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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 333-33194
STYLECLICK, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-4106745
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3861 Sepulveda Blvd., Culver City, CA 90230
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(Address of principal executive offices) (Zip Code)
(310) 751-2100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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The number of outstanding shares of the registrant's Common Stock as of August
14, 2000, was:
Class A common stock 7,912,568
Class B common stock 23,039,706
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30,952,274
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Styleclick, Inc.
Condensed Consolidated Balance Sheet
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 8 $ 9
Accounts receivable, net of allowance
of $142 and $42, respectively 176 679
Inventory 9,783 11,319
Prepaid assets 500 913
------------ ------------
Total current assets 10,467 12,920
Property and equipment, net of
accumulated depreciation of $8,902
and $6,020, respectively 10,329 15,121
Other assets 80 80
------------ ------------
Total assets $ 20,876 $ 28,121
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,748 $ 2,876
Accrued liabilities 6,088 8,736
Due to USANi LLC - 329
------------ ------------
Total current liabilities 7,836 11,941
Stockholders' equity:
Preferred stock--$0.01 par value;
authorized 25,000,000 shares, none
issued and outstanding - -
Class A common stock--$0.01 par value,
authorized 150,000,000 shares, 184,497
issued and outstanding, respectively 2 2
Class B common stock--$0.01 par value,
authorized 112,500,000 shares, 20,346,103
issued and outstanding, respectively 203 203
Additional paid in capital 119,292 103,213
Accumulated deficit (106,457) (87,238)
------------ ------------
Total stockholders' equity 13,040 16,180
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Total liabilities and stockholders' equity $ 20,876 $ 28,121
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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Styleclick, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Net revenues $ 4,785 $ 6,544 $ 10,326 $ 12,877
Cost of sales 5,250 6,812 10,588 12,576
--------- --------- --------- ---------
Gross profit (loss) (465) (268) (262) 301
Operating costs and expenses:
Selling and marketing 2,107 3,493 3,858 5,474
Product development costs 1,140 1,445 2,048 2,961
General and administrative 3,999 6,014 7,910 9,584
Write-off of capitalized software 2,260 - 2,260 -
Depreciation and amortization 1,383 533 2,882 930
--------- --------- --------- ---------
Total operating costs and expenses 10,889 11,485 18,958 18,949
--------- --------- --------- ---------
Operating loss (11,354) (11,753) (19,220) (18,648)
Other income (expense), net 1 6 1 (2)
--------- --------- --------- ---------
Net loss $(11,353) $(11,747) $(19,219) $(18,650)
========= ========= ========= =========
Basic and diluted loss per share $ (0.55) $ (0.57) $ (0.94) $ (0.91)
========= ========= ========= =========
Basic and diluted weighted average
common share outstanding 20,460,110 20,460,110 20,460,110 20,460,110
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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Styleclick, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
(in thousands)
2000 1999
----------- -----------
<S> <C> <C>
Net loss $ (19,219) $ (18,650)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 2,882 930
Write-off of capitalized software costs 2,260 -
Changes in operating assets and liabilities:
Accounts receivable 503 435
Inventories 1,536 (1,889)
Accounts payable (1,128) 160
Accrued liabilities (2,648) 4,718
Other, net 413 (580)
----------- -----------
Net cash used in operating activities (15,401) (14,876)
Cash flow from investing activities
Capital expenditures (350) (6,508)
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Net cash used in investing activities (350) (6,508)
Cash flow from financing activities
Capital contributed by USANi LLC 15,750 21,385
----------- -----------
Net cash used in financing activities 15,750 21,385
Net increase (decrease) in cash and cash equivalents (1) 1
----------- -----------
Cash and cash equivalents at beginning of period 9 3
----------- -----------
Cash and cash equivalents at end of period $ 8 $ 4
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</TABLE>
Supplemental disclosure of non-cash transactions
During the first six months ended December 31, 2000 and 1999, the Company paid
no income taxes or interest.
The accompanying notes are an integral part of these financial statements.
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Styleclick, Inc.
Notes to Condensed Financial Statements
1. Organization and Basis of Presentation
Organization
The Company was incorporated in the State of Delaware on March 22, 2000 as a
subsidiary of USANi LLC, which is a subsidiary of USA Networks, Inc. ("USAi").
