<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REGISTRATION NO. 333-33194
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STYLECLICK, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5961 13-4106745
(Primary Standard
(State or Other Jurisdiction of Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
152 W. 57TH STREET
NEW YORK, NEW YORK 10019
(212) 314-7300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
THOMAS J. KUHN, ESQ.
SECRETARY
STYLECLICK, INC.
C/O USA NETWORKS, INC.
152 W. 57TH STREET
NEW YORK, NEW YORK 10019
(212) 314-7300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH COPIES TO:
<TABLE>
<S> <C> <C>
MAURIZIO VECCHIONE
ROBERT B. SCHUMER, ESQ. Styleclick.com Inc. JOHN A. ST. CLAIR, ESQ.
Paul, Weiss, Rifkind, Wharton & Garrison 3861 Sepulveda Boulevard Coudert Brothers
1285 Avenue of the Americas Culver City, California 950 17th Street, Suite 1800
New York, New York 10019 90230 Denver, Colorado 80202
(212) 373-3000 (310) 751-2100 (303) 607-0888
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective and the
effective time of the merger discussed in this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities of an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
STYLECLICK.COM INC
3861 SEPULVEDA BOULEVARD
CULVER CITY, CALIFORNIA 90230
PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
Dear Styleclick.com Inc. Shareholder:
As a shareholder of Styleclick.com Inc., you are being asked to approve a
merger and merger agreement. If the merger is completed, each of your shares of
Styleclick.com Inc. will be converted into the right to receive one share of
Class A Common stock of Styleclick, Inc., a newly-formed Delaware corporation
that is an indirect subsidiary of USA Networks, Inc, referred to as USAi. In the
accompanying proxy statement/prospectus, the existing Styleclick.com in which
you hold shares is referred to as Old Styleclick, and the new entity,
Styleclick, Inc., is referred to as New Styleclick.
Under the terms of the merger agreement, both Old Styleclick and Internet
Shopping Network, an indirect subsidiary of USAi, will become wholly-owned
subsidiaries of New Styleclick following the merger. USANi Sub, the current
majority owner of Internet Shopping Network, will be the majority shareholder of
New Styleclick, and shares issued to USANi Sub in the merger will be Class B
common stock. USAi will also contribute approximately $40 million in cash and
agree to provide $10 million in advertising and promotional services to New
Styleclick in exchange for additional shares of New Styleclick Class B common
stock. Class B common stock of New Styleclick will be convertible into Class A
common stock and will have 10 votes per share. Class A common stock will have
one vote per share.
The Board of Directors of Old Styleclick has unanimously approved the merger
agreement; however, the merger cannot be completed without the approval of the
holders of a majority of the outstanding shares of Old Styleclick. The Old
Styleclick Board unanimously recommends that you vote in favor of the merger. In
arriving at its decision, the Board considered several factors that are
described in detail in the accompanying proxy statement/prospectus, which you
are urged to read carefully.
There is no existing public market for any class of New Styleclick common
stock, but New Styleclick has applied to have its shares of Class A common stock
approved for listing on the Nasdaq National Market under the symbol "IBUY,"
which is the ticker symbol currently used by Old Styleclick.
BEFORE YOU MAKE A DECISION, YOU SHOULD CAREFULLY CONSIDER THE ACCOMPANYING
PROXY STATEMENT/PROSPECTUS, WHICH GIVES YOU MORE DETAILED INFORMATION CONCERNING
THE MERGERS AND THE RELATED TRANSACTIONS. IN PARTICULAR, YOU SHOULD CAREFULLY
CONSIDER THE DISCUSSION IN THE "RISK FACTORS" SECTION, BEGINNING ON PAGE 12 OF
THIS PROXY STATEMENT/PROSPECTUS.
Sincerely,
Joyce Freedman
Chairman and Co-Chief Executive
Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated [ ], 2000, and was first mailed to
Old Styleclick's shareholders on or about [ ], 2000.
<PAGE>
STYLECLICK.COM INC.
3861 SEPULVEDA BOULEVARD
CULVER CITY, CALIFORNIA 90230
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [ ], 2000
[ ], 2000
TO SHAREHOLDERS OF STYLECLICK.COM INC.:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
Styleclick.com Inc., referred to as Old Styleclick, will be held on [ ],
2000, at [ ] p.m., Pacific Standard Time, at Old Styleclick's principal
executive offices at 3861 Sepulveda Boulevard, Culver City, California 90230,
for the following purposes, each as more fully described in the attached proxy
statement/prospectus:
1. To approve the Amended and Restated Agreement and Plan of Merger
entered into by Old Styleclick, Internet Shopping Network LLC and USANi Sub
LLC as of March 21, 2000 and the transactions contemplated by the merger
agreement, including the merger of Old Styleclick and Internet Shopping
Network, a subsidiary of USAi, into subsidiaries of Styleclick, Inc., a
newly formed Delaware corporation, referred to as New Styleclick. Following
the merger, each outstanding share of common stock of Old Styleclick will be
converted into one share of Class A common stock of New Styleclick, par
value $0.01 per share, and Old Styleclick will become a wholly-owned
subsidiary of New Styleclick.
2. To act upon any other matters which may properly be brought before
the special meeting and any adjournments or postponements of the meeting.
The close of business on [ ], 2000 has been fixed by the Board of
Directors of Old Styleclick as the record date for determining shareholders
entitled to notice of and to vote at the special meeting or at any
adjournment(s) of the meeting.
All shareholders are cordially invited to attend the special meeting in
person. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, IN
ORDER TO ENSURE YOUR REPRESENTATION AND THE PRESENCE OF A QUORUM AT THE SPECIAL
MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY
AS POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. Any
shareholder attending the special meeting may vote in person even if such
shareholder has returned a proxy.
Please do not send your Old Styleclick common stock certificates at this
time. If the proposed transactions are approved, you will be given instructions
on how to exchange your certificates.
By Order of the Board of Directors
Joyce Freedman
Chairman and Co-Chief Executive
Officer
Your vote is important. Please complete, date and sign the enclosed proxy card
and return it in the accompanying postage paid envelope, even if you plan to
attend the special meeting. If you attend the special meeting, you may vote in
person even if you have previously returned your proxy card. Failure to return
the proxy card or vote in person will be the same as a vote against the proposed
transactions.
<PAGE>
WHERE TO FIND ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Old Styleclick from documents that are not included
in or delivered with this proxy statement/prospectus. This information is
available to you without charge upon your written or oral request. You can
obtain documents incorporated by reference in this proxy statement/prospectus by
requesting them in writing or by telephone from Old Styleclick at 3861 Sepulveda
Blvd., Culver City, California 90230, Attention: Investor Relations, (310)
751-2100.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY [ ], 2000 IN
ORDER TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Questions and Answers About the Merger...................... 1
Who Can Help Answer Your Questions.......................... 3
Summary..................................................... 4
New Styleclick Summary Unaudited Pro Forma Financial Data... 8
Old Styleclick Selected Historical Financial Data........... 9
Internet Shopping Network Selected Historical Financial
Data...................................................... 10
Certain Comparative Per Share Data.......................... 11
Risk Factors................................................ 12
The Proposed Transactions................................... 17
Special Note Regarding Forward-Looking Statements........... 37
New Styleclick Unaudited Pro Forma Combined Condensed
Financial Statements...................................... 38
New Styleclick Unaudited Pro Forma Combined Condensed
Balance Sheet............................................. 39
New Styleclick Unaudited Pro Forma Combined Condensed
Statement of Operations................................... 40
New Styleclick Notes to Unaudited Pro Forma Combined
Condensed Financial Statements............................ 42
New Styleclick Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 43
Old Styleclick Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 45
Internet Shopping Network Management's Discussion and
Analysis of Financial Condition and Results of
Operations................................................ 53
Market Price and Dividend Information....................... 57
Special Meeting of Old Styleclick Shareholders.............. 58
The Merger Agreement........................................ 61
Description of Related Agreements........................... 67
New Styleclick's Business................................... 70
Old Styleclick's Business................................... 76
Internet Shopping Network's Business........................ 78
Management of New Styleclick Following Transactions......... 81
Security Ownership of Management and Principal Stockholders
of New Styleclick......................................... 86
Comparison of the Rights of New Styleclick Shareholders and
Old Styleclick Shareholders............................... 88
Future Shareholder Proposals................................ 97
Experts and Legal Matters................................... 97
Where You Can Find More Information......................... 98
Index to Financial Statements............................... F-1
Appendices to the Proxy Statement/Prospectus................ A-1
</TABLE>
i
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT ARE THE PROPOSED TRANSACTIONS?
A: New Styleclick is proposing to acquire Old Styleclick and Internet
Shopping Network. Following the transactions, Old Styleclick and Internet
Shopping Network will be owned by New Styleclick and USANi Sub, a
subsidiary of USAi, will be the majority shareholder of New Styleclick.
Q: WHAT ARE OLD STYLECLICK SHAREHOLDERS VOTING ON?
A: Old Styleclick shareholders are voting on the proposed acquisition of Old
Styleclick by New Styleclick. In order to complete this transaction, Old
Styleclick needs to obtain the approval of holders of a majority of its
common stock.
Q: WHAT DO OLD STYLECLICK SHAREHOLDERS NEED TO DO NOW?
A: After carefully reading the information contained in this document,
simply vote your shares. To vote, follow the instructions in this
document and the proxy card included with it. By voting, your shares will
be represented at the special meeting. If you do not vote your shares in
connection with the proposed transactions, it will have the same effect
as voting against the proposed merger and related transactions.
Q: IF OLD STYLECLICK SHARES ARE HELD IN STREET NAME BY A BROKER, WILL THE BROKER
VOTE THOSE SHARES?
A: No. Your broker can vote your shares only if you provide the broker with
instructions on how to vote. You should instruct your broker on how to
vote your shares following the directions provided by your broker. Your
failure to instruct your broker on how to vote your shares will be the
equivalent of voting against the proposed merger and related
transactions.
Q: WHEN DO YOU EXPECT THE TRANSACTIONS TO BE COMPLETED?
A: New Styleclick, Old Styleclick and Internet Shopping Network are working
toward completing the mergers as soon as possible and expect to complete
them shortly after the Old Styleclick special meeting if Old Styleclick's
shareholders approve the proposed merger. However, it is possible that
delays in satisfying other conditions to closing could postpone
completion of the proposed transactions.
Q: SHOULD OLD STYLECLICK SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES NOW?
A: No. If the proposed transactions are approved, you will receive
instructions for exchanging your stock certificates for certificates
representing shares of New Styleclick Class A common stock after the
merger of Old Styleclick with a subsidiary of New Styleclick is complete.
Q: CAN OLD STYLECLICK SHAREHOLDERS CHANGE THEIR VOTE AFTER THEY HAVE MAILED THE
PROXY CARD OR
PROVIDED INSTRUCTIONS TO THEIR BROKERS?
A: Yes. You can change your vote at any time before your proxy is voted at
the special meeting. This document contains instructions on how to change
your vote. If you have instructed your broker to vote your shares, you
must follow the directions provided by your broker to change those
instructions. See "Special Meeting of Old Styleclick Shareholders."
1
<PAGE>
Q: DO OLD STYLECLICK SHAREHOLDERS NEED TO ATTEND THE OLD STYLECLICK SPECIAL
MEETING IN PERSON?
A: No. It is not necessary for you to attend the special meeting to vote
your shares, although you are welcome to attend.
Q: WHEN AND WHERE IS THE OLD STYLECLICK SPECIAL MEETING?
A: The special meeting will take place on [ ], 2000 at
[ ] p.m., Pacific Standard Time, at Old Styleclick's principal executive
offices at 3861 Sepulveda Boulevard, Culver City, California 90230. See
"Special Meeting of Old Styleclick Shareholders."
2
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If Old Styleclick shareholders have more questions about the proposed
transactions after reading this document, they should contact:
<TABLE>
<S> <C>
Styleclick.com Inc. MacKenzie Partners, Inc.
3861 Sepulveda Boulevard 156 Fifth Avenue
Culver City, California 90230 New York, New York 10010
Attention: Investor Relations Telephone: (800) 322-2885 or (212) 929-5500
Telephone: (310) 751-2100 Facsimile: (212) 929-0308
Facsimile: (310) 751-2120 Email: [email protected]
Email: [email protected]
</TABLE>
3
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT/PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. TO UNDERSTAND THE PROPOSED TRANSACTIONS FULLY, AND FOR A MORE
COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE TRANSACTIONS, YOU SHOULD
CAREFULLY READ THIS ENTIRE DOCUMENT. REFER TO "WHO CAN HELP ANSWER YOUR
QUESTIONS" FOR ADDITIONAL SOURCES OF INFORMATION.
THE COMPANIES (SEE PAGES 67, 78, AND 82)
New Styleclick
c/o USA Networks, Inc.
152 W. 57(th) Street
New York, New York 10019
(212) 314-7300
New Styleclick is a newly formed Delaware corporation that will, upon
completion of the proposed transactions, have two electronic commerce marketing
and merchandising subsidiaries: Internet Shopping Network and Old Styleclick.
Immediately following the closing of the mergers, New Styleclick will have:
- Old Styleclick's business, including its web services business and its
websites, Styleclick.com and Fashiontrip.com.
- Internet Shopping Network's business, including its websites:
FirstJewelry.com and FirstAuction.com.
- Syndication relationships with approximately 13 websites, including AOL,
iVillage.com, Women.com, Oxygen.com, Excite@Home and CollegeBroadcast.com.
- Relationships with more than 750 manufacturers and vendors representing
approximately 500 brands.
- Relationships with more than 5,000 affiliate websites.
- Access to USAi's fulfillment and customer service operations.
The companies comprising New Styleclick have limited operating histories and
historical combined negative cash flows for 1999 of approximately $66 million.
Although New Styleclick expects to incur significant losses in the future, its
negative cash flows should be lower as a result of the merger.
Old Styleclick
3861 Sepulveda Boulevard
Culver City, California 90230
(310) 751-2100
Old Styleclick is a publicly traded California corporation founded in
February 1988. Old Styleclick develops and sells products and services that
enable electronic commerce. Old Styleclick has developed technologies designed
to manage, search and display digital product information, enabling advanced
product visualization for electronic commerce. Old Styleclick also operates two
principal websites: Styleclick.com launched in April 1999 and Fashiontrip.com
established in August 1998. Each of the websites features a wide variety of name
brand apparel, shoes, health and beauty products and lifestyle-related
merchandise. Styleclick.com is targeted at female consumers, while
Fashiontrip.com focuses on the female teen market.
Internet Shopping Network
500 Macara Avenue
Sunnyvale, California 94086
(408) 617-7400
4
<PAGE>
Internet Shopping Network is a Delaware limited liability company and a
majority-owned subsidiary of USANi Sub. Each of Internet Shopping Network and
USANi Sub are controlled by USA Networks, Inc., a publicly traded Delaware
corporation, referred to as USAi. Internet Shopping Network is an Internet
electronic commerce retailer that operates two websites: FirstAuction.com and
FirstJewelry.com. FirstAuction.com was established in June 1997 and features
home and leisure merchandise, including jewelry, gourmet food, apparel and
consumer electronics, in an online auction format targeted at value-conscious
female consumers. FirstJewelry.com was launched in October 1999 and is an online
jewelry retailer that offers a broad assortment of jewelry from popular new
designers.
RECORD DATE; VOTING POWER (SEE PAGE 36)
Old Styleclick shareholders are entitled to vote at the special meeting if
they owned shares of Old Styleclick common stock as of the close of business on
the record date of [ ], 2000. There were [ ] shares of Old Styleclick
common stock outstanding on the record date. Each Old Styleclick shareholder
will have one vote at the special meeting for each share of Old Styleclick
common stock owned on the record date.
VOTE REQUIRED TO APPROVE THE MERGER (SEE PAGES 37)
The affirmative vote of the holders of a majority of the outstanding shares
of Old Styleclick common stock on the record date is required to approve the
merger agreement and the merger of Old Styleclick with a subsidiary of New
Styleclick. Certain principal shareholders of Old Styleclick who collectively
hold approximately 32.6% of the currently outstanding shares have executed a
voting agreement with USANi Sub agreeing to vote in favor of the merger. Your
failure to vote or to tell your broker how to vote on your behalf will have the
effect of a vote against the proposed transactions.
USANi Sub, the holder of more than 95% of Internet Shopping Network's
currently outstanding limited liability company units, has approved the proposed
merger of Internet Shopping Network with a subsidiary of New Styleclick.
Therefore, no further vote of Internet Shopping Network unitholders is required.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF OLD STYLECLICK IN THE
TRANSACTIONS (SEE PAGE 51)
Certain executive officers and members of the Board of Directors of Old
Styleclick have interests in the proposed transaction that are different from,
or in addition to, the interests of the shareholders of Old Styleclick
generally. The Board of Directors of Old Styleclick was aware of these interests
and considered them, among other matters, in unanimously approving the merger
agreement and the transactions contemplated by the merger agreement.
RECOMMENDATION OF OLD STYLECLICK'S BOARD (SEE PAGES 37 AND 41)
The Old Styleclick Board of Directors believes that the merger agreement is
fair to, and in the best interests of, the shareholders of Old Styleclick. The
Old Styleclick Board unanimously recommends that you vote "FOR" the proposal to
approve the merger agreement. In reaching its decision to adopt the merger
agreement, Old Styleclick's Board of Directors considered a number of factors,
which are more fully described under "Recommendation of Old Styleclick Board of
Directors."
OPINIONS OF FINANCIAL ADVISORS TO OLD STYLECLICK (SEE PAGES 42 AND 47)
In deciding to adopt the merger agreement, Old Styleclick's Board of
Directors considered opinions from its financial advisors, ING Barings LLC and
PaineWebber Incorporated. These opinions stated that, subject to the conditions
set forth in the opinions, the merger consideration to be received by the Old
Styleclick shareholders is fair from a financial point of view.
5
<PAGE>
THE MERGER (SEE PAGE 58)
New Styleclick is proposing to acquire Old Styleclick and Internet Shopping
Network. In connection with the transaction with Old Styleclick, each
shareholder of Old Styleclick would receive one share of New Styleclick Class A
common stock per share of Old Styleclick common stock. In connection with the
transaction with Internet Shopping Network, USANi Sub would receive one share of
Class B common stock per unit of Internet Shopping Network and the other
unitholders of Internet Shopping Network would receive one share of New
Styleclick Class A common stock per unit of Internet Shopping Network. Following
the merger, Old Styleclick and Internet Shopping Network would be wholly-owned
subsidiaries of New Styleclick. Class A common stock has one vote per share and
Class B common stock has 10 votes per share. As a result, USANi Sub would have
96% of the voting power, and will control, New Styleclick.
<TABLE>
<CAPTION>
AFTER THE MERGER
(FULLY DILUTED)
---------------------------------------------------------
NEW STYLECLICK NEW STYLECLICK
CLASS A CLASS B OWNERSHIP VOTING
COMMON STOCK COMMON STOCK PERCENTAGE PERCENTAGE
-------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Former Old Styleclick Shareholders............ 12,600,000 25% 3.5%
Former Internet Shopping Network Unitholders
(other than USANi Sub)...................... 2,000,000 4% 0.5%
USANi Sub, including affiliates............... 36,000,000 71% 96%
</TABLE>
The merger agreement is attached to this proxy statement/prospectus as
Annex A. You are encouraged to read the merger agreement in its entirety as it
is the legal document that governs the merger.
CONDITIONS PRECEDENT TO THE MERGER (SEE PAGE 60)
Completion of the merger is subject to customary conditions described in
more detail in "The Merger Agreement--Conditions Precedent to the Merger."
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 62)
The merger agreement may be terminated at any time prior to the completion
of the mergers by mutual written consent of Old Styleclick, Internet Shopping
Network and USANi Sub, or by one or other of the parties under certain
conditions. See "The Merger Agreement--Termination" for a more complete
description.
TERMINATION FEE AND EXPENSES (SEE PAGE 62)
Old Styleclick must pay Internet Shopping Network a termination fee of
approximately $5.5 million if the merger agreement is terminated in some
circumstances. See "The Merger Agreement--Termination Fee and Expenses" for a
more complete description.
LISTING OF NEW STYLECLICK COMMON STOCK (SEE PAGE 56)
New Styleclick has applied for listing of its Class A common stock on the
Nasdaq National Market under the symbol "IBUY," which is the symbol currently
used by Old Styleclick.
MANAGEMENT OF NEW STYLECLICK FOLLOWING TRANSACTIONS (SEE PAGE 73)
Following the merger, New Styleclick will be governed by a Board of
Directors initially consisting of 11 people. Under an agreement among the
principal shareholders of New Styleclick, USANi Sub, Ms. Joyce Freedman,
Mr. Maurizio Vecchione and Mr. Lee Freedman agree to vote their shares of
6
<PAGE>
New Styleclick common stock in favor of six directors designated by USANi Sub,
two directors designated collectively by Ms. Freedman, Mr. Vecchione and
Mr. Freedman and three independent directors designated by the Board of
Directors of New Styleclick. New Styleclick's officers will include:
Mr. Maurizio Vecchione, Chief Executive Officer; Mr. Bill Lane, President;
Mr. Edward Zinser, Executive Vice President and Chief Operating Officer;
Mr. Barry Hall, Executive Vice President and Chief Financial Officer; and
Mr. Bruce Goldstein, Executive Vice President, Business Development.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 53)
The merger is intended to be tax-free to you. However, you should consult
with your own tax advisors for a full understanding of the tax consequences of
the merger.
APPRAISAL RIGHTS (SEE PAGE 91)
You may be entitled to dissenters' appraisal rights if you vote against the
proposed transactions, demand appraisal rights and demands for appraisal are
filed by holders of 5% or more of Old Styleclick's outstanding common stock on
or before the date of the special meeting. If holders of more than 10% of Old
Styleclick's shares exercise their dissenters' appraisal rights, Internet
Shopping Network and USANi Sub each have the right to terminate the proposed
transactions. See "The Proposed Transactions--Limited Appraisal Rights for Old
Styleclick Shareholders."
COMPARISON OF THE RIGHTS OF NEW STYLECLICK SHAREHOLDERS AND OLD STYLECLICK
SHAREHOLDERS (SEE PAGE 86)
The rights of Old Styleclick shareholders are governed by California
corporate law and Old Styleclick's charter documents. If the merger is approved,
you will become a shareholder of New Styleclick and your rights will be governed
by Delaware corporate law and New Styleclick's charter documents. As a result,
your rights will be different after the merger. For a discussion of the
differences, see the section entitled "Comparison of the Rights of New
Styleclick Shareholders and Old Styleclick Shareholders."
7
<PAGE>
NEW STYLECLICK
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following table presents summary unaudited pro forma financial data of
New Styleclick. The unaudited pro forma combined condensed statement of
operations data gives effect to the mergers as if they had occurred on January
1, 1999. The unaudited pro forma combined condensed balance sheet data gives
effect to the mergers as if they had occurred on March 31, 2000. Pro forma
earnings per share data is presented based on the approximately 7.7 million
shares of New Styleclick to be issued to Old Styleclick shareholders and the
approximately 23.1 million shares of New Styleclick to be issued to Internet
Shopping Network unitholders. In addition to the shares to be issued at the time
of the merger to Old Styleclick shareholders and Internet Shopping Network
unitholders, New Styleclick has 19.8 million additional potentially dilutive
securities outstanding related to employee stock options and warrants issued for
services to be provided. On a fully diluted basis, USANi Sub will own
36.0 million shares, other Internet Shopping Network unitholders 2.0 million
shares, and the shareholders of Old Styleclick, including warrant holders,
12.6 million shares. The information in this table should be read in conjunction
with the financial statements and accompanying notes and other financial data
pertaining to Old Styleclick and Internet Shopping Network as well as "New
Styleclick Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Old Styleclick Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Internet Shopping Network
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this proxy statement/prospectus. For a further
discussion of the pro forma adjustments, see "Unaudited Pro Forma Combined
Condensed Financial Statements".
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................... $ 6,793 $ 30,864
Cost of sales.................................. 5,517 24,513
-------- ---------
Gross profit............................. 1,276 6,351
Operating costs and expenses:
Selling, general and administrative.......... 9,578 42,684
Product development and research costs....... 2,198 11,574
Write-off of capitalized software costs...... -- 4,489
Depreciation and amortization of software
costs...................................... 1,905 5,847
Amortization of goodwill..................... 12,239 48,957
-------- ---------
Total operating costs and expenses....... 25,920 113,551
-------- ---------
Operating loss........................... (24,644) (107,200)
Interest income (expense), net................. (34) 278
Miscellaneous.................................. -- (3)
-------- ---------
Loss before income taxes and minority
interest..................................... (24,678) (106,925)
Income tax (expense) benefit................... -- --
-------- ---------
Net loss....................................... $(24,678) $(106,925)
======== =========
Basic and diluted net loss per share........... $ (0.80) $ (3.46)
======== =========
Basic and diluted weighted average shares
outstanding.................................. 30,868 30,868
======== =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 2000
--------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments................ $ 36,432
Working capital................................ 41,207
Goodwill and other intangibles................. 146,870
Total assets................................... 232,142
</TABLE>
<TABLE>
<S> <C> <C>
Stockholders' equity........................... 211,871
</TABLE>
8
<PAGE>
OLD STYLECLICK
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data are derived from the
financial statements of Old Styleclick. The financial statements as of and for
the year ended December 31, 1999 have been audited by Ernst & Young LLP,
independent auditors, and the financial statements as of and for the years ended
December 31, 1995, 1996, 1997 and 1998 have been audited by Singer Lewak
Greenbaum and Goldstein LLP. The data should be read in conjunction with the
financial statements, related notes and other financial information pertaining
to Old Styleclick, as well as "Old Styleclick Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this proxy statement/prospectus.
<TABLE>
<CAPTION>
OLD STYLECLICK
-------------------------------------------------------------- THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31, 2000
-------------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $ 1,905 $ 3,370 $ 4,450 $ 6,681 $ 6,174 $ 3,790 $ 1,252
Cost of sales................ 224 115 87 82 668 119 179
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............. 1,681 3,255 4,363 6,599 5,506 3,671 1,073
Operating costs and expenses:
Selling, general and
administrative........... 1,036 2,338 3,394 8,291 13,362 2,420 4,124
Research and development... 249 78 172 3,541 6,054 1,661 1,290
Amortization of software
development costs........ 80 295 774 4,890 1,842 623 197
Merger related costs....... -- -- -- -- 405 -- 1,369
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating costs and
expenses............... 1,365 2,711 4340 16,722 21,663 4,704 6,980
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating profit
(loss)................. 316 544 23 (10,123) (16,157) (1,033) (5,907)
Other income (expense)....... (308) 102 331 435 278 48 (34)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 8 $ 646 $ 354 $ (9,688) $ (15,879) $ (985) $ (5,941)
========== ========== ========== ========== ========== ========== ==========
Basic income (loss) per
share...................... -- $ 0.20 $ 0.07 $ (1.59) $ (2.24) $ (0.16) $ (0.77)
Diluted income (loss) per
share...................... -- 0.20 0.06 (1.59) (2.24) (0.16) (0.77)
Weighted average shares
outstanding................ 2,594,816 3,307,288 4,800,918 6,088,247 7,092,374 6,156,502 7,712,905
BALANCE SHEET DATA:
Net working capital
(deficit).................. $ (873) $ 3,115 $ 14,864 $ 6,753 $ 3,114 $ 6,255 $ (2,250)
Total assets................. 1,864 7,182 21,404 13,050 15,047 13,648 15,433
Net stockholders' equity..... 3,960 6,661 20,939 12,310 13,071 11,628 7,587
</TABLE>
9
<PAGE>
INTERNET SHOPPING NETWORK
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data are derived from audited
and unaudited (where indicated) financial statements of Internet Shopping
Network and its predecessor. The financial statements as of and for the years
ended December 31, 1997, 1998 and 1999 have been audited by Ernst & Young LLP,
independent auditors. The data should be read in conjunction with the financial
statements, related notes and other financial information pertaining to Internet
Shopping Network and its predecessor company, as well as "Internet Shopping
Network Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this proxy statement/prospectus.
The operating results for the years ended December 31, 1995 and 1996 and the
balance sheet data as of December 31, 1995 represents the predecessor to
Internet Shopping Network. USAi acquired Internet Shopping Network on
December 20, 1996 in conjunction with its acquisition of Home Shopping Network.
USAi accounted for the transaction using the purchase method of accounting and
the assets and liabilities of Internet Shopping Network were adjusted as of
December 31, 1996 to reflect their respective fair values.
<TABLE>
<CAPTION>
INTERNET SHOPPING NETWORK
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------------- -------- -------- -------- --------
PREDECESSOR (IN THOUSANDS) (UNAUDITED)
COMPANY
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................... $ 6,853 $11,022 $ 12,954 $ 21,288 $ 24,690 $ 6,333 $ 5,541
Cost of sales................... 6,561 11,287 12,987 20,216 23,845 5,764 5,338
------- ------- -------- -------- -------- -------- --------
Gross profit................ 292 (265) (33) 1,072 845 569 203
Operating costs and expenses:
Selling and marketing......... 1,347 1,314 1,176 5,193 10,793 1,981 1,751
Product development costs..... 912 1,290 1,580 3,334 5,520 1,516 908
General and administrative.... 2,538 3,779 5,869 8,231 19,283 3,570 3,911
Write-off of capitalized
software costs.............. -- -- -- -- 4,489 -- --
Depreciation and
amortization................ 1,856 2,070 2,018 1,436 3,251 397 1,499
------- ------- -------- -------- -------- -------- --------
Total operating costs and
expenses.................. 6,653 8,453 10,643 18,194 43,336 7,464 8,069
------- ------- -------- -------- -------- -------- --------
Operating loss.............. (6,361) (8,718) (10,676) (17,122) (42,491) (6,895) (7,866)
Other income (expense).......... -- 1 -- 198 (3) (8) --
------- ------- -------- -------- -------- -------- --------
Net loss.................... $(6,361) $(8,717) $(10,676) $(16,924) $(42,494) $ (6,903) $ (7,866)
======= ======= ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Net working capital (deficit)... $(1,862) $(1,654) $ 1,002 $ 3,150 $ 979 2,166 (5,643)
Total assets.................... 3,840 2,233 3,554 12,659 28,121 12,758 25,785
Net stockholders'/members'
equity (deficiency)........... (2,688) 248 3,593 7,249 16,180 6,874 8,314
</TABLE>
10
<PAGE>
CERTAIN COMPARATIVE PER SHARE DATA
The table below provides certain historical and pro forma per share
financial information as of and for the three months ended March 31, 2000 and
for the year ended December 31, 1999. New Styleclick prepared the New Styleclick
pro forma combined amounts based on the purchase method of accounting and a
preliminary allocation of the purchase price of Old Styleclick.
It is important that when you read this information, you read it along with
Internet Shopping Networks' and Old Styleclick's historical financial statements
and related notes included elsewhere in this proxy statement/prospectus. It is
also important the you read the Unaudited Pro Forma Combined Condensed Financial
Statements and accompanying discussion that begin on page [20] of this document.
The pro forma information is presented for illustrative purposes only. It is not
necessarily indicative of the results of operations or financial position which
actually would have been reported had these transactions occurred on March 31,
2000 or January 1, 1999, nor are they necessarily indicative of future financial
results of operations or financial position.
<TABLE>
<CAPTION>
OLD STYLECLICK
ISN NEW STYLECLICK -------------------------
---------- -------------- EQUIVALENT
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(2)
---------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
BOOK VALUE PER SHARE/UNIT
Units/Common stock and class B common stock
March 31, 2000............................... $ 244.22 $2,105.80 $ 983.72 $2,105.80
December 31, 1999............................ 475.28 1,843.03
BASIC EARNINGS (LOSS) PER SHARE/UNIT
For the three months ended March 31, 2000.... $ (0.23) $ (0.80) $ (0.77) $ (0.80)
For the year ended December 31, 1999......... (1.25) (3.46) (2.24) (3.46)
DILUTED EARNINGS (LOSS) PER SHARE/UNIT
For the three months ended March 31, 2000.... $ (0.23) $ (0.80) $ (0.77) $ (0.80)
For the year ended December 31, 1999......... (0.23) (3.46) (2.24) (3.46)
</TABLE>
- ------------------------
(1) Pro forma information gives effect to the merger as of and for the periods
indicated
(2) The equivalent pro forma per share date for Old Styleclick is computed
multiplying New Styleclick's pro forma per share information by the exchange
ratio of 1.
11
<PAGE>
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
NEW STYLECLICK MAY NOT EARN ENOUGH MONEY TO COVER ITS COSTS AND NEEDS FOR
WORKING CAPITAL.
Historical cash flow for 1999 on a combined basis for Internet Shopping
Network and Old StyleClick would have been negative by approximately
$66 million. New Styleclick expects to incur additional operating expenses as it
expands its sales and marketing operations, develops and extends its brands,
funds greater levels of product development, develops and commercializes
additional media properties and acquires complementary businesses and
technologies. However, although it is expecting to incur significant losses in
the short term and to generate a negative cash flow, because of efficiencies
resulting from the merger and the New Styleclick business strategy, New
Styleclick expects its negative cash flows to be lower in the future. Based on
current plans and assumptions relating to operations, New Styleclick anticipates
that the contribution from USAi and cash generated from operations should be
sufficient to satisfy its anticipated cash requirements through June 2001. If
New Styleclick's actual revenue is lower than predicted, it may be unable to
adjust its operating expenses accordingly and, thus, could require additional
capital at an earlier date.
NEW STYLECLICK IS A NEW COMPANY WITH AN UNPROVEN BUSINESS MODEL, NO HISTORY OF
PROFITS AND NO EXPECTATION OF MAKING PROFITS IN THE FORESEEABLE FUTURE.
New Styleclick was organized in March 2000 and has no operating history. The
companies and properties comprising New Styleclick have a limited operating
history and a history of losses averaging $10.7 million per quarter for the past
2 years. Old Styleclick was founded in February 1988 and has a limited operating
history in the Internet electronic-commerce market. Internet Shopping Network's
predecessor was founded in May 1993, and FirstAuction.com and FirstJewelry.com
websites were launched in June 1997 and October 1999, respectively. In addition,
the evolving business model to be employed by New Styleclick makes the
prediction of future operating results difficult, and New Styleclick expects to
incur net losses for the foreseeable future. New Styleclick's is subject to
similar risks, expenses and uncertainties encountered by other companies that
operate in the new and rapidly evolving markets for Internet products and
services. These companies often experience costs which exceed revenues by a
significant margin in the early stages of their operations. Depending on its
ongoing evaluation of the prospects of its operations, including alternative
uses of capital and resources, as well as general economic and industry
conditions, New Styleclick may shift the focus of, dispose of or subsantially
reduce its interest in some or all of these operations. Any such shift,
disposition or reduction may cause a decrease in New Styleclick's anticipated
revenue.
NEW STYLECLICK'S BUSINESS COULD BE HARMED IF IT IS UNABLE TO RESPOND EFFECTIVELY
TO SEASONAL FLUCTUATIONS IN THE PRODUCTS IT SELLS, CHANGES IN CONSUMER TASTES OR
CHANGES IN THE OVERALL ECONOMY.
New Styleclick's products and services, including its Internet shopping
websites, are focused on the jewelry, online auction, apparel, textile, home
furnishings and home design industries, which historically have been subject to
seasonal variations due to changing consumer needs. Any downturn, whether real
or perceived, in economic conditions or prospects of the economy generally, and
of the jewelry, online auction, apparel, textile, home furnishings and home
design industries in particular, could decrease consumer spending habits and
decrease revenues for New Styleclick. Additionally, fashion and shopping trends
can change rapidly, and New Styleclick's business may be sensitive to those
changes. New Styleclick may not accurately anticipate shifts in fashion or
shopping trends and adjust its merchandise mix or presentation format to appeal
to changing consumer tastes in a timely manner. If it misjudges the product
market, or if it is unsuccessful in responding to changes in fashion or shopping
trends or in market demand, New Styleclick's business could be materially
adversely affected due to excess inventory and a decreased demand for its
products.
12
<PAGE>
NEW STYLECLICK'S BUSINESS COULD LOSE MARKET SHARE IF IT DOES NOT RESPOND TO
TECHNOLOGICAL CHANGES.
The electronic commerce Internet markets for shopping and related services
are characterized by rapid changes in technology, customer needs and preferences
and evolving industry standards. The Internet electronic commerce industry is
relatively young and unpredictable. Consequently, it may encounter rapid product
obsolescence and the necessity for frequent new and enhanced product and service
introductions. New Styleclick's success will depend significantly on its ability
to forecast the future needs and preferences of customers and clients, to
enhance its current products and services, to develop new products and services
that meet changing customer needs, and all on a timely and cost-effective basis.
If New Styleclick fails to anticipate or respond adequately to changes in
technology and customer requirements and preferences, or if it encounters any
significant delays in developing or enhancing its products and services, such
failure or delays may make it difficult for New Styleclick to effectively
compete in the marketplace, and result in a reduction in anticipated revenues.
NEW STYLECLICK COULD SUFFER A LOSS OF REVENUES IF TECHNOLOGICAL PROBLEMS CAUSE
INTERRUPTIONS IN SERVICE WITH INTERNET SHOPPING NETWORK'S FIRSTAUCTION WEBSITE.
Internet Shopping Network's FirstAuction website has experienced
intermittent service interruptions caused by technological problems, and systems
downtime is likely to continue until a solution is in place. New Styleclick may
continue to suffer from lost revenues before a solution is implemented.
Additionally, the transition to a new technological platform using New
Styleclick technology may result in additional downtime and decreased sales.
NEW STYLECLICK RELIES ON THIRD PARTIES TO PROVIDE MERCHANDISE AND SERVICES
ESSENTIAL TO ITS BUSINESS, AND ITS BUSINESS WOULD BE HARMED IF IT IS UNABLE TO
OBTAIN THESE PRODUCTS AND SERVICES.
The success of New Styleclick's products and services is entirely dependent
upon the continued support of manufacturers, vendors and suppliers, particularly
Home Shopping Network. New Styleclick, Old Styleclick and Internet Shopping
Network do not have long-term contracts or arrangements with their respective
manufacturers, vendors or shippers that guarantee the availability of
merchandise, the continuation of particular payment terms or the extension of
credit limits. Any negative change in these relationships could adversely affect
the day-to-day operations of New Styleclick which may cause a decline in
customers and revenues.
NEW STYLECLICK'S GROWTH WILL BE HAMPERED IF IT IS UNABLE TO ACCESS LEADING
PORTAL WEBSITES.
In order to create traffic for New Styleclick's online properties, it will
seek to maintain and develop agreements and informal relationships with leading
portal websites. These arrangements with portals typically are not exclusive and
may be terminated upon little or no notice. Any failure to obtain access to
large numbers of Internet users in a cost-effective manner could make it
difficult for New Styleclick to increase their market share and therefore suffer
a decline in anticipated revenues.
NEW STYLECLICK MAY NOT BE ABLE TO PREVENT OTHERS FROM USING OUR TECHNOLOGY IN
WAYS THAT WILL HARM OUR BUSINESS.
All of Old Styleclick's products are based on or use a common core
technology encompassing proprietary algorithms, which are covered by three
issued United States patents, and Old Styleclick has received notice of
allowances for two additional pending patent applications. New Styleclick's
ability to compete effectively depends in large part on developing and
maintaining the essential components of that technology as proprietary. However,
there can be no assurance that patent and other intellectual property protection
will be available or be enforceable in any particular instance or that financial
resources will be available to enforce those rights. If they are not available,
New Styleclick could lose a competitive advantage in the market.
13
<PAGE>
RISKS RELATED TO THE INDUSTRY
THE INTERNET AND ELECTRONIC COMMERCE FIELD ARE HIGHLY COMPETITIVE AND RAPIDLY
CHANGING AND NEW STYLECLICK MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The electronic commerce market is new, rapidly evolving and intensely
competitive with more competitors entering the market daily. Barriers to entry
are minimal, and current and new competitors can launch new websites at a
relatively low cost. In addition, the traditional retail shopping industry is a
large source of competition for consumer dollars. Vendors competing to sell
products to consumers through electronic commerce or otherwise include: online
vendors such as Amazon.com, traditional retailers such as J. Crew and The Gap,
mail order operators such as Eddie Bauer and traditional shopping forums such as
shopping malls. These competitors have greater experience, resources and, in
many cases, name recognition and therefore may be more successful in attracting
consumers, thus making it difficult for New Styleclick to capture a share of the
market.
CHANGES IN GOVERNMENT REGULATION AND THE UNCERTAIN LEGAL ENVIRONMENT IN WHICH
NEW STYLECLICK OPERATES COULD SLOW NEW STYLECLICK'S GROWTH.
Substantive federal, state and international regulations may be adopted in
the future relating to user privacy and the collection and utilization of user
information through the Internet. The recently enacted Children's Online Privacy
Protection Act restricts the distribution of certain materials deemed harmful to
children and imposes additional restrictions on the ability of online services
to collect user information from minors, and similar regulations are in force in
many European countries. In addition, a number of other countries and the
European Commission have announced or are considering additional regulation
concerning, among other things, the liability of online service providers for
activities that take place using their services. The recently enacted Digital
Millennium Copyright Act is intended to reduce the liability of online service
providers for listing or linking to third-party websites that include materials
that infringe copyrights or other rights of others, but there can be no
assurance that its enforcement will be successful. Furthermore, because the
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure, local telephone carriers have sought
increased regulation of the Internet and electronic commerce including the
imposition of certain access and other fees. Increased regulation or the
imposition of access fees could substantially increase the costs of
communicating on the Internet and potentially decrease the demand for New
Styleclick's products and services.
RISKS RELATED TO THE MERGER
NEW STYLECLICK MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OLD STYLECLICK AND
INTERNET SHOPPING NETWORK.
The success of New Styleclick will require the technological integration of
the Styleclick.com, Fashiontrip.com, FirstAuction.com and FirstJewelry.com
websites and the coordination of the sales, operations, content, creative,
marketing, fulfillment, merchandising and research and development efforts of
Old Styleclick and Internet Shopping Network. If New Styleclick's management is
not able to successfully integrate the operations of Old Styleclick and Internet
Shopping Network, it may cause an increase in operating costs, a decrease in
anticipated revenue and divert management attention. If the benefits of the
transactions are not realized, the market price of New Styleclick shares could
decline.
Some of the factors that may contribute to the integration risks faced by
New Styleclick are:
- difficulties and expenses of integrating operations, technology and
personnel into New Styleclick's operations while preserving the goodwill
of Old Styleclick and Internet Shopping Network's existing businesses;
14
<PAGE>
- the potential disruption caused to the businesses of Old Styleclick and
Internet Shopping Network by the need to dedicate management and other
resources to completing the proposed transaction;
- the difficulty of creating and maintaining uniform standards, controls,
procedures and policies;
- the ability of New Styleclick's management to manage the substantial
expansion of New Styleclick's employee base and the integration of teams
that have not previously worked together while dealing with the potential
loss of any key employees of Old Styleclick or Internet Shopping Network;
and
- the relocation of some of Internet Shopping Network employees to Old
Styleclick's corporate headquarters.
NEW STYLECLICK WILL BE CONTROLLED BY USAI AND AS A RESULT OTHER SHAREHOLDERS
WILL HAVE LITTLE OR NO INFLUENCE OVER SHAREHOLDERS' DECISIONS.
New Styleclick is currently a wholly-owned subsidiary of USANi Sub, which is
controlled by USAi. On a fully diluted basis following the mergers, USANi Sub
will own approximately 35,500,000 shares of New Styleclick Class B common stock,
which has ten votes per share. Consequently, USANi Sub will have approximately
96% of the total voting power of New Styleclick common stock and, therefore,
USAi will have the right to control the outcome of any matter submitted for the
vote or consent of New Styleclick's shareholders, unless a separate class vote
is required under Delaware law. USANi Sub will have the voting power to control
the election of the New Styleclick Board of Directors and it will be able to
cause the amendment of New Styleclick's certificate of incorporation or bylaws.
USANi Sub also may be able to cause changes in our business without seeking the
approval of any other party. These changes may not be to the advantage of New
Styleclick or in the best interest of New Styleclick's other shareholders. For
example, USANi Sub will have the power to prevent, delay or cause a change in
control and could take other actions that might be favorable to USANi Sub, but
not necessarily to other shareholders. Similarly, USAi has the voting power to
exercise a controlling influence over USANi Sub's business and affairs and has
the ability to make decisions concerning such things as:
- mergers or other business combinations;
- purchases or sales of assets;
- offerings of securities;
- indebtedness that New Styleclick may incur; and
- payments of any dividends.
New Styleclick cannot assure you that USANi Sub's ownership of New
Styleclick common stock or its relationship with New Styleclick will not have a
material adverse effect on the overall business strategy of New Styleclick or on
the market price of the Class A common stock.
USAI COULD SELL ITS CONTROLLING INTEREST IN NEW STYLECLICK AND THEREFORE NEW
STYLECLICK COULD EVENTUALLY BE CONTROLLED BY AN UNKNOWN THIRD PARTY.
USANi Sub could elect to sell all or a substantial portion of its equity
interest in New Styleclick to a third party, which would represent a controlling
or substantial interest, without offering to New Styleclick's other shareholders
the opportunity to participate in this transaction. If another party acquires
USANi Sub's interest in New Styleclick, that third party may be able to control
New Styleclick in the same manner that USANi Sub is able to control New
Styleclick. A sale to a third party also may adversely affect the market price
of New Styleclick's class A common stock because the change in
15
<PAGE>
control may result in a change in management decisions, business policy and New
Styleclick's attractiveness to future investors. See "Risk Factors--USANi Sub
may sell its shares of New Styleclick's common stock which may depress New
Styleclick's share price."
NEW STYLECLICK MAY FACE POTENTIAL CONFLICTS OF INTEREST WITH USAI WHICH MAY HARM
ITS BUSINESS.
Conflicts of interest may arise between New Styleclick, on the one hand, and
USANi Sub and its affiliates including USAi, on the other hand, in areas
relating to past, ongoing, and future relationships, corporate opportunities,
indemnity agreements, tax and intellectual property matters, potential
acquisitions or financing transactions, sales or other dispositions by USANi Sub
of shares of New Styleclick's common stock and the exercise by USANi Sub of its
ability to control our management and affairs. For example, affiliates of USANi
Sub that engage in a diverse range of media and entertainment-related
businesses, including businesses engaged in electronic commerce, fulfillment and
customer service such as Home Shopping Network, Ticketmaster Online-CitySearch,
Hotel Reservations Network, MXGonline and USAi Interactive may have interests
that conflict or compete in some manner with New Styleclick's business. New
Styleclick cannot assure you that any conflicts that may arise between New
Styleclick and USANi Sub or its affiliates, any loss of a corporate opportunity
to USANi Sub or its affiliates that may otherwise be available to New
Styleclick, or any engagement by USANi Sub or its affiliates in any activity
that is similar to our business, will not harm our business or result in
decreased profits because these conflicts of interest or loss of a corporate
opportunity could result in a loss of customers and, therefore, revenues. See
"Comparison of the Rights of Old Styleclick Shareholders and New Styleclick
Shareholders."
USAI HAS NO OBLIGATION TO SHARE OPPORTUNITIES WITH NEW STYLECLICK.
USANi Sub is under no obligation to share any future business opportunities
with New Styleclick, unless Delaware law requires New Styleclick to do so. New
Styleclick's certificate of incorporation specifically includes provisions which
release USANi Sub from this obligation and any liability that would result from
a breach of this obligation.
USANI SUB MAY SELL ITS SHARES OF NEW STYLECLICK'S COMMON STOCK WHICH MAY CAUSE
NEW STYLECLICK'S SHARE PRICE TO FALL.
Subject to applicable federal securities laws, USANi Sub may at any time
convert each of its shares of Class B common stock into a share of Class A
common stock. USANi Sub also may transfer its stock in a privately-negotiated
transaction or to its affiliates or shareholders. In addition, 18 months
following completion of the mergers, USANi Sub may convert its Class B common
stock, demand registration of its Class A common stock and sell the Class A
common stock into the public market. Any sales or distributions by USANi Sub of
a substantial amount of New Styleclick's Class A common stock in the
marketplace, or to its shareholders, or the perception that these transfers,
sales or distributions could occur, could adversely affect the prevailing market
prices for our Class A common stock.
We cannot assure you that in any transfer by USANi Sub of its controlling
interest in our company, you or any other holders of our common stock will be
able to participate in this transaction or will realize any premium or high
price with respect to the sale.
16
<PAGE>
THE PROPOSED TRANSACTIONS
This section of the proxy statement/prospectus describes the material
aspects of the proposed transactions. For more detailed information, you should
review the merger agreement, the option agreement, the stockholder agreement and
the other agreements referred to in this discussion, which are attached to this
proxy statement/prospectus as annexes and which are incorporated herein by
reference.
BACKGROUND
During 1999, as the management of Old Styleclick attempted to develop and
expand its Internet electronic commerce businesses through its Styleclick.com
and Fashiontrip.com websites, management recognized Old Styleclick's need for
substantially greater capital and marketing resources in order for its business
to compete effectively. At meetings of Old Styleclick's Board of Directors
during 1998 and 1999, the Board considered various ways for Old Styleclick to
obtain the capital and marketing and merchandising resources necessary to expand
its business. The Board requested Old Styleclick's officers to investigate
opportunities for growth through strategic alliances and ventures with other
companies in the commerce arena. In 1998 and during the first three quarters of
1999, Old Styleclick's executives explored several potential opportunities for
growth through strategic alliances or joint ventures and investigated the
availability of substantial new capital through one or more equity offerings.
Although Old Styleclick was able to secure $8.5 million of new capital through a
privately-placed financings in April 1999, the Board considered Old Styleclick's
diminishing working capital resources and the cash flow needs of its business
expansion, especially employee and marketing expenses, and determined that
additional capital was necessary to promote Old Styleclick's continued growth
and development.
In August 1999, Old Styleclick was recommended to Internet Shopping Network
as a company that could provide Internet development and technical services for
companies engaging in Internet-based electronic commerce. A meeting was held on
September 3, 1999 between representatives of the Old Styleclick and Internet
Shopping Network where Old Styleclick presented its technology to Internet
Shopping Network's senior management. During September and October of 1999,
representatives of Internet Shopping Network met with representatives of Old
Styleclick. In the course of discussions about how the technical expertise of
Old Styleclick could be made available to Internet Shopping Network to develop
and improve its websites and how the merchandising/electronic commerce expertise
of Internet Shopping Network could help Old Styleclick, the possibility of a
strategic alliance between Old Styleclick and Internet Shopping Network was
raised. The representatives of both parties expressed an interest in
investigating possible synergies that an alliance might present and agreed to
future discussions after raising the proposal with their respective senior
management and, in the case of Internet Shopping Network, with its parent
company, USAi.
Following a discussion in September, Old Styleclick, Internet Shopping
Network and USAi, investigated the public information available about the other
respective companies and businesses and independently concluded that further
consideration of some form of strategic alliance or business combination
appeared to be justified. Old Styleclick and USAi signed a confidentiality and
non-disclosure agreement on October 4, 1999 in order for their executives to
investigate and evaluate considerations related to an alliance or business
combination of their companies.
On October 14, 1999, senior management of Internet Shopping Network brought
representatives from USAi to meet with representatives of Old Styleclick and
discuss Old Styleclick's business and technology. On the following day, Mr. Dara
Khosrowshahi, President of USA Networks Interactive, a division of USAi
responsible for evaluating interactive opportunities on behalf of the parent
company, met with Old Styleclick senior management to discuss the possibility of
a business combination with Internet Shopping Network and the potential
advantages that could be realized by both companies from such a combination.
17
<PAGE>
Based on the view of Old Styleclick's executives that significant strategic
benefits could be realized by some form of alliance or business combination of
Old Styleclick, Internet Shopping Network and USAi, Old Styleclick's Board of
Directors directed Mr. Vecchione to continue discussions with Internet Shopping
Network, with the goal of determining the basis and structure for such an
alliance or business combination.
On November 30, 1999, a telephone conference was held between executives of
Old Styleclick, executives of Internet Shopping Network and USAi and their
respective financial and legal advisors. The parties and their advisors
discussed the potential terms of a merger between Internet Shopping Network and
Old Styleclick, including potential structures for a transaction and the
business and strategic goals that might be realized by a transaction. Following
the telephone conference on November 30, 1999, drafts of a term sheet for a
business combination of Old Styleclick and Internet Shopping Network were
exchanged and negotiated between representatives of Old Styleclick, Internet
Shopping Network, and USAi, and representatives of Old Styleclick, Internet
Shopping Network and USAi conducted due diligence investigations and discussed
financial information and projections. During negotiations it was recognized
that an important condition to Internet Shopping Network's willingness to
proceed with discussions was that Old Styleclick obtain waivers from investors
in its April 1999 private placement of several material terms of their warrants
and investment agreements and obtain voting, waiver and lock-up agreements from
Ms. Freedman, Mr. Vecchione, Mr. Freedman and Intel Corporation, significant Old
Styleclick shareholders. In December 1999, Old Styleclick retained PaineWebber
Incorporated and ING Barings LLC to advise Old Styleclick about the financial
considerations of a merger with USAi or one of its subsidiaries and the fairness
from a financial point of view of the terms of such a transaction.
From November 30, 1999 through December 31, 1999, representatives of Old
Styleclick, Internet Shopping Network and USANi Sub, and their respective legal
and financial advisors, continued their due diligence investigations and
conducted further negotiations regarding the principal terms of a merger of the
two companies. On December 21, 1999, Mr. Vecchione, co-CEO of Old Styleclick,
met with Mr. Barry Diller, Chairman and Chief Executive Officer of USAi, at Mr.
Diller's offices in New York City to discuss the proposed transaction. In
addition, preliminary discussions were held with investors in Old Styleclick's
April 1999 private placement regarding the waivers required from those investors
by USANi Sub. Those investors requested additional information about the
proposed
transaction, and in late December 1999 Old Styleclick entered into
confidentiality and non-disclosure
agreements with two of those investors, Castle Creek Technology Partners LLC and
Marshall Capital Management Inc. Negotiations then continued with investors in
Old Styleclick's April 1999 private placement regarding the waivers required by
USANi Sub.
On January 20, 2000, a special meeting of the Board of Directors of USAi and
the Board of Managers of USANi Sub LLC was held at which Mr. Dara Khosrowshahi
presented the terms and conditions of the proposed transactions. The Boards
discussed and unanimously approved the proposed transactions and authorized
Mr. Khosrowshahi and other senior executives of USAi to reach final agreement
with Old Styleclick.
On January 23, 2000, a special meeting of the Board of Directors of Old
Styleclick was held at which all the directors were present as well as Old
Styleclick's counsel and financial advisors. At the meeting, the Board reviewed
and discussed the terms and conditions of the proposed merger with Internet
Shopping Network, including the terms and conditions of the related transactions
and agreements, heard reports from representatives of PaineWebber and ING
Barings as to the fairness from a financial point of view of the proposed terms
and engaged in a full discussion of the proposed merger and related
transactions. At the conclusion of the meeting, Old Styleclick's Board of
Directors tentatively approved the terms and conditions of the proposed merger
with Internet Shopping Network and related transactions and agreements, and
authorized Old Styleclick's executives and advisors to reach final agreement
with Internet Shopping Network and USANi Sub on all terms of the merger and
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<PAGE>
related transactions, and to obtain the waivers and agreements from investors in
Old Styleclick's April 1999 private placement.
Following the January 23, 2000 meeting, negotiations continued among the
representatives of Internet Shopping Network, USANi Sub, Old Styleclick and the
investors. A special meeting of the Old Styleclick Board of Directors was held
on January 24, 2000, with all the directors and Old Styleclick's counsel and
financial advisors present. The Board reviewed and considered the final terms of
the proposed merger and related agreements which had been negotiated with
Internet Shopping Network and USANi Sub, reviewed and considered the terms of
the voting and waiver agreements which had been negotiated with the principal
Old Styleclick shareholders and the April 1999 private placement investors and
discussed various financial and strategic considerations related to the merger.
PaineWebber and ING Barings, in separate presentations to, and discussions with
the Board, reviewed their respective analyses of the fairness of the merger
transaction and rendered their respective oral opinions that the merger was fair
from a financial point of view to Old Styleclick and its shareholders, both
before and after the issuance of shares to USANi Sub upon the exercise of the
option provided in the merger and related agreements. Following the
presentations of PaineWebber and ING Barings, Old Styleclick's Board engaged in
a full discussion of the advisability of entering into the merger agreement and
related transactions with Internet Shopping Network and USANi Sub. At the
conclusion of the meeting, Old Styleclick's Board approved the terms of all of
the agreements, determined that the merger and related transactions were
advisable and fair to, and in the best interests of, Old Styleclick and its
shareholders and authorized the executives of Old Styleclick to proceed with
execution of the documents.
In the early morning of January 25, 2000, the parties executed the merger
agreement and the related documents. The merger was jointly announced by Old
Styleclick and USAi later that morning.
In early March 2000, the parties agreed to amend and restate the merger
agreement to provide that Internet Shopping Network will merge with a
wholly-owned subsidiary of New Styleclick. This change does not affect the value
to be received by Old Styleclick shareholders in New Styleclick because New
Styleclick will have the same assets following the merger and the aggregate
percentage of New Styleclick common stock held by former Old Styleclick
shareholders will remain the same.
RECOMMENDATION OF OLD STYLECLICK BOARD OF DIRECTORS
In reaching its decision to adopt the merger agreement, Old Styleclick's
Board of Directors considered a number of factors, including the following:
- the proportion of New Styleclick that shareholders of Old Styleclick would
receive in exchange for their shares in Old Styleclick and the value of
that proportion of New Styleclick. The Board compared that value with the
value of Old Styleclick as a stand-alone business, if it did not proceed
with the merger;
- the ability of Old Styleclick to implement its strategic plans in the
Internet electronic commerce marketplace. In order to succeed in the
electronic commerce marketplace, Old Styleclick believed it needed to
increase the scope and volume of its business in order to increase its
revenues and to grow its market share. Old Styleclick did not have
sufficient resources to accomplish such growth. The proposed merger
presented an opportunity to increase the scope and volume of Old
Styleclick's business because it would combine the personnel and assets of
Old Styleclick with the personnel and assets of Internet Shopping Network,
the cash, advertising and promotional services and the other advantages,
described in more detail below, within New Styleclick. Other methods of
increasing the scope and volume of Old Styleclick's business, such as
increasing promotional spending and adding new products would not, in the
view of Old Styleclick's Board, be as successful or as rapid as the
proposed merger; principally because they
19
<PAGE>
would require Old Styleclick to raise additional capital, which the Board
believed would take substantial time to complete;
- the difficulty Old Styleclick had encountered in finding additional
sources of capital, including strategic partners, prior to receiving the
merger proposal. Old Styleclick's liquidity and capital resources were
diminishing and Old Styleclick was devoting substantial management time to
pursuing sources of capital or strategic partners who could contribute
capital to Old Styleclick. Although it considered other potential sources
of capital, the Board determined that those sources, which proposed
potentially highly-dilutive convertible debt or preferred securities,
would not provide capital to Old Styleclick on terms that were as
attractive as the merger proposal, which included the immediately
available line of credit described in more detail below;
- the strategic benefits anticipated from the affiliation of New Styleclick
with USAi. The relationship with USAi and its affiliates was seen by the
Board as a potential source of capital, financial, operational and
expansion opportunities which Old Styleclick did not have, and was
unlikely to develop, as a stand alone business. The Board considered the
potential benefits from access to USAi's and its affiliates' media outlets
and marketing capabilities for advertising of New Styleclick's services
following the merger and the potential benefits of access to USAi's
Electronic Commerce Services Division for product fulfillment, customer
service and marketing management expertise;
- the availability of USAi's capital, personnel and marketing resources to
develop and implement a business plan in the developing international
electronic commerce marketplace, particularly the ability to market New
Styleclick's business services capabilities. As a stand-alone business Old
Styleclick did not have the capital resources to pursue international
expansion, which the Board consider to be important to the growth of Old
Styleclick. The Board determined that a relationship with USAi and its
affiliates could be expected to provide New Styleclick with potential
access to such expansion opportunities as they may develop;
- the financial analyses and conclusions presented to the Board of Old
Styleclick by each of ING Barings and PaineWebber that the valuation of
Old Styleclick reflected in the merger is fair to the shareholders of Old
Styleclick from a financial point of view;
- the advantages of the $10 million line of credit which USAi offered to
extend to Old Styleclick upon signing of the merger agreement as opposed
to several alternate interim financing sources which Old Styleclick had
investigated and which had been previously reported to the Board of Old
Styleclick.
In the light of these factors and after considering the advantages of Old
Styleclick continuing as an independent company, the Board determined that it
was more advisable to proceed with the merger. The Old Styleclick Board also
considered the terms and conditions of the merger agreement, the option
agreement and the other related agreements in light of the foregoing factors and
concluded that those agreements should be entered into by Old Styleclick.
Following the amendment and restatement of the merger agreement, the Old
Styleclick Board considered the amendments and determined that they did not
affect the substance of the merger proposal. The Old Styleclick Board approved
the amended and restated merger agreement and concluded that it should be
entered into by Old Styleclick.
The foregoing discussion of the factors considered by the Old Styleclick
Board is not intended to be exhaustive but includes all material factors
considered by Old Styleclick Board in approving the merger. In view of the wide
variety of factors considered, the Old Styleclick Board did not find it
practical to, and did not, assign any relative or specific weights to the
foregoing factors. Individual directors may have given different weights to
different factors. For a discussion of the interests of members of Old
Styleclick's management and Board of Directors in the merger, see "Interests of
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<PAGE>
Executive Officers and Directors of Old Styleclick in the Transactions." The Old
Styleclick Board recognized these interests and determined that they neither
supported nor detracted from the advisability of the merger to Old Styleclick
shareholders.
FOR THE REASONS DISCUSSED ABOVE, OLD STYLECLICK'S BOARD OF DIRECTORS HAS
DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE CONTEMPLATED
TRANSACTIONS ARE FAIR TO, AND IN THE BEST INTERESTS OF, OLD STYLECLICK AND ITS
SHAREHOLDERS. ACCORDINGLY, OLD STYLECLICK'S BOARD RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF OLD STYLECLICK IN THE
TRANSACTIONS
Some of the executive officers and members of the Board of Directors of Old
Styleclick have interests in the proposed transaction that are different from,
or in addition to, the interests of the shareholders of Old Styleclick
generally. These include provisions in the merger agreement relating to
indemnification and the acceleration or payout of benefits under existing
agreements. The Board of Directors of Old Styleclick was aware of these
interests and considered them in approving the merger agreement and the
contemplated transactions.
As discussed below, the merger agreement provides that, following the
merger, USANi Sub will cause New Styleclick to assume and honor certain existing
employment, warrant and stock option agreements between Old Styleclick and its
executive officers and directors.
