<PAGE>
As filed with the Securities and Exchange Commission on April 21, 1999
Registration No. 333-____
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
____________________________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________________________________
MODACAD, INC.
(Exact name of registrant)
California 7372 95-4145930
(State or jurisdiction Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number Identification
organization) Number)
3861 Sepulveda Blvd.
Culver City, California 90230
(310) 751-2100
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
____________________________________________
JOYCE FREEDMAN
Chief Executive Officer
ModaCAD, Inc.
3861 Sepulveda Blvd.
Culver City, California 90230
(310) 751-2100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
____________________________________________
Copies to:
JOHN A. ST. CLAIR, ESQ.
SYLVIA K. BURKS, ESQ.
TOM W. ROTHENBUCHER, ESQ.
Coudert Brothers
1055 West Seventh Street, 20th Floor
Los Angeles, California 90017
(213) 688-9088
____________________________________________
Approximate date of proposed sale to the public:
From time to time after the effective date of this Registration Statement
<PAGE>
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. o
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. x
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering.o
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
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. o
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.o
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
to be Offering Price Offering Registration
Registered(1) per Security Price Fee
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 1,232,045(2) $12.19 $15,018,629 $4,176
Common Stock 159,326(3) $12.19 $1,942,184 $540
Common Stock 271,889(4) $13.72 $3,730,317 $1,037
Common Stock 1,026,702(5) $13.18 $13,531,932 $3,762
TOTAL $34,223,062 $9,515
================================================================================
</TABLE>
(1) In the event of a stock split, stock dividend, or similar transaction
involving common stock of the Company, in order to prevent dilution, the
number of shares registered shall be automatically increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act.
(2) 776,827 of such shares of common stock were sold and issued in April 1999
to four investors in a private placement (the " Investor Transaction"), and
(b) 455,218 of such shares were sold to Intel Corporation pursuant to an
agreement with Intel Corporation (the "Intel Transaction"). Pursuant to
Rule 457(c), the registration fee is based on the average of the high and
low prices for the Company's common stock as reported on the Nasdaq
National Market on April 19, 1999.
(3) Such shares of common stock are issuable upon exercise of the warrants to
purchase 159,326 shares of common stock which were previously issued, along
with warrants to purchase an additional 379,348 shares of common stock, to
Intel (collectively the "Intel Warrants") in connection with the Intel
Transaction. Pursuant to Rule 457(g), the registration fee for such
securities is based on the average of the high and low prices for the
Company's common stock as reported on the Nasdaq National Market on April
19, 1999.
(4) Such shares of common stock are issuable upon exercise of the warrants to
purchase 271,889 shares of common stock which were previously issued, along
with warrants to purchase an additional 647,354 shares of common stock
(collectively, the "Investor Warrants'" to the Investors in connection with
the Investor Transaction. Pursuant to Rule 457(g), the registration fee for
such securities has been calculated based upon the exercise price of the
Investor Warrants.
(5) Such shares of common stock are issuable upon exercise of (a) 647,354 of
the Investor Warrants previously issued to the Investors, and (b) 379,348
of the Intel Warrants previously issued to Intel. Pursuant to Rule 457(g),
the registration fee for such securities has been calculated based upon the
exercise price of such Investor Warrants and such Intel Warrants.
<PAGE>
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 or until this registration statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
PROSPECTUS Subject to Completion, Dated April __, 1999
ModaCAD, Inc.
2,689,962 Shares of Common Stock
The Securities Offered Hereby Involve
a High Degree of Risk. See "Risk Factors"
on Page 4 of This Prospectus.
This prospectus relates to 2,689,962 shares of the common stock of ModaCAD,
Inc. On April 7, 1999, we issued and sold in a private placement to Castle Creek
Technology Partners LLC, Marshall Capital Management, Inc., Winfield Capital
Corp., and Spinner Global Technology Fund, Ltd. (the "Investors"), 776,827
shares of common stock and, subject to shareholder approval, warrants to
purchase 919,243 shares of common stock (the "Investor Warrants"). Concurrently
with the Investor Transaction, we entered into an agreement with Intel
Corporation whereby Intel purchased 455,218 shares of common stock and, subject
to shareholder approval, warrants to purchase 538,674 shares of common stock
(the "Intel Warrants").
Of the Investor Warrants, (i) 271,889 are exercisable at a price of $13.72
and expire on April 7, 2004; (ii) 323,677 are exercisable at a price of $13.18
and expire on April 7, 2000; and (iii) 323,677 are exercisable at a price of
$13.18 and expire on July 7, 2000. Of the Intel Warrants (i) 159,326 are
exercisable at a price of $10.98 and expire on April 7, 2004; (ii) 189,674 are
exercisable at a price of $13.18 and expire on April 7, 2000; (iii) 189,674 are
exercisable at a price of $13.18 and expire on July 7, 2000.
The Investor Warrants and the Intel Warrants are sometimes referred to
herein as the "Warrants." The Warrants and the shares are sometimes referred to
in this prospectus as the "Securities." Pursuant to this prospectus, the selling
security holders identified in the prospectus (the "Selling Security Holders")
may sell some or all of the shares, including the shares they may receive by
exercising the Warrants, to new purchasers, through ordinary brokerage
transactions, directly to market makers of our shares, or through any of the
other means described in the "Plan of Distribution" section of this prospectus
beginning on page 19. The Selling Security Holders will receive all of the
proceeds from the sale of the shares, less any brokerage or other expenses of
sale incurred by them. We will receive as the exercise price of the Warrants up
to $19,204,433 (less estimated offering expenses of approximately $104,515, and
assuming no exercise of the cashless exercise right contained in warrants to
purchase a total of 431,215 shares held by Intel and by each of the Investors)
if the Selling Security Holders exercise all of the Warrants.
Our common stock is quoted on the Nasdaq National Market under the symbol
"MODA."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is April __, 1999
<PAGE>
TABLE OF CONTENTS
Page
WHERE YOU CAN FIND MORE INFORMATION...........................................3
THE COMPANY...................................................................4
RISK FACTORS..................................................................4
USE OF PROCEEDS..............................................................20
RECENT DEVELOPMENTS..........................................................20
SELLING SECURITY HOLDERS.....................................................20
PLAN OF DISTRIBUTION.........................................................22
LEGAL MATTERS................................................................23
EXPERTS......................................................................23
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We have not authorized anyone to give any information or to make any
representations not contained in this prospectus. You should only rely on the
information or representations in this prospectus and in any prospectus
supplement. This prospectus does not offer to sell or buy any Securities in any
jurisdiction where it would be unlawful to do so. You should only assume that
the information in this prospectus or any prospectus Supplement is accurate as
of the date on the front of the documents.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You can inspect and copy the registration
statement, as well as such reports, proxy statements and other information at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington D.C. 20549, and at the Commission's regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549, at prescribed rates. You may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. We are also required to file electronic versions of these
documents with the Commission, which may be accessed through the Commission's
web site at http://www.sec.gov. Our common stock is quoted on the Nasdaq
National Market. You may inspect reports, proxy and information statements and
other information about us at the Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
This prospectus is part of a registration statement on Form S-3 that we
filed with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities covered by this prospectus. The SEC allows us to "incorporate by
reference" the information we file with it, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and later information filed with the SEC will update and supersede
this information.
We previously filed the following documents with the SEC, and they are
incorporated by reference in this prospectus:
- Our Annual Report on Form 10-KSB for the year ended December 31, 1998;
- Our Current Reports on Form 8-K, filed with the SEC on March 26, 1999,
April 9, 1999 and April 14, 1999; and
- The description of our common stock set forth in our registration
statement on Form 8A, filed with the SEC on March 28, 1996, including
any amendments or reports filed for the purpose of updating such
description.
- All future reports and other documents filed by us pursuant to section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended.
We will provide without charge to you, on written or oral request, a copy
of any or all of the documents which have been or may be incorporated by
reference in this prospectus (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference into the information this
prospectus incorporates). You should direct any requests for such copies to
Modacad, Inc., 3861 Sepulveda Blvd., Culver City, California 90230. Attention:
President, Telephone: (310) 751-2100.
This prospectus does not contain all of the information set forth in the
registration statement as permitted by the rules and regulations of the SEC.
Statements contained herein concerning the provisions of certain documents filed
with, or incorporated by reference in, the registration statement are not
necessarily complete and each such statement is qualified in its entirety by
reference to the applicable document filed with the SEC.
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THE COMPANY
Modacad, Inc. is a California corporation, founded in February 1988. Our
executive offices are located at 3861 Sepulveda Blvd., Culver City, California
and our telephone number is (310) 751-2100. We develop and provide technologies
and digital content for electronic merchandising in the business-to-consumer and
the business-to-business contexts of the apparel, textile, home furnishings and
home design industries.
RISK FACTORS
There are Forward-Looking Statements in this Prospectus that May not Prove
to be Accurate. This prospectus contains or incorporates forward-looking
statements including statements regarding, among other items, our business
strategy, growth strategy, and anticipated trends in our business. We may make
additional written or oral forward-looking statements from time to time in
filings with the SEC or otherwise. When we use the words "believe," "expect,"
"anticipate," "project" and similar expressions, this should alert you that this
is a forward-looking statement. Forward-looking statements speak only as of the
date the statement is made and are based largely on our expectations. They are
subject to a number of risks and uncertainties, some of which can not be
predicted or quantified and are beyond our control. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Statements in this prospectus (or
made in documents incorporated in this prospectus), including those set forth in
"Risk Factors" and "The Company", describe factors, among others, that could
contribute to or cause such differences. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this prospectus will in fact transpire or prove to be accurate. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by this
Section.
There are Risks Associated with Changes in our Primary Business Focus to
Become an Internet E-Commerce Business and in Implementing New Strategy. Modacad
was incorporated in 1988 to develop, market and support software products based
on its proprietary modeling and rendering technology for use in the apparel,
textile and home furnishings industries. Until 1992, we were primarily engaged
in research and development and had only limited revenues. Historically, our
major focus was the business-to-business marketplace. In 1998, we began to shift
our focus to the emerging consumer Internet electronic commerce ("e-commerce")
market, using our technologies and data bases developed for the
business-to-business market place in such a way as to give us critical
advantages in positioning ourselves as a key enabler of electronic commerce for
the apparel, textile, home furnishings and home design industries.
