4 of the Employment Agreement), or a termination for "just
cause" (as defined in the Employment Agreement), or if there is a "Change
in Control" (as defined below), the exercisability of the Option shall
automatically accelerate, effective upon the date of termination of
employment or the Change in Control, so that the Option shall then become
exercisable in full, the Optionee shall have the right to exercise the
Option at any time within, as the case may be, ninety (90) days after the
date of such termination or five (5) years after the effective date of a
Change in Control.
(b) If the Optionee's Continuous Employment terminates due to the
death or disability (pursuant to, respectively, Paragraph 3.2 or Paragraph
4.4 of the Employment Agreement) of the Optionee, the Option, to the extent
then exercisable (including, for such purpose, any portion which becomes
exercisable because the ISO Trigger occurs and the Company has consolidated
net income before taxes and executive bonuses in the calendar year in which
death or disability occurs), may be exercised at any time within twelve
(12) months after the date of such termination, in the case of death, by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, or, in the case of disability, by the
Optionee.
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<PAGE>
(c) Notwithstanding the foregoing regarding the exercise of the Option
after the termination of Continuous Employment, the Option shall not be
exercisable after the expiration of the periods of exercisability set forth
in Section 2 herein.
(d) If the Optionee's Continuous Employment with the Company
terminates due to his or her termination for "just cause," the Option shall
terminate as of the date of such termination, to the extent not exercised
prior to such date.
(e) A "Change in Control" of the Company shall be deemed to have
occurred (a) on the date the Company first has actual knowledge that any
person (as such term is used in Sections 13(d) and 14(d) (2) of the
Exchange Act) has become the beneficial owner (as defined in Rule 13(d)-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing forty percent (40%) or more of the combined voting
power of the Company's then outstanding securities or (b) on the date the
shareholders of the Company approve (i) a merger of the Company with or
into any other corporation in which the Company is not the surviving
corporation or in which the Company survives as a subsidiary of another
corporation, (ii) a consolidation of the Company with any other
corporation, or (iii) the sale or disposition of all or substantially all
of the Company's assets or a plan of complete liquidation.
7. Withholding. The Company reserves the right to withhold, in accordance
with any applicable laws, from any compensation or other consideration payable
to the Optionee, any taxes required to be withheld by federal, state or local
law as a result of the grant or exercise of this Option or the sale or other
disposition of the Shares issued upon exercise of this Option; and, if such
compensation or consideration is insufficient, the Company may require Optionee
to pay to the company an amount sufficient to cover such withholding tax
liability.
8. Nontransferability of Option. This Option may not be sold, pledged,
assigned, hypothecated, gifted, transferred or disposed of in any manner, either
voluntarily or involuntarily by operation of law or otherwise, other than by
will or by the laws of descent or distribution or a transfer between spouses
incident to a divorce, and may be exercised during the lifetime or the Optionee
only by such Optionee or his or her legal guardian. Subject to the foregoing and
the terms of the Plan, the terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
9. Changes in Capitalization.
(a) The number and class of shares subject to the Option, the exercise
price per share (but not the total price), and the minimum number of shares
as to which the Option may be exercised at any one time, shall be
proportionately adjusted in the event of any increase or decrease in the
number of the issued shares of Common Stock of the Company which results
from a split-up or consolidation of shares, payment of a stock dividend, a
recapitalization (other than the conversion of convertible securities
-4-
<PAGE>
according to their terms), a combination of shares or other like capital
adjustment, so that upon exercise of the Option, Optionee shall receive the
number and class of shares he would have received had he been the holder of
the number of shares of Common Stock for which the Option is being
exercised upon the date of such change or increase or decrease in the
number of issued shares of the Company.
(b) Upon a reorganization, merger of consolidation of the Company with
one or more corporations as a result of which the Company is not the
surviving corporation, or in which the Company survives as a subsidiary of
another corporation, a sale of all or substantially all of the property of
the Company to another corporation or any dividend or distribution to
shareholders of more than ten percent of the Company's assets, adequate
adjustment or other provisions shall be made by the Company or other party
to such transaction so that there shall remain and/or be substituted for
the Option Shares provided for herein, the shares, securities or assets
which would have been issuable or payable in respect of or in exchange for
the Option Shares then remaining under the Option, as if Optionee had been
the owner of such shares as of the applicable date. Any securities so
substituted shall be subject to similar successive adjustments.
10. Continuation of Employment. Neither the Plan, this Option, nor any
Option granted thereunder shall (a) confer upon the Optionee any right
whatsoever to continue in the employment of the Company or any of its
Subsidiaries or (b) limit or restrict in any respect the rights of the Company,
which rights are hereby expressly reserved, to terminate the Optionee's
employment and compensation at any time for any reason whatsoever, with or
without cause, in the Company's sole discretion and with or without notice.
11. The Plan. The Option is subject to, and the Company and the Optionee
agree to be bound by, all of the terms and conditions of the Company's Plan (as
supplemented by the further terms and conditions of this Option, which have been
determined by the Company's Board of Directors in accordance with Section 4(b)
of the Plan) as such Plan may be amended from time to time in accordance with
the terms thereof, provided that no such amendment shall deprive the Optionee,
without his consent, of this Option or any rights hereunder. Pursuant to the
Plan, the Board is authorized to adopt rules and regulations not inconsistent
with the Plan as it shall deem appropriate and proper. A copy of the Plan in its
present form is available for inspection at the Company's principal office
during business hours by the Optionee or the persons entitled to exercise this
Option.