INDEMNIFICATION AND INSURANCE
The merger agreement provides that, following the merger, USANi Sub will
cause New Styleclick to indemnify (including the payment of any expenses,
settlements or judgments) each present and former director of Old Styleclick to
the fullest extent permitted under applicable law or Old Styleclick's articles
of incorporation or bylaws for acts or omissions occurring prior to the merger.
The merger agreement also provides that USANi Sub will cause New Styleclick
to maintain Old Styleclick's current policies of directors' and officers'
liability insurance for six years after the date of the merger on terms no less
favorable than the policies currently in effect. However, New Styleclick is not
obligated to pay for any annual premium that is greater than 150% of the
combined annual premiums of Old Styleclick and Internet Shopping Network during
the twelve-month period ended November 30, 1999.
OPTIONS AND WARRANTS
Old Styleclick has granted a number of options and warrants to purchase
shares in Old Styleclick. Under the terms of the merger agreement, these options
and warrants will be assumed by New Styleclick upon completion of the merger.
This means existing warrants and options to purchase shares of Old Styleclick
will become warrants or options to purchase shares of New Styleclick Class A
common stock. The terms, conditions and number of shares purchasable under the
options and warrants will remain otherwise unchanged.
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<PAGE>
Additionally, the following persons have options or warrants to purchase
common stock of Old Styleclick that will become immediately exercisable upon
completion of the merger:
<TABLE>
<CAPTION>
VALUE OF IN-
THE-
NUMBER OF SHARES MONEY
PURCHASABLE IF OPTIONS OR
OPTIONS OR WARRANTS AS
WARRANTS OF
INDIVIDUAL EXERCISED MAY 4, 2000(2)
- ---------- ---------------- ---------------
<S> <C> <C>
Maurizio Vecchione...................................... 133,334 0
Barry Hall.............................................. 150,000 309,300
Joyce Freedman.......................................... 133,334 0
Chris Conahan........................................... 50,000 0
F. Stephen Wyle(1)...................................... 15,000 22,500
Leslie Saleson(1)....................................... 15,000 22,500
Peter Frank(1).......................................... 15,000 22,500
</TABLE>
- ------------------------
(1) a non-employee director of Old Styleclick
(2) Dollar value is based on the market value of Old Styleclick's common stock
of $9.00 per share at May 4, 2000, minus the per share exercise price.
EMPLOYMENT AGREEMENTS AND SEVERANCE PAYMENTS
As a condition to USANi Sub's obligation to close the merger, Mr. Vecchione
will enter into a new employment agreement with New Styleclick.
Mr. Freedman and Ms. Freedman have employment agreements with Old Styleclick
that provide for substantial severance payments to be made to each of them by
Old Styleclick upon a change of control if their employment agreements are not
assumed by the acquiring company. In the stockholders agreement that will be
entered into concurrently with the closing of the merger, Mr. Freedman and Ms.
Freedman each agree to automatic termination of their employment agreements on
the six-month anniversary of the closing of the merger without any severance or
other payments due.
OPINION OF PAINEWEBBER--FINANCIAL ADVISOR TO OLD STYLECLICK
Old Styleclick engaged PaineWebber in connection with the proposed
transaction solely for an opinion as to whether the proposed consideration to be
received by the shareholders of Old Styleclick in the merger, taken as a whole,
is fair to the shareholders from a financial point of view. PaineWebber was
selected by the Old Styleclick Board of Directors based on PaineWebber's
qualifications, expertise and reputation, as well as PaineWebber's historical
investment banking relationship and familiarity with Old Styleclick. PaineWebber
reviewed the proposed transaction and discussed the valuation methodologies it
employed with the Old Styleclick Board of Directors on January 23, 2000.
PaineWebber then rendered its oral opinion, which was subsequently confirmed in
writing on January 24, 2000, to the effect that, as of that date, the proposed
consideration to be received by the shareholders of the Old Styleclick in the
merger, taken as a whole, is fair to the shareholders from a financial point of
view. Although, since the date its opinion was issued, the form of the proposed
transaction has been amended, in part, from a contribution of units in Internet
Shopping Network to a merger, PaineWebber has determined not to revise its
opinion and its opinion therefore reflects the transaction in its proposed
structure as of January 24, 2000. The following is a summary of the report
presented by PaineWebber to the Old Styleclick Board of Directors in connection
with the rendering of its opinion.
THE FULL TEXT OF THE OPINION DELIVERED BY PAINEWEBBER TO THE OLD STYLECLICK
BOARD OF DIRECTORS, DATED JANUARY 24, 2000, WHICH SETS FORTH THE ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
SCOPE OF REVIEW UNDERTAKEN BY PAINEWEBBER IN RENDERING ITS OPINION,
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<PAGE>
IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED BY
REFERENCE. OLD STYLECLICK SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY
IN ITS ENTIRETY. THE PAINEWEBBER OPINION IS TO THE EFFECT THAT THE PROPOSED
CONSIDERATION TO BE RECEIVED BY THE SHAREHOLDERS OF OLD STYLECLICK IN THE
MERGER, TAKEN AS A WHOLE, IS FAIR TO THE SHAREHOLDERS FROM A FINANCIAL POINT OF
VIEW. THE PAINEWEBBER OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY OLD
STYLECLICK SHAREHOLDER AS TO HOW THE SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE
MERGER AGREEMENT.
In arriving at its opinion, PaineWebber, among other things:
- Reviewed Old Styleclick's Annual Reports on Form 10-K and the related
financial information for the two fiscal years ended December 31, 1998,
and Old Styleclick's Quarterly Reports on Form 10-Q and the related
unaudited financial information for the nine months ended September 30,
1999;
- Reviewed information, including financial forecasts and historical
financial statements, relating to the business and prospects of Old
Styleclick and Internet Shopping Network, furnished to PaineWebber by Old
Styleclick and Internet Shopping Network;
- Conducted discussions with members of senior management of Old Styleclick
and Internet Shopping Network concerning their respective businesses and
prospects;
- Reviewed the historical market prices and trading activity for the common
stock of Old Styleclick and compared them with that of publicly traded
companies which PaineWebber deemed to be relevant;
- Compared the financial position and results of operations of Old
Styleclick and Internet Shopping Network with that of companies which
PaineWebber deemed relevant;
- Compared the proposed financial terms of the transactions contemplated by
the merger agreement with the financial terms of other mergers and
acquisitions which PaineWebber deemed to be relevant;
- Reviewed a draft of the merger agreement, dated January 24, 2000;
- Reviewed a draft of the stockholders agreement among New Styleclick, USANi
Sub, USAi, Old Styleclick, Joyce Freedman, Lee Freedman and Maurizio
Vecchione, dated January 21, 2000;
- Reviewed a draft of the voting and waiver agreements among USANi Sub and
certain Investors and principal shareholders, dated January 22, 2000;
- Reviewed a draft of the waiver agreement between Spinner Asset Management
Co. and USANi Sub, dated January 24, 2000;
- Reviewed a draft of the credit agreement between Old Styleclick and USAi,
Inc., dated January 21, 2000;
- Reviewed a draft of the option agreement between Old Styleclick and USANi
Sub, dated January 19, 2000;
- Reviewed a draft of the media warrant agreement between USAi and New
Styleclick, dated January 21, 2000; and
- Reviewed other financial studies and analyses and performed other
investigations and took into account other matters as PaineWebber deemed
necessary, including its assessment of general economic, market and
monetary conditions.
In preparing its opinion, PaineWebber relied on the accuracy and
completeness of all information publicly available, supplied or otherwise
communicated or made available to PaineWebber by Old
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<PAGE>
Styleclick and Internet Shopping Network, and PaineWebber did not assume any
responsibility to independently verify such information. With respect to the
financial forecasts examined, PaineWebber assumed, with Old Styleclick's and
Internet Shopping Network's consent, that they were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the management of Old Styleclick and Internet Shopping Network, respectively, as
to the future performance of Old Styleclick and Internet Shopping Network,
respectively. PaineWebber also relied upon assurances of the management of Old
Styleclick and Internet Shopping Network, respectively, that they were unaware
of any facts that would make the information or financial forecasts provided to
PaineWebber incomplete or misleading. PaineWebber was not engaged to make, and
did not make, any independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Old Styleclick or Internet Shopping
Network nor was PaineWebber furnished with any such evaluations or appraisals.
PaineWebber assumed, with the consent of Old Styleclick, that:
- Internet Shopping Network will account for the merger under the purchase
method of accounting;
- The transactions will be tax-free transactions to Old Styleclick; and
- Any material liabilities (contingent or otherwise, known or unknown) of
Old Styleclick and Internet Shopping Network were as set forth in the
financial information provided by such entities.
PaineWebber's opinion is based upon economic, monetary and market conditions
existing on the date of the PaineWebber opinion. Furthermore, PaineWebber
expressed no opinion as to the price or trading range at which the securities to
be issued in the merger to the shareholders of Old Styleclick may trade at any
time.
PaineWebber's opinion does not address the relative merits of the merger and
any other transactions or business strategies that may have been discussed by
the Old Styleclick Board of Directors as alternatives to the merger, or the
decision of the Old Styleclick Board of Directors to proceed with the merger.
Old Styleclick did not place any limitations upon PaineWebber with respect to
the procedures followed or factors considered in rendering its opinion.
The following is a summary of the significant financial analyses performed
by PaineWebber in connection with providing its written opinion to the Old
Styleclick Board of Directors on January 24, 2000. In performing the various
financial analyses, PaineWebber valued the combined company assuming
consummation of the transactions contemplated by the merger agreement. This
summary includes information presented in tabular format and the tables should
be read together with the text of each summary.
CONTRIBUTION ANALYSIS
PaineWebber observed that, after giving effect to the issuance of New
Styleclick common stock in the merger, USANi Sub (including its affiliates) and
the shareholders of Old Styleclick would receive 75.0% and 25.0%, respectively,
of New Styleclick's common stock on a primary basis and 75.6% and 24.4%,
respectively, of New Styleclick's common stock on a fully diluted basis.
PaineWebber analyzed the relative revenue contributions of Old Styleclick and
observed that for fiscal years 1999, 2000, 2001
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<PAGE>
and 2002, Old Styleclick would contribute 9.5%, 16.6%, 16.8% and 12.2%,
respectively, of the combined entity's total revenues, excluding synergies, and
9.5%, 15.6%, 14.2% and 8.8%, respectively, of the combined entity's total
revenues, including synergies.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 2000 2001 2002
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Old Styleclick Revenue Contribution (excl.
synergies).................................. 9.5% 16.6% 16.8% 12.2%
Old Styleclick Revenue Contribution (incl.
synergies).................................. 9.5% 15.6% 14.2% 8.8%
</TABLE>
PRO FORMA ANALYSIS
PaineWebber analyzed pro forma effects to revenue per share, cash earnings
per share and earnings per share for fiscal years 2000 through 2002 using
forecasts prepared by Internet Shopping Network and Old Styleclick management
that included synergies. In addition, PaineWebber analyzed pro forma revenue per
share, cash earnings per share and earnings per share projected by Internet
Shopping Network and Old Styleclick management without giving any effect to
synergies. The analysis indicated that the merger would be accretive on a pro
forma basis in all cases for 2000, 2001 and 2002 except for fiscal years 2001
and 2002 earnings per share under the no-synergy scenario and fiscal year 2002
earnings per share under the synergy scenario.
PREMIUM ANALYSIS
PaineWebber compared the implied premium of the offer as of January 24, 2000
to similar premiums for six completed public company electronic commerce
transactions announced on or after January 1, 1998, 34 completed or pending
Internet transactions with transaction values greater than or equal to $35
million that were announced on or after January 1, 1998, and 526 acquisitions of
a majority interest in non-financial, domestic and completed transactions with
values greater than $50 million announced on or after January 1, 1998.
PaineWebber compared the median premiums paid for these three groups of
transactions to the implied premium paid to Old Styleclick's stock price on
January 24, 2000 and the implied premium to the unaffected stock price on
October 13, 1999. The date selected for the unaffected stock price was one day
prior to the date of Internet Shopping Network's initial overture regarding a
merger between Old Styleclick and Internet Shopping Network.
<TABLE>
<CAPTION>
ONE DAY ONE WEEK FOUR WEEKS
PRIOR TO PRIOR TO PRIOR TO
ANALYSIS ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT
-------- ------------- ------------ ------------
<S> <C> <C> <C>
Comparable Public Electronic Commerce
Transactions...................................... 24.5% 29.2% 69.6%
Internet Transactions............................... 23.8% 30.8% 56.1%
All Transactions.................................... 25.6% 33.3% 39.8%
</TABLE>
<TABLE>
<CAPTION>
FOUR WEEKS
ONE DAY PRIOR ONE WEEK PRIOR PRIOR
------------------- ------------------- -------------------
ANALYSIS LOW HIGH LOW HIGH LOW HIGH
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Implied Premium to Old Styleclick stock price on
January 24, 2000................................. (18.5)% (1.6)% 0.0% 20.7% 23.5% 49.1%
Implied Premium to Old Styleclick stock price on
October 13, 1999................................. 105.1% 147.6% 116.1% 160.8% 68.1% 102.9%
</TABLE>
25
<PAGE>
VALUATION ANALYSIS OF INTERNET SHOPPING NETWORK CONTRIBUTED ASSETS
In addition to the above analyses pertaining to Old Styleclick, PaineWebber
presented to the Old Styleclick Board of Directors the financial analyses
described below regarding the assets of Internet Shopping Network.
ANALYSIS OF PUBLICLY TRADED COMPANIES COMPARABLE TO INTERNET SHOPPING NETWORK
Using PaineWebber research and published Wall Street estimates, PaineWebber
compared, among other things, the equity values, revenues for the last quarter
annualized and projected revenues for calendar years 1999, 2000 and 2001 of
companies PaineWebber considered comparable to Internet Shopping Network.
PaineWebber determined that the following companies were comparable to Internet
Shopping Network.
Alloy Online, Inc.
Amazon.com, Inc.
Ashford.com, Inc.
Barnesandnoble.com, Inc.
Bluefly, Inc.
CDnow, Inc.
Cyberian Outpost, Inc.
Drugstore.com, Inc.
Egghead.com, Inc.
eToys, Inc.
Fashionmall.com, Inc.
ftd.com, Inc.
Garden.com, Inc.
iTurf, Inc.
PlanetRx, Inc.
ShopNow.com, Inc.
Value America, Inc.
VitaminShoppe.com, Inc.
Multiples of equity value represent the market value of a particular
company's equity as a measure of certain identified operating statistics. The
relevant operating statistic in the case of Internet Shopping Network and the
comparable companies is revenue. PaineWebber determined average revenue
multiples for the companies considered comparable to Internet Shopping Network
and applied these multiples to projected calendar year 1999, 2000 and 2001
revenues supplied by Internet Shopping Network management. Based on the
foregoing, PaineWebber determined a range of implied equity values of Internet
Shopping Network of $268.5 million to $385.4 million.
Because of the inherent differences between the product and service
offerings and operations of Internet Shopping Network and the comparable
companies, PaineWebber believed that a purely quantitative analysis would be
insufficient and not adequately reliable to render a fairness opinion. As
PaineWebber informed the Old Styleclick Board of Directors, an appropriate use
of comparable company analysis in this instance would involve qualitative
judgements concerning differences between the financial and operating
characteristics which would affect the public trading values of the comparable
companies.
ANALYSIS OF COMPARABLE PUBLIC E-COMMERCE ACQUISITIONS
PaineWebber reviewed and analyzed the publicly available financial terms of
six selected acquisition transactions comparable to the proposed merger, and
compared the financial terms of such transactions to those of the proposed
transaction.
PaineWebber noted that none of the comparable transactions were identical to
the proposed transaction and that, accordingly, any analysis of the comparable
public electronic commerce acquisitions necessarily involved complex
considerations and judgements concerning the differences in financial and
operating characteristics and other factors that would necessarily affect the
acquisition values.
PaineWebber reviewed the prices paid in such transactions and analyzed
various operating and financial information and imputed valuation multiples and
ratios. Specifically, PaineWebber reviewed
26
<PAGE>
the target's equity value as a multiple of last quarter annualized, one-year and
two-year forward revenues at the time of the announcement of each transaction.
PaineWebber's analysis of the comparable public electronic commerce acquisitions
was inconclusive and was therefore not included in its valuation.
OTHER ANALYSES
PaineWebber conducted other analyses it deemed necessary, including
reviewing historical and projected financial and operating data for Old
Styleclick and Internet Shopping Network and selected investment research
reports on Old Styleclick, including information pertaining to the estimated
revenues for Old Styleclick. PaineWebber also assessed future acquisition and
growth opportunities for Internet Shopping Network and Old Styleclick.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Accordingly, PaineWebber believes that its analysis must be
considered as a whole and that considering any portion of such analysis and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the PaineWebber
opinion. In its analysis, PaineWebber made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond control of Old Styleclick and Internet
Shopping Network. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses can be actually sold. Accordingly,
such analyses and estimates are inherently subject to substantial uncertainty
and neither PaineWebber, Old Styleclick nor Internet Shopping Network assume
responsibility for the accuracy of such analyses and estimates.
FEE ARRANGEMENTS
Pursuant to an engagement letter between Old Styleclick and PaineWebber
dated December 21, 1999, PaineWebber earned a fee of $450,000 for rendering the
opinion and will also be reimbursed for certain of its related expenses.
PaineWebber's compensation for its services in rendering the opinion was not
contingent upon the results of the opinion. Old Styleclick also agreed, under a
separate agreement, to indemnify PaineWebber, its affiliates and each of its
directors, officers, agents and employees and each person, if any, controlling
PaineWebber or any of its affiliates against certain liabilities, including
liabilities under the federal securities laws.
In the past, PaineWebber and/or its affiliates have provided investment
banking and other financial services to Old Styleclick and have received fees
for rendering these services. PaineWebber currently holds warrants to purchase
7,768 shares of common stock of Old Styleclick which it received for acting as
placement agent for Old Styleclick in connection with an April 1999 private
placement of Old Styleclick common stock to certain investors. PaineWebber may
receive additional warrants and additional fees if some of those investors
exercise warrants that they currently hold that were issued in the private
placement. PaineWebber, Old Styleclick and USANi Sub have entered into an
agreement whereby PaineWebber has waived certain of its rights as a warrant
holder in order to permit the proposed transactions to proceed.
In the ordinary course of business, PaineWebber and its affiliates may trade
the securities of Old Styleclick for their own accounts and for the accounts of
their customers and, accordingly, may at any time hold long or short positions
in such securities.
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OPINION OF ING BARINGS--FINANCIAL ADVISOR TO OLD STYLECLICK
At the January 24, 2000 meeting of Old Styleclick's Board of Directors, ING
Barings delivered an opinion that the consideration to be received by the
holders of common stock of Old Styleclick in the proposed transactions was fair,
from a financial point of view, to the holders. Although the form of the
proposed transaction has been amended, in part, from a contribution of units in
Internet Shopping Network to a merger, ING Barings has concluded that the change
in form was not material to its opinion and has consequently issued its opinion
reflecting the transaction in its current proposed structure including a merger
between Internet Shopping Network and a subsidiary of New Styleclick. On
March 21, 2000, ING Barings delivered a revised fairness opinion to the Old
Styleclick Board of Directors reflecting the current proposed structure.
The full text of the opinion of ING Barings, which sets forth the
assumptions made, matters considered and qualifications and limitations on the
reviews undertaken by ING Barings, is attached as Annex B to this proxy
statement/prospectus and is incorporated by reference. Old Styleclick
shareholders are urged to read carefully the opinion in its entirety.
In conducting its analysis and arriving at its opinion, ING Barings reviewed
and analyzed, among other things, the following:
- draft forms of the merger agreement, including the exhibits, and the
credit agreement, including the exhibits, both dated January 21, 2000, and
other documents relating to the proposed transactions;
- Old Styleclick's Annual Reports on Form 10-K for each of the fiscal years
in the two year period ended December 31, 1998, Old Styleclick's Quarterly
Reports on Form 10-Q for the quarters ended March 31, June 30 and
September 30, 1998 and 1999, and Old Styleclick's Form 8-K's dated March
26, 1999, April 9, 1999, April 14, 1999, April 20, 1999, July 2, 1999, and
July 19, 1999;
- other publicly available information concerning Old Styleclick and the
trading market for the common stock of Old Styleclick;
- internal information and other data relating to Old Styleclick, its
business and prospects, including financial forecasts and projections,
provided to ING Barings by management of Old Styleclick;
- non-public information and other data relating to the business and
prospects of Internet Shopping Network, including historical financial
statements and financial projections, provided to ING Barings by
management of Internet Shopping Network;
- publicly available financial data, stock market performance data and
valuation parameters of companies which ING Barings deemed generally
comparable to Old Styleclick, to the businesses of Internet Shopping
Network and to the combined company on a pro-forma basis giving effect to
the merger; and
- the financial terms of certain recent business combinations involving
Internet companies which ING Barings believed to be relevant.
ING Barings also met with certain officers and employees of Old Styleclick
and Internet Shopping Network concerning their businesses and operations,
assets, present conditions and prospects and undertook such other studies,
analyses and investigations as ING Barings deemed appropriate.
In arriving at its opinion, ING Barings assumed and relied upon the accuracy
and completeness of the financial and other information used by ING Barings and
it did not attempt independently to verify the information, nor did it assume
any responsibility to do so. With respect to the projected financial results
provided to them, ING Barings assumed that they had been reasonably prepared
based on the
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best current estimates and judgment of the senior management of Old Styleclick
and Internet Shopping Network as to the expected future financial condition and
results of operations of Old Styleclick and Internet Shopping Network. ING
Barings also assumed that the business plan of New Styleclick, as presented to
them by the management of Old Styleclick and Internet Shopping Network, is based
on reasonable assumptions and is reasonably obtainable under current and
reasonably foreseeable market conditions. ING Barings visited but did not
conduct a physical inspection of the properties and facilities of Old Styleclick
or Internet Shopping Network, nor did ING Barings make or obtain any independent
evaluation or appraisal of such properties, facilities or liabilities. ING
Barings also took into account its assessment of general economic, market and
financial conditions and its experience in similar transactions, as well as its
experience in the valuation of securities and business in general. ING Barings'
opinion necessarily is based upon economic, market, financial and other
conditions as they exist and can be evaluated on the date of such opinion and
ING Barings assumed no responsibility to update or revise its opinion based upon
events or circumstances occurring after the date of the opinion.
The opinion of ING Barings is directed to the Board of Directors of Old
Styleclick. The opinion does not address Old Styleclick's underlying business
decision to approve the proposed transactions or constitute a recommendation to
the shareholders of Old Styleclick as to how such shareholders should vote or as
to any other action such shareholders should take regarding the proposed
transactions. Furthermore, ING Barings recognized that the market prices for
Internet related companies such as Old Styleclick and, on a proforma basis, New
Styleclick, have been the subject of significant speculation and movement in
recent months and the opinion was not intended to nor does it predict or
otherwise guarantee the trading price of Old Styleclick or New Styleclick
following the announcement of or consummation of the proposed transactions. ING
Barings was requested to prepare its opinion in connection with the proposed
transactions and was directed not to, and did not, seek or pursue alternative
transactions to the proposed transactions, including the possible sale of Old
Styleclick as a whole.
In connection with preparing and rendering the opinion, ING Barings
performed a variety of valuation, financial and comparative analyses. The
summary of the analyses, as set forth below, is not a complete description of
the analyses underlying the ING Barings opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to summary
description. ING Barings believes that its analyses must be considered as a
whole, and that selecting portions of its analyses and the factors considered by
it, without considering all the factors and analyses, could create an incomplete
view of the processes underlying the opinion. Moreover, the estimates contained
in the analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable than
those suggested by the analyses. In addition, analyses relating to the value of
the businesses or securities do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Accordingly, the estimates are inherently subject to substantial uncertainties.
The following is a summary of the material valuation, financial and
comparative analyses considered by ING Barings in arriving at its opinion. Such
summary is not a complete description of the analyses underlying the ING Barings
opinion and is qualified in its entirety by reference to the full text of the
ING Barings opinion, but does summarize the material analyses considered by ING
Barings in rendering its opinion.
OLD STYLECLICK "HAS-GETS" ANALYSIS
Based on projections provided by management of Old Styleclick and Internet
Shopping Network, ING Barings conducted a "Has-Gets" analysis of the impact of
the proposed transactions on the shareholders of Old Styleclick. A "Has-Gets"
analysis is a comparison of what shareholders of Old Styleclick have prior to
the consummation of the proposed transactions in terms of financial ratios (and
thus would have absent consummation of such proposed transactions) to what such
shareholders will
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get upon consummation of the proposed transactions. Such financial ratios
included fully-diluted revenues per share, loss per share before goodwill
amortization, cash and cash equivalents per share and tangible book value per
share. The proforma financial projections provided by the management of Old
Styleclick and Internet Shopping Network did not take into account goodwill
amortization or other merger adjustments in accordance with GAAP. Therefore of
the financial ratios below are not in accordance with GAAP. This analysis
indicated that:
- fully-diluted revenues per share was estimated to increase in 1999 from
$0.21 per share for Old Styleclick to $0.54 per share for New Styleclick,
and in 2000 from $0.82 per share for Old Styleclick to $1.31 per share for
New Styleclick;
- loss per share before goodwill amortization was estimated to decrease in
1999 from $(2.79) per share for Old Styleclick to $(2.00) per share for
New Styleclick, and in 2000 from $(2.86) per share for Old Styleclick to
$(1.48) per share for New Styleclick;
- cash and cash equivalents per share was estimated to increase as of
September 30, 1999, from $0.58 per share for Old Styleclick to $1.89 per
share for New Styleclick; and
- tangible book value per share was estimated to increase as of September
30, 1999, from $6.08 per share for Old Styleclick to $6.41 per share for
New Styleclick.
COMPARABLE PUBLIC COMPANY ANALYSIS
ING Barings compared operating, financial, trading and valuation information
for the operations of New Styleclick to publicly available operating, financial,
trading and valuation information for nine selected companies, comprised of
retail electronic commerce, Internet services, electronic commerce graphic
providers, jewelry and business-to-consumer online auction companies, which in
ING Barings' judgement, were comparable to the operations of New Styleclick. A
comparable company analysis estimates a stock market trading value for a company
based on its operating performance and outlook relative to a group of
publicly-traded comparable companies and their stock market valuation and
corresponding multiples. As is industry practice in Internet related companies,
ING Barings used enterprise value, calculated as a multiple of calendar year
1999, 2000 and 2001 projected revenues, as the appropriate valuation measure.
The companies included:
<TABLE>
<CAPTION>
E-TAILING INTERNET SERVICES ELECTRONIC COMMERCE GRAPHIC PROVIDERS
- --------- ----------------- -------------------------------------
<S> <C> <C>
Fashionmall.com Modem Media Poppe Tyson Metacreations
Iturf Razorfish
Cybershop.com
</TABLE>
<TABLE>
<CAPTION>
JEWELRY E-TAILING BUSINESS-TO CONSUMER ONLINE AUCTION
- ----------------- -----------------------------------
<S> <C>
Ashford Ubid
OnSale
</TABLE>
ING Barings noted that none of the comparable companies listed above were
exactly identical to the corresponding constituent of Old Styleclick or New
Styleclick and that, accordingly, any analysis of comparable companies
necessarily involved complex considerations and judgements concerning
differences in financial and operating characteristics and other factors that
would necessarily affect the
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<PAGE>
relative trading and acquisition values. Based on such analysis, ING Barings
arrived at the following valuation for New Styleclick:
<TABLE>
<CAPTION>
NEW STYLECLICK
VALUATION RANGE
-------------------------------
<S> <C>
Implied Equity Value (fully diluted)................ $583.0-$698.0 million
Implied Equity Value per Share (fully diluted)...... $11.54-$13.81 per Share
</TABLE>
ING Barings noted that this valuation range represented a 34.1% to 21.1%
discount to Old Styleclick's stock price one day prior to announcement of the
proposed transaction, a 23.7% to 8.7% discount to Old Styleclick's stock price
one week prior to announcement of the proposed transaction, and a 34.1% discount
to a 12.8% premium to Old Styleclick's stock price four weeks prior to
announcement of the proposed transaction.
COMPARABLE M&A TRANSACTION ANALYSIS
ING Barings reviewed and analyzed the publicly available financial terms of
six selected acquisition transactions in the Internet sector which, in ING
Barings' judgement, were reasonably comparable to the proposed transactions, and
compared the financial terms of such transactions to those of the proposed
transactions. A comparable acquisition analysis provides a valuation range based
upon financial information of companies which have been acquired in selected
recent acquisitions and which are in the similar industries as the business
being evaluated. The six transactions included:
- Excite@Home's acquisition of iMall
- CDNow's acquisition of N2K
- Yahoo's acquisition of Broadcast.com
- America Online's acquisition of MovieFone
- America Online's acquisition of Netscape
- @Home's acquisition of Excite
ING Barings reviewed the prices paid in these transactions and analyzed
various operating and financial information and imputed valuation multiples and
ratios. Specifically, ING Barings reviewed for each transaction the target
company's enterprise value calculated as a multiple of last twelve months and
one-year forward revenues at the time of the announcement of each transaction.
ING Barings also looked at the implied premium one week and four weeks prior to
the announcement date that was paid to the shareholders of the target company.
ING Barings concluded that none of the target companies listed above were
directly comparable to Old Styleclick and therefore such merger and acquisition
transactions were not directly used to evaluate the fairness of the proposed
transactions.
FEE ARRANGEMENTS
Pursuant to an engagement letter between Old Styleclick and ING Barings
dated December 21, 1999, ING Barings earned a fee of $450,000 for rendering the
opinion and will also be reimbursed for certain related expenses. ING Barings'
compensation for its services in rendering the opinion was not contingent upon
the results of the opinion. Old Styleclick also agreed, under a separate
agreement, to indemnify ING Barings, its affiliates and each of its directors,
officers, agents and employees and each person, if any, controlling ING Barings
or any of its affiliates against certain liabilities, including liabilities
under the federal securities laws.
In the past, ING Barings and/or its affiliates have provided investment
banking and other financial services to Old Styleclick and have received fees
for rendering these services. ING Barings currently
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holds warrants to purchase 7,768 shares of common stock of Old Styleclick which
it received for acting as placement agent for Old Styleclick in connection with
an April 1999 private placement of Old Styleclick common stock to certain
investors. ING Barings may receive additional warrants and additional fees if
some of those investors exercise warrants that they currently hold that were
issued in the private placement. ING Barings and USANi Sub have entered into an
agreement whereby ING Barings has waived certain of its rights as a warrant
holder in order to permit the proposed transactions to proceed.
In the ordinary course of business, ING Barings and its affiliates may trade
the securities of Old Styleclick for their own accounts and for the accounts of
their customers and, accordingly, may at any time hold long or short positions
in such securities.
GOVERNMENTAL AND REGULATORY MATTERS
Filings with, notifications to and authorizations and approvals of various
governmental agencies with respect to the transactions contemplated by the
merger agreement must be made and received prior to the closing of the merger.
The closing of the merger is conditioned upon the expiration or termination
of the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. Early termination of the applicable
waiting period was granted on March 10, 2000.
At any time before or after the closing time of the merger, the FTC or the
Department of Justice may take action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to stop the
closing of the merger or ordering the sale of assets of New Styleclick or Old
Styleclick. Similarly, at any time before or after the closing of the merger,
any state could take any action under the antitrust laws as it deems necessary
or desirable in the public interest.
The respective obligations of Old Styleclick, Internet Shopping Network and
USANi Sub to close the merger are subject to the condition that no court or
other governmental entity having jurisdiction over Old Styleclick, Internet
Shopping Network, USANi Sub or any of their respective subsidiaries enters any
injunction or other order, whether temporary, preliminary or permanent, which
restrains, enjoins or otherwise prohibits the closing of the merger. See "The
Merger Agreement--Conditions Precedent to the Merger."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
TAX OPINION. Upon execution of the merger agreement, Old Styleclick
received an opinion from its counsel, Coudert Brothers, and USANi Sub received
an opinion from its counsel, Paul, Weiss, Rifkind, Wharton & Garrison, to the
effect that, for U.S. federal income tax purposes, the merger will qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code, and
that each of Old Styleclick, New Styleclick and USANi Sub will be a party to the
tax-free reorganization within the meaning of Section 368(b) of the Internal
Revenue Code. Closing of the merger is conditioned upon nothing occurring that
would prevent each counsel from delivering an opinion to the same effect at the
closing of the merger.
CONSEQUENCES OF REORGANIZATION STATUS. If the merger constitutes a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, and New Styleclick, Old Styleclick, Internet Shopping Network and the
merger subsidiaries are each a party to the reorganization within the meaning of
Section 368(b) of the Internal Revenue Code, then for U.S. federal income tax
purposes:
- no gain or loss will be recognized by Old Styleclick shareholders or
Internet Shopping Network unitholders except with respect to any cash
received for fractional share interests;
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- the tax basis of Old Styleclick shareholders and Internet Shopping Network
unitholders in the shares of New Styleclick common stock received in the
merger will be equal to their tax basis in the shares of Old Styleclick
common stock or Internet Shopping Network limited liability company units
exchanged therefor;
- for purposes of determining whether gain or loss on the subsequent
disposition of New Styleclick common stock received in the merger is
long-term or short-term, the holding period of New Styleclick common stock
received by Old Styleclick shareholders and Internet Shopping Network
unitholders will include the holding period of the shares of Old
Styleclick common stock or limited liability company units exchanged, if
the shares of Old Styleclick common stock or limited liability company
units were held as a capital asset. Individual long-term capital gains,
i.e. gains derived in respect of capital assets held for more than one
year, are eligible for reduced rates of taxation;
- no gain or loss will be recognized by New Styleclick, Old Styleclick,
Internet Shopping Network or the merger subsidiaries as a result of the
merger.
You will be required to retain records and file a statement setting forth
certain facts relating to the merger with your U.S. federal income tax returns.
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local or other tax laws.
THE OPINIONS OF COUDERT BROTHERS AND PAUL, WEISS, RIFKIND, WHARTON &
GARRISON ARE NOT BINDING ON THE INTERNAL REVENUE SERVICE. BECAUSE OF THE
COMPLEXITY OF THE TAX LAWS, AND BECAUSE THE TAX CONSEQUENCES OF THE MERGER TO
YOU MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, YOU ARE URGED TO CONSULT
YOUR OWN TAX ADVISOR WITH RESPECT TO YOUR OWN PARTICULAR CIRCUMSTANCES,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS,
ESTATE TAX LAW AND PROPOSED CHANGES IN APPLICABLE TAX LAWS.
ANTICIPATED ACCOUNTING TREATMENT
The merger will be accounted for under the purchase method of accounting,
with Internet Shopping Network treated as the acquiring entity for accounting
purposes. For purposes of preparing New Styleclick's consolidated financial
statements, New Styleclick will establish a new accounting basis for Old
Styleclick's assets acquired and liabilities assumed based upon their fair
market values.
LIMITED APPRAISAL RIGHTS FOR OLD STYLECLICK SHAREHOLDERS
The following is a summary of the statutory procedure to be followed by a
dissenting shareholder of Old Styleclick in order to exercise his, her or its
dissenters' appraisal rights under Chapter 13 of the California Corporations
Code (CCC). This summary is not a complete statement of the law relating to
dissenters' appraisal rights and is qualified in its entirety by reference to
the full text of Chapter 13 of the CCC and any other relevant provisions of
California law. THIS DISCUSSION AND CHAPTER 13 OF THE CCC SHOULD BE REVIEWED
CAREFULLY BY ANY OLD STYLECLICK SHAREHOLDER WHO WISHES TO EXERCISE STATUTORY
DISSENTERS' APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, SINCE
FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE CCC WILL
RESULT IN THE LOSS OR WAIVER OF DISSENTERS' APPRAISAL RIGHTS.
UNDER CALIFORNIA LAW, YOU ARE ONLY ENTITLED TO DISSENT FROM THE MERGER AND
SEEK THE FAIR VALUE OF YOUR OLD STYLECLICK COMMON STOCK IF YOU VOTED AGAINST THE
MERGER AND DEMANDS FOR APPRAISAL ARE FILED ON OR BEFORE THE MEETING WITH RESPECT
TO 5% OR MORE OF THE OUTSTANDING OLD STYLECLICK COMMON STOCK.
If the merger is approved by the holders of a majority of Old Styleclick's
outstanding common stock and 5% or more holders filed demands for appraisal on
or before the special meeting, each Old
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Styleclick shareholder who voted against the merger and who follows the
procedures set forth in Chapter 13 of the CCC will be entitled to exercise
dissenters' appraisal rights under the CCC and thereby require Old Styleclick to
purchase its shares for cash at fair market value. Any Old Styleclick shares as
to which dissenters' appraisal rights are exercised will not be converted into
the right to receive shares of New Styleclick Class A common stock but instead
will be converted into the right to receive the fair market value of Old
Styleclick shares. The fair value of the shares will be determined as of the
date before the first announcement of the terms of the proposed merger,
excluding any appreciation or depreciation in consequence of the proposed merger
but adjusted for any stock split, reverse stock split or stock dividend that
becomes effective thereafter.
Shares of Old Styleclick common stock must satisfy each of the following
requirements to qualify as dissenting shares under California law:
- the shares of Old Styleclick common stock must have been outstanding on
the record date;
- the shares of Old Styleclick common stock must have been voted against the
merger;
- the holder of the shares of Old Styleclick common stock must make a
written demand that Old Styleclick repurchase the shares of Old Styleclick
common stock at fair market value which must be received by Old Styleclick
before the special meeting; and
- the holder of the shares of Old Styleclick common stock must submit the
share certificates for endorsement.
Within 10 days after the date of the approval of the merger, Old Styleclick
must mail a notice of the approval of the merger to each shareholder who holds
dissenting shares, together with a statement of the price determined by Old
Styleclick to represent the fair market value of Old Styleclick shares, a brief
description of the procedure to be followed in order for the shareholder to
pursue dissenters' appraisal rights, and a copy of Sections 1300 to 1304 of
Chapter 13 of the CCC. The statement of price by Old Styleclick constitutes an
offer by Old Styleclick to purchase all properly dissenting shares at the stated
amount.
In order to exercise rights as a dissenting shareholder, within 30 days
after the date on which notice of the approval of the merger is mailed to
dissenting shareholders, Old Styleclick must receive a dissenting shareholder's
written demand that Old Styleclick repurchase such shareholder's dissenting
shares. This demand must set forth the number and class of dissenting shares
held of record by such shareholder that the shareholder demands that Old
Styleclick purchase and a statement of what the shareholder claims to be the
fair market value of the dissenting shares as of the day before the announcement
of the proposed merger. The statement of fair market value set forth in demand
by the dissenting shareholder constitutes an offer by the shareholder to sell
the dissenting shares at such price to Old Styleclick. The dissenting
shareholder must also submit to Old Styleclick, within 30 days after the date on
which notice of the approval of the merger was mailed to shareholders, share
certificates representing any dissenting shares that the shareholder demands
that Old Styleclick purchase, so that these dissenting shares may be either
endorsed with the statement that they are dissenting shares or exchanged for
certificates stamped with a similar endorsement.
If the shareholder and Old Styleclick agree that the shares qualify as
dissenting shares and agree upon the price of the shares, the shareholder will
be entitled to the agreed upon price plus the legal rate of interest on
judgments from the date of the agreement. This amount is to be paid to the
shareholder within the later of 30 days after the date of the agreement or 30
days after any statutory or contractual conditions to the closing of the merger
are satisfied or waived upon the shareholder's surrender of certificates
representing the dissenting shares to Old Styleclick.
If the shareholder and Old Styleclick fail to agree upon the fair market
value of the dissenting shares or whether the shares qualify as dissenting
shares, the shareholder may file a complaint in
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California superior court within six months after the date on which notice of
the approval of the merger is mailed requesting that the court determine the
fair market value of the dissenting shares and/ or whether the shares qualify as
dissenting shares. California law provides that a shareholder may not withdraw
the demand for payment of the fair market value of dissenting shares unless Old
Styleclick consents to such request for withdrawal.
Under the provisions of Section 500 and Section 1306 of the CCC, a
California corporation is legally prohibited from purchasing shares of stock
through the payment of cash or other property, even if all dissenters' appraisal
rights conditions are fulfilled, unless the corporation satisfies specified
financial conditions. Due to these legal restrictions, Old Styleclick may not
legally be able to repurchase all or any dissenting shares for cash following
the merger.
To the extent that the provisions of the CCC prohibit cash payments to
holders of dissenting shares, the dissenting shareholders will become creditors
of Old Styleclick for an amount equal to the fair market value of their shares
plus accrued interest until the date of payment. The rights of the dissenting
shareholders, however, will be subordinate to the rights of all other creditors
of Old Styleclick in any liquidation proceeding.
Dissenting shareholders considering seeking appraisal should be aware that
the fair market value of their shares of common stock, as determined under
Chapter 13 of the CCC, could be more than, the same as or less than the value of
the consideration they would receive pursuant to the merger agreement. The costs
and expenses of the appraisal proceeding will be determined by the court and
assessed against Old Styleclick. However, if a court determines that the
dissenting shareholder did not act in good faith in demanding payment, the court
may assess the costs and expenses against the dissenting shareholder.
If any Old Styleclick shareholder who demands the purchase of his, her or
its shares under Chapter 13 of the CCC fails to perfect, or effectively
withdraws or loses his, her or its right to the purchase, the shares of the
holder will be converted into a right to receive the merger consideration.
Dissenting shares lose their status as dissenting shares and the holders of
dissenting shares cease to be dissenting shareholders and cease to be entitled
to require Old Styleclick to purchase their shares if:
- the merger is abandoned;
- the shares are transferred prior to their submission for the required
endorsement;
- the dissenting shareholder and Old Styleclick do not agree upon the status
of the shares as dissenting shares or do not agree on the purchase price,
but neither Old Styleclick nor the shareholder files a complaint or
intervenes in a pending action within six months after the mailing of the
notice of approval of the merger; or
- with Old Styleclick's consent, the shareholder delivers to New Styleclick
a written withdrawal of such shareholder's demand for purchase of his, her
or its shares.
Except as expressly limited by provisions of California law pertaining to
dissenters' rights, holders of dissenting shares continue to have all the rights
and privileges incident to their shares until the fair market value of their
shares is agreed upon or determined.
FAILURE TO FOLLOW THE STEPS REQUIRED BY CHAPTER 13 OF THE CCC FOR PERFECTING
DISSENTERS' APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS, IN WHICH
EVENT A SHAREHOLDER WILL BE ENTITLED TO RECEIVE THE MERGER CONSIDERATION WITH
RESPECT TO THE DISSENTING SHARES IN ACCORDANCE WITH THE MERGER AGREEMENT. IN
VIEW OF THE COMPLEXITY OF THE PROVISIONS OF CHAPTER 13, OLD STYLECLICK
SHAREHOLDERS WHO ARE CONSIDERING OBJECTING TO THE MERGER SHOULD CONSULT THEIR
OWN LEGAL ADVISORS.
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LISTING OF NEW STYLECLICK COMMON STOCK
It is a condition to closing of the merger that the Class A common stock of
New Styleclick be authorized for quotation on the Nasdaq National Market or any
other national securities exchange or automated quotation system approved by Old
Styleclick, Internet Shopping Network and USANi Sub. New Styleclick has applied
to have its Class A common stock listed on the Nasdaq National Market.
DELISTING AND DEREGISTRATION OF OLD STYLECLICK COMMON STOCK
If the merger is completed, Old Styleclick common stock will be delisted
from the Nasdaq National Market and will be deregistered under the Securities
Exchange Act of 1934 prior to the closing of the merger.
RESALES OF NEW STYLECLICK COMMON STOCK
New Styleclick Class A common stock to be issued under the merger agreement
will be registered under the Securities Act. This registration allows these
shares to be freely traded without restriction by all former Old Styleclick
shareholders and Internet Shopping Network unitholders who are not "affiliates"
of Old Styleclick or Internet Shopping Network, respectively, at the time that
the shareholders or unitholders approve the merger and who do not become
"affiliates" of New Styleclick after the merger. Persons who may be deemed to be
affiliates of New Styleclick, Old Styleclick or Internet Shopping Network
generally include individuals or entities that control, are controlled by, or
are under common control with, New Styleclick, Old Styleclick or Internet
Shopping Network and may include officers and directors of New Styleclick, Old
Styleclick and Internet Shopping Network, as well as significant shareholders.
Shares of New Styleclick Class A common stock received by those Old
Styleclick shareholders or Internet Shopping Network unitholders who are deemed
to be affiliates of Old Styleclick or Internet Shopping Network may be resold
without registration under the Securities Act only as permitted by Rule 145
under the Securities Act or as otherwise permitted under the Securities Act.
This proxy statement/prospectus does not cover resales of New Styleclick
Class A common stock received by any person who may be deemed to be an affiliate
of New Styleclick, Old Styleclick or Internet Shopping Network.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains "forward-looking statements" within
the meaning of the securities laws. New Styleclick has based these
forward-looking statements on its current expectations and projections about
future events, based on the information currently available to it. These
forward-looking statements are principally contained in the sections "Risk
Factors," the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" sections for New Styleclick, Old Styleclick and Internet
Shopping Network and the "Business" sections for New Styleclick, Old Styleclick
and Internet Shopping Network. The forward-looking statements include, among
other things, statements relating to New Styleclick's anticipated financial
performance, business prospects, new developments, new strategies and similar
matters.
These forward-looking statements are subject to risks, uncertainties and
assumptions, that may affect the operations, performance, development and
results of New Styleclick's business and include, but are not limited to, the
risk factors described under the section "Risk Factors" in this prospectus and
the following:
- material adverse changes in economic conditions in New Styleclick's
markets;
- future regulatory actions and conditions in New Styleclick's operating
areas;
- competition from others;
- successful integration of New Styleclick's management and structure;
- product demand and market acceptance;
- the ability to protect proprietary information and technology or to obtain
necessary licenses on commercially reasonable terms; and
- obtaining and retaining key executives and employees.
37
<PAGE>
NEW STYLECLICK
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the merger of Internet Shopping Network and
Old Styleclick with separate wholly-owned subsidiaries of New Styleclick.
Internet Shopping Network will be treated as the acquiring entity for accounting
purposes, and the assets and liabilities of Old Styleclick will be recorded at
their respective fair values under the purchase method of accounting.
The unaudited pro forma combined condensed financial statements reflect
certain assumptions regarding the proposed transaction and are based on the
historical financial statements of Internet Shopping Network and Old Styleclick.
The combined condensed financial statements, including the notes accompanying
them, are qualified in their entirety by reference to, and should be read in
conjunction with, the audited financial statements of Internet Shopping Network
and Old Styleclick, including the notes accompanying them, which are included
elsewhere in this proxy statement/prospectus.
The unaudited pro forma combined condensed balance sheet as March 31, 2000
gives effect to the merger of Internet Shopping Network and Old Styleclick with
separate wholly-owned subsidiaries of New Styleclick as if the merger had
occurred on March 31, 2000.
The unaudited pro forma combined condensed statement of operations for the
three months ended March 31, 2000 and the year ended December 31, 1999 gives
effect to the merger of Internet Shopping Network and Old Styleclick with
separate wholly-owned subsidiaries of New Styleclick as if the merger had
occurred on January 1, 1999.
New Styleclick is in the process of evaluating the fair value of assets to
be acquired and liabilities to be assumed in order to make a final allocation of
the excess purchase price, including allocation to intangibles other than
goodwill. Accordingly, the purchase accounting information is preliminary and
has been made solely for the purpose of developing the unaudited pro forma
combined condensed financial information.
New Styleclick does not expect the final allocation to differ materially
from the preliminary allocation. The final allocation should be completed
shortly after the merger closing. As of this time, New Styleclick has not
identified any reliably measured intangibles, although the final allocation may
include allocation of the purchase price to intangibles other than goodwill. The
amortization period assigned to goodwill is subjective, as it is management's
best estimate of the future economic benefit of the excess of the purchase price
over net assets acquired. This life of this benefit is difficult to determine at
the time of the transaction. The carrying value of goodwill is reviewed if facts
and circumstances suggest that it may be impaired. If this review indicates the
goodwill will not be recoverable, the carry amount of the goodwill would be
reduced. Due to the history of operating losses of Old Styleclick, management
has determined that a three-year life is appropriate.
The pro forma combined condensed statement of operations is presented for
illustrative purposes only. It is not necessarily indicative of the results of
operations or financial position which actually would have been reported had
these transactions occurred on March 31, 2000 or on January 1, 2000, nor are
they necessarily indicative of future financial results of operations.
38
<PAGE>
NEW STYLECLICK
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
INTERNET SHOPPING PRO FORMA PRO FORMA
NETWORK OLD STYLECLICK ADJUSTMENTS COMBINED
----------------- -------------- ----------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 9 $ 2,369 $ 34,054 (1) $ 36,432
Accounts receivable, net........................ 197 488 -- 685
Inventories, net................................ 11,117 -- -- 11,117
Prepaid expenses and other current assets....... 505 2,739 10,000 (1) 13,244
-------- -------- -------- --------
Total current assets...................... 11,828 5,596 44,054 61,478
Property and equipment, net..................... 13,877 5,050 -- 18,927
Goodwill........................................ -- -- 146,870 (1) 146,870
Other assets.................................... 80 4,787 -- 4,867
-------- -------- -------- --------
Total Assets.............................. $ 25,785 $ 15,433 $190,924 $232,142
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings........................... $ -- $ 5,046 $ (5,046)(5) $ --
Accounts payable, accrued and other current
liabilities................................... 17,471 2,660 -- 20,131
Deferred income................................. -- 140 -- 140
-------- -------- -------- --------
Total current liabilities................. 17,471 7,846 (5,046) 20,271
Stockholders' equity:
Internet Shopping Network Historical
equity:
Class A units-34,043,444 issued and
outstanding............................. 103,418 (103,418) --
Class B units-none issued and
outstanding............................. --
Old Styleclick historical equity.......... 43,674 (43,674)(2) --
New Styleclick pro forma equity:
Preferred stock-$.01 par value; authorized
25,000,000 shares, none issued and
outstanding............................. -- --
Class A common stock-$.01 par value;
authorized 150,000,000 shares; 7,716,830
issued and outstanding.................. 77 (1) 77
Class B common stock-$.01 par value;
authorized 112,500,000 shares;
23,150,790 issued and outstanding....... 232 (1) 232
Additional paid in capital................ 306,666 (1) 306,666
Historical and pro forma retained
earnings................................ (95,104) (36,087) 36,087 (1) (95,104)
-------- -------- -------- --------
Total stockholders' equity................ 8,314 7,587 195,970 211,871
-------- -------- -------- --------
Total liabilities and stockholders'
equity.................................. $ 25,785 $ 15,433 $190,924 $232,142
======== ======== ======== ========
</TABLE>
39
<PAGE>
NEW STYLECLICK
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
OLD PRO FORMA PRO FORMA
ISN STYLECLICK ADJUSTMENTS COMBINED
--------------- ---------- ----------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues....................................... $ 5,541 $ 1,252 -- $ 6,793
Cost of sales...................................... 5,338 179 -- 5,517
--------------- --------- --------- ----------------
Gross profit................................. 203 1,073 -- 1,276
Operating costs and expenses:
Selling, general and administrative.............. 5,662 3,916 -- 9,578
Product development and research costs........... 908 1,290 -- 2,198
Depreciation and amortization of software
costs.......................................... 1,499 406 -- 1,905
Merger related costs............................. -- 1,368 $ (1,368)(3) --
Amortization of goodwill......................... -- -- 12,239 (4) 12,239
--------------- --------- --------- ----------------
Total operating costs and expenses............. 8,069 6,980 10,871 25,920
--------------- --------- --------- ----------------
Operating loss................................. (7,866) (5,907) (10,871) (24,644)
Interest income, net............................. -- (34) -- (34)
--------------- --------- --------- ----------------
NET LOSS........................................... $ (7,866) $ (5,941) $ (10,871) $ (24,678)
=============== ========= ========= ================
Net loss per common share
Basic............................................ $ (0.23) $ (0.77) $ (0.80)
Diluted.......................................... (0.23) (0.77) (0.80)
Weighted average shares outstanding(6)............. 34,043 7,713 30,868
Weighted average diluted shares outstanding(6)..... 34,043 7,713 30,868
</TABLE>
40
<PAGE>
NEW STYLECLICK
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
OLD PRO FORMA PRO FORMA
ISN STYLECLICK ADJUSTMENTS COMBINED
--------------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues...................................... $ 24,690 $ 6,174 -- $ 30,864
Cost of sales..................................... 23,845 668 -- 24,513
--------------- --------- --------- ---------
Gross profit................................ 845 5,506 -- 6,351
Operating costs and expenses:
Selling, general and administrative............. 30,076 12,608 -- 42,684
Product development and research costs.......... 5,520 6,054 -- 11,574
Write-off of capitalized software costs......... 4,489 -- -- 4,489
Depreciation and amortization of software
costs......................................... 3,251 2,596 -- 5,847
Merger related costs............................ -- 405 $ (405)(3) --
Amortization of goodwill........................ -- -- 48,957 (4) 48,957
--------------- --------- --------- ---------
Total operating costs and expenses............ 43,336 21,663 48,552 113,551
--------------- --------- --------- ---------
Operating loss................................ (42,491) (16,157) (48,552) (107,200)
Interest income, net............................ -- 278 -- 278
Miscellaneous................................... (3) -- -- (3)
--------------- --------- --------- ---------
NET LOSS.......................................... $ (42,494) $ (15,879) $ (48,552) $(106,925)
=============== ========= ========= =========
Net loss per common share
Basic........................................... $ (1.25) $ (2.24) $ (3.46)
Diluted......................................... (1.25) (2.24) (3.46)
Weighted average shares outstanding(6)............ 34,043 7,092 30,868
Weighted average diluted shares outstanding(6).... 34,043 7,092 30,868
</TABLE>
41
<PAGE>
NEW STYLECLICK
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(1) Acquisition costs and the preliminary determination of the unallocated
excess of merger costs over net assets to be acquired are set forth below:
<TABLE>
<S> <C>
Value of portion of Old Styleclick acquired in the
merger.................................................. $121,781
Additional cash and promotional investment by USAi and
USANi LLC............................................... 50,000
Fair value of outstanding "in the money options" and
warrants of Old Styleclick.............................. 31,026
Estimated transaction costs............................... 750
--------
Total acquisition costs................................... 203,557
Less: Net assets acquired (including the $50,000 of cash
and media to be received from USANi LLC)................ 56,687
--------
Unallocated excess of acquisition cost over net assets
acquired preliminarily allocated to goodwill............ $146,870
========
</TABLE>
The fair value of the non-cash exchange between New Styleclick and Old
Styleclick was valued by New Styleclick based on the fair value of the
portion of Old Styleclick acquired in the transaction, including the payment
of $40 million in cash and $10 million in advertising and promotional
services to New Styleclick immediately prior to the merger. The fair value
of Old Styleclick before the merger was $121.8 million based on the fair
value of $15.78 per share times 7.7 million shares outstanding. Fair value
of the shares was determined by taking an average of the opening and closing
price of Old Styleclick common stock for the period just before and just
after the terms of the transaction were agreed to by the parties and
announced to the public. 2.7 million shares at $18.56 will be issued to
USANi LLC for the $40 million in cash and $10 million in advertising and
promotion. USAi and its affiliates will provide promotional time on its
media properties over a three year period from the closing of the merger.
Such promotion will be contributed to New Styleclick at its fair market
value based on amounts charged to third parties. Net assets acquired
includes the net assets of Old Styleclick at March 31, 2000 of $7.6 million,
the $50 million of cash and promotion to be contributed by USAi and USANi
LLC, offset by the $0.9 million that Old Styleclick will pay its investment
advisors upon the closing of the merger.
(2) Reflects elimination of the Old Styleclick historical equity.
(3) Reflects elimination of costs directly related to the merger incurred by the
acquiree, Old Styleclick.
(4) Reflects additional amortization expense resulting from the increase in
goodwill and other intangible assets due to the transaction. The unallocated
excess of acquisition costs over net assets acquired has been preliminarily
allocated to goodwill, which is being amortized over three years. New
Styleclick does not expect the final allocation to differ materially from
the preliminary allocation as of this time, New Styleclick has not
identified any reliably measured intangibles, although the final allocation
may include allocation to intangibles other than goodwill. In connection
with finalizing the purchase price allocation, New Styleclick is currently
evaluating the fair value of assets to be acquired and liabilities to be
assumed. Using this information, New Styleclick will make a final allocation
of the excess purchase price, including allocation to intangibles other than
goodwill. Accordingly, the purchase accounting information is preliminary.
(5) Represents repayment of amounts borrowed from USANi LLC under the bridge
loan.
(6) Pro forma basic and diluted earnings per share is based upon the
7.7 million shares to be issued to Old Styleclick shareholders and the
23.1 million shares to be issued to Internet Shopping Network unitholders.
Pro forma diluted earnings per share exclude 19.8 million potentially
dilutive securities as their effect in antidilutive.
42
<PAGE>
NEW STYLECLICK
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
New Styleclick will provide services that enable other businesses to engage
in electronic commerce and also will sell products directly through websites it
owns and operates. New Styleclick will sell digital content development services
and merchandising services and will facilitate fulfillment and customer
services. New Styleclick will provide the technological platform to distribute
products through other affiliated websites. Products will be sold directly to
customers through FirstAuction.com, FirstJewelry.com, Styleclick.com and
FashionTrip.com. Depending on its ongoing evaluation of the prospects of its
operations, including alternative uses of capital and resources, as well as
general economic and industry conditions, New Styleclick may shift the focus of,
dispose of or substantially reduce its interest in some or all of these
operations. Any such shift, disposition or reduction may cause a decrease in New
Styleclick's anticipated revenue.
PRO FORMA OPERATIONS AND LIQUIDITY FOR THE THREE MONTHS ENDED MARCH 31, 2000
Pro forma revenue for the three months ended March 31, 2000 of $6.8 million
was composed principally of $5.5 million from the FirstAuction website and
$1.1 million from Internet activities, including website design and support. The
Company also earned revenues from a royalty related to the license of software
products to a third party which took place in 1999. New Styleclick anticipates
that it will continue to operate the FirstAuction and FirstJewelry websites and
provide website design and support, and that the combined entity can also
service customers who require support from the merchandising and order taking
(the website) to order fulfillment and customer service. However, as described
above, New Styleclick may shift the focus of, dispose of or substantially reduce
its interest in some or all of these operations. The pro forma gross margin for
the three months ended March 31, 2000 was 18.8%
Pro forma operating expenses were $25.9 million, including $12.2 million
related to the amortization of goodwill. The goodwill is being amortized over a
life of three years. Other operating expenses include $9.6 million for selling,
general and administrative and $2.2 million for product development and research
costs. Depreciation and amortization of software costs was $1.9 million for the
three months ended March 31, 2000.
Pro forma net loss was $24.7 million for the three months ended March 31,
2000. Management believes that the Company will continue to incur losses due to
the amortization of goodwill and the operating costs it expects to incur to grow
the business.
The Company expects to incur capital expenditures of approximately
$2 million per year related mainly to computer equipment and software.
PRO FORMA OPERATIONS FOR YEAR ENDED DECEMBER 31, 1999
Pro forma revenue for the year ended December 31, 1999 of $30.9 million was
composed of $24.3 million from the FirstAuction website, $0.3 million from the
FirstJewelry website and $6.2 million from Old Styleclick including $3.5 million
from the sale of and royalties from the business software product line which are
not anticipated to materially contribute to revenues in the future. New
Styleclick anticipates that it will continue to operate the FirstAuction and
FirstJewelry websites and provide website design and support, and that the
combined entity can also service customers who require support from the
merchandising and order taking (the website) to order fulfillment and customer
service. However, as described above, New Styleclick may shift the focus of,
dispose of or substantially
43
<PAGE>
reduce its interest in some or all of these operations. The pro forma gross
margin for the year ended December 31, 1999 was 20.6%.
Pro forma operating expenses were $113.6 million, including $49.0 million
related to the amortization of goodwill. The goodwill is being amortized over a
life of three years. Other operating expenses include $42.7 million for selling,
general and administrative and $11.6 million for product development and
research costs. Depreciation and amortization of software costs was
$5.8 million for the year ended December 31, 1999. Also, in 1999 Internet
Shopping Network wrote off $4.5 million of costs associated with the FirstOutlet
Website, which were incurred in 1999, when management determined not to launch
the website.
Pro forma net loss was $106.9 million for the year ended December 31, 1999.
Management believes that New Styleclick will continue to incur losses for the
foreseeable future due to the amortization of goodwill and the operating costs
it expects to incur to grow the business.
New Styleclick expects to incur capital expenditures of approximately
$2 million per year related mainly to computer equipment and software and the
new corporate headquarters in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the mergers, New Styleclick will have cash of $40 million
less any amounts borrowed under the $10 million bridge loan from USAi, which was
$5 million as at March 20, 2000. Additionally, New Styleclick will have a
commitment valued at $10 million for advertising and promotional services to be
provided over a three year period on USAi's controlled subsidiaries. New
Styleclick's management anticipates that the combined cash on hand and media
value should be sufficient to fund New Styleclick's operating activities through
the first quarter of 2001. However, New Styleclick does not anticipate that it
will be profitable nor generating positive cash flow at that time. Consequently,
New Styleclick believes that it will be necessary to obtain additional capital
prior to April 2001. New Styleclick's management anticipates that new funding
will be generated by either the sale of additional common stock, exercise of
media warrants by USAi or a combination of both. See "Description of Related
Agreements--Media Warrants." Should New Styleclick be unable to generate
additional capital prior to that time it may be necessary to reduce the level of
its operations, including terminating certain employees, substantially reducing
its product development initiatives and cutting back on its sales and marketing
efforts. New Styleclick's management believes that taking such actions would
seriously impair the long-term viability and value of New Styleclick.
DISCLOSURES ABOUT MARKET RISK
New Styleclick expects to invest in equity securities of privately held
companies for business and strategic purposes although no specific investment
opportunities have been identified at this time. For investments in which no
public market exists, it will regularly review the operating performance,
financing transactions and cash flow forecasts for such companies in assessing
the net realizable values of the securities of these companies. New Styleclick
will identify and record impairment losses on long-lived assets when events and
circumstances indicate that such assets might be impaired.
44
<PAGE>
OLD STYLECLICK
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 proxy
statement/prospectus.
GENERAL
Old Styleclick is in the business of developing, marketing, and supporting
electronic commerce Internet websites, Internet related software applications
and business and consumer software products based on its proprietary technology
for managing product information. Old Styleclick has three principal product
groups: electronic commerce Internet websites, software including CD-ROM
products and applications including computer aided design and electronic
merchandising products, referred to as business software products.
