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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[ 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
---------------
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
------------------------- ----------------------------------------
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
--- ---
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 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:
<TABLE>
<CAPTION>
Sales Prices
High Low
<S> <C> <C>
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
</TABLE>
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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<TABLE>
<CAPTION>
Item 6. Selected Financial Data
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 revenues $ 6,174 $ 6,681 $ 4,450 $ 3,370 $ 1,905
Net income (loss) (15,879) (9,688) 354 646 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 Internet web-sites, Internet related software applications
and business and consumer software products based on its proprietary technology
for managing product information. The Company has three principal product
groups: electronic commerce Internet web-sites, software including CD-ROM
products and applications including computer aided design 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 electronic commerce market. The Company is focusing its
technology on building and managing electronic commerce Internet sites, such as
comparative search and shopping solutions aimed at facilitating businesses' use
of electronic commerce to reach consumers in the apparel, footwear, accessories,
cosmetics and home furnishing industries.
Revenues generated from the Company's electronic commerce Internet web-sites
include revenues received from:
o web-site development and maintenance fees
o project participation fees for managing product information
o on-line advertising revenue
o commissions from sales on websites
o commissions on sales by affiliates through the Styleclick.com website
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Revenues from web development 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. Commissions fees are
recognized based on a percentage of gross revenues from the related
transactions. From website sales are recognized upon notification of shipment of
the vendors' products by the Company's fulfillment warehouse or the participant
vendors. Commissions on sales by affiliates 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 cost.
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
Product sales $ 3,387 54.9% $ 3,477 52.0% $ 2,379 53.5%
Service revenues 2,787 45.1 3,204 48.0 2,071 46.5
-------- ------- ------- ------- ------- -------
$ 6,174 100.0 $ 6,681 100.0 $ 4,450 100.0
Cost of sales
Product sales 124 2.0 81 1.2 87 1.9
Service revenues 544 8.8 1 - - -
-------- ------- ------- ------- ------- -------
668 10.8 82 1.2 87 1.9
-------- ------- ------- ------- ------- -------
Gross profit 5,506 89.2 6,599 98.8 4,363 98.1
Operating costs and
expenses:
Selling, general and
administrative 13,362 216.4 8,291 124.1 3,394 76.3
Research and product
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 97.6
-------- ------- ------- ------- ------- -------
Income (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 income (loss) $(15,879) (257.2%) $(9,688) (145.0%) $ 354 8.0%
======== ======= ======= ======= ======= =======
</TABLE>
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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 8%), web-site
development fees ($910,000, or 19%) 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 a decrease of $4,368,000 in revenues from the Company's
consumer CD-ROM products, a decrease of $54,000 in revenues from training
services and 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
electronic commerce Internet web-sites and an increase of $533,000 in revenues
from consulting services.
Product sales decreased to $3,387,000 in 1999 from $3,477,000 in 1998, or 3%.
The decrease in product sales is primarily due to a decrease of $1,980,000 in
CD-ROM consumer product sales, a decrease of $128,000 in maintenance product
sales and an increase of $1,887,000 in business product sales. Service revenues
decreased to $2,787,000 in 1999 from $3,204,000 in 1998, or 13%. The decrease in
service revenues is primarily due to a decrease of $2,388,000 in CD-ROM consumer
service sales, offset by increases in electronic commerce service revenues of
$1,623,000 and consulting and training services of $479,000. The decreases in
product sales and service revenues are more fully described below.
Service revenues generated from the Company's electronic 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 to $0 in 1999 from
$1,980,000 in 1998 due to the one-time sale of The Company's 3-D Home Interiors
product to its publisher in 1998.
Service revenues generated from consumer CD-ROM products decreased $2,388,000,
or 80%, to $607,000 in 1999 from $2,995,000 in 1998, primarily due to a decrease
of $1,200,000 in connection with The Company's developing CD-ROM applications
and $793,000 in lower CD-ROM participation revenue in connection with those
CD-ROM applications. The decrease in developing CD-ROM application and
participation revenues resulted from The Company's strategy to shift its
marketing focus to Internet electronic commerce during 1999. In addition,
$395,000 of service revenue generated in connection with consumer product
developing services provided to one of The Company's major customers in 1998 was
not repeated in 1999.
Sales of business software products, which were primarily product sales,
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
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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 electronic 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.