12. Entire Agreement. The terms of this Agreement and the Plan constitute
the entire agreement between the Company and the Optionee with respect to the
subject matter hereof and supersede any and all previous agreements between the
Company and the Optionee.
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<PAGE>
ModaCAD, Inc.
a California corporation
Date: By: /s/ JOYCE FREEDMAN
----------------------------
Title: Chief Executive Officer
Date: /s/ MAURIZIO VECCHIONE
--------------------------------
Signature of Optionee
--------------------------------
Address
--------------------------------
City State Zip code
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXECUTION OF
THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR
DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION ARE SUBJECT
TO A RIGHT OF FIRST REFUSAL AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE
TERMS OF A STOCK PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF
THIS OPTION AND THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH
AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY.
-6-
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 ("Amendment") to the Employment Agreement dated as of
January 1, 1998 (the "Agreement"), by and between STYLECLICK.COM INC. (formerly
ModaCAD, Inc.) (the "Employer"), and JOYCE FREEDMAN (the "Executive") is dated
and made effective as of October 1, 1999.
WITNESSETH:
WHEREAS, the Agreement provides for a fixed salary to be paid to Executive
during the Employment Term;
WHEREAS, subject to the terms and conditions set forth herein, the Employer
and Executive have agreed to amend the Agreement to specify a new salary; and
WHEREAS, Employer and Executive wish to set forth in this Amendment certain
respective rights and obligations, as herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and obligations contained herein, Employer and Executive hereby agree as
follows:
1. Definitions
Unless otherwise defined herein, all capitalized terms used herein shall
have the respective meanings set forth in the Agreement.
2. Amendments
(a) Section 2.1 of the Agreement is amended by replacing the phrase "salary
at the rate of Two Hundred Thousand Dollars ($200,000) per year" with the phrase
"salary at the rate of Two Hundred Thirty Thousand Dollars ($230,000) per year
effective on and after January 1, 2000".
(b) The entire text of the first clause of Section 2.7 of the Agreement is
deleted and replaced with the following text: "During the Employment Term and
continuing for the life of Executive thereafter,".
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(c) Section 2.9.1 of the Agreement is amended as follows:
(1) The second sentence of Section 2.9.1 of the Agreement is amended
by adding the following text after the phrase "The Option shall be
exercisable based on the following schedule:" and before the phrase "With
respect to calendar year 1998":
"With respect to calendar year 1999, as of December 31, 1999, a portion of
the Option to purchase Sixty-six Thousand Six Hundred Sixty-six (66,666)
shares shall vest and become exercisable; with respect to calendar year
2000, as of December 31, 2000, a portion of the Option to purchase
Sixty-six Thousand Six Hundred Sixty-six (66,666) shares shall vest and
become exercisable; and with respect to calendar year 2001, as of December
31, 2001, a portion of the Option to purchase Sixty-six Thousand Six
Hundred Sixty-seven (66,667) shares shall vest and become exercisable,
provided that Executive is an employee of, or consultant to, Employer on
each applicable date. The Option, however, is subject to accelerated
exercisability, in addition to any portion of the Option previously vested
as provided herein, as follows:".
(2) The fourth through sixth sentences of Section 2.9.1 of the
Agreement are amended by replacing the text following the phrase "The
Option shall be exercisable" but preceding the phrase "hereto, providing,
among other things" with:
"at a price per share equal to one hundred percent (100%) of the fair
market value of a share of Employer's common stock on the Date of Grant, as
provided in the Stock Option Agreement to be entered into with Executive.
Any portion of the Option which becomes vested and exercisable shall be
exercisable for a period of five (5) years from the Date of Grant. The
grant of the Option shall be made pursuant to a written stock option
agreement, in substantially the form attached hereto as Exhibit A".
3. Effect of Amendments
Except as expressly modified by the provisions of this Amendment, the
Agreement and all of the terms, provisions and conditions thereof shall for
all purposes remain unchanged, and in full force and effect, and are
approved, ratified and confirmed, and from and after the date hereof all
references to the Agreement in any other agreement to which any of the
undersigned are parties shall mean the Agreement as amended hereby.
4. Counterparts
This Amendment may be executed in any number of counterparts, each of
which will be deemed an original, but all of which together will constitute
one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by each party hereto as of the day and year first above written.
STYLECLICK.COM INC.
By: /s/ MAURIZIO VECCHIONE /s/ JOYCE FREEDMAN
-------------------------- --------------------------
Name: Maurizio Vecchione Joyce Freedman
Title: President
3
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 ("Amendment") to the Employment Agreement dated as of
January 1, 1998 (the "Agreement"), by and between STYLECLICK.COM INC. (formerly
ModaCAD, Inc.) (the "Employer"), and MAURIZIO VECCHIONE (the "Executive") is
dated and made effective as of October 1, 1999.
