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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-28088
MODACAD, INC.
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(Exact Name of Registrant 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 CA 90230
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(Address of principal executive offices) (Zip Code)
(310) 751-2100
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(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The number of outstanding shares of the registrant's common stock, as of May 26,
1999, was 7,401,515.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ModaCAD, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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(Unaudited) (Note 1)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,496,765 $ 6,343,599
Accounts receivable, net of allowance for 1,190,598 752,487
doubtful account of $147,500 at March 31,
1999 and $132,500 at December 31, 1998
Prepaid expenses and other current assets 587,897 397,101
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Total current assets 8,275,260 7,493,187
Capitalized computer software development costs, 2,663,835 3,014,043
net of accumulated amortization of
$6,662,275 at March 31, 1999 and $6,039,105
at December 31, 1998 (Note 2)
Furniture and equipment, net of accumulated 2,584,458 2,459,656
depreciation of $1,242,545 at March 31, 1999
and $6,039,105 at December 31, 1998
Other assets 124,704 83,055
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Total assets $13,648,257 $13,049,941
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</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 1,537,258 $ 503,198
Deferred income 483,399 237,052
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Total current liabilities 2,020,657 740,250
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Commitments (Note 3)
Stockholders' equity:
Common stock; No par value; authorized 26,878,877 26,575,627
15,000,000 shares; Issued and outstanding
6,164,874 shares at March 31, 1999 and
6,143,374 at December 31, 1998 (Note 4)
Accumulated deficit (15,251,277) (14,265,936)
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Total stockholders' equity 11,627,600 13,409,691
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Total liabilities and stockholders' equity $13,648,257 $13,049,941
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
ModaCAD, Inc.
Condensed Statements Of Operations
(Unaudited)
Three Months Ended March 31,
1999 1998
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<S> <C> <C>
Net sales $ 3,789,877 $ 964,253
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Cost of sales 119,011 7,946
Selling, general and administrative 2,420,061 1,545,472
Research and development 1,661,086 1,215,294
Amortization of capitalized software 623,170 244,526
development costs ------------- ------------
Total expenses 4,823,328 3,013,238
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Loss from operations (1,033,451) (2,048,985)
Investment income 48,113 122,882
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Net loss $ (985,338) $(1,926,103)
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Basic loss per share (Note 5) $ (0.16) $ (0.32)
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Diluted loss per share (Note 5) $ (0.16) $ (0.32)
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Weighted average common shares outstanding 6,156,502 6,049,085
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
ModaCAD, Inc.
Condensed Statements Of Cash Flows
(Unaudited)
Three Months Ended March 31,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (985,338) $(1,926,103)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation 172,712 73,371
Amortization of capitalized 623,170 244,526
software development costs
Provision for loss an accounts receivable 15,000 6,000
Issuance of warrants for services rendered 99,000 3,000
(Increase) decrease in:
Accounts receivable (453,111) (506,339)
Inventories 375 2,963
Prepaid expenses and other current assets (191,169) 241,807
Other assets (41,654) (3,800)
Increase (decrease) in:
Accounts payable and accrued expenses 1,034,059 658,396
Deferred income 246,347 717,525
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Net cash provided by (used in) operating activities 519,391 (488,654)
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Cash flows from investing activities:
Purchase of furniture and equipment (297,514) (573,170)
Capitalized computer software development cost (272,961) (263,276)
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Net cash used in investing activities (570,475) (836,446)
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Cash flows from financing activities:
Proceeds from issuance of common stock 204,250 202,000
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Net cash provided by financing activities 204,250 202,000
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Net increase (decrease) in cash 153,166 (1,123,100)
Cash and cash equivalents, beginning of period 6,343,599 12,419,992
------------ ------------
Cash and cash equivalents, end of period $ 6,496,765 $11,296,892
============ ============
</TABLE>
<TABLE>
<CAPTION>
Supplemental Cash Flow Information
<S> <C> <C>
$ 0 $ 0
Interest paid ============ ============
Income taxes paid $ 1,070 $ 13,263
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ModaCAD, Inc.
Notes to Condensed Financial Statements
Note 1: BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of ModaCAD, Inc.
("ModaCAD" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. These adjustments consisted of normal recurring accruals with the
exception of a $249,808 write-off of capitalized software development cost in
relation to products sold in the first quarter of 1999. Operating results for
the first quarter of 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 1998, as amended.
