<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-28088
MODACAD, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 95-4145930
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1954 Cotner Avenue, Los Angeles 90025
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(310) 312-9826
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the registrant's common stock, as of May
14, 1996, was 3,864,492.
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE> 2
MODACAD, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Item Table of Contents Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Balance Sheet at March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statements of Operations for the three months ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 10
5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODACAD, INC.
BALANCE SHEET
MARCH 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 31,158
Accounts receivable, net of allowance for doubtful accounts of $15,000 311,274
Inventories 44,575
Prepaid expenses and other current assets 5,220
----------
Total current assets 392,227
Capitalized computer software development costs,
net of accumulated amortization of $115,295 1,215,244
Furniture and equipment, net of accumulated depreciation of $326,250 206,097
Investment in and advances to unconsolidated subsidiary 55,324
Other assets 11,958
Deferred offering costs 480,124
----------
$2,360,974
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 400,000
Advances -- officers/stockholders, unsecured, due on
demand, non-interest bearing 390,000
Accounts payable and accrued expenses 992,337
Deferred income 69,674
----------
Total current liabilities 1,852,011
----------
Stockholders' equity:
Common stock. no par value; authorized 15,000,000 shares;
issued and outstanding 2,566,660 (Note 2, 3 and 4) 6,228,672
Accumulated deficit (5,719,709)
----------
Total stockholders' equity 508,963
----------
$2,360,974
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
MODACAD, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1996 1995
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<S> <C> <C>
Net sales $ 338,964 $ 334,810
---------- ----------
Cost of sales 28,755 78,380
Selling, general and administrative 380,627 320,934
Research and development 35,507 63,906
Amortization of capitalized software development costs 35,777 19,880
---------- ----------
Total expenses 480,666 483,100
---------- ----------
Loss from operations (141,702) (148,290)
Interest expense -- related party 0 75,790
---------- ----------
Net loss $ (141,702) $ (224,080)
========== ==========
Net loss per share $ (0.08) $ (0.13)
========== ==========
Weighted average common shares outstanding 1,754,307 1,694,816
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
MODACAD, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (141,702) $ (224,080)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 10,254 3,762
Amortization of capitalized software development costs 35,777 19,880
(Increase) decrease in:
Accounts receivable 67,354 228,132
Inventories (35,025) 0
Prepaid expenses and other current assets (800) 930
Other assets 0 27,038
Increase (decrease) in:
Accounts payable and accrued expenses 251,020 17,593
Deferred income 9,676 57,106
Accrued interest 0 75,790
---------- ----------
Net cash provided by operating activities 196,554 206,151
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment (70,852) (56,161)
Capitalized computer software development cost (294,926) (162,040)
---------- ----------
Net cash used in investing activities (365,778) (218,201)
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable 150,000 0
Advances -- officers/stockholders 115,000 0
Proceeds from issuance of common stock 9,125 0
Increase in deferred offering costs (86,967) (2,038)
---------- ----------
Net cash provided by (used in) financing activities 187,158 (2,038)
Net increase (decrease) in cash 17,934 (14,088)
Cash, beginning of period 13,224 86,198
---------- ----------
Cash, end of period $ 31,158 $ 72,110
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 0 $ 0
========== ==========
Income taxes paid $ 800 $ 0
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
MODACAD, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1: GENERAL
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The interim financial data are unaudited;
however, in the opinion of ModaCAD, Inc. (the "Company"), the interim data
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for interim periods are not necessarily indicative of those to be expected for
the full year.
Note 2: NOTE PAYABLE--RELATED PARTY
A note payable to certain of the Company's officers/stockholders in the
principal amount of $3,073,713 and accrued interest of $1,471,462 was converted
into 900,000 shares of the Company's common stock on March 27, 1996.
Note 3: STOCKHOLDERS' EQUITY
Exercise of Warrant
Certain of the Company's officers/stockholders exercised their warrant to
purchase 236,955 shares of the Company's common stock for $9,125 in March 1996.
