<PAGE>
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, 1998
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)
3861 Sepulveda Blvd., Culver City 90230
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(310) 751-2100
---------------------------
(Issuer's telephone number)
Check whether the registrant (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 15,
1998, was 6,071,974.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ModaCAD, Inc.
BALANCE SHEET
March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 11,296,892
Accounts receivable,
net of allowance for doubtful accounts of $87,500 2,661,491
Inventories 12,600
Prepaid expenses and other current assets 490,406
-------------
Total current assets 14,461,389
Capitalized computer software development costs,
net of accumulated amortization of $1,393,645 4,879,703
Furniture and equipment, net (Note 2) 1,567,010
Investment in and advances to unconsolidated subsidiary 55,324
Other assets 95,448
-------------
$ 21,058,874
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,019,116
Deferred income 821,806
-------------
Total current liabilities 1,840,922
-------------
Stockholders' equity:
Common stock. no par value; authorized 15,000,000 shares;
issued and outstanding 6,062,974 (Note 3) 25,722,352
Accumulated deficit (6,504,400)
-------------
Total stockholders' equity 19,217,952
-------------
$ 21,058,874
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
ModaCAD, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 964,253 $ 595,890
------------ -----------
Cost of sales 7,946 20,311
Selling, general and administrative 1,545,472 584,866
Research and development 1,215,294 24,878
Amortization of capitalized software
development costs 244,526 167,953
------------ -----------
Total expenses 3,013,238 798,008
------------ -----------
Loss from operations (2,048,985) (202,118)
Investment income 122,882 19,525
------------ -----------
Net loss $(1,926,103) $ (182,593)
============ ===========
Basic loss per share (Note 4) $ (0.32) $ (0.05)
============ ===========
Diluted loss per share (Note 4) $ (0.32) $ (0.05)
============ ===========
Weighted average common shares outstanding 6,049,085 3,875,068
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ModaCAD, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,926,103) $ (182,593)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 73,371 9,682
Amortization of capitalized software
development costs 244,526 167,953
Provision for loss on accounts receivable 6,000 6,000
Issuance of warrants for services rendered 3,000 3,000
(Increase) decrease in:
Accounts receivable (506,339) 617,221
Inventories 2,963 2,775
Prepaid expenses and other current assets 241,807 18,493
Other assets (3,800) 2,400
Increase (decrease) in:
Accounts payable and accrued expenses 658,396 (15,369)
Deferred income 717,525 22,688
----------- -----------
Net cash provided by(used in) operating activities (488,654) 652,250
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (573,170) (72,833)
Capitalized computer software development cost (263,276) (663,009)
----------- -----------
Net cash used in investing activities (836,446) (735,842)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 202,000 110,000
----------- -----------
Net cash provided by financing activities 202,000 110,000
----------- -----------
Net increase (decrease) in cash (1,123,100) 26,408
Cash, beginning of period 12,419,992 2,138,963
------------ ------------
Cash, end of period $11,296,892 $ 2,165,371
============ ============
Supplemental Cash Flow Information
Interest paid $ 0 $ 0
=========== ===========
Income taxes paid $ 13,263 $ 800
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
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" or "ModaCAD"), 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: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 226,269
Office equipment 171,339
Computer equipment and software 1,517,991
Leasehold improvements 354,380
------------
$ 2,269,979
Less: Accumulated depreciation 702,969
------------
$ 1,567,010
============
</TABLE>
Note 3: STOCKHOLDERS' EQUITY
Warrants
In connection with the IPO, the Company issued to the principal underwriter in
the IPO, for $1,400, a warrant to purchase 140,000 units, at a per unit exercise
price of $6.00, each unit 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 warrants are exercisable for a four-year
period which began March 27, 1997. As of March 31, 1998, the underwriter (or
assignees of the underwriter) exercised a portion of the warrants to purchase an
aggregate of 88,300 shares of the Company's common stock and 88,300 redeemable
common stock purchase warrants. 30,800 of 88,300 redeemable common stock
purchase warrants were further exercised to purchase 30,800 shares of the
Company's common stock.
In December 1996, the Company issued to an outside consultant, for services
provided to the Company, 250,000 common stock purchase warrants, expiring in
December 1999, at an exercise price of $5.00 per share. As of March 31, 1998,
these warrants have not been exercised.
In November 1997, the Company issued to its project co-developer, for services
to be provided to the Company, 126,316 common stock purchase warrants, expiring
in November 2002, at an exercise price of $19.00 per share. As of March 31,
1998, these warrants have not been exercised.
4
<PAGE>
ModaCAD, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 3: STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan
In 1995, the Company adopted the 1995 Stock Option Plan (the "Plan") which
expires in 2006. In June 1997, the Plan was amended, upon receipt of shareholder
approval, to increase the number of shares of common stock authorized for
issuance pursuant to the exercise of stock options under the Plan from 300,000
to 750,000 shares. As of March 31, 1998, 69,000 shares had been issued upon the
exercise of options granted under the Plan, 899,455 shares were issuable upon
the exercise of outstanding options with exercise prices ranging from $4.6875 to
$20.0625 per share, and no shares remained available for additional option
grants under the Plan. As of March 31, 1998, additional options to purchase an
aggregate of 149,445 shares of the Company's common stock were granted by the
board of directors under the Plan subject to approval by the Company's
shareholders, at the 1998 annual meeting scheduled to be held on June 5, 1998.