WITNESSETH:
WHEREAS, the Agreement provides for a fixed salary to be paid to Executive
during the Employment Term;
WHEREAS, subject to the terms and conditions set forth herein, the Employer
and Executive have agreed to amend the Agreement to specify a new salary; and
WHEREAS, Employer and Executive wish to set forth in this Amendment certain
respective rights and obligations, as herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and obligations contained herein, Employer and Executive hereby agree as
follows:
1. Definitions
Unless otherwise defined herein, all capitalized terms used herein shall
have the respective meanings set forth in the Agreement.
2. Amendments
(a) Section 2.1 of the Agreement is amended by replacing the phrase "salary
at the rate of Two Hundred Thousand Dollars ($200,000) per year" with the phrase
"salary at the rate of Two Hundred Thirty Thousand Dollars ($230,000) per year
effective on and after January 1, 2000".
(b) The entire text of the first clause of Section 2.7 of the Agreement is
deleted and replaced with the following text: "During the Employment Term and
continuing for the life of Executive thereafter,".
(c) Section 2.9.1 of the Agreement is amended as follows:
(1) The second sentence of Section 2.9.1 of the Agreement is amended
by adding the following text after the phrase "The Option shall be
exercisable based on the following schedule:" and before the phrase "With
respect to calendar year 1998":
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"With respect to calendar year 1999, as of December 31, 1999, a portion of
the Option to purchase Sixty-six Thousand Six Hundred Sixty-six (66,666)
shares shall vest and become exercisable; with respect to calendar year
2000, as of December 31, 2000, a portion of the Option to purchase
Sixty-six Thousand Six Hundred Sixty-six (66,666) shares shall vest and
become exercisable; and with respect to calendar year 2001, as of December
31, 2001, a portion of the Option to purchase Sixty-six Thousand Six
Hundred Sixty-seven (66,667) shares shall vest and become exercisable,
provided that Executive is an employee of, or consultant to, Employer on
each applicable date. The Option, however, is subject to accelerated
exercisability, in addition to any portion of the Option previously vested
as provided herein, as follows:".
(2) The fourth through sixth sentences of Section 2.9.1 of the
Agreement are amended by replacing the text following the phrase "The
Option shall be exercisable" but preceding the phrase "hereto, providing,
among other things" with:
"at a price per share equal to one hundred percent (100%) of the fair
market value of a share of Employer's common stock on the Date of Grant, as
provided in the Stock Option Agreement to be entered into with Executive.
Any portion of the Option which becomes vested and exercisable shall be
exercisable for a period of ten (10) years from the Date of Grant. The
grant of the Option shall be made pursuant to a written stock option
agreement, in substantially the form attached hereto as Exhibit A".
3. Effect of Amendments
Except as expressly modified by the provisions of this Amendment, the
Agreement and all of the terms, provisions and conditions thereof shall for all
purposes remain unchanged, and in full force and effect, and are approved,
ratified and confirmed, and from and after the date hereof all references to the
Agreement in any other agreement to which any of the undersigned are parties
shall mean the Agreement as amended hereby.
4. Counterparts
This Amendment may be executed in any number of counterparts, each of which
will be deemed an original, but all of which together will constitute one and
the same instrument.
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by
each party hereto as of the day and year first above written.
STYLECLICK.COM INC.
By: /s/ JOYCE FREEDMAN /s/ MAURIZIO VECCHIONE
------------------------ ----------------------------
Name: Joyce Freedman Maurizio Vecchione
Title: Chairman
2
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
the 5th day of May, 1999 ("Effective Date"), by and between ModaCAD, Inc., a
California corporation ("Employer"), and Lee Freedman, an individual resident in
California ("Executive").
RECITALS
A. Employer is a corporation engaged in the business of designing,
developing, marketing and distributing computer software products and is a
developer and provider of technologies and digital content for electronic
merchandising on the Internet.
B. Executive is employed by Employer as its Chief Financial Officer (CFO)
and Financial Vice President (Financial V.P.).
C. Employee and Executive now desire to enter into this Agreement for the
purpose of providing for the continued employment of Executive by Employer on
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the above recitals and the mutual
promises and covenants set forth herein, and for other valuable consideration,
the adequacy and receipt of which are hereby acknowledged, the parties hereby
agree as follows:
1. Employment; Employment Term
1.1 Employer agrees to employ Executive, and Executive agrees to be
employed by Employer, as Employer's CFO and Financial V.P. until such time
as a new replacement CFO is hired by the Company and thereafter Executive
is to be employed as its Executive Vice President (Exec. V.P.), for a term
commencing on the Effective Date and continuing for a term of three (3)
years, unless earlier terminated in accordance with the provisions of
Section 4 hereof (the "Employment Term"). Executive's primary duties and
responsibilities as CFO and Financial V.P. hereunder shall be to manage and
administer the financial matters of the Company, and as Exec. V.P to be
responsible for contract management, negotiation and administration, all
subject to the supervision and direction of Employer's Chairman and
Co-Chief Executive Officer and President and Co-Chief Executive Officer
(collectively the Co-CEOs). Executive agrees to perform such duties and to
satisfy such responsibilities throughout the Employment Term.