Issuance of Stock
The Company issued 11,251 shares of common stock to employees of the Company
for employee stock awards accrued in prior years.
Note 4: SUBSEQUENT EVENTS
Completion of Initial Public Offering
In April 1996, the Company completed an initial public offering (the "IPO") of
1,400,000 units ("Units") resulting in net proceeds of approximately $5,600,000
after paying underwriters' fees and costs associated with the offering. Each
Unit consisted of one share of the Company's common stock and one redeemable
warrant exercisable to purchase one share of common stock at a price of $6.50
per share for a period of five years from March 27, 1996. In April 1996, an
additional 210,000 Units were sold pursuant to the over-allotment option
granted to the underwriters resulting in net proceeds of approximately $900,000
after paying underwriters' fees and cost of issuance.
Repurchase of Shares
Upon completion of the IPO, the Company repurchased 312,168 shares of its
common stock for $900,000.
4
<PAGE> 7
MODACAD, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 4: SUBSEQUENT EVENTS (Continued)
Issuance of Warrant
The Company issued to the underwriters in the IPO, in consideration for $1,400,
a warrant to purchase 140,000 units, at a per unit exercise price of $6.00,
each consisting of one share of Common Stock and one redeemable warrant
exercisable to purchase one share of Common Stock at an exercise price of $9.10
per share. Such units are exercisable for a four-year period commencing March
26, 1997.
Pay-off of Notes Payable
In April 1996, two promissory notes with aggregate principal of $400,000 and
accrued interest of $14,650 were paid. As of April 30, 1996, the note holder
retained warrants to purchase 200,000 Units with an exercise price of $4.00 per
Unit. The warrants are exercisable through December 1997.
5
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Form 10-QSB.
GENERAL
ModaCAD was incorporated in 1988 to develop, market and support software
products based on its proprietary modeling and rendering technology for use in
industrial design applications including the apparel, textile and home
furnishings industries. The Company's existing products utilize the Company's
proprietary modeling and rendering technology, operate on standard personal
computers running Macintosh or Windows operating systems and are grouped into
two principal product families: computer aided design ("CAD") and electronic
merchandising software products. The Company's CAD software products are used
principally by industrial designers to model three-dimensional synthetic
objects from two-dimensional images and to render such objects in real time
with photorealistic imagery. The Company's electronic merchandising software
combines the Company's technology with digital product catalogs produced by the
Company or by product manufacturers using the Company's CAD software. The
Company's revenues have been generated principally from sales of its CAD and
electronics merchandising products. Sales revenue in the first quarter of 1996
remained relatively constant with sales revenue for the first quarter of 1995.
The Company's selling, general and administrative and research and development
costs increased in the first quarter of 1996 compared to the first quarter of
1995 due in large part to the Company's efforts associated with its new
consumer software being developed.
The Company is currently developing a new consumer software product line called
ModaCAD's Home Decorator Series aimed at the consumer software market.
Development of that new product line increased the Company's research and
development expenditures in the first quarter of 1996 over the first quarter of
1995 and such expenditures are expected to continue to increase in the second
quarter of 1996. A substantial portion of these research and development costs
have been capitalized.
6
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth statements of operations items (in thousands)
and the percentages that such items bear to net sales:
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1996 1995
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<S> <C> <C> <C> <C>
Net sales $ 339 100.0% $ 335 100.0%
Cost of sales 29 8.5 78 23.4
Selling, general and administrative 381 112.3 321 95.9
Research and development 35 10.5 64 19.1
Amortization of software development costs 36 10.6 20 5.9
------ ------ ------ ------
Total expenses 481 141.8 483 144.3
------ ------ ------ ------
Income from operations (142) -41.8 (148) -44.3
Interest expense 0 0.0 76 22.6
------ ------ ------ ------
Net income $ (142) -41.8% $ (224) -66.9%
====== ====== ====== ======
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Net Sales
Net sales increased by $4,000, or 1%, to $339,000 in the first quarter of 1996
from $335,000 in the first quarter of 1995 due primarily to sales increases in
electronic merchandising and CAD products and maintenance services. However, a
decline in sales of consulting and training services and hardware offset those
increases, resulting in a slight overall increase in total net sales.