Due to the recent shift in our business strategies, we have a limited
operating history in a major portion of our current product/service mix. Our
limited operating history, especially with respect to the products and services
on which we now plan to focus, and our evolving business model make the
prediction of future operating results difficult, and there is no assurance that
we will be profitable in the future. Our prospects are subject to the risks,
expenses and uncertainties frequently encountered by companies that operate in
the new and rapidly evolving markets for Internet products and services.
Successfully achieving our growth plan in the e-commerce industry depends on,
among other things:
- our ability to continue to establish, develop and successfully market
the Fashiontrip.com, Styleclick.com and other brands used in
connection with our e-commerce business;
- our ability to generate revenues through advertising on our websites;
- our ability to handle increased volumes of e-commerce sales conducted
through our sites without errors or interruptions in service;
- our ability to provide superior product imaging compared to other
existing and future shopping sites on the Internet;
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- our ability to provide superior product search capabilities compared
to other shopping sites on the Internet;
- our ability to develop enhancements of our websites and additional
add-on sites;
- our ability to maintain and increase the levels of traffic on the
Fasiontrip.com, Styleclick.com and other websites and to increase the
number of purchases made by visitors on the websites;
- our ability to develop or acquire services or products equal or
superior to those of our competitors;
- the widespread adoption by consumers of online shopping as a preferred
shopping method;
- our ability to create and maintain relationships with a significant
number of vendors whose products are marketable on the Internet;
- our ability to maintain profitable pricing levels for the types of
products and services we offer on the Internet despite likely
increasing competition and other factors that could reduce market
prices;
- our ability to keep pace with changing technological developments
affecting e-commerce and the Internet generally; and
- our ability to continue to identify, attract, retain and motivate
qualified personnel.
There can be no assurance that we will overcome the above risks and successfully
implement our new business strategy.
We are Dependent on our Key Personnel and Need to Attract Additional
Personnel. Our success depends to a significant extent on the continued service
of certain key technical and management personnel, particularly Maurizio
Vecchione and Joyce Freedman. Our growth and future success will depend in large
part on our ability to continue to hire, motivate and retain those and other
qualified employees. The competition for such personnel is intense, and the loss
of key employees, or the failure to attract additional qualified personnel,
could have an immediate and long-term adverse effect on us. Although Ms.
Freedman and Mr. Vecchione each have entered into an employment agreement with
us, there can be no assurance that we will be able to retain them or our other
key employees in the future.
There are Risks Associated with our New Business Strategy. We believe that
the success of our Internet shopping sites will depend in large part on our
ability to attract e-commerce customers to our shopping sites, which, in part,
depends on our ability to attract a broad range of retailers offering quality
merchandise on our sites. We expect to incur significant costs in connection
with the establishment, expansion and maintenance of Styleclick.com and
additional sites launched by us in the future. These expenses include
advertising and marketing expenses which are necessary to attract a high volume
of traffic to our websites.
The Industries Which our Products and Services Target are Subject to
Uncertainties. Our products and services, including our Internet shopping sites,
are focused on the apparel, textile, home furnishings and home design
industries, which historically have been subject to seasonal variations. Any
downturn, whether real or perceived, in economic conditions or prospects of the
economy generally or of the apparel, textile, home furnishings and home design
industries in particular could adversely affect consumer spending habits and our
business. Fashion and shopping trends can change rapidly, and our business may
be sensitive to those changes. We cannot be certain that we will accurately
anticipate shifts in fashion or shopping trends and adjust our merchandise mix
or presentation format to appeal to changing consumer tastes in a timely manner.
If we misjudge the market for the products to be sold on our websites, or if we
are unsuccessful in responding to changes in fashion or shopping trends or in
market demand, our business, results and operations and financial condition
could be materially adversely affected.
5
<PAGE>
We Have Limited Working Capital and May Need Additional Financing. To date,
we have obtained working capital through our initial public offering, through
our warrantholders' exercise of warrants, from the private placement of our
securities, from licensing royalties and sale of assets, and from our general
operations. We anticipate, based on current plans and assumptions relating to
our operations, that existing resources and cash generated from operations
should be sufficient to satisfy our contemplated cash requirements for up to 18
months from the date of this prospectus. However, we can not be certain that we
will not require additional financing during such 18-month period. We may seek
to raise additional capital before that time, depending on various
considerations and developments, but our existing contractual restrictions
restrict our freedom through April 2000 to make below market issuances of
securities. Proceeds from the exercise of outstanding warrants and options
granted under our stock option plan could be a source of capital, although there
can be no assurance of any such exercise, and we do not expect the anticipated
proceeds from such exercises to provide a material amount of our needed capital.
If current cash on hand and cash generated from operations is insufficient to
satisfy our capital requirements, if an attractive opportunity to raise capital
arises, or if our need for capital occurs sooner than we project, we may have to
sell additional equity or debt securities or obtain other credit facilities,
assuming we can do so on acceptable terms and consistent with our contractual
restraints. There can be no assurance that any additional financing or other
sources of capital will be available to us upon acceptable terms, or at all. The
inability to obtain additional financing when needed would have a material
adverse effect on our business, financial condition and operating results.
We are Dependent on the Continued Growth in the Use of the Internet. Our
future success is dependent upon continued growth in the use of the Internet and
the World Wide Web as a shopping venue. Online shopping is relatively new, and
it is difficult to predict the rate or extent of further growth, if any, in
online shopping expenditures, particularly by customers in the apparel, textile,
home furnishings and home design industries. Demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty. We rely on consumers who have historically used
traditional means of commerce to purchase merchandise. If we are to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. In addition, critical issues concerning the
commercial use of the Internet, such as ease of access, security, reliability,
cost and quality of service, remain unresolved and may affect the growth of
Internet use or the attractiveness of conducting e-commerce.
The Internet may not prove to be a viable commercial marketplace for a
number of reasons, including potentially inadequate development of the necessary
infrastructure, or the failure to develop and commercialize timely
telecommunications performance improvements. To the extent that the Internet
continues to experience significant growth in the number of users and level of
use, the Internet infrastructure may not be able to support the demands placed
upon it by such growth and the performance or reliability of the Internet as an
e-commerce marketplace may be adversely affected, which would have a material
adverse effect on our ability to implement successfully our business strategy.
In addition, use of the Internet or online services could lose their viability
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet or online services activity.
Changes in or insufficient availability of telecommunications services to
support the Internet or online services also could result in slower response
times and adversely affect usage of the Internet and online services generally
and, in particular, our business. Some websites have experienced interruptions
in their services as a result of outages and other delays occurring throughout
the Internet network infrastructure. If these outages or delays occur frequently
in the future, Internet usage, as well as usage of our websites, could grow more
slowly than expected, or could decline. If use of the Internet and online
services does not continue to grow or grows more slowly than expected, if the
infrastructure for the Internet and online services does not effectively support
growth that may occur, or if the Internet and online services do not become a
viable commercial marketplace, our business and financial condition would be
materially adversely affected.
6
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The Markets for Some of our Products and Services are Still in Development.
The markets for Internet shopping products and services, and the complementary
Internet-enabled software, which are at the center of our new business strategy,
have only recently begun to develop, are rapidly evolving and are increasingly
competitive. Demand for, and market acceptance of, recently introduced products
and services are subject to a high level of uncertainty and risk. It is
difficult for us to predict whether, or how fast, these markets will grow. We
cannot guarantee that the market for our online sales and marketing products,
services and software will continue to develop or that demand for our products
will be sustainable. If the market develops more slowly than expected or becomes
saturated with competitors, or if our products do not sustain market acceptance,
our business, operating results, and financial condition will be materially and
adversely affected.
The Viability of our Websites' Functionality is Uncertain. Although
technological feasibility of Fashiontrip.com and Styleclick.com have been
achieved and operation of the sites begun, completing the development of
Styleclick.com, and development of future sites, require continued expansion and
enhancement of major features. Successful operation of e-commerce software
products as complex as those which provide Styleclick.com and our other websites
with e-commerce features may contain undetected programming errors or "bugs"
that degrade performance or permit security breaches. Despite our significant
testing, there is no assurance that errors will not occur, or security breaches
that do occur will not result in loss of or delay in market acceptance of our
websites and our e-commerce services. Furthermore, from time to time, we and
others may announce new products, services, capabilities or technologies that
have the potential to replace or shorten the life cycles of our existing
products and services.
We Face Rapid Technological Change and Frequent New Product Introductions.
The e-commerce Internet market for shopping and the market for related services,
which only recently have come into existence, are characterized by rapid changes
in technology, customer needs and preferences and evolving industry standards.
The Internet e-commerce industry is relatively young and unpredictable.
Consequently, we expect that it will encounter rapid product obsolescence and
the necessity for frequent new and enhanced product and service introductions.
The introduction of new technologies, including new operating systems and
platforms, could render our products and services obsolete or unmarketable. Our
future success will depend significantly on our ability to enhance our current
products and services, to develop new products and services that meet changing
customer needs on a timely and cost-effective basis, and to respond to emerging
industry standards and other technological changes. The development of new
products and services involves considerable expenditures and can take from
several months to several years. Accordingly, new product and service
development requires a long-term forecast of market trends and customer needs
and often a substantial commitment of capital resources with no assurance that
such products and services will be commercially viable. There can be no
assurance that we will be successful in enhancing our existing products and
services or developing new products and services on a timely basis or that such
new or enhanced products and services will achieve market acceptance or sustain
any such acceptance for any significant period. If we fail to anticipate or
respond adequately to changes in technology and customer requirements and
preferences, or if we encounter any significant delays in development of
enhanced and new products and services, such failure or delay will have a
material and adverse effect on our business, financial condition and results of
operations.