On July 27, 2000, USAi contributed Internet Shopping Network LLC ("ISN") to the
Company in conjunction with the acquisition of Styleclick.com, Inc. ("Old
Styleclick") by the Company. The contribution and acquisition was structured as
a merger of ISN and Old Styleclick with separate, wholly owned subsidiaries of
the Company. The contribution of ISN by USAi was accounted for in the
accompanying financial statements in a manner similar to the
pooling-of-interests for business combinations due to the common ownership of
the Company and ISN. Accordingly, the assets and liabilities were transferred to
the Company at USANi LLC's historical cost and the accompanying consolidated
balance sheets and statements of operations data reflect ISN's historical
balances and operations. On July 27, 2000, the Company completed its acquisition
of Styleclick.com, Inc. ("Old Styleclick"). See Note 2 for more information.
Weighted average basic and diluted shares outstanding and earnings per share
data is presented as if all shares issued to USAi and its subsidiaries in
consideration of the contribution of ISN were outstanding for all periods
presented.
Basis of Presentation
The interim Condensed Consolidated Financial Statements and Notes thereto of the
Company as of and for the three and six months ended June 30, 2000, and for the
three and six months ended June 30, 1999 do not reflect the Company's
acquisition of Old Styleclick on July 27, 2000 and reflect only the consolidated
historical financial position and results of operations of ISN. Such Financial
Statements and Notes thereto are unaudited and should be read in conjunction
with the audited Internet Shopping Network LLC Financial Statements and Notes
thereto for the twelve months ended December 31, 1999 presented in the Company's
Registration Statements on Form S-4.
In the opinion of the Company, all adjustments necessary for a fair presentation
of such Condensed Consolidated 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
Consolidated 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 Consolidated Financial Statements and Notes
thereto.
4
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Styleclick, Inc.
Notes to Condensed Financial Statements
2. Merger of Styleclick.com and ISN
On July 27, 2000, USAi and its subsidiaries contributed ISN to the Company,
which contribution was structured as a merger of ISN with a wholly owned
subsidiary of the Company. USAi received 0.601 shares of the Company's Class B
common stock, and the other ISN unitholders received 0.601 shares of the
Company's Class A common stock, for each ISN unit owned on that date. In
addition, USAi invested approximately $40 million in cash and will contribute
$10 million in dedicated media. Following approval of Old Styleclick's
shareholders, Old Styleclick was merged with the Company on July 27, 2000. Each
former Old Styleclick shareholder received one share of the Company's Class A
common stock for each Old Styleclick share owned on that date.
Holders of the Class A common stock are entitled to one vote per share and
holders of the Class B common stock are entitled to ten votes per share.
Subsequent to the acquisition of Old Styleclick, USAi and its subsidiaries
control approximately 96% of the outstanding total voting power and are
effectively able to control the outcome of nearly all matters submitted to vote
of the Company's shareholders.
Subsequent to the transactions, the Company owns and operates the combined
properties of Old Styleclick and ISN, which includes Old Styleclick's network of
branded e-commerce websites and ISN's First Auction.com and FirstJewelry.com
websites.
The acquisition of Old Styleclick will be accounted for as a purchase
transaction; accordingly the value of the net assets acquired will be based on
their fair market value. The excess of the acquisition cost over the net assets
acquired will preliminarily be allocated to goodwill. The results of operation
of Old Styleclick will be included in the results of operations of the Company
from the date of acquisition.
The following pro forma results of operations have been prepared to give effect
to the merger of ISN and Old Styleclick for the three and six months ended June
30, 2000 and 1999:
<TABLE>
<CAPTION>
3 months 6 months
ended June 30, ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 5,279 7,119 $ 12,071 $ 17,242
Net loss $(17,048) $(16,078) $ (30,856) $(23,966)
Basic and diluted earnings per share $ (0.60) $ (0.57) $ (1.08) $ (0.84)
</TABLE>
3. Advances from USANi
Prior to the acquisition of Old Styleclick, USANi LLC provided funds as needed
to ISN for operations. During the first six months of 2000, USANi LLC
contributed capital to ISN of $15.5 million to fund operations. In addition,
$0.3 million which was funded by USANi LLC in prior periods and reflected as a
liability was contributed by USANi LLC.
5
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those set forth below and elsewhere in this Form 10-Q.