Sales of electronic merchandising products increased $48,000, or 45%, to
$106,000 in the first quarter of 1996 from $58,000 in the first quarter of 1995
due primarily to completion of a 2.0 version of the Company's electronic
merchandising products and establishment of new electronic merchandising
accounts. Sales of CAD products increased $14,000, or 9%, to $161,000 in the
first quarter 1996 from $147,000 in the first quarter of 1995 due to increased
demand for such products. Net sales in the first quarter of 1996 also reflect
higher revenues derived from product maintenance fees.
Net sales attributable to consulting services, training and hardware sales
decreased by $77,000 to $20,000 in the first quarter of 1996 from $97,000 in
the first quarter of 1995 due primarily to the Company's decisions to outsource
some customer training to an independent contractor and to phase out its
hardware sales which historically generated low profit margins for the Company.
Cost of Sales
Cost of sales decreased $49,000, or 63%, to $29,000 in the first quarter of
1996 from $78,000 in the first quarter of 1995 reflecting the decreases in
hardware sales and training revenue.
7
<PAGE> 10
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $60,000, or 19%, to
$381,000 in the first quarter of 1996 from $321,000 in the first quarter of
1995 due primarily to an increase in salary expense by $76,000, which was
caused by the hiring of additional personnel in the first quarter of 1996 as
compared to the first quarter of 1995. However, the increase was partially
offset by a decline in professional fees.
Research and Development
The Company incurred $330,000 of research and development costs during the
first quarter of 1996, of which $295,000 was capitalized and $35,000 was
expensed, compared to $226,000 for the comparable period of 1995, of which
$162,000 was capitalized and $64,000 was expensed. The 46% increase in
research and development expenditure from the first quarter of 1995 to the
first quarter of 1996 was due primarily to the hiring of additional personnel
in connection with the development of the Home Decorator Series.
Amortization of Software Development Costs
The amortization of software development costs increased $16,000, or 80%, to
$36,000 in the first quarter 1996 from $20,000 in the first quarter of 1995 is
due to the fact that, in addition to the existing software being amortized
commencing in the year of 1995, the Company began marketing a newly developed
software product in the first quarter of 1996.
Interest Expense
Interest expense of $76,000 in the first quarter of 1995 related to a
promissory note held by the Company's majority stockholders who are also
officers of the Company. The note and the related accrued interest were
converted into 900,000 shares of the Company's common stock upon effectiveness
of the registration statement in the IPO. The note holders also agreed to waive
all interest accruing in 1996.
Income Taxes
The Company recorded no provision for income tax in the first quarters of 1996
and 1995 due to the utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flow from its
operations and cash loans provided by two of its officers who are the majority
shareholders of the Company on an as-needed basis in support of the Company's
software development programs. In March 1996, the loans with aggregate
principal amount of $3,073,713 and accrued interest of $1,471,462 were
converted into 900,000 shares of the Company's common stock pursuant to an
agreement between the officers and the Company in connection with the Company's
initial public offering.
8
<PAGE> 11
In June 1995, the Company needed additional funding to support its accelerated
costs of operation and the development program for ModaCAD's Home Decorator
Series. To fund such costs from June 1995 through March 1996,
non-interest-bearing loans in the aggregate amount of $390,000 were provided as
of March 31, 1996 by the two officers and majority shareholders mentioned in
the preceding paragraph.
In December of 1995 and January 1996, a third party loaned the Company $250,000
and $150,000, respectively, to help finance the costs of the IPO and the
ongoing operations of the Company. In connection with such loans, the Company
granted the lender two-year Unit Purchase Warrants , with registration rights,
to purchase an aggregate of 200,000 Units with an exercise price of $4.00 per
Unit. In April 1996, the loans with aggregate principal of $400,000 and
accrued interest of $14,650 were paid.