Revenues from consulting services were $538,000 in 1999 and $5,000 in 1998.
Revenues from training services decreased $54,000, or 73%, to $20,000 in 1999
from $74,000 in 1998, and maintenance fees, which were primarily product sales,
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 electronic 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
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increased operating activities in the emerging electronic commerce market and
support of its new electronic 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 additional reserve was recorded in 1999.
Research and Product Development
The Company incurred $7,177,000 of research and product development expenditures
in 1999, of which $1,123,000 was capitalized in connection with two of the
Company's Internet shopping websites 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 product 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. In 1999, in accordance with SOP 98-1, The Company capitalized
$1,123,000 in software development costs including $1,041,000 incurred in
developing two of The Company's Internet shopping websites and $82,000 incurred
on two projects including certain shopping features and an online tracking
program. In 1998, in accordance with FAS 86, The Company capitalized $3,051,000
in software costs including $1,985,000 incurred in developing two consumer
CD-ROM projects, $557,000 incurred in developing five business software products
and $509,000 incurred in developing an The Company Internet shopping website.
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 due primarily to a $3,443,000
write-off of capitalized software cost in 1998 as compared to 1999. $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 business software products which the Company is exiting as a result of
its new business strategy to target the emerging electronic commerce market. In
1999, the Company wrote-off a total of $250,000 of capitalized software cost.
The write-off was related to the product lines sold to one of the Company's
competitors in the first quarter of 1999.
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.
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Income Taxes
The Company recorded no provision for income taxes in 1999 and 1998 due to net
operating losses in both years.
Net Loss
Net loss increased $6,191,000, or 64%, to $15,879,000 in 1999 from $9,688,000 in
1998 primarily due to a $507,000 decrease in net revenue, a $586,000 increase in
costs of sales, a $5,071,000 increase in selling general and administrative
expenses, a $2,513,000 increase in research and development, a $405,000 increase
in merger related costs, a $3,048,000 decrease in amortization of software
development costs and a $157,000 decrease in investment income.
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 an increase in the revenues from the
Company's consumer CD-ROM products, an increase of $5,000 in revenue from
training services, and 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.
Product sales increased to $3,477,000 in 1998 from $2,379,000 in 1997, or 46%.
The increase in product sales is primarily due to an increase of $1,980,000 in
CD-ROM consumer product sales, a decrease of $887,000 in business product sales,
and an increase of $71,000 in maintenance product sales. Service revenues
increased to $3,204,000 in 1998 from $2,071,000 in 1997, or 55%. The increase in
service revenues is primarily due to an increase of $1,193,000 in CD-ROM
consumer service sales, offset by various minor decreases in consulting and
training services of $126,000. The increases in product sales and service
revenues are more fully described below.
Revenues generated from consumer CD-ROM products increased to $1,980,000 in 1998
from $0 in 1997 due to the one-time sale of The Company's 3-D Home Interiors
product to its publisher in 1998.
Service revenue generated from consumer CD-ROM products increased $1,193,000 or
66%, to $2,995,000 in 1998 from $1,802,000 in 1997. The increase was primarily
due to $1,600,000 of revenue generated in connection with the Company's
developing two CD-ROM applications, $395,000 of revenue generated in connection
with consumer product developing services provided to one of the Company's major
customers and $1,000,000 CD-ROM participation revenue generated from 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 in service 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, which were primarily product sales,
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 electronic commerce.
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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 electronic
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.
Research and Product Development
The Company incurred $6,592,000 of research and product development costs in
1998, as compared to $3,000,000 in 1997. In 1998, $3,051,000 of such costs were
capitalized as software development costs, while in 1997, $2,828,000 of such
costs were capitalized as software development costs. The remaining $3,541,000
of research and product development costs in 1998 were expensed, compared to
$172,000 in 1997. The 122% increase in research and product 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 product expenses incurred prior to the
completion of those two major projects was capitalized as software development
costs. In 1998, in accordance with FAS 86, the Company capitalized $3,051,000 in
software costs including $1,985,000 incurred in developing two consumer CD-ROM
projects, $557,000 incurred in developing five business software products and
$509,000 incurred in developing an the Company's Internet shopping website. In
1997, in accordance with FAS 86, the Company capitalized $2,828,000 in software
costs including $2,084,000 incurred in developing nine business software
products and $744,000 incurred in developing two consumer CD-ROM projects.