Since 1998, Old Styleclick 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. Old Styleclick 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 furnishings industries.
Revenues generated from Old Styleclick's electronic commerce Internet
websites include revenues received from:
- website development and maintenance fees
- project participation fees for managing product information
- on-line advertising revenue
- commissions from sales on websites
- commissions on sales by affilates through the Styleclick.com website
Revenues from web development are recognized based upon the accomplishment
of contractual milestones in a manner that matches revenue with the related
cost. 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 Old Styleclick's fulfillment warehouse or the
participant vendors. Commissions on sales by affiliates are recognized based
upon notification of the sales information by Old Styleclick's vendors, the
independent Internet traffic tracking companies or Old Styleclick's on-line
tracking reports.
Revenues generated from Old Styleclick's consumer CD-ROM products include
revenues received in connection with sales of Old Styleclick's developed
consumer CD-ROM products and vendor participation in Old Styleclick'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 Old Styleclick's business software products include
revenues received in connection with sales and licenses of Old Styleclick'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.
45
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected items from Old Styleclick's
statement of operations for the years ended 1999, 1998 and 1997 and the
percentages that such items bear to net revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues.......................... $ 6,174 100.0% $ 6,681 100.0% $4,450 100.0%
Cost of sales......................... 668 10.8 82 1.2 87 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 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>
1999 COMPARED WITH 1998
NET REVENUES. Revenues in the amount of $4.8 million, or 78% of total
revenues for the year ended December 31, 1999, were earned from three sources
which can not be expected to reoccur, including product development fees
($0.4 million, or 8%), web-site development fees ($0.9 million, or 19%) and the
sale of Old Styleclick's business software product line ($3.5 million, or 57% of
revenues). Net revenues decreased $0.5 million, or 8%, to $6.2 million in 1999
from $6.7 million in 1998. The decrease was primarily due to a decrease of
$4.4 million in revenues from Old Styleclick's consumer CD-ROM products, a
decrease of $0.054 million in revenues from training services and a decrease of
$0.1 million in maintenance fees. These decreases were offset by an increase of
$1.9 million in sales of Old Styleclick's business software products, an
increase of $1.6 million in revenues generated from Old Styleclick's electronic
commerce Internet websites and an increase of $0.5 million in revenues from
consulting services.
Revenues generated from Old Styleclick's electronic commerce Internet
web-sites were $1.6 million in 1999 as compared to no such revenue generated in
1998. The $1.6 million in revenues primarily consisted of revenues generated
from website development and maintenance fees, project participation fees,
on-line advertising revenue, digital content generation fees, transactional
revenues and product referral fees.
Revenues generated from consumer CD-ROM products decreased $4.4 million, or
88%, to $0.6 million in 1999 from $5 million in 1998 primarily due to
$2 million of revenue generated in 1998 from the one-time license of Old
Styleclick's 3-D HOME INTERIORS product to its publisher and $0.4 million of
revenue generated in connection with consumer product developing services
provided to one of Old Styleclick's major customers in 1998. These revenues were
not repeated in 1999 as Old Styleclick has shifted its primary business focus to
the emerging consumer Internet electronic commerce market. Additionally, revenue
generated in connection with Old Styleclick's developing CD-ROM applications
decreased $1.2 million to $0.4 million in 1999 from $1.6 million in 1998. The
$0.4 million in revenue generated in 1999 resulted from the completion of
development of one of the CD-ROM applications which had been in development
since 1998. Finally, $0.8 million of the decrease was due to lower CD-ROM
participation revenue generated from Old Styleclick's consumer CD-ROM
applications in 1999 as compared to 1998. The decrease in CD-ROM participation
revenues resulted from Old Styleclick's strategy to shift its marketing focus to
Internet electronic commerce during 1999.
46
<PAGE>
Sales of business software products increased $1.9 million, or 135%, to
$3.3 million in 1999 from $1.4 million in 1998 primarily due to the sale of two
of Old Styleclick's business software product lines and the license of certain
related technologies for an up-front fee of $3 million in 1999. In March 1999,
Old Styleclick entered into an agreement with one of its major competitors.
Under the agreement, Old Styleclick sold two of its business software product
lines and licensed its cataloging software to the buyer for an up-front fee of
$3 million, additional support fees of up to $1 million, and a contingent
payment of up to $1 million depending on future sales over the next 24 months
generated from the product lines sold to the buyer. Except for support services,
Old Styleclick 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 Old Styleclick'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 Old Styleclick's
ongoing business. As a result of the sale, Old Styleclick 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 $0.5 million in 1999 and $50,000 in
1998.
Revenues from training services decreased $50,000, or 73%, to $20,000 in
1999 from $70,000 in 1998, and maintenance fees decreased $130,000, or 56%, to
$100,000 in 1999 from $230,000 in 1998, primarily due to Old Styleclick's
overall shift in its primary business focus away from business software
products, as discussed above, from which most training and maintenance fees,
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 $0.6 million to $0.7 million in 1999 from $0.08 million in 1998
primarily due to $0.1 million in cost of sales incurred in connection with the
$3 million sale and license of certain of Old Styleclick's business software
products in 1999, and a $0.5 million non-cash charge to royalty expense. Old
Styleclick issued stock and warrants to Intel, Old Styleclick's project
co-developer, valued at approximately $5.5 million in exchange for future
royalties through December 2007. Such amount was recorded as prepaid royalties
and will be continuously amortized at $0.2 million 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 $5.1 million, or 61%, to $13.4 million in 1999
from $8.3 million in 1998 due to the following factors. Personnel costs
increased $1.6 million, or 58%, to $4.4 million in 1999 from $2.8 million in
1998. The increase in personnel costs resulted primarily from the hiring of
additional personnel in late 1998 to support Old Styleclick'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 $0.2 million of bonuses
paid to Old Styleclick'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
$3.6 million, or 102%, to $7.1 million in 1999 from $3.5 million in 1998. Of
that increase, $3.5 million was related to an increase in Old Styleclick's
marketing activities in 1999 to support its new electronic commerce products.
Additionally, professional services including accounting, legal and consulting
services increased $0.7 million, or 75%, to $1.6 million in 1999 from
$0.9 million in 1998. The increase in professional services was primarily due to
Old Styleclick's increased requirements for these services in 1999 compared to
1998, resulting from Old Styleclick's increased operating activities in the
emerging electronic commerce market and support of its new electronic commerce
products and dispositions of certain Old Styleclick's business software product
lines. Finally, bad debt expense decreased $0.8 million, or 93%, to $60,000 in
1999 from $0.9 million in 1998. Such decrease was primarily attributable to the
additional bad debt reserve in the amount of $0.9 million recorded by Old
Styleclick during 1998 upon Old Styleclick's review of certain specific
accounts. No such additional reserve was recorded in 1999.
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RESEARCH AND DEVELOPMENT. Old Styleclick incurred $7.2 million of research
and development expenditures in 1999, of which $1.1 million was capitalized and
$6.1 million was expensed, compared to $6.6 million in 1998, of which
$3.1 million was capitalized and $3.5 million was expensed. The 9% increase in
research and development expenditures from 1998 to 1999 was primarily due to the
hiring of additional personnel in connection with the further development of Old
Styleclick's Internet application projects.
MERGER RELATED COSTS. Old Styleclick incurred $0.4 million of expense in
connection with its merger plan with USANi Sub in the fourth quarter of 1999. No
such expense was incurred in 1998. The $0.4 million expense was primarily
related to legal and accounting services. Costs related to the merger are
expected to increase significantly in the first and second quarters of 2000.
AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS. The amortization of software
development costs decreased $3.1 million, or 62%, to $1.8 million in 1999 from
$4.9 million in 1998 due primarily to a $3.4 million write-off of capitalized
software cost in 1999 as compared to 1998. Approximately $1.0 million of the
total write-off was related to the exclusive license of Old Styleclick's 3D HOME
INTERIORS product to its publisher. The remaining $2.4 million was primarily
attributable to the software capitalized prior to 1998 in relation to certain
business software products which Old Styleclick is exiting as a result of its
new business strategy to target the emerging electronic commerce market. In
1999, Old Styleclick wrote-off a total of $0.3 million of capitalized software
cost. The write-off was related to the product lines sold to one of Old
Styleclick's competitors in the first quarter of 1999.
INVESTMENT INCOME. Investment income decreased $0.1 million, or 36%, to
$0.3 million in 1999 from $0.4 million in 1998 due to the decrease in income
generated from a money market account in which Old Styleclick's funds are
maintained. The decrease resulted from a lower average cash balance maintained
in this account in 1999 as compared 1998.
INCOME TAXES. Old Styleclick recorded no provision for income taxes in 1999
and 1998 due to net operating losses in both years.
NET LOSS. Net loss increased $6.2 million, or 64% to $15.9 million in 1999
from $9.7 million in 1998 primarily due to a $0.5 million decrease in net
revenue, a $0.6 million increase in costs of sales, a $5.1 million increase in
selling general and administrative expenses, a $2.6 million increase in research
and development, a $0.4 million increase in merger related costs, a
$3.1 million decrease in amortization of software development costs and a
$0.1 million decrease in investment income.
1998 COMPARED WITH 1997
NET REVENUES. Net revenues increased $2.2 million, or 50%, to $6.7 million
in 1998 from $4.5 million in 1997. The increase was primarily due to an increase
in the revenues from Old Styleclick's consumer CD-ROM products, an increase of
$0.005 million in revenue from training services, and an increase of
$0.07 million in maintenance fees. The increase was offset by a decrease of
$0.9 million in sales of Old Styleclick's business software products and a
decrease of $0.1 million in revenues from consulting services.
Revenue generated from consumer CD-ROM products increased $3.2 million or
176%, to $5 million in 1998 from $1.8 million in 1997. The increase was
primarily due to $2 million of revenue generated from the exclusive license of
Old Styleclick's 3D HOME INTERIORS product to its publisher, $1.6 million of
revenue generated in connection with Old Styleclick's developing two CD-ROM
applications, $0.4 million of revenue generated in connection with consumer
product developing services provided to one of Old Styleclick's major customers
and $1 million CD-ROM participation revenue generated form Old Styleclick's
consumer CD-ROM applications in 1998. No such revenues were generated in 1997.
The increase was offset by a total of $1.8 million revenues generated in 1997
which were not repeated in 1998, including a one-time payment of $1.5 million in
connection with Old Styleclick's fulfillment of certain obligations under an
agreement with Intel in connection with the co-development of consumer software.
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Sales of business software products decreased $0.9 million, or 39%, to
$1.4 million in 1998 from $2.3 million in 1997 primarily due to $0.4 million in
foreign sales generated by two of Old Styleclick's major customers in Europe in
1997, which sales were not repeated in 1998. The remaining decrease resulted
from Old Styleclick's strategy to shift its focus to Internet electronic
commerce.
COST OF SALES. Cost of sales associated with Old Styleclick'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 $4.9 million, or 144%, to $8.3 million in 1998
from $3.4 million in 1997. Personnel costs increased $1.2 million, or 78%, to
$2.8 million in 1998 from $1.6 million in 1997. The increase in personnel costs
resulted from the hiring of additional personnel in late 1997 and 1998 to
support Old Styleclick'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 $2.3 million, or 180%, to $3.5 million in
1998 from $1.3 million in 1997. $1.4 million of such increase was related to Old
Styleclick's increasing marketing activities in 1998 to support its new
electronic commerce products. Also, professional services including accounting,
legal and consulting services increased $0.5 million, or 108%, to $1 million in
1998 from $0.4 million in 1997. The increase in professional services was
primarily due to Old Styleclick's increased requirements for these services in
1998 compared to 1997 resulting from Old Styleclick's increased operating
activities. Finally, bad debt expense increased $0.9 million, or 1,663%, to
$0.9 million in 1998 from $52,000 in 1997 due to Old Styleclick's decision in
1998 to increase its bad debt reserve by $0.9 million due to Old Styleclick's
increasing sales volume, and based on a review of specific accounts.
RESEARCH AND DEVELOPMENT. Old Styleclick incurred $6.6 million of research
and development costs in 1998, as compared to $3.1 million in 1997. In 1998,
$3.1 million of such costs were capitalized as software development costs, while
in 1997, $2.8 million of such costs were capitalized as software development
costs. The remaining $3.5 million of research and development costs in 1998 were
expensed, compared to $0.2 million in 1997. The 102% increase in research and
development expenditure from 1997 to 1998 was primarily due to the hiring of
additional personnel to perform software programming services in connection with
the further development of Old Styleclick'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 Old
Styleclick's completion of two major projects at the beginning of 1998. A
significant portion of the research and development expenses incurred prior to
the completion of those two major projects was capitalized as software
development costs.
AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS. The amortization of software
development costs increased $4.1 million, or 532%, to $4.9 million in 1998 from
$0.8 million in 1997 partially because Old Styleclick began marketing and
amortizing development costs associated with several new versions of software
products in late 1997 and in 1998. In addition, Old Styleclick took a one-time
charge to write off a total of $3.4 million of its research and development cost
in 1998. Of the total write-off $1 million was related to the exclusive license
of Old Styleclick's 3D HOME INTERIORS product to its publisher. The remaining
$2.4 million write-off was primarily attributable to the software capitalized
prior to 1998 in relation to certain products in the business software market
which Old Styleclick is exiting as a result of its new business strategy to
target the emerging electronic commerce market.
INVESTMENT INCOME. Investment income increased $0.1 million, or 31%, to
$0.4 million in 1998 from $0.3 million 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 Old Styleclick's
public warrants after notice of redemption was given in June 1997, along with
other amounts, are maintained.
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INCOME TAXES. Old Styleclick 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 $10.1 million to
$9.7 million net loss in 1998 from $0.4 million net income in 1997 primarily due
to a $2.2 million increase in net revenue, a $4.9 million increase in selling
general and administrative expenses, a $3.4 million increase in research and
development, a $4.1 million increase in amortization of software development
costs and a $0.1 million increase in investment income.
LIQUIDITY AND CAPITAL RESOURCES
Old Styleclick's ratio of current assets to current liabilities on
December 31, 1999 decreased to 2.6 from 10.12 on December 31, 1998. The decrease
was primarily due to a 32% decrease in Old Styleclick'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 $4.95 million decrease in cash. The decrease was offset by a $0.2 million
increase in accounts receivable, a $1.4 million increase in prepaid expenses and
other current assets, a $0.6 million increase in deferred royalties and a
$0.5 million increase in deferred advertising and promotion. The 167% increase
in current liabilities was primarily due to a $1 million increase in accounts
payable and accrued expenses.
Old Styleclick's cash balance decreased $4.9 million, or 78%, to
$1.4 million at December 31, 1999 from $6.3 million at December 31, 1998
primarily due to a decrease of $13.5 million resulting from cash used by Old
Styleclick in its operating activities and a decrease of $0.9 million resulting
from cash used for the purchase of fixed assets. Such decreases were offset by
an increase of $0.4 million in cash received by Old Styleclick in connection
with stock options exercised by Old Styleclick's employees in 1999, $6,000
received by Old Styleclick in connection with warrants exercised by its IPO
principal underwriter, $1.3 million received by Old Styleclick in connection
with warrants exercised by one of its outside consultants and net proceeds of
$7.8 million received by Old Styleclick in connection with the issuance of
776,827 shares of its common stock in April 1999.
Old Styleclick's accounts receivable balance increased $0.1 million, or 18%,
to $1 million at December 31, 1999 from $0.9 million at December 31, 1998. This
increase was primarily due to a $0.5 million receivable balance at December 31,
1999, which was related to the revenue generated in late 1999 from one of Old
Styleclick's major customers. The increase was offset by a decrease resulting
from the collection during 1999 from two of Old Styleclick's major customers of
approximately $0.3 million in accounts receivable from such customers at
December 31, 1998.
Old Styleclick's prepaid expenses and other current assets balance increased
$1.4 million to $1.8 million on December 31, 1999 from $0.4 million on
December 31, 1998 primarily due to a $3.4 million prepayment recorded in 1999 in
connection with a two-year electronic commerce marketing agreement entered into
by Old Styleclick with an Internet portal company as a prepayment of future
marketing expense. Of this amount, $1.9 million was expensed in 1999.
Old Styleclick had $5.1 million in deferred royalties at December 31, 1999
compared to none at December 31, 1998. In April 1999, Old Styleclick recorded
$5.5 million in deferred royalties in connection with the issuance of 455,218
shares of Old Styleclick's common stock and warrants to purchase a total of
538,674 shares of Old Styleclick's common stock to Intel, its project
co-developer. $0.5 million of this amount was expensed in 1999.
Old Styleclick had $1.0 million in deferred advertising and promotion
expense at December 31, 1999 compared to none at December 31, 1998. In 1999, Old
Styleclick recorded $1.4 million in deferred advertising and promotion expenses
related to the issuance of warrants to purchase a total of 250,000 shares of
common stock in consideration of business promotion services to be provided to
Old Styleclick. Of this amount, $0.4 million was expensed in 1999.
On December 31, 1999 Old Styleclick's accounts payable and accrued expenses
balance increased $1.3 million to $1.8 million from $0.5 million at
December 31, 1998 primarily due to a $0.2 million
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increase in accrued legal service fees from December 31, 1998 to December 31,
1999 and a $0.3 million increase in accrued bonus primarily due to $0.2 million
in bonuses accrued for Old Styleclick's executive officers at December 31, 1999.
Finally, the total balance from the year-end outstanding bills increased
$0.7 million from December 31, 1998 to December 31, 1999 primarily due to
advertising bills in a total amount of $0.6 million recorded in late 1999 and
paid subsequent to December 31, 1999. No such bills were recorded at
December 31, 1998.
From 1997 to 1999 Old Styleclick spent between $0.6 million and
$1.6 million on capital expenditure. Should the merger not be completed, Old
Styleclick expects to spend approximately $1.0 million on capital expenditures
in 2000. However, there are no material commitments for these expenditures at
this time.
Old Styleclick's total shareholders' equity balance increased $0.8 million,
or 6%, to $13.1 million at December 31, 1999 from $12.3 million at December 31,
1998 primarily due to $7.8 million in net proceeds received from the issuance of
a total of 776,827 shares of Old Styleclick's common stock to four of its
investors in April 1999, $0.4 million in proceeds received from the exercise of
stock options to purchase a total of 44,500 shares of Old Styleclick'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 Old Styleclick's common stock
by the principal underwriter of its initial public offering and $1.3 million
received by Old Styleclick in connection with warrants exercised by an outside
consultant. Additionally, an increase of $5.5 million resulted from Old
Styleclick'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 Old Styleclick's
common stock. Finally, an increase of $1.7 million resulted from Old
Styleclick'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 Old Styleclick. The increase was offset by a net operating
loss in the amount of $15.9 million 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 Old Styleclick's common
stock with a weighted average exercise price of $13 per share were exercisable.
Approximately $39 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 Old
Styleclick's stock market price, the option/warrant holders' willingness to
exercise and certain restrictive trading regulations.
In January 2000, Old Styleclick and USAi announced an agreement to merge.
Under the agreement, Old Styleclick will merge with a wholly-owned subsidiary of
New Styleclick and Internet Shopping Network, an indirect wholly owned
subsidiary of USAi will merge with another wholly-owned subsidiary of New
Styleclick. The new company will own and operate the combined properties of Old
Styleclick and Internet Shopping Network. Under the terms of the agreement, USAi
will also invest $40 million in cash, contribute $10 million in advertising and
promotional services 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 Old Styleclick's
shareholders will own approximately 25%. In the interim, USAi has extended a
$10 million credit line to Old Styleclick. Consummation of the merger is subject
to various conditions, including approval by Old Styleclick's shareholders and
the receipt of required regulatory approvals.
Old Styleclick anticipates continuing to use its capital primarily to fund
the activities related to the design, development, marketing, sales and support
of its electronic commerce websites. Together with its existing capital, the
$10 million credit line provided by USAi and anticipated funds from operations,
Old Styleclick 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. Old Styleclick 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 capital requirements, Old
Styleclick may have to sell additional equity or debt securities or obtain
credit facilities, assuming it can do so on acceptable terms.
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EFFECT ON OLD STYLECLICK IF CONTEMPLATED TRANSACTIONS ARE NOT APPROVED OR DO NOT
OCCUR
If Old Styleclick shareholders do not approve the proposed merger of Old
Styleclick with a subsidiary of New Styleclick and Old Styleclick enters into a
business combination transaction with a third party or a third party acquires
15% or more of the assets or outstanding securities of Old Styleclick, then:
- USANi Sub may exercise its option to purchase 19.9% of Old Styleclick's
common stock at $17.50 per share;
- Old Styleclick must repay any outstanding portion of the $10 million loan
to USAi within 45 days; and
- Old Styleclick must pay Internet Shopping Network a termination fee of
$5.5 million.
Old Styleclick'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 the sale of equity or through the sale of
convertible securities, both of which would dilute existing stockholders
ownership of Old Styleclick. Additionally Old Styleclick may be forced to cut
back on operations including laying off employees, decreasing marketing programs
and eliminating certain development activities.
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INTERNET SHOPPING NETWORK MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Internet Shopping Network is engaged in electronic commerce business
transacted over the Internet through its two websites, FirstAuction.com and
FirstJewelry.com. FirstAuction.com was launched in June of 1997 and is an online
real time diversified auction retailer. FirstJewelry.com was launched in October
1999 and is an online retailer of jewelry offering a broad merchandise
assortment across 9-10 categories with over 30 subcategories.
On December 20, 1996, USAi acquired Internet Shopping Network in connection
with its acquisition of Home Shopping Network, Inc. and on February 12, 1998
USAi contributed its interest in Internet Shopping Network to USANi LLC, a
company formed in connection with USAi's acquisition of certain cable networks
and television production businesses from Universal Studios, Inc., a subsidiary
of The Seagram Company Ltd.
RESULTS OF OPERATIONS
The following table sets forth Internet Shopping Network's statement of
operations for the three months ended March 31, 2000 and 1999 and for the years
ended 1999, 1998 and 1997:
<TABLE>
<CAPTION>
INTERNET SHOPPING NETWORK
--------------------------------- THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- -------------------
1997 1998 1999 1999 2000
----------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $ 12,954 $ 21,288 $ 24,690 $ 6,333 $ 5,541
Cost of sales............................. 12,987 20,216 23,845 5,764 5,338
-------- -------- -------- ------- -------
Gross profit (loss)................... (33) 1,072 845 569 203
Operating costs and expenses:
Selling and marketing................... 1,176 5,193 10,793 1,981 1,751
Product development costs............... 1,580 3,334 5,520 1,516 908
General and administrative.............. 5,869 8,231 19,283 3,570 3,911
Write-off of capitalized software....... -- -- 4,489 -- --
Depreciation and amortization........... 2,018 1,436 3,251 397 1,499
-------- -------- -------- ------- -------
Total operating costs and expenses.... 10,643 18,194 43,336 7,464 8,069
-------- -------- -------- ------- -------
Operating loss........................ (10,676) (17,122) (42,491) (6,895) (7,866)
Other income (expense).................... -- 198 (3) (8) --
-------- -------- -------- ------- -------
NET LOSS.............................. $(10,676) $(16,924) $(42,494) $(6,903) $(7,866)
======== ======== ======== ======= =======
</TABLE>
Q1 2000 COMPARED WITH Q1 1999
GROSS PROFIT (LOSS). For the first quarter ended March 31, 2000, net
revenues decreased by $0.8 million, or 13%, compared to the first quarter of
1999 primarily due to lower consumer electronic and computer sales. These
categories were reduced in the second half of 1999 to focus upon the more
profitable home, leisure and accessories product categories. Gross profit
decreased by $0.4 million due primarily to lower cost recovery for shipping and
handling and increased sales through clearance events.
OPERATING COSTS AND EXPENSES. For the first quarter ended March 31, 2000,
total operating costs and expenses of $8.0 million increased by $0.6 million, or
8%. The decrease of $0.6 million in product development costs reflects spending
for software development during the preliminary project stage for
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website development in Q1 1999 at year-end per GAAP (SOP 98-1) and depreciation
and amortization expense increased from $0.4 million to $1.5 million due to
hardware and software purchases and capitalized software development for the
FirstJewelry.com website.
As a limited liability company, Internet Shopping Network is not subject to
federal or state income taxes, but rather the LLC partners are responsible for
taxes related to earnings attributable to each partner.
1999 COMPARED WITH 1998
GROSS PROFIT (LOSS). For the year ended December 31, 1999, net revenues
increased $3.4 million, or 16.0%, to $24.7 million from $21.3 million compared
to 1998 primarily due to increased sales from FirstAuction.com and to a lesser
extent FirstJewelry.com, which was launched at the beginning of the fourth
quarter of 1999. These increases were partially offset by the shut down of the
Computer Superstore business in October 1998. Total units shipped increased by
96.4% to 1.0 million units compared to 0.5 million units in 1998 as the product
mix shifted away from higher priced electronics and computers to lower priced
home and leisure products. Gross profit decreased by $0.2 million, to $0.8
million (3.4%) from $1.1 million (5.0%) in 1998 due primarily to increased costs
of shipping product as FirstAuction.com offered free shipping to expand the
business.
OPERATING COSTS AND EXPENSES. For the year ended December 31, 1999, total
operating costs and expenses increased $25.1 million, or 138.2%, to
$43.3 million from $18.2 million compared to 1998, primarily due to increased
general and administrative costs of $11.1 million, $5.6 million in selling and
marketing and $2.2 million of product development expenses. The increase in
general and administrative expenses was primarily personnel expenses of $6.5
million due to increased staffing needs, and the product development cost
increase was for the launch of FirstJewelry.com and to expand and enhance the
FirstAuction business. The increase in selling and marketing costs resulted
primarily from advertising and promotion of $3.0 million for the
FirstJewelry.com launch. Also, in 1999, Internet Shopping Network wrote off
$4.5 million of costs associated with the FirstOutlet website, which were
incurred in 1999, when management determined not to launch the website.
Depreciation expense increased $1.8 million due to hardware, software
licenses and software development purchases to support the operations of
FirstAuction.com and for the launch of FirstJewelry.com.
As a limited liability company, Internet Shopping Network is not subject to
federal or state income taxes, but rather the LLC partners are responsible for
taxes related to the earnings attributable to each partner.
1998 COMPARED WITH 1997
GROSS PROFIT (LOSS). For the year ended December 31, 1998, net revenues
increased $8.3 million, or 64.3%, to $21.3 million from $13.0 million in 1997
due to increased sales of $14.4 million from FirstAuction.com which launched in
June of 1997, partially offset by the shutdown of the Computer Superstore in
October 1998. Gross profit increased by $1.1 million, to $1.1 million (5.0%)
from a loss of $30,000 million in 1998 due primarily to the increase in revenue.
OPERATING COSTS AND EXPENSES. For the year ended December 31, 1998, total
operating costs and expenses increased by $7.6 million, or 70.9%, to
$18.2 million from $10.6 million in 1997, primarily due to increased selling and
marketing costs of $4.1 million, $2.4 million in general and administrative
expenses and $1.8 million of product development expenses. The increase in
selling and marketing costs resulted primarily from a full year of promotional
spending for FirstAuction.com. The increase in general and administrative
expenses was due to the expansion of staff to support general business growth
and the sourcing of products from beyond the Home Shopping Network. Product
development increases were for increased functionality and website enhancements
for FirstAuction.com.
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Depreciation expense increased $0.6 million due to assets placed in service
to support the operations of FirstAuction.com. Amortization of goodwill
decreased by $1.1 million due to goodwill associated with the acquisition of
Computer Superstore being fully amortized in 1997.
As a limited liability company, Internet Shopping Network is not subject to
federal or state income taxes, but rather the LLC partners are responsible for
taxes related to the earnings attributable to each partner.
LIQUIDITY AND CAPITAL RESOURCES
The continuing operations and capital resources and liquidity requirements
of Internet Shopping Network are dependent on USAi and USANi LLC, as the
operating losses and capital expenditures of Internet Shopping Network have been
funded through December 31, 1999 by capital contributions by USAi.
Net cash used in operating activities was $8.5 million and $6.1 million for
the three months ended March 31, 2000 and 1999, respectively, and
$33.7 million, $18.0 million and $11.4 million for the years ended December 31,
1999, 1998 and 1997, respectively. Cash used primarily resulted from operating
losses in each period. Internet Shopping Network made capital expenditures of
$.2 million and $.4 million for the three months ended March 31, 2000 and 1999,
respectively, and $17.7 million, $2.6 million and $2.6 million in the years
ended December 31, 1999, 1998 and 1997, respectively. Should the merger not be
completed, Internet Shopping Network expects to spend approximately
$5.0 million on capital expenditures for technology in 2000. However, there are
no material commitments for these expenditures at this time. USAi made capital
contributions of $6.5 million, $51.4 million, $20.6 million and $14.0 million in
the three months ended March 31, 1999 and the years ended December 31, 1999,
1998 and 1997, respectively, to fund operations and the capital expenditures.
On February 12, 1998, USAi and USANi LLC, as borrower, entered into the
credit agreement, which provides for a $1.6 billion credit facility. The credit
facility was used to finance the proposed transactions and to refinance USAi's
then-existing $275.0 million revolving credit facility. The credit facility
consists of a $600.0 million revolving credit facility with a $40.0 million
sub-limit for letters of credit, a $750.0 million Tranche A Term Loan and a
$250.0 million Tranche B Term Loan. The Tranche A Term Loan and the Tranche B
Term Loan have been permanently repaid as of December 31, 1999, as described
below. The revolving credit facility expires on December 31, 2002. As of March
31, 2000, there was $599.0 million available for borrowing after taking into
account outstanding letters of credit.
Since December 31, 1999, USANi LLC has continued to fund the operations of
Internet Shopping Network through a demand note, which bears interest at USANi
LLC's borrowing rate under the existing credit agreement. Internet Shopping
Network anticipates that USANi LLC will have to continue to fund its operations
until the mergers are completed. USANi LLC and affiliates funded $8.7 million in
the three months ended March 31, 2000.
On January 25, 2000, USAi and Styleclick.com Inc., a leading enabler of
electronic commerce for manufacturers and retailers, announced an agreement to
form a new company by merging Internet Shopping Network and Old Styleclick.
Under the terms of the agreement, USAi and USANi LLC will also invest $40
million in cash, contribute $10 million in advertising and promotional services,
and will receive warrants to purchase additional shares of the new company. In
the interim, USAi has agreed to extend a $10 million line of credit to Old
Styleclick. The proposed transaction is expected to close in the third quarter
of 2000. Through March 31, 2000, $5 million was outstanding under the line of
credit.
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EFFECT ON INTERNET SHOPPING NETWORK IF CONTEMPLATED TRANSACTIONS ARE NOT
APPROVED OR DO NOT OCCUR
Old Styleclick's electronic commerce operating systems and technology
platform are assets that will enable Internet Shopping Network to execute its
vision and business strategies. If the proposed transactions do not occur,
Internet Shopping Network will need to pursue other acquisitions, strategic
partnerships and/or significant internal development efforts to address these
important business requirements.
OTHER MATTERS
In late 1999, Internet Shopping Network completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
Internet Shopping Network experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
Internet Shopping Network is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, including the
systems of Home Shopping Network on which certain applications are run, or the
products and services of third parties. Internet Shopping Network will continue
to monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
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MARKET PRICE AND DIVIDEND INFORMATION
Since July 19, 1999, Old Styleclick's common stock has traded on the Nasdaq
National Market under the symbol "IBUY." From March 1996 until July 19, 1999,
Old Styleclick'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
Old Styleclick's common stock for the fiscal years ended December 31, 1998 and
1999, as reported by Nasdaq:
<TABLE>
<CAPTION>
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
FISCAL QUARTER ENDED MARCH 31, 2000......................... 19 1/8 8 5/8
</TABLE>
On May 11, 2000, the last reported sale price for the day of Old Styleclick
common stock was $7.25 per share. On January 24, 2000, the last full trading
date prior to the public announcement of the signing of the merger agreement,
the last reported sale price for the day of Old Styleclick common stock was
$17.50 per share.
New Styleclick has applied to have its shares of Class A common stock
approved for listing on the Nasdaq National Market under the symbol "IBUY."
There is no established trading market for the limited liability company
units of Internet Shopping Network.
DIVIDEND INFORMATION
To date, neither Old Styleclick nor Internet Shopping Network has declared
or paid dividends. New Styleclick anticipates that it also will not declare or
pay dividends on any class of stock, and will retain any earnings for the
foreseeable future for use in its operating activities.
NUMBER OF SHAREHOLDERS
As of May 10, 2000, there were approximately 3,400 holders of record of Old
Styleclick common stock.
If the mergers are completed, each share of common stock of Old Styleclick
will be converted into one share of Class A common stock of New Styleclick. Each
unit of Internet Shopping Network, other than units held by USANi Sub, will be
coverted into 0.601 shares of class A common stock of New Styleclick and each
unit of Internet Shopping Network held by USANi Sub will be converted into
0.601 shares of Class B common stock of New Styleclick. In addition, options and
warrants to purchase shares of common stock of Old Styleclick, will be converted
into options or warrants to purchase the same number of shares of Class A common
stock of New Styleclick, on the same terms and conditions and at the same per
share exercise price that applied before the merger. See "The Proposed
Transactions--Interests of Executive Officers and Directors of Old Styleclick in
the Transactions".
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SPECIAL MEETING OF OLD STYLECLICK SHAREHOLDERS
GENERAL
New Styleclick is furnishing this proxy statement/prospectus to the
shareholders of Old Styleclick in connection with the solicitation of proxies by
the Old Styleclick Board of Directors for use at the special meeting of Old
Styleclick shareholders.
DATE, TIME AND PLACE
The special meeting of Old Styleclick shareholders will be held on [ ],
2000, at [ ] p.m., Pacific Standard Time, at Old Styleclick's principal
executive offices at 3861 Sepulveda Boulevard, Culver City, California 90230.
MATTERS TO BE CONSIDERED
At the special meeting, the shareholders of Old Styleclick will be asked to
consider and vote upon:
1. The approval of the merger agreement and the transactions
contemplated by the merger agreement, including the merger of a wholly-owned
subsidiary of New Styleclick with and into Old Styleclick; and
2. Other matters which may properly be brought before the special
meeting and any adjournments or postponements of the meeting.
RECORD DATE FOR VOTING ON THE MERGER; SHAREHOLDERS ENTITLED TO VOTE
The Old Styleclick Board has fixed the close of business on [ ], 2000,
as the record date for determination of Old Styleclick shareholders entitled to
notice of and to vote at the special meeting. As of the close of business on the
record date, there were [ ] shares of Old Styleclick common stock
outstanding and entitled to vote, held of record by [ ] shareholders.
VOTING PROCEDURES
The proxy accompanying this document is solicited on behalf of Old
Styleclick's Board of Directors. A majority of the outstanding shares of Old
Styleclick common stock issued and outstanding on the record date must be
present or represented by proxy at the special meeting in order to have a
quorum. Abstentions are counted as shares that are present and entitled to vote
for purposes of determining the presence of a quorum, but not as voting for
purposes of determining the approval of any matter submitted to the shareholders
for a vote.
On all matters, each share of Old Styleclick common stock has one vote. The
affirmative vote of a majority of the outstanding shares is required to approve
the merger. If your shares are held in street name, you must instruct your
broker how to vote your shares. See "Questions and Answers About The Merger." If
a broker indicates on the proxy that it does not have discretionary authority to
vote on a particular matter as to certain shares, those shares will not be
considered as voting with respect to that matter. Such a proxy, however, will be
counted for purposes of determining a quorum.
Old Styleclick shareholders are requested to complete, date, sign and return
the accompanying proxy in the enclosed envelope or otherwise mail it to Old
Styleclick. Whether or not you are able to attend the special meeting, you are
urged to vote your proxy. All properly completed proxies received by Old
Styleclick prior to the special meeting that are not revoked will be voted at
the special meeting in accordance with the instructions indicated on the proxies
or, if no direction is indicated, will be voted "FOR" approval of the merger
agreement and the merger of Old Styleclick with a wholly-owned subsidiary of New
Styleclick. Old Styleclick's Board of Directors does not intend to bring any
other
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business before the special meeting, and, so far as Old Styleclick's Board
knows, no other matters are to be brought before the special meeting. If any
other business properly comes before the special meeting, the proxies will be
voted in accordance with the judgment of the person voting such proxies.
REVOCATION OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time prior to the time the proxy is to be voted at the special
meeting by attending the special meeting and voting in person or by delivering
to Old Styleclick a written notice or a duly executed proxy, each bearing a date
later than the date of the proxy, stating that the proxy is revoked prior to the
special meeting.
VOTE REQUIRED TO APPROVE THE MERGER
The affirmative vote of the holders of a majority of the outstanding shares
of Old Styleclick common stock is required to approve and adopt the merger
agreement and approve the merger of Old Styleclick with a wholly-owned
subsidiary of New Styleclick. Abstentions and broker non-votes are not
affirmative votes and will have the same effect as votes cast against the
proposed transactions.
Ms. Freedman, Mr. Vecchione, Mr. Freedman and Intel Corporation have each
agreed to vote in favor of the proposed transactions. These principal
shareholders hold approximately 2,519,036 shares of Old Styleclick common stock
representing approximately 32.6% of the outstanding voting shares of Old
Styleclick.
RECOMMENDATION OF OLD STYLECLICK'S BOARD OF DIRECTORS
After careful consideration of the merger agreement and proposed acquisition
of Old Styleclick by New Styleclick, the Board of Directors of Old Styleclick
has determined that the transaction is fair to, and in the best interests of,
Old Styleclick and its shareholders. Accordingly, the Board of Directors of Old
Styleclick unanimously approved the merger agreement and the acquisition and
unanimously recommends that the Old Styleclick shareholders vote for approval
and adoption of the merger agreement and approval of the acquisition.
The matters to be considered at the special meeting are of great importance
to Old Styleclick and its shareholders. Accordingly, you are urged to read and
carefully consider the information presented in this document, and to complete,
date, sign and promptly return the enclosed proxy card in the enclosed
postage-paid envelope.
EXCHANGE OF STOCK CERTIFICATES
Do not send any stock certificates now. A transmittal form with instructions
for the surrender of certificates for Old Styleclick common stock will be mailed
after completion of the merger to holders of Old Styleclick common stock.
SOLICITATION OF PROXIES
Old Styleclick, Internet Shopping Network and USANi Sub each will bear its
own expenses in connection with the preparation and filing of this proxy
statement/prospectus and the solicitation of proxies from Old Styleclick
shareholders. In addition to solicitation by mail, Old Styleclick's directors,
officers and employees may solicit proxies by telephone, telegram, telecopier,
electronic mail or otherwise. The directors, officers and employees of Old
Styleclick will not receive compensation for such solicitation but may receive
reimbursement from Old Styleclick for out-of-pocket expenses incurred in
connection with the solicitation. Old Styleclick will request that brokerage
firms, fiduciaries and other custodians forward copies of the solicitation
materials to the beneficial owners of shares of Old
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Styleclick common stock held of record by them and Old Styleclick will reimburse
them for reasonable expenses incurred in forwarding the material. Old Styleclick
has retained a proxy solicitation firm, MacKenzie Partners, Inc., to aid it in
the solicitation.
SHARE OWNERSHIP OF MANAGEMENT
On the record date, directors and executive officers of Old Styleclick,
including Ms. Freedman, Mr. Vecchione, and Mr. Freedman, and their affiliates
owned and had the right to vote an aggregate of 2,063,818 shares of Old
Styleclick common stock, constituting approximately 26.7% of the shares of Old
Styleclick common stock.
Each of Ms. Freedman, Mr. Vecchione and Mr. Freedman has agreed, pursuant to
separate voting agreements with USANi Sub, to vote all of the shares of Old
Styleclick common stock that they have the right to vote for approval and
adoption of the merger agreement and approval of the merger of Old Styleclick
with a wholly-owned subsidiary of New Styleclick.
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THE MERGER AGREEMENT
This section of the proxy statement/prospectus describes the material
provisions of the merger agreement. For more detailed information, you should
review the merger agreement, which is attached to this proxy
statement/prospectus as Annex A and incorporated by reference in this proxy
statement/ prospectus.
THE MERGER
The merger agreement provides for New Styleclick, a newly-formed subsidiary
of USANi Sub, to form two wholly-owned subsidiaries: Styleclick Merger Sub, a
California corporation, and Internet Shopping Network Merger Sub, a Delaware
limited liability company. Following the approval and adoption by the
shareholders of Old Styleclick of the merger agreement, the merger and the
satisfaction or waiver of the other conditions to the merger, Styleclick Merger
Sub and Internet Shopping Network Merger Sub will be merged with and into Old
Styleclick and Internet Shopping Network, respectively. As a result of the
mergers, Old Styleclick and Internet Shopping Network will become wholly owned
subsidiaries of New Styleclick.
Immediately prior to the mergers, USAi or its affiliates will contribute
approximately $40 million in cash and agree to provide $10 million in
advertising and promotional services to New Styleclick in exchange for an
issuance of approximately 2,700,000 shares of New Styleclick Class B common
stock. In addition, at the time of the mergers, Old Styleclick will issue a
warrant to USAi to purchase approximately 12,800,000 shares of New Styleclick
Class B common stock for a purchase price of $11.50 per share.
The merger will become effective upon both the filing of an agreement of
merger with the Secretary of State of the State of California relating to the
Styleclick merger and the filing of a certificate of merger with the Secretary
of State of the State of Delaware relating to the Internet Shopping Network
merger.
CONVERSION OF OLD STYLECLICK COMMON STOCK
Upon the merger's effectiveness, each share of common stock of Old
Styleclick will be converted into one share of Class A common stock of New
Styleclick. The Class A common stock of New Styleclick will have the rights
described in "Comparison of the Rights of New Styleclick Shareholders and Old
Styleclick Shareholders."
CONVERSION OF INTERNET SHOPPING NETWORK UNITS
Each limited liability company unit of Internet Shopping Network, other than
units held by USANi Sub, will be converted into 0.601 shares of Class A common
stock of New Styleclick, and each limited liability company unit of Internet
Shopping Network held by USANi Sub will be converted into 0.601 shares of Class
B common stock of New Styleclick. The Class A common stock of New Styleclick and
the Class B common stock of New Styleclick will have the rights described in
"Comparison of the Rights of New Styleclick Shareholders and Old Styleclick
Shareholders."
EXCHANGE AGENT; PROCEDURES FOR EXCHANGE OF CERTIFICATES
USANi Sub will select an exchange agent for the purpose of effecting the
exchange of New Styleclick shares for Old Styleclick shares and Internet
Shopping Network units. As of the effective time of the merger, New Styleclick
will deposit shares of New Styleclick Class A common stock with the exchange
agent to be delivered in exchange for shares of Old Styleclick common stock and
Internet Shopping Network units. After the effective time of the merger, New
Styleclick also will deposit with the exchange agent any dividends or
distributions payable on New Styleclick Class A common stock to
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cover any dividends or distributions payable on shares of Old Styleclick common
stock that have not yet been exchanged for shares New Styleclick Class A common
stock.
As soon as practicable after the effective time of the merger, a letter of
transmittal will be mailed to you. The letter of transmittal must be used in
forwarding certificates evidencing Old Styleclick common stock and Internet
Shopping Network units in exchange for certificates evidencing New Styleclick
Class A common stock and, if applicable, any unpaid dividends. The letter of
transmittal will be accompanied by instructions specifying details of the
exchange. After receipt of the letter of transmittal, you should surrender your
certificates to the exchange agent in accordance with the instructions
accompanying the letter of transmittal. In exchange for your Old Styleclick
certificates and Internet Shopping Network units, you will receive a new
certificate evidencing the whole number of shares of New Styleclick Class A
common stock to which you are entitled and any unpaid dividends and
distributions which you have the right to receive pursuant to the merger
agreement, after deducting any required withholding tax.
After the effective time of the merger, each certificate evidencing Old
Styleclick common stock, until surrendered and exchanged, will be deemed to
represent only the right to receive, upon surrender, a certificate representing
shares of New Styleclick Class A common stock and any unpaid dividends and
distributions as provided above.
YOU SHOULD NOT FORWARD YOUR OLD STYLECLICK CERTIFICATES WITH THE ENCLOSED
PROXY CARD, NOR SHOULD YOU SEND IN YOUR OLD STYLECLICK SHARE CERTIFICATES TO THE
EXCHANGE AGENT, UNTIL YOU HAVE RECEIVED A TRANSMITTAL LETTER.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary mutual representations and
warranties by each of Old Styleclick, Internet Shopping Network and New
Styleclick, including:
- organization, good standing, qualification, corporate power and similar
corporate matters;
- the charter documents of Old Styleclick and Internet Shopping Network;
- capitalization;
- authorization, execution, delivery, performance and enforceability of the
merger agreement;
- required filings with governmental entities in connection with the
mergers;
- the absence of conflicts, violations and defaults under charter documents
and certain other agreements and documents;
- documents and reports filed by Old Styleclick with the SEC and the
accuracy and completeness of the information contained in the documents
and reports;
- the absence of certain changes in Old Styleclick and Internet Shopping
Network's respective businesses, properties, results of operations and
financial conditions;
- the absence of certain litigation and liabilities;
- compliance with laws and permits;
- environmental and tax matters; and
- brokers and finders' fees.
In addition, the merger agreement contains additional representations and
warranties of Old Styleclick relating to, among other things:
- employee matters;
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- intellectual property; and
- takeover defense mechanisms.
All representations and warranties of Old Styleclick, Internet Shopping
Network and New Styleclick expire at the effective time of the merger.
CONDUCT OF BUSINESS PENDING THE MERGER
Under the terms of the merger agreement, Old Styleclick has agreed that from
the date of the merger agreement through the effective time of the merger, it
will, and will cause its subsidiaries to, conduct its business in the ordinary
and usual course and use all reasonable efforts to preserve its business
organization intact. Old Styleclick also has agreed to maintain its existing
relationships with customers, suppliers, contractors, distributors, licensors,
licensees and others having business dealings with them so that Old Styleclick's
goodwill and ongoing businesses will not be impaired in any material respect at
the closing date.
NO SOLICITATION BY OLD STYLECLICK
Under the terms of the merger agreement, Old Styleclick has agreed not to
solicit or encourage any alternative business combination transaction, including
a merger, recapitalization, sale of assets or sale of 15% or more of the equity
of Old Styleclick. However, Old Styleclick is permitted to furnish information
to third parties who make a transaction proposal for the acquisition of at least
75% of the equity of Old Styleclick, if the Board of Old Styleclick believes,
after receipt of an opinion from a financial advisor, such proposal is more
favorable than the transaction contemplated by this proxy statement/prospectus.
In addition, the Old Styleclick Board may engage in discussions or negotiations
with those third parties and make disclosures of the Board's position with
respect to the third parties required under the Securities Exchange Act of 1934,
as amended, after it receives an opinion from a financial advisor that the
transaction proposed by a third party is more favorable than the transactions
contemplated in this proxy statement/prospectus and an opinion from legal
counsel that failure to do so would constitute a failure to comply with its
fiduciary duties.
CONDITIONS PRECEDENT TO THE MERGER
The respective obligations of New Styleclick, Old Styleclick and Internet
Shopping Network to effect the mergers are subject to the fulfillment or waiver
of the following conditions at or prior to the mergers:
- approval of the merger agreement by Old Styleclick shareholders;
- listing on the Nasdaq National Market of the shares of New Styleclick
common stock you will receive in connection with the merger;
- expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended;
- receipt of all required consents or approvals of, or the making of all
required filings with, any governmental entity;
- absence of any law, statute, ordinance, rule, regulation, judgment,
decree, injunction or other order restraining, enjoining or otherwise
prohibiting the merger;
- effectiveness of the registration statement and the absence of any stop
order suspending the effectiveness of the registration statement; and
- receipt by New Styleclick of all necessary state securities and "blue sky"
approvals.
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The obligations of USANi Sub to effect the mergers are also subject to the
fulfillment or waiver at or prior to the mergers of the following additional
conditions:
- each of the representations and warranties of Old Styleclick being true
and correct in all material respects when made and at and as of the
closing date as if they were made at and as of the closing date;
- performance in all material respects by Old Styleclick of its obligations
under the merger agreement and the other transaction documents;
- there is no change in circumstances that would cause Paul, Weiss, Rifkind,
Wharton & Garrison not to be able to issue an opinion to the effect that
the mergers will be treated for federal income tax purposes as a
reorganization qualifying under the provisions of Section 368(a) of the
Code and that each of Old Styleclick, New Styleclick and the merger
subsidiaries will be a party to the reorganization within the meaning of
Section 368(b) of the Code; and
- there is no material adverse change to with respect to the business of Old
Styleclick;
- no more than 10% of the shareholders of Old Styleclick shall have demanded
appraisal rights for their shares;
- an employment agreement between New Styleclick and Maurizio Vecchione
shall have been executed;
- the receipt of waiver agreements from certain warrant holders of Old
Styleclick.
The obligation of Old Styleclick to effect the merger is also subject to the
fulfillment or waiver at or prior to the effective time of the merger of the
following additional conditions:
- each of the representations and warranties of USANi Sub being true and
correct in all material respects when made and at and as of the closing
date as if they were made at and as of the closing date;
- performance in all material respects by USANi Sub of its obligations under
the merger agreement and the other transaction documents;
- there is no change in circumstances that would cause Coudert Brothers not
to be able to issue an opinion to the effect that the merger will be
treated for federal income tax purposes as a reorganization qualifying
under the provisions of Section 368(a) of the Code and that each of Old
Styleclick, New Styleclick and the merger subsidiaries will be a party to
the reorganization within the meaning of Section 368(b) of the Code;
- New Styleclick owning 100% of the capital stock of the merger
subsidiaries; and
- the execution and delivery of all other transaction documents by each
party.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
Old Styleclick will indemnify and hold harmless, to the fullest extent
permitted under applicable law, each present and former director and officer of
Old Styleclick and of Internet Shopping Network and their subsidiaries against
any costs or expenses, including reasonable attorneys' fees, judgments, fines,
losses, claims, damages or liabilities incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of pertaining to matters existing
or occurring at or prior to the merger, including the transactions contemplated
by the merger agreement.
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Old Styleclick also will advance expenses to the indemnified parties as
incurred to the fullest extent permitted under applicable law if the person to
whom expenses are advanced provides a commitment to repay the advances if it is
ultimately determined that the indemnified party is not entitled to
indemnification.
For a period of six years from the effective time of the merger, New
Styleclick will use its best efforts to maintain officers' and directors'
liability insurance covering those persons in both Old Styleclick and Internet
Shopping Network who are currently covered by such policies, as long as the
annual premium for the insurance is not in excess of 150% of the combined
premiums of Old Styleclick and Internet Shopping Network for the 12 months ended
November 30, 1999.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the completion
of the merger by mutual written consent of Old Styleclick and USANi Sub, or by:
- either USANi Sub or Old Styleclick, if there is a material breach of any
representation, warranty, covenant or agreement by the other party and
that breach has not been cured, if capable of being cured, within 20
business days after receipt of written notice of the breach;
- either USANi Sub or Old Styleclick, if the merger has not been completed
by July 31, 2000, but neither USANi Sub nor Old Styleclick can terminate
if the reason that the merger has not been completed is its own breach;
- either USANi Sub or Old Styleclick, if the shareholders of Old Styleclick
fail to approve the merger agreement at the special meeting or any
adjournment of the meeting;
- either USANi Sub or Old Styleclick, if a court or other governmental
entity issues a final and nonappealable injunction, order, decree or
ruling, or takes other similar action, prohibiting either Old Styleclick
or USANi Sub from completing the merger;
- USANi Sub, if Old Styleclick's Board of Directors changes its
recommendation to its shareholders in a manner adverse to USANi Sub or
recommends an alternate transaction or fails to recommend opposition to an
alternate transaction;
- Old Styleclick, if Old Styleclick's Board of Directors determines in good
faith, following advice of its counsel, that failure to terminate the
merger agreement would be a breach of their fiduciary duties, and Old
Styleclick executes a definitive agreement providing for the acquisition
by a third party of at least 75% of the equity of Old Styleclick, after
receiving an opinion from its financial advisers that the alternative
transaction is superior financially for the shareholders of Old
Styleclick, and after providing New Styleclick with five business days to
adjust its terms to meet the superior proposal.
TERMINATION FEE AND EXPENSES
Old Styleclick must pay Internet Shopping Network a termination fee of
approximately $5.5 million if the merger agreement is terminated under any of
the following circumstances:
- Old Styleclick's shareholders do not approve the merger at the special
meeting and an alternate transaction with a third party was announced
before the special meeting or is consummated within one year of the date
of the special meeting or any adjournment of the special meeting; or
- the Board of Directors of Old Styleclick withdraws its recommendation of
the merger and recommends an alternate transaction with a third party or
resolves to terminate the merger agreement in order to enter into an
alternate transaction with a third party which it regards as superior,
from a financial point of view, to the merger.
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An alternate transaction is any business combination or similar transaction
which:
- would impede the merger;
- any sale or other disposition of 15% or more of the assets of Old
Styleclick; or
- the acquisition by any person of 15% or more of the issued shares of Old
Styleclick.
The merger agreement provides that each of Old Styleclick, Internet Shopping
Network and USANi Sub will pay its own costs and expenses in connection with the
merger agreement and the related transactions, whether or not the merger is
completed.
AMENDMENT
At any time prior to the merger, the parties to the merger agreement may
modify or amend the merger agreement.
WAIVER
The conditions to each party's obligations to close the merger may be waived
by such party in whole or in part. If a material condition is waived by Old
Styleclick, Old Styleclick will notify Old Styleclick shareholders by
resoliciting a proxy statement.
OPTIONS TO PURCHASE OLD STYLECLICK SHARES AND INTERNET SHOPPING NETWORK UNITS
At the effective time of the merger, each outstanding Old Styleclick stock
option that has not been exercised will become and represent an option to
purchase one share of New Styleclick Class A common stock. The exercise price
per share of New Styleclick common stock will be equal to the exercise price per
share of Old Styleclick common stock immediately prior to the merger. After the
merger, each New Styleclick option will be exercisable upon the same terms,
conditions and restrictions as were applicable to the Old Styleclick options
immediately prior to the merger.
At the effective time of the merger, each outstanding option to purchase a
limited liability company unit of Internet Shopping Network that has not been
exercised will become and represent an option to purchase 0.601 shares of New
Styleclick Class A common stock. The exercise price per share of New Styleclick
Class A common stock shall be the exercise price per Internet Shopping Network
unit immediately prior to the merger times 1.664. After the merger, each
substitute option will be exercisable upon the same terms, conditions and
restrictions as were applicable to the related Internet Shopping Network option
immediately prior to the merger.
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DESCRIPTION OF RELATED AGREEMENTS
It is a condition to the closing of the merger agreement that specified
related transaction documents are executed and delivered. The following are
summaries of the material provisions of those documents. For more detailed
information you should review the agreements in their entirety. The agreements
are incorporated herein by reference.
CREDIT AGREEMENT AND RELATED DOCUMENTS
In order to provide Old Styleclick with short-term working capital funds,
and in connection with the merger, USAi has made available to Old Styleclick a
one-year line of credit in the aggregate principal amount of $10 million. The
terms and conditions of the bridge loan are set forth in the credit agreement,
dated January 24, 2000, between USAi and Old Styleclick. The loan is evidenced
by a promissory note issued by Old Styleclick to USAi and secured by the
collateral agreement between USAi and Old Styleclick. The loan bears interest at
7.5% per year for amounts outstanding. In connection with the credit agreement,
Old Styleclick has entered into a bridge loan warrant agreement with USAi and
delivered to USAi a warrant for 328,084 shares of Old Styleclick's common stock
at an exercise price of $19.05. The loan is to be repaid on January 24, 2001,
subject to acceleration in some circumstances.
MEDIA WARRANTS
In connection with the proposed transactions, New Styleclick will issue to
USAi a warrant to purchase the number of shares of Class B common stock of New
Styleclick, at $11.50 per share such that, immediately following the effective
time of the mergers, on a fully diluted basis, the former Internet Shopping
Network unitholders and optionholders will hold 75% of the common stock of New
Styleclick, which will be approximately 12,800,000 shares. Under the terms of
the agreement, USAi may exercise the warrant without payment of cash by electing
to receive only the number of shares equal to the increase in the value of the
warrant divided by the market price of the shares at the time of exercise. USAi
may pay up to 50% of the exercise price of the warrant in the form of
advertising and promotional services provided to New Styleclick. The agreement
also contains provisions designed to protect the warrant from being diluted, or
otherwise diminish in value, and prohibits New Styleclick from entering into
other transactions which may have an adverse impact on the rights of USAi. The
warrants will terminate ten years from their date of issuance.
LICENSE AGREEMENT
Under the license agreement, New Styleclick, Old Styleclick and Internet
Shopping Network each grants to USAi a perpetual non-exclusive worldwide license
to use all of their proprietary technology, including rights to sub-license the
intellectual property where it is necessary for USAi to sell products or
services incorporating the licensed technology. The royalty fees for any
licensed technology not licensed to third parties are to be determined by the
parties based on the fair market value of the license. The royalty fees for any
licensed technology licensed to third parties are to be the lower of the lowest
fee payable by any comparable third party and the fair market value of the
license. While New Styleclick is a controlled subsidiary of USAi, USAi agrees to
provide business services to New Styleclick, including fulfillment,
teleservices, commercials, database marketing, call center operations, customer
care and other services that USAi provides to third parties. The terms on which
these services will be offered will be negotiated between the parties and shall
be no less favorable than the terms provided by USAi to any comparable third
party.
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STOCKHOLDERS AGREEMENT
Under the stockholders agreement, New Styleclick, USAi, USANi Sub, Joyce
Freedman, Lee Freedman and Maurizio Vecchione will agree:
- to take all reasonable actions within each of the parties' control to
elect a Board of Directors of New Styleclick comprised of six directors
nominated by USANi Sub, two directors nominated by Joyce Freedman, Lee
Freedman and Maurizio Vecchione, collectively, and three outside directors
appointed by the Board of New Styleclick;
- that New Styleclick will not dispose of substantially all its assets, or
enter into any business combination, reorganization or other extraordinary
transaction without the approval and recommendation of a special committee
of the New Styleclick Board of Directors comprised solely of directors
other than directors appointed by USANi Sub and only after the special
board committee has obtained an opinion from a nationally recognized
investment banking firm to the effect that the extraordinary transaction
is fair to shareholders from a financial point of view;
- that, with some exceptions, USANi Sub or its affiliates will not transfer
their shares in New Styleclick to any third party for 18 months following
the merger and that principal shareholders Joyce Freedman, Lee Freedman
and Maurizio Vecchione will not transfer their shares in New Styleclick to
any third party for six months following the merger. The exceptions relate
to sales between the principal shareholders, sales by parties with the
consent of the other principal shareholders and some private sales where
the transferee agrees to be bound by the transfer restrictions in the
Stockholders Agreement;
- to register the shares held by Joyce Freedman and Lee Freedman if New
Styleclick proposes to file a registration statement with respect to an
offering of securities by New Styleclick within six months of the merger;
and
- to the termination of the employment agreements between each of Joyce
Freedman and Lee Freedman and Old Styleclick.
REGISTRATION RIGHTS AGREEMENT
Under the registration rights agreement, New Styleclick will grant
registration rights to USAi and USANi Sub, or any of their permitted
transferees, with respect to the New Styleclick securities they hold, in the
following circumstances:
- at any time after 18 months from the date of the merger, if USAi, USANi
Sub or their transferees requests registration of its Class B Common Stock
under the Securities Act. However, New Styleclick will not be required to
file a registration between the effective date of a registration statement
filed by New Styleclick and the end of any lock-up period in connection
with that registration statement; and
- at any time after 18 months from the close of the merger, if New
Styleclick proposes to file a registration statement under the Securities
Act with respect to an offering of capital stock by New Styleclick other
than a registration statement in connection with a business combination or
an employee benefits plan. New Styleclick must give 30 days notice to
USAi, USANi Sub and their permitted transferees of the proposed
registration and must use reasonable best efforts to include their
securities in the offering if requested.
OPTION AGREEMENT
Under the terms of the option agreement entered into on the date of the
merger agreement, Old Styleclick granted to USANi Sub an irrevocable option to
purchase up to 19.9% of the shares of
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common stock of Old Styleclick at a price of $17.50 per share. The option is
exercisable at any time following:
- the acquisition by any person of 15% or more of the outstanding common
stock of Old Styleclick;
- the commencement or announcement of a tender offer for 15% or more of the
outstanding common stock of Old Styleclick;
- the withdrawal or modification of the Old Styleclick Board of Directors'
recommendation of the proposed merger in a manner adverse to Internet
Shopping Network or USANi Sub, the failure of Old Styleclick's Board to
recommend against a transaction proposal by a third party or its
recommendation of a superior transaction proposal by a third party; or
- the failure of the shareholders of Old Styleclick to approve the merger at
the special meeting and prior to the meeting a transaction proposal by a
third party has been announced or, within 12 months following termination
of the merger agreement, Old Styleclick definitively agrees to a
transaction proposal by a third party.
In connection with the grant of the option, Old Styleclick also granted
registration rights to USANi which may be exercised at any time within three
years of USANi Sub exercising the option. USANi Sub may request registration of
the shares underlying the option no more than twice during this period. The
total profit that USANi is permitted to make on the exercise of the option, when
combined with any termination fee payable under the merger agreement, is limited
to $5.5 million.
The option agreement was entered into by Old Styleclick and USANi Sub
concurrently with the execution of the merger agreement in an effort to increase
the likelihood that the merger will be completed in accordance with the terms
set forth in the merger agreement. Consequently, the option agreement may have
the effect of discouraging persons who are now, or prior to the merger may have
been, interested in merging with or acquiring a significant equity interest in
Old Styleclick or proposing an acquisition. In addition, the grant of the option
to USANi Sub may make it impossible for any third party to close a transaction
with Old Styleclick on a pooling of interests basis.
VOTING AND FIRST OFFER AGREEMENTS
Each of Joyce Freedman, Maurizio Vecchione, Lee Freedman and Intel
Corporation have entered into voting and first offer agreements with USANi Sub
agreeing to certain transfer restrictions and to vote their shares in favor of
the merger. As of January 24, 2000, the date the voting and first offer
agreements were executed Ms. Freedman, Mr. Vecchione, Mr. Freedman and Intel
Corporation held 2,519,036 shares of Old Styleclick common stock, representing
approximately 32.6% of outstanding Old Styleclick common stock.
WAIVER AGREEMENTS
Some of Old Styleclick's shareholders who had purchased Old Styleclick
securities in a private placement in April 1999 entered into agreements with
USANi Sub agreeing to waive or modify provisions of the agreement executed in
connection with the private placement and their warrant agreements.