In March 1996, such officers and majority shareholders exercised a warrant to
purchase 236,955 shares of the Company's common stock for $9,125.
In April 1996, the Company completed an initial public offering of 1,400,000
Units resulting in net proceeds to the Company of approximately $5,600,000
after paying underwriters' fees and costs associated with the offering. An
additional 210,000 Units were sold in April 1996 pursuant to the over-allotment
option granted to the underwriters resulting in additional net proceeds to the
Company of approximately $900,000 after paying underwriters' fees and cost of
issuance.
In April 1996, the Company issued a warrant to the underwriters for $1,400 to
purchase 140,000 units. (See Note 4 to Financial Statements above.) The units
are exercisable for a four-year period commencing March 26, 1997 at an exercise
price of $6.00 per unit.
The Company anticipates spending during 1996 approximately $400,000 to purchase
equipment and for office expansion.
Together with its existing capital and anticipated funds from operations, the
Company believes that the net proceeds received from the IPO will be sufficient
to provide its anticipated cash needs for working capital and capital
expenditure for at least the next 12 months. Thereafter, if cash generated
from operations is insufficient to satisfy the Company's capital requirements,
the Company may have to sell additional equity or debt securities or obtain
credit facilities.
9
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Effective January 24, 1996, the shareholders of the Company adopted
resolutions by written consent of all of the outstanding shares of
the Company's Common Stock which (i) amended the Company's Bylaws to
allow the Company's Board of Directors or shareholders to determine
the number of members of the Board of Directors within a range of
four to seven and set the currently authorized number of directors
at six and (ii) approve the Company's 1995 Stock Option Plan,
previously adopted by the Board of Directors on November 29, 1995.
These resolutions were approved by 1,666,660 of the 1,666,660
outstanding shares.
Item 5. Other Information
In addition to the patent possessed by the Company covering its core
rendering and modeling technology, the Company has received another
patent issued by the US Patent Office in April 1996. The new patent
covers the Company's newly developed three-dimensional modeling
technology.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation.1
3.2 Bylaws, as amended.1
27.1 Financial Data Schedule.2
(b) Reports on Form 8-K
None.
__________________________________
1 Incorporation by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 333-1166-LA) filed with the Securities and Exchange
Commission on February 7, 1996, as amended by Amendment No. 1 thereto filed on
March 19, 1996 and Amendment No. 2 thereto filed on March 27, 1996.
2 This exhibit is being filed electronically in the electronic format specified
by EDGAR.
10
<PAGE> 13
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ModaCAD, INC.
Date: May 14, 1996 By: /s/ LEE FREEDMAN
------------------------------
Lee Freedman
Chief Financial Officer
11
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER SEQUENTIALLY
DESCRIPTION NUMBERED PAGE
<S> <C>
3.1 Amended and Restated Articles of Incoporation.1
3.2 Bylaws, as amended.1
27.1 Financial Data Schedule.2
</TABLE>
__________________________________
1 Incorporation by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 333-1166-LA) filed with the Securities and Exchange
Commission on February 7, 1996, as amended by Amendment No. 1 thereto filed on
March 19, 1996 and Amendment No. 2 thereto filed on March 27, 1996.
2 This exhibit is being filed electronically in the electronic format specified
by EDGAR.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AS OF MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-QSB FOR QURATER ENDED MARCH 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 31,158
<SECURITIES> 0
<RECEIVABLES> 311,274
<ALLOWANCES> 15,000
<INVENTORY> 44,575
<CURRENT-ASSETS> 392,227
<PP&E> 206,097
<DEPRECIATION> 326,250
<TOTAL-ASSETS> 2,360,974
<CURRENT-LIABILITIES> 1,852,011
<BONDS> 0
0
0
<COMMON> 6,228,672
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,360,974
<SALES> 338,964
<TOTAL-REVENUES> 338,964
<CGS> 28,755
<TOTAL-COSTS> 28,755
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141,702)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