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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 electronic 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.
Net Income (Loss)
Net income (loss) decreased $10,042,000 to $9,688,000 net loss in 1998 from
$354,000 net income in 1997 primarily due to a $2,231,000 increase in net
revenue, a $4,897,000 increase in selling general and administrative expenses, a
$3,369,000 increase in research and development, a $4,116,000 increase in
amortization of software development costs and a $104,000 increase in investment
income.
10
<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 electronic 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.
11
<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.
From 1997 to 1999 the Company spent between $616,000 and $1,558,000 on capital
expenditure. Should the merger not be completed, the Company expects to spend
approximately $1 million on capital expenditures in 2000. However, there are no
material commitments for these expenditures at this time.
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, an indirect wholly owned subsidiary of USAi. The new company will own
and operate the combined properties of the Company and Internet Shopping
Network. 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.
12
<PAGE>
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 electronic commerce websites. 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 or third 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.
Effect on the Company if Contemplated Transactions Are Not Approved or Do Not
Occur
If the Company shareholders do not approve the proposed merger of the Company
with a subsidiary of USAi and the Company enters into a business combination
transaction with a third party or a third party acquire 15% or more of the
assets or outstanding securities of the Company, then:
o USAi may exercise its option to purchase 19.9% of the Company's common
stock at $17.50 per share;
o The Company must repay any outstanding portion of the $10 million loan to
USAi within 45 days; and
o The Company must pay ISN a termination fee of $5.5 million.
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
capital either through sale of equity or through sale of convertible securities,
both of which would dilute existing stockholders ownership of the Company.
Additionally, the Company may be forced to cut back on operations including
laying off employees, decreasing marketing programs and eliminating certain
development activities.
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.
13
<PAGE>
Audited Financial Statements
Styleclick.com Inc.
Years ended December 31, 1999, 1998 and 1997
with Report of Independent Auditors
14
<PAGE>
Styleclick.com Inc.
Audited Financial Statements
Years ended December 31, 1999, 1998 and 1997
Contents
Report of Independent Auditors.....................................16
Audited Financial Statements
Balance Sheets.....................................................18
Statements of Operations...........................................19
Statements of Stockholders' Equity.................................20
Statements of Cash Flows...........................................21
Notes to Financial Statements......................................23
15
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
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 audits 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
16
<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 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 (except for Note 11,
As to which the date is May 19, 1999)
17
<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.
18
<PAGE>
Styleclick.com Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Net revenues
Product sales $ 3,386,521 $ 3,477,208 $ 2,378,726
Service revenues 2,787,403 3,204,072 2,071,131
-----------------------------------------
6,173,924 6,681,280 4,449,857
Cost of sales
Product sales 124,187 81,161 87,470
Service revenues 543,514 974 -
-----------------------------------------
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 product 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.
19
<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.
20
<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.
21
<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 the years ended December 31, 1999, 1998 and 1997, the Company paid no
income taxes or interest.
See accompanying notes to financial statements.
22
<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 as 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.
23
<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. Software
development costs capitalized under SFAS 86 prior to 1999 were primarily related
to products for external sales. The products developed for external sales are
categorized in two groups: consumer CD-ROM applications and business software
products. Consumer CD-ROM applications are developed to be used by individual
consumers. Business software products, including computer aided designed and
electronic merchandising products, are developed to be used for commercial
purposes. In late 1998, the Company incurred $508,671 in costs related to
internally development software primarily for the development of the Company's
Internet shopping web-site. The amount of software development costs capitalized
under SFAS 86 was $0 and $3,050,471 for the years ended December 31, 1999 and
1998, respectively.
In late 1998, the Company shifted its marketing focus into the Internet
e-commerce business. Accordingly, the Company has developed its computer
software particularly for internal use and 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, primarily payroll costs and consultants' fees of individuals working
directly on the development of specific software projects. All other internal
use development costs are expensed as incurred. The amount of software
development costs capitalized under SOP 98-1 was $1,122,668 and $0 for the years
ended December 31, 1999 an 1998, respectively.
Software development costs have all been incurred internally. 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. 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,
which represented the reminder of all capitalized costs associated with such
prodcut. The remaining $2,405,000 write-off was primarily attributable to
software capitalized prior to 1998 in relation to certain products in the
business software market which the Company exited as a result of its new
business strategy to target the emerging E-commerce market.