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NEW STYLECLICK'S BUSINESS
CORPORATE OVERVIEW
New Styleclick was incorporated in Delaware on March 22, 2000 by USANi Sub
in connection with the mergers. New Styleclick will be the parent company for
Old Styleclick and Internet Shopping Network, each of which will merge into a
wholly-owned subsidiary of New Styleclick in separate merger transactions. New
Styleclick has applied for listing on the Nasdaq National Market under the
symbol "IBUY," which is currently used by Old Styleclick.
BUSINESS OVERVIEW
New Styleclick plans to utilize the strengths and expertise of Old
Styleclick, Internet Shopping Network and USAi and its affiliates to sell
services and products across the Internet. New Styleclick will be an Internet
merchandising services company that provides technology and services to run
electronic commerce websites and also will sell products directly through
websites that it owns and operates. Specifically, New Styleclick will sell
website development, create product information in a digital format, provide
merchandising services and manage the outsourcing of product fulfillment and
customer services. In addition, New Styleclick will provide the technology to
distribute product information to websites that it manages and other websites
with which New Styleclick has agreements, referred to as New Styleclick's
syndication network. New Styleclick will offer "lifestyle" products such as
apparel, jewelry, accessories, cosmetics, footwear, home decorating and home
improvement products. As described in "Industry Background" below, sales of
apparel and accessories on the Internet are expected to grow as electronic
commerce evolves to encompass a broader mix of products. New Styleclick expects
to benefit from cross marketing through its affiliation with USAi, Home Shopping
Network, Ticketmaster Online City Search and other USAi affiliates. New
Styleclick also intends to explore partnerships with other established brands to
expand its consumer reach and reduce associated marketing costs.
INDUSTRY BACKGROUND
The Internet is a highly interactive medium that allows companies involved
in electronic commerce to customize online stores, advertising and promotional
materials and to target specific groups and individuals. Jupiter Communications,
an independent market research organization, in their report titled ONLINE
SHOPPING REPORT (January 2000), estimates that the number of people shopping
online will increase from 28.8 million in 1999 to 85.0 million in 2003 and that
online shoppers will increase their spending on products offered on the Internet
from $23.1 billion in 1999 to $78.0 billion in 2003. In the same report, Jupiter
Communications estimates that sales of apparel and accessories on the Internet
will grow from $800 million in 1999 to $6.7 billion in 2003. However, Jupiter
Communications points out that, while this growth would put the apparel industry
among the leading online categories, online sales would account for less than
four percent of all sales in the apparel and footwear industry. To capture a
share of this growth, an Internet merchandising services company needs to
distinguish itself from competitors and reach consumers through cost effective
marketing programs and consumer retention efforts. New Styleclick believes that
to realize these forecasts the presentation of apparel and accessories over the
Internet must be improved. However, improved presentation techniques will rely
on high-speed Internet access to some degree and Jupiter Communications
estimates that only 23 percent of Internet users will have high-speed Internet
access by 2003.
COMPETITIVE ADVANTAGES
New Styleclick will be able to offer a complete electronic merchandising
solution to outside third parties, affiliates of USAi and its own electronic
commerce websites. These capabilities include the following:
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TECHNOLOGY PLATFORM. Old Styleclick has developed and currently uses
technologies that manage website content in the form of words and pictures and
then place that content in specific locations on the Internet with other related
content in a timely fashion. It uses this technology for products it sells on
the websites that it manages and through its syndication network.
MERCHANDISING EXPERTISE. The employees of Internet Shopping Network have
significant merchandising experience and understand merchandise planning,
inventory control and product sourcing. These employees place product within a
relevant context to create immediacy in the purchasing process. This process is
referred to as contextual merchandising.
PROMOTIONAL CAPABILITIES. As a majority-owned subsidiary of USAi, New
Styleclick will be affiliated with the fifth largest entertainment company in
the United States, as ranked according to revenues by Fortune magazine on
April 17, 2000. USAi reaches consumers through a variety of direct and indirect
marketing methods, and New Styleclick intends to use this relationship to
develop methods of marketing to USAi's broad customer base.
LOGISTICAL CAPABILITIES. Through Internet Shopping Network and Old
Styleclick, New Styleclick will have contractual relationships with USAi's
Electronic Commerce and Services division and the systems to work in conjunction
with independent third parties for fulfillment and customer service.
REVENUES FROM BUSINESS SERVICES
New Styleclick will generate revenue by enabling manufacturers and retailers
to establish an electronic commerce presence on the Internet and utilize its
electronic merchandising services. These include website development and
management, development and maintenance of digital product information in the
form of electronic catalogues and distribution and management of products to its
syndication network. Revenues will be earned directly for services performed and
from commissions on the sales of products.
WEBSITE DEVELOPMENT. New Styleclick will be able to build highly customized
websites via a new proprietary technology called Java Servlet Explosion, which
allows the programmer to use templates that can be updated with a minimum amount
of additional programming.
DEVELOPMENT AND MAINTENANCE OF DIGITAL CONTENT. New Styleclick will own
technology that allows it to create and manage large electronic catalogs of
product information. This process is often a major bottleneck in the creation
and management of electronic commerce websites.
COMMISSIONS FROM ELECTRONIC COMMERCE TRANSACTIONS. New Styleclick will
manage and operate third party websites on behalf of its customers' brands and
will build on its current customer base which includes:
<TABLE>
<S> <C>
- Cindy Crawford's Fashion and fan information
Cindystore.com
- Daisyfuentesstore.com Fashion and fan information
- Hunterdouglas.com Window fashions
- jennalanegroup.com Womens apparel
- Pingcollectionstore.com Golf wear
- Susandunn.com Robes and spa wear
- Pjsavage.com Sleepwear
- Freestyleusa.com Sports Watches
</TABLE>
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ELECTRONIC COMMERCE MANAGEMENT. New Styleclick will manage the entire
transaction with the customer, including merchandising, billing, fulfillment and
customer service. Fulfillment and customer service will be outsourced to either
a division of USAi or an independent third party.
DISTRIBUTED E-COMMERCE. New Styleclick's syndication network will include
major portals such as AOL, Excite, Netscape, iVillage, Women.com and Oxygen
Media, and New Styleclick will continue to expand this network. Arrangements
with members of the syndication network will allow New Styleclick to manage
electronic commerce venues inside those portals, and to merchandise those venues
with products from manufacturers and retailers affiliated with New Styleclick.
As a result, New Styleclick can provide its manufacturers and retailers with
placement in major portals on the Internet, which increases their access to
consumers. Furthermore, the portals can sell merchandise and earn commissions
without the consumer leaving the website portal.
REVENUES FROM CONSUMER TRANSACTIONS
New Styleclick will also generate revenues by selling products through its
electronic commerce websites: FirstAuction.com, FirstJewelry.com, Styleclick.com
and Fashiontrip.com. The products sold on these websites will be targeted at the
online female shopper.
FIRSTAUCTION.COM. FirstAuction.com is an auction website targeted at women.
Its goal is to deliver an engaging and entertaining buying experience in a deal
format through which women can find bargains and purchase from a wide assortment
of general merchandise. It also provides a "Satisfaction Guarantee" with any
purchase.
FIRSTJEWELRY.COM. FirstJewelry.com is a retail website that offers a broad
assortment of jewelry by popular designers and more traditional gold and silver
products. FirstJewelry.com specializes in selling jewelry generally less than
$750 to the style-conscious woman.
STYLECLICK.COM. Styleclick.com is a retail website that offers fashion and
accessories from a large selection of in-style brands. Styleclick.com is
positioned as an easy way for today's busy woman to shop and gives her the
flexibility of shopping by brand, by category or by specialty shop.
FASHIONTRIP.COM. Fashiontrip.com is a retail website that features articles
of interest to teenage girls. At the website, teenagers can read about and share
views on social, global and environmental issues through a variety of formats,
including articles and online chats.
Following the closing of the merger, all existing websites of Internet
Shopping Network and Old Styleclick will be integrated and linked, allowing
visitors access across all of our websites. Depending on its ongoing evaluation
of the prospects of these operations, including alternative uses of capital and
resources, as well as general economic and industry conditions, New StyleClick
may shift the focus of, dispose of or substantially reduce its interest in some
or all of these operations. Any such shift, disposition or reduction may cause a
decrease in New StyleClick's anticipated revenue.
TECHNOLOGY AND PROCESSES
Old Styleclick has developed key technologies and processes that will
support New Styleclick's business strategy. These technologies will provide New
Styleclick with key capabilities in conducting electronic commerce over the
Internet, including:
Website Management--for managing the creation of Internet websites and
updating these websites with product information which is updateable with a
minimum amount of programming effort using a proprietary technology called Java
Servlet Explosion.
Content Management--for managing the rapid creation and merchandising of
product information across the syndication network.
Presentation--designed to manage, search and display digital product
information, in a way that allows compatible search engines to become aware of,
and match content against, user searches.
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Distributed electronic commerce--designed to deliver product information and
conduct electronic commerce transactions within websites across the syndication
network.
New Styleclick believes that these technologies allow it to differentiate
itself from its competitors.
Most of Old Styleclick's proprietary technology is covered by two United
States patents: one related to rendering and modeling technology and the second
related to 3-D modeling techniques. Old Styleclick also has received a notice of
allowance of its pending patent application covering the ability to create an
interactive digital dressing room that allows apparel to be fitted to specific
body dimensions and pending patent application for the delivery of 3D scenes. In
addition to patent protection and patents under development for website
management, Old Styleclick relies on a combination of intellectual property laws
and confidentiality and nondisclosure agreements to protect its proprietary
rights.
Currently, Old Styleclick's product development focuses on:
- the creation of the design, organization and features for its websites;
- product information cataloging;
- increasing the speed at which users interact with the website;
- managing high and low consumer traffic volume for efficient handling of
concurrent transactions;
- developing technology that enables detailed product information to be
delivered through slow Internet connections; and
- technologies that enable the comparison and recommendation of products to
consumers.
Old Styleclick's hardware configuration is currently located in two sites
and is operated under an agreement with Verio Networks. This architecture is
highly scaleable and redundant.
It is expected that within six months of completion of the merger all of Old
Styleclick Internet Shopping Network's electronic commerce websites will be
serviced from a common New Styleclick technology platform. New Styleclick
believes that this will provide an enhanced user experience, improved website
performance, enhanced merchandising and access to Old Styleclick's distributed
syndication network.
RELATIONSHIP WITH USAI
Through relationships with USAi and its affiliates, New Styleclick hopes to
attract new visitors, build a large family of repeat, loyal customers and
develop cross-marketing and joint fulfillment capabilities. New Styleclick
expects to be able to access merchandise suppliers and customer databases to
utilize USAi's extensive capabilities and relationships in the television medium
to capitalize on synergies between television and Internet media.
BUSINESS SERVICES COMPETITION
The market for New Styleclick's businesses services is evolving and
unpredictable and is characterized by high levels of competition. The management
of New Styleclick expects brand name recognition to become an increasingly
important competitive factor.
Delivering New Styleclick's integrated services and tools is complex,
involves significant technology investment and requires the combination of
merchandising experience and technology expertise. To its knowledge, New
Styleclick has no direct competitor that is positioned as a complete electronic
merchandising services company. However, some companies compete with aspects of
New Styleclick's business. These companies include U.S. Web, Razorfish, iXL,
Organic and Sapient, which primarily offer website production and hosting,
database marketing and reporting services. Many of these competitors are more
established and have significantly greater financial resources than New
Styleclick. However,
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they currently do not offer product information updating, merchandising, product
procurement, fulfillment and customer service and a syndication network, which
New Styleclick will offer.
CONSUMER TRANSACTIONS COMPETITION
The market for New Styleclick's consumer products has low barriers to entry
and is characterized by an increasing number of competitors entering the market.
As with its business services, New Styleclick expects brand name recognition to
become an increasingly important competitive factor in this market.
FIRST AUCTION--COMPETITION
There are many auction competitors in the consumer transactions market and
new competitors are constantly emerging. To New Styleclick's knowledge, none of
these auction websites are focused on female consumers like FirstAuction.com.
However, New Styleclick expects more competitors specifically targeting female
consumers to emerge. New Styleclick's current major competitors in this market
include:
- Onsale--specializing in computer hardware and software, electronics,
travel destinations and sports and fitness products.
- uBid--specializing in refurbished products such as an assortment of
computer hardware and software and electronics.
- bid.com--specializing in computer and consumer electronics.
FIRST JEWELRY--COMPETITION
There are currently a number of competitors selling jewelry over the
Internet. New Styleclick's current major competitors in this market include:
- Miadora--sells designer jewelry and moderately priced fine jewelry and
includes features such as live chat, coupons and gift certificates.
- Mondera.com--sells traditional jewelry products with a focus on classic
fine jewelry.
- Ashford.com--sells a broad assortment of mid to high priced jewelry,
luggage and eyewear and has Amazon.com as a major investor.
- adornis.com--sells high-end designer jewelry.
STYLECLICK.COM--COMPETITION
The competition is divided into four segments:
- online outlets, which primarily sell seconds or grey-market goods, such as
www.bluefly.com
- online department stores, which usually offer some, but rarely all, of the
selection of their brick-and-mortar counterparts and at generally higher
prices, such as www.macys.com or www.nordstrom.com;
- brand websites, which are typically catalogers and basic retailers and
offer only their own brand, such as www.gap.com or www.landsend.com; and
- aggregators, which typically pass consumers through to third party
websites, such as www.fashionmall.com and malls online.
FASHIONTRIP.COM--COMPETITION
Fashiontrip.com has the same competition as Styleclick.com. Additionally,
there are currently a number of teen-oriented websites on the Internet,
including MXGonline.com. USAi is an investor in MXGonline.
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INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
New Styleclick will maintain Old Styleclick's technology as proprietary and
will try to protect it under existing United States and international laws
relating to the protection of intellectual property. New Styleclick intends to
integrate the existing internal procedures of Internet Shopping Network and Old
Styleclick to control access and dissemination of its proprietary information.
Some of the technology that will be incorporated into New Styleclick's websites
is based on technology licensed from third parties. As new services are
introduced, it may be necessary to license additional technology, although New
Styleclick expects to develop most of the required proprietary technology
internally.
LEGAL PROCEEDINGS
As a newly formed company, New Styleclick does not have any pending or
threatened litigation. Our operations and financial performance, however, may be
affected by pending litigation against Internet Shopping Network. See "Legal
Proceedings" under "Internet Shopping Networks Business."
EMPLOYEES
As of December 31, 1999, Old Styleclick and Internet Shopping Network had a
total of 304 full-time employees, including 24 in sales and marketing, 82 in
development and systems, 94 in product-related activities and fulfillment, 69 in
content and creative areas and 35 in general and administration areas. Following
the merger, New Styleclick expects to have approximately 250 employees. From
time to time, New Styleclick will employ independent contractors to support its
research and development, marketing, sales and support and administrative
operations. On the closing of the merger, New Styleclick's employees will not be
covered by any collective bargaining agreement.
PROPERTY
Following the merger, the current operations of Old Styleclick and Internet
Shopping Network will be located at facilities in Los Angeles County,
California; New York, New York and High Point, North Carolina. New Styleclick's
headquarters will be located at 5105 West Golden Leaf Circle, Los Angeles,
California.
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OLD STYLECLICK'S BUSINESS
DESCRIPTION OF BUSINESS
Old Styleclick facilitates electronic commerce in the fashion, accessories,
footwear, cosmetics, home furnishing, decorating and improvement industries. In
addition, by using the various technologies that it has developed, Old
Styleclick provides electronic merchandising services to manufacturers and
retailers. Old Styleclick has developed technologies designed to manage, search
and display product information, in the form of pictures of products and related
descriptions. These technologies allow search engines to become aware of, and
match content against, user searches. Furthermore, Old Styleclick has developed
methods of displaying this information in graphically rich ways that are
designed to increase user perception of visual details.
PRODUCTS AND SERVICES
Old Styleclick's products and services are divided into three major classes:
- a business services unit which uses Old Styleclick's electronic
merchandising, product and information management and visualization
technologies to provide Internet solutions to retailers and manufacturers;
- Internet based electronic commerce websites intended to search and manage
digital product information and facilitate Internet commerce for
consumers; and
- consumer software applications on CD-ROM for electronic commerce.
BUSINESS SERVICES
Old Styleclick builds highly customized websites via its Java Servlet
Explosion technology. Old Styleclick also owns technology which allows it to
build large electronic catalogs of product information. In addition, Old
Styleclick manages electronic commerce venues inside its syndication network and
manages third party websites on behalf of its consumer brands, as described in
more detail under "New Styleclick's Business." Finally, Old Styleclick
coordinates with third parties to provide product fulfillment and customer
services.
INTERNET APPLICATIONS
Old Styleclick's flagship consumer website, Styleclick.com, offers consumers
a convenient way to find and buy apparel, accessories, and related products
online. The website offers a large selection of designer brand original items
for men, women, and children of all ages and sizes. The website features
proprietary navigation and product search technology, enabling consumers to make
informed purchasing decisions. Additionally, the website enables consumers to
view high resolution product images with the ability to pan and zoom to inspect
details such as fabric texture and stitching.
Fashiontrip.com is Old Styleclick's teen-oriented website. Fashiontrip.com
offers a large selection of apparel, shoes, accessories, bath & beauty products,
and style related merchandise aimed at the teen market. Old Styleclick uses its
proprietary technology to deliver an online shopping and lifestyle environment
that is designed to appeal to the teenage consumer market.
CONSUMER SOFTWARE, CD-ROM APPLICATIONS
The precursor to Old Styleclick's Internet electronic commerce strategy was
a series of consumer software applications which Old Styleclick developed
beginning in 1996, including the 3D Home Interiors and 3D Home Suite product
lines. In 1998, Old Styleclick sold its rights to these product lines to
Broderbund, the publisher, for a one-time royalty payment.
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The Fashiontrip and iStyle CD-ROM software applications were jointly
developed by Old Styleclick and Intel Corporation in late 1997. Cendant Software
Corporation published the CD-ROM's and distributes them through its distribution
channels.
TECHNOLOGY
Old Styleclick has completed most of the core technologies necessary to
operate its websites. Details related to Old Styleclick's technology development
are described in more detail in "New Styleclick Business--Technology and
Processes."
PATENTS AND PROPRIETARY RIGHTS
Old Styleclick holds three United States patents. The first covers Old
Styleclick's rendering and modeling technology. The second covers 3-D modeling
techniques. The third relates to business software products which have become a
less important part of New Styleclick's business. Additionally, Old Styleclick
has received notices of allowance of two pending patent applications covering
the ability to create an interactive digital dressing room that allows apparel
to be fitted to specific body dimensions and to deliver 3D scenes. Old
Styleclick relies on a combination of intellectual property laws and
confidentiality and nondisclosure agreements to protect its proprietary rights.
Old Styleclick employs a "lock and key" system with respect to the proprietary
information underlying its software. This system is designed to ensure that only
certain key employees have access to such information, all of whom have signed
confidentiality and nondisclosure agreements. In addition, Old Styleclick has
nine registered trademarks.
EMPLOYEES
As of December 31, 1999, Old Styleclick employed 157 full-time employees,
including 18 in sales and marketing, 55 in development and systems, 31 in
product-related activities and fulfillment, 38 in content and creative areas and
15 in general and administrative areas. None of Old Styleclick's employees are
represented by a labor union, and Old Styleclick has never experienced a work
stoppage.
PROPERTY
In 1998, Old Styleclick moved its executive headquarters to a three-story
office building with approximately 23,000 square feet of office space in Culver
City, California, under a lease that will expire in 2006, with an option to
extend the lease term for additional ten years. Prior to completion of the
merger, Old Styleclick expects to lease approximately 23,000 square feet of
additional space at 5105 West Golden Leaf Circle, Los Angeles, California under
a lease that will expire in 2005, with an option to extend the lease for an
additional five years. Old Styleclick has sub-leased its other Los Angeles
property under a sub-lease that will expire in 2002, the same expiration date of
the original lease.
Old Styleclick leases approximately 4,800 square feet in High Point, North
Carolina, under a lease that expires in 2004, for production and customer
service activities, directed primarily at electronic merchandising customers and
consumer product lines. The facility was necessary to accommodate Old
Styleclick's recent growth in its personnel in this office. Old Styleclick
acquired this additional space on commercially reasonable terms. Old Styleclick
leases approximately 1,500 square feet in New York primarily for sales and
marketing support activities in the Northeast region under a lease that expires
in August 2000. Old Styleclick anticipates that it may require additional space
in New York in the second half of 2000 to handle the expected increased levels
of its business activities.
LEGAL PROCEEDINGS
Old Styleclick is not currently involved in any material legal proceedings.
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INTERNET SHOPPING NETWORK'S BUSINESS
OVERVIEW
Internet Shopping Network was one of the first Internet retailers in the
world when it launched its original online store in April 1994.
FIRST AUCTION. Internet Shopping Network launched FirstAuction.com, the
first real-time auction website on the Internet, in June 1997. First Auction
features home and leisure merchandise, including jewelry, gourmet food, apparel,
cosmetics, furniture, consumer electronics and computers.
FIRST JEWELRY. In October 1999, Internet Shopping Network launched
FirstJewelry.com. By focusing on quality and breadth of selection, Internet
Shopping Network intends to be the online fashion authority for accessible
jewelry, offering access to the newest designers.
RELATIONSHIP WITH USAI AND HOME SHOPPING NETWORK
Because it is an indirect subsidiary of USAi, Internet Shopping Network
believes it can continue to assure its consumers efficient fulfillment and
customer services, from a large and well known retailer, the Home Shopping
Network. Internet Shopping Network believes that its relationship with USAi and
Home Shopping Network gives it meaningful advantages relative to other online
retailers, including:
- The use of Home Shopping Network's distribution center for its warehouse
and product fulfillment requirements, which enables Internet Shopping
Network to offer over 15,000 in-stock items for fast delivery;
- The use of Home Shopping Network's customer service facility to handle
customer inquiries and returns processing;
- The size of Home Shopping Network and USAi, which provides leverage in
negotiating with online portals, distribution partners, content and media
companies as well as with other strategic relationships;
- The ability to conduct marketing programs and promotional activities
across the many media and commerce assets of USAi such as Home Shopping
Network, SCI-FI.com, Ticketmaster and USA Network.
- Ongoing access to the substantial selling, merchandising and direct
marketing knowledge and experience of Home Shopping Network and USAi.
FIRST AUCTION BUSINESS
FirstAuction.com's online auctions provide a sales format that uses the
unique characteristics of the Internet, such as interactivity and a sense of
community. The auction format allows Internet Shopping Network's targeted female
consumers to bid against one another in a freely competitive market unlike
typical traditional retailing. Thousands of new auctions are being added to
FirstAuction.com each day. Departments on FirstAuction.com include Lifestyles,
with toys, music and entertainment, golf, tennis, footwear and luggage; The Home
Shop, with bed & bath, dining and entertaining, home improvement and gourmet
food; Collectibles; Designer Dolls; Healthy Living, with nutritional and
personal care products; Furniture; and Women's Apparel.
FirstAuction.com's consumer base increased by over 200,000 members in 1999.
FirstAuction.com has sold approximately $55 million of merchandise and
approximately 1.7 million units since its first auction in June 1997. In the
fourth quarter of 1999 alone, First Auction.com sold $6.2 million of merchandise
across 300,000 units to 41,000 unique bidders.
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The website design highlights Internet Shopping Network's unique Flash
Auctions, the only 30 minute auctions on the Internet. Flash Auctions, which
start at one dollar and last just thirty minutes, offers consumers a fast-paced
auction and the opportunity to get great deals. Regular auctions on
FirstAuction.com last a maximum of 48 hours. Every day there is a Daily Buy
which features products at low prices available for a maximum of 24 hours.
FirstAuction.com also offers a members-only newsletter, which informs
members via e-mail of upcoming auction and special promotions. Additionally,
most of the merchandise sold by Internet Shopping Network carries a warranty
from the vendor.
FIRST JEWELRY BUSINESS
In both design and merchandising, the FirstJewelry.com website approaches
its visitors with the goal of satisfying their individual shopping needs. The
website has the ability to search for product in a number of distinct ways that
will complement the manner in which a consumer wants to shop. The consumer can
search merchandise by lifestyles, categories, price, promotions and points of
view.
The website currently offers an assortment of new designers who have limited
distribution of their products. Additionally, FirstJewelry.com offers a large
assortment of fine fashion jewelry with value pricing below the standard prices
at department stores and competitive with other jewelry websites. Internet
Shopping Network intends to make FirstJewelry.com the fashion jewelry authority
for the style conscious woman.
Internet Shopping Network purchases most of its jewelry product directly
from manufacturers. This will provide its consumers with a broad assortment of
products; exclusive product for First Jewelry; current fashions and closeouts at
compelling prices.
Its merchandising assortment consists of 4,000 unique items merchandised
into 9-10 categories with 30 subcategories. Categories include a breadth of
basics like gold, silver, diamonds, platinum and gemstones, men's jewelry,
watches, wedding & bridal, seasonal/spiritual, and an assortment of fashion
jewelry and accessories. FirstJewelry.com has lifestyle shops and specialized
designer boutiques to highlight its designer and one-of-a kind products.
Internet Shopping Network offers high-quality products that are returnable
if consumers are not satisfied. The majority of its products come with
manufacturers or industry standard certifications such as GIA.
MERCHANDISE FULFILLMENT, CUSTOMER SERVICE AND SUPPORT
Home Shopping Network provides fulfillment and consumer service for Internet
Shopping Network's websites. Home Shopping Network is responsible for
warehousing, picking, packing and shipping from its Salem, Virginia; Roanoke,
Virginia and Waterloo, Iowa facilities. For jewelry, the fulfillment facility
processes multi-line orders and specialty packaging requests. The customer
service is handled by Home Shopping Network from their Clearwater, Florida,
offices.
EMPLOYEES
As of December 31, 1999, Internet Shopping Network employed 147 full-time
employees, including 6 in sales and marketing, 27 in development and systems, 63
in product-related activities and fulfillment, 31 in content and creative areas
and 20 in general and administrative areas.
PROPERTY
Internet Shopping Network's headquarters are located in Sunnyvale,
California, where it currently leases approximately 32,000 square feet under a
lease expiring in August 2000.
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LEGAL PROCEEDINGS
Internet Shopping Network is currently involved in one material litigation
which will involve New Styleclick:
In February 1999, Internet Shopping Network filed a demand for arbitration
against former Internet Shopping Network President Mr. Kirk Loevner under the
terms of the arbitration provision in his employment agreement. In response,
Mr. Loevner filed a complaint against Internet Shopping Network in Superior
Court for Santa Clara County, California. The Superior Court decided not to
enforce the arbitration provision of Mr. Loevner's employment agreement, and the
Court's ruling is currently on appeal. Mr. Loevner's employment with Internet
Shopping Network ceased in August 1998. Mr. Loevner alleges that Internet
Shopping Network breached his employment agreement and its stock option plan. He
is seeking declaratory relief that he did not breach his employment agreement by
accepting employment with his subsequent employer FreeShop International, Inc.
and, consequently, that his options for 250,000 shares of Internet Shopping
Network's predecessor Internet Shopping Network, Inc., with an exercise price of
$1.75 per share, are entitled to vest. Additionally, Mr. Loevner is seeking
penalties and attorneys fees under the California Labor Code. In December 1999,
Mr. Loevner filed a complaint in U.S. District for Northern District of
California against Home Shopping Network, Barry Diller and Mr. Jed Trosper,
seeking declaratory and injunctive relief, and damages relating to his alleged
entitlement to shares of Internet Shopping Network stock. In April 2000 this
complaint was dismissed without prejudice.
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MANAGEMENT OF NEW STYLECLICK FOLLOWING TRANSACTIONS
Immediately following the closing of the proposed transactions, the New
Styleclick Board of Directors will consist of eleven directors, ten of which
have currently been approved. Initially, USANi Sub will have the right to
designate six directors and the former principal shareholders of Old Styleclick
will have the right to designate two directors. Three independent directors will
be designated by the directors. The executive officers, directors and key
employees of New Styleclick following the closing of the merger and their
respective ages are set forth below:
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ----------- --------------------------------------------
<S> <C> <C>
Maurizio Vecchione......................... 37 Chief Executive Officer and Director
Bill Lane.................................. 49 President
Edward Zinser.............................. 42 Executive Vice President and Chief Operating
Officer
Barry Hall................................. 52 Executive Vice President and Chief Financial
Officer
Bruce Goldstein............................ 51 Executive Vice President, Business
Development
Barry Baker................................ 47 Director
Mark Bozek................................. 41 Director
Victor Kaufman............................. 56 Director
Dara Khosrowshahi.......................... 30 Director
Jon Miller................................. 43 Director
Leslie Saleson 47 Director
Michael Sileck............................. 40 Director
Hamilton South............................. 34 Director
John Tinker................................ 43 Director
</TABLE>
Mr. Vecchione will be the Chief Executive Officer and a director of New
Styleclick. From May 1999 to the present Mr. Vecchione has served as Co-Chief
Executive Officer of Old Styleclick of which he was a founder. From January 1998
to April 1999 he was the Chief Operating Officer of Old Styleclick and from
February 1988 to December 1997 he was Executive Vice President of Old
Styleclick. Prior to co-founding Old Styleclick Mr. Vecchione held various
executive, technical and marketing positions with CAECO a developer of CAD/CAM
software, Tektronix Corporation a computer graphics and instrumentation
manufacturer, and Photomatrix and Proprietary Software, developers of imaging
and computer graphics software.
Mr. Lane is the President of New Styleclick. From May 1998 to the present,
Mr. Lane has served as Chief Operating Officer of Internet Shopping Network.
From November 1994 to August 1997 he was Vice President for New Markets of QVC,
Inc., a cable television shopping network. Prior to that Mr. Lane was Vice
President for Merchandising and Marketing for The Joan Rivers Can We Shop TV
Program and previously spent 10 years at Bloomingdale's Department Stores where
he held various positions in merchandising, marketing and operations.
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Mr. Zinser is the Executive Vice President, Chief Operating Officer of New
Styleclick. From July 1999 to the present he has served as Senior Vice President
and Chief Financial Officer of Internet Shopping Network. From June 1998 to June
1999 Mr. Zinser was Executive Vice President, Chief Financial Officer of
Chromium Graphics, Inc., a developer, manufacturer and marketer of premium print
products. From June 1993 to May 1998 he was Vice President, Chief Financial
Officer of Disney Publishing, the book, magazine and licensed publishing
division of The Walt Disney Company. Prior to that Mr. Zinser was an executive
with The Franklin Mint a manufacturer and direct marketer of sculpture, die cast
cars, dolls, plates and jewelry. During that time he held the positions of Vice
President Finance, Vice President Advertising and Vice President Product
Development.
Mr. Hall will be Executive Vice President, Chief Financial Officer of New
Styleclick. From October 1999 he has held the same position at Styleclick.com
Inc. From May 1998 until August 1999 he was Chief Operating Officer of
Interactive Light, Inc. a developer and marketer of digital interactive
entertainment systems and platforms. From January 1998 to April 1998 Mr. Hall
was Chief Financial Officer of Apparel Technologies, Inc. a developer of digital
printing technologies for the apparel industry. From January 1996 to September
1997 he was Executive Vice President, Chief Financial Officer of EarthLink
Networks, Inc. a nationwide Internet Services Provider. Prior to that Mr. Hall
was Chairman and Chief Executive Officer of California Amplifier, a developer,
manufacturer and marketer of electronic components used in the reception of
microwave and satellite television signals.
Mr. Goldstein is Executive Vice President of Business Development of New
Styleclick. From September 1998 he has held the position of Vice President,
Senior Product and Planning Officer of Internet Shopping Network and since
September 1999 he has acted as Interim Vice President Marketing. From June 1997
to August 1998 Mr. Goldstein was Senior Vice President, Worldwide Marketing and
Licensing of MY-CD.com, an online distributor of custom compiled compact disks.
From March 1994 to May 1997, he was President and Chief Executive Officer of
Universal Management, Inc., a merchandising and new media consulting company.
Prior to that Mr. Goldstein was President and Chief Executive Officer of
Worldwide Thai LTD, a merchandiser and marketer of Thai food and housewares
under the brand name "Thai Chef."
Mr. Baker will be a director of New Styleclick. He has been President and
Chief Operating Officer of USAi since March 1999. Mr. Baker was Executive Vice
President of Sinclair Broadcast Group, Inc. and served as Chief Executive
Officer designate and as a director of Sinclair Communications, Inc. from June
1996 through February 1999. From 1989 through May 1996, he was the founder and
served as Chief Executive Officer of River City Broadcasting, L.P., which was
acquired by Sinclair Broadcasting. Mr. Baker serves as a director of Hotel
Reservations Network, Inc., Ticketmaster Online-CitySearch, Inc., USAi, iBEAM
Broadcasting Corporation and Production Resource Group, Inc.
Mr. Bozek will be a director of New Styleclick. He has been President of
Home Shopping Network since December 1998 and Chief Executive Officer of Home
Shopping Network since March 1999. Prior to joining Home Shopping Network,
Mr. Bozek was Vice President of Broadcasting at QVC, Inc. He has also served as
Vice President of Communication for WilliWear/WilliSmith, Inc. and a producer at
20th Century Fox. Mr. Bozek serves as a director of H.O.T. Home Order
Television, AG.
Mr. Kaufman will be a director of New Styleclick. Since October 1999,
Mr. Kaufman has served as Vice Chairman of USAi. From January 1997 until October
1999, Mr. Kaufman served in the Office of the Chairman of USAi, and from
November 1997 until October 1999, he served as Chief Financial Officer for USAi.
Prior to that time, he served as Chairman and Chief Executive Officer of Savoy
since March 1992 and as a director of Savoy since February 1992. Mr. Kaufman was
the founding Chairman and Chief Executive Officer of Tri-Star Pictures, Inc.
from 1983 until December 1987, at which time he became President and Chief
Executive Officer of Tri-Star's successor company, Columbia Pictures
Entertainment, Inc. He resigned from these positions at the end of 1989
following the acquisition of Columbia by Sony USA, Inc. Mr. Kaufman joined
Columbia in 1974 and served in a variety of senior
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positions at Columbia and its affiliates prior to the founding of Tri-Star.
Mr. Kaufman also serves as a direct of Hotel Reservations Network, Inc.,
Ticketmaster Online-CitySearch, Inc. and USAi.
Mr. Khosrowshahi is a director of New Styleclick and will continue to be a
director after closing of the proposed transactions. Since August 1999,
Mr. Khosrowshahi has been President of USA Networks Interactive, a division of
USAi. Prior to that time, Mr. Khosrowshahi was the Vice President of Strategic
Planning for USAi and USANi LLC since March 1998. Prior to joining USAi, from
1991 to 1998, he was at Allen & Company Incorporated where he was a Vice
President from 1995 to 1996 and a Director from 1996 to 1998. Mr. Khosrowshahi
also serves as a director of Hotel Reservations Network, Inc., Ticketmaster
Online-CitySearch, Inc., BET.com LLC and FreePC.
Mr. Miller will be a director of New Styleclick. He has been President and
Chief Executive Officer of USA Electronic Commerce and Services, a USAi company,
since October 1999. Prior to joining USA Electronic Commerce and Services,
Mr. Miller was President and Chief Executive Officer of USA Broadcasting and
Managing Director of Nickelodeon International. He has also served as Chief
Executive of Paramount Comedy Channel London, UK, Vice President, Programming of
NBA
Properties and Co-General Manager of NBA Entertainment.
Ms. Saleson will be a director of New Styleclick. Since November 1998, Ms.
Saleson has been President and Chief Operating Officer of Abbott Resource Group,
Inc., a privately held company based in Irvine, California. From April 1997 to
November 1998, Ms. Saleson served as an independent financial advisor to several
corporations. From February 1994 to April 1997. Ms. Saleson was a managing
director of The Westcott Group, a Beverly Hills-based merchant bank. From 1990
to 1993 Ms. Saleson was an owner, Co-Chief Executive Officer and Chief Financial
Officer of Pogens, Inc., a packaged cookie manufacturer. In 1981, Ms. Saleson
founded Saleson and Company, Inc., an investment-banking firm, where she served
as President until 1990. Ms. Saleson currently serves as a director of Old
Styleclick.
Mr. Sileck will be a director of New Styleclick. Since October 12, 1999,
Mr. Sileck has served as Chief Financial Officer of USA Networks, Inc. Prior to
that time, Mr. Sileck had served as CFO for USA Networks, a division of USA
Networks, Inc., since September 1999. Before joining USA
Networks, Mr. Sileck served as Vice President of Finance at Sinclair Broadcast
Group from June 1996 to August 1999. Prior to that, he served as Director of
Finance at River City Broadcasting from July 1990 to June 1996. Mr. Sileck also
serves as a director of Hotel Reservations Network, Inc.
Mr. South will be a director of New Styleclick. He served as Group President
and Chief Marketing Officer of Polo Ralph Lauren Corp. from March 1999 through
[ ] Prior to joining Polo in 1996, Mr. South was editor-at-large of
Vanity Fair Magazine.
Mr. Tinker will be a director of New Styleclick. He is is founder and
Managing Partner of Steamer Capital, LLC, a hedge fund focusing on public
investments in the Internet, media and telecommunications industries. Prior to
forming Steamer Capital, LLC in 1999, Mr. Tinker served as Senior Managing
Director and co-founder of the Media and Communications group and Senior
Research Analyst covering media and entertainment companies at Montgomery
Securities from 1996 to 1999. From 1991 to 1996, Mr. Tinker served as Managing
Director of Media and Entertainment research at Furman Selz. Prior to joining
Furman Selz, Mr. Tinker served as the research analyst covering media and
entertainment for Morgan Stanley & Co. from 1987 to 1991. Previously, Mr. Tinker
also worked for Polygram Records in the United Kingdom.
BOARD COMPENSATION AND COMMITTEES
Following the closing of the proposed transactions, New Styleclick's Board
of Directors will be comprised of 11 directors. Under a stockholders agreement
among Mr. Vecchione, Ms. Freedman, Mr. Freedman, USAi, USANi Sub and Old
Styleclick, USANi Sub will initially have the right to
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appoint six directors and Mr. Vecchione, Ms. Freedman and Mr. Freedman will
collectively have the right to appoint two directors. Three independent
directors will be designated by the directors. The Board will have a
compensation committee that will initially be comprised of Mr. Tinker,
Mr. South and another independent director who is yet to be appointed. The
compensation committee will make recommendations to the Board of Directors
concerning salaries and incentive compensation for New Styleclick's officers and
employees, including equity compensation for senior executives. The Board will
also have an audit committee that will initially be comprised of Mr. Tinker,
Mr. South and Ms. Saleson, all of whom are independent directors. The audit
committee will review and monitor New Styleclick's corporate financial reporting
and audits, as well as any other accounting-relating matters.
DIRECTOR COMPENSATION
All nonemployee directors will receive options to purchase 5,000 shares of
New Styleclick Class A common stock upon the director's election to office, and
thereafter annually on the date of the annual meeting of Old Styleclick
shareholders at which the director is re-elected to office, at an exercise price
equal to the fair market value of the shares on the trading date immediately
preceding the date of grant. In addition, the directors will be reimbursed for
all costs and expenses of attending meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the New Styleclick board of
directors or its compensation committee and the board of directors or
compensation committee of any other company.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation to be paid to New Styleclick's Chief Executive Officer and our
other executive officers, who are expected to earn in excess of $100,000 in
compensation during the year. The options described below have already been
granted to the named executive officers in their current positions with Old
Styleclick or Internet Shopping Network, as applicable. These options will be
converted into shares of New Styleclick Class A common stock upon completion of
the proposed transactions and will be considered part of the executive officer's
annual compensation from New Styleclick.
<TABLE>
<CAPTION>
ANNUAL STOCK
POSITION COMPENSATION OPTIONS
-------- ------------ --------
<S> <C> <C> <C>
Maurizio Vecchione................ Chief Executive Officer 250,000 387,227
Bill Lane......................... President 300,000 176,279
Edward Zinser..................... Executive Vice President and Chief 200,000 173,205
Operating Officer
Barry Hall........................ Executive Vice President and Chief 185,000 250,000
Financial Officer
Bruce Goldstein................... Executive Vice President 175,000 155,175
</TABLE>
As a condition to USANi Sub's obligation to close the merger, Mr. Vecchione
will enter into an employment agreement with New Styleclick. The employment
agreement will begin as soon as the merger is complete and have an initial term
of two years. Under the agreement, Mr. Vecchione will be paid an annual salary
of $250,000 plus an annual bonus of $50,000 if New Styleclick reaches 90% of its
budgeted sales target. All of Mr. Vecchione's options to purchase common stock
of Old Styleclick will vest prior to the change-of-control or be assumed by New
Styleclick in accordance with the terms of the agreements under which the
options were granted and the merger agreement. If New Styleclick terminates
Mr. Vecchione's employment without cause or Mr. Vecchione dies or becomes
permanently disabled, then New Styleclick must pay Mr. Vecchione's base salary
through the end of the initial term.
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The employment agreement also contains customary terms and conditions
restricting Mr. Vecchione's ability to compete with New Styleclick following
termination of the agreement.
STOCK INCENTIVE PLAN
Immediately prior to the completion of the mergers, New Styleclick will
adopt an employee stock option plan. The plan will provide that options to
purchase shares of New Styleclick Class A common stock may be granted to any
employee, officer or director of New Styleclick or its subsidiaries. New
Styleclick's Board of Directors or its Compensation Committee will select the
persons to whom options will be granted and determine the type of option and
number of shares subject to each option. Under the plan, options to purchase
[ ] shares of New Styleclick Class A common stock will be reserved for
issuance. All options to purchase Old Styleclick common stock and Internet
Shopping Network units outstanding immediately prior to completion of the
mergers will be converted into options governed by the New Styleclick employee
stock option plan.
401(K) PLAN
In connection with the proposed transactions, New Styleclick expects to
establish an employee benefit plan pursuant to Section 401(k) of the Internal
Revenue Code covering most of the full-time employees of New Styleclick and its
subsidiaries. New Styleclick's share of the matching employer contributions will
be set at the discretion of New Styleclick's Board of Directors or its
Compensation Committee.
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SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDERS OF NEW STYLECLICK
The following tables set forth certain beneficial ownership information with
respect to New Styleclick.
CLASS A COMMON STOCK
The following table sets forth, as of the date of this proxy
statement/prospectus, certain pro forma information regarding the beneficial
ownership of Class A common stock after giving effect to the proposed
transactions by (a) each person or entity who, to the knowledge of New
Styleclick, would own beneficially 5% or more of outstanding Class A common
stock; (b) each director of New Styleclick; (c) each named executive officer;
and (d) all directors and officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF SHARES VOTING POWER
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(1) (OF ALL CLASSES)
- ------------------- --------------------- --------------------- -------------------
<S> <C> <C> <C>
USA Networks, Inc....................... 13,735,131 31% 37%
152 West 57(th) Street, 42(nd) Floor
New York, NY 10019
USANi LLC............................... 22,614,991 73% 95%
152 West 57(th) Street, 42(nd) Floor
New York, NY 10019
Maurizio Vecchione(2)(5)................ 658,846 2% *
Bill Lane(3)............................ 44,007 * *
Edward Zinser(3)........................ 44,250 * *
Barry Hall(2)........................... 150,000 * *
Bruce Goldstein(3)...................... 46,312 * *
Barry Baker(4).......................... -- -- --
Mark Bozek(4)........................... -- -- --
Victor Kaufman(4)....................... -- -- --
Dara Khosrowshahi(4).................... -- -- --
Leslie Saleson(2)....................... 26,000 * *
Jon Miller(4)........................... -- -- --
Michael Sileck(4)....................... -- -- --
All executive officers and directors as
a group (11 persons).................. 969,415 3% *
</TABLE>
- ------------------------
(1) All numbers shown give effect to the issuance of shares of New Styleclick's
Class A common stock in the proposed transactions. Prior to the closing of
the mergers, no shares of Class A common stock will be issued or
outstanding, and no shares of Class A common stock will be beneficially
owned. Under New Styleclick's certificate of incorporation, shares of Class
B common stock are convertible at any time into an equal number of shares of
Class A common stock. The percentage of shares beneficially owned assumes
the conversion of all shares of Class B common stock beneficially owned by
USAi and USANi LLC, the parent of USANi Sub. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Except as indicated
by footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Class A common stock shown as beneficially owned by
them.
(2) The address for Mr. Vecchione, Mr. Hall and Ms. Saleson is c/o Old
Styleclick, 3861 Sepulveda Boulevard, Culver City, CA 90230.
(3) The address for Mr. Lane, Mr. Zinser and Mr. Goldstein is c/o Internet
Shopping Network, 500 Macara Avenue, Sunnyvale, CA 94086.
(4) The address for Mr. Baker, Mr. Bozek, Mr. Kaufman, Ms. Khosrowshahi,
Mr. Miller and Mr. Sileck is c/o USAi, 152 W. 57th Street, New York, NY
10019.
(5) Includes 4,000 shares which may be purchased by Andrea Vecchione,
Mr. Vecchione's wife, upon the exercise of vested and currently exercisable
warrants at an exercise price of $9.50 per share. Ms. Vecchione is a former
director of Old Styleclick.
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CLASS B COMMON STOCK
The following table sets forth, as of the date of this proxy
statement/prospectus, certain pro forma information regarding the beneficial
ownership of Class B common stock after giving effect to the mergers by (a) each
person or entity who, to the knowledge of New Styleclick, would own beneficially
5% or more of outstanding Class B common stock; (b) each director of New
Styleclick; (c) each named executive officer; and (d) all directors and officers
as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED(1) CLASS(1)
- ------------------- ---------------- -------------
<S> <C> <C>
USA Networks, Inc........................................... 13,735,131 38%
152 West 57(th) Street, 42(nd) Floor
New York, NY 10019
USANi LLC................................................... 22,500,985 98%
152 West 57(th) Street, 42(nd) Floor
New York, NY 10019
Maurizio Vecchione(2)....................................... -- --
Bill Lane(3)................................................ -- --
Edward Zinser(3)............................................ -- --
Barry Hall(2)............................................... -- --
Bruce Goldstein(3).......................................... -- --
Barry Baker(4).............................................. -- --
Mark Bozek(4)............................................... -- --
Victor Kaufman(4)........................................... -- --
Dara Kosrowshahi(4)......................................... -- --
Jon Miller(4)............................................... -- --
Leslie Saleson(2)........................................... -- --
Michael Sileck(4)........................................... -- --
All executive officers and directors as a group (11 -- --
persons)..................................................
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Except as otherwise indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Class B common stock shown as beneficially owned by them. Shares of Class B
common stock are convertible at any time into an equal number of shares of
our Class A common stock.
(2) The address for Mr. Vecchione, Mr. Hall and Ms. Saleson is c/o Old
Styleclick, 3861 Sepulveda Boulevard, Culver City, CA 90230.
(3) The address for Mr. Lane, Mr. Zinser and Mr. Goldstein is c/o Internet
Shopping Network, 500 Macara Avenue, Sunnyvale, CA 94086.
(4) The address for Mr. Baker, Mr. Bozek, Mr. Kaufman, Mr. Khosrowshahi,
Mr. Miller and Mr. Sileck is c/o USAi, 152 W. 57th Street, New York, NY
10019.
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COMPARISON OF THE RIGHTS OF NEW STYLECLICK SHAREHOLDERS
AND OLD STYLECLICK SHAREHOLDERS
The following is a summary of some of the material differences between the
rights of the holders of Old Styleclick common stock and the rights of the
holders of New Styleclick Class A common stock. For a full understanding of the
rights of the holders of Old Styleclick common stock and New Styleclick Class A
common stock, refer to California Law, Delaware Law, Old Styleclick's articles
of incorporation and bylaws, and New Styleclick's certificate of incorporation
and bylaws. See "Where You Can Find More Information".
The rights of New Styleclick's shareholders are governed by Delaware law,
including the Delaware General Corporation Law (DGCL), and by New Styleclick's
certificate of incorporation and bylaws. The rights of Old Styleclick's
shareholders are governed by California Law, including the California
Corporation Code (CCC), and by Old Styleclick's articles of incorporation and
bylaws. The rights of Internet Shopping Network's unitholders are governed by
Delaware Law, including the Delaware Limited Liability Company Act, and by
Internet Shopping Network's operating agreement. Upon completion of the merger,
holders of Old Styleclick common stock and Internet Shopping Network units will
become holders of New Styleclick Class A common stock, and accordingly, their
rights will be governed by Delaware law and New Styleclick's certificate of
incorporation and bylaws.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
NEW STYLECLICK. The certificate of incorporation currently authorizes the
issuance of 150 million shares of Class A common stock, par value $0.01 per
share, 112.5 million shares of Class B common stock, par value $0.01 per share,
and 25 million shares of preferred stock, par value $.01 per share. As of
May 10, 2000, there are no shares of Class A common stock and one share of Class
B common stock outstanding. The shares of Class B common stock are convertible
at any time at the option of the holders into shares of Class A common stock on
a share-for-share basis. Each share of Class B common stock will convert
automatically into a share of Class A common stock upon any sale, conveyance,
foreclosure upon, assignment or other transfer or disposition of the share
unless the share is transferred to USAi or any of its affiliates. In connection
with the mergers, warrants and options, to purchase approximately 2,300,000
shares of Old Styleclick common stock will convert one for one into warrants and
options, respectively, to purchase an equal number of shares of New Styleclick
Class A common stock, and options to purchase approximately 3,000,000 units of
Internet Shopping Network will convert into options to purchase approximately
1,800,000 shares of New Styleclick Class A Common Stock. In addition, New
Styleclick will issue a warrant to purchase approximately 12,800,000 shares of
New Styleclick Class B Common Stock to USAi. See "Description of Related
Agreements."
OLD STYLECLICK. The articles of incorporation currently authorize the
issuance of 15 million shares of common stock, par value $0.01 per share. As of
May 10, 2000, there were 7,724,930 shares of common stock outstanding.
VOTING RIGHTS
NEW STYLECLICK. The shares of Class A common stock are entitled to one vote
per share and the shares of Class B common stock are entitled to 10 votes per
share. The Class A common stock and the Class B common stock will vote together
as a single class on all matters submitted to a vote or for the consent of
shareholders unless Delaware law requires otherwise. The holders of one-third of
all outstanding shares of stock entitled to vote at any meeting constitute a
quorum and all matters are decided by the affirmative vote of a majority of the
votes cast, unless Delaware law or New Styleclick's certificate of incorporation
requires a greater number of votes. The New Styleclick Board of Directors will
determine the terms and conditions of the preferred stock if and when it is
issued.
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OLD STYLECLICK. The holders of a majority of the shares entitled to vote at
any meeting constitute a quorum, and all matters are decided by the affirmative
vote of a majority of the votes cast, unless California law or Old Styleclick's
articles of incorporation require a greater number of votes.
SPECIAL MEETING OF SHAREHOLDERS
NEW STYLECLICK. The New Styleclick bylaws permit a special meeting of
shareholders, other than a special meeting for the election of directors, to be
called by the New Styleclick Board of Directors, the President or the Secretary.
OLD STYLECLICK. The Old Styleclick bylaws permit a special meeting of
shareholders to be called for any reason by the Old Styleclick Board of
Directors, the Chairman of the Board, the President or by the holders of shares
entitled to cast not less than 10 percent of the Old Styleclick voting stock.
SHAREHOLDER CONSENT IN LIEU OF MEETING
Under Delaware law and California law, unless otherwise provided in the
certificate or articles of incorporation, any action required to be taken or
which may be taken at an annual or special meeting of shareholders may be taken
without a meeting and without prior notice if a consent in writing is signed by
the holders of outstanding stock having at least the minimum number of votes
required to authorize such action. If an action is taken without the unanimous
written consent of all shareholders entitled to vote on the action, notice of
the action shall be given promptly to the shareholders who did not consent.
California law does not allow directors to be elected by less than the unanimous
written consent of all shares entitled to vote for the election of directors.
NUMBER AND ELECTION OF DIRECTORS
NEW STYLECLICK. The New Styleclick bylaws provide for a Board of Directors
consisting of one or more directors, each serving a one year term or until his
or her earlier death, resignation or removal. The number of directors may be
changed by the shareholders or the Board of Directors. Directors need not be
elected by written ballot, and are to be elected annually by the shareholders.
Directors are elected by a plurality of the votes cast by the holders of shares
entitled to vote in the election, present in person or by proxy. Some
shareholders of New Styleclick have agreed to vote in favor of the election of
Directors nominated by certain groups of shareholders. See "Stockholders
Agreement."
OLD STYLECLICK. The Old Styleclick bylaws provide that the Board of
Directors shall consist of no less than four and no more than seven directors,
each serving a one year term or until his or her successor is elected and
qualified. The number of directors may be changed by the shareholders or the
Board of Directors subject to some limitations. See "Amendment of Bylaws."
Directors are to be elected annually by the shareholders. Each shareholder
entitled to vote at any election of directors may cumulate its votes and give
one candidate for director a number of votes equal to the number of directors to
be elected, multiplied by the number of votes to which the individual
shareholder's shares are entitled. Alternatively, the shareholder may distribute
its votes among candidates at its discretion. The candidates receiving the
highest number of votes shall be elected. Old Styleclick's Board of Directors
currently consists of six directors.
FILLING VACANCIES
NEW STYLECLICK. Vacancies on the New Styleclick Board of Directors may be
filled by the majority vote of the remaining directors or a plurality of the
votes cast by the shareholders entitled to vote in the election.
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OLD STYLECLICK. Unless caused by the removal of a director, vacancies on
the Old Styleclick Board of Directors may be filled by the Board of Directors,
and shareholders may fill any vacancy not filled by the Board of Directors.
REMOVAL OF DIRECTORS
NEW STYLECLICK. Directors of New Styleclick may be removed, with or without
cause, by the affirmative vote of the holders of a majority of the shares of
stock entitled to vote in an election of directors.
OLD STYLECLICK. The Old Styleclick Board of Directors may declare vacant
the office of a director who has been declared of unsound mind by a court or who
has been convicted of a felony. Any director or the entire Board of Directors
may be removed, with or without cause, by a majority of the outstanding shares
entitled to vote at an election of directors. However, no director may be
removed, unless the entire Board is removed, if the number of votes cast against
the removal would be sufficient to elect the director if voted cumulatively at
an election where the same total number of votes cast were cast. Under
California law, shareholders holding at least 10% of the outstanding shares in
any class may sue in superior county court to remove from office any director or
officer for fraud, dishonest acts or gross abuse of authority or discretion.
FIDUCIARY DUTIES OF DIRECTORS
NEW STYLECLICK. Under Delaware law, directors are charged with fiduciary
duties of loyalty and care to both the corporation and the shareholders. The
duty of care requires that directors act in an informed and deliberative manner
and that they inform themselves, prior to making a business decision, of all
material information reasonably available to them. The duty of loyalty requires
that directors act in good faith, not out of self-interest, and in a manner that
the directors reasonably believe to be in the best interests of the corporation.
A party challenging the decision of a board of directors generally bears the
burden of rebutting the applicability of the so-called "business judgment rule,"
which is a presumption that, in making a business decision, directors acted on
an informed basis, in good faith and with the honest belief that the action was
taken in the best interests of the corporation. Unless this presumption is
rebutted, the business judgment exercised by directors in making their decisions
is not subject to judicial review. To rebut this presumption, a party must
demonstrate that, in reaching their decision, the directors breached one or more
of their fiduciary duties. If the presumption is rebutted, the directors bear
the burden of demonstrating the entire fairness of the relevant transaction.
Notwithstanding the foregoing, Delaware courts may subject directors' defensive
actions taken in response to a threat to corporate control or their approval of
a change-of-control transaction to greater scrutiny.
OLD STYLECLICK. Under California Law, a director is obligated to perform
his or her duties in good faith, in a manner that the director reasonably
believes to be in the best interests of the corporation and its shareholders and
with such care, including reasonable inquiry, as an ordinarily prudent person in
a like position would exercise under similar circumstances. In performing the
duties of a director, a director is entitled to rely on information, opinions,
reports or statements, including financial statements and other financial data,
prepared or presented by officers or employees of the corporation, the
corporation's counsel or independent accountant or a committee of the board upon
which the director does not serve, so long as, in any such case, the director
acts in good faith, after reasonable inquiry when the need is indicated by the
circumstances and without knowledge that would cause such reliance to be
unwarranted.
LIABILITY OF DIRECTORS
NEW STYLECLICK. Delaware law permits a corporation to include in its
certificate of incorporation a provision that limits or eliminates the liability
of its directors for monetary damages for breach of
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fiduciary duty to the corporation or its shareholders, except under certain
circumstances. These circumstances are a breach of the duty of loyalty to the
corporation or its shareholders, any acts or omission not in good faith or which
involve intentional misconduct or a knowing violation of law, an unlawful
payment of a dividend or repurchase or redemption of stock or any transaction
from which the director derived an improper personal benefit. The New Styleclick
certificate of incorporation eliminates director liability to the fullest extent
permitted by Delaware law.
OLD STYLECLICK. California law permits a corporation to include in its
articles of incorporation provisions that limit or eliminate the liability of
its directors to the corporation or its shareholders, except in certain
circumstances. These circumstances are intentional misconduct or knowing and
culpable violation of law, acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, receipt of an
improper personal benefit, acts or omissions that show reckless disregard for
the director's duty to the corporation or its shareholders where a director in
the ordinary course of performing a director's duties should be aware of a risk
of serious injury to the corporation or its shareholders, acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the corporation and its shareholders, interested
transactions between the corporation and a director in which a director has a
material financial interest and liability for improper distributions, loans or
guarantees. The Old Styleclick articles of incorporation contain a provision
limiting the liability of its directors to the fullest extent provided by
California law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
NEW STYLECLICK. Delaware law permits Old Styleclick to indemnify a director
or officer of the corporation against costs, expenses, including attorneys'
fees, judgments, fines, penalties and settlement amounts incurred in a civil,
administrative or criminal action, suit, investigation or proceeding, including
a derivative action, by reason of being a director or officer or having been a
representative of, or serving at the request of, the corporation. New
Styleclick's bylaws provide for the indemnification of directors to the fullest
extent permitted by law, and permits the New Styleclick Board of Directors to
indemnify additional persons. However, these provisions are not exclusive and
directors and officers may be provided with additional rights under New
Styleclick's certificate of incorporation, or by agreement, vote of shareholders
or otherwise. Under the New Styleclick bylaws, New Styleclick is required to
advance a director or officer the expenses incurred in defending any action, if
New Styleclick receives a commitment from the director or officer to repay the
amount advanced if it is ultimately determined that the person is not entitled
to indemnification. Despite these indemnification provisions, no indemnification
for expenses in a derivative action is permitted under Delaware law if the
person is found to be liable to the corporation, unless a court finds him or her
entitled to such indemnification. If however, that person is successful, on the
merits or otherwise, in defending a third party or derivative action,
indemnification for expenses incurred is mandatory. Moreover, in the opinion of
the SEC indemnification for various liabilities under the Securities Act is
against public policy and is unenforceable.
OLD STYLECLICK. Under California law, the corporation has the power to
indemnify present and former directors, officers and agents against expenses,
judgments, fines, settlements or other amounts actually and reasonably incurred
by the person in connection with any proceeding. The Old Styleclick bylaws
require Old Styleclick to advance a director, officer or agent the expenses
incurred in defending any action, if it receives a commitment from the director,
officer or agent to repay the amount advanced if it is ultimately determined
that the person is not entitled to indemnification. California law permits the
indemnification of officers and directors in excess of that provided in the
provisions of the CCC, for breach of duty to the corporation or its
shareholders, if it is provided in the bylaws or articles of incorporation.
Directors cannot, however, be relieved of liability for acts, omissions or
transactions expressly prohibited by California law.
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DIVIDEND RIGHTS
NEW STYLECLICK. The holders of New Styleclick Class A common stock and New
Styleclick Class B common stock may receive dividends if and when they are
declared by the New Styleclick Board of Directors. No dividends may be paid in
stock unless all shares of New Styleclick Class A common stock and New
Styleclick Class B common stock then outstanding are treated equally and
identically. Under Delaware law, a corporation may pay dividends out of surplus
or, if no surplus exists, out of net profits for the fiscal year in which the
dividends are declared and/or its preceding fiscal year. However, dividends may
not be declared out of net profits if the capital of the corporation is less
than the aggregate amount of capital represented by any issued and outstanding
preferred stock.
OLD STYLECLICK. California law provides that a corporation may make a
distribution to its shareholders if the corporation's retained earnings equal at
least the amount of the proposed distribution. In the event that sufficient
retained earnings are not available for the proposed distribution, a corporation
may nevertheless make a distribution to its shareholders if it meets two
conditions: the corporation's assets equal at least 1 1/4 times its liabilities
and the corporation's current assets equal at least its current liabilities, or,
if the average of the corporation's earnings before taxes on income and before
interest expense for two preceding fiscal years was less than the average of the
interest expense for the corporation for such fiscal years, then the
corporation's current assets must equal at least 1 1/4 times its current
liabilities.
AMENDMENT OF BYLAWS
NEW STYLECLICK. The New Styleclick certificate of incorporation and bylaws
provide that the New Styleclick Board of Directors or the shareholders can
adopt, amend or repeal the bylaws. Any bylaw adopted by or amended by the New
Styleclick Board of Directors may be amended or repealed by the shareholders.
OLD STYLECLICK. The Old Styleclick bylaws provide that they may be adopted,
amended or repealed either by the shareholders or the Old Styleclick Board of
Directors. An amendment dealing with a change to the fixed number of directors,
or a change from a fixed number of directors to a variable number, or vice
versa, may only be made with the approval majority of the outstanding shares
entitled to vote and changes to the minimum or the maximum number are subject to
additional voting requirements.
AMENDMENTS TO CERTIFICATE OR ARTICLES OF INCORPORATION
NEW STYLECLICK. Under Delaware law, amendments to the certificate of
incorporation generally require the affirmative vote of holders of a majority of
the outstanding stock of each class entitled to vote on the amendment unless a
greater level of approval is required by the certificate of incorporation.
Delaware law also requires that if an amendment would increase or decrease the
aggregate number of authorized shares of a particular class, increase or
decrease the par value of shares of a particular class or alter or change the
powers, preferences or special rights of a particular class or series of stock
so as to affect them adversely, the class or series effected must be given the
power to vote as a class.
OLD STYLECLICK. Under California law, unless otherwise specified in the
articles of incorporation, an amendment to the articles of incorporation
requires the approval of the corporation's board of directors and the
affirmative vote of a majority of the outstanding shares entitled to vote,
either before or after the board approval, although certain minor amendments,
such as amendments changing Old Styleclick's name or address given in the
articles, may be made by the board of directors acting alone.