We Face the Need for Continual Development and Enhancements of our Products
and Services. Our ability to compete in the e-commerce industry requires that we
continue to enhance and improve the responsiveness, functionality and features
of our online shopping facilities and related products and services. The
Internet e-commerce industry is characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new
industry standards and practices that could render our existing websites,
services and technologies obsolete. To the extent that higher bandwidth Internet
access becomes more widely available through cable modems or other future
technologies, we may be required to make significant changes to the design and
content of our websites in order to compete effectively. Any failure to adapt
effectively to these or any other technological developments could have a
material adverse effect on our business, operating results, and financial
condition.
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<PAGE>
Our future success will depend, in part, on our ability to enhance our
existing services and develop new products, services and e-commerce technologies
that address the increasingly sophisticated and varied needs of our current and
prospective vendors and customers. Success will also depend on our ability to
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of our online sales and
marketing products, the content on our websites, our proprietary technology and
the functionality and features of our websites will require significant
technical ability and investment. We can not be sure that we will successfully
use new technologies effectively or adapt our websites, proprietary technology
and transaction-processing systems to customer requirements or emerging industry
standards. Our inability, for technical, legal, financial or other reasons, to
adapt in a timely manner in response to changing market conditions or customer
requirements, would have a material adverse effect on our business, financial
condition and results of operations.
We are Dependent on a Single Core Technology and Have Limited Product
Lines. To date, we have derived substantially all of our revenues from
operations from sales of our CAD products for business-to-business design
applications, our electronic merchandising products, and our consumer software,
all of which are based on our core rendering and modeling technology. For the
foreseeable future, enhancements to Styleclick.com, Fashiontrip.com and other
existing products and services, and development and enhancement of future
websites and other new e-commerce products and services, will also be based on
that technology, which we are continuing to develop. Thus, our revenues are, and
for the foreseeable future will be, based on the market acceptance of products
and services utilizing our core technology. A decline in demand for products and
services based on such technology as used in our current websites, products,
services and e-commerce applications, whether as a result of competition,
technological change or any other reason, would have a material and adverse
effect on our business, financial condition and results of operations.
We Face Online Commerce Security Risks. A significant barrier to online
commerce and communications is the need for secure transmission of confidential
information over public networks. Merchants on the Internet are subject to the
risk of credit card fraud and other types of theft and fraud perpetrated by
hackers and online thieves. Credit card companies may hold merchants fully
responsible for any fraudulent purchases made when the signature cannot be
verified. Credit card companies and others are in the process of developing
anti-theft and anti-fraud protections. We rely on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information, such as credit card numbers, in connection with our e-commerce
activities. While we are continually monitoring concerns about online security,
developing internal controls and trying to obtain third party security products,
at the present time the risk of such potential breaches of security could have a
material adverse effect on our business, prospects, financial condition and
results of operations. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments will not result in a compromise or breach of the algorithms we use
to protect customer transaction data. A party who is able to circumvent our
security measures could misappropriate confidential information or cause
interruptions in our operations. We may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. If any such compromise of our
security were to occur, it, and our potential liability resulting therefrom,
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
Users of our Products and Services have Concerns about Online Privacy.
While we notify our website users of our privacy policies and about our use of
the data we acquire from their use of our websites, we expect that regulatory
restrictions on use of such data, and increases in consumers' concerns about
such use, may inhibit the growth of the Internet and other online services
generally, especially as a means of conducting e-commerce. Our activities and
the activities of our third-party contractors involve storage and transmission
of proprietary information, such as credit card numbers and other confidential
information. Any such security breaches could damage our reputation and expose
us to a risk of loss, litigation and possible liability. We can not be certain
that our security measures will prevent security breaches or that failure to
prevent such security breaches will not have a material adverse effect on our
business, prospects, financial condition and results of operations.
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We Face Potential E-Commerce-Related Liabilities and Expenses. As part of
our business, we enter into agreements with sponsors, content providers, service
providers, and merchants under which we are entitled to receive a share of
revenues from the purchase of goods and services by users of our shopping sites.
We also act as merchant of record with respect to sales of certain merchandise,
some of which is shipped by the manufacturers and some of which is shipped by
one or more third-party fulfillment agents. Such arrangements may expose us to
additional legal risks and uncertainties, including potential liabilities to
consumers of such products and services. Although we expect to obtain
indemnities from the manufacturers of all products that are sold via our
websites and we carry general liability insurance, in the event that a
manufacturer fails to honor the indemnification obligation our insurance may not
cover potential claims of this type or may not be adequate to indemnify us for
all liability that may be imposed.
Our e-commerce activities expose us to a number of potential risks,
including:
- potential liabilities for illegal activities that may be conducted by
participating vendors;
- claims that materials included in our websites or merchant sites
linked to our websites or sold by merchants through these sites
infringe third-party patents, copyrights, trademarks or other
intellectual property rights, or are libelous, defamatory or in breach
of third-party confidentiality or privacy rights for which we will not
have or receive complete indemnification;
- consumer fraud and false or deceptive advertising or sales practices;
- breach of contract claims relating to sales transactions;
- claims relating to any failure of our fulfillment agents or
participating merchants to appropriately collect and remit sales or
other taxes arising from e-commerce transactions conducted through our
sites; and
- claims that may be brought by merchants as a result of their exclusion
from our commerce services or losses resulting from any downtime or
other performance failures in our hosting services.
Although we maintain liability insurance, insurance may not cover these
claims or may not be adequate. Even to the extent such claims do not result in
material liability, investigating and defending such claims are expensive.
We Face Potential Liability for Online Services from End-Users. Our
Internet services to users will include a variety of services that enable
individuals to exchange information, conduct business and engage in various
online activities, such as participating in on-line chats. The law relating to
the liability of providers of these online services for activities of their
users is currently unsettled. Claims could be made against us
- for products liability or other tort claims relating to goods or
services sold through our websites or through links from our websites;
- for defamation, negligence, copyright or trademark infringement,
personal injury or other theories based on the nature and content of
information that may be posted online by our users;
- with respect to content and materials that may be posted by users in
chat rooms or other interactive services (for example, for copyright
or trademark infringement or other wrongful actions of third parties
because we provide hypertext links to websites operated by such third
parties, or for legal injury caused by statements made to, or actions
taken by, participants in our chat room services); and
- for losses incurred in reliance on such information in connection with
information provided through our services based on errors contained in
the product information or magazine content.
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Our Business is Subject to Possible Future Government Regulation and Legal
Uncertainties. There are currently few laws or regulations directly applicable
to consumers' access to, or the conduct of e-commerce on, the Internet, other
than laws and regulations generally applicable to consumer marketing, sales and
telecommunications. Because the laws relating to the use of the Internet are
evolving and constantly being impacted by the events and circumstances occurring
on the Internet, the law surrounding many Internet issues is uncertain. For
example, courts are currently grappling with jurisdictional and taxation issues
related to operations conducted over the Internet. Our websites are available
over the Internet in many states and foreign countries, and, as sales are
effected through our websites to consumers residing in such states and foreign
countries, such jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each such state and foreign country. We are
qualified to do business in only two states, and our failure to qualify as a
foreign corporation in a jurisdiction where such qualification is required could
subject us to taxes and penalties for the failure to qualify.
Due to the global nature of the Internet, it is possible that the
governments of other states and foreign countries might attempt to regulate our
transmissions or prosecute us for violations of their laws. We might
unintentionally violate existing laws, or laws may be modified, or new laws
enacted, in the future, about which we know little or nothing. Any ignorance of,
or inability to keep abreast of, the laws of other states and countries and any
resulting penalties, fees or disabilities could have a material adverse effect
on our business, financial condition, and results of operations.
We anticipate that in the near future additional substantive federal, state
and international regulations may be adopted relating to user privacy and the
collection and utilization of user information on or through the Internet. The
Children's Online Protection Act and the Children's Online Privacy Act, which
will restrict the distribution of certain materials deemed harmful to children
and impose additional restrictions on the ability of online services to collect
user information from minors, was recently signed into law in the United States,
and regulations restricting the collection and utilization of user information
are in force in many European countries. To the extent that we do not
effectively comply with such regulations, or if such regulations materially
impair our ability to effectively utilize direct marketing, our business,
results of operations, and financial condition could be materially and adversely
affected.
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. Such laws and regulations could fundamentally impair our ability to
provide Internet search engine, sales and marketing, chat rooms and other
services as planned, or could substantially increase the cost of doing so.
Congress recently passed (and the President has signed into law) the Digital
Millennium Copyright Act, which 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 we can not be
certain that this or future legislation will limit our potential liability
resulting from such actions.
Several telecommunications carriers and others are seeking government
regulation of communications over the Internet. Because the growing popularity
and use of the Internet has burdened the existing telecommunications
infrastructure and many areas with high Internet use have begun to experience
interruptions in phone service, local telephone carriers have sought increased
regulation of Internet service providers ("ISPs") and online service providers
("OSPs") and to impose certain access and other fees. Increased regulation or
the imposition of access fees could substantially increase the costs of
communicating on the Internet, potentially decreasing the demand for our
products and services. Proposals have been made at the federal, state and local
level that would impose additional taxes on the sale of goods and services
through the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce, and could adversely affect our opportunity to
derive financial benefit from such activities.
It is probable that additional laws and regulations will be adopted
covering issues such as defamation, pricing, taxation, content regulation,
quality of products and services, and intellectual property ownership and
infringement. Such legislation could expose us to substantial liability. Such
legislation could also dampen the growth in use of the Internet for commerce,
decrease the acceptance of the Internet as a communications and commercial
medium, or require us to incur significant expense in complying with any new
regulations.
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We Could Become Subject to Sales and Other Taxes. We do not currently
collect sales and other similar taxes with respect to shipments of goods to
consumers into states other than California, New York and North Carolina.
However, one or more states may seek to impose sales tax collection obligations
on out-of-state companies which engage in online commerce. In addition, any new
operation in states outside of California could subject shipments into such
states to state sales taxes under current or future laws. A successful assertion
by one or more states or any foreign country that we should collect sales or
other taxes on the sale of merchandise could have a material adverse effect on
our business, prospects, financial condition and results of operations.