General
Internet Shopping Network ("ISN") 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 July 27, 2000, ISN and Old Styleclick merged into the Company. Following the
merger, the Company owns and operates the combined properties of Old Styleclick
and ISN, which include ISN's FirstAuction.com, FirstJewelry.com and Old
Styleclick's network of branded e-commerce web sites.
The acquisition of Old Styleclick will be accounted for as a purchase
transaction; accordingly the value of the Old Styleclick net assets acquired
will be based on their fair market value. The excess of the acquisition cost
over the net assets acquired will preliminarily be allocated to goodwill. The
results of operations of Old Styleclick will be included in the results of
operations of the Company from the date of acquisition, July 27, 2000. The
Company's results of operations described in the following section do not
include Old Styleclick's results of operations.
Through Old Styleclick and ISN, the Company will sell merchandise directly to
consumers over the Internet and will develop and sell services that allow
companies to engage in electronic commerce over the Internet. For example, the
Company will develop and manage websites for its business clients and provide
its business clients with the technological platform to distribute products
through its syndication network. The Company will also provide merchandise
services, fulfill customer orders and supply customer services. The Company
expects that more than 75% of its revenue will initially come from the
businesses of ISN. However, this percentage is expected to decrease as revenue
from business services increases. 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, the Company may
decide to reduce the marketing costs associated with, shift the focus of,
dispose of or substantially reduce its interest in some or all of these
operations. Any such actions may cause a decrease in the Company's anticipated
revenue or net income.
The following analysis discusses only ISN's results of operations during the
mentioned periods.
Results of Operations
Comparison of Three Months Ended June 30, 2000 and 1999
Revenue and Gross Profit (Loss)
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For the three months ended June 30, 2000, net revenues decreased by $1.8
million, or 27%, compared to the three months ended June 30, 1999. The revenue
decrease resulted primarily from the absence of furniture sales in the 2000
period (which was eliminated in the second half of 1999), the absence during the
2000 period a free shipping promotion in the second quarter of 1999 that
resulted in increased revenues, and decreased advertising during the 2000 period
as compared to the 1999 period. Gross profit decreased by $0.2 million due
primarily to the $0.9 million inventory expense to reduce the value of the
inventory to be sold through alternative distribution channels, including
liquidation and retail outlets.
Operating Costs and Expenses
For the three months ended June 30, 2000, total operating costs and expenses of
$10.9 million decreased by $0.6 million or 5%. The decrease of $1.4 million in
selling and marketing reflected reduced advertising spending on the First
Auction site in anticipation of the re-launch planned for late 2000. General and
administrative expenses were $2 million below the second quarter of 1999 due to
reduced headcount and recruiting expenses. The Company recorded a one-time
write-off of capitalized software costs of $2.3 million, related to an
accounting software package and electronic data interchange software that
management determined in the second quarter of 2000 will not be implemented.
Note that the capitalized software products were not in use and have no
realizable value to Internet Shopping Network or Styleclick, Inc. Depreciation
and amortization expense is $0.9 million greater than the same quarter in the
prior year due to hardware, software and software development purchases made in
the second half of 1999, primarily for the launch of the First Jewelry website.
In addition to the $2.3 million write-off of capitalized software costs, $1
million related to restructuring costs incurred in the three months ended June
30, 2000 was also recorded as a one-time charge.
For the quarter ended June 30, 2000, net loss decreased by $0.1 million compared
to the quarter ended June 30, 1999 due to decreased operating expenses which
offset lower margins due to lower sales and the inventory write-off.
As a limited liability company, ISN 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.
In conjunction with the merger, the Company changed its status to a C
Corporation and consequently will be subject to tax as a C Corporation. On a pro
forma basis, the change in tax status has no significant impact on the results
of the Company's operations.
Comparison of Six Months Ended June 30, 2000 and 1999
Revenue and Gross Loss
For the six months ended June 30, 2000, net revenues decreased by $2.6 million,
or 20%, compared to the six months ended June 30, 1999. In the second half of
1999, the Company reduced computer, consumer electronic and furniture sales to
focus upon more profitable home and accessories categories. As a result, the
sales from the less profitable categories were not yet fully replaced in the
first half of 2000.