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Under California law, the holders of the outstanding shares of a class of
stock are entitled to vote as a class if a proposed amendment to the articles of
incorporation would:
- increase or decrease the aggregate number of authorized shares of such
class;
- effect an exchange, reclassification or cancellation of all or part of the
shares of such class, other than a stock split;
- effect an exchange, or create a right of exchange, of all of part of the
shares of another class into the shares of such class;
- change the rights, preferences, privileges or restrictions of the shares
of such class;
- create a new class of shares having rights, preferences or privileges
prior to the shares of such class, or increase the rights, preferences or
privileges or the number of authorized shares having rights, preference or
privileges prior to the shares of such class;
- in the case of preferred shares, divide the shares of any class into
series having different rights, preferences, privileges or restrictions or
authorize the board of directors to do so; or
- cancel or otherwise affect dividends on the shares of such class which
have accrued but have not been paid.
DERIVATIVE ACTION
NEW STYLECLICK. Derivative actions may be brought in Delaware by a
shareholder on behalf of, and for the benefit of, the corporation. Delaware law
requires that a shareholder must have been a shareholder of the corporation at
the time of the event giving rise to the action. A shareholder may not sue
derivatively unless he or she first makes demand on the corporation that it
bring suit and such demand has been refused, unless it is shown that such demand
would have been futile.
OLD STYLECLICK. California law provides that a shareholder bringing a
derivative action on behalf of the corporation need not have been a shareholder
at the time of the event in question, provided that certain tests are met
concerning the fairness of allowing the action to go forward. The shareholder
must make a demand on the board before filing suit. California law also provides
that the corporation or the defendant in a derivative suit may make a motion to
the court for an order requiring the plaintiff shareholder to furnish a security
bond.
APPRAISAL RIGHTS
NEW STYLECLICK. Under Delaware law, holders of shares of any class or
series, who do not vote in favor of the merger or consolidation or consent to
the transaction in writing, have the right, in certain circumstances, to dissent
from a merger or consolidation by demanding payment in cash for their shares
equal to the fair value, excluding any appreciation or depreciation as a
consequence or in expectation of the transaction, of their shares. Delaware law
grants dissenters' appraisal rights only in the case of mergers or
consolidations and not in the case of a sale or transfer of assets or a purchase
of assets for stock regardless of the number of shares being issued. Further, no
dissenters' appraisal rights are available for shares of any class or series
listed on a national securities exchange or designated as a national market
system security on the Nasdaq National Market or held of record by more than
2,000 shareholders, unless the agreement of merger or consolidation converts
shares into anything other than stock of the surviving corporation, stock of
another corporation which is either listed on a national securities exchange or
designated as a national market system security on the Nasdaq National Market or
held of record by more than 2,000 shareholders, cash in lieu of fractional
shares or some combination of the above. In addition, dissenters' appraisal
rights are not available for any shares of the surviving corporation if the
merger did not require the vote of the shareholders of the surviving
corporation.
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OLD STYLECLICK. Under California law, if the approval of the outstanding
shares of the corporation is required for a merger or reorganization, each
shareholder entitled to vote on the transaction, who did not vote in favor of
the reorganization, may require the corporation to purchase for cash at their
fair market value the shares owned by such shareholder. The fair value of the
shares is determined as of the day before the first announcement of the proposed
reorganization or merger, excluding any appreciation or depreciation as a
consequence or in expectation of the transaction. No appraisal rights are
available for shares listed on any national securities exchange certified by the
Commissioner of Corporations or listed on the list of OTC margin stocks issued
by the Board of Governors of the Federal Reserve Systems, unless there exists,
with respect to such shares, any restriction on transfer imposed by the
corporation or by any law or regulation, or if demands for payment are filed
with respect to 5% or more of the outstanding shares of that class. See "The
Merger and Related Transactions-- Dissenters' Appraisal Rights."
APPROVAL OF MERGERS AND ASSET SALES
NEW STYLECLICK. Under Delaware law, the affirmative vote of a majority of
the outstanding shares of all classes of stock entitled to vote on a transaction
is required to approve a merger or consolidation or the sale, lease or exchange
of all or substantially all of the corporation's assets. No vote is required,
however, in connection with a merger in which the corporation is the surviving
corporation and the merger agreement does not amend the corporation's
certificate of incorporation, each share of outstanding capital stock before the
merger is to be outstanding, with the same rights, after the merger, and the
number of shares of capital stock to be issued in the merger is less than 20% of
the outstanding capital stock before the merger.
OLD STYLECLICK. California law generally requires a vote by the
shareholders of each constituent corporation to a merger, a corporation selling
all or substantially all of its assets, the acquiring corporation in either a
share-for-share exchange or a sale of assets reorganization and a parent
corporation, even though it is not a constituent corporation, whose equity
securities are being issued in connection with a corporate reorganization such
as a triangular merger. California law does not require shareholder approval in
the case of any corporation in a merger as to which a corporation and/or its
shareholders will hold five-sixths or more of the voting power of the surviving
or acquiring corporation after consummation of the merger, unless the shares
acquired in the merger have different rights, preferences, privileges or
restrictions than those surrendered.
CORPORATE OPPORTUNITIES
NEW STYLECLICK. New Styleclick's certificate of incorporation provides that
USAi, its affiliates, and their respective officers, directors, agents,
shareholders, members, partners or affiliates, do not have a fiduciary duty or
any other obligation to share any business opportunities with New Styleclick and
releases them from any liability that could result from a breach of this kind of
obligation. Business opportunities include investments, business opportunities
or prospective economic advantages in which New Styleclick otherwise could have
an interest or expectancy.
OLD STYLECLICK. Old Styleclick's articles of incorporation do not contain a
comparable provision.
TRANSACTIONS WITH INTERESTED STOCKHOLDERS
NEW STYLECLICK. Under Delaware law, a corporation is prohibited from
engaging in any "business combination" with an "interested stockholder," which
is a person who, together with affiliates or associates, owns or within the
prior three year period did own, 15% or more of the corporation's outstanding
voting stock for a period of three years following the date on which the
shareholder became an interested stockholder, unless:
- the original certificate of incorporation provides otherwise;
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- prior to the date on which the person became an interested stockholder,
the board of directors either approved the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
- the interested stockholder owned 85% or more of the voting stock of the
corporation, excluding specified shares, upon completion of the
transaction as the result of which he or she became an interested
stockholder;
- on or after the date on which such person became an interested
stockholder, the business combination is approved by the board of
directors and the affirmative vote, at as special meeting and not by
written consent, of at least 66 2/3% of the outstanding voting shares of
the corporation, excluding shares held by such interested stockholder; or
- the corporation does not have a class of voting stock that is listed on a
national securities exchange, authorized for quotation on an inter-dealer
quotation system of a registered national securities association, or held
of record by more than 2,000 shareholders unless any of the foregoing
results from action taken, directly or indirectly, by an interested
stockholder or from a transaction in which a person becomes an interested
stockholder.
A business combination includes:
- mergers, consolidations and sales or other dispositions of 10% or more of
the assets of a corporation to or with an interested stockholder;
- certain transactions resulting in the issuance or transfer to an
interested stockholder of any stock of such corporation or its
subsidiaries; and
- other transactions resulting in a disproportionate financial benefit to an
interested stockholder.
New Styleclick will be governed by this provision. However, this provision
would not apply to USANi Sub because the transaction by which it became an
interested stockholder was approved by the New Styleclick Board of Directors.
OLD STYLECLICK. There is no comparable provision under California law.
However, California law does provide that, except where the fairness of the
terms and conditions of the transaction have been approved by the California
Commissioner of Corporations and except in a "short-form" merger, which is the
merger of a parent corporation with a subsidiary in which the parent owns at
least 90% of the outstanding shares of each class of the subsidiary's stock, if
the surviving corporation or its parent corporation owns, directly or
indirectly, shares of the target corporation representing more than 50% of the
voting power of the target corporation prior to the merger, the nonredeemable
common stock of a target corporation may be converted only into nonredeemable
common stock of the surviving corporation or its parent corporation, unless all
of the shareholders of the class consent. The effect of this provision is to
prohibit a cash-out merger of minority shareholders, except where the majority
shareholders already own 90% or more of the voting power of the target
corporation and, therefore, could effect a short-form merger to accomplish such
a cash-out of minority shareholders.
INTERESTED DIRECTOR TRANSACTIONS
Under both California and Delaware law, certain contracts or transactions in
which one or more of a corporation's directors have an interest are not void or
voidable because of such interest if certain conditions are met. With certain
exceptions, the conditions are similar under California and Delaware law. Under
California and Delaware law, either the shareholders or the board of directors
must approve any such contract or transaction after full disclosure of the
material facts, and, in the case of board approval, the contract or transaction
must also be "just and reasonable," under California law or "fair," under
Delaware law to the corporation, or the contract or transaction must have been
"just and reasonable" or "fair," as applicable, as to the corporation at the
time it was approved. In the latter
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case, California law explicitly places the burden of proof on the interested
director. Under California law, if shareholder approval is sought, the
interested director is not entitled to vote his shares at a shareholder meeting
with respect to any action regarding such contract or transaction. If board
approval is sought, the contract or transaction must be approved by a majority
vote of a quorum of the directors, without counting the vote of any interested
directors, except that interested directors may be counted for purposes of
establishing a quorum. Under Delaware law, if shareholder approval is sought
generally, the contract or transaction must be approved in good faith by a
majority of disinterested shareholders. If board approval is sought, the
contract or transaction must be approved by a majority of the disinterested
directors, even though less than a majority of quorum. Therefore, certain
transactions that the Old Styleclick Board of Directors might not be able to
approve because of the number of interested directors could be approved by a
majority of the disinterested directors of New Styleclick, although less than a
majority of a quorum.
LOANS TO OFFICERS AND EMPLOYEES
NEW STYLECLICK. Under Delaware law, a corporation may make loans to,
guaranty the obligations of, or otherwise assist its officers or other employees
and those of its subsidiaries, including directors who are also officers or
employees, when such action, in the judgment of the directors, may reasonably be
expected to benefit the corporation.
OLD STYLECLICK. Under California law, a corporation cannot make any loan or
guaranty to or for the benefit of a director or officer of the corporation or
its parent corporation unless such loan or guaranty, or a plan providing for
such loan or guaranty, is approved by shareholders owning a majority of the
outstanding shares of the corporation. However, under California law, any
corporation with 100 or more shareholders of record may authorize the board of
directors to approve loans or guaranties to or on behalf of officers, whether or
not such officers are directors, if the board determines that any such loan or
guaranty may reasonably be expected to benefit the corporation. Old Styleclick's
bylaws do not authorize the Old Styleclick Board of Directors to approve such
loans or guaranties.
NOTICE PROVISIONS
NEW STYLECLICK. New Styleclick's bylaws require that shareholders entitled
to vote be provided written notice of any meeting no more than 60 days nor less
than 10 days prior to the date of the meeting. In the case of special meetings,
the notice must state the purpose or purposes for which the meeting is called.
OLD STYLECLICK. California law requires that shareholders entitled to vote
be provided written notice no more than 60 days nor less than 10 days prior to
the date of any meeting. In the case of special meetings, the notice must state
the purpose or purposes for which the meeting is called.
INSPECTION OF BOOKS AND RECORDS
NEW STYLECLICK. New Styleclick's bylaws permit the New Styleclick Board of
Directors to determine if, when and under what conditions shareholders may
inspect New Styleclick's books and records.
OLD STYLECLICK. California law allows any shareholder to inspect the
accounting books and records and minutes of proceedings of the shareholders and
the board of directors and to inspect the shareholders' list at any reasonable
time during usual business hours, for a purpose reasonably related to such
holder's interests as a shareholder. California law also provides for an
absolute right to inspect and copy the corporation's shareholders list by a
shareholder or shareholders holding at least 5% in the aggregate of the
corporation's outstanding voting shares, or any shareholder or shareholders
holding 1% or more of the shares who have filed a Schedule 14A with the
Commission.
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FUTURE SHAREHOLDER PROPOSALS
If the merger is not consummated, Old Styleclick will hold an annual meeting
of shareholders. If such meeting is held, any proposals of shareholders of Old
Styleclick that are intended to be presented at Old Styleclick's 2000 annual
meeting had to be received by Old Styleclick no later than December 31, 1999 to
be included in the proxy statement and form of proxy relating to that meeting.
EXPERTS AND LEGAL MATTERS
Ernst & Young LLP, independent auditors, have audited New Styleclick
financial statement at March 21, 2000 as contained in their report. We have
included this financial statement in the proxy statement/prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report given their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited Old Styleclick
financial statements at and for the year ended December 31, 1999 as contained in
their report. We have included these financial statements in the proxy
statement/prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report given their authority as experts in accounting and
auditing.
Singer Lewak Greenbaum & Goldstein LLP, independent certified public
accountants, have audited Old Styleclick financial statements at December 31,
1998 and for the years ended December 31, 1998 and 1997 as contained in their
report. We have included these financial statements in the proxy
statement/prospectus and elsewhere in the registration statement in reliance on
Singer Lewak Greenbaum and Goldstein LLP's report given their authority as
experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited Internet Shopping
Network financial statements at December 31, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999 as contained in their report.
We have included these financial statements in the proxy statement/prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report given their authority as experts in accounting and auditing.
Certain legal matters in connection with the issuance of New Styleclick
common stock under the merger agreement and other transaction documents and the
federal income tax consequences of the merger will be passed upon for Internet
Shopping Network, USANi Sub and USAi by Paul, Weiss, Rifkind, Wharton, &
Garrison and for Old Styleclick by Coudert Brothers.
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WHERE YOU CAN FIND MORE INFORMATION
Old Styleclick files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information filed by Old Styleclick at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
The public reference room at the SEC's office in Washington, D.C. is located at
450 Fifth Street, N.W. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Old Styleclick's SEC filings are also
available to the public from commercial document retrieval services and at the
website maintained by the SEC at http://www.sec.gov.
New Styleclick has filed a registration statement on Form S-4 to register
with the SEC New Styleclick Class A common stock to be delivered to Old
Styleclick shareholders in the merger. This proxy statement/prospectus is a part
of that registration statement and constitutes a prospectus of New Styleclick in
addition to being a proxy statement of Old Styleclick for the special meeting.
As permitted by SEC rules, this proxy statement/prospectus does not contain all
of the information you can find in the registration statement or the exhibits to
the registration statement.
The federal securities laws allow New Styleclick and Old Styleclick to
"incorporate by reference" information into this proxy statement/prospectus,
which means important information may be disclosed to you by referring you to
another document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this proxy statement/prospectus, except for
any information superseded by information in, or incorporated by reference in,
this proxy statement/prospectus. This proxy statement/prospectus incorporates by
reference the documents set forth below that have been previously filed with the
SEC. These documents contain important information about the companies and their
finances.
<TABLE>
<CAPTION>
OLD STYLECLICK SEC FILINGS (FILE NO. 33-3116) PERIOD
- --------------------------------------------- ------
<S> <C>
Quarterly Report on Form 10-Q Quarter ended March 31, 2000.
Annual Report on Form 10-K Year ended December 31, 1999.
Quarterly Report on Form 10-Q Quarter ended September 30, 1999.
Quarterly Report on Form 10-Q Quarter ended June 30, 1999.
Current Report on Form 8-K Dated February 9, 2000.
</TABLE>
New Styleclick and Old Styleclick are also incorporating by reference
additional documents that Old Styleclick may file with the SEC between the date
of this proxy statement/prospectus and the date of the special meeting. If any
document Old Styleclick files with the SEC during that time period changes in
any way a statement made in any earlier document, including this document, you
should consider the most recently reported information to be the correct
information making the earlier statements invalid to the extent they are
modified.
New Styleclick has supplied all information contained or incorporated by
reference in this proxy statement/prospectus relating to New Styleclick, Old
Styleclick has supplied all the information relating to Old Styleclick, and
Internet Shopping Network has supplied all the information relating to Internet
Shopping Network.
If you are an Old Styleclick shareholder, Old Styleclick may have sent you
some of Old Styleclick's documents incorporated by reference. You also may
obtain any of them through either Old Styleclick or the SEC. Documents
incorporated by reference are available from any of the companies without
charge, excluding all exhibits unless specifically incorporated by reference in
this proxy statement/prospectus. Shareholders may obtain free copies of
documents incorporated by reference in this proxy statement/
98
<PAGE>
prospectus or those that are exhibits to the Form S-4 by requesting them in
writing or by telephone from the appropriate party at the following address:
Styleclick.com Inc.
3861 Sepulveda Blvd.
Culver City, California 90230
Tel: (310) 751-2100
Fax: (310) 751-2120
Attention: Investor Relations
Website: www.styleclickinc.com
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM ANY OF THE COMPANIES, PLEASE DO
SO BY [ ], 2000 TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the approval of the
merger agreement. This proxy statement/prospectus is dated
[ ], 2000. You should not assume that the information
contained in the proxy statement/prospectus is accurate as of any date other
than such date, and neither the mailing of this proxy statement/prospectus to
shareholders nor the delivery of New Styleclick Class A common stock in the
merger shall create any implication to the contrary.
NEW STYLECLICK, OLD STYLECLICK AND INTERNET SHOPPING NETWORK HAVE NOT
AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY REPRESENTATION
ABOUT THE PROPOSED MERGER OR THE COMPANIES THAT DIFFERS FROM OR ADDS TO THE
INFORMATION CONTAINED IN THIS DOCUMENT OR IN THE DOCUMENTS NEW STYLECLICK, OLD
STYLECLICK AND INTERNET SHOPPING NETWORK HAVE PUBLICLY FILED WITH THE SEC.
THEREFORE, IF ANYONE SHOULD GIVE YOU ANY DIFFERENT OR ADDITIONAL INFORMATION,
YOU SHOULD NOT RELY ON IT.
IF YOU LIVE IN A JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO EXCHANGE OR
SELL, OR TO ASK FOR OFFERS TO EXCHANGE OR BUY, THE SECURITIES OFFERED BY THIS
DOCUMENT, OR TO ASK FOR PROXIES, OR, IF YOU ARE A PERSON TO WHOM IT IS UNLAWFUL
TO DIRECT SUCH ACTIVITIES, THEN THE OFFER PRESENTED BY THIS DOCUMENT DOES NOT
EXTEND TO YOU.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STYLECLICK, INC.
Report of Independent Auditors............................ F-2
Balance Sheet at March 22, 2000........................... F-3
Notes to Financial Statement.............................. F-4
STYLECLICK.COM INC.
Report of Independent Auditors............................ F-5
Report of Independent Certified Public Accountants........ F-6
Balance Sheets at December 31, 1999 and 1998.............. F-7
Statements of Operations for the years ended December 31,
1999, 1998 and 1997..................................... F-8
Statement of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................ F-9
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................... F-10
Notes to Financial Statements............................. F-12
INTERNET SHOPPING NETWORK LLC
Balance Sheet at March 31, 2000 (unaudited)............... F-25
Statements of Operations for the Three Months Ended
March 31, 2000 and 1999
(unaudited)............................................. F-26
Statement of Members' Equity for the Three Months Ended
March 31, 2000 (unaudited).............................. F-27
Statement of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 (unaudited)..................... F-28
Notes to Financial Statements (unaudited)................. F-29
Report of Independent Auditors............................ F-31
Balance Sheets at December 31, 1999 and 1998.............. F-32
Statements of Operations for the years ended December 31,
1999, 1998 and 1997..................................... F-33
Statement of Stockholders'/Members' Equity for the years
ended December 31, 1999, 1998 and 1997.................. F-34
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................... F-35
Notes to Financial Statements............................. F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholder of
Styleclick, Inc.
We have audited the accompanying balance sheet of Styleclick, Inc. (the
"Company") as of March 22, 2000. This financial statement is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement 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 provide a reasonable basis for
our opinion.
In our opinion, the financial statement referred to above present fairly, in
all material respects, the financial position of Styleclick, Inc. as of
March 22, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
New York, New York
March 22, 2000
F-2
<PAGE>
STYLECLICK, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 22,
2000
---------
<S> <C>
Assets
Cash...................................................... $ 1
--------
Total current assets........................................ 1
========
Total assets................................................ $ 1
========
Shareholder's equity
Preferred stock--$.01 par value; 25,000,000 shares
authorized, none issued and outstanding:
Class A common stock--$.01 par value, 150,000,000 shares
authorized, none issued and outstanding.................
Class B common stock--$.01 par value; 112,500,000 shares
authorized; 1 shares issued and outstanding............. --
Additional paid-in capital................................ 1
--------
Total shareholder's equity.................................. $ 1
========
</TABLE>
See accompanying notes.
F-3
<PAGE>
STYLECLICK, INC.
NOTES TO FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS
New Styleclick was incorporated in the State of Delaware on March 22, 2000
as a wholly owned subsidiary of USANi Sub LLC and an indirect non-wholly
subsidiary of USAi. New Styleclick does not have any operations.
SHAREHOLDER'S EQUITY
COMMON STOCK
Class A common stock has 150,000,000 shares authorized and none are issued
and outstanding. Class B common stock has 112,500,000 shares authorized and one
share is issued and outstanding. All common stock has a $0.01 par value.
Class A common stock has one vote per share and Class B common stock has ten
votes per share.
PREFERRED STOCK
Preferred stock has 25,000,000 shares authorized with a par value of $0.01
and none are issued and outstanding.
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of Styleclick.com Inc.
We have audited the accompanying balance sheet of Styleclick.com Inc. as of
December 31, 1999 and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the Index at Item 21(b). 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
Los Angeles, California
February 21, 2000
F-5
<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 in Exhibit 99.4. 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
- --------------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 16, 1999 (except for Note 11,
as to which the date is May 19, 1999)
F-6
<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.
F-7
<PAGE>
STYLECLICK.COM INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Net revenues.......................................... $ 6,173,924 $ 6,681,280 $4,449,857
Cost of sales......................................... 667,701 82,135 87,470
------------ ------------ ----------
Gross profit.......................................... 5,506,223 6,599,145 4,362,387
Operating costs and expenses:
Selling, general and administrative................... 13,361,980 8,290,979 3,393,765
Research and 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 profit (loss)............................... (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 income (loss)..................................... $(15,879,341) $ (9,687,639) $ 354,275
============ ============ ==========
Basic income (loss) per share......................... $ (2.24) $ (1.59) $ 0.07
============ ============ ==========
Diluted income (loss) 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.
F-8
<PAGE>
STYLECLICK.COM INC.
STATEMENT 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.
F-9
<PAGE>
STYLECLICK.COM INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $(15,879,341) $ (9,687,639) $ 354,275
Adjustments to reconcile net income (loss) to net
cash (used in) provided by 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.
F-10
<PAGE>
STYLECLICK.COM INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
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.
F-11
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS
1. LINE OF BUSINESS AND BASIS OF PRESENTATION
Styleclick.com Inc. ("Styleclick" or the "Company"), formerly known as
Modacad, Inc., was incorporated in California on February 4, 1988. The Company
is in the business of developing, marketing, and supporting electronic commerce
("E-commerce") Internet web-sites; Internet enabled applications; and business
and consumer software products, based on its proprietary technology for content
management, including modeling and rendering technology.
Beginning in 1999, the Company shifted its primary business focus from the
business-to-business marketplace to the emerging consumer Internet E-commerce
market. In connection with this shift in focus, the Company divested many of its
products in the business-to-business and consumer software product groups. The
Company is focusing its technology to build and deploy E-commerce Internet
sites, such a comparative search and shopping solutions aimed at facilitating
businesses' use of electronic commerce to reach consumers in the apparel,
footwear, accessories, cosmetics and home furnishings industries.
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 bridge loan 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.
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
developed for external sales with an exception of $508,671 costs capitalized in
late 1998 which was for internal use. 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
F-12
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
electronic merchandising products, are developed to be used for commercial
purposes. Products developed for internal use are related to 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 and 1998, respectively.
Capitalized software development costs are all internally developed costs.
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. 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).
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 website, specifically
which of four stages of costs are expensed and capitalized. The Company does not
expect 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 furniture and equipment are included in the results of
operations.
F-13
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 APPLICATION.
Revenue generated from the Company's fulfillment services provided to the
Company's on-line shopping Internet web-site participant vendors ("transactional
revenue") is recognized based on a percentage of gross revenues from the related
transactions upon notification of shipment of the vendors' products by the
Company's fulfillment warehouse or the participant vendors.
Revenue generated from referral of vendors' products to Internet consumers
through the Company's on-line shopping Internet web-sites ("product referral
fees") are recognized based on a percentage of gross revenues from the related
transactions based upon notification of the respective sales information by the
Company's vendors, the independent Internet traffic tracking companies or the
Company's on-line tracking reports.
OTHER
Revenue generated from advertising on the Company's on-line shopping
web-sites ("on-line advertising revenue") is recognized over the terms of the
corresponding contracts, which is generally twelve months, on a straight-line
basis.
CONSUMER SOFTWARE, CD-ROM APPLICATIONS
The Company recognizes revenues related to software licenses and software
maintenance in accordance with the SOP 97-2, "Software Revenue Recognition."
Product revenue is recorded at the time of shipment, net of estimated allowances
and returns. Revenue generated from post contract customer support is recognized
on a straight-line basis over the term of the corresponding contract, which is
generally twelve months.
F-14
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF SALES
Costs of sales are comprised primarily of product fulfillment costs, credit
card processing fees, direct shipping material and product royalties associated
with the respective revenues. 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.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. These
costs consist primarily of salaries, consulting fees and direct overhead.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), "Accounting for Stock-Based Compensation." The Company accounts for
equity securities issued to non-employees in accordance with the provisions of
SFAS No. 123. All stock options are issued at an exercise price at or above the
deemed fair value of the Company's stock.
INCOME TAXES
The Company accounts for income taxes under the liability method, and
deferred tax assets and liabilities are recognized for the future tax
consequences attributed to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation
F-15
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 PRONOUNCEMENTS
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
F-16
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 101 and
SAB 101A is effective for companies with calendar year-ends in the second
quarter of 2000. The Company is in the process of analyzing the impact of
SAB 101 which may have a material effect on its financial position and results
of operations and may require the Company to change its accounting policy
regarding revenue recognition.
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.
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 $120,000, respectively.
F-17
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENTS
In 1998, the Company entered into two new employment agreements, expiring on
December 31, 2005, with two key officers of the Company. Under the agreements,
these officers receive aggregate annual salaries of $400,000 and monthly
aggregate automobile allowances of $1,200. In addition, these officers received
aggregate signing bonuses of $200,000. Further, the Company shall pay an annual
performance bonus to each officer for each calendar year of the employment term
in an amount determined by the Compensation Committee of the Board of the
Directors. In 1999, the Company amended these two employment agreements to
increase annual salaries paid to these officers to an aggregate amount of
$460,000 effective January 1, 2000 and awarded $200,000 performance bonuses to
these officers.
In connection with the employment agreements, the same key officers were
granted five-year options to purchase up to an aggregate of 400,000 shares of
the Company's common stock at an exercise price of $15.88. Such options vest and
become exercisable over the next three years and contain accelerated vesting and
exercisability criteria based on achieving certain operating results. Options to
purchase 133,332 shares are vested and became exercisable as of December 31,
1999 and options to purchase 133,334 and 133,334 shares will be vested and
become exercisable as of December 31, 2000 and 2001, respectively.
In July 1999, the Company entered into a new employment agreement with a key
officer of the company that expires on June 30, 2002. Under the agreement, the
officer receives an annual salary of $125,000 and a monthly automobile allowance
of $400.
E-COMMERCE MARKETING AGREEMENT
In June 1999, the Company entered into a two-year interactive marketing
agreement with an Internet Portal company (the "Portal"). Under the agreement,
the Portal will promote the Company's E-commerce Internet web-site in several
areas of the Portal's Internet web-sites. In consideration of such promotion,
the Company will make payments to the Portal totaling up to $7.5 million in cash
through January 2001. As of December 31, 1999, the Company had paid $3,214,286
in cash to the Portal under this agreement. In addition, in June 1999, the
Company issued warrants to the Portal to purchase 100,000 shares of the
Company's common stock at an exercise price of $12.34 that expire in
December 2001. The fair value of such warrants was $200,000 based on the fair
value of the consideration received. This cash and the value of the warrant was
deferred and is included in prepaid expenses and other current assets at
December 31, 1999, net amount of amortization of $1,925,000 in 1999. The entire
amount of $7.7 million is being amortized to expense over the two-year term of
the marketing agreement.
F-18
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
WARRANTS
In connection with the Company's initial public offering ("IPO") in
March 1996, the Company issued to the principal underwriter unit purchase
warrants to purchase 140,000 units at a per unit exercise price of $6.00. Each
unit consisted of one share of common stock and one redeemable warrant
exercisable to purchase one share of common stock at an exercise price of $9.10
per share. Such unit purchase warrants are exercisable for a four-year period,
which began March 27, 1997. In 1997, the underwriter (or assignees of the
underwriter) exercised a portion of the warrants to purchase an aggregate of
88,300 shares of the Company's common stock and 88,300 redeemable common stock
purchase warrants for an aggregate exercise price of $529,800. The underwriter
(or its assignees) further exercised redeemable common stock purchase warrants
to purchase 30,800 shares of the Company's common stock for $280,280. In 1998,
the underwriter (or its assignees) exercised redeemable common stock purchase
warrants to purchase an aggregate of 26,400 shares of the Company's common stock
for $158,400. In 1999, the underwriter (or its assignees) exercised redeemable
common stock purchase warrants to purchase an aggregate of 1,000 shares of the
Company's common stock for $6,000.
In December 1996, the Company issued warrants to purchase 250,000 shares of
common stock to an outside consultant for services provided to the Company. The
warrants had an exercise price of
F-19
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
$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 to 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.
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.
F-20
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-statuatory) 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>
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
F-21
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLAN (CONTINUED)
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>
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.
F-22
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
Capitalized research and development cost for tax......... 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.
F-23
<PAGE>
STYLECLICK.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
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.
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 ("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, USANi LLC, a subsidiary of 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, USANi LLC 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
bridge loan commitment to the Company. The transaction is expected to close in
the second quarter of 2000.
F-24
<PAGE>
INTERNET SHOPPING NETWORK LLC
BALANCE SHEET (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
2000
--------------
(IN THOUSANDS)
<S> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 9
Accounts and notes receivable, net of allowance of $142..... 197
Inventories, net............................................ 11,117
Prepaid assets.............................................. 505
-------
Total current assets........................................ 11,828
PROPERTY, PLANT AND EQUIPMENT
Computer equipment and software costs....................... 17,625
Leasehold improvements...................................... 602
Furniture and other equipment............................... 977
-------
19,204
Less accumulated depreciation and amortization.......... (7,519)
-------
11,685
Projects in progress........................................ 2,192
-------
13,877
Other assets................................................ 80
-------
$25,785
=======
</TABLE>
LIABILITIES AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31,
2000
(IN THOUSANDS)
--------------
<S> <C>
CURRENT LIABILITIES
Accounts payable............................................ $ 2,202
Due to USANi LLC............................................ 8,721
Accrued liabilities......................................... 6,548
-------
Total current liabilities................................... 17,471
MEMBERS' EQUITY
Class A (34,043,444 units).................................. 103,418
Class B (no units outstanding).............................. --
Accumulated deficit......................................... (95,104)
-------
Total members' equity................................... 8,314
-------
$25,785
=======
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
INTERNET SHOPPING NETWORK LLC
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
(IN THOUSANDS)
2000 1999
-------- -----------
<S> <C> <C>
NET REVENUES................................................ $ 5,541 $ 6,333
Cost of sales............................................... 5,338 5,764
------- -------
Gross profit (loss)......................................... 203 569
Operating costs and expenses:
Selling and marketing....................................... 1,751 1,981
Product development costs................................... 908 1,516
General and administrative.................................. 3,911 3,570
Depreciation and amortization............................... 1,499 397
------- -------
Total operating costs and expenses.......................... 8,069 7,464
------- -------
Operating loss.............................................. (7,866) (6,895)
Other expense, net.......................................... -- (8)
------- -------
NET LOSS.................................................... $(7,866) $(6,903)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
INTERNET SHOPPING NETWORK LLC
STATEMENT OF MEMBERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
LLC ACCUMULATED
SHARES DEFICIT TOTAL
-------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
MEMBERS' EQUITY AT DECEMBER 31, 1999...................... $103,418 $(87,238) $16,180
Net loss for the three months ended March 31, 2000........ -- (7,866) (7,866)
-------- -------- -------
MEMBERS' EQUITY AT MARCH 31, 2000......................... $103,418 $(95,104) $ 8,314
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
INTERNET SHOPPING NETWORK LLC
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999
2000 (IN THOUSANDS)
-------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(7,866) $(6,903)
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization............................. 1,499 397
Changes in current assets and liabilities:
Accounts receivable....................................... 482 317
Inventories............................................... 202 (356)
Accounts payable.......................................... (674) (384)
Accrued liabilities....................................... (2,517) 858
Other, net.................................................. 408 (49)
------- -------
Net cash used in operating activities....................... (8,466) (6,120)
Cash flows from investing activities:
Capital expenditures, net................................... (255) (408)
------- -------
Net cash used in investing activities..................... (255) (408)
Cash flows from financing activities:
Proceeds from issuance of LLC Shares........................ -- 6,528
Advance from USAi......................................... 8,721 --
------- -------
Net cash provided by financing activities................. 8,721 6,528
Net increase (decrease) in cash and cash equivalents........ -- --
Cash and cash equivalents at beginning of period.......... 9 3
------- -------
Cash and cash equivalents at end of period.................. $ 9 $ 3
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Internet Shopping Network LCC ("Internet Shopping Network") a Delaware
limited liability company, was formed on January 29, 1998, and offers home and
leisure merchandise, computers and consumer electronics in an online auction
format over its website FirstAuction.com and jewelry over its website
FirstJewelry.com.
Internet Shopping Network is a subsidiary of USANi LLC, which is a direct,
non-wholly owned subsidiary of Home Shopping Network, which is an indirect
non-wholly owned subsidiary of USAi. USAi acquired the predecessor to Internet
Shopping Network, Internet Shopping Network, Inc., on December 20, 1996 in
conjunction with its acquisition of Home Shopping. USAi accounted for the
transaction using the purchase method of accounting and the assets and
liabilities of Internet Shopping Network, Inc. were adjusted as of December 31,
1996 to reflect their respective fair values. At Internet Shopping Network's
formation, Home Shopping contributed substantially all of the operating assets
and liabilities of Internet Shopping Network, Inc., at USAi's historical cost
basis, to Internet Shopping Network in exchange for 100 units in Internet
Shopping Network. On December 1, 1999, Internet Shopping Network declared a
189,695 to 1 members' unit split effective as of January 29, 1998.
BASIS OF PRESENTATION
The interim Condensed Financial Statements and Notes thereto of Internet
Shopping Network are unaudited and should be read in conjunction with the
audited Financial Statements and Notes thereto for the twelve months ended
December 31, 1999.
In the opinion of Internet Shopping Network, all adjustments necessary for a
fair presentation of such Condensed Financial Statements have been included.
Such adjustments consist of normal recurring items. Interim results are not
necessarily indicative of results for a full year. The interim Condensed
Financial Statements and Notes thereto are presented as permitted by the
Securities and Exchange Commission and do not contain certain information
included in the Company's audited Financial Statements and Notes thereto.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See Internet Shopping Network's financial statements for the fiscal year
ended December 31, 1999 included elsewhere in this offering for a summary of all
significant accounting policies.
NOTE 3--LITIGATION
In February 1999, Internet Shopping Network filed a demand for arbitration
against former Internet Shopping Network President Kirk Loevner under the terms
of the arbitration provision in his employment agreement. In response, Loevner
filed a complaint against Internet Shopping Network in Superior Court for Santa
Clara County, California. The Superior Court decided not to enforce the
arbitration provision of Mr. Loevner's employment agreement, and the court's
ruling is currently on appeal. Mr. Loevner's employment with Internet Shopping
Network ceased in August 1998. Mr. Loevner alleges that Internet Shopping
Network breached his employment agreement and its stock option plan. He is
seeking declaratory relief that he did not breach his employment agreement by
accepting employment with his new and current employer FreeShop International,
Inc. and, consequently, that his options for 250,000 shares of Internet Shopping
Network's predecessor, International
F-29
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 3--LITIGATION (CONTINUED)
Shopping Network, Inc. (with an exercise price of $1.75 per share) are entitled
to vest. Additionally, Mr. Loevner is seeking penalties and attorneys fees under
the California Labor Code. In December 1999, Loevner filed a complaint in U.S.
District for the Northern District of California against Home Shopping Network,
and certain executive officers of Home Shopping Network, seeking declaratory and
injunctive relief, and damages relating to his alleged entitlement to shares of
Internet Shopping Network stock. USAi believes that this suit is duplicative of
the above stated action against Internet Shopping Network, and intends to file a
motion to dismiss or stay the federal action and seek sanctions for
Mr. Loevner's multiplication of the legal proceedings. In April 2000, this
federal action was dismissed without prejudice.
In April 2000, Internet Shopping Network settled its pending litigation with
First Jewelry Company of Canada, Inc. and its affiliate A & A Jewelers, Inc. on
terms that are not material to the operations of Internet Shopping Network.
In the ordinary course of business, Internet Shopping Network is engaged in
various other lawsuits. In the opinion of management, the ultimate outcome of
the various lawsuits should not have a material impact on the liquidity, results
of operations or financial condition of Internet Shopping Network.
NOTE 4--ADVANCES FROM USAI AND FINANCING
USANi LLC provides funds as needed to Internet Shopping Network for
operations. Furthermore, Internet Shopping Network is required to transfer
excess cash to USANi LLC no less frequently than monthly. To date Internet
Shopping Network has not transferred any funds to USANi LLC. During the three
months ended March 31, 2000, the Company borrowed $8.5 million from USANi LLC
and its subsidiaries to fund operations.
NOTE 5--MERGER WITH OLD STYLECLICK
On January 25, 2000, USAi and Styleclick.com Inc. ("Old Styleclick"), a
leading enabler of e-commerce for manufacturers and retailers, announced an
agreement to form a new company by merging Internet Shopping Network and Old
Styleclick. The new company, which will be named Styleclick, Inc., will own and
operate the combined properties of Old Styleclick and Internet Shopping Network,
which include Internet Shopping Network's FirstAuction.com, FirstJewelry.com and
Old Styleclick's network of branded e-commerce web sites. 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 Old Styleclick
stockholders will own approximately 25%. In the interim, USAi has agreed to
extend a $10 million bridge loan to Old Styleclick. The transaction is expected
to close in the second quarter of 2000 and is subject to regulatory and Old
Styleclick stockholder approval. The new company is expected to trade on Nasdaq
under the symbol "IBUY."
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Members of Internet Shopping Network LLC
We have audited the accompanying balance sheets of Internet Shopping Network
LLC as of December 31, 1999 and 1998, and the related statements of operations,
stockholders'/members' equity, and cash flows for each of the three years in the
period ended December 31,1999. Our audits also included the financial statement
schedule listed in the Index at Item 21(b). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Internet Shopping Network
LLC at December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31,1999, in
conformity with generally accepted accounting principles 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
New York, New York
March 2, 2000
F-31
<PAGE>
INTERNET SHOPPING NETWORK LLC
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 9 $ 3
Accounts receivable, net of allowance of $42 and $41,
respectively.............................................. 679 609
Inventories, net............................................ 11,319 7,831
Prepaid assets.............................................. 913 117
-------- --------
Total current assets.................................... 12,920 8,560
PROPERTY AND EQUIPMENT
Computer equipment and software costs....................... 17,184 5,068
Leasehold improvements...................................... 601 487
Furniture and other equipment............................... 1,198 814
Projects in progress........................................ 2,158 471
-------- --------
21,141 6,840
Less accumulated depreciation and amortization............ (6,020) (2,821)
-------- --------
15,121 4,019
Other assets................................................ 80 80
-------- --------
$ 28,121 $ 12,659
======== ========
</TABLE>
LIABILITIES AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable............................................ $ 2,876 $ 2,321
Accrued liabilities......................................... 8,736 2,760
Due to USANi LLC............................................ 329 329
-------- --------
Total current liabilities............................... 11,941 5,410
MEMBERS' EQUITY
Class A (34,043,444 and 24,432,362 units, respectively)..... 103,418 51,993
Class B (no units outstanding).............................. -- --
Accumulated deficit......................................... (87,238) (44,744)
-------- --------
Total members' equity................................... 16,180 7,249
-------- --------
$ 28,121 $ 12,659
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
INTERNET SHOPPING NETWORK LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
NET REVENUES................................................ $ 24,690 $ 21,288 $ 12,954
Cost of sales............................................... 23,845 20,216 12,987
-------- -------- --------
Gross profit (loss)................................... 845 1,072 (33)
Operating costs and expenses:
Selling and marketing..................................... 10,793 5,193 1,176
Product development costs................................. 5,520 3,334 1,580
General and administrative................................ 19,283 8,231 5,869
Write-off of capitalized software costs................... 4,489 -- --
Depreciation and amortization............................. 3,251 1,436 2,018
-------- -------- --------
Total operating costs and expenses.................... 43,336 18,194 10,643
-------- -------- --------
Operating loss........................................ (42,491) (17,122) (10,676)
Other income (expense), net................................. (3) 198 --
-------- -------- --------
NET LOSS.................................................... $(42,494) $(16,924) $(10,676)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
INTERNET SHOPPING NETWORK LLC
STATEMENT OF STOCKHOLDERS'/MEMBERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'/
COMMON LLC PAID-IN ACCUMULATED MEMBERS'
STOCK UNITS CAPITAL DEFICIT EQUITY
-------- -------- ---------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY AT JANUARY 1,
1997................................. $ 68 $ 17,324 $(17,144) $ 248
Issuance of common stock............... 63 13,958 -- 14,021
Net loss for the year ended December
31, 1997............................. -- -- (10,676) (10,676)
----- -------- -------- --------
STOCKHOLDERS' EQUITY AT DECEMBER 31,
1997................................. 131 31,282 (27,820) 3,593
----- -------- -------- --------
Reclassification of equity upon
contribution of ISN assets to ISN
LLC.................................. (131) $ 31,413 (31,282) -- --
LLC units issued....................... -- 20,580 -- -- 20,580
Net loss for the year ended December
31, 1998............................. -- -- -- (16,924) (16,924)
----- -------- -------- -------- --------
MEMBERS' EQUITY AT DECEMBER 31, 1998... $ -- 51,993 $ -- (44,744) 7,249
===== ========
LLC units issued....................... 51,425 -- 51,425
Net loss for the year ended December
31, 1999............................. -- (42,494) (42,494)
-------- -------- --------
MEMBERS' EQUITY AT DECEMBER 31, 1999... $103,418 $(87,238) $ 16,180
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
INTERNET SHOPPING NETWORK LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(42,494) $(16,924) $(10,676)
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization........................... 3,251 1,436 2,018
Write-off of capitalized software costs................. 4,489 -- --
Changes in current assets and liabilities:
Accounts receivable................................... (70) (359) 45
Inventories........................................... (3,488) (5,207) (2,624)
Accounts payable...................................... 555 1,379 (112)
Accrued liabilities................................... 4,875 1,640 128
Other, net.............................................. (796) 34 (173)
-------- -------- --------
Net cash used in operating activities............... (33,678) (18,001) (11,394)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (17,741) (2,579) (2,626)
-------- -------- --------
Net cash used in investing activities............... (17,741) (2,579) (2,626)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of LLC units....................... 51,425 20,580 14,021
-------- -------- --------
Net cash provided by financing activities........... 51,425 20,580 14,021
-------- -------- --------
Net increase in cash and cash equivalents................... 6 -- 1
Cash and cash equivalents at beginning of period.......... 3 3 2
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 9 $ 3 $ 3
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
Internet Shopping Network LLC (the "Company" or "Internet Shopping
Network"), a Delaware limited liability company, was formed on January 29, 1998,
and offers home and leisure merchandise, apparel, gourmet food and consumer
electronics in an online auction format over its website FirstAuction.com and
jewelry over its website FirstJewelry.com.
The Company is a subsidiary of USANi LLC, which is a direct, non-wholly
owned subsidiary of Home Shopping Network, Inc. ("Home Shopping"), which is an
indirect non-wholly owned subsidiary of USA Networks, Inc. ("USAi"). USAi
acquired the predecessor to the Company, Internet Shopping Network, Inc., on
December 20, 1996 in conjunction with its acquisition of Home Shopping. USAi
accounted for the transaction using the purchase method of accounting and the
assets and liabilities of Internet Shopping Network, Inc. were adjusted as of
December 31, 1996 to reflect their respective fair values. At Internet Shopping
Network's formation, Home Shopping contributed substantially all of the
operating assets and liabilities of Internet Shopping Network, Inc., at USAi's
historical cost basis to Internet Shopping Network in exchange for 100 units in
the Company. The financial results of Internet Shopping Network, Inc. for the
year ended December 31, 1997 are based on its historical basis of accounting. On
December 1, 1999, the Company declared a 189,695 to 1 unit split effective as of
January 29, 1998. All share amounts presented have been adjusted to reflect this
split.
The following is a summary of the significant accounting policies of the
Company consistently applied in the preparation of the accompanying consolidated
financial statements.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUES
Revenues primarily consist of merchandise sales and are reduced by incentive
discounts and sales returns to arrive at net revenue. Revenues are recognized
upon shipment. Internet Shopping Network's sales policy allows jewelry sold over
the FirstJewelry.com website to be returned at the customer's discretion within
30 days of the date of receipt and merchandise sold on the FirstAuction.com
website to be returned if it is damaged or defective within 30 days of the date
of receipt. Allowances for returned merchandise and other adjustments are
provided based upon past experience.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments.
INVENTORIES, NET
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out method. Cost includes freight and certain other
related costs. Market is determined on the basis of net realizable value, giving
consideration to obsolescence and other factors. All inventories are finished
goods. Inventories are presented net of an inventory carrying adjustment of
$1.7 million and $1.4 million at December 31, 1999 and 1998, respectively.
Carrying adjustments establish a new cost basis for financial reporting
purposes. Substantially all inventory is warehoused and shipped by Home Shopping
Network, and affiliate of the Company, although the Company has title to such
inventory.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, are recorded at
cost. Costs incurred for computer software and websites developed or obtained
for internal use during the application
F-36
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
development stage are capitalized and classified as computer equipment and
software costs. Repairs and maintenance and any gains or losses on dispositions
are included in operations.
Depreciation and amortization is provided for on a straight-line basis to
allocate the cost of depreciable assets to operations over their estimated
service lives.
<TABLE>
<CAPTION>
DEPRECIATION/
ASSET CATEGORY AMORTIZATION PERIOD
- -------------- -------------------
<S> <C>
Computer equipment and software costs...................... 3 to 7 Years
Leasehold improvements..................................... 4 Years
Furniture and other equipment.............................. 3 to 10 Years
</TABLE>
LONG-LIVED ASSETS INCLUDING INTANGIBLES
The Company's accounting policy regarding the assessment of the
recoverability of the carrying value of long-lived assets, including property,
plant and equipment, is to review the carrying value of the assets if the facts
and circumstances suggest that they may be impaired. If this review indicates
that the carrying value will not be recoverable, as determined based on the
undiscounted future cash flows of the assets, the carrying value is reduced to
its estimated fair value. Internet Shopping Network wrote off $4.5 million of
costs associated with the First Outlet website, which were incurred in 1999,
when management determined not to launch the website.
FAIR VALUE FINANCIAL INSTRUMENTS
The carrying amounts for the Company's cash, prepaid assets, other assets,
accounts payable and accrued liabilities approximate fair value.
INCOME TAXES
The Company was formed as a limited liability company. As a limited
liability company, the Company is treated as a partnership for income tax
purposes and all income/(loss) is reflected on the member's tax returns. As
such, the Company is not subject to Federal and state income taxation.
For the year ended December 31, 1997, the Company's predecessor was included
in the consolidated tax return of USAi and accounted for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS 109). Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable 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.
PRODUCT DEVELOPMENT COSTS
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's websites. Product
development costs are expensed as incurred during the preliminary project and
post-implementation stages.
ADVERTISING
Advertising costs are expensed in the period incurred. Advertising expense
was $9.9 million, $4.6 million and $0.8 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
F-37
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT
The Company operates in one segment and the financial information prescribed
herein materially represents all the financial information related to that
segment. The Company manages its online auction business as one combined entity,
allocates resources and analyzes information used to operate the business on a
combined basis.
STOCK-BASED COMPENSATION
Internet Shopping Network is subject to Statement of Financial Accounting
Standards No. 123 "Accounting and Disclosure of Stock-Based Compensation"
("SFAS 123"). As allowed by SFAS 123, Internet Shopping Network accounts for
stock-based compensation in accordance with APB 25, "Accounting for Stock Issued
to Employees." In cases where exercise prices are less than fair value as of the
grant date, compensation is recognized over the vesting period.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements and notes include the inventory carrying adjustment, sales return
accrual, allowance for doubtful accounts and other long-lived assets.
NOTE 3--COMMITMENTS AND CONTINGENCIES
Internet Shopping Network leases office space and equipment used in
connection with its operations under various operating leases and contracts,
many of which contain escalation clauses.
Future minimum payments under non-cancellable agreements are $0.6 million in
2000.
Expenses charged to operations under these agreements were $1.0 million,
$1.0 million, and $0.8 million the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE 4--LITIGATION
In February 1999, Internet Shopping Network filed a demand for arbitration
against former Internet Shopping Network President Kirk Loevner under the terms
of the arbitration provision in his employment agreement. In response, Loevner
filed a complaint against Internet Shopping Network in Superior Court for Santa
Clara County, California. The Superior Court decided not to enforce the
arbitration provision of Mr. Loevner's employment agreement, and the court's
ruling is currently on appeal. Mr. Loevner's employment with Internet Shopping
Network ceased in August 1998. Mr. Loevner alleges that Internet Shopping
Network breached his employment agreement and its stock option plan. He is
seeking declaratory relief that he did not breach his employment agreement by
accepting employment with his new and current employer FreeShop International,
Inc. and, consequently, that his options for 250,000 shares of Internet Shopping
Network's predecessor, International Shopping Network, Inc. (with an exercise
price of $1.75 per share) are entitled to vest. Additionally, Mr. Loevner is
seeking penalties and attorneys fees under the California Labor Code. In
December 1999, Loevner filed a complaint in U.S. District for the Northern
District of California against Home Shopping Network, and certain executive
officers of Home Shopping Network, seeking declaratory and
F-38
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LITIGATION (CONTINUED)
injunctive relief, and damages relating to his alleged entitlement to shares of
Internet Shopping Network stock. USAi believes that this suit is duplicative of
the above stated action against Internet Shopping Network, and intends to file a
motion to dismiss or stay the federal action and seek sanctions for
Mr. Loevner's multiplication of the legal proceedings.
On November 10, 1999, First Jewelry Company of Canada, Inc. and its
affiliate A&A Jewelers, Inc., filed a complaint against Internet Shopping
Network and USAi in U.S. District Court for the Southern District of New York,
claiming that Internet Shopping Network's use of the "First Jewelry" name and
URL infringes on plaintiffs' claimed "First Jewellery" and "1(st) Jewellery"
trademarks. The plaintiffs also filed a domain name challenge with Network
Solutions, Inc. On December 14, 1999, a hearing was held on the plaintiff's
preliminary injunction motion. On January 31, 2000 and February 17, 2000, the
court issued two orders granting the preliminary injunction motion, ordering
Internet Shopping Network to cease using the name "First Jewelry" in connection
with Internet Shopping Network's jewelry business commencing on April 17, 2000,
unless used to announce a name change, and ordering Internet Shopping Network
until such name change to prominently display next to the "First Jewelry" logo
on the FirstJewelry.com home page a statement disclaiming affiliation with
plaintiffs, but permitting Internet Shopping Network throughout the duration of
the litigation to use the "www.firstjewelry.com" URL provided the web page at
such URL is only used to announce the new name and provide consumers a link to a
new URL under which the website operates with its new name.
In the ordinary course of business, Internet Shopping Network is engaged in
various other lawsuits. In the opinion of management, the ultimate outcome of
the various lawsuits should not have a material impact on the liquidity, results
of operations or financial condition of Internet Shopping Network.
NOTE 5--BENEFIT PLAN
Internet Shopping Network offers a plan pursuant to Section 401(k) of the
Internal Revenue Code covering substantially all full-time employees who are not
party to collective bargaining agreements. Internet Shopping Network's matching
contributions are set at the discretion of the Board of Directors or the
applicable committee thereof. Expense under this plan was $0.2 million,
$0.1 million and less than $0.1 million in the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE 6--ADVANCES FROM USAI AND FINANCING
USANi LLC provides funds as needed to Internet Shopping Network for
operations. Internet Shopping Network is required to transfer excess cash to
USANi LLC no less frequently than monthly. To date Internet Shopping Network has
not transferred any funds to USANi LLC. USANi LLC has elected to receive equity
interests in Internet Shopping Network in consideration of all funding provided
through December 31, 1999.
NOTE 7--RELATED PARTY TRANSACTIONS
Home Shopping provides warehouse, teleservices, accounting and other
administrative services to Internet Shopping Network based upon an oral
agreement. The services are charged on a monthly basis. Expenses charged to
operations under these services were $5.4 million, $2.6 million, and
$1.6 million the years ended December 31, 1999, 1998 and 1997, respectively.
F-39
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCK OPTION PLANS
The Company has a stock option plan (the "Plan") under which options to
purchase share units may be granted to employees of the Company. The plan
authorizes the Company to issue options to acquire 10,000,000 Class B units. To
date, no shares have been issued. The options under the Plan vest ratably,
generally over a period of four years from the date of grant and generally
expire not more than 10 years from the date of grant. The Plan has options
available for future grants. There are also options outstanding under another
plan, from which the Company is not allowed to grant shares under this plan.
A summary of changes in outstanding options under the stock option plans
with respect to employees and/or directors of the Company are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- --------------------
PRICE PRICE PRICE
SHARES RANGE SHARES RANGE SHARES RANGE
---------- ----------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period.................... 1,357,500 $1.75-4.27 1,356,000 $ 1.75 1,522,000 $1.75
Granted................... 1,244,000 $ 5.35 774,000 $1.75-4.27 566,000 $1.75
Exercised................. -- -- -- -- -- --
Cancelled................. (1,500,321) $1.75-5.35 (772,500) $ 1.75 (732,000) $1.75
---------- --------- ---------
Outstanding at end of
period.................... 1,101,179 $1.75-5.35 1,357,500 $1.75-4.27 1,356,000 $1.75
========== ========= =========
Options exercisable......... 223,012 63,626 4,750
========== ========= =========
Available for grant......... 8,756,000 244,000 242,500
========== ========= =========
</TABLE>
The weighted average exercise prices during the year ended December 31, 1999
was $5.35 and $3.31 for options granted and cancelled. The weighted average fair
value of options granted during the year was $5.35.
The weighted average exercise prices during the year ended December 31,
1998, were $2.71 and $1.75 for options granted and cancelled, respectively. The
weighted average fair value of options granted during the year was $2.79.
The weighted average exercise prices during the year ended December 31, 1997
was $1.75 for options granted and cancelled. The weighted average fair value of
options granted during the year was $1.75.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
OUTSTANDING AT WEIGHTED WEIGHTED EXERCISABLE AT WEIGHTED
DECEMBER 31, AVERAGE REMAINING AVERAGE DECEMBER 31, AVERAGE
RANGE OF EXERCISE PRICE 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
- ----------------------- -------------- ----------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$1.00 to $5.00........... 388,179 8.1 $2.58 205,012 $2.41
$5.01 to $10.00.......... 713,000 9.5 5.35 18,000 5.35
--------- ----- ----- ------- -----
1,101,179 9.0 $4.37 223,012 $2.64
========= ===== ===== ======= =====
</TABLE>
The Company has issued options at times to employees and/or directors with
an exercise price below fair market value. Accordingly, in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees," the difference between the fair market value and the
F-40
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCK OPTION PLANS (Continued)
exercise price has been recognized as compensation cost and is being amortized
over the vesting period.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation." The information is determined as if the Company has
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair market value method. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for all periods: risk-free interest
rate of 5.8%; a dividend yield of zero; a volatility factor of 100%, based on
historical trends of comparable companies; and a weighted-average expected life
of the options of five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair market value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require 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 market value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock 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 DEC. 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma net loss............................. $(43,232) $(17,113) $(10,721)
</TABLE>
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.
NOTE 9--GUARANTEE OF NOTES
USAi issued $500.0 million 6 3/4% Senior Notes due 2005 (the "Notes"). USANi
LLC is a co-issuer and co-obligor of the Notes. The Notes are jointly,
severally, fully and unconditionally guaranteed by certain subsidiaries of USAi,
including Home Shopping and all of the subsidiaries of USANi LLC, including the
Company (other than subsidiaries that are, individually and in the aggregate,
inconsequential to USANi LLC on a consolidated basis) (collectively, the
"Subsidiary Guarantors"). All of the Subsidiary Guarantors (other than Home
Shopping) (the "Wholly Owned Subsidiary Guarantors") are wholly owned, directly
or indirectly, by USAi or USANi LLC, as the case may be.
NOTE 10--INCOME TAXES
The Company was formed as a limited liability company. As a limited
liability company, the Company is treated as a partnership for income tax
purposes. As such, the Company is not subject to Federal and state income
taxation. For the year ended December 31, 1997, the Company's predecessor was
included in the consolidated tax return of USAi. The Company's financial
statements for the year ended December 31, 1997 does not reflect any income tax
benefit computed on a stand-alone basis as the benefits related to net operating
loss carryover were utilized by USAi.
F-41
<PAGE>
INTERNET SHOPPING NETWORK LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SUBSEQUENT EVENT (UNAUDITED)
On January 25, 2000, USAi and Styleclick.com Inc. ("Old Styleclick") Old
Styleclick, a leading enabler of e-commerce for manufacturers and retailers,
announced an agreement to form a new company by merging Internet Shopping
Network and Old Styleclick. The new company, which will be named
Styleclick, Inc., will own and operate the combined properties of Old Styleclick
and Internet Shopping Network, which include Internet Shopping Network's
FirstAuction.com, FirstJewelry.com and Old Styleclick's network of branded
e-commerce web sites. Under the terms of the agreement, USANi Sub LLC and its
affiliates 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, USANi Sub LLC will own approximately 75% of the new company and Old
Styleclick stockholders will own approximately 25%. In the interim, USAi has
agreed to extend a $10 million bridge loan to Old Styleclick. The transaction is
expected to close in July 2000 and is subject to regulatory and Old Styleclick
stockholder approval. The new company is expected to trade on Nasdaq under the
symbol "IBUY."
F-42
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
STYLECLICK.COM INC.,
INTERNET SHOPPING NETWORK LLC
AND
USANI SUB LLC
DATED AS OF MARCH 23, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 1 THE MERGERS................................................. 11
1.1 Formation of Newco and Merger Subs.......................... 11
1.2 The ISN Merger.............................................. 12
1.3 The Company Merger.......................................... 12
1.4 Closing..................................................... 13
1.5 Effective Time.............................................. 13
1.6 Articles of Incorporation; By-laws and LLC Agreement........ 13
1.7 Directors and Officers...................................... 14
1.8 Calculation of Specified Number; Anti-Dilution Adjustment... 14
ARTICLE 2 EFFECT OF THE MERGERS ON THE EQUITY OF THE CONSTITUENT
ENTITIES; EXCHANGE OF CERTIFICATES.......................... 15
2.1 Effect of Company Merger.................................... 15
2.2 Effect of ISN Merger........................................ 16
2.3 Exchange of Certificates.................................... 17
2.4 Appraisal Rights............................................ 20
2.5 Treatment of Stock Options and Warrants..................... 21
2.6 Adjustments................................................. 23
2.7 Lost Certificates........................................... 23
2.8 Withholding Rights.......................................... 23
2.9 Additional Shares Payable to Parent......................... 23
ARTICLE 3 REPRESENTATIONS AND WARRANTIES.............................. 24
3.1 Representations and Warranties of the Company............... 24
3.2 Representations and Warranties of ISN and Parent............ 41
ARTICLE 4 COVENANTS................................................... 55
4.1 Covenants of the Company.................................... 55
4.2 Covenants of ISN and Parent................................. 56
ARTICLE 5 ADDITIONAL COVENANTS........................................ 57
5.1 No Solicitation............................................. 57
5.2 Directors and Officers Indemnification and Insurance........ 59
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
5.3 Notification of Certain Matters............................. 60
5.4 Tax Treatment............................................... 60
5.5 Company Stockholder Meeting................................. 60
5.6 Registration Statement, Proxy Statement/Prospectus.......... 61
5.7 Further Action, Reasonable Efforts.......................... 62
5.8 Public Announcements........................................ 62
5.9 Blue Sky.................................................... 63
5.10 NASDAQ...................................................... 63
5.11 Affiliates.................................................. 63
5.12 Tax Matters................................................. 63
ARTICLE 6 CONDITIONS PRECEDENT........................................ 64
6.1 Conditions to the Obligations of each Party................. 64
6.2 Conditions to the Obligations of ISN and Parent............. 65
6.3 Conditions to the Obligations of the Company................ 66
6.4 Frustration of Closing Conditions........................... 67
ARTICLE 7 TERMINATION AND AMENDMENT................................... 68
7.1 Termination................................................. 68
7.2 Effect of Termination....................................... 69
ARTICLE 8 GENERAL PROVISIONS.......................................... 69
8.1 Notices..................................................... 69
8.2 Waivers and Amendments...................................... 71
8.3 Expenses and Other Payments................................. 71
8.4 Newco Common Stock.......................................... 72
8.5 Assignment.................................................. 73
8.6 Non-Survival of Representations and Warranties.............. 73
8.7 Headings.................................................... 73
8.8 Interpretation.............................................. 73
8.9 Severability of Provisions.................................. 73
8.10 Entire Agreement; No Third Party Beneficiaries.............. 73
8.11 Governing Law............................................... 74
8.12 Submission To Jurisdiction; Waivers......................... 74
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
8.13 WAIVERS OF JURY TRIAL....................................... 74
8.14 Counterparts................................................ 74
</TABLE>
Exhibit A--Form of Stockholders Agreement
Exhibit B--Form of Registration Rights Agreement
Exhibit C--Form of Agreement of Merger
Exhibit D--Form of Newco Charter and By-laws
Exhibit E--Media Warrant
Exhibit F--License Agreement
Exhibit G--Form of Rule 145 Affiliate Agreement
Exhibit H--Form of Certificate of Merger
iii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated
as of March 23, 2000, by and among Styleclick.com Inc., a California corporation
(the "COMPANY"), ISN LLC, a Delaware limited liability company ("ISN"), and
USANi Sub LLC, a Delaware limited liability company ("PARENT").