We Rely on One or More Third-Party Internet Providers. We rely on one or
more private third-party providers for our principal Internet connections. Any
disruption in the Internet access provided by third-party providers or any
failure of such third-party providers to handle current or higher volumes of use
could have a material adverse effect on our business, prospects, financial
condition, and results of operations. We are dependent on hardware suppliers for
prompt delivery, installation, and service of servers and other equipment to
deliver our services, which will become increasingly important as our business
grows. Any errors, failures, or delays experienced in connection with these
third-party service providers could negatively impact our relationship with
users, and adversely affect our brand and our business, and could expose us to
liabilities to third parties.
We are Dependent on the Availability of Merchandise and our Relationships
with Vendors. The continued success of our software and business-to-business
electronic merchandising products, and the success of the products and services
associated with our Internet shopping sites, are substantially dependent upon
the continued support by manufacturers and vendors in the apparel, textile, home
furnishings and home design industries. We have established relationships with
major manufacturers and retailers in the apparel, textile, home furnishings and
home design industries, and we have featured the products of home furnishings
manufacturers and vendors in catalogs used together with our electronic
merchandising software. We expect the relationships that we maintain with major
manufacturers and retailers in the apparel, textile, home furnishings and home
design industries will be key to the development and success, if any, of our
Internet shopping sites. We can not be certain that manufacturers or vendors
whose products are represented in electronic merchandising catalogs for in-store
use will continue to support the Company's electronic merchandising software, or
that manufacturers and vendors whose products are featured on our software
products will continue to contract with us. We have no long-term contracts or
arrangements with our vendors that guarantee the availability of merchandise,
the continuation of particular payment terms or the extension of credit limits.
There can be no assurance that our current vendors will continue to sell
merchandise through our online services on the current terms or that we will be
able to establish new, or extend current, vendor relationships to ensure
acquisition and delivery of merchandise to consumers in a timely and efficient
manner and on acceptable commercial terms. In addition, we can not be certain
that we will be able to obtain the quantity or quality of products for purchase
through our Internet shopping sites that we believe is optimum. Our ability to
partner with reputable suppliers, obtain high quality merchandise from those
suppliers, and our suppliers' ability to produce, stock and deliver high quality
products to our customers, is critical to our success. If we are unable to
satisfy any of these elements or are unable to develop and maintain
relationships with suppliers that would allow us to obtain a sufficient variety
and quantity of quality merchandise on acceptable commercial terms, our
business, prospects, financial condition and results of operations would be
materially, adversely affected.
We are Dependent on Third Parties for Content Development. A key element of
our strategy involves providing content targeted for interest areas and
demographic groups in order to attract consumers to our shopping sites. In these
efforts, we rely on content development efforts of third parties. We cannot
guarantee that our current or future third-party affiliates will provide content
that attracts the numbers or types of consumers needed for sales volumes that
will result in significant revenue to us. Any failure of these parties to
develop high-quality content also could hurt the Styleclick.com, Fashiontrip.com
and other of our existing and future brands. Certain of our arrangements also
require us to integrate third parties' content with our services, which can
require significant programming and design efforts.
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We are Dependent on Distribution Relationships. In order to create traffic
for our online properties and make them more attractive to advertisers and
consumers, we have certain distribution agreements and informal relationships
with leading portal sites, and we will seek to develop additional such
agreements. We believe these arrangements are important to the promotion of our
shopping sites, particularly among new Internet users who may first access the
Internet through these sites. Our business relationships with these companies
are intended to increase the use and visibility of Styleclick.com,
Fashiontrip.com, and our other products and services. These distribution
arrangements typically are not exclusive, and may be terminated upon little or
no notice. Any failure to obtain distribution in a cost-effective manner could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
We are Dependent on Certain Suppliers and Shippers. Unlike retail store
operators and certain online commerce providers, we carry no material amounts of
inventory and have no warehouse employees or facilities. We rely on rapid
fulfillment from our vendors and third-party fulfillment agents. We have no
long-term contracts or arrangements with our vendors that guarantee the
availability of merchandise, the continuation of particular payment terms, the
extension of credit limits or shipping schedules. We can not be certain that we
will be able to establish new, or extend current, vendor and third-party
fulfillment relationships to ensure delivery of merchandise to consumers in a
timely and efficient manner and on acceptable commercial terms. If we were
unable to maintain relationships with vendors and one or more third-party
fulfillment agents that will allow us to obtain sufficient quantities of
merchandise on acceptable commercial terms, or in the event of labor disputes or
natural catastrophes affecting such vendors arrangements, our business,
prospects, financial condition and results of operations would be materially
adversely affected. We believe that the fulfillment agent that we have currently
retained is reputable and honest in effecting business transactions necessary to
our operations, and we will continue to investigate the reputation and
businesses of any other fulfillment agents that we retain in the future.
However, any misfeasance on the part of any fulfillment agent could have an
adverse effect on our reputation and results of operations.
We Need to Manage our Potential Growth Effectively. To manage our potential
growth, we must continue to implement and improve our operational and financial
systems and controls and to expand, train, and manage our employee base. The
process of managing our sales and advertising operations is an increasingly
important and complex task. To the extent that any failures in our order
processing or fulfillment activities result in consumer dissatisfaction, the
Styleclick.com and Fashiontrip.com brands, and any other of our brands used in
connection with our products and services, would be harmed and opportunities for
repeat sales to such consumers, vendors and advertisers would be reduced. To the
extent that any extended failure of our advertising management system results in
incorrect advertising copy, we may be exposed to "make good" obligations with
our advertising customers, which, by displacing advertising inventory, could
defer advertising revenues. Failure of our management systems effectively to
scale to higher levels of use or effectively to track and provide accurate and
timely reports on sales and advertising results also could negatively affect our
relationships with vendors and advertisers, particularly if we experience rapid
growth. Our systems, procedures, or controls may not be adequate to support our
operations. Our management may not be able to achieve the rapid execution
necessary to fully exploit our market opportunity. Any inability to effectively
manage growth could have a material adverse effect on our business, prospects,
financial condition and results of operations.
We Face a Risk of Systems Failures and Inadequacy. We are dependent on our
ability effectively to serve high volume use of our shopping and marketing
services. Accordingly, the performance of our systems is critical to our
reputation, our ability to attract vendors, consumers and advertisers to our
websites, and to achieve market acceptance of our products and websites. Any
system failure that causes an interruption or an increase in response time of
our products or services could result in less traffic to our websites and, if
sustained or repeated, could reduce the attractiveness of our products and
services. An increase in the volume of product searches conducted through our
search engine capabilities could strain the capacity of the software or hardware
we have deployed, which could lead to slower response time or system failures.
In addition, as the number of websites, web pages and users of our websites
increase, our products and infrastructure may not be able to scale accordingly.
We may not be able to successfully implement and scale our services to the
extent required by any growth in the number of users of such services. Failure
to do so may affect the goodwill of users of these services, or negatively
affect our brand and reputation, which could have a material adverse effect on
our business, prospects, financial condition and results of operations.
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Our operations are susceptible to outages due to fire, floods, power loss,
telecommunications failures, break-ins, and similar events. In addition,
substantially all of our network infrastructure is located in Southern
California, an area susceptible to earthquakes. We do not have multiple
infrastructure site capacity in the event of any such occurrence. Despite our
implementation of network security measures, our servers are vulnerable to
computer viruses, break-ins, and similar disruptions from unauthorized tampering
with our computer systems. We do not carry sufficient business interruption
insurance to compensate us for losses that may occur as a result of any of these
events. Such events could have a material adverse effect on our business,
prospects, financial condition and results of operations.
We Rely on Advertising Revenues. We expect to derive a substantial portion
of our revenues from the sale of advertisements on our websites under short-term
contracts. Many of our advertising customers have limited experience with the
Internet as an advertising medium. Our ability to generate significant
advertising revenues will depend upon, among other things:
- our advertisers' acceptance of the Internet as an effective and
sustainable advertising medium which justifies their continuing
financial commitment vis-a-vis other channels of advertising;
- the development of a large base of users of our services who generate
e-commerce transaction business and who possess demographic
characteristics attractive to our advertisers; and
- our ability to continue to develop and update effective advertising
delivery and measurement systems.
No standards have yet been widely accepted for the measurement of the
effectiveness of Internet advertising. We cannot guarantee that such standards
will develop sufficiently to support Internet advertising as a significant
advertising medium. Nor can we guarantee that advertisers will determine that
banner advertising, which is the primary form of advertising that we offer, is
an effective advertising medium. We may not be able to effectively transition to
any other forms of Internet advertising, should such other forms prove more
popular. Certain advertising filter software programs are available that limit
or remove advertising from an Internet user's monitor. Such software, if
generally adopted by users, may have a material adverse effect upon the
viability of advertising on the Internet. Our advertising customers may not
accept the internal and third-party measurements of impressions received by
advertisements on our websites; such measurements may contain errors. We rely
primarily on our internal advertising sales force for advertising sales, which
involves additional risks and uncertainties, including risks associated with the
recruitment, retention, management, training, and motivation of sales personnel.
As a result of these factors, we may not be able to sustain or increase current
advertising sales levels. Failure to do so could have a material adverse effect
on our business, operating results, and financial position.
We Face Competition for Advertising Expenditures. We compete with online
services, other website operators and advertising networks, as well as
traditional offline media such as television, radio and print for a share of
advertisers' total advertising budgets. We believe that the number of companies
selling Internet-based advertising and the available inventory of advertising
space has recently increased substantially. Accordingly, we may face increased
pricing pressure for the sale of advertisements, which could reduce our
advertising revenues. In addition, our sales may be adversely affected to the
extent that our competitors offer superior advertising services that better
target users or provide better reporting of advertising results.
We Face Intense Competition in the E-Commerce Industry. The e-commerce
market is new, rapidly evolving and intensely competitive. We expect competition
in the online e-commerce market to intensify in the future. Barriers to entry
are minimal, and current and new competitors can launch new sites at a
relatively low cost. In addition, the retail shopping industry generally, in
which our e-commerce strategy is focused, is intensely competitive.