Note 4: NET LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share." Basic loss per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding. Diluted loss per share is computed
similar to basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Loss per share for the first quarter of 1997 has been
restated using the methodologies of SFAS No. 128.
Note 5: SUBSEQUENT EVENTS
Employment Agreements
In April 1998, the Company entered into new employment agreements effective
January 1, 1998 with Ms. Freedman, as Chairman of the Board and Chief Executive
Officer, and Mr. Vecchione, as President and Chief Operating Officer, which have
terms expiring December 31, 2005. The employment agreements each provide for an
annual salary of $200,000, a signing bonus of $100,000 and a monthly automobile
allowance of $600. Each employment agreement further provides for an annual
performance bonus payable for each calendar year during the term of the
agreement, in an amount to be determined by the Compensation Committee of the
Board. In addition, in connection with the new employment agreements, the
Company granted to Ms. Freedman and Mr. Vecchione each a five-year option to
purchase 200,000 shares of Common Stock, subject to approval by the Company's
shareholders at the 1998 annual meeting. Such options vest and become
exercisable as follows: if the closing sale price of the Company's Common Stock
is greater than $10 per share for a period of 20 consecutive trading days in any
fiscal year during the term of the employment agreement, options to purchase 50
shares of Common Stock for each $1,000 of net income (before deductions for
taxes and executive bonuses) of the Company in such calendar year vest and
become exercisable at an exercise price equal to the market value per share on
the grant date.
5
<PAGE>
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
The Company is in the business of developing, marketing and supporting software
products based on its proprietary modeling and rendering technology for use in
industrial design applications including the apparel, textile and home
furnishings industries and as used in consumer software products. The Company's
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 groups: commercial (computer
aided design or "CAD" and electronic merchandising products) and consumer.
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 products combine the Company's technology with digital
product catalogs produced by the Company or by product manufacturers using the
Company's CAD software.
To develop a consumer product line, the Company signed an agreement with Intel
Corporation in November 1997 for the co-development and distribution of
interactive software to be used in connection with Intel's Pentium (R) II
processor. The companies agreed to co-develop an e-commerce solution for fashion
retailers and manufacturers using advanced Internet push technology and
multimedia enhancements which are intended to enable a rich and personalized
end-user shopping experience.
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's statements of
operations (in thousands) and the percentages that such items bear to net sales:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 964 100.0% $ 596 100.0%
Cost of sales 8 0.8 20 3.4
Selling, general and administrative 1,545 160.3 585 98.1
Research and development 1,215 126.1 25 4.2
Amortization of software development costs 245 25.4 168 28.2
------- ------ ------- ------
Total expenses 3,013 312.6 798 133.9
------- ------ ------- ------
Loss from operations (2,049) (216.6) (202) (33.9)
Investment income 123 12.8 20 3.4
------- ------ ------- ------
Net loss $(1,926) (119.8%) $(182) (30.5%)
======= ====== ======= ======
</TABLE>
6
<PAGE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net Sales
Net sales increased $368,000, or 62%, to $964,000 in the first quarter of 1998
from $596,000 in the first quarter of 1997 due to $603,000 revenue increases
from the Company's consumer products, training services and maintenance fees
less $235,000 sales decreases in the Company's commercial products (electronic
merchandising and CAD products) and revenue decrease from consulting services.
Sales of commercial products decreased $196,000, or 39%, to $306,000 in the
first quarter of 1998 from $502,000 in the first quarter of 1997 primarily due
to the fact that the Company's sales force was focused on developing a new
commercial product market channel. No revenue was generated from this new
commercial product market as it was in the launching stage.
The Company generated $591,000 in the first quarter of 1998 from its consumer
products in connection with the Company's newly developing e-commerce project.
No such revenue was generated in the first quarter of 1997 as the Company
commenced developing this project in late 1997.
Consulting services decreased $39,000, or 98%, to $1,000 in the first quarter of
1998 from $40,000 in the first quarter of 1997 primarily due to a $40,000
revenue generated from one of the Company's major customers in connection with
its purchase of the Company's commercial product in the first quarter of 1997.
No such revenue was generated in the first quarter of 1998.
Training services increased by $7,000, or 47%, to $22,000 in the first quarter
of 1998 from $15,000 in the first quarter of 1997 due primarily to the Company's
decision to terminate the relationship with an independent contractor and to
provide customer training itself. Net sales resulting from products maintenance
fees increased $5,000 in the first quarter of 1998 from the first quarter of
1997.