1
<PAGE>
1.2 The services to be rendered by Executive hereunder shall be
furnished at such places as Employer deems appropriate, but in no event
will Executive be required to relocate his principal residence outside Los
Angeles, California, or to spend more than thirty (30) days in any one
calendar year outside of Los Angeles, California, in order to perform
Executive's duties under this Agreement.
2. Compensation
2.1 Employer agrees to pay Executive a salary at the rate of One
Hundred Twenty Five Thousand Dollars ($125,000) per year, payable in
accordance with Employer's regular salary payroll policies and procedures.
In addition, upon execution and delivery of this Agreement,
2.2 Employer shall pay to Executive an annual performance bonus for
each calendar year of the Employment Term in which Employer achieves
"aggregate gross revenues" equal to or greater than the minimum target
amount for such calendar year set forth on Exhibit "A" hereto, the amount
of which bonus shall be equal to the dollar amount set forth opposite the
relevant target amount of aggregate gross revenues which Employer achieves
for such calendar year. For this purpose, "aggregate gross revenues" shall
include all revenues of Employer and any company controlling, controlled by
or under common control with Employer for the relevant calendar year.
Executive's bonus shall be due and payable to Executive not later than
thirty (30) days following the release of Employer's audited financial
statements for the year concerned.
2.3 It is recognized that during the Employment Term Executive will be
required to incur ordinary and necessary business promotion expenses in
connection with the performance of his duties and Executive shall be
entitled to reimbursement for such expenses in accordance with Employer's
general reimbursement policies and procedures as may be established from
time to time by Employer's Co-CEOs. Such reimbursement shall be subject to
authorization by the Co-CEOs.
2.4 It is recognized that the services to be performed by Executive
will require the use of a suitable automobile and Employer shall pay to
Executive monthly on the first business day of each month during the
Employment Term an automobile expenses reimbursement allowance in an amount
of Four Hundred Dollars ($400).
2.5 It is recognized that during the Employment Term Executive will be
required to incur continuing expenses to stay abreast of developments in
the areas of Executive's expertise. Executive shall be entitled to
reimbursement for such expenses to the extent incurred in accordance with
Employer's policies upon presentation of vouchers or other evidence of
those expenditures in a form in accordance with Employer's policies and
procedures as may be established from time to time by Employer's Co-CEOs.
2.6 Executive shall be entitled to reimbursement for expenses incurred
in connection with his home office as may be required in order to perform
his duties under this Agreement, to the extent such expenses are permitted
in accordance with the Employer's policies and procedures as may be
established from time to time by Employer's Co-CEOs. Such expenses shall
be reimbursed upon presentation of vouchers or other evidence of those
2
<PAGE>
expenditures in a form in accordance with Employer's policies and
procedures as may be established from time to time by Employer's Co-CEOs.
Without limitation of the immediately preceding sentence, Employer
acknowledges that it is a requirement of Executive's duties that Executive
have a separate telephone line at his home office and the expense incurred
by Executive in connection with the installation and use of such separate
telephone facilities shall be reimbursed to Executive when and as incurred.
2.7 During the Employment Term and continuing for the life of the
Executive thereafter, without regard to whether Executive is employed by
Employer during any part of such period, Executive and Executive's
dependents shall be entitled to participate in any and all of Employer's
group medical, dental, medical reimbursement and life insurance benefit
programs, the benefits set forth in Paragraph 3, and other such benefit
programs as may be made available to Employer's executives generally, upon
the same terms and conditions as such programs are made available to other
senior executive executives of Employer; provided, however, that if at any
time during such period of time Employer does not offer Executive and
Executive's dependents full coverage under a comprehensive medical and
dental reimbursement plan, Employer shall promptly reimburse Executive for
all costs and expenses of Executive's own medical and dental reimbursement
plan for Executive and Executive's dependents; and provided, further, that
Employer shall have no obligation under this Section 2.7 following any
termination of Executive pursuant to Section 4.2.
2.8 Executive shall be entitled to three (3) full weeks of vacation
during each calendar year of the Employment Term, commencing with calendar
year 1999. Executive agrees that without the express prior written consent
of Employer such vacation periods shall not be accumulated, but shall be
taken during each calendar year or forfeited, and Executive agrees to
schedule and take such vacation at a time or times which do not
unreasonably impair Employer's operations.
2.9.1 Executive shall be entitled to incentive stock options and
bonuses under Employer's 1995 Stock Option Plan as amended _____1998, which
are granted to other executives based on performance or other criteria
established from time to time by Employer.
3
<PAGE>
Employment of Executive with Employer shall terminate for any reason
other than as described in clause (a) or other than for a reason
constituting "just cause" pursuant to Section 4.2, or if there is a "Change
in Control" (as defined below), the exercisability of the Option shall
accelerate so that it becomes immediately exercisable, as of the date of
termination or Change in Control, as to all of the shares covered by the
Option and shall thereafter remain exercisable for a period of 90 days, in
the case of such a termination (except that the 90 day period shall be
extended to 12 months if Executive shall die during such 90 day period) or,
in the case of a Change in Control, for a period of five (5) years; and (c)
for customary antidilution protections.