WHEREAS, the Company and Parent are parties to the Merger Agreement, dated
as of January 24, 2000 (the "ORIGINAL MERGER AGREEMENT"), subject to the terms
and conditions of which, the parties approved certain business combination
transactions;
WHEREAS, upon the terms and subject to the conditions of this Agreement, ISN
and a Delaware limited liability company and a wholly owned Subsidiary of Newco
(as defined below) to be formed by Newco prior to the Effective Time (as defined
below) ("ISN MERGER SUB") will enter into a business combination transaction
pursuant to which ISN Merger Sub will merge with and into ISN (the "ISN
MERGER"), whereby each outstanding ISN Unit (as defined below) will be converted
into the right to receive 0.601 shares of Newco Common Stock (as defined below);
WHEREAS, upon the terms and subject to the conditions of this Agreement, the
Company and a California corporation and a wholly owned Subsidiary of Newco to
be formed by Newco prior to the Effective Time ("COMPANY MERGER SUB" and,
collectively with ISN Merger Sub, the "MERGER SUBS"), will enter into a business
combination transaction pursuant to which Company Merger Sub will merge with and
into the Company (the "COMPANY MERGER" and, collectively with the ISN Merger,
the "MERGERS"), whereby each issued and outstanding share of common stock of the
Company, no par value ("COMPANY COMMON STOCK") (other than shares of Company
Common Stock that are owned by the Company or any subsidiary of the Company),
will be converted into the right to receive one share of Class A Common Stock,
par value $.01 per share, of Newco ("NEWCO CLASS A COMMON STOCK");
WHEREAS, (a) Newco, Parent and certain individuals named therein (each such
individual, a "PRINCIPAL COMPANY STOCKHOLDER") will, prior to the Effective
Time, enter into a Stockholders Agreement, substantially in the form of
Exhibit A attached hereto (the "STOCKHOLDERS AGREEMENT"), providing for, among
other things, certain transfer restrictions on the shares of Newco Common Stock
owned by the parties as a result of the Mergers, and (b) Newco, USA
Networks, Inc. ("USA") and Parent will enter into a Registration Rights
Agreement substantially in the form of Exhibit B attached hereto (the
"REGISTRATION RIGHTS AGREEMENT");
WHEREAS, the Board of Directors of the Company has determined that the
Company Merger is fair to, and in the best interests of, the Company's
stockholders and has adopted, authorized and approved the execution and delivery
of this Agreement and the other agreements and instruments contemplated hereby
and the consummation of the Company Merger and the other transactions
contemplated hereby;
WHEREAS, concurrently with the execution of the Original Merger Agreement
and as a condition to the willingness of the parties to enter into the Original
Merger Agreement, (i) USA provided a term loan facility (the "TERM LOAN
FACILITY") to the Company in the principal amount of $10 million pursuant to a
Credit Agreement, dated as of January 24, 2000, between the Company and USA (the
"CREDIT AGREEMENT"); (ii) Parent entered into separate Voting Agreements (the
"VOTING AGREEMENTS") with certain stockholders of the Company, pursuant to which
each such stockholder agrees to, among other things, vote its shares of Company
Common Stock in favor of the Company Merger and/or waive certain contractual and
other rights in connection with the Transactions (as defined below);
(iii) Parent entered into separate Waiver Agreements (the "WAIVER AGREEMENTS")
with certain warrantholders of the Company, pursuant to which each such
warrantholder agrees to waive certain contractual and other rights in connection
with the Transactions; and (iv) the Company and Parent executed an Option
A-1
<PAGE>
Agreement (the "OPTION AGREEMENT") granting Parent the irrevocable right to
purchase shares of Company Common Stock on the terms and subject to the
conditions contained therein;
WHEREAS, for federal income tax purposes, it is intended that the Mergers
shall qualify as tax-free events under either or both of Section 351 and
Section 368 of the Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder (the "CODE");
WHEREAS, the Company, ISN and Parent wish to make certain representations,
warranties and agreements in connection with the consummation of the
Transactions and to prescribe various conditions to the Transactions; and
WHEREAS, the Company and Parent wish to amend and restate the Original
Merger Agreement in order to restructure the business combination transactions
contemplated thereby and make ISN and Newco a party thereto.
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree to amend and restate the Original Merger Agreement
so that, as amended and restated, it reads in its entirety as follows:
DEFINITIONS
Definitions shall apply equally to both the singular and plural forms of the
terms defined. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. All references herein to
Articles, Sections, Exhibits, Annexes and Schedules shall be deemed to be
references to Articles and Sections of, and Exhibits, Annexes and Schedules to,
this Agreement unless the context shall otherwise require. All Exhibits, Annexes
and Schedules attached hereto shall be deemed incorporated herein as if set
forth in full herein and, unless otherwise defined therein, all terms used in
any Exhibit, Annex or Schedule shall have the meaning ascribed to such term in
this Agreement. The words "INCLUDE," "INCLUDES" and "INCLUDING" shall be deemed
to be followed by the phrase "WITHOUT LIMITATION." The words "HEREOF," "HEREIN"
and "HEREUNDER" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement. Unless otherwise expressly provided herein, any agreement, plan,
instrument or statute defined or referred to herein or in any agreement or
instrument that is referred to herein means such agreement, plan, instrument or
statute as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes) by succession of comparable successor statutes and references to all
attachments thereto and instruments incorporated therein. For the purposes of
this Agreement, the following terms have the following meanings:
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly controls, is controlled by, or is under common control
with, such first Person. The term "CONTROL" means possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"AGENTS" means, with respect to any Person, such Person's officers,
directors, employees, attorneys, accountants, investment bankers, financial
advisors or other representatives or agents.
"AGREEMENT OF MERGER" means the Agreement of Merger, conforming to the
provisions of Section 1101 of California Law, substantially in the form attached
as Exhibit C hereto.
"ALTERNATE TRANSACTION" means (i) a merger, consolidation, share exchange,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving the Company or any of its Subsidiaries or any other
material corporate transaction (other than the Transactions), the consummation
of which could reasonably be expected to impede, interfere with, prevent or
materially delay the
A-2
<PAGE>
consummation of the Transactions; (ii) a sale, lease, exchange, transfer or
other disposition of 15% or more of the assets of the Company and its
Subsidiaries taken as a whole, in a single transaction or series of transactions
(other than the Transactions); or (iii) the acquisition by any Person or "group"
(as defined in Section 13(d) of the Exchange Act), other than USA or Parent or
any of their respective controlled Affiliates, of "beneficial ownership" of 15%
or more of the issued and outstanding Equity Securities of the Company whether
by tender offer or exchange offer or otherwise and including a self tender
offer.
"APRIL 1999 WARRANTS" means the warrants identified as such in
Section 3.1(c) of the Company Disclosure Schedule.
"BUSINESS DAY" means any day other than a day on which (i) banks in the
State of New York are authorized or obligated to be closed or (ii) the New York
Stock Exchange is closed.
"CERTIFICATE OF MERGER" means the Certificate of Merger, conforming to the
provisions of Section 18-209 of the Delaware LLC Act, substantially in the form
attached as Exhibit H hereto.
"COMPANY DISCLOSURE SCHEDULE" means the disclosure letter delivered to
Parent by the Company concurrently with the execution of the Original Merger
Agreement.
"COMPANY OPTION PLAN" means the Company's 1995 Stock Option Plan, a copy of
which was made available to Parent.
"COMPANY STOCK OPTION" means an option to purchase Company Common Stock
granted by the Company and listed in Section 3.1(c) of the Company Disclosure
Schedule.
"COMPANY WARRANT" means a warrant to purchase Company Common Stock granted
pursuant to a Warrant Agreement and listed in Section 3.1(c) of the Company
Disclosure Schedule.
"CONTRACT" means any note, bond, mortgage, indenture, contract, agreement,
commitment, lease, license, permit, franchise, arrangement or other instrument
or obligation whether or not in writing.
"DEBT" of any Person means, without duplication, (i) all indebtedness of
such Person for borrowed money; (ii) all obligations of such Person evidenced by
notes, bonds, debentures or other similar instruments; (iii) all obligations of
such Person as a lessee under a lease that has been or should be, in accordance
with GAAP, recorded as a capital lease; (iv) all obligations, contingent or
otherwise, of such Person under acceptance, letter of credit or similar
facilities; (v) all Debt of others referred to in clauses (i) through
(iv) above guaranteed directly or indirectly in any manner by such Person; and
(vi) all Debt of others referred to in clauses (i) through (v) above secured by
(or for which the holder of such Debt has an existing right, contingent or
otherwise, to be secured by) any Lien on property (including accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Debt.
"EQUITY SECURITIES" has the meaning ascribed to such term in Rule 405
promulgated under the Securities Act as in effect on the date hereof, and in any
event includes any limited partnership interest, any limited liability company
interest and any other interest or security having the attendant right to vote
for directors or similar representatives.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"FINANCIAL STATEMENTS" with respect to the Company, means the Company's
(i) audited balance sheet as of December 31, 1998; (ii) statement of cash flows
and statement of changes in shareholders' equity for the year ended
December 31, 1998; (iii) unaudited balance sheet as of September 30, 1999; and
(iv) unaudited statement of operations for the three month period ended
September 30, 1999, in each case which were provided by the Company to Parent on
or prior to the date of the Original
A-3
<PAGE>
Merger Agreement; and, with respect to ISN, means ISN's (x) audited balance
sheet as of November 30, 1999 and (y) audited statement of cash flows and
statement of operations for the eleven month period ended November 30, 1999, in
each case which were provided by Parent to the Company on or prior to the date
of the Original Merger Agreement.
"GAAP" means generally accepted accounting principles in the United States
of America.
"GOVERNMENTAL ENTITY" means any foreign, federal, state, municipal or other
governmental or regulatory department, commission, board, bureau, agency or
instrumentality.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder.
"INTELLECTUAL PROPERTY" means all of the following as they exist in all
jurisdictions throughout the world: (i) patents, patent applications and other
patent rights (including any divisions, continuations, continuations-in-part,
substitutions or reissues thereof, whether or not patents are issued on any such
applications and whether or not any such applications are modified, withdrawn or
resubmitted); (ii) trademarks, service marks, trade dress, trade names, brand
names, Internet domain names, designs, logos or corporate names, whether
registered or unregistered, and all registrations and applications for
registration thereof; (iii) copyrights, including all renewals and extensions
thereof, copyright registrations and applications for registration thereof and
non-registered copyrights; (iv) trade secrets, concepts, ideas, designs,
research, processes, procedures, techniques, methods, know-how, data, mask
works, discoveries, inventions, modifications, extensions, improvements and
other proprietary rights (whether or not patentable or subject to copyright,
mask work or trade secret protection) (collectively, "TECHNOLOGY"); and
(iv) computer software programs, including all source code, object code and
documentation related thereto (the "SOFTWARE").
"IRS" means the Internal Revenue Service of the United States of America.
"ISN OPTION PLAN" means the ISN 1999 Stock Option Plan, a copy of which was
made available to the Company.
"ISN STOCK OPTION" means an option to purchase ISN Units granted pursuant to
the ISN Option Plan that is listed in Section 3.2(c) of the Parent Disclosure
Schedule.
"ISN UNITS" means all of the issued and outstanding limited liability
interests of ISN.
"KNOWLEDGE" means, with respect to a natural Person, the actual knowledge of
such Person and, with respect to a non-natural Person, the actual knowledge of
such Person's officers and directors (or similar representatives).
"LAWS" means any applicable law, statute, rule, regulation or code of any
Governmental Entity.
"LIABILITIES" means any Debt, liability, claim, loss, or obligation of any
kind, whether accrued or unaccrued, liquidated or unliquidated, secured or
unsecured, absolute, contingent, inchoate or otherwise.
"MATERIAL ADVERSE CHANGE" means, with respect to any Person, a change,
development or effect that, together with all such other changes, developments
or effects, individually or in the aggregate, has had, or is reasonably likely
to have, a Material Adverse Effect on such Person.
"MATERIAL ADVERSE EFFECT" means, with respect to any Person, any
circumstance (i) that is, or is reasonably likely to be, materially adverse to
the financial condition, business, assets or results of operations of such
Person and its Subsidiaries taken as a whole, or (ii) that adversely affects the
ability of such Person to perform its obligations under this Agreement or to
consummate the Transactions, but in each of clauses (i) and (ii) excluding any
circumstance, fact, change, development, effect, affect or impairment resulting
primarily from (x) events adversely affecting the industry in which such Person
is
A-4
<PAGE>
involved or (y) circumstances, matters or events described on the disclosure
letter delivered by such Person concurrently with execution of this Agreement.
"MEDIA VALUE" means advertising time on the Network computed on a net basis
at fair market value rates, which shall be determined by taking into account
recent sales by the Network of comparable size, volume and desired times in
similar product categories.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"NETWORK" means the network of media properties of USA, including USA
Network, SciFi Channel, USA Broadcasting, Ticketmaster, Home Shopping Network,
Sci-Fi.com, USA Networks.com, USA Studios.com and USA Films.com and others as
they may exist from time to time.
"NEWCO CLASS B COMMON STOCK" means the Class B Common Stock, par value $0.01
per share, of Newco.
"NEWCO COMMON STOCK" means the Newco Class A Common Stock and the Newco
Class B Common Stock.
"OFFICER'S CERTIFICATE" means a certificate executed by a duly authorized
officer of Company Merger Sub or the Company, as the case may be, certifying to
the information, and otherwise conforming, to the provisions of Section 1103 of
California Law.
"ORDER" means any applicable order, judgment, injunction, writ or decree.
"PARENT DISCLOSURE SCHEDULE" means the disclosure letter delivered to the
Company by Parent concurrently with the execution of the Original Merger
Agreement.
"PERSON" means any individual, corporation, partnership, firm, group (as
such term is used in Section 13(d)(3) of the Exchange Act), joint venture,
association, trust, limited liability company, unincorporated organization,
estate, trust or other entity.
"PROPORTIONATE NUMBER" means, with respect to any holder of ISN Units, a
fraction, the numerator of which is the number of shares of Newco Common Stock
issued to such holder pursuant to Section 2.2(b), and the denominator of which
is the total number of shares of Newco Common Stock issued pursuant to
Section 2.2(b).
"PROPRIETARY RIGHTS ASSIGNMENT AND NON-DISCLOSURE AGREEMENT" means the form
of Employee Confidentiality and Invention Assignment Agreement of the Company,
and any revised versions thereof, in the form provided by the Company to Parent
on or prior to the date of the Original Merger Agreement, pursuant to which,
among other things, each employee or consultant that is a signatory thereto
agrees (i) to irrevocably assign all right title and interest in any work,
invention or technology developed by such employee or consultant during the term
of his employment or consultancy to the Company, (ii) that any work created by
such employee or consultant during the term of his employment or consultancy to
the Company are work-for-hire and any authorship shall vest in the Company,
(iii) that the employee shall execute any documents necessary for the Company to
perfect its ownership in such works, inventions, or technology, including
without limitation, any patent application, patent assignment forms or copyright
assignment forms and (iv) that they shall not disclose any confidential
information to any third party outside of the Company without the prior written
consent of the Company, except confidential information that is already publicly
disclosed, independently developed, or if so directed by legal process.
"QUALIFIED ALTERNATE TRANSACTION PROPOSAL" means a bona fide written
proposal made by a Third Party to acquire, directly or indirectly, including
pursuant to a tender offer, exchange offer, merger, consolidation, business
combination, recapitalization, reorganization, liquidation, dissolution or
similar transaction, in exchange for cash and/or securities, at least 75% of the
outstanding shares of Company Common Stock on terms which the Board of Directors
of the Company determines in good faith (after
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receipt of a written opinion of a nationally recognized independent financial
advisor, and after taking into account all legal, financial and regulatory
aspects of such proposal, the identity of the Third Party making the proposal,
the strategic benefits to be derived from the Transactions and the long-term
prospects of Newco and its Subsidiaries) to be (a) more favorable to the
Company's stockholders than the Transactions from a financial point of view,
(b) reasonably capable of being financed and (c) not subject to any material
contingencies relating to financing.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"SEC" means the Securities and Exchange Commission.
"SUBSIDIARY" of any Person means any corporation, partnership, joint venture
or other legal entity of which such Person (either directly or through or
together with any other Subsidiary of such Person), owns, directly or
indirectly, 50% or more of the stock or other equity interests the holders of
which are generally entitled to vote for the election of the board of directors
or similar governing body of such corporation, partnership, joint venture or
other legal entity.
"THIRD PARTY" means any Person other than USA, ISN, Parent or the Company or
any of their respective controlled Affiliates.
"TRANSACTION DOCUMENTS" shall mean this Agreement and each of the agreements
and instruments contemplated hereby or thereby, including the Agreement of
Merger, the Officer's Certificates, the Stockholders Agreement, the Registration
Rights Agreement, the Media Commitment, the Media Warrants, the License
Agreement, the Credit Agreement, the Option Agreement and all documents,
instruments or agreements attached to or contemplated by any of the foregoing.
"TRANSACTIONS" means, collectively, the transactions contemplated by this
Agreement and the other Transaction Documents.
"WARRANT AGREEMENTS" means any agreement pursuant to which a Company Warrant
was issued that is listed in Section 3.1(c) of the Company Disclosure Schedule,
in each case in the form provided by the Company to Parent on or prior to the
date of the Original Merger Agreement.
CROSS-REFERENCES
Each of the following terms shall have the meaning ascribed thereto in the
Section set forth opposite such term:
<TABLE>
<CAPTION>
TERM SECTION
- ---- ----------------
<S> <C>
Agreement................................................... Recitals, 1.1(b)
Appraisal Rights............................................ 2.3(a)
Black Scholes Option........................................ 1.8(a)
California Law.............................................. 1.1(a)
Cash Out Elections.......................................... 1.8(a)
Certificates................................................ 2.2(b)
Claim....................................................... 5.2(a)
Closing..................................................... 1.4
Closing Date................................................ 1.4
Code........................................................ Recitals
Company..................................................... Recitals
Company Benefit Plans....................................... 3.1(l)(i)
Company Certificates........................................ 2.1(b)
Company Common Stock........................................ Recitals
Company Governmental Approvals.............................. 3.1(g)(i)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
- ---- ----------------
<S> <C>
Company Merger.............................................. Recitals
Company Merger Securities................................... 2.1(b)
Company Merger Sub.......................................... Recitals
Company Merger Sub Common Stock............................. 2.1
Company Permits............................................. 3.1(f)
Company Required Consents................................... 3.1(g)(ii)
Company SEC Documents....................................... 3.1(d)
Confidentiality Agreement................................... 8.9
Covered Person.............................................. 5.2(a)
Credit Agreement............................................ Recitals
DGCL........................................................ 1.1(a)
Delaware LLC Act............................................ 1.1(a)
Dissenting Shareholders..................................... 2.3
Dissenting Shares........................................... 2.3
Effective Time.............................................. 1.5
Environmental Laws.......................................... 3.1(o)
ERISA....................................................... 3.1(l)(i)
Exchange Agent.............................................. 2.2(a)
Exchange Fund............................................... 2.2(a)
Infoseek Litigation......................................... 4.2(g)
IP Licenses................................................. 3.1(m)(i)(B)
ISN......................................................... Recitals
ISN Benefit Plans........................................... 3.2(l)(i)
ISN Certificates............................................ 2.2(b)
ISN Class A Merger Securities............................... 2.2(b)
ISN Class B Merger Securities............................... 2.2(b)
ISN Merger.................................................. Recitals
ISN Merger Securities....................................... 2.2(b)
ISN Merger Sub.............................................. Recitals
ISN Merger Sub Units........................................ 2.2
ISN Permits................................................. 3.2(f)
ISN Stock Options........................................... 3.2(c)
Key Employee................................................ 3.1(y)
License Agreement........................................... 4.2(e)
Liens....................................................... 3.1(a)
Losses...................................................... 5.2(a)
Maximum Premium............................................. 5.2(c)
Measurement Time............................................ 2.3(a)
Media Commitment............................................ 4.2(d)
Media Warrant............................................... 4.2(d)
Mergers..................................................... Recitals
Merger Subs................................................. Recitals
Newco....................................................... 1.1(a)
Newco Class A Common Stock.................................. Recitals
Option Agreement............................................ Recitals
Original Merger Agreement................................... Recitals
Parent...................................................... Recitals
Parent Governmental Approvals............................... 3.2(g)(i)
Parent Required Consents.................................... 3.2(g)(ii)
Payment..................................................... 3.1(w), 3.2(u)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
- ---- ----------------
<S> <C>
Principal Company Stockholder............................... Recitals
Proposed Intellectual Property Agreements................... 3.1(m)(i)(D)
Proxy Statement/Prospectus.................................. 3.1(t)
Recommendation.............................................. 3.1(q)
Registration Rights Agreement............................... Recitals
Registration Statement...................................... 3.1(t)
Required Shareholder Approval............................... 3.1(e)
Rule 145 Affiliate Agreement................................ 5.11
Rule 145 Affiliates......................................... 5.11
SARs........................................................ 3.1(c)
Software.................................................... Recitals
Specified Number............................................ 1.8(c)
Stockholders Agreement...................................... Recitals
Stockholders' Meeting....................................... 5.5
Surviving Corporation....................................... 1.3
Surviving LLC............................................... 1.2
Systems..................................................... 3.1(m)(vii)
Tax......................................................... 3.1(j)(i)
Tax Return.................................................. 3.1(j)(ii)
Technology.................................................. Recitals
Term Loan Facility.......................................... Recitals
Termination Fee............................................. 8.3(b)(ii)
USA......................................................... Recitals
Voting Agreement............................................ Recitals
Waiver Agreement............................................ Recitals
WARN........................................................ 3.1(l)(xiii)
Year 2000 Compliant......................................... 3.1(m)(vii)
</TABLE>
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ARTICLE 1
THE MERGERS
Section 1.1 FORMATION OF NEWCO AND MERGER SUBS.
(a) As promptly as practicable following the execution of this
Agreement, Parent shall cause a corporation ("NEWCO") to be organized under
the Delaware General Corporation Law (the "DGCL"), shall cause Company
Merger Sub to be organized as a corporation under the California General
Corporation Law ("CALIFORNIA LAW") and shall cause ISN Merger Sub to be
organized as a limited liability company under the Delaware Limited
Liability Company Act (the "DELAWARE LLC ACT"). The Certificate of
Incorporation and By-laws of Newco shall be substantially in the forms
attached hereto as Exhibit D and the Articles of Incorporation and By-laws
of Company Merger Sub and Certificate of Formation and the Limited Liability
Company Agreement of ISN Merger Sub shall be as reasonably agreed to by
Parent and the Company prior to the Effective Time. The officers and
directors of Newco and Company Merger Sub as of the Effective Time and the
officers of ISN Merger Sub will be determined by Parent subject, with
respect to Newco, to the provisions of the Stockholders Agreement.
(b) As promptly as practicable following the execution of this Agreement
and the organization of Newco and the Merger Subs pursuant to
Section 1.1(a), Parent shall take all steps necessary (i) to cause the
directors of Newco and Company Merger Sub to ratify and approve this
Agreement, the Agreement of Merger, the Mergers and the other Transactions,
(ii) to cause Newco, as the sole member of ISN Merger Sub, to ratify and
approve this Agreement, the Certificate of Merger, the Mergers and the other
Transactions, (iii) to cause the Agreement of Merger to be executed on
behalf of Newco and Company Merger Sub, (iv) to cause the Certificate of
Merger to be executed on behalf of Newco and ISN Merger Sub, (v) to cause
Newco, as the sole stockholder of Company Merger Sub, to adopt and approve
this Agreement, the Agreement of Merger, the Mergers and the other
Transactions and (vi) to approve, as the sole stockholder of Newco, the
issuance of Newco Common Stock in connection with the Mergers. Unless the
context otherwise requires, the term "AGREEMENT" as used herein refers
collectively to this Agreement, the Agreement of Merger and the Certificate
of Merger.
Section 1.2 THE ISN MERGER. Upon the terms and subject to the conditions
set forth in this Agreement and in accordance with the Delaware LLC Act, ISN
Merger Sub shall be merged with and into ISN at the Effective Time. Upon and
after the Effective Time, the separate existence of ISN Merger Sub shall cease
and ISN shall be the surviving entity in the ISN Merger (the "SURVIVING LLC").
In accordance with the Delaware LLC Act, all of the rights, privileges, powers,
immunities, purposes and franchises of ISN and ISN Merger Sub shall vest in the
Surviving LLC and all of the Liabilities and duties of ISN and ISN Merger Sub
shall become the Liabilities and duties of the Surviving LLC.
Section 1.3 THE COMPANY MERGER. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with California Law,
Company Merger Sub shall be merged with and into the Company at the Effective
Time. Upon and after the Effective Time, the separate corporate existence of
Company Merger Sub shall cease and the Company shall be the surviving
corporation in the Company Merger (the "SURVIVING CORPORATION"). In accordance
with California Law, all of the rights, privileges, powers, immunities, purposes
and franchises of the Company and Company Merger Sub shall vest in the Surviving
Corporation and all of the Liabilities and duties of the Company and Company
Merger Sub shall become the Liabilities and duties of the Surviving Corporation.
Section 1.4. CLOSING. The closing of the Mergers (the "CLOSING") shall
take place at the offices of Paul, Weiss, Rifkind, Wharton & Garrison at
10:00 a.m. on the first Business Day on which each of the conditions set forth
in Article 5 (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the fulfillment or waiver of those
conditions) have been satisfied or waived by the party entitled to the benefit
of such conditions or at such other place, time and date as the
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Company and Parent may agree. The time and date upon which the Closing occurs is
referred to herein as the "CLOSING DATE."
Section 1.5. EFFECTIVE TIME. On the Closing Date (or on such other date as
the Company, Parent and ISN may agree), the Company, Parent and ISN (a) shall
cause the Company Merger to be consummated by executing, delivering and filing
(or by causing the execution, delivery and filing of) the Agreement of Merger
and a duly executed Officer's Certificate of each of Company Merger Sub and the
Company (accompanied by a certificate of satisfaction of the California
Franchise Tax Board (if required) for Company Merger Sub), with the Secretary of
State of the State of California in accordance with the relevant provisions of
California Law and shall make all other filings or recordings required in
connection herewith under California Law and (b) shall cause the ISN Merger to
be consummated by executing, delivering and filing (or by causing the execution,
delivery and filing of) the Certificate of Merger with the Secretary of State of
the State of Delaware in accordance with the relevant provisions of the Delaware
LLC Act and shall make all other filings or recordings required in connection
herewith under the Delaware LLC Act. The Mergers shall become effective at such
time as both the Agreement of Merger and the Certificate of Merger are duly
filed, or at such later time as is specified in the Certificate of Merger and
the Agreement of Merger and the Officer's Certificate and in accordance with the
Delaware LLC Act and California Law (the "EFFECTIVE TIME").
Section 1.6. ARTICLES OF INCORPORATION; BY-LAWS AND LLC AGREEMENT. The
Articles of Incorporation of Company Merger Sub in effect at the Effective Time
shall be the Articles of Incorporation of the Surviving Corporation until
amended in accordance with its terms and applicable Law; PROVIDED, HOWEVER, that
at the Effective Time, Article I of such Articles of Incorporation shall be
amended by virtue of this Agreement to read as follows: "THE NAME OF THE
CORPORATION IS STYLECLICK.COM INC." The By-laws of Company Merger Sub in effect
at the Effective Time shall be the By-laws of the Surviving Corporation until
amended in accordance with its terms and applicable law. The Certificate of
Formation of ISN Merger Sub in effect at the Effective Time shall be the
Certificate of Formation of the Surviving LLC until amended in accordance with
its terms and applicable law; PROVIDED, HOWEVER, that at the Effective Time,
Article I of such Certificate of Formation shall be amended by virtue of this
Agreement to read as follows: "The name of the limited liability company
(hereinafter called the "limited liability company") is Internet Shopping
Network LLC." The Limited Liability Company Agreement of ISN Merger Sub in
effect at the Effective Time shall be the Limited Liability Company Agreement of
the Surviving LLC until amended in accordance with its terms and applicable Law.
Section 1.7. DIRECTORS AND OFFICERS. The directors and officers of Company
Merger Sub immediately prior to the Effective Time shall be the directors and
officers, respectively, of the Surviving Corporation as of the Effective Time
and until their successors are duly elected or appointed and qualified in
accordance with applicable Law. The officers of ISN Merger Sub immediately prior
to the Effective Time shall be the officers of the Surviving LLC as of the
Effective Time and until their successors are duly elected or appointed and
qualified in accordance with applicable Law.
Section 1.8. CALCULATION OF SPECIFIED NUMBER; ANTI-DILUTION ADJUSTMENT.
(a) If on or prior to the Effective Time, any holder of an April 1999
Warrant has exercised its right (each a "BLACK SCHOLES OPTION") to receive
cash in exchange for such April 1999 Warrant as a result of the
Transactions, then the Company shall promptly (and in any event prior to the
Effective Time) notify Parent in writing of each such exercise (the "CASH
OUT ELECTIONS"), which notice shall include the amount of cash payable to
each such holder. At Closing, each holder of ISN Units (other than Parent)
shall be entitled to receive a number of shares of Class A Common Stock
equal to the Specified Number multiplied by such holder's Proportionate
Number and Parent shall be entitled to receive a number of shares of
Class B Common Stock equal to the Specified Number multiplied by Parent's
Proportionate Number. Any issuance pursuant to the
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preceding sentence shall be in addition to any other shares issuable to such
holders pursuant to this Agreement.
(b) If at any time following the Effective Time, Newco or the Surviving
Corporation becomes obligated to pay any cash in respect of any exercise of
a Black Scholes Option as a result of the Transactions that was not
reflected in the calculation of the Specified Number pursuant to
Section 1.8(a), then the Specified Number shall be calculated in accordance
with the formula set forth in Section 1.8(c) and Newco shall issue to
holders of ISN Units such additional number of shares of Newco Common Stock
calculated as follows: each holder of ISN Units (other than Parent) shall be
entitled to receive a number of shares of Class A Common Stock equal to the
Specified Number multiplied by such holder's Proportionate Number and Parent
shall be entitled to receive a number of shares of Class B Common Stock
equal to the Specified Number multiplied by Parent's Proportionate Number.
Any issuance pursuant to the preceding sentence shall be in addition to any
other shares issuable to such holders pursuant to this Agreement.
(c) S = (CD/$11.50) * 3
Where, as of any date:
S = the Specified Number as of such date
CD = the aggregate amount of cash paid or payable on or prior to such
date by the Company (and, after the Mergers, Newco or the Surviving
Corporation) to holders of April 1999 Warrants in respect of any
Black Scholes Option, which, in the case of any determination made
at or prior to the Effective Time, shall be the aggregate amounts
set forth in all Cash Out Elections received by Parent on or prior
to the Effective Time.
(d) The parties shall take all reasonable action necessary to cause
Newco to reserve for issuance a sufficient number of shares of Newco Common
Stock for deliveries required pursuant to this Section 1.8.
ARTICLE 2
EFFECT OF THE MERGERS ON THE EQUITY OF
THE CONSTITUENT ENTITIES; EXCHANGE OF CERTIFICATES
Section 2.1. EFFECT OF COMPANY MERGER. At the Effective Time, by virtue of
the Company Merger and without any action on the part of the holder of any
shares of Company Common Stock or any shares of Common Stock of Company Merger
Sub ("COMPANY MERGER SUB COMMON STOCK"):
(a) EFFECT OF COMPANY MERGER ON SHARES OF COMPANY MERGER SUB COMMON
STOCK. Each issued and outstanding share of Company Merger Sub Common Stock
shall be converted into and become one fully paid and nonassessable share of
Common Stock of the Surviving Corporation and, as converted, shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation.
(b) CONVERSION OF SHARES OF COMPANY COMMON STOCK. Each share of
Company Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of Company Common Stock that are owned by
the Company or any Subsidiary of the Company) shall be converted into the
right to receive one share of Newco Class A Common Stock (the "COMPANY
MERGER SECURITIES"). At the Effective Time, all shares of Company Common
Stock shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate that
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (collectively, the "COMPANY CERTIFICATES") shall cease
to have any rights with respect thereto, except the right to receive the
Company Merger Securities to be issued
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in consideration therefor upon surrender of such certificate in accordance
with Section 2.3, without interest.
(c) CANCELLATION OF COMPANY-OWNED STOCK. Each share of Company Common
Stock that is owned by the Company or any of its Subsidiaries immediately
prior to the Effective Time shall automatically be canceled and retired and
shall cease to exist, and no consideration shall be delivered in exchange
therefor.
Section 2.2. EFFECT OF ISN MERGER. At the Effective Time, by virtue of the
ISN Merger and without any action on the part of the holder of any ISN Units or
any limited liability company interests of ISN Merger Sub (the "ISN MERGER SUB
UNITS"):
(a) EFFECT OF ISN MERGER ON ISN MERGER SUB UNITS. All of the issued
and outstanding ISN Merger Sub Units shall be converted into and become all
of the issued and outstanding limited liability company interests of the
Surviving LLC.
(b) CONVERSION OF ISN UNITS. Each ISN Unit issued and outstanding
immediately prior to the Effective Time (other than ISN Units that are owned
by Parent) shall be converted into the right to receive 0.601 shares of
Newco Class A Common Stock (the "ISN CLASS A MERGER SECURITIES"). Each ISN
Unit owned by Parent immediately prior to the Effective Time shall be
converted into the right to receive 0.601 shares of Newco Class B Common
Stock plus, in the aggregate, the number of shares of Newco Class B Common
Stock payable pursuant to Section 2.9 (the "ISN CLASS B MERGER SECURITIES"
and, collectively with the ISN Class A Merger Securities, the "ISN MERGER
SECURITIES"). At the Effective Time, all ISN Units shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a certificate that immediately prior to the
Effective Time represented outstanding ISN Units (collectively, the "ISN
CERTIFICATES"and collectively with the Company Certificates, the
"CERTIFICATES") shall cease to have any rights with respect thereto, except
the right to receive the applicable ISN Merger Securities with respect
thereto and any cash in lieu of fractional shares of applicable Newco Common
Stock with respect thereto to be issued in consideration therefor and any
dividends or other distributions to which holders of ISN Units become
untitled upon surrender of such Certificate in accordance with Section 2.3,
without interest.
Section 2.3. EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Effective Time, Parent shall
designate a bank or trust company reasonably acceptable to the Company to
act as exchange agent in the Mergers (the "EXCHANGE AGENT") for purposes of
effecting the exchange for the Company Merger Securities and the ISN Merger
Securities. At the Effective Time, Parent shall cause Newco to deposit with
the Exchange Agent, for the benefit of the holders of Certificates, the
number of shares of Newco Common Stock issuable pursuant to Section 2.1(b)
and 2.2(b). Parent agrees to cause Newco to make available to the Exchange
Agent from time to time as needed, cash sufficient to pay cash in lieu of
factional shares pursuant to Section 2.3(e) and any dividends or other
distributions pursuant to this Section 2.3(b). For purposes of this
Agreement, shares of Newco Common Stock comprising the Company Merger
Securities and the ISN Merger Securities, any cash in lieu of fractional
shares with respect thereto and any dividends or distributions with respect
thereto are hereinafter referred to as the "EXCHANGE FUND." The Exchange
Agent shall, pursuant to irrevocable instructions, deliver the shares of
Newco Common Stock comprising the Company Merger Securities and the ISN
Merger Securities in accordance with Section 2.3(b).
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation and the Surviving LLC shall
instruct the Exchange Agent to mail to each holder of record of a
Certificate or Certificates whose Company Common Stock or ISN Units were
converted into the right to receive the Company Merger Securities or the ISN
Merger Securities
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pursuant to Section 2.1(b) or 2.2(b) (i) a letter of transmittal specifying
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent, in such form and with other provisions as the Surviving
Corporation and the Surviving LLC may reasonably specify and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing the shares of Newco Common Stock
comprising the Company Merger Securities and the ISN Merger Securities,
together with any dividends and other distributions with respect thereto and
any cash in lieu of fractional shares. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as reasonably may be
required by the Exchange Agent, and acceptance thereof by the Exchange
Agent, each holder of a Certificate shall be entitled to receive in exchange
therefor (A) a certificate representing the shares of Newco Common Stock
comprising the Company Merger Securities and the ISN Merger Securities that
such holder has the right to receive pursuant to the provisions of this
Article 2 and (B) a check in the amount equal to the cash that such holder
has the right to receive pursuant to the provisions of this Article 2,
including cash in lieu of fractional shares pursuant to Section 2.3(e) and
dividends and other distributions pursuant to this Section 2.3(b). The
Exchange Agent shall accept such Certificates upon compliance with such
reasonable terms and conditions as the Exchange Agent may impose to effect
an orderly exchange thereof in accordance with normal exchange practices,
and the Certificate so surrendered shall forthwith be canceled. After the
Effective Time, there shall be no further transfer of Certificates on the
books and records of the Company or its transfer agent or ISN and, if such
Certificates are presented to the Company or its transfer agent or ISN for
transfer, they shall be canceled against delivery of certificates
representing the shares of Newco Common Stock comprising the Company Merger
Securities or the ISN Merger Securities and any cash payable pursuant to
this Section 2.3(b) or Section 2.3(e) that such holder has the right to
receive pursuant to the provisions of this Article 2, and the Certificate so
surrendered shall forthwith be canceled. If any certificates for shares of
Newco Common Stock are to be issued in a name other than that in which the
Certificate surrendered for exchange is registered, it shall be a condition
of such exchange that the Certificate so surrendered shall be properly
endorsed, with the signature guaranteed, or otherwise in proper form for
transfer and that the Person requesting such exchange shall pay to Newco or
its transfer agent any transfer or other taxes required by reason of the
issuance of certificates representing such shares of Newco Common Stock in a
name other than that of the registered holder of the Certificate
surrendered, or establish to the satisfaction of Newco or its transfer agent
that such tax has been paid or is not required to be paid under applicable
Law. Until surrendered as contemplated by this Section 2.3, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender certificates representing the shares of
Newco Common Stock to which such holder is entitled and cash and other
dividends, distributions or payments as contemplated by this Article 2.
Subject to applicable Law, following surrender of any such Certificate,
there shall be paid to the record holder thereof, the certificates
representing the shares of Newco Common Stock issued in exchange therefor,
as well as, (x) at the time of such surrender, the amount of cash payable in
lieu of fractional shares pursuant to Section 2.3(e), (y) at the time of
such surrender, the amount of dividends or other distributions or payments
with a record date after the Effective Time theretofore paid with respect to
such shares of Newco Common Stock, and (z) at the appropriate payment date,
the amount of dividends or other distributions or payments with a record
date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole shares of Newco
Common Stock. In no event shall Persons entitled to receive such dividends,
distributions or payments be entitled to receive any interest thereon.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions or payments declared or made after the Effective Time
with respect to Newco Common Stock, with a record date after the Effective
Time, and no cash payment in lieu of fractional shares shall be paid
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to the holder of any unsurrendered Certificate with respect to the shares of
Newco Common Stock represented thereby until the holder of record of such
Certificate has surrendered such Certificate.
(d) NO FURTHER OWNERSHIP RIGHTS. The shares of Newco Common Stock
comprising the Company Merger Securities and the ISN Merger Securities
issued upon the surrender for exchange of Certificates in accordance with
the terms of this Article 2, together with any dividends, distributions or
payments contemplated by Section 2.3(b) shall be deemed to have been issued
(and paid) in full satisfaction of all rights in respect of the shares of
Company Common Stock or ISN Units theretofore represented by such
Certificates. If, after the Effective Time, Certificates are presented to
the Surviving Corporation, the Surviving LLC or the Exchange Agent for any
reason, they shall be canceled and exchanged as provided in this Article 2.
(e) NO FRACTIONAL SHARES OF NEWCO COMMON STOCK.
(i) No certificates or scrip or shares of Newco Common Stock
representing fractional shares of Newco Common Stock shall be issued upon
the surrender for exchange of Certificates and such fractional share
interests will not entitle the owner thereof to vote or to have any
rights of a stockholder of Newco or a holder of shares of Newco Common
Stock.
(ii) Notwithstanding any other provision of this Agreement, each
holder of ISN Units exchanged pursuant to the ISN Merger who would
otherwise have been entitled to receive a fraction of a share of Newco
Common Stock (determined after taking into account all ISN Certificates
delivered by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to the product of (A) such fractional part
of a share of Newco Common Stock, multiplied by (B) the closing bid price
for a share of Newco Class A Common Stock as reported on NASDAQ on the
first trading day following the date on which the Effective Time occurs.
As promptly as practicable after the determination of the amount of cash,
if any, to be paid to holders of fractional interests, the Exchange agent
shall so notify Newco, and Newco shall deposit such amount with the
Exchange Agent and shall cause the Exchange Agent to forward payments to
such holders of fractional interests subject to and in accordance with
the terms hereof.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund,
including any shares of Newco Class A Common Stock attributable to
Dissenting Shares, which remains undistributed for six months after the
Effective Time shall be delivered to Newco, upon demand, and any former
stockholders of the Company or former unitholders of ISN who have not
theretofore complied with this Article 2 shall thereafter look only to Newco
for payment of their claim for any Company Merger Securities or ISN Merger
Securities and any cash in lieu of fractional shares of Newco Common Stock
to which such holders are entitled pursuant to Section 2.3(e) any dividends
or distributions or other payments with respect to shares of Newco Common
Stock to which such holders are entitled pursuant to Section 3.3(b). If any
Certificates have not been surrendered prior to five years after the
Effective Time (or immediately prior to such earlier date on which any
Company Merger Securities or ISN Merger Securities in respect of such
Certificate would otherwise escheat to or become the property of any
Governmental Entity), any amounts payable in respect of such Certificate
shall, to the extent permitted by applicable Law, become the property of
Newco, free and clear of all claims or interests of any Person previously
entitled to such amounts.
(g) NO LIABILITY. None of Newco, the Surviving Corporation, the
Surviving LLC, the Exchange Agent or any other Person shall be liable to any
Person in respect of any shares of Newco Common Stock comprising the Company
Merger Securities or ISN Merger Securities delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(h) INVESTMENT OF THE EXCHANGE FUND. The Exchange Agent shall invest
any cash included in the Exchange Fund as directed by Newco on a daily
basis; provided that no such investment or loss
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thereon shall affect the amount payable to holders of Company Common Stock
or ISN Units pursuant to this Article 2. Any interest or other income
resulting from such investments shall be promptly paid to Newco.
Section 2.4 APPRAISAL RIGHTS.
(a) Notwithstanding anything in this Agreement to the contrary, shares
("DISSENTING SHARES") of Company Common Stock outstanding immediately prior
to the Effective Time and held by any holder who is entitled to demand, and
who properly demands, appraisal for such shares in accordance with
Section 1300 et seq. of California Law and is otherwise entitled to the
protections afforded a "dissenting shareholder" as such term is used in such
sections of California Law (collectively, the "DISSENTING SHAREHOLDERS"),
shall not be converted as provided in Section 2.1, unless such holder fails
to perfect or otherwise loses any rights to appraisal of such Dissenting
Shares under, and shall otherwise cease to be a "dissenting shareholder" as
provided in, such sections of California Law. If, after the Effective Time,
such holder fails to perfect or loses any such right to appraisal, such
Dissenting Shares shall be treated as if they had been converted as of the
Effective Time into the right to receive Company Merger Securities. The
Company shall give ISN (i) prompt written notice of any demands for
appraisal or payment, and any withdrawals of such demands, received by the
Company and any other related instruments served pursuant to California Law
and received by the Company, and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for payment under
California Law. The Company shall not, except with the prior written consent
of ISN, enter into any agreement or settlement with any Dissenting
Shareholder or otherwise make any payment with respect to any demands for
appraisal or payment or negotiate, offer to settle or settle any such
demands.
(b) If at any time (the "MEASUREMENT TIME") following the Effective
Time, Newco or the Surviving Corporation becomes obligated to pay any cash
in respect of any exercise by a Dissenting Shareholder of its appraisal
rights under California Law in respect of any Dissenting Shares as a result
of the Transactions ("APPRAISAL RIGHTS"), then the Appraisal Number shall be
calculated in accordance with the formula set forth in Section 2.4(c) and
Newco shall issue (i) to Parent, the number of shares of Class B Common
Stock as is equal to the Appraisal Number multiplied by Parent's
Proportionate Number and (ii) to ISN unitholders other than Parent, the
number of shares of Class A Common Stock as is equal to the Appraisal Number
multiplied by such holder's Proportionate Number.
(c) A = [(CD/$11.50)-S] * 3
Where, as of a Measurement Time:
A = the Appraisal Number as of such time
CD = the aggregate amount of cash paid or payable as of the Measurement
Time by Newco or the Surviving Corporation to Dissenting
Shareholders by reason of the exercise of any Appraisal Right in
respect of Dissenting Shares.
S = the aggregate number of shares purchased from Dissenting
Shareholders.
(d) The parties shall take all reasonable action to cause Newco to
reserve for issuance a sufficient number of shares of Newco Common Stock for
delivery pursuant to Section 2.4(c).
Section 2.5 TREATMENT OF STOCK OPTIONS AND WARRANTS.
(a) The Company and ISN shall take such actions as are necessary to
provide that at the Effective Time each outstanding Company Stock Option and
Company Warrant that is not canceled in accordance with its terms as a
result of the Mergers shall be assumed by Newco and converted into an option
or warrant, as the case may be, to purchase the same number of shares
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of Newco Class A Common Stock at the same per share exercise price as
applied to the Company Stock Option or Company Warrant, as the case may be,
prior to such conversion. Following the Effective Time, each Company Stock
Option and Company Warrant shall continue to have, and shall be subject to,
the same terms and conditions as set forth in the Company Option Plan, the
Warrant Agreements and any other agreement pursuant to which such Company
Stock Option or Company Warrant was subject immediately prior to the
Effective Time, as the case may be.
(b) The Company and ISN shall take such actions as are necessary to
provide that at the Effective Time each outstanding ISN Stock Option that is
not canceled in accordance with its terms as a result of the Mergers shall
be assumed by Newco and converted into an option to purchase .601 shares of
Newco Class A Common Stock at a per share exercise price equal to the
product of 1.664 and the per share exercise price of the ISN Stock Option
prior to such conversion. Following the Effective Time, each ISN Stock
Option shall continue to have, and shall be subject to, the same terms and
conditions as set forth in the ISN Option Plan, and any other agreement
pursuant to which such ISN Stock Option was subject immediately prior to the
Effective Time, as the case may be, and as the same may be amended or waived
from time to time in accordance therewith.
(c) As soon as practicable following the date of the Original Merger
Agreement, the Company shall deliver to the holders of the Company Stock
Options and holders of the Company Warrants appropriate notices setting
forth such holders' rights after giving effect to the Company Merger and the
provisions set forth above. At or prior to the Effective Time, the Company
shall make such amendments and take such other actions, if any, to the
Company Option Plan, the Warrant Agreements or such other agreements
pursuant to which the Company Stock Options or the Company Warrants were
issued as shall be necessary to permit the assumption and adjustment
referred to in this Section 2.5, subject in each case to the approval of
Parent.
(d) As soon as practicable following the date of the Original Merger
Agreement, ISN shall deliver to the holders of the ISN Stock Options
appropriate notices setting forth such holders' rights after giving effect
to the ISN Merger and the provisions set forth above. At or prior to the
Effective Time, ISN shall make such amendments and take such other actions,
if any, to the ISN Option Plan or any agreements pursuant to which the ISN
Stock Options were issued as shall be necessary to permit the assumption and
adjustment referred to in this Section 2.5.
(e) It is the intention of the parties that, to the extent any Company
Stock Option or ISN Stock Option constituted an incentive stock option
immediately prior to the Effective Time, such option shall continue to
qualify as an incentive stock option to the maximum extent permitted by
Section 422 of the Code, and that the assumption of the Company Stock
Options and ISN Stock Options provided by this Section 2.5 satisfy the
conditions set forth in Section 424(a) of the Code. Newco shall comply with
the terms of the Company Option Plan and ensure, to the extent required by,
and subject to the provisions of such Company Option Plan, that the Company
Stock Options and ISN Stock Options that qualified as incentive stock
options prior to the Effective Time continue to qualify as incentive stock
options after the Effective Time.
(f) Newco shall take all corporate action necessary to establish a stock
option plan and to reserve for issuance thereunder a sufficient number of
shares of Newco Class A Common Stock for delivery upon exercise of the
Company Stock Options, the Company Warrants and the ISN Stock Options at and
after the Effective Time and such additional shares for future option grants
as shall be determined by the Board of Directors of Newco.
Section 2.6 ADJUSTMENTS. If, prior to the Effective Time, any change in
the number of outstanding shares of Company Common Stock or ISN Units shall
occur, including by reason of any reclassification, recapitalization, stock
dividend, stock split or combination, exchange or readjustment of shares of
Company Common Stock or ISN Units, or any stock dividend thereon with a record
date prior to the Effective Time, the Company Merger Securities and the ISN
Merger Securities and any other amounts payable pursuant to this Agreement, as
the case may be, shall be appropriately adjusted.
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Section 2.7 LOST CERTIFICATES. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation or the Surviving LLC, the posting by such Person of a
bond, in such reasonable amount as the Surviving Corporation or the Surviving
LLC may direct, as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will pay, in exchange for such
affidavit claiming such Certificate is lost, stolen or destroyed, the Company
Merger Securities or the ISN Merger Securities, to be paid in respect of the
shares of Company Common Stock or ISN Units represented by such Certificate, any
cash in lieu of fractional shares of Newco Common Stock and any unpaid dividends
and distributions on shares of Newco Common Stock deliverable in respect
thereof, each as contemplated by this Article 2.
Section 2.8 WITHHOLDING RIGHTS. Each of Newco, the Surviving Corporation,
the Surviving LLC and the Exchange Agent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement to
any holder of shares of Company Common Stock or ISN Units such amounts as Newco,
the Surviving Corporation, the Surviving LLC or the Exchange Agent are required
to deduct and withhold with respect to the making of such payment under the Code
or any provision of state, local or foreign tax law. To the extent that amounts
are so withheld by Newco, the Surviving Corporation, the Surviving LLC or the
Exchange Agent, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of a Certificate in respect of which
such deduction and withholding was made by Newco, the Surviving Corporation, the
Surviving LLC or the Exchange Agent.
Section 2.9 ADDITIONAL SHARES PAYABLE TO PARENT. The parties acknowledge
that the conversion ratios set forth in Section 2.2(b) contemplate issuances of
ISN Units to certain holders of options to purchase stock in ISN's predecessor
company. If any such holder elects to receive cash in lieu of the ISN Units
offered to such holder, Parent shall make such cash payment on behalf of ISN and
shall be entitled to receive a number of shares of Class B Common Stock equal to
the product of 0.601, multiplied by the number of ISN Units to which such holder
would otherwise be entitled.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Section 3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to ISN and Parent that, as of the date of the Original
Merger Agreement:
(a) ORGANIZATION, STANDING AND CORPORATE POWER; SUBSIDIARIES. The
Company and each of its Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the State of
California, has all requisite power and authority to own, lease and operate
its properties and to carry on its business as now being conducted, and is
duly qualified or licensed and in good standing to do business in each
jurisdiction in which the nature of its business or the ownership or leasing
of its properties makes such qualification or licensing necessary, other
than in such jurisdictions where the failure so to qualify would not have a
Material Adverse Effect with respect to the Company. Section 3.1(a) of the
Company Disclosure Schedule sets forth, as of the date of the Original
Merger Agreement, a true and complete list of all of the Company's
Subsidiaries, including (x) the jurisdiction of incorporation of each such
Subsidiary and (y) the percentage of each such Subsidiary's outstanding
capital stock, and the nature of such capital stock, owned by the Company
and/or another Subsidiary of the Company, as the case may be. All of the
outstanding shares of capital stock in each of the Subsidiaries of the
Company are duly authorized, validly issued, fully paid and nonassessable
and, except as set forth in Section 3.1(a) of the Company Disclosure
Schedule, are owned (of record and beneficially) by the Company and/or by
another Subsidiary of the Company, as the case may be, free and clear of all
pledges, claims, options, rights
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of first refusal, liens, charges, encumbrances and security interests of any
kind or nature whatsoever (collectively, "LIENS"), and are not subject to
preemptive rights created by statute, such Subsidiary's Articles of
Incorporation or By-laws (or similar constituent documents) or any agreement
to which such Subsidiary is a party or by which such Subsidiary is bound.
Other than as set forth in Section 3.1(a) of the Company Disclosure
Schedule, the Company does not directly or indirectly own any Equity
Securities in any Person.
(b) ARTICLES OF INCORPORATION AND BY LAWS. Complete and correct copies
of the Articles of Incorporation and By-laws, each as amended to the date of
the Original Merger Agreement, of the Company and each of its Subsidiaries
have been delivered to Parent. The Articles of Incorporation and By-laws of
the Company and each of its Subsidiaries are in full force and effect.
Neither the Company nor any of its Subsidiaries is in violation of any
provision of its Articles of Incorporation or By-laws.
(c) CAPITALIZATION. As of the date of the Original Merger Agreement,
the authorized capital stock of the Company consists of 15,000,000 shares of
Company Common Stock, of which (i) 7,716,930 shares were issued and
outstanding, all of which were duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights, whether created by
statute, the Articles of Incorporation or By-Laws of the Company or any
agreement to which the Company is party or bound or otherwise,
(ii) 2,500,000 shares were reserved for future issuance pursuant to the
Company Option Plan, (iii) 2,386,269 shares were reserved for future
issuance pursuant to the Warrant Agreements; and (iv) no shares were held in
the treasury of the Company or by its Subsidiaries.
Section 3.1(c) of the Company Disclosure Schedule sets forth, (v) the
Persons to whom Company Stock Options or Company Warrants have been granted,
(w) the exercise price for the Company Stock Options or the Company Warrants
held by each such Person, (x) whether such the Company Stock Options or the
Company Warrants are subject to vesting and, if subject to vesting, the dates on
which each such Company Stock Option or the Company Warrant vest, (y) the
agreement pursuant to which such Company Stock Option or Company Warrant was
issued and (z) whether any such Company Stock Options or Company Warrants are
subject to adjustment in the exercise price thereof or subject to rights of the
holders thereof to receive any property (including cash) other than (A) prior to
the Effective Time, shares of Company Common Stock and (B) following the
Effective Time, shares of Newco Class A Common Stock. Section 3.1(c) of the
Company Disclosure Schedule also identifies which Company Warrants are
April 1999 Warrants. Except as set forth in Section 3.1(c) of the Company
Disclosure Schedule, none of the Company Stock Options or the Company Warrants
which are subject to vesting will vest as a result of the consummation of the
Transactions. Except as described in this Section 3.1(c) of the Company
Disclosure Schedule, no shares of capital stock or other Equity Securities of
the Company are authorized, issued or outstanding, or reserved for any other
purpose, and there are no options, warrants or other rights (including
Registration rights), agreements, arrangements or commitments of any character
to which the Company or any of its Subsidiaries is a party relating to the
issued or unissued capital stock or other Equity Securities or ownership
interests of the Company or any of its Subsidiaries or with respect to any stock
appreciation right or similar derivative security or instrument ("SARS"), or
obligating the Company or any of its Subsidiaries to grant, issue or sell any
Equity Securities or any SARs of the Company or any of its Subsidiaries, by
sale, lease, license or otherwise. Other than pursuant to or as contemplated by
the Credit Agreement, there is no outstanding Debt of the Company, except up to
$0.5 million of Debt incurred in the ordinary course of business, and none of
the Debt provides the holders with the right to vote or is otherwise convertible
into or exercisable for securities having the right to vote with the
stockholders of the Company on any matter. Other than as contemplated by this
Agreement or as set forth in Section 3.1(c) of the Company Disclosure Schedule,
there are no outstanding contractual obligations, commitments, understandings or
arrangements of the Company or any of its Subsidiaries to repurchase, redeem or
otherwise acquire or
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make any payment in respect of any shares of capital stock or other equity
securities or ownership interests or SARs of the Company or any of its
Subsidiaries.
(d) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company has made
available to Parent a true and complete copy of each form, report, schedule,
registration statement and definitive proxy statement filed by the Company
with the SEC since January 1, 1997 (as such documents have since the time of
their filing been amended or supplemented, the "COMPANY SEC DOCUMENTS"),
which are all of the documents that the Company was required to file with
the SEC since January 1, 1997. Except as set forth in Section 3.1(d) of the
Company Disclosure Schedule, as of their respective dates, the Company SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act, as applicable, and none of the Company
SEC Documents (including all financial statements included therein and all
exhibits and schedules thereto and documents incorporated by reference
therein) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The Financial Statements delivered by the Company to
Parent comply as to form in all material respects with applicable accounting
requirements and with the rules and regulations of the SEC with respect
thereto, have been prepared in accordance with GAAP applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto or, in the case of the unaudited Financial Statements, as permitted
by Exchange Act Form 10-Q) and fairly present (subject, in the case of the
unaudited Financial Statements, to normal, recurring audit adjustments that,
individually and in the aggregate, were not material) the financial position
of the Company and its Subsidiaries as at the dates thereof and the results
of each of their operations and cash flows for the periods then ended. There
are no Liabilities of any kind required to be disclosed under GAAP that are
not disclosed, reflected or reserved against in the Financial Statements of
the Company, except for such Liabilities incurred in the ordinary course of
business consistent with past practice since the date of the Company's most
recent audited Financial Statements or as set forth in Section 3.1(d) of the
Company Disclosure Schedule or as would not have a Material Adverse Effect
with respect to the Company.
(e) AUTHORITY. The Company has all requisite corporate power and
authority to enter into this Agreement and each of the other Transaction
Documents to which it is party, to perform its obligations hereunder and
thereunder and to consummate the Transactions. The execution and delivery of
this Agreement and each of the other Transaction Documents to which it is
party and the consummation of the Transactions have been duly and validly
authorized by all necessary corporate action on the part of the Company and
no other corporate proceedings on the part of the Company are necessary to
authorize this Agreement or the other Transaction Documents to which the
Company is party or to consummate the Transactions, subject, in the case of
the Company Merger, to the approval thereof by the shareholders of a
majority of the issued and outstanding Company Common Stock (the "REQUIRED
SHAREHOLDER APPROVAL") and the filing and recordation of the Agreement of
Merger, in each case in accordance with the requirements of California Law.
This Agreement and each of the other Transaction Documents to which the
Company is party have been duly and validly executed and delivered by the
Company and constitute a valid and binding obligation of the Company
enforceable against the Company in accordance with their terms, subject, in
the case of the Company Merger, to the Required Shareholder Approval and the
filing and recordation of the Agreement of Merger, in each case in
accordance with the requirements of California Law. To the Knowledge of the
Company, as of the date of the Original Merger Agreement, the Principal
Company Stockholders and Intel Corporation collectively owned of record
32.65% of the issued and outstanding shares of Company Common Stock.
(f) COMPLIANCE WITH APPLICABLE LAWS. Each of the Company and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities, except
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where any such failure so to hold, individually and in the aggregate, would
not have a Material Adverse Effect with respect to the Company (the "COMPANY
PERMITS"). The Company and its Subsidiaries are in compliance with the terms
of the Company Permits in all material respects. The businesses of the
Company and its Subsidiaries are not being conducted in violation of any
material Law. No investigation or review by any Governmental Entity with
respect to the Company or any of its Subsidiaries is pending or, to the
Knowledge of the Company, threatened, nor, to the Knowledge of the Company,
has any Governmental Entity indicated an intention to conduct the same.
(g) GOVERNMENT APPROVALS; REQUIRED CONSENTS.
(i) No consent, approval, authorization or action of, declaration or
filing with, or notice to, any Governmental Entity on the part of the
Company is required in connection with the execution or delivery by the
Company of this Agreement or any of the other Transaction Documents to
which the Company is party, the consummation by the Company of the
Transactions or compliance by the Company with the terms hereof or
thereof, other than (A) filing the Agreement of Merger in accordance with
the requirements of California Law, (B) filing the Certificate of Merger
in accordance with the requirements of the Delaware LLC Act, (C) filings
with the SEC and NASDAQ, (D) filings under state securities or "BLUE SKY"
laws, (E) filings under the HSR Act, (any such consents, approvals,
authorizations, declarations, filings or notices specified in clauses
(A) through (E) being referred to as the "COMPANY GOVERNMENTAL
APPROVALS") and (F) such consents, approvals, authorizations,
declarations, filings or notices that, individually and in the aggregate,
would not have a Material Adverse Effect with respect to the Company.
(ii) No consent, approval, authorization or action of, filing with,
or notice to, any Person (other than a Governmental Entity) shall be
required in connection with the execution or delivery by the Company of
this Agreement or any of the other Transaction Documents to which the
Company is party, consummation by the Company of the Transactions or
compliance by the Company with the terms hereof or thereof, other than
(A) as set forth in Section 3.1(g)(ii) or Section 3.1(h) of the Company
Disclosure Schedule (the "COMPANY REQUIRED CONSENTS") or (B) such
consents, approvals, actions, filings or notices that, individually and
in the aggregate, would not have a Material Adverse Effect with respect
to the Company.
(h) NON-CONTRAVENTION. The execution, delivery and performance by the
Company of this Agreement and the other Transaction Documents to which the
Company is party and the consummation of the Transactions do not and will
not (i) contravene or conflict with or result in any violation or breach of
any provision of the Articles of Incorporation or By-laws of the Company or
any of its Subsidiaries, (ii) assuming all Company Governmental Approvals
and Company Required Consents have been made or obtained, contravene or
conflict with or result in a violation or breach of any provision of any Law
or order binding upon or applicable to the Company or any of its
Subsidiaries or any of their respective assets, (iii) require any consent or
other action by any Person under, constitute a default under or give rise to
a right of termination, cancellation, change of any right or obligation, or
acceleration of any right or obligation or to the loss of any benefit or
adverse modification of the effect (including an increase in the price paid
by, or cost to, the Company or any of its Subsidiaries) of, or under any
provision of any agreement or other instrument to which the Company is a
party or that is binding upon the Company or any of its Subsidiaries or
their properties or assets or any license, franchise, permit or other
similar authorization held by the Company or any of its Subsidiaries or
(iv) result in the creation or imposition of any Lien on any asset of the
Company or any of its Subsidiaries, except with respect to clauses
(iii) and (iv) as set forth in Section 3.1(h) of the Company Disclosure
Schedule; PROVIDED, HOWEVER, that clauses (ii) through (iv) above address
only those matters that, individually or in the aggregate, would have a
Material Adverse Effect with respect to the Company.
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(i) LITIGATION. As of the date of the Original Merger Agreement,
except as set forth in Section 3.1(i) of the Company Disclosure Schedule,
there was no suit, claim, action or proceeding pending, or, to the Knowledge
of the Company, threatened against the Company or any of its Affiliates
that, individually or in the aggregate, would have a Material Adverse Effect
with respect to the Company, nor was there any Order of any Governmental
Entity outstanding against the Company or any of its Affiliates that,
individually or in the aggregate, would have a Material Adverse Effect with
respect to the Company.