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adoption of Statement of Position 98-1
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP, which has been adopted prospectively as of
January 1, 1999, requires the capitalization of certain costs incurred in
connection with developing or obtaining internal use software. During the first
quarter of 1999, the Company capitalized $272,960 of internal use software
development costs.
Revenue Recognition
The Company recognizes revenue generated from vendor participation in the
Company's on-line shopping Internet web-sites ("project participation fees")
over the terms of the corresponding contracts in a manner that matches revenue
with the related cost incurred to set up and manage vendor web-site content.
Revenue generated from services provided to customers in the development and
maintenance of their Internet web-sites ("web-site development and maintenance
fees") is recognized over the terms of the corresponding contracts in a manner
that matches revenue with the related cost incurred to develop and maintain the
web-sites. Revenue generated from advertising on the Company's on-line shopping
web-sites ("on-line advertising revenue") is recognized over the terms of the
corresponding contracts on a straight-line basis. Revenue generated from the
Company's fulfillment services provided to the Company's on-line shopping
Internet web-site participant vendors ("transactional revenue") is recognized
upon notification of shipment of the vendors' products by the Company's
fulfillment warehouse. Revenue generated from referral of vendors' products to
Internet consumers through the Company's on-line shopping Internet web-sites
("product referral fees") are similarly recognized upon notification of shipment
of the products by the vendors.
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ModaCAD, Inc.
Notes to Condensed Financial Statements
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company recognizes revenues related to software licenses and software
maintenance in accordance with the AICPA SOP 97-2, "Software Revenue
Recognition." Product revenue is recorded at the time of shipment, net of
estimated allowances and returns. Revenue generated from Post Contract Customer
Support is recognized on a straight-line basis over the term of the
corresponding contract, which is generally twelve months.
Comprehensive Income
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did not have
any of the items of comprehensive income in any period presented.
Note 3: COMMITMENTS
Employment Agreements
In 1998, the Company entered into two new employment agreements, expiring on
December 31, 2005, with two key officers of the Company. Under the agreements,
these officers receive aggregate annual salaries of $400,000 and a monthly
aggregate automobile allowance of $1,200. In addition, these officers received
aggregate signing bonuses of $200,000. Further, the Company shall pay an annual
performance bonus to each officer for each calendar year of the employment term
in an amount determined by the Compensation Committee of the Board.
In connection with the employment agreements, the same key officers were granted
five-year options to purchase up to an aggregate 400,000 shares of the Company's
common stock. 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 employee agreements, 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. The option exercise
price at execution of the agreement was $15.875 per share, which is not less
than the fair market value on the date of grant. As of March 31, 1999, no
granted shares were vested.
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ModaCAD, Inc.
Notes to Condensed Financial Statements
Note 3: COMMITMENTS (Continued)
Line of Credit
In October 1998, the Company entered into a line of credit agreement with a
bank, expiring in September 1999, which provides for borrowings of up to
$1,000,000. Borrowings under the agreement are secured by the Company's accounts
receivable and bear interest at the bank's prime rate (7.75% at March 31, 1999).
Terms of the agreement require the Company to maintain certain minimum financial
ratios. The Company is in compliance with those financial ratios. As of March
31, 1999, no amounts have been drawn against the line of credit.
Note 4: STOCKHOLDERS' EQUITY
Warrants
In connection with the IPO in March 1996, the Company issued to the principal
underwriter in the IPO, for $1,400, unit purchase warrants 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 unit purchase
warrants are exercisable for a four-year period, which began March 27, 1997. As
of March 31, 1999, the underwriter (or assignees of the underwriter) exercised a
portion of the warrants to purchase an aggregate of 114,700 shares of the
Company's common stock and 114,700 redeemable common stock purchase warrants.
Additionally, 30,800 of 114,700 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 warrants, expiring in December 1999, to purchase 250,000
shares of common stock at an exercise price of $5.00 per share. As of March 31,
1999, these warrants have not been exercised.
In July 1997, the Company issued to a financial advisor for services provided to
the Company warrants, expiring in July 2002, to purchase 100,000 shares of
common stock at an exercise price of $14.38 per share. As of March 31, 1999,
these warrants have not been exercised.
In November 1997, the Company issued to its project co-developer for services
provided to the Company warrants, expiring in November 2002, to purchase 126,316
shares of common stock at an exercise price of $19.00 per share. As of March 31,
1999, these warrants have not been exercised.