2.9.2 As used herein, the term "Change in Control" shall be deemed to
have occurred (a) on the date Employer first has actual knowledge that any
person (as such term in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) who is not such
beneficial owner on the Date of Grant has become the beneficial owner (as
defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of
securities of Employer representing 40% or more of the combined voting
power of Employer's then outstanding securities or (b) on a date the
stockholders of Employer approve (i) a merger of Employer with or into any
other corporation in which Employer is not the surviving corporation or in
which Employer survives as a subsidiary of another corporation, (ii) a
consolidation of Employer with any other corporation or (iii) the sale or
disposition of all or substantially all of Employer's assets or a plan of
complete liquidation.
2.9.3 In addition to any ISO's granted to Executive pursuant to
Section 2.9.1, Employer shall grant such number of additional options,
exercisable for five (5) years at a per share price equal to the fair
market value of a share of Employer's Common Stock on the date of grant, to
purchase shares of Employer's Common Stock as the Compensation Committee
shall determine is appropriate from time to time. To the extent permitted
under Section 422(d) of the Internal Revenue Code of 1986, as amended, such
additional options shall be "incentive stock options" and, to the extent
not so permitted, such options will be "nonstatutory stock options".
2.9 Executive shall be entitled to participate in any profit-sharing,
pension, stock option, stock ownership, insurance or other plans, benefits
or policies available generally to Executives of Employer on terms and
conditions not less advantageous than those applicable to such Executives.
2.10 Executive shall be entitled during the Employment Term, and
thereafter in regard to any claim or assertion relating to actions,
circumstances or events occurring during the Employment Term, to the
benefit of the indemnification provisions contained in Employer's Bylaws,
as they may be amended from time to time, to the extent permitted by
applicable law; provided, however, that, notwithstanding such
indemnification provisions, Executive shall not be required to serve as a
director of Employer during any period of time in which Executive is not
covered by a policy of directors' and officers' errors and omissions
insurance policy, having coverage in an amount and scope reasonably
satisfactory to Executive.
3. Sick Leave and Disability.
3.1 During the Employment Term, in the event that Executive shall, by
reason of illness or other physical or mental disability, be unable to
perform his duties herein for a period of up to one hundred eighty (180)
4
<PAGE>
consecutive days, said disability shall be deemed for purposes of this
Agreement to be temporary and Executive shall continue to receive all
compensation payable pursuant to Section 2.
3.2 During the Employment Term, in the event that Executive shall, by
reason of illness or other physical or mental disability, be unable to
perform his duties hereunder for more than One Hundred Eighty (180)
consecutive days, said disability shall be deemed for purposes of this
Agreement to be permanent, and this Agreement shall thereupon terminate,
and, subject to the provisions of Section 3.3 hereof, Employer shall have
no further obligations whatever to Executive, except pursuant to the Option
and to make the severance payments provided in Sections 4.3.1 and 4.3.2
hereof, which payments shall be paid to Executive immediately upon such
termination. It is understood that, except as provided in Sections 3.1 and
3.3 hereof, Executive shall not be entitled to receive compensation during
any period of disability.
3.3 In the event of Executive's permanent disability as provided in
Sections 3.2 hereof, if Employer does not then have an Employer-paid
disability insurance plan providing for Executive to receive payments for
as long as Executive remains permanently disabled in amounts equal to at
least seventy percent (70%) of Executive's salary paid as provided in this
Agreement, Employer shall make disability payments monthly to Executive for
so long as Executive remains permanently disabled in an amount equal to
seventy percent (70%) of Executive's salary paid as provided in this
Agreement.
4. Termination of Agreement.
4.1.1 Employer, acting only through a resolution adopted by its Board
of Directors, may terminate Executive's employment under this Agreement at
Employer's election by sending a six month written notice to Executive,
notifying Executive that effective at the end of such six-month period this
Agreement and the Employment Term shall be terminated. Upon the expiration
of such six-month period, Employer's employment of Executive and the
Employment Term shall cease and be at an end and Employer shall have no
further obligations whatever to Executive, except pursuant to the Option
and to continue to provide Executive the benefits set forth in Section 2.7
and to make the severance payments provided in Sections 4.3.1 and 4.3.2
hereof, the performance of which shall be an absolute condition to the
effectiveness of any termination by Employer of Executive's employment
pursuant to this Section 4.1.1.
4.1.2 Executive may terminate his employment with Employer by giving
thirty (30) days written notice of termination to Employer's Board of
Directors, and this Agreement and the Employment Term shall be terminated
effective at the close of business on said thirtieth (30th) day. Thereupon,
the Employment Term shall cease at the expiration of such thirty (30) day
period, Executive shall have no further obligations whatever to Employer
and Executive shall not be entitled to be paid the severance payment
provided in Section 4.3 hereof, however Executive shall be entitled to
continue to receive the lifetime benefits set forth in Section 2.7 hereof.
4.2 Notwithstanding any provision set forth in Section 4.1 hereof,
Executive's employment may be terminated at any time by Employer
immediately and without any requirement of advance notice, and without any
obligation to pay any severance payment, for just cause. For purposes of
this Agreement, "just cause" means: (i) the continued use of non-medically
prescribed narcotic drugs by Executive which renders him unable to fulfill
his duties under this Agreement; and (ii) the commission by Executive of an
act of fraud or embezzlement against Employer or Executive's conviction of
a felony involving moral turpitude.