(j) TAXES AND RELATED TAX MATTERS.
(i) Other than Taxes that individually and in the aggregate are not
material (A) all federal, state, county, local, foreign and other taxes
(including, without limitation, income, profits, premium, estimated,
excise, sales, use, occupancy, gross receipts, franchise, ad valorem,
severance, capital levy, production, transfer, withholding, employment,
unemployment compensation, payroll related and property taxes, import
duties and other governmental charges and assessments), whether or not
measured in whole or in part by net income, and including deficiencies,
interest, additions to tax or interest, penalties with respect thereto
and expenses associated with contesting any proposed adjustment related
to any of the foregoing (hereinafter "TAXES" or, individually, a "TAX")
required to be paid on or before the date of the Original Merger
Agreement by or with respect to the Company and its Subsidiaries (or any
of them) have been timely paid, and (B) any Taxes required to be paid by
or with respect to the Company and its Subsidiaries (or any of them)
after the date of the Original Merger Agreement and on or before the
Effective Time shall be timely paid.
(ii) All material returns and reports required to be filed
(hereinafter "TAX RETURNS" or, individually, a "TAX RETURN") by or with
respect to the Company and its Subsidiaries (or any of them) with respect
to Taxes on or before the date of the Original Merger Agreement have been
timely filed. All material Tax Returns required to be filed by or with
respect to the Company and its Subsidiaries (or any of them) after the
date of the Original Merger Agreement and on or before the Effective Time
shall be prepared and timely filed, in a manner consistent with prior
years and applicable laws and regulations. No penalties or other charges
in a material amount are or will become due with respect to the late
filing of any Tax Return of the Company or any of its Subsidiaries or
payment of any Tax of the Company or any of its Subsidiaries, required to
be filed or paid on or before the Effective Time.
(iii) With respect to all Tax Returns filed by or with respect to the
Company and any of its Subsidiaries, except as set forth in
Section 3.1(j) of the Company Disclosure Schedule, (A) the statute of
limitations for the assessment of Taxes has expired with respect to all
periods ending on or before August 31, 1995; (B) no audit is in progress
and no extension of time has been executed with respect to any date on
which any Tax Return was or is to be filed and no waiver or agreement has
been executed for the extension of time for the assessment or payment of
any Tax; and (C) there is no unassessed deficiency proposed or threatened
against the Company or any of its Subsidiaries.
(iv) Neither the Company, nor any of its Subsidiaries or Affiliates
(or any of them) has taken, or agreed to take any action, that would
prevent the Mergers from qualifying as tax-free events under Section 351
or Section 368 of the Code.
(v) Except as set forth in Section 3.1(j) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries has been or is
a party to any tax sharing agreement or similar arrangement.
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(vi) Except as set forth in Section 3.1(j) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries has been part
of a group of affiliated corporations that has filed a consolidated
federal income tax return.
(k) CERTAIN AGREEMENTS. Except for this Agreement and as set forth in
Section 3.1(k) and/or Section 3.1(l) of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries is a party to any oral or
written (i) union or collective bargaining agreement, (ii) agreement with
any executive officer or other key employee of the Company or any of its
Subsidiaries the benefits of which are contingent, or the terms of which
would be materially altered, upon the consummation of the Transactions,
(iii) agreement with respect to any executive officer of the Company
providing any term of employment or compensation guarantee extending beyond
December 31, 2000 or for the payment of in excess of $200,000 per annum
(excluding any signing bonuses, performance-based or other discretionary
bonuses or expense reimbursements provided under a plan disclosed in
Section 3.1(l) of the Company Disclosure Schedule) or (iv) plan, including
any stock option plan, stock appreciation rights plan, restricted stock plan
or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which would be accelerated, by the occurrence
of any of the Transactions or the value of any of the benefits of which will
be calculated on the basis of any of the Transactions.
(l) EMPLOYEE BENEFIT PLANS; EMPLOYEE RELATIONS. The following
representations and warranties contained in this Section 3.1(l) are
qualified by such exceptions which, individually and in the aggregate, would
not have a Material Adverse Effect with respect to the Company:
(i) Section 3.1(l)(i) of the Company Disclosure Schedule contains a
true and complete list of each "EMPLOYEE BENEFIT PLAN" (within the
meaning of section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), including multiemployer plans within the
meaning of ERISA section 3(37)), stock purchase, stock option, severance,
employment, change-in-control, fringe benefit, welfare benefit,
collective bargaining, bonus, incentive, deferred compensation and all
other employee benefit plans, agreements, programs, policies or other
arrangements, whether or not subject to ERISA (including any funding
mechanism therefor now in effect or required in the future as a result of
the Transactions contemplated by this Agreement or otherwise), whether
formal or informal, oral or written, legally binding or not, under which
any employee or former employee of the Company has any present or future
right to benefits or under which the Company has any present or future
liability. All such plans, agreements, programs, policies and
arrangements shall be collectively referred to as the "COMPANY BENEFIT
PLANS."Where appropriate all references to the "COMPANY" in this
Section 3.1(l) refer to the Company and any member of its "CONTROLLED
GROUP" within the meaning of Section 414 of the Code.
(ii) The Company has, with respect to each Company Benefit Plan, if
applicable, delivered or made available to the Purchaser true and
complete copies of: (i) all plan texts and agreements and related trust
agreements (or other funding vehicles); (ii) the most recent summary plan
descriptions and material employee communications; (iii) the most recent
annual report (including all schedules thereto); (iv) the most recent
annual audited financial statement and opinion; (v) if the plan is
intended to qualify under Code section 401(a), the most recent
determination letter received from the IRS; and (vi) all material
communications with any governmental entity or agency (including the PBGC
and the IRS) given or received within the past three years.
(iii) Except as set forth in Section 3.1(l)(iii) of the Company
Disclosure Schedule, all amounts properly accrued as liabilities to or
expenses of any Company Benefit Plan have been properly reflected on the
Company's most recent financial statements to the extent required by
GAAP. Since the date of the Company's most recent financial statements,
there has been
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no amendment or change in interpretation by the Company relating to any
Company Benefit Plan which would materially increase the cost thereof.
(iv) No Company Benefit Plan is subject to either Code section 412 or
Title IV of ERISA.
(v) Each Company Benefit Plan is in material compliance with all
applicable Laws. Each Company Benefit Plan which is intended to qualify
under Code section 401(a) has been issued a favorable determination
letter by the IRS and has not been amended in a manner, and no event has
occurred since such date, which would cause any such plan to fail to
remain so qualified. Each Company Benefit Plan that requires registration
with a relevant government body has been so registered.
(vi) Except as set forth in Section 3.1(l)(vi) of the Company
Disclosure Schedule, there are no actions, liens, suits or claims pending
or, to Company's Knowledge, threatened (other than routine claims for
benefits) with respect to any Company Benefit Plan as to which the
Company has or could reasonably be expected to have any direct or
indirect actual or contingent material liability.
(vii) Each Company Benefit Plan which is a "GROUP HEALTH PLAN" (as
defined in ERISA section 607(1)) is in material compliance with the
provisions of COBRA (within the meaning of Code section 4980B), Health
Insurance Portability and Accountability Act and any other applicable
federal, state or local Law.
(viii) There are no (i) Company Benefit Plans maintained by the
Company pursuant to which welfare benefits are provided to current or
former employees beyond their retirement or other termination of service,
other than coverage mandated by COBRA, the cost of which is fully paid by
the current or former employees or their dependents; or (ii) unfunded
Company Benefit Plan obligations with respect to any employee of the
Company which are not fairly reflected by reserves shown on the Financial
Statements of the Company.
(ix) Except as set forth in Section 3.1(l)(ix) of the Company
Disclosure Schedule, the consummation of the Transactions will not
(i) entitle any current or former employee of the Company to severance
pay, unemployment compensation or any similar payment or (ii) accelerate
the time of payment or vesting, or increase the amount of any
compensation due to, any current or former employee of the Company.
(x) No Company Benefit Plan is a "MULTIEMPLOYER PLAN" or "MULTIPLE
EMPLOYER PLAN" within the meaning of the Code or ERISA or the regulations
promulgated thereunder.
(xi) Neither the Company nor any Company Benefit Plan, or to the
Company's Knowledge any "DISQUALIFIED PERSON" (as defined in Code
section 4975) or any "PARTY IN INTEREST" (as defined in ERISA
section 3(18)), has engaged in any non-exempt prohibited transaction
(within the meaning of Code section 4975 or ERISA section 406) which
could reasonably be expected to result in any material liability to any
of the Company.
(xii) None of the Company's employees is represented by a union, and
to Company's Knowledge no union organizing efforts have been conducted
within the last five years or were being conducted as of the date of the
Original Merger Agreement. As of the date of the Original Merger
Agreement, the Company did not have, nor to Company's Knowledge, was
there threatened, a strike, picket, work stoppage, work slowdown or other
organized labor dispute. As of the date of the Original Merger Agreement,
the Company had not incurred any liability or obligation under the Worker
Adjustment and Retraining Notification Act, as it may have been amended
from time to time ("WARN") or any similar state law.
(m) INTELLECTUAL PROPERTY.
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(i) Disclosure.
(A) Section 3.1(m)(i)(A) or Section 3.1(m)(i)(B) of the Company
Disclosure Schedule sets forth all United States and foreign patents
and patent applications, trademark and service mark registrations and
applications, Internet domain name registrations and applications and
copyright registrations and applications owned or licensed by the
Company or any of its Subsidiaries specifying as to each item, as
applicable; the nature of the item, including the title; the owner of
the item; the jurisdictions in which the item is issued or registered
or in which an application for issuance or registration has been
filed; and the issuance, registration, or application numbers and
dates.
(B) Section 3.1(m)(i)(B) of the Company Disclosure Schedule sets
forth all material licenses, sublicenses and other agreements or
permissions ("IP LICENSES") under which the Company or any of its
Subsidiaries is a licensor or licensee or otherwise is authorized to
use or practice any Intellectual Property.
(C) Except as set forth in Section 3.1(m)(i)(C) of the Company
Disclosure Schedule, all Intellectual Property that is material to
the business or development of the Company has been developed by
employees of the Company and all such employees have executed a
Proprietary Rights Assignment and Non-Disclosure Agreement.
(D) Section 3.1(m)(i)(D) of the Company Disclosure Schedule sets
forth and describes the status of any material agreements involving
Intellectual Property that were in negotiation or proposed ("PROPOSED
INTELLECTUAL PROPERTY AGREEMENTS") by the Company or any of its
Subsidiaries as of the date of the Original Merger Agreement.
(ii) Ownership. The Company and its Subsidiaries own, free and clear
of all Liens, and have the unrestricted right to use, sell or license,
all Intellectual Property in their possession, except for failures to own
free and clear or to have the unrestricted right to use, sell, or license
that, individually and in the aggregate, would not have a Material
Adverse Effect with respect to the Company and except for technology
licensed to the Company and listed on Section 3.1(m)(i)(B) of the Company
Disclosure Schedule. Notwithstanding the foregoing and as of the date of
the Original Merger Agreement, the Company possessed free and clear of
all liens or assignments, all Intellectual Property rights necessary in
order for the Company to operate its business.
(iii) Claims. Except as set forth in Section 3.2(m)(ii) of the
Company Disclosure Schedule, the Company and its Affiliates have not been
a party to any Claim, nor, to the Company's Knowledge, is any such Claim
threatened, that challenges the validity, enforceability, ownership, or
right to use, sell or license, any Intellectual Property in the
possession of the Company or any of its Subsidiaries. To the Company's
Knowledge, no third party is infringing upon any such Intellectual
Property.
(iv) Administration and Enforcement. The Company and its Subsidiaries
have taken all necessary and desirable actions to maintain and protect
each item of Intellectual Property owned by the Company or its
Subsidiaries, as the case may be, except for failures to take such
actions that, individually and in the aggregate, would not have a
Material Adverse Effect with respect to the Company.
(v) Protection of Trade Secrets and Technology. The Company and its
Subsidiaries have taken all reasonable precautions to protect the
secrecy, confidentiality and value of their respective trade secrets and
the proprietary nature and value of their respective Technology,
including requiring all employees and contractors to execute a
Proprietary Rights Assignment and Non-Disclosure Agreement.
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(vi) Software. All material Software used by the Company and its
Subsidiaries performs in conformance with its documentation, except for
failures to perform that, individually and in the aggregate, would not
have a Material Adverse Effect with respect to the Company. The
Transactions will not require any third party consents under the terms of
the documentation related to the Software other than (A) as set forth in
Section 3.1(m)(vi) of the Company Disclosure Schedule or (B) such
consents that, individually and in the aggregate, would not have a
Material Adverse Effect with respect to the Company.
(vii) Year 2000 Compliance. All Software, hardware, databases and
embedded control systems (collectively, the "SYSTEMS") used by the
Company and its Subsidiaries are Year 2000 Compliant, except for failures
to be Year 2000 Compliant that, individually and in the aggregate, would
not have a Material Adverse Effect with respect to the Company. As used
herein, the term "YEAR 2000 COMPLIANT" means that the Systems
(i) accurately process date and time data (including calculating,
comparing and sequencing) from, into and between the twentieth and
twenty-first centuries, the years 1999 and 2000 and leap year
calculations and (ii) operate accurately with other software and hardware
that use standard date format (4 digits) for representation of the year.
(viii) Effect of Transaction. The Company and its Subsidiaries are
not, nor, as a result of the execution and delivery of this Agreement,
the consummation of the Transactions or the performance of the Company's
obligations hereunder, will be, in violation of any agreement relating to
any Intellectual Property, except for violations that, individually and
in the aggregate, would not have a Material Adverse Effect with respect
to the Company. Upon consummation of the transactions, the Surviving
Corporation will own all right, title and interest in and to or have a
license to use all Intellectual Property on identical terms and
conditions as the Company or its Subsidiaries, as the case may be,
enjoyed immediately prior to such Transactions, except for failures to
own or have available for use that would not have a Material Adverse
Effect with respect to the Company.
(n) CONTRACTS. Except as set forth on Section 3.1(n) of the Company
Disclosure Schedule, all material Contracts of the Company and its
Subsidiaries have been filed with the SEC (whether or not required to have
been filed) and the Company is not, and to the Knowledge of the Company no
other parties thereto are, in default, breach or violation of any such
Contracts, except for such defaults, breaches or violations that,
individually and in the aggregate, would not have a Material Adverse Effect
with respect to the Company. Except as set forth in Section 3.1(n) of the
Company's Disclosure Schedule, neither the Company nor any of its
Subsidiaries is a party to or bound by any Contract (i) restricting the
ability of the Company or any of its Subsidiaries (or after the Mergers,
Newco or any of its Subsidiaries) to compete in or conduct any line of
business or to engage in any business in any geographic area,
(ii) containing any covenants of any other person not to compete in any
material respect with the Company or any of its Subsidiaries,
(iii) containing any so-called "MOST FAVORED NATION" provisions or any
similar provision requiring the Company or any of its Subsidiaries (or after
the Mergers, Newco or any of its Subsidiaries) to offer a third party terms
or concessions at least as favorable as offered to one or more other
parties.
(o) ENVIRONMENTAL MATTERS. (i) the Company and each of its
Subsidiaries has obtained and is in material compliance with the terms and
conditions of all permits, licenses and other authorizations required under
applicable federal, state, local and foreign laws, regulations and codes as
currently in effect relating to pollution and protection of the environment
("ENVIRONMENTAL LAWS"); (ii) no asbestos in a friable condition or equipment
containing polychlorinated biphenyls or leaking underground or above-ground
storage tanks are contained in or located at any facility owned, leased or
controlled by the Company or any of its Subsidiaries; (iii) the Company and
each of its Subsidiaries is in material compliance with all applicable
Environmental Laws, and has fully disclosed all known material past and
present non-compliance with Environmental Laws, and all
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known past discharges, emissions, leaking or releases known to the Company
of any substance or waste regulated under or defined by Environmental Laws
that could reasonably be expected to form the basis of any claim, action,
suit, proceeding, hearing or investigation under any applicable
Environmental Laws; and (iv) neither the Company nor any of its Subsidiaries
has received notice of any past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans that have
resulted in or threaten to result in any common law or legal liability, or
otherwise form the basis of any claim, action, suit, proceeding, hearing or
investigation under any applicable Environmental Laws; provided, however,
that clauses (i) through (iv) above address only those matters that,
individually or in the aggregate, would have a Material Adverse Effect with
respect to the Company.
(p) ABSENCE OF CERTAIN CHANGES. Except as disclosed in Section 3.1(p)
of the Company Disclosure Schedule, since the date of the Company's most
recent audited Financial Statements:
(i) there has not been any Material Adverse Change with respect to
the Company;
(ii) there has not been any declaration, setting aside or payment of
any dividend or other distribution with respect to any shares of capital
stock of the Company, or any repurchase, redemption or other acquisition
by the Company or any of its Subsidiaries of any outstanding shares of
capital stock or other securities of, or other ownership interests in,
the Company or any of its Subsidiaries or any split, combination or
reclassification of any of the Company's capital stock or issuance or
authorization relating to the issuance of any other securities in respect
of, in lieu of or in substitution for shares of the Company's capital
stock;
(iii) there has not been any amendment to, or change in, the Articles
of Incorporation or By-laws of the Company or any of its Subsidiaries or
modification through merger, liquidation, reorganization, restructuring
or in any other fashion to the corporate structure or ownership of any
Subsidiary of the Company;
(iv) there has not been any incurrence, creation or assumption by the
Company or any of its Subsidiaries of any Debt or any Lien on any
material asset, and the Company has not issued or sold any debt
securities or warrants or other rights to acquire any debt securities of
the Company or entered into any "KEEP WELL" or other agreement to
maintain any financial statement condition of another Person or entered
into any arrangement having the economic effect of any of the foregoing;
(v) there has not been any change in any method of accounting or
accounting practice by the Company or any of its Subsidiaries, except for
any such change required by reason of a concurrent change in GAAP or to
conform a Subsidiary's accounting policies and practices to those of the
Company;
(vi) there has not been any sale or transfer by the Company of any of
material assets of the Company or any of its Subsidiaries, cancellation
of any Debt or claims or waiver of any material rights by the Company or
any of its Subsidiaries;
(vii) the Company has not made any loans, advances or capital
contributions to or investments in, any other Person, other than travel
and entertainment advances to employees of the Company in the ordinary
course of business consistent with past practices;
(viii) except for this Agreement and any other Transaction Documents,
the Company has not entered into any material transaction or incurred any
material expenditure other than in the ordinary course of business
consistent with past practice;
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(ix) there has not been any adverse change in a material customer or
material supplier relationship, including any cancellation or termination
or written notice of cancellation or termination by any material customer
or material supplier of its relationship or a material portion of its
relationship with the Company or any of its Subsidiaries or any material
decrease in the usage or purchase of the products or services of the
Company or any of its Subsidiaries by any such customer or any material
decrease or limitation of services or supplies of the products or
services to the Company or any of its Subsidiaries by any such supplier
which would have, individually or in the aggregate, a Material Adverse
Effect with respect to the Company;
(x) there has not been any waiver or release of any material right of
claim of the Company or any of its Subsidiaries, including any write-off
or other compromise of any account receivable of the Company or any
Subsidiary, other than in the ordinary course of business and consistent
with past practices;
(xi) there has not been, to the Knowledge of the Company, any
assertion by any advertiser, subscriber and/or customer of the Company,
or any of its Subsidiaries, which, if substantiated, would have a
Material Adverse Effect with respect to the Company;
(xii) there has not been any material change in the policies under
which the Company or any of its Subsidiaries extends discounts, credits
or warranties to customers or otherwise deals with its customers;
(xiii) there has not been any grant of exclusive promotion or
sponsorship with respect to any portion of any website of the Company or
any of its Subsidiaries;
(xiv) the Company has not authorized for issuance, issued, delivered,
sold or agreed or committed to issue, sell or deliver (whether through
the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), pledge or otherwise
encumber any shares of capital stock or other Equity Securities of the
Company or any of its Subsidiaries;
(xv) except with respect to annual bonuses made in the ordinary
course of business consistent with past practice, the Company has not
adopted or amended in any material respect any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation
right, pension, retirement, employment or other employee benefit
agreement, trust, plan or other arrangement for the benefit or welfare of
any director, officer or employee of the Company or any of its
Subsidiaries or increase in any manner the compensation or fringe
benefits of any director, officer or employee of the Company or any of
its Subsidiaries or pay any benefit not required by any existing
agreement or place any assets in any trust for the benefit of any
director, officer or employee of the Company or any of its Subsidiaries
(in each case, except with respect to employees in the ordinary course of
business consistent with past practice);
(xvi) there has not been any grant or transfer of any rights of value
or modify or change in any material respect any existing material
license, lease, Contract or other document;
(xvii) the Company has not adopted a plan of complete or partial
liquidation or resolutions providing for or authorizing such a
liquidation or a dissolution, merger, consolidation, restructuring,
recapitalization or reorganization other than as is necessary in order to
effect the Transactions;
(xviii) the Company has not settled or compromised any shareholder
derivative suits arising out of the transactions contemplated hereby or
any other litigation (whether or not commenced prior to the date of this
Agreement) or settled, paid or compromised any claims
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not required to be paid, individually in an amount in excess of $100,000
and in the aggregate in an amount in excess of $1,000,000, other than in
consultation and cooperation with Parent, and, with respect to any such
settlement, with the prior written consent of Parent;
(xix) the Company has not entered into any transaction or series of
transactions with any Affiliate of the Company (other than a wholly owned
Subsidiary of the Company) or otherwise that would be required to be
disclosed pursuant to Item 404 of Regulation S-K other than on terms and
conditions substantially as favorable to the Company or such Subsidiary
as would be obtainable by the Company or such Subsidiary at the time of
such transaction with a Person that is not an Affiliate of the Company;
(xx) there has not been any acquisition or agreement to acquire
(x) by merging or consolidating with, or by purchasing a substantial
portion of the stock or assets of, or by any other manner, any business
or any other Person or (y) any assets that are material, individually or
in the aggregate, to the Company and its Subsidiaries taken as a whole,
except purchases of inventory in the ordinary course of business
consistent with past practice; and
(xxi) there has been no agreement by the Company, whether written or
oral, to do any of the foregoing.
(q) RECOMMENDATION OF BOARD OF DIRECTORS; VOTE REQUIRED. The Board of
Directors of the Company has unanimously approved this Agreement and the
other Transaction Documents to which the Company is party and the
consummation of the Company Merger and the other Transactions and has
recommended that the stockholders of the Company vote in favor of the
adoption and approval of this Agreement and consummation of the Company
Merger (the "RECOMMENDATION"). The Required Stockholder Approval is the only
vote of the holders of any Equity Securities of the Company necessary to
approve the Company Merger and the other Transactions.
(r) ANTI-TAKEOVER PLAN; STATE TAKEOVER STATUTES. Neither the Company
nor any of its Subsidiaries has in effect any shareholder rights plan or
similar device or arrangement, commonly or colloquially known as a "poison
pill" or "anti-takeover" plan or any similar plan, device or arrangement and
the Board of Directors of the Company has not adopted or authorized the
adoption of such a plan, device or arrangement. To the best of the Company's
Knowledge, no state takeover or "fair price" or "interested party" statute
or similar statute or regulation applies or purports to apply to the
Mergers, this Agreement or any of the Transactions.
(s) OPINION OF FINANCIAL ADVISOR. The Company has received the
opinions of Paine Webber Incorporated and ING Baring Furman Selz LLC, dated
the date of the Original Merger Agreement, to the effect that, as of such
date, the consideration to be paid in the Company Merger is fair to the
Company's stockholders from a financial point of view, a copy of which
opinion has been delivered to Parent.
(t) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in
(i) the registration statement on Form S-4 to be filed with the SEC by Newco
in connection with the issuance of the Company Merger Securities and the ISN
Merger Securities (together with any amendments thereof or supplements
thereto, the "REGISTRATION STATEMENT") and (ii) the proxy statement to be
filed with the SEC by the Company in connection with the Stockholders'
Meeting (together with any amendments thereof or supplements thereto, the
"PROXY STATEMENT/PROSPECTUS") will, at the time the Registration Statement
is filed with the SEC, at any time it is amended or supplemented, or at the
time it becomes effective under the Securities Act or at the time the Proxy
Statement/Prospectus is mailed to the Company's stockholders, as the case
may be, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
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(u) BROKERS OR FINDERS. No agent, broker, investment banker, financial
advisor or other Person retained by or on behalf of the Company is or will
be entitled to any broker's or finder's fee or any other commission or
similar fee in connection with any of the Transactions, except PaineWebber
Incorporated and ING Baring Furman Selz LLC, whose fees and expenses will be
paid by the Company in accordance with the Company's agreement with such
firm (a copy of which agreement has been delivered by the Company to Parent
prior to the date of this Agreement).
(v) INSURANCE. The Company maintains, and has maintained, without
interruption, during its existence, policies or binders of insurance
covering such risk and events, including personal injury, property damage
and general liability, in amounts the Company reasonably believes adequate
for its business and operations and, except as set forth in
Section 3.1(v) of the Company Disclosure Schedule, such policies shall not
terminate as a result of the consummation of the Transactions.
(w) ABSENCE OF SENSITIVE PAYMENTS. To the Company's Knowledge, none of
the Company, or any of its Subsidiaries or Affiliates, acting alone or
together, has performed any of the following acts: (i) the making of any
contribution, payment, remuneration, gift or other form of economic benefit
(a "PAYMENT") to or for the private use of any governmental official,
employee or agent where the Payment or the purpose of the Payment was
illegal under the laws of the United States or the jurisdiction in which
such payment was made, (ii) the establishment or maintenance of any
unrecorded fund, asset or liability for any purpose or the making of any
false or artificial entries on its books, (iii) the making of any Payment to
any Person or the receipt of any Payment with the intention or understanding
that any part of the Payment was to be used for any purpose other than that
described in the documents supporting the Payment, or (iv) the giving of any
Payment to, or the receipt of any Payment from, any Person who was or could
have been in a position to help or hinder the business of the Company or any
of its Subsidiaries in connection with any actual or proposed transaction
which (A) would reasonably have been expected to subject the Company or any
of its Subsidiaries or Affiliates to any damage or penalty in any civil,
criminal or governmental litigation or proceeding, (B) if not given in the
past, would have had a Material Adverse Effect on the Company or (C) if it
had not continued in the future, would have had a Material Adverse Effect
with respect to the Company.
(x) AFFILIATE TRANSACTIONS. Except to the extent disclosed in any
Company SEC Report, there are no other transactions, agreements,
arrangements or understandings between the Company or any of its
Subsidiaries, on the one hand, and the Company's Affiliates (other than
wholly-owned Subsidiaries of the Company) or other Persons, on the other
hand, that would be required to be disclosed under Item 404 of
Regulation S-K under the Securities Act.
Section 3.2 REPRESENTATIONS AND WARRANTIES OF ISN AND PARENT. ISN and
Parent represents and warrants to the Company that, as of the date of the
Original Merger Agreement:
(a) ORGANIZATION, STANDING AND POWER; SUBSIDIARIES. Each of Parent and
ISN is a limited liability company duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
limited liability company power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. ISN is duly
qualified and in good standing to do business in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties
makes such qualification necessary, other than in such jurisdictions where
the failure so to qualify would not have a Material Adverse Effect with
respect to ISN. ISN has no Subsidiaries. As of the Effective Time, each of
Newco and Company Merger Sub will be a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, will have all requisite corporate (or similar) power and
authority to own, lease and operate its properties and to carry on its
business as then being conducted and will be duly qualified and in good
standing to do business in each jurisdiction in which the nature of its
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business or the ownership or leasing of its properties make such
qualification necessary, other than in such jurisdictions where the failure
so to qualify would not have a Material Adverse Effect with respect to such
entity. As of the Effective Time, ISN Merger Sub will be a limited liability
company duly organized, validly existing and in good standing under the laws
of the State of Delaware, will have all requisite limited liability company
power and authority to own, lease and operate its properties and to carry on
its business as then being conducted and will be duly qualified and in good
standing to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties make such
qualification necessary, other than in such jurisdictions where the failure
so to qualify would not have a Material Adverse Effect with respect to ISN
Merger Sub.
(b) CERTIFICATE OF FORMATION AND LIMITED LIABILITY COMPANY
AGREEMENT. Complete and correct copies of the Certificate of Formation and
Limited Liability Company Agreement, each as amended to date, of ISN have
been delivered to the Company. The Certificate of Formation and Limited
Liability Company Agreement of ISN are in full force and effect. ISN is not
in violation of any provision of its Certificate of Formation or Limited
Liability Company Agreement. Complete and correct copies of the Certificate
of Incorporation or Articles of Incorporation (as applicable) and By-laws of
Newco and Company Merger Sub and the Certificate of Formation and Limited
Liability Company Agreement of ISN Merger Sub will be delivered to the
Company as soon as they are available but in no event later than ten
(10) Business Days prior to the Effective Time. As of the Effective Time,
such Certificate of Incorporation or Articles of Incorporation (as
applicable) and By-laws and such Certificate of Formation and Limited
Liability Company Agreement of ISN Merger Sub will be in full force and
effect and Newco, Company Merger Sub and ISN Merger Sub will not be in
violation of any provision thereof.
(c) CAPITALIZATION. Section 3.2(c) of the Parent Disclosure Schedule
sets forth the number of outstanding ISN Units as of the date of this
Agreement. At the Effective Time, all of the issued and outstanding capital
stock of Company Merger Sub and ISN Merger Sub will be owned by Newco.
Section 3.2(c) of the Parent Disclosure Schedule sets forth, (i) the Persons
to whom ISN Stock Options have been granted, (ii) the exercise price for the ISN
Stock Options held by each such Person, (iii) whether the ISN Stock Options are
subject to vesting and, if subject to vesting, the dates on which each such ISN
Stock Option vest and (iv) the agreement pursuant to which each such ISN Stock
Option was issued. None of the ISN Stock Options are subject to being cashed-out
or will vest as a result of the transactions contemplated hereby. Except as
described in this Section 3.2(c) or in Section 3.2(c) of the Parent Disclosure
Schedule, no ISN Units or other equity securities of ISN are authorized, issued
or outstanding, or reserved for any other purpose, and there are no options,
warrants or other rights (including registration rights), agreements,
arrangements or commitments of any character to which ISN is a party relating to
the issued or unissued ISN Units or with respect to any SAR or obligating ISN to
grant, issue or sell any ISN Units, by sale, lease, license or otherwise. Except
as set forth in Section 3.2(c) of the Parent Disclosure Schedule, ISN has no
share purchase agreements, rights plans or agreements containing similar
provisions and no agreements containing anti-dilution provisions. No
anti-dilution provisions will be triggered as a result of any of the
transactions contemplated under this Agreement. ISN has no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote or which are convertible into or exercisable for securities having the
right to vote with the members of ISN on any matter. The only outstanding Debt
of ISN is listed in Section 3.2(c) of the Parent Disclosure Schedule, all of
which will be satisfied and discharged prior to the Effective Time. Other than
as contemplated by this Agreement or as set forth in Section 3.2(c) of the
Parent Disclosure Schedule, there are no outstanding contractual obligations,
commitments, understandings or arrangements of ISN to repurchase, redeem or
otherwise acquire or make any payment in respect of any ISN Units or SARs of
ISN. At the Effective Time, Newco, ISN Merger Sub and
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Company Merger Sub will not have conducted any business or have any assets or
liabilities other than pursuant to this Agreement or in connection with such
entity's formation or qualification.
(d) FINANCIAL STATEMENTS. The Financial Statements of ISN have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto), and
fairly present the financial position of ISN as at the dates thereof and the
results of its operations and cash flows for the periods then ended. There
are no Liabilities of any kind required to be disclosed under GAAP that are
not disclosed, reflected or reserved against in the Financial Statements of
ISN, except for such Liabilities incurred in the ordinary course of business
consistent with past practice since the date of ISN's most recently audited
Financial Statements, or as set forth in Section 3.2(d) of the ISN
Disclosure Schedule or as would not have a Material Adverse Effect with
respect to ISN.
(e) AUTHORITY. Each of ISN and Parent has all requisite limited
liability company power and authority to enter into this Agreement and each
of the other Transaction Documents to which it is party, to perform its
obligations hereunder and thereunder and to consummate the Transactions. The
execution and delivery of this Agreement and each of the other Transaction
Documents to which it is party and the consummation of the Transactions
hereunder and thereunder have been duly and validly authorized by all
necessary action on the part of each of ISN and Parent and no other
proceedings on the part of ISN or Parent are necessary to authorize this
Agreement or the other Transaction Documents to which ISN or Parent is party
or to consummate the Transactions subject, in the case of the ISN Merger, to
the filing and recordation of the Certificate of Merger in accordance with
the requirements of the Delaware LLC Act. This Agreement and each of the
other Transaction Documents to which ISN or Parent is party have been duly
and validly executed and delivered by ISN or Parent, as applicable, and
constitute a valid and binding obligation of ISN or Parent, as applicable,
enforceable against ISN or Parent in accordance with their terms.
(f) COMPLIANCE WITH APPLICABLE LAWS. ISN holds all permits, licenses,
variances, exemptions, orders and approvals of all Governmental Entities,
except where any such failure so to hold, individually and in the aggregate,
would not have a Material Adverse Effect with respect to ISN (the "ISN
PERMITS"). ISN is in compliance with the terms of the ISN Permits in all
material respects. The business of ISN is not being conducted in violation
of any material Law. Except as set forth in Section 3.2(f) of the Parent
Disclosure Schedule, no investigation or review by any Governmental Entity
with respect to ISN is pending or, to the Knowledge of Parent, threatened,
nor, to the Knowledge of ISN or Parent, has any Governmental Entity
indicated an intention to conduct the same.
(g) GOVERNMENT APPROVALS; REQUIRED CONSENTS.
(i) No consent, approval, authorization or action of, declaration or
filing with or notice to, any Governmental Entity on the part of ISN or
Parent is required in connection with the execution or delivery by ISN
and Parent of this Agreement or any of the other Transaction Documents to
which ISN or Parent is party, the consummation by ISN or Parent of the
Transactions or compliance with the terms hereof or thereof, other than
(A) filing the Agreement of Merger in accordance with the requirements of
California Law, (B) filing the Certificate of Merger in accordance with
the requirements of the Delaware LLC Act, (C) filings with the SEC and
NASDAQ, (D) filings under state securities or "Blue Sky" laws,
(E) filings under the HSR Act, (F) as otherwise set forth in
Section 3.2(g)(i) of the Parent Disclosure Schedule (any such consents,
approvals, authorizations, declarations, filings or notices specified in
clauses (A) through (E) being referred to as the "PARENT GOVERNMENTAL
APPROVALS") and (F) such consents, approvals, authorizations,
declarations, filings or notices that, individually and in the aggregate,
would not have a Material Adverse Effect with respect to ISN.
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(ii) No consent, approval, authorization or action of, filing with or
notice to, any Person (other than a Governmental Entity) shall be
required in connection with the execution or delivery by ISN and Parent
of this Agreement or any of the other Transaction Documents to which ISN
or Parent is party, the consummation by ISN or Parent of the Transactions
or compliance by ISN or Parent with the terms hereof or thereof other
than (A) as set forth in Section 3.2(g)(ii) or Section 3.1(h) of the
Parent Disclosure Schedule (the "PARENT REQUIRED CONSENTS") or (B) such
consents, approvals, actions, filings or notices that, individually and
in the aggregate, would not have a Material Adverse Effect on ISN.
(h) NON-CONTRAVENTION. The execution, delivery and performance by ISN
and Parent of this Agreement and the other Transaction Documents to which
ISN or Parent is party and the consummation of the Transactions do not and
will not (i) contravene or conflict with or result in any violation or
breach of any provision of the Certificate of Formation or Limited Liability
Company Agreement of ISN or Parent or, as of the Effective Time, any
provision of the Certificate of Incorporation or Articles of Incorporation
(as applicable) or By-laws of Newco or Company Merger Sub or, as of the
Effective Time, any provision of the Certificate of Formation or Limited
Liability Company Agreement of ISN Merger Sub; (ii) assuming all Parent
Governmental Approvals and Parent Required Consents have been made or
obtained, contravene or conflict with or result in a violation or breach of
any provision of any Law, order or decree binding upon or applicable to ISN
or Parent or any of their respective assets, (iii) require any consent or
other action by any Person under, constitute a default under or give rise to
a right of termination, cancellation, change of any right or obligation, or
acceleration of any right or obligation or to the loss of any benefit or
adverse modification of the effect (including an increase in the price paid
by, or cost to, ISN) of, or under any provision of any agreement or other
instrument to which ISN is a party or that is binding upon ISN or its
properties or assets or any license, franchise, permit or other similar
authorization held by ISN or (iv) result in the creation or imposition of
any Lien on any assets of ISN, except with respect to clauses (iii) and
(iv) as set forth in Section 3.2(h) of the Parent Disclosure Schedule;
PROVIDED, HOWEVER, that clauses (ii) through (iv) above address only those
matters that, individually or in the aggregate, would have a Material
Adverse Effect with respect to ISN.
(i) LITIGATION. As of the date of the Original Merger Agreement,
except as set forth in Section 3.2(i) of the Parent Disclosure Schedule,
there was no suit, claim, action or proceeding pending, or, to the Knowledge
of ISN or Parent, threatened against ISN or any Affiliate of ISN that,
individually or in the aggregate, would have a Material Adverse Effect on
ISN, nor was there any Order of any Governmental Entity outstanding against
ISN or an Affiliate of ISN that, individually or in the aggregate, would
have a Material Adverse Effect with respect to ISN.
(j) TAXES AND RELATED TAX MATTERS.
(i) Other than Taxes that, individually and in the aggregate, are not
material (A) all Taxes required to be paid on or before the date of the
Original Merger Agreement by ISN have been timely paid, and (B) any Taxes
required to be paid by ISN after the date of the Original Merger
Agreement and on or before the Effective Time shall be timely paid.
(ii) All Tax Returns required to be filed by or with respect to ISN
with respect to Taxes on or before the date of the Original Merger
Agreement have been timely filed. All material Tax Returns required to be
filed by or with respect to ISN after the date of the Original Merger
Agreement and on or before the Effective Time shall be prepared and
timely filed, in a manner consistent with prior years and applicable laws
and regulations. No penalties or other charges in a material amount are
or will become due with respect to the late filing of any Tax Return of
ISN or payment of any Tax required to be paid by ISN or required to be
filed or paid on or before the Effective Time.
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(iii) With respect to all Tax Returns filed by or with respect to
ISN, except as set forth in Section 3.2(j) of the Parent Disclosure
Schedule, (A) the statute of limitations for the assessment of Taxes has
expired with respect to all periods ending on or before August 31, 1995;
(B) no audit is in progress and no extension of time has been executed
with respect to any date on which any Tax Return was or is to be filed
and no waiver or agreement has been executed for the extension of time
for the assessment or payment of any Tax; and (C) there is no unassessed
deficiency proposed or threatened against ISN.
(iv) Neither Parent, ISN, nor any of their respective Affiliates has
taken, or agreed to take, any action that would prevent the Mergers from
qualifying as tax-free events under Section 351 or Section 368 of the
Code.
(v) Except as set forth in Section 3.2(j) of the Parent Disclosure
Schedule, neither ISN nor Parent is or has been a party to any tax
sharing agreement or similar arrangement.
(vi) Except as set forth in Section 3.2(j) of the Parent Disclosure
Schedule, neither ISN nor Parent has been a part of a group of affiliated
corporations that has filed a consolidated federal income tax return.
(k) CERTAIN AGREEMENTS. Except for this Agreement and as set forth in
Section 3.2(k) and/or Section 3.2(l) of the Parent Disclosure Schedule, ISN
is not a party to any oral or written (i) union or collective bargaining
agreement, (ii) agreement with any executive officer or other key employee
of ISN the benefits of which are contingent, or the terms of which would be
materially altered, upon the consummation of the Transactions,
(iii) agreement with respect to any executive officer of ISN providing any
term of employment or compensation guarantee extending for a period longer
than two years after the Closing Date and for the payment of in excess of
$200,000 per annum or (iv) plan, including any stock option plan, stock
appreciation right plan, restricted stock plan or stock purchase plan, any
of the benefits of which will be increased, or the vesting of the benefits
of which would be accelerated, by the occurrence of any of the Transactions
or the value of any of the benefits of which will be calculated on the basis
of any of the Transactions.
(l) EMPLOYEE BENEFIT PLANS; EMPLOYEE RELATIONS. The following
representations and warranties contained in this Section 3.2(l) are
qualified by such exceptions which, individually and in the aggregate, would
not have a Material Adverse Effect with respect to ISN.
(i) Section 3.2(l)(i) of the Parent Disclosure Schedule contains a
true and complete list of each "employee benefit plan" (within the
meaning of section 3(3) of ERISA, including multiemployer plans within
the meaning of ERISA section 3(37)), stock purchase, stock option,
severance, employment, change-in-control, fringe benefit, welfare
benefit, collective bargaining, bonus, incentive, deferred compensation
and all other employee benefit plans, agreements, programs, policies or
other arrangements, whether or not subject to ERISA (including any
funding mechanism therefor now in effect or required in the future as a
result of the transaction contemplated by this Agreement or otherwise),
whether formal or informal, oral or written, legally binding or not,
under which any employee or former employee of ISN has any present or
future right to benefits or under which ISN has any present or future
liability. All such plans, agreements, programs, policies and
arrangements shall be collectively referred to as the "ISN BENEFIT
PLANS." Where appropriate all references to the "ISN" in this
Section 3.2(l) refer to ISN and any member of its "controlled group"
within the meaning of Section 414 of the Code.
(ii) ISN has, with respect to each ISN Benefit Plan, if applicable,
delivered or made available to the Company true and complete copies of:
(i) all plan texts and agreements and related trust agreements (or other
funding vehicles); (ii) the most recent summary plan descriptions and
material employee communications; (iii) the most recent annual report
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(including all schedules thereto); (iv) the most recent annual audited
financial statement and opinion; (v) if the plan is intended to qualify
under Code section 401(a), the most recent determination letter received
from the IRS; and (vi) all material communications with any governmental
entity or agency (including the PBGC and the IRS) given or received
within the past three years.
(iii) Except as set forth in Section 3.2(l)(iii) of the Parent
Disclosure Schedule, all amounts properly accrued as liabilities to or
expenses of any ISN Benefit Plan have been properly reflected on ISN's
Financial Statements to the extent required by GAAP. Since the date of
ISN's Financial Statements to the date of the Original Merger Agreement,
there has been no amendment or change in interpretation by ISN relating
to any ISN Benefit Plan which would materially increase the cost thereof.
(iv) No ISN Benefit Plan is subject to either Code section 412 or
Title IV of ERISA.
(v) Each ISN Benefit Plan is in material compliance with all
applicable laws and regulations. Each ISN Benefit Plan which is intended
to qualify under Code section 401(a) has been issued a favorable
determination letter by the IRS and has not been amended in a manner, and
no event has occurred since such date, which would cause any such plan to
fail to remain so qualified. Each ISN Benefit Plan that requires
registration with a relevant government body has been so registered.
(vi) Except as set forth in Section 3.2(l)(vi) of the Parent
Disclosure Schedule, there are no actions, liens, suits or claims pending
or, to ISN's Knowledge, threatened (other than routine claims for
benefits) with respect to any ISN Benefit Plan as to which ISN has or
could reasonably be expected to have any direct or indirect actual or
contingent material liability.
(vii) Each ISN Benefit Plan which is a "group health plan" (as
defined in ERISA section 607(1)) is in material compliance with the
provisions of COBRA (within the meaning of Code section 4980B), Health
Insurance Portability and Accountability Act and any other applicable
federal, state or local Law.
(viii) There are no (i) ISN Benefit Plans maintained by ISN pursuant
to which welfare benefits are provided to current or former employees
beyond their retirement or other termination of service, other than
coverage mandated by COBRA, the cost of which is fully paid by the
current or former employees or their dependents; or (ii) unfunded ISN
Benefit Plan obligations with respect to any employee of ISN which are
not fairly reflected by reserves shown on the Financial Statements.
(ix) Except as set forth in Section 3.2(l)(ix) of the Parent
Disclosure Schedule, the consummation of the Transactions will not
(i) entitle any current or former employee of ISN to severance pay,
unemployment compensation or any similar payment or (ii) accelerate the
time of payment or vesting, or increase the amount of any compensation
due to, any current or former employee of ISN.
(x) Neither ISN nor any ISN Benefit Plan, nor to ISN's Knowledge any
"disqualified person" (as defined in Code section 4975) or any "PARTY IN
INTEREST" (as defined in ERISA section 3(18)), has engaged in any
non-exempt prohibited transaction (within the meaning of Code
section 4975 or ERISA section 406) which could reasonably be expected to
result in any material liability to ISN.
(xi) None of ISN's employees is represented by a union, and to ISN's
Knowledge no union organizing efforts have been conducted within the last
five years or were being conducted as of the date of the Original Merger
Agreement. As of the date of the Original Merger Agreement, ISN did not
have, nor to ISN's Knowledge, was there threatened, a strike,
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picket, work stoppage, work slowdown or other organized labor dispute. As
of the date of the Original Merger Agreement, ISN had not incurred any
liability or obligation under WARN or any similar state law.
(m) INTELLECTUAL PROPERTY.
(i) DISCLOSURE.
(A) Section 3.2(m)(i)(A) or Section 3.2(m)(i)(B) of the Parent
Disclosure Schedule sets forth all United States and foreign patents
and patent applications, trademark and service mark registrations and
applications, Internet domain name registrations and applications and
copyright registrations and applications owned or licensed by ISN
specifying as to each item, as applicable; the nature of the item,
including the title; the owner of the item; the jurisdictions in
which the item is issued or registered or in which an application for
issuance or registration has been filed; and the issuance,
registration, or application numbers and dates.
(B) Section 3.2(m)(i)(B) of the Parent Disclosure Schedule sets
forth all IP Licenses under which ISN is a licensor or licensee or
otherwise is authorized to use or practice any Intellectual Property.
(C) Section 3.2(m)(i)(C) of the Parent Disclosure Schedule sets
forth and describes the status of any Proposed Intellectual Property
Agreements of ISN.
(ii) OWNERSHIP. ISN owns, free and clear of all Liens, and has the
unrestricted right to use, sell or license, all Intellectual Property in
its possession, except for failures to own free and clear or to have the
unrestricted right to use, sell, or license that would not, individually
or in the aggregate, have a Material Adverse Effect on ISN, and except
for technology licensed to Parent and listed on Section 3.2(m)(i)(B) of
the Parent Disclosure Schedule. Notwithstanding the foregoing and as of
the date of the Original Merger Agreement, ISN possessed free and clear
of all Liens or assignments, all Intellectual Property rights necessary
in order for ISN to operate its business.
(iii) CLAIMS. Except as set forth in Section 3.2(m)(iii) of the
Parent Disclosure Schedule, neither ISN nor any of its Affiliates has
been a party to any such Claim, nor, to Parent's Knowledge, is any Claim
threatened, that challenges the validity, enforceability, ownership, or
right to use, sell or license, any Intellectual Property in ISN's
possession. Except as set forth in Section 3.2(m)(iii) of the Parent
Disclosure Schedule, to Parent's Knowledge, no third party is infringing
upon any such Intellectual Property.
(iv) ADMINISTRATION AND ENFORCEMENT. Except as set forth in
Section 3.2(m) (iv) of the Parent Disclosure Schedule, ISN has taken all
reasonably necessary and desirable actions to maintain and protect each
item of Intellectual Property owned by ISN, except for failures to take
such actions that, individually or in the aggregate, would not have a
Material Adverse Effect with respect to ISN.
(v) PROTECTION OF TRADE SECRETS AND TECHNOLOGY. ISN has taken all
reasonable precautions to protect the secrecy, confidentiality, and value
of its respective trade secrets and the proprietary nature and value of
their respective Technology, except for failures to take such precautions
that would not have a Material Adverse Effect on ISN.
(vi) SOFTWARE. Except as set forth in Section 3.2(m)(vi) of the
Parent Disclosure Schedule, all material Software used by ISN performs in
conformance with its documentation, except for failures to perform that
would not have a Material Adverse Effect with respect to ISN. The
transactions contemplated by this Agreement will not require any third
party consents under the terms of the documentation related to the
Software other than (A) as set
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forth in Section 3.2(m)(vi) of the Parent Disclosure Schedule or
(B) such consents that, individually and in the aggregate, would not have
a Material Adverse Effect on ISN.
(vii) YEAR 2000 COMPLIANCE. All Systems used by ISN are Year 2000
Compliant, except for failures to be Year 2000 Compliant that,
individually or in the aggregate, would not have a Material Adverse
Effect with respect to ISN.
(viii) EFFECT OF TRANSACTION. ISN and Parent are not, nor, as a
result of the execution and delivery of this Agreement, the consummation
of the Transactions or the performance of ISN and Parent's obligations
hereunder, will be, in violation of any agreement relating to any
Intellectual Property, except for violations that, individually or in the
aggregate, would not have a Material Adverse Effect on ISN. Upon
consummation of the Transactions, the Surviving LLC will own all right,
title and interest in and to or have a license to use all Intellectual
Property on identical terms and conditions as ISN enjoyed immediately
prior to such Transactions, except for failures to own or have available
for use that, individually or in the aggregate, would not have a Material
Adverse Effect with respect to ISN.
(n) CONTRACTS. Except as set forth in Section 3.2(i) of the Parent
Disclosure Schedule, ISN is not, and to the knowledge of ISN and Parent, no
other parties thereto are, in default, breach or violation of any material
Contracts of ISN, except for such defaults, breaches or violations that,
individually or in the aggregate, would not have a Material Adverse Effect
with respect to ISN. Except as set forth in Section 3.2(n) of Parent's
Disclosure Schedule, ISN is not a party to or bound by any Contract
(i) restricting the ability of ISN (or after the Mergers, Newco or any of
its Subsidiaries) to compete in or conduct any line of business or to engage
in any business in any geographic area, (ii) containing any covenants of any
other person not to compete in any material respect with ISN,
(iii) containing any so-called "most favored nation" provisions or any
similar provision requiring ISN (or after the Mergers, Newco or any of its
Subsidiaries) to offer a third party terms or concessions at least as
favorable as offered to one or more other parties.
(o) ENVIRONMENTAL MATTERS. (i) ISN has obtained and is in material
compliance with the terms and conditions of all permits, licenses and other
authorizations required under applicable Environmental Laws; (ii) no
asbestos in a friable condition or equipment containing polychlorinated
biphenyls or leaking underground or above-ground storage tanks is contained
in or located at any facility owned, leased or controlled by ISN; (iii) ISN
is in material compliance with all applicable Environmental Laws, and has
fully disclosed all known material past and present non-compliance with
Environmental Laws, and all known past discharges, emissions, leaking or
releases known to ISN of any substance or waste regulated under or defined
by Environmental Laws that could reasonably be expected to form the basis of
any claim, action, suit, proceeding, hearing or investigation under any
applicable Environmental Laws; and (iv) ISN has not received notice of any
past or present events, conditions, circumstances, activities, practices,
incidents, actions or plans that have resulted in, or threaten to result in,
any common law or legal liability, or otherwise form the basis of any claim,
action, suit, proceeding, hearing or investigation under any applicable
Environmental Laws; PROVIDED, HOWEVER, that clauses (i) through (iv) above
address only those matters that, individually or in the aggregate, would
have a Material Adverse Effect with respect to ISN.
(p) ABSENCE OF CERTAIN CHANGES. Except as disclosed in Section 3.2(p)
of the Parent Disclosure Letter, since the date of ISN's most recent audited
Financial Statements:
(i) there has not been any Material Adverse Change with respect to ISN;
(ii) there has not been any declaration, setting aside or payment of any
non-cash dividend or other non-cash distribution with respect to any ISN
Units (except as provided under Section 4.2(g)) or any repurchase,
redemption or other acquisition by ISN of any outstanding ISN
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Units or any split, combination or reclassification of any ISN Units or
issuance or authorization relating to the issuance of any ISN Units, in lieu
of or in substitution for ISN Units;
(iii) there has not been any amendment to, or change in, the Certificate
of Formation or Limited Liability Company Agreement of ISN;
(iv) there has not been any incurrence, creation or assumption by ISN of
any Debt or any Lien on any material asset, and ISN has not issued or sold
any debt securities or warrants or other rights to acquire any debt
securities of ISN or entered into any "KEEP WELL" or other agreement to
maintain any financial statement condition of another Person or entered into
any arrangement having the economic effect of any of the foregoing, except,
in each case, to the extent that such Debt or other obligation is satisfied
or discharged prior to the Closing;
(v) there has not been any change in any method of accounting or
accounting practice by ISN;
(vi) there has not been any sale or transfer by ISN of any of its
material assets, cancellation of any Debt or claims or waiver of any
material rights by ISN;
(vii) ISN has not made any loans, advances or capital contributions to
or investments in, any other Person, other than travel and entertainment
advances to employees of ISN in the ordinary course of business consistent
with past practices;
(viii) except for this Agreement and any other Transaction Documents,
ISN has not entered into any material transaction or incurred any material
expenditure other than in the ordinary course of business consistent with
past practice;
(ix) there has not been any adverse change in a material customer or
material supplier relationship, including any cancellation or termination or
written notice of cancellation or termination by any material customer or
material supplier of its relationship or a material portion of its
relationship with ISN or any material decrease in the usage or purchase of
the products or services of ISN by any such customer or any material
decrease or limitation of services or supplies of the products or services
to ISN by any such supplier that, individually or in the aggregate, would
have a Material Adverse Effect with respect to ISN;
(x) there has not been any waiver or release of any material right of
claim of ISN, including any write-off or other compromise of any account
receivable of ISN, other than in the ordinary course of business and
consistent with past practices;
(xi) there has not been, to the Knowledge of ISN or Parent, any
assertion by any advertiser, subscriber and/or customer of ISN, that, if
substantiated, would have a Material Adverse Effect with respect to ISN;
(xii) there has not been any material change in the policies under which
ISN extends discounts, credits or warranties to customers or otherwise deals
with its customers;
(xiii) there has not been any grant of exclusive promotion or
sponsorship with respect to any portion of any website of ISN;
(xiv) ISN has not authorized for issuance, issued, delivered, sold or
agreed or committed to issue, sell or deliver (whether through the issuance
or granting of options, warrants, commitments, subscriptions, rights to
purchase or otherwise), pledge or otherwise encumber any ISN Units or any
other Equity Securities of ISN;
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(xv) except with respect to annual bonuses made in the ordinary course
of business consistent with past practice, ISN has not adopted or amended in
any material respect any bonus, profit sharing, compensation, severance,
termination, stock option, stock appreciation right, pension, retirement,
employment or other employee benefit agreement, trust, plan or other
arrangement for the benefit or welfare of any director, officer or employee
of ISN or increase in any manner the compensation or fringe benefits of any
director, officer or employee of ISN or pay any benefit not required by any
existing agreement or place any assets in any trust for the benefit of any
director, officer or employee of ISN (in each case, except with respect to
employees in the ordinary course of business consistent with past practice);
(xvi) there has not been any grant or transfer of any rights of value or
modification or change in any material respect any existing material
license, lease, Contract or other document;
(xvii) ISN has not adopted a plan of complete or partial liquidation or
resolutions providing for or authorizing such a liquidation or a
dissolution, merger, consolidation, restructuring, recapitalization or
reorganization other than as is necessary in order to effect the
Transactions;
(xviii) Except with respect to the Infoseek Litigation, ISN has not
settled or compromised any shareholder derivative suits arising out of the
transactions contemplated hereby or any other litigation (whether or not
commenced prior to the date of this Agreement) or settled, paid or
compromised any claims not required to be paid, individually in an amount in
excess of $100,000 and in the aggregate in an amount in excess of
$1,000,000, other than in consultation and cooperation with the Company,
and, with respect to any such settlement, with the prior written consent of
the Company;
(xix) ISN has not entered into any transaction or series of transactions
with any Affiliate of ISN (other than a wholly-owned Subsidiary of ISN) or
otherwise that would be required to be disclosed pursuant to Item 404 of
Regulation S-K other than on terms and conditions substantially as favorable
to ISN as would be obtainable by ISN at the time of such transaction with a
Person that is not an Affiliate of ISN;
(xx) there has not been any acquisition or agreement to acquire (x) by
merging or consolidating with, or by purchasing a substantial portion of the
stock or assets of, or by any other manner, any business or any other Person
or (y) any assets that are material, individually or in the aggregate, to
ISN and its Subsidiaries taken as a whole, except purchases of inventory in
the ordinary course of business consistent with past practice; and
(xxi) there has been no agreement by ISN, whether written or oral, to do
any of the foregoing.
(q) ANTI-TAKEOVER PLAN; STATE TAKEOVER STATUTES. ISN does not have in
effect any shareholder rights plan or similar device or arrangement,
commonly or colloquially known as a "poison pill" or "anti-takeover" plan or
any similar plan, device or arrangement and ISN has not adopted or
authorized the adoption of such a plan, device or arrangement. To the best
of ISN and Parent's Knowledge, no state takeover or "fair price" of
"interested party" statute or similar statute or regulation applies or
purports to apply to the Mergers, this Agreement or any of the Transactions.
(r) INFORMATION SUPPLIED. The information supplied or to be supplied
by ISN or Parent for inclusion or incorporation by reference in (i) the
Registration Statement and (ii) the Proxy Statement/Prospectus will, at the
time the Registration Statement is filed with the SEC, at any time it is
amended or supplemented, or at the time it becomes effective under the
Securities Act or at the time the Proxy Statement/Prospectus is mailed to
the Company's stockholders, as the case may be, not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not materially
misleading.
(s) BROKERS OR FINDERS. No agent, broker, investment banker, financial
advisor or other Person retained by or on behalf of ISN or Parent is or will
be entitled to any broker's or finder's fee or any other commission or
similar fee in connection with any of the Transactions.
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(t) INSURANCE. ISN maintains, and has maintained, without
interruption, during its existence, policies or binders of insurance
covering such risk and events, including personal injury, property damage
and general liability, in amounts that ISN reasonably believes adequate for
its business and operations and, except as set forth in Section 3.2(t) of
the Parent Disclosure Schedule, such policies shall not terminate as a
result of the consummation of the Transactions.
(u) ABSENCE OF SENSITIVE PAYMENTS. To ISN and Parent's Knowledge, none of
ISN or any of its Affiliates, acting alone or together, has performed any of the
following acts: (i) the making of any contribution, payment, remuneration, gift
or other form of economic benefit (a "PAYMENT") to or for the private use of any
governmental official, employee or agent where the Payment or the purpose of the
Payment was illegal under the laws of the United States or the jurisdiction in
which such payment was made, (ii) the establishment or maintenance of any
unrecorded fund, asset or liability for any purpose or the making of any false
or artificial entries on its books, (iii) the making of any Payment to any
Person or the receipt of any Payment with the intention or understanding that
any part of the Payment was to be used for any purpose other than that described
in the documents supporting the Payment, or (iv) the giving of any Payment to,
or the receipt of any Payment from, any Person who was or could have been in a
position to help or hinder the business of ISN in connection with any actual or
proposed transaction which (A) would reasonably have been expected to subject
ISN or any of its Affiliates to any damage or penalty in any civil, criminal or
governmental litigation or proceeding, (B) if not given in the past, would have
had a Material Adverse Effect on ISN or (C) if it had not continued in the
future, would have had a Material Adverse Effect on ISN.
(v) AFFILIATE TRANSACTIONS. Except in the ordinary course of business
or as disclosed elsewhere herein and except for the Media Commitment, there
were no transactions, agreements or arrangements that created any continuing
obligation or liability of ISN, on the one hand, to Parent or any of its
Affiliates, on the other hand, that will be in effect following the ISN
Merger. Upon consummation of the ISN Merger at the Closing, ISN will owe no
Debt to Parent or any Affiliate of Parent.
ARTICLE IV.
COVENANTS
Section 4.1 COVENANTS OF THE COMPANY. During the period from the date of
this Agreement and continuing until the Closing Date, the Company agrees that,
except as expressly contemplated or permitted by this Agreement or to the extent
that ISN and Parent shall otherwise consent in writing (which consent may not be
unreasonably withheld or delayed):
(a) ACCESS TO INFORMATION. Upon reasonable notice, the Company shall,
and shall cause its Subsidiaries to, afford to ISN and Parent and each of
their respective Agents, access, during normal business hours during the
period prior to the Closing Date, to all properties, books, Contracts,
commitments and records of the Company and its Subsidiaries and, during such
period, the Company shall, and shall cause its Subsidiaries to, promptly
furnish or otherwise make available to ISN and Parent (i) a copy of each
report, schedule, registration statement and other document filed or
received by the Company or any of its Subsidiaries during such period
pursuant to the requirements of Federal securities laws and (ii) all other
information concerning the business, properties and personnel of the Company
or any of its Subsidiaries as ISN or Parent may reasonably request.
(b) ORDINARY COURSE. The Company shall, and shall cause its
Subsidiaries to, carry on their respective businesses in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted
and use commercially reasonable efforts to preserve intact their current
business organizations, keep available the services of their current
officers, directors and employees and preserve their relationships with
customers, suppliers, contractors, distributors, licensors, licensees and
others having business dealings with them to the end that their goodwill and
ongoing businesses shall not be impaired in any material respect at the
Closing Date. Without limiting the
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generality of the foregoing, and except or as contemplated by this Agreement
or as otherwise required by law, neither the Company nor any of its
Subsidiaries shall take any action or omit to take any action that, if taken
or omitted immediately prior to the execution hereof, would have been
required to have been disclosed in the Company Disclosure Schedule pursuant
to Section 3.1(p); PROVIDED that the Company shall be allowed to issue
Company Common Stock to holders of Company Stock Options upon exercise of
such Company Stock Options.
(c) COMPLIANCE WITH LAWS. The Company agrees to conduct its business
and cause the businesses of its Subsidiaries to be conducted in compliance
with all Laws.
(d) TRANSACTION DOCUMENTS. The Company shall execute all Transaction
Documents to be executed by the Company, and shall cause the Principal
Company Stockholders and any warrantholder of the Company to execute all
Transaction Documents to which they are parties, prior to the Effective
Time.
Section 4.2 COVENANTS OF ISN AND PARENT. During the period from the date
of this Agreement and continuing until the Closing Date, ISN and Parent agree
that, except as expressly contemplated or permitted by this Agreement, or to the
extent that the Company shall otherwise consent in writing (which consent may be
withheld in its sole discretion):
(a) ACCESS TO INFORMATION. Upon reasonable notice, ISN and Parent
shall afford to the Company and its Agents access, during normal business
hours during the period prior to the Closing Date, to all properties, books,
Contracts, commitments and records of ISN and, during such period, ISN and
Parent shall promptly furnish or otherwise make available to the Company
(i) a copy of each report, schedule, registration statement and other
document filed or received by ISN or Parent during such period pursuant to
the requirements of Federal securities laws and (ii) all other information
concerning the businesses, properties and personnel of ISN as the Company
may reasonably request.