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ModaCAD, Inc.
Notes to Condensed Financial Statements
Note 4: STOCKHOLDERS' EQUITY (Continued)
In June 1998, the Company issued to an outside promotion agency for services
provided to the Company warrants, expiring in May 2003, to purchase 50,000
shares of common stock at an exercise price of $17.75 per share. In December
1998, the Company issued to the same agency for services provided to the Company
additional warrants, expiring in November 2003, to purchase 8,333 shares of
common stock at an exercise price of $20.00 per share. In the first quarter of
1999, the Company issued to the same agency for services provided to the Company
warrants to purchase a total of 24,999 shares of common stock warrants, expiring
in December 2003, to purchase 8,333 shares of common stock at an exercise price
of $16.68 per share; warrants, expiring January 2004, to purchase 8,333 shares
of common stock at an exercise price of $20.00 per share; warrants, expiring
February 2004, to purchase 8,333 shares of common stock at an exercise price of
$16.00 per share. As of March 31, 1999, these warrants have not been exercised.
In March 1999, the Company issued warrants, expiring in March 2004, to purchase
250,000 shares of common stock at an exercise price of $16.80 per share in
consideration of business promotion services to be provided to the Company. As
of March 31, 1999, these warrants have not been exercised.
In May 1996, the Company granted to one of its non-employee directors for
services provided to the Company warrants, expiring in May 2001, to purchase
2,000 shares of common stock at an exercise price of $4.25 per share. In October
1998, in consideration for services provided to the Company, the Company
repriced to $9.50 a five-year warrant, expiring July 2002, to purchase 8,000
shares of common stock that was granted to a non-employee director in July 1997
and two ten-year warrants, expiring October 2007, to purchase a total of 4,000
shares that were granted to two non-employee directors in October 1997. In
October 1998, the Company granted to three non-employee directors in
consideration of services rendered to the Company ten-year warrants, expiring
October 2008, to purchase a total of 18,000 shares of common stock at an
exercise price of $9.50 per share.
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 granted under the Plan from
300,000 to 750,000 shares. In June 1998, the Plan was further 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 granted
under the Plan from 750,000 to 1,650,000 shares. As of March 31, 1999, 144,500
shares had been issued upon the exercise of options granted under the Plan;
1,397,954 shares were issuable upon the exercise of outstanding options with
exercise prices ranging from $4.69 to $20.06 per share and 107,546 shares
remained available for additional option grants under the Plan.
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ModaCAD, Inc.
Notes to Condensed Financial Statements
Note 5: NET LOSS PER SHARE
Basic and diluted net loss per common shares are presented in conformity with
Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("FAS
128"), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per share has been computed using the weighted average number of
outstanding common stock shares during the period. The Company has excluded all
warrants and outstanding stock options from the calculation of diluted per share
because all such securities are antidilutive for all period presented.
Note 6: SUBSEQUENT EVENTS
In November 1997, the Company entered into a Project Development Agreement with
a project co-developer ("Co-developer"). Under the agreement, the Company had an
obligation to the Co-developer for certain royalty payments in the form of cash
and common stock purchase warrants in consideration of the Co-developer's
contribution to the project development. In April 1999, the Company entered into
a Stock and Warrant Purchase and Investor Rights Agreement with this
Co-developer. Under the agreement, the Company issued to the Co-developer
455,218 shares of common stock and warrants to purchase 538,674 shares of common
stock. The exercise of such warrants is subject to shareholder approval at the
Company's 1999 Annual Meeting of Shareholders. In return, the Company's royalty
obligation stated in the Project Development Agreement was terminated.
Concurrently with this agreement, the Company entered into a Securities Purchase
Agreement with each of four investors. Under such agreement, the investors
purchased an aggregate of 776,827 shares of the Company's common stock and
warrants to purchase an aggregate of 919,243 common stock shares of common
stock. The exercise of such warrants is subject to shareholder approval at the
Company's 1999 Annual Meeting of Shareholders. As a result of this offering, the
Company received approximately $7,800,000 in net proceeds after paying costs
associated with the offering.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ModaCAD, INC.
Date: June 7, 1999 By: /s/ MAURIZIO VECCHIONE
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Maurizio Vecchione
President and
Chief Operating Officer
/s/ LEE FREEDMAN
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Lee Freedman
Vice President, Finance and
Chief Financial Officer
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