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We currently compete with a variety of other companies, both for products
and for end consumers. Competitors for vendors of products to sell products
online and/or for end consumers include the following types of entities:
- There are a great many online vendors and destination sites and new
sites are being formed on a continuous basis. Examples of a few online
vendors are Bluefly.com, Buy.com, Ivillage.com, Amazon.com,
Shopping.com, and Fashionmall.com.
- Various fashion and decorating magazines have sponsored destination
sites, such as Elle.com, Gurl.com and Cosmopolitan.com, to name just a
few.
- Retailers, such as J. Crew and The Gap, who have traditionally
operated their businesses out of brick-and-mortar premises, are now
seeking to expand their businesses in the e-commerce arena.
- Mail order operators, such as Lands' End and Eddie Bauer, and
television shopping channels have also established Internet shopping
sites.
- Retail shopping malls, designer factory outlet malls and designer
boutiques continue to compete for end-users.
We have not positioned ourselves as a discounter of the products sold on
our sites, and customers may find some or all of the products offered on our
websites at lower prices elsewhere. To the extent that we are not able to
continue to attract product lines that fit the desired profile for our shopping
sites or consumers choose to make their purchases from our competitors, our
financial results would be negatively impacted.
The principal competitive factors in the e-commerce consumer market are
brand recognition, selection, personalized services (such as search and
intelligent agent capabilities), convenience, price, accessibility, customer
service, quality of search tools, quality of site content, reliability and speed
of fulfillment. Many of our existing and potential competitors have longer
operating histories, more product offerings, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources. In addition, current and future online retailers may be acquired by,
receive investments from, or enter into other commercial relationships with,
larger, better-established and well-financed companies as use of the Internet
and other online services increases. Certain of our competitors may be able to
secure merchandise from manufacturers on more favorable terms, devote greater
resources to marketing and promotional campaigns, adopt more aggressive pricing
or inventory availability policies and devote substantially more resources to
website and systems development. Increased competition may cause us to suffer
reduced operating margins, loss of market share and a diminished brand
franchise. There can be no assurance that we will be able to compete
successfully against current and future competitors, and competitive pressures
may have a material adverse effect on our business and prospects. Further, as a
strategic response to changes in the competitive environment, we may from time
to time make certain pricing, service or marketing decisions or acquisitions
that could have a material adverse effect on our financial results. New
technologies and the expansion of existing technologies may increase the
competitive pressures on our business, with a consequent material adverse effect
on our business, prospects, financial condition and results of operations.
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We Face Risks Associated with Brand Development. We believe that
establishing and maintaining the Styleclick.com and Fashiontrip.com brands, and
brands associated with future websites, as Internet shopping destinations is a
critical aspect of our efforts to attract vendors and consumers to use our
services, and advertisers to advertise on our sites. We also believe that the
importance of Internet shopping destination brand recognition will increase due
to the growing number of Internet shopping sites and the relatively low barriers
to entry. Promotion and enhancement of our brands will depend largely on our
success in providing high-quality products and services. In order to attract and
retain Internet users and to promote and maintain our brand names, we may find
it necessary to increase expenditures devoted to creating and maintaining brand
loyalty. In the event of any breach or alleged breach of security or privacy
involving our services, or if any third party undertakes illegal or harmful
actions utilizing our services, we could suffer substantial adverse publicity
and impairment of our brands and reputation. If we are unable to provide
high-quality products and services or otherwise fail to promote and maintain our
brand, or if we incur excessive expenses in an attempt to improve our products
and services or promote and maintain our brand, our business, operating results,
and financial condition will be materially and adversely affected.
We Face Risks Associated with Patents and Other Intellectual Property
Protection. All of our products are based on or use a common core technology
encompassing proprietary algorithms for rendering and modeling. This process is
covered by two issued United States patents and one patent that has been
"allowed" for issuance. Our ability to compete effectively depends in large part
on our ability to develop and maintain as proprietary the essential components
of our technology. In addition, we regard our copyrights, trademarks, trade
dress, trade secrets, and similar intellectual property as critical to our
success.
To protect our proprietary rights, we rely on a combination of the patents
covering parts of our core technology and our other pending patent, copyright
and trademark laws, trade secret protection, confidentiality procedures and
contractual provisions, including nondisclosure agreements with employees and
others. Although we intend to enforce aggressively our intellectual property
rights, such protection may not preclude competitors from developing products
with features and functionalities similar to our products, and there can be no
assurance that such protection will be available or be enforceable in any
particular instances of competition or that we will have the financial resources
necessary to enforce our patent, trade secret or other intellectual property
rights which may be infringed. Any inability to enforce such rights could
materially decrease the expected benefits from our technology. In addition, we
can not be certain that any confidentiality and nondisclosure agreements between
us and our employees and others will provide adequate protection for the
Company's proprietary information in the event of any unauthorized use or
disclosure of such proprietary information. We are aware that the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. Furthermore, we have not sought or
received patent protection in any foreign jurisdiction nor trademark protection
for our product trademarks in most foreign jurisdictions. In addition, some
aspects of our products are not subject to intellectual property protection.
Many parties are actively developing search, indexing, and related Internet
technologies and, increasingly, companies with much greater capital, operational
and personnel capabilities than we have are devoting their efforts on
e-commerce. We believe that such parties will continue to take steps to grow,
enhance and protect these technologies, including seeking patent protection. As
a result, we believe that disputes regarding the ownership of such technologies
are likely to arise in the future. For example, we are aware that patents have
been issued in the areas of electronic commerce, Internet-based information
indexing and retrieval, online direct marketing business methods and other areas
relating to the World Wide Web and the Internet. We anticipate that additional
third-party patents will be issued in the future. As a result, third parties may
assert patent infringement claims against us, based on allegations that our
products and services infringe their patent rights, and we have in the past
received letters and other communications from third parties alleging such
claims. In addition to patent claims, third parties may assert claims against us
alleging infringement of copyrights, trademark rights, trade secret rights or
other proprietary rights or alleging unfair competition. We may incur
substantial expenses in defending against any such third party infringement
claims regardless of the merit of such claims. In the event that there is a
determination that we have infringed third party proprietary rights, we could
incur substantial monetary liability.
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We Face Potential Claims of Product Infringement. We believe that our
products, trademarks and other proprietary rights do not infringe on the
proprietary rights of third parties. However, we can not be certain that third
parties will not assert infringement claims against us in the future. The law
relating to use of others' copyrighted information and trademarks posted on the
Internet is in the process of development, and many legal issues in the
intellectual property area remain unsettled. For example, whether, and, if so,
the circumstances under which, a website owner may create deep links into
websites of third parties without their consent is not yet resolved. This
ability, however, is an important function of search engines, like those
developed by us, intended to identify and provide access to wide-ranging
information on the Internet about comparative products. We have agreed to defend
and indemnify some of our licensees against certain infringement, unfair
competition and similar claims relating to the products and components developed
by us. The successful assertion of such claims against us would have a material
adverse effect on our business, prospects, financial condition and results of
operation. While we are not currently engaged in any intellectual property
litigation or proceedings, we can not be certain that we will not become so
involved in the future. An adverse outcome in litigation or similar proceedings
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from others or require us to cease marketing or using
certain products, any of which could have a material and adverse effect on our
business, prospects, financial condition and results of operations. If we are
required to obtain licenses under patents or proprietary rights of others, there
can be no assurance that any required licenses would be made available on terms
acceptable to us, if at all. In addition, the cost of responding to an
intellectual property litigation claim both in legal fees and expenses and the
diversion of management resources, whether or not the claim is valid, could have
a material adverse effect on our results of operations.
We Face Risks Associated with Domain Names. We currently hold various
Internet domain names relating to our brands, including the "Fashiontrip.com"
and "Styleclick.com" domain names. The acquisition and maintenance of domain
names generally is regulated by governmental agencies and their designees. For
example, in the United States, Network Solutions, Inc. is the exclusive
registrar for the ".com", ".net", and ".org" generic top-level domains. The
regulation of domain names in the United States and in foreign countries is
subject to change. Governing bodies may establish additional top-level domains,
appoint additional domain name registrars or modify the requirements for holding
domain names. As a result, there can be no assurance that we will be able to
acquire or maintain relevant domain names in all countries in which we conduct
business. Furthermore, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights in unclear.
We may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our trademarks and
other proprietary rights. Any such inability could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
Our Operating Results Fluctuate. We have experienced, and expect to
continue to experience, substantial fluctuations in revenues and other operating
results due to a variety of factors, some of which are unforeseeable and beyond
our direct control. Our quarterly results of operations can be substantially
affected by factors such as our ability to achieve sufficient sales volume and
advertising revenues to realize economies of scale, research and development
expenditures, the timing of receipt of software license fees, and customer
acceptance of new products and product enhancements and product promotions by us
or by our competitors. Our quarterly results of operations are also affected by
changes in pricing policies by us and by our competitors, changes in general
economic conditions and other factors. In addition, our quarterly results have
at times in the past been affected by extraordinary events, such as the proceeds
received from the exercise of our publicly-traded warrants after we notified
warrantholders of our intent to redeem such warrants, our sale of specific
assets, and the expensing of certain items.
The ability to use past quarters' operating results as a metric for
predicting future quarters' results will also be impacted by the changes in our
business strategy to concentrate our efforts on the development and launch of
e-commerce shopping sites and related products and services. Our change in focus
marks a significant departure from past operations, and results obtained by us
in connection with past operations are not likely to be indicative of future
performance. Introduction of products and services into the e-commerce market
and the revenues received by us from such products and services will be
dependent upon the timing of our completion of product and service development
and beta testing, the price established for such products and services, the
levels and timing of product sales and other criterial factors, all of which are
uncertain.
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In general, traffic levels on Internet websites have typically fluctuated
on a quarterly basis, which could result in a decrease in user traffic on
Internet shopping sites during certain periods. We believe that advertising
sales in traditional media, such as television and radio, generally are lower in
the first and third calendar quarters of each year. In addition, sales in the
traditional retail industry are much higher in the fourth calendar quarter of
each year than in the preceding three quarters. Similar seasonal or other
patterns may develop in the e-commerce industry, although we are not able to
predict any trends or patterns that may develop.