5
<PAGE>
4.3.1 If Employer should terminate this Agreement for any reason other
than for a reason constituting just cause pursuant to Section 4.2 hereof,
Employer shall pay to Executive (and the vesting of any Options granted
shall accelerate in accordance with Section 2.9.1(b)), on the effective
date of such termination, a severance payment in an amount equal to the
greater of: (i) Two Hundred Thousand Dollars ($200,000.00); or (ii) the
cumulative balance of Executive's salary which would have been payable to
Executive during the remainder of the full three (3)-year Employment Term
pursuant to Section 2.1 of this Agreement if Employer had not so terminated
this Agreement. Further, upon the occurrence of a Change in Control which
does not result in this Employment Agreement, and all rights and
obligations hereunder, being fully assumed by, as the case may be, the
surviving corporation, the successor to Employer or the transferee of all
or substantially all of the Company's assets, such Change in Control shall
be deemed a termination entitling Executive to receive the severance
payments set forth in the immediately preceding sentence and in Section
4.3.2. In partial consideration of such payment and continuing for a period
of Two and One-Half years (913 days) thereafter (the "Advisory Period"),
Executive shall, to the extent that his physical and mental conditions
permit, be available to consult with and advise Employer's officers,
directors and other representatives in regard to matters concerning
Employer's business. Notwithstanding any other provision of this Agreement,
if Executive's physical or mental condition prevents him from fulfilling
his consulting or advisory duties, he shall still be paid such severance
payment. Executive and Employer agree that it is impossible to determine
with any reasonable accuracy the amount of prospective damages to Executive
from Employer's termination other than for just cause of this Agreement;
and, in consideration thereof, Executive and Employer agree that the
severance payment provided above is reasonable, and is not a penalty, based
upon facts and circumstances of the parties at the time of entering into
this Agreement, and with due regard to Executive's future expectations.
Notwithstanding the foregoing, if Executive should cease his employment
hereunder voluntarily for any reason, or if Employer should terminate this
Agreement for just cause, all compensation and benefits payable to
Executive (including those provided in Section 2.7) shall thereupon without
any further writing or act cease, lapse and be unconditionally terminated.
4.3.2 If any payments made to Executive under this Agreement or
otherwise (the "Payments") are subject to the excise tax imposed by Section
4999 of the Code (the "Excise Tax"), then Employer shall pay Executive an
additional amount ("Gross Up") such that the net amount retained by
Executive after deduction of any Excise Tax on the Payments and any Federal
and State income taxes and Excise Tax upon the Payments shall be equal to
the Payments. For purposes of determining the amount of the Gross Up,
Executive shall be deemed to pay Federal, State and local income taxes at
the highest marginal rate of taxation in the calendar year in which the
Payment is to be made. State and local income taxes shall be determined
based upon the state and locality of your domicile on the date on
termination is effective. The determination of whether such Excise Tax is
payable and the amount thereof shall be based upon the opinion of tax
counsel selected by Employer and acceptable to Executive. If such opinion
is not finally accepted by the IRS upon audit, then appropriate adjustments
shall be computed (without interest but with Gross Up, if applicable) by
such tax counsel based upon the final amount of the Excise Tax so
determined. The amount shall be paid by the appropriate party in one lump
cash sum within 30 days of such computation.
4.4 On the event of Executive's death at any time during the
Employment Term, this Agreement and the Employment Term shall thereupon
6
<PAGE>
terminate, and Employer shall be obligated to pay Executive's estate only
that portion of Executive's salary which had accrued through the date of
his death, plus a death benefit bonus, in an amount equal to six months'
salary of Executive, provided, that, if Executive should die after Employer
shall have given notice pursuant to Section 4.1.1 of termination of
Executive's employment other than for just cause, but prior to the
expiration of the six-month notice period required by that Section,
Employer shall nonetheless pay to Executive's estate the severance payment
provided in Section 4.3 hereof.
4.5 Any demotion of Executive from the position set forth in Section
1.1 of this Agreement, or any material diminishment of the responsibilities
regularly exercised by an Executive holding that job title, shall be
conclusively presumed for purposes of this Agreement, unless Executive
otherwise agrees in advance in writing, to constitute Employer's
termination without just cause of Executive's employment under this
Agreement. Such presumptive termination shall entitle Executive to the
severance payment provided in Section 4.3 hereof and accelerated vesting of
the Option as provided in Section 2.9.1(b), without limitation of any other
right or remedy of Executive under this Agreement or applicable law. It is
agreed that the changes in duty from Chief Financial Officer to Executive
Vice President, and, if applicable, any resumption thereafter of some or
all of the duties of Chief Financial Officer, would not be deemed to be a
demotion or material diminishment of responsibilities.
5. Executive's Agreement Not to Compete With, and to Protect the
Proprietary Assets of Employer.