Cost of Sales
Cost of sales decreased $12,000, or 60%, to $8,000 in the first quarter of 1998
from $20,000 in the first quarter of 1997. This decrease reflected the sales
decrease in commercial products as no cost of sales incurred for the consumer
products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $960,000, or 164%, to
$1,545,000 in the first quarter of 1998 from $585,000 in the first quarter of
1997. Personnel costs increased $582,000, or 208%, to $862,000 in the first
quarter of 1998 from $280,000 in the first quarter of 1997. The increase in
personnel costs resulted from the hiring of additional personnel in late 1997 to
support the Company's increased operating activities. Additionally, certain
related costs including travel, marketing, telephone and office supplies
expenses increased $235,000, or 115%, to $440,000 in the first quarter of 1998
from $205,000 in the first quarter of 1997. Also, professional services
including accounting, legal and consulting services increased $94,000, or 154%,
to $155,000 in the first quarter of 1998 from $61,000 in the first quarter of
1997. The increase in professional services was primarily due to the Company's
increased requirements for these services in the first quarter of 1998 compared
to the first quarter of 1997 resulting from the Company's increased operating
activities.
7
<PAGE>
Research and Development
The Company incurred $1,486,000 of research and development costs during the
first quarter of 1998, of which $271,000 was capitalized as software development
costs and $1,215,000 was expensed, compared to $720,000 for the first quarter of
1997, of which $695,000 was capitalized and $25,000 was expensed. The 106%
increase in research and development expenditures from the first quarter of 1997
to the first quarter of 1998 was primarily due to the hiring of additional
personnel in connection with the further development of the Company's commercial
and consumer products. A lower percentage of research and development
expenditures was capitalized in the first quarter of 1998 as compared to the
first quarter of 1997 due primarily to the Company completing two of its major
projects at the beginning of 1998. A significant portion of the research and
development expenses incurred prior to the completion of these two major
projects was capitalized as software development costs.
Amortization of Software Development Costs
The amortization of software development costs increased $77,000, or 46%, to
$245,000 in the first quarter of 1998 from $168,000 in the first quarter of 1997
as the Company began marketing (and amortizing development costs associated
with) several new versions of software products in 1997.
Investment Income
Investment income increased $103,000, or 515%, to $123,000 in the first quarter
of 1998 from $20,000 in the first quarter of 1997 due to the increase in income
generated from a money market account in which the unexpended proceeds from the
Company's IPO and the proceeds received upon the exercise by warrant holders of
the Company's public warrants after notice of redemption made in June 1997 are
maintained.
Income Taxes
The Company recorded no provision for income taxes in both the first quarters of
1998 and 1997 due to the utilization of net operating loss carryforwards.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable balance increased $506,000, or 23%, to
$2,749,000 at March 31, 1998 from $2,243,000 at December 31, 1997. This increase
was primarily due to a total receivable balance of $1,224,000 at March 31, 1998,
related to the revenues generated from the Company's consumer products in the
first quarter of 1998. However, a $750,000 receivable balance at December 31,
1997 attributable to an agreement between the Company and Intel in connection
with the co-development consumer software was collected in February 1998.
During the first quarter of 1998, two of the Company's employees exercised their
stock options to purchase a total of 40,000 shares of the Company's common stock
for $202,0000.
The Company anticipates continuing to use its capital primarily to fund the
activities related to the design, development, marketing, sales and support of
the Company's products. Together with its existing capital received from the
exercise of warrants as a result of the Company's notice of warrant redemption
in June 1997 and anticipated funds from operations, the Company believes that
its capital resources will be sufficient to provide its anticipated cash needs
for working capital and capital expenditure for at least the next 15 months
although the Company may seek to raise additional capital before then, depending
on various considerations and developments. 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, assuming the Company can do so on acceptable terms.
9
<PAGE>
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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.1
(b) Reports on Form 8-K
None.
- --------
1 This exhibit is being filed electronically in the electronic format specified
by EDGAR.
10
<PAGE>
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 15, 1998 By: /s/ LEE FREEDMAN
---------------------------
Lee Freedman
Vice President, Finance and
Chief Financial Officer
11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Sequentially
Description Numbered Page
<S> <C>
27.1 Financial Data Schedule.1
</TABLE>
- --------
1 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 SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH 10-QSB FOR QUARTER ENDED SEPTEMBER 30,1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,296,892
<SECURITIES> 0
<RECEIVABLES> 2,748,991
<ALLOWANCES> 87,500
<INVENTORY> 12,600
<CURRENT-ASSETS> 14,461,389
<PP&E> 2,269,979
<DEPRECIATION> 702,969
<TOTAL-ASSETS> 21,058,874
<CURRENT-LIABILITIES> 1,840,922
<BONDS> 0
0
0
<COMMON> 25,722,352
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,058,874
<SALES> 964,253
<TOTAL-REVENUES> 964,253
<CGS> 7,946
<TOTAL-COSTS> 7,946
<OTHER-EXPENSES> 3,005,292
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,926,103)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,926,103)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,926,103)
<EPS-PRIMARY> (0.318)
<EPS-DILUTED> (0.318)
</TABLE>