In view of such fluctuations and the changes in our business strategy to
concentrate our efforts on e-commerce shopping sites and related products and
services, we believe that quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied on as an indication of future
performance.
Our Stock Price is Volatile. The trading price of our stock has been and
may continue to be subject to wide fluctuations. During 1998, the closing sale
prices of our common stock on the Nasdaq Stock Market ranged from $7.125 to
$24.25, and during the first quarter of 1999, from $12.00 to $20.75. Our stock
price may fluctuate in response to a number of events and factors, such as
quarterly variations in operating results, announcements of technological
innovations, new products and vendor and other agreements by us or our
competitors, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable, and news reports relating to trends in our
markets. In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to operating performance. These broad market and
industry fluctuations may adversely affect the price of the stock, regardless of
our operating performance.
As a Software Company Focusing on Internet E-Commerce, our Common Stock May
be Subject to Erratic Price Fluctuations for Reasons Beyond our Control. From
time to time, the stock market experiences significant price and volume
fluctuations, which may affect the market price of our common stock for reasons
unrelated to our performance. Recently, such volatility has particularly
impacted the stock prices of publicly-traded technology companies. In the past,
securities class action litigation has been instituted against a companies
following period of volatility in the market price of a company's securities. If
similar litigation were instituted against us, it could result in substantial
costs and a diversion of our management's attention and resources, which could
have an adverse effect on our business. In addition, after this offering, the
market price of our common stock may be subject to significant fluctuations in
response to numerous factors, including:
- Variations in our annual or quarterly financial results or those of
our competitors;
- Changes by financial research analysts in their estimates o four
earnings or our failure to meet such estimates;
- Conditions in the economy in general or in the software and other
technology industries;
- Announcements of key developments by competitors;
- Loss of key personnel;
- Unfavorable publicity affecting our industry or us;
- Adverse legal events affecting us; and
- Sales of our common stock by existing shareholders.
17
<PAGE>
We Face Risks Associated with Outstanding Rights of First Refusal. We
granted Intel Corporation ("Intel") the right of first refusal to purchase a pro
rata share of any new securities issued by us after April 7, 1999, until the
earlier of (i) Intel and/or its majority-owned affiliates owning less than 20%
of the 455,217 shares purchased under the Stock and Warrant Purchase and
Investor Rights Agreement dated April 7, 1999; or (ii) April 7, 2002. The right
granted to Intel does not extend to issuance of up to 2,500,000 shares of common
stock or options or warrants therefor issued to our employees, officers,
directors or consultants; 750,000 shares of common stock issuable to strategic
investors in transactions unanimously approved by the Board; shares issued
pursuant to a merger, acquisition or other reorganization; and shares of common
stock issuable upon exercise of outstanding warrants and options.
We Face Risks Associated with Outstanding Repurchase Options. We issued
warrants to purchase an aggregate of 1,457,917 shares of common stock to Intel,
Castle Creek Technology Partners LLC, Marshall Capital Management, Inc. Spinner
Global Technology Fund, Ltd. and Winfield Capital Corp., subject to approval by
our shareholders. These warrants are subject to a repurchase option with respect
to all or any part of such warrants if our shareholders fail to approve the
grant of such warrants prior to July 30, 1999. If the repurchase option is
elected, we would be obligated to repurchase all or a portion of the warrants at
the greater of (i) 150% of the option price calculated by reference to the
Black-Sholes formula utilizing the Bloomberg online page on the date of the
exercise of the repurchase option, and (ii) the average closing sale price
during the ten trading days immediately preceding the earlier of July 30, 1999,
and the annual meeting of our shareholders at which shareholder approval is
sought minus the exercise price. The exercise of the repurchase options would
have a material adverse effect on our business, prospects, financial conditions
and results of operations.
There is Additional Common Stock Eligible for Future Sale. The market price
of our Common Stock could decline as a result of future sales of shares of
common stock (i) by existing shareholders pursuant to Rule 144 under the
Securities Act, (ii) by existing shareholders who hold shares that are freely
tradeable, (iii) through the exercise of piggyback or demand registration rights
for shares issuable upon conversion of outstanding convertible securities, (iv)
in connection with the exercise of warrants or employee stock options, or
otherwise. At April 9, 1999, (i) 7,399,515 shares of common stock are issued and
outstanding, (ii) options to purchase a total of 1,797,454 shares of common
stock are outstanding (some of which were granted subject to shareholder
approval of an increase in the number of shares under our 1995 Stock Option
Plan), of which 553,954 are currently exercisable, (iii) warrants to purchase
959,181 shares of common stock are outstanding, of which 943,181 are currently
exercisable, and (iv) warrants to purchase an aggregate of 1,491,838 shares of
common stock have been granted subject to shareholder approval. Sales of
substantial amounts of shares in the public market, or the prospect of such
sales, could adversely affect the market price of common stock.
Effecting a Change of Control Could be Difficult Due to the Concentration
of Stock Ownership. As of April 9, 1999: (i) our directors and executive
officers, and their affiliates beneficially owned approximately 31.4% of our
outstanding stock; (ii) Intel Corporation beneficially owned approximately 7.9%
of our outstanding stock (and will own 13.89% of our outstanding stock when and
if all of the Intel Warrants are exercised); and (iii) Castle Creek Technology
Partners LLC beneficially owned approximately 6.2% of our outstanding stock (and
will own approximately 12.52% of our outstanding stock when and if all of the
Investor Warrants held by Castle Creek Technology Partners LLC are exercised).
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
We do not Anticipate Paying Dividends. We have never paid cash dividends on
our common stock and do not anticipate paying cash dividends on our common stock
in the foreseeable future.
The Liability of Our Directors is Limited. Our Articles of Incorporation
substantially limit the liability of our directors to Modacad and to our
shareholders for breach of fiduciary and other duties to Modacad.
18
<PAGE>
Our Management has Discretion in the Use of Proceeds. We currently intend
to use the proceeds from the exercise of the Warrants, in addition to the
$6,343,599 of cash and cash-equivalents on hand at December 31, 1998, for
working capital purposes, investment in additional development and acquisition
opportunities, and to finance expansion of our Internet shopping sites.
Management will have broad discretion as to the use of such proceeds and
reserves the right to reallocate all proceeds to working capital. The Company
does not currently have any pending acquisitions, nor does it have any specific
planned acquisitions.
We May Face Year 2000 Risks. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field and cannot distinguish 21st century dates from 20th century dates. These
date code fields will need to distinguish 21st century dates from 20th century
dates and, as a result, many software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. We
have assessed the Year 2000 issue and believe that the cost of additional
actions will not have a material effect on our results of operations or
financial condition. Although we currently believe that our systems are Year
2000 compliant in all material respects, our current systems and products may
contain undetected errors or defects with Year 2000 date functions that may
result in material costs. Although we are not aware of any material operational
issues or costs associated with preparing our internal systems for the Year
2000, we may experience serious unanticipated negative consequences (such as
significant downtime for one or more of our websites) or material costs caused
by undetected errors or defects in the technology used in our internal systems.
We have solicited and received from our major vendors of computer products used
in our operations Year 2000 compliance statements with respect to the products
purchased from our vendors. Although we currently believe that our major
vendors' products used in our operations are Year 2000 compliant in all material
respects, such products may contain undetected or undisclosed errors or defects
with Year 2000 date functions that may result in material costs, and we could
experience serious unanticipated negative consequences or material costs caused
by any such errors or defects. In addition, we utilize third-party equipment,
software and content, including non-information technology systems ("non-IT
systems"), such as our security system, building equipment and non-IT systems
embedded microcontrollers that may not be Year 2000 compliant. We can not be
certain that no Year 2000 problems will arise. Failure of such third-party
equipment, software or content to operate properly with regard to the year 2000
and thereafter could require us to incur unanticipated expenses to remedy any
problems, which could have a material adverse effect on our business, results of
operations, and financial condition. Finally, we are also subject to external
forces that might generally affect industry and commerce, such as
telecommunications, utility or transportation company Year 2000 compliance
failures and related service interruptions. Furthermore, the purchasing patterns
of advertisers may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000 compliance.
However, these expenditures may result in reduced funds available for Internet
advertising or sponsorship of Internet services, which could have a material
adverse effect on our business, results of operations, and financial condition.
We Face Risks Associated with International Operations and Expansion. A
major part of our strategy is to extend Styleclick.com, Fashionclick.com and
other websites, as they are developed and launched, in international markets. To
date, we have only limited experience in developing localized versions of our
products and marketing and operating our products and services internationally.
We expect to continue to experience higher costs as a percentage of revenues in
connection with international online properties. International markets we have
selected may not develop at a rate that supports our level of investment. In
particular, international markets may be slower in adoption of the Internet as
an advertising and commerce medium. We may experience difficulty in managing
international operations as a result of distance as well as language and
cultural differences. We or our partners may not be able successfully to market
and operate our products and services in foreign markets. In addition, in a
number of international markets we face substantial competition from ISPs, some
of which have a dominant market share in their territories, that offer or may
offer their own navigational service.
19
<PAGE>
USE OF PROCEEDS
The Selling Security Holders will receive all of the proceeds from the sale
of the shares, less any brokerage or other expenses of sale incurred by them. We
will receive up to $19,223,062 (less the estimated offering expenses of
approximately $104,515, and assuming no exercise of the cashless exercise right
contained in warrants to purchase a total of 431,215 shares held by Intel and
each of the Investors, respectively) if the Selling Security Holders exercise
all of the Warrants. We can not be certain that any or all of the Warrants will
be exercised. We expect to use the net proceeds from the exercise of the
Warrants for working capital purposes, including the launch of successive
portions of Styleclick.com and future Internet shopping sites, enhancement of
its existing software products, expansion of its product lines by developing new
software products principally directed at the consumer marketplace, and
expansion of its distribution network and its sales and marketing forces within
the United States and internationally. Pending such uses, we will invest any net
proceeds from exercise of the Warrants in short-term, investment grade,
interest-bearing securities.