5.1 During the Employment Term, Executive shall not directly or
indirectly engage, be involved, or have any financial interest, in any
proprietorship, partnership, company or other business which engages in
competition with Employer in any line of business in which Employer is or
may be from time to time engaged during such period of time, whether
Executive does so as a partner, officer, director, Executive, consultant or
holder of any beneficial interest in any such business or activity. During
and after the Employment Term, Executive shall not divert nor attempt to
divert from Employer any business of any kind in which Employer is or may
be engaged. Furthermore, Executive shall not induce or attempt to induce
any person who is an Executive of Employer to leave the employ of Employer.
5.2 Employer acknowledges that in the performance of his duties as an
Executive of Employer he may have access to Employer's existing or
potential trade secrets, including, but not limited to, any formula,
discovery, idea or concept, pattern, device, compilation of information
used in Employer's business, designs, plan, proposal, software (both object
code and source code) and software documentation, flow charts, diagrams,
models, data and data bases, marketing and research and development plans,
pricing plans and price lists, financial data and projections of sales,
expenses, etc., and other confidential information, which allows Employer
to obtain an advantage over others, including competitors, who do not know
7
<PAGE>
or use such trade secrets (cumulatively, "Trade Secrets"); inventions,
including but not limited to, any new machines, manufacturing or production
devices, methods, processes, uses, apparatuses, developments, improvements,
composition of matter, design, or configuration of any kind, discovered,
conceived, developed, made, or produced, or any improvements to them
(cumulatively, "Inventions"); and other confidential market information,
including, but not limited to, customer, marketing, sales, financial,
administrative, production, processing, operational and other proprietary
information used in Employer's business (cumulatively, "Confidential
Information") which are confidential and proprietary to Employer.
Accordingly, during and after the Employment Term, Executive shall keep in
confidence at all times and not disclose to any person, firm or
corporation, and not make any use of, except as expressly authorized by
Employer, any Trade Secrets, Inventions or Confidential Information which
are made available to Executive and identified as proprietary or which,
from the circumstances involved, Executive should recognize as proprietary.
Executive further agrees that all Trade Secrets, Inventions and
Confidential Information shall remain the exclusive property of Employer
and shall not be removed from Employer's premises under any circumstances
whatever, except as expressly authorized by Employer.
5.3 If Executive at any time should have any question about
Executive's use or disclosure of Trade Secrets, Inventions or Confidential
Information or whether any ideas, procedures, information, documentation,
materials or representations are Trade Secrets, Inventions or Confidential
Information, Executive shall promptly discuss the question with Employer's
Management, whose determination shall be binding on Executive.
5.4 Executive further agrees not to disclose to Employer, or induce
Employer to use, any Trade Secrets, Inventions or Confidential Information
belonging to a third party.
6. Executive's Agreement that All Inventions Developed in the Course of
Employment Are the Property of Employer.
6.1 As part of Executive's employment responsibilities, Executive is
being hired to invent and develop further ideas, products, financial
policies and procedures relating to Employer's business, including, without
limitation, new products and systems. Accordingly, Executive shall:
(i) Disclose promptly, in writing, to such person and in such
manner as Employer may from time to time designate, all inventions,
made or conceived by Executive, either solely or jointly with others,
during the Employment Term relating to Employer's business or
Employer's actual or anticipated research and development or resulting
from any work which Executive performed for Employer. Executive also
agrees to assign and convey to Employer upon request, the complete
right, title and interest in and to all such inventions, improvements,
and developments. Executive understands that Employer does not require
disclosure or an assignment of any rights in an invention for which no
equipment, supplies, facility, Trade Secrets, Inventions or
Confidential Information of Employer was used, or which was developed
entirely on Executive's own time, and (a) which does not relate to the
business of Employer or to Employer's actual or anticipated research
or development, or (b) which does not result from any work which
Executive performed for Employer.
(ii) Upon request made during the Employment Term or thereafter,
to do all lawful acts, including the execution of papers and giving of
testimony, that may be necessary or helpful in obtaining, sustaining,
or reissuing patents of the United States and foreign counties on all
Trade Secrets and Inventions, and for perfecting and maintaining
Employer's title thereto; and to otherwise cooperate with Employer in
any controversy or legal proceedings relating to any invention or
patents thereon.
8
<PAGE>
(iii) Cooperate generally with Employer in any controversy or
legal proceedings relating to said inventions, improvement or
developments, or to patent applications or patents thereon or
copyrights thereof.
6.2 For purposes of this Agreement, an invention related to Employer's
business is deemed to have been made during the Employment Term, if, during
such period, the invention was conceived or actually reduced to practice.
Any patent applications filed by Executive during the Employment Term shall
be presumed to relate to an invention made during the Employment Term, and
Employer shall be entitled to all right, title and interest in and to each
such invention, unless a preponderance of the evidence shows that the
invention was not made during such period or was unrelated to Employer's
business.
6.3 A complete description of all inventions, discoveries and other
rights, properties and assets actually made or owned by Executive, and
potentially related to Employer's business, before entering Employer's
employ and being retained by Executive as his property is set forth in
Exhibit 1 hereto, which is incorporated by this reference in full into this
Agreement.