7
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Operating Costs and Expenses
For the six months ended June 30, 2000, total operating costs and expenses of
$19 million were consistent with the prior year. The decrease in selling and
marketing of $1.6 million was primarily due to reduced First Auction advertising
spending in the second quarter in anticipation of a re-launch in the fourth
quarter. Product development costs decreased by $0.9 million due to software
development for the First Jewelry website for the preliminary project stage
which were expensed in the first quarter of 1999. General and administrative
expenses were $1.7 million lower than the first six months of 1999 due to
reduced headcount, recruiting expenses and travel and entertainment. The
decreases were offset by the one-time write-off of capitalized software costs of
$2.3 million. Depreciation and amortization expense was $2.0 million higher than
the first six months of 1999 due to capital spending for hardware, software and
software development primarily related to the First Jewelry.com website. In
addition to the $2.3 million write-off of capitalized software costs, $1 million
related to restructuring costs incurred in the first six months of 2000 was also
recorded as a one-time charge.
For the six months ended June 30, 2000, net loss increased $0.6 million due to
lower sales, the write-off of inventory, and software development expenses,
partially offset by lower operating costs.
As a limited liability company, ISN 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.
In conjunction with the merger, the Company changed its status to a C
Corporation and consequently will be subject to tax as a C Corporation. On a pro
forma basis, the change in tax status has no significant impact on the results
of the Company's operations.
Liquidity and Capital Resources
Net cash used in operating activities was $15.4 million which primarily resulted
from the $19.2 million operating loss and the $3.8 million payments made by the
Company on its accounts payable and accrued liabilities since December 31, 1999.
Such operating loss and cash payments were offset by two noncash expense items:
depreciation and amortization ($2.9 million) and write-off of the Company's
capitalized software costs ($2.3 million). Additionally, cash used in investing
activities for capital expenditure was $350,000 during the first six months of
2000. Finally, USAi made capital contributions of $15.8 million in the first six
months of 2000 to fund operations and the capital expenditures.
On July 27, 2000, in connection with the merger of Old Styleclick and ISN, USAi
has invested $40 million in cash and will contribute $10 million in dedicated
media. Further, the Company repaid to USAi approximately $10 million, which was
previously advanced to Old Styleclick under a bridge loan. The receipt of $40
million and the repayment of the USAi bridge loan were recorded subsequent to
June 30, 2000 and were not included in the Company's condensed consolidated
financial statements presented under "Item 1. Financial Statements."
The Company's management anticipates that the combined cash on hand and media
value should be sufficient to fund the Company's operating activities through
the first quarter of 2001. However, the Company does not anticipate that it will
be profitable nor generate positive cash flow through the first quarter of 2001.
Consequently, the Company believes that it will be necessary to obtain
additional capital prior to April 2001. The Company'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. Should the
Company 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. The Company's management
believes that taking such actions would seriously impair the long-term viability
and value of the Company.
8
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Forward-Looking Information
Certain statements in this Section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect the
Company's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "believe," "expect," "anticipate," "intend," and
"project" and similar words or expressions are intended to identify
forward-looking statements. These statements speak only as of the date of this
report. The statements are based on current expectations, are inherently
uncertain, are subject to risks, and should be reviewed with caution. Actual
results and experience may differ materially from the forward-looking statements
as a result of many factors, including changes in economic conditions in the
markets served by the Company, increasing competition, fluctuations in raw
materials and energy prices, and other unanticipated events and conditions. It
is not possible to foresee or identify all such factors. The Company makes no
commitment to update any forward-looking statement or to disclose any facts,
events, or circumstances after the date hereof that may affect the accuracy of
any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
There have been no changes in reported market risks since the
Company's filing on Form S-4.
9
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In February 1999, Internet Shopping Network LLC ("ISN") filed a demand
for arbitration against former ISN President Kirk Loevner under the
terms of the arbitration provision in his employment agreement. In
response, Loevner filed a complaint against ISN 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 ISN ceased in August 1998. Mr. Loevner
alleges that ISN 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 ISN'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 the ordinary course of business, ISN 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 ISN.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Styleclick, Inc.
Date: August 14, 2000 By: /s/ MAURIZIO VECCHIONE
-----------------------------
Maurizio Vecchione
Chief Executive Officer
/s/ BARRY HALL
-----------------------------
Barry Hall
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
27.1 Financial Data Schedule.1
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1 This exhibit is being filed electronically in the electronic format specified
by EDGAR.
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