RECENT DEVELOPMENTS
In March 1999, Modacad announced the sale of its 3D Visual MerchantTM
product line and ModaDESIGN PRO TM product to Lectra Systems, Inc. ("Lectra"), a
subsidiary of Lectra Systems SA. Additionally, we licensed to Lectra our
ModaFINITY and ModaCATALOG software products and the right to use certain of our
core technology. In April 1999, we announced the completion of a private
placement of our common stock and warrants valued at $8.5 million. Concurrently,
we announced the issuance of $5 million of Modacad common stock to Intel
Corporation in return for Intel Corporation's agreement to terminate its royalty
stream under its software development agreement with us.
SELLING SECURITY HOLDERS
The following table sets forth: (i) the number of shares of common stock
beneficially owned by each Selling Security Holder as of April 9, 1999, (ii) the
number of shares of common stock to be offered under this registration statement
by each Selling Security Holder, and (iii) the number of shares of common stock
and the percentage of the outstanding shares of common stock to be beneficially
owned by each Selling Security Holder after completion of the offering. The
information set forth below is based on information provided by each Selling
Security Holder. Except as set forth in the footnotes, none of the Selling
Security Holders has had a material relationship with us within the past three
years, other than as a result of the ownership of Modacad, Inc. shares or other
securities.
Shares
Beneficially Owned Shares Beneficially
Prior to Offering Owned After Offering(4)
--------------------- ----------------------------------------
Name of Number Number Number Percent Number Percent
Selling (excluding (including No.of (excluding (excluding (including (including
Security Warrant Warrant Shares Warrant Warrant Warrant Warrant
Holder(1) Shares)(2) Shares)(3) Offered Shares) Shares)(5) Shares) Shares)(5)
- --------- ---------- --------- --------- --------- --------- --------- ---------
Intel
Corporation 581,534(6) 1,120,208(7) 993,892 126,316 1.7% 126,316 1.6%
Castle
Creek 455,218(8) 993,892(9) 993,892 0 0 0 0
Marshall
Capital 227,609(10) 496,946(11) 496,946 0 0 0 0
Winfield
Capital 47,000(12) 102,616(13) 102,616 0 0 0 0
Spinner Global
Technology
Fund 132,000(14) 187,616(15) 102,616 85,000 1.1% 85,000 1.1%
______________________
(1) Such persons have sole voting and investment power with respect to all
shares of common stock shown as being beneficially owned by them, subject
to community property laws, where applicable, and the information contained
in the footnotes to this table.
(2) Number excludes the shares of common stock registered hereunder which may
be purchased by Selling Security Holder, subject to shareholder approval,
upon the exercise of common stock purchase warrants purchased by Selling
Security Holder in April 1999.
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<PAGE>
(3) Number includes the shares of common stock registered hereunder which may
be purchased by Selling Security Holder, subject to shareholder approval,
upon the exercise of common stock purchase warrants purchased by Selling
Security Holder in April 1999.
(4) For each Selling Security Holder, assumes that all of the shares covered by
the prospectus are sold or otherwise disposed of and that no other shares
are acquired or sold by the Selling Security Holders.
(5) Based on 7,399,515 total shares outstanding as of April 9, 1999.
(6) Includes 126,316 shares of common stock which may be purchased by Intel
upon the exercise of a currently exercisable five-year warrant at an
exercise price of $19.00 per share, which warrant was granted in connection
with a software development agreement entered into with Intel in November
1997. Excludes 538,674 shares of common stock which may be purchased by
Intel, subject to shareholder approval, upon the exercise of common stock
purchase warrants which were purchased by Intel in April 1999.
(7) Includes (a) 126,316 shares which may be purchased by Intel upon the
exercise of a currently exercisable five-year warrant at an exercise price
of $19.00 per share, which warrant was granted in connection with a
software development agreement entered into with Intel in November 1997,
and (b) 538,674 shares which may be purchased by Intel, subject to
shareholder approval, upon the exercise of common stock purchase warrants
which were purchased by Intel in April 1999.
(8) Excludes 538,674 shares of common stock which may be purchased by Castle
Creek Technology Partners LLC, subject to shareholder approval, upon the
exercise of common stock purchase warrants which were purchased by Castle
Creek Technology Partners LLC in April 1999. Pursuant to a management
agreement, Castle Creek Partners LLC may be deemed to beneficially own the
securities held by Castle Creek Technology Partners LLC. Castle Creek
Partners, L.L.C. disclaims such beneficial ownership. John Ziegelman and
Daniel Asher, as managing members of Castle Creek Partners, L.L.C., may be
deemed to be beneficial owners of such securities. Messrs. Asher and
Ziegelman disclaim such beneficial ownership.
(9) Includes 538,674 shares of common stock which may be purchased by Castle
Creek Technology Partners LLC, subject to shareholder approval, upon the
exercise of common stock purchase warrants which were purchased by Castle
Creek Technology Partners LLC in April 1999. Pursuant to a management
agreement, Castle Creek Partners, L.L.C. may be deemed to beneficially own
the securities held by Castle Creek Technology Partners LLC. Castle Creek
Partners, L.L.C. disclaims such beneficial ownership. John Ziegelman and
Daniel Asher, as managing members of Castle Creek Partners, L.L.C., may be
deemed to be beneficial owners of such securities. Messrs. Asher and
Ziegelman disclaim such beneficial ownership.
(10) Excludes 269,337 shares of common stock which may be purchased by Marshall
Capital Management, Inc., subject to shareholder approval, upon the
exercise of common stock purchase warrants which were purchased by Marshall
Capital Management, Inc. in April 1999.
(11) Includes 269,337 shares of common stock which may be purchased by Marshall
Capital Management, Inc., subject to shareholder approval, upon the
exercise of common stock purchase warrants which were purchased by Marshall
Capital Management, Inc. in April 1999.
(12) Excludes 55,616 shares of common stock which may be purchased by Winfield
Capital Corp., subject to shareholder approval, upon the exercise of common
stock purchase warrants which were purchased by Winfield Capital Corp. in
April 1999.
(13) Includes 55,616 shares of common stock which may be purchased by Winfield
Capital Corp., subject to shareholder approval, upon the exercise of common
stock purchase warrants which were purchased by Winfield Capital Corp. in
April 1999.
(14) Excludes 55,616 shares of common stock which may be purchased by Spinner
Global Technology Fund, Ltd., subject to shareholder approval, upon the
exercise of common stock purchase warrants which were purchased by Spinner
Global Technology Fund, Ltd. in April 1999. Pursuant to a management
agreement, Spinner Global Technology Fund, Ltd. shares investment power
with Spinner Management Corporation.
(15) Includes 55,616 shares of common stock which may be purchased by Spinner
Global Technology Fund, Ltd., subject to shareholder approval, upon the
exercise of common stock purchase warrants which were purchased by Spinner
Global Technology Fund, Ltd. in April 1999. Pursuant to a management
agreement, Spinner Global Technology Fund, Ltd. shares investment power
with Spinner Management Corporation.
21
<PAGE>
PLAN OF DISTRIBUTION
The shares of our common stock offered by this prospectus may be sold from
time to time by the Selling Security Holders to purchasers directly by any of
the Selling Security Holders in one or more transactions at a fixed price, which
may be changed, or at varying prices determined at the time of sale or at
negotiated prices. Such prices will be determined by the holders of such
securities or by agreement between such holders and underwriters or dealers who
may receive fees or commissions in connection therewith.
Any of the Selling Security Holders may from time to time offer shares of
our common stock beneficially owned by them through underwriters, dealers or
agents, who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Security Holders and the purchasers
of the shares for whom they may act as agent. Each Selling Security Holder will
be responsible for payment of commissions, concessions and discounts of
underwriters, dealers or agents. The aggregate proceeds to the Selling Security
Holders from the sale of the shares of our common stock offered by them under
this prospectus will be the purchase price of such shares less discounts and
commissions, if any. Each of the Selling Security Holders reserves the right to
accept and, together with their agents from time to time to reject, in whole or
in part, any proposed purchase of shares to be made directly or through agents.
We will not receive any of the proceeds from this offering. Alternatively, the
Selling Security Holders may sell all or a portion of the shares of our common
stock beneficially owned by them and offered under this prospectus from time to
time on any exchange on which the securities are listed on terms to be
determined at the times of such sales. The Selling Security Holders may also
make private sales directly or through a broker or brokers. Transactions through
broker-dealers may, including block trades in which brokers or dealers will
attempt to sell the shares of our common stock as agent but may position and
resell the block as principal to facilitate the transaction, or one or more
underwritten offerings on a firm commitment or best effort basis.
From time to time, the Selling Security Holders may transfer, pledge,
donate or assign shares of our common stock to lenders or others and each of
such persons will be deemed to be a "Selling Security Holder" for purposes of
the prospectus. The number of the Selling Security Holders' shares beneficially
owned by a Selling Security Holder who transfers, pledges, donates or assigns
shares of our common stock will decrease as and when they take such actions. The
plan of distribution for Selling Security Holders' shares sold hereunder will
otherwise remain unchanged, except that the transferees, pledgees, donees or
other successors will be Selling Security Holders hereunder.
A selling stockholder may enter into hedging transactions with
broker-dealers, and the broker-dealers may engage in short sales of the shares
of our common stock in the course of hedging the positions they assume with such
Selling Security Holder, including, without limitation, in connection with
distribution of the shares of our common stock by such broker-dealers. In
addition, the Selling Security Holders may, from time to time, sell short the
shares of our common stock, and in such instances, this prospectus may be
delivered in connection with such short sales and the shares offered hereby may
be used to cover such short sales. The Selling Security Holders may also enter
into option or other transactions with broker-dealers that involve the delivery
of the shares of our common stock to the broker-dealers, who may then resell or
otherwise transfer such shares. The Selling Security Holders may also loan or
pledge the shares to a broker-dealer and the broker-dealer may sell the shares
as loaned or upon a default may sell or otherwise transfer the pledge shares.