6.4 Executive acknowledges and agrees that his covenants and
undertakings contained in this Section 6 relate to matters which are of a
special, unique and extraordinary character, which gives them a peculiar
value impossible of replacement by Employer and for the loss of which
Employer cannot be reasonably or adequately compensated by monetary
damages. Accordingly, any breach by Executive of the provisions of this
Section 6 would cause Employer irreparable injury and damages and Executive
therefore expressly agrees that Employer shall be entitled to injunctive
and other equitable relief to prevent a breach or a continuing breach of
any of the provisions of this Section 6, and to secure the enforcement of
any of these provisions, in addition to any other legal or equitable remedy
that may be available to Employer. Further, Executive agrees that the
provisions of this Section 6 shall survive any termination of Executive's
employment by Employer, and that those provisions shall not be construed to
limit any of Executive's obligations and duties to Employer which may be
provided by law.
7. Miscellaneous.
7.1 All notices hereunder to the parties hereto shall be in writing
and sent by certified or registered mail, return receipt requested, postage
prepaid, or by telegram or telex, addressed to the respective parties at
the following addresses:
EMPLOYER: ModaCAD, Inc.
3861 Sepulveda Boulevard
Culver City, CA 90230
Attention: The Board of Directors
Executive: Mr. Lee Freedman
11823 Bellagio Road
Los Angeles, CA 90049
Any party may, by written notice complying with the requirements of this
Section, specify another or different person or address for the purpose of
9
<PAGE>
notification hereunder. Such notices shall be deemed to have been given and
received on the next day following the sending of such telegram or telex
and, if mailed, on the fifth business day following such mailing.
7.2 This Agreement contains the entire and only agreement of the
parties hereto respecting the matters herein set forth, supersedes all
prior agreements (including, without limitation, the Existing Employment
Agreement, provided, however, that any salary, bonus, expense allowance or
reimbursement, or other compensation or benefit accrued but unpaid to
Executive as of the Effective Date shall continue to be owing and payable
by the Employer to Executive and any incentive stock options which
Executive is entitled to under the provisions of Section 2.9 of the
Existing Employee Agreement shall be granted at the first Board of
Directors meeting following release of Employer's audited financial
statement for 1997) and understandings between the parties hereto regarding
the matters hereby contemplated, and may not be changed or terminated
orally, nor shall any change, termination or attempted waiver of any of the
provisions contained in this Agreement by binding unless in writing and
signed by the party against whom the same is sought to be enforced, nor
shall this Section itself be waived verbally. This Agreement may be amended
only by a written instrument duly executed by or on behalf of the parties
hereto.
7.3 This Agreement and all of its provisions, rights and obligations
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors. This Agreement may be assigned by the
Employer to any person, firm or cooperation which shall become the owner of
substantially all of the assets of the Employer or which shall succeed to
the business of the Employer; provided, however, that in the event of any
such assignment Employer shall obtain an instrument in writing from the
assignee in which such assignee assumes the obligations of Employer
hereunder and Employer shall deliver an executed copy thereof to Executive,
whereupon Employer shall be released of all further liability to Executive
hereunder.
7.4 This Agreement is made and intended to be performed principally in
the State of California and shall take effect under, be construed and
enforced according to, and the rights and obligations of the parties shall
be governed in all respects by, the laws of the State of California. Should
any action be brought to interpret or enforce the terms hereof, the
prevailing party shall be awarded costs and reasonable attorneys' fees.
7.5 The headings of the Sections of this Agreement have been inserted
for convenience of reference only, and shall in no way affect the
interpretation of any of the terms or conditions of this Agreement.
7.6 If any provision or part thereof of this Agreement for any reason
shall be held by an official body to be invalid or unenforceable, the valid
and enforceable provisions or parts of this Agreement shall nonetheless
continue to be given effect and bind Employer and Executive.
10
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
MODACAD, INC.,
a California corporation
/s/ LEE FREEDMAN By: /s/ MAURIZIO VECCHIONE
- ------------------------- -------------------------------
Lee Freedman, Maurizio Vecchione,
"Executive" President and COO
"Employer"
11
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-92343) pertaining to the 1995 Stock Option Plan of Styleclick.com
Inc. and in the Registration Statement (Form S-3 No. 333-90175) of our report
dated February 21, 2000, with respect to the financial statements and schedule
of Styleclick.com Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1999.
/s/ Ernst & Young LLP
Los Angeles, California
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AS OF DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH 10-K FOR YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEc-31-1999
<CASH> 1,395,991
<SECURITIES> 0
<RECEIVABLES> 1,042,091
<ALLOWANCES> 242,229
<INVENTORY> 2,025
<CURRENT-ASSETS> 5,089,518
<PP&E> 4,424,308
<DEPRECIATION> 1,823,850
<TOTAL-ASSETS> 15,046,916
<CURRENT-LIABILITIES> 1,975,446
<BONDS> 0
0
0
<COMMON> 43,216,747
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,046,916
<SALES> 6,173,924
<TOTAL-REVENUES> 6,173,924
<CGS> 667,701
<TOTAL-COSTS> 667,701
<OTHER-EXPENSES> 21,663,216
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,879,341)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,879,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,879,341)
<EPS-BASIC> (2.24)
<EPS-DILUTED> (2.24)
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