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).
24
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Software Development Costs (continued)
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.
Revenue Recognition
Business Services
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 milestones 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
To date, the Company has entered into several barter transaction arrangements
where by it receives certain non-monetary benefits. To date, 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.
25
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
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, which is generally twelve months, on a straight-line
basis.
Consumer Software, CD-ROM Applications
The Company recognizes revenues related to product sales, software licenses and
software maintenance in accordance with the SOP 97-2, "Software Revenue
Recognition." Revenue related to product sales and software licenses is recorded
net of estimated allowances and returns at the time of the product or software
is delivered, the Company has no remaining obligations and collectibility is
deemed probable. Software maintenance revenue representing 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.
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. Product fulfillment costs include processing costs for
purchase orders and merchandise storage fees charged by a third party
fulfillment warehouse with whom the Company has a contract. Direct shipping
material includes freight, packaging and postage costs. Product royalties
represent the royalty expense incurred in connection with the respective sold
products.
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.
26
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
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.
2. Summary of Significant Accounting Policies (continued)
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.
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.
27
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Segment and Related Information
The Company views its operations as principally one segment and the financial
information disclosed herein materially represents all of the financial
information related to the Company's principal operating segment. The Company
manages its online business as one combined entity, allocates resources and
analyzes information used to operate the business on a combined basis.
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.
Recently Issued Accounting Pronouncement
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements,
further amended by SAB 101A. SAB 101 spells out four basic criteria that must be
met before a company can record revenue and contains numerous examples, in the
form of questions and answers, that illustrate how the SEC staff applies basic
revenue recognition criteria in certain facts and circumstances. SAB 101 also
provides guidance on the disclosures companies should make about their revenue
recognition policies and the impact of events and trends on revenue. SAB 101and
SAB 101A is effective for companies with calendar year-ends in the second
quarter of 2000. The Company analyzed the impact of SAB 101 and does not expect
it to have a material effect on its financial position and results of operation.
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, of which $0, $154,957 and
$145,047, was capitalized as software development costs during 1999, 1998 and
1997, respectively.
28
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
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.
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.
29
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
4. Commitments (continued)
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. 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 promotional services received. The aggregate
consideration of $7.7 million, including cash payments and warrants issued, is
being amortized to expense over the two year term of the marketing agreement. As
of December 31, 1999, the Company had paid $3,214,286 in cash to the Portal and
recognized $1,925,000 of amortization expense in 1999. The remaining amount of
$1,489,286 is included in prepaid expenses and other assets.
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.
30
<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 a portion of its warrants to
purchase an aggregate of 1,000 shares of the Company's common stock and 1,000
redeemable common stock purchase warrants 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.
31
<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.
32
<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>
33
<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>
34
<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.
35
<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.
36
<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>
414,918 and 490,616 weighted average shares that could potentially dilute basic
income per share in the future were excluded in the computation of diluted loss
per share for the years ended December 31, 1999 and 1998, respectively.
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, 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
Internet Shopping Network. 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 line
of credit to the Company. The transaction is expected to close in the second
quarter of 2000.
37
<PAGE>
Styleclick.com Inc.
Notes to Financial Statements
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.
38
<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: June 22, 2000 By: /s/ JOYCE FREEDMAN
-----------------------------
Joyce Freedman
Chairman of the Board and
Co-Chief Executive Officer
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/ JOYCE FREEDMAN Chairman of the Board and June 22, 2000
------------------------ Co-Chief Executive Officer ------------------
Joyce Freedman Date
/s/ MAURIZIO VECCHIONE President, June 22, 2000
------------------------ Co-Chief Executive Officer ------------------
Maurizio Vecchione Director Date
/s/ BARRY HALL Executive Vice President, Finance June 22, 2000
------------------------ and Chief Financial Officer ------------------
Barry Hall Date
/s/ LEE FREEDMAN Executive Vice President and June 22, 2000
------------------------ Director ------------------
Lee Freedman Date
/s/ STEPHEN WYLE Director June 22, 2000
------------------------ ------------------
Stephen Wyle Date
/s/ PETER FRANK Director June 22, 2000
------------------------ ------------------
Peter Frank Date
/s/ LESLIE SALESON Director June 22, 2000
------------------------ ------------------
Leslie Saleson Date