The Selling Security Holders and any underwriters, dealers or agents that
participate in the distribution of the shares of our common stock offered under
this prospectus may be deemed to be underwriters within the meaning of the
Securities Act, and any discounts, commissions or concessions received by them
and any provided pursuant to the sale of shares by them might be deemed to be
underwriting discounts and commissions under the Securities Act.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. There is no
assurance that any selling stockholder will sell any or all of the shares of our
common stock described herein, and any selling stockholder may transfer, devise
or gift such securities by other means not described herein.
22
<PAGE>
To the extent required, the specific shares of our common stock to be sold,
the names of the Selling Security Holders, the respective purchase prices and
public offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a
post-effective amendment to the registration statement of which this prospectus
is a part. We entered into a registration rights agreement in connection with
the private placement of shares of our common stock which required us to
register the Investors' shares of our common stock, including those to be issued
upon exercise of the warrants purchased by the Investors, under applicable
federal and state securities laws. The registration rights agreement provides
for cross-indemnification of the Selling Security Holders and us and their
respective directors, officers and controlling persons against certain
liabilities in connection with the offer and sale of the shares of our common
stock, including liabilities under the Securities Act, and to contribute to
payments the parties may be required to make in respect thereof.
We will pay substantially all of the expenses incurred by the Selling
Security Holders and us incident to the offering and sale of the shares of
common stock under this prospectus, excluding any underwriting discounts or
commissions.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon by
Coudert Brothers, Los Angeles, California, counsel to the Company.
EXPERTS
The audited financial statements and schedules incorporated by reference in
this prospectus and elsewhere in the registration statement have been audited by
Singer Lewak Greenbaum & Goldstein LLP, independent public accountants, as
indicated in the respective reports, and have been so incorporated in reliance
upon the authority of said firm as experts in auditing and accounting.
23
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the expenses in connection with the sale and
distribution of the securities being registered. All the amounts shown are
estimates except for the SEC registration fee:
<TABLE>
<CAPTION>
Registration
--------------
<S> <C>
SEC registration fee .............................................$ 9,515
Accounting fees and expenses .....................................$ 2,000
Legal fees and expenses ..........................................$ 30,000
Cost of printing .................................................$ 500
Indemnification of Directors and Officers.........................$ 40,000
NASDAQ listing fee........................................... $ 17,500
Miscellaneous expenses ...........................................$ 5,000
-----------
Total ....................................................$ 104,515
</TABLE>
Item 15. Indemnification of Directors and Officers
Section 317 of the California Corporations Code provides for the
indemnification of directors, officers and corporate "agents" of the corporation
in terms sufficiently broad to indemnify such persons under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act.
Articles V and VI of the Company's Amended and Restated Articles of
Incorporation and Section 5.7 of the Company's bylaws provide for
indemnification of the directors, officers, employees, and other agents of the
Company to the extent and under the circumstances permitted by the California
Corporations Code. The Company has obtained directors and officers insurance
with a maximum coverage of $2,000,000.
In connection with this offering, the Selling Security Holders have agreed
to indemnify the registrant, its directors and officers and each such person who
controls the registrant, against any and all liability arising from inaccurate
information provided to the registrant by the Selling Security Holders and made
in this registration statement and the prospectus contained herein, and in any
amendments or supplements to such registration statement or prospectus.
Item 16. Exhibits and Financial Statement Schedules
Exhibit Number
5.1 Opinion of Coudert Brothers.
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP.
23.2 Consent of Coudert Brothers (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-3 of this registration statement).
Item 17. Undertakings
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
prospectus required by Section 10(a)(3) of the Securities Act;
II-1
<PAGE>
2) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to reflect in the
prospectus any facts or events arising after the effective date of this
registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration statement;
Provided, however, That paragraphs (1) and (2) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the SEC
by us pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(4) That, for the purpose of determining any liability under the Securities
Act, each post-effective amendment 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.
(5) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(6) 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
Section 15(d) of the Exchange Act 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.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company 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 Company of expenses
incurred or paid by a director, officer or controlling person of the Company 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 Company 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.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized in Culver City, State of California, on April 20, 1999.
Modacad, Inc.
By: /s/ MAURIZIO VECCHIONE
-----------------------------
Maurizio Vecchione, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Maurizio Vecchione and Joyce Freedman, or
either of them, his or her attorneys-in-fact and agents, each with full power of
substitution for him or her and in his or her name, place and stead, in any and
all capacities, to sign any or all amendments to this Registration Statement,
and to file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each of
said attorneys-in-fact and agents full power and authority to do so and perform
each and every act and thing requisite and necessary to be done in connection
with this Registration Statement, as fully to all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all that either
of said attorneys-in-fact and agents, or his or her substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
Signature Title Date
- ------------------------ ------------------------------------ ------------------
/s/ JOYCE FREEDMAN Chairman of the Board April 20, 1999
- ------------------------ (Principal Executive Officer) --------------
Joyce Freedman Date
/s/ MAURIZIO VECCHIONE President and Director April 20, 1999
- ------------------------ (Chief Operating Officer) --------------
Maurizio Vecchione Date
/s/ LEE FREEDMAN Vice President, Finance and April 20, 1999
- ---------------------- - Director (Principal Financial ---------------
Lee Freedman and Accounting Officer) Date
/s/ ANDREA VECCHIONE Director April 20, 1999
- ------------------------ --------------
Andrea Vecchione Date
/s/ STEPHEN WYLE Director April 20, 1999
- ------------------------ --------------
Stephen Wyle Date
/s/ PETER FRANK Director April 20, 1999
- ------------------------ --------------
Peter Frank Date
/s/ LESLIE SALESON Director April 20, 1999
- ------------------------ --------------
Leslie Saleson Date
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Number Description Numbered
Page
<S> <C> <C>
5.1 Opinion of Coudert Brothers. 31
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP 33
23.2 Consent of Coudert Brothers (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-3 of this Registration Statement)
</TABLE>
April 21, 1999
Modacad, Inc.
3861 Sepulveda Boulevard
Culver City, California 90230
Re: Modacad, Inc. - Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as securities counsel for Modacad, Inc. (the "Company") in
connection with the preparation of a registration statement on Form S-3 (the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"Securities Act"), that was filed with the Securities and Exchange Commission
(the "Commission") on April 21, 1999, in connection with the registration of a
total of 2,689,962 shares of the Company's common stock (the "Securities"),
which are being registered for resale by the Selling Security Holders named in
the Registration Statement. Of such Securities, (i) 776,827 shares have
previously been issued to, cumulatively, Castle Creek Technology Partners LLC,
Marshall Capital Management, Inc., Winfield Capital Corp., and Spinner Global
Technology Fund, Ltd. (the "Investors"); (ii) 271,889 shares are, subject to the
Company's shareholders' approval, issuable upon exercise of warrants previously
granted, exercisable at a price of $13.72 per share and expire on April 7, 2004;
(iii) 323,677 shares are, subject to the Company's shareholders' approval,
issuable upon exercise of warrants previously granted to the Investors,
exercisable at a price of $13.18 per share and expire on April 7, 2000; (iv)
323,677 shares are, subject to the Company's shareholders' approval, issuable
upon exercise of warrants previously granted to the Investors, exercisable at a
price of $13.18 per share and expire on July 7, 2000 (collectively, the warrants
described in clauses (ii), (iii) and (iv) above are referred to as the "Investor
Warrants"); (v) 455,218 shares were previously issued to Intel Corporation
("Intel"); (vi) 159,326 shares are, subject to the Company's shareholders'
approval, issuable upon exercise of warrants previously granted to Intel,
exercisable at a price of $10.98 per share and expire on April 7, 2004; (vii)
189,674 shares are, subject to the Company's shareholders' approval, issuable
upon exercise of warrants previously granted to Intel, exercisable at a price of
$13.18 per share and expire on April 7, 2000; and (viii) 189,674 shares are,
subject to the Company's shareholders' approval, issuable upon exercise of
warrant previously granted to Intel, exercisable at a price of $13.18 per share
and expire on July 7, 2000 (collectively, the warrants described in clauses
(vi), (vii) and (viii) above are referred to as the "Intel Warrants").
Collectively, the Investor Warrants and the Intel Warrants are referred to as
the "Warrants."
31
<PAGE>
Modacad, Inc.
April 20, 1999
Page 2
In connection with the preparation of the Registration Statement, we have
examined such documents, instruments, records, certificates and matters as we
have considered appropriate and necessary to render this opinion. We have
assumed for the purpose of this opinion the authenticity of all documents
submitted to us as originals and the conformity with the originals of all
documents submitted to us as copies, and the genuineness of all signatures
thereon.
Based on the foregoing and in reliance thereon, it is our opinion that the
Securities have been duly authorized and, after the Registration Statement
becomes effective and after any post-effective amendment required by law is duly
completed, filed and becomes effective (such Registration Statement as it
finally becomes effective or, if required to be post-effectively amended, then
as it is so amended, is referred to hereinafter as the "Final Registration
Statement"); and when the applicable provisions of "Blue Sky" and other state
securities laws shall have been complied with; and when, with respect to the
Warrants, the Company's shareholders' have approved the issuance of the
Securities issuable upon exercise of the Warrants and as Securities are issued
upon exercise of the Warrants in accordance with the certificates evidencing
such Warrants, the Securities will be validly issued, fully paid and
nonassessable.
We hereby consent to the inclusion of our opinion as Exhibit 5.1 to the
Registration Statement and further consent to the references to this firm in the
Registration Statement. In giving this consent, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act, or the rules and regulations of the Commission thereunder.
We are opining herein as to the effect on the subject transaction only of
United States federal law and the internal (and not the conflict of law) laws of
the State of California, and we assume no responsibility as to the applicability
thereto, or the effect thereon, of the laws of any other jurisdiction.
Very truly yours,
/s/ COUDERT BROTHERS
COUDERT BROTHERS
32
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report, dated March 16, 1999, of the Annual Report
on Form 10-KSB of ModaCAD, Inc. for the year ended December 31, 1998. We also
consent to the reference to our Firm under the caption "Experts" in the
aforementioned Registration Statement.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 15, 1999
33