(b) ORDINARY COURSE. ISN shall carry on its business in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted and use commercially reasonable efforts to preserve intact its
current business organizations, keep available the services of its current
officers and employees and preserve its relationships with customers,
suppliers, contractors, distributors, licensors, licensees and others having
business dealings with it to the end that its goodwill and ongoing
businesses shall not be impaired in any material respect at the Closing
Date. Without limiting the generality of the foregoing, and except as
required by law, ISN shall not take any action or omit to take any action
that, if taken or omitted immediately prior to the execution hereof would
have been required to be disclosed in the Parent Disclosure Schedule
pursuant to Section 3.2(p); PROVIDED that ISN shall be allowed to issue ISN
Units to holders of ISN Stock Options upon exercise of such ISN Stock
Options and to holders of options to purchase stock in ISN's predecessor
company.
(c) COMPLIANCE WITH LAWS. ISN agrees to conduct its business in
compliance with all applicable Laws.
(d) MEDIA COMMITMENT. At or prior to the Effective Time, USA will
enter into a definitive agreement ("MEDIA COMMITMENT") with Newco pursuant
to which USA will commit to provide to Newco $10 million of Media Value from
the Network in exchange for an issuance of 538,721 shares of Class B Common
Stock to Parent. The Media Commitment will terminate on the third
anniversary of the Closing Date and, to the extent reasonably practical, be
made available in equal annual amounts over the term. The Media Commitment
shall require USA to use its reasonable best efforts to place the
advertising to the satisfaction of Newco; PROVIDED, HOWEVER, that USA will
determine, in its sole discretion, the actual placement of all commercial
advertising time purchased by Newco, based on, among things, available
inventory. The Media Commitment shall remain in effect following the
Mergers.
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(e) LICENSE AGREEMENT. On the Closing Date, Newco, the Company, ISN
and USA shall enter into a license agreement substantially in the form of
EXHIBIT F hereto (the "LICENSE AGREEMENT").
(f) TRANSACTION DOCUMENTS. ISN and Parent shall execute all
Transaction Documents to which it is a party, and shall cause USA to execute
all Transaction Documents to which it is a party, prior to the Effective
Time.
(g) INFOSEEK LITIGATION. ISN shall distribute or otherwise transfer to
Parent or an Affiliate of Parent the rights associated with the litigation
captioned ISN LLC V. INFOSEEK CORPORATION (the "INFOSEEK LITIGATION")
(including the right to any awards received), and Parent or an Affiliate of
Parent shall assume all liabilities associated with such litigation
(including all of ISN's costs related thereto).
(h) PARENT CONTRIBUTION. Prior to the Effective Time, Parent or an
Affiliate of Parent shall contribute $40 million in cash or cash equivalents
to Newco in exchange for an issuance of 2,154,882 shares of Class B Common
Stock to Parent.
(i) MEDIA WARRANT. At the Effective Time, Newco shall issue a warrant
substantially in the form of EXHIBIT E hereto (the "MEDIA WARRANT") to USA
to purchase 12,867,606 shares of Class B Common Stock, such number to be
adjusted such that, in the aggregate on a fully diluted basis, the
percentage of Newco Common Stock to be held by former holders of ISN Units
and ISN Options immediately after the Effective Time shall equal 75% of
outstanding Newco Common Stock immediately after the Effective Time, on a
fully diluted basis.
ARTICLE V.
ADDITIONAL COVENANTS
Section 5.1 NO SOLICITATION.
(a) From the date of the Original Merger Agreement until the termination
of this Agreement in accordance herewith, the Company shall not, and shall
cause its Subsidiaries and Agents not to, directly or indirectly,
(i) solicit, initiate, encourage (including by way of furnishing
information, except as required by applicable Law) or take any other action
to facilitate, any inquiry or the making of any proposal which constitutes,
or may reasonably be expected to lead to, any Alternate Transaction or agree
to or endorse any Alternate Transaction, (ii) propose, enter into or
participate in any discussions or negotiations regarding any of the
foregoing or, except as required by applicable Law, furnish any information
relating to the Company or any of its Subsidiaries or their respective
assets or businesses, or (iii) otherwise cooperate in anyway with, or assist
or participate in, facilitate or encourage, any effort or attempt by any
other Person to do or seek any of the foregoing (including, without
limitation, through the grant of waivers in respect of any obligations to
the Company). The Company will immediately notify ISN and Parent after
receipt of any inquiry or proposal for an Alternate Transaction or any
indication that any Person is considering making any such inquiry or
proposal or any request for nonpublic information relating to the Company or
any of its Subsidiaries or for access to the properties, books or records of
the Company or any of its Subsidiaries by any Person that may be considering
making, or has made, any such inquiry or proposal or that the Company
intends to engage in negotiations with, or to provide information to any
such Person. The Company shall immediately provide ISN and Parent with the
identity of such Person and a reasonable description of such inquiry or
proposal and, if available, a copy of such inquiry or proposal. The Company
shall, and shall cause its Subsidiaries and Agents to, immediately cease and
cause to be terminated, any existing solicitation, activity, discussions or
negotiations with any Third Parties conducted heretofore by the Company or
any of its representatives with respect to any proposal for an Alternate
Transmission.
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(b) Notwithstanding the foregoing, nothing contained in this Agreement
shall prevent the Company from (x) furnishing information pursuant to an
appropriate confidentiality letter concerning the Company and its
businesses, properties or assets to any Third Party who has made a Qualified
Alternate Transaction Proposal, (y) engaging in discussions or negotiations
with such Third Party, or (z) following receipt of such a Qualified
Alternate Transaction Proposal, taking and disclosing to the Company's
stockholders a position contemplated by Rule 14e-2(a) under the Exchange
Act, but in each case referred to in the foregoing clauses (x) through
(z) only after the Board of Directors of the Company concludes in good
faith, which with respect to clauses (y) and (z) is made following receipt
of an opinion from the Company's outside counsel, that such action is
reasonably necessary for the Board of Directors of the Company to comply
with its fiduciary obligations to the Company's stockholders under
California Law and, in each case referred to in clauses (x) through (z),
only following written notice to ISN and Parent. If the Board of Directors
of the Company receives any inquiry or proposal for an Alternate
Transaction, then the Company shall immediately inform ISN and Parent of the
terms and conditions of such inquiry or proposal and the identity of the
Person making such inquiry or proposal and shall keep ISN and Parent fully
informed of the status and details of any such inquiry or proposal and of
all steps the Company is taking in response to such inquiry or proposal.
(c) The Company's Board of Directors will not withdraw or modify (or
propose to withdraw or modify) in any manner adverse to ISN or Parent, or
otherwise fail to make the Recommendation and will not approve, recommend,
or propose to approve or recommend, or fail to oppose, an Alternate
Transaction, in each case except in response to a Qualified Alternate
Transaction Proposal, and then only upon or after termination of this
Agreement pursuant to Section 7.1(f).
Section 5.2 DIRECTORS AND OFFICERS INDEMNIFICATION AND INSURANCE.
(a) From and after the Effective Time, Newco shall cause the Surviving
Corporation and the Surviving LLC to, and the Surviving Corporation and the
Surviving LLC, shall indemnify, defend and hold harmless the present and
former officers, directors, employees and agents of the Company and ISN,
respectively (each a "COVERED PERSON"), against all losses, expenses,
claims, damages, liabilities or amounts ("LOSSES") that are paid in
settlement (provided that, with respect to amounts paid in settlement, such
settlement has been approved by Newco, such approval not to be unreasonably
withheld or delayed) of, or otherwise in connection with, any claim, action,
suit, proceeding or investigation (a "CLAIM") based in whole or in part on
the fact that such person is or was a director, officer, employee or agent
of the Company or ISN, as applicable, and arising out of actions or
omissions occurring at or prior to the Effective Time, in each case to the
full extent permitted under applicable Law and the Company's Articles of
Incorporation and By-laws or ISN's Certificate of Formation and Limited
Liability Company Agreement, as applicable, as in effect on the date of this
Agreement. The Surviving Corporation or the Surviving LLC, as applicable,
shall pay, when and as such expenses are incurred by a Covered Person, any
expenses in advance of the final disposition of any such Claim to each
Covered Person to the fullest extent permitted under applicable Law upon
receipt from the Covered Person to whom expenses are advanced of any
undertaking to repay such advances required under applicable Law. The
Surviving Corporation or the Surviving LLC, as applicable, shall cooperate
in the defense of any such matter.
(b) Newco shall cause the Surviving Corporation and the Surviving LLC to
keep in effect provisions in their respective Articles of Incorporation and
By-Laws and Certificate of Formation and Limited Liability Company Agreement
providing for exculpation of director liability, advancement of expenses
prior to disposition of any Claim and indemnification of the Covered
Persons, in each case to the fullest extent permitted under applicable Law,
which provisions shall not be amended except as required by applicable Law
or except to make changes permitted by Law that would enlarge the right of
indemnification of the Covered Persons.
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(c) For a period of six (6) years after the Effective Time, Newco shall
cause the Surviving Corporation and the Surviving LLC to maintain in effect
the current policies of directors and officers liability insurance (or
similar policies) maintained by the Company and ISN covering persons who are
currently covered by any such policies with respect to actions or omissions
occurring at or prior to the Effective Time to the extent that such policies
are available; PROVIDED, that policies of at least the same coverage
containing terms and conditions which are no less advantageous to the
insureds may be substituted therefor, PROVIDED, FURTHER, that in no event
shall the Surviving Corporation or the Surviving LLC be required to expend
amounts for premiums per annum in excess of 150% of the annual premiums of
the Company and ISN, as applicable, prevailing during the twelve-month
period ended November 30, 1999 (such annual premiums, the "MAXIMUM PREMIUM")
to maintain or procure insurance coverage pursuant to this Section 5.2, or,
if the cost of such coverage exceeds the Maximum Premium, the maximum amount
of coverage that can be purchased for the Maximum Premium.
(d) The provisions of this Section 5.2 shall survive the consummation of
the Mergers and are expressly intended to benefit each of the Covered
Persons.
Section 5.3 NOTIFICATION OF CERTAIN MATTERS. ISN and Parent shall give
prompt notice to the Company, and the Company shall give prompt notice to ISN
and Parent, of (a) the occurrence or nonoccurrence of any event, the occurrence
or nonoccurrence of which would be reasonably likely to cause any covenant,
condition or agreement contained in this Agreement not to be complied with or
satisfied, (b) any failure of ISN or the Company, as the case may be, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder and (c) the commencement of any litigation or claim
against such party; PROVIDED, HOWEVER, that the delivery of any notice pursuant
to this Section 5.3 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 5.4 TAX TREATMENT. Each of ISN, Parent, the Company and their
Affiliates shall take such actions, or refrain from taking such actions, as may
be reasonably necessary so that the Mergers will qualify as tax-free events
under either or both of Section 351 or Section 368 of the Code and the
conditions to closing described in Sections 6.2(d) and 6.3(e) will be met.
Section 5.5 COMPANY STOCKHOLDER MEETING. The Company shall, as promptly as
practicable following the date of this Agreement, duly call, give notice of and
convene and hold a meeting of its stockholders (the "STOCKHOLDER MEETING") for
the purpose of considering and voting upon the adoption of this Agreement and
obtaining the Required Stockholder Approval. Without limiting the generality of
the foregoing, the Company agrees that, unless this Agreement is terminated in
accordance with Section 7.1(f), its obligations pursuant to the first sentence
of this Section 5.5 shall not be affected by the commencement, public proposal,
public disclosure or communication to the Company of any Alternate Transaction
(including any Qualified Alternate Transaction Proposal). The Company will,
through its Board of Directors, recommend to its stockholders the adoption of
this Agreement, except to the extent that the Board of Directors of the Company
shall have withdrawn or modified its approval or recommendation of this
Agreement or the Company Merger and terminated this Agreement in accordance with
Sections 5.1(c) and 7.1(f).
Section 5.6 REGISTRATION STATEMENT, PROXY STATEMENT/PROSPECTUS.
(a) As promptly as practicable after the execution of this Agreement,
(i) the Company shall prepare and file the Proxy Statement/Prospectus with
the SEC and (ii) Parent shall cause Newco to prepare and file the
Registration Statement with the SEC in which the Proxy Statement/Prospectus
shall be included as a prospectus, in connection with the registration under
the Securities Act of the shares of Newco Class A Common Stock to be issued
pursuant to the Mergers. Each of ISN, Parent and the Company (i) shall cause
the Proxy Statement/Prospectus and the Registration Statement to comply as
to form in all material respects with the applicable provisions of the
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Securities Act, the Exchange Act and the rules and regulations thereunder,
(ii) shall use commercially reasonable efforts to have or cause the
Registration Statement to become effective as promptly as practicable and
(iii) shall take any and all action required under any applicable federal or
state securities laws in connection with the issuance of shares of Newco
Class A Common Stock in connection with the Mergers. The Company, ISN, and
Parent shall furnish to the other parties all information concerning the
Company, Parent, ISN and Newco as the other parties may reasonably request
in connection with the preparation of the documents referred to herein. As
promptly as practicable after the Registration Statement shall have become
effective, ISN, Parent and the Company shall mail the Proxy
Statement/Prospectus to stockholders of the Company and the unitholders of
ISN.
(b) The information supplied by each of the Company, ISN, and Parent for
inclusion in the Registration Statement and the Proxy Statement/Prospectus
shall not, at (i) the time the Registration Statement is declared effective,
(ii) the time the Proxy Statement/Prospectus (or any amendment thereof or
supplement thereto) is first mailed to the stockholders of the Company and
the unitholders of ISN, (iii) the time of the Stockholders Meeting, or
(iv) the Effective Time, contain any untrue statement of material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein not materially misleading. If, at
any time prior to the Effective Time, any event or circumstance relating to
the Company, Parent, ISN, or their respective Subsidiaries or officers or
directors, should be discovered by such party which should be set forth in
an amendment or a supplement to the Registration Statement or Proxy
Statement/Prospectus, such party shall promptly inform the other parties
thereof and take appropriate action in respect thereof.
(c) Each party shall confer on a regular and frequent basis with the
other, report on operational matters and promptly advise the other orally
and in writing of (i) any material notice or other communication from any
Third Party alleging that the consent of such Third Party is or may be
required in connection with the Transactions; (ii) any material notice or
other communication from any regulatory authority, NASDAQ or national
securities exchange in connection with the Transactions; (iii) any claims,
actions, proceedings or investigations commenced or, to the best of such
party's Knowledge, threatened, involving or affecting such party or any of
its Subsidiaries, or any of its property or assets, or, to the best of such
party's Knowledge, any employee, consultant, director or officer, in his or
her capacity as such, which, if pending on the date of the Original Merger
Agreement, would have been required to have been disclosed in the Company
Disclosure Schedule or the Parent Disclosure Schedule, as the case may be,
or which relates to the consummation of the Transactions; and (iv) any
change or event that would have a Material Adverse Effect with respect to
such party. Each party shall promptly provide the other party (or its
counsel) copies of all filings made by such party with any Governmental
Entity in connection with this Agreement and the Transactions.
Section 5.7 FURTHER ACTION, REASONABLE EFFORTS.
(a) Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use commercially reasonable efforts to (i) promptly
make its respective filings, and thereafter make any other required
submissions, under the HSR Act with respect to the transactions contemplated
hereby, and (ii) take, or cause to be taken, all appropriate action, and to
do, or cause to be done, all things necessary, proper or advisable under
applicable Laws and regulations to consummate and make effective the
Transactions in the most expeditious manner practicable, including using
commercially reasonable efforts to obtain all licenses, permits, consents,
approvals, authorizations, qualifications and orders of Governmental
Entities, making all filings and required submissions with Governmental
Entities, including foreign filings and submissions, obtaining all consents
and approvals from Third Parties to Contracts with the Company, ISN, Parent
or their respective Subsidiaries as are necessary for the consummation of
the Mergers and the other Transactions and defending any lawsuit or legal
challenges, whether judicial or administrative, challenging this
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Agreement or the transactions contemplated hereby. In case at any time after
the Effective Time any other action is necessary or desirable to carry out
the purposes of this Agreement, each party to this Agreement shall use their
reasonable efforts to take all such action.
(b) Without limiting any covenant or agreement herein, each party shall
use reasonable commercial efforts not to take any action, or enter into any
transaction, which would result in a breach of any covenant made by such
party in this Agreement.
Section 5.8 PUBLIC ANNOUNCEMENTS. The Company, ISN and Parent shall, and
shall cause their respective Affiliates to, consult with each other before
issuing any press release or otherwise making any public statements with respect
to this Agreement or any of the transactions contemplated hereby and shall not
issue any such press release or make any such public statement without the prior
consent of the other parties, which consent shall not be unreasonably withheld
or delayed; PROVIDED, HOWEVER, that a party or its Affiliates may, without the
prior consent of the other party, issue such press release or make such public
statement as may be required by Law or any listing agreement or arrangement to
which the Company, ISN or Parent, or any of their respective Affiliates, is a
party with NASDAQ or a national securities exchange if it has used all
reasonable efforts to consult with the other party and to obtain such party's
consent but has been unable to do so in a timely manner.
Section 5.9 BLUE SKY. Parent shall cause Newco to use its best efforts to
obtain prior to the Effective Time all approvals or permits required to carry
out the transactions contemplated hereby under applicable "Blue Sky" laws in
connection with the issuance of shares of Newco Class A Common Stock in
connection with the Mergers and as contemplated by this Agreement; PROVIDED,
HOWEVER, that with respect to such qualifications neither ISN, Parent, Newco nor
the Company shall be required to register or qualify as a foreign corporation or
to take any action which would subject it to general service of process or
taxation in any jurisdiction where any such entity is not now so subject.
Section 5.10 NASDAQ. Parent shall cause Newco to promptly prepare and
submit to the NASDAQ National Market System, NASD applications covering the
shares of Newco Class A Common Stock to be issued in connection with the Mergers
and the Newco Class A Common Stock issuable upon conversion of the Newco
Class B Common Stock issued in connection with the ISN Merger (including
pursuant to Sections 1.8 and 2.4), and shall use commercially reasonable efforts
to cause such shares to be approved for listing on the NASDAQ prior to the
Effective Time, subject to official notice of issuance.
Section 5.11 AFFILIATES. As soon as reasonably practicable after the date
of this Agreement, (a) the Company shall deliver to ISN and Parent a letter
identifying all persons who may be deemed to be affiliates of the Company under
Rule 145 of the Securities Act as of the record date for the Stockholders
Meeting, including, without limitation, all of its directors and executive
officers (the "RULE 145 AFFILIATES") and (b) the Company shall advise the
persons identified in such letter of the resale restrictions imposed by
applicable securities laws and shall obtain from each person identified in such
letter a written agreement, substantially in the form of Exhibit G hereto (a
"RULE 145 AFFILIATE AGREEMENT").
Section 5.12 TAX MATTERS. The parties hereto agree to (i) prepare or cause
to be prepared all Tax Returns or other governmental filings, reports,
applicable books and records in accordance with the treatment of the Mergers as
tax-free events under either or both of Section 351 and Section 368 of the Code,
unless otherwise required by Law, and (ii) take such other actions, or refrain
from taking any action, as may be reasonably necessary so that the Mergers will
qualify for such treatment; PROVIDED, HOWEVER, that such actions or inactions
must be consistent with the terms of this Agreement. Parent agrees to indemnify
Newco from and against any Material Adverse Effect that Newco may suffer
resulting from, arising out of, relating to, in the nature of, or caused by any
Liability of ISN for Taxes of any Person other than ISN under Reg. 1-1502-6
promulgated under the Code.
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ARTICLE 6
CONDITIONS PRECEDENT
Section 6.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The respective
obligations of each party to effect the Mergers and to consummate the other
Transactions shall be subject to the satisfaction, on or prior to the Closing
Date, of the following conditions:
(a) STOCKHOLDER APPROVAL. The Required Stockholder Approval shall have
been obtained and be in full force and effect and ISN and Parent shall have
received reasonably satisfactory evidence of same.
(b) REGISTRATION STATEMENT. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings seeking a stop order.
(c) BLUE SKY LAWS. Newco shall have received all state securities or
"Blue Sky" permits and other authorizations necessary to issue in the shares
of Newco Class A Common Stock.
(d) LISTING. The Newco Class A Common Stock to be issued in connection
with the Mergers and the Newco Class A Common Stock issuable upon conversion
of Newco Class B Common Stock issued in connection with the ISN Merger
(including pursuant to Sections 1.8 and 2.4) shall have been authorized for
quotation on the NASDAQ listing or on any other national securities exchange
or automated quotation system approved by the Company, ISN and Parent,
subject to official notice of issuance.
(e) NO INJUNCTIONS OR RESTRAINTS. No Law or Order shall have been
enacted, entered, promulgated or enforced (and not repealed, superseded,
lifted or otherwise made inapplicable), by any court of competent
jurisdiction or Government Entity which restrains, enjoins or otherwise
prohibits the consummation of the Transactions.
(f) HSR ACT. All HSR Act waiting periods applicable to the
transactions contemplated under this Agreement shall have expired or been
terminated.
(g) GOVERNMENTAL AND REGULATORY CONSENTS. All filings required to be
made prior to the Effective Time with, and all consents, approvals, permits
and authorizations required to be obtained prior to the Effective Time from,
Governmental Entities in connection with the execution and delivery of this
Agreement and the consummation of the Transactions shall have been made or
obtained.
Section 6.2 CONDITIONS TO THE OBLIGATIONS OF ISN AND PARENT. The
obligations of ISN and Parent under this Agreement to consummate the
Transactions are subject to the satisfaction of the following conditions on or
prior to Closing, the imposition of which is solely for the benefit of ISN and
Parent and any one of more of which may be expressly waived by ISN and Parent,
in their sole discretion, except as otherwise required by Law:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the Company contained herein shall have been true and
correct (except that any representation or warranty qualified by materiality
shall be true and correct in all respects taking into account such
qualification) as of the date of the Original Merger Agreement and as of the
Closing Date (except to the extent that any such representation and warranty
is by its terms made as of a specific date in which case such representation
and warranty shall have been true and correct (or true and correct in all
material respects, as applicable) as of such specific date).
(b) PERFORMANCE OF AGREEMENTS. The Company shall have performed in all
material respects all obligations and agreements and complied in all
material respects with all covenants contained
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in this Agreement or any other Transaction Document to be performed and
complied with by the Company at or prior to the Closing Date.
(c) NO MATERIAL ADVERSE CHANGE. Since the date of the Original Merger
Agreement, there shall have been no Material Adverse Change with respect to
the Company.
(d) APPRAISAL RIGHTS. Holders of not more than 10% of the shares of
Company Common Stock outstanding immediately prior to the Effective Time
shall have demanded appraisal rights for their shares of Company Common
Stock.
(e) TAX OPINION. Concurrently with the execution of this Agreement,
ISN and Parent received an opinion of Paul, Weiss, Rifkind, Wharton &
Garrison, counsel to Parent, to the effect that the Mergers should qualify
as tax-free events under Section 351 or Section 368 of the Code. Nothing has
occurred since the date of that opinion that would prevent such counsel from
delivering an opinion to substantially the same effect on the Closing Date.
(f) AFFILIATE LETTERS. ISN and Parent shall have received from each
Rule 145 Affiliate of the Company an executed copy of a Rule 145 Affiliate
Agreement from each Rule 145 Affiliate as contemplated by Section 5.11
hereof.
(g) TRANSACTION DOCUMENTS. Each of the Transaction Documents shall
have been executed and delivered by each party thereto (other than USA, ISN
or Parent).
(h) VECCHIONE EMPLOYMENT AGREEMENT. An employment agreement between
Maurizio Vecchione and Newco shall have been executed in form and substance
satisfactory to ISN and Parent, and such employment agreement shall be valid
and binding on the Closing Date. Maurizio Vecchione shall be a full-time
employee of the Company immediately prior to the Closing Date and of Newco
as of the Closing Date.
(i) FREEDMAN SECURITY INTERESTS. Joyce Freedman and Lee Freedman shall
have released all of the security interests they hold in the assets of the
Company and shall have filed appropriate documentation of such release with
the United States Patent and Trademark Office.
(j) CERTIFICATE. ISN and Parent shall have received a certificate,
dated as of the Closing Date, executed by an officer of the Company
certifying as to the satisfaction of the conditions in Section 6.2(a), (b),
(c) and (d).
Section 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the Transactions are subject to the satisfaction of
the following conditions on or prior to Closing, the imposition of which is
solely for the benefit of the Company and any one or more of which may be
expressly waived by the Company, in its sole discretion, except as otherwise
required by Law:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Parent contained herein shall have been true and correct
(except that any representation or warranty qualified by materiality shall
be true and correct in all respects taking into account such qualification)
as of the date of the Original Merger Agreement and as of the Closing Date
(except to the extent that any such representation and warranty is by its
terms made as of a specific date, in which case such representation and
warranty shall have been true and correct (or true and correct in all
material respects, as applicable) as of such specific date).
(b) PERFORMANCE OF AGREEMENTS. Each of ISN and Parent shall have
performed in all material respects all obligations and agreements and
complied in all material respects with all covenants contained in this
Agreement or any other Transaction Document to be performed and complied
with by ISN or Parent at or prior to the Closing Date, and the Required
Stockholder Approval shall have been obtained and be in full force and
effect.
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(c) NO MATERIAL ADVERSE CHANGE. Since the date of the Original Merger
Agreement, there shall have been no Material Adverse Change with respect to
ISN.
(d) OWNERSHIP OF NEWCO AND MERGER SUBS. Immediately prior to the
Effective Time, (i) 100% of the issued and outstanding capital stock of
Newco shall be owned by Parent, (ii) 100% of the outstanding limited
liability company interests of ISN Merger Sub shall be owned by Newco,
(iii) 100% of the issued and outstanding capital stock of Company Merger Sub
shall be owned by Newco and (iv) except as contemplated by this Agreement or
the other Transaction Documents (x) there shall be no options, warrants or
other rights (including registration rights), agreements, arrangements or
commitments of any character relating to the capital stock of Newco, ISN
Merger Sub, or Company Merger Sub or obligating Newco, ISN Merger Sub, or
Company Merger Sub to grant, issue or sell any shares of its capital stock
or other equity securities, other than pursuant to the Transactions
(including the Media Warrants) and (y) there shall be no outstanding
Contracts requiring Newco, ISN Merger Sub, or Company Merger Sub to
repurchase, redeem or otherwise acquire or make any payment in respect of
shares of its capital stock.
(e) TAX OPINION. Concurrently with the execution of the Original
Merger Agreement, the Company received an opinion of Coudert Brothers,
counsel to the Company, to the effect that the Company Merger should qualify
as a tax-free event under Section 351 or Section 368 of the Code. Nothing
has occurred since the date of that opinion that would prevent such counsel
from delivering an opinion to the same effect on the Closing Date.
(f) TRANSACTION DOCUMENTS. Each of the Transaction Documents shall
have been executed and delivered by each party thereto (other than the
Company).
(g) CERTIFICATE. The Company shall have received a certificate, dated
as of the Closing Date, executed by an officer of each of ISN and Parent,
certifying as to the satisfaction of the conditions in Section 6.3(a),
(b) and (c).
Section 6.4 FRUSTRATION OF CLOSING CONDITIONS. Neither ISN, Parent nor the
Company may rely on the failure of any condition set forth in Section 6.1, 6.2
or 6.3, as the case may be, to be satisfied if such failure is due to the
failure of such party to perform or observe its covenants hereunder, including
its obligations to use reasonable best efforts to consummate the Transactions.
ARTICLE 7
TERMINATION AND AMENDMENT
Section 7.1 TERMINATION. This Agreement may be terminated and the Mergers
contemplated hereby may be abandoned at any time prior to the Effective Time
whether before or after approval by the stockholders of the Company:
(a) by mutual written consent of ISN, Parent and the Company;
(b) by any of ISN, Parent or the Company if there has been a material
breach of any representation, warranty or covenant in this Agreement on the
part of the Company, on the one hand, or ISN or Parent, on the other hand,
as the case may be, which breach has not been cured within twenty
(20) Business Days following receipt by the party committing such breach of
written notice of such breach; PROVIDED that the terminating party has not
materially breached any of its representations, warranties or covenants
herein;
(c) by any of ISN, Parent or the Company if the Closing shall not have
occurred on or before July 31, 2000 (or such later date as may be agreed to
by Parent and the Company); PROVIDED, however, that no party may terminate
this Agreement under this Section 7.1(c) if such failure has been caused by
such party's material breach of its obligations under this Agreement;
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(d) by any of ISN, Parent or the Company, if this Agreement shall fail
to receive the Required Stockholder Approval at the Stockholders' Meeting or
any adjournment thereof.
(e) by ISN and Parent, if (i) the Board of Directors of the Company
shall withdraw, modify or change the Recommendation in a manner adverse to
ISN or Parent or shall have resolved to do any of the foregoing or (ii) the
Board of Directors of the Company shall have recommended to the stockholders
of the Company any Alternate Transaction, or failed to recommend opposition
to any such Alternate Transaction, or shall have resolved to do any of the
foregoing; PROVIDED that a termination by ISN and Parent pursuant to this
Section 7.1(e) shall not affect the right of ISN to receive payments from
the Company under Section 8.3;
(f) by the Company, if the Board of Directors of the Company shall,
following advice of outside counsel (who may be the Company's regularly
engaged independent legal counsel), determine that failure to so terminate
would cause the Board of Directors of the Company to breach its fiduciary
duties under California Law and, on or prior to such date, the Company has
executed a definitive agreement with respect to a Qualified Alternate
Transaction Proposal; PROVIDED, HOWEVER, that the Company may not terminate
this Agreement pursuant to this Section 6.1(f) until five Business Days have
elapsed following delivery to ISN and Parent of written notice of such
determination of the Company (which written notice will inform ISN and
Parent of the material terms and conditions of the Qualified Alternate
Transaction Proposal) and the Company has offered ISN and Parent the
opportunity during such period to alter the terms and conditions of the
Transactions to prevent the Qualified Alternate Transaction Proposal from
qualifying as such; PROVIDED, FURTHER, that such termination under this
Section 7.1(f) shall not be effective until the Company has made payment to
ISN of the amounts required to be paid pursuant to Section 8.3; or
(g) by ISN, Parent or the Company if a court or other Governmental
Entity of competent jurisdiction shall have issued an Order or taken any
other action restraining, enjoining or otherwise prohibiting the
consummation of the Mergers or any other Transaction and such Order or other
action shall have become final and nonappealable.
Section 7.2 EFFECT OF TERMINATION. In the event this Agreement is
terminated pursuant to Section 7.1, all further obligations of the parties
hereunder shall terminate except that the obligations set forth in this
Section 7.2 and Article 8 shall survive; PROVIDED that, if this Agreement is so
terminated by a party because one or more of the conditions to such party's
obligations hereunder is not satisfied as a result of the other party's willful
or knowing failure to comply with its obligations under this Agreement, the
terminating party's right to pursue all legal remedies for breach of contract or
otherwise, including damages relating thereto, shall also survive such
termination unimpaired.
ARTICLE 8
GENERAL PROVISIONS
Section 8.1 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally, upon a
receipt of a transmittal confirmation if sent by facsimile or like transmission,
and on the next Business Day when sent by Federal Express, Express Mail or
similar overnight courier service to the parties at the following addresses or
facsimile numbers (or at such other address or facsimile number for a party as
shall be specified by like notice):
(i) If to the Company, to:
Styleclick.com Inc.
3861 Sepulveda Blvd.
Culver City, CA 90230
Attention: Maurizio Vecchione
Facsimile: (310) 751-2122
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with a copy to:
Coudert Brothers
950 17th St., 18th Fl.
Denver, CO 80202
Attention: John A. St. Clair
Facsimile: (303) 607-1080
(ii) If to ISN, to:
ISN LLC
500 Macara Avenue
Sunnyvale, CA 94086
Attention: Bill Lane
Facsimile: (408) 617-7415
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Robert B. Schumer
Facsimile: (212) 757-3990
(c) If to Parent, to:
USANi Sub LLC
Carnegie Hall Tower
152 West 57th Street, 42nd Floor
New York, NY 10019
Attention: Tom Kuhn
Facsimile: 212-314-7329
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Robert B. Schumer
Facsimile: (212) 757-3990
Section 8.2 WAIVERS AND AMENDMENTS. This Agreement may be amended,
superseded, canceled, renewed or extended, and the terms hereof may be waived,
only by written instruments signed by the parties to this Agreement, or in the
case of a waiver, by the party waiving compliance. Except where a specific
period for action or inaction is provided herein, no delay on the part of a
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof. Neither any waiver on the part of a party of any such right,
power or privilege, nor any single or partial exercise of any such right, power
or privilege, shall preclude any further exercise thereof or the exercise of any
other such right, power or privilege.
Section 8.3 EXPENSES AND OTHER PAYMENTS.
(a) The parties to this Agreement shall, except as otherwise
specifically provided herein, bear their respective costs expenses incurred
in connection with the preparation, execution and performance of this
Agreement and the consummation of the Transactions, including, without
limitation, all fees and expenses of their respective Agents.
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(b) The Company agrees that if this Agreement shall be terminated
pursuant to:
(i) Section 7.1(d) and either (A) an Alternate Transaction was
publicly announced prior to such termination or (B) an Alternate
Transaction is consummated, or a definitive agreement with respect
thereto is executed, by the Company or any of its Affiliates following
such termination and on or prior to the 12 month anniversary of such
termination; or
(ii) Section 7.1(e) or 7.1(f);
then the Company shall pay to ISN $5,545,809 (the "TERMINATION FEE") and
shall reimburse each of ISN, Parent and its Affiliates for all of their
respective costs and expenses incurred in connection with the preparation,
execution and performance of this Agreement, the other Transaction Documents
and the Transactions, including all fees and expenses of each of their
respective Agents.
(c) Any payment required to be made pursuant to Section 8.3(b) shall be
made concurrently with the termination of this Agreement and shall be made
by wire transfer of immediately available funds to an account designated by
ISN, except that any payment to be made solely as the result of
Section 8.3(b)(i)(B) shall be made upon the earlier to occur of the
consummation of the Alternate Transaction or the execution of the definitive
agreement providing for the Alternate Transaction. The Company acknowledges
that the agreements contained in Section 8.3 are an integral part of the
transaction contemplated by this Agreement, and that, without these
agreements, ISN and Parent would not have entered into this Agreement.
Accordingly, if the Company fails to pay promptly any amounts due pursuant
to Section 8.3 and, in order to obtain such payment, ISN or Parent commences
a suit which results in a judgment against the Company for the fee or
expense reimbursement set forth in this Section 8.3, the Company shall pay
to ISN and Parent their respective costs and expenses (including attorneys'
fees) in connection with such suit, together with interest from the date of
termination of this Agreement on the amounts so owed at the prime rate of
Chase Manhattan Bank in effect from time to time during such period plus
four percent (4%).
Section 8.4 NEWCO COMMON STOCK. If the Nasdaq Stock Market, Inc. ("NSMI")
does not approve the listing of Newco Class A Common Stock, or if the NSMI or
SEC commence or threaten to commence an action seeking to delist the Company
Common Stock, in each case, as a result of the dual class structure of Newco
Common Stock contemplated hereby, all reference to Newco Class A Common Stock,
Newco Class B Common Stock and Newco Common Stock contained herein and terms of
similar meaning contained in the Transaction Documents or in any Exhibit hereto,
including without limitation Exhibit D, shall automatically be deemed to mean
one class of common stock, par value $.01 per share, of Newco. In such event,
(x) the parties shall negotiate expeditiously and agree in good faith to such
changes to this Agreement and the Transaction Documents and Exhibits hereto to
enable the parties to achieve the benefits of the dual class structure
contemplated hereby, without any material harm to the other benefits intended to
be provided hereunder to the parties hereto and (y) if alternative arrangements
satisfactory to Parent are not effected prior to or at the Closing, the parties
shall amend Exhibit D to provide that if Newco issues any shares of Newco Common
Stock or securities convertible into shares of Newco Common Stock (an
"ISSUANCE"), Newco shall concurrently offer Parent the right to purchase an
amount of Newco Common Stock at its then fair market value to enable Parent to
maintain an equity ownership position in Newco equal to the equity ownership
position prior to the completion of such issuance (taking into account such
issuance and any exercise by Parent of its rights under this clause (y));
PROVIDED, that the right contained in this clause (y) will not be made available
to Parent upon the issuance of employee stock options approved by the Board of
Directors of Newco or any committee thereof or the issuance of Newco Common
Stock upon exercise of such employee stock options.
Section 8.5 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by either of the parties
hereto (whether by operation of law or otherwise)
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without the prior written consent of the other parties; PROVIDED, that, from and
after the Effective Time, Parent shall be permitted to assign its rights under
Section 1.8 or 2.4 to USA or any of its controlled Affiliates. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties and their respective successors and permitted
assigns.
Section 8.6 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made in this Agreement or in any instrument
delivered pursuant to this Agreement shall not survive Closing.
Section 8.7 HEADINGS. The headings in this Agreement are for reference
only, and shall not affect the interpretation of this Agreement.
Section 8.8 INTERPRETATION. The parties acknowledge and agree that:
(a) each party and its counsel reviewed and negotiated the terms and provisions
of this Agreement and have contributed to its revision; (b) the rule of
construction to the effect that any ambiguities are resolved against the
drafting party shall not be employed in the interpretation of this Agreement;
and (c) the terms and provisions of this Agreement shall be construed fairly as
to all parties hereto, regardless of which party was generally responsible for
the preparation of this Agreement.
Section 8.9 SEVERABILITY OF PROVISIONS. The provisions of this Agreement
shall be deemed severable and the invalidity or unenforceability of any
provision shall not affect the validity or enforceability or the other
provisions of this Agreement. If any provision of this Agreement, or the
application of that provision to any person or any circumstance, is invalid or
unenforceable, 1. a suitable and equitable provision shall be substituted for
that provision in order to carry out, so far as may be valid and enforceable,
the intent and purpose of the invalid or unenforceable provision and 2. the
remainder of this Agreement and the application of the provision to other
persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforceability affect the
validity or enforceability of the provision, or the application of that
provision, in any other jurisdiction.
Section 8.10 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This
Agreement (including the documents and the instruments referred to herein) and
the Confidentiality Agreement, dated October 4, 1999 between the Company and
Parent (the "CONFIDENTIALITY AGREEMENT") (a) constitute the entire agreement,
and supersede all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof and (b) other than
Sections 1.8, 2.4(b), 2.4(d), 4.2(d), 4.2(e) and 5.2 of this Agreement, are not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder. The Confidentiality Agreement shall survive execution of
this Agreement and shall terminate upon the earlier of expiration of such
agreement by its terms and the Effective Time.
Section 8.11 GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be performed entirely within such state.
Section 8.12 SUBMISSION TO JURISDICTION; WAIVERS. Each of the parties
hereto hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Transaction Documents to
which it is a party, or for recognition and enforcement of any judgement in
respect thereof, to the non-exclusive general jurisdiction of the Courts of
the State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in
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any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or proceeding may
be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, in accordance with
Section 8.1; and
(d) agrees that nothing herein shall affect the right to effect service
of process in any other manner permitted by law or shall limit the right to
sue in any other jurisdiction.
SECTION 8.13 WAIVERS OF JURY TRIAL. THE PARTIES HERETO HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
Section 8.14 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company, ISN, and Parent have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first above written.
STYLECLICK.COM INC.
By:
--------------------------------------
Name:
Title:
INTERNET SHOPPING NETWORK LLC
By:
--------------------------------------
Name:
Title:
USANI SUB LLC
By:
--------------------------------------
Name:
Title:
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ANNEX B
January 24, 2000
Confidential
Board of Directors
Styleclick.com, Inc.
3861 Sepulveda Blvd.
Culver City, CA 90230
Ladies and Gentlemen:
Styleclick.com, Inc. (the "Company") and USA Networks Interactive Sub LLC
(the "Purchaser"), an affiliate of USA Networks, Inc. (the "Acquiring Company"),
propose to enter into an agreement and plan of merger (the "Agreement") pursuant
to which a wholly-owned subsidiary ("Merger Sub") of a newly formed company
("Newco") will merge with and into the Company (the "Merger"). In connection
with the Merger, the Purchaser will contribute to Newco all of the outstanding
limited liability company interests of Internet Shopping Network LLC ("ISN") and
$40 million in cash in exchange for Class B Common Stock of Newco. Upon the
consummation of the Merger, each share of the Company's Common Stock will be
converted into the right to receive one share of Newco Class A Common Stock (the
"Proposed Consideration") such that the Acquiring Company and its affiliates
will own approximately 75% of Newco's issued and outstanding Class A Common
Stock and Class B Common Stock (collectively "Newco Common Stock") and the
Company's former stockholders will own approximately 25% of Newco Common Stock
immediately after the Merger. Each share of Class A Common Stock is entitled to
one vote per share and each share of Class B Common Stock is entitled to fifteen
votes per share. Additionally, (i) concurrent with the execution of the
Agreement, an affiliate of the Acquiring Company will provide a collateralized
term loan facility in the principal amount of $10 million to the Company in
exchange for a warrant to purchase shares of the Company's Common Stock in
accordance with the terms set forth in the credit agreement, the collateral
agreement and the bridge loan warrant agreement between the Company and the
Acquiring Company (collectively the "Credit Agreements"), (ii) at or prior to
the closing of the Merger, the Acquiring Company will enter into a definitive
media commitment agreement with ISN pursuant to which the Acquiring Company will
commit to provide $10 million of media promotion over a period of three years
from the closing and, in exchange, Newco will grant the Acquiring Company
certain warrants to purchase Class B Common Stock of Newco, in accordance with
the terms set forth in the media warrant agreement (the "Media Warrant
Agreement").
Simultaneous with the execution of the Agreement, (i) Newco, the Purchaser,
the Acquiring Company, the Company and certain stockholders of the Company will
enter into a stockholders agreement (the "Stockholders Agreement") providing
for, among other things, certain transfer restrictions on the common stock of
Newco received by the parties as a result of the transaction contemplated by the
Agreement, (ii) the Purchaser and certain holders of equity securities of the
Company holding in the aggregate approximately 37% of the Company's Common Stock
will enter into one or more voting and first offer agreements (collectively the
"Voting Agreements") pursuant to which such holders agree, among other things,
to vote their shares of Company Common Stock in favor of the Merger and to waive
certain contractual and other rights in connection with the transaction
contemplated by the Agreement, (iii) the Purchaser and certain holders of
warrants of the Company, including PaineWebber
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Incorporated, will enter into waiver agreements (the "Waiver Agreements")
pursuant to which each such warrant holder agrees to waive certain contractual
and other rights in connection with the transactions contemplated by the
Agreement, and (iv) the Company and the Purchaser will enter into an option
agreement (the "Option Agreement") pursuant to which the Company will grant the
Acquiring Company an option to acquire shares of Company Common Stock, which, if
issued, would represent approximately 19.9% of the Company's total outstanding
shares.
You have asked us whether or not, in our opinion, the Proposed Consideration
to be received by the stockholders of the Company pursuant to the Merger is fair
to such stockholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed the Company's Annual Reports, Forms 10-K and the related
financial information for the two fiscal years ended December 31, 1998,
and the Company's Form 10-Q and the related unaudited financial
information for the nine months ended September 30, 1999;
(2) reviewed certain information, including financial forecasts and
historical financial statements, relating to the business and prospects
of the Company and ISN, furnished to us by the Company and ISN;
(3) conducted discussions with members of senior management of the Company
and ISN concerning their respective businesses and prospects;
(4) reviewed the historical market prices and trading activity for the
Common Stock of the Company and compared them with that of certain
publicly traded companies which we deemed to be relevant;
(5) compared the financial position and results of operations of the Company
and ISN with that of certain companies which we deemed relevant;
(6) compared the proposed financial terms of the transactions contemplated
by the Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(7) reviewed a draft of the Agreement dated January 24, 2000;
(8) reviewed a draft of the Stockholders Agreement dated January 21, 2000;
(9) reviewed drafts of the Voting Agreements dated January 22, 2000;
(10) reviewed drafts of the Waiver Agreements dated January 24, 2000;
(11) reviewed a draft of the Credit Agreement dated January 21, 2000;
(12) reviewed a draft of the Option Agreement dated January 19, 2000;
(13) reviewed a draft of the Media Warrant Agreement dated January 21, 2000;
and
(14) reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market
and monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness of
all information publicly available, and all information supplied or otherwise
communicated or made available to us by the Company and ISN, and we have not
assumed any responsibility to independently verify such information. With
respect to the financial forecasts examined by us, we have assumed that they
were reasonably prepared on bases reflecting the best currently available
estimates and good faith judgments
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of the management of the Company and ISN, respectively, as to the future
performance of the Company and ISN, respectively. We have also relied upon
assurances of the management of the Company and ISN, respectively, that they are
unaware of any facts that would make the information or financial forecasts
provided to us incomplete or misleading. We have not been engaged to make, and
have not made, any independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Company or ISN nor have we been
furnished with any such evaluations or appraisals. We have also assumed with
your consent, that (i) the Merger will be accounted for under the purchase
method of accounting, (ii) the Merger and the contribution of the LLC interests
of ISN to Newco will be tax-free transactions and (iii) any material liabilities
(contingent or otherwise, known or unknown) of the Company and ISN are as set
forth in the consolidated financial statements of the Company and ISN,
respectively. No opinion is expressed herein as to the price at which the
securities to be issued in the Merger to the stockholders of the Company may
trade at any time. Our opinion is based on economic, monetary and market
conditions existing on the date hereof.
Our opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any stockholder of the Company as to how any
such stockholder should vote on the Merger. This opinion does not address the
relative merits of the Merger and any other transactions or business strategies
discussed by the Board of Directors of the Company as alternatives to the Merger
or the decision of the Board of Directors of the Company to proceed with the
Merger. We were not requested to, and did not, solicit third party indications
of interest in acquiring all or any portion of the Company.
In the ordinary course of business, PaineWebber Incorporated may trade in
the securities of the Company and the Acquiring Company for our own account and
for the accounts of our customers and, accordingly, may at any time hold long or
short positions in such securities.
PaineWebber Incorporated will be receiving a fee in connection with the
rendering of this opinion. In the past, PaineWebber Incorporated and its
affiliates have provided investment banking and other financial services to the
Company and have received fees for rendering these services. PaineWebber
Incorporated currently holds 7,768 warrants to purchase Common Stock of the
Company and, as noted above, will enter into the Waiver Agreement in connection
with the Merger.
On the basis of, and subject to the foregoing, we are of the opinion that
the Proposed Consideration to be received by the stockholders of the Company
pursuant to the Merger, taken as a whole, is fair to such stockholders from a
financial point of view.
This opinion has been prepared for the information of the Board of Directors
of the Company in connection with the Merger and shall not be reproduced,
summarized, described or referred to, provided to any person or otherwise made
public or used for any other purpose without the prior written consent of
PaineWebber Incorporated, provided, however, that this letter may be reproduced
in full in the Proxy Statement/Prospectus related to the Merger.
Very truly yours,
PAINEWEBBER INCORPORATED
B-3
<PAGE>
March 21, 2000
Board of Directors
Styleclick.com Inc.
3861 Sepulveda Blvd.
Culver City, CA 90230
Ladies and Gentlemen:
We understand that Styleclick.com Inc. (the "Company") proposes to enter
into an Agreement and Plan of Merger (the "Merger Agreement") whereby a
wholly-owned subsidiary of a newly-formed company ("Newco") organized by USA
Networks, Inc. ("USA Networks") will merge with and into the Company, and
another wholly-owned subsidiary of Newco will merge with and into Internet
Shopping Network LLC ("ISN"), an indirect wholly-owned subsidiary of USA
Networks (the "Merger Transaction"). ISN will have $40 million in cash and no
material liabilities upon consummation of the Merger Transaction. Upon the
consummation of the Merger Transaction each share of the Company's common stock
will be converted into the right to receive one share of Newco common stock, and
the Company's former shareholders (including option holders and warrant holders)
and USA Networks and its affiliates will own 24.8% and 75.2%, respectively, of
Newco's common stock on a fully-diluted basis including the Media Warrants and
Bridge Warrants, each as defined below. We understand that Newco will include
the businesses of the Company and ISN, including FirstAuction.com and
FirstJewelry.com, plus $40 million in cash contributed by Parent. In addition,
we understand that (i) concurrent with the execution and delivery of the Merger
Agreement, USA Networks or an affiliate will make a $10 million loan available
to the Company in accordance with the terms set forth in the Credit Agreement
(the "Credit Agreement") for which it will receive certain warrants to purchase
additional common stock of Newco (the "Bridge Warrants"), (ii) prior to closing,
USA Networks will enter in a definitive agreement with ISN pursuant to which USA
Networks will commit to provide $10 million of advertising time on the media
properties of USA Networks at fair market rates over a period ending three years
from closing, and (iii) USA Networks will receive certain warrants (the "Media
Warrants") to purchase additional common stock of Newco (these transactions,
including the Merger Transaction, are collectively referred to herein as the
"Proposed Transactions").
You have asked us to render our opinion as to whether the consideration to
be received by the holders of the Common Stock of the Company in the Proposed
Transactions is fair, from a financial point of view, to such holders. We have
acted as financial advisor to the Board of Directors of the Company in
connection with the Proposed Transactions and will receive a customary fee for
our services. We have also performed other investment banking services for the
Company in the past 12 months for which we received customary fees. In addition,
in the ordinary course of our business, we may trade or otherwise effect
transactions in the securities of the Company for our own account and for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities.
In conducting our analysis and arriving at our opinion as expressed herein,
we have reviewed and analyzed, among other things, the following:
(i) the Merger Agreement, including the exhibits thereto, and the Credit
Agreement, including the exhibits thereto (both dated January 24, 2000) and
certain other documents relating to the Proposed Transactions;
(ii) the Company's Annual Reports on Form 10-K for each of the fiscal
years in the two year period ended December 31, 1998, the Company's
Quarterly Reports on Form 10-Q for the
B-4
<PAGE>
Board of Directors
Styleclick.com Inc.
Page 2
quarters ended March 31, June 30 and September 30, 1998 and 1999, and the
Company's Form 8-K's dated March 26, 1999, April 9, 1999, April 14, 1999,
April 20, 1999, July 2, 1999, and July 19, 1999;
(iii) certain other publicly available information concerning the
Company and the trading market for the Common Stock;
(iv) certain internal information and other data relating to the
Company, its business and prospects, including financial forecasts and
projections, provided to us by management of the Company;
(v) certain non-public information and other data relating to the
business and prospects of ISN, including certain historical financial
statements and financial projections, provided to us by management of ISN;
(vi) certain publicly available financial data, stock market performance
data and valuation parameters of companies which we deemed generally
comparable to the Company, to the businesses of ISN, and to the combined
company on a pro-forma basis giving effect to the Proposed Transactions; and
(vii) the financial terms of certain recent business combinations
involving companies which we believe to be relevant.
We have also met with certain officers and employees of the Company and ISN
concerning their businesses and operations, assets, present conditions and
prospects and undertook such other studies, analyses and investigations as we
deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us and have not
attempted independently to verify such information, nor do we assume any
responsibility to do so. With respect to the projected financial results
provided to us, we have assumed that they have been reasonably prepared based on
the best current estimates and judgment of the senior management of the Company
and ISN as to the expected future financial condition and results of operations
of the Company and ISN. We also assume that the business plan of Newco, as
presented to us by the management of the Company and ISN, is viable. We have
visited but have not conducted a physical inspection of the properties and
facilities of the Company or ISN, nor have we made or obtained any independent
evaluation or appraisal of such properties, facilities or liabilities. We have
also taken into account our assessment of general economic, market and financial
conditions and our experience in similar transactions, as well as our experience
in the valuation of securities and businesses in general. Our opinion
necessarily is based upon economic, market, financial and other conditions as
they exist and can be evaluated on the date hereof and we assume no
responsibility to update or revise our opinion based upon events or
circumstances occurring after the date hereof.
This letter and the opinion expressed herein are for the use of the Board of
Directors of the Company. This opinion does not address the Company's underlying
business decision to approve the Proposed Transactions or constitute a
recommendation to the shareholders of the Company as to how such shareholders
should vote or as to any other action such shareholders should take regarding
the Proposed Transactions. Furthermore, we recognize that the market prices for
Internet related companies such as the Company (and, on a pro forma basis,
Newco) have been the subject of significant speculation and movement in recent
months and this opinion is not intended to predict or
B-5
<PAGE>
Board of Directors
Styleclick.com Inc.
Page 3
otherwise guarantee the trading price of the Company or Newco following the
announcement or consummation of the Proposed Transactions. We were requested to
prepare this opinion in connection with the Proposed Transactions and were
directed not to, and did not, seek or pursue alternative transactions to the
Proposed Transactions, including the possible sale of the Company as a whole.
This opinion may not be reproduced, summarized, excerpted from or otherwise
publicly referred to or disclosed in any manner without our prior written
consent except the Company may include this opinion in its entirety in any proxy
statement or information statement relating to the Proposed Transactions sent to
the Company's shareholders.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that as of January 24, 2000, the date which we completed our review, the
consideration to be received by the holders of the Common Stock of the Company
in the Proposed Transactions is fair, from a financial point of view, to such
holders. This letter replaces and supercedes our prior letter dated January 24,
2000.
Very truly yours,
ING BARINGS LLC
B-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a corporation
to indemnify its directors, officers, employees and agents against certain
liabilities they may incur in such capacities, including liabilities under the
Securities Act, provided they act in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation. The
registrant's Certificate of Incorporation and Bylaws require the registrant to
indemnify its officers and directors to the full extent permitted by Delaware
law.
Section 102 of the Delaware General Corporation Law authorizes a corporation
to limit or eliminate its directors' liability to the corporation or its
stockholders for monetary damages for breaches of fiduciary duties, other than
for (i) breaches of the duty of loyalty, (ii) acts or omissions not in bad faith
that involve intentional misconduct or knowing violations of law,
(iii) unlawful payments of dividends, stock purchases or redemptions, or
(iv) transactions from which a director derives an improper personal benefit.
The registrant's Certificate of Incorporation contains provisions limiting the
liability of the directors to the registrant and to its stockholders to the full
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law authorizes a corporation
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation against any liability
asserted against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such. The registrant's Certificate of
Incorporation and Bylaws provide that the registrant may, to the full extent
permitted by law, purchase and maintain insurance on behalf of any director,
officer, employee or agent of the registrant against any liability that may be
asserted against him or her and the registrant currently maintains such
insurance. The registrant will obtain liability insurance covering its directors
and officers for claims asserted against them or incurred by them in such
capacity, including claims brought under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The Exhibit Index is hereby incorporated by reference.
(b) The financial statement schedules are included as Exhibits 99.3 and 99.4
and are incorporated herein by reference.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of
II-1
<PAGE>
the registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item4 of this Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on May 12, 2000.
<TABLE>
<S> <C> <C>
STYLECLICK, INC.
By: /s/ DEIRDRE STANLEY
-----------------------------------------
Name: Deirdre Stanley
Title: Vice President
</TABLE>
Pursuant to the requirements of the Securities Act, this amendment to the
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Vice Chairman
- ------------------------------ (Principal Executive May 12, 2000
Bill Lane Officer)
Executive Vice President,
* Chief Operating Officer
- ------------------------------ (Principal Financial May 12, 2000
Edward Zinser Officer, Principal
Accounting Officer)
*
- ------------------------------ Director May 12, 2000
Dara Khosrowshahi
*By:/s/ DEIRDRE STANLEY
- ------------------------------
Name: Deirdre Stanley
Title: Attorney-in-Fact
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------------------- -----------
<C> <S> <C>
2.1*** Amended and Restated Agreement and Plan of Merger (attached
as Annex A to this proxy statement/prospectus and
incorporated herein by reference)
2.2** Form of Agreement of Merger of Merger Sub and Styleclick.com
Inc.
2.3** Form of Certificate of Merger Merging ISN Merger Sub LLC
Into Internet Shopping Network LLC
3.1** Certificate of Incorporation of Styleclick, Inc.
3.2** Form of Bylaws of Styleclick, Inc.
4.1* Specimen class A common stock certificate
4.2** Form of Stockholders Agreement among Styleclick, Inc., USANI
Sub LLC, USA Networks, Inc., Styleclick.com Inc. and the
stockholders named therein
4.3** Form of Registration Rights Agreement among USANI Sub LLC
and Styleclick, Inc.
5.1*** Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
8.1** Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
8.2** Opinion of Coudert Brothers
9.1** Voting and First Offer Agreement between Maurizio Vecchione
and USANi Sub LLC
9.2** Voting and First Offer Agreement between Intel Corporation
and USANi Sub LLC
10.1** Form of Media Warrant Agreement between Styleclick, Inc. and
USA Networks, Inc.
10.2** Form of License Agreement by and among Styleclick, Inc.,
Styleclick.com, Inc., ISN LLC and USA Networks, Inc.
10.3** Option Agreement by and between USANI Sub LLC and
Styleclick.com Inc.
10.4** Waiver Agreements between Castle Creek Technology Partners,
LLC, Styleclick.com Inc. and USANi Sub LLC
10.5** Credit Agreement between Styleclick.com Inc. and USA
Networks, Inc.
10.6** Bridge Loan Warrant Agreement between Styleclick.com Inc.
and USA Networks, Inc.
10.7** Warrant to purchase 328,084 Shares of common stock of
Styleclick.com Inc. issued to USA Networks, Inc.
10.8** Collateral Agreement between Styleclick.com Inc. and USA
Networks, Inc.
10.9** Promissory Note in a principal amount not to exceed
$10 million Issued by Styleclick.com Inc. to USA Networks,
Inc.
21.1** Subsidiaries of registrant
23.1*** Consent of Ernst & Young LLP
23.2*** Consent of Ernst & Young LLP
23.3*** Consent of Singer Lewak Greenbaum and Goldstein LLP
23.4*** Consent of Ernst & Young LLP
23.5** Consent of Coudert Brothers
23.6** Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibit 5.1)
24.1** Powers of Attorney (contained on signature page)
27.1** Financial Data Schedule--ISN LLC (for SEC use only)
27.2** Financial Data Schedule--Styleclick.com Inc. (for SEC use
only)
99.1*** Fairness Opinion of PaineWebber Incorporated (attached as
Annex B to this proxy statement/prospectus and
incorporated herein by reference)
99.2*** Fairness Opinion of ING Barings LLC (attached as Annex B to
this proxy statement/ prospectus and incorporated herein
by reference)
99.3** Valuation and qualifying accounts schedules
99.4** Valuation and qualifying accounts schedules
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
*** Filed herewith.
<PAGE>
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 Avenue of the Americas
New York, New York 10019-6064
(212) 373-3000
May 11, 2000
Styleclick, Inc.
152 West 57th Street
New York, New York 10019
Styleclick, Inc.
Registration Statement on Form S-4
----------------------------------
Ladies and Gentlemen:
In connection with the above-captioned Registration Statement
on Form S-4 (the "Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"),
and the rules and regulations under the Act (the "Rules"), we have been
requested by Styleclick, Inc., a Delaware corporation (the "Company"), to
furnish our opinion as to the legality of up to 7,980,000 shares of the
Company's class A common stock, par value $0.01 per share (the "Class A
Shares"), registered for sale under the Registration Statement.
<PAGE>
2
In connection with this opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of the following
documents (collectively, the "Documents"): (i) the Registration Statement, (ii)
the Company's Certificate of Incorporation and Bylaws, and (iii) records of
certain of the Company's corporate proceedings. In addition, we have made those
other examinations of law and fact as we deemed relevant and necessary in order
to form a basis for our opinions.
In our examination of the Documents, we have assumed, without
independent investigation, the genuineness of all signatures, the enforceability
of the Documents against each party to them, the authenticity of all documents
submitted to us as originals, the conformity to the original documents of all
documents submitted to us as certified, photostatic, reproduced or conformed
copies of valid existing agreements or other documents and the authenticity of
all the latter documents. As to certain matters of fact, we have relied on
representations, statements or certificates of officers of the Company.
Based on the foregoing, and subject to the stated assumptions,
we are of the opinion that (i) the Class A Shares have been duly authorized for
issuance and (ii) the Class A Shares, when issued and delivered and paid for as
contemplated in the Documents, will be validly issued, fully paid and
non-assessable.
Our opinions expressed above are limited to the Delaware
General Corporation Law (together with the applicable provisions of the
Constitution of the State of Delaware), the Federal laws of the United States
of America, and the judicial decisions interpreting the same. Our opinion is
rendered
<PAGE>
3
only with respect to the laws, and the rules, regulations, orders and reported
decisions under them, that are currently in effect.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the captions
"Legal Matters" and "Material Federal Income Tax Consequences" in the prospectus
included in the Registration Statement. In giving this consent, we do not agree
or admit that we come within the category of persons whose consent is required
by the Act or the Rules.
Very truly yours,
/s/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated March 22, 2000, with respect
to the financial statement of Styleclick, Inc. as of March 22, 2000 in Amendment
No. 1 to the Registration Statement on Form S-4 (No. 333-33194) and related
Proxy Statement/Prospectus of Styleclick, Inc. for the registration of 7,980,000
shares of its common stock, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
New York, New York
May 11, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and in the
headnote under "Old Styleclick Selected Historical Financial Data" in Amendment
No. 1 to the Registration Statement on Form S-4 (No. 333-33194) and related
Proxy Statement/Prospectus of Styleclick, Inc. for the registration of 7,980,000
shares of its common stock and to the inclusion of our report dated
February 21, 2000, with respect to the financial statements and schedule of
Styleclick.com Inc. for the year ended December 31, 1999, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Los Angeles, California
May 11, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of Styleclick,
Inc. on Form S-4 (Amendment No. 1) of our report, dated March 16, 1999 (except
for Note 11, as to which the date is May 19, 1999), relating to the financial
statements of Styleclick.com Inc. (formerly ModaCAD, Inc.) and the financial
statements schedule in Exhibit 99.4. We also consent to the reference to our
Firm under the caption "Experts"and in the headnote under "Old Styleclick
Selected Historical Financial Data" in the prospectus, which is part of this
Registration Statement.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
- -------------------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 11, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
headnote under "Internet Shopping Network Selected Historical Financial Data" in
Amendment No. 1 to the Registration Statement (No. 333-33194) and related Proxy
Statement/Prospectus of Styleclick, Inc. for the registration of 7,980,000
shares of its common stock and to the inclusion of our report dated March 2,
2000, with respect to the financial statements and schedule of Internet Shopping
Network LLC as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
New York, New York
May 11, 